As filed with the Securities and Exchange Commission on September 10, 1998
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PROFUTURES BULL & BEAR FUND, L.P.
(Exact name of registrant as specified in its charter)
Delaware 6793 74-2849862
(State of Organization) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification Number)
c/o ProFutures, Inc.
11612 Bee Cave Road
Suite 100
Austin, Texas 78733
(800) 348-3601
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Gary D. Halbert
c/o ProFutures, Inc.
11612 Bee Cave Road
Suite 100
Austin, Texas 78733
(800) 348-3601
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
William D. Kerr
Kathleen H. Pender
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of each Class of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered per Unit* Offering Price Registration Fee
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Units of Limited Partnership
Interest.......................... $60,000,000 Net Asset Value $60,000,000 $20,690
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* Calculated pursuant to Rule 457(c)
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Preliminary Prospectus dated September 10, 1998 - Subject to Completion
PROFUTURES BULL & BEAR FUND, L.P.
$60,000,000
Limited Partnership Units
The Fund
The Fund was organized to engage primarily in the speculative trading
of stock index futures contracts. Stock index futures trading offers several
features that are not widely available when using traditional securities, such
as additional leverage, higher liquidity in active market conditions and the
potential to profit from stock market downturns by selling short.
The Advisor
Hampton Investors, Inc., a professional managed futures advisor,
trades the Fund's assets pursuant to its Leverage 3 trading program, which
currently trades only the S&P 500 Stock Index futures contract on the Chicago
Mercantile Exchange.
The Units
As of July 31, 1998, Units had increased in Net Asset Value by
approximately 19% since the Fund began trading pursuant to a private offering in
November 1997. Past performance is not necessarily indicative of future results.
Units are purchased at a price equal to 101% of the Net Asset Value
per Unit on the last day of each month.
The Risks
These are speculative securities. Before you decide whether to invest,
read this entire prospectus carefully and consider The Risks You Face beginning
on page 8.
You could lose all or substantially all of your investment in the
Fund.
The Fund is speculative and leveraged.
Performance has been volatile and the Net Asset Value per Unit may
fluctuate significantly within a single month.
The use of a single advisor trading only stock index futures contracts
reduces diversification and increases risk of loss relative to a fund trading a
diversified portfolio of futures contracts.
Substantial expenses must be offset by trading profits and interest
income for the Fund to be profitable.
Minimum Investment
The minimum purchase for first-time investors is $10,000; $5,000 for
IRAs, other tax-exempt accounts and current investors.
____________________
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS
OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED
ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
____________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________________
PROFUTURES, INC.
General Partner
PROFUTURES FINANCIAL GROUP, INC.
Selling Agent
______ , 1998
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS
YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT
FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGES 20 TO 23
AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO
RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 6.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE,
BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGES 8 TO 13.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED
STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE
POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE
UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR
MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY
BE EFFECTED.
__________________________
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 SEC IN
WASHINGTON, D.C.
THE FUND WILL FILE QUARTERLY AND ANNUAL REPORTS WITH THE SEC. YOU CAN
READ AND COPY THESE REPORTS AT THE SEC PUBLIC REFERENCE FACILITIES IN CHICAGO,
NEW YORK OR WASHINGTON, D.C. PLEASE CALL THE SEC AT 1-800-SEC-0300 FOR FURTHER
INFORMATION.
THE FUND'S FILINGS WILL BE POSTED AT THE SEC WEBSITE AT
HTTP://WWW.SEC.GOV. THIS PROSPECTUS AND ALL PERIODIC FILINGS WILL ALSO BE POSTED
AT THE GENERAL PARTNER'S WEBSITE AT HTTP://WWW.ADVISORLINK.COM.
_________________________
PROFUTURES, INC.
General Partner
11612 Bee Cave Road
Suite 100
Austin, Texas 78733
(800) 348-3601
-1-
Table of Contents
Page
----
Summary.................................................... 3
The Risks You Face......................................... 8
Fund Operations............................................ 13
Performance of the Fund.................................... 16
Selected Financial Data.................................... 17
Management's Analysis of Operations........................ 18
Use of Proceeds; Interest Income Arrangements.............. 19
Analysis of Fees and Expenses Paid
by the Fund............................................. 20
The Advisor................................................ 23
The General Partner........................................ 30
Brokerage Arrangements..................................... 33
Net Asset Value............................................ 34
Conflicts of Interest...................................... 34
The Stock Index Futures Markets............................ 35
Summary of the Limited Partnership
Agreement................................................ 39
Tax Consequences........................................... 39
Purchases by Employee Benefit Plans........................ 42
General.................................................... 44
Financial Statements....................................... 45
Exhibit A -- Limited Partnership
Agreement.................................... LPA-1
Exhibit B -- Subscription Agreement and Power of Attorney.. B-1
Exhibit C -- Request for Redemption........................ C-1
-2-
Summary
General
The Fund offers individual investors a way to participate in the equity
markets through stock index futures, specifically the S&P 500 Stock Index (the
"Index") futures contract on the Chicago Mercantile Exchange (the "S&P 500
Contract"), under the guidance of an experienced, professional commodity trading
advisor. The Index is based on the stock prices of 500 large-capitalization
companies. The market value of the 500 companies is equal to about 80% of the
value of all stocks listed on the New York Stock Exchange. The trading of the
S&P 500 Contract permits investors to trade the Index at various multiples, thus
creating, in effect, a highly-leveraged stock portfolio. The S&P 500 Contract
may also offer greater liquidity than the underlying stocks in active market
conditions and the potential to profit from stock market downturns by selling
short.
ProFutures, Inc.
ProFutures, Inc., the General Partner and commodity pool operator of the
Fund, began operations in 1984 and specializes in the management of speculative
managed futures funds. The General Partner currently operates three futures
funds -- the Fund and two multi-advisor, widely diversified public futures
funds -- having an aggregate capitalization as of July 31, 1998 of approximately
$95 million.
Hampton Investors, Inc.
General
Hampton Investors, Inc., the commodity trading advisor for the Fund, has
been managing investor accounts and its own capital in the securities markets
since 1985 and began trading investor capital in the futures markets in May
1995. The Advisor trades for the Fund pursuant to its Leverage 3 trading program
which, since July 1995, has focused on trading only the S&P 500 Contract.
Trading Strategy
The Advisor's trading system uses several indicators that examine relevant
information relating to the S&P 500 Contract. These indicators are broken down
into three categories: monetary, market-action based and price-based. The system
requires the Advisor to scale up into a position or scale down, depending on how
many of its indicators are in a "buy mode." In this manner, the program goes
into and out of trades.
The Advisor's Leverage 3 program attempts to take a position in the S&P 500
Contract in the range of two to three times that of a fully-funded S&P 500
Contract. The value of a fully-funded S&P 500 Contract equals the contract
multiplier (currently $250) times the Index level (which fluctuates daily but
assume for purposes of this example that the Index level is 1,100). In this
example, a fully-funded S&P 500 Contract is worth $275,000 ($250 x 1,100). If
you wanted to trade without use of leverage, you could deposit $275,000 in cash
and buy one S&P 500 Contract. Your account would then go up and down in line
with the Index. When the Advisor's system is in its most bullish position, the
Advisor will buy three S&P 500 Contracts for each $275,000 in the Fund. That
means that when the Index moves 1%, the value of the Fund should move
approximately 3% in the same direction. In other words, the Fund will at such
times be three times leveraged.
-3-
The Advisor's system increases and decreases leverage as its signal becomes
stronger or weaker. If, in the above example, a certain number of the indicators
turns negative, the Advisor would reduce its position so as to be only two times
leveraged. If more indicators turn negative, the Advisor would liquidate the
entire position and be neutral (100% cash, no S&P 500 Contract position). And if
more indicators became negative, the Advisor would "short" the market by selling
S&P 500 Contracts, again at three times leverage. In that scenario, the Fund
would gain approximately 3% for each 1% the Index falls -- assuming the Advisor
remains in the position. In summary, the program has four positions: maximum
leverage long (three times leverage long), long (two times leverage long),
neutral (100% cash) and maximum leverage short (three times leverage short).
The Advisor's program provides significant leverage, well above what one
can accomplish in a margin account with a stock broker, but well below that of
trading futures contracts at an exchange's minimum margin. While the Fund uses
considerably less margin than traditional futures trading, investors should be
prepared for significant volatility. Leverage amplifies both gains and losses.
There has been considerable short-term volatility in the program.
The Advisor may also trade other futures and commodity contracts, including
other stock index futures contracts, on behalf of the Fund. However, the Advisor
currently expects to limit its trading to the S&P 500 Contract.
Brokerage Arrangements
ING (U.S.) Securities, Futures & Options, Inc. currently acts as the Fund's
futures clearing broker.
Cash Management
Horizon Cash Management L.L.C. (the "Cash Manager"), an investment adviser
registered with the Securities and Exchange Commission, provides cash management
services covering the Fund's non-margin assets, investing in U.S. government
securities and/or other high quality, interest-earning obligations.
Major Risks of the Fund
Investors must be prepared to lose all or substantially all of their
investment in the Units. The Fund utilizes substantial leverage, which magnifies
the impact of profits and losses.
The Fund is a speculative investment. It is not possible to predict how the
Fund will perform over either the long or short term.
Investors must not rely on the past performance of either the Fund or the
Advisor in deciding whether to purchase Units.
The use of a single trading advisor trading only one type of contract
reduces diversification and increases risk of loss relative to a fund trading a
diversified portfolio of futures contracts.
The Fund is subject to substantial charges. During the first year of an
investor's participation in the Fund, the Fund must earn overall trading profits
of approximately 2.26% of its average Net Asset Value simply to break even after
all fees and expenses.
Because the Fund's performance is entirely unpredictable, there is no way
of telling when would be a good time to invest in the Fund.
-4-
The Net Asset Value per Unit may vary substantially within a single month.
Because investors must submit irrevocable subscriptions as well as redemption
notices at least 10 days before the purchase or redemption of Units -- and can
do so up to approximately a month before --they cannot know the Net Asset Value
at which they will acquire or redeem Units. The Fund could incur material losses
between the time investors subscribe and the time they receive their Units. In
addition, investors cannot control the maximum losses on their Units because
they cannot be sure of the redemption value of their Units.
As limited partners, investors have no voice in the operation of the Fund;
they are entirely dependent on the management of the General Partner and the
Advisor for the success of their investment.
Fees and Expenses
The incentive fee payable to the Advisor is calculated on a quarterly basis
and could be substantial even in a break-even or losing year. The Fund's other
significant expenses are its management fees, brokerage commissions, operating
and administrative expenses and cash management fee. Further, investors pay a
one-time organizational charge. If the Fund's Net Asset Value increases, the
absolute dollar amount of any percentage-of-assets fees will also, but they will
have the same effect on the Fund's rate of return.
-5-
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Break-Even Table
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Twelve-month
Break-Even
Expenses ($10,100 Initial
- -------- Investment)/1/
- -------------------------------------------------------------------------------
Organizational and offering/2/
expenses $ 100.00
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Management fee/3/ $ 312.37
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Operating and
administrative expenses/4/ $ 200.00
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Round-turn brokerage commissions
and other transactional charges/5/ $ 100.00
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Incentive fee/6/ $ 25.59
- -------------------------------------------------------------------------------
Interest income/7/
(net of the Cash Manager's fee) $(510.00)
- -------------------------------------------------------------------------------
TWELVE MONTH DOLLAR
BREAK-EVEN $ 227.96
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TWELVE MONTH BREAK-EVEN
AS A PERCENTAGE
OF THE $10,100 GROSS
SUBSCRIPTION PRICE 2.26%
- -------------------------------------------------------------------------------
See "Analysis of Fees and Expenses
Paid by the Fund" at page 20.
Explanatory Notes:
(1) The foregoing break-even analysis is an approximation only. It assumes
that the Units have constant month-end Net Asset Value. All fees and expenses
summarized herein are described fully under "Analysis of Fees and Expenses Paid
by the Fund." No estimate is included for "bid-asked" spreads or mark-ups on
forward trades, as these amounts are not a true "expense" of the Fund but rather
represent the component of the sale or purchase price which represents the
dealer's profit on the transaction. Calculations are based on $10,000 as the Net
Asset Value of the Unit, after deducting the 1% organizational charge.
(2) It has been assumed that the gross subscription price of Units was
$10,100. For purposes of this break-even analysis, there has been no payment of
selling commissions. The organizational charge of $100 was calculated by
multiplying $10,000 by 1%.
(3) The Fund pays a management fee to the General Partner equal to 3% per
annum of month-end Net Assets. This amount has been assumed for the analysis.
(4) The Fund pays its ongoing accounting, auditing, legal, printing,
computer and other operating and administrative expenses. The General Partner
estimates that these expenses will be approximately 2% per annum of average
annual Net Assets. These expenses could be substantially lower as the Fund's
assets increase. Actual expenses could, however, substantially exceed this
level.
(5) The Fund pays round-turn brokerage commissions of $8.00 per round-turn
trade, plus exchange, pit and NFA fees, any "incidental" trading expenses, floor
brokerage expenses and any "give-up" fees. Round-turn commissions and related
charges are estimated by the Advisor at approximately 1% of average annual Net
Assets based on the Advisor's historical and anticipated trading velocity.
Actual round-turn commissions could, however, substantially exceed this level.
(6) The Fund pays the Advisor a quarterly incentive fee equal to 20% of New
Trading Profit.
(7) Interest income is estimated at 5.10% of average month-end Net Assets
per annum based on current Treasury bill rates, net of an estimated fee of 0.25%
annually paid to the Cash Manager. Actual interest income could be more or less
than this level.
-6-
Principal Tax Aspects of Owning Units
Investors are taxed each year on any gains recognized by the Fund whether
or not they redeem any Units or receive any distributions from the Fund.
40% of any trading profits on U.S. exchange-traded futures contracts are
taxed as short-term capital gains at the individual investor's ordinary income
tax rate (39.6% maximum), while 60% of such gains are taxed as long-term capital
gain at a 20% maximum rate for individuals. The Fund's trading gains from other
contracts, if any, will likely be primarily short-term capital gain. This tax
treatment applies regardless of how long an investor holds Units. If, on the
other hand, an investor held a stock or bond for longer than 12 months, all the
gain realized on its sale would generally be taxed at a 20% maximum rate.
Losses on the Units may be deducted against capital gains. Any losses in
excess of capital gains may only be deducted against ordinary income by
individuals to the extent of $3,000 per year. Consequently, investors could pay
tax on the Fund's interest income even though they have lost money on their
Units. See "Tax Consequences" beginning at page 39.
Liquidity of the Units
Units may be redeemed at any month-end upon 10 days' written notice to the
General Partner. There is no required minimum holding period; however, the
General Partner believes that investors should consider the Units at least a 2-
to 3-year commitment.
Is the Fund a Suitable Investment for You?
You should consider investing in the Fund only if you are interested in a
leveraged exposure to up or down U.S. stock market movements and you are
prepared to risk significant losses and withstand high volatility.
-7-
The Risks You Face
Possible Total Loss of an Investment in the Fund
You could lose all or substantially all of your investment in the Fund.
Investors Must Not Rely on the Past Performance of Either the
Advisor or the Fund in Deciding Whether to Buy Units
The future performance of the Fund is entirely unpredictable, and the past
performance of the Fund as well as of the Advisor is not necessarily indicative
of their future results.
Stock Index Futures Trading Involves Substantial Leverage
Stock index futures are typically traded on margin. This means that a small
amount of capital can be used to invest in contracts of much greater total
value. The resulting leverage means that a relatively small change in the market
price of the S&P 500 Contract can produce a substantial profit or loss. The
Advisor generally uses up to three times leverage in its trading program. For
example, if the market price of the S&P 500 Contract were to change by 1% and
the Fund was fully leveraged, the Fund would likely experience a gain or loss of
3%. Leverage enhances the Fund's sensitivity to market movements which can
result in greater profits when the Advisor anticipates the direction of the move
correctly, or greater losses when the Advisor is incorrect.
Stock Index Futures Trading is Speculative, Highly
Volatile and Can Result in Large Losses
A principal risk in stock index futures trading is the rapid fluctuation in
the market prices of stock index futures contracts. The profitability of the
Fund depends greatly on the Advisor correctly anticipating trends in market
prices. If the Advisor incorrectly predicts the movement of futures prices,
large losses could result. Price movements of futures contracts are influenced
by such factors as: changing supply and demand relationships; government trade,
fiscal, monetary and exchange control programs and policies; national and
international political and economic events; and speculative frenzy and the
emotions of the marketplace.
Importance of Market Conditions to Profitability
Most futures traders are more likely to, although there can be no assurance
that they will, trade profitably during periods when major price movements
occur. Such movements generally occur in any given market only infrequently, and
during periods of static or "whipsaw" markets it is unlikely that the Advisor
will achieve profits for the Fund. Overall market or economic conditions may
have a material effect on performance.
Futures Markets Investments Are Different from Securities Markets Investments
An investment in the Fund is very different from a typical securities
investment (stocks and/or bonds) in which there is an expectation of some
consistency of yield (in the case of bonds) or participation over time in
general economic growth (in the case of stocks). Futures trading is a "zero-sum"
economic activity, meaning for every gain there is an equal and offsetting loss
(without considering transaction costs).
-8-
The Large Size of the Fund's Trading Positions Increases
the Risk of Sudden, Major Losses
The Fund takes positions with face values up to as much as approximately 3
times its total equity. Consequently, even small price movements can cause major
losses.
Illiquid Markets Could Make It Impossible for
the Fund to Realize Profits or Limit Losses
It is not always possible to execute a buy or sell order at the desired
price, or to close out an open position, due to market conditions. Daily price
fluctuation limits are established by the exchanges and approved by the
Commodity Futures Trading Commission (the "CFTC"). When the market price of a
futures contract reaches its daily price fluctuation limit, no trades can be
executed at prices outside such limit. The holder of a commodity futures
contract (including the Fund) may therefore be locked into an adverse price
movement for several days or more and lose considerably more than the initial
margin put up to establish the position. Another instance of difficult or
impossible execution occurs in thinly traded or illiquid markets. While the S&P
500 Contract is generally considered to be an extremely liquid contract, no
assurance can be given that Fund orders will be executed at or near the desired
price.
Speculative Position Limits May Require the
Advisor to Modify Its Trading to the Detriment
of the Fund
The exchanges have established and the CFTC has approved speculative
position limits (referred to as "position limits") on the maximum futures
position which any person, or group of persons acting in concert, may hold or
control in particular futures contracts. For stock index futures contracts, such
position limits are set by the exchanges. The position limit for the S&P 500
Contract is very high in comparison to other stock indices. While unlikely, the
Advisor may be required to reduce the size of the futures positions which would
otherwise be taken in order to avoid exceeding such limits. Such modification of
the Fund's trades, if required, could adversely affect the operations and
profitability of the Fund.
The Advisor May Have Unexpected Problems in Executing Trades
The Advisor relies on computer, telephone and related electronic equipment
for the execution of its trades. If such equipment fails and/or the firms
handling the Advisor's computer and communications facilities are adversely
affected due to uncontrollable factors such as weather problems, the Advisor may
not be able to execute trades for the Fund, which could cause the Fund to incur
losses. The Advisor intends to use back-up systems to try to minimize the impact
of such potential execution problems.
The Advisor May Not be Successful in
"Downward" Equity Markets
The Advisor's past performance record has been compiled during a period of
predominantly rising equity markets. A static leveraged long position in such
markets would be certain to generate substantial profits. While the Advisor can
and does take short positions, there is no assurance that its strategy will be
successful in down or "bear" markets.
-9-
"Stop-Loss" Policy is Not a Limit on Losses
The Fund's "stop-loss" policy provides no assurance that the Net Assets of
the Fund will not drop below fifty percent (50%) of its previous month-end
level, since there can be no assurance that the Fund will not incur additional
losses in attempting to liquidate open positions.
Trading in Options on Stock Index Futures
Is Speculative and Highly Leveraged
The Advisor may trade options on stock index futures contracts, although it
does not do so at present. An option is a right, purchased for a certain price,
to either buy or sell the underlying stock index futures contract during a
certain period of time for a fixed price. Trading options on stock index futures
is speculative and highly leveraged. Specific market movements of the stock
index futures contracts underlying an option cannot accurately be predicted. If
the Fund purchases an option, it is subject to the risk of losing the entire
purchase price of the option. On the other hand, if the Fund writes (sells) an
option it is subject to the risk of loss resulting from the difference between
the premium received for the option and the price of the futures contract
underlying the option which the Fund must purchase or deliver upon exercise of
the option.
Limitation of the Markets Traded by the Advisor Also
Reduces Diversification, Increasing the Risk of Loss
The Advisor's program concentrates on only one contract -- the S&P 500
Stock Index futures contract on the Chicago Mercantile Exchange. Market
concentration increases the risk of major losses and unstable Unit values
relative to diversification in multiple commodities markets. Further, the S&P
500 Contract has historically been quite volatile relative to many other futures
contracts.
As it is impossible to predict when price trends will occur, certain
futures managers attempt to maximize the chance of exploiting such trends by
taking positions in as many different markets and market sectors as feasible.
The Fund does not follow this approach and, as a result, may not capture trends
in other markets which would have been highly profitable.
Substantial Expenses Will Cause Losses for the
Fund Unless Offset by Profits and Interest Income
The Fund pays fixed annual expenses (net of interest income) of
approximately 1% of its average annual net asset value (in addition to the one-
time 1% organizational charge payable by investors). In addition to this annual
expense level, the Fund is also subject to a 20% quarterly incentive fee during
its profitable quarters. Because the incentive fee is calculated quarterly, it
could represent a substantial expense to the Fund even in a break-even or losing
year. The Fund's expenses could, over time, result in significant losses. Except
for the incentive fee, these expenses are not contingent and are payable whether
or not the Fund is profitable. See "Summary -- Fees and Expenses" at page 5 and
"Analysis of Fees and Expenses Paid by the Fund" on page 20.
It will be necessary for the Fund to achieve gains from trading and
interest income in excess of its charges in order for limited partners to
realize increases in the Net Asset Value of their Units. No assurance can be
given that the Fund will be able to achieve such, or any, appreciation of its
assets. All interest income earned on the Fund's assets (currently estimated at
5.1% annually net of the Cash Manager's fee) is paid to the Fund.
-10-
Unit Values Are Unpredictable and Vary Significantly Month-to-Month
The Net Asset Value per Unit varies significantly month-to-month. Investors
cannot know at the time they submit a redemption request what the redemption
value of their Units will be.
The only way to take money out of the Fund is to redeem Units. You can only
redeem Units at month-end upon at least 10 days' advance notice. The
restrictions imposed on redemptions limit your ability to protect yourself
against major losses by redeeming part or all of your Units.
In addition, investors are unable to know whether they are subscribing
after a significant upswing in the Net Asset Value per Unit --often a time when
the Fund has an increased probability of entering into a losing period.
Investing in the Units May Not Diversify an Overall Portfolio
Because the Fund focuses on the S&P 500 Contract, its returns may be
correlated with equity market returns. The use of leverage and short selling may
reduce this correlation at certain times, especially in a falling market. An
investment in the Fund may or may not result in diversification of an investor's
overall portfolio, depending on what other assets the investor owns and the
Advisor's ability to correctly react to stock market trends.
The Advisor's Increased Equity Under Management
Could Lead to Diminished Returns
The more money the Advisor manages, the more difficult it may be for the
Advisor to trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance. Large trades
generally result in more price slippage than do smaller orders.
The Advisor May Change Its Trading
Approach and/or Futures Contracts Traded
The Advisor may change its trading approach and/or the futures contracts
traded. If the Advisor adds additional contracts to its program, there will be
no assurance that its methods will be successful in trading such other
contracts.
The Advisor Alone Directs the Fund's Trading
As the sole advisor to the Fund, the Advisor alone directs the Fund's
futures trading. If the Advisor was for any reason unable to continue to manage
the Fund's assets, the General Partner most likely would appoint a replacement
advisor to trade the Fund's assets after due notice to the limited partners.
The Fund May Trade on Non-U.S. Futures Markets
Although the Advisor currently does not engage in trading on futures
markets outside the United States on behalf of the Fund, it may do so in the
future. Foreign trading involves risks -- including exchange-rate exposure,
possible governmental intervention and lack of regulation -- which U.S. trading
does not. In addition, the Fund may not have the same access to certain
positions on foreign exchanges as do local traders, and the historical market
data on which the Advisor may base its strategy may not be as reliable or
accessible as it is in the United States. Certain foreign exchanges may also be
in a more or less developmental stage so that prior price histories may not be
indicative of current price dynamics. The rights
-11-
of clients in the event of the insolvency or bankruptcy of a non-U.S. market or
broker are also likely to be more limited than in the case of U.S. markets or
brokers.
The Fund's Cash Management Strategies
Could Lose Both Yield and Principal
The Cash Manager will try to generate yields on non-margin assets in excess
of the 91-day Treasury bill rate. However, there can be no assurance that the
securities the Cash Manager invests in for the Fund will not lose value. If this
occurs, the Fund could lose not only the interest it hopes to gain, but also the
principal it originally invested with the Cash Manager.
The Fund Could Lose Assets and Have Its Trading
Disrupted Due to the Bankruptcy of its Broker or
Others
The Fund is subject to the risk of broker, exchange or clearinghouse
insolvency. Fund assets could be lost or impounded in such an insolvency during
lengthy bankruptcy proceedings. Were a substantial portion of the Fund's capital
tied up in a bankruptcy, the General Partner might suspend or limit trading,
perhaps causing the Fund to miss significant profit opportunities.
____________________
The following are not risks but rather important tax features of investing
in the Fund which all prospective investors should carefully consider before
deciding whether to purchase Units.
Investors Are Taxed Every Year on Their Share of
the Fund's Profits -- Not Only When They Redeem
as Would Be the Case if They Held Stocks or Bonds
Investors are taxed each year on their investment in the Fund, irrespective
of whether they redeem any Units. In contrast, an investor holding stocks or
bonds generally pays no tax on their capital appreciation until the securities
are sold. Over time, the deferral of tax on stock and bond appreciation has a
compounding effect.
All performance information included in this prospectus is presented on a
pre-tax basis; the investors who experienced such performance had to pay the
related taxes from other sources.
The Fund's Trading Gains May Be Taxed
at Higher Rates
Investors are taxed on their share of any trading profits of the Fund at
both short- and long-term capital gain rates. These tax rates are determined
irrespective of how long an investor holds Units. Consequently, the tax rate on
the Fund's trading gains may be higher than those applicable to other
investments held by an investor for a comparable period.
-12-
Tax Could Be Due from Investors on Their Share
of the Fund's Interest Income Despite Overall Losses
Investors may be required to pay tax on their allocable share of the Fund's
interest income, even though the Fund incurs overall losses. Trading losses can
only be used by individuals to offset trading gains and $3,000 of interest
income each year. Consequently, if an investor were allocated $5,000 of interest
income and $10,000 of net trading losses, the investor would owe tax on $2,000
of interest income even though the investor would have a $5,000 loss for the
year. The $7,000 capital loss would carry forward, but subject to the same
limitation on its deductibility against interest income.
Fund Operations
Buying Units
You may buy whole Units (or fractions thereof calculated to three decimal
places) as of the last business day of any month at Net Asset Value plus a 1%
organizational charge. Your subscription should be submitted by the 20th day of
such month. Subscriptions submitted after the 20th day of the month may be
applied to Unit sales as of the end of the month after receipt, unless revoked.
In order to purchase Units initially, you must mail or deliver the following to
ProFutures Financial Group, Inc. (the "Selling Agent"): (i) a completed and
executed copy of the Subscription Agreement and Power of Attorney (attached as
Exhibit B); and (ii) a check for the amount of your investment, plus the 1%
organizational charge, made payable to ProFutures Bull & Bear Fund, L.P.
Only first-time investors need to submit Subscription Agreements, unless
the Selling Agent believes it is necessary to reconfirm an investor's
suitability in writing. To purchase additional Units, contact the General
Partner or the Selling Agent.
The Subscription Agreement and Power of Attorney requires you to make
certain specified representations and warranties. You should carefully read
Exhibit B -- Subscription Agreement and Power of Attorney and the Subscription
Agreement and Power of Attorney Signature Page which accompanies this prospectus
in addition to reviewing this entire prospectus carefully before you decide
whether to invest in the Units.
The minimum purchase for first-time investors is $10,000; $5,000 for IRAs,
other tax-exempt accounts and current investors.
Proceeds from the sale of Units received prior to the closing date will be
held at the Fund's cash management account with a major financial institution
until the last business day of the month. All interest (net of the Cash
Manager's fee) earned on subscriptions pending their month-end acceptance will
be paid to the Fund, not the individual subscribers. Similarly, if the
subscription is rejected, in whole or in part (in the sole discretion of the
General Partner), the subscription funds or the rejected portion thereof will be
returned within 20 days to the subscriber without interest.
The Units are offered on a best efforts basis through the Selling Agent.
The Selling Agent may permit certain other registered broker-dealers to
participate in the offering ("Additional Selling Agents"). If any Additional
Selling Agents are engaged to offer Units, the General Partner may pay, out of
its own funds, the Additional Selling Agents up to 3% of the sales price of any
Units sold by them at any month-end closing and/or ongoing "trail" commissions
with respect to Units sold by them which remain outstanding.
-13-
Use of Proceeds; Interest Income
After payment of the 1% organizational charge, 100% of all subscription
proceeds are invested directly into the Fund. Neither the Fund nor any
subscriber pays any selling commissions. The General Partner may pay, out of its
own funds, selling commissions to the Additional Selling Agents, if any.
The Fund uses subscription proceeds to margin its speculative futures
trading, as well as to pay trading losses, fees and expenses. At the same time
that the Fund's assets are being used as margin, they are also available for
cash management. All the cash management return earned on the Fund's assets is
paid to the Fund, subject to the cash management fee and minor incidental
charges.
The Fund's assets are held either in bank custodial accounts or deposited
with ING (U.S.) Securities, Futures & Options, Inc. (the "Futures Broker") in
regulated customer accounts. The Cash Manager applies its yield-enhancement
strategies to the Fund's assets deposited in its custodial account. As mentioned
above, while being managed by the Cash Manager, these assets are also available
to support the Fund's futures trading. The Fund receives all of the interest
income generated by investments held in the Fund's brokerage and custodial
accounts, subject to a cash management fee and minor incidental charges.
Redeeming Units
You can redeem Units at each month-end upon ten (10) days' advance written
notice by forwarding the completed Request for Redemption (included herein as
Exhibit C) to the General Partner, Attention: Fund Administration, ProFutures,
Inc., 11612 Bee Cave Road, Suite 100, Austin, Texas 78733. There are no
redemption charges or penalties.
Payment in respect of Units redeemed will be made (by mailing a check) as
promptly as practicable after the effective date of redemption, but in no event
more than thirty (30) days thereafter, barring unusual circumstances.
Uncertain Subscription and Redemption Value of Units
The Fund sells and redeems Units at subscription or redemption date Net
Asset Value (plus the 1% organizational charge in the case of subscriptions),
not at the Net Asset Value as of the date that subscriptions or redemption
requests are submitted. Investors must submit irrevocable subscriptions and
redemption requests at least 10 days prior to the effective date of subscription
or redemption. Because of the volatility of Unit values, this delay means that
investors cannot know the value at which they will purchase or redeem their
Units. Materially adverse changes in the Fund's financial position could occur
between the time an investor irrevocably commits to acquire or redeem Units and
the time the purchase or redemption is made.
Mandatory Trading Suspension If Unit
Value Falls 50% Since Last Month-End
In the event that the Net Asset Value per Unit declines 50% or more since
the last month-end, the Fund must liquidate all open positions, suspend trading
and offer all limited partners an opportunity to redeem their Units before
trading resumes. Only if sufficient capital remained in the Fund after any such
special redemption date would the Fund continue operations.
-14-
Distributions
The Fund does not anticipate making any distributions to investors. No
distributions have been made to date.
Small Minimum Investment
The current minimum size for an individually managed account with the
Advisor is generally $500,000. By investing in the Fund, you participate in the
Advisor's trading program with a minimum investment of only $10,000; $5,000 for
IRAs, other tax-exempt accounts and existing investors.
Limited Liability for Fund Investors
Investors who open individual futures accounts are personally liable for
all losses, including margin calls potentially in excess of their investment. As
a limited partner of the Fund, you can never lose more than your investment in
the Fund and your share of the Fund's profits.
Liquidity
The Fund is intended to be a long-term investment. The Fund is, however,
structured to allow limited partners to redeem all or part of their investment
in the Fund as of any month-end without any redemption charge.
Administrative Convenience
The General Partner provides all administrative services needed for the
Fund, including financial and tax reporting. Investors receive monthly financial
summaries and annual audited financials. Investors may telephone the General
Partner during its normal business hours for the Net Asset Value per Unit.
-15-
Performance of the Fund
The following are the monthly rates of return from the inception of the
Fund through July 31, 1998. There can be no assurance that the Fund will
continue to perform in the future the way it has in the past.
PROFUTURES BULL & BEAR FUND, L.P.
November 1997-July 1998
Type of Pool: Privately Offered
Inception of Trading: November 1997
Aggregate Subscriptions: $7,505,357
Current Net Asset Value: $7,955,412
Worst Monthly Drawdown (Month/Year): (6.06)% (12/97)
Worst Peak-to-Valley Drawdown (Month/Year): (6.06)% (12/97)
- ---------------------------------------------------
Month Monthly Rates of Return
- ---------------------------------------------------
1998 1997
- ---------------------------------------------------
January 2.77% --
- ---------------------------------------------------
February 10.43% --
- ---------------------------------------------------
March 9.56% --
- ---------------------------------------------------
April 2.44% --
- ---------------------------------------------------
May 0.37% --
- ---------------------------------------------------
June (0.84)% --
- ---------------------------------------------------
July (2.26)% --
- ---------------------------------------------------
August --
- ---------------------------------------------------
September --
- ---------------------------------------------------
October --
- ---------------------------------------------------
November 1.92%
- ---------------------------------------------------
December (6.06)%
- ---------------------------------------------------
23.90% (4.25)%
Compound Rate of Return (7 months) (2 months)
- ---------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Notes to Performance of the Fund
- --------------------------------
Monthly Rates of Return are calculated by dividing the Fund's net
performance during a month by the Fund's Net Asset Value as of the beginning of
such month.
Compound Rate of Return is calculated by compounding the monthly rates of
return. For example, the compound rate of return of (4.25)% for 1997 was
calculated by multiplying (1.0192 x 0.9394) -1=(4.25)%.
Drawdown means losses experienced by the Fund over a specified period.
Worst Peak-to-Valley Drawdown means the greatest cumulative percentage
decline in month-end Net Asset Value due to losses sustained by the Fund during
any period in which the initial month-end Net Asset Value is not equaled or
exceeded by a subsequent month-end Net Asset Value.
_______________
-16-
Selected Financial Data
The following selected financial data is derived from the audited financial
statements of the Fund as of December 31, 1997 and for the period August 21,
1997 (inception of the Fund, but not commencement of operations) to December 31,
1997 and the unaudited financial statements of the Fund as of and for the seven
months ended July 31, 1998. The Fund commenced trading operations on November
20, 1997. See "Financial Statements" beginning at page 45.
---------------------
January 1, 1998 August 21, 1997
to to
July 31, 1998 December 31, 1997
--------------- ------------------
TOTAL ASSETS $7,992,641 $2,932,764
========== ==========
TOTAL PARTNERS' CAPITAL $7,955,412 $2,914,736
========== ==========
INCOME
Trading gains (losses)
Realized $ 789,454 $ (116,342)
Change in unrealized 4,475 2,175
---------- ----------
Gain (loss) from trading 793,929 (114,167)
Interest income 150,530 19,520
---------- ----------
Total gain (loss) 944,459 (94,647)
---------- ----------
EXPENSES
Brokerage commissions 2,946 564
General Partner management fee 81,845 9,826
Advisor incentive fee 171,310 0
Operating expenses 31,070 11,704
---------- ----------
Total expenses 287,171 22,094
---------- ----------
NET INCOME (LOSS) $ 657,288 $ (116,741)
========== ==========
NET INCOME (LOSS) PER UNIT
(based on weighted average number
of Units outstanding during the period) $ 164.50 $ (48.21)
========== ==========
INCREASE (DECREASE) IN
NET ASSET VALUE PER UNIT $ 228.81 $ (42.55)
========== ==========
-17-
Management's Analysis of Operations
Results of Operations
General
The program of a purely technical futures trader, such as the Advisor,
makes no attempt to predict price movements. The Advisor does not engage in
fundamental economic supply or demand analysis to attempt to identify
mispricings in the market, nor does it conduct a macroeconomic assessment of the
relative strengths of the national economy or economic sectors. Instead, the
trading program applies proprietary computer models to analyzing historical
market data, and from this data alone attempts to determine whether market
prices are trending. The theory behind a technical trader's strategy is that
market prices are the best and most efficient indication of market movements.
The likelihood of a technical trader's strategy being profitable is materially
diminished during periods when events external to the markets themselves, rather
than historical market data, have an important impact on prices. In such
instances, a technical trader's historical price analysis could establish
positions on the wrong side of the price movements caused by such external
events.
Only historical market data and not economic conditions, political events,
etc., or other factors external to market data is directly relevant to the
Advisor's trading results. There is no direct connection between particular
market conditions and price trends. There are so many influences on the markets
that the same general type of economic event may lead to a price trend in some
cases but not in others.
This performance summary is an outline description of how the Fund
performed in the past, not necessarily any indication of how it will perform in
the future.
Performance Summary
1998 (7 months)
The Fund had a very successful first quarter of 1998 as the Advisor's
trading model correctly anticipated a strongly rising stock market and remained
in the leveraged long position that had been initiated in December 1997. The
Fund showed a profit in all three months of the first quarter and the Net Asset
Value per Unit climbed over 24%. In the second quarter of 1998, the stock market
began showing signs of instability and the Fund earned only a small gain of
approximately 2%. As the third quarter began in July, the Fund remained in a
long position, resulting in a small loss when the stock market began to fall. In
late July, the Advisor's system issued a sell-short signal in anticipation of
further market declines.
1997 (2 months)
The Fund commenced trading in November 1997 with a short position in the
S&P 500 Contract. That initial position resulted in a small profit in the Fund's
first month of operation. However, a December stock market rally then caused a
loss on the short position. The Advisor's system reversed and went long in the
month of December, but as of month-end the Fund still showed a loss of
approximately 6%. The long position was still open and subsequently became
profitable as the stock market rallied into 1998.
-18-
Liquidity and Capital Resources
The amount of assets invested in the Fund generally does not affect its
performance, as typically this amount is not a limiting factor on the positions
acquired by the Advisor, and the Fund's expenses are primarily charged as a
fixed percentage of its asset base, however large.
The Fund raises additional capital only through the sale of Units and
trading profits (if any) and does not engage in borrowing. The Fund sells no
securities other than the Units.
The Fund's assets are held primarily in U.S. Treasury bills or other high-
quality, interest earning obligations, as well as in cash. The Net Asset Value
of the Fund's cash and financial instruments is not materially affected by
inflation. Changes in interest rates, which are often associated with inflation,
could cause the value of certain of the Fund's debt securities to decline, but
only to a limited extent. More importantly, changes in interest rates could
cause periods of strong up or down price trends, during which the Fund's profit
potential generally increases.
The Fund's assets are held in cash and highly liquid U.S. government
securities. Accordingly, except in very unusual circumstances, the Fund should
be able to close out any or all of its open trading positions and liquidate any
or all of its securities holdings quickly and at market prices. This permits the
Advisor to limit losses as well as reduce market exposure on short notice should
its program direct it to do so in order to reduce market exposure. In addition,
because there is a readily available market value for the Fund's positions and
assets, the Fund's monthly Net Asset Value calculations are precise.
Use of Proceeds; Interest
Income Arrangements
Custody of Fund Assets
After payment of the 1% organizational charge covering its organization and
offering expenses, the net proceeds of this offering are (a) deposited in the
Fund's cash management account at a major financial institution and at banks
selected by the General Partner to be invested in U.S. government securities
and/or other high quality, interest-earning obligations and/or held as cash;
and/or (b) deposited in the Fund's trading account with the Futures Broker for
use in the Fund's futures trading. All of the Fund's assets are expected to be
used for speculative trading in financial futures contracts, currently only the
S&P 500 Contract. It is expected that 9% to 15% of the Fund's assets will be
used as original margin under the trading program currently used by the Fund.
The Fund fulfills its margin commitments with cash, U.S. Treasury bills or
high-quality, interest-earning obligations. A majority of the Fund's assets will
be held in the Fund's cash management account and managed by the Cash Manager.
These assets will be committed for margin calls on the Fund's account(s) at the
Futures Broker. More specifically, the Cash Manager, on behalf of the Fund, may
direct the investment of these funds in items such as: (a) U.S. Treasury
securities, bankers' acceptances and certificates of deposit (banks with a long-
term credit rating of at least AA); (b) time deposits (one day only -- banks
with a long-term credit rating of at least AA); (c) interests in money market
funds regulated under U.S. securities laws and regulations; and/or (d)
commercial paper (rated AP-1 of top issuers). The Cash Manager's objective is
for the Fund's account to earn net interest income and/or profits in excess of
short-term Treasury bill rates, net of its fees; however, there is no guarantee
the Cash Manager can produce any income or profits on the Fund's account. (The
Cash Manager is also responsible for the management of subscription funds held
in the Fund's cash management account prior to acceptance of the subscription by
the Fund.) The remaining
-19-
assets will be held at the Futures Broker for margin purposes and will earn
interest at short-term Treasury bill rates. The Fund may maintain assets with
one or more unaffiliated banks for normal payment of bills and money management
purposes.
All assets on deposit with the Futures Broker will be segregated as
customer funds under the Commodity Exchange Act, as amended (the "CEA"), except
as related to assets used to margin any foreign futures trading (not expected by
the Fund -- see below). The assets held in the Fund's cash management account
and/or a Fund bank account are not subject to the segregation standards of the
CEA.
The Fund will not: (a) invest in any debt instruments, other than those
incident to the Cash Manager's management of the Fund's assets and any other
CFTC-authorized investments; (b) invest in any equity security without prior
notice to limited partners; or (c) make loans to entities affiliated with the
Fund or the General Partner. The General Partner will not commingle the Fund's
property with the property of any other person or entity.
The Advisor does not currently expect to trade on foreign markets. However,
if the Fund does so, assets on deposit at the Futures Broker used to margin
foreign futures and options trading will not be held in customer segregation.
Rather, such assets will be held in a variety of foreign currencies in the
Futures Broker's "foreign futures secured amount" accounts, as required under
CFTC rules.
Interest Income
The Fund will receive all of the interest income generated by investments
held in the accounts discussed in the preceding section, subject to the cash
management fee and minor incidental charges. The Fund's interest income, as well
as the assets on which such interest is credited, is subject to the risk of
trading losses.
General
Subscriptions that are received on a timely basis and are accepted become
effective on the first day of the month following receipt. No interest will be
credited on subscription amounts prior to the first day of the month.
Analysis of Fees and Expenses Paid by the Fund
Fees and Expenses to Date
- --------------------------------------------------------------------------------
01/01/98- 11/20/97-
Fees and Expenses 07/31/98 12/31/97
----------------- -------- --------
- --------------------------------------------------------------------------------
Management fees $ 81,845 $ 9,826
- --------------------------------------------------------------------------------
Operating and administrative expenses 26,329 10,962
- --------------------------------------------------------------------------------
Brokerage commissions and
transactional charges 2,946 564
- --------------------------------------------------------------------------------
Cash management fee 4,741 742
- --------------------------------------------------------------------------------
Incentive fees 171,310 0
- --------------------------------------------------------------------------------
TOTAL $287,171 $22,094
- --------------------------------------------------------------------------------
-20-
Fees and Expenses Payable by the Fund
Brokerage Commissions
ING (U.S.) Securities, Futures & Options Inc. serves as the futures broker
for the Fund. Futures brokerage commissions for trades upon exchanges are often
paid only after a futures position has been both initiated and closed-out. Such
commissions are referred to as "round-turn commissions," as they cover both the
initial purchase (or sale) of a commodity futures contract and the subsequent
offsetting sale (or purchase). Under the brokerage agreement between the Futures
Broker and the Fund, the Fund pays brokerage commissions to the Futures Broker
in respect of all futures and option trades executed or cleared on behalf of the
Fund, on Chicago exchanges, at $8.00 per round-turn, plus exchange, pit and
National Futures Association ("NFA") fees, any "incidental" trading expenses,
floor brokerage expenses and any "give-up" fees. Any futures trades executed on
other U.S. exchanges would be charged at comparable rates. Brokerage rates for
any foreign futures trading may be higher. Give-up fees paid to executing
brokers that "give-up" the trades for clearing through the Futures Broker are
expected to range from $2.00 to $4.00 per "round-turn" trade. The Futures Broker
receives a round-turn commission on each purchase or sale of an option by the
Fund. In addition, in the event that an option contract is exercised, the Fund
pays the Futures Broker a round-turn commission just as it would upon any other
acquisition of a futures position. No commission is payable upon the expiration
of an outstanding option.
The Fund reimburses the Futures Broker for all delivery, insurance, storage
and other charges incidental to its trading (which are not expected to be
significant). The commission charge includes exchange and clearing fees (see
below) and floor brokerage charges. Although the Fund pays commissions on a
round-turn basis, the Net Asset Value of the Fund (for all purposes, including
redemptions) reflects an accrued liability for the round-turn commissions
payable upon the liquidation of each of the Fund's open contracts.
The Fund's brokerage commission rates do not include the transaction fee
assessed by the NFA upon all options and futures trades on United States and
foreign commodity exchanges. These fees have currently been established at $0.20
per round-turn trade of each futures contract and $0.10 per each option trade (a
$0.10 fee is charged upon the purchase and upon the exercise, but not upon the
expiration, of an option, and an additional $0.20 fee upon the liquidation of
the futures position acquired upon such exercise).
Round-turn commissions and related charges are estimated by the Advisor to
be approximately 1% of average annual Net Assets based on the Advisor's
historical and anticipated trading velocity. Actual round-turn commissions
could, however, substantially exceed this level.
The brokerage rates may only be increased upon notice to the limited
partners providing them sufficient time to redeem Units prior to such increase
becoming effective.
Management Fee
The General Partner is paid a management fee equal to 1/4 of 1% of month-
end Net Assets (3% annually). Such fee shall be accrued monthly, and paid as
soon as practicable, but no later than the end of the month following the month
in which the fee accrued. The management fee is pro-rated for partial periods
and any interim subscriptions and redemptions. Net Assets for this purpose are
calculated after brokerage commissions, operating and administrative expenses
and incentive fees, as described below, paid or accrued as of such month-end.
-21-
Incentive Fee
The Advisor is paid a quarterly incentive fee equal to 20% of any New
Trading Profit, as defined below, recognized during each calendar quarter. New
Trading Profit is the net profits (realized and unrealized), if any, from the
Fund's trading through the end of each calendar quarter, after subtraction of
the brokerage commissions (including the difference, positive or negative, in
accrued commissions on open positions between the end of such period and the end
of the previous period). Any trading losses from prior periods must be recouped
before New Trading Profit, and thus new incentive fees to the Advisor, can again
be generated. New Trading Profit does not include interest income. New Trading
Profit is not reduced by operating and administrative expenses, management fees,
upfront organizational charges or the Cash Manager's fee. Accordingly, the Fund
may be required to pay the Advisor an incentive fee for a quarter (based on New
Trading Profit) even though the Fund has a net loss for the quarter (after
deduction of all such fees and expenses).
Accrued incentive fees on redeemed Units are paid to the Advisor.
Redemption of Units will result in a reduction in any loss carryforward existing
for incentive fee purposes on the redemption date in proportion to the
percentage of the total capital redeemed.
Cash Management Fee
The Fund pays the Cash Manager a monthly fee based on a sliding scale
ranging from an annualized 0.50% to 0.25% depending on the amount of aggregate
assets under its management related to accounts associated with the General
Partner, ATA Research, Inc. and their respective affiliates and clients.
Organizational Charge
An organizational charge of 1% of the subscription amount will be paid to
the General Partner (or the Selling Agent, its affiliated broker-dealer) by each
subscriber. The General Partner has paid for all actual costs of organizing the
Fund and conducting the public offering of Units. To the extent that the
aggregate 1% organizational charge collected is less than these actual costs,
the General Partner will pay the costs. To the extent that the aggregate 1%
organizational charge collected exceeds these actual costs, the excess amount
will be paid to the Selling Agent. Such payment could be deemed to be a selling
commission.
Selling Commissions to Additional Selling Agents
The General Partner may pay, out of its own funds, to third-party selling
agents upfront selling commissions of up to 3% of the sales price of any Units
sold by them at any month-end closing and/or ongoing "trail" commissions with
respect to Units sold by such selling agents which remain outstanding. Any such
payments will be made to the Selling Agent and then to the third-party selling
agents.
Operating and Administrative Expenses
The Fund pays its operating and administrative expenses, such as ongoing
accounting, audit, legal, printing, computer and other administrative fees and
expenses. The General Partner estimates that such expenses will be approximately
2% per annum of average annual Net Assets, although these expenses could be
lower if the Fund's assets increase. Actual expenses could, however, also exceed
this level.
Extraordinary Expenses
The Fund will be required to pay any extraordinary charges (such as taxes)
incidental to its trading or otherwise. It is anticipated that there will either
be no extraordinary charges or that they will not be material in amount.
Extraordinary charges will be assessed to Units on a pro rata basis.
-22-
General
It will be necessary for the Fund to experience gains from futures trading
(and interest income) in excess of such expenses in order for limited partners
to realize increases in the Net Asset Value of their Units. No assurance can be
given that the Fund will be able to achieve any appreciation of its assets.
The General Partner will send each limited partner monthly and annual
statements, complying with applicable CFTC regulations, which will include a
description of the performance of the Fund and set forth, among other things,
the aggregate incentive fee, brokerage commissions, management fees, and other
expenses incurred or accrued by the Fund during the preceding month or year, as
the case may be. The monthly statements will contain unaudited and the annual
statements audited financial information.
The Advisor
Background and Principals
The Advisor's place of business is located at 2519 Avenue U, Brooklyn, New
York 11229. The telephone number is (800) 524-4832. All books and records
pertaining to its business will be maintained at the above address. The Advisor,
incorporated in New York in February 1985, is an investment adviser registered
with the SEC. In August 1995, the Advisor registered with the CFTC as a
commodity trading advisor and is a member of the NFA in such capacity. The sole
principals of the Advisor are Charles Mizrahi and Gary Mizrahi.
The Advisor started managing client assets in mutual funds in 1985. Its
expansion into futures resulted from the fact that mutual funds have certain
inherent limitations including lack of leverage and the inability at that time
to go short. Moreover, a mutual fund account could only trade once per day.
Realizing these limitations, the Advisor developed a modified version of its
model to take advantage of its stock market signals. The Advisor's specialty in
stock market trading, encompassing a period of over twelve years, found a
natural outlet in the S&P stock index futures market.
Charles Mizrahi, born 1962, has been the Advisor's President and
responsible for its trading activities since he founded the firm in February
1985. From January 1988 through July 1994, he was also an officer and registered
representative of Hampton Management, Inc. ("Hampton Management"), an SEC-
registered broker-dealer. Mr. Mizrahi was registered with the CFTC as a sole
proprietor commodity pool operator from July 1986 to July 1987, managing several
small pools whose assets were allocated to third-party advisors. He also was a
Vice President of Sales for Comart, Inc., an introducing broker, from June 1984
until February 1985. Mr. Mizrahi attended Brooklyn College in September 1981
prior to beginning his career as a floor trader at the New York Futures Exchange
("NYFE"), trading NYFE stock index futures.
Gary Mizrahi, born 1963, has been the Advisor's Treasurer since February
1988 and is primarily responsible for its back office and administrative
operations. Mr. Mizrahi was the Advisor's controller from December 1986 until
February 1988. He also was Treasurer of Hampton Management from February 1988
through July 1994. Mr. Mizrahi assists in trading execution and is instrumental
in the ongoing research and development of the Advisor's proprietary systems.
-23-
Description of Trading Methods and Strategies
The objective of the Advisor's Leverage 3 trading program is to achieve
appreciation of the Fund's assets through speculative trading in futures
contracts. The Advisor's system in the Leverage 3 trading program is totally
technical and mechanical. Technical analysis of the markets often includes a
study of the actual daily, weekly and monthly price, volume and open interest
data, utilizing charts and/or computers for analysis of these items.
The Advisor currently trades only the S&P 500 Contract on the Chicago
Mercantile Exchange. An index represents a "basket" or portfolio of stocks or
commodities, grouped in a particular way. How a particular stock or commodity
index tracks the market depends on the composition of the stocks or commodities
included in the index, the percentage weight of each component, and the method
of calculating each index. The S&P 500 Stock Index has long been the benchmark
by which professionals measure equity portfolio performance. The Standard &
Poor's Corporation designed and maintains the Index to be an accurate proxy for
a diversified stock portfolio. The Index is based on the stock prices of 500
large-capitalization companies. The market value of the 500 companies is equal
to about 80% of the value of all stocks listed on the New York Stock Exchange.
These companies' stocks are chosen for market size, liquidity and various
industry representation. The Index is capitalization weighted, representing the
market value of all outstanding common shares of the companies listed (share
price multiplied by the number of shares outstanding). This means that a change
in the price of any one stock influences the index in proportion to the relative
market value of that company's outstanding shares.
The trading of futures contracts on a stock index such as the S&P 500 Stock
Index permits an investor to trade the Index at a multiple thus creating, in
effect, a highly-leveraged stock portfolio. The S&P 500 Contract is valued at an
amount which equals the multiplier (currently $250) times the Index level (which
fluctuates daily but for these purposes is assumed to equal 1,100). In such
example the S&P 500 Contract is worth $275,000 ($250 x 1,100). The Advisor's
Leverage 3 program attempts to take a position in the S&P 500 Contract in the
range of three times the size of a fully-funded S&P 500 Contract. For example,
if the program is maximum leverage long, the program would take a position size
of up to $825,000 (3 x $275,000) for each $275,000 in Fund capital.
There are also variations on the S&P 500 Contract, such as the S&P
500/BARRA Growth Index and S&P 500/BARRA Value Index futures contracts, as well
as several other stock index futures contracts covering stock values in the
United States and worldwide. The Chicago Mercantile Exchange (the "Exchange")
has recently decreased the multiplier for the S&P 500 Contract from $500 to
$250. The Exchange has also introduced an electronic mini S&P 500 Stock Index
futures contract (the "E-Mini") that makes it possible to process small orders
through an entirely electronic order entry and execution system. With a
multiplier of only $50 times the S&P 500 Stock Index, the E-Mini gives more
investors the opportunity to trade the Index, theoretically creating a very
liquid market. The E-Mini futures contract features the same 500 stocks, the
same benchmark standards, the same liquid index complex, but with a $50
multiplier. The Advisor may in the future trade any of these variations or even
other stock index contracts on behalf of the Fund.
Since the Advisor employs a systematic approach to trading the S&P 500
Contract, and signals are generated at 4:00 p.m., New York City time, most
orders are entered as "on market close." On occasion when data is not accurate
due to updates made by the exchanges after the markets close, the Advisor will
run its systems and place orders on the GLOBEX exchange overnight or enter
orders on the market open of the next day. Rollover of contracts can be executed
during the trading day. The Advisor's model uses several indicators that examine
the prices of the S&P 500 Contract, broader market action (advance/decline,
volume, new highs, new lows) and changes in monetary policy. The system requires
the Advisor to scale up into a position or scale down out of a position
depending on how many indicators are in a buy mode.
-24-
When enough signals are on buy, the Advisor will initiate a position, but
not add to it, unless and until additional indicators click into buy signals.
The same principles are used to implement short positions. The system has four
positions: maximum leverage long (+3 leverage), long (+2 leverage), neutral
(100% cash) and maximum leverage short (-3 leverage).
The Advisor is authorized to trade a wide range of commodity interests on
U.S. and foreign exchanges, but currently trades only the S&P 500 Contract. The
Advisor may trade any of the commodity interests which are now, or may hereafter
be, offered for trading on or off local and international exchanges and markets.
In that regard, the Advisor, from time to time in its sole discretion, may add
new commodity interests to and delete commodity interests from the portfolio.
Trading methods utilized by the Advisor are proprietary and confidential.
The description set forth herein is not intended to be exhaustive. Also, the
trading methods used by the Advisor for an account may differ from those used
with respect to other accounts managed by the Advisor or the trading methods
used by the Advisor in trading its own account or those of its principals.
The Advisory Agreement
The First Amendment and Restatement to Advisory Contract (the "Advisory
Agreement") between the Fund and the Advisor terminates on August 31, 1999 and
is subject to one-year renewals on the same terms, at the option of the Fund
unless terminated by the Advisor or the Fund as set forth herein. The Advisory
Agreement terminates automatically without notice in the event that: (a) the
Fund is terminated or liquidated; or (b) the registration of the Advisor as a
commodity trading advisor or the membership in the NFA is terminated or
suspended. In addition, the Fund may terminate the Advisory Agreement at any
time for any reason by providing the Advisor with at least thirty (30) days'
advance notice of its intent to terminate. Further, the Fund may terminate the
Advisory Agreement immediately if there has been any material breach by the
Advisor of any provision of the Advisory Agreement, in particular, without
limitation, a material breach of any of the representations and warranties set
forth therein. The Advisor may terminate the Advisory Agreement (a) immediately
if there has been any material breach of the Advisory Agreement by the Fund or
(b) at its discretion upon ninety (90) days' notice following the initial one-
year term of the Advisory Agreement. In addition, the Advisor may terminate the
Agreement upon thirty (30) days' notice to the Fund as of any month-end if (a)
the Advisor notifies the General Partner of a proposed material change to the
strategy to be used in trading the Fund's assets and the General Partner has
instructed the Advisor not to implement such change or (b) the Advisor has
determined to cease managing customer accounts pursuant to the Leverage 3
trading strategy used on behalf of the Fund.
The Fund has agreed to indemnify the Advisor and related persons for any
claims or proceedings involving the business or activities of the Fund, provided
that the conduct of such persons does not constitute negligence, misconduct or
breach of the Advisory Agreement or of any fiduciary obligation to the Fund and
was done in good faith and in a manner reasonably believed to be in, or not
opposed to, the best interests of the Fund.
The Advisor and related persons will not be liable to the Fund or any of
the partners in connection with its management of the Fund's assets except (i)
by reason of acts or omissions in breach of the Advisory Agreement, (ii) due to
their misconduct or negligence, or (iii) by reason of not having acted in good
faith and in the reasonable belief that such actions or omissions were in, or
not opposed to, the best interests of the Fund.
-25-
Year 2000 Compliance
The Advisor is taking immediate action to identify any of its computer
systems that are Year 2000 vulnerable. If such systems are identified that
negatively affect its services (e.g., trade details, fee information), the
Advisor will take immediate action to update those systems, extensively test the
systems internally and with other parties (if appropriate) to ensure that system
interdependencies have been adequately addressed, and establish contingency
plans and provide such plans in the event of a malfunction of any part of the
systems. If the Advisor has a Year 2000 vulnerable system which is unable to be
corrected by the year 2000, it will notify the General Partner in a timely
manner. If material to the Fund, the General Partner will promptly notify
investors.
General
The Advisor and/or its principals expect to maintain a substantial
investment as limited partners in the Fund.
There has not been any material administrative, civil or criminal actions
(whether pending, on appeal or concluded) against the Advisor or its principals
within the five-year period preceding the date of this Memorandum, except as
follows: On September 20, 1995, the Advisor, acting as a registered investment
adviser, entered into a Consent Order with the Arizona Corporation Commission
(neither admitting nor denying the findings of fact and conclusions of law) at
Docket No. 3080-I. The order stemmed from an alleged improper use of solicitors
who were registered as investment advisers with the Securities and Exchange
Commission but who had not previously been qualified as investment adviser
representatives with the Arizona Corporation Commission.
Performance of the Advisor
Capsule A below reflects the performance of the Leverage 3 Trading Program
managed by the Advisor as of July 31, 1998 for the entire history of the program
(July 1995 through July 1998), on a monthly and annual basis (year-to-date for
partial years). Management fees are charged at rates of 0% to 0.5% (2% annually)
of month-end or quarter-end account equity. Incentive fees are charged at rates
of 20% to 30% of trading profits. Capsule B below reflects the performance of
the Leverage 2 trading program managed by the Advisor as of October 31, 1996 for
the entire history of the program (May 1995 through October 1996), on a monthly
and year-to-date basis. The management fee was charged at a rate of 0.5% (2%
annually) of quarter-end account equity. The incentive fee was charged at a rate
of 20% of trading profits. The Leverage 2 trading program has been terminated
and is no longer offered to clients. The Advisor has adopted the Fully-Funded
Subset method for computing Rates of Return, pursuant to an Advisory published
by the Commodity Futures Trading Commission for both capsules.
Capsule A presents the composite performance of all accounts managed by the
Advisor in the Leverage 3 Program, including both the Fund and other investors.
While the performance of the Fund has been similar, investors should not expect
the Fund to always experience the same gains or losses as the Leverage 3
composite performance summary. There can be significant differences between the
two for reasons such as differing fee structures for other clients, leverage,
use of notional funds, and cash flows into and out of the Fund or the composite.
For example, in early 1998 the Fund received substantial additional investments
from limited partners, which the Advisor was unable to add to a profitable
futures trade that was already in place. The presence of this uninvested cash
had the effect of reducing the Fund's overall leverage and therefore the
returns. Of course, had that particular trade experienced a loss, the uninvested
cash might have reduced the Fund's overall loss.
-26-
The accounts reflected in the capsules were charged different fees than the
Fund and the capsules have not been adjusted to reflect the fees and expenses
payable by the Fund.
In the following capsules "Drawdown" means losses experienced by an account
over a specified period and "Worst Peak-to-Valley Drawdown" means the greatest
cumulative percentage decline in month-end net asset value due to losses
sustained by any account during any period in which the initial month-end net
asset value is not equaled or exceeded by a subsequent month-end net asset
value.
Prospective investors are cautioned that the performance information set
forth below is not necessarily indicative of, and has no necessary bearing on,
any trading results which may be attained in the future by the Advisor, since
past results are not necessarily indicative of future results. There can be no
assurance that a participating investor will make any profits at all or avoid
incurring substantial losses. Further, the rates of return earned when an
advisor is managing a limited amount of equity may bear little relationship to
those which such advisor is able to achieve managing greater amounts of equity.
-27-
CAPSULE A
Commodity Trading Advisor: Hampton Investors, Inc.
Name of Program: Leverage 3 Program
Inception of Trading Client Accounts: May 1995
Inception of Trading Program: July 1995
Number of Open Accounts: 17
Total Actual Assets under Management Overall: $16,669,222
Total Assets Including Notional Funds under Management Overall: $24,052,194
Total Actual Assets under Management in Program: $16,669,222
Total Assets Including Notional Funds under Management in Program: $24,052,194
Worst Monthly Drawdown: (12.78)% (8/97)
Worst Peak-to-Valley Drawdown: (12.78)% (8/97)
Accounts closed with positive net performance: 2
Accounts closed with negative net performance: 0
======================================================
Rate of Return
(Computed on a compounded
Monthly basis)
==============================================================================
Month 1998 1997 1996 1995
- ------------------------------------------------------------------------------
January 2.85% 12.07% 11.88% --
- ------------------------------------------------------------------------------
February 15.79% 3.80% 0.02% --
- ------------------------------------------------------------------------------
March 11.90% 10.94% 3.33% --
- ------------------------------------------------------------------------------
April 3.51% (10.73)% 4.26% --
- ------------------------------------------------------------------------------
May 0.11% 9.14% 4.77% --
- ------------------------------------------------------------------------------
June (0.82)% 10.02% 1.81% --
- ------------------------------------------------------------------------------
July (2.62)% 14.57% (3.65)% (1.11)%
- ------------------------------------------------------------------------------
August (9.96)% 0.57% (0.29)%
- ------------------------------------------------------------------------------
September 11.19% 9.34% 6.82%
- ------------------------------------------------------------------------------
October (8.42)% 3.43% 1.61%
- ------------------------------------------------------------------------------
November 5.88% 4.51% (9.65)%
- ------------------------------------------------------------------------------
December (7.76)% (7.31)% 2.08%
==============================================================================
Year 33.37% 41.91% 36.48% (1.29)%
==============================================================================
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
-28-
CAPSULE B
Commodity Trading Advisor: Hampton Investors, Inc.
Name of Program: Leverage 2 Program
Inception of Trading Client Accounts: May 1995
Inception of Trading Program: May 1995
Number of Open Accounts: 0
Total Actual Assets under Management Overall: $16,669,222
Total Assets Including Notional Funds under Management Overall: $24,052,194
Total Actual Assets under Management in Program: $0
Total Assets Including Notional Funds under Management in Program: $0
Worst Monthly Drawdown: (6.63)% 11/95
Worst Peak-to-Valley Drawdown: (6.63)% 11/95
Accounts closed with positive net performance: 1
Accounts closed with negative net performance: 0
===============================
Rate of Return
(Computed on a compounded
Monthly basis)
==============================================================================
Month 1996 1995
- ------------------------------------------------------------------------------
January 8.55% --
- -----------------------------------------------------------------------------
February 0.05% --
- -----------------------------------------------------------------------------
March 1.63% --
- -----------------------------------------------------------------------------
April 2.48% --
- -----------------------------------------------------------------------------
May 3.46% (0.85)%
- -----------------------------------------------------------------------------
June 1.57% (0.4)%
- -----------------------------------------------------------------------------
July (1.92)% (0.51)%
- -----------------------------------------------------------------------------
August 0.31% (0.12)%
- -----------------------------------------------------------------------------
September 5.05% 3.43%
- -----------------------------------------------------------------------------
October 1.52% 0.87%
- -----------------------------------------------------------------------------
November (6.63)%
- -----------------------------------------------------------------------------
December 1.10%
=============================================================================
Year 16.59% (2.25)%
=============================================================================
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
-29-
The General Partner
Background and Principals
ProFutures, Inc., a Texas corporation, began operations in December 1984
and specializes in the management of speculative managed futures accounts and
funds. The General Partner has been registered with the CFTC as a commodity pool
operator since January 1987 and as a commodity trading advisor and introducing
broker since December 1984. The General Partner is a member of the NFA in such
capacities. Its office address is 11612 Bee Cave Road, Suite 100, Austin, Texas
78733. Its telephone numbers are (800) 348-3601 and (512) 263-3800. The
principals of the General Partner are Gary D. Halbert, Debi B. Halbert and
Patrick W. Watson. The General Partner is also the commodity pool operator of
two multi-advisor, diversified public commodity pools.
Gary D. Halbert, born 1952, is a Director, President and majority
stockholder of the General Partner. Mr. Halbert is also the Chairman, President
and controlling stockholder of: (a) the Selling Agent; (b) ProFutures Fund
Management, Inc., which serves as a co-general partner in private investment
companies primarily engaged in the trading of securities; (c) ProFutures Capital
Management, Inc., a registered investment adviser; and (d) ProFutures
International, Ltd., a Bahamian corporation. Mr. Halbert has 27 years of
continuous experience in the futures industry. Mr. Halbert, who has served as an
arbitrator on several occasions for the NFA, holds a Master's degree in
International Management from the American Graduate School (Thunderbird) and a
Bachelor of Science degree from Texas Tech University.
Debi B. Halbert, born 1955, is a Director, the Chief Financial Officer,
Treasurer and minority shareholder of the General Partner. She is also: (a) the
Chief Financial Officer and Treasurer of ProFutures Fund Management, Inc.; and
(b) the Chief Financial Officer, Treasurer and Director of ProFutures Financial
Group, Inc., the Selling Agent, and ProFutures Capital Management, Inc. Ms.
Halbert, the wife of Gary D. Halbert, attended Richland College (Texas). She has
over fifteen years of experience in the futures industry. Ms. Halbert's
principal responsibility is serving as Chief Financial Officer and compliance
officer. She manages back-office operations and administration of the Fund and
other accounts.
Patrick W. Watson, born 1964, is Vice President of the General Partner and
is involved in business development, management information systems and investor
relations. Mr. Watson joined the General Partner in October 1991. He has also
served as Vice President of the Selling Agent and ProFutures Capital Management,
Inc. since February 1996. Mr. Watson has a Bachelor of Arts degree from Howard
Payne University and a Master of Arts degree from Rice University.
Year 2000 Compliance
The General Partner's modifications for Year 2000 systems compliance are
proceeding according to plan and are expected to be completed on or before June
1999. These modifications will include all systems which substantially affect
the operations of the Fund. Based on information currently available, the
remaining expenditures are estimated at less than $5,000 and will cover any
hardware and software upgrades, systems consulting and computer maintenance.
These expenditures are not expected to have a material adverse impact on the
General Partner's financial position, results of operations or cash flows in
future periods. However, the failure of the General Partner's futures exchanges,
clearing organizations, vendors, clients or regulators to resolve their own
processing issues in a timely manner could result in a material financial risk.
The General Partner is devoting the necessary resources to address all Year 2000
issues in a timely manner.
-30-
General Partner's Investment
The General Partner is required by the Limited Partnership Agreement to
maintain a general partnership investment in the Fund equal to 1% of the total
contributions of all Partners to the Fund. The General Partner may make
withdrawals of such investment as of the end of any month, but at all times its
capital account must equal at least 1% of the Fund's Net Assets. The General
Partner's general partnership interest in the Fund will, for purposes of
allocating Fund expenses, be treated as Units.
Performance of the Fund and the General Partner
The past performance of the Fund is set forth on page 16. The past
performance of the General Partner's other commodity pools is set forth below.
The General Partner is a co-general partner of ATA Research/ProFutures
Diversified Fund, L.P. and is the general partner of Alternative Asset Growth
Fund, L.P. These pools are multi-advisor, widely-diversified commodity pools
that have previously sold interests on a public basis. The CFTC requires
commodity pool operators to disclose the performance of other pools they operate
for only the past five years, although the CFTC permits older performance to be
included on a supplemental basis. The past performance of the General Partner's
other commodity pools since inception through July 31, 1998 is set forth in the
capsule performance table on the following page.
Each of the following funds is a materially different investment than the
Fund. CFTC regulations require their performance to be included in this
prospectus.
In the following capsules "Drawdown" means losses experienced by the pool
over a specified period and "Worst Peak-to-Valley Drawdown" means the greatest
cumulative percentage decline in month-end net asset value due to losses
sustained by the pool during any period in which the initial month-end net asset
value is not equaled or exceeded by a subsequent month-end net asset value.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURES RESULTS
-31-
- ---------------------------------------------------------------------------------------------------------
Summary of Capsule Performance of Other Pools
operated by ProFutures, Inc.
as of July 31, 1998
- ---------------------------------------------------------------------------------------------------------
ATA Research/ProFutures Alternative Asset
Name of Pool Diversified Fund L.P. Growth Fund, L.P.
- ---------------------------------------------------------------------------------------------------------
Type of Pool: Publicly Offered Publicly Offered
- ---------------------------------------------------------------------------------------------------------
Inception of Trading: August 1987 March 1990
- ---------------------------------------------------------------------------------------------------------
Aggregate Subscriptions: $128,636,643 $37,373,069
- ---------------------------------------------------------------------------------------------------------
Current Net Asset Value: $73,243,914 $14,001,700
- ---------------------------------------------------------------------------------------------------------
Largest Monthly Percentage (7.26)% (4/98) (6.72)% (2/96)
Drawdown: (Inception of Trading to Date) (Inception of Trading to Date)
(7.26)% (4/98) (6.72)% (2/96)
(Past Five Years and Year-to-Date) (Past Five Years and Year-to-Date)
- ---------------------------------------------------------------------------------------------------------
Worst Peak-to-Valley (17.23)% (7/93 to 10/95) (16.13)% (7/93 to 10/95)
Drawdown: (Inception of Trading to Date) (Inception of Trading to Date)
(17.23)% (7/93 to 10/95) (16.13)% (7/93 to 10/95)
(Past Five Years and Year-to-Date) (Past Five Years and Year-to-Date)
- ---------------------------------------------------------------------------------------------------------
Rates of Return:
- ---------------------------------------------------------------------------------------------------------
1998 through July (10.14)% (9.44)%
- ---------------------------------------------------------------------------------------------------------
1997 9.92% 9.43%
- ---------------------------------------------------------------------------------------------------------
1996 11.13% 4.83%
- ---------------------------------------------------------------------------------------------------------
1995 0.73% (3.49)%
- ---------------------------------------------------------------------------------------------------------
1994 (0.50)% 0.85%
- ---------------------------------------------------------------------------------------------------------
1993 6.54% 8.09%
=========================================================================================================
1992 2.83% (4.86)%
- ---------------------------------------------------------------------------------------------------------
1991 7.65% 6.05%
- ---------------------------------------------------------------------------------------------------------
1990 38.66% 12.44%
- ---------------------------------------------------------------------------------------------------------
1989 11.57% --
- ---------------------------------------------------------------------------------------------------------
1988 2.18% --
- ---------------------------------------------------------------------------------------------------------
1987 1.36% --
- ---------------------------------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
THE GENERAL PARTNER'S COMMODITY POOLS INCLUDED IN THE FOREGOING
TABLE ARE MATERIALLY DIFFERENT INVESTMENTS THAN THE FUND.
-32-
Brokerage Arrangements
The Fund's brokers are responsible for holding and maintaining the Fund's
funds, securities, commodities and other assets on deposit, the execution or
clearance of transactions, the recordkeeping, preparation and transmittal to the
Fund of daily confirmations of transactions and monthly statements of account,
the calculation of the balance and margin requirements of the Fund's accounts
maintained at such brokers, and similar administrative functions.
A minority of the Fund's assets are deposited primarily in one brokerage
account with ING (U.S.) Securities, Futures & Options Inc., the Futures Broker.
Such assets may, however, be deposited in more than one brokerage account with
various futures commission merchants. The General Partner has sole
responsibility for selection of the Fund's futures brokers. The designation of
clearing brokers may change at any time and limited partners will receive notice
of such change in the Fund's monthly reports. The General Partner also has the
sole authority to negotiate brokerage rates for the Fund.
The Futures Broker is a duly registered futures commission merchant and a
member of the NFA. The Futures Broker is also registered as a broker-dealer and
is a member of the National Association of Securities Dealers, Inc. ING (U.S.)
Securities, Futures & Options Inc., which was formed in 1990, operates under the
trade name ING BARINGS Futures & Options Clearing Services and is a clearing
firm of each of the principal U.S. futures exchanges and the Chicago Board of
Options Exchange. The Futures Broker is a wholly-owned subsidiary of ING Bank
N.V. in Amsterdam, one of the largest financial institutions in the world. The
Futures Broker is an Illinois corporation with a principal place of business at
233 South Wacker Drive, Suite 5200, Chicago, Illinois 60606; telephone (312)
496-7000.
At any given time, the Futures Broker may be involved in legal actions,
some of which may seek significant damages. With the exception of the action
noted below, during the past five years preceding the date hereof, there have
been no administrative, civil or criminal actions against the Futures Broker or
any of its principals -- whether pending, on appeal or concluded -- which is
material in light of all the circumstances.
In 1998, a former client filed a demand for arbitration at the National
Futures Association seeking a significant award. It is alleged that the
claimants' liquidation of positions on a foreign futures exchange in the
volatile period of October 1997 resulted in losses. The Futures Broker is
vigorously defending the claim, which it believes to be baseless.
Under the customer agreement between the Futures Broker and the Fund, the
Fund has agreed to maintain at all times such collateral and/or margin in
accordance with exchange minimum margin requirements as established by the
exchange on which the transaction is executed and has agreed to pay immediately
on demand any amount owing with respect to any of the Fund's accounts. Margin
requirements may be increased at the Futures Broker's sole and absolute
discretion, and may differ from those established by the exchange on which the
transaction is executed. If the Fund fails to deposit sufficient funds to pay
for any commodities and/or to satisfy any demands for original and/or variation
margin, or whenever in the Futures Broker's sole and absolute discretion the
Futures Broker considers it necessary, the Futures Broker may, without prior
demand or notice, when and if it deems appropriate, notwithstanding any rule of
any exchange, liquidate the positions in the Fund's account(s), hedge and/or
offset those positions in the cash market or otherwise, sell any property
belonging to the Fund or in which the Fund has an interest, cancel any open
orders for the purchase and sale of any property, or borrow or buy any property
required to make delivery against any sales, including a short sale, effected
for the Fund, all for the Fund's sole account and risk. The Fund has agreed that
the Futures Broker has no duty and is not required to liquidate positions in the
Fund's account(s).
-33-
The Fund has obtained the foregoing information from the Futures Broker.
Other than providing this information, the Futures Broker is not a party to and
has not reviewed or passed upon the merits of this prospectus nor will the
Futures Broker participate in the Fund beyond its clearing duties pursuant to a
brokerage agreement, so long as that agreement is in effect.
Net Asset Value
The Net Asset Value of the Fund equals its assets less its liabilities, as
determined in accordance with Generally Accepted Accounting Principles,
including any unrealized profits and losses on its open positions. More
specifically, the Net Asset Value of the Fund equals the sum of all cash, the
liquidating value (or cost of liquidation, as the case may be) of all futures
and options on futures positions and the fair market value of all other assets
of the Fund, less all liabilities of the Fund (including accrued liabilities,
irrespective of whether such liabilities -- for example, incentive fees -- may
in fact never be paid), in each case as determined by the General Partner
generally in accordance with Generally Accepted Accounting Principles.
Conflicts of Interest
Neither the General Partner, the Advisor, nor their respective principals
and affiliates (the "Associated Parties") has established any formal procedures
to resolve the following conflicts of interest. Consequently, investors cannot
rely on an independent control on how the Associated Parties will resolve these
conflicts to ensure that the Fund is treated equitably with other clients of the
Associated Parties.
Because no formal procedures are in place for resolving conflicts, they may
be resolved by the Associated Parties in a manner which causes the Fund losses.
The value of limited partners' investment may be diminished by actions or
omissions which independent third parties could have prevented or corrected.
Although the following conflicts of interest are present in the operation
of the Fund, the General Partner does not believe that they are likely to have a
material adverse effect on its performance. This belief is based on a number of
factors, including the following:
(i) The Advisor trades all similarly situated accounts in parallel,
placing bulk orders which are allocated among the Advisor's accounts
pursuant to pre-established procedures. Consequently, the Advisor has
little opportunity to prefer another client over the Fund.
(ii) The Futures Broker simply receives and executes the Advisor's bulk
orders based on pre-established procedures. The Futures Broker has no
ability in allocating positions to favor one account over another.
(iii) The General Partner, as a fiduciary, is prohibited from benefiting
itself at the expense of the Fund.
Any of the Associated Parties are free to manage and advise commodity pools
and commodity trading accounts in addition to the Fund's account. The General
Partner or the Advisor may have a conflict of interest in rendering advice to
the Fund because their respective benefit from managing some other commodity
pools or commodity accounts may exceed their benefit from managing the Fund's
account and, therefore, may provide an incentive to favor such other accounts.
Moreover, if any of the Associated Parties makes trading decisions for such
other accounts and the Fund's account at or about the same time, the Fund may be
competing with such other pools or accounts for the same or similar positions.
No Associated Party will enter into transactions where it knowingly and
deliberately favors itself or another client over the Fund; however, the
Associated Parties each have considerable
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flexibility to trade for other accounts, and each intends to do so to a
significant extent. Accordingly, no assurance is given that the performance of
all accounts controlled and managed by the Associated Parties will be identical
or even similar.
The Associated Parties may trade in the futures markets for their own
accounts. An Associated Party may, as a result of a neutral allocation system or
testing a new trading system, trade proprietary accounts more aggressively, or
take any other actions that would not constitute a violation of applicable
duties to the Fund, which includes taking positions in their proprietary
accounts which are the same as, to or opposite from those positions taken for a
client, including the Fund. The records of such trading will not be made
available to limited partners.
The Selling Agent will have an incentive to sell Units (despite receiving
no direct compensation other than possibly any excess of the aggregate
organizational charge) since the management fee received by the General Partner
(its affiliate) will be greater should the Fund's capitalization increase.
The General Partner is an affiliate of ProFutures Capital Management, Inc.
("PCM"), a registered investment adviser. Under its AdvisorLink program, PCM has
selected the Advisor's mutual fund trading program as one of a few it recommends
to its clients. PCM receives a portion of the fees paid to the Advisor by
clients which PCM referred to the Advisor's mutual fund trading program.
The General Partner operates two multi-advisor, diversified commodity
pools. The General Partner is a co-general partner of ATA Research/ProFutures
Diversified Fund, L.P. (the "Diversified Fund") and is the general partner of
Alternative Asset Growth Fund, L.P. (the "Alternative Fund"). The General
Partner has selected the Futures Broker to serve as the primary futures broker
for both of these pools. The Futures Broker has agreed, so long as it remains
the futures broker for these pools and the Fund, to purchase, under specified
conditions, shares of common stock of the General Partner sufficient to meet the
net worth requirement imposed on the General Partner in connection with its
publicly-offered funds (including the Fund). Accordingly, there is an incentive
for the General Partner to retain the Futures Broker as the primary futures
broker for the Fund. In addition, the Advisor is a trading advisor to the
Diversified Fund and the Alternative Fund.
The Futures Broker acts as commodity broker for accounts other than the
Fund, including accounts of the Futures Broker's affiliates and of limited
partnerships of which the Futures Broker or one of its affiliates is general
partner, and may have financial and other incentives to favor certain of such
accounts over the Fund. The compensation received by the Futures Broker from
such accounts may be more or less than the compensation the Futures Broker will
receive for its services to the Fund.
Certain employees of the Futures Broker are, and will in the future be,
members of United States commodities exchanges and are and will serve on the
governing bodies and standing committees of such exchanges and of their
clearinghouses. In such capacities, these employees have a fiduciary duty to the
exchanges and their clearinghouses which will compel such employees to act in
the best interests of these entities, perhaps to the detriment of the Fund.
The Stock Index Futures Markets
Stock Index Futures Contracts
Stock index futures contracts are contracts made on a commodity exchange
and call for cash settlement, at the close of business on the expiration date of
the contract, based on the level of the index in question at such time. In
addition, under the daily marked-to-market procedure employed by commodity
exchanges, there is a
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cash settlement each day that a trader holds an open position whereby the trader
either pays or receives variation margin based on the change in the value of his
position since the close of trading on the previous day.
Stock Index Options
An option on a stock index futures contract gives the purchaser of the
option the right (but not the obligation) to take a position at a specified
price (the "striking," "strike" or "exercise" price) in the underlying stock
index futures contract. Options have limited life spans, usually tied to the
delivery or settlement date of the underlying futures contract. The value of an
option at any given point in time is a function of market volatility and the
price level of the underlying stock index futures contract.
Stock Index Futures Market Participants
The two broad classifications of persons who trade in stock index futures
are "hedgers" and "speculators." Financial institutions, pension plans and
corporations with large equity portfolios use the stock index futures markets to
hedge such portfolios against declines in overall stock index levels. In doing
so, such hedgers typically accept the "delta" risk -- i.e., the risk that their
actual equity portfolio will perform somewhat differently from the overall
market -- for their own account. A pension plan might, for example, decide
during a run-up in the S&P 500 Stock Index, that it is prudent to hedge 50% of a
$100 million stock portfolio against the risk of the S&P 500 Stock Index level
dropping below a certain level. Accordingly, the plan would acquire short
positions in the S&P 500 Contract with an aggregate face value of $50 million
when the market was at such pre-determined level. For every decline of the Index
below such level, the plan would earn $1 on its short futures position for every
$2 it lost in its equity portfolio -- plus or minus the extent to which such
portfolio overperformed or underperformed the S&P 500 Stock Index. The objective
of the hedger is to protect all or a portion of the value of his equity holdings
from price declines, rather than to profit from his futures trading. The
speculator, on the other hand, risks his capital with the hope of making profits
from fluctuations in the price of stock index futures contracts. The speculator
is, in effect, the risk bearer who assumes the risks which the hedger seeks to
avoid.
The stock index futures markets are also used by a number of market
participants as a means of establishing "proxy" or "surrogate" equity portfolios
which will be replaced in due course by the acquisition of actual stocks. For
example, a money manager might determine that it was appropriate to rebalance an
investment company's portfolio by allocating 10% of such fund's overall holdings
out of fixed income instruments and into common stocks. To purchase stocks
comprising the S&P 500 Stock Index and in a manner which will minimize execution
costs might take several days, whereas the manager may believe that a major
stock market movement is imminent. In such circumstances, the manager could
acquire stock index futures contracts with a gross value equal to 10% of the
investment company's portfolio, thereby immediately positioning the fund to take
advantage of upward movements in overall equity price levels, and gradually
close out futures positions as the fund's brokers gradually acquired the "cash"
equity positions in what they considered to be the most advantageous manner.
Another group of market participants in the stock index futures markets are
institutions which engage in the arbitrage strategy commonly referred to as
"program trading." Program trading involves the purchase or sale of a cash
equity portfolio and the simultaneous offsetting sale or purchase of stock index
futures contracts of the same aggregate face value. The purpose is to capture
the pricing differentials which develop between the cash and the futures
markets, whereby one is from time to time over- or under-priced with respect to
the other, after taking into account the dividends one earns on actual stocks
(as opposed to futures) held and the interest one earns on the assets which one
would otherwise have to spend to acquire a "cash" equity position, but which one
is able to retain if such position is established in the futures markets, in
which it is not necessary to acquire any actual stocks. Barring execution
"slippage" the arbitrage position established in a classic program trade should
be riskless because upon the expiration of the stock index futures contracts
acquired, the value of such contracts would equal the value of the "cash" stock
index, thereby causing the program traders' futures and cash positions exactly
to offset each other.
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Speculative Position Limits
The exchanges have established, and the CFTC has approved, limits, referred
to as "speculative position limits," on the maximum net long or net short
position that any person (other than a hedger) may hold or control in stock
index futures contracts. The position limit for the S&P 500 Contract is very
high relative to other stock indices. The principal purpose of speculative
position limits is to prevent a "corner" on a market or undue influence on
prices by any single trader or group of traders.
Daily Limits
The exchanges have established, and the CFTC has approved, regulations
which limit the amount of fluctuation in stock index futures prices during a
single trading day. These regulations specify what are referred to as "daily
price fluctuation limits" or more commonly "daily limits." The daily limits
establish the maximum amount by which the price of a stock index futures
contract may vary either up or down from the previous day's settlement price at
the end of the trading session. Once the daily limit has been reached in a
particular commodity for delivery in a particular month, it may be difficult,
costly or impossible to liquidate positions in that futures contract. Since
"daily limits" restrict price movements only for a given trading day, they do
not limit ultimate losses.
Regulation
Commodity exchanges in the United States, and trading thereon, are subject
to regulation by the CFTC under the CEA. In addition, the various commodity
exchanges themselves exercise regulatory and supervisory authority over their
members.
The CFTC also regulates the activities of "commodity trading advisors" and
"commodity pool operators" and has adopted regulations with respect to certain
of such persons' activities. Under the CEA, a registered commodity pool
operator, such as the General Partner, is required to make annual filings with
the CFTC describing its organization, capital structure, management and
controlling persons. In addition, the CEA authorizes the CFTC to require the
maintenance of specified books and records and the preparation of disclosure
documents by registered commodity pool operators. Pursuant to such authority,
the CFTC requires a commodity pool operator to keep accurate, current and
orderly records with respect to each pool it operates. The CFTC has delegated
substantial authority to review such books, records and documents to the NFA.
The CFTC may suspend the registration of a commodity pool operator (i) if the
CFTC finds that the operator's trading practices tend to disrupt orderly market
conditions, (ii) if any controlling person of the pool operator is subject to an
order of the CFTC denying such person trading privileges on any exchange and
(iii) in certain other circumstances. Suspension or termination of the General
Partner's registration as a commodity pool operator would prevent it, until such
time (if any) as such registration were reinstated, from acting as general
partner of the Fund, and would be likely to result in the termination of the
Fund.
The CEA gives similar authority to the CFTC with respect to the activities
of "commodity trading advisors," such as the Advisor. If the Advisor's
registration as a commodity trading advisor were to be terminated or suspended,
it would be unable, until such time (if any) as such registration was
reinstated, to render trading advice to the Fund and the Fund's trading
activities would be suspended unless the General Partner selected another
trading advisor, which would be unlikely.
The CEA requires all "futures commission merchants," such as the Futures
Broker, to meet and maintain specified financial requirements, account
separately for all customers' funds and positions, and maintain specified books
and records open to inspection by the staff of the CFTC. The CFTC has, in
effect, delegated responsibility to audit compliance with such financial
requirements to the commodity exchanges and the NFA. The CEA authorizes the CFTC
to regulate trading by futures commission merchants and their officers and
directors,
-37-
permits the CFTC to require action by exchanges in the event of market
emergencies, and establishes a reparations procedure under which commodity
customers may institute complaints for damages arising from alleged violations
of the CEA by persons required to be registered thereunder. The CEA also gives
the states certain powers to enforce its provisions and the regulations of the
CFTC.
Limited partners are afforded certain rights to institute reparation
proceedings under the CEA for violations of the CEA or of any rule, regulation
or order of the CFTC by the General Partner, the Advisor or the Futures Broker.
The NFA is a "registered futures association" under Section 17 of the CEA.
At the present time, the NFA is the only non-exchange, self-regulatory
organization for commodities industry professionals. The NFA also arbitrates
disputes between members and their customers and conducts registration and
fitness screening of applicants for membership.
The regulations of the CFTC and the NFA prohibit any representation by a
person registered with the CFTC or by a member of the NFA, respectively, that
such registration or membership in any respect indicates that the CFTC or the
NFA, as the case may be, has approved or endorsed such person or such person's
trading program or objectives. The registrations and memberships described above
must not be considered as constituting any such approval or endorsement.
The regulation of futures contract trading in the United States and other
countries is a constantly changing area of the law. The various statements made
herein are subject to modification by legislative action and changes in the
rules and regulations of the CFTC, the NFA, commodity exchanges and other
regulatory bodies.
Margins
Initial margin is the minimum amount of funds that must be deposited by a
commodity futures trader with his commodity broker in order to initiate futures
trading. Maintenance margin is the minimum which must remain on deposit with the
broker to maintain the trader's open positions in futures contracts. A margin
deposit, like a cash performance bond, helps assure the commodity trader's
performance of his obligations under his open positions. The initial margin on
the S&P 500 Contract is currently set at approximately 3%-5% of contract value.
The minimum amount of margin required to acquire or maintain a particular
futures contract is set from time to time by the exchange upon which such
commodity futures contract is traded and may be modified from time to time by
the exchange during the term of the contract. Brokerage firms carrying accounts
for traders in commodity futures contracts may increase the amount of margin
required as a matter of policy in order to further protect themselves. Such
increased margin requirements may apply to existing positions held by the Fund
as well as to positions acquired in the future.
When the market value of a particular open commodity futures or option
position changes to a point where the margin on deposit does not satisfy
maintenance margin requirements, a margin call will be made by the trader's
commodity broker. If the margin call is not met within a reasonable time, the
broker is generally required to close out the trader's position. Margin
requirements are computed each day by the trader's commodity broker. With
respect to the Fund's trading, the Fund, and not the limited partners
personally, will be subject to margin calls.
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The foregoing description of the stock index futures markets is intended to
provide only a summary of selected aspects of this industry and should not be
viewed as being either comprehensive or exhaustive. Prospective investors should
have a general familiarity with the stock index futures markets and may consult
an independent adviser or contact the General Partner for further information.
Summary of the Limited Partnership Agreement
The Fund's Limited Partnership Agreement effectively gives the General
Partner full control over the management of the Fund. Limited partners have no
voice in its operations. In addition, the General Partner in its operation of
the Fund is specifically authorized to engage in the transactions described
herein, and is exculpated and indemnified by the Fund against claims sustained
in connection with the Fund, provided that such claims were not the result of
negligence or misconduct and that the General Partner determined that such
conduct was in the best interests of the Fund.
Although limited partners investors have no right to participate in the
control or management of the Fund, they are entitled to: (i) vote on a variety
of different matters; (ii) receive annual audited financial statements,
unaudited monthly reports and timely tax information; (iii) inspect the Fund's
books and records; (iv) redeem Units; and (v) not have the business terms of the
Fund changed in a manner which increases the compensation received by the
General Partner or its affiliates without the consent of a majority of the
limited partners.
Limited partners' voting rights extend to any proposed change in the
Limited Partnership Agreement which would adversely affect them, as well as to
their right to terminate the Fund's contracts with affiliates of the General
Partner. Limited partners also have the right to call meetings of the Fund in
order to permit limited partners to vote on any matter on which they are
entitled to vote, including the removal of the General Partner as general
partner of the Fund.
Limited partners or their duly authorized representatives may inspect the
Fund's books and records, for a purpose related to their status as limited
partners in the Fund, during normal business hours upon reasonable written
notice to the General Partner. They may also obtain copies of such records upon
payment of reasonable reproduction costs; provided, however, that such limited
partners represent that the inspection and/or copies of such records will not be
for commercial purposes unrelated to such limited partners' interest in the
Fund.
The Limited Partnership Agreement provides for the economic and tax
allocations of the Fund's profit and loss. Economic allocations are based on
investors' capital accounts, and the tax allocations generally attempt to
equalize tax and capital accounts by, for example, making a priority allocation
of taxable income to limited partners who redeem at a profit.
The General Partner may amend the Limited Partnership Agreement in any
manner not adverse to the limited partners without need of obtaining their
consent.
Tax Consequences
In the opinion of Sidley & Austin, the following summary of the tax
consequences to United States taxpayers who are individuals is materially
correct. Sidley & Austin's opinion is filed as an Exhibit to the Registration
Statement of which this prospectus is a part.
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Partnership Tax Status of the Fund
Based on the type of income expected to be earned by the Fund, it will not
be treated as a "publicly-traded partnership," and, therefore, will not pay
federal income tax.
Taxation of Partners on Profits or Losses of the Fund
Each Partner must pay tax on his share of the Fund's income and gains. Such
share must be included each year in a Partner's taxable income whether or not
such Partner has redeemed Units. In addition, a Partner may be subject to paying
taxes on the Fund's interest income even though the Net Asset Value per Unit has
decreased due to trading losses. See "--Tax on Capital Gains and Losses;
Interest Income," below.
The Fund provides each Partner with an annual schedule of his share of tax
items. The Fund generally allocates these items equally to each Unit. However,
when a Partner redeems Units, the Fund allocates capital gains or losses so as
to reduce or eliminate any difference between the redemption proceeds and the
tax accounts of such Units.
Limited Deductibility of Fund Losses and Deductions
A Partner may not deduct Fund losses or deductions in excess of his tax
basis in his Units as of year-end. Generally, a Partner's tax basis in his Units
is the amount paid for such Units reduced (but not below zero) by his share of
any Fund distributions, losses and deductions and increased by his share of the
Fund's income and gains.
Limited Deductibility for Certain Expenses
For individuals who itemize deductions, the expenses of producing income,
including "investment advisory fees," are to be aggregated with unreimbursed
employee business expenses and certain other expenses of producing income
(collectively, the "Aggregate Investment Expenses"), and such Aggregate
Investment Expenses will be deductible only to the extent in excess of 2% of the
individual's adjusted gross income. In addition, Aggregate Investment Expenses
in excess of the 2% threshold, when combined with certain other itemized
deductions, are subject to a reduction generally equal to 3% of the individual's
adjusted gross income in excess of a certain threshold amount. Moreover, such
Aggregate Investment Expenses are miscellaneous itemized deductions, which are
not deductible by an individual in calculating his or her alternative minimum
tax liability.
The IRS might contend that the management fees, the incentive fee and other
expenses of the Fund constitute "investment advisory fees." If this contention
were sustained, an individual Partner's pro rata share of the amounts so
characterized would be included in Aggregate Investment Expenses potentially
subject to these deduction limitations. In addition, each individual Partner's
share of income from the Fund would be increased (solely for tax purposes) by
such Partner's pro rata share of the amounts so characterized.
PROSPECTIVE INVESTORS MUST CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
FOREGOING "INVESTMENT ADVISORY FEES" ISSUE, WHICH IS A MATTER OF UNCERTAINTY AND
COULD HAVE A MATERIAL IMPACT ON AN INVESTMENT IN THE FUND IN TERMS OF THE TOTAL
TAX PAYABLE.
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Year-End Mark-to-Market of Open Positions
Section 1256 Contracts are futures, futures options traded on U.S.
exchanges and stock index options. Currently, all of the Fund's open positions
are Section 1256 Contracts. Section 1256 Contracts that remain open at the end
of each year are treated for tax purposes as if such positions had been sold and
any gain or loss recognized. The gain or loss on Section 1256 Contracts is
characterized as 40% short-term capital gain or loss and 60% long-term capital
gain or loss regardless of how long any given position has been held. Non-U.S.
exchange-traded futures are generally non-Section 1256 Contracts. Gain or loss
on any non-Section 1256 Contracts will be recognized when sold by the Fund and
will be primarily short-term gain or loss.
Tax on Capital Gains and Losses; Interest Income
As described under "--Year-End Mark-to-Market of Open Positions," the
Fund's trading, not including its cash management which generates primarily
ordinary income, generates 60% long-term capital gains or losses and 40% short-
term capital gains or losses from its Section 1256 Contracts and primarily
short-term capital gain or loss from any non-Section 1256 Contracts. Individuals
pay tax on long-term capital gains at a maximum rate of 20%. Short-term capital
gains are subject to tax at the same rates as ordinary income, with a maximum
rate of 39.6% for individuals.
Individual taxpayers may deduct capital losses only to the extent of their
capital gains plus $3,000. Accordingly, the Fund could incur significant losses
but a limited partner could be required to pay taxes on his share of the Fund's
interest income.
If an individual taxpayer incurs a net capital loss for a year, he may
elect to carry back (up to three years) the portion of such loss which consists
of a net loss on Section 1256 Contracts. A taxpayer may deduct such losses only
against net capital gain for a carryback year to the extent that such gain
includes gains on Section 1256 Contracts. To the extent that a taxpayer could
not use such losses to offset gains on Section 1256 Contracts in a carryback
year, the taxpayer may carry forward such losses indefinitely as losses on
Section 1256 Contracts.
Syndication Expenses
Neither the Fund nor any limited partner will be entitled to any deduction
for the Fund's syndication expenses, including the one-time upfront
organizational charge paid to the General Partner and any amount paid by the
General Partner to any Additional Selling Agents, nor can such expenses be
amortized by the Fund or any limited partner.
Unrelated Business Taxable Income
Tax-exempt limited partners 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 Partners
The IRS is required to audit Fund-related items at the Fund level rather
than the partner level. The General Partner is the Fund's "tax matters partner"
with general authority to determine the Fund's responses to a tax audit. If an
audit of the Fund results in an adjustment, all partners may be required to pay
additional taxes plus interest as well as penalties.
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State and Other Taxes
In addition to the federal income tax consequences described above, the
Fund and the partners may be subject to various state and other taxes.
____________________
Prospective investors are urged to consult their tax advisers before
deciding whether to invest.
Purchases by Employee Benefit Plans
In General
This section sets forth certain consequences under ERISA and the Code which
a fiduciary of an "employee benefit plan" as defined in and subject to ERISA or
of a "plan" as defined in Section 4975 of the 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"). Furthermore, all potential investors should read the following
disclosure because it describes certain issues that could affect the Fund as a
consequence of Plans purchasing Units. The terms "employee benefit plans" and
"plans" include, but are not limited to, corporate pension and profit sharing
plans, "simplified employee pension plans," KEOGH plans for self-employed
individuals (including partners), individual retirement accounts described in
Section 408 of the Code and medical benefit plans.
Special Investment Considerations
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 the investment 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.
The Fund Should Not Be Deemed To Hold "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 (i) investment by all "benefit plan investors" is not
significant (the "Participation Exception"), or (ii) the equity interest
purchased is a "publicly-offered security" (the "Publicly-Offered Security
Exception"). If the underlying assets of a partnership are considered to be
assets of any Plan for purposes of ERISA or Section 4975 of the 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.
The Participation Exception applies if, immediately after the most recent
acquisition of an equity interest of the partnership, "benefit plan investors"
(defined as any Plan, any other employee benefit plan as defined in, but not
subject to, ERISA and any entity deemed for any purpose of ERISA or Section 4975
of the Code to hold assets of any employee benefit plan or plan) own, in the
aggregate, less than 25% of the value of each class of equity interests of the
partnership (determined by not including the investments of persons with
discretionary authority or control over the assets of such partnership, certain
other persons and their "affiliates" (as defined in the ERISA Regulation)).
The Publicly-Offered Security Exception applies if the equity interest 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, or (b) sold to the Plan as part of a public offering pursuant to an
effective registration statement under the Securities Act of 1933 and the class
of which such security is a part is registered under the Securities Exchange Act
of 1934 within 120 days (or such later time as may be allowed by the Securities
and Exchange Commission) after the end of the fiscal year of the issuer in which
the offering of such security occurred.
Prior to the date of this Prospectus, the General Partner relied upon the
Participation Exception to avoid having the underlying assets of the Fund be
plan assets. As of the date of this Prospectus, the General Partner believes
that the Publicly-Offered Security Exception will apply with respect to the
Units and, accordingly, will rely upon such exception, instead of the
Participation Exception, to avoid having the underlying assets of the Fund be
plan assets.
In the event that the number of investors holding Units who are independent
of the Fund and of each other drops below 100, the Publicly-Offered Security
Exception may no longer apply and, therefore, the General Partner intends, in
such situation, to thereafter comply with the Participation Exception. In
addition, if it is determined for any other reason that the Units do not qualify
as publicly-offered securities under the ERISA Regulation, the General Partner
intends to thereafter comply with the Participation Exception. Such Exception
would require the General Partner to restrict the aggregate investment by
benefit plan investors to under 25% of the total capital of each class of equity
interests of the Fund (not including any investments of the General Partner, the
Advisor, the Cash Manager and certain other persons). Furthermore, because the
25% test is ongoing, it not only restricts additional investment by benefit plan
investors, but also can cause the General Partner to require that existing
benefit plan investors withdraw from the Fund in the event that other investors
withdraw. If rejection of subscriptions or such mandatory withdrawals are
necessary, as determined by the General Partner, so that the assets of the Fund
will not be plan assets, the General Partner will effect such rejections or
withdrawals in such manner as the General Partner, in its sole discretion,
determines.
Ineligible Purchasers
Units may not be purchased with the assets of a Plan if the General
Partner, the Advisor, the Selling Agent, any Additional Selling Agents, the
Futures Broker, the Cash Manager or any of their respective affiliates either:
(a) has investment discretion with respect to the investment of such plan
assets; (b) has authority or responsibility to give or regularly gives
investment advice with respect to such 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 such plan assets and that such advice will
be based on the particular investment needs of the plan; or (c) is an employer
maintaining or contributing to such Plan.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF ANY PLAN IS IN NO RESPECT A
REPRESENTATION BY THE GENERAL PARTNER OR THE ADVISOR THAT AN INVESTMENT IN THE
UNITS IS APPROPRIATE OR AUTHORIZED FOR SUCH PLAN. EACH PLAN FIDUCIARY
CONSIDERING ACQUIRING UNITS MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS
BEFORE DOING SO.
-42-
General
Sidley & Austin has advised the General Partner on the offering of the
Units. Sidley & Austin drafted "Tax Consequences." Sidley & Austin does not
serve as counsel to the Fund or to the limited partners.
The balance sheet of the General Partner as of June 30, 1998 and the
financial statements of the Fund as of December 31, 1997 and for the period
August 21, 1997 (inception) to December 31, 1997 included herein have been
audited by Arthur F. Bell, Jr. & Associates, L.L.C.
-43-
Financial Statements
Index to Financial Statements
Page
----
ProFutures Bull & Bear Fund, L.P.
Independent Auditor's Report...........................................46
Statements of Financial Condition as of July 31, 1998 (Unaudited)
and December 31, 1997 (Audited)......................................47
Statements of Operations for the Seven Months Ended July 31, 1998
(Unaudited) and For the Period August 21, 1997 (inception) to
December 31, 1997 (Audited)..........................................48
Statements of Changes in Partners' Capital (Net Asset Value)
For the Seven Months Ended July 31, 1998 (Unaudited) and
For the Period August 21, 1997 (inception) to December 31,1997
(Audited)............................................................49
Notes to Financial Statements For the Seven Months Ended
July 31, 1998 (Unaudited) and For the Period August 21, 1997
(inception) to December 31,1997 (Audited)............................50
ProFutures Inc.
Independent Auditor's Report...........................................55
Balance Sheet as of June 30, 1998......................................56
Notes to Balance Sheet.................................................57
______________________
Schedules are omitted for the reason that they are not required
or are not applicable or that equivalent information has been included
in the financial statements or notes thereto.
_______________
-44-
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Partners
ProFutures Bull & Bear Fund, L.P.
We have audited the accompanying statement of financial condition of ProFutures
Bull & Bear Fund, L.P. as of December 31, 1997, and the related statements of
operations and changes in partners' capital (net asset value) for the period
August 21, 1997 (inception) to December 31, 1997. These financial statements are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides 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 ProFutures Bull & Bear Fund,
L.P. as of December 31, 1997, and the results of its operations and the changes
in its net asset value for the period August 21, 1997 (inception) to December
31, 1997, in conformity with generally accepted accounting principles.
ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C.
March 9, 1998
Lutherville, Maryland
-45-
PROFUTURES BULL & BEAR FUND, L.P.
STATEMENTS OF FINANCIAL CONDITION
JULY 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997 (AUDITED)
- --------------------------------------------------------------------------------
July 31, December 31,
1998 1997
(Unaudited) (Audited)
----------- ------------
ASSETS
Equity in broker trading account
Cash $1,565,849 $ 585,732
Unrealized gain on open contracts 6,650 2,175
---------- ----------
Deposits with broker 1,572,499 587,907
Cash and cash equivalents 6,036,905 2,275,163
Subscriptions receivable 383,237 69,694
---------- ----------
Total assets $7,992,641 $2,932,764
========== ==========
LIABILITIES
Accounts payable $ 18,871 $ 11,744
Commissions and other trading fees
on open contracts 320 189
General Partner management fee 18,038 6,095
---------- ----------
Total liabilities 37,229 18,028
---------- ----------
PARTNERS' CAPITAL (Net Asset Value)
General Partner - 61.4461 and 30.6159 units outstanding
at July 31, 1998 and December 31, 1997 72,891 29,313
Limited Partners - 6,644.8448 and 3,013.6483 units
outstanding at July 31, 1998 and December 31, 1997 7,882,521 2,885,423
---------- ----------
Total partners' capital
(Net Asset Value) 7,955,412 2,914,736
---------- ----------
Total liabilities and partners' capital $7,992,641 $2,932,764
========== ==========
See accompanying notes.
Past performance is not necessarily indicative of future results.
-46-
PROFUTURES BULL & BEAR FUND, L.P.
STATEMENTS OF OPERATIONS FOR
THE SEVEN MONTHS ENDED JULY 31, 1998 (UNAUDITED) AND
FOR THE PERIOD AUGUST 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 (AUDITED)
- --------------------------------------------------------------------------------
Seven
Months Period
Ended Ended
July 31, December 31,
1998 1997
(Unaudited) (Audited)
----------- ------------
INCOME
Trading gains (losses)
Realized $789,454 $(116,342)
Change in unrealized 4,475 2,175
-------- ---------
Gain (loss) from trading 793,929 (114,167)
Interest income 150,530 19,520
-------- ---------
Total gain (loss) 944,459 (94,647)
-------- ---------
EXPENSES
Brokerage commissions 2,946 564
General Partner management fee 81,845 9,826
Advisor incentive fee 171,310 0
Operating expenses 31,070 11,704
-------- ---------
Total expenses 287,171 22,094
-------- ---------
NET INCOME (LOSS) $657,288 $(116,741)
======== =========
NET INCOME (LOSS) PER UNIT
(based on weighted average number of
units outstanding during the period $ 164.50 $ (48.21)
======== =========
INCREASE (DECREASE) IN NET
ASSET VALUE PER UNIT $ 228.81 $ (42.55)
======== =========
See accompanying notes.
Past performance is not necessarily indicative of future results.
-47-
PROFUTURES BULL & BEAR FUND, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
FOR THE SEVEN MONTHS ENDED JULY 31, 1998 (UNAUDITED) AND
FOR THE PERIOD AUGUST 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 (AUDITED)
- ----------------------------------------------------------------------------------------------------
Total Partners' Capital
Number of ----------------------------------------
Units General Limited Total
----------- ------- ------- -----
Audited
-------
Balances at
August 21, 1997 (inception) 0.0000 $ 0 $ 0 $ 0
Additions 3,044.2642 30,198 3,001,279 3,031,477
Net (loss) for the period
August 21, 1997 (inception)
to December 31, 1997 (885) (115,856) (116,741)
---------- -------- ---------- ----------
Balances at
December 31, 1997 3,044.2642 29,313 2,885,423 2,914,736
Unaudited
---------
Net income for the seven months
ended July 31, 1998 6,647 650,641 657,288
Additions 3,741.1284 36,931 4,436,951 4,473,882
Redemptions (79.1017) 0 (90,494) (90,494)
---------- -------- ---------- ----------
Balances at
July 31, 1998 6,706.2909 $ 72,891 $7,882,521 $7,955,412
========== ======== ========== ==========
Net Asset Value Per Unit
---------------------------------
July 31, December 31,
1998 1997
---- ----
$1,186.26 $957.45
========= =======
See accompanying notes.
Past performance is not necessarily indicative of future results.
-48-
PROFUTURES BULL & BEAR FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTHS ENDED JULY 31, 1998 (UNAUDITED) AND
FOR THE PERIOD AUGUST 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 (AUDITED)
- --------------------------------------------------------------------------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General Description of the Fund
ProFutures Bull & Bear Fund, L.P. (the "Fund") is a Delaware
limited partnership which operates as a commodity investment
pool. It is subject to the regulations of the Commodity Futures
Trading Commission, an agency of the United States (U.S.)
government which regulates most aspects of the commodity futures
industry, rules of the National Futures Association, an industry
self-regulatory organization, and the requirements of commodity
exchanges and Futures Commission Merchants (brokers) through
which the Fund trades.
The Fund was organized on August 21, 1997 and commenced trading
on November 20, 1997.
B. Method of Reporting
The Fund's financial statements are presented in accordance with
generally accepted accounting principles, which require the use
of certain estimates made by the Fund's management. Gains or
losses are realized when contracts are liquidated. Unrealized
gains or losses on open contracts (the difference between
contract purchase price and market price) at the date of the
statement of financial condition are included in equity in the
broker trading account. Any change in net unrealized gain or loss
from the preceding period is reported in the statement of
operations.
C. Cash and Cash Equivalents
Cash and cash equivalents includes cash and short-term
investments in fixed income securities.
D. Brokerage Commissions
Brokerage commissions include other trading fees and are charged
to expense when contracts are opened.
Past performance is not necessarily indicative of future results.
-49-
PROFUTURES BULL & BEAR FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (continued)
FOR THE SEVEN MONTHS ENDED JULY 31, 1998 (UNAUDITED) AND
FOR THE PERIOD AUGUST 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 (AUDITED)
- --------------------------------------------------------------------------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
E. Income Taxes
The Fund prepares calendar year U.S. and state information tax
returns and reports to the partners their allocable shares of the
Fund's income, expenses and trading gains or losses.
F. Organizational Charge
The General Partner pays all organizational and offering costs of
the Fund. As reimbursement for such costs, the General Partner
(or the Distributor, ProFutures Financial Group, Inc., a
broker/dealer affiliate of the General Partner) receives an
organizational charge of 1% of the subscription amount of each
subscriber to the Fund. Additions are reflected in the statement
of changes in partners' capital (net asset value) net of such
organizational charge totaling $44,739 for the seven months ended
July 31, 1998 and $30,315 for the period August 21, 1997
(inception) to December 31, 1997.
Note 2. GENERAL PARTNER
The General Partner of the Fund is ProFutures, Inc., which conducts
and manages the business of the Fund. The Limited Partnership
Agreement requires the General Partner to maintain a capital account
equal to at least 1% of the total capital of the Fund.
The General Partner is paid a monthly management fee equal to 1/4 of
1% (3% annually) of month-end Net Assets (as defined in the Limited
Partnership Agreement).
Note 3. COMMODITY TRADING ADVISOR
The Fund has an advisory contract with Hampton Investors, Inc.
pursuant to which the Fund pays a quarterly incentive fee equal to 20%
of New Trading Profits (as defined in the advisory contract).
Past performance is not necessarily indicative of future results.
-50-
PROFUTURES BULL & BEAR FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (continued)
FOR THE SEVEN MONTHS ENDED JULY 31, 1998 (UNAUDITED) AND
FOR THE PERIOD AUGUST 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 (AUDITED)
- --------------------------------------------------------------------------------
Note 4. DEPOSITS WITH BROKER
The Fund deposits funds with ING (U.S.) Securities, Futures & Options
Inc. to act as broker subject to Commodity Futures Trading Commission
regulations and various exchange and broker requirements. Margin
requirements are satisfied by the deposit of cash with such broker.
The Fund earns interest income on its cash deposited with the broker.
Note 5. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
Investments in the Fund are made by subscription agreement, subject to
acceptance by the General Partner.
The Fund is not required to make distributions, but may do so at the
sole discretion of the General Partner. A Limited Partner may request
and receive redemption of units owned, subject to restrictions in the
Limited Partnership Agreement.
Note 6. TRADING ACTIVITIES AND RELATED RISKS
The Fund engages in the speculative trading of stock index futures
contracts ("derivatives") on U.S. exchanges. 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 according to the terms of a contract.
Purchase and sale of futures contracts requires margin deposits with
the broker. Additional deposits may be necessary for any loss on
contract value. The Commodity Exchange Act requires a broker to
segregate all customer transactions and assets from such broker's
proprietary activities. A customer's cash and other property (for
example, U.S. Treasury bills) deposited with a broker are considered
commingled with all other customer funds subject to the broker's
segregation requirements. In the event of a broker's insolvency,
recovery may be limited to a pro rata share of segregated funds
available. It is possible that the recovered amount could be less than
total cash and other property deposited.
The Fund has a substantial portion of its assets on deposit with
financial institutions in connection with its cash management
activities. In the event of a financial institution's insolvency,
recovery of Fund assets on deposit may be limited to account insurance
or other protection afforded such deposits. In the normal course of
business, the Fund does not require collateral from such financial
institutions.
Past performance is not necessarily indicative of future results.
-51-
PROFUTURES BULL & BEAR FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (continued)
FOR THE SEVEN MONTHS ENDED JULY 31, 1998 (UNAUDITED) AND
FOR THE PERIOD AUGUST 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 (AUDITED)
- --------------------------------------------------------------------------------
Note 6. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
For derivatives, risks arise from changes in the market value of the
contracts. Theoretically, the Fund is exposed to a market risk equal
to the value of futures contracts purchased and unlimited liability on
such contracts sold short.
The fair value of derivatives represents unrealized gains and losses
on open futures contracts. The average fair value of derivatives for
the seven months ended July 31, 1998 and for the period November 20,
1997 (commencement of trading) to December 31, 1997 was approximately
$140,000 and $30,000, respectively, and the related values at July 31,
1998 and December 31, 1997 were approximately $7,000 and $2,000,
respectively.
Net trading results from derivatives for the seven months ended July
31, 1998 and for the period August 21, 1997 (inception) to December
31, 1997 are reflected in the statement of operations and equal gain
(loss) from trading less brokerage commissions. Such trading results
reflect the net gain (loss) arising from the Fund's speculative
trading of futures contracts.
At July 31, 1998 and December 31, 1997, the notional amount of open
contracts to purchase totaled approximately $0 and $5,600,000,
respectively, and the notional amount of open contracts to sell
totaled approximately $18,800,000 and $0, respectively. These amounts
do not represent the Fund's risk of loss due to market and credit
risk, but rather represent the Fund's extent of involvement in
derivatives at the date of the statement of financial condition.
The General Partner has established procedures to actively monitor and
minimize market and credit risk. 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 7. SUBSEQUENT EVENTS
The General Partner of the Fund commenced procedures to register the
Fund's units with the Securities and Exchange Commission under the
Securities Act of 1933. The General Partner anticipates filing an
initial Registration Statement on Form S-1 in September 1998. In
connection with this registration, the General Partner anticipates
amending and restating the Limited Partnership Agreement.
Past performance is not necessarily indicative of future results.
-52-
PROFUTURES BULL & BEAR FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (continued)
FOR THE SEVEN MONTHS ENDED JULY 31, 1998 (UNAUDITED) AND
FOR THE PERIOD AUGUST 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 (AUDITED)
- --------------------------------------------------------------------------------
Note 8. INTERIM FINANCIAL STATEMENTS
The statement of financial condition as of July 31, 1998 and the
statements of operations and changes in partners' capital (net asset
value) for the seven months ended July 31, 1998 are unaudited. In the
opinion of management, such financial statements reflect all
adjustments, which were of a normal and recurring nature, necessary
for a fair presentation of financial position as of July 31, 1998 and
the results of operations for the seven months ended July 31, 1998.
Past performance is not necessarily indicative of future results.
-53-
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Stockholders and Board of Directors
ProFutures, Inc.
We have audited the accompanying balance sheet of ProFutures, Inc. as of June
30, 1998. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of ProFutures, Inc. as of June 30,
1998, in conformity with generally accepted accounting principles.
ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C.
Lutherville, Maryland
August 21, 1998
-54-
PROFUTURES, INC.
BALANCE SHEET
June 30, 1998
---------
ASSETS
Cash and cash equivalents $420,231
Management fees receivable 237,248
General partner interests in commodity pools 308,679
Other assets 8,574
--------
974,732
--------
Fixed Assets
Furniture and fixtures 13,866
Office equipment 122,124
Leasehold improvements 1,900
--------
137,890
Less: Accumulated depreciation 128,906
--------
8,984
--------
Total assets $983,716
========
LIABILITIES
Accounts payable $ 14,952
Franchise tax payable 17,530
--------
Total liabilities 32,482
--------
STOCKHOLDERS' EQUITY
Common stock - no par value; 1,000,000 shares
authorized; 5,251 shares issued and outstanding 1,000
Retained earnings 950,234
--------
Total stockholders' equity 951,234
--------
Total liabilities and stockholders' equity $983,716
========
See accompanying notes.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-55-
PROFUTURES, INC.
NOTES TO BALANCE SHEET
------------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General
ProFutures, Inc. (the "Company") is a Texas corporation,
organized on December 3, 1984, which specializes in speculative
managed futures accounts. The Company is a Commodity Trading
Advisor, Commodity Pool Operator and a Guaranteed Introducing
Broker 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 a member of and subject to the rules
of the National Futures Association, an industry self-regulatory
organization.
B. Method of Accounting
The balance sheet is presented in accordance with generally
accepted accounting principles. The preparation of the balance
sheet in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that effect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the balance
sheet. Actual results could differ from those estimates, and such
differences may be material to the financial statement.
C. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and a money market
mutual fund account.
D. Management Fees
Management fees are accrued based on the terms of the related
agreements.
E. General Partner Interests in Commodity Pools
The Company is the general partner or co-general partner of
several commodity pools formed as limited partnerships,
collectively referred to as partnerships. The Company's
investments in partnerships are carried at its share of the
underlying equity in the net asset value of the limited
partnerships. The partnerships carry their assets and
liabilities at fair value as required by generally accepted
accounting principles for such entities.
As a general partner, the Company has a fiduciary responsibility
to the limited partnerships and potential liability beyond
amounts recognized as an asset in the balance sheet.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-56-
PROFUTURES, INC.
NOTES TO BALANCE SHEET (CONTINUED)
------------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
F. Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization is
provided for using straight-line and accelerated methods with
lives that range from 5 to 31 years.
G. Income Taxes
The Company has elected "S" corporation status under the Internal
Revenue Code, pursuant to which the Company does not pay U.S.
corporate income tax on its taxable income. Instead, the
stockholders are liable for individual income tax on the
Company's taxable income. However, the Company is liable for
Texas Franchise tax, which has been reflected in the balance
sheet.
Note 2. GENERAL PARTNER INTERESTS IN COMMODITY POOLS
ProFutures, Inc. is a general partner and commodity pool operator of ATA
Research/ProFutures Diversified Fund, L.P., Alternative Asset Growth Fund,
L.P. and ProFutures Bull & Bear Fund, L.P., collectively referred to as
partnerships.
Summarized activity for the Company's investments in partnerships is as
follows:
ATA Research/ Alternative ProFutures
ProFutures Diversified Asset Growth Bull & Bear
Fund, L.P. Fund, L.P. Fund, L.P.
----------------------- ------------- -----------
Net asset value at
December 31, 1997 $131,712 $119,749 $29,313
Additions 0 0 37,158
Net income (loss) for the six
months ended June 30, 1998 (9,790) (7,570) 8,107
-------- -------- -------
Net asset value at
June 30, 1998 $121,922 $112,179 $74,578
======== ======== =======
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-57-
PROFUTURES, INC.
NOTES TO BALANCE SHEET (CONTINUED)
------------------
Note 2. GENERAL PARTNER INTERESTS IN COMMODITY POOLS (CONTINUED)
Summarized financial information with respect to partnerships as of
and for the six months ended June 30, 1998 is as follows:
ATA Research/ Alternative ProFutures
ProFutures Diversified Asset Growth Bull & Bear
Fund, L.P. Fund, L.P. Fund, L.P.
---------------------- ------------ -----------
Balance Sheet Data
Assets $78,935,514 $15,423,257 $7,403,045
Liabilities (2,189,548) (776,391) (39,154)
----------- ----------- ----------
Net Asset Value $76,745,966 $14,646,866 $7,363,891
=========== =========== ==========
Operating Data
Total income (loss) $(1,145,101) $ 194,655 $1,088,962
Total expenses 5,266,614 1,217,047 265,123
----------- ----------- ----------
Net income (loss) $(6,411,715) $(1,022,392) $ 823,839
=========== =========== ==========
For managing the businesses of the partnerships, the Company earns
management fees and administrative fees based on the terms of the
respective limited partnership agreements. June 30, 1998 management
fees receivable represent management fees owed by the partnerships for
the month of June, 1998.
The agreements of limited partnership of ATA Research/ProFutures
Diversified Fund, L.P. and Alternative Asset Growth Fund, L.P.
requires the Company to maintain in the aggregate a net worth not less
than the sum of (i) the lesser of $250,000 or 15% of the aggregate
capital contributions of any limited partnership for which it acts as
a general partner or co-general partner if such contributions are
equal to or less than $2,500,000; and (ii) 10% of the aggregate
capital contributions of any limited partnership for which it shall
act as a general partner or co-general partner if such contributions
exceed $2,500,000.
The agreements of limited partnership also require the Company to
maintain minimum investments in the partnerships.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-58-
PROFUTURES, INC.
NOTES TO BALANCE SHEET (CONTINUED)
------------------
Note 3. CALLABLE SUBSCRIPTIONS TO COMMON STOCK
ProFutures, Inc. has callable subscription agreements with
Internationale Nederlanden (U.S.) Securities, Futures & Options Inc.
(ING), whereby ING agrees to purchase or subscribe, up to $19,000,090,
for the number of shares of common stock of ProFutures, Inc. necessary
to maintain the general partner net worth requirements described in
Note 2.
Note 4. RELATED PARTIES
The Company is one of a group of corporations that are commonly
controlled. The Company shares facilities and other resources with
these corporations, which are related through common ownership and
management. A portion of the costs for these shared facilities and
other resources are paid for by the Company and allocated to such
affiliated entities.
Note 5. TRADING ACTIVITIES AND RELATED RISKS
The partnerships for which the Company is either the sole general
partner or co-general partner engage in the speculative trading of
U.S. and foreign futures contracts and options on U.S. and foreign
futures contracts (collectively, "derivatives"). These derivatives
include both financial and non-financial contracts held as part of a
diversified trading strategy. The partnerships are 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 according to the terms of a contract. Theoretically, the
partnerships and the Company, as a general partner, are exposed to a
market risk equal to the notional value of futures contracts
purchased and unlimited liability on such contracts sold short. As
both a buyer and seller of options, the partnerships pay or receive a
premium at the outset and then bear the risk of unfavorable changes in
the price of the contract underlying the option. Written options
expose the partnerships and the Company, as a general partner, to
potentially unlimited liability, and purchased options expose the
partnerships to a risk of loss limited to the premiums paid.
The average fair value of derivatives held by the partnerships during
the six months ended June 30, 1998 was approximately $1,240,000, and
the fair value as of June 30, 1998 is approximately $1,245,000. The
fair value of derivatives represents unrealized gains and losses on
open futures contracts and long and short options at market value.
At June 30, 1998, the notional amount of the partnerships' open
contracts is as follows:
Contracts to Contracts to
Purchase Sell
------------ ------------
Derivatives (excluding
purchased options) $914,000,000 $673,150,000
Purchased options 15,200,000 8,500,000
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-59-
PROFUTURES, INC.
NOTES TO BALANCE SHEET (CONTINUED)
------------------
Note 5. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
The above amounts do not represent the partnerships' risk of loss due
to market and credit risk, but rather represent the partnerships'
extent of involvement in derivatives at the date of the balance sheet.
The Company, as general partner or co-general partner, has established
procedures to actively monitor and minimize market and credit risks.
Note 6. LEASE COMMITMENT
The Company leases space in an office building in Austin, Texas under
a lease expiring November 30, 1998. The Company has the right to
terminate the lease after November 30, 1996 by giving 120 days' notice
to the lessor.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-60-
EXHIBIT A
PROFUTURES BULL & BEAR FUND L.P.
FORM OF
SECOND AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
Dated as of
______, 1998
PROFUTURES, INC.
GENERAL PARTNER
PROFUTURES BULL & BEAR FUND L.P.
FORM OF
SECOND AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
Page
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1. Continuation and Name................................................ LPA-1
2. Principal Office..................................................... LPA-1
3. Business............................................................. LPA-1
4. Term, Fiscal Year and Net Assets..................................... LPA-1
(a) Term....................................................... LPA-1
(b) Fiscal Year................................................ LPA-1
(c) Net Assets................................................. LPA-2
5. Net Worth of General Partner......................................... LPA-2
6. Capital Contributions................................................ LPA-2
7. Allocation of Profits and Losses..................................... LPA-3
(a) Capital Accounts........................................... LPA-3
(b) Allocations; Valuation Dates............................... LPA-3
(c) Allocation of Profit and Loss for Federal
Income Tax Purposes........................................ LPA-3
(d) Expenses................................................... LPA-5
(e) Limited Liability of Limited Partners...................... LPA-6
8. Management of the Fund............................................... LPA-6
(a) General.................................................... LPA-6
(b) Fiduciary Duties........................................... LPA-7
(c) Brokerage Arrangements..................................... LPA-7
(d) Loans; Investments......................................... LPA-7
(e) Certain Conflicts of Interest Prohibited................... LPA-7
(f) Certain Agreements......................................... LPA-7
(g) No "Pyramiding"............................................ LPA-7
(h) Other Activities........................................... LPA-7
9. Audits and Reports................................................... LPA-8
10. Assigning Units...................................................... LPA-9
11. Redeeming Units...................................................... LPA-9
12. Offering of Units....................................................LPA-10
13. Power of Attorney....................................................LPA-10
14. Withdrawal of a Partner..............................................LPA-11
15. Standard of Liability; Indemnification...............................LPA-11
(a) Standard of Liability for the General Partner..............LPA-11
(b) Indemnification of the General Partner by the Fund.........LPA-11
(c) Indemnification of the Fund by the Partners................LPA-12
16. Amendments; Meetings.................................................LPA-12
(a) Amendments with Consent of the General Partner.............LPA-12
(b) Amendments and Actions without Consent of the General
Partner....................................................LPA-13
(c) Meetings; Other Voting Matters.............................LPA-13
17. Benefit Plan Investors...............................................LPA-14
18. GOVERNING LAW........................................................LPA-14
19. Miscellaneous........................................................LPA-15
(a) Notices....................................................LPA-15
(b) Binding Effect.............................................LPA-15
(c) Captions...................................................LPA-15
(d) Close of Business..........................................LPA-15
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PROFUTURES, INC.
General Partner
LPA-(i)
PROFUTURES BULL & BEAR FUND, L.P.
SECOND AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
This Second Amended and Restated Limited Partnership Agreement (this
"Agreement") is made as of _________, 1998, by and among ProFutures, Inc., a
Texas corporation, as general partner (the "General Partner"), and each other
party who shall execute a counterpart of this Limited Partnership Agreement as a
limited partner or who becomes a party to this agreement as a limited partner by
execution of a Subscription Agreement and Power of Attorney or other instrument
or otherwise and who is shown on the books and records of the Partnership as a
limited partner (individually, a "Limited Partner" and collectively, "Limited
Partners") (the General Partner and Limited Partners are collectively referred
to herein as "Partners").
WITNESSETH:
1. Continuation and Name.
The parties hereby form and continue ProFutures Bull & Bear Fund, L.P. (the
"Fund") under the Delaware Revised Uniform Limited Partnership Act (the "Act").
This Agreement amends and restates all previous Limited Partnership Agreements
of the Fund.
2. Principal Office.
The principal office of the Fund is c/o the General Partner, 11612 Bee Cave
Road, Suite 100, Austin, Texas 78733. The registered office and agent for
service of process in the State of Delaware is c/o Corporation Service Company,
1013 Centre Road, Wilmington, New Castle County, Delaware 19805.
3. Business.
The Fund's business and purpose is to trade, buy, sell or otherwise
acquire, hold or dispose of futures contracts on commodities, financial
instruments and currencies, spot and forward currency contracts, commodities and
options on any of the foregoing, and to engage in all activities incidental
thereto on domestic and foreign exchanges and/or through over-the-counter
markets. The objective of the Fund's business is appreciation of its assets
through speculative trading. The Fund may engage in such business directly or
through partnerships, joint ventures or similar arrangements.
4. Term, Fiscal Year and Net Assets.
(a) Term. The Fund began on August 21, 1997 and will dissolve on the
earlier of: (1) December 31, 2035; (2) receipt by the General Partner of 90
days' notice to dissolve from Limited Partners owning more than 50% of the
outstanding Units; (3) withdrawal, insolvency or dissolution of the General
Partner, or any other event that causes the General Partner to cease to be a
general partner of the Fund unless (i) at the time of such event there is at
least one remaining general partner of the Fund who carries on the business of
the Fund, or (ii) within 90 days after such event all Limited Partners agree in
writing to continue the business of the Fund and to the appointment, effective
as of the date of such event, of one or more general partners of the Fund; (4)
dissolution of the Fund as otherwise provided in this Agreement; or (5) any
other event requiring dissolution.
Upon dissolution of the Fund, the General Partner, or another person
approved by a majority of the Units, shall act as liquidator trustee.
(b) Fiscal Year. January 1 through December 31.
LPA-1
(c) Net Assets. The "Net Assets" of the Fund are its assets less its
liabilities, determined in accordance with Generally Accepted Accounting
Principles, including any unrealized profits and losses on its open
positions. More specifically, the Net Asset Value of the Fund equals the
sum of all cash, the liquidating value (or cost of liquidation, as the case
may be) of all futures and options on futures positions and the fair market
value of all other assets of the Fund, less all liabilities of the Fund
(including accrued liabilities, irrespective of whether such liabilities --
for example, incentive fees -- may in fact never be paid), in each case as
determined by the General Partner generally in accordance with Generally
Accepted Accounting Principles. The General Partner's interest in the Fund
shall be represented by Units of General Partnership Interest. Interests in
the Fund, other than the Units of General Partnership Interest of the
General Partner, shall be Units of Limited Partnership Interest ("Units" or,
indi vidually, a "Unit"). The "Net Asset Value per Unit" shall mean the
Net Assets divided by the number of Units outstanding. The Fund may issue
an unlimited number of Units of Limited Partnership Interest at the Net
Asset Value per Unit.
5. Net Worth of General Partner.
The General Partner agrees that it will maintain a net worth of not less
than the greater of $50,000 or at least 5% of the total contributions to the
Fund and all other partnerships of which the General Partner is general partner.
For these purposes, Net Worth shall be calculated in accordance with generally
accepted accounting principles, consistently applied, with all current assets
valued at then current fair market values, and may include promissory notes or
stock subscriptions issued to the General Partner by its affiliates or other
persons, including the Fund's commodity broker and shall exclude any interest
held by the General Partner in the Fund or any other limited partnership. In no
event shall the General Partner be required to maintain a net worth in excess of
the greater of: (i) $1,000,000 or (ii) the amount by which the General Partner
is advised by counsel is necessary or advisable to ensure that the Fund is taxed
as a partnership for federal income tax purposes. This net worth agreement may
be modified if counsel opines that such change will not adversely affect the
partnership taxation of the Fund, and if such change meets applicable state
securities laws or guidelines.
6. Capital Contributions.
The General Partner and/or its principals and affiliates shall make
contributions to the capital of the Fund in amounts which equal at least 1% of
the aggregate capital contributions to the Fund (including the General Partner's
contribution). The General Partner and/or its principals and affiliates shall
not reduce by withdrawal the aggregate interest in the capital of the Fund to
less than a 1% interest in the capital, income and losses of the Fund from time
to time. The General Partner and/or its principals and affiliates may withdraw
any portion of its interest in the Fund which is in excess of its required
interest described above. The Partners' contributions to the capital of the Fund
shall be as shown in the books and records of the Fund.
The General Partner may on behalf of the Fund admit additional Limited
Partners to the Fund in compliance with applicable law and may issue and sell
Units to them. After the admission of each new Partner, the General Partner's
(and its principals and affiliates) interest in the capital, income and losses
of the Fund shall always be at least 1%. The General Partner is authorized to
take such action and make such arrangements for the issue and sale of such
Units, if any, as it deems appropriate.
All Units 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 a check or draft of a subscriber for Units representing
payment for Units is returned unpaid, the Fund shall cancel the Units issued to
such subscriber represented by such returned check or draft. Any losses or
profits sustained by the Fund in connection with the Fund's commodity trading
allocable to such canceled Units shall be deemed an increase or decrease in Net
Assets and allocated among the remaining Partners as described in Section 7. The
Fund may require a Partner to reimburse the Fund for any expense or loss
(including any trading loss) incurred in connection with the issuance and
cancellation of any such Limited Partnership Interests issued to him.
LPA-2
The Partners' respective capital contributions shall be as shown on
the books and records of the Fund.
7. Allocation of Profits and Losses.
(a) Capital Accounts. A capital account shall be established for each
Partner. The initial balance of each capital account shall be the amount
initially contributed to the Fund with respect to Units allocated to that
account, net of organizational or other similar charges. For purposes of this
Section, the general partnership interest of the General Partner shall be
treated on a Unit-equivalent basis.
(b) Allocations; Valuation Dates. As of the close of business (as
determined by the General Partner) on the last day of each month and on each
redemption date (including any Special Redemption Date), the following
determinations and allocations shall be made.
(1) The Net Assets of the Fund shall be determined.
(2) Any increase or decrease in the Net Assets of the Fund as compared
to the last such determination of Net Assets shall be credited or charged to
the capital accounts of each Partner in the ratio that the balance of each
account bears to the balance of all accounts.
(3) The amount of any distribution to a Partner, any amount paid upon
redemption of Units and any amount paid to the General Partner on withdrawal
of its interest in the Fund shall be charged to the Partner's capital account.
(4) The Net Asset Value of a Unit shall be determined.
(c) Allocation of Profit and Loss for Federal Income Tax Purposes. As of
the end of each fiscal year, the Fund's profit or loss shall be allocated among
the Partners for federal income tax purposes pursuant to the following
subparagraphs. If the allocations contained herein were determined to lack
"substantial economic effect," each Limited Partner's distributive share of
items of Fund income, gain, loss, deduction or credit shall be determined in
accordance with such Partner's interest in the Fund (taking into account all the
facts and circumstances).
(1) Items of operating income, including, without limitation, interest and
items of operating expense, including, if applicable, legal, accounting and
administrative expenses shall be allocated to each Partner by allocating such
items which accrued during each month among the persons who were Partners
during such month in the ratio that each such Partner's capital account bears
to all such Partners' capital accounts at the end of such month.
(2) Net realized capital gain or loss and any net gain or loss from Section
988 of the Internal Revenue Code of 1986, as amended (the "Code"),
transactions associated with the Fund's trading activities shall be allocated
in the following manner:
(aa) For the purpose of allocating the Fund's net realized capital
gain or loss and any net gain or loss from Code Section 988 among the
Partners, there shall be established a tax allocation account with respect
to each outstanding Unit. The initial balance of each allocation account
shall be the amount paid to the Fund for the Units (net of any organization
and offering charges). Allocation accounts shall be adjusted as of the end
of each fiscal year as follows.
(i) Each allocation account shall be increased by the amount of
income allocated to the holder of the Unit with respect to the Unit
pursuant to subparagraph (c)(1) above and subparagraphs (bb) and (cc)
below.
LPA-3
(ii) Each allocation account shall be decreased by the amount of
expense or loss allocated to the holder of the Unit with respect to
the Unit pursuant to subparagraphs (c)(1) above and subparagraphs (dd)
and (ee) below and by the amount of any distribution the holder of the
Unit has received with respect to the Unit (other than on redemption
of the Unit).
(iii) When a Unit is redeemed, the allocation account with
respect to such Unit shall be eliminated.
(bb) Net realized capital gain shall be allocated first to each
Partner who has redeemed a Unit during the fiscal year up to the excess, if
any, of the amount received upon redemption of the Unit over the allocation
account attributable to the redeemed Unit. If the gain to be so allocated
to all Partners who have redeemed Units during a fiscal year is less than
the excess of all such amounts received upon redemption over all such
allocation accounts, the entire capital gain for such fiscal year shall be
allocated among all such Partners in the ratio that each such Partner's
excess bears to the aggregate excess of all such Partners who redeemed
Units during such fiscal year.
(cc) Net realized capital gain remaining after the allocation thereof
pursuant to subparagraph (bb) shall be allocated next among all Partners
whose capital accounts are in excess of the Units' tax allocation accounts
(after the adjustments in subsection (bb)) in the ratio that each such
Partner's excess bears to all such Partners' excesses. In the event that
gain to be allocated pursuant to this subsection (cc) is greater than the
excess of all such Partners' capital accounts over all such allocation
accounts, the excess will be allocated among all Partners in the ratio that
each Partner's capital account bears to all Partners' capital accounts.
(dd) Net realized capital loss shall be allocated first to each
Partner who has redeemed a Unit during the fiscal year up to the excess, if
any, of the allocation account attributable to the redeemed Unit over the
amount received upon redemption of the Unit. If the loss to be so allocated
to all Partners who have redeemed Units during a fiscal year is less than
the excess of all such allocation accounts over all such amounts received
upon redemption, the entire capital loss for such fiscal year shall be
allocated among all such Partners in the ratio that each such Partner's
excess bears to the aggregate excess of all such Partners who redeemed
Units during such fiscal year.
(ee) Net realized capital loss remaining after the allocation thereof
pursuant to subsection (dd) shall be allocated next among all Partners
whose tax allocation accounts (after the adjustments in subsection (dd))
are in excess of their capital accounts in the ratio that each such
Partner's excess bears to all such Partners' excesses. In the event that
loss to be allocated pursuant to this subsection (ee) is greater than the
excess of all such allocation accounts over all such Partners' capital
accounts, the excess loss will be allocated among all Partners in the ratio
that each Partner's capital account bears to all Partners' capital
accounts.
(ff) In the event that Units have been assigned with the consent of
the General Partner, the allocations prescribed by this Section 7(c) shall
be made with respect to such Units without regard to the assignment except
that in the year of assignment the allocations prescribed by Section
7(c)(1) shall be divided between the assignor and the assignee based on the
number of whole months each held the assigned Units. For purposes of this
Section 7(c), tax allocations shall be made to the General Partner's
general partnership interest on a Unit-equivalent basis.
(gg) The allocations of profit and loss to the Partners in respect of
the Units shall not exceed the allocations permitted under Subchapter K of
the Code, as determined by the General Partner, whose determination shall
be binding. The purpose of the foregoing allocations is to
LPA-4
allocate taxable income so as nearly as possible to have Limited Partners'
tax basis accounts equal to their capital accounts as provided by the Code,
including without limitation a "Qualified Income Offset."
(3) For the purposes of this Section 7(c), net realized capital gain or
loss shall include any gain or loss required to be taken into account under
Section 1256 of the Code.
(d) Expenses. Operating, administration and all other expenses and
liabilities of the Fund shall be paid by the Fund. The General Partner shall be
reimbursed for any such expenses incurred on behalf of the Fund. The Fund shall
pay any extraordinary charges (such as taxes) incidental to its trading or
otherwise.
The General Partner shall be entitled to charge Limited Partners upon
admission to the Fund an organizational charge of 1% of Net Asset Value to
reimburse the General Partner or an affiliate thereof for any and all costs and
expenses paid by it which are related to the organization of the Fund, as well
as the initial and any future offering of Units. Such organizational and
offering expenses shall include all expenses incurred by the Fund in connection
with and in preparing the Fund's Units for registration or exemption therefrom,
and subsequently offering and distributing its Units to investors, on a public
or private basis including, but not limited to, expenses for printing,
engraving, mailing, charges of transfer agents, registrars, trustees, escrow
holders, depositories, experts, expenses of qualification of the sale of its
Units under federal and state law, including taxes and fees, accountants' and
attorneys' fees.
The Fund shall pay to the General Partner a management fee equal to 1/4 of
1% of month-end Net Assets (3% annually). Net Assets for this purpose are
calculated after brokerage commissions, operating and administrative expenses
and incentive fees paid or accrued as of such month-end. The management fee
shall be accrued as required herein and paid as soon as practicable, but no
later than the end of the month following the month in which the fee accrued.
The management fee will be pro-rated for partial periods and any interim capital
contributions and capital withdrawals.
The Fund shall pay all routine charges incidental to trading (including,
without limitation, brokerage commissions, exchange, clearinghouse, regulatory,
floor brokerage and "give-up" fees) and any extraordinary charges incidental to
trading (for example insurance or delivery charges). The General Partner shall
be reimbursed promptly for any operating, administration and other expenses and
liabilities incurred on behalf of the Fund. None of the General Partner's
"overhead" expenses (including, but not limited to, salaries, rent and travel
expenses) may be charged to the Fund; provided, however, that the General
Partner may be reimbursed for time and expenses of internal counsel, if any,
incurred in connection with legal and compliance matters for the Fund, as well
as time and expenses for accounting services provided by the General Partner or
an Affiliate thereof for the Fund, all at such reasonable rates determined by
the General Partner.
The General Partner pays the costs of the continuous offering of the Units.
The General Partner pays the selling commissions (if any) and ongoing
compensation due on the Units.
Any goods and services provided to the Fund by the General Partner shall be
provided at rates and terms at least as favorable as those which may be obtained
from third parties in arm's-length negotiations. All of the expenses which are
for the Fund's account shall be billed directly to the Fund.
The Fund will pay any taxes applicable to it and any charges incidental to
its trading.
The General Partner will reimburse the Fund, on an annual basis, to the
extent that the Fund's brokerage commissions have exceeded 14% of the Fund's
average month-end Net Assets during the preceding year.
The General Partner shall reimburse the Fund for any fees paid by the Fund
to any trading advisor during any fiscal year, to the extent that such fees
exceed the percentage limitation on annual management fees and quarterly
incentive fees contemplated by the North American Securities Administrators
Association, Inc. Guidelines
LPA-5
for the Registration of Commodity Pool Programs (the "NASAA Guidelines") during
such year. Any such reimbursement shall be made on a present value basis, fully
compensating the Fund for having made payments at any time during the year which
would not otherwise have been due from it. The General Partner shall disclose
any such reimbursement in the Annual Report delivered to Limited Partners.
No compensation paid by the Fund to any party may be increased without
prior written notice to Limited Partners within sufficient time for them to
redeem prior to such increase becoming effective. Such notification shall
contain a description of Limited Partners' voting and redemption rights as well
as a description of any material effect of such increase.
(e) Limited Liability of Limited Partners. Each Unit, when purchased in
accordance with this Agreement, shall be fully-paid and nonassessable, except as
otherwise provided by law. Any provisions of this Limited Partnership Agreement
to the contrary notwithstanding, no Limited Partner shall be liable for Fund
obligations in excess of the capital contributed by him, plus his share of
undistributed profits and assets (including his obligation, as required by law,
under certain circumstances to return to the Fund distributions and returns of
contributions).
8. Management of the Fund.
(a) General. The General Partner shall manage the business of the Fund.
The General Partner shall determine what distributions, if any, shall be
made to the Partners.
The General Partner may take such actions relating to the business of the
Fund as the General Partner deems necessary or advisable and which are
consistent with the terms of this Agreement.
In addition to any specific contract or agreements described herein, the
Fund, and the General Partner on behalf of the Fund, may enter into any other
contracts or agreements specifically described in or contemplated by the
prospectus for the Units current at the time the General Partner entered into
such contract (the "Prospectus") without any further act, approval or vote of
any Partner other than the General Partner, notwithstanding any other provisions
of this Agreement, the Act or any applicable law, rule or regulations.
The General Partner is specifically authorized, without limitation, by each
Limited Partner to enter into the cash management arrangements described under
"Use of Proceeds, Interest Income Arrangements" in the Prospectus.
The General Partner is hereby specifically authorized to enter into,
deliver and perform on behalf of the Fund, the business arrangements referred to
in the Prospectus.
The General Partner may engage such persons as the General Partner in its
sole judgment shall deem advisable for operating the business of the Fund;
provided, that no such arrangement shall allow brokerage commissions above those
described in the Prospectus or permitted under applicable NASAA Guidelines in
effect as of the date of the Prospectus, whichever is higher.
Any material change in the Fund's basic investment policies or structure
requires the approval of a majority of the Units.
The General Partner is the "tax matters partner" of the Fund.
LPA-6
The General Partner has authority to cause the Fund to take such actions as
it may deem appropriate, subject to the fiduciary obligations and other
restrictions applicable to the General Partner as general partner of the Fund.
(b) Fiduciary Duties. The General Partner shall be under a fiduciary duty
to conduct the affairs of the Fund in the best interests of the Fund, provided
that the General Partner shall not be obligated to engage in any conduct on
behalf of the Fund to the detriment of any other commodity pool to which the
General Partner owes similar fiduciary duties. The Limited Partners will under
no circumstances be deemed to have contracted away the fiduciary obligations
owed to them by the General Partner under the common law.
The General Partner's fiduciary duty includes, among other things, the
safekeeping of all Fund assets and the use thereof for the benefit of the Fund.
The General Partner shall at all times act with integrity and good faith
and exercise due diligence in all activities relating to the conduct of the
business of the Fund and in resolving conflicts of interest. The General Partner
will take no actions with respect to the property of the Fund which do not
benefit the Fund.
(c) Brokerage Arrangements. The Fund's brokerage arrangements shall be
non-exclusive, and the brokerage commissions paid by the Fund shall be
competitive. The Fund shall seek the best price and services available for its
commodity transactions.
The brokerage fees paid by the Fund may not exceed the amount permitted
under applicable NASAA Guidelines in effect as of the date hereof.
(d) Loans; Investments. The Fund shall not make loans, and the funds of
the Fund will not be commingled with the funds of any other person or entity
(deposit of funds with a commodity or securities broker or clearinghouse or
entering into joint ventures or partnerships shall not be deemed to constitute
"commingling" for these purposes).
(e) Certain Conflicts of Interest Prohibited. No person or entity may
receive, directly or indirectly, any advisory fees or incentive fees from
entities in which the Fund participates, for investment advice or management who
shares or participates in any commodity brokerage commissions paid by the Fund;
and no broker may pay, directly or indirectly, rebates or give-ups to any
trading advisor, the General Partner or any of their respective affiliates. Such
prohibitions may not be circumvented by any reciprocal business arrangements. No
trading advisor for the Fund shall be affiliated with the Fund's commodity
broker, the General Partner or any of their affiliates.
(f) Certain Agreements. Any agreements between the Fund and the General
Partner or any affiliate of the General Partner shall be terminable by the Fund
on no more than 60 days' written notice.
All trading advisors used by the Fund must satisfy the experience
requirements of the NASAA Guidelines.
The maximum period covered by any contract entered into by the Fund, except
for the various provisions of the Selling Agreement which survive the final
closing of the sale of the Units, shall not exceed one year.
(g) No "Pyramiding." The Fund is prohibited from "pyramiding."
(h) Other Activities. The General Partner engages in other business
activities and shall not be required to refrain from any such activities,
whether or not in competition with the Fund. Neither the Fund nor any of
LPA-7
the Partners shall have any rights in such activities. Limited Partners may
similarly engage in any such other business activities.
The General Partner shall devote to the Fund such time as the General
Partner deems advisable to conduct the Fund's business.
9. Audits and Reports.
The Fund's books shall be audited annually by an independent certified
public accountant. The Fund will use its best efforts to cause each Limited
Partner to receive (i) within 90 days after the close of each fiscal year
certified financial statements of the Fund for the fiscal year then ended, (ii)
in no event later than March 15 of each year all tax information relating to the
prior fiscal year necessary to complete his federal income tax return and (iii)
such other information as the CFTC may by regulation require.
The General Partner shall include in the annual financial statements sent
to Limited Partners an estimate of the brokerage rate paid by the Fund during
the preceding year as a percentage of average Net Assets.
The Fund will seek the best price and services available on its commodity
brokerage transactions and will, with the assistance of the Fund's commodity
broker, make an annual review of the Fund's commodity brokerage arrangements. In
connection with such review, the General Partner will determine, to the extent
practicable, the commodity brokerage rates charged to other major commodity
pools whose trading and operations are, in the opinion of the General Partner,
comparable to those of the Fund, in order to assess whether the rates charged to
the Fund are reasonable in light of the services it receives. If, as a result of
such review, the General Partner determines that such rates are not so
reasonable, the General Partner will notify the Limited Partners, describing the
rates charged to the Fund and several funds which are, in the General Partner's
opinion, comparable to the Fund.
Limited Partners or their duly authorized representatives may inspect the
Fund's books and records, for any purpose reasonably related to their status as
Limited Partners in the Fund, during normal business hours upon reasonable
written notice to the General Partner. They may also obtain copies of such
records upon payment of reasonable reproduction costs; provided, however, that
such Limited Partners shall represent that the inspection and/or copies of such
records will not be for commercial purposes unrelated to such Limited Partners'
interest in the Fund.
The General Partner shall calculate the Net Asset Value per Unit on a daily
basis and furnish such information upon request to any Limited Partner.
The General Partner will send written notice to each Limited Partner
within seven days of (i) any decline in the Fund's Net Asset Value per Unit to
50% or less of such Net Asset Value as of the previous month-end, (ii) any
material change in its agreement with the Advisor or any modification in
connection with the method of calculating the incentive fee due to the Advisor
or (iii) any material change affecting the compensation of any party. Any such
notice shall contain a description of Limited Partners' voting rights.
The General Partner shall maintain and preserve all Fund records for a
period of not less than 6 years. In particular, and not by way of limitation,
the General Partner will retain all Subscription Agreement and Power of Attorney
Signature Pages submitted by persons admitted as Limited Partners, and all other
records necessary to substantiate that Units are sold only to purchasers for
whom the Units are a suitable investment, for at least six (6) years after Units
are sold to such persons.
LPA-8
10. Assigning Units.
Each Limited Partner agrees that he will not assign, transfer or otherwise
dispose of any interest in his Units in violation of any applicable federal or
state securities laws or without giving written notice to the General Partner.
No assignment, transfer or disposition of Units shall be effective against the
Fund or the General Partner until the first day of the month following the month
in which the General Partner receives such notice. The General Partner may, in
its sole discretion, waive any such notice.
No assignee, except with the consent of the General Partner, may become a
substituted Limited Partner. The General Partner intends to so consent, provided
that the General Partner and the Fund receive an opinion of counsel to the
General Partner that such admission will not adversely affect the tax
classification of the Fund as a partnership. If the General Partner withholds
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 capital and profits and shall have that
right of redemption to which his assignor would otherwise have been entitled.
Each Limited Partner agrees that with the consent of the General Partner
any assignee may become a substituted Limited Partner without the consent of any
Limited Partner.
If the General Partner withholds 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
capital and profits and shall have that right of redemption to which his or her
assignor would otherwise have been entitled. The General Partner will send
written confirmation to both the transferors and transferees of Units that the
transfers in question have been duly recorded on the Fund's books and records.
11. Redeeming Units.
Units may be redeemed as of the close of business (as determined by the
General Partner) in Austin, Texas on the last day of any month, provided that
(i) all liabilities, contingent or otherwise, of the Fund have been paid or
there remains property of the Fund sufficient to pay them and (ii) the Fund has
received written notice of redemption at least ten (10) days before the last day
of such month, or such lesser period as shall be acceptable to the General
Partner.
Any number of whole Units may be redeemed. Fractional Units may only be
redeemed upon redemption of a Limited Partner's entire interest in the Fund.
Redemption requests must be in writing, unless the General Partner determines
otherwise.
In the event that the Net Assets of the Fund has, as of the close of
business on any business day, declined to a level equal to less than fifty
percent (50%) of the Net Assets of the Fund at the end of the preceding month
(adjusted for contributions, redemptions and distributions), the General Partner
shall so notify the Limited Partners within seven (7) business days thereafter
and shall suspend new trading and liquidate all positions as promptly as
practicable. The General Partner, in its notification, will set a date ten (10)
business days after the notice date as of which Limited Partners may redeem
their Units. The General Partner shall mail notice of such date to each Limited
Partner and assignee of Units of whom it has received written notice, by first
class mail, postage prepaid, together with instructions as to the procedure such
Limited Partner or assignee must follow to have such Limited Partner's or
assignee's interest (only entire, not partial, interests may be so redeemed
unless otherwise determined by the General Partner) in the Fund redeemed on such
date. Upon redemption pursuant to a Special Redemption Date, a Limited Partner
or any other assignee of whom the General Partner has received written notice,
shall receive from the Fund an amount equal to the Net Asset Value of such
Limited Partner's interest, determined as of the close of business (as
determined by the General Partner) on such Special Redemption Date. No
redemption charges shall be assessed on any such Special Redemption Date. As in
the case of a regular redemption, an assignee shall not be
LPA-9
entitled to redemption on any Special Redemption Date until the General Partner
has received written notice of the assignment, transfer or disposition under
which the assignee claims an interest in the Units to be redeemed. After such
Special Redemption Date, the Fund may, in the discretion of the General Partner,
resume trading. If the General Partner determines not to resume trading, the
Fund will be terminated.
The General Partner may, in its discretion, declare additional regular
redemption dates for Units, permit certain Limited Partners to redeem at other
than month-end and waive the 10-day notice period otherwise required to effect
redemptions.
The General Partner may declare additional Special Redemption Dates upon
notice to the Partners and assignees of whom the General Partner has received
notice. In the event the General Partner does, in its discretion, declare a
Special Redemption Date, the General Partner may, in its notice of such Special
Redemption Date modify the circumstances under which the General Partner is
again required to declare a Special Redemption Date, as set forth in the
preceding paragraph.
The General Partner may for any reason, upon two (2) days' advance written
notice, cause the involuntary withdrawal of any Limited Partner by redeeming all
or part of his Units as of any month-end.
Payment in respect of Units redeemed will be made (by mailing a check) as
promptly as practicable after the effective date of redemption or the Special
Redemption Date, but in no event more than thirty (30) days thereafter. However,
under special circumstances including, but not limited to, inability to
liquidate commodity positions due to the operation of daily limits or otherwise
as of such redemption or Special Redemption Date, or default or delay in
payments due the Fund from futures brokers, banks, dealers 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 of the Units being redeemed
represented by the sums which are the subject of such circumstances.
All redemptions will be made at Net Asset Value as of the effective day of
redemption.
12. Offering of Units.
The General Partner may, in its discretion, continue or terminate the
offering of the Units on a public or private basis.
All sales of Units in the United States will be conducted by registered
brokers.
13. Power of Attorney.
Each Limited Partner hereby irrevocably appoints the General Partner and
each officer of the General Partner, with full power of substitution, as his
true and lawful attorney-in-fact, in his name, place and stead, to execute,
acknowledge, swear to, deliver and file, record in public offices and publish:
(i) this Agreement, including any amendments; (ii) certificates of limited
partnership or assumed name, including amendments, with respect to the Fund;
(iii) all conveyances and other instruments which the General Partner deems
appropriate to qualify or continue the Fund in the State of Delaware and any
other jurisdictions in which the Fund may conduct business, or which may be
required to be filed by the Fund or the Partners under the laws of any
jurisdiction; and (iv) to file, prosecute, defend, settle or compromise
litigation, claims or arbitrations on behalf of the Fund. The Power of Attorney
granted herein shall be deemed to be coupled with an interest, shall survive and
shall not be affected by the subsequent incapacity, disability or death of a
Limited Partner.
LPA-10
14. Withdrawal of a Partner.
The Fund shall be dissolved upon the withdrawal, dissolution, insolvency or
removal of the General Partner, or any other event that causes the General
Partner to cease to be a general partner under the Act, unless the Fund is
continued pursuant to the terms of Section 4(a)(3). In addition, the General
Partner may withdraw from the Fund, without any breach of this Agreement, at any
time upon 120 days' written notice by first class mail, postage prepaid, to each
Limited Partner and each assignee of whom the General Partner has notice. If the
General Partner withdraws as general partner, and the Fund's business is
continued pursuant to the terms of Section 4(a)(3)(ii), the withdrawing General
Partner shall pay all expenses incurred by the Fund as a result of its
withdrawal.
The General Partner may not assign its general partner interest or its
obligation to direct the trading of the Fund's assets without the consent of
each Limited Partner. The General Partner will notify all Limited Partners of
any change in the principals of the General Partner.
A Limited Partner ceasing to be a Limited Partner will not terminate or
dissolve the Fund. No Limited Partner, including such Limited Partner's estate,
custodian or personal representative, shall have any right to redeem or value
such Limited Partner's interest in the Fund except as provided in Section 11.
Each Limited Partner agrees that in the event of his death, he waives on behalf
of himself and of his estate, and directs the legal representatives of his
estate and any person interested therein to waive, any inventory, accounting or
appraisal of the assets of the Fund and any right to an audit or examination of
the books of the Fund. Nothing in this Section 14 shall, however, waive any
right for a Limited Partner to be informed of the Net Asset Value of his Units,
to receive periodic reports, audited financial statements and other pertinent
information from the General Partner or the Fund or to redeem or transfer Units.
15. Standard of Liability; Indemnification.
(a) Standard of Liability for the General Partner. The General Partner and
its Affiliates, as defined below, shall have no liability to the Fund or to any
Partner for any loss suffered by the Fund which arises out of any action or
inaction of the General Partner or its Affiliates, if the General Partner, in
good faith, determined that such course of conduct was in the best interests of
the Fund, and such course of conduct did not constitute negligence or misconduct
on behalf of the General Partner or its Affiliates.
(b) Indemnification of the General Partner by the Fund. To the fullest
extent permitted by law, subject to this Section 15, the General Partner and its
Affiliates shall be indemnified by the Fund against any losses, judgments,
liabilities, expenses and amounts paid in settlement of any claims sustained by
them in connection with the Fund; provided, that such claims were not the result
of negligence or misconduct on the part of the General Partner or its
Affiliates, and the General Partner, in good faith, determined that such conduct
was in the best interests of the Fund; and provided further, that Affiliates of
the General Partner shall be entitled to indemnification only for losses
incurred by such Affiliates in performing the duties of the General Partner and
acting wholly within the scope of the authority of the General Partner.
Notwithstanding anything to the contrary contained in the preceding
paragraph, none of the General Partner, its Affiliates or any persons acting as
selling agent for the Units shall be indemnified for any losses, liabilities or
expenses arising from or out of an alleged violation of federal or state
securities laws unless (1) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the
particular indemnitee and the court approves indemnification of the litigation
costs, or (2) such claims have been with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and the court approves
indemnification of the litigation costs, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made.
LPA-11
In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission, the California Department of
Corporations, the Massachusetts Securities Division, the Pennsylvania Securities
Commission, the Tennessee Securities Division, the Texas Securities Board and
any other state or applicable regulatory authority with respect to the issue of
indemnification for securities law violations.
The Fund shall not bear the cost of that portion of any insurance which
insures any party against any liability the indemnification of which is herein
prohibited.
For the purposes of this Section 15, the term, "Affiliates," shall mean any
person acting on behalf of or performing services on behalf of the Fund who: (1)
directly or indirectly controls, is controlled by, or is under common control
with the General Partner; or (2) owns or controls 10% or more of the outstanding
voting securities of the General Partner; or (3) is an officer or director of
the General Partner; or (4) if the General Partner is an officer, director,
partner or trustee, is any entity for which the General Partner acts in any such
capacity.
Advances from Fund assets to the General Partner and its Affiliates for
legal expenses and other costs incurred as a result of any legal action
initiated against the General Partner by a Limited Partner are prohibited.
Advances from Fund assets to the General Partner and its Affiliates for
legal expenses and other costs incurred as a result of a legal action will be
made only if the following three conditions are satisfied: (1) the legal action
relates to the performance of duties or services by the General Partner or its
Affiliates on behalf of the Fund; (2) the legal action is initiated by a third
party who is not a Limited Partner; and (3) the General Partner or its
Affiliates undertake to repay the advanced funds, with interest from the initial
date of such advance, to the Fund in cases in which they would not be entitled
to indemnification under the standard of liability set forth in Section 15(a).
In no event shall any indemnity or exculpation provided for herein be more
favorable to the General Partner or any Affiliate than that contemplated by the
NASAA Guidelines as in effect on the date of this Agreement.
In no event shall any indemnification permitted by this Section 15(b) be
made by the Fund unless all provisions of this Section for the payment of
indemnification have been complied with in all respects. Furthermore, it shall
be a precondition of any such indemnification that the Fund receive a
determination of qualified independent legal counsel in a written opinion that
the party which seeks to be indemnified hereunder has met the applicable
standard of conduct set forth herein. Receipt of any such opinion shall not,
however, in itself, entitle any such party to indemnification unless
indemnification is otherwise proper hereunder. Any indemnification payable by
the Fund hereunder shall be made only as provided in the specific case.
In no event shall any indemnification obligations of the Fund under this
Section 15(b) subject a Limited Partner to any liability in excess of that
contemplated by Section 7(d).
(c) Indemnification of the Fund by the Partners. In the event the Fund 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 Limited Partner's activities,
obligations or liabilities unrelated to the Fund's business, or as a result of
or in connection with a transfer, assignment or other disposition or an
attempted transfer, assignment or other disposition by a Limited Partner or an
assignee of its Units or of any part of its right, title and interest in the
capital or profits of the Fund in violation of this Agreement, such Limited
Partner shall indemnify and reimburse the Fund for all such loss and expense
incurred, including reasonable attorneys' fees.
16. Amendments; Meetings.
(a) Amendments with Consent of the General Partner. The General Partner may
amend this Agreement with the approval the majority of the Units. No meeting
procedure or specified notice period is required in
LPA-12
the case of amendments made with the consent of the General Partner, mere
receipt of an adequate number of unrevoked written consents being sufficient.
Such vote shall be taken at least 30 but not more than 60 days after delivery by
the General Partner to each Limited Partner of record by certified mail of
notice of the proposed amendment and voting procedures. The General Partner may
also amend this Agreement without the consent of the Limited Partners in order:
(i) to clarify any clerical inaccuracy or ambiguity or reconcile any
inconsistency (including any inconsistency between this Agreement and the
Prospectus); (ii) to effect the intent of the allocations proposed herein to the
maximum extent possible in the event of a change in the Code or the
interpretations thereof affecting such allocations; (iii) to attempt to ensure
that the Fund is taxed as a partnership; (iv) to qualify or maintain the
qualification of the Fund as a limited partnership in any jurisdiction; (v) to
change this Agreement as required by the Staff of the Securities and Exchange
Commission, any other federal agency or any state "Blue Sky" official or in
order to opt to be governed by any amendment or successor statute to the Act;
(vi) to make any amendment to this Agreement which the General Partner deems
advisable, provided that such amendment is not adverse to the Limited Partners;
(vii) to make any amendment that is appropriate or necessary, in the opinion of
the General Partner, to avoid causing the assets of the Fund from being
considered for any purpose of ERISA or Section 4975 of the Code to constitute
assets of any Plan; and (viii) to make any amendment to this Agreement required
by law.
(b) Amendments and Actions without Consent of the General Partner. In any
vote called by the General Partner or pursuant to Section 16(c), upon the
affirmative vote of a majority of the Units, the following actions may be taken,
irrespective of whether the General Partner concurs: (i) this Agreement may be
amended, provided, however, that the approval of all Limited Partners shall be
required in the case of amendments changing or altering this Section 16,
extending the term of the Fund or materially changing the Fund's basic
investment policies; (ii) the Fund may be dissolved; (iii) the General Partner
may be removed and replaced; (iv) a new general partner may be elected if the
General Partner withdraws from the Fund; (v) the sale of all or substantially
all of the assets of the Fund may be approved; and (vi) any contract with the
General Partner or any of its affiliates may be disapproved of and terminated
upon 60 days' notice.
No reduction of any Limited Partner's capital account or modification of
the percentage of profits, losses or distributions to which a Limited Partner is
entitled shall be made without such Limited Partner's written consent;
(c) Meetings; Other Voting Matters. Any Limited Partner may for a purpose
related to his status as a Limited Partner obtain from the General Partner,
provided that reasonable copying and mailing costs are paid in advance, a list
of the names, addresses and number of Units held by each Limited Partner. Such
list will be mailed by the General Partner within ten days of the receipt of the
request; provided, that the General Partner may require any Limited Partner
requesting such information to submit written confirmation that such information
will not be used for commercial purposes.
Upon receipt of a written proposal, signed by Limited Partners owning at
least 10% of the Units, that a meeting of the Fund be called to vote on any
matter on which the Limited Partners are entitled to vote, the General Partner
will, by written notice to each Limited Partner of record sent by certified mail
within 15 days after such receipt, call the meeting. Such meeting shall be held
at least 30 but not more than 60 days after the mailing of such notice, and such
notice shall specify the date, a reasonable place and time for such meeting, as
well as its purpose. Such notice shall establish a record date for Limited
Partners entitled to vote at the meeting, which shall be not more than 15 days
prior to the date established for such meeting.
In determining whether a majority of the Units has approved an action or
amendment, only Units owned by Limited Partners shall be counted. Any Units
acquired by the General Partner or any of its Affiliates will be non-voting, and
will not be considered outstanding for purposes of determining whether the
majority approval of the outstanding Units has been obtained.
The General Partner may not restrict the voting rights of Limited Partners
as set forth herein.
LPA-13
In the event that this Agreement is to be amended in any material respect,
the amendment will not become effective prior to all Limited Partners having an
opportunity to redeem their Units.
17. Benefit Plan Investors.
(a) Investment in accordance with Law. Each Limited Partner that is an
"employee benefit plan" as defined in and subject to ERISA, a "plan" as defined
in Section 4975 of the Code (collectively, a "Plan"), and each fiduciary who has
caused a Plan to become a Limited Partner (a "Plan Fiduciary"), represents and
warrants that: (a) the Plan Fiduciary has considered an investment in the Fund
in light of the risks relating thereto; (b) the Plan Fiduciary has determined
that the investment in the Fund is consistent with the Plan Fiduciary's
responsibilities under ERISA; (c) the investment in the Fund does not violate
the terms of any legal document constituting the Plan or any trust agreement
thereunder; (d) the Plan's investment in the Fund has been duly authorized and
approved by all necessary parties; (e) none of the General Partner, the Fund's
advisor(s), the Fund's cash manager, the Fund's futures broker, any selling
agents and any of their respective affiliates or any of their respective agents
or employees: (i) has investment discretion with respect to the assets of the
Plan used to purchase Units; (ii) has authority or responsibility to or
regularly gives investment advice with respect to the assets of the Plan used to
purchase Units 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 and that such advice will be based on the particular investment needs
of the Plan; or (iii) is an employer maintaining or contributing to the Plan;
and (f) the Plan Fiduciary: (i) is authorized to make, and is responsible for,
the decision of the Plan to invest in the Fund, including the determination that
such 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; (ii) is independent of the General Partner, the Fund's advisor(s), the
Fund's cash manager, the Fund's futures broker, any selling agents and any of
their respective affiliates; and (iii) is qualified to make such investment
decision.
(b) Disclosures and Restrictions Regarding Benefit Plan Investors. Each
Limited Partner that is a "benefit plan investor" (defined as any Plan, any
other employee benefit plan as defined in but not subject to ERISA and any
entity deemed for any purpose of ERISA or Section 4975 of the Code to hold
assets of any employee benefit plan or plan) represents that the individual
signing the Subscription Agreement and Power of Attorney has disclosed such
Limited Partner's status as a benefit plan investor in the Subscription
Agreement and Power of Attorney. Each Limited Partner that is not a "benefit
plan investor" represents and agrees that if at a later date such Limited
Partner becomes a benefit plan investor, such Limited Partner will immediately
notify the General Partner of such change of status. Notwithstanding anything
herein to the contrary, the General Partner, on behalf of the Fund, may take any
and all action including, but not limited to, refusing to admit persons as
Limited Partners or refusing to accept additional capital contributions, and
requiring the redemption of the Units of any Limited Partner upon two (2) days'
notice to the Limited Partner and otherwise in accordance with Section 11
hereof, as may be necessary or desirable to avoid having the assets of the Fund
be considered for any purpose of ERISA or Section 4975 of the Code to constitute
assets of any Plan.
18. GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY 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.
19. Miscellaneous.
(a) Notices. All notices under this Agreement must be in writing and will
be effective upon personal delivery, or if sent by first class mail, postage
prepaid, upon the deposit of such notice in the United States mail.
(b) Binding Effect. This Agreement shall inure to and be binding upon all
of the parties hereto and all parties indemnified under Section 15, as well as
their respective successors and assigns, custodians, estates, heirs and personal
representatives.
For purposes of determining the rights of any Partner or assignee
hereunder, the Fund and the General Partner may rely upon the Fund records as to
who are Partners and assignees, and all Partners and assignees agree that their
rights shall be determined and they shall be bound thereby.
(c) Captions. Captions are not part of this Agreement.
(d) Close of Business. The General Partner will decide when the close of
business occurs.
* * * * *
LPA-14
The parties hereby execute this Second Amended and Restated Limited
Partnership Agreement as of the day and year first above written.
GENERAL PARTNER: LIMITED PARTNERS:
PROFUTURES, INC. PROFUTURES, INC.
Attorney-in-Fact
By /s/ GARY D. HALBERT By /s/ GARY D. HALBERT
----------------------- -----------------------
Gary D. Halbert Gary D. Halbert
President President
LPA-15
EXHIBIT B
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
PROFUTURES BULL & BEAR FUND, L.P.
(To be executed by all purchasers)
Subscription Instructions
Fill in all of the boxes and blanks on page B-7, as follows:
Part 1 . Indicate if this is an addition to an existing account; if so, enter
your Limited Partner account number.
. Indicate if you are a Benefit Plan Investor (see page B-7) or an
employee of an NASD member firm.
. Enter your Social Security Number or Taxpayer ID Number and check the
appropriate box to indicate the type of entity that is subscribing. In
case of joint ownership, either Social Security Number may be used.
. Enter the exact name in which the Units are to be held based on
ownership type, and other information.
. If there is a Co-Purchaser, Trustee or Custodian, complete the
applicable information. IRA or Keogh plan investments may only be
accepted if received from a third party custodian. Call the General
Partner for details.
Part 2 . Enter the dollar amount of the subscription. Make your check payable
to ProFutures Bull & Bear Fund, L.P. (the "Fund")
Part 3 . You must execute the Subscription Agreement and Power of Attorney
Signature Page. Each joint tenant or tenant in common must sign in the
space provided. If purchaser is a trust, partnership, corporation or
other business association, the signing trustee, partner or officer
represents and warrants that he/she/it has full power and authority to
execute this Agreement on its behalf. If Purchaser is a trust or
partnership, please attach a copy of the trust instrument or
partnership agreement. If Purchaser is a corporation, please attach
certified corporate resolution authorizing signature.
Mail Executed Subscription Agreement and Power of Attorney to:
PROFUTURES BULL & BEAR FUND, L.P.
c/o ProFutures Financial Group, Inc.
11612 Bee Cave Road, Suite 100
Austin, Texas 78733
Read this prospectus carefully before you subscribe. Contained herein are
disclosures concerning various risks, conflicts, fees and expenses relating to
or to be paid by the Fund. You should be aware that the disclosure made may be
used as a defense if proceedings are brought by Limited Partners relating to the
Fund.
B-1
Subscription Agreement and Power of Attorney
By executing page B-7 of this Subscription Agreement and Power of Attorney
(hereafter, the "Subscription Agreement"), you irrevocably subscribe for Units
of Limited Partnership Interest ("Units") in the Fund. You have enclosed the sum
indicated on page B-7 (minimum $10,000 or $5,000 for IRAs and retirement plans).
Subscriptions, whether checks or wire transfers, should be made payable to
"ProFutures Bull & Bear Fund, L.P." If this Subscription Agreement is accepted,
you agree to contribute the amount enclosed to the Fund and to be bound by the
terms of the Second Amended and Restated Limited Partnership Agreement, as it
may be amended from time to time.
Representations and Warranties
You represent and warrant to the Fund, the General Partner and their
respective affiliates as follows:
(1) You are of legal age and legally competent to execute this
Subscription Agreement.
(2) All information in this Subscription Agreement is correct and
complete. You will immediately contact the General Partner if there is
any change in such information.
(3) Your subscription is made with your own funds and for your own
account.
(4) Your subscription, if made as custodian for a minor, is a gift you
have made to such minor or, if not a gift, the following
representations as to net worth and annual income apply to such minor
personally.
(5) If you are subscribing in a representative capacity, you have full
power and authority to purchase the Units on behalf of the entity for
which you are acting, and such entity has full power and authority to
purchase such Units.
(6) If required to be, you are registered with the Commodity Futures
Trading Commission or a member of the National Futures Association.
(7) If you are acting on behalf of an "employee benefit plan," you confirm
the representations set forth in Section 17 of the Limited Partnership
Agreement.
General
You acknowledge that:
(1) The Units are speculative investments and purchasing them
involves a high degree of risk of loss of your entire investment
in the Fund.
(2) You are encouraged to discuss your proposed purchase with your
attorney, accountant or a Purchaser Representative (as defined
under Regulation D, promulgated under the Securities Act of 1933,
as amended), are aware of and can afford the risks of an
investment in the Fund, and are satisfied that you have had an
adequate opportunity to ask questions concerning the Fund, the
Units and the transactions described in the Prospectus.
(3) No federal or state agency has passed upon the adequacy of the
information set forth in the Prospectus or made any finding or
determination as to the fairness of the investment, or any
recommendation or endorsement of the Units as an investment.
B-2
(4) You are not dependent upon a current cash return with respect to
your investment in the Units. You understand that distributions
are not required to be made, and that redemptions probably will
be your sole method to withdraw profits and capital from the
Fund.
(5) The Fund is not a "tax shelter," and any information to be
furnished to you concerning the federal income tax consequences
arising from your investment in the Fund is necessarily general
in nature, and the specific tax consequences to you as a result
of your investment in the Fund depends on your individual
circumstances.
(6) Trading in commodity futures contracts involves investing capital
in assets that can fluctuate rapidly and substantially in value,
often resulting in quick and substantial gains and losses.
(7) Management fees to the General Partner, brokerage commissions and
certain other expenses must be paid regardless of whether the
Fund realizes profits.
You understand and agree that this subscription may be accepted or rejected
by the General Partner, in whole or in part, in its sole and absolute
discretion. You hereby acknowledge and agree that this Subscription Agreement
shall survive: (i) changes in the transactions, documents and instruments
described in the Prospectus which are not material; (ii) your death or
disability; and (iii) the acceptance of this subscription by the General
Partner.
By executing this Subscription Agreement below, you: (i) acknowledge the
accuracy of all statements herein and (ii) appoint the General Partner to act as
your true and lawful attorney and agent to execute the Limited Partnership
Agreement and to file any documents or take any action required for the Fund to
carry out its business activities. In addition, by executing this Subscription
Agreement you waive on behalf of yourself and your estate the furnishing of any
inventory, accounting or appraisal of the assets of the Fund; provided that such
waiver does not extend to any rights granted a Limited Partner under the Limited
Partnership Agreement.
The foregoing information which has provided to the General Partner is true
and accurate as of the date hereof and shall be true and accurate as of the date
of your admission to the Fund as a limited partner. If in any respect such
representations, warranties or information shall not be true and accurate at any
time prior to your admission as a limited partner, you will give written notice
of such fact to the General Partner, specifying which representation, warranty
or information is not true and accurate and the reason therefor.
Tax Matters
By executing this Subscription Agreement, you certify, under penalty of
perjury:
(1) That the Social Security Number or Taxpayer Identification Number
provided below is correct.
(2) That the IRS has never notified you that you are subject to 20% backup
withholding, or has notified you that you are no longer subject to
such backup withholding. (Note: If this part (2) is not true in your
case, please strike out this part before signing).
(3) You are a U.S. citizen or resident, or a domestic corporation,
partnership, limited liability company or trust, as defined in the
Internal Revenue Code of 1986, as amended.
(4) You acknowledge and agree that this information may be disclosed to
the Internal Revenue Service by the Fund and that any false statement
contained in this Section is punishable by fine, imprisonment or both.
You will notify the Fund within sixty (60) days of the date upon which
any of the information contained herein becomes false or otherwise
changes
B-3
in a material manner, or you become a foreign person. You agree to
update this information whenever requested by the Fund. Under
penalties of perjury, you declare that you have examined the
information contained herein and to the best of the undersigned's
knowledge and belief, correct and complete, and that you have the
authority to execute this Subscription Agreement.
This Subscription Agreement and the representations and warranties
contained herein shall be binding upon your heirs, executors,
administrators and other successors. If there is more than one
signatory hereto, your obligations, representations, warranties and
agreements are made jointly and severally.
Benefit Plan Investors
(1) The undersigned has checked the box on page B-7 if the Purchaser is a
"benefit plan investor." The term "benefit plan investor" refers to
(i) any "employee benefit plan" as defined in the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), regardless of
whether it is subject to ERISA, (ii) any "plan" as defined in section
4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
and (iii) any entity deemed for any purpose of ERISA or Section 4975
of the Code to hold assets of any such employee benefit plan or plan.
(2) If the undersigned is not a benefit plan investor, on the date this
Subscription Agreement and Power of Attorney is signed, the
undersigned agrees to notify the General Partner immediately if the
undersigned becomes a benefit plan investor.
(3) If the undersigned is acting on behalf of an "employee benefit plan,"
as defined in and subject to ERISA, or any "plan," as defined in
Section 4975 of the Code (a "Plan"), the individual signing this
Subscription Agreement and Power of Attorney on behalf of the
undersigned, in addition to the representations and warranties set
forth above, hereby further represents and warrants as, or on behalf
of, the fiduciary of the Plan responsible for purchasing Units (the
"Plan Fiduciary") that: (a) the Plan Fiduciary has considered an
investment in the Fund for such Plan in light of the risks relating
thereto; (b) the Plan Fiduciary has determined that, in view of such
considerations, the investment in the Fund is consistent with the Plan
Fiduciary's responsibilities under ERISA; (c) the Plan's 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; (d) the Plan's investment in the Fund has been
duly authorized and approved by all necessary parties; (e) none of the
General Partner, the Fund's advisors, the Fund's cash manager, the
Fund's futures broker, any selling agent, any of their respective
affiliates or any of their respective agents or employees: (i) has
investment discretion with respect to the investment of assets of the
Plan used to purchase Units; (ii) has authority or responsibility to
or regularly gives investment advice with respect to the assets of the
Plan used to purchase Units 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 and that such advice
will be based on the particular investment needs of the Plan; or (iii)
is an employer maintaining or contributing to the Plan; and (f) the
Plan Fiduciary (i) is authorized to make, and is responsible for, the
decision to invest in the Fund, including the determination that such
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, (ii) is independent of the General Partner, the
Fund's advisors, the Fund's cash manager, the Fund's futures broker,
any selling agent, each of their respective affiliates, and (iii) is
qualified to make such investment decision. The undersigned will, at
the request of the General Partner, furnish the General Partner with
such information as the General Partner may reasonably require to
establish that the purchase of the Units by the Plan does not violate
any
B-4
provision of ERISA or the Code, including without limitation,
those provisions relating to "prohibited transactions" by "parties in
interest" or "disqualified persons" as defined therein.
Investor Suitability Requirements
You understand that the purchase of Units may be made only by persons who,
at a minimum, have (i) a net worth of at least $150,000 (exclusive of home,
furnishings and automobiles) or (ii) an annual gross income of at least $45,000
and a net worth (similarly calculated) of at least $45,000. Residents of the
following states must meet the specific requirements set forth below (net worth
is, in all cases, to be calculated exclusive of home, furnishings and
automobiles).
1. Arizona -- Net worth of at least $225,000 or a net worth of at least
$60,000 and annual taxable income of at least $60,000.
2. California -- Liquid net worth of at least $100,000 and an annual
taxable income of at least $50,000.
3. Iowa -- Net worth of at least $225,000 or a net worth of at least
$60,000 and an annual taxable income of at least $60,000. Minimum purchase for
individual retirement accounts and employee benefit plans in Iowa is $2,500.
4. Maine -- Net worth of at least $200,000 or a net worth of at least
$50,000 and an annual income of at least $50,000. All Maine residents, including
existing Limited Partners in the Fund subscribing for additional Units, must
execute a Subscription Agreement and Power of Attorney Signature Page. Maine
residents must sign a Subscription Agreement and Power of Attorney Signature
Page specifically prepared for Maine residents, a copy of which shall accompany
this Prospectus and be delivered to all Maine residents.
5. Massachusetts -- Net worth of at least $225,000 or a net worth of at
least $60,000 and annual taxable income of at least $60,000.
6. Michigan -- Net worth of at least $225,000 or a net worth of at least
$60,000 and taxable income during the preceding year of at least $60,000.
7. Minnesota -- Except as provided in the immediately following sentence,
each Minnesota purchaser must be an "accredited investor" as defined in
Regulation D under the Securities Act of 1933 and must, either alone or together
with a purchaser representative, have sufficient financial knowledge and
experience to be capable of evaluating the risks and merits of an investment in
the Units. The Fund may effect no more than 35 sales of Units to non-accredited
investors in Minnesota in any consecutive 12-month period. Each non-accredited
investor must have a net worth of at least $225,000 or a net worth of at least
$60,000 and an annual income of at least $60,000. Minnesota residents must sign
a Subscription Agreement and Power of Attorney Signature Page specifically
prepared for Minnesota residents, a copy of which shall accompany this
Prospectus and delivered to all Minnesota residents.
8. Mississippi -- Net worth of at least $225,000 or a net worth of at least
$60,000 and annual taxable income of at least $60,000.
9. Missouri -- Net worth of at least $225,000 or a net worth of at least
$60,000 and annual taxable income of at least $60,000.
10. New Hampshire -- Net worth of at least $250,000 or a net worth of at
least $125,000 and an annual taxable income of at least $50,000.
B-5
11. North Carolina -- Net worth of at least $225,000 or a net worth of at
least $60,000 and annual taxable income of at least $60,000.
12. Oklahoma -- Net worth of at least $225,000 or a net worth of $60,000
and an annual income of at least $60,000.
13. Oregon -- Net worth of at least $225,000 or a net worth of at least
$60,000 and an annual income of at least $60,000.
14. Pennsylvania -- Net worth of at least $175,000 or a net worth of at
least $100,000 and an annual income of at least $50,000. No individual
Pennsylvania purchaser may invest more than 10% of his or her net worth
(exclusive of home, furnishings and automobiles) in the Fund.
15. South Carolina -- Net worth of at least $100,000 or a net income in the
preceding year some portion of which was subject to maximum federal and state
income tax.
16. South Dakota -- Net worth of at least $225,000 or a net worth of at
least $60,000 and annual taxable income of at least $60,000.
17. Tennessee -- Net worth of at least $250,000 or a net worth of at least
$65,000 and annual taxable income of at least $65,000.
18. Texas -- Net worth of at least $225,000 or a net worth of at least
$60,000 and annual taxable income of at least $60,000.
-------------------------
In the case of IRA and SEP plans, the foregoing suitability standards are
applicable to the owner of the plan for whose account the Units are being
acquired.
The foregoing suitability standards are regulatory minimums only.
Mail Subscription Agreement and Power of Attorney and Check to:
ProFutures Bull & Bear Fund, L.P.
ProFutures Financial Group, Inc.
11612 Bee Cave Road, Suite 100
Austin, Texas 78733
1-800-348-3601
B-6
Signature Page
PART 1 - SUBSCRIBER
Is this an addition to an existing Fund account? [_] Yes [_] No
If so, enter LP#
----------------------------------------------------------
The undersigned is the following kind of entity (please check):
[_] Individual Ownership
[_] Joint Tenants w/Rights of Survivorship (JTWROS)*
[_] Joint Tenants in common (TENCOM)*
[_] Partnership*
[_] Corporation*
[_] Non-Profit Organization*
[_] Trust*
[_] UGMA (Gift to Minor)
[_] Pension Plan*
[_] Other (Specify)
------------------------
*NOTE: Please refer to instructions on page B-1 of this Subscription Agreement.
[_] Benefit Plan Investor? (see page B-4)
[_] Employee of NASD member firm? Firm Name and Address
-------------------------
- ----------------------------------------------- -----------------------------
Print Purchaser's Full Name or Name of Trust or Social Security or
Custodian Account Taxpayer ID #
- ----------------------------------------------- -----------------------------
Print Name of Co-Purchaser or Authorized Person, Date of Birth of Purchaser
if an Institutional Trust
( )
- ----------------------------------------------- -----------------------------
Street Address of Purchaser Business Phone (Day)
( )
- ----------------------------------------------- -----------------------------
City, State and Zip Code Home Phone
PART 2 - SUBSCRIPTION
Make your check payable only to:
Subscription Amount $ PROFUTURES BULL & BEAR FUND, L.P.
-----------
PART 3 - SIGNATURE
Date:
----------------
Signature of Purchaser or Authorized Person Signature of Co-Purchaser
- ----------------------------------------------- -----------------------------
TO BE COMPLETED BY REGISTERED REPRESENTATIVE LP #
---------
B-7
The undersigned certifies that he has informed the Purchaser of all
pertinent facts relating to the liquidity and marketability of the Units as set
forth in the Prospectus.
The undersigned has reasonable grounds to believe on the basis of
information obtained from the Purchaser concerning his investment objectives,
other investments, financial situation and needs, and any other information
known by the undersigned, that: (i) the Purchaser is or will be in a financial
position appropriate to enable him to realize to a significant extent the
benefits described in the Prospectus; (ii) the Purchaser has a fair market net
worth sufficient to sustain the risks inherent in the Fund, including losses of
investment and lack of liquidity; and (iii) the Fund is otherwise a suitable
investment for the Purchaser.
Accepted _____________ by:
ProFutures Financial Group, Inc. ProFutures Inc.
Austin, Texas CRD #24328 General Partner of
Gary D. Halbert, Registered Representative ProFutures Bull & Bear Fund, L.P.
- ------------------------------------------ ---------------------------------
Gary D. Halbert, Registered Representative Gary D. Halbert, President
B-8
EXHIBIT C
REQUEST FOR REDEMPTION
_______________________, 199_
PROFUTURES BULL & BEAR FUND, L.P.
c/o ProFutures, Inc.
11612 Bee Cave Road
Suite 100
Austin, Texas 78733
The undersigned hereby requests redemption of _____ Units. The undersigned
hereby represents and warrants that he is the true and lawful owner of the
Unit(s) to which this request relates with full power and authority to request
redemption of such Unit(s). Such Unit(s) are not subject to any pledge or
otherwise encumbered in any fashion. This redemption shall be governed by the
terms of the Fund's Limited Partnership Agreement.
Please forward to the undersigned at the address below.
Name_________________________________________
Address _____________________________________
City, State__________________________________
PARTNER'S SIGNATURE MUST BE IDENTICAL TO NAME IN WHICH UNITS ARE REGISTERED.
By: _________________________________________
(Signature of Owner)
Name:________________________________________
Partnership, Trust, Plan or Corporation
By:__________________________________________
(Signature of Authorized Representative)
Name: _______________________________________
Title: ______________________________________
C-1
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
An organizational charge of 1% of the subscription amount is paid to
the General Partner (or the Selling Agent, its affiliated broker-dealer) by each
subscriber. The General Partner will pay for all actual costs of conducting the
public offering of Units. To the extent that the aggregate 1% organizational
charge collected is less than these actual costs, the General Partner will pay
the costs. To the extent that the aggregate 1% organizational charge collected
exceeds these actual costs, the excess amount will be paid to the Selling Agent.
Such payment could be deemed to be a selling commission. The following is an
estimate of such costs:
Approximate Amount
------------------
Securities and Exchange Commission Registration Fee.......... $ 20,690*
National Association of Securities Dealers, Inc. Filing Fee.. 6,500*
Printing Expenses............................................ 40,000
Fees of Certified Public Accountants......................... 25,000
Blue Sky Expenses (Excluding Legal Fees)..................... 50,000
Fees of Counsel.............................................. 200,000
Miscellaneous Offering Costs................................. 20,000
--------
Total...................................................... $362,190
========
-----------------------
* Fees marked with an asterisk are exact rather than estimated and
approximate.
--------------------
Item 14. Indemnification of Directors and Officers.
Section 15 of the Limited Partnership Agreement (attached as Exhibit A
to the prospectus which forms a part of the Registration Statement) provides for
the indemnification of the General Partner and certain of its Affiliates by the
Registrant. "Affiliates" shall mean any person performing services on behalf of
the Partnership who: (1) directly or indirectly controls, is controlled by, or
is under common control with the General Partner; or (2) owns or controls 10% or
more of the outstanding voting securities of the General Partner; or (3) is an
officer or director of the General Partner; or (4) if the General Partner is an
officer, director, partner or trustee, is any entity for which the General
Partner acts in any such capacity. Indemnification is to be provided for any
loss suffered by the Registrant which arises out of any action or inaction, if
the party, in good faith, determined that such course of conduct was in the best
interest of the Registrant and such conduct did not constitute negligence or
misconduct. The General Partner and its Affiliates will only be entitled to
indemnification for losses incurred by such Affiliates in performing the duties
of the General Partner and acting wholly within the scope of the authority of
the General Partner.
Item 15. Recent Sales of Unregistered Securities.
Beginning on September 1, 1997 and until August 31, 1998, the
Registrant sold, at month-end closings, Units of Limited Partnership Interest to
accredited investors and less than 35 unaccredited investors pursuant to a
private offering which was exempt under Section 4(2) of the Securities Act of
1933. Such Units were sold by the General Partner and/or the Selling Agent.
II-1
Item 16. Exhibits and Financial Statement Schedules.
The following documents (unless otherwise indicated) are filed
herewith and made a part of this Registration Statement:
(a) Exhibits.
Exhibit
Number Description of Document
- ------- -----------------------
1.01 Form of Amended and Restated Selling Agreement among the
Registrant, the General Partner, the Selling Agent and the Advisor.
3.01 Certificate of Limited Partnership of the Registrant
3.02 Form of Second Amended and Restated Limited Partnership Agreement of
the Registrant (included as Exhibit A to the Prospectus).
5.01 Opinion of Sidley & Austin relating to the legality of the Units.
8.01 Opinion of Sidley & Austin with respect to federal income tax
consequences.
10.01 First Amendment and Restatement of Advisory Contract between the
Registrant and the Advisor.
10.02 Customer Agreement between the Registrant and the Futures Broker.
10.03 Investment Advisory Agreement between the Registrant and the Cash
Manager
10.04 Form of Additional Selling Agents Agreement
10.05 Form of Subscription Agreement and Power of Attorney (included as
Exhibit B to the Prospectus).
23.01 Consent of Sidley & Austin.
23.02 Consent of Arthur F. Bell, Jr. & Associates, L.L.C.
27 Financial Data Schedule
Item 17.
The undersigned registrant hereby undertakes:
(a) Rule 415 Offerings
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or
II-2
high end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) Equity Offerings of Nonreporting Registrants
Note: The Units are not certificated.
(c) Indemnification
Insofar as indemnification for liabilities under the Securities
Act of 1933 may be permitted to officers, directors or controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by an officer, director, or
controlling person of the registrant in the successful defense of any such
action, suit or proceeding) is asserted by such officer, director or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
General Partner of the Registrant has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Austin in the State of Texas on the 9th day of September, 1998.
ProFutures Bull & Bear Fund, L.P.
By: ProFutures, Inc.
By: /s/ GARY D. HALBERT, JR.
--------------------------------------
Gary D. Halbert, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person on behalf
of ProFutures, Inc., General Partner of the Registrant, in the capacities and on
the date indicated.
/s/ GARY D. HALBERT President and Director September 9, 1998
- ---------------------------- (Principal Executive
Gary D. Halbert Officer)
/s/ DEBI B. HALBERT Chief Financial Officer, September 9, 1998
- ---------------------------- Treasurer and Director
Debi B. Halbert (Principal Financial
and Accounting Officer)
(Being the principal executive officer, the principal financial and
accounting officer and a majority of the directors of ProFutures, Inc.)
PROFUTURES, INC. General Partner of Registrant
By /s/ GARY D.HALBERT September 9, 1998
-------------------------
Gary D. Halbert
President
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
The following exhibits are filed herewith.
1.01 Form of Amended and Restated Selling Agreement among the Fund, the
General Partner, the Selling Agent and the Advisor.
3.01 Certificate of Limited Partnership of the Registrant.
3.02 Form of Second Amended and Restated Limited Partnership Agreement of
the Fund (included as Exhibit A to the Prospectus).
5.01 Opinion of Sidley & Austin relating to the legality of the Units.
8.01 Opinion of Sidley & Austin with respect to federal income tax
consequences.
10.01 First Amendment and Restatement of Advisory Contract between the Fund
and the Advisor.
10.02 Customer Agreement between the Fund and the Futures Broker.
10.03 Investment Advisory Agreement between the Fund and the Cash Manager.
10.04 Form of Additional Selling Agents Agreement.
10.05 Form of Subscription Agreement and Power of Attorney (included as
Exhibit B to the Prospectus).
23.01 Consent of Sidley & Austin.
23.02 Consent of Arthur F. Bell, Jr. & Associates, L.L.C.
27 Financial Data Schedule