REGISTRATION NO. 333-46550
FILED PURSUANT TO RULE 424(B)(3)
SHAFFER DIVERSIFIED FUND, LP
$23,839,000
UNITS OF LIMITED PARTNERSHIP INTEREST
THE OFFERING
The Fund, a Delaware limited partnership, trades speculatively in the
United States futures markets. Specifically, the Fund trades a diversified
portfolio of futures contracts in the currency, metals, grains, interest rate
and energy markets. Shaffer Asset Management, Inc., a professional futures
trading advisor, is the general partner and trading advisor of the Fund. Shaffer
Asset Management allocates the Fund's assets according to its proprietary
trading program.
As of September 30, 2002, the Net Asset Value of a Fund Unit that
sold for $1,000, minus a 5% sales charge, as of February 14, 2002, when the Fund
began trading, was $1,027.67. Units are offered for sale as of the last day of
each month at their then current Net Asset Value plus 5%. Berthel Fisher &
Company Financial Services, Inc., the Fund's principal selling agent, and any
additional selling agents will use their best efforts to sell the Units offered,
but are not obligated to sell any number of Units. If the total amount of this
offering is sold, proceeds to the Fund will be approximately $22,647,050,
proceeds to the selling agents will be approximately $953,560 and proceeds to
Shaffer Asset Management, as reimbursement for paying the Fund's initial
organizational costs, will be approximately $238,390. There is no scheduled
termination date of this offering and no escrow account will be used in
connection with this offering.
THE RISKS
THESE ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK.
READ THIS PROSPECTUS BEFORE YOU DECIDE TO INVEST. SEE "RISK FACTORS" ON PAGE 5
OF THIS PROSPECTUS.
o You could lose all or substantially all of your investment in the Fund. o
The Fund is speculative and highly leveraged.
o Shaffer Asset Management has total trading authority over the Fund. Its
computerized trading methods could expose the Fund to significant risks and
the use of a single advisor could mean lack of diversification and,
consequently, higher risk.
o There is no secondary market for the Units. Redemptions are permitted only
at the end of a month. Redemption penalties apply during the first twelve
months after a Unit is sold.
o Transfers of interest in the Units are subject to limitations. Shaffer
Asset Management may deny a transfer request if it determines that the
transfer may result in adverse legal or tax consequences for the Fund.
o Substantial expenses must be offset by trading profits and interest income.
For an investor to breakeven after twelve months following investment, the
Fund must generate trading profits of approximately 12.09% if redemption
charges apply and of approximately 10.92% if redemption charges do not
apply.
o The Fund has a limited operating history.
MINIMUM INVESTMENT
$10,000 initial investment; $5,000 for IRAs and other tax-exempt
accounts; $1,000 additional investments
--------------------
Investors are required to make representations and warranties
relating to their suitability in connection with this investment. Each investor
is encouraged to discuss the investment with his/her individual financial, legal
and tax advisor.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE ACCOMPANYING STATEMENT
OF ADDITIONAL INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS IS IN TWO PARTS: A DISCLOSURE DOCUMENT AND A
STATEMENT OF ADDITIONAL INFORMATION. THESE PARTS ARE BOUND TOGETHER, AND BOTH
CONTAIN IMPORTANT INFORMATION.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE
MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMODITY FUTURES TRADING
COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
-------------------------
SHAFFER ASSET MANAGEMENT, INC.
General Partner
October 25, 2002
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE
THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS
GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL
AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION,
RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR
PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 17 AND A
STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER
THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 22.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER
FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD
CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE
PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE 5.
----------------------------------
This prospectus does not include all of the information or exhibits
in the Fund's registration statement. You can read and copy the entire
registration statement at the public reference facilities maintained by the
Securities and Exchange Commission in Washington, D.C.
The Fund files quarterly and annual reports with the SEC. You can
read and copy these reports at the SEC public reference facilities in
Washington, D.C. at 450 Fifth Street, N.W. Room 1200, Washington, D.C. 20549.
Please call the SEC at 1-202-942-8090 for further information.
The Fund's filings are posted at the SEC website at
http://www.sec.gov.
(i)
SHAFFER DIVERSIFIED FUND, LP
PART ONE
PAGE
SUMMARY.......................................................1
RISK FACTORS..................................................5
Possibility of Losing Entire Investment.................5
Commodity Futures Trading is Speculative................5
Commodity Futures Trading is Highly Leveraged...........5
Markets in Which the Fund Trades May Become
Illiquid..............................................5
Automatic Termination...................................5
Substantial Fees, Commissions and Expenses..............6
Distortions Produced by Incentive Allocation
Arrangement ..........................................6
Limitations of Trend-Following, Technical Trading
Strategies ...........................................6
Dependence on Key Personnel.............................6
Limited Operating History...............................7
Limited Ability of Limited Partners to Liquidate
Investment in the Units ..............................7
Possible Effect of Redemptions on Unit
Values..............................................7
Limited Rights of Investors / Limited Partners Will Not
Participate in Management ............................7
Unpredictability of Regulatory Changes..................7
Partners' Tax Liability May Exceed
Distributions......................................7
Tax Could be Due From Investors on Their Share of the
Fund's Ordinary Income Despite Overall Losses .....8
There Could be a Limit on the Deductibility of Brokerage
and Performance Fees ..............................8
Conflicts of Interest...................................8
Other Clients of the Fund's Advisor.....................9
Expiration of the Advisory Agreement With Shaffer
Asset Management .................................9
Possible Effects of Speculative Position
Limits............................................9
Possible Effects of Market Limits.......................9
Limitation on Portfolio Diversification................10
Lack of Independent Experts............................10
TABLE OF CONTENTS
PAGE
POSSIBLE ADVANTAGES OF INVESTMENT IN THE FUND................10
ORGANIZATIONAL CHART.........................................12
SUMMARY FINANCIAL INFORMATION................................13
CONFLICTS OF INTEREST / FIDUCIARY
RESPONSIBILITY OF THE GENERAL PARTNER....................14
USE OF PROCEEDS..............................................17
FEES, COMPENSATION AND EXPENSES..............................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .....................23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...............................................25
PERFORMANCE OF THE FUND......................................29
THE GENERAL PARTNER / ADVISOR................................29
COMMODITY BROKERAGE ARRANGEMENTS.............................35
PLAN OF DISTRIBUTION.........................................37
INVESTMENTS BY ERISA ACCOUNTS................................39
DISTRIBUTIONS AND REDEMPTIONS................................40
TRADING POLICIES.............................................41
SUMMARY OF THE ADVISORY AGREEMENT............................43
SUMMARY OF THE LIMITED PARTNERSHIP
AGREEMENT.................................................44
FEDERAL INCOME TAX CONSIDERATIONS............................48
LEGAL MATTERS................................................50
EXPERTS......................................................50
INDEX TO FINANCIAL STATEMENTS................................51
PART TWO
PAGE
DESCRIPTION OF COMMODITY TRADING.............................67
SUPPLEMENTAL PAST PERFORMANCE OF THE ADVISOR.................70
APPENDIX - GLOSSARY AND DEFINITIONS OF COMMODITY
FUTURES TRADING .....................................APP-1
EXHIBIT A - SECOND AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP ....................................A-1
EXHIBIT B - SUBSCRIPTION REQUIREMENTS........................B-1
EXHIBIT C - SUBSCRIPTION INSTRUCTIONS FOR SUBSCRIPTION
AGREEMENT / POWER OF ATTORNEY............................C-1
EXHIBIT D - REQUEST FOR REDEMPTION...........................D-1
THE EXECUTION COPY OF THE SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY ACCOMPANIES
THIS PROSPECTUS.
SHAFFER ASSET MANAGEMENT, INC.
General Partner
925 Westchester Avenue, Suite 306
White Plains, NY 10604
800-352-5265
(ii)
SUMMARY
GENERAL
The following summary is intended to highlight the significant information
contained in the body of this prospectus and the accompanying statement of
additional information. More detailed information is found in the remainder of
this prospectus and the accompanying statement of additional information. This
summary is qualified in its entirety by the information appearing elsewhere in
this prospectus and the accompanying statement of additional information, and
the description of any document is qualified in its entirety by reference to
such document.
RISK FACTORS
The following is a summary of the major risks involved in a purchase
of the Units. For a further explanation of these and other risks, please read
this entire prospectus carefully and consider the "Risk Factors" on page 5.
The purchase of Units is speculative and involves a high degree of
risk. Purchasers could lose all or substantially all of their investments in the
Fund. Shaffer Asset Management uses technical trend-following trading methods
which could expose the Fund to significant risks. There is no secondary market
for the Units. There are restrictions and possible fees assessed with
redemptions of the Units. Transfers of interests in the Units require the
consent of Shaffer Asset Management, which consent may be withheld in its sole
discretion. Substantial expenses must be offset by trading profits and interest
income. Shaffer Asset Management is dependent on its key personnel. The Fund has
limited operating history.
FEES AND EXPENSES
The fees and expenses to be paid with respect to a Unit at the time you
purchase Units, during the first year following your purchase, and in subsequent
years, are as follows:
LIMITED PARTNER TRANSACTION EXPENSES (1)
Sales Charge............................................... 4.00%
Syndication fee............................................ 1.00%
------
TOTAL...................................................... 5.00%
=====
ANNUAL FEES AND EXPENSES PAID DURING FIRST YEAR FOLLOWING PURCHASE OF
UNITS (2) (3) (4)
Management fee............................................. 3.75%
Continuing Service fee..................................... 1.25%
Commodities Brokerage Commissions (5)...................... 1.00%
Operating Expenses......................................... 0.50%
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TOTAL...................................................... 6.50%
=====
ANNUAL FEES AND EXPENSES PAID FROM YEAR TWO FOLLOWING PURCHASE OF UNITS THROUGH
THE REMAINDER OF THE LIFE OF THE FUND (2) (3) (4)
Management fee............................................. 1.00%
Continuing Service fee..................................... 4.00%
Commodities Brokerage Commissions (5)...................... 1.00%
Operating Expenses......................................... 0.50%
------
TOTAL...................................................... 6.50%
=====
- -----------
(1) As a percentage of offering price per Unit.
(2) As a percentage of average monthly Net Asset Value per Unit.
(3) Does not include early redemption fees of up to 4% payable on any
redemption of Units made within one year of purchase.
(4) Does not include Incentive Allocation to Shaffer Asset Management of 15%
of New Trading Profits.
(5) Estimated based on the historical trading patterns of Shaffer Asset
Management.
-1-
THE FUND
THE FUND
Shaffer Diversified Fund, LP is a limited partnership organized on
August 29, 2000 under the Delaware Revised Uniform Limited Partnership Act as an
investment vehicle that allows investors to include commodity futures contracts
traded on the United States commodity futures markets in their portfolios in the
same way that they include mutual funds, money market funds and limited
partnerships in other areas. The Fund will terminate on December 31, 2025, or
upon an earlier date in certain circumstances as described in the Fund's
Agreement of Limited Partnership, attached to this prospectus as Exhibit A.
LOCATION AND TELEPHONE NUMBER
The principal executive offices of the Fund and Shaffer Asset
Management are located at 925 Westchester Avenue, White Plains, New York 10604;
telephone number is (800) 352-5265 (toll-free).
BUSINESS
The business of the Fund is to seek medium and long-term capital
appreciation through speculative trading in a diversified portfolio of commodity
futures contracts in the United States commodity futures markets pursuant to the
trading instructions of Shaffer Asset Management. Specifically, the Fund trades
and invests in the markets of currency, interest rate, grain, metals and energy
futures.
ADMINISTRATION
Shaffer Asset Management, in its capacity as the general partner of
and the commodity trading advisor to the Fund, administers the business and
affairs of the Fund and has sole and exclusive authority over its trading
decisions. The Fund's Units are offered through Berthel Fisher & Company
Financial, Inc., the Fund's principal selling agent, and possibly through
additional selling agents introduced by Berthel Fisher & Company, referred to in
this prospectus as "selected dealers." Berthel Fisher & Company and the selected
dealers are referred to collectively as "selling agents." ADM Investor Services,
Inc. serves as the Fund's current commodity broker.
FEES AND EXPENSES PAYABLE BY THE FUND
The Fund is required to pay substantial charges, such as continuing
services fees; management fees and possible incentive allocations; brokerage
commissions; legal, accounting, auditing, printing, recording, filing and other
periodic fees and expenses; and any extraordinary expenses. Shaffer Asset
Management has agreed, however, to pay all such expenses that are, in the
aggregate, in excess of 0.5% of the average monthly Net Asset Value of the Fund
per annum, except for sales charges, continuing services fees, management fees,
incentive allocations, brokerage commissions and extraordinary expenses, which
expenses shall be paid by the Fund. A complete description of these charges is
set forth below under "Fees, Compensation and Expenses."
FEES AND EXPENSES PAYABLE BY THE GENERAL PARTNER
Shaffer Asset Management will pay all organizational and initial
offering expenses of the Fund, exclusive of selling commissions. In addition,
Shaffer Asset Management will pay all operating and other administrative
expenses attributable to the Fund that are in the aggregate in excess of 0.5% of
the average monthly Net Asset Value of the Fund per annum, except for sales
charges, continuing services fees, management fees, incentive allocations,
brokerage commissions and extraordinary expenses, which expenses shall be paid
by the Fund.
BREAK-EVEN THRESHOLD
Charges of the Fund that are not offset by trading gains and interest
income will deplete the assets of the Fund. In order for an investor to "break
even" on his or her investment in the first year of trading, the Fund will have
to earn $1,209, if redemption charges apply, or $1,092 if redemption charges do
not apply, 12.09% or 10.92%, respectively, of an initial $10,000 investment. See
"Fees, Compensation and Expenses -- Estimate of Break-even Threshold."
-2-
DISTRIBUTIONS
Distributions of profits, if any, will be made at the discretion of
Shaffer Asset Management. Investors should be aware, however, that Shaffer Asset
Management does not intend to make any distributions of any profits. See
"Distribution and Redemptions."
REDEMPTION OF UNITS
Limited partners of the Fund can redeem some or all of their Units as
of the last business day of each month at the then current Net Asset Value per
Unit on ten days' prior written notice to Shaffer Asset Management; no
redemption which applies to less than all of a partner's interest in the Fund
can result, however, in the partner's capital account being reduced below
$10,000 ($5,000 in the case of investments by pension, profit-sharing or other
employee benefit plans qualified under Section 401 of the Internal Revenue Code,
IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension -- IRA
plans and retirement and deferred compensation and annuity plans and trusts used
to fund those plans) after the redemption is effected. See "Distributions and
Redemptions."
The Fund charges an early redemption fee, except on redemptions
effected to provide funds for the payment of taxes on profits, equal to 4% of
the Net Asset Value of the Units redeemed as of or before the end of the third
full calendar month after their purchase. This fee will decrease by one
percentage point for every three subsequent calendar months so that there will
be no early redemption fee charged on redemptions effected after the end of the
twelfth full calendar month after their purchase. See "Fees, Compensation and
Expenses -- Description of Fees, Compensation and Expenses -- Early Redemption
Fees" and "Distributions and Redemptions."
FEDERAL TAX TREATMENT
For Federal income tax purposes, the Fund is treated as a partnership
and not a corporation; however, no ruling from the IRS has been obtained
confirming this tax treatment. The Fund's status as a partnership means that
investors will be subject to tax on their allocable shares of the Fund's
interest income and any gains earned each year, whether or not they redeem any
Units or receive any cash distributions from the Fund during such year.
Also, an individual who incurs a capital loss in any year may not be
able to deduct (for tax purposes) all of that loss in that same year. The amount
deductible in any one year is subject to an annual limit. The annual limit is an
amount equal to (i) that person's capital gains incurred in the same year, plus
(ii) $3,000. However, the rest of the capital loss can be deducted in future
years, but subject to the same annual limit. See "Federal Income Tax
Considerations."
SECURITIES OFFERED
During the continuing offering period, Units are offered at Net Asset
Value as of the last business day of each calendar month at a purchase price
equal to the then current Net Asset Value per Unit, plus a sales charge of 5% of
the Net Asset Value per Unit for each Unit purchased. See "Plan of Distribution
- -- Subscription Procedures."
The net assets of the Fund are its assets less its liabilities
determined in accordance with the Limited Partnership Agreement. The Net Asset
Value per Unit equals the net assets of the Fund divided by the number of Units
outstanding as of the date of determination. Investors must submit subscriptions
at least ten business days prior to the applicable month-end closing date.
Approved subscriptions will be accepted once payments are received and cleared.
The Fund accepts subscriptions throughout the continuing offering
period, which can be terminated by Shaffer Asset Management at any time. Shaffer
Asset Management has no present intention to terminate the offering.
The Fund's selling agents will use their best efforts to sell the
Units offered but are not obligated to sell any specific number of Units.
INVESTORS ARE REQUIRED TO MAKE REPRESENTATIONS AND WARRANTIES RELATING TO THEIR
SUITABILITY TO PURCHASE THE UNITS IN THE SUBSCRIPTION AGREEMENT AND POWER OF
ATTORNEY. READ THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY AS WELL AS THIS
PROSPECTUS CAREFULLY BEFORE YOU DECIDE WHETHER TO INVEST
-3-
MINIMUM INVESTMENT AMOUNTS
The minimum initial investment in the Fund by any one investor is
$10,000. However, the minimum initial investment for pension, profit-sharing or
other employee benefit plan qualified under Section 401 of the Internal Revenue
Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension
- -- IRA plans and retirement and deferred compensation and annuity plans and
trusts used to fund those plans is $5,000. Additional investments may be made in
amounts of not less than $1,000. See "Plan of Distribution -- Subscription
Procedure."
SUITABILITY STANDARDS
Each investor must represent in the Subscription Agreement / Power of
Attorney, attached as Exhibit C to the statement of additional information that
accompanies this prospectus, that his or her net worth and/or annual gross
income satisfy certain requirements, that he or she has received a copy of this
prospectus and the accompanying statement of additional information, and that he
or she is able to assume the risks inherent in an investment in the Fund. See
"Plan of Distribution -- Subscriptions/Investment Requirements/Investor
Suitability Requirements."
USE OF PROCEEDS
The entire offering proceeds, net of initial sales charges and
syndication fees, will be credited to the Fund's accounts at JPMorganChase and
ADM Investor Services and/or other banks and commodity brokers and will be
available to support the Fund's trading in commodity futures contracts pursuant
to the instructions of Shaffer Asset Management. See "Use of Proceeds."
RISKS AND CONFLICTS OF INTEREST
An investment in the Fund involves substantial risks. The risks of
investing in the Fund include, but are not limited to, the highly speculative
nature of trading in commodity futures contracts and the substantial charges
that the Fund will incur regardless of whether any profits are realized. A
limited partner of the Fund may lose his or her entire investment in the Fund,
including any profits. In addition, the Fund is subject to various conflicts of
interest. See "Risk Factors" and "Conflicts of Interest/Fiduciary Responsibility
of the General Partner."
-4-
RISK FACTORS
SET FORTH BELOW ARE THE PRINCIPAL RISKS ASSOCIATED WITH AN INVESTMENT
IN THE FUND. YOU SHOULD CONSIDER THESE RISKS WHEN MAKING YOUR INVESTMENT
DECISION. YOU SHOULD ALSO READ THIS ENTIRE PROSPECTUS AND THE STATEMENT OF
ADDITIONAL INFORMATION CAREFULLY AND DISCUSS YOUR INVESTMENT DECISION WITH YOUR
LEGAL, TAX AND FINANCIAL ADVISORS.
POSSIBILITY OF LOSING ENTIRE INVESTMENT.
An investment in the Fund is a speculative investment. The Fund may
not achieve its objectives or avoid substantial losses. For every gain in
futures trading, there is an equal and offsetting loss by another. Shaffer Asset
Management has, from time to time, incurred substantial losses in trading on
behalf of its customers. An investor in the Fund may lose all or substantially
all of his or her investment in the Fund.
COMMODITY FUTURES TRADING IS SPECULATIVE.
Commodity futures prices are highly volatile and are subject to
occasional rapid and substantial changes. Price movements for commodity futures
contracts and other related interests are influenced by, among other things:
government trade, fiscal, monetary and exchange control programs and policies;
weather and climate conditions; changing supply and demand relationships;
national and international political and economic events; changes in interest
rates; and the psychological emotions of the market place. In addition,
governments may intervene periodically in certain markets, generally currencies,
either directly or by regulation, often with the intent of influencing prices
directly. The trading techniques utilized by Shaffer Asset Management are
primarily technical in nature, and Shaffer Asset Management does not ordinarily
consider fundamental economic factors, such as supply and demand, except to the
extent that such factors are reflected in the technical input data analyzed by
Shaffer Asset Management. See "The General Partner / Advisor -- Trading Methods"
and "Description of Commodity Trading" in the statement of additional
information that accompanies this prospectus.
COMMODITY FUTURES TRADING IS HIGHLY LEVERAGED.
Commodity futures contracts are traded on margins that typically
range from about 4% to 20% to the value of the contract. The average margin is
less than 10% of the value of the contract. Low margin provides a large amount
of leverage -- that is, commodity futures contracts for a large number of Units
of a commodity interest (bushels, pounds, etc.) having a value substantially
greater than the required margin may be traded for a relatively small amount of
money. Hence, a relatively small change in the market price of a commodity
interest produces a corresponding large profit or loss in relation to the amount
of money invested. Thus, if the Fund has invested a substantial portion of its
Net Asset Value in such a commodity interest, a substantial change, up or down,
in the value of a Unit would result. The Fund may lose more than its initial
margin on a trade, up to the entire amount at risk, but a limited partner of the
Fund cannot incur net losses greater than the amount of his or her investment.
See "Summary of the Limited Partnership Agreement -- Liabilities."
MARKETS IN WHICH THE FUND TRADES MAY BECOME ILLIQUID.
Unexpected market illiquidity could cause major losses for the Fund.
In illiquid markets, the Fund could be unable to close out positions to limit
losses or to take positions favorable to the Fund. There are too many different
factors that can contribute to market illiquidity to predict when or where
illiquid markets may occur. In addition, the Fund may take large positions that
become difficult to liquidate or to liquidate at the prices desired by the Fund,
possibly causing losses for the Fund.
United States commodity exchanges impose limits on the amount the
price of some, but not all, futures contracts may change on a single day. Once a
futures contract has reached its daily limit, it may be impossible for the Fund
to liquidate a position in that contract, if the market has moved adversely to
the Fund, until the limit is either raised by the exchange or the contract
begins to trade away from the limit price.
-5-
AUTOMATIC TERMINATION.
The Fund will close out all open positions and suspend trading, and
may terminate, if the Net Asset Value per Unit (increased by the amount of
distributions per Unit, if any) on any business day during any given fiscal year
decreases to or below 50% of the Net Asset Value per Unit as of the beginning of
the fiscal year, provided that such 50% decrease results in a Net Asset Value
per Unit of less than $1,000, or if the Net Asset Value per Unit (increased by
the amount of distributions per Unit, if any) decreases on any business day to
or below $350. No assurance can be given, however, that the investor will
receive at least one-half of any year's beginning Net Asset Value per Unit or
$350 per Unit because there is no assurance that the Fund will be able to
liquidate its positions at favorable prices. See "Trading Policies."
SUBSTANTIAL FEES, COMMISSIONS AND EXPENSES.
The Fund is obligated to pay substantial fees, commissions and
expenses without regard to profitability. Therefore, the Fund will have to make
substantial gross gains from commodity trading each year in order for the
limited partners of the Fund to realize any appreciation in the value of their
Units. In addition, the payment by the Fund of such fees, commissions and
expenses could cause the Fund to close out all open positions, suspend trading
and possibly terminate as described in "Risk Factors--Automatic Termination,"
above. See "Conflicts of Interest/Fiduciary Responsibility of the General
Partner," "Fees, Compensation and Expenses," "Commodity Brokerage Arrangements"
and "Summary of the Limited Partnership Agreement -- Termination."
DISTORTIONS PRODUCED BY INCENTIVE ALLOCATION ARRANGEMENT.
As more fully described under "Plan of Distribution," the purchase
price of Units continuously sold vary with the Net Asset Value per Unit.
Incentive allocations allocable to the Fund's advisor are contingent on
cumulative New Trading Profits (as hereinafter defined), and all Advisory Losses
(as hereinafter defined) incurred by Shaffer Asset Management following the
allocation of any incentive allocations to it must be recovered by Shaffer Asset
Management before any additional incentive allocations are allocable to it. The
combination of this arrangement with the withdrawal of existing partners or the
admission of new partners will distort the results experienced by the Units. A
decline in the Fund's cumulative profits creates, in effect, a "credit" against
future incentive allocations. A partner who withdraws from the Fund while such a
"credit" remains outstanding forfeits his share thereof. A partner who is
admitted to the Fund while such a "credit" remains outstanding acquires a share
therein (thereby diluting the existing partners' share therein) even though he
has not personally suffered the loss that gave rise to it.
In addition, the Fund allocates to Shaffer Asset Management, on a
quarterly basis, a percentage of New Trading Profits generated by the Fund for
such calendar quarter, including unrealized appreciation on open commodity
interest positions. Such appreciation may not be realized by the Fund and those
open positions might be closed at no profit or even a loss due to adverse market
conditions; nevertheless, Shaffer Asset Management would retain the entire
amount of such allocation.
LIMITATIONS OF TREND-FOLLOWING, TECHNICAL TRADING STRATEGIES.
Shaffer Asset Management uses technical, trend-following trading
methods based on mathematical analyses of certain technical data regarding past
market performance that does not ordinarily consider fundamental factors such as
weather, supply, demand and political or economic events except to the extent
reflected in technical input data analyzed by Shaffer Asset Management. Inherent
in the use of such trend-following, technical trading methods are the following
limitations: (i) such technical methods may be unable to respond to fundamental
causative events until after their impact has ceased to influence the market,
and commodity interest positions dictated by such methods may be incorrect in
light of the fundamental factors then affecting the market; (ii) such technical
trading methods may not identify a trend on which it can act, or it may react to
a minor price movement in establishing a position contrary to the overall price
trend if there are no substantial price movements, or if a price movement is
erratic or ill-defined; and (iii) such technical trading methods may, for
inexplicable reasons, produce profitable results for a period of time, after
which further application of such techniques fails to forecast correctly any
future price movement. For this reason, commodity trading advisors utilizing
such methods may modify and alter their techniques on a periodic basis. Hence,
as a result of continued modification, it is possible that the trading methods
and strategies used by Shaffer Asset Management may be different in the future
from those currently in use.
DEPENDENCE ON KEY PERSONNEL.
Currently, Daniel S. Shaffer and Bruce I. Greenberg are the sole
employees of Shaffer Asset Management. The loss of the services of both Mr.
Shaffer and Mr. Greenberg would have a material adverse effect on the operations
of Shaffer Asset Management and the Fund. See "The General Partner/Advisor."
-6-
LIMITED OPERATING HISTORY.
The Fund commenced trading February 14, 2002 and, accordingly, has a
limited operating history. Shaffer Asset Management has managed client commodity
accounts since March 1999. Neither Shaffer Asset Management nor any of its
principals has prior experience operating or advising a commodity pool. See "The
General Partner / Advisor."
LIMITED ABILITY OF LIMITED PARTNERS TO LIQUIDATE INVESTMENT IN THE UNITS.
An investor in the Fund may not be able immediately to liquidate an
investment in the Units. There is no public market for the Units, nor is one
likely to develop. In addition, a transferee of a Unit may become a substituted
limited partner of the Fund only with the consent of Shaffer Asset Management,
which consent may be withheld in its sole discretion. However, a limited partner
of the Fund may require the Fund to redeem any or all of his Units at the then
current Net Asset Value as of the close of business on the last business day of
any calendar month upon ten days' prior written notice to Shaffer Asset
Management, subject to an early redemption fee for redemptions of Units effected
as of or before the end of the twelfth full calendar month after their purchase,
other than redemptions effected to provide funds for the payment of taxes on
profits. See "Distributions and Redemptions" and "Summary of the Limited
Partnership Agreement -- Redemptions."
POSSIBLE EFFECT OF REDEMPTIONS ON UNIT VALUES.
Substantial redemptions of Units at the same time could require the
Fund to liquidate market positions to raise the necessary cash to fund
redemptions. Forced liquidations could adversely affect the value of the Units
redeemed and of the Units remaining outstanding.
LIMITED RIGHTS OF INVESTORS / LIMITED PARTNERS WILL NOT PARTICIPATE IN
MANAGEMENT.
Purchasers of the Units become limited partners of the Fund and, as
such, are unable to exercise any management functions with respect to its
operations. The rights and obligations of the Fund's limited partners are
governed by the provisions of the Delaware Revised Uniform Limited Partnership
Act and by the Fund's limited partnership agreement, which provides, in part,
that a majority in interest of the limited partners of the Fund may:
o adopt amendments to the Fund's limited partnership agreement proposed
by Shaffer Asset Management or by limited partners of the Fund owning
at least 10% of the outstanding Units;
o dissolve the Fund;
o remove Shaffer Asset Management as the Fund's general partner;
o elect a new general partner if Shaffer Asset Management withdraws or
is removed; or
o cancel any contract for services with Shaffer Asset Management or its
affiliates for any reason on sixty days' prior written notice.
See "Summary of the Limited Partnership Agreement" and Exhibit A to
the statement of additional information that accompanies this prospectus.
UNPREDICTABILITY OF REGULATORY CHANGES.
The futures markets are subject to comprehensive statutes,
regulations and margin requirements. In addition, the CFTC and the exchanges on
which commodity futures contracts are traded are authorized to take
extraordinary actions in the event of a market emergency, including the
retroactive implementation of speculative position limits or higher margin
requirements, the establishment of daily price limits and the suspension of
trading. The regulation of commodity futures transactions in the United States
is a rapidly changing area of law and is subject to modification by government
and judicial action at any time and from time to time.
-7-
PARTNERS' TAX LIABILITY MAY EXCEED DISTRIBUTIONS.
The distribution of cash to partners is subject to the sole
discretion of Shaffer Asset Management, and Shaffer Asset Management may
determine, and in fact intends, not to make any distributions. However, the
Fund's taxable income for a fiscal year, if any, will be taxable to the partners
in accordance with their distributive shares of Fund income whether or not any
cash has been distributed to the partners. As a result, distributions to the
limited partners of the Fund may not equal taxes payable by partners with
respect to Fund income. Subject to certain restrictions, however, partners have
the right to redeem some or all of their Units as of the last business day of
any calendar month upon ten days' prior written notice to Shaffer Asset
Management and may be able to exercise such right in order to provide funds for
the payment of taxes and other purposes. In addition, the Fund might sustain
losses offsetting such profits after the end of the Fund's fiscal year, so a
partner might never receive the profits on which he has paid taxes. In addition,
due to the complex requirements relating to partnership tax accounting, it is
possible that under certain conditions partners may be allocated gains or losses
for tax purposes which are greater or less than any actual increase or decrease
in the value of their Units. See "Distributions and Redemptions" and "Federal
Income Tax Consequences."
TAX COULD BE DUE FROM INVESTORS ON THEIR SHARE OF THE FUND'S ORDINARY INCOME
DESPITE OVERALL LOSSES.
Investors may be required to pay tax on their allocable share of the
Fund's ordinary income, which in the case of the Fund is primarily the Fund's
interest income, even though the Fund incurs overall losses. Capital losses of
individuals can be used only to offset capital gains and $3,000 of ordinary
income each year. Consequently, if an investor having no other items of capital
gain or loss in a particular year were allocated $5,000 of ordinary income and
$10,000 of capital losses from the Fund, the investor would owe tax on $2,000 of
ordinary income even though the investor would have economically incurred a
$5,000 overall loss for the year. The remaining $7,000 nondeductible capital
loss could be used in subsequent years to offset capital gain and ordinary
income, but subject to the same annual limitation on its deductibility against
ordinary income.
THERE COULD BE A LIMIT ON THE DEDUCTIBILITY OF BROKERAGE AND PERFORMANCE FEES.
Although Shaffer Asset Management treats the management fees paid to
it, and brokerage fees paid to the commodity brokerages, and certain other
expenses of the Fund, as ordinary and necessary business expenses, upon audit
the Fund may be required to treat such fees as "investment advisory fees" if the
Fund's trading activities did not constitute a trade or business for tax
purposes. If the expenses were investment advisory expenses, the tax liability
of a limited partner of the Fund would likely increase. In addition, upon audit,
a portion of the brokerage fees might be treated as a non-deductible syndication
cost or might be treated as a reduction in the Fund's capital gain or as an
increase in the Fund's capital loss. If the brokerage fees were so treated, the
tax liability of a limited partner of the Fund would likely increase.
CONFLICTS OF INTEREST.
There exist inherent and potential conflicts of interest in the
operation of the Fund's business. These include:
o the ability of Shaffer Asset Management to increase the amount of the
management fees payable to it and the continuing services fees
payable to the selling agents (one of which the sole officers,
directors and shareholders of Shaffer Asset Management are registered
representatives) by limiting the distributions of profits, if any, of
the Fund;
o competition in making purchases and/or sales of commodity futures
contracts among Shaffer Asset Management, its selling agents, its
commodity brokers and their respective officers, directors,
shareholders, employees, customers and affiliates;
o the limited ability of Shaffer Asset Management to prevent itself
from violating the trading policies of the Fund and from engaging in
excessive trading, and the potential absence of arm's length
negotiations with respect to the terms of the advisory agreement
entered into between the Fund and Shaffer Asset Management, each
caused by Shaffer Asset Management acting as the Fund's general
partner and commodity trading advisor; and
o the potential absence of arm's length negotiations with respect to
the terms of the selling agent agreement entered into between the
Fund and Berthel Fisher & Company, caused by the sole officers,
directors and shareholders of Shaffer Asset Management being
registered representatives of Berthel Fisher & Company.
For a complete discussion of the inherent and potential conflicts of
interest that may constitute a current risk to potential investors in the Fund,
see "Conflicts of Interest / Fiduciary Responsibility of the General Partner."
-8-
OTHER CLIENTS OF THE FUND'S ADVISOR.
Shaffer Asset Management and its sole officers, directors and
shareholders, Daniel S. Shaffer and Bruce I. Greenberg, currently manage other
trading accounts and trade for their own account, and they and their principals,
employees and affiliates will remain free to manage additional accounts,
including their own accounts, in the future subject to certain limitations. It
is possible that such accounts and any additional accounts managed by Shaffer
Asset Management or its principals, employees or affiliates in the future may be
in competition with the Fund for the same or similar positions in the futures
markets. In addition, Shaffer Asset Management may vary the trading strategies
applicable to the Fund from those used for its other managed accounts. No
assurance is given that the results of the Fund's trading will be similar to
that of other accounts concurrently managed by Shaffer Asset Management or its
principals, employees and affiliates. However, in its trading for the Fund's
account and such other accounts, Shaffer Asset Management has agreed to use its
good faith, best efforts to achieve an equitable treatment of all accounts,
including with respect to priorities of order entry and changes in trading
strategies or recommendations resulting from the application of speculative
position limits. See "Risk Factors -- Possible Effects of Speculative Position
Limits."
EXPIRATION OF THE ADVISORY AGREEMENT WITH SHAFFER ASSET MANAGEMENT.
The advisory agreement between the Fund and Shaffer Asset Management
is for a one year term, subject to earlier termination by the Fund or Shaffer
Asset Management and subject to automatic renewal on the same terms and
conditions for an additional one year term, unless Shaffer Asset Management
elects against renewal. Upon the expiration of the advisory agreement, Shaffer
Asset Management, on behalf of the Fund, must either attempt to renegotiate the
advisory agreement or make other arrangements for providing advisory services to
the Fund if the Fund intends to continue trading. No assurance is given that the
principals of Shaffer Asset Management will continue their association with
Shaffer Asset Management during the term of the advisory agreement or that the
services of Shaffer Asset Management or any of its principals will then be
available on the terms contained in the current advisory agreement or on any
other terms. Notwithstanding the foregoing, Shaffer Asset Management intends to
amend the advisory agreement to provide for successive automatic one-year
renewals on the same terms and conditions. See "Summary of the Advisory
Agreement."
POSSIBLE EFFECTS OF SPECULATIVE POSITION LIMITS.
The CFTC and certain exchanges have established speculative position
limits on the maximum net long or short futures position which any person, or
group of persons acting in concert, may hold or control in some, but not all,
commodities. All commodity accounts controlled by Shaffer Asset Management and
its principal(s) will be aggregated for these speculative position limit
purposes. With respect to trading in commodity futures contracts subject to such
limits, Shaffer Asset Management may reduce the size of the positions that would
otherwise be taken for the Fund in such commodity futures contracts and may not
trade commodity futures contracts on certain commodities in order to avoid
exceeding such limits. Such modifications of the Fund's trades, if required,
could adversely affect the operations and profitability of the Fund. See
"Conflicts of Interest / Fiduciary Responsibility of the General Partner" and
"Summary of the Advisory Agreement."
POSSIBLE EFFECTS OF MARKET LIMITS.
It is not always possible to execute a buy or sell order at the
desired price or to close out an open position, either due to market conditions
or to limits on open positions and/or daily price fluctuation limits imposed by
exchanges and approved by the CFTC.
When the market price of a commodity futures contract reaches its
daily price fluctuation limit, no trades can be executed unless traders are
willing to effect trades at or within the limit, which may be unlikely due to
movements in the market price of the underlying cash commodity. The holder of a
commodity futures contract, including the Fund, may therefore be locked into an
adverse price movement for several days or more and lose considerably more than
the margin committed to trading the contract. In certain commodities, the daily
price fluctuation limits apply throughout the life of the contract, and hence
the holder of a futures contract who cannot liquidate his position by the end of
trading on the last trading day may be required to make or take delivery of the
underlying commodity.
Another instance of difficult or impossible execution occurs in
thinly traded markets or markets which lack sufficient trading liquidity.
Although the Fund purchases and sells actively traded commodities, no assurance
can be given that this will always be the case or that the Fund's orders will be
executed at or near the desired price.
-9-
LIMITATION ON PORTFOLIO DIVERSIFICATION.
Historically, managed commodity futures contracts have generally not
correlated with the performance of other asset classes, such as stocks and
bonds. Non-correlation means that (i) there is no statistically valid
relationship between the past performance of commodity futures contracts, on the
one hand, and stocks or bonds, on the other hand and (ii) the Fund may not
necessarily be profitable or unprofitable during unfavorable periods for the
stock market. If the Fund does not perform in a manner that is not correlated
with the general financial markets or does not perform successfully, an investor
will obtain no diversification benefits by investing in the Units. In addition,
an investor may have no gains from the Fund to offset losses in the rest of his
or her portfolio.
LACK OF INDEPENDENT EXPERTS.
Shaffer Asset Management has consulted with independent counsel,
accountants and other experts regarding the formation and operation of the Fund.
The Fund has not, however, engaged separate counsel, accountants or experts to
represent investors in connection with this offering. Each investor should,
therefore, consult with his or her own legal, tax and financial advisors
regarding the desirability of an investment in the Fund.
POSSIBLE ADVANTAGES OF INVESTMENT IN THE FUND
ALTHOUGH THERE CAN BE NO ASSURANCE THAT SHAFFER ASSET MANAGEMENT WILL
TRADE SUCCESSFULLY ON BEHALF OF THE FUND OR THAT THE FUND WILL AVOID LOSSES, IF
THE FUND IS SUCCESSFUL, AN INVESTMENT IN THE FUND OFFERS INVESTORS THE FOLLOWING
POTENTIAL ADVANTAGES.
PROFESSIONAL COMMODITY TRADING MANAGEMENT
Trading decisions for the Fund are made by Shaffer Asset Management
pursuant to its trend-following, technical trading strategies. The Fund,
therefore, enables investors to take advantage of the trading expertise of a
professional commodity trading advisor which would not otherwise be available
unless substantially more than the minimum investment in the Fund were committed
to trading -- in this case, generally a minimum investment of $100,000 per
account.
INVESTMENT DIVERSIFICATION
The Fund allows investors to include commodity futures contracts in
their portfolios in the same way that they include mutual funds, money market
funds and limited partnerships in other areas, e.g., oil and gas and real
estate. A commodity futures investment can be an especially attractive
diversification for a portfolio of stocks and bonds because it can be profitable
during periods of both favorable and unfavorable economic conditions. Of course,
it can also suffer losses during such periods as well.
COMMODITY FUTURES MARKET DIVERSIFICATION
The Fund will be large enough to enable Shaffer Asset Management to
trade in as many different commodity futures markets as it chooses, thereby
diversifying risk. Each of the Fund's limited partners will obtain greater
diversification in the variety of contracts and markets traded than would
otherwise be possible trading individually an account the size of a minimum
investment in the Fund.
LIMITED LIABILITY
Because of the highly leveraged nature of commodity futures trading,
an individual who invests directly in commodity futures contracts may lose
substantially more than his or her investment. A limited partner of the Fund,
however, cannot be individually subjected to margin calls or lose more than his
or her investment in the Fund and his or her share of profits, if any, whether
or not distributed.
-10-
LIQUIDITY
Limited partners of the Fund can redeem same or all of their Units as
of the last business day of each month. partial redemptions may not, however,
reduce a limited partner's capital account below the minimum investment amount
applicable to such limited partner. Redemption fees apply to Units redeemed
during the first full twelve calendar months after their purchase, except for
redemptions effected to provide funds for the payment of taxes on profits. See
"Distributions and Redemptions."
RISK MANAGEMENT
The Fund will close out all open positions and suspend trading, and
may terminate, if the Net Asset Value per Unit (increased by the amount of
distributions per Unit, if any) on any business day during any given fiscal year
decreases to or below 50% of the Net Asset Value per Unit as of the beginning of
the fiscal year, provided that such 50% decrease results in a Net Asset Value
per Unit of less than $1,000, or if the Net Asset Value per Unit (increased by
the amount of distributions per Unit, if any) decreases on any business day to
or below $350. See "Trading Policies."
FAVORABLE TAX TREATMENT
Substantially all of the Fund's commodity futures trading are taxed
at a maximum potential Federal income tax rate of 27.84% for individuals with no
holding period requirement. Because the Fund is a limited partnership, all tax
effects flow through to its limited partners. See "Federal Income Tax
Considerations."
LEVERAGE
Commodity futures contracts are traded on margins that typically
range from about 4% to 20% of the value of the contract. As a result, the Fund
is able to hold positions in its account with face values equal to several times
its net assets. A relatively small change in the market price of a commodity
interest, therefore, produces a corresponding large profit or loss in relation
to the amount of money invested. In general, Shaffer Asset Management intends to
commit between 10% and 40% of the Fund's net assets as margin for commodity
trading.
INTEREST INCOME
Unlike some "alternative investment" funds, the Fund does not borrow
money in order to obtain leverage, so the Fund does not incur any interest
expense. Rather, the Fund's margin deposits are maintained in cash equivalents,
such as U.S. Treasury bills. As a result, the Fund earns interest on
approximately 90% of its net assets, even while such assets are committed to
trading.
ADMINISTRATIVE CONVENIENCE
The Fund provides to or obtains for its limited partners many
services designed to alleviate the administrative details involved in engaging
directly in futures transactions, including maintenance of the books and
accounts of trading activities, preparing monthly and annual account statements
for its limited partners, and supplying its limited partners with information
necessary for individual Federal tax returns.
-11-
ORGANIZATIONAL CHART
The following organizational chart illustrates the relationships
among the various service providers of this offering. Shaffer Asset Management
is both the general partner of, and the commodity trading advisor to, the Fund.
Berthel Fisher & Company, the selected dealers and ADM Investor Services are not
affiliated with each other or with Shaffer Asset Management or the Fund, except
that Daniel S. Shaffer and Bruce I. Greenberg, the sole officers, directors and
shareholders of Shaffer Asset Management are registered representatives of
Berthel Fisher & Company, the Fund's principal selling agent. No loans have
been, are or will be made between Shaffer Asset Management or any of its
principals and the Fund. Descriptions of the dealings between Shaffer Asset
Management and the Fund are set forth under "Fees, Compensation and Expenses"
beginning on page 17.
GENERAL PARTNER/
ADVISOR:
SHAFFER ASSET
MANAGEMENT,
INC. |
| |
| |
Individual Managed | | Advisory
Account Agreements | | Agreement
| | Customer
| Agreement COMMODITY
INDIVIDUAL SHAFFER DIVERSIFIED ------------ BROKER:
MANAGED ACCOUNT FUND, LP
PROGRAM | ADM INVESTOR
| SERVICES, INC.
|
| Selling Agent Agreement
|
|
BERTHEL FISHER & COMPANY
|
|
|Selected Dealer Agreements
|
|
|
SELLING DEALERS
-12-
SUMMARY FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
Period Ended For the year Ended
September 30, December 31,
------------- -----------------------
2002 2001 2000
------------- ---------- ----------
Total Assets $1,149,265 $ 413,586 $ 1,916
Total Liabilities 5,786 413,000 0.00
Total Liabilities & Partners' Capital 1,149,265 413,586 1,916
Net Income (Loss) After special
allocation to the General Partner 76,989 (1,330) (84)
Net Income (Loss) Per General
and Limited Partner Unit * 73.20 (665.00) (42.00)
Increase (Decrease) in Net Asset Value
per General and Limited Partner Units 77.67 (665.00) (42.00)
NOTE: The Fund commenced trading February 14, 2002.
* Based on weighted average number of units outstanding during the period.
SUPPLEMENTARY FINANCIAL INFORMATION
The following summarized quarterly financial information presents the
results of operations for the three-month periods ending March 31, 2002,
June 30, 2002 and September 30, 2002.
1st Qtr. 2nd Qtr. 3rd Qtr.
2002 2002 2002
-------- -------- --------
Gain (loss) from Trading $ 31,104 $ 133,088 $ (18,489)
Total Income (Loss) 32,665 137,456 (14,016)
Net Income (Loss) 16,208 99,190 (38,409)
Net Income (Loss) per General
and Limited Partner Unit * 15.45 95.65 (35.96)
Increase ( Decrease) in Net Asset Value per
General and Limited Partner Units 15.45 96.10 (33.88)
Net Asset Value per General and Limited Partner
Unit at the End of the Period 965.45 1,061.55 1,027.67
* Based on weighted average number of units outstanding during the period.
-13-
CONFLICTS OF INTEREST / FIDUCIARY RESPONSIBILITY
OF THE GENERAL PARTNER
THE FOLLOWING INHERENT OR POTENTIAL CONFLICTS OF INTEREST SHOULD BE
CONSIDERED BY POTENTIAL SUBSCRIBERS BEFORE INVESTING IN THE FUND. POTENTIAL
SUBSCRIBERS SHOULD BE AWARE THAT SHAFFER ASSET MANAGEMENT HAS NOT ESTABLISHED
ANY FORMAL PROCEDURES TO RESOLVE THE CONFLICTS OF INTEREST DESCRIBED BELOW, AND
THAT, CONSEQUENTLY, LIMITED PARTNERS IN THE FUND ARE DEPENDENT ON THE GOOD FAITH
OF THE RESPECTIVE PARTIES SUBJECT TO SUCH CONFLICTS TO RESOLVE THEM EQUITABLY.
IN ADDITION, POTENTIAL SUBSCRIBERS SHOULD CONSIDER THE FIDUCIARY
RESPONSIBILITIES OF SHAFFER ASSET MANAGEMENT TO THE FUND AND THE LIMITED
PARTNERS OF THE FUND AS EXPLAINED BELOW.
CONFLICTS OF INTEREST
DISTRIBUTION OF PROFITS.
Under the terms of the Fund's limited partnership agreement, Shaffer
Asset Management has discretion as to the distribution of profits, if any, to
the limited partners of the Fund. At present, Shaffer Asset Management does not
intend to make any distributions of any profits. To the extent that profits are
retained by the Fund rather than distributed, the Net Asset Value of the Fund,
which is the basis for determining the management fee payable to Shaffer Asset
Management and the continuing services fees payable to Berthel Fisher & Company,
the selected dealers and their respective registered representatives (including
Daniel S. Shaffer and Bruce I. Greenberg, the sole officers, directors,
employees and shareholders of General Partner / Advisor who are also registered
representatives of Berthel Fisher & Company), will be increased.
OTHER TRADING ACCOUNTS OF THE ADVISOR, SELLING AGENTS, COMMODITY BROKER AND
THEIR PRINCIPALS AND AFFILIATES.
Shaffer Asset Management and its sole officers, directors and
shareholders, Daniel S. Shaffer and Bruce I. Greenberg, currently trade for
accounts other than the Fund, and they will remain free to trade for such other
accounts and to utilize the same trading strategies and formulas in trading for
such other accounts that Shaffer Asset Management will utilize in making trading
decisions for the Fund; and the selling agents, ADM Investor Services the
commodity brokers and their respective shareholders, directors, officers,
employees and affiliates may and will be free to trade for their own accounts
from time to time. The records of any such trading will not be available for
inspection by the limited partners of the Fund except to the extent required by
law. In addition, the commodity broker(s) ADM Investor Services are futures
commission merchants and effect transactions for customers in addition to the
Fund. Since the identities of the purchaser and seller are not disclosed until
after the trade, it is possible that transactions could be effected for the Fund
in which the other parties to the transactions are shareholders, officers,
directors, employees, customers or affiliates of the commodity broker(s) ADM
Investor Services. Such persons might also compete with the Fund in making
purchases or sales of commodity futures contracts without knowing that the Fund
is also bidding on such commodity futures contracts. Since similar orders (e.g.,
market orders for the same commodity futures contracts) are filled in the order
they are received by a particular floor broker, transactions for any of such
persons might be effected at less favorable prices. Regulations of the CFTC
prohibit futures commission merchants from utilizing their knowledge of Fund
trades for their own or their other customers' benefit. Furthermore, all of the
positions held by accounts managed by Shaffer Asset Management and its
principals and affiliates will be aggregated for purposes of applying
speculative position limits. As a result, the Fund might not be able to enter
into or maintain certain positions if such positions, when added to the
positions already held by the Fund and such other accounts, would exceed the
applicable limits.
RELATIONSHIP BETWEEN SHAFFER ASSET MANAGEMENT AND THE FUND'S COMMODITY
BROKER(S).
Under the terms of the Fund's limited partnership agreement, Shaffer
Asset Management has the authority to designate commodity broker(s) to execute
trades on behalf of the Fund and, at present, Shaffer Asset Management has
selected ADM Investor Services, Inc. to act as the commodity broker for the
Fund. The Fund pays ADM Investor Services brokerage commissions at the rate of
$17.00 per "round-turn" trade for trades executed on domestic exchanges, which
amount is reasonable, in the opinion of Shaffer Asset Management, based upon the
standard published rates currently being charged by many major brokerage firms
to their individual public customers, although such commission rates may change
in the future. Potential investors should note that the brokerage commission
rates at which the Fund will pay ADM Investor Services may be higher than rates
charged by ADM Investor Services to certain of its other customer accounts,
including the accounts of its employees, and the rates charged by other
brokerage firms. This brokerage arrangement may result; therefore, in the Fund
paying brokerage commissions for it's trading at rates that exceed the lowest
rates that might otherwise be available.
-14-
Although the Fund's brokerage arrangement with ADM Investor Services
is non-exclusive so that the Fund will have the right to seek lower commission
rates from other brokers at any time, Shaffer Asset Management believes that the
arrangements between the Fund and ADM Investor Services are fair and reasonable
in view of the nature and quality of the services to be provided by ADM Investor
Services with respect to the execution of transactions. Shaffer Asset Management
intends to seek high quality execution services and financial responsibility and
does not generally intend to seek lower commission rates from other brokers or
to negotiate with ADM Investor Services for lower commission rates. Shaffer
Asset Management intends to cause the Fund to pay a commission which it believes
to be fair and reasonable in view of the nature and quality of the services
rendered as well as the advantage of an ongoing relationship with a particular
broker or brokers who execute trades on behalf of the Fund. In directing
transactions to brokers for execution, Shaffer Asset Management considers such
factors as commission rates which will be charged to the Fund, the reputation
and financial stability of the broker, the ability of the broker to obtain fast
and accurate executions for the Fund at a fair price, the quality and accuracy
of the broker's reporting paperwork, confirmations, and monthly statements, and
other services which may be beneficial to the Fund. The Fund, therefore, may pay
commission rates that exceed the lowest commission rates available from brokers.
However, Shaffer Asset Management will review, at least annually, the commission
rates charged to other comparable commodity pools and other relevant factors to
determine that the commission rates being paid by the Fund continue to be fair
and reasonable.
Neither Shaffer Asset Management nor any of its principals directly
or indirectly share in the brokerage commissions paid by the Fund for brokerage
services. Since Shaffer Asset Management and its principals also have no
affiliations or business arrangements, direct or indirect, with any broker or
any principal thereof whereby Shaffer Asset Management or its principals may
benefit, directly or indirectly, from the maintenance of the Fund's account with
such broker, there is no actual or potential conflict of interest between
Shaffer Asset Management or any of its principals and any of the brokers with
which the Fund may carry its account, including ADM Investor Services, Inc., the
Fund's present commodity broker.
SELECTION OF THE TRADING ADVISOR(S).
Under the terms of the Fund's limited partnership agreement, Shaffer
Asset Management selects the trading advisor(s) to direct the Fund's trading.
The Fund has entered into an advisory agreement with Shaffer Asset Management,
Inc., the Fund's general partner, to manage the Fund's commodity transactions.
Since Shaffer Asset Management acts as both the general partner of, and the
trading advisor to, the Fund, it has a conflict of interest with respect to its
responsibility to prevent the trading advisor from violating the trading
policies of the Fund and from engaging in excessive trading that could cause the
Fund to pay substantial brokerage commissions. However, neither Shaffer Asset
Management nor any of its principal(s) directly or indirectly receive any
portion of the brokerage commissions paid by the Fund for brokerage services or
otherwise benefit from the maintenance of the Fund's trading accounts with any
particular broker or brokers. Shaffer Asset Management may be deemed to have a
conflict of interest with respect to its responsibility to review the trading
performance of Shaffer Asset Management and to determine whether to terminate
the advisory agreement with Shaffer Asset Management on behalf of the Fund.
There may also be deemed to be an absence of arm's-length negotiations with
respect to the terms of the advisory agreement entered into with Shaffer Asset
Management by the Fund.
SYNDICATION FEES, SALES COMMISSIONS AND CONTINUING SERVICE FEES.
Prospective investors should note as Units are sold and accepted
during the continuing offering period, the Fund will pay Shaffer Asset
Management, Berthel Fisher & Company, certain selected dealers and their
respective registered representatives an amount equal to approximately 5% above
the then current Net Asset Value per Unit of each Unit sold by them and accepted
by Shaffer Asset Management. Approximately 20% of all sales charges shall be
paid to Shaffer Asset Management to reimburse Shaffer Asset Management for the
payment of the Fund's organizational and initial offering expenses and the
Fund's operating expenses that are payable by Shaffer Asset Management and
approximately 80% of all sales charges shall be paid as syndication fees to
Berthel Fisher & Company and as selling commissions to the selling agents. The
selling agents may in turn pay a portion of such syndication fees and selling
commissions to their respective employees who are NASD registered
representatives for each Unit sold by them. In addition and subject to the
-15-
limitations described herein under "Plan of Distribution," the Fund will pay a
monthly continuing services fee to Berthel Fisher & Company and, through Berthel
Fisher & Company, certain selected dealers who are appropriately registered with
the CFTC and/or the NFA and their respective registered representatives equal
to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (as defined
in "Fees, Compensation and Expense -- Certain Definitions: 2. Net Asset Value
per Unit," below) of the Fund's assets under management at month's end (without
reduction for distributions or redemptions effected as of such date or
management fees payable or incentive allocations allocable as of such date) with
respect to Units purchased within the prior 12-month period and 1/12 of 4% of
the Net Asset Value per Unit of the Fund's assets under management at month's
end (without reduction for distributions or redemptions effected as of such date
or management fees payable or incentive allocations allocable as of such date)
with respect to Units purchased more than 12 months prior thereto. In advising
customers whether to purchase or redeem Units, Shaffer Asset Management, the
selling agents and their respective registered representatives have a conflict
of interest between maximizing their current and on-going compensation, on the
one hand, and providing financial advice that is in the best interests of their
customers, on the other hand. In addition, investors should note that Daniel S.
Shaffer and Bruce I. Greenberg, the sole officers, directors and shareholders of
Shaffer Asset Management, are also registered representatives of Berthel Fisher
& Company, and in that capacity, may receive a portion of the syndication fees
and continuing service fees referred to herein. A conflict of interest may
exist, therefore, between Mr. Shaffer's and Mr. Greenberg's interest in Shaffer
Asset Management; their interest in maximizing their current and on-going
compensation; and the interests of their customers in making an investment
decision, such as a decision to purchase and/or redeem Units. There may also be
deemed to be an absence of arm's-length negotiations with respect to the terms
of the selling agent agreement entered into between the Fund and Berthel Fisher
& Company.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
In evaluating these conflicts of interest, prospective investors
should be aware that Shaffer Asset Management has a fiduciary responsibility to
the limited partners of the Fund to exercise good faith and fairness in all
dealings affecting the Fund. In the event that a limited partner of the Fund
believes that Shaffer Asset Management has violated its duty to the limited
partners, he may seek legal relief on his behalf or on behalf of the Fund under
applicable laws to recover damages from or require an accounting by Shaffer
Asset Management. Limited partners of the Fund should be aware that the
performance by Shaffer Asset Management of its responsibilities to the Fund will
be measured by the terms of the Fund's limited partnership agreement, including
the authority of Shaffer Asset Management to enter into the advisory and
brokerage agreements, as well as applicable law. Limited partners of the Fund
are afforded certain rights to institute reparations proceedings under the
Commodity Exchange Act, as amended, for violations of such act or of any rule,
regulation or order of the CFTC by Shaffer Asset Management. Excessive trading
of the Fund's account may constitute a violation of the CE Act. A limited
partner of the Fund is also entitled by statute to bring suit for certain
violations of the CE Act. Limited partners of the Fund should be aware that it
may be difficult to establish that the Fund's trading has been excessive due to
the broad trading discretion given to Shaffer Asset Management under the Fund's
advisory agreement, the authority of Shaffer Asset Management to enter into such
contract under the Fund's limited partnership agreement and the Fund's
subscription agreement / power of attorney, the exculpatory provisions in the
Fund's advisory agreement and the Fund's limited partnership agreement, and the
absence of judicial or administrative standards defining excessive trading.
Although ADM Investor Services provides various services to the Fund, it accepts
no responsibility for verifying that any instructions received from Shaffer
Asset Management or any of their employees or agents are in conformance with
Shaffer Asset Management's authority and ADM Investor Services accepts no
responsibility for monitoring the actions of Shaffer Asset Management in this
regard, to ensure that such actions are not contrary to the provisions of this
prospectus or any amendments thereto.
The Fund's limited partnership agreement provides that Shaffer Asset
Management shall not be liable to the Fund or to any of the partners except by
reason of misconduct or negligence or for not having acted in good faith in the
reasonable belief that its actions were taken in, or not opposed to, the best
interests of the Fund.
The Fund's limited partnership agreement provides that with respect
to any action in which Shaffer Asset Management or any of its shareholders,
directors, officers, employees, affiliates or any person who controls Shaffer
Asset Management is made a party (including an action brought by or in the right
of the Fund), the Fund shall indemnify and hold harmless such person, subject to
receipt of an independent legal opinion regarding the applicable standard of
conduct, against any loss, liability, damage, cost, expense (including, without
limitation, attorneys' and accountants' fees and disbursements), judgments and
amounts paid in settlement incurred in connection with the investigation,
defense or settlement of such action, if the indemnified party acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Fund and if such actions did not involve negligence, misconduct
-16-
or breach of fiduciary obligations on the part of the person seeking
indemnification, unless the court in which such action is brought determines
that, in view of all of the circumstances of the case, the indemnified party is
fairly and reasonably entitled to indemnification for such amounts as the court
shall deem proper. To the extent that the indemnified party has been successful
in the defense of any action, no independent legal opinion is necessary.
Expenses may be paid by the Fund in advance of the final disposition of any such
action if the indemnified person agrees to reimburse the Fund in the event that
indemnification is not permitted.
The Fund's limited partnership agreement prohibits the Fund from
making any loans. The limited partnership agreement also provides that no person
who shares or participates in the brokerage commissions paid by the Fund may
receive, directly or indirectly, any advisory, management or incentive fees for
trading advice or management; that no broker may pay, directly or indirectly,
rebates or give ups to Shaffer Asset Management or any trading advisors; and
that such prohibitions may not be circumvented by any reciprocal business
arrangements.
USE OF PROCEEDS
During the continuing offering period the Units are sold as of the
last business day of each month at a purchase price equal to the then current
Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per
Unit for each Unit purchased. The entire offering proceeds, net of initial sales
charges and syndication fees, are credited to the Fund's bank account(s) at
JPMorganChase, and trading account(s) with ADM Investor Services and/or other
banks and commodity brokers to engage in trading activities and as reserves for
that trading. ADM Investor Services deposits the assets received from the Fund
in segregated accounts as required by the regulations promulgated by the CFTC.
Under the CFTC's regulations, the assets of other customers of ADM Investor
Services, including other commodity pools, may also be deposited in such
segregated accounts and thus be commingled with the assets of the Fund.
Approximately 10% to 40% of the Fund's net assets normally are
committed as required margin for commodity trading, with the remaining 60% to
90% being held in reserve for such trading. The Fund's assets, both those that
are deposited to meet margin requirements and those that are held in reserve,
may be held in cash, United States Treasury Bills or in any other form
permissible under applicable laws and regulations. As of August 31, 2002, the
Fund held approximately 79% of such assets in United States Treasury Bills and
approximately 6% in money market funds. Interest, if any, earned on such assets,
therefore, will inure to the benefit of the Fund.
FEES, COMPENSATION AND EXPENSES
SUMMARY
Shaffer Asset Management believes prospective investors should
consider the fees, compensation obligations and expenses to which the Fund is
subject, which are described in more detail below, when making their investment
decision. The relationship among these entities is described and shown in
"Organizational Chart," above.
SHAFFER ASSET MANAGEMENT, INC.
MONTHLY MANAGEMENT FEE
1/12 of 3.75% of the month-end Net Asset Value per Unit (as defined
below) with respect to Units purchased within the prior 12-month period and 1/12
of 1% of the month-end Net Asset Value per Unit with respect to Units held more
than 12 months will be paid by the Fund to Shaffer Asset Management as a monthly
management fee.
QUARTERLY INCENTIVE ALLOCATION
15% of the Fund's New Trading Profits (as defined below) will be
allocated by the Fund to Shaffer Asset Management as a quarterly incentive
allocation.
-17-
REIMBURSEMENT OF ORGANIZATIONAL, INITIAL OFFERING AND OPERATING EXPENSES
1% of the Net Asset Value per Unit of Units sold and all early
redemption fees charged by the Fund upon redemptions of Units, will be paid by
the Fund to Shaffer Asset Management to reimburse Shaffer Asset Management for
paying the Fund's organizational, initial offering and operating expenses.
OTHER
Shaffer Asset Management shares, to the same extent as the limited
partners, in the Fund's profits and losses with respect to any Units of limited
or general partnership interest purchased by Shaffer Asset Management.
BERTHEL FISHER & COMPANY
SYNDICATION FEE
Berthel Fisher & Company receives a syndication fee of 1% of the Net
Asset Value of each Unit sold. Berthel Fisher & Company solicits other
broker-dealers to become selected dealers for the Fund. Berthel Fisher & Company
may reallow a portion of its syndication fee to such selected dealers.
SELLING COMMISSIONS
3% of the Net Asset Value per Unit of Units sold by Berthel Fisher &
Company will be paid to Berthel Fisher & Company and its registered
representatives as a selling commission.
MONTHLY CONTINUING SERVICE FEE
With respect to sales of Units by registered representatives of
Berthel Fisher & Company, 1/12 of 1.25% of the Net Asset Value per Unit with
respect to Units purchased within the prior 12-month period and 1/12 of 4% per
Unit with respect to Units purchased more than 12 months prior thereto will be
paid to Berthel Fisher & Company (which may reallow any portion of such amount
to its registered representatives) as a monthly continuing service fee. All such
amounts will be paid provided Berthel Fisher & Company and any of its registered
representatives to whom such continuing service fee is to be reallowed are
appropriately registered with the CFTC and/or NFA. If Berthel Fisher & Company
or any of its registered representatives to whom such continuing service fees
are reallowed are not appropriately registered with the CFTC and/or NFA, then
the fee will be deemed a selling commission and will be paid as long as the
aggregate amount of commissions plus additional costs and commissions in
connection with the sale of the Units do not exceed 10% of the initial sale
price of the Units sold. With respect to sales of Units by registered
representatives of selected dealers, 1/12 of .25% of the Net Asset Value per
Unit (as defined below) with respect to Units purchased within the prior
12-month period and 1/12 of 1% of the Net Asset Value per Unit with respect to
Units purchased more than 12 months prior thereto will be paid by the Fund to
Berthel Fisher & Company (which may reallow any portion of such amount to its
registered representatives) as a monthly continuing service fee (subject to
appropriate CFTC registration).
EXPENSE REIMBURSEMENT
All expenses of Berthel Fisher & Company incurred in performing its
obligations related to this offering will be reimbursed by Shaffer Asset
Management.
SELECTED DEALERS AND THEIR RESPECTIVE REGISTERED REPRESENTATIVES
SELLING COMMISSIONS
3% of the Net Asset Value per Unit of Units sold by the selected
dealers will be paid to the selected dealers and their respective registered
representatives as a selling commission.
-18-
MONTHLY CONTINUING SERVICE FEE
1/12 of 1% of the Net Asset Value per Unit (as defined below) of the
Fund's assets under management at month's end with respect to Units purchased
within the prior 12-month period and 1/12 of 3% of the Net Asset Value per Unit
(as defined below) with respect to Units purchased more than 12 months prior
thereto will be paid by the Fund to the selected dealers and their respective
registered representatives as a monthly continuing service fee, provided the
selected dealers and their registered representatives are appropriately
registered with the CFTC and/or NFA. If the selected dealers and their
registered representatives are not appropriately registered with the CFTC and/or
NFA, then the fee will be deemed a selling commission and will be paid as long
as the aggregate amount of commissions plus additional costs and commissions in
connection with the sale of the Units do not exceed 10% of the initial sale
price of the Units sold.
ADM INVESTOR SERVICES, INC.
COMMODITY BROKERAGE COMMISSIONS
Brokerage commissions at a rate of $17 per "round-turn" trade on
domestic exchanges will be paid by the Fund to ADM Investor Services. ADM
Investor Services is responsible, however, for all other charges relating to the
Fund's trading, such as exchange, clearing, transfer and NFA fees.
OTHERS
LEGAL, ACCOUNTING, AUDITING, PRINTING, RECORDING, FILING AND OTHER PERIODIC FEES
AND EXPENSES; AND EXTRAORDINARY EXPENSES
Shaffer Asset Management has agreed to supply and pay for such
services as are deemed by Shaffer Asset Management to be necessary or desirable
and proper for the continuous operations of the Fund that are in the aggregate
in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum,
except for sales charges, continuing services fees, management fees, incentive
allocations, brokerage commissions and extraordinary expenses, which expenses
shall be paid by the Fund. One percent of the Net Asset Value per Unit of Units
sold and all early redemption fees charged by the Fund upon redemptions of Units
will be paid to Shaffer Asset Management to reimburse Shaffer Asset Management
for the payment by Shaffer Asset Management of the Fund's organizational and
initial offering and the Fund's operating expenses that are payable by Shaffer
Asset Management.
DETAILED DESCRIPTION OF FEES, COMPENSATION AND EXPENSES
MANAGEMENT FEES AND INCENTIVE ALLOCATIONS
Pursuant to the terms of the advisory agreement between the Fund and
Shaffer Asset Management, the Fund has agreed (i) to pay to Shaffer Asset
Management a monthly management fee equal to 1/12 of 3.75% of the Net Asset
Value per Unit (see "Certain Definitions: 2. Net Asset Value per Unit," below)
of the Fund's assets under management at month's end with respect to Units
purchased within the prior twelve-month period and 1/12 of 1% of the Net Asset
Value per Unit (as defined below) of the Fund's assets under management at
month's end with respect to Units purchased more than twelve months prior
thereto, and (ii) to allocate to Shaffer Asset Management, on a quarterly basis,
an Incentive Allocation, such Incentive Allocation being defined as an amount
equal to 15% of the Fund's New Trading Profits (exclusive of any interest earned
by the Fund) achieved by Shaffer Asset Management for such quarter on the Fund's
assets under management by Shaffer Asset Management (see "Certain Definitions:
3. New Trading Profits," below). In its sole discretion, Shaffer Asset
Management may, during the first twelve months following the Sale of Unit pay a
portion of its management fee to the Selling Agents as additional compensation
in connection with the sale of the Unit. Such additional compensation would be
provided solely from the amount that Shaffer Asset Management would otherwise
receive, and would not dilute the interests of Investors in the Fund. Such
amount may not be paid to the extent that the amount proposed to be paid,
together with all other costs and commissions in connection with the sale of the
Units would exceed 10% of the initial sale price of the Units sold. THE MONTHLY
MANAGEMENT FEES WILL BE PAID MONTHLY, AND THE QUARTERLY INCENTIVE ALLOCATION, IF
EARNED, WILL BE ALLOCATED QUARTERLY, WHETHER OR NOT THE FUND EARNS PROFITS FOR
THE YEAR. However, the quarterly incentive allocation is allocable only on
cumulative profits achieved by the Fund.
-19-
SYNDICATION FEES / SELLING COMMISSIONS / SALES CHARGES
The Units are being offered and sold at the current Net Asset Value
per Unit (as hereinafter defined) plus a charge of 5% of the Net Asset Value per
Unit. From that 5% amount, approximately 1% of the sale proceeds is paid to
Shaffer Asset Management to reimburse it for the payment of the Fund's
organizational, initial offering and operating expenses payable by Shaffer Asset
Management, approximately 1% of the sale proceeds is paid to Berthel Fisher &
Company as a syndication fee, and approximately 3% of the sale proceeds is paid
to the selling agent that sold the Unit as a selling commission. Berthel Fisher
& Company may reallow a portion of its syndication fee to the selected dealers.
Berthel Fisher & Company and the selected dealers may in turn pay a portion of
such syndication fees and selling commissions to their respective employees who
are NASD registered representatives for each Unit sold by them.
CONTINUING SERVICES FEES
The Fund will pay a monthly continuing services fee to Berthel Fisher
& Company and its registered representatives and, through Berthel Fisher &
Company, to certain selected dealers and their respective registered
representatives equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value
per Unit (see "Certain Definitions: 2. Net Asset Value per Unit," below) of the
Fund's assets at month's end (without reduction for distributions or redemptions
effected as of such date or management fees or incentive fees payable as of such
date) with respect to Units purchased within the prior twelve-month period and
1/12 of 4% of the Net Asset Value per Unit of the Fund's assets at month's end
(without reduction for distributions or redemptions effected as of such date or
management fees or incentive fees payable as of such date) with respect to Units
purchased more than twelve months prior thereto. The monthly continuing services
fee will be paid to Berthel Fisher & Company, and certain selected dealers, who
may reallow a portion of such fees to their respective registered
representatives, provided each is appropriately registered with the CFTC and/or
the NFA and agrees to provide the services described below. If any such party is
not appropriately registered with the CFTC and/or the NFA or does not agree to
provide services, then the fee paid to such party will be deemed a selling
commission and will be paid in an amount such that the aggregate amount of
commissions plus additional costs paid to such party do not exceed 10% of the
initial sale price of the Units sold by such party. Such continuing services fee
shall be paid to the selling agents and their respective registered
representatives in return for their continuing services to the Fund and the
limited partners of the Fund solicited by them. Such services include, without
limitation, keeping the limited partners of the Fund apprised of developments
affecting the Fund, responding to specific inquiries received from limited
partners relating to the Fund and the commodity markets, communicating current
valuations of the Fund's Net Asset Value per Unit to the limited partners,
assisting in redemptions, transfers and distributions, assisting limited
partners in interpreting the Fund's monthly and annual reports, financial
statements and the tax information provided to limited partners, and providing
such other services as the limited partners from time to time may reasonably
request.
The continuing services fee will be allocated between Berthel Fisher
& Company, its registered representatives to whom it shall reallow any portion
of such fee, and the selected dealers and their respective registered
representatives based upon the amount of time that each Unit has been
outstanding. With respect to Units sold by selected dealers and their
representatives, the continuing services fee attributable to a Unit that has
been outstanding for twelve or fewer months shall be allocated between Berthel
Fisher & Company and the selected dealers and their respective registered
representatives as follows:
o 20% to Berthel Fisher & Company; and
o 80% to the selected dealers and their respective registered
representatives that solicited the subscription;
and all other continuing services fees shall be allocated as follows:
o 25% to Berthel Fisher & Company; and
o 75% to the selected dealers and their respective registered
representative that solicited the subscription.
-20-
For this purpose, continuing service fees are deemed to be
attributable to Units sold by a selected dealer in the proportion that the
number of such Units bears to the number of Units outstanding at any time. For
example, if a selected dealer were responsible for the sale of 2,500 Units, and
there were 25,000 Units outstanding, the continuing service fees payable to the
selected dealer as set forth above would be a percentage of the 10% (2,500 of
the 25,000) of the Net Asset Value of the Fund that was attributable to the
Units sold by the selected dealer. The continuing service fees will be paid to a
selected dealer and its registered representatives for so long as the Units
remain outstanding and the selected dealer and its registered representatives
are providing the services described above to holders of such Units.
COMMODITY BROKERAGE COMMISSIONS
The Fund currently pays its commodity broker ADM Investor Services
brokerage commissions at the rate of $17.00 per "round-turn" trade executed on
domestic exchanges (i.e., when an open position is closed). Based upon the
historical trading patterns of Shaffer Asset Management, the Fund expects to pay
brokerage commissions of approximately 1% of its average yearly Net Asset Value,
although the actual amount could exceed such 1% level and there is no agreement
to limit brokerage commission charges to any particular level. Brokerage
commissions will be charged only when an open position is closed. The commodity
broker ADM Investor Services may change its aggregate commission rates at any
time, and a limited partner of the Fund may obtain the current Fund commission
rate schedule from Shaffer Asset Management upon request. Shaffer Asset
Management, however, must ensure that such charges remain reasonable in light of
the nature and quality of services rendered (including, among others, execution
services) and the other standards applicable thereto. In no event will the
commissions exceed 80% of the published retail rate for such commissions or 14%
annually of the Fund's average Net Assets. Shaffer Asset Management will
periodically review brokerage commission rates charged to public commodity pools
of comparable size and management structure as a factor in determining whether
the rates paid by the Fund are comparable and remain reasonable. The Fund,
nonetheless, may pay brokerage commission rates exceeding the lowest such rates
otherwise available. See "Conflicts of Interest/Fiduciary Responsibility of the
General Partner" and "Commodity Brokerage Arrangements."
EARLY REDEMPTION FEES
The Fund charges an early redemption fee equal to 4% of the Net Asset
Value per Unit of the Units redeemed as of or before the end of the third full
calendar month after their purchase. This fee decreases by one percentage point
for every three subsequent calendar months. Thereafter, no redemption fee is
charged. In addition and in order to assure each of the Fund's limited partners
the availability of funds to pay taxes on each year's profits, if any, the
redemption fee will be waived on redemptions of Units to the extent, if any,
distributions in the first quarter of a calendar year are less than 35% of the
profits reportable to a limited partner for the prior year. See "Distributions
and Redemptions."
ORGANIZATIONAL AND INITIAL OFFERING EXPENSES
Shaffer Asset Management has agreed to pay all expenses (estimated at
$463,000) associated with the organization of the Fund and the initial offering
of the Units other than selling commissions. Approximately 1% of all sales
proceeds and 100% of all early redemption fees charged by the Fund are paid to
Shaffer Asset Management to reimburse Shaffer Asset Management for the payment
of the Fund's organizational and initial offering expenses and the Fund's
operating expenses that are payable by Shaffer Asset Management.
OTHER EXPENSES
The Fund is obligated to pay various periodic fees and expenses which
are estimated at approximately $30,000 per year for accounting services and
auditing charges, $25,000 for legal fees, $15,000 for printing, $20,000 for
technical services and $15,000 for filing fees, postage and extraordinary
expenses, or, in the aggregate, $105,000 per year at current price levels.
Shaffer Asset Management has agreed to supply and pay for such services it deems
necessary or desirable and proper for the continuous operations of the Fund that
are in the aggregate in excess of 0.5% of the average monthly Net Asset Value of
the Fund per annum, except for sales charges, continuing services fees,
management fees, incentive allocations, brokerage commissions and extraordinary
expenses, which expenses shall be paid by the Fund.
Shaffer Asset Management will furnish each of the Fund's limited
partners with monthly statements and an annual report covering the Fund's
operations and expenses, including its advisory fees, brokerage commissions and
other expenses. See "Summary of the Limited Partnership Agreement -- Reports and
Accounting."
-21-
ESTIMATE OF BREAK-EVEN THRESHOLD
Assuming an initial investment of $10,000, the Fund must earn
approximately $1,092, or 10.92% during the first twelve months after the
investment date, provided that no redemption charge is applicable, for an
investor to "breakeven" on his investment at the end of his first year as an
investor. Redemption fees apply through the first twelve month-ends following
purchase as follows: 4% of Net Asset Value per Unit redeemed through the third
month-end, 3% of Net Asset Value per Unit redeemed through the sixth month-end,
2% of Net Asset Value per Unit redeemed through the ninth month-end, and 1% of
Net Asset Value per Unit redeemed through the twelfth month-end. After the
twelfth month-end following purchase of a Unit, no redemption fees apply. The
break-even threshold is calculated on the basis of the fees and expenses
described above and is shown in the following table.
"BREAK EVEN" ANALYSIS
Assumed Initial Investment.................................... $10,000
Less: Sales Charges .......................................... 500
Management Fees......................................... 375
Continuing Service Fees................................. 125
Brokerage Fees.......................................... 100
Operating Expenses...................................... 50
Incentive Allocation *.................................. 105
Redemption Charge *..................................... 101
Plus: Interest Income *....................................... (147)
Twelve-month break-even point
WITH redemption charge.............................. $ 1,209
Percentage of Assumed Initial Investment............ 12.09%
Twelve-month break-even point
WITHOUT redemption charge........................... $ 1,092
Percentage of Assumed Initial Investment............ 10.92%
--------------------
*Estimated. In a break-even year, an incentive allocation on the
Fund's trading profits necessary to offset the redemption charge and
sales charges would be allocated to Shaffer Asset Management.
Interest income is assumed to be 90% of the current 91-day Treasury
bill rate. This break even analysis assumes a constant $10,000 Net
Asset Value and a break even year. Because the incentive allocation
is allocated quarterly, if earned, it is possible for an incentive
allocation to be allocated in a losing year.
CERTAIN DEFINITIONS USED IN THIS PROSPECTUS
Certain of the following terms are used in calculating the purchase
price for the Units and the fees, compensation and expenses payable by the Fund
described above.
1. NET ASSET VALUE. Net Asset Value means the Fund's total assets less total
liabilities determined, except as set forth below, on the basis of
generally accepted accounting principles for partnership accounting,
consistently applied. Net Asset Value will be calculated daily. For
purposes of this calculation:
(a) Net Asset Value shall include any unrealized profit or loss
on open securities and commodity interest positions.
-22-
(b) All open securities and commodity interest positions shall
be calculated at their then market value which means, with
respect to open commodity interest positions, the settlement
price as determined by the exchange on which the transaction
is effected or the most recent appropriate quotation as
supplied by the clearing broker or banks through which the
transaction is effected, except that United States Treasury
Bills (but not futures contracts for United States Treasury
Bills) shall be carried at cost plus accrued interest. If
there are no trades on the date of the calculation due to
the operation of the daily price fluctuation limits or due
to a closing of the exchange on which the transaction is
executed, the contract will be valued at fair market value
as determined by Shaffer Asset Management. Interest, if any,
shall be accrued at least monthly.
(c) Brokerage commissions on open positions shall be considered
accrued in full (i.e., on a "round-turn" basis) as a
liability of the Fund. Management fees and incentive fees
shall be accrued daily even though not paid until month's
end. Incentive fees shall be accrued, and such accruals
shall be reversed to reflect losses, monthly even though not
paid until quarter's end.
2. NET ASSET VALUE PER UNIT. Net Asset Value per Unit means the Net Asset
Value divided by the number of Units of general partnership interest and
limited partnership interest outstanding.
3. NEW TRADING PROFITS. The excess, if any, of Net Assets at the end of the
Valuation Period over Net Assets at the end of the highest previous
Valuation Period or Net Assets at the date trading commences, whichever is
higher, and as further adjusted to eliminate the effect on Net Assets
resulting from new capital contributions, redemptions, or capital
distributions, if any, made during the period decreased by interest or
other income, not directly related to trading activity, earned on Fund
assets during the period, whether the assets are held separately or in
margin account.
4. AFFILIATE. An affiliate of a person means (a) any person directly or
indirectly owning, controlling or holding with power to vote 10% or more
of the outstanding voting securities of such person; (b) any person 10% or
more of whose outstanding voting securities are directly or indirectly
owned, controlled or held with power to vote, by such person; (c) any
person, directly or indirectly, controlling, controlled by, or under
common control of such person; (d) any officer, director or partner of
such person; or (e) if such person is an officer, director or partner, any
person for which such person acts in any such capacity.
5. SPONSOR. Any person directly or indirectly instrumental in organizing a
program or any person who will manage or participate in the management of
a program including a commodity broker who pays any portion of the
organizational expenses of the program, and the general partner(s) and any
other person who regularly performs or selects the persons who perform
services for the program. Sponsor does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services rendered in connection with the
offering of the Units. The term "sponsor" shall be deemed to include its
affiliates.
6. NET ASSETS. The total assets, less total liabilities, of the Fund
determined on the basis of generally accepted accounting principles. Net
Assets shall include any unrealized profits or losses on open positions,
and any fee or expense including Net Asset fees accruing to the Fund.
7. VALUATION PERIOD. The preceding calendar quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Shaffer Diversified Fund, LP (the "Partnership" or the "Fund") is a
limited partnership organized on August 29, 2000 under the Delaware Revised
Uniform Limited Partnership Act as an investment vehicle that allows investors
to include commodity futures contracts traded on the United States commodity
futures markets in their portfolios in the same way that they include mutual
funds, money market funds and limited partnerships.
-23-
The Fund originally filed a registration statement with the United
States Securities and Exchange Commission on September 25, 2000 for the sale of
a minimum of $1,000,000 and a maximum of $25,000,000 in Units of Limited
Partnership at $1,000.00 each, ($950.00 + $50.00 sales charges & syndication
fees), which registration statement was declared effective on October 16, 2001.
The Fund's initial offering period lasted approximately 120 days and ended
February 13, 2002. During the initial offering the Fund accepted subscriptions
for 1,049 Units of Limited Partnership Interests at a selling price of $1,000.00
($950.00 + $50.00 sales charges & syndication fees) for a total of $1,049,000.
Selling charges and expenses of $49,950 were disbursed at closing and the Fund
commenced trading activities with net proceeds of $996,550. The Fund commenced
trading activities on February 14, 2002.
LIQUIDITY
The Fund deposits its assets with commodity brokers in a separate
futures trading account established for the trading advisor, which assets are
used as margin to engage in trading. The assets are held in either
non-interest-bearing bank accounts or in securities and instruments permitted by
the CFTC for investment of customer segregated or secured funds. The Fund's
assets held by the commodity broker may be used as margin solely for the Fund's
trading. Since the Fund's sole purpose is to trade in futures, it is expected
that the Fund will continue to own such liquid assets for margin purposes.
The Fund's investment in futures may, from time to time, be illiquid.
Most U.S. futures exchanges limit fluctuations in prices during a single day by
regulations referred to as "daily price fluctuations limits" or "daily limits. "
Trades may not be executed at prices beyond the daily limit. If the price for a
particular futures contract has increased or decreased by an amount equal to the
daily limit, positions in that futures contract can neither be taken nor
liquidated unless traders are willing to effect trades at or within the limit.
Futures prices have occasionally moved the daily limit for several consecutive
days with little or no trading. These market conditions could prevent the Fund
from promptly liquidating its futures contract and result in restrictions on
redemptions.
CAPITAL RESOURCES
The Fund will raise additional capital only through the sale of Units
and does not engage in borrowing due to the nature of the Fund's business, the
Fund will make no capital expenditures and will not have any capital assets
which are not operating capital or assets. Redemptions, exchanges and sales of
additional Units in the future will affect the amount of funds available for
investments in futures interests in subsequent periods. It is not possible to
estimate the amount and therefore the impact of future redemptions.
FINANCIAL INSTRUMENTS
The Fund is a party to financial instruments with elements of
off-balance sheet market and credit risk. The Fund trades futures in interest
rates, currencies, energies, grains and precious metals. In entering into these
contracts, the Fund is subject to the market risk that such contracts may be
significantly influenced by market conditions, such as interest rate volatility,
resulting in such contracts being less valuable. If the markets should move
against all of the positions held by the Fund at the same time, and if the
trading advisor is unable to offset positions of the Fund, the Fund could lose
all of its assets and investors would realize a 100% loss.
In addition to market risk, in entering into futures contracts there
is a credit risk to the Fund that the counterparty on a contract will not be
able to meet its obligations to the Fund. The ultimate counterparty of the
futures contracts traded on the U.S. exchanges in which the Fund trades are the
clearinghouses associated with such exchange. In general, a clearinghouse is
backed by the membership of the exchange and will act in the event of
non-performance by one of its members or one of its member's customers, which
should significantly reduce this credit risk. For example, a clearinghouse may
cover a default by drawing upon a defaulting member's mandatory contributions
and/or non-defaulting members' contributions to a clearinghouse guarantee fund,
established lines or letters of credit with banks, and/or the clearinghouse's
surplus capital and other available assets of the exchange and clearinghouse, or
assessing its members.
There is no assurance that a clearinghouse or exchange will meet its
obligations to the Fund, and the general partner and commodity brokers will not
indemnify the Fund against a default by such parties. Further, the law is
unclear as to whether a commodity broker has any obligation to protect its
customers from loss in the event of an exchange or clearinghouse defaulting on
trades effected for the broker's customers.
Shaffer Asset Management will deal with these credit risks of the
Fund in several ways. It will monitor the Fund's credit exposure to each
exchange on a daily basis, calculating not only the amount of margin required
for it but also the amount of its unrealized gains at each exchange, if any. The
commodity brokers inform the Fund, as with all their customers, of its net
margin requirements for all its existing open positions, but do not break that
net figure down, exchange by exchange.
-24-
The value of the Fund's cash financial instruments is not materially
affected by inflation, although inflation may affect the markets in which the
Fund trades giving rise to market conditions that may be either favorable or
unfavorable to the trading strategy employed by the Fund.
RESULTS OF OPERATIONS
The Fund commenced trading operations February 14, 2002.
The return for the period ending March 31, 2002 was 1.93%. Trading
gains of approximately 3.07% plus interest income of approximately 0.15% were
offset by approximately 1.29% due to brokerage fees, performance fees, operating
fees and administrative costs. The return for the quarter ending June 30, 2002
was 9.81%. Trading gains of approximately 11.92% plus interest income of
approximately 0.39% were offset by approximately 2.50% due to brokerage fees,
performance fees, operating fees and administrative costs. The return for the
quarter ending September 30, 2002 was (3.19%). Trading losses of approximately
(1.62%) plus interest income of approximately 0.39% were offset by approximately
1.96% due to brokerage fees, operating fees and administrative costs. An
analysis of the Fund's trading gains and losses by sector is as follows:
% OF GAIN/LOSS % OF GAIN/LOSS% OF GAIN/LOSS % OF GAIN/LOSS
PERIOD ENDED QUARTER ENDED QUARTER ENDED NINE MONTHS ENDED
SECTOR MARCH 31 JUNE 30 SEPTEMBER 30 SEPTEMBER 30
------- -------------- ------- ------------- ------------
Interest Rates 1.50 0.72 6.16 8.29
Energies 4.15 -2.67 -3.67 -2.25
Currencies -1.64 12.45 -3.64 6.70
Metals -2.07 0.20 0.89 -.090
Grains 1.13 1.22 -1.36 0.90
---- ------ ----- ----
3.07% 11.92% -1.62% 12.74%
===== ====== ====== =====
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE
INTRODUCTION
The Fund is a commodity pool involved in the speculative trading of
futures. The Fund commenced trading activities on February 14, 2002. The
market-sensitive instruments held by the Fund are acquired for speculative
trading purposes only and, as a result, all or substantially all of the Fund's
assets are at risk of trading loss. Unlike an operating company, the risk of
market-sensitive instruments is central, not incidental, to the Fund's main
business activities.
The futures traded by the Fund involve varying degrees of market
risk. Market risk is often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial instruments and
commodities. Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Fund's open positions, and,
consequently, in its earnings and cash flow.
The Fund's total market risk is influenced by a wide variety of
factors, including the diversification among the Fund's open positions, the
volatility present within the markets, and the liquidity of the markets. At
different times, each of these factors may act to increase or decrease the
market risk associated with the Fund.
Any attempt to numerically quantify a Fund's market risk is limited
by the uncertainty of its speculative trading. The Fund's speculative trading
may cause future losses and volatility (i.e., "risk of ruin") that far exceed
any reasonable expectations based upon historical changes in market value.
Market movements result in frequent changes in the fair market value
of the Fund's open positions and, consequently, in its earnings and cash flow.
The Fund's market risk is influenced by a wide variety of factors, including the
level and volatility of exchange rates, interest rates, equity price levels, the
market value of financial instruments and contracts, the diversification effects
among the Fund's open positions and the liquidity of the markets in which it
trades.
-25-
The Fund rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Fund's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Fund could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Fund's speculative trading and the recurrence in the markets
traded by the Fund of market movements far exceeding expectations could result
in actual trading or non-trading losses far beyond the indicated Value at Risk
or the Fund's experience to date (i.e., "risk of ruin"). In light of the
foregoing as well as the risks and uncertainties intrinsic to all future
projections, the inclusion of the quantification included in this section should
not be considered to constitute any assurance or representation that the Fund's
losses in any market sector will be limited to Value at Risk or by the Fund's
attempts to manage its market risk.
STANDARD OF MATERIALITY
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, and multiplier features of the Fund's market sensitive
instruments.
QUANTIFYING THE FUND'S TRADING VALUE AT RISK
QUANTITATIVE FORWARD-LOOKING STATEMENTS
The following quantitative disclosures regarding the Fund's market
risk exposures contain "forward-looking statements" within the meaning of the
safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor, except for statements of historical
fact (such as the dollar amount of maintenance margin required for market risk
sensitive instruments held at the end of the reporting period).
The Fund's risk exposure in the various market sectors traded by
Shaffer Asset Management is quantified below in terms of Value at Risk. Due to
the Fund's mark-to-market accounting, any loss in the fair value of the Fund's
open positions is directly reflected in the Fund's earnings (realized or
unrealized).
Exchange maintenance requirements have been used by the Fund as the
measure of its Value at Risk. Maintenance requirements are set by exchanges to
equal or exceed the maximum losses reasonably expected to be incurred in the
fair value of any given contract in 95%-99% of any one-day intervals. Dealers
and exchanges use historical price studies, as well as an assessment of current
market volatility and economic fundamentals, to estimate the maximum expected
near-term one-day price fluctuation for establishing maintenance levels.
Maintenance has been used rather than the more generally available initial
margin, because initial margin includes a credit risk component, which is not
relevant to Value at Risk.
In quantifying the Fund's Value at Risk, 100% positive correlation in
the different positions held in each market risk category has been assumed.
Consequently, the margin requirements applicable to the open contracts have
simply been aggregated to determine each trading category's aggregate Value at
Risk. The diversification effects resulting from the fact that the Fund's
positions are rarely, if ever, 100% positively correlated have not been
reflected.
THE FUND'S TRADING VALUE
The following tables indicate the trading Value at Risk associated
with the Fund's open positions by market category as of September 30, 2002 and
the trading gains/losses by market category for the nine months ended September
30, 2002. All open position-trading risk exposures of the Fund have been
included in calculating the figures set forth below. As of September 30, 2002
the Fund's total capitalization was approximately $1,143,479.
-26-
TRADING
MARKET SECTOR VALUE AT RISK CAPITALIZATION GAIN/LOSS
- ------------- ------------- --------------- ---------
Currencies $ 6,480 0.57% 6.70%
Interest Rates $ 25,920 2.27% 8.29%
Grains $ -0- -0-% 0.90%
Energies $ 40,500 3.54% (2.25%)
Metals $ 39,150 3.42% (0.90%)
------- ----- ------
Total $112,050 9.80% 12.74%
======== ====== ======
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the Fund is
typically many times the applicable maintenance margin requirement (maintenance
margin requirements generally ranging between approximately 1% and 10% of
contract face value) as well as many times the capitalization of the Fund. The
magnitude of the Fund's open positions creates a "risk of ruin" not typically
found in most other investment vehicles. Because of the size of its positions,
certain market conditions -- unusual, but historically recurring from time to
time -- could cause the Fund to incur severe losses over a short period of time.
The foregoing Value at Risk tables -- as well as the past performance of the
Fund -- gives no indication of this "risk of ruin."
NON-TRADING RISK
The Fund has non-trading market risk as a result of investing a
substantial portion of its available assets in U.S. Treasury Bills. The market
risk represented by these investments is immaterial.
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
THE FOLLOWING QUALITATIVE DISCLOSURES REGARDING THE FUND'S MARKET
RISK EXPOSURES -- EXCEPT FOR (I) THOSE DISCLOSURES THAT ARE STATEMENTS OF
HISTORICAL FACT AND (II) THE DESCRIPTIONS OF HOW THE FUND MANAGES ITS PRIMARY
MARKET RISK EXPOSURES -- CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT. THE FUND'S PRIMARY MARKET RISK EXPOSURES AS WELL AS THE STRATEGIES
USED AND TO BE USED BY SHAFFER ASSET MANAGEMENT FOR MANAGING SUCH EXPOSURES ARE
SUBJECT TO NUMEROUS UNCERTAINTIES, CONTINGENCIES AND RISKS, ANY ONE OF WHICH
COULD CAUSE THE ACTUAL RESULTS OF THE FUND'S RISK CONTROLS TO DIFFER MATERIALLY
FROM THE OBJECTIVES OF SUCH STRATEGIES. GOVERNMENT INTERVENTIONS, DEFAULTS AND
EXPROPRIATIONS, ILLIQUID MARKETS, THE EMERGENCE OF DOMINANT FUNDAMENTAL FACTORS,
POLITICAL UPHEAVALS, CHANGES IN HISTORICAL PRICE RELATIONSHIPS, AN INFLUX OF NEW
MARKET PARTICIPANTS, INCREASED REGULATION AND MANY OTHER FACTORS COULD RESULT IN
MATERIAL LOSSES AS WELL AS IN MATERIAL CHANGES TO THE RISK EXPOSURES AND THE
RISK MANAGEMENT STRATEGIES OF THE FUND. THERE CAN BE NO ASSURANCE THAT THE
FUND'S CURRENT MARKET EXPOSURE AND/OR RISK MANAGEMENT STRATEGIES WILL NOT CHANGE
MATERIALLY OR THAT ANY SUCH STRATEGIES WILL BE EFFECTIVE IN EITHER THE SHORT- OR
LONG-TERM. INVESTORS MUST BE PREPARED TO LOSE ALL OR SUBSTANTIALLY ALL OF THEIR
INVESTMENT IN THE FUND.
The following were the primary trading risk exposures of the Fund as
of September 30, 2002, by market sector.
CURRENCIES
The Fund's currency futures contracts exposure fluctuates due to
interest-rate changes along with political and economic changes. The Fund trades
currency futures on United States Futures Exchanges. Shaffer Asset Management
does not anticipate that the risk profile of the Fund's currency sector will
change significantly in the future.
INTEREST RATES
The Fund's interest-rate futures contracts exposure fluctuates due to
interest-rate movements in the United States. Shaffer Asset Management
anticipates that changes in interest rates which have the most effect on the
Fund are changes in medium- to long-term, as opposed to short-term rates. Most
of the speculative positions held by the Fund are in medium- to long-term
instruments. Consequently, even a material change in short-term rates would have
little effect on the Fund were the medium- to long-term rates to remain steady.
-27-
ENERGIES
The Fund's energy futures contracts exposure is influenced by market
supply and demand, political instability and seasonality. Shaffer Asset
Management anticipates substantial profits and losses due to the current
volatile conditions and these conditions are expected to continue in these
markets.
METALS
The Fund's metal futures contracts exposure is influenced by supply
and demand in gold, silver and copper. Currently, market volatility in gold and
silver has been extremely low compared to periods prior to commencement of the
Fund. Metals have been in a slow declining period, which can limit trading
opportunities until major trend changes begin to develop.
GRAINS
The Fund's grain futures contracts exposure is influenced by supply
and demand along with weather related conditions around the world. Currently,
market volatility in the grains sector has been continually low, as these
markets have been making slow declines in prices. Limited trading opportunities
are present and may continue until a major weather related event transpires
which can cause an imbalance in supply and demand.
QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
The following were the only non-trading risk exposures of the Fund as
of September 30, 2002.
TREASURY BILL POSITIONS
The Fund's only market exposure in instruments held other than for
trading is in its Treasury Bill portfolio. The Fund holds Treasury Bills
(interest bearing and credit risk-free) with durations no longer than six
months. Violent fluctuations in prevailing interest rates could cause immaterial
mark-to-market losses on the Fund's Treasury Bills, although substantially all
of these short-term investments are held to maturity.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
The means by which Shaffer Asset Management attempts to manage the
risk of the Fund's open positions is essentially the same in all market
categories traded. Shaffer Asset Management applies risk management policies to
its trading which generally limit the total exposure that may be taken per "risk
unit" of assets under management. In addition, Shaffer Asset Management follows
diversification guidelines, as well as imposing "stop-loss" points at which open
positions must be closed out.
Shaffer Asset controls the risk of the Fund's non-trading instruments
(Treasury Bills held for cash management purposes) by limiting the duration of
such instruments to no more than six months.
GENERAL
The Fund is not aware of any (i) demands, commitments or capital
expenditures; (ii) material trends, favorable or unfavorable, in its capital
resources; or (iii) trends or uncertainties that will have a material effect on
operations. From time to time, certain regulatory agencies have proposed
increased margin requirements on commodity futures contracts. Because the Fund
generally will use a small percentage of assets as margin, the Fund does not
believe that any increase in margin requirements, as proposed, will have a
material effect on the Fund's operations.
-28-
PERFORMANCE OF THE FUND
FEBRUARY 14, 2002 - SEPTEMBER 30, 2002
Type of Pool ......................................... Publicly offered
Inception of Trading:................................. February 14, 2002
Aggregate Gross Capital Subscriptions to the Fund:.... $1,161,000
Current Net Asset Value of the Fund:.................. $1,143,479
Worst Monthly Percentage Drawdown (1): ............... September 2002; 3.25%
Worst Peak to Valley Drawdown (1):.................... August 2002 - Sept 2002;
4.75%
PERCENTAGE RATE OF RETURN(2)
(Computed on a compounded monthly basis)
- ----------------- ----------------
- ---------------- 2002 YTD
MONTH
- ----------------- ----------------
- ----------------- ----------------
January -
- ----------------- ----------------
- ----------------- ----------------
February -2.24%
- ----------------- ----------------
- ----------------- ----------------
March 3.96%
- ----------------- ----------------
- ----------------- ----------------
April 0.65%
- ----------------- ----------------
- ----------------- ----------------
May 4.07%
- ----------------- ----------------
- ----------------- ----------------
June 4.83%
- ----------------- ----------------
- ----------------- ----------------
July 1.77%
- ----------------- ----------------
- ----------------- ----------------
August -1.55%
- ----------------- ----------------
- ----------------- ----------------
September -3.25%
- ----------------- ----------------
- ----------------- ----------------
October
- ----------------- ----------------
- ----------------- ----------------
November
- ----------------- ----------------
- ----------------- ----------------
December
- ----------------- ----------------
- ----------------- ----------------
Total 8.18%
- ----------------- ----------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURES RESULTS
(1) "Drawdown" means losses experienced by the Fund over a specified
period.
(2) The "Rate of Return" for a period is calculated by dividing the net
profit or loss by the assets at the beginning of such period.
Additions and withdrawals occurring during the period are included as
an addition to or deduction from beginning net assets in the
calculations of "Rates of Return."
The Shaffer Diversified Fund, LP is currently one of 14 accounts
managed by Shaffer Asset Management, Inc. As of September 30, 2002, Shaffer
Asset Management, Inc. managed total assets of 2,534,201.
THE GENERAL PARTNER / ADVISOR
DESCRIPTION OF THE GENERAL PARTNER / ADVISOR
Shaffer Asset Management, Inc., a New York corporation organized on
March 16, 1998, is the general partner and commodity trading advisor of the
Fund. Shaffer Asset Management is, and has been, registered with the CFTC as a
commodity pool operator since July 7, 2000 and as a commodity trading advisor
since October 2, 1998, but such registrations do not imply that the CFTC has
reviewed or approved the accuracy of the information contained in its
application for registration or its qualifications to act as described in this
prospectus and the accompanying statement of additional information or that the
CFTC supervises the business activities engaged in by Shaffer Asset Management.
In addition, Shaffer Asset Management is, and has been, a member of the NFA in
its capacity as a commodity pool operator since July 2000 and as a commodity
trading advisor since October 1998. Daniel S. Shaffer and Bruce I. Greenberg are
currently the sole employees of Shaffer Asset Management.
-29-
Shaffer Asset Management began managing commodity accounts for others
in March 1999. Shaffer Asset Management currently offers trading advice to
customers with respect to futures contracts that are traded on United States
agricultural, currency, energy, metals, United States Treasury and other
markets. As of September 30, 2002, Shaffer Asset Management had approximately
$2.5 million in assets under management. The trading results of these individual
accounts are separately set forth in Tables A and B under the caption "Past
Performance of the Advisor." Although Shaffer Asset Management is not currently
organizing, and does not currently sponsor, any other commodity pools, it does
plan to organize and sponsor other commodity pools in the future, both publicly
and privately offered.
Shaffer Asset has agreed to make capital contributions to the Fund
equal to at least 1% of the net aggregate capital contributions of all partners.
As of September 30, 2002, Shaffer Asset owned 50 units of general partnership
interest, an amount equivalent to or 4.49% of the Fund's Net Asset Value.
The offices of Shaffer Asset Management are located at 925
Westchester Avenue, White Plains, New York, New York 10604, and its telephone
number is (800) 352-5265.
The backgrounds of the sole principals of Shaffer Asset Management
are as follows:
DANIEL S. SHAFFER, age 41. Mr. Shaffer received a Bachelor of Science
degree from Syracuse University in December 1982 with a major in Speech
Communications and a minor in Finance/Accounting. Mr. Shaffer received a Master
of Science degree in Accounting from New York University in June 1986.
Mr. Shaffer currently is, and has been, a shareholder and director
and the President of Shaffer Asset Management since March 18, 1998. In addition,
Mr. Shaffer currently is, and has been, a registered representative with Berthel
Fisher & Company since May 2000.
Mr. Shaffer's prior experiences include the following:
July 1998 to May 2000............................... Registered representative with Nathan & Lewis Securities, Inc.
July 1998 to March 2000............................. Manager with Metropolitan Life Insurance Co.
March 1997 to December 2000......................... Sole officer, director and shareholder of Shaffer Consulting Group,
Inc. (a life, disability and long-term care insurance broker)
April 1989 to July 1998............................. Agent with Northwestern Mutual Financial Network and a Registered
Representative with Robert W. Baird & Co., Inc.
March 1988 to April 1989............................ Registered representative with Hambrecht & Quist
October 1987 to March 1988.......................... Registered representative with Bear, Stearns & Co., Inc.
October 1986 to October 1987........................ Senior Accountant with Aaron Gottesman, Public Accountants
June 1986 to October 1986........................... Representative with Citicorp Investment Services, Inc.
January 1986 to June 1986........................... Internal Auditor - Special Project with Dean Witter Reynolds
June 1984 to January 1986........................... Accountant / Auditor with Coopers & Lybrand
February 1983 to June 1984.......................... Registered representative and commodity broker with Bear, Stearns
& Company
January 1983 to February 1983....................... Floor trader on the New York Futures Exchange
BRUCE I. GREENBERG, age 41. Mr. Greenberg received a Bachelor of
Science degree in Accounting from Brooklyn College in September 1983.
Mr. Greenberg currently is, and has been, (i) a shareholder and
director and the Vice President and Chief Financial Officer of Shaffer Asset
Management since January 2001 and (ii) the sole shareholder and director and the
President of Bruce I. Greenberg, CPA, PC (an accounting and tax firm) since
1993. In addition, Mr. Greenberg currently is, and has been, a registered
representative with Berthel Fisher & Company since May 2000. Mr. Greenberg's
prior experiences include the following:
July 1991 to November 2000.......................... Partner with the accounting and tax firm of Blaustein, Greenberg &
Company
May 1999 to May 2000................................ Registered representative with Nathan & Lewis Securities, Inc.
July 1995 to May 1999............................... Registered Representative with Trusted Securities Advisors Corp.
January 1990 to June 1991........................... Manager with MR Weiser & Company
December 1987 to December 1999...................... Manager with Siegel, Rich, Patchman & Company
September 1982 to November 1987..................... Staff Accountant with Solomon, Schneider & Orenstein
-30-
Messrs. Shaffer and Greenberg currently invest in commodity interests
for their own account, and they may continue to do so in the future. Although
Shaffer Asset Management is not currently organizing or sponsoring any other
commodity pools, it does plan to sponsor other commodity pools in the future,
both publicly and privately offered.
There has never been any material civil, criminal or administrative
action pending, on appeal or concluded against Shaffer Asset Management or its
sole principals.
The past performance of Shaffer Asset Management is set forth on
pages 29 and 34 and in Table A, beginning on page 72.
DUTIES OF THE GENERAL PARTNER
Under the terms of the Fund's limited partnership agreement, Shaffer
Asset Management is vested with exclusive responsibility for managing the
business and affairs of the Fund. Limited partners of the Fund do not
participate in management decisions affecting the Fund, and they have no voice
in the operation of the Fund. In addition, Shaffer Asset Management is
responsible for the preparation and distribution of monthly and annual reports
to the limited partners of the Fund; filing reports required by the CFTC, the
SEC and any other Federal or state agencies; the calculation of the Net Asset
Value of the Fund and the advisory fees; determining whether the Fund will make
distributions to the partners; selecting an accountant and causing an annual
audit of the Fund's business affairs; executing documents on behalf of the Fund
and on behalf of the limited partners of the Fund pursuant to the powers of
attorney granted by the limited partners upon execution of the Fund's limited
partnership agreement; and supervising the liquidation of the Fund.
Shaffer Asset Management provides suitable facilities and procedures
for handling redemptions, transfers, distributions of profits, if any, and
orderly liquidation of the Fund. In addition, Shaffer Asset Management will pay
all operating and other administrative expenses attributable to the Fund that
are in the aggregate in excess of 0.5% of the average monthly Net Asset Value of
the Fund per annum, except for sales charges, continuing services fees,
management fees, incentive allocations, brokerage commissions and extraordinary
expenses, which expenses shall be paid by the Fund.
Shaffer Asset Management, in its capacity as the general partner of
the Fund, shall cause itself, in its capacity as the commodity trading advisor
to the Fund, to close out all open positions and suspend trading if the Net
Asset Value per Unit (increased by the amount of distribution, if any) on any
business day during any given fiscal year decreases to or below 50% of the Net
Asset Value per Unit as of the beginning of the fiscal year, provided that such
50% decrease results in a Net Asset Value per Unit of less than $1,000, or if
the Net Asset Value per Unit decreases on any business day to or below $350. In
addition, Shaffer Asset Management shall give notice of the occurrence of such
event within ten business days thereof. Included in such notification shall be a
description of the rights of the limited partners of the Fund. See "Trading
Policies" and "Summary of the Limited Partnership Agreement -- Reports and
Accounting."
MINIMUM INVESTMENT AND NET WORTH REQUIREMENTS IMPOSED ON THE GENERAL PARTNER
The Fund's limited partnership agreement provides that Shaffer Asset
Management must make a capital contribution to the Fund equal to at least the
greater of: (i) 1% of the aggregate amount of capital contributions made to the
Fund by the partners, including Shaffer Asset Management's capital contribution,
or (ii) $25,000. Shaffer Asset Management will share Fund losses and profits
with the limited partners of the Fund PRO RATA to the extent of its investment
and will maintain its interest in the Fund so long as it is acting as general
partner of the Fund. However, Shaffer Asset Management may withdraw or receive a
distribution of any portion of its interest in the Fund that is in excess of its
minimum investment requirement upon thirty days' prior written notice to the
limited partners of the Fund, although withdrawals of any incentive allocations
to Shaffer Asset Management do not require such notice.
Except as stated above, neither Shaffer Asset Management, its Selling
Agents, Selected Dealers or ADM Investor Services nor any of their respective
principals have arranged or committed to purchase any Units but any of them may
do so in the future.
-31-
Under the Fund's limited partnership agreement, Shaffer Asset
Management is obligated, for so long as it continues to serve as the general
partner of the Fund, to maintain a net worth of at least the greater of (i)
$50,000, or (ii) 5% of the aggregate capital contributions made to the Fund by
all the partners including Shaffer Asset Management's capital contributions. In
addition, to the extent that Shaffer Asset Management serves as the general
partner of any other limited partnership in addition to the Fund, the Fund's
limited partnership agreement would require Shaffer Asset Management to maintain
a net worth at least equal to the net worth required by the preceding sentence
plus, for each such additional limited partnership, an amount equal to 5% of the
total capital contributions made to such other limited partnership by all
partners including Shaffer Asset Management. Notwithstanding the foregoing,
Shaffer Asset Management's net worth need not exceed $1,000,000. The calculation
of Shaffer Asset Management's net worth shall be based upon fair market values
from time to time, shall exclude its interest in the Fund or any other limited
partnership of which it is a general partner, and shall otherwise be determined
in accordance with generally accepted accounting principles. See the Fund's
limited partnership agreement attached as Exhibit A to the statement of
additional information that accompanies this prospectus.
Daniel S. Shaffer and Bruce I. Greenberg, the sole officers,
directors, employees and shareholders of Shaffer Asset Management, have
undertaken, jointly and severally, to provide Shaffer Asset Management with
capitalization sufficient to meet such net worth requirements during the
continuous offering of Units and the closing of the offering of interests in any
other limited partnership for which Shaffer Asset Management acts as general
partner. In addition, each of them has agreed not to make any withdrawal of
capital from Shaffer Asset Management that would cause Shaffer Asset Management
to have an aggregate net worth less than that which they have agreed, jointly
and severally, to provide at the time of such closing.
TRADING PHILOSOPHY AND METHODS OF THE ADVISOR
TRADING STRATEGIES IN GENERAL
Commodity traders generally rely on either fundamental or technical
analysis or a combination thereof in making trading decisions and attempting to
identify price trends. Fundamental analysis looks at factors external to the
trading market that affect the supply and demand of a particular commodity in
order to predict future prices. As an example, some of the fundamental factors
that affect the supply of a commodity such as corn include the acreage planted,
crop conditions such as drought, flood and disease, strikes affecting the
planting, harvesting and distribution of the commodity, and the previous year's
crop carryover. The demand for commodities such as corn consists of domestic
consumption and exports and is a product of many things, including general world
economic conditions, as well as the cost of corn in relation to the cost of
competing products such as soybean meal. Technical analysis is not based on the
anticipated supply and demand of the cash (actual) commodity; instead, it is
based on the theory that a study of the markets themselves will provide a means
of anticipating future prices. Technical analysis of the markets often includes
a study of the actual daily, weekly and monthly price fluctuations, volume
variations and changes in open interest utilizing charts and/or computers for
analysis of these items and other technical market data.
Shaffer Asset Management makes commodity trading decisions for the
Fund pursuant to trading strategies that include technical trend analysis and
technical trading principles as described below. The principal objective of the
trading strategies is to participate in major, sustained price movements in the
commodities traded.
SHAFFER ASSET MANAGEMENT TRADING STRATEGY
Shaffer Asset Management's analyses are based generally on technical
systems that attempt to detect trends in price movements. The principal
technical trading strategies used by Shaffer Asset Management to generate
signals for buy and sell points for the various commodities traded have been
developed through actual trading experience and through computer testing against
historical commodity futures trading data. Given trends in price of sufficient
duration and magnitude, the trading methods employing such strategies may be
profitable even though more than half of all individual trades are unprofitable;
however, a period of time without such trends may result in substantial losses.
The theoretical buy and sell points generated by technical analysis
are approximate levels, and as such will require the judgment of Shaffer Asset
Management to translate the information into actual orders. Furthermore,
decisions whether to trade a particular commodity futures contract are based
upon various factors, including liquidity, significance in terms of desired
degrees of concentration and diversification and profit potential, both
historical and at a given time. These decisions will also require the exercise
of judgment by Shaffer Asset Management. The decision not to trade certain
commodities for certain periods, or to reduce the number of contracts traded in
a particular commodity, may result at times in missing significant profit
opportunities which otherwise would be captured by technical strategies.
-32-
Successful speculative commodity trading depends upon establishing a
position and then maintaining `that position while the market moves in favor of
the commodity trader. The trading system of Shaffer Asset Management seeks to
establish such positions and to exit the market when the favorable trend either
reverses or does not materialize. No such system will be successful if the price
trend is adverse to the direction detected by each of the systems or if the
market is moving in an erratic and non-trending manner. Since turning points and
reverses in price movements in the commodity futures markets are generally not
predictable and since commodity futures price trends may be short lived, market
position entry point signals may be given by the systems at or near the end of a
price trend. If the market reverses itself shortly after the trader establishes
a position, sizeable losses may be incurred before the exit price signal is
reached. The possibility exists that a brief market reversal, which is only a
temporary deviation from a long-term price trend, may trigger an exit signal
that would prevent the trader from realizing any profits from the long-term
price movement. Additionally, such an interim reversal of price trend could
conceivably generate a system entry signal to establish an opposite market
position, which means that the system would be completely misinterpreting the
trend of the market. System misinterpretations of brief changes and reversals in
market price trends may cause the Fund to incur trading losses and to pay
brokerage commissions on numerous trades that, in retrospect, may appear to have
been unnecessary.
Subject to the limitations on commodities to be traded and the Fund's
trading policies, Shaffer Asset Management may refine or alter its trading
methods from time to time, including, without limitation, trading systems,
commodity futures contracts and markets traded, and trading principles, without
approval by the limited partners of the Fund, if Shaffer Asset Management
determines that such change in methods is in the best interests of the Fund.
No assurance is given that trades of the Fund implemented in reliance
upon Shaffer Asset Management's trading methods will result in profits to the
Fund or that such methods will in fact accomplish their intended objectives or
reduce the Fund's risk of loss.
PAST PERFORMANCE OF THE ADVISOR
The table below, sets forth the unaudited composite trading results
of all individual managed accounts managed by Shaffer Asset Management from
March 1999 to September 30, 2002. The number of such accounts managed by the
Advisor totaled 1, 11, 17, 15 and 13, at March 31, 1999, at December 31, 1999,
at December 31, 2000, at December 31, 2001 and at September 30, 2002,
respectively. Through September 30, 2002, 6 of such accounts showed net gains
and 7 showed net losses. As of September 30, 2002, 6 accounts had closed
profitably and 9 had closed unprofitably.
Applicable CFTC regulations require disclosure of the "rate of
return" for each month of all accounts managed by Shaffer Asset Management or
its principal(s). The method of calculation mandated by the CFTC is necessarily
subject to potential distortions due to the fact that such method does not
account for additions and withdrawals that may occur during the month for which
the calculation is made. It should be noted that there are other methods of
calculating rate of return and, because of the differences among such methods,
the percentage results may vary. The rates of return indicated should not be
taken as representative of any rate actually earned by any of the accounts
included in the Table or as being indicative of any return the Fund may earn in
the future.
The information included in the Table has not been audited but, in
the opinion of Shaffer Asset Management, such information fairly presents the
performance of the accounts managed by Shaffer Asset Management for the periods
shown.
The results set forth in the Table are not indicative of the results
that may be achieved by Shaffer Asset Management since past results are not
determinative of future results. No representation is being made that the Fund
will or is likely to achieve profits similar to those shown. The composite
results set forth in the Table are based upon individual accounts and commodity
pool accounts managed by Shaffer Asset Management during the periods shown. The
Table does not reflect the actual performance of any one account. Accordingly,
investors in specific accounts included in the composite figures may have had
more or less favorable results than the Table indicates. All accounts advised by
Shaffer Asset Management do not in all instances have parallel performance due
to different times of market entry and varying amounts of capital. For example,
-33-
larger account size may have effects on particular trading decisions, such as
the relative size of positions taken, degree of diversification and particular
commodity interests traded. In addition, the performance of each account
included in the composite figures has varied depending upon the size of the
investment, the date the account started trading and the length of time the
account was open. The fees and brokerage commissions charged to the Fund may
differ from the fees and brokerage commissions actually charged to these
accounts, and the commission rate charged to the Fund may also change in the
future. In addition, because Shaffer Asset Management has modified its trading
methods in the past and will continue to modify its trading methods in the
future, the results shown in the Table do not necessarily reflect the trading
methods which will be used by Shaffer Asset Management on behalf of the Fund. It
should also be noted that the aggregate value of the Fund's account will
constitute a significant increase in the assets under Shaffer Asset Management's
control if all or a substantial number of the Units being offered are sold.
Apart from the effects of a large account size on particular trading decisions,
such as the time of entry of orders, the relative size of positions taken,
degree of diversification and particular commodities traded, the size of the
Fund's assets may affect generally the design and execution of Shaffer Asset
Management's trading methods.
Please refer to "Past Performance of the Advisor" in the statement of
additional information that accompanies this prospectus for additional
performance information and historical performance data for accounts
individually managed by the Advisor. PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
SHAFFER ASSET MANAGEMENT, INC. INDIVIDUALLY MANAGED ACCOUNT PROGRAM
September 30, 2002
Inception of Trading:......................... March 1999
Aggregate Deposits:........................... $1,827,312
Current Net Asset Value:...................... $1,390,722
Worst Monthly Percentage Drawdown
(for any single account) (1):................. 2/2002; 44. 52% **
Worst Peak to Valley Drawdown
(for any single account) (1):................. 4/2001--2/2002; 63.93% **
PERCENTAGE RATE OF RETURN (2)
(COMPUTED ON A COMPOUNDED
MONTHLY BASIS)
-------------------
MONTH YEAR TO DATE 2001 2000 1999
- ----- ------------ ------ ------ ------
January................................................................. -6.63% 0.25% 5.92% --
February................................................................ -17.47% 1.09% 3.54% --
March................................................................... 14.28% 5.62% -6.47% 10.31%
April................................................................... -0.92% 1.81% 4.45% 12.77%
May..................................................................... 4.36% -14.50% 3.21% 0.85%
June.................................................................... 9.48% 5.14% 4.30% -0.19%
July.................................................................... 0.02% -13.42% -2.64% 11.59%
August.................................................................. -2.80% -2.28% 8.64% -10.62%
September............................................................... -6.30% 2.86% -2.97% 22.50%
October................................................................. 9.17% -14.43% -10.90%
November................................................................ -8.70% -0.98% 19.21%
December................................................................ -3.12% 22.10% 2.41%
Year.................................................................... -9.18% -17.67% 22.46% 58.59%
<FN>
- -----------------------------
(1) "Drawdown" means losses experienced by any account over a specified
period expressed as a percentage of the account's Net Asset Value at the
beginning of that period. The "Worst Monthly Percentage Drawdown" is the
greatest cumulative percentage decline in month-ending Net Asset Value
due to losses sustained by an individual account. The "Worst
Peak-to-Valley Drawdown" is the greatest cumulative percentage decline in
month-ending Net Asset Value due to losses sustained by an individual
account during any period in which the initial month-ending Net Asset
Value is not equaled or exceeded by a subsequent month-ending Net Asset
Value.
(2) The "Rate of Return" for a period is calculated by dividing the net
profit or loss of the fully funded accounts in the program on a composite
basis for such period by the equity of the program at the beginning of
such period, except in periods of significant additions or withdrawals to
the accounts in the composite. In such instances, the composite is
adjusted to exclude amounts with significant additions or withdrawals,
which would materially distort the rate of return.
** These returns are for a single account that was capitalized at an
amount less than the normal required minimum by the advisor and was not
classified as a notional account. The Worst Monthly Percentage Draw-down
(for any single account) and Worst Peak-to-Valley Draw-down (for any
single account) for an account funded with the normal required minimum of
the advisor would have been February 2002; 22.26% and April 2001-February
2002; 31.97%, respectively.
</FN>
-34-
COMMODITY BROKERAGE ARRANGEMENTS
GENERAL
Under the Fund's limited partnership agreement, Shaffer Asset
Management is responsible for selecting the Fund's commodity broker(s) and has
selected ADM Investor Services, Inc. to act as the Fund's commodity broker. In
this regard, the Fund has entered into a non-exclusive brokerage agreement with
ADM that is terminable by the Fund or ADM Investor Services on sixty days' prior
written notice. From time to time, Shaffer Asset Management may engage another
or one or more additional firms to act as the Fund's commodity broker, although
it has no current intention to do so.
DESCRIPTION OF THE COMMODITY BROKER
ADM Investor Services is a Delaware corporation and wholly owned
subsidiary of Archer Daniels Midland Company. Through its branch office and
introducing broker network, ADM Investor Services is engaged primarily in
providing individual and institutional clients with services in connection with
the purchase and sale of commodity interests throughout the United States and in
many foreign countries. ADM Investor Services is a clearing member of the
Chicago Board of Trade; the Chicago Mercantile Exchange; the New York Mercantile
Exchange and the Commodity Exchange; the New York Board of Trade; the
Minneapolis Grain Exchange; and the London International Financial Futures
Exchange.
ADM Investor Services is registered with the CFTC as a futures
commission merchant. Such registration does not imply, however, that the CFTC
has approved the accuracy of the information contained in ADM Investor Services'
application for registration or the qualifications of ADM Investor Services to
act as a futures commission merchant, or that the CFTC supervises the business
activities engaged in by ADM Investor Services. ADM Investor Services is also a
member of the NFA.
ADM Investor Services' principal offices are located at 1600A Board
of Trade Building, 141 West Jackson Boulevard, Chicago, Illinois 60604, and its
telephone number is (312) 435-7000.
CIVIL, CRIMINAL AND ADMINISTRATIVE ACTIONS
CFTC NOTICE OF INTENT TO REVOKE, SUSPEND OR RESTRICT REGISTRATION. On
May 16, 1997, the CFTC filed a notice of intent to revoke, suspend or restrict
the registration of ADM Investor Services as a futures commission merchant based
upon a 1996 conviction of ADM Investor Services' parent company, Archer Daniels
Midland Company ("Archer Daniels Midland"), for violations of the Sherman
Antitrust Act. Specifically, Archer Daniels Midland pled guilty on October 15,
1996 to charges that it participated in a conspiracy to fix the prices of lysine
and citric acid. As part of its guilty plea, Archer Daniel Midland agreed to pay
fines totaling $100 million.
In connection with the CFTC's proceeding against ADM Investor
Services, ADM Investor Services accepted an offer of settlement that placed
various restrictions on ADM Investor Services' registration as a futures
commission merchant. In particular, ADM Investor Services is prohibited from (i)
employing any person who was directly or indirectly involved in the conduct of
Archer Daniels Midland in the alleged conspiracy, and (ii) employing any person
who was employed by Archer Daniels Midland for a period of four years, except
for the current president of ADM Investor Services. In addition, ADM Investor
Services is required to conduct a weekly review of all trading activities
conducted by or on behalf of Archer Daniels Midland for consistency with the CE
Act and CFTC regulations. ADM Investor Services has advised Shaffer Asset
Management that (i) ADM Investor Services was not cited by the CFTC for any
alleged or actual violations of the CE Act or rules and regulations promulgated
by the CFTC thereunder, (ii) the CFTC's action against ADM Investor Services was
based entirely on the fact that ADM Investor Services was a subsidiary of Archer
Daniels Midland, and (iii) the proceeding has not had, and is not expected to
have, a material adverse effect on the activities of ADM Investor Services as a
futures commission merchant.
-35-
OTHER ACTIONS. ADM Investor Services is currently a defendant in
certain lawsuits incidental to its commodities business. ADM Investor Services
has advised Shaffer Asset Management that such actions have not had, and are not
expected to have, a material adverse effect on the activities of ADM Investor
Services as a futures commission merchant.
Other than the foregoing actions, there have been no material civil,
criminal or administrative actions pending, on appeal or concluded against ADM
Investor Services or any of its principals during the past five years.
DESCRIPTION OF BROKERAGE ARRANGEMENTS
The Fund maintains a commodity trading account with ADM Investor
Services pursuant to a brokerage agreement entered into with ADM Investor
Services. Under that agreement, all assets and credits carried for the Fund will
be subject to a general lien to discharge its trading obligations; the margins
required to initiate or maintain open positions may be increased or decreased at
any time at the discretion of ADM Investor Services; open positions may be
liquidated or new positions may be rejected if, in the discretion of ADM
Investor Services, the margin is deemed insufficient or is required by the
emergency rules of any exchange; and reports of trading become conclusive if no
written objection thereto is made within stated times. The brokerage agreement
also provides that ADM Investor Services and its stockholders, directors,
officers, employees, and affiliates shall not be liable to the Fund, its
partners, or any of their successors or assigns except for acts or omissions
taken or omitted to be taken by them in their capacities as brokers for the Fund
if such acts or omissions involved gross negligence or willful, wanton or
reckless misconduct. In addition, the brokerage agreement also provides that the
Fund shall indemnify ADM Investor Services and its stockholders, directors,
officers, employees and affiliates against any or all losses, liabilities,
costs, damages, expenses (including, without limitation, attorneys' and
accountants' fees and disbursements), judgments and amounts paid in settlement
(collectively, "Losses") incurred or suffered by any of them in connection with
or relating to their performance of services to the Fund unless such Losses
resulted from the gross negligence or willful, wanton or reckless misconduct of
ADM Investor Services or its stockholders, directors, officers, employees or
affiliates. ADM Investor Services will provide various services to the Fund with
respect to the execution, clearance and confirmation of transactions on behalf
of the Fund, but will receive direction and instructions in this regard from
Shaffer Asset Management. The brokerage agreement provides that, under no
circumstances shall ADM Investor Services accept any responsibility for
verifying that any of such instructions are in conformance with Shaffer Asset
Management's authority and ADM Investor Services will not undertake to monitor
the actions of Shaffer Asset Management in this regard to ensure that such
actions are not contrary to the provisions of this prospectus, the accompanying
statement of additional information or any related agreements or any subsequent
amendments thereto. No indemnification of Shaffer Asset Management or its
affiliates is permitted for Losses resulting from a violation by Shaffer Asset
Management or any of its affiliates of the Securities Act of 1933, as amended,
or of any applicable state securities laws in connection with the Registration
Statement or the sale of Units. The Fund (or the limited partners of the Fund)
or the other parties thereto may terminate the brokerage agreements and close
the Fund's commodity accounts at any time on sixty days prior notice.
The Fund pays brokerage commissions to ADM Investor Services at the
rate of $17 per "round-turn" for trades executed on domestic exchanges. Based
upon the rate of the brokerage commissions to be charged the Fund and the
anticipated trading patterns of Shaffer Asset Management, the Fund expects to
pay brokerage commissions of approximately 1% of its average annual Net Asset
Value, though the actual amount may be higher. There is no agreement to limit
such commission charges to any particular level. ADM Investor Services will
maintain the Fund's assets in segregated accounts as required by CFTC
regulations.
CFTC regulations permit brokers to retain interest earned on customer
funds. Many brokers permit accounts above a certain size to have a portion of
their funds held in the form of interest-bearing obligations such as United
States Treasury Bills, thereby enabling such accounts to earn interest on assets
being used for trading. This advantage would not generally be extended to
individuals unless substantially more than the minimum investment required by
the Fund was committed to commodity trading. The Fund's assets, both those that
are deposited to meet margin requirements and those that are held in reserve,
may be held in cash, United States Treasury Bills or in any other form
permissible under applicable laws and regulations. Shaffer Asset Management
currently intends to cause the Fund to hold not less than 90% of such assets in
United States Treasury Bills; interest, if any, earned on such assets,
therefore, will inure to the benefit of the Fund.
-36-
Shaffer Asset Management will review the terms of the brokerage
agreement at least annually and determine to the extent possible the brokerage
commission rates charged by other brokers to other public commodity funds whose
size and management structure is comparable to that of the Fund as a factor in
determining that the commission rates paid by the Fund continue to be fair and
reasonable in light of the services the Fund receives from ADM Investor Services
and its affiliates including, among others, execution services. Investors should
note that, notwithstanding the foregoing, the Fund may pay brokerage commission
rates exceeding rates which are otherwise available. Commission rates proposed
for the Fund, as well as those currently charged to most other public commodity
pools by other commodity brokers (to the best of Shaffer Asset Management's
knowledge), are ultimately based upon the scheduled retail commission rates
charged by most major commodity brokerage houses to regular public customers.
While the rates charged to the Fund ostensibly represent a discount from those
scheduled rates, the rates charged to the Fund, and other public commodity
pools, may exceed the lowest rates negotiable with ADM Investor Services or
certain other brokers by an account as large as the Fund's account. See
"Conflicts of Interest and Fiduciary Responsibility of the General Partner."
PLAN OF DISTRIBUTION
SUBSCRIPTION PROCEDURE
The Fund is currently offering the Units to the public at the Net
Asset Value per Unit as of the close of business on the last business day of
each calendar month, plus a sales charge of 5% of the Net Asset Value per Unit
for each Unit purchased. Any subscription may be rejected by Shaffer Asset
Management in whole or in part for any reason, but no subscription may be
revoked by a subscriber after 5 days following the subscription date.
The minimum investment in the Fund by any one investor is $10,000
(initially 10 Units), except that in the case of investments by pension,
profit-sharing or other employee benefit plan qualified under Section 401 of the
Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified
Employee Pension -- IRA plans and retirement and deferred compensation and
annuity plans and trusts used to fund those plans, including but not limited to,
those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code,
the minimum investment is $5,000. Additional investments in the Fund may be made
in amounts of not less than $1,000. Purchases by investors and their spouses and
by entities, including retirement plan trusts, that are legally or beneficially
owned in their entirety by investors and/or their spouses shall be aggregated
for purposes of meeting the minimum purchase requirements. Fractional Units may
be sold by the Fund.
During the continuing offering period, approximately 20% of all sales
charges are paid to Shaffer Asset Management to reimburse Shaffer Asset
Management for the payment by Shaffer Asset Management of the Fund's
organizational, initial offering and operating expenses payable by Shaffer Asset
Management and approximately 80% of all sales charges are paid as syndication
fees to the Selling Agents and as selling commissions to the selected dealers.
The Selling Agents and the selected dealers may in turn pay a portion of such
syndication fees and selling commissions to their respective employees who are
NASD registered representatives for each Unit sold by them. All expenses of the
Selling Agents incurred in performing its obligations related to the offering
will be reimbursed by the Fund (or by Shaffer Asset Management on its behalf).
In no event may compensation to the Selling Agents and the selected dealers
exceed 10% of the gross proceeds of this offering (excluding, for the purposes
of such calculations, the reimbursement to the Selling Agents of actual
out-of-pocket expenses).
In addition to the syndication fees and selling commissions described
above, the Fund will pay a monthly continuing services fee to the Selling Agents
and, through the Selling Agents, certain selected dealers who are appropriately
registered with the CFTC and/or the NFA and their respective registered
representatives equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value
per Unit of the Fund's assets under management at month's end (without reduction
for distributions or redemptions effected as of such date or management fees
payable or incentive allocations allocable as of such date) with respect to
Units purchased within the prior twelve-month period and 1/12 of 4% of the Net
Asset Value per Unit of the Fund's assets under management at month's end
(without reduction for distributions or redemptions effected as of such date or
management fees payable or incentive allocations allocable as of such date) with
respect to Units purchased more than twelve months prior thereto. Such
continuing services fee shall be paid to the Selling Agents and such selected
dealers and their respective registered representatives in return for their
continuing services to the Fund and the limited partners of the Fund that were
solicited by them. Such services include, without limitation, keeping the
limited partners of the Fund apprised of developments affecting the Fund,
responding to specific inquiries received from limited partners relating to the
Fund and the commodity markets, communicating current valuations of the Fund's
Net Asset Value per Unit to the limited partners, assisting in redemptions,
transfers and distributions, assisting limited partners in interpreting the
Fund's monthly and annual reports, financial statements and the tax information
provided to limited partners, and providing such other services as the limited
partners from time to time may reasonably request. The continuing services fee
may be increased at any time and from time to time by Shaffer Asset Management
upon sixty days' prior written notice to the limited partners.
-37-
Shaffer Asset Management is responsible for all of the Fund's
organizational and initial offering expenses, exclusive of selling commissions.
Shaffer Asset Management is also required to reimburse the Selling Agents for
out-of-pocket expenses incurred by it in connection with this offering. Although
the Fund will not be obligated to reimburse Shaffer Asset Management for any of
such expenses, approximately 20% of all sales charges imposed by the Fund on
Units sold and 100% of all early redemption fees charged by the Fund upon
redemptions of Units will be paid to Shaffer Asset Management to reimburse
Shaffer Asset Management for the payment by Shaffer Asset Management of the
Fund's organizational and initial offering expenses and the Fund's operating
expenses that are payable by Shaffer Asset Management. See "Summary -- Fees and
Expenses Payable by the General Partner," "Fees, Compensation and Expenses" and
"Distributions and Redemptions."
Berthel Fisher & Company is, and Shaffer Asset Management may be
deemed to be, an "underwriter" in connection with this offering within the
meaning of the Securities Act of 1933 and the rules and regulations of the SEC
promulgated thereunder.
The Fund has agreed to indemnify Berthel Fisher & Company and the
selected dealers against certain liabilities that they may incur in connection
with the offering and sale of the Units, including liabilities under the
Securities Act of 1933 (in the case of the selected dealers only) and the CE
Act. The Fund will not indemnify the Selling Agents for any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees and disbursements) resulting from a violation by Shaffer Asset
Management or its affiliates of the Securities Act of 1933 or any state
securities laws in connection with the Registration Statement or the sale of the
Units.
The Fund has been advised by Berthel Fisher & Company that neither
the Selling Agents nor any of the selected dealers engaged to sell the Units
will execute any transaction in the Units in any trading account over which it
has discretion, without the prior written approval of the holder of such
account.
Following acceptance by the Fund of a subscription, Shaffer Asset
Management will provide the subscriber with confirmation of the acceptance of
the Subscriber's purchase of the Units.
SUBSCRIPTIONS / INVESTMENT REQUIREMENTS / INVESTOR SUITABILITY STANDARDS
In order to subscribe for Units, a subscriber must (i) complete and
execute a Subscription Agreement / Power of Attorney that is attached as Exhibit
C to the statement of additional information that accompanies this prospectus,
and (ii) deliver or mail such documents to the Fund at the address shown,
together with a check, made out in accordance with the instructions of the
selected dealer, for the full purchase price of the Units to be purchased,
together with any and all applicable sales charges. If the subscription is
rejected by Shaffer Asset Management, in whole or in part (which is in the sole
discretion of Shaffer Asset Management), the subscription funds or the rejected
portion thereof will be returned to the subscriber without interest. Shaffer
Asset Management will determine whether to accept or reject a subscription as
promptly as possible following its receipt. All subscriptions, once made, are
irrevocable by the subscriber after 5 days following the subscription date but
may be rejected in whole or in part by Shaffer Asset Management.
Each subscriber must represent and warrant in the Subscription
Agreement / Power of Attorney, a copy of which is attached as Exhibit C to the
statement of additional information that accompanies this prospectus, that
o he or she has either (A) a net worth (exclusive of home,
furnishings and automobiles) of at least $225,000, or (B) a
net worth (similarly calculated) of at least $60,000 and an
annual gross income of at least $60,000, and his or her
investment in the Fund will not constitute more than 10% of
his or her net worth, exclusive of home, furnishings and
automobiles; and
o If he or she is a resident of Iowa, Kansas, Missouri or
North Carolina, he or she has (i) a net worth of at least
$350,000 or (ii) a net worth of at least $100,000 and
$100,000 taxable income
-38-
o If he or she is a resident of Nebraska or Texas, he or she
has (i) a net worth, or joint net worth with his or her
spouse, that exceeds $1,000,000 or (ii) had income in
excess of $200,000 in each of the two most recent years or
a joint income with his or her spouse in excess of
$300,000, and he or she has a reasonable expectation of
reaching this same income level in the current year.
o he or she has reviewed this prospectus and the accompanying
statement of additional information and is aware of and can
afford the risks of an investment in the Fund, including
the risk of losing his or her entire investment.
The administrator of the securities laws of certain states have
imposed additional suitability requirements on the residents of such states.
These standards, however, are only regulatory minimums. Even if a subscriber
meets the suitability requirements described above, an investment in the Units
may not be suitable for him or her. Only the subscriber can make that
determination. See "Subscription Requirements" attached as Exhibit B to the
statement of additional information that accompanies this prospectus.
In the case of a subscription on behalf of a fiduciary account, the
subscription requirements must be met by the account beneficiary. However, in a
case where a donor or grantee directly or indirectly supplies the funds to
purchase the Units, and the donor or grantee acts as the fiduciary for the
account, then the subscription requirements may be met by the donor or grantee.
It is the responsibility of Shaffer Asset Management, the Selling
Agents and each person selling Units to make every reasonable effort to
determine that a purchase of Units is a suitable and appropriate investment for
each subscriber.
During the continuing offering period, all monies remitted by
subscribers are deposited in the Fund's account with JPMorganChase pending
distribution to the Fund's trading account.
INVESTMENTS BY ERISA ACCOUNTS
GENERAL
This section sets forth certain consequences under ERISA and the
Internal Revenue Code of 1986, as amended (the "Code"), which a fiduciary of an
"employee benefit plan" as defined in and subject to ERISA or of a "plan" as
defined in and subject to Section 4975 of the Internal Revenue Code who has
investment discretion should consider before deciding to invest the plan's
assets in the Fund (such "employee benefit plans" and "plans" being referred to
herein as "Plans," and such fiduciaries with investment discretion being
referred to herein as "Plan Fiduciaries").
Violations of the rules under ERISA and/or Section 4975 of the
Internal Revenue Code by fiduciaries can result in various types of liabilities,
including civil penalties and excise taxes. Because of the complexity of these
rules, plan fiduciaries are strongly encouraged to consult with their legal
advisors prior to causing a plan to invest in the Fund.
Each Plan Fiduciary must give appropriate consideration to the facts
and circumstances that are relevant to an investment in the Fund, including the
role that an investment in the Fund plays or would play in the Plan's overall
investment portfolio. Each Plan Fiduciary, before deciding to invest in the
Fund, must be satisfied that such investment is prudent for the Plan, that the
investments of the Plan, including in the Fund, are diversified so as to
minimize the risk of large losses and that an investment in the Fund complies
with the terms of the Plan and related trust.
"PLAN ASSETS"
A regulation issued under ERISA (the "ERISA Regulation") contains
rules for determining when an investment by a Plan in an equity interest of a
limited partnership will result in the underlying assets of the partnership
being assets of the Plan for purposes of ERISA and Section 4975 of the Code
(i.e., "plan assets"). Those rules provide in pertinent part that assets of a
limited partnership will not be plan assets of a Plan which purchases an equity
interest in the partnership if the equity interest purchased is a
"publicly-offered security" (the "Publicly-Offered Security Exception"), or if
investment by benefit plan investors is not "significant." If the underlying
assets of a partnership are considered to be assets of any Plan for purposes of
ERISA or Section 4975 of the Internal Revenue Code, the operations of such
partnership would be subject to and, in some cases, limited by, the provisions
of ERISA and Section 4975 of the Code.
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The Publicly-Offered Security Exception applies if the equity is a
security that is:
(1) "freely transferable" determined based on the applicable
facts and circumstances;
(2) part of a class of securities that is "widely held" --
meaning that the class of securities is owned by 100 or more
investors independent of the issuer and of each other; and
(3) either (a) part of a class of securities registered
under Section 12(b) or 12(g) of the Securities Exchange Act of
1934,as amended, or (b) sold to the Plan as part of a public offering
pursuant to an effective registrationstatement under the Securities
Act of 1933, and the class of which such security is a part is
registered under the Securities Exchange Act of 1934, within 120
days, or such later time as may be allowed by the SEC, after the end
of the fiscal year of the issuer in which the offering of such
security occurred.
If the Fund does not qualify for the Publicly Offered Security
Exception, Shaffer Asset Management shall limit investments by benefit plan
investors, in the aggregate, to less than 25% of the total capital of each class
of equity interest of the Fund not owned by Shaffer Asset Management or its
affiliates (the "25% Limitation"). If Shaffer Asset Management applies the 25%
Limitation, investment by benefit plan investors will not be considered
"significant" under the ERISA Regulation, and the underlying assets of the Fund
will not be considered to constitute assets of any Plan that purchases Units.
This 25% Limitation may restrict additional investments by benefit plan
investors and cause Shaffer Asset Management to require that some investors
withdraw from the Fund in the event other investors withdraw. If, in the opinion
of Shaffer Asset Management, a rejection of subscriptions or mandatory
withdrawals are necessary to meet the 25% Limitation, Shaffer Asset Management
will effect the rejections or withdrawals in a manner determined in the sole
discretion of Shaffer Asset Management. However, Shaffer Asset Management will
use its best efforts to effect withdrawals on a pro rata basis among all benefit
plan investors. As of the date of this prospectus, the Fund is relying on the
25% limitation.
INELIGIBLE PURCHASERS
In general, Units may not be purchased with the assets of a Plan if
Shaffer Asset Management, any of the selling agents, selected dealers, ADM
Investor Services or any of their respective employees and/or affiliates or any
of its affiliates or employees either:
(1) exercise any discretionary authority or discretionary
control respecting management of the Plan;
(2) exercise any authority or control respecting management
or disposition of the assets of the Plan;
(3) render investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of the Plan;
(4) have any authority or responsibility to render
investment advice with respect to any moneys or other property of the
Plan; or
(5) have any discretionary authority or discretionary
responsibility in the administration of the Plan.
DISTRIBUTIONS AND REDEMPTIONS
Distributions of profits, if any, will be made at Shaffer Asset
Management's discretion. Investors should be aware, however, that Shaffer Asset
Management does not intend to make any distributions of any profits. See "Risk
Factors -- Partners' Tax Liability May Exceed Distributions," "Conflicts of
Interest and Fiduciary Responsibility of the General Partner," "Summary of the
Limited Partnership Agreement -- Profits and Losses; Distributions" and "Federal
Income Tax Considerations."
-40-
A limited partner of the Fund may cause some or all of his Units to
be redeemed by the Fund as of the last business day of any month at the then
current Net Asset Value per Unit (less the early redemption fee described in the
following paragraph for certain redemptions effected during the first twelve
full calendar months after their purchase) on ten days' prior written notice to
Shaffer Asset Management, provided, however, that no redemption which applies to
less than all of a partner's interest in the Fund can result in the partner's
capital account being reduced below $10,000 ($5,000 in the case of investments
by pension, profit-sharing or other employee benefit plan qualified under
Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs,
SIMPLE IRAs, Simplified Employee Pension -- IRA plans and retirement and
deferred compensation and annuity plans and trusts used to fund those plans,
including but not limited to, those defined in Sections 401(a), 403(b) or 457 of
the Internal Revenue Code) after the redemption is effected. Requests for
redemption are irrevocable. The Net Asset Value per Unit for purposes of
redemption equals the Net Asset Value of the Fund allocated to the capital
account of the Fund represented by Units divided by the number of Units
outstanding on the date of redemption. Units are redeemed at their Net Asset
Value determined as of the day on which they are redeemed, not as of the date on
which a request for redemption is made or received. Accordingly, the redemption
price actually received for a Unit may differ significantly from that which
would have been received at the time when the decision to redeem was made.
The Fund will charge an early redemption fee equal to 4% of the Net
Asset Value per Unit of the Units redeemed as of or before the end of the third
full calendar month after their purchase. This fee will decrease by one
percentage point for every three full calendar months thereafter. Accordingly,
Units redeemed as of the end of or during the tenth, eleventh and twelfth full
calendar months after their purchase will be subject to a redemption fee equal
to 1% of the Net Asset Value per Unit of the Unit(s) redeemed. Thereafter, no
redemption fee will be charged. In addition and in order to assure each of the
Fund's limited partners the availability of funds to pay taxes on each year's
profits, if any, the redemption fee will be waived on redemptions of Units to
the extent, if any, distributions in the first quarter of a calendar year are
less than 35% of the profits reportable to a limited partner for the prior year.
The Fund will pay all early redemption fees to Shaffer Asset Management to
reimburse Shaffer Asset Management for the payment by Shaffer Asset Management
of the Fund's organizational and initial offering expenses and the Fund's
operating expenses that are payable by Shaffer Asset Management. Investors
should note that the early redemption fees will reduce the redemption value of a
Unit significantly below its purchase price unless the Fund achieves significant
net New Trading Profits from its trading activities.
All requests for redemption in proper form will be honored and
payment will be made within ten business days of the effective date of
redemption, except as described below. The right to redeem is contingent on the
Fund having assets sufficient to discharge its liabilities on the date of
redemption. It is also contingent on receipt by Shaffer Asset Management of a
request for redemption in the form attached as Exhibit D to the statement of
additional information that accompanies this prospectus or any other form
approved by Shaffer Asset Management at least ten days (or such shorter period
as may be acceptable to Shaffer Asset Management) prior to the date on which
redemption is requested. Under special circumstances, including but not limited
to default or delay in payments due to the Fund from banks or other persons, the
Fund may in turn delay payment to partners requesting redemption of Units of the
proportionate part of the Net Asset Value per Unit represented by the sums which
are the subject of such default or delay.
A limited partner of the Fund will not be liable by operation of law
for any sum in excess of his or her capital contribution and profits, if any
(including any distributions and amounts received upon redemption of Units and
interest thereon), necessary to discharge the Fund's liabilities to all
creditors who extended credit or whose claims arose before the return of the
cash value of the limited partner's interest. The Fund will not make such a
claim with respect to amounts distributed to limited partners and amounts paid
upon redemption of Units unless the assets of the Fund are insufficient to
discharge the Fund's liabilities to its creditors.
TRADING POLICIES
THE OBJECTIVE OF THE FUND IS TO ACHIEVE MAXIMUM CAPITAL APPRECIATION
OF ITS ASSETS THROUGH SPECULATIVE TRADING IN COMMODITY FUTURES CONTRACTS AND
OTHER COMMODITY INTERESTS IN THE UNITED STATES COMMODITY FUTURES MARKETS. NO
ASSURANCE CAN BE GIVEN THAT THE FUND'S OBJECTIVES WILL BE MET. THE FUND ATTEMPTS
TO ACCOMPLISH ITS OBJECTIVES BY FOLLOWING THE TRADING POLICIES SET FORTH BELOW:
(1) Fund monies are invested in futures contracts only of
commodities, which are traded in sufficient volume to
permit, in the opinion of the Fund's advisor(s), ease of
taking and liquidating positions.
(2) The Fund does not allow any advisor to acquire, on behalf
of the Fund, additional positions in any commodity if such
additional positions would result in a net long or short
position for any individual commodity requiring as margin
more than 25% of the Fund's Net Asset Value at the time.
-41-
(3) The Fund estimates that between 10% and 40% of the Fund's
assets will normally be committed as margin, although such
percentage may be outside such range from time to time. As
a result, the Fund will not generally be as highly
leveraged as permitted for investments by an individual.
Margin requirements will be met with cash, through deposits
of United States Treasury Bills or in such other manner as
may be permitted under applicable laws and regulations.
(4) The Fund will ordinarily avoid entering into an open
position during a delivery month, except with respect to
commodity futures contracts on currencies.
(5) The Fund will not employ the trading technique commonly
known as "pyramiding," in which the speculator uses
unrealized profits on existing positions as margin for the
purchase or sale of additional positions in the same or a
related commodity. However, the Fund's advisor(s) may take
into account the Fund's open trade equity on existing
positions in determining generally whether to acquire
additional commodity futures contracts on behalf of the
Fund in light of the policy described in paragraph 3,
above.
(6) The Fund will not utilize borrowings, except to finance the
Fund's taking delivery of cash commodities. Although the
Fund has no current intention to make or accept delivery of
cash commodities, the Fund may from time to time make or
accept delivery of a cash commodity. Normally, such
deliveries will be disposed of promptly by re-tendering to
the appropriate clearinghouse the warehouse receipt
representing the delivery.
(7) Although the Fund has no current intention to employ
trading techniques such as spreads or straddles, the Fund
may from time to time employ such trading techniques. The
term "spread" or "straddle" describes a commodity futures
trading transaction involving the simultaneous buying and
selling of commodity futures contracts dealing with the
same commodity but involving different delivery dates or
different markets, and in which the trader expects to earn
profits from a widening or narrowing movement of the prices
of the different commodity futures contracts.
(8) The Fund, under extraordinary circumstances, may establish
offsetting positions in foreign currencies through banks or
in the inter-bank market to reduce risk exposure due to
lack of liquidity on the commodity exchanges and to protect
the Fund's capital.
(9) The Fund will not permit rebates or give-ups to be received
by Shaffer Asset Management or any advisor.
(10) The Fund will not buy, sell or trade in securities other
than those in which customers' funds are permitted to be
invested under the CE Act, nor will it write, purchase,
sell or trade in options on securities. Although the Fund
has no current intention to trade in options on commodity
futures contracts or physical commodities, the Fund may
from time to time trade in options on commodity futures
contracts or physical commodities.
(11) The Fund will not commingle its assets with those of other
persons, except as permitted by law.
(12) The Fund will not permit the churning of its commodity
trading account.
(13) The Fund may trade in futures contracts on foreign
currencies through domestic commodity exchanges, including
the International Monetary Market Division of the Chicago
Mercantile Exchange.
(14) The Fund will generally maintain approximately 90% of its
assets in investment mediums such as United States Treasury
Bills and other interest bearing debt obligations or
repurchase agreements relating thereto.
(15) The Fund will not be a dealer and therefore will not
acquire commodity interests as inventory or primarily for
sale to customers in the ordinary course of business.
Although Shaffer Asset Management is currently serving as the general
partner of, and the commodity trading advisor to, the Fund, Shaffer Asset
Management will monitor the trading policies of the Fund described above and
will impose any additional restrictions upon the trading activities of the
Fund's other advisor(s), if any, as Shaffer Asset Management, in the exercise of
its prudent business judgment, deems appropriate. In addition, Shaffer Asset
Management may change the trading policies described above without notice to or
the approval of the limited partners of the Fund if it, in its sole discretion,
determines that such change is in the best interests of the Fund. Shaffer Asset
Management will not make a material change in the basic investment policy or
structure of the Fund unless it obtains an affirmative vote of a majority of the
Units.
-42-
If the Net Asset Value of the Fund (increased by the amount of
distributions per Unit, if any) on any business day during any given fiscal year
decreases to or below 50% of the Net Asset Value per Unit as of the beginning of
that fiscal year, provided that such 50% decrease results in a Net Asset Value
per Unit of less than $1,000, or if the Net Asset Value per Unit decreases on
any business day to or below $350, the Fund will attempt to liquidate all open
positions as expeditiously as possible and suspend trading. No assurance is
given that the Fund will be able to close out all open positions without
incurring substantial additional losses. Within ten business days after the date
of the suspension of trading, Shaffer Asset Management shall either give notice
to the limited partners of the Fund of its intention to withdraw from the Fund
or shall declare a special redemption date. Such special redemption date, if
declared, shall be a business day within thirty business days from the date of
suspension of trading by the Fund, and Shaffer Asset Management shall mail
notice of such date to each limited partner of the Fund by first class mail,
postage prepaid, not later than ten business days prior to such special
redemption date, together with instructions as to the procedure such partner
must follow to have his Units redeemed on such date by the Fund, if such partner
so desires. No redemption fees would be due in respect of a Unit redeemed on the
special redemption date. If, after such special redemption date, the Fund's Net
Asset Value is at least 50% of the Net Asset Value on the close of business on
the day before the special redemption date, the Fund will resume trading unless
Shaffer Asset Management elects to withdraw from the Fund. If, after such
special redemption date, the Fund's Net Asset Value is less than 50% of the Net
Asset Value of the close of business on the day before the special redemption
date, the Fund shall terminate. See "Risk Factors."
SUMMARY OF THE ADVISORY AGREEMENT
The Fund has entered into an advisory agreement with Shaffer Asset
Management that provides that Shaffer Asset Management will have sole discretion
during the term of the contract to determine the Fund's trades. The advisory
agreement has a term ending one year after the end of the month in which the
Fund commences trading subject to the Fund's right to automatically renew the
advisory agreement on the same terms and conditions for one additional year on
ninety days' prior written notice and further subject to Shaffer Asset
Management's right to terminate the advisory agreement during the extended term
on sixty days' prior written notice. Shaffer Asset Management intends to amend
the advisory agreement to provide for successive, automatic one-year renewals on
the same terms and conditions, subject to a right to terminate the agreement
notice to the Fund and the Limited partners not less than 60 days prior to any
renewal date. The advisory agreement terminates automatically in the event that
the Fund is terminated and may be terminated at any time by the Fund or its
general partner upon sixty days' prior written notice to Shaffer Asset
Management. The advisory agreement may also be terminated at the election of the
Fund's general partner at any time, upon written notice to the Fund, in the
event that: (i) Shaffer Asset Management withdraws from the Fund as its general
partner; (ii) Shaffer Asset Management's registration as a commodity trading
advisor with the CFTC lapses or is suspended or terminated; (iii) the Fund's
general partner, in its sole discretion, should determine in good faith that
Shaffer Asset Management has violated the Fund's trading policies; (iv) the
Fund's Net Asset Value per Unit (increased by the amount of any distributions
per Unit, if any) on any business day during any given fiscal year decreases to
or below 50% of the Net Asset Value per Unit of the Fund at the beginning of the
fiscal year, provided that such 50% decrease results in a Net Asset Value per
Unit of less than $1,000, or if the Net Asset Value per Unit (increased by the
amount of any distributions per Unit, if any) decreases on any business day to
or below $350.00; (v) Mr. Shaffer leaves the employ of Shaffer Asset Management,
becomes incapacitated or is otherwise not active in the management of the
trading programs of Shaffer Asset Management; (vi) Shaffer Asset Management
becomes unable to use its trading strategies for the benefit of the Fund for any
reason; or (vii) Shaffer Asset Management merges, consolidates with or sells a
substantial portion of its assets, any portion of its trading strategies,
trading programs or goodwill to any individual or entity, or becomes bankrupt or
insolvent. Under the terms of the advisory agreement, upon the termination or
expiration of the advisory agreement, the Fund may retain a new trading advisor
or advisors or may renegotiate the advisory agreement with Shaffer Asset
Management on the same or different terms. No assurance is given that, after the
expiration of such contract, the Fund will be able to retain the trading
management services of Shaffer Asset Management or obtain those services on the
same terms as those of the current advisory agreement. In addition, Shaffer
Asset Management has the right to terminate the advisory agreement with the Fund
in certain circumstances, and no assurance is given that the advisory agreement
will not be terminated prior to the expiration of the initial twelve-month term.
The types of commodity interests that the Fund may trade under the terms of any
new advisory agreement may differ from those that Shaffer Asset Management will
trade for the Fund under the current advisory agreement. The compensation of a
new trading advisor or Shaffer Asset Management under any advisory agreement
negotiated in the future may be determined without regard to the previous
performance of the Fund. ADM Investor Services has agreed to keep confidential
Shaffer Asset Management's trades and trading strategies as disclosed to it,
except to the extent necessary to conduct the affairs of the Fund. The
compensation payable by the Fund to Shaffer Asset Management is described under
"Fees, Compensation and Expenses."
-43-
The business of Shaffer Asset Management is the management of
discretionary commodity trading accounts, and it may manage other accounts
during the same period that it is managing the Fund's account. The advisory
agreement provides that Shaffer Asset Management and its principals, employees
and affiliates shall be free to trade for their own accounts and manage other
trading accounts and to use the same information, trading strategies and
formulae which it obtains, produces or utilizes in the performance of services
for the Fund. The limited partners of the Fund will have no right to inspect the
trading records or evaluate the performance of such accounts except to the
extent required by law. Shaffer Asset Management has agreed with the Fund that
it will not deliberately use any trading strategies for the Fund which it knows
are inferior to those employed by it for any other account managed by Shaffer
Asset Management or any of its principals or affiliates. In addition, in its
trading for the Fund's account and such other accounts, Shaffer Asset Management
has agreed to use its good faith, best efforts to achieve an equitable treatment
of all accounts including with respect to priorities of order entry and any
changes or modifications to Shaffer Asset Management's trading strategies or
recommendations resulting from the application of speculative position limits.
No assurance is or can be given, however, that the results of the Fund's trading
will be similar to those of other accounts concurrently managed by Shaffer Asset
Management. See "Conflicts of Interest / Fiduciary Responsibility of the General
Partner."
The advisory agreement provides that Shaffer Asset Management, its
shareholders, directors, officers, employees and other affiliates shall not be
liable to the Fund under certain circumstances and further provides that the
Fund shall indemnify such persons, subject to certain limitations.
The advisory agreement prohibits Shaffer Asset Management from
receiving any commission, compensation, remuneration or payment whatsoever by
reason of Fund transactions from any commodity broker with whom the Fund carries
any account. The Fund will pay Shaffer Asset Management a management fee and
allocate to Shaffer Asset Management an incentive allocation as described under
the caption "Fees, Compensation and Expenses."
SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT
The rights and duties of Shaffer Asset Management and the limited
partners of the Fund are governed by the provisions of the Delaware Revised
Uniform Limited Partnership Act and by the Fund's limited partnership agreement,
a copy of which is included as Exhibit A to the statement of additional
information that accompanies this prospectus. Certain features of the limited
partnership agreement are explained below, but reference is made to the limited
partnership agreement for complete details of its terms and conditions. When
appropriate, the term "General Partner" herein refers to Shaffer Asset
Management, Inc. or any successor general partner of the Fund.
ADDITIONAL LIMITED PARTNERS
Shaffer Asset Management has the sole discretion to admit additional
limited partners. The offering is continuous, and the Fund may offer and sell
additional Units, and there is no limitation on the total number of Units that
may be outstanding. All Units offered by the Fund may be offered and sold by the
Fund at the then current Net Asset Value per Unit, plus a sales charge of 5% of
the Net Asset Value per Unit for each Unit sold.
AMENDMENTS; MEETINGS
The Fund's limited partnership agreement may be amended in any
respect (except to change the Fund to a general partnership, to change the
liability of Shaffer Asset Management or any limited partners, to reduce the
capital account of a limited partner, to modify the profits, losses or
distributions attributable to any limited partner, or to terminate the Fund or
to extend its duration) by a vote of the holders of a majority of the
outstanding Units (not including Units held by Shaffer Asset Management), either
pursuant to a written vote or at a duly called meeting of the limited partners
of the Fund. An amendment may be proposed or a meeting may be called by Shaffer
Asset Management or by the holders of at least 10% of the outstanding Units. It
is not expected that Shaffer Asset Management will call any annual meetings of
the Fund's limited partners.
-44-
CERTIFICATES FOR UNITS
The Fund's limited partnership agreement provides that Units need not
be evidenced by certificates, but the Fund presently issues certificates to the
limited partners of the Fund with respect to Units purchased by them.
ELECTION, REMOVAL AND WITHDRAWAL OF THE GENERAL PARTNER
Shaffer Asset Management may be removed by a vote of the holders of a
majority of the outstanding Units (not including Units held by Shaffer Asset
Management, if any), and additional or successor general partner(s) may be
elected by a vote of a majority of the outstanding Units (not including Units
held by Shaffer Asset Management, if any). Shaffer Asset Management may withdraw
as the general partner of the Fund upon one hundred twenty days' notice to the
limited partners of the Fund.
INDEMNIFICATION
The Fund's limited partnership agreement provides that the Fund shall
not provide for indemnification of Shaffer Asset Management or its affiliates
for any liability or loss suffered by such person, nor shall it provide that
such person be held harmless for any loss or liability suffered by the Fund,
unless, and Shaffer Asset Management shall have no liability to the Partnership
if, all of the following conditions are met: (a) such person has determined, in
good faith, that the course of conduct which caused the loss or liability was in
the best interests of the Fund, and (b) such person was acting on behalf of or
performing services for the Fund, and (c) such liability was not the result of
negligence or misconduct by such person, and (d) such indemnification or
agreement to hold harmless is recoverable only out of the assets of the Fund and
not from the holders of the partnership interests. In any action threatened,
pending or completed against Shaffer Asset Management or its affiliates
involving the management of the Fund, the Fund shall indemnify and hold harmless
Shaffer Asset Management and its affiliates, against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees and disbursements) judgment or amount paid in settlement
incurred in connection with the investigation, defense or settlement of such
actions. Expenses may be paid by the Fund in advance of the final disposition of
such action if the indemnified person shall agree to reimburse the Fund in the
event indemnification is not permitted. No indemnification of Shaffer Asset
Management or its affiliates is permitted for losses resulting from or arising
out of any violation of the Federal securities laws or applicable state
securities laws in connection with or related to the registration, offer or sale
of the Units, unless (i) there has been a successful adjudication on the merits
of each count involving alleged securities law violations as to Shaffer Asset
Management or its affiliates, (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction, or (iii) a court
of competent jurisdiction approves a settlement of the claims and finds that
indemnification of the settlement and related costs should be made; provided
that such court has been advised of the position as to indemnification for
violations of securities laws of the SEC and the securities administrators of
the jurisdictions in which the claimant alleges to have been offered or sold
Units. The position of the SEC is that any such indemnification is contrary to
the federal securities laws and therefore unenforceable. The Fund may not incur
the cost of that portion of any liability insurance which insures Shaffer Asset
Management or any of its personnel for any liability for which Shaffer Asset
Management or any of its personnel are prohibited from being indemnified under
the Limited Partnership Agreement.
LIABILITIES
A limited partner of the Fund is not be personally liable for any
debts or losses of the Fund beyond the amount of his capital contribution and
profits earned thereon, if any. In the event that the Fund is otherwise unable
to meet its obligations, the limited partners of the Fund might be required,
under applicable law, to repay to the Fund, cash distributions previously
received by them (including distributions on partial or complete redemptions,
wrongfully distributed profits and distributions deemed to be a return of
capital), with interest, to the extent that such distributions were made after
the date that the Fund's obligations arose. Each Unit, when issued, will be
fully paid and non-assessable. Except as indicated above, losses in excess of
the Fund's assets will be the obligation of Shaffer Asset Management.
-45-
LIMITED PARTNERS' RIGHTS
Each limited partner of the Fund or his duly authorized
representative may inspect the Fund's books and records during normal business
hours. Holders of a majority of the Units (exclusive of any such Units held by
Shaffer Asset Management, if any) may (a) adopt amendments to the Fund's limited
partnership agreement proposed by Shaffer Asset Management or limited partners
of the Fund owning at least 10% of the outstanding Units, (b) elect new general
partner(s) if Shaffer Asset Management withdraws or is removed or is otherwise
unable to serve, or (c) admit additional general partner(s). In addition,
holders of a majority of the outstanding Units (not including Units held by
Shaffer Asset Management, if any) may (a) remove Shaffer Asset Management, (b)
cancel any contract for services with Shaffer Asset Management or its affiliates
for any reason on sixty days' notice or (c) terminate the Fund. In addition,
limited partners of the Fund must approve any material change in the Fund's
trading policies. See "Trading Policies."
PROFIT AND LOSS; DISTRIBUTIONS
Shaffer Asset Management may, but need not and, in fact, does not
intend to, distribute any portion of the capital or profits of the Fund. Shaffer
Asset Management may declare distributions in additional Units of the Fund, in
which event limited partners of the Fund will be given at least sixty days'
prior written notice and the option to elect to receive cash instead of
additional Units. However, a limited partner has the right to redeem a portion
or all of his Units in accordance with the redemption procedures described in
this prospectus and the accompanying statement of additional information. For
purposes of calculating Net Asset Value, any distribution shall become a
liability of the Fund as of the date of its declaration. See "Distributions and
Redemptions."
The allocation of the Fund's income or loss for Federal income tax
purposes is discussed under the caption "Federal Income Tax Considerations."
REDEMPTIONS
The Fund's limited partnership agreement provides that the Fund's
limited partners may redeem all or a portion of their Units as of the close of
business on the last business day of each calendar month upon at least ten days'
prior written notice to Shaffer Asset Management, subject to certain
restrictions and in some instances to early redemption fees during the first
full twelve calendar months following the purchase of the Units. Notwithstanding
the foregoing, partial redemptions shall be in whole Units except as Shaffer
Asset Management may permit. See "Distributions and Redemptions."
Limited partners of the Fund should note that there are certain tax
consequences attendant upon redemptions of their Units. See "Federal Income Tax
Considerations."
REPORTS AND ACCOUNTING
The Fund keeps its books in accordance with generally accepted
accounting principles on the accrual basis of accounting. The Fund's fiscal year
is a calendar year for all purposes. The books of the Fund shall be audited at
least annually at the Fund's expense by an independent public accountant to be
designated by Shaffer Asset Management and each limited partner of the Fund
shall be furnished with an annual report certified by an independent public
accountant containing such information as the CFTC requires. CFTC regulations
presently require that an annual report be provided to futures fund participants
within ninety days after the close of each fiscal year, setting forth among
other matters:
(1) the Fund's Net Asset Value as of the end of each of its two
preceding fiscal years;
(2) the Net Asset Value per Unit outstanding as of the end of
each of its two preceding fiscal years;
(3) a Statement of Financial Condition as of the close of the
Fund's fiscal year and preceding fiscal year;
(4) Statements of Income (Loss), Changes in Financial Position
and Changes in Ownership Equity for the most recent fiscal
year, together with Statements of Income (Loss), Changes in
Financial Position and Changes in Ownership Equity for the
previous fiscal year; and
(5) appropriate footnote disclosure and such further material
information as may be necessary to make the required
statements not misleading.
-46-
In addition to the annual report, present CFTC rules require that the
Fund furnish each limited partner of the Fund, within thirty days of the end of
each month, with an unaudited account statement covering such month, which
statement shall be presented in the form of a Statement of Income (Loss) and a
Statement of Changes in Net Asset Value. In addition, limited partners of the
Fund will be furnished with such additional information as Shaffer Asset
Management, in its sole discretion, deems appropriate, as well as any
information required to be provided to the limited partners of the Fund by any
governmental authority having jurisdiction over the Fund. Shaffer Asset
Management will also furnish each limited partner of the Fund, by no later than
the 15th day of the third month following the close of the Fund's fiscal year
(i.e., March 15) with tax information in a form which may be utilized in the
preparation of Federal income tax returns.
Each limited partner of the Fund shall be notified within seven
business days of the decline in the Net Asset Value per Unit during a month to
less than 50% of the Net Asset Value per Unit as of the last business day of the
preceding month. Included in such notification shall be a description of the
limited partners' voting rights, which rights include (a) the right, upon the
initiative of Shaffer Asset Management or the holders of 10% of the outstanding
Units and by vote of a simple majority of such Units (exclusive of any Units
owned by Shaffer Asset Management, if any), to revise the Fund's limited
partnership agreement, or (b) the right by a vote of the holders of at least
seventy five percent of the outstanding Units (not including Units held by
Shaffer Asset Management, if any) to (i) replace or revise the Fund's
arrangements with Shaffer Asset Management or (ii) to terminate the Fund.
Shaffer Asset Management shall maintain a list of the names and
addresses of, and the number of Units owned by, all limited partners of the Fund
at the Fund's principal office. Such list shall be made available for the review
of any limited partner of the Fund or his representative at reasonable times and
upon request, either in person or by mail. Shaffer Asset Management shall
furnish a copy of such list to a limited partner of the Fund or his
representative upon payment of the costs of reproduction and mailing; provided,
however, that such list shall not be used by the limited partner for commercial
purposes.
TERMINATION
Unless earlier dissolved, the Fund shall cease doing business on
December 31, 2025, and shall thereupon be dissolved. The Fund shall also cease
doing business and shall thereafter be dissolved if required by law or upon the
occurrence of any of the following events:
(1) The decrease of the Fund's Net Asset Value per Unit
(increased by the amount of distributions per Unit, if any)
on any business day during any given fiscal year to or
below 50% of the Net Asset Value per Unit as of the
beginning of the fiscal year, provided that such 50%
decrease results in a Net Asset Value per Unit of less than
$1,000, or the decrease of the Fund's Net Asset Value per
Unit (increased by the amount of distributions per Unit, if
any) on any business day to or below $350;
(2) the legal disability, bankruptcy, dissolution or withdrawal
of Shaffer Asset Management, provided, however, that the
holders of a majority of outstanding Units (not including
Units held by Shaffer Asset Management, if any) may elect,
within the ninety day period following Shaffer Asset
Management's required notice of withdrawal, one or more
substitute general partners to continue the Fund;
(3) the vote of the holders of at least seventy five percent of
the outstanding Units (not including Units held by Shaffer
Asset Management, if any) to dissolve the Fund; or
(4) the insolvency or bankruptcy of the Fund.
Upon the dissolution of the Fund, its affairs shall be wound up, its
liabilities discharged and its remaining assets distributed to the Unit holders
in accordance with their capital accounts maintained for financial accounting
purposes (the "Book Capital Accounts"). To the extent that the Fund has open
commodity futures interest positions at such time, it will use its best efforts
to close such positions, although no assurance can be given that market
conditions might not delay such liquidation.
-47-
TRANSFER OF UNITS
A limited partner's Units may be assigned at the election of the
limited partner upon notice to Shaffer Asset Management. However, the assignee
shall become a substituted limited partner of the Fund only upon the consent of
Shaffer Asset Management, which may be granted or withheld in its sole
discretion. An assignee who does not become a substituted limited partner of the
Fund shall be entitled to be allocated the share of the profits or losses or the
return of capital to which his assignor would otherwise be entitled, but he
shall not be entitled to vote, to receive an accounting of Fund transactions, to
receive tax information, or to inspect the books and records of the Fund. There
is no public market for the Units, and it is unlikely that one will develop in
the future.
The Fund has been advised by the selling agents that the selling
agents shall inform the prospective transferee of such Units of all pertinent
facts relating to the liquidity and marketability of the Units before assisting
in the transfer of Units.
FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING CONSTITUTES THE OPINION OF SIDLEY AUSTIN BROWN & WOOD
AND SUMMARIZES THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO INDIVIDUAL
INVESTORS IN THE FUND. SIDLEY AUSTIN BROWN & WOOD'S OPINION IS FILED AS AN
EXHIBIT TO THE REGISTRATION STATEMENT AMENDMENT OF WHICH THIS PROSPECTUS IS A
PART.
THE FUND'S PARTNERSHIP TAX STATUS
The Fund will be treated as a partnership and, based on the type of
income expected to be earned by the Fund, it will not be treated as a "publicly
traded partnership." Accordingly, the Fund will not pay any federal income tax.
TAXATION OF LIMITED PARTNERS ON PROFITS AND LOSSES OF THE FUND
Each limited partner of the Fund must pay tax on his share of the
Fund's annual income and gains, if any, even if the Fund does not make any cash
distributions. The Fund generally allocates the Fund's gains and losses equally
to each Unit. However, a limited partner who redeems any Units will be allocated
such limited partner's share of the Fund's gains and losses in order that the
amount of cash the limited partner receives for the redeemed Units equals such
limited partner's adjusted tax basis in the redeemed Units. A limited partner's
adjusted tax basis in a Unit equals the amount originally paid for the Unit,
increased by income or gains allocated to the Unit and decreased, but not below
zero, by distributions, deductions or losses allocated to the Unit.
FUND LOSSES BY LIMITED PARTNERS
A limited partner may deduct such limited partner's Fund losses only
to the extent of such limited partner's adjusted tax basis in such limited
partner's Units. Generally, a limited partner's tax basis is the amount paid for
the Units reduced (but not below zero) by such limited partner's share of any
Fund distributions, deductions or losses and increased by such limited partner's
share of the Fund's income and gains. However, a limited partner subject to the
so-called "at-risk" limitations (generally, non-corporate taxpayers and
closely-held corporations) can only deduct losses to the extent such limited
partner's is "at-risk. " The "at-risk" amount is similar to tax basis, except
that it does not include any amount borrowed on a non-recourse basis or from
someone with an interest in the Fund.
"PASSIVE-ACTIVITY LOSS RULES" AND THEIR EFFECT ON THE TREATMENT OF INCOME AND
LOSS
The trading activities of the Fund are not a "passive activity. "
Accordingly, a limited partner of the Fund can deduct Fund losses from taxable
income. However, a limited partner of the Fund cannot offset losses from
"passive activities" against Fund gains.
CASH DISTRIBUTIONS AND UNIT REDEMPTIONS
A limited partner of the Fund who receives cash from the Fund, either
through a distribution or a partial redemption, will not pay tax on that cash
until such partner's adjusted tax basis in such partner's Units has been reduced
to zero.
-48-
GAIN OR LOSS ON SECTION 1256 CONTRACTS AND NON-SECTION 1256 CONTRACTS
Section 1256 Contracts are futures and most options traded on U.S.
exchanges and certain foreign currency contracts. For tax purposes, Section 1256
Contracts that remain open at year-end are treated as if the position were
closed at year-end. The gain or loss on Section 1256 Contracts is characterized
as 60% long-term capital gain or loss and 40% short-term capital gain or loss
regardless of how long the position was open. Non-Section 1256 Contracts are,
among other things, certain foreign currency transactions, including Section 988
transactions -- transactions in which the amount paid or received is in a
foreign currency. Although the Fund does not currently engage in Non-Section
1256 transactions, the Fund expects to make a tax election that will cause gain
and loss from Non-Section 1256 Contracts generally to be short-term gain or
loss, in the event that it does, in the future, engage in Non-Section 1256
transactions.
TAX ON CAPITAL GAINS AND LOSSES
Long-term capital gains -- net gain on capital assets held more than
one year and 60% of the gain on Section 1256 Contracts -- are taxed at a maximum
federal income tax rate of 20% for individuals. Short-term capital gains -- net
gain on capital assets held less than one year and 40% of the gain on Section
1256 Contracts -- are subject to tax at the same rates as ordinary income.
Individual taxpayers can deduct capital losses in any one year only to the
extent of their capital gains in such year plus $3,000. Accordingly, the Fund
could suffer significant losses and a limited partner of the Fund could still be
required to pay taxes on such limited partner's share of the Fund's interest
income. An individual taxpayer can carry back net capital losses on Section 1256
Contracts three years to offset earlier gains on Section 1256 Contracts. To the
extent the taxpayer cannot offset past Section 1256 Contract gains, the taxpayer
can carry forward such losses indefinitely as losses on Section 1256 Contracts.
LIMITED DEDUCTION FOR CERTAIN EXPENSES
Shaffer Asset Management does not consider the management fee and
incentive allocation, as well as other ordinary expenses of the Fund, to be
investment advisory expenses. Accordingly, Shaffer Asset Management treats these
expenses as ordinary business deductions not subject to the material
deductibility limitations that apply to investment advisory expenses. The IRS
could contend otherwise and, to the extent the IRS recharacterizes these
expenses, a limited partner of the Fund would have the amount of the ordinary
expenses allocated to him reduced accordingly.
INTEREST INCOME
Interest received by the Fund is taxed as ordinary income. Net
capital losses can offset ordinary income only to the extent of $3,000 per year.
See "-- Tax on Capital Gains and Losses."
SYNDICATION FEES
The 5% sales charge will not be deductible by the Fund or the limited
partners.
INVESTMENT INTEREST DEDUCTIBILITY LIMITATIONS
Individual taxpayers can deduct "investment interest" -- interest on
indebtedness allocable to property held for investment -- only to the extent
that it does not exceed net investment income. Net investment income does not
include capital gain taxed at the lower 20% rate.
UNRELATED BUSINESS TAXABLE INCOME
Tax-exempt limited partners of the Fund will not be required to pay
tax on their share of income or gains of the Fund, provided that such limited
partners do not purchase Units with borrowed funds.
IRS AUDITS OF THE FUND AND ITS LIMITED PARTNERS
The IRS audits Fund-related items at the Fund level rather than at
the limited partner level. Shaffer Asset Management acts as "tax matters
partner" with the authority to determine the Fund's responses to an audit. If an
audit results in an adjustment, all limited partners may be required to pay
additional taxes, interest and penalties.
-49-
STATE AND OTHER TAXES
In addition to the federal income tax consequences described above,
the Fund and its limited partners may be subject to various state and other
taxes.
TAXATION OF FOREIGN LIMITED PARTNERS
Subject to the discussion below regarding derivative transactions, a
non-resident alien individual not otherwise engaged in a United States trade or
business should not be deemed to be engaged in a United States trade or business
solely by virtue of an investment as a limited partner of the Fund. Capital
gains earned by the Fund and allocated to such a foreign limited partner will,
as a general matter, not be subject to United States federal income tax or
withholding, but may be subject to tax in the jurisdiction in which the foreign
limited partner is resident. Interest income earned by the Fund will, as a
general rule, likewise not be subject to United States federal income tax or
withholding, but may be subject to tax in other jurisdictions to which the
foreign limited partner is connected. With respect to derivative transactions
such as swaps or forward contracts, based on current law it is uncertain whether
entering into derivative transactions may cause the Fund, and therefore any
foreign limited partners, to be treated as engaged in a trade or business within
the United States. However, the Treasury has issued proposed regulations, which,
if finalized in their current form, would provide that foreign limited partners
should not be deemed to be engaged in a United States trade or business solely
by virtue of an investment as a limited partner of the Fund even if the Fund
enters into derivative transactions. These regulations are proposed to be
effective for taxable years beginning 30 days after the date final regulations
are published in the Federal Register. Under the terms of the proposed
regulations, however, the Fund may elect to apply the final regulations
retroactively once they are finalized. Portfolio interest income (other than
so-called "contingent interest") allocable to a foreign limited partner is
likewise not subject to United States federal income tax withholding, provided
that such partner is not engaged in a trade or business within the United States
and provides the Fund with a form W-8BEN or other applicable form. Similarly, a
foreign limited partner's allocable share of interest on U.S. bank deposits,
certificates of deposit and discount obligations with maturities (from original
issue) of 183 days or less is not subject to United States federal income tax
withholding. Generally, other interest from United States sources (including
original issue discount) paid to the Fund and allocable to foreign limited
partners will be subject to United States federal income tax withholding at a
statutory rate of 30% (subject to applicable treaty reductions).
---------------------------------
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS BEFORE
DECIDING WHETHER TO INVEST IN THE FUND.
LEGAL MATTERS
Sidley Austin Brown & Wood, Chicago, Illinois, has advised Shaffer
Asset Management in connection with the offer of Units pursuant to this
prospectus. Sidley Austin Brown & Wood does not represent the Fund or the
limited partners. Sidley Austin Brown & Wood may continue to advise Shaffer
Asset Management, including concerning its responsibilities as general partner
of the Fund. Sidley Austin Brown & Wood drafted "Federal Income Tax
Considerations."
EXPERTS
The financial statements of the Fund as of December 31, 2001 and
2000, and for the year ended December 31, 2001 and the period from its inception
August 29, 2000 to December 31, 2000, and the balance sheets Shaffer Asset
Management as of December 31, 2001 and 2000, each of which is included in this
prospectus, have been audited by Anchin, Block & Anchin LLP, independent
auditors, as set forth in their reports appearing in the statement of additional
information that accompanies this prospectus and are included in such statement
of additional information in reliance upon the authority of the firm as experts
in auditing and accounting. Information subsequent to December 31, 2001 has not
been audited by Anchin, Block & Anchin LLP and accordingly they do not express
an opinion on it.
-50-
INDEX TO FINANCIAL STATEMENTS
SHAFFER DIVERSIFIED FUND, LP
Independent Auditors' Report.................................................................. 52
Financial Statements:
Statements of Financial Condition as of September 30, 2002 (unaudited)
and as of December 31, 2001 and 2000.............................................. 53
Statements of Operations for the Nine Months Ended September 30,
2002 and 2001 (unaudited) and for the Year Ended December 31,
2001 and for the Period from Inception
August 29, 2000 to December 31, 2000.............................................. 54
Statements of Cash flows for the Nine Months Ended September 30,
2002 and 2001 (unaudited) and for Year Ended December 31, 2001
and for the Period from Inception
August 29, 2000 to December 31, 2000 ............................................. 55
Statements of Changes in Partners' Capital (Net Asset Value) For the
Nine Months Ended September 30, 2002 and 2001 (unaudited) And
for the Year Ended December 31, 2001 and for the Period
Inception August 29, 2000 to December 31, 2000.................................... 56
Notes to the Financial Statements....................................................... 57
SHAFFER ASSET MANAGEMENT, INC.
Independent Auditors' Report.................................................................. 62
Financial Statements:
Balance Sheets as of September 30, 2002 (unaudited), December 31,
2001, and 2000 ................................................................... 63
Notes to the Financial Statements....................................................... 64
-51-
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF
SHAFFER DIVERSIFIED FUND, LP:
We have audited the accompanying statements of financial condition of Shaffer
Diversified Fund, LP as of December 31, 2001 and 2000 and the related statements
of operations, changes in partners' capital and cash flows for the year ended
December 31, 2001 and the period from August 29, 2000 (inception) through
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shaffer Diversified Fund, LP at
December 31, 2001 and 2000 and the results of its operations and the changes in
partners' capital and its cash flows for the year ended December 31, 2001 and
the period from August 29, 2000 (inception) through December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Anchin, Block & Anchin LLP
New York, New York
February 15, 2002
-52-
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF FINANCIAL CONDITION
UNAUDITED AUDITED
------------- --------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001 2000
ASSETS:
Equity in broker trading accounts
Cash and cash equivalents $ 153,255 $ -- $ --
United States government securities
At market value (cost $942,485) 948,081 -- --
Unrealized gain on open futures contracts 47,211 -- --
---------- ---------- ----------
Deposits with broker 1,148,547 -- --
---------- ---------- ----------
Cash 718 586 1,916
Cash in escrow account -- 413,000 --
---------- ---------- ----------
TOTAL ASSETS $1,149,265 $ 413,586 $ 1,916
========== ========== ==========
LIABILITIES:
Accounts payable $ 1,676 $ -- $ --
Brokerage fees on open contracts 519 -- --
Management fees payable to General Partner 3,591 -- --
Subscription deposits -- 413,000 --
---------- ---------- ----------
Total Liabilities 5,786 413,000 --
---------- ---------- ----------
PARTNERS' CAPITAL (Net Asset Value):
General Partner - 50 units
outstanding at September 30, 2002
and 1 unit at December 31, 2001 and 2000 51,383 586 916
Limited Partners - 1,062.685 units
outstanding at September 30, 2002
and 1 unit at December 31, 2001 and 2000 1,092,096 -- 1,000
---------- ---------- ----------
Total partners' capital
(Net Asset Value) 1,143,479 586 1,916
---------- ---------- ----------
TOTAL PARTNERS' CAPITAL AND
LIABILITIES $1,149,265 $ 413,586 $ 1,916
========== ========== ==========
See the accompanying Notes to the Financial Statements.
-53-
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF OPERATIONS
UNAUDITED AUDITED
-------------- -----------------------------
PERIOD FROM
NINE MONTHS AUGUST 29, 2000
ENDED YEAR ENDED (INCEPTION) TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------- ------------ ------------
2002 2001 2001 2000
INCOME:
Trading gains
Realized $ 98,492 $ -- $ -- $ --
Change in unrealized 47,211 -- -- --
-------- -------- -------- --------
Gains from trading 145,703 -- -- --
Investment income
Interest income 10,402 -- -- --
-------- -------- -------- --------
Total income 156,105 -- -- --
-------- -------- -------- --------
OPERATING EXPENSES:
Brokerage trading fees 17,918 -- -- --
Management fees 27,143 -- -- --
Operating expenses 15,003 1,232 1,330 84
-------- -------- -------- --------
Total Expenses 60,064 (1,232) 1,330 84
-------- -------- -------- --------
Net Income (Loss) before special
Allocation to the General Partner 96,041 (1,232) (1,330) (84)
Special allocation to the
General Partner 19,052 -- -- --
-------- -------- -------- --------
NET INCOME (LOSS)
AVAILABLE FOR PRO
RATA DISTRIBUTION $ 76,989 $ (1,232) $ (1,330) $ (84)
======== ======== ======== ========
NET INCOME (LOSS) PER
UNIT OF PARTNERSHIP INTEREST:
Weighted average number of
Units outstanding
during the period 1,051.718 2.00 2.00 2.00
======== ======== ======== ========
Net Income (loss) per unit $ 73.20 $(616.00) $(665.00) $ (42.00)
======== ======== ======== ========
See the accompanying Notes to the Financial Statements.
-54-
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF CASH FLOWS
UNAUDITED AUDITED
---------------------- --------------------------
AUGUST 29, 2000
NINE MONTHS ENDED YEAR ENDED (INCEPTION) TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
---------------------- ------------ ------------
2002 2001 2001 2000
-------- -------- -------- --------
Cash Flows From Operating Activities:
Net income (loss) $ 96,041 $ (1,232) $ (1,330) $ (84)
Adjustments to reconcile net income (loss)
to net cash used in Operating activities:
Net change in unrealized - Futures (47,211) -- -- --
Net change in unrealized - US
Gov't Securities (5,596) -- -- --
Net (purchases) of investments
in US Gov't Securities (942,485) -- -- --
Increase in accounts payable and
accrued expenses 5,786 -- -- --
--------- --------- --------- ---------
Net Cash Used in
Operating Activities (893,465) (1,232) (1,330) (84)
--------- --------- --------- ---------
Cash Flows From Financing Activities:
Addition of units 748,000 -- -- 2,000
Sales charges and syndication costs (55,550) -- -- --
Redemption of units and withdrawals (58,598) -- -- --
--------- --------- --------- ---------
Net Cash Provided by
Financing Activities 633,852 -- -- 2,000
--------- --------- --------- ---------
Net (Decrease) Increase In Cash (259,613) (1,232) (1,330) 1,916
Cash and Cash Equivalents:
Beginning of period 413,586 1,916 1,916 --
--------- --------- --------- ---------
End of period $ 153,973 $ 684 $ 586 $ 1,916
========= ========= ========= =========
End of period cash and cash equivalents consists of:
Cash in broker trading accounts 153,255 -- -- --
Cash in bank 718 684 586 1,916
--------- --------- --------- ---------
Total end of period cash and
Cash equivalents $ 153,973 $ 684 $ 586 $ 1,916
--------- --------- --------- ---------
Supplemental Disclosure of Non Cash
Financing activities:
Subscription deposits received
In advance $ 413,000 $ -- $ -- $ --
--------- --------- --------- ---------
See the accompanying Notes to the Financial Statements.
-55-
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
NET ASSET VALUE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) AND
FOR THE YEAR ENDED DECEMBER 31, 2001
AND FOR THE PERIOD FROM AUGUST 29, 2000 (INCEPTION) TO DECEMBER 31, 2000 (AUDITED)
TOTAL PARTNERS' CAPITAL
UNITS GENERAL LIMITED TOTAL
--------- -------- ---------- ----------
Nine Months Ended September 30, 2002
Balances at December 31, 2001 2.00 (414) 1,000 $ 586
Additions 1,150.203 50,000 1,111,000 1,161,000
Allocation of net income
For the nine months ended September 30, 2002:
Special allocation to the General Partner 18.161 19,052 -- 19,052
Net income available for
Pro rata distribution -- 3,885 73,104 76,989
Sales charges and syndication fees -- -- (55,550) (55,550)
Redemptions and withdrawals (57.679) (21,140) (37,458) (58,598)
--------- --------- ----------- -----------
Balances, at September 30, 2002 1,112.685 $ 51,383 $ 1,092,096 $ 1,143,479
========= ========= =========== ===========
Year Ended December 31, 2001
Balances at December 31, 2000 2.00 916 1,000 $ 1,916
Additions -- -- -- --
Net income (loss) available for
Pro rata distribution -- (1,330) -- (1,330)
--------- --------- ----------- -----------
Balances, at December 31, 2001 2.00 $ (414) $ 1,000 $ 586
========= ========= =========== ===========
August 29, 2000 (inception) to December 31, 2000
Balances - beginning -- -- -- --
Additions 2.00 1,000 1,000 2,000
Net income (loss) available for
Pro rata distribution -- (84) -- (84)
--------- --------- ----------- -----------
Balances, at December 31, 2000 2.00 $ 916 $ 1,000 $ 1,916
========= ========= =========== ===========
See the accompanying Notes to the Financial Statements.
-56-
SHAFFER DIVERSIFIED FUND, LP
NOTES TO FINANCIAL STATEMENTS
The financial statements are audited for the years ending December 31, 2001 and
2000. Information presented subsequent to that date is unaudited. All
information is derived from the Fund's audited and unaudited financial
statements and reflect all adjustments (consisting only of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods. The financial statements should be read in conjunction with the notes
thereto, together with management's discussion and analysis of financial
condition and results of operations. The results of operations for the nine
months ended September 30, 2002 are not necessarily indicative of the results
for the entire fiscal year ending December 31, 2002, or any future interim
period.
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) GENERAL DESCRIPTION
Shaffer Diversified Fund, LP (the "Partnership" or the "Fund") is a limited
partnership organized on August 29, 2000 under the Delaware Revised Uniform
Limited Partnership Act. The Fund is a commodity investment pool, whose purpose
is to trade speculatively in the United States futures markets. The business of
the Fund is to seek medium and long-term capital appreciation through
speculative trading in a diversified portfolio of commodity futures contracts
and other related interests in the United States commodity futures markets.
Specifically, the Fund invests in a diversified portfolio consisting primarily
of currency, interest rate, grain, metal and energy futures contracts. The
trading advisor and general partner of the Fund is Shaffer Asset Management,
Inc. ("Shaffer Asset"). In addition to making all trading decisions in its
capacity as trading advisor, Shaffer Asset controls all aspects of the business
and administration of the Fund in its role as general partner.
The Fund originally filed a registration statement with the United States
Securities and Exchange Commission on September 25, 2000 for the sale of a
minimum of $1,000,000 and a maximum of $25,000,000 in Units of Limited
Partnership at $1,000.00 each, ($950.00 + $50.00 sales charges & syndication
fees), which registration statement was declared effective on October 16, 2001.
The Fund's initial offering period lasted approximately 120 days and ended
February 13, 2002. During the initial offering the Fund accepted subscriptions
for 1,049 Units of Partnership Interests at a selling price of $1,000.00
($950.00 + $50.00 sales charges & syndication fees) for a total of $1,049,000.
Sales charges & syndication fees of $49,950 were disbursed at closing and the
Fund commenced trading activities with net proceeds of $996,550.
The Fund will continue until December 31, 2025 unless terminated earlier.
However, if the Fund's investments experience a substantial decline in value, as
defined in the Partnership Agreement, the Partnership will be dissolved.
B) FINANCIAL STATEMENT REPORTING
The Fund's financial statements are presented in conformity with generally
accepted accounting principles, which require using certain estimates and
assumptions made by the Fund's management that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from these
estimates.
Transactions are accounted for on the trade date. Gains or losses are realized
when contracts are liquidated. Unrealized gains and losses on open contracts
(the difference between contract trade price and market price) are reported in
the statement of financial position as a net gain or loss, as there exists a
right of offset of unrealized gains or losses in accordance with Financial
Accounting Standards Board Interpretation No. 39 - "Offsetting of Amounts
Related to Certain Contracts. " Any change in net unrealized gain or loss from
the preceding period is reported in the statement of operations. Brokerage
expenses and other trading fees paid directly to the broker are included in
"brokerage fees" and are charged to expenses when contracts are open. United
States government securities are stated at cost plus accrued interest, which
approximates market value.
-57-
SHAFFER DIVERSIFIED FUND, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and money market deposits held at
financial institutions and short term securities with maturity dates of less
than three months from the date of the financial statements.
D) INCOME TAXES
The Partnership is not subject to income taxes. The partners report their
allocable share of income, expense and trading gains or losses on their own tax
returns.
E) ORGANIZATION COSTS AND OPERATING EXPENSES
The General Partner has agreed to pay all expenses associated with the
organization of the Fund. Shaffer Asset Management, Inc. has incurred total
costs in connection with the organization of the Fund of approximately $463,000
through September 30, 2002.
The General Partner is disputing fees of approximately $183,000 for legal
services provided for the organizational and offering costs of the Fund. The
General Partner does not believe this dispute has a material effect on the Fund.
The General Partner is also responsible for Fund operating expenses, (excluding
sales charges, syndication fees, continuing service fees, management fees,
incentive allocations, brokerage commissions and extraordinary expenses) in
excess of 0.5% of the average monthly Net Asset Value of the Fund. The Fund is
only liable for payment of operating expenses on a monthly basis as calculated
based on the limitations stated above. If the Fund terminates prior to
completion of payment of the calculated amounts to Shaffer Asset, Shaffer Asset
will not be entitled to any additional payments, and the Fund will have no
further obligation to Shaffer Asset. Shaffer Asset has charged the Fund $3,641
for operating expenses through September 30, 2002.
F) REGULATION
The Fund's operations are regulated by the provisions of the Commodity Exchange
Act, the regulations of the Commodity Futures Trading Commission, and the rules
of the National Futures Association. The Fund is subject to regulatory
requirements under the Securities Act of 1933 and the Securities Exchange Act of
1934. As a commodity investment pool, the Fund is subject to the regulations of
the Commodity Futures Trading Commission, an agency of the United States ("US")
Government which regulates most aspects of the commodity futures industry; the
rules of the National Futures Association, an industry self-regulatory
organization; and the requirements of the various commodity exchanges where the
Fund executes transactions. Additionally, the Fund is subject to the
requirements of Futures Commission Merchants or Brokers through which the Fund
trades.
In addition to such registration requirements, the CFTC and certain commodity
exchanges have established limits on the maximum net long and net short
positions which any person, including the Fund, may hold or control in
particular commodities. Most exchanges also limit the maximum changes in futures
contract prices that may occur during a single trading day.
G) ALLOCATION OF INCOME
The General Partner and each Limited Partner share in the profits and losses of
the partnership in proportion to their respective interests in the partnership,
except for the incentive allocation to the General Partner. A Limited Partner's
loss is limited to the amount of his or her investment.
H) NET ASSET VALUE PER UNIT
Net Asset Value is calculated by dividing the Net Assets of the Fund at the end
of the reporting period by the number of Fund units outstanding at the end of
the reporting period.
-58-
SHAFFER DIVERSIFIED FUND, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Net Assets of the Fund is equal to: total assets, less total liabilities, of
the Fund determined on the basis of generally accepted accounting principles.
Net Assets shall include any unrealized profits or losses on open positions, and
any fee or expense including net asset fees accruing to the Fund.
NOTE 2. GENERAL PARTNER AND COMMODITY TRADING ADVISOR
The General Partner of the Fund is Shaffer Asset Management, Inc., which
conducts and manages the business of the Fund. The General Partner is also the
commodity trading advisor of the Fund.
The Fund pays for management and servicing at an annual rate of 5% of monthly
Net Asset Value of the Fund, calculated and payable monthly. Such fees are
allocated between the General Partner and the selling agents as follows: 3.75%
to the General Partner and 1.25% to the selling agents during the first 12
months after an investment is made and 1% to the General Partner and 4% to the
selling agents thereafter for various services performed on an ongoing basis.
New investors are charged a 5% sales commission of which the General Partner
receives approximately 20%.
The General Partner shares in all Fund income and losses to the extent of its
interest in the Fund. The General Partner also receives on a quarterly basis an
incentive allocation from the Fund equivalent to 15% per year of any increase in
the cumulative appreciation of the Net Asset Value of the Fund, as defined in
the Partnership Agreement.
The General Partner has agreed to maintain a minimum net worth of not less than
the greater of $50,000 or 5% of contributions made to the Fund as further
defined in the Partnership Agreement. The General Partner is also required to
maintain a minimum capital contribution to the Fund of the greater of $25,000 or
1% of contributions made to the Fund as further defined in the Partnership
Agreement.
The General Partner has agreed to pay all expenses associated with the
organization of the Fund and the initial offering of the Units of the limited
and general partnership interest in the Fund. The General Partner is responsible
for Fund operating expenses, (excluding continuing service fees, management
fees, incentive allocations, brokerage commissions and extraordinary expenses)
in excess of 0.5% of the average monthly Net Asset Value of the Fund.
NOTE 3. DEPOSITS WITH BROKER AND FINANCIAL INSTITUTIONS
The Fund deposits assets with a broker subject to Commodity Futures Trading
Commission regulations and various exchange and broker requirements and other
financial institutions. The Fund satisfies margin requirements by depositing
U.S. Treasury bills and cash with such broker and other financial institutions.
The Fund earns interest income on these assets.
NOTE 4. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
Investments in the Fund are made by subscription agreement, subject to
acceptance by Shaffer Asset. As of September 30, 2002 funds received from
prospective limited partners whom Shaffer Asset has not yet admitted to the Fund
were zero.
The Fund is not required to make distributions, but a limited partner may
request and receive redemption of its units owned, subject to restrictions in
the Partnership Agreement. Early redemption fees charged to the limited partner
apply through the first twelve months following purchase ranging from 1% to 4%
based on length of investment. After twelve months following purchase of a Unit,
no redemption fees will be charged. These fees are payable to the General
Partner. Shaffer Asset has received $1,458 in redemption fees for the period
ended September 30, 2002.
NOTE 5. TRADING ACTIVITIES AND RELATED RISKS
The Fund engages in the speculative trading of US commodity futures contracts,
which are derivative financial instruments. The Fund is exposed to both market
risk, the risk arising from changes in the market value of the contracts, and
credit risk, the risk of failure by another party to perform.
-59-
SHAFFER DIVERSIFIED FUND, LP
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
Purchase and sale of futures contracts requires margin deposits with the
Commodity Broker. In the event of a broker's insolvency, it is possible that the
recovered amount of margin deposits could be less than the total property
deposited.
The amount of required margin and good faith deposits with the broker usually
ranges from 10% to 40% of Net Asset Value. The market value of securities held
to satisfy such requirements at September 30, 2002 was $199,196, which equals
17.42% of Net Asset Value.
The unrealized gain (loss) on open futures contracts at September 30, 2002 is
comprised of the following:
Gross unrealized gains $ 48,186
Gross unrealized losses (975)
--------
Net unrealized gain $ 47,211
========
Open contracts generally mature within three months: as of September 30, 2002
the latest maturity date for open futures contracts is December 2002. However
the Fund intends to close all contracts prior to maturity.
Shaffer Asset has established procedures to actively monitor market risk and
minimize credit risk, although there can be no assurance that they will, in
fact, succeed in doing so. Shaffer Asset's basic market risk control procedures
consist of continuously monitoring open positions, diversification of the
portfolio, protective stop orders and maintenance of a margin-to-equity ratio
that rarely exceeds 30%. Shaffer Asset seeks to minimize credit risk primarily
by depositing and maintaining the Fund's assets at financial institutions and
brokers, which Shaffer Asset believes to be creditworthy. The limited partners
bear the risk of loss only to the extent of the market value of their respective
investments and, in certain specific circumstances, distributions and
redemptions received.
NOTE 6. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements reflect
all adjustments, which were of a normal and recurring nature, necessary for a
fair presentation of financial position as of September 30, 2002, and the
results of operations for the three and nine months ending September 30, 2002
and 2001.
NOTE 7. FINANCIAL HIGHLIGHTS
The following information contains per unit operating performance data for a
unit outstanding during the entire three and nine months ended September 30,
2002, and other supplemental financial data. This information has been derived
from information presented in the financial statements.
-60-
SHAFFER DIVERSIFIED FUND, LP
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
(Unaudited) (Unaudited)
------------------- ------------------
Per Unit Performance (for a unit outstanding
from the initial trading period February 14, 2002)
Initial Offering Value Per Unit at February 14, 2002
and Net Asset Value per unit at June 30, 2002 $ 1,061.55 $ 1,000.00
Sales charges and syndication fees -- 50.00
---------------- --------------
Net asset value 1,061.55 950.00
Income (loss) from operations:
Trading gains (losses) * (15.61) 142.89
Investment income 4.03 9.73
Operating expenses ** (22.30) (74.95)
---------------- --------------
Total income from operations (33.88) 77.67
---------------- --------------
Net Asset Value Per Unit at September 30, 2002 $ 1,027.67 $ 1,027.67
================ ==============
Total Return Year to Date *** -3.19% 8.18%
================ ==============
SUPPLEMENTAL DATA
Ratio to average net assets:
Average net assets 1,118,985 572,033
Operating expenses **, + 8.72% 18.44%
Investment income + 1.60% 2.42%
<FN>
* Excludes brokerage commissions and other trading
fees paid directly to the broker.
** Includes brokerage commissions and other trading
fees paid directly to the broker and incentive
fees paid to the general partner.
*** Not annualized
+ Annualized
</FN>
-61-
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF SHAFFER ASSET MANAGEMENT, INC.
We have audited the accompanying balance sheets of Shaffer Asset Management,
Inc. as of December 31, 2001 and 2000. These balance sheets are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these balance sheets based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance
sheets are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheets. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Shaffer Asset Management, Inc. at
December 31, 2001 and 2000 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying balance sheet has been revised to reflect certain transactions
as described in footnote 6.
/s/ Anchin, Block & Anchin LLP
------------------------------
New York, New York
February 18, 2002
-62-
SHAFFER ASSET MANAGEMENT, INC.
BALANCE SHEETS
UNAUDITED AUDITED
------------- ------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001 2000
ASSETS
CURRENT ASSETS:
Cash $ 615 $ 73,529 $ 139
Demand note receivable 273,000 -- --
Fees receivable 5,495 -- 15,985
----------- ----------- -----------
Total Current Assets 279,110 73,529 16,124
----------- ----------- -----------
FIXED ASSETS:
Equipment and software 15,811 11,686 9,392
Less: Accumulated depreciation
and amortization (7,806) (6,051) (3,023)
----------- ----------- -----------
Total Fixed Assets 8,005 5,635 6,369
----------- ----------- -----------
OTHER ASSETS:
Deferred offering costs
(net of amortization of $ 289,548
as of September 30, 2002) 173,729 446,160 220,774
Due from stockholder -- -- 66,781
Investment in Shaffer Diversified Fund, LP 51,353 -- --
Security deposit 10,640 10,640 2,675
----------- ----------- -----------
Total Other Assets 235,722 456,800 290,230
----------- ----------- -----------
TOTAL ASSETS $ 522,837 $ 535,964 $ 312,723
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 317,379 $ 368,459 $ 212,089
Lines of credit payable 103,810 108,188 96,345
----------- ----------- -----------
Total Current Liabilities 421,189 476,647 308,434
----------- ----------- -----------
STOCKHOLDER'S EQUITY:
Capital stock:
Class A voting, no par, $2 stated value; 200 shares
Authorized, 100 shares issued and outstanding
in 2002 and 2001, and 50 in 2000 200 200 100
Additional Paid-in Capital 1,308,886 1,183,187 --
Less: demand note receivable (727,000) (1,000,000) --
Retained earnings (deficit) (480,438) (124,070) 4,189
----------- ----------- -----------
Total Stockholder's Equity 101,648 59,317 4,289
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 522,837 $ 535,964 $ 312,723
=========== =========== ===========
See the accompanying Notes to the Balance Sheets.
-63-
SHAFFER ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
The balance sheets are audited for the years ending December 31, 2001and 2000.
Information presented subsequent to that date is unaudited.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
Shaffer Asset Management, Inc. (the "Company") earns fees on managed accounts as
a Commodity Trading Advisor registered with and subject to the regulations of
the Commodity Futures Trading Commission, an agency of the United States
government, which regulates most aspects of the commodity futures industry. It
is also subject to the rules of the National Futures Association, an industry
self-regulatory organization. In addition the Company will receive additional
fees for services performed as General Partner in a Commodity Fund (See Note 4).
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Performance fees are earned by achieving defined performance objectives.
Performances fees are accrued when the conditions of the performance fee
agreement are satisfied.
FIXED ASSETS:
Fixed assets are stated at cost. Depreciation and amortization are computed by
the straight-line method over the estimated useful lives of the assets, which
are five years for office equipment and three years for computer software.
INCOME TAXES:
The Company is taxed as an S corporation for federal and New York State tax
purposes, whereby the Company's income is reported by the stockholder.
Accordingly, no provision has been made for federal income taxes. The Company
remains liable for New York State income taxes on S corporations.
DEFERRED OFFERING COSTS:
The Company has incurred costs related to the initial offering of units of a
Partnership (see Note 4). These deferred offering costs are being amortized over
a twelve-month period.
Included in accounts payable and accrued expenses is approximately $248,000 at
September 30, 2002 and $230,000 and $197,000 at December 31, 2001 and 2000
respectively, of accrued legal fees in connection with the offering.
NOTE 2 -- RELATED PARTY TRANSACTIONS:
The loan to the stockholder is non-interest bearing and is payable on demand.
NOTE 3 -- LINES OF CREDIT PAYABLE:
The Company has lines of credit from two financial institutions in the amount of
$108,000 and $96,500, respectively. The lines of credit bear interest at rates
ranging from 1% to 3.9% over the prime rate and are guaranteed by a stockholder.
The average rate of interest was 7.5% for the period ended September 30, 2002
and 10.3% and 12.4% during the years ended December 31, 2001 and 2000,
respectively. Management believes the fair value of the debt is equivalent to
the recorded amount based on its short-term nature and the interest rates, which
fluctuate with prime.
-64-
SHAFFER ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company lease office space under a lease expiring March 31, 2006.
Future minimum lease payments are approximately as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2002 $ 34,587
2003 35,548
2004 35,868
2005 35,868
2006 8,967
Total $150,838
========
OTHER
The accompanying balance sheet reflects current liabilities in excess of current
assets of approximately $400,000. The Company is disputing certain unpaid legal
fees, included in accounts payable, in connection with the Partnership offering
(note 5). Management is in the process of negotiating a settlement of the
amounts, however there is no assurance of the ultimate outcome. In order to fund
the working capital needs of the Company, the shareholders have agreed to make
payments to the Company under a demand promissory note (note 5) as required.
NOTE 5 -- AGREEMENT WITH SHAFFER DIVERSIFIED FUND, LP:
The Company is the trading advisor and General Partner of the Shaffer
Diversified Fund, LP, ("the Partnership or the Fund") a commodity investment
pool. The Fund commenced trading February 14, 2002. The Company receives
approximately 20% of the 5% sales commission charged to new investors and
management fees at an annual rate of 3.75% of the monthly value of the
investments during the first twelve months after an investment is made and 1%
thereafter. The Company also receives on a quarterly basis a special incentive
fee allocation from the Fund equivalent to 15% per year of any increase in the
cumulative appreciation of the Net Asset Value of the Fund, as defined in the
Fund's Partnership agreement. Additionally, the Company is responsible for
expenses of the Fund (excluding continuing services fees, management fees,
incentive allocations, brokerage commissions and extraordinary expenses) in
excess of 0.5% of the average monthly net assets of the Fund and expenses
associated with the organization of the Fund and initial offering costs.
As the General Partner of the Fund, the Company has entered into a net worth
agreement with two officers/stockholders of the Company. The officers have
agreed to contribute funds to the Company as capital amounts sufficient so that
the Company will at all times have a net worth equal to not less than the
greater of the five percent of the aggregate capital contributions made by the
partners to the Fund or $50,000. The officers/stockholders have also agreed to
provide the Company with sufficient capital to enable the Company to purchase
and maintain units of interest in the Fund in an amount equal to not less than
the greater of one percent of the aggregate capital contributions made by all
partners to the Fund or $25,000. As of September 30, 2002, the Company believes
it is in compliance with its net worth requirements.
The Company received a capital contribution of $1,000,000 from its stockholders
in the form of a demand negotiable promissory note. No cash was transferred, nor
is it known when and if any will transferred in the future. As such, the demand
note is shown as a reduction of stockholders' equity. The note bears interest
equivalent to the
-65-
SHAFFER ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prime rate charged by JP Morgan Bank and is payable annually commencing one
month from the date the demand is made at which time the interest begin to
accrue.
The Company requested from its stockholders payment of $273,000 under the demand
promissory note. On October 4, 2002 the stockholders satisfied this obligation
and made the required payment. Accordingly, this portion of the demand
promissory note is shown as a current asset in the balance sheet as of September
30, 2002.
NOTE 6 -- REVISIONS TO THE BALANCE SHEET
The accompanying 2001 balance sheet has been revised to reflect the recording of
additional 2001 legal costs associated with the Partnership offering of
approximately $172,000 (note 4) and a capital contribution of $1,000,000 in the
form of a demand promissory note (note 5) in 2001.
-66-
PART TWO
STATEMENT OF ADDITIONAL INFORMATION
THIS PROSPECTUS IS IN TWO PARTS. A DISCLOSURE DOCUMENT AND A
STATEMENT OF ADDITIONAL INFORMATION. THESE PARTS ARE BOUND TOGETHER AND MAY NOT
BE DISTRIBUTED SEPARATELY.
DESCRIPTION OF COMMODITY TRADING
GENERAL
Commodity futures contracts are made on or through a commodity exchange
and provide for future delivery of agricultural and industrial commodities,
foreign currencies or financial instruments, or, in more recent instances, the
cash equivalent thereof. Such contracts are uniform for each commodity and vary
only with respect to price and delivery time. A commodity futures contract to
accept delivery (buy) is referred to as a "long" contract; conversely, a
contract to make delivery (sell) is referred to as a "short" contract. A long
contract may be satisfied either by taking delivery of the commodity and paying
the entire purchase price therefore or by offsetting the contractual obligation
prior to delivery through the acquisition of a corresponding short contract on
the same exchange. A short contract may be satisfied either by making delivery
of the commodity (usually by tendering warehouse receipts, shipping certificates
or similar documents of title) or by acquiring a corresponding long contract on
the same exchange. Commodity exchanges provide a clearing mechanism to
facilitate the matching of offsetting trades. Until a commodity futures contract
is satisfied by delivery or offset, it is said to be an "open" position.
Commodity futures contracts are but one category of organized commodity trading,
as it presently exists in the United States. Two other categories of commodity
transactions are "spot" contracts and "forward" contracts. Both of these are
varieties of cash commodity transactions, as opposed to futures transactions, in
that they relate to the purchase and sale of specific actual physical
commodities. Whereas futures contracts are uniform except for price and delivery
time, cash commodity contracts may differ from each other with respect to such
terms as quantity, grade, mode of shipment, terms of payment, penalties, risk of
loss and the like. Spot contracts are generally cash commodity contracts for the
purchase and sale of a specific physical commodity for immediate delivery.
Forward contracts are cash commodity contracts for the purchase and sale of a
specific physical commodity for delivery at some future time under terms and
conditions specifically negotiated by the parties. Cash commodity transactions
may arise in conjunction with commodity futures transactions. For example, if
the holder of a long contract satisfies it by taking delivery of the commodity,
such holder is said to have a cash commodity position. This cash position, if it
is not to be used or processed by the holder, may be sold through spot or
forward contracts, or delivered in satisfaction of a commodity futures contract.
Another type of commodity contract is the "commodity option" which gives the
holder the right (but not the obligation) to buy or sell a specified futures
contract or commodity at a future date for a specified price.
The prices of commodities fluctuate rapidly and over wide ranges. Except
for the effect of government price control and support programs, commodity
prices are generally determined by the interaction of supply and demand. The
market is subject to the many psychological factors working on each buyer and
seller, as well as to crop conditions, deflation or inflation, strikes
(especially in the transportation and commodity storage industries), world
conditions, war or threats of war, interest rates, and other factors. Any
fundamental prediction of commodity prices is necessarily subject to all of
these factors, which can change daily if not hourly. Only by constant updating
of accurate information as to these fundamental factors or by technical analysis
can any reasonable forecasts be made for commodity prices, and, notwithstanding
that current and correct information as to substantially all factors is known,
prices still may not react as predicted. Prices of commodities are listed in
most major daily newspapers and financial journals.
The prices of financial instruments and foreign currencies are subject to
the factors described above. Some of the other factors that affect financial
instrument or foreign currency prices include a country's balance of payments
(surplus or deficit), political stability, treaties, government policies and
exchange controls, the inflation rate, and interest rates.
There are two broad classifications of commodity traders: hedgers and
speculators. Hedgers are persons or entities who market or process commodities
and utilize the commodity markets for protection against the risk of price
variation. For example, a seller or processor is at the risk of market price
fluctuations between the time he contracts to sell or process and the time he
must perform on the contract. In such cases, at the time of the contract, he
will simultaneously enter into futures contracts to buy the necessary equivalent
quantity of the commodity he needs or to sell the equivalent quantity of the
commodity he intends to market at some later date. To illustrate, a cattle
feeder may enter into a futures contract to sell cattle, which can ultimately be
satisfied by the delivery of his herd, thus relieving himself of exposure to
price variations in either his raw material or ultimate market product.
-67-
Similarly, a farmer may hedge against the price fluctuations between the day he
plants his crop and the day it is ready for delivery. In these examples, the
hedger may either make or take delivery in satisfaction of his futures contract,
or else close the position prior to delivery and buy or sell the necessary
equivalent amount of the physical commodity. In either case, the price of the
commodity is established at the time the hedger initiates his futures position.
Thus, the commodity markets enable the hedger to shift the risk of price
fluctuations to the speculator. See "Mechanics of Commodity Futures Trading,"
below.
A speculator is a person or entity that buys or sells in expectation of a
rise or decline in the price of a commodity and assumes the market risk sought
to be avoided by the hedger. For instance, the speculator may take the opposite
side of a hedger's trade, as in the example above, by acquiring the opposite
side of the futures contract sold by the cattle feeder. If the price rises, the
speculator can close out his position at a profit, either by taking delivery of
the cattle covered by his contract or, more usually, by offsetting his original
position by taking an opposite position. If the price falls, the speculator can
still liquidate his position, but at a loss. Because the speculator may take
either a long or short position in the futures markets, it is possible for him
to make profits or incur losses regardless of the direction of price trends. All
trades made by the Fund will be for speculative rather than hedging purposes.
See "Mechanics of Commodity Futures Trading" below.
MECHANICS OF FUTURES TRADING
The commodity futures contract is the basic instrument involved in futures
trading. Upon entering into or acquiring such a contract, the trader becomes
obligated to buy or sell a certain quantity of a specific commodity on a certain
date. Thereafter, trading profits or losses result from movements in the price
of the commodity underlying the futures contract. For example, if on April 1st a
trader enters into a contract to buy for $5.00 a bushel of wheat for delivery in
July and the price of July wheat subsequently rises to $7.50 per bushel, then a
profit of $2.50 per bushel has been achieved. Conversely, if the price of July
wheat falls to $2.50 per bushel, the investor will have lost $2.50 per bushel
because he is obligated to pay $5.00 for something worth only half that price.
When the trader places an order with a broker, the order is transmitted by
the broker to the floor of a commodity futures exchange where the trade is
consummated by floor brokers by means of "open outcry" and the details of the
transaction are recorded. The individual trader does not appear on the exchange
records as buyer or seller; the contract is, rather, executed in the name of the
"clearing house member" through which the order has ultimately been placed and
the exchange's clearing house itself becomes the opposite party to the contract.
At the close of each trading day, cash settlements are made which reflect that
day's price movements in all the commodities covered by outstanding futures
contracts. The clearinghouse credits the account of the clearing member whose
position shows a gain, and debits the account of the clearing member who
suffered a loss.
In practice, a commodity futures contract seldom results in the taking or
making of delivery in accordance with its terms. Usually, the contract will be
"offset" with a second futures contract that represents a position that is the
opposite of the first. Using the same example given above, if a futures contract
provides for the purchase of a bushel of July wheat for $5.00 and the price
subsequently rises to $7.50 per bushel, the trader can close out his position
and liquidate his profit by entering into or acquiring a contract to sell a
bushel of July wheat for $7.50.
MARGINS
In commodity trading, "margins" are good faith deposits that must be
deposited with a broker in order to initiate or maintain an open position in a
commodity futures contract. When commodity futures contracts are traded, both
buyer and seller are required to post margins with the brokers handling their
trades as security for the performance of their buying and selling undertakings
and to offset losses in their trades due to daily fluctuations in the markets.
Minimum margins are set by the several exchanges and generally range from 4% to
20% of the value of the commodity underlying the contract. For example, wheat
valued at $5.00 per bushel may have a margin set at 50 cents per bushel. A
speculator with only $2,500 may thus enter into a contract for 5,000 bushels of
wheat worth $25,000. A variation of 50 cents per bushel in price would then
result in a loss of $2,500 (his entire margin) or a gain of $2,500 (a 100%
profit on his margin). If delivery of a commodity is made in satisfaction of a
futures contract the entire contract price is generally payable by the buyer.
Brokerage firms carrying accounts for traders in commodity futures contracts may
increase the amount of required margin as a matter of policy in order to afford
further protection for themselves. It is presently contemplated that ADM
Investor Services will require the Fund to make margin deposits of at least 100%
of the minimum level for all commodity futures contracts. This requirement may
be altered from time to time at the discretion of ADM Investor Services.
-68-
The customer's margin deposit is the "equity" in his account. A change in
the market price of a commodity futures contract will increase or decrease the
equity. If the equity decreases below the "maintenance margin" amount (generally
75% of the initial margin requirement), the broker may issue a margin call
requiring the customer to increase the account's equity. Failure to honor such a
margin call may result in the closing out of the open position. If at the time
such open position is closed the account equity is negative, then the equities
in the customer's open positions in excess of their required margins, as well as
the customer's cash reserves, will be used to offset such debit balance. If such
equities and reserves are not sufficient, the customer will be liable for the
remaining unpaid balance.
REGULATION
Congress enacted the Commodity Exchange Act, as amended, to regulate
trading in commodity futures contracts and other commodity interests, the
exchanges on which they are traded, the individual brokers who are members of
such exchanges, and commodity professionals and commodity brokerage houses that
trade in these commodities. The CFTC is an independent agency that administers
the CE Act and is authorized to promulgate rules thereunder. The CE Act is
designed to promote the orderly and systematic marketing of commodities and
futures contracts while preventing fraud, speculative excess and price
manipulations, and makes unlawful any device, scheme or artifice to defraud a
customer or participant in a commodity pool. It also prohibits any transaction,
practice or course of business that operates as a fraud or deceit upon any
current or prospective customer or participant.
The CE Act further provides, among other things, that futures trading in
commodities must be upon exchanges designated as "contract markets" by the CFTC.
The CFTC has adopted regulations covering the designation of contract markets,
the monitoring of commodity exchange rules, the establishing of position limits,
the registration of brokers and brokerage houses, commodity trading advisors and
commodity pool operators, the segregation of customers' funds, minimum financial
requirements, record keeping and periodic audits of such registered brokerage
houses and professionals. Under the CE Act, the CFTC is empowered, among other
things, to (i) hear and adjudicate customer complaints against all individuals
and firms registered under the CE Act (reparations), (ii) seek injunctions and
restraining orders, (iii) issue orders to cease and desist, (iv) initiate
disciplinary proceedings, (v) revoke or suspend registrations, and (vi) levy
substantial fines.
Shaffer Asset Management, Inc., the Fund's general partner and commodity
trading advisor, is a "commodity pool operator" and a "commodity trading
advisor" and ADM Investor Services, Inc. is a "futures commission merchant," as
those terms are used in the CE Act and, as such, are registered with, and
subject to regulation by, the CFTC. If the registration of Shaffer Asset
Management as a commodity pool operator were to be suspended or terminated, the
Fund would no longer be able to trade until a substitute general partner could
be duly elected and registered. If the registration of Shaffer Asset Management
as a commodity trading advisor was similarly suspended or revoked, Shaffer Asset
Management would not be permitted to advise the Fund. Should the registration of
ADM Investor Services as a futures commission merchant be suspended or revoked,
the Fund would no longer be able to maintain its account with ADM Investor
Services, and a new futures commission merchant would be retained by Shaffer
Asset Management.
The CE Act and the regulations promulgated thereunder make it unlawful for
any commodity pool operator, commodity trading advisor, principal thereof or
person who solicits therefore to represent or imply in any manner whatsoever
that they have been sponsored, recommended or approved, or that their abilities
or qualifications have in any respect been passed upon, by the CFTC, the Federal
government, or any agency thereof. The CFTC registrations of Shaffer Asset
Management and ADM Investor Services should not be taken by prospective
investors as governmental endorsements of the registered entities.
The CFTC has in effect a comprehensive scheme for the regulation of
commodity pool operators and commodity trading advisors. As now in effect, the
rules require commodity pool operators and commodity trading advisors to provide
certain disclosures to new customers and to retain certain trading and other
records, prohibit pool operators from commingling pool assets with those of the
operators or its customers, and require pool operators to provide their
customers with periodic account statements and an annual report. Upon request by
the CFTC, the names and addresses of the Limited Partners in the Fund would be
required to be furnished to the CFTC, along with copies of all transactions
with, and reports and other communications to, the Limited Partners.
-69-
Commodity exchanges are given certain latitude in promulgating rules and
regulations to control and regulate their members and clearing houses as well as
the trading conducted on their floors. Examples of regulation by an exchange
include the establishment of initial and maintenance margins, limits on price
fluctuations, size of trading limits and contract specifications. The CFTC
reviews such rules, except those relating to margins, and all such rules and
regulations relating to the terms and conditions of contracts of sale or to
other trading requirements must be approved by the CFTC.
In order to prevent excessive speculation and attempted cornering of a
market, the various exchanges and the CFTC have imposed speculative position
limits on commodity futures transactions, and certain exchanges may have
established limits referred to as "daily trading limits" on the maximum number
of contracts which any person may trade on a particular trading day. Position
limits are subject to certain exemptions, such as bona fide hedging
transactions. All futures trades made by Shaffer Asset Management and its
principals on behalf of their respective managed accounts, including trades for
the Fund, will be aggregated for purposes of determining speculative position
limits.
Violation of the CE Act and the regulations thereunder subjects the
violator to penalties under the CE Act, including revocation of registration,
suspension of trading privileges, civil fines and imprisonment.
In 1979, the staff of the SEC adopted the position that the trading of
futures contracts with respect to financial instruments (other than United
States Treasury Notes, United States Treasury Bills, United States Treasury
Bonds, Government National Mortgage Association certificates and commercial
paper) by a commodity pool such as the Fund would require such pool to register
under the Investment Company Act of 1940, as amended, and its trading advisors
to register under the Investment Advisors Act of 1940, as amended. Since that
time, other financial instrument futures contracts, such as the stock index
contract have begun trading. The Futures Trading Act of 1982 expressly granted
jurisdiction to the CFTC over stock index contracts and, accordingly, the Fund
may trade such contracts. Additionally, as a result of these statutory revisions
and a June 1988 "no-action" letter issued by the staff of the SEC, the Fund is
permitted to trade in futures contracts on financial instruments and in options
on futures contracts without registration under the Investment Company Act of
1940 or the Investment Advisors Act of 1940.
In the fall of 1981, the CFTC approved the application of the National
Futures Association to become a "registered futures association" under Section
17 of the CE Act, and the NFA became operational in 1982. The NFA acts as a
general "self-regulatory" body for the commodity industry, performing a role
similar to that played by the NASD with respect to the securities industry.
Significant regulatory responsibilities under the CE Act, particularly with
respect to the activities of futures commission merchants and introducing
brokers, was transferred from the CFTC to the NFA. Shaffer Asset
Management/Advisor and ADM Investor Services are members of NFA.
The Futures Trading Act of 1982 was signed into law in January 1983. It
contains various amendments to the CE Act, including additional regulations for
commodity pool operators, such as Shaffer Asset Management, an express, private
right of action to bring suit in Federal courts for violations of the CE Act,
and additional powers to the NFA to carry out its responsibilities as a
self-regulatory organization.
SUPPLEMENTAL PAST PERFORMANCE OF THE ADVISOR
Table A below sets forth the unaudited composite trading results of all
individual managed accounts managed by Shaffer Asset Management from March 1999
to September 30, 2002. The number of accounts managed by the Advisor totaled 1,
11, 17, 15 and 13, at March 31, 1999, at December 31, 1999, at December 31,
2000, at December 31, 2001 and at September 30, 2002, respectively. Through
August 31, 2002, 7 of such accounts showed net gains and 7 showed net losses. As
of September 30, 2002, 6 accounts closed profitability and 9 accounts closed
with a loss.
Table B below presents a comparison of the actual brokerage commissions
and advisory fees charged to the accounts whose performance is set forth in
Table A to the "pro forma" amounts of such charges which would have been imposed
on these accounts if they had been charged the commissions, fees and allocations
proposed to be charged to the Fund. The bases upon which the pro forma amounts
were computed are discussed in the notes to Table B.
Applicable CFTC regulations require disclosure of the "rate of return" for
each month of all accounts managed by Shaffer Asset Management or its
principal(s). The method of calculation mandated by the CFTC is necessarily
subject to potential distortions due to the fact that such method does not
account for additions and withdrawals that may occur during the month for which
the calculation is made. It should be noted that there are other methods of
calculating rate of return and, because of the differences among such methods,
the percentage results may vary. The rates of return indicated should not be
taken as representative of any rate actually earned by any of the accounts
included in Tables A or B or as being indicative of any return the Fund may earn
in the future.
-70-
The information included in Tables A and B below has not been audited but,
in the opinion of Shaffer Asset Management, such information, other than the pro
forma results, fairly presents the performance of the accounts managed by
Shaffer Asset Management for the periods shown.
The results set forth in Table A below are not indicative of the results
that may be achieved by Shaffer Asset Management since past results are not
determinative of future results. No representation is being made that the Fund
will or is likely to achieve profits similar to those shown. The composite
results set forth in Table A are based upon individual managed accounts managed
by Shaffer Asset Management during the periods shown. Table A does not reflect
the actual performance of any one account. Accordingly, investors in specific
accounts included in the composite figures may have had more or less favorable
results than Table A indicates. All accounts advised by Shaffer Asset Management
do not in all instances, have parallel performance due to different times of
market entry and varying amounts of capital. For example, larger account size
may have effects on particular trading decisions, such as the relative size of
positions taken, degree of diversification and particular commodity interests
traded. In addition, the performance of each account included in the composite
figures has varied depending upon the size of the investment, the date the
account started trading and the length of time the account was open. Such
results are presented on a composite basis rather than account-by-account, and
each account's experience may differ from the composite figures shown. The fees
and brokerage commissions charged to the Fund may differ from the fees and
brokerage commissions actually charged to these accounts, and the commission
rate charged to the Fund may also change in the future. In addition, because
Shaffer Asset Management has modified its trading methods in the past and will
continue to modify its trading methods in the future, the results shown in Table
A do not necessarily reflect the trading methods which will be used by Shaffer
Asset Management on behalf of the Fund. It should also be noted that the
aggregate value of the Fund's account will constitute a significant increase in
the assets under Shaffer Asset Management's control if all or a substantial
number of the Units being offered are sold. Apart from the effects of a large
account size on particular trading decisions, such as the time of entry of
orders, the relative size of positions taken, degree of diversification and
particular commodities traded, the size of the Fund's assets may affect
generally the design and execution of Shaffer Asset Management's trading
methods. Past results are no guarantee of future results, and no representation
is made that the Fund will, or is likely to, achieve results similar to those
shown.
THE DATA SET FORTH BELOW IS NOT INDICATIVE OF AND HAS NO BEARING ON ANY
RESULTS WHICH MAY BE ATTAINED BY THE FUND OR SHAFFER ASSET MANAGEMENT IN THE
FUTURE. SHAFFER ASSET MANAGEMENT'S SYSTEM HAS EVOLVED OVER THE YEARS BASED ON
ACCUMULATED EXPERIENCE AND FURTHER TESTING OF DATA. AN ACCOUNT TRADED PURSUANT
TO SHAFFER ASSET MANAGEMENT'S CURRENT TRADING SYSTEM WOULD NOT HAVE EXPERIENCED
THE SAME RESULTS REFLECTED IN THE TABLE DUE TO DIFFERENCES IN BROKERAGE
COMMISSIONS AND MANAGEMENT AND INCENTIVE FEES AND CHANGES IN SHAFFER ASSET
MANAGEMENT'S TRADING SYSTEM, INCLUDING THE SIZE OF POSITIONS TAKEN IN RELATION
TO ACCOUNT SIZE AND THE DEGREE OF DIVERSIFICATION IN TERMS OF THE NUMBER OF
COMMODITY INTERESTS TRADED AT A PARTICULAR TIME AND DIFFERENCES IN COMMODITY
INTERESTS TRADED.
-71-
TABLE A
COMPOSITE PERFORMANCE RECORD OF ACCOUNTS
MANAGED BY SHAFFER ASSET MANAGEMENT, INC.,
BASED UPON FULLY FUNDED CLIENT ACCOUNTS
(UNAUDITED)
- ----------- ----------- ------------ ------------ -------------- ----------- ---------------- ------------ ---------- -------------
---------- Gross Net Change in
Nominal Realized Realized Unrealized
Actual Beginning Additions Withdrawals Profit Brokerage Profit Interest Profit
Beginning Equity Nominal Nominal (Loss) Commissions (Loss) Income (Loss)
Equity (1a) (2) (3) (4) (5) (6) (7) (8)
(1)
- ----------- ----------- ------------ ------------ -------------- ----------- ---------------- ------------ ---------- -------------
1999
- -----------
- -----------
Mar 0 0 50,000 0 (457) 687 (1,144) 0 7,859
- -----------
Apr 55,156 55,156 100,000 0 3,539 818 2,720 138 23,011
- -----------
May 174,969 174.969 50,096 0 20,170 2,531 17,639 317 (15,741)
- -----------
Jun 226,970 226,970 300,000 0 (31,771) 4,148 (35,919) 696 35,020
- -----------
Jul 525,992 525,992 0 0 80,573 4,829 75,743 1,515 (2,308)
- -----------
Aug 586,935 586,935 150,176 0 (7,240) 5,670 (12,910) 1,692 (77,523)
- -----------
Sep 658,816 658,816 100,000 0 (141,163) 6,939 (148,102) 1,833 352,312
- -----------
Oct 929,563 929,563 0 0 237,117 7,754 229,363 2,511 (336,406)
- -----------
Nov 828,285 828,285 100,360 0 33,138 10,200 22,937 2,195 161,278
- -----------
Dec 1,095,616 1,095,616 160,000 0 (38,950) 10,173 (49,124) 2,857 11,661
- -----------
- -----------
2000
- -----------
Jan 1,228,789 1,228,789 69,315 0 43,202 6,456 36,745 3,000 52,298
- -----------
Feb 1,372,714 1,372,714 90,000 58,094 109,649 6,059 103,590 4,569 (47,633)
- -----------
Mar 1,454,282 1,454,282 200,000 0 31,032 10,674 20,358 5,150 (151,837)
- -----------
Apr 1,549,373 1,549,373 120,000 14,651 (47,630) 6,703 (54,334) 5,436 136,061
- -----------
May 1,728,073 1,728,073 450,000 0 111,704 12,350 99,353 6,908 (10,093)
- -----------
Jun 2,157,382 2,257,382 0 0 72,829 9,201 63,628 7,122 49,488
- -----------
Jul 2,256,213 2,356,213 0 0 (27,036) 4,989 (32,025) 7,503 (34,379)
- -----------
Aug 2,196,941 2,296,941 167,451 0 211,841 14,228 197,612 7,980 41,652
- -----------
Sep 2,577,964 2,677,964 0 0 66,394 11,338 55,055 10,792 (171,810)
- -----------
Oct 2,495,948 2,595,948 0 102,732 (414,029) 11,769 (425,798) 8,932 59,380
- -----------
Nov 2,033,175 2,133,175 0 50,716 (43,911) 9,425 (53,337) 7,722 17,912
- -----------
Dec 1,952,942 2,052,942 75,000 0 239,837 9,908 229,929 6,314 231,069
- -----------
- -----------
-------------- ----------- ------------ -------------- ----------- ----------- ---------
Change in Trading Monthly
Accrued Advisor's Other Net Ending Rate of
- ----------- Commission Fees Expenses Performance Equity Return Index
(9) (10) (11) (12) (13) (14) (15)
- ------------------------- ----------- ------------ -------------- ----------- ----------- ---------
1999 1,000
- -----------
Mar (269) 1,289 0 5,156 55,156 10.31% 1,103
- -----------
Apr (1,139) 4,918 0 19,812 174,969 12.77% 1,244
- -----------
May 86 396 0 1,904 226,970 0.85% 1,255
- -----------
Jun (383) 391 0 (977) 525,992 (0.19)% 1,252
- -----------
Jul 38 14,047 0 60,942 586,935 11.59% 1,397
- -----------
Aug (1,756) (12,202) 0 (78,295) 658,816 (10.62)% 1,249
- -----------
Sep (862) 34,433 0 170,747 929,563 22.50% 1,530
- -----------
Oct 3,252 0 0 (101,278) 828,285 (10.90)% 1,363
- -----------
Nov (4,193) 15,246 0 166,971 1,095,616 19.21% 1,625
- -----------
Dec 605 (7,173) 0 (28,826) 1,228,789 (2.41)% 1,586
- -----------
(16) 1999 COMPOUNDED RATE OF RETURN 58.59%
- -----------
2000
- -----------
Jan 221 17,655 0 74,610 1,372,714 5.92% 1,680
- -----------
Feb 563 11,428 0 49,661 1,454,282 3.54% 1,739
- -----------
Mar 50 (21,368) 0 (104,908) 1,549,373 (6.47)% 1,627
- -----------
Apr (1,373) 12,437 0 73,351 1,728,073 4.45% 1,699
- -----------
May 595 17,454 0 79,309 2,257,382 3.21% 1,754
- -----------
Jun 494 21,903 0 98,830 2,356,213 4.30% 1,829
- -----------
Jul (371) 0 0 (59,272) 2,296,941 (2.64)% 1,781
- -----------
Aug 1,157 34,832 0 213,571 2,677,964 8.64% 1,935
- -----------
Sep 2,387 (21,558) 0 (82,015) 2,595,948 (2.97)% 1,877
- -----------
Oct (2,554) 0 0 (360,040) 2,133,175 (14.43)% 1,606
- -----------
Nov (1,813) 0 0 (29,516) 2,052,942 (0.98)% 1,591
- -----------
Dec 690 15,984 0 452,018 2,579,961 22.10% 1,942
- -----------
(16) 2000 COMPOUNDED RATE OF RETURN 22.46%
- -------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of this Performance Record.
Past results are not necessarily indicative of future results.
-72-
TABLE A CONTINUED
- ----------- ----------- ------------ ------------ -------------- ----------- ---------------- ------------ ---------- -------------
Gross Net Change in
Actual Nominal Realized Realized Unrealized
Beginning Beginning Additions Withdrawals Profit Brokerage Profit Interest Profit
Equity Equity Nominal Nominal (Loss) Commissions (Loss) Income (Loss)
(1) (1a) (2) (3) (4) (5) (6) (7) (8)
- ----------- ----------- ------------ ------------ -------------- ----------- ---------------- ------------ ---------- -------------
2001
- -----------
===========
Jan 2,479,961 2,579,961 0 149,418 330,727 10,786 319,940 3,857 (313,573)
===========
Feb 2,336,061 2,436,061 100,000 0 47,079 16,839 30,239 7,194 (3,080)
- -----------
Mar 2,466,458 2,566,458 98,002 0 (37,259) 18,201 (55,461) 5,701 245,288
- -----------
Apr 2,718,515 2,818,515 75,000 44,280 59,490 20,424 39,065 6,323 7,637
- -----------
May 2,794,049 2,894,049 0 0 (281,088) 33,847 (314,935) 5,245 (126,542)
- -----------
Jun 2,369,024 2,469,024 249,999 98,541 27,413 34,062 (6,648) 5,272 145,419
- -----------
Jul 2,579,025 2,759,025 10,000 52,097 (216,638) 18,639 (235,277) 4,377 (132,335)
- -----------
Aug 2,173,014 2,353,014 0 54,419 78,472 26,642 51,829 4,541 (118,899)
- -----------
Sep 2,065,521 2,245,521 97,500 48,854 (107,543) 7,694 (115,238) 4,090 184,089
- -----------
Oct 2,181,176 2,361,176 0 0 168,738 7,556 161,181 3,156 58,105
- -----------
Nov 2,398,896 2,578,896 0 0 130,129 24,362 105,766 2,693 (339,421)
- -----------
Dec 2,170,441 2,350,441 0 75,695 (279,600) 18,706 (298,307) 2,441 221,044
- -----------
- -----------
2002
- -----------
Jan 2,022,658 2,202,658 12 181,875 (213,034) 18,161 (231,195) 4,424 89,042
- -----------
Feb 1,699,129 1,879,129 5,000 161,738 (100,147) 18,205 (118,352) 1,653 (227,292)
- -----------
Mar 1,306,968 1,386,968 0 0 98,344 6,913 91,430 1,316 108,512
- -----------
Apr 1,507,120 1,587,120 0 0 (13,726) 8,012 (21,738) 1,570 5,230
- -----------
May 1,492,254 1,572,254 0 0 115,793 7,982 107,810 1,456 (41,795)
- -----------
Jun 1,560,268 1,640,268 100,000 113,364 79,977 9,781 70,195 1,576 82,842
- -----------
Jul 1,600,658 1,780,658 100,000 0 136,734 8,692 128,042 1,480 (131,492)
- -----------
Aug 1,701,080 1,881,080 0 0 (15,011) 8,482 (23,493) 1,709 (28,844)
- -----------
Sep 1,651,177 1,831,177 0 331,643 (174,417) 11,370 (185,787) 1,574 76,436
- -----------
Oct
- -----------
Nov
- -----------
Dec
- -----------
-------------- ----------- ------------ -------------- ----------- ----------- ---------
Change in Trading Monthly
- ----------- Accrued Advisor's Other Net Ending Rate of
Commission Fees Expenses Performance Equity Return Index
2001 (9) (10) (11) (12) (13) (14) (15)
- ------------------------- ----------- ------------ -------------- ----------- ----------- ---------
===========
Jan (4,033) 673 0 5,518 2,436,061 0.25% 1,947
===========
Feb (1,852) 2,102 0 30,397 2,566,458 1.09% 1,968
- -----------
Mar (4,459) 37,013 0 154,054 2,818,515 5.62% 2,079
- -----------
Apr 3,027 11,239 0 44,814 2,894,049 1.81% 2,116
- -----------
May (31) (11,239) 0 (425,024) 2,469,024 (14.50)% 1,810
- -----------
Jun (426) 5,074 0 138,543 2,759,025 5.14% 1,903
- -----------
Jul (677) 0 0 (363,913) 2,353,014 (13.42)% 1,647
- -----------
Aug 9,454 0 0 (53,073) 2,245,521 (2.28)% 1,610
- -----------
Sep (5,932) 0 0 67,009 2,361,176 2.86% 1,656
- -----------
Oct (2,814) 1,910 0 217,719 2,578,896 9.17% 1,808
- -----------
Nov 742 (1,764) 0 (228,454) 2,350,441 (8.70)% 1,650
- -----------
Dec 2,587 (146) 0 (72,087) 2,202,658 (3.12)% 1,599
- -----------
(16) 2001 COMPOUNDED RATE OF RETURN (17.67)%
- -----------
2002
- -----------
Jan (3,937) 0 0 (141,665) 1,879,129 (6.63)% 1,493
- -----------
Feb 8.568 0 0 (335,422) 1,386,968 (17.47)% 1,232
- -----------
Mar (1,107) 0 0 200,151 1,587,120 14.28% 1,408
- -----------
Apr 71 0 0 (14,865) 1,572,254 (0.92)% 1,395
- -----------
May 542 0 0 68,014 1,640,268 4.36% 1,456
- -----------
Jun (860) 0 0 153,754 1,780,658 9.48% 1,594
- -----------
Jul 2,391 0 0 421 1,881,080 0.02% 1,594
- -----------
Aug 725 0 0 (49,902) 1,831,177 (2.80)% 1,550
- -----------
Sep (1,036) 0 0 (108,812) 1,390,722 (6.30)% 1,452
- -----------
Oct
- -----------
Nov
- -----------
Dec
- -----------
(16) 2002 COMPOUNDED RATE OF RETURN (9.18)%
- --------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of this Performance Record.
Past results are not necessarily indicative of future results.
-73-
NOTES TO TABLE A
A summary of the significant accounting policies, which have been
followed in preparing the accompanying performance table, is set forth below.
The performance represents the actual performance of accounts managed by the
CTA, adjusted for management and incentive fees.
The CTA uses a method of computing rate of return and performance
disclosure, referred to as the "Fully-Funded Subset" method, pursuant to an
Advisory published by the Commodity Futures Trading Commission. To qualify for
use of the Fully-Funded Subset method, the Advisory requires that certain
computations be made in order to arrive at the Fully-Funded Subset. And that the
accounts for which the performance is so reported meet two tests which are
designed to provide assurance that the Fully-Funded Subset method and the
resultant rates of return are representative of the trading program.
(1) BEGINNING EQUITY - ACTUAL equals the ending equity of actual client funds
from the previous month, if applicable, and includes the sum of all cash,
accrued interest income, accrued brokerage commissions and miscellaneous
expenses and the current market value of all open commodity positions.
(1A) BEGINNING EQUITY - NOMINAL represents amounts included in (1) above and
also represents amounts which exceed the amount of actual funds traded. These
amounts represent notional funds.
(2) ADDITIONS - NOMINAL are the amounts, other than through sources of income,
added during the period and are comprised of cash, committed and notional funds.
(3) WITHDRAWALS - NOMINAL are the amounts, other than through sources of
expense, withdrawn during the period and are comprised of cash, committed and
notional funds.
(4) GROSS REALIZED PROFIT (LOSS) is the gross realized gain (loss) on closed
futures contracts for the month. It is not reduced by brokerage commissions and
miscellaneous expenses.
(5) BROKERAGE COMMISSIONS are recognized on an accrual basis and represent the
commissions charged per round-turn by the futures commission merchant plus
charges by certain exchanges and self regulatory organizations and other charges
to the account.
(6) NET REALIZED PROFIT (LOSS) represents the sum of Gross Realized Profit
(Loss) less Brokerage Commissions. (See Notes (4) and (5).)
(7) INTEREST INCOME is recognized on an accrual basis and represents interest
earned on U.S. Government obligations, if any, held as margin in the trading
account, and/or interest earned, if any, on balances at the futures commission
merchant.
(8) INCREASE (DECREASE) IN UNREALIZED PROFIT (LOSS) represents the total
increase (decrease) from the preceding month in open commodity positions.
Unrealized gains (losses) on futures contracts are calculated at the end of each
month based on contract sizes and the differences between the commodity futures
contract closing price and the price at which the contract was initially
purchased or sold.
(9) CHANGE IN ACCRUED COMMISSION represents the total increase (decrease) from
open commodity positions brokerage commissions recognized on an accrual basis
and represent the commissions charged per round-turn by the futures commission
merchant plus charges by certain exchanges and self regulatory organizations.
(10) TRADING ADVISOR'S FEE represents the amount of asset based management and
performance based incentive fees, as defined in the agreement, charged to the
account, and is recorded on an accrual basis.
(11) OTHER EXPENSES represents other charges to the account.
(12) NET PERFORMANCE equals net realized profit (loss) plus change in unrealized
profit (loss) plus interest income less accrued brokerage commissions and
accrued advisor's fees.
(13) ENDING EQUITY equals the sum of beginning equity - nominal plus additions -
nominal minus withdrawals - nominal plus net performance.
(14) MONTHLY RATE OF RETURN for each period is computed by dividing net
performance of the Fully-Funded Subset by the beginning equity of the
Fully-Funded Subset, except in periods of significant additions or withdrawals
to the accounts in the Fully-Funded Subset. In such instances, the Fully-Funded
Subset is adjusted to exclude accounts with significant additions or withdrawals
which would materially change the rate of return pursuant to the Fully-Funded
Subset method.
-74-
The period rates of return for accounts excluded from the Fully-Funded Subset
will often be different from the rate of return for the Fully-Funded Subset.
Accounts not included in the Fully-Funded Subset for any particular period may
include: accounts opened or closed during the period or accounts which are being
phased into the program and, consequently, do not have a complete set of
positions that the other accounts in the program have. The rates of return for
these excluded accounts may be significantly higher or lower than the rate of
return for the Fully-Funded Subset.
(15) INDEX is included for informational purposes only and represents the
estimated compounded monthly value of each hypothetical $1,000 investment
assumed to have been made as of the beginning of the period presented. Index is
calculated as (1 plus the Monthly Rate of Return) times the prior month's Index.
Index may not be an accurate indicator of performance since it assumes a
continuous investment with no subsequent additions, withdrawals or distributions
of accumulated profits.
(16) COMPOUNDED RATE OF RETURN is listed below the final Monthly Rate of Return
for each calendar period presented. It represents the compounded rate of return
for each year or portion of the year presented. It is computed by applying
successively the respective Monthly Rate of Return for each month beginning with
the first month of that calendar period. Compounded Rate of Return may not be an
accurate indicator of performance since it assumes a continuous investment
throughout the period.
-75-
TABLE B
PRO FORMA BROKERAGE COMMISSIONS AND ADVISORY FEES
BROKERAGE COMMISSIONS MANAGEMENT AND INCENTIVE FEES/ALLOCATIONS
--------------------- -----------------------------------------
ACTUAL OVER ACTUAL OVER
PRO (UNDER) PRO PRO (UNDER) PRO
PERIOD ACTUAL (1) FORMA (2) FORMA (3) ACTUAL (4) FORMA (5) FORMA (6)
- ----------- ---------- --------- ---------- ---------- --------- -----------
1999
March ..... 956 621 335 1,289 783 506
April ..... 1,957 1,272 685 4,918 3,551 1,367
May ....... 2,445 1,589 856 396 697 (301)
June ...... 4,531 2,945 1,586 391 (665) 1,056
July ...... 4,791 3,114 1,677 14,047 13,061 986
August .... 7,426 4,827 2,599 (12,202) (12,782) 580
September . 7,801 5,071 2,730 34,433 33,026 1,407
October ... 4,502 2,926 1,576 0 (12,779) 12,779
November .. 14,393 9,355 5,038 15,246 30,061 (14,815)
December .. 9,568 6,219 3,349 (7,173) (2,617) (4,556)
-------- -------- -------- -------- -------- --------
TOTAL ..... 58,370 37,941 20,430 51,345 52,335 (990)
======== ======== ======== ======== ======== ========
2000
January ... 6,235 4,053 2,182 17,655 17,506 149
February .. 5,496 3,572 1,924 11,428 12,827 (1,399)
March ..... 10,624 6,906 3,718 (21,368) (16,157) (5,211)
April ..... 8,076 5,249 2,827 12,437 31,800 (19,363)
May ....... 11,755 7,641 4,114 17,454 17,832 (378)
June ...... 8,707 5,660 3,047 21,903 25,123 (3,220)
July ...... 5,360 3,484 1,876 0 (2,129) 2,129
August .... 13,071 8,496 4,575 34,832 43,870 (9,038)
September . 8,951 5,818 3,133 (21,558) (8,833) (12,725)
October ... 14,323 9,310 5,013 0 (47,549) 47,549
November .. 11,238 7,305 3,933 0 1,779 (1,779)
December .. 9,218 5,992 3,226 15,984 77,379 (61,395)
-------- -------- -------- -------- -------- --------
TOTAL ..... 113,054 73,485 39,569 88,767 153,448 (64,681)
======== ======== ======== ======== ======== ========
2001
January ... 14,819 9,632 5,187 673 9,496 (8,823)
February .. 18,791 12,214 6,577 2,102 11,734 (9,632)
March ..... 22,660 14,729 7,931 37,316 37,342 (26)
April ..... 17,397 11,308 6,089 11,239 16,100 (4,861)
May ....... 33,878 22,021 11,857 (11,239) (58,342) 47,103
June ...... 34,488 22,417 12,071 5,074 28,360 (23,286)
July ...... 19,316 12,555 6,761 0 9,403 (9,403)
August .... 17,188 11,172 6,016 0 8,911 (8,911)
September . 13,626 8,857 4,769 0 9,359 (9,359)
October ... 10,370 6,741 3,630 0 10,062 (10,062)
November .. 23,620 15,353 8,267 0 9,094 (9,094)
December .. 16,119 10,477 5,642 0 8,769 (8,769)
-------- -------- -------- -------- -------- --------
TOTAL ..... 242,272 157,477 84,795 44,862 169,688 (124,826)
======== ======== ======== ======== ======== ========
2002
January ... 22,098 14,364 7,734 0 7,867 (7,867)
February .. 9,637 6,264 3,373 0 5,689 (5,689)
March ..... 8,020 5,213 2,807 0 5,843 (5,843)
April ..... 7,942 5,162 2,780 0 5,767 (5,767)
May ....... 7,440 4,836 2,604 0 6,035 (6,035)
June ...... 10,641 6,917 3,724 0 6,667 (6,667)
July ...... 6,301 4,096 2,205 0 6,960 (6,960)
August .... 7,757 5,042 2,715 0 6,731 (6,731)
September . 12,406 8,064 4,342 0 6,272 (6,272)
October ... 0 0 0 0 0 0
November .. 0 0 0 0 0 0
December .. 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
TOTAL ..... 92,241 59,957 32,284 0 58,229 (58,229)
-------- -------- -------- -------- -------- --------
-76-
NOTES TO TABLE B
(1) "Brokerage Commissions (Actual)" represents the actual brokerage
commissions charged to the accounts included in Table A.
(2) "Brokerage Commissions (Pro Forma") represents brokerage commissions which
would have been paid each month if the rates that will initially be charged
to the Fund (see "Commodity Brokerage Arrangements") had actually been
charged to the accounts included in Table A.
(3) "Brokerage Commissions (Actual Over (Under) Pro Forma)" represents the
amounts by which actual brokerage commissions after greater (less) than the
pro forma. When these amounts are positive, the pro forma brokerage
commissions are less than the actual and thus favorable in comparison with
the corresponding amount paid by the accounts included in Table A.
(4) "Management and Incentive Fees/Allocations (Actual)" represents the actual
management and incentive fees paid by the accounts included in Table A.
(5) "Management and Incentive Fees/Allocations (Pro Forma)" represents the
total management fees and incentive allocations which would have been
payable and allocable by the accounts if they had been charged the advisory
fees which will be applicable to the Fund. Pro forma management fees are
equal to 1/12 of 3.75% of the Net Asset Value per Unit of the Fund's asset
under management at month's end with respect to Units purchased within the
prior 12-month period and 1/12 of 1% of the Net Asset Value per Unit of the
Fund's assets under management at month's end with respect to Units
purchased more than twelve months prior thereto, and pro forma incentive
allocations are equal to 15% of New Trading Profits. "Brokerage Commissions
(Pro Forma)" were not taken into account in determining "Pro Forma Advisory
Fees."
(6) "Management and Incentive Fees/Allocations (Actual Over (Under) Pro Forma)"
represents the amount by which actual advisory fees are greater (less) than
the pro forma. When these amounts are positive, the pro forma advisory fees
are less than the actual and thus favorable in comparison to the
corresponding amounts paid by the accounts included in Table A.
-77-
APPENDIX
GLOSSARY AND DEFINITIONS OF COMMODITY FUTURES TRADING
The following glossary may assist the prospective investor in
understanding the terms used in the accompanying prospectus of Shaffer
Diversified Fund, LP and this statement of additional information:
AFFILIATE. See "Fees, Compensation and Expenses-- Certain
Definitions" in the accompanying prospectus.
CAPITAL CONTRIBUTION. The payment by Shaffer Asset Management, Inc.,
the Fund's general partner and initial commodity trading advisor or a limited
partner of the Fund of the purchase price for units of general partnership
interest or units of limited partnership interest in the Fund (the "Units"),
respectively.
CLEARING BROKER. Certain futures commission merchants and all
introducing brokers may not be members of the various organized commodity
exchanges, or in the case of futures commission merchants who are members, they
may choose not to clear their own trades and are, therefore, not members of the
exchange's related clearing house. Such futures commission merchants and
introducing brokers use a member firm for clearing and other administrative
services. The firm providing this service is known as a "clearing broker" and
the firm using this service is known as a "correspondent. " The services usually
performed include the clearance and settlement of transactions, ordering
executions on the floor and various back-office type functions.
CLEARING HOUSE. The agency, associated with a commodity exchange,
through which futures contracts are offset or fulfilled and financial
settlements are made.
COMMISSION. The fee charged by a broker for executing a trade in a
commodity trading account of a customer. ADM Investor Services, Inc., the Fund's
initial commodity broker, will (as is the industry custom) charge the Fund
commissions on a "round-turn" basis (i.e., only upon the closing of an open
position). However, for purposes of calculating the Net Asset Value of the Fund,
commodity brokerage commissions on open positions will be subtracted from any
unrealized profits or added to any unrealized losses on such positions.
COMMODITY. The term "commodity" refers to goods, wares, merchandise,
produce, and in general everything that is bought and sold in commerce,
including financial instruments and currencies. Out of this large class, certain
commodities (including the aforesaid "financial" commodities), because of their
wide distribution, universal acceptance and marketability in commercial
channels, have become the subjects of trading on various national and
international exchanges located in principal marketing and commercial areas.
Traded commodities include: grains such as wheat corn, oats and soybean products
(meal and oil); foods such as livestock and meat, poultry and poultry products,
frozen concentrated orange juice, potatoes, sugar, cocoa and coffee; fibers such
as cotton, lumber and plywood; metals such as copper, silver, gold, platinum,
tin and zinc; financial instruments such as obligations issued by the Government
National Mortgage Association (GNMA's), United States Treasury Bills and
Treasury Bonds and corporate commercial paper; foreign currencies; such as
British pounds, Canadian dollars, Deutche marks, EuroCurrency, Japanese yen and
Swiss francs; contracts based on securities indices and groups; and energy
supplies such as petroleum and petroleum products (heating oil). Those
"physical" commodities that are traded are sold according to uniform,
established grade standards, in convenient predetermined lots and quantities
such as bushels, pounds, or bales, are fungible (admit of free substitution of
one lot for another to satisfy a contract) and, with few exceptions, are
storable over periods of time. See "Fees, Compensation and Expenses -- Certain
Definitions" in the accompanying prospectus.
COMMODITY FUTURES CONTRACT. See "Futures Contract," below.
COMMODITY OPTION. See "Option," below.
COMMODITY FUTURES TRADING COMMISSION (CFTC). An independent
regulatory commission of the United States Government empowered to regulate
commodity futures transactions and other commodity interest transactions under
the Commodity Exchange Act, as amended.
APP-1
COMMODITY POOL OPERATOR. The sponsor or administrator of a commodity
pool such as the Fund. Shaffer Asset Management/Advisor is a CFTC-registered
commodity pool operator.
COMMODITY TRADING ADVISOR. One who analyzes or makes recommendations
with respect to commodity values and commodity trading or manages commodity
trading accounts for others. The General Partner/Advisor is a CFTC-registered
commodity trading advisor.
CONTRACT MARKET. A commodity exchange or, more correctly, that
specific market within a commodity exchange that is devoted to a particular
commodity, upon which the trading of a particular futures contract or commodity
option has, been authorized by the CFTC.
DAILY PRICE FLUCTUATION LIMIT. The maximum permitted fluctuation,
imposed by an exchange and approved by the CFTC, in the price of a commodity
futures contract for a given commodity that can occur on a commodity exchange on
a given day in relation to the previous day's settlement price, which maximum
permitted fluctuation is subject to change by the exchange from time to time.
DAILY TRADING LIMIT. The maximum number of futures contracts for a
given commodity allowed to be purchased or sold on a given day by any one person
or group of persons acting together. In the past, daily trading limits have been
established by certain exchanges and may be established again in the future.
DAY TRADING. The purchase and sale of the same futures contract
during a single day.
DELIVERY. The process of satisfying a commodity futures contract by
transferring ownership of a specified quantity and grade of a cash commodity
(i.e., the actual underlying commodity) to the purchaser thereof.
FORWARD CONTRACT. A cash market transaction in which buyer and seller
agree to the purchase and sale of a specific quantity of a commodity for
delivery at some future time under such terms and conditions as the two may
agree upon through negotiation.
FULLY DISCLOSED BROKERAGE ARRANGEMENT. An arrangement between a
retail broker or an introducing broker and its clearing broker pursuant to which
the latter carries the individual accounts of the former's customers on its
books. Under this arrangement, the retail broker or introducing broker receives
a share of the income generated by the account.
FUNDAMENTAL ANALYSIS. Analyzing the price trends of commodities using
the underlying factors of supply and demand. Among these are items such as
weather, weather forecasts, price support programs, political developments,
population, floods, drought, labor problems, the economy, acreage yields,
substitutes, and so on.
FUTURES CONTRACT. Traditionally, a contract providing for delivery or
receipt at a future date of a specified amount and type of a traded commodity at
a specified price and delivery point. A commodity futures contract should be
distinguished from the actual physical commodity, which is termed a "cash
commodity." "Stock index futures," however, are based upon the values of certain
stock indices and are settled in cash rather than by delivery of an underlying
commodity.
FUTURES COMMISSION MERCHANT. A commodity broker. ADM Investor
Services is a CFTC-registered futures commission merchant.
HEDGING. Reducing or attempting to reduce exposure to changes in the
market for a commodity through the establishment of an opposite position in the
futures market from that held in the cash or "spot" market therefore. See
"Description of Commodity Futures Trading -- General," below.
INTRODUCING BROKER. Any person, except an individual who elects to be
and is registered as an associated person of a futures commission merchant or
introducing broker, engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery on or subject to the rules
of any contract market who does not accept any money, securities, or property
(or extend credit in lieu thereof) to margin, guarantee, or secure any trades or
contracts that result or may result therefrom.
APP-2
LIMIT. See "Daily price fluctuation limit," above.
LIMIT ORDER. A trading order which sets a limit on either price or
time of execution or both. Limit orders (as contrasted with stop orders) do not
become market orders (see below).
LONG CONTRACT (POSITION). A commodity futures contract to buy a
specified amount and grade of a commodity at a future date at a specified price
(or the trading position arising therefrom).
MARGIN. In commodity trading, "margin" refers to good faith deposits
with a broker to assure fulfillment of a purchase or sale of a commodity futures
contract. At present, margins generally range from 4% to 20% of the value of the
commodity underlying the contract. "Maintenance" margin requirements are
generally 75% of initial margin requirements. See `Description of Commodity
Futures Trading -- Margins," below.
MARGIN CALL. A demand for additional funds after the initial margin
deposit required to maintain a customer's account in compliance with the
"maintenance margin" requirements of a particular commodity exchange or of a
commodity broker. See "Description of Commodity Futures Trading -- Margins,"
below.
MARKET ORDER. An order to execute a trade at the prevailing price as
soon as possible.
NET ASSET VALUE AND NET ASSET VALUE PER UNIT. See "Fees, Compensation
and Expenses -- Certain Definitions" in the accompanying prospectus.
OPEN POSITION (OR TRADE). The contractual commitment arising from an
outstanding long or short futures contract that has not been extinguished by an
offsetting trade or by delivery.
OPTION. A contract giving the holder the right, but not the
obligation, to buy (a call) or sell (a put) a specified commodity futures
contract or commodity at a future date for a specified price.
POSITION LIMIT. The maximum number of commodity futures contracts in
one commodity on a contract market that can be held or controlled at one time by
one person or a group of persons acting together, as allowed by the CFTC or a
commodity exchange.
POSITION TRADING. Holding futures contracts for an extended period of
time, as contrasted with "day trading," above.
PYRAMIDING. The use of unrealized profits in an existing position to
provide margin for the acquisition of additional commodity futures contracts in
the same or a related commodity.
ROUND-TURN. The acquisition and subsequent liquidation of a futures
contract (i.e., open position). Commodity brokerage commissions are
traditionally charged on a "round-turn" basis.
SYNDICATION FEES/SELLING COMMISSIONS/SALES CHARGES. Units may be
offered and sold by the Fund at the then current Net Asset Value per Unit, plus
a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased.
Approximately 20% of all sales charges shall be paid to Shaffer Asset Management
to reimburse Shaffer Asset Management for the payment of the Fund's
organizational and initial offering and the Fund's operating expenses payable by
Shaffer Asset Management and approximately 80% of all sales charges shall be
paid as syndication fees to Berthel Fisher & Company Financial Services, Inc.
and as selling commissions to certain other firms that are members of the NASD
and certain foreign dealers and institutions which are not members of the NASD
that may participate in the offering. Berthel Fisher & Company and the selected
dealers may in turn pay a portion of such syndication fees and selling
commissions to their respective employees who are NASD registered
representatives for each Unit sold by them. See "Fees, Compensation and Expenses
- -- Description of Fees, Compensation and Expenses -- Syndication Fees/Selling
Commissions/Sales Charges" and "Plan of Distribution" in the accompanying
prospectus.
APP-3
SETTLEMENT PRICE. The daily price or value of each futures contract
established by a commodity exchange's clearing house after the close of each
day's trading, usually the closing price, on the basis of which "maintenance
margin" requirements are set. See "Description of Commodity Futures Trading --
Margins," above.
SHORT CONTRACT (POSITION). A commodity futures contract to sell a
specified amount and grade of a commodity at a future date at a specified price
(or the trading position arising therefrom).
SPECULATING. In commodity trading, to trade other than for the
purpose of hedging; to trade in hopes of profiting from favorable price changes.
See "Description of Commodity Futures Trading-- General," below.
SPOT CONTRACT. A cash market transaction in which buyer and seller
agree to the purchase and sale of a specific commodity lot for immediate
delivery.
SPREAD. The taking of both long and short positions with respect to
the same or related commodities but in different delivery months or on different
exchanges.
STOP ORDER. An order given to a broker to execute a trade in a
commodity futures contract when the market price for the contract reaches the
specified stop order price. Stop orders are utilized to protect gains or limit
losses on open positions. Stop orders become market orders when the stop order
price is reached.
STRADDLE. Same as "Spread," above.
TECHNICAL ANALYSIS. An approach to forecasting commodity prices based
on the study of price movement itself without regard to underlying fundamental
market factors.
TRADING LIMIT. See "Daily trading limit," above.
UNREALIZED PROFIT OR LOSS. The profit or loss which would be realized
on an open position if it were closed out at the current settlement price.
APP-4
SHAFFER DIVERSIFIED FUND, LP
(A DELAWARE LIMITED PARTNERSHIP)
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this
"Agreement") made as of September 30, 2002, by and between SHAFFER ASSET
MANAGEMENT, INC., a New York corporation having an address at 925 Westchester
Avenue, White Plains, NY 10604 (the "General Partner / Advisor"), and DANIEL S.
SHAFFER, an individual having an address c/o Shaffer Asset Management, Inc., 925
Westchester Avenue, White Plains, NY 10604 (the "Initial Limited Partner"), and
those who hereafter execute this Agreement, whether in counterpart, by separate
instrument, by attorney-in-fact or otherwise, with the consent of the General
Partner, as limited partners (the "Limited Partners"; the General Partner and
the Limited Partners collectively being referred to herein as the "Partners").
WITNESSETH :
WHEREAS, the parties hereto have entered into an amended and restated
agreement of limited partnership dated as of October 16, 2001 under the
provisions of the Delaware Revised Uniform Limited Partnership Act, as amended
and in effect on the date hereof (the "Act"), for the purpose of speculatively
trading in commodity futures contracts and other commodity interests; the
parties now wish to amend and restate such agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
ORGANIZATION
1.1 FORMATION AND NAME
The parties hereto have formed a limited partnership under the name
SHAFFER DIVERSIFIED FUND, LP (the "Partnership") under the provisions of the Act
and do hereby continue the Partnership pursuant to the terms hereof. The General
Partner has heretofore executed and filed with the Office of the Secretary of
State of the State of Delaware a Certificate of Limited Partnership of the
Partnership (the "Certificate of Limited Partnership") in accordance with the
Act, and the General Partner shall execute, file, record and publish as
appropriate all other certificates, amendments and documents as the General
Partner deems necessary or advisable. Each Limited Partner hereby undertakes to
furnish to the General Partner a power of attorney, which may be filed with the
Certificate of Limited Partnership and/or this Agreement and any amendment
thereto and/or hereto, and such additional information as is required to
complete such documents, and to execute and cooperate in the filing, recording
or publishing of such documents at the request of the General Partner.
1.2 BUSINESS
The Partnership's business and purpose is to buy, sell, trade or
otherwise acquire, hold and dispose of commodities, commodity futures contracts
(including, without limitation, futures contracts on United States Treasury
Bills and other financial instruments), commodity options, other commodity
interests, and any other items which are presently or may hereafter become the
subject of futures contract trading (hereinafter collectively referred to as
"Futures Interests"), and other investments and to engage in any and all
activities incidental or related thereto. The objective of the Partnership's
business is to achieve appreciation of its assets through the speculative
trading of Futures Interests.
A-1
1.3 TERM
The term of the Partnership commenced upon the execution and filing with
the Office of the Secretary of State of the State of Delaware on August 29, 2000
of the Certificate of Limited Partnership and shall continue in existence until
December 31, 2025 unless earlier terminated as provided in Section 5.1 hereof or
by operation of law.
1.4 FISCAL YEAR; TAX MATTERS PARTNER
The fiscal year of the Partnership for all purposes shall commence on
January 1 and shall end on December 31 each year, unless the General Partner
elects, with the approval of the Internal Revenue Service and the Commodity
Futures Trading Commission (the "CFTC"), a different fiscal year. The tax
matters partner for the Partnership shall be the General Partner.
1.5 PRINCIPAL OFFICE
The Partnership's principal place of business shall be located at 925
Westchester Avenue, White Plains, NY 10604; additional or other places of
business may be established at such other locations as may be determined, from
time to time, by the General Partner.
1.6 POWER OF ATTORNEY
Each Limited Partner, by the execution of this Agreement, whether in
counterpart, by separate instrument, by attorney-in-fact or otherwise, does
hereby irrevocably constitute and appoint the General Partner, with full power
of substitution, his true and lawful attorney and agent, with full power and
authority in his name, place and stead, to admit additional Limited Partners, to
file, prosecute, defend, settle or compromise any and all actions at law or
suits in equity for or on behalf of the Partnership with respect to any claim,
demand or liability asserted or threatened by or against the Partnership, and to
execute, acknowledge, deliver, file and record on each Limited Partner's behalf
in the appropriate public offices (i) all certificates and other instruments
(including, without limitation, the Certificate of Limited Partnership, all
amendments thereto, all counterparts of this Agreement and all amendments
hereto) which the General Partner deems necessary or appropriate to qualify or
continue the Partnership as a limited partnership in the jurisdictions in which
the Partnership may conduct business or which may be required to be filed by the
Partnership or any of the Partners under the laws of any jurisdiction; (ii) all
instruments which the General Partner deems appropriate to reflect a change in
or modification of the Partnership in accordance with the terms of this
Agreement; (iii) all conveyances and other instruments which the General Partner
deems appropriate to reflect the termination and dissolution of the Partnership;
(iv) certificates of assumed name; (v) the advisory agreement (the "Advisory
Agreement") between the Partnership and Shaffer Asset Management, Inc., the
Partnership's general partner and initial commodity trading advisor (the
"Advisor"), requiring the payment of management fees and advisory allocations
described in Section 2.3 hereof, the Prospectus and Statement of Additional
Information (as defined in Section 3.1(a) of this Agreement) or such other
advisory agreement(s) as the General Partner may deem, from time to time,
necessary or desirable; and (vi) the customer agreement (the "Customer
Agreement") between the Partnership and ADM Investor Services, Inc., the
Partnership's initial commodity broker (the "Commodity Broker"), requiring the
payment of the brokerage commissions described in the Prospectus and Statement
of Additional Information or such other brokerage agreement(s) as the General
Partner may deem, from time to time, necessary or desirable. The Power of
Attorney granted herein shall be irrevocable and be deemed to be a power coupled
with an interest and shall survive the incapacity or death of any Limited
Partner. Each Limited Partner hereby agrees to be bound by any representation
made by the General Partner and by any successor(s) thereto acting in good faith
pursuant to such Power of Attorney, and each Limited Partner hereby waives any
and all defenses which may be available to contest, negate or disaffirm the
action of the General Partner and any successor(s) thereto taken in good faith
under such Power of Attorney. In the event of any conflict between this
Agreement and any instruments filed by such attorney pursuant to the Power of
Attorney granted in this Section 1.6, this Agreement shall control.
1.7 PARTNERSHIP UNITS
All partnership interests in the Partnership shall be evidenced by units
and as used herein the term "Unit" is defined as an interest in the Partnership
acquired upon the making of a capital contribution by either the General Partner
or a Limited Partner. The General Partner's capital contribution shall be
evidenced by Units of General Partnership Interest and a Limited Partner's
capital contribution shall be evidenced by Units of Limited Partnership
Interest. When used herein without qualification, the term "Units" shall include
both Units of Limited Partnership Interest and Units of General Partnership
Interest, PARI PASSU.
A-2
1.8 EXPENSES; LIMITS; RESERVES
(a) Except as otherwise set forth herein or in the Prospectus or
Statement of Additional Information, the Partnership shall be
obligated to pay all liabilities incurred by it, including
without limitation Continuing Services Fees (as defined in
Section 4.4 hereof); Management Fees (as defined in Section 4.4
hereof) and Incentive Allocations (as defined in Section 4.4
hereof); brokerage commissions; legal, accounting, auditing,
printing, recording, filing and other periodic fees and expenses;
and extraordinary expenses incurred by the Partnership; provided
that the sum of the Continuing Services Fees and Management Fees
paid by the partnership during any twelve month period shall not
exceed 5.00% of the sum of the Net Asset Values of the
Partnership assets under management as of the close of business
on the last day (without reductions for distributions or
redemptions effected as of such date or management fees or
incentive fees payable as of such date) during such twelve month
period. Notwithstanding the foregoing, the General Partner shall
be responsible for all such expenses (except Continuing Services
Fees, Management Fees, Incentive Allocations, brokerage
commissions and extraordinary expenses incurred by the
Partnership) to the extent that such expenses exceed, in a fiscal
year, 0.5% of the average monthly Net Asset Value (as defined in
Section 4.4 hereof) of the Partnership. In addition, the General
Partner shall pay the organizational and initial offering
expenses of the public offering and sale of the Units of Limited
Partnership Interest described in Section 3.1(a) hereof, and no
such expenses shall be deducted from the proceeds of such
offering. For the purposes of this Agreement, organization and
initial offering expenses shall include all costs paid or
incurred by the Partnership or the General Partner in organizing
the Partnership and offering the Units of Limited Partnership
Interest, including bank and escrow agent charges, blue sky
filing fees, filing fees payable upon formation and organization
of the Partnership and legal, accounting and printing fees
associated with the preparation, filing and printing of the
Registration Statement (as defined in Section 3.1 hereof), the
Prospectus and the Statement of Additional Information related to
such offering. Indirect expenses of the General Partner, such as
salaries, rent and other overhead expenses, shall not be
liabilities of the Partnership.
(b) Compensation to any party, including the General Partner (or any
commodity trading advisor that may be retained in the future),
shall not exceed the limitations imposed as of the date hereof by
the North American Securities Administrators Association. In the
event that such compensation exceeds such limitations, the
General Partner shall promptly reimburse the Partnership for such
excess.
(c) Appropriate reserves shall be created, accrued and charged to the
Partners' capital accounts for contingent liabilities (in
accordance with generally accepted accounting principles), if
any, as of the date of any such contingent liability becomes
known to the General Partner.
1.9 PROHIBITIONS
The Partnership shall not (a) engage in pyramiding, (b) commingle its
assets with the assets of any other person, except as permitted by law, (c) make
loans to the General Partner, any affiliate thereof or any other person or
entity at any time for any reason, (d) pay per-trade compensation to the General
Partner, any commodity trading advisor, any affiliate thereof or any other
person or entity that receives any other form of compensation from the
Partnership, (e) permit rebates or give-ups to be received by the General
Partner or any affiliate thereof (nor shall the General Partner participate in
any reciprocal business arrangements that would circumvent the foregoing or any
other provision of this Agreement) or (f) borrow cash or other assets from the
General Partner.
ARTICLE II
GENERAL PARTNER; ADMINISTRATION
2.1 MANAGEMENT
Subject to the limitations of this Agreement, the General Partner shall
have full, exclusive and complete authority for and control of the management of
the Partnership's affairs for the purposes herein stated, and shall make all
decisions affecting the Partnership's affairs, including, without limitation,
the decision to enter into contracts for trading advisors' services and
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brokerage services. In that regard, the General Partner may, but need not, make
trading decisions for the Partnership and may employ one or more affiliated
and/or unaffiliated commodity trading advisors to perform that function. The
General Partner may take such other actions as it deems necessary or desirable
to manage the business and affairs of the Partnership including, but not limited
to, the following: opening bank accounts with state or national banks; paying,
or authorizing the payment of, distributions to the Partners and expenses of the
Partnership such as selling commissions (if any), advisory fees, brokerage
commissions, legal and accounting fees, printing fees, and registration and
other fees of governmental agencies; and investing or directing the investment
of assets of the Partnership, whether or not involving the purchase or sale of
Futures Interests. Subject to the terms and conditions set forth in this
Agreement, the General Partner may engage and compensate on behalf of the
Partnership from assets of the Partnership such persons or entities, including
any affiliated person or entity or any other person or entity, as the General
Partner in its sole discretion shall deem advisable for the conduct and
operation of the business of the Partnership.
2.2 COMPENSATION AND REIMBURSEMENT
The General Partner shall share in all Partnership income, gains, losses,
deductions and credits to the extent of its interest in the Partnership. In
addition, the General Partner, in its capacity as the general partner of the
Partnership, shall receive from the Partnership (i) approximately twenty percent
(20%) of all Sales Charges (as defined in Section 4.4 hereof), if at least 1,000
Units are sold and accepted by the General Partner during the Initial Offering
Period (as defined in Section 3.1(c) hereof); and (ii) all early redemption fees
charged by the Partnership upon redemptions of Units of Limited Partnership
Interest to reimburse the General Partner for the payment by the General Partner
of the Partnership's organizational, initial offering and operating expenses
payable by the General Partner.
2.3 INITIAL COMMODITY TRADING ADVISOR
The General Partner is hereby authorized, on behalf of the Partnership,
to enter into the Advisory Agreement with the Advisor (which also serves as the
general partner of the Partnership). The General Partner, in its sole
discretion, may employ on behalf of the Partnership the Advisor or other
commodity trading advisors on the terms and conditions contained in the Advisory
Agreement or on different terms and conditions, and the compensation for such
other commodity trading advisors may be negotiated and determined without regard
to the Partnership's previous trading performance. No person who receives any
advisory, management, incentive or administrative fees or allocations from the
Partnership for trading advisory or management services may share or
participate, directly or indirectly, in the brokerage commissions paid by the
Partnership.
2.4 INITIAL COMMODITY BROKER
The General Partner is further authorized, on behalf of the Partnership,
to enter into the Customer Agreement with ADM Investor Services and to cause the
Partnership to pay to ADM Investor Services brokerage commissions at such rates
as may be established and re-established from time to time under the terms of
the Customer Agreement, which rates may exceed the lowest rates otherwise
available.
2.5 STANDARD OF LIABILITY; INDEMNIFICATION
(a) The Partnership shall not provide for indemnification of the
General Partner or its affiliates for any liability or loss
suffered by such person, nor shall it provide that such person be
held harmless for any loss or liability suffered by the
Partnership, unless, and the General Partner shall have no
liability to the Partnership if, all of the following conditions
are met: (a) such person has determined, in good faith, that the
course of conduct which caused the loss or liability was in the
best interests of the Partnership, and (b) such person was acting
on behalf of or performing services for the Partnership, and (c)
such liability was not the result of negligence or misconduct by
such person, and (d) such indemnification or agreement to hold
harmless is recoverable only out of the assets of the Partnership
and not from the holders of the partnership interests.
(b) In any threatened, pending or completed action, suit or
proceeding to which the General Partner was, is or is threatened
to be made a party by reason of the fact that it is or was a
general partner or sponsor of the Partnership (including an
action brought by or in the right of the Partnership), the
Partnership shall subject to Section 2.5(a) indemnify, defend and
hold harmless the General Partner, from and against any loss,
liability, damage, cost, expense (including, without limitation,
attorneys' and accountants' fees and disbursements), judgments
and amounts paid in settlement actually incurred by it in
connection with the investigation, defense or settlement of any
such action, suit or proceeding. The termination of any action,
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suit or proceeding by judgment, order or settlement shall not, in
and of itself, create a presumption that the General Partner did
not act in good faith and in a manner which it reasonably
believed to be in or not opposed to the best interests of the
Partnership.
(c) To the extent that the General Partner has been successful on the
merits or otherwise in defense of any action, suit or proceeding
referred to in Section 2.5(b) hereof, or in the defense of any
claim, issue or matter therein, the Partnership shall indemnify
it against the costs and expenses (including, without limitation,
attorneys' and accountants' fees and disbursements) actually and
reasonably incurred by it in connection therewith.
(d) No indemnification of the General Partner by the Partnership
shall be permitted to the extent that the General Partner incurs
any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees, costs and expenses
incurred in investigating or defending any demand, claim, suit or
proceeding) resulting from or arising out of any violation by the
General Partner of Federal or applicable state securities laws in
connection with or related to the Registration Statement or to
the offer or sale of the Units, unless (i) there has been a
successful adjudication on the merits of each count involving
alleged securities law violations as to the General Partner, (ii)
such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction, or (iii) a court of competent
jurisdiction approves a settlement of the claims and finds that
indemnification of the settlement and related costs should be
made; PROVIDED that such court has been advised of the position
as to indemnification for violations of securities laws of the
Securities and Exchange Commission (the "SEC") and the securities
administrators of the jurisdictions in which the claimant alleges
to have been offered or sold Units.
(e) Expenses incurred in defending a threatened or pending civil,
administrative or criminal action, suit or proceeding against the
General Partner may be paid by the Partnership in advance of the
final disposition of such action, suit or proceeding if and to
the extent that (i) such action, suit or proceeding relates to
acts or omissions with respect to the performance of duties or
services on behalf of the Partnership, (ii) such action, suit or
proceeding is initiated by a party who is not a Limited Partner
or, if by a Limited Partner, then such advance payment is
specifically approved by a court of competent jurisdiction, and
(iii) the General Partner agrees to reimburse the Partnership,
together with the applicable legal rate of interest thereon, in
the event that indemnification is not permitted under this
Section 2.5 upon final disposition.
(f) The term "General Partner" as used in this Section 2.5 shall
include the General Partner (including any former general partner
of the Partnership that has withdrawn from the Partnership), and
its stockholders, directors, officers, employees and affiliates
and each person who controls the General Partner (including such
former general partner), as the case may be.
(g) In the event that the Partnership is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as
a result of or in connection with any Partner's (or assignee's)
obligations or liabilities unrelated to the Partnership's
business, such Partner (or assignees, cumulatively) shall
indemnify and reimburse the Partnership for all losses and
expenses incurred by the Partnership in connection therewith
(including, without limitation, attorneys and accountants' fees
and disbursements).
(h) The Partnership may not incur the cost of that portion of any
liability insurance, which insures the General Partner or any of
its officers, agents, employees, directors, members, or managers
for any liability for which such parties are prohibited from
being indemnified by this Agreement.
2.6 NET WORTH OF THE GENERAL PARTNER
The General Partner agrees that, so long as it acts as a general partner
of the Partnership, it will maintain its Net Worth (as hereafter defined) at an
amount equal to not less than the greater of (i) five percent (5%) of the
aggregate capital contributions made to the Partnership by all Partners
(including the General Partners' capital contributions) or (ii) Fifty Thousand
Dollars ($50,000). The General Partner further agrees that it will not be a
general partner of any limited partnership in addition to the Partnership unless
at all times when it is a general partner of any such additional limited
partnership its Net Worth shall be at least equal to the Net Worth required by
the preceding sentence plus, for each such additional limited partnership, an
amount equal to five percent (5%) of the total capital contributions made by all
the partners to such other limited partnership (including the contributions made
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by the General Partner). Notwithstanding the foregoing, the General Partner's
net worth need not exceed $1,000,000. For purposes of this Section 2.6, "Net
Worth" shall reflect the carrying of all assets at fair market value, shall
exclude the General Partner's interest in the Partnership or in any other
limited partnership of which it is a general partner, and shall otherwise be
determined in accordance with generally accepted accounting principles.
2.7 GENERAL PARTNER'S CAPITAL CONTRIBUTION
The General Partner shall make a capital contribution to the Partnership
by purchasing Units of General Partnership Interest in an amount equal to not
less than the greater of: (i) one percent (1%) of the aggregate amount of
capital contributions made to the Partnership by the Partners (including the
General Partner's capital contributions), or (ii) Twenty Five Thousand Dollars
($25,000). The General Partner may not make any transfer or withdrawal of its
contribution to the Partnership or receive any distribution of any portion of
its General Partnership Interest in the Partnership while it is a general
partner of the Partnership which would reduce its percentage interest in the
Partnership to less than its required interest as set forth in the preceding
sentence. The General Partner may contribute any greater amount to the
Partnership. The General Partner may withdraw or receive a distribution of any
portion of its interest in the Partnership that is in excess of its required
interest upon thirty (30) days' prior written notice to the Limited Partners
(provided, however, that the withdrawal of any Incentive Allocation allocated to
the General Partner pursuant to Section 4.2(c) shall not require such notice).
2.8 OTHER BUSINESS
The General Partner and its principals and affiliates may engage in other
business activities (including without limitation serving as a general partner
of other partnerships) and shall not be required to refrain from any other
activity or disgorge any profits derived from any such other activity. Any of
the commodity trading advisors to the Partnership, including the Advisor, and
their respective principals and affiliates will also be free to manage
additional accounts other than the Partnership's account, including for their
own account.
2.9 DISTRIBUTIONS
(a) The General Partner shall have sole discretion in determining the
amount and frequency of any distributions which the Partnership
shall make other than distributions made upon the withdrawal of or
redemption by any Partner. The General Partner may declare
distribution in additional Units of the Fund, in which event Limited
Partners will be given at least sixty (60) days' prior written
notice and the option to receive cash instead of additional Units.
All distributions shall be made pro rata to the number of Units held
of record by the respective Partners.
(b) Current and liquidating distributions shall be made (i) first, to
the General Partner, so that the General Partner receives an amount
equal to the aggregate amount of any Incentive Allocation credited
to its capital account pursuant to Article V hereof, and (ii)
second, to the Partners in the ratio that the capital account of
each Partner bears to the capital account of all Partners.
2.10 CONTRACTS WITH THE GENERAL PARTNERS OR ITS AFFILIATES
The maximum term of any contract between the Partnership and the General
Partner or an affiliate thereof shall be one year (excluding renewals or
extensions thereof); PROVIDED that certain provisions in any such contract may
expressly survive the termination of the contract if survival would be
customary. Agreements between the Partnership and the General Partner or any
affiliate thereof shall be terminable by the Partnership without penalty on
sixty (60) days' prior written notice.
2.11 WITHDRAWAL
The Partnership shall terminate and be dissolved upon the withdrawal of
the General Partner (unless in the case of the withdrawal of the General
Partner, the actions necessary to continue the Partnership are taken pursuant to
Section 5.1 hereof). In that regard, the General Partner shall cease to be, and
shall be deemed to have withdrawn as, a general partner of the Partnership upon
the occurrence of any of the following events:
(i) the legal disability, insolvency, bankruptcy, dissolution or
liquidation of the General Partner;
(ii) any event of withdrawal prescribed in the Act that is not
encompassed in this Article 2.11; or
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(iii) on written notice given by the General Partner, at least one
hundred twenty (120) days prior thereto, of the intention of the
General Partner to withdraw as a general partner of the
Partnership.
If the General Partner withdraws as general partner of the Partnership,
it shall receive the proportionate share of the Net Assets of the Partnership
attributable to its general partnership interest as of the close of business on
the last business day of the month in which the withdrawal is effective. If the
Limited Partners elect to continue the Partnership, the withdrawing General
Partner shall pay all Partnership expenses incurred as a result of its
withdrawal. Except as provided by this Section 2.11, the General Partner may not
sell, assign or otherwise dispose of all or substantially all of its general
partnership interest in the Partnership, except for a sale or transfer of all
interests of all Partners or a sale of all or substantially all of its general
partnership interest to a corporation controlled by the General Partner;
PROVIDED that the General Partner may mortgage, pledge, hypothecate or grant a
security interest in its general partnership interest as collateral for a loan
or loans. Any such assignment of all or any portion of a general partnership
interest shall not cause an event of withdrawal with respect to the General
Partner pursuant to this Section 2.11.
2.12 TAX ELECTIONS
The General Partner, in its sole discretion, may cause the Partnership to
make, refrain from making and, once having made, revoke the election referred to
in Section 754 of the Internal Revenue Code of 1986, as amended, (the "Internal
Revenue Code"), or any other election affecting the computation of Partnership
income required to be made by the Partnership pursuant to Section 703(b) of the
Internal Revenue Code, and any similar election provided by state or local law
or any similar provision enacted in lieu thereof.
2.13 NO PERSONAL LIABILITY FOR RETURN OF CAPITAL
Subject to Section 2.5 hereof, the General Partner shall not be
personally liable for the return or repayment of all or any portion of the
capital or profits of any Partner (or assignee of Unit(s)), it being expressly
agreed that any such return or repayment of capital or profits made pursuant to
this Agreement shall be made solely from the assets of the Partnership (which
shall not include any right of contribution from the General Partner).
2.14 DAILY CALCULATION OF NET ASSET VALUE
The General Partner shall calculate Net Asset Value daily and shall make
available upon the request of a Limited Partner, the Net Asset Value Per Unit.
2.15 FIDUCIARY DUTY FOR SAFEKEEPING OF FUNDS
The General Partner shall have fiduciary responsibilities for the
safekeeping and use of all funds and assets of the Partnership, whether or not
in its immediate possession or control, and shall not employ or permit another
to employ such funds or assets in any other manner except for the exclusive
benefit of the Partnership.
ARTICLE III
LIMITED PARTNERS
3.1 CAPITAL CONTRIBUTIONS AND PUBLIC OFFERING OF UNITS OF LIMITED PARTNERSHIP
INTEREST
(a) The General Partner, on behalf of the Partnership, shall (i) file
or cause to be filed with the SEC such registration statement(s)
and such amendments thereto as the General Partner deems
advisable from time to time (collectively, the "Registration
Statement"), for the registration of the public offering and sale
of Units of Limited Partnership Interest; (ii) file or cause to
be filed copies of the final prospectus(es) and statement(s) of
additional information included as part of the Registration
Statement (collectively, the "Prospectus and Statement of
Additional Information") with the SEC pursuant to Rule 424(b);
(iii) seek to qualify Units of Limited Partnership Interest for
sale under the securities laws of such states of the United
States or other jurisdictions as the General Partner shall deem
necessary or advisable, and (iv) take such action with respect to
the matters described in subsections (i) through (iii), above, as
it shall deem advisable or necessary.
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(b) The General Partner is authorized to take such actions and make
such arrangements for the sale of the Units of Limited
Partnership Interest as it deems appropriate including, without
limitation, the execution on behalf of the Partnership of a
Selling Agent agreement appointing Berthel Fisher & Company
Investment Services, Inc. (the "Selling Agent") as the
Partnership's selling agent for the offer and sale of the Units
of Limited Partnership Interest as contemplated in the Prospectus
and Statement of Additional Information. The General Partner will
keep copies of all Subscription Agreements / Powers of Attorney
signed by Limited Partners in connection with the public
offerings of the Units of Limited Partnership Interest for a
period of at least six years.
(c) The General Partner may, on behalf of the Partnership and in
accordance with the latest Prospectus and Statement of Additional
Information, issue and sell Units of Limited Partnership Interest
to investors at any time without the consent of the other Limited
Partners. Such additional Limited Partners shall contribute
capital to the Partnership and shall be admitted as Limited
Partners as of the first business day of the month immediately
following the month in which their subscriptions are accepted by
the General Partner; it being understood and agreed, however,
that the General Partner may reject any subscription for Units at
any time and for any reason.
Units of Limited Partnership Interest may be sold as of the last
business day of each calendar month at a purchase price per Unit
equal to the Net Asset Value per Unit (as defined in Section 4.4
hereof) as of the last business day of such month, plus a Sales
Charge of five percent (5%) of the Net Asset Value per Unit for
each Unit purchased.
The General Partner may terminate the offering of Units of
Limited Partnership Interest at any time. The aggregate of all
capital contributions, plus interest thereon, shall be available
to the Partnership to carry on its business, and no interest
shall be paid by the Partnership to any Partner on any such
contribution.
Pursuant to Section 3.5 hereof, the General Partner, in its sole
discretion, may consent to and admit any assignee of Units of
Limited Partnership Interest as a substituted Limited Partner.
(d) All Units of Limited Partnership Interest subscribed for upon
receipt of a check or draft of the subscriber are issued subject
to the collection of the funds represented by such check or
draft. In the event that a check or draft of a subscriber for
Units of Limited Partnership Interest representing payment for
Units of Limited Partnership Interest is returned unpaid, the
Partnership shall cancel the Units of Limited Partnership
Interest issued to such subscriber represented by such returned
check or draft. Any losses or profits sustained by the
Partnership in connection with the Partnership's trading
allocable to such cancelled Units of Limited Partnership Interest
shall be deemed an increase or decrease in Net Asset Value and
allocated among the remaining Partners as described in Article IV
hereof.
(e) The Units are, but need not be evidenced by certificates.
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS
No additional contributions of capital are or shall be required of any
Limited Partner.
3.3 RIGHTS AND OBLIGATIONS
Each Unit of Limited Partnership Interest owned by a Limited Partner
shall be fully paid and non-assessable upon issuance. A Limited Partner shall be
liable for the obligations of the Partnership to the extent of the capital
contributed by such Limited Partner plus the share of undistributed profits, if
any, allocable to such Limited Partner. A Limited Partner who receives a return
of any part of the capital contributed by such Limited Partner to the
Partnership shall be liable to the Partnership for one year thereafter for the
amount of the returned contribution, but only to the extent necessary to
discharge liabilities of the Partnership to creditors who extended credit to the
Partnership during the period that the capital contribution was held by the
Partnership. A Limited Partner shall also be liable to the Partnership for
return of any part of his capital contribution returned to him for a period of
six (6) years thereafter, if such return was in violation of this Agreement or
the Act.
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No Limited Partner shall take part in the management of the business or
transact any business for the Partnership, and no Limited Partner shall have the
power to sign for or bind the Partnership. No salary shall be paid to any
Limited Partner, nor shall any Limited Partner have a drawing account or earn
interest on his contribution once contributed to the capital of the Partnership.
No Limited Partner shall be entitled to the return of his contribution or any
profits with respect thereto except (i) to the extent, if any, that
distributions made, or deemed to be made, pursuant to this Agreement, may be
considered as such by law; (ii) upon dissolution of the Partnership; or (iii)
upon redemption and then only to the extent provided for in this Agreement. No
Limited Partner shall have priority over any other Limited Partner either as to
the return of contributions of capital or as to profits, losses or
distributions. In no event shall a Limited Partner be entitled to demand or
receive property other than cash in return for capital contributed.
3.4 ASSIGNMENT OF LIMITED PARTNERSHIP INTEREST (S)
(a) GENERAL. Each Limited Partner expressly agrees that he will not
transfer, assign or dispose of, by gift or otherwise, any of his
Units of Limited Partnership Interest or any part or all of his
right, title or interest in and to the capital or profits of the
Partnership without giving written notice of the assignment,
transfer or disposition to the General Partner and without
complying with the suitability standards imposed by the
Partnership, applicable laws (including, without limitation,
state securities or Blue Sky laws) and the rules of any other
applicable governmental authority. Each and every transfer,
assignment or disposition of Units of Limited Partnership
Interest shall be subject to all applicable laws (including,
without limitation, state securities or Blue Sky laws). In
addition, the transferor or assignor of such Units shall bear all
costs, including attorneys' fees and disbursements, incurred in
connection with such transfer, assignment or disposition.
(b) EFFECTIVENESS; NOTICE. No such transfer, assignment or
disposition shall be effective against the Partnership or the
General Partner until the General Partner receives the written
notice described below. If a transfer, assignment or disposition
occurs by reason of the death of a Limited Partner or assignee,
such written notice may be given by the duly authorized
representative of the estate of the Limited Partner or assignee
and shall be supported by such proof of legal authority and valid
assignment as may reasonably be requested by the General Partner.
The written notice required by this Section 3.5: (i) shall
specify (A) the name, address and Social Security or taxpayer
identification number of the transferee or assignee, (B) the
number of Units of Limited Partnership Interest transferred or
assigned, and (C) the date of such transfer or assignment, (ii)
shall include a statement by the transferee or assignee that he
agrees to give the above-described written notice to the General
Partner upon any subsequent transfer, assignment or disposition,
(iii) shall contain such other information and be accompanied by
such additional documentation as the General Partner may request,
and (iv) shall be signed by the assignor and transferee or
assignee. The General Partner, in its sole discretion, may waive
receipt of the above-described notice or any defect therein.
Any transfer, assignment or disposition of Units of Limited
Partnership Interest permitted hereunder shall be effective as of
the beginning of the month following the month in which the
General Partner has received notice of such transfer, assignment
or disposition; it being understood, however, that the
Partnership need not recognize any transfer, assignment or
disposition of Units of Limited Partnership Interest until it has
received at least thirty (30) days' prior written notice thereof.
Notwithstanding the foregoing, no transfer, assignment or
disposition of Units of Limited Partnership Interest shall be
effective or recognized by the Partnership if (i) such transfer,
assignment or disposition would be in violation of the Act, (ii)
the amount of the transfer, assignment or disposition (other than
transfers by gift or inheritance or to affiliates, including
members of the transferor's or assignor's immediate family) is
less than the minimum subscription amount, (iii) as a result of
such transfer, assignment or disposition, the Partnership would
no longer be treated as a partnership rather than a corporation
or an association under the Internal Revenue Code, or (iv) as a
result of such transfer or assignment, there would result a
termination of the Partnership for United States Federal income
tax purposes as provided in Section 708(b) of the Internal
Revenue Code.
(c) SUBSTITUTED LIMITED PARTNER. No assignee or transferee of Units
of Limited Partnership Interest shall become a substituted
Limited Partner unless the General Partner consents in writing to
such substitution (which consent may be withheld in the sole and
absolute discretion of the General Partner). A substituted
Limited Partner shall have all the rights and powers and shall be
subject to all the restrictions and liabilities of his assignor.
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Each Limited Partner agrees that, with the consent of the General
Partner, any assignee may become a substituted Limited Partner
without the further act or consent of any Limited Partner. Each
Limited Partner agrees that he has no right to consent to and
will not consent to any person or entity becoming a substituted
Limited Partner, except as set forth in the preceding sentence.
If the General Partner withholds its consent, an assignee shall
not become a substituted Limited Partner and shall not have any
of the rights of a Limited Partner, except that the assignee
shall be entitled to receive that share of the Partnership's
capital and profits, if any, and shall have that right of
redemption to which his assignor would otherwise have been
entitled. An assigning Limited Partner shall remain liable to the
Partnership as provided in the Act, regardless of whether his
assignee becomes a substituted Limited Partner.
3.5 REDEMPTION OF UNITS OF LIMITED PARTNERSHIP INTEREST
(a) GENERAL. A Limited Partner (and the General Partner subject to
Sections 2.7 and 2.11 hereof) or any assignee of Units of Limited
Partnership Interest of whom the General Partner has received
written notice as described in Section 3.5 hereof may withdraw
all or any part of his capital contributions and undistributed
profits, if any, from the Partnership (such withdrawal being
herein referred to as "redemption"), effective as of the last
business day of any calendar month, by requiring the Partnership
to redeem any or all of his Units of Limited Partnership Interest
at the Net Asset Value per Unit (subject to the penalties for
early redemption described below), calculated as of the close of
business (as determined by the General Partner) on the effective
date of redemption; provided that (i) all liabilities, contingent
or otherwise, of the Partnership, except any liability to
Partners on account of their capital contributions, have been
paid or there remains property of the Partnership sufficient to
pay them, and (ii) the General Partner shall have timely received
a Request for Redemption in the form included as Exhibit D to the
Statement of Additional Information. As used herein, Request for
Redemption shall mean a letter in the form specified herein sent
by a Limited Partner (or any assignee of whom the General Partner
has received written notice as described in Section 3.5 hereof)
and received by the General Partner at least ten (10) days (or
such lesser period as shall be acceptable to the General Partner)
in advance of the requested effective date of redemption.
Requests for Redemption that are received by the General Partner
at least ten (10) days prior to the last business day of a
calendar month shall be effected as of the close of business on
the last business day of that month. Requests for redemption that
are received by the General Partner less than ten (10) days prior
to the last business day of a calendar month shall be effected as
of the close of business on the last business day of the
following month. The General Partner may declare additional
redemption dates upon notice to the Limited Partners. Redemptions
of fractional Units of Limited Partnership Interest will be
permitted. The Partnership shall not be obligated to redeem Units
of Limited Partnership Interest that are subject to a pledge or
otherwise encumbered in any fashion.
(b) PAYMENT. Upon redemption, a Limited Partner (or any assignee of
whom the General Partner has received written notice as described
above) shall receive from the Partnership for each Unit of
Limited Partnership Interest redeemed an amount equal to the Net
Asset Value per Unit as of the date of redemption, less (i) any
amount owing by such Partner (or assignee) to the Partnership,
and (ii) any applicable redemptions fees due under Section 3.5(f)
hereof. Redemption payments shall be made within twenty (20) days
following the date of redemption. Under special circumstances,
however, including but not limited to the inability of the
Partnership to liquidate its commodity positions or defaults or
delays in payments due to the Partnership from banks or other
persons, the Partnership may delay payment to Partners requesting
redemptions of Units of the proportionate part of the Net Asset
Value thereof represented by the sums which are the subject of
such inability to liquidate its positions, default or delay. If
the General Partner delays redemption payments for any reason,
the General Partner shall cause payments to resume as soon as
practicable and shall be make redemption payments in the order in
which the requests for redemption were received. The General
Partner shall notify any Limited Partner or assignee of Units who
requests redemption within ten (10) days after the date of
redemption if payment will be delayed.
(c) REDEMPTIONS BY ASSIGNEES. If a redemption is requested by an
assignee, all amounts owed under Section 3.5(f) by the Partner to
whom such Unit was sold by the Partnership as well as all amounts
owed by all assignees who owned such Unit shall be deducted from
the amount paid to such assignee upon redemption of his Units of
Limited Partnership Interest. An assignee shall not be entitled
to redemption until the General Partner has received written
notice (as described in Section 3.5 hereof) of the assignment,
transfer or disposition under which the assignee claims an
interest in the Units of Limited Partnership Interest to be
redeemed and shall have no claim against the Partnership or the
General Partner with respect to distributions or amounts paid on
redemption of Units of Limited Partnership Interest prior to the
receipt by the General Partner of such notice.
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(d) REDEMPTIONS UPON NOTICE OF SUBSTANTIAL DECLINE. If (i) the Net
Asset Value per Unit (increased by the amount of distributions
per Unit, if any) on any business day during any given fiscal
year decreases to or below 50% of the Net Asset Value per Unit as
of the beginning of the fiscal year, and such 50% decrease
results in a Net Asset Value per Unit of less than $1,000, or
(ii) if the Net Asset Value per Unit (increased by the amount of
distributions per Unit, if any) decreases on any business day to
or below $350, the Partnership will liquidate all open positions
as expeditiously as possible and suspend trading. Within ten (10)
business days after the date of the suspension of trading, the
General Partner shall either give notice to the Limited Partners
of its intention to withdraw from the Partnership or shall
declare a special redemption date. Such special redemption date,
if declared, shall be a business day within thirty (30) business
days from the date of suspension of trading by the Partnership,
and the General Partner shall mail notice of such date to each
Limited Partner by first class mail, postage prepaid, not later
than ten (10) business days prior to such special redemption
date, together with instructions as to the procedure such Limited
Partner must follow to have his Units redeemed on such date by
the Partnership, if such Limited Partner so desires. No
redemption fees would be due in respect of a Unit redeemed on the
special redemption date. If, after such special redemption date,
the Partnership's Net Asset Value is at least 50% of the
Partnership's Net Asset Value on the close of business on the day
before the special redemption date, the Partnership will resume
trading unless the General Partner elects to withdraw from the
Partnership. If, after such special redemption date, the
Partnership's Net Asset Value is less than 50% of the Net Asset
Value of the close of business on the day before the special
redemption date, the Partnership shall terminate and dissolve in
accordance with the provisions of Article V hereof.
(e) MANDATORY REDEMPTION(S). If and to the extent necessary to ensure
that the assets of the Partnership are not considered "plan
assets" for purposes of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), the General Partner may redeem
all or a portion of the Units held by one or more Limited
Partners without the consent of such Limited Partners at the Net
Asset Value per Unit without the imposition of any redemption
fee. Such redemption may be effected from time to time in any
manner deemed reasonable in the sole discretion of the General
Partner, provided, however, that the General Partner will use its
best efforts to cause a redemption of Units of Limited
Partnership Interest on a pro rata basis among all "benefit plan
investors" in an amount sufficient to reduce the number of Units
of Limited Partnership Interest held by all of them to not more
than 24.9%. For purposes of this Section, a "benefit plan
investor" shall mean a Limited Partner who is (i) an "Employee
Benefit Plan," as defined in Section 3(3) of ERISA; (ii) a plan
described in Section 4975(e)(1) of the Internal Revenue Code; or
(iii) a partnership, the general partner of which has been
appointed "investment manager," as defined in Section 3(38) of
ERISA, over the assets used by one or more Employee Benefit Plans
to purchase limited partnership interests in such partnership.
(f) REDEMPTION FEES. Except as set forth in Sections 3.5(d) and (e)
hereof, this Section 3.5(f) or as otherwise waived by the General
Partner in its discretion, an early redemption fee equal to a
percentage of the Net Asset Value of the Units of Limited
Partnership Interests redeemed (the "Redemption Fee") shall be
charged by the Partnership in the case of redemptions of Units of
Limited Partnership Interest that are effected as of or before
the end of the twelfth (12th) full calendar month after their
purchase. The Redemption Fee shall be four percent (4%) of the
Net Asset Value of the Units of Limited Partnership Interest
redeemed for such redemptions occurring as of or before the end
of the third (3rd) full calendar month after their purchase;
three percent (3%) of the Net Asset Value of the Units of Limited
Partnership Interest redeemed for such redemptions occurring as
of or before the end of the sixth (6th) full calendar month after
their purchase; two percent (2%) of the Net Asset Value of the
Units of Limited Partnership Interest redeemed for such
redemptions occurring as of or before the end of the ninth (9th)
full calendar month after their purchase; and one percent (1%) of
the Net Asset Value of the Units of Limited Partnership Interest
redeemed for such redemptions occurring as of or before the end
of the twelfth (12th) full calendar month after their purchase.
There shall be no Redemption Fee charged with respect to Units of
Limited Partnership Interest redeemed after the twelfth (12th)
full calendar month after their purchase. Notwithstanding the
foregoing and in order to assure each Limited Partner the
availability of funds to pay taxes on each year's profits, if
any, the redemption fee will be waived on redemptions of Units to
the extent, if any, distributions in the first quarter on a
calendar year are less than thirty-five (35%) of the profits
reportable to a Limited Partner for the prior year. Redemption
Fees received by the Partnership will be paid over by the
Partnership to the General Partner to reimburse the General
Partner for the payment by the General Partner of the
Partnership's organizational, initial offering and operating
expenses payable by the General Partner.
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3.6 MAINTENANCE OF RECORDS AND BOOKS OF ACCOUNT
(a) BOOKS OF ACCOUNT AND RECORDS. The General Partner shall keep and
retain for at least six (6) years such books of account and
records relating to the business of the Partnership as it deems
necessary or advisable (including without limitation to
substantiate the efforts of the Partnership to ensure that Units
were sold only to purchasers for whom an investment in the Units
was suitable) and as are required by the Commodity Exchange Act,
as amended (the "CE Act") and the rules and regulations
promulgated thereunder. Such books of account and records shall
be kept at the Partnership's principal place of business, and
each Limited Partner (or any duly constituted designee of a
Limited Partner) shall at all times during reasonable business
hours have free access to and the right to inspect and copy said
books. The books of accounts and records of the Partnership shall
be kept on an accrual basis of accounting in accordance with
generally accepted accounting principles, consistently applied.
The books of account or financial statements of the Partnership
shall be audited at least annually at the Partnership's expense
by an independent public accountant to be selected by the General
Partner.
(b) UNIT-HOLDER LISTS. The General Partner shall also maintain at the
principal office of the Partnership a list of the names and
addresses of, and the number of Units of Limited Partnership
Interest owned by, all of the Limited Partners at the
Partnership's principal office, and the General Partner shall
make such list available for review by any Limited Partner or his
personal representative at the offices of the Partnership at
reasonable times upon request or by mail upon payment of the
costs of reproduction and mailing, provided, however, that such
list shall not be used by any Limited Partner for commercial
purposes.
ARTICLE IV
PROFIT AND LOSS
4.1 CAPITAL ACCOUNTS
The Partnership shall establish for each Partner, and maintain in
accordance with the terms of this Agreement, a capital account. The initial
balance of each Partner's capital account shall be the amount of the initial
cash contribution to the Partnership of such Partner.
4.2 ADJUSTMENTS TO CAPITAL ACCOUNTS
As of the close of business (as determined by the General Partner in its
sole discretion) on the last business day of each calendar month, the General
Partner shall make the following calculations, payments and allocations and
shall redeem and accept subscriptions for Units, each in the following order:
(a) the Management Fee (as defined in Section 4.4 hereof) earned with
respect to such month shall be calculated and paid; the
Continuing Services Fee (as defined in Section 4.4 hereof) earned
with respect to such month shall be calculated and paid; other
expenses of and reimbursements by the Partnership shall be
calculated and paid; and any costs of indemnification to the
extent permitted under Section 2.5 shall be paid;
(b) Net Assets (as defined in Section 4.4 hereof) shall be
calculated;
(c) the amount of any Incentive Allocation (as defined in Section 4.4
hereof) shall be calculated and credited to the capital account
of the General Partner;
(d) any increase (less the amount of any Incentive Allocation) or
decrease in Net Assets shall be credited or charged to the
capital accounts of the Partners in the ratio that the capital
account of each Partner bears to the capital accounts of all
Partners;
(e) the amount of any distributions or any withdrawn capital during
such month, and the amount of any redemption payments in such
month shall be charged to the capital accounts of the relevant
Partners;
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(f) Net Asset Value (as defined in Section 4.4 hereof) shall be
calculated;
(g) redemptions of Units shall be effected;
(h) Syndication Fees / Sales Charges (as defined in Section 4.4
hereof) shall be calculated and paid with respect to any
subscriptions for Units that the General Partner intends to
accept during such month; and
(i) Subscriptions for Units shall be accepted in the sole discretion
of the General Partner.
4.3 ALLOCATION OF PROFIT AND LOSS
At the end of each taxable year, each item of Partnership income, gain,
loss, deduction and credit shall be allocated among the Partners in accordance
with the following provisions:
(a) Capital Gain (as defined in Section 4.4 hereof) shall be
allocated first to each Partner who has redeemed all of his Units
or withdrawn all of his capital during the year to the extent
that the amount the Partner received on redemption exceeded the
amount paid for the redeemed Units or to the extent of the
withdrawn capital;
(b) Capital Gain shall be allocated second to each Partner who has
redeemed some of his Units or withdrawn some of his capital
during the year to the extent that the amount that such Partner
received on redemption exceeded the amount paid for the redeemed
Units or to the extent of the withdrawn capital;
(c) Capital Gain remaining after the allocations in Sections 4.3(a)
and 4.3(b) hereof shall be allocated among the Partners in the
ratio that the capital account of each Partner bears to the
capital accounts of all Partners;
(d) Capital Loss (as defined in Section 4.4 hereof) shall be
allocated first to each Partner who has redeemed all of his Units
or withdrawn all of his capital during the year to the extent
that the amount that the Partner paid for the redeemed Units
exceeded the amount that the Partner received on redemption;
(e) Capital Loss shall be allocated second to each Partner who has
redeemed some of his Units or withdrawn some of his capital
during the year to the extent that the amount that the Partner
paid for the redeemed Units exceeded the amount that the Partner
received on redemption;
(f) Capital Loss remaining after the allocations in Sections 4.3(d)
and (e) hereof shall be allocated among the Partners in the ratio
that the capital account of each Partner bears to the capital
accounts of all Partners;
(g) For the purpose of the allocations of Capital Gain and Capital
Loss in Sections 4.3(a), (b), (d) and (e) hereof, the amount that
each Partner paid for each of his Units shall be deemed to have
been increased by the amount of Capital Gain allocated to such
Partner with respect to such Unit pursuant to Section 4.3(c)
hereof or ordinary income allocated pursuant to Section 4.3(h)
hereof, to have been decreased by the amount of any Capital Loss
allocated to such Partner with respect to such Unit pursuant to
Section 4.3(f) hereof or ordinary expense allocated pursuant to
Section 4.3(h) hereof and to have decreased by the amount of any
distributions to such Partner with respect to such Unit pursuant
to Section 2.9 hereof;
(h) Items of ordinary income and expense shall be allocated among the
Partners in the ratio that the capital account of each Partner
bears to the capital account of all Partners;
(i) Notwithstanding Sections 4.3(e), (f) and (h) hereof, to the
extent that an allocation of Capital Loss or expense would cause
the capital account of a Limited Partner to have a deficit
balance, then such loss or expense shall be allocated to the
capital account of the General Partner; and
(j) Allocations of Capital Gain or Capital Loss shall be made PRO
RATA from each category of Capital Gain or Capital Loss
determined under Section 1(h) of the Internal Revenue Code and
income or loss determined under Section 988 of the Internal
Revenue Code.
The allocation of profit and loss for federal income tax purposes set
forth herein allocates taxable profit and loss among the Partners in the ratio
and to the extent that financial profit and loss are allocated to such Partnerss
and so as to eliminate, to the maximum practicable extent, any disparity between
a Partner's capital account and its tax account, consistent with principles set
forth in Section 704 of the Code, including without limitation a "Qualified
Income Offset." The allocations of profit and loss to the Partners shall not
exceed the allocations permitted under Subchapter K of the Code, as determined
by the General Partner, whose determination shall be binding
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4.4 DEFINITIONS
For purposes of this Article IV, the following terms shall have the
following meanings:
(a) "CONTINUING SERVICES FEE" shall mean a fee charged to each Unit
equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value
per Unit of the Partnership's assets under management as of the
close of business on the last day of each month (without
reduction for distributions or redemptions effected as of such
date or management fees or incentive fees payable as of such
date) with respect to Units purchased within the prior twelve
(12) month period and 1/12 of 4% of the Net Asset Value per Unit
of the Partnership's assets under management as of the close of
business on the last day of each month (without reduction for
distributions or redemptions effected as of such date or
management fees or incentive fees payable as of such date) with
respect to Units purchased more than twelve (12) months prior
thereto. Such Continuing Services Fee shall be paid to the
Selling Agent and certain selected dealers and their respective
registered representatives in return for their continuing
services to the Partnership and the Limited Partners solicited by
them. Such services include, without limitation, keeping the
Limited Partners apprised of developments affecting the
Partnership, responding to specific inquiries received from
Limited Partners relating to the Partnership and the commodity
markets, communicating current valuations of the Partnership's
Net Asset Value per Unit to the Limited Partners, assisting in
redemptions, transfers and distributions, assisting Limited
Partners in interpreting the Partnership's monthly and annual
reports, financial statements and the tax information provided to
Limited Partners, and providing such other services as the
Limited Partners from time to time may reasonably request.
With respect to each of the first twelve (12) month-ends during
which a Unit is outstanding, the Continuing Services Fee
attributable to such Unit shall be paid (i) twenty percent (20%)
to the Selling Agent, and (ii) eighty percent (80%) to the
selected dealers and their respective registered representatives
that solicited the Limited Partner's subscription. After a Unit
has been outstanding for twelve (12) month-ends, the preceding
sentence shall be amended so that the Continuing Services Fee
attributable to such Unit shall be paid twenty-five percent (25%)
to the Selling Agent and seventy-five (75%) to the selected
dealers and their respective registered representative that
solicited the Limited Partner's subscription. Notwithstanding the
foregoing, such Continuing Services Fee shall be paid only to, or
for the benefit of, persons who are registered with the CFTC
and/or the National Futures Association ("NFA") as futures
commission merchants or introducing brokers. In the event that
the Selling Agent or any selected dealer is not registered with
the CFTC and/or the NFA as futures commission merchants or
introducing brokers, the Selling Agent's and such selected
dealers' portions(s) of such Continuing Services Fee shall be
paid to the General Partner.
(b) "CAPITAL GAIN" or "CAPITAL LOSS" shall mean gain or loss
characterized as gain or loss from the sale or exchange of a
capital asset by the Internal Revenue Code, including without
limitation gain or loss required to be taken into account
pursuant to Sections 988 and 1256 of the Internal Revenue Code.
(c) "MANAGEMENT FEE" shall mean a fee equal to 1/12 of 3.75% of the
Net Asset Value per Unit of the Partnership's asset under
management as of the close of business on the last day of each
month with respect to Units purchased within the prior twelve
(12) month period and 1/12 of 1% of the Net Asset Value per Unit
of the Fund's assets under management as of the close of business
on the last day of each month with respect to Units purchased
more than twelve (12) months prior thereto which shall be paid to
the Advisor.
(d) "NET ASSETS" shall mean the total assets, less total liabilities,
of the Fund determined on the basis of generally accepted
accounting principles. Net Assets shall include any unrealized
profits or losses on open positions, and any fee or expense
including net asset fees accruing to the program.
(e) "NET ASSET VALUE" of the Partnership shall mean the total capital
accounts of all Partners. The "Net Asset Value" of a Unit shall
be the total capital accounts of all Partners, divided by the
number of Units owned by all Partners.
(f) "SYNDICATION FEE / SALES CHARGE" shall mean a fee, calculated and
paid immediately prior to the acceptance of a subscription, equal
to five percent (5%) of the subscription amount for a Unit. The
Syndication Fee / Sales Charge attributable to such Unit shall be
paid (i) twenty percent (20%) to the General Partner, and (ii)
eighty percent (80%) to the Partnership's selling agent, who in
turn may pay up to seventy-five percent (75%) of its Syndication
Fee / Sales Charge to the selected dealer that solicited the
subscription pursuant to the terms of any selected dealer
agreement entered into from time to time between the
Partnership's selling agent and such selected dealer.
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(g) "INCENTIVE ALLOCATION" shall mean a quarterly special allocation
to the Advisor equal to fifteen percent (15%) of the New Trading
Profits.
(h) "NEW TRADING PROFITS" shall mean the excess, if any, of Net
Assets on the last business day of the Valuation Period over Net
Assets on the last business day of the highest previous Valuation
Period or Net Assets at the date trading commences, whichever is
higher, and as further adjusted to eliminate the effect on Net
Assets resulting from new capital contributions, redemptions, or
capital distributions, if any, made during the period decreased
by interest or other income, not directly related to trading
activity, earned on Fund assets during the period, whether the
assets are held separately or in margin account.
(i) "VALUATION PERIOD" shall mean the preceding calendar quarter.
4.5 EQUITABLE ALLOCATIONS
The General Partner may make such other or additional allocations of
income, gain, loss and deduction among the Units as are, in the General
Partner's reasonable discretion, equitable in order to allocate income, gain,
loss and deduction for Federal income tax purposes among the Partners in
accordance with their respective interest in the Partnership.
ARTICLE V
TERMINATION
5.1 DISSOLUTION
The Partnership shall terminate and be dissolved immediately upon (i) the
conclusion of the Initial Offering Period without the sale or acceptance of at
least 1,000 Units of Limited Partnership Interest, (ii) the withdrawal of the
General Partner, as defined in, and subject to the limitation of Section 2.11
hereof, (iii) an election to dissolve the Partnership in accordance with the
provisions of Section 6.1 hereof by Limited Partners owning more than fifty
percent (50%) of the Units of Limited Partnership Interest, (iv) a reduction in
Net Asset Value of the Partnership following a substantial decline in the Net
Asset Value per Unit as more fully described in Section 3.5(d) hereof, (v) a
determination by the General Partner that the purpose of the Partnership cannot
be fulfilled; and (vi) any event that constitutes a dissolution of a limited
partnership under the Act or otherwise makes it unlawful for the existence of
the Partnership to be continued. The General Partner shall give, prior to its
voluntary withdrawal, one hundred twenty (120) days' prior notice to all Limited
Partners pursuant to Section 2.11 hereof, who may within such period elect
substitute general partner(s) in accordance with Section 6.2 hereof and continue
the Partnership. Unless earlier terminated as specified above or by operation of
law, the Partnership shall terminate on December 31, 2025.
The death, incompetence, incapacity, legal disability, bankruptcy,
insolvency, dissolution or withdrawal of any Limited Partner shall not result in
the dissolution or termination of the. Partnership, and such Limited Partner, or
the estate, custodian or personal representative thereof, shall have no right to
withdraw as a limited partner of the Partnership or to have his Units redeemed
except as provided in Section 3.5 hereof. Upon the death or legal disability of
a Limited Partner, his interest in the Partnership shall pass to his legal
representatives. Each Limited Partner (and any assignee of such Limited
Partner's interest) expressly agrees that, in the event of his death, he waives
on behalf of himself and his estate, and he directs the legal representative of
his estate and any person interested therein to waive, the furnishing of any
inventory, accounting or appraisal of the assets of the Partnership and any
right to a special audit or examination of the books and records of the
Partnership.
5.2 FINAL ACCOUNTING
Upon the dissolution of and failure to reconstitute the Partnership, an
accounting shall be made of the accounts of the Partnership, the capital
accounts of each Unit, and the Partnership's assets, liabilities and operations
from the date of the last previous accounting to the date of such dissolution.
Thereupon, the General Partner (or in the event that the dissolution is caused
by the legal disability, bankruptcy, dissolution, liquidation or withdrawal of
the General Partner, such person as may be designated by the holders of a
majority of the then outstanding Units of Limited Partnership Interest, not
including Units of Limited Partnership Interest held by the General Partner)
shall act as liquidating trustee and immediately proceed to wind up and
terminate the business and affairs of the Partnership and to liquidate the
property and assets of the Partnership.
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5.3 DISTRIBUTION
Upon the winding up and termination of the business and affairs of the
Partnership, its liabilities and obligations to creditors and all expenses
incurred in its liquidation shall be paid, and its remaining assets shall be
distributed to the Partners in accordance with their capital accounts as
determined under Article IV hereof.
5.4 USE OF FIRM NAME UPON DISSOLUTION
At no time during the operation of the Partnership or upon the
termination of and dissolution of the Partnership shall any value be placed on
the firm name, the right to its use, or the goodwill, if any, attached thereto,
either between the Partners or for the purpose of determining any distributive
interest of any Partner in accordance with this Agreement.
5.5 BALANCE OWED BY A PARTNER
No Limited Partner shall be required to restore any deficit balance in
such Limited Partner's Capital account.
ARTICLE VI
MISCELLANEOUS
6.1 MEETINGS
Meetings of the Partnership for purposes of amending this Agreement or
taking any action permitted to be taken by the Limited Partners under this
Agreement may be called by the General Partner and shall, subject to the
limitations imposed by the final sentence of this Section 6.1, be called by it
when requested in writing by the Limited Partners holding ten percent (10%) or
more of the Units of Limited Partnership Interest. The General Partner shall
deposit the call in the United States mail within fifteen (15) days after
receipt of such written requests from the requisite percentage of the Limited
Partners. The call shall state the date, place, time and purpose of such
meeting, setting forth any amendments to this Agreement proposed to be adopted,
and no other business shall be conducted at such meeting except as set forth in
the call. The meeting shall be held no less than thirty (30) and no more than
sixty (60) days after the date of the mailing of the call. The Limited Partners
may vote in person or by proxy at any such meeting. In the event that the
Partnership is required to comply with Regulation 14A under the Securities
Exchange Act of 1934 (the so-called "Proxy Rules") or any successor regulation,
the foregoing time periods may be altered by the General Partner so as not to
conflict therewith.
6.2 AMENDMENTS
(a) Amendments to this Agreement may be proposed by the General
Partner or by Limited Partners owning not less than ten percent
(10%) of the Units of Limited Partnership Interest. Within thirty
(30) days following such proposal, the General Partner shall
submit the proposed amendment to the Limited Partners together
with an opinion of counsel as to the legality of such amendment
and its effect on the Limited Partners for the Partnership's
debts. The General Partner shall make its recommendation with
regard to each such proposal advanced by any Limited Partner. A
simple majority of the Units of Limited Partnership Interest
outstanding (not including Units of Limited Partnership Interest
held by the General Partner) shall be required to pass an
amendment; provided, however, that no such amendment shall (i)
change or alter the terms of this Section 6.2, (ii) cause the
Partnership to become a general partnership, (iii) change the
liability of the General Partner or the Limited Partners, (iii)
reduce the capital account of any Partner, (iv) modify the
percentage of profits, losses or distributions to which any
Partner is entitled, or (v) extend the duration of the
Partnership, in each case without the consent of the General
Partner and all of the Limited Partners. For purposes of
obtaining a written vote, the General Partner may require
response within a specified time.
(b) Notwithstanding any provision to the contrary contained herein,
the General Partner may, without the consent of the Limited
Partners, make such amendments to this Agreement as are
necessary:
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(i) to reflect the admission of an additional or substitute
general partner;
(ii) to change the name of the Partnership;
(iii) to effect any other minor change that the General Partner
deems advisable, so long as such amendment is not adverse to
the Limited Partners and does not alter the basic investment
policies and structure of the Partnership, or that is
required by law;
(iv) to clarify any inaccuracy or ambiguity, to correct or
supplement any provision herein which may be inconsistent
with any other provision herein or otherwise (including any
inconsistency between this Agreement and the Prospectus or
Statement of Additional Information), or to make any other
provisions with respect to matters or questions arising
under this Agreement which will not be inconsistent with the
provisions of this Agreement;
(v) to delete from or add to this Agreement any provision
required to be so deleted or added by representatives of the
SEC, the CFTC or any other government authority (including
state securities or Blue Sky administrators) having
jurisdiction over activities of the Partnership, which
addition or deletion is deemed by such agency, authority or
administrators to be for the benefit or protection of the
Limited Partners;
(vi) to attempt to ensure that the Partnership is not treated as
an association taxable as a corporation for federal income
tax purposes;
(vii) to modify, with respect to a taxable year ending after the
date of such amendment or for which a tax return of the
Partnership has not yet been filed, and to the extent
permitted by law, any provision concerning the allocation of
profits and losses for Federal income tax purposes, if such
modification is deemed, in the General Partner's discretion,
necessary to promote an equitable treatment among the
Partners with respect to such allocations, as measured by
the degree to which the profits and losses allocated to them
for tax purposes reflect the actual increase or decrease in
the value of their investments;
(viii)to effect the intent of the tax allocations proposed
herein, including without limitation the allocation of
Capital Gain and Capital Loss on a net rather than a gross
basis, to the maximum extent possible in the event of a
change in the Code or the interpretations thereof affecting
such allocations;
(ix) to effect any other change that is appropriate or necessary,
in the opinion of the General Partner, to prevent the
Partnership or the General Partner or its controlling
persons from in any manner being subject to the provisions
of the Investment Company Act of 1940, as amended, or the
"plan asset" regulations adopted under ERISA as a result of
their association with the Partnership; and
(x) to add to the representations, duties or obligations of the
General Partner or surrender any right or power granted to
the General Partner herein for the benefit of the Limited
Partners.
(c) Notwithstanding anything to the contrary contained herein, (i)
this Agreement may be amended without the consent of the General
Partner in accordance with and only to the extent permissible
under the Act; PROVIDED that consent of all Limited Partners
shall be required in the case of amendments requiring the consent
of all Limited Partners under the Act, (ii) the Partnership may
be dissolved, (iii) all or substantially all of the Partnership
assets may be sold or pledged, (iv) the General Partner may be
removed from office and replaced, (v) a new general partner may
be elected if the General Partner withdraws from the Partnership,
or (vi) any contract between the Partnership and the General
Partner or any of its affiliates may be cancelled upon not more
than sixty (60) days' prior written notice and without penalty,
in each case by the affirmative vote of the holders of a simple
majority of the Units of Limited Partnership Interest (not
including any Units of Limited Partnership Interest held by the
General Partner), at a meeting called and conducted in accordance
with Section 6.1 hereof. However, nothing contained in this
Section 6.2(c), or in any other section of this Agreement, shall
imply that the Limited Partners have any rights of management or
control over the operations of the Partnership.
If an action described in the first sentence of subsection (iv)
or (v) of this Section 6.2 (c) is taken, the General Partner
shall withdraw from the Partnership and shall receive the
proportionate share of the Net Assets attributable to its general
partnership interest as of the close of business on the last
business day of the month in which the withdrawal is effective.
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(d) Upon any amendment of this Agreement, the Certificate of Limited
Partnership shall also be amended if necessary to reflect such
amendment.
(e) The General Partner may not make a material change in the basic
investment policy or structure unless it shall first obtain the
affirmative vote of the holders of a simple majority of the Units
of Limited Partnership Interest.
6.3 ANNUAL REPORTS AND MONTHLY STATEMENTS
(a) As required by the CE Act, the General Partner shall furnish each
Limited Partner with unaudited monthly statements as of the end
of each calendar month and with an audited annual report
containing financial statements certified by an independent
public accountant as of the end of each fiscal year. The General
Partner shall also furnish each Limited Partner with such other
reports and information (and in such detail) as are required to
be given to the Limited Partners by the CFTC or any other
governmental authority which has jurisdiction over the activities
of the Partnership and as the General Partner, in its sole
discretion, deems necessary or appropriate.
(b) Annual reports shall be transmitted to the Limited Partners
within ninety (90) days after the close of the Partnership's
fiscal year (unless a shorter period is provided by applicable
law or regulations) containing financial statements of the
Partnership certified by an independent public accountant
including a balance sheet as of the end of the fiscal year and
statements of income, Partners' equity, and changes in financial
position for the year then ended, all of which shall be prepared
in accordance with generally accepted accounting principles, and
a statement showing the total fees, compensation, brokerage
commissions and expenses of the Partnership, segregated as to
type. Appropriate tax information (adequate to enable each
Limited Partner to complete and file his United States Federal
income tax return) shall be delivered to each Limited Partner no
later than the fifteenth (15th) day of the third month following
the end of each fiscal year.
6.4 ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties hereto
with respect to the transactions contemplated by this Agreement and supersedes
all prior arrangements or understandings with respect thereto.
6.5 DESCRIPTIVE HEADINGS
The descriptive headings of this Agreement are for convenience only and
shall not control or affect the meaning or construction of any provision of this
Agreement.
6.6 NOTICES
All notices or other communications required or permitted to be given
pursuant to this Agreement shall be in writing and shall be considered properly
given or made if delivered personally or mailed by registered mail, postage
prepaid, return receipt requested, or if telegraphed by prepaid telegram and
confirmed by written notice mailed contemporaneously as aforesaid, and
addressed, if to the General Partner, to it at 925 Westchester Avenue, White
Plains, NY 10604 and if to a Limited Partner, to the address set forth below
such Limited Partner's signature on the execution page hereof. Notwithstanding
the foregoing, Requests for Redemption and notices of transfer, assignment or
disposition of Units of Limited Partnership Interest shall be effective upon
receipt by the Partnership or the General Partner; and reports by the General
Partner to the Limited Partners may be mailed by unregistered first class mail,
postage prepaid, return receipt not requested. Any Limited Partner may change
his address by giving notice in writing to the General Partner stating his new
address, and the General Partner may change its address by giving such notice to
all the Limited Partners. Commencing on the tenth (10th) day after the giving of
such notice, such newly designated address shall be such Partner's or Partners'
address for the purpose of all notices or other communications required or
permitted to be given pursuant to this Agreement.
6.7 GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW;
PROVIDED THAT THE FOREGOING CHOICE OF LAW SHALL NOT RESTRICT THE APPLICATION OF
ANY STATE'S SECURITIES LAWS TO THE SALE OF UNITS TO ITS RESIDENTS OR WITHIN SUCH
STATE.
A-18
6.8 ILLEGALITIES
In the event that any provision contained in this Agreement shall be
determined to be invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and the remaining provisions of this Agreement shall not, at the
election of the party for whose benefit the provision exists, be in any way
impaired.
6.9 BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the
Partners, their respective legal representatives, successors, heirs and
permitted assigns. Any person hereafter admitted to the Partnership as a general
partner or a Limited Partner shall be subject to all of the provisions of this
Agreement as if an original signatory thereto.
6.10 THIRD PARTY RIGHTS
Notwithstanding any other provision of this Agreement, this Agreement
shall not create benefits on behalf of any third party, and this Agreement shall
be effective only as between the parties hereto and their respective legal
representatives, successors, heirs and permitted assigns.
6.11 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute on and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SHAFFER ASSET MANAGEMENT, INC.
By: /S/ DANIEL S. SHAFFER
---------------------------------------
Daniel S. Shaffer
PRESIDENT
LIMITED PARTNERS
Daniel S. Shaffer as attorney-in-fact for the
Limited Partners who have agreed by separate
instrument to be a party hereto.
/S/ DANIEL S. SHAFFER
---------------------------------------
Daniel S. Shaffer
EXHIBIT B
SUBSCRIPTION REQUIREMENTS
GENERAL SUITABILITY REQUIREMENTS
Unless the subscriber is a resident of a state listed below, the
subscriber must have net worth of at least $225,000, exclusive of home,
furnishings and automobiles, or an annual gross income of at least $60,000 and a
net worth similarly calculated of at least $60,000, and the investment of the
subscriber in the Fund must not constitute more than 10% of the net worth,
exclusive of home, furnishings and automobiles, of the subscriber.
ADDITIONAL STATE LAW SUITABILITY REQUIREMENTS
Some jurisdictions impose additional requirements on subscribers, which
requirements may change from time to time. The descriptions below are based on
unofficial compilations of the blue-sky laws believed to be accurate on the date
of the accompanying Prospectus and this Statement of Additional Information.
Subscribers who are residents of the following states represent and warrant that
they meet the following additional requirements imposed by such states, in each
case excluding from their net worth the value of their home, furnishings and
automobiles:
IOWA: Net worth of at least $350,000 or a net worth of at least
$100,000 and $100,000 taxable income.
KANSAS: Net worth of at least $350,000 or a net worth of at least
$100,000 and $100,000 taxable income.
MISSOURI: Net worth of at least $350,000 or a net worth of at least
$100,000 and $100,000 taxable income.
NORTH CAROLINA: Net worth of at least $350,000 or a net worth of at
least $100,000 and $100,000 taxable income.
NEBRASKA AND TEXAS: Net worth, or joint net worth with spouse, that
exceeds $1,000,000 or income in excess of $200,000 in each of the two most
recent years or a joint income with spouse in excess of $300,000, and a
reasonable expectation of income of a similar level in the current year.
ERISA REQUIREMENTS
If a subscriber in the Fund is acting on behalf of an "employee benefit
plan" as defined in and subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or a "plan" as defined in Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code"), the individual signing
the Subscription Agreement / Power of Attorney as plan fiduciary further
represents and warrants, on behalf of the subscriber, to the Fund, the General
Partner, the Selling Agent, the selected dealer(s) that solicited the
subscription, and ADM Investor Services that:
o the plan fiduciary has considered an investment in the Fund for such plan
in light of the risks relating thereto;
o the plan fiduciary has determined that, in view of such considerations, the
investment in the Fund is consistent with the responsibilities of the plan
fiduciary under ERISA;
o an investment in the Fund does not violate and is not otherwise
inconsistent with the terms of any legal document constituting the plan or
any trust agreement thereunder;
o an investment in the Fund has been duly authorized and approved by all
necessary parties;
o none of the General Partner, the Advisor, the Selling Agent, the selected
dealer(s) that solicited the subscription, or any of their respective
affiliates, agents or employees:
- has investment discretion with respect to the plan assets;
- has authority or responsibility to give or regularly gives investment
advice with respect to the plan assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary
basis for investment decisions with respect to the plan assets and
that such advice will be based on the particular investment needs of
the plan; or
- is an employer maintaining or contributing to the plan;
o the plan fiduciary:
- is authorized to make, and is responsible for, the decision to invest
in the Fund, including the determination that the investment is
consistent with the requirement imposed by Section 404 of ERISA that
plan investments be diversified so as to minimize the risks of large
losses;
B-1
- is independent of the General Partner, the Advisor, the Selling Agent,
the selected dealer(s) that solicited the subscription, ADM Investor
Services, and their respective affiliates, agents and employees; and
- is qualified to make the investment decision.
At the request of the General Partner, the plan fiduciary agrees to
furnish the General Partner with any information reasonably required by the
General Partner to establish that the purchase of the Units by the plan does not
violate any provision of ERISA or the Internal Revenue Code, including without
limitation those provisions relating to "prohibited transactions" by "parties in
interest" or "disqualified persons."
FIDUCIARY ACCOUNTS
In the case of a subscription on behalf of a fiduciary account, the
account beneficiary must meet the subscription requirements. However, in a case
where a donor or grantee directly or indirectly supplies the funds to purchase
the Units, and the donor or grantee acts as the fiduciary for the account, then
the donor or grantee may meet the subscription requirements.
B-2
EXHIBIT C
SUBSCRIPTION INSTRUCTIONS FOR
SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY
Prospective investors in Shaffer Diversified Fund, LP (the "Fund") should
carefully read and review a copy of the Fund's most recent Prospectus and
Statement of Additional Information. In addition, the Prospectus and Statement
of Additional Information should be accompanied by the most recent monthly
report of the Fund.
1. Enter the total dollar amount being invested on LINE 1. Initial minimum
investment: $10,000 in Units ($5,000 in Units in the case of any pension,
profit-sharing or other employee benefit plan qualified under Section 401
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue
Code"), IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee
Pension - IRA plans and retirement and deferred compensation and annuity
plans and trusts used to fund those plans, including but not limited to,
those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue
Code. Subsequent minimum investment: $1,000.
2. If a customer securities account is to be debited for the investment, enter
the account number on LINE 2.
3. Enter the Social Security or Taxpayer Identification Number of the
subscriber on LINE 3, and check the appropriate box to indicate ownership
type. For individual retirement accounts, enter the Social Security Number
of the subscriber and the Taxpayer Identification Number of the custodian.
4. Check the box in LINE 4 if this investment is an addition to an existing
account, and complete the account number.
5/6. Enter the name of the subscriber on LINE 5. For UGMA/UTMA accounts, enter
the name of the minor on LINE 5, followed by "minor," and enter the name of
the custodian on LINE 6. For trusts, enter the name of the trust on LINE 5
and the name(s) of the trustee(s) on LINE 6. For corporations, partnerships
and estates enter the name of the entity on LINE 5 and the name of the
officer or contact person of such entity on LINE 6. Subscribers who are not
individuals must furnish a copy of organizing or other documents evidencing
the authority of the entity to invest in the Fund. For example, trusts must
furnish a copy of the trust agreement, and corporations must furnish a copy
of the corporate charter, bylaws and enabling resolutions.
7. Enter the legal address, which is the residence or domicile address used
for tax purposes, of the subscriber on LINE 7. Do not enter post office
boxes.
8. If the mailing address of the subscriber is different from the legal
address of the subscriber, complete LINE 8.
9. If an individual retirement account, enter the name and address of the
custodian on LINE 9.
10. The subscriber must sign and date LINE 10. If a joint account, both
subscribers must sign. In an individual retirement account, both the
custodian and the subscriber must sign.
11. Financial advisors must complete and sign under "Financial Advisors" below.
The financial advisor should send the Subscription Agreements / Power of
Attorney, payments and all other required documents to the selling agent:
Berthel Fisher & Company
Financial Services, Inc.
701 Tama Street
PO Box 609
Marion, IA 52302-0609
Phone: (800) 356-5234 or
(319) 447-5700
Facsimile: (319) 447-4250
E-mail: danderson@berthel.com
Please send all documents and payments early in the month to ensure
timely delivery. Subscriptions close on the last business day of each month. The
fund administration department of the Selling Agent and the selected dealer(s)
that solicited the subscription may have an earlier deadline for subscriptions.
C-1
If payment is being made by wire transfer, the financial advisor should
contact Berthel Fisher & Company. PAYMENTS MADE BY CHECK MUST BE RECEIVED BY THE
FUND AT LEAST THREE BUSINESS DAYS PRIOR TO THE LAST BUSINESS DAY OF THE MONTH,
AND PERSONAL CHECKS MUST BE RECEIVED BY THE FUND AT LEAST FIVE BUSINESS DAYS
PRIOR TO THE LAST BUSINESS DAY OF THE MONTH. ONLY SUBSCRIPTIONS FOR WHICH
PAYMENT HAS CLEARED WILL BE ACCEPTED.
A financial advisor having specific questions about the subscription
process should call the Berthel Fisher & Company Marketing Department at (800)
356-5234.
C-2
SHAFFER DIVERSIFIED FUND, LP
(A DELAWARE LIMITED PARTNERSHIP)
SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY
Shaffer Diversified Fund, LP
c/o Shaffer Asset Management, Inc.
925 Westchester Avenue
White Plains, NY 10604
Dear Sir or Madam:
SUBSCRIPTION FOR UNITS. By executing this Subscription Agreement / Power
of Attorney, I hereby irrevocably subscribe for the number of units ("Units") of
limited partnership interest in Shaffer Diversified Fund, LP (the "Fund") set
forth on page C-4 hereof at a purchase price equal to the Net Asset Value per
Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit
purchased, as more fully described in the Fund's prospectus (the "Prospectus")
and accompanying Statement of Additional Information (the "Statement of
Additional Information"), as the same may be amended or supplemented from time
to time. I understand that fractional Units may be purchased. My check payable
to "Shaffer Diversified Fund, LP" in the full amount of my subscription
accompanies this Subscription Agreement / Power of Attorney, or I have
authorized Berthel Fisher & Company Financial Services, Inc. (the "Selling
Agent") or the selected dealer(s) that solicited this subscription to debit my
customer securities account in the amount set forth herein.
REPRESENTATIONS AND WARRANTIES. I represent the following (subscriber to
initial as indicated):
Initial: _____ I have received a copy of the Prospectus and accompanying
Statement of Additional Information.
Initial: _____ I am purchasing the Units only for my own account.
Initial: _____ This purchase does not exceed more than ten percent (10%)
of my net worth.
INITIAL ONLY ONE OF THE FOLLOWING:
Initial: ______ Except as noted below, I have (i) a net worth (exclusive
of home, home furnishings and automobiles) of at least $225,000 or (ii) an
annual gross income of at least $60,000 and a net worth similarly calculated of
at least $60,000, and my investment in the Fund will not constitute more than
10% of my net worth, exclusive of my home, home furnishings and automobiles.
Initial: ______ I am a resident of Iowa, Kansas, Missouri or North
Carolina and I have (i) a net worth of at least $350,000 or (ii) a net worth of
at least $100,000 and $100,000 taxable income.
Initial: ______ I am a resident of Nebraska or Texas, and I have (i) a
net worth, or joint net worth with my spouse, that exceeds $1,000,000 or (ii)
had income in excess of $200,000 in each of the two most recent years or a joint
income with my spouse in excess of $300,000, and I have a reasonable expectation
of reaching this same income level in the current year.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, HOWEVER, I
UNDERSTAND THAT BY SIGNING THIS SUBSCRIPTION AGREEMENT, I AM NOT WAIVING ANY
RIGHTS THAT I MAY HAVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER.
AGREEMENTS
By signing this letter, I shall be deemed to have executed and to agree
to be bound by the terms of the Agreement of Limited Partnership, as amended, of
the Fund (the "Limited Partnership Agreement") attached as Exhibit A to the
Statement of Additional Information. In addition, I agree to reimburse the Fund
and Shaffer Asset Management, Inc. (the "General Partner / Advisor") for any
expense or loss incurred as a result of my failure to deliver good funds for the
subscription amount. I consent to the execution and delivery of an advisory
agreement between the Fund and the General Partner /Advisor and to the payment
to the General Partner / Advisor of the compensation described in the Prospectus
and the Statement of Additional Information. In addition, if I am not a citizen
or resident of the United States for federal income tax purposes and not a
dealer in commodities, I agree to pay or reimburse the Fund for any taxes
imposed as a result of my status as a limited partner in the Fund.
C-3
POWER OF ATTORNEY
In connection with my purchase of Units, I do hereby irrevocably
constitute and appoint the General Partner / Advisor as my true and lawful
Attorney-in-Fact, with full power of substitution, in my name, place and stead,
(i) to file, prosecute, defend, settle or compromise litigation, claims or
arbitration on behalf of the Fund and (ii) to make, execute, sign, acknowledge,
swear to, deliver, file and record on my behalf any documents or instruments
considered necessary or desirable by the General Partner /Advisor to carry out
fully the provisions of the Limited Partnership Agreement, including without
limitation the execution of the Certificate of Limited Partnership of the Fund,
the Limited Partnership Agreement, and all amendments thereto permitted by the
terms thereof to be entered into by the General Partner / Advisor. The power of
attorney granted hereby shall be deemed to be coupled with an interest, shall be
irrevocable and shall survive and not be affected by my subsequent death,
incapacity, disability, insolvency or dissolution or any delivery by me of an
assignment of the whole or any portion of my interest in the Fund.
IRREVOCABILITY; GOVERNING LAW
My subscription for Units will not be complete until the close of
business on the day that is five days after I receive a final prospectus of the
Fund. I hereby acknowledge that after the expiration of that five-day period I
am not entitled to cancel, terminate or revoke this subscription or any of my
agreements hereunder after this subscription has been submitted. The laws of the
State of Delaware shall govern this Subscription Agreement / Power of Attorney.
1. Amount of subscription: $______________________
2. If debit is to be made to customer securities account, account number: ____________________.
3. Social Security _______ - ______ - ______ or taxpayer identification number: ______ - __________
Taxable investors (check one): Non-taxable investors (check one):
[ ] Individual [ ] Individual retirement account
[ ] Joint tenants with right of survivorship [ ] Roth IRA
[ ] Tenants in common [ ] IRA rollover
[ ] Community property [ ] SEP
[ ] Estate [ ] Profit-sharing account
[ ] UGMA/UTMA [ ] Defined benefit account
[ ] Corporation [ ] Pension
[ ] Partnership [ ] Other Retirement Benefit Plan
[ ] Grantor or other revocable trust [ ] Other (specify) _____________
[ ] Trust other than grantor or revocable trust
4. [ ] Existing account number: ____________________.
5. Names in which Units are to be registered: __________________
6. Additional information (see instructions): ___________________
7. Address: ____________________________________________
Telephone No: ____________________________________________
Facsimile No: ____________________________________________
E-mail Address: ____________________________________________
C-4
8. Mailing address (if different):
--------------------------------------------
--------------------------------------------
--------------------------------------------
9. Custodian name and mailing address:
--------------------------------------------
--------------------------------------------
--------------------------------------------
Account Number: _____________________________
10. Signature of Investor: Date:
-------------------------------- -----------------------
Signature of joint investor or Custodian: Date:
-------------------------------- -----------------------
UNITED STATES INVESTORS
[ ] I have checked the box if I am subject to backup withholding under the
provisions of section 3406(a)(1)(C) of the Internal Revenue Code of 1986,
as amended. Under penalties of perjury, I hereby certify by signature
above that the Social Security or Taxpayer Identification Number above is
my true, correct and complete Social Security or Taxpayer Identification
Number and that the information given in the immediately preceding
sentence is true, correct and complete.
NON-UNITED STATES INVESTORS
Under penalties of perjury, I hereby certify by signature above that I am
not a citizen or resident of the United States and not a United States
corporation, partnership, estate or trust.
FINANCIAL ADVISORS
I hereby certify that I have informed the subscriber herein of all
pertinent facts relating to the risks, tax consequences, liquidity,
marketability, management and control of the Fund with respect to an investment
in the Units, as set forth in the Prospectus and the Statement of Additional
Information. I have also informed the subscriber that it is unlikely that a
public trading market in the Units will develop.
I have reasonable grounds to believe, based on information obtained from
the subscriber concerning his or her investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the Fund by the subscriber is suitable for the subscriber in light
of his or her financial position, net worth and other suitability
characteristics.
The financial advisor must sign below to substantiate compliance with
NASD Rule 2810. The office manager (if required by the procedures of the Selling
Agent or selected dealer(s) that solicited this subscription) must sign below:
Financial advisor signature: Date:
----------------------- -----------------------
Office manager signature: Date:
----------------------- -----------------------
Financial advisor name: __________________________________________
Address: __________________________________________
Telephone: __________________________________________
Facsimile: __________________________________________
E-mail address: __________________________________________
C-5
EXHIBIT D
SHAFFER DIVERSIFIED FUND, LP
(A DELAWARE LIMITED PARTNERSHIP)
REQUEST FOR REDEMPTION
_________________, 20___
(Please date)
PLEASE SEND ORIGINAL TO:
Shaffer Asset Management, Inc.,
as General Partner
Shaffer Diversified Fund, LP
925 Westchester Avenue
White Plains, NY 10604
Re:Account No: ________________________
Social Security or taxpayer
identification number:
____________________
Dear Sir or Madam:
I hereby request redemption, as defined in and subject to all of the
terms and conditions of the Agreement of Limited Partnership of Shaffer
Diversified Fund, LP, a Delaware limited partnership (the "Fund"), as amended,
of _______________ [insert number of Units to be redeemed OR write the word
"All"] of my Units of limited partnership interest in the Fund at the Net Asset
Value per Unit described in the current Prospectus and accompanying Statement of
Additional Information of the Fund. I understand that the redemption shall be
effective as of the close of business on the last business day of the calendar
month in which this request for redemption is received by the General Partner;
PROVIDED that this request for redemption is received by the General Partner at
least 10 days prior to such effective date, and that if this request for
redemption is received by the General Partner less than 10 days prior to a
permitted redemption date, my Units may be redeemed on the next succeeding
redemption date. I also understand that the redemption fees described in the
Prospectus may apply to this redemption.
I (either in my individual capacity or as an authorized representative of
an entity, if applicable) hereby represent and warrant that I am the true,
lawful and beneficial owner of the Units of limited partnership interest to
which this request for redemption relates, with full power and authority to
request redemption of such Units. Such Units are not subject to any pledge or
otherwise encumbered in any fashion.
UNITED STATES INVESTORS
[ ] I have checked the box if I am subject to backup withholding under
the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code. Under
penalties of perjury, by signature below I hereby certify that the Social
Security or taxpayer identification number above is my true, correct and
complete Social Security or taxpayer identification number and that the
information given in the immediately preceding sentence is true, correct and
complete.
-1-
NON-UNITED STATES INVESTORS
Under penalties of perjury, by signature below I hereby certify that I am
not a citizen or resident of the United States and not a United States
corporation, partnership, estate or trust.
Please forward redemption proceeds by mail to me at:
--------------------------------------------
--------------------------------------------
--------------------------------------------
SIGNATURES MUST BE IDENTICAL TO NAME (S) IN, WHICH UNITS ARE REGISTERED. (Duly
authorized persons should sign on behalf of entities.)
Individual Limited Partner(s)
--------------------------------------------
Name(s) (please print)
Signature ____________________________________
Signature ____________________________________
Partnership, Trust, Corporate of Other Entity Limited Partner(s):
--------------------------------------
Name of Partnership, Trust, Corporation or
Other Entity (please print)
By:_____________________________________________
Signature of partner, trustee or authorized
officer
--------------------------------------------
Name of Partner, Trustee or Other Authorized
Officer
(please print)
--------------------------------------------
Title (please print)
THIS REQUEST FOR REDEMPTION MUST BE MAILED TO THE FUND'S OFFICE BY
REGISTERED MAIL, RETURN RECEIPT REQUESTED, TOGETHER WITH THE CERTIFICATE (S)
REPRESENTING THE UNITS TO BE REDEEMED.
-2-