Filed Pursuant to Rule 424(b)(3)
Registration No. 333-46550
PROSPECTUS
SHAFFER DIVERSIFIED FUND, LP
A MINIMUM OF 1,000 AND A MAXIMUM OF
25,000 UNITS OF LIMITED PARTNERSHIP INTEREST
Shaffer Diversified Fund, LP is a Delaware limited partnership organized in
August 2000 to seek medium and long-term capital appreciation through
speculative trading in a diversified portfolio of commodity futures contracts
and other commodity interests in the United States commodity futures markets.
THESE UNITS ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK. A
DESCRIPTION OF THE MATERIAL RISK FACTORS RELATING TO AN INVESTMENT IN THE FUND
APPEARS UNDER THE HEADING "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS.
o You could lose all or substantially all of your investment in the Fund.
o The Fund is speculative and highly leveraged.
o The Fund's advisor uses trading methods which could expose the Fund to
significant risks.
o There is no secondary market for the Units.
o Substantial expenses must be offset by trading profits and interest
income.
o The Fund is a newly formed entity with no operating history.
This offering consists of a minimum of 1,000 and up to a maximum of 25,000
units of limited partnership interest of the Fund. Shaffer Asset Management,
Inc., the general partner of the Fund, will purchase at least $25,000 of Units
(25 Units). The Units purchased by Shaffer Asset Management and any Units
purchased by Affiliates of Shaffer Asset Management will count toward the
minimum offering of 1,000 Units. The Units are being offered for sale through
Berthel Fisher & Company Financial Services, Inc., which will act as
underwriter for this offering. As underwriter, Berthel Fisher & Company will
serve as the Fund's selling agent on a best efforts basis. Berthel Fisher &
Company may select other firms that are members of the NASD and certain
foreign dealers and institutions that are not members of the NASD to
participate in this offering.
The initial offering period for the Units will extend for 60 days from the
date of this prospectus, subject to the right of Shaffer Asset Management to
extend the initial offering period for up to an additional 60 days. During
that period, the initial offering price per Unit will be $1,000 ($950 per
Unit, plus an initial sales charge of $50 per Unit). The proceeds from the
sale of Units during that period will be deposited in an escrow account with
The Chase Manhattan Bank, 450 West 33rd Street, 15th fl., New York, NY 10001
in accordance with the arrangements described in "Plan of Distribution". After
that period, unsold Units, if any, may be offered and sold by the Fund at the
then current Net Asset Value per Unit, plus a sales charge of 5% of the Net
Asset Value per Unit for each Unit purchased. Each investor in the Fund is
required to purchase a minimum of $10,000 in Units ($5,000 in Units in the
case of certain pension, profit-sharing or other employee benefit plans).
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Price to Public* Selling Commissions Proceeds to Fund
----------------------------------------------------------------------------------------------------------------
Per Initial Unit.................................. $ 1,000 $ 50 $ 950
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Total Minimum (1,000 Initial Units)............... $ 1,000,000 $ 50,000 $ 950,000
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Total Maximum (25,000 Initial Units).............. $25,000,000 $1,250,000 $23,750,000
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* The public offering price of the Units has been determined arbitrarily by
Shaffer Asset Management.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE ACCOMPANYING STATEMENT OF
ADDITIONAL INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMODITY FUTURES TRADING COMMISSION
PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE ACCOMPANYING
STATEMENT OF ADDITIONAL INFORMATION.
[BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. LOGO]
October 16, 2001
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU
TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT
FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTION MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 19 AND A
STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER
THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 24.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE,
BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGE 5.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF ITS ISSUE.
-----------------
INFORMATION ABOUT THE FUND AND THIS OFFERING IS CONTAINED IN TWO
PARTS--THE PROSPECTUS WHICH APPEARS HEREIN AS PART I AND A SEPARATE STATEMENT OF
ADDITIONAL INFORMATION WHICH APPEARS HEREIN AS PART II. BOTH THIS PROSPECTUS AND
THE STATEMENT OF ADDITIONAL INFORMATION MUST BE PROVIDED TO INVESTORS PRIOR TO
INVESTMENT IN THE FUND. INVESTORS SHOULD CAREFULLY READ BOTH THIS PROSPECTUS AND
THE ACCOMPANYING STATEMENT OF ADDITIONAL INFORMATION PRIOR TO MAKING AN
INVESTMENT IN THE FUND. IN ADDITION, EACH INVESTOR IS ENCOURAGED TO DISCUSS
INVESTMENT IN THE FUND WITH HIS OR HER OWN LEGAL, TAX AND FINANCIAL ADVISORS.
-----------------
THIS PROSPECTUS AND THE ACCOMPANYING STATEMENT OF ADDITIONAL INFORMATION
DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE FUND'S REGISTRATION
STATEMENT. YOU CAN READ THE ENTIRE REGISTRATION STATEMENT AT THE PUBLIC
REFERENCE FACILITIES MAINTAINED BY THE SECURITIES AND EXCHANGE COMMISSION IN
WASHINGTON, D.C.
PART ONE -- PROSPECTUS
TABLE OF CONTENTS
Page
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Summary.......................................................................................... 1
Risk Factors.......................................................................... 1
Fees and Expenses..................................................................... 1
The Fund.............................................................................. 2
The Offering.......................................................................... 3
Risk Factors..................................................................................... 5
Possible Advantages of Investment in the Fund.................................................... 12
Organizational Chart............................................................................. 14
Financial Information............................................................................ 15
Conflicts of Interest / Fiduciary Responsibility of the General Partner.......................... 15
Use of Proceeds.................................................................................. 18
Fees, Compensation and Expenses.................................................................. 19
Summary............................................................................... 19
Description of Fees, Compensation and Expenses........................................ 20
Estimate of Break-Even Threshold...................................................... 23
Certain Definitions Used in this Prospectus........................................... 25
Management's Discussion and Analysis of Financial Condition and Results of Operations............ 26
Qualitative Disclosures about Market Risk........................................................ 27
The General Partner / Advisor.................................................................... 28
Description of the General Partner / Advisor.......................................... 28
Duties of the General Partner......................................................... 29
Minimum Investment and Net Worth Requirements Imposed on the General Partner.......... 29
Trading Philosophy and Methods of the Advisor......................................... 30
Past Performance of the Advisor....................................................... 31
Commodity Brokerage Arrangements................................................................. 34
General............................................................................... 34
Description of the Commodity Broker................................................... 34
Civil, Criminal and Administrative Actions............................................ 34
Description of Brokerage Arrangements................................................. 35
Plan of Distribution............................................................................. 36
The Offering.......................................................................... 36
Subscriptions / Investment Requirements / Investor Suitability Standards.............. 37
Investments by ERISA Accounts.................................................................... 39
General............................................................................... 39
Special Investment Considerations..................................................... 39
The Fund Should Not Be Deemed to Hold "Plan Assets"................................... 39
Ineligible Purchasers................................................................. 40
Distributions and Redemptions.................................................................... 41
Trading Policies................................................................................. 42
Summary of the Advisory Agreement................................................................ 44
Summary of the Limited Partnership Agreement..................................................... 46
Additional Limited Partners........................................................... 46
Amendments; Meetings.................................................................. 46
Certificates for Units................................................................ 46
Election, Removal and Withdrawal of the General Partner............................... 46
Indemnification....................................................................... 46
Liabilities........................................................................... 47
Limited Partners' Rights.............................................................. 47
Profit and Loss; Distributions........................................................ 47
Redemptions........................................................................... 47
Reports and Accounting................................................................ 48
Termination........................................................................... 48
Transfer of Units..................................................................... 49
Capitalization / Selected Financial Data......................................................... 50
Federal Income Tax Considerations................................................................ 51
Forward-Looking Statements....................................................................... 54
Legal Matters.................................................................................... 54
Experts.......................................................................................... 54
Additional Information........................................................................... 54
Index to Financial Statements.................................................................... F-1
SUMMARY
The following summary is intended to highlight the significant information
contained in the body of this prospectus and the accompanying statement of
additional information. More detailed information is found in the remainder of
this prospectus and the accompanying statement of additional information. This
summary is qualified in its entirety by the information appearing elsewhere in
this prospectus and the accompanying statement of additional information, and
the description of any document is qualified in its entirety by reference to
such document.
RISK FACTORS
The following is a summary of certain risk factors which are involved in
any purchase of the Units. For a further explanation of these and other risk
factors, please read this entire prospectus carefully and consider the "Risk
Factors" on page 5.
The purchase of Units is speculative and involves a high degree of risk.
Purchasers could lose all or substantially all of their investments in the Fund.
Shaffer Asset Management uses technical trend-following trading methods which
could expose the Fund to significant risks. There is no secondary market for the
Units. There are restrictions and possible fees assessed with redemptions of the
Units. Transfers of interests in the Units require the consent of Shaffer Asset
Management, which consent may be withheld in its sole discretion. Substantial
expenses must be offset by trading profits and interest income. Shaffer Asset
Management is dependent on its key personnel. The Fund is a newly formed entity
with no operating history.
FEES AND EXPENSES
The fees and expenses to be paid with respect to a Unit at the time you
purchase Units, during the first year following your purchase, and in subsequent
years, are as follows:
LIMITED PARTNER TRANSACTION EXPENSES (1)
Sales Charge............................................................ 4.00%
Syndication fee......................................................... 1.00%
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Total......................................................... ......... 5.00%
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ANNUAL FEES AND EXPENSES PAID DURING FIRST YEAR FOLLOWING PURCHASE OF UNITS (2)
(3) (4)
Management fee.......................................................... 3.75%
Continuing Service fee.................................................. 1.25%
Commodities Brokerage Commissions (5)................................... 1.00%
Operating Expenses...................................................... 0.50%
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Total.................................................................. 6.50%
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ANNUAL FEES AND EXPENSES PAID FROM YEAR TWO FOLLOWING PURCHASE OF UNITS THROUGH
THE REMAINDER OF THE LIFE OF THE FUND (2) (3) (4)
Management fee.......................................................... 1.00%
Continuing Service fee.................................................. 4.00%
Commodities Brokerage Commissions (5)................................... 1.00%
Operating Expenses...................................................... 0.50%
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Total................................................................... 6.50%
======
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(1) As a percentage of offering price per Unit.
(2) As a percentage of average monthly Net Asset Value per Unit.
(3) Does not include early redemption fees of 4% payable on any redemptions
of Units made within one year of purchase.
(4) Does not include Incentive Allocation to Shaffer Asset Management of 15%
of New Trading Profits.
(5) Estimated based on the historical trading patterns of Shaffer Asset
Management.
1
THE FUND
THE FUND
Shaffer Diversified Fund, LP is a limited partnership organized on August
29, 2000 under the Delaware Revised Uniform Limited Partnership Act as an
investment vehicle that allows investors to include commodity futures contracts
traded on the United States commodity futures markets in their portfolios in the
same way that they include mutual funds, money market funds and limited
partnerships in other areas. The Fund will terminate its existence on December
31, 2025, or upon an earlier date in certain circumstances.
LOCATION AND TELEPHONE NUMBER
The principal executive offices of the Fund and Shaffer Asset Management
are located at 925 Westchester Avenue, White Plains, New York 10604, and their
telephone number at such address is (800) 352-5265 (toll-free).
BUSINESS
The business of the Fund is to seek medium and long-term capital
appreciation through speculative trading in a diversified portfolio of commodity
futures contracts and other related interests in the United States commodity
futures markets pursuant to the trading instructions of Shaffer Asset
Management. Specifically, the Fund intends to invest in a diversified portfolio
consisting primarily of currency, interest rate, grain, metal and energy futures
contracts.
ADMINISTRATION
Shaffer Asset Management, in its capacity as the general partner of and
commodity trading advisor to the Fund, will administer the business and affairs
of the Fund and have sole and exclusive authority over its trading decisions.
Berthel Fisher & Company Financial Services, Inc. will act as the Fund's selling
agent and ADM Investor Services, Inc. will act as the Fund's initial commodity
broker. See "The General Partner / Advisor" and "Plan of Distribution".
FEES AND EXPENSES PAYABLE BY THE FUND
The Fund will be required to pay substantial charges, such as continuing
services fees; management fees and possible incentive allocations; brokerage
commissions; legal, accounting, auditing, printing, recording, filing and other
periodic fees and expenses; and extraordinary expenses. Shaffer Asset Management
has agreed, however, to pay all such expenses that are in the aggregate in
excess of 0.5% of the average monthly Net Asset Value of the Fund per annum,
except for sales charges, continuing services fees, management fees, incentive
allocations, brokerage commissions and extraordinary expenses, which expenses
shall be paid by the Fund. A complete description of these charges is set forth
under the caption "Fees, Compensation and Expenses".
FEES AND EXPENSES PAYABLE BY THE GENERAL PARTNER
Shaffer Asset Management will pay all organizational and initial offering
expenses of the Fund, exclusive of selling commissions. In addition, Shaffer
Asset Management will pay all operating and other administrative expenses
attributable to the Fund that are in the aggregate in excess of 0.5% of the
average monthly Net Asset Value of the Fund per annum, except for sales charges,
continuing services fees, management fees, incentive allocations, brokerage
commissions and extraordinary expenses, which expenses shall be paid by the
Fund.
BREAK-EVEN THRESHOLD
Charges of the Fund that are not offset by trading gains and interest
income will deplete the assets of the Fund. In order for an investor to "break
even" on his or her investment in the first year of trading, therefore, the Fund
will have to earn $750 per initial investment (i.e., 10 Units), or 7.5%,
assuming an initial investment of $10,000. See "Fees, Compensation and Expenses
-- Estimate of Break-even Threshold".
DISTRIBUTIONS
Distributions of profits, if any, will be made at the discretion of
Shaffer Asset Management. Investors should be aware, however, that Shaffer Asset
Management does not intend to make any distributions of any profits. See
"Distribution and Redemptions".
2
REDEMPTION OF UNITS
Limited partners of the Fund can redeem some or all of their Units as of
the last business day of each month at the then current Net Asset Value per Unit
on ten days' prior written notice to Shaffer Asset Management; no redemption
which applies to less than all of a partner's interest in the Fund can result,
however, in the partner's capital account being reduced below $10,000 ($5,000 in
the case of investments by pension, profit-sharing or other employee benefit
plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education
IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension -- IRA plans and
retirement and deferred compensation and annuity plans and trusts used to fund
those plans) after the redemption is effected. See "Distributions and
Redemptions".
The Fund will charge an early redemption fee, except on redemptions
effected to provide funds for the payment of taxes on profits, equal to 4% of
the Net Asset Value of the Units redeemed as of or before the end of the third
full calendar month after their purchase. This fee will decrease by one
percentage point for every three subsequent calendar months so that there will
be no early redemption fee charged on redemptions effected after the end of the
twelfth full calendar month after their purchase. See "Fees, Compensation and
Expenses -- Description of Fees, Compensation and Expenses -- Early Redemption
Fees" and "Distributions and Redemptions".
FEDERAL TAX TREATMENT
For Federal income tax purposes, the Fund will be treated as a partnership
and not a corporation; however, no ruling from the IRS will be obtained
confirming this tax treatment. The Fund's status as a partnership means that
investors will be subject to tax on their allocable shares of the Fund's
interest income and any gains earned each year, whether or not they redeem any
Units or receive any cash distributions from the Fund during such year.
Also, an individual who incurs a capital loss in any year may not be able
to deduct (for tax purposes) all of that loss in that same year. The amount
deductible in any one year is subject to an annual limit. The annual limit is an
amount equal to (i) that person's capital gains incurred in the same year, plus
(ii) $3,000. However, the rest of the capital loss can be deducted in future
years, but subject to the same annual limit. See "Federal Income Tax
Consequences".
THE OFFERING
SECURITIES OFFERED
This offering consists of 25,000 units of limited partnership interest of
the Fund. The initial offering of the Units will extend for 60 days from the
date of this prospectus, subject to the right of Shaffer Asset Management to
extend this offering for up to an additional 60 days. During that period, the
Units will be offered at an initial offering price of $1,000 per Unit ($950 per
Unit, plus an initial sales charge of $50 per Unit). After that period, unsold
Units, if any, may be sold as of the last business day of each calendar month at
a purchase price equal to the then current Net Asset Value per Unit, plus a
sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. See
"Plan of Distribution -- The Offering".
MINIMUM INVESTMENT AMOUNTS
The minimum investment in the Fund by any one investor is $10,000
(initially 10 Units), except that in the case of investments by pension,
profit-sharing or other employee benefit plan qualified under Section 401 of the
Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified
Employee Pension -- IRA plans and retirement and deferred compensation and
annuity plans and trusts used to fund those plans it is $5,000. Additional
investments may be made in amounts of not less than $1,000. See "Plan of
Distribution -- The Offering".
SUITABILITY STANDARDS
Each investor must represent in the Subscription Agreement / Power of
Attorney that is attached as Exhibit C to the statement of additional
information that accompanies this prospectus that his or her net worth and/or
annual gross income satisfy certain requirements, that he or she has received a
copy of this prospectus and the accompanying statement of additional
information, and that he or she is able to assume the risks inherent in an
investment in the Fund. See "Plan of Distribution -- Subscriptions/Investment
Requirements/Investor Suitability Requirements".
3
PLAN OF DISTRIBUTION
The Units are being offered through Berthel Fisher & Company on a best
efforts basis. Before trading can commence, the initial offering under this
prospectus must have concluded, and at least 1,000 Units must have been sold and
accepted by Shaffer Asset Management. All subscriptions received and accepted by
Shaffer Asset Management will be deposited in an escrow account with The Chase
Manhattan Bank, 450 West 33rd Street, 15th fl., New York NY 10001 until the
conclusion of the initial offering period. If the minimum number of Units is not
sold and accepted by Shaffer Asset Management prior to the expiration of the
initial offering period, plus any extensions, all subscription monies and sales
charges will be returned to the subscribers. Each subscriber will receive the
interest earned on his or her subscription while held in escrow whether or not
the minimum number of Units is sold and accepted. Any subscription may be
rejected by Shaffer Asset Management in whole or in part for any reason, but no
subscription may be revoked by the subscriber. See "Plan of Distribution".
USE OF PROCEEDS
The proceeds of this offering ($950,000 if the minimum number of Units is
sold and $23,750,000 if the maximum number of Units is sold) will be deposited
in a bank account with The Chase Manhattan Bank, a trading account with ADM
Investor Services and/or other banks and commodity brokers and used to trade in
commodity futures contracts and other related interests pursuant to the
instructions of Shaffer Asset Management. See "Use of Proceeds".
RISKS AND CONFLICTS OF INTEREST
An investment in the Fund involves substantial risks. The risks of
investing in the Fund include, but are not limited to, the highly speculative
nature of trading in commodity futures contracts and the substantial charges
that the Fund will incur regardless of whether any profits are realized. A
limited partner of the Fund may lose his or her entire investment in the Fund,
including any profits earned thereon, whether or not distributed. In addition,
reference is made to the existence of various conflicts of interest. See "Risk
Factors" and "Conflicts of Interest and Fiduciary Responsibility of the General
Partner".
4
RISK FACTORS
THE FOLLOWING IS, IN THE OPINION OF SHAFFER ASSET MANAGEMENT, A
DESCRIPTION OF ALL MATERIAL RISK FACTORS RELATED TO AN INVESTMENT IN THE FUND.
PROSPECTIVE INVESTORS SHOULD (I) READ THIS PROSPECTUS AND THE ACCOMPANYING
STATEMENT OF ADDITIONAL INFORMATION CAREFULLY, AND (II) CONSULT WITH
INDEPENDENT, QUALIFIED SOURCES OF LEGAL, TAX AND FINANCIAL ADVICE, BEFORE
DECIDING WHETHER TO INVEST IN THE FUND.
POSSIBILITY OF LOSING ENTIRE INVESTMENT. Futures contracts have a high
degree of price variability and are subject to occasional rapid and substantial
changes. The Fund may not achieve its objectives or avoid substantial losses.
For every gain in futures trading, there is an equal and offsetting loss.
Shaffer Asset Management has, from time to time, incurred substantial losses in
trading on behalf of its customers. An investor in the Fund may lose all or
substantially all of his or her investment in the Fund.
COMMODITY FUTURES TRADING IS SPECULATIVE. Commodity futures prices are
highly volatile. Price movements for commodity futures contracts and other
related interests are influenced by, among other things: government trade,
fiscal, monetary and exchange control programs and policies; weather and climate
conditions; changing supply and demand relationships; national and international
political and economic events; changes in interest rates; and the psychological
emotions of the market place. In addition, governments may intervene
periodically in certain markets, either directly or by regulation, often with
the intent of influencing prices directly. The trading techniques utilized by
Shaffer Asset Management are primarily technical in nature, and Shaffer Asset
Management does not ordinarily consider "fundamental" factors except to the
extent that such factors are reflected in the technical input data analyzed by
Shaffer Asset Management. See "The General Partner / Advisor -- Trading Methods"
and "Description of Commodity Futures Trading" in the statement of additional
information that accompanies this prospectus.
COMMODITY FUTURES TRADING IS HIGHLY LEVERAGED. Commodity futures contracts
are traded on margins that typically range from about 4% to 20% to the value of
the contract. The average margin is less than 10% of the value of the contract.
Low margin provides a large amount of leverage -- that is, commodity futures
contracts for a large number of units of a commodity interest (bushels, pounds,
etc.) having a value substantially greater than the required margin may be
traded for a relatively small amount of money. Hence, a relatively small change
in the market price of a commodity interest produces a corresponding large
profit or loss in relation to the amount of money invested. Thus, if the Fund
has invested a substantial portion of its Net Asset Value in such a commodity
interest, a substantial change, up or down, in the value of a Unit would result.
The Fund may lose more than its initial margin on a trade, up to the entire
amount at risk, but a limited partner of the Fund cannot incur net losses
greater than the amount of his or her investment. See "Limited Partnership
Agreement -- Liabilities".
MARKET RISK. The Fund is a commodity pool involved in the speculative
trading of futures. The market sensitive instruments to be held by the Fund will
be acquired for speculative trading purposes only and, as a result, all or
substantially all of the Fund's assets will be at risk of trading loss. Unlike
an operating company, the risk of market sensitive instruments is central, not
incidental, to the Fund's main business activities.
The futures traded by the Fund involve varying degrees of market risk.
Market risk is often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial instruments and
commodities. Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Fund's open positions, and,
consequently, in its earnings and cash flow.
The Fund's total market risk will be influenced by a wide variety of
factors, including the diversification among the Fund's open positions, the
volatility present within the markets, and the liquidity of the markets. At
different times, each of these factors may act to increase or decrease the
market risk associated with the Fund.
Any attempt to numerically quantify a Fund's market risk is limited by the
uncertainty of its speculative trading. The Fund's speculative trading may cause
future losses and volatility (i.e. "risk of ruin") that far exceed any
reasonable expectations based upon historical changes in market value.
AUTOMATIC TERMINATION. The Fund will close out all open positions and
suspend trading, and may terminate, if the Net Asset Value per Unit (increased
by the amount of distributions per Unit, if any) on any business
5
day during any given fiscal year decreases to or below 50% of the Net Asset
Value per Unit as of the beginning of the fiscal year, provided that such 50%
decrease results in a Net Asset Value per Unit of less than $1,000, or if the
Net Asset Value per Unit (increased by the amount of distributions per Unit, if
any) decreases on any business day to or below $350. No assurance can be given,
however, that the investor will receive at least one-half of any year's
beginning Net Asset Value per Unit or $350 per Unit, since the impossibility of
executing trades under all conditions, together with the expenses of
liquidation, may deplete the Fund's assets below such amounts. See "Trading
Policies".
SUBSTANTIAL FEES, COMMISSIONS AND EXPENSES. The Fund is obligated to pay
substantial fees, commissions and expenses without regard to profitability.
Therefore, the Fund will have to make substantial gross gains from commodity
trading each year in order for the limited partners of the Fund to realize any
appreciation in the value of their Units. In addition, the payment by the Fund
of such fees, commissions and expenses could cause the Fund to close out all
open positions, suspend trading and possibly terminate as described in "Risk
Factors--Automatic Termination", above. See "Conflicts of Interest and Fiduciary
Responsibility of the General Partner", "Fees, Compensation and Expenses",
"Commodity Brokerage Arrangements" and "Summary of the Limited Partnership
Agreement -- Termination".
DISTORTIONS PRODUCED BY INCENTIVE ALLOCATION ARRANGEMENT. As more fully
described under the caption "Plan of Distribution", the purchase price of Units
sold after trading operations commence will vary with the Net Asset Value per
Unit. Incentive allocations allocable to the Fund's advisor are contingent on
cumulative New Trading Profits (as hereinafter defined), and all Advisory Losses
(as hereinafter defined) incurred by Shaffer Asset Management following the
allocation of any incentive allocations to it must be recovered by Shaffer Asset
Management before any additional incentive allocations are allocable to it. The
combination of this arrangement with the withdrawal of existing partners or the
admission of new partners will distort the results experienced by the Units. A
decline in the Fund's cumulative profits creates, in effect, a "credit" against
future incentive allocations. A partner who withdraws from the Fund while such a
"credit" remains outstanding forfeits his share thereof. A partner who is
admitted to the Fund while such a "credit" remains outstanding acquires a share
therein (thereby diluting the existing partners' share therein) even though he
has not personally suffered the loss that gave rise to it.
In addition, the Fund will allocate to Shaffer Asset Management, on a
quarterly basis, a percentage of the New Trading Profits generated by Shaffer
Asset Management for such calendar quarter, including unrealized appreciation on
open commodity interest positions. Such appreciation may never be realized by
the Fund and those open positions might be closed at no profit or even a loss
due to adverse market conditions; nevertheless, Shaffer Asset Management would
retain the entire amount of such allocation.
LIMITATIONS OF TREND-FOLLOWING, TECHNICAL TRADING STRATEGIES. Shaffer
Asset Management uses technical, trend-following trading methods based on
mathematical analyses of certain technical data regarding past market
performance that does not ordinarily consider fundamental factors such as
weather, supply, demand and political or economic events except to the extent
reflected in technical input data analyzed by Shaffer Asset Management. Inherent
in the use of such trend-following, technical trading methods are the following
limitations: (i) such technical methods may be unable to respond to fundamental
causative events until after their impact has ceased to influence the market,
and commodity interest positions dictated by such methods may be incorrect in
light of the fundamental factors then affecting the market; (ii) such technical
trading methods may not identify a trend on which it can act, or it may react to
a minor price movement in establishing a position contrary to the overall price
trend if there are no substantial price movements, or if a price movement is
erratic or ill-defined; and (iii) such technical trading methods may, for
inexplicable reasons, produce profitable results for a period of time, after
which further application of such techniques fails to forecast correctly any
future price movement. For this reason, commodity trading advisors utilizing
such methods may modify and alter their techniques on a periodic basis. Hence,
as a result of continued modification, it is possible that the trading methods
and strategies used by Shaffer Asset Management may be different in the future
from those presently in use.
DEPENDENCE ON KEY PERSONNEL. Currently, Daniel S. Shaffer and Bruce I.
Greenberg are the sole employees of Shaffer Asset Management. The loss of the
services of both Mr. Shaffer and Mr. Greenberg would have a material adverse
effect on the operations of Shaffer Asset Management and the Fund. See "The
General Partner/Advisor".
NO OPERATING HISTORY. The Fund is a newly formed entity with no operating
history, and Shaffer Asset Management and its principals have only a limited
operating history. Neither Shaffer Asset Management nor any of its principals
has any experience in operating or advising a commodity pool. See "The General
Partner / Advisor".
6
THE COMMODITY FUTURES TRADING COMMISSION REQUIRES A COMMODITY POOL
OPERATOR TO DISCLOSE TO PROSPECTIVE POOL PARTICIPANTS THE ACTUAL PERFORMANCE
RECORD OF THE POOL FOR WHICH THE OPERATOR IS SOLICITING PARTICIPANTS. YOU SHOULD
NOTE THAT THIS POOL HAS NOT YET BEGUN TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.
SPECIAL CHARACTERISTICS OF THE START-UP PERIOD. The Fund will encounter a
start-up period during which it will incur certain risks relating to the initial
investing of its assets. First, the Fund may commence trading at an unpropitious
time, such as after sustained price moves in a number of commodity interests.
Second, the start-up period represents a special risk in that diversification
may be substantially lower than in a fully committed portfolio. Although Shaffer
Asset Management has established procedures for preserving capital while moving
to a fully invested position, these procedures are based on market judgment, and
no assurance is given that they are optimal or will be successful.
NO ASSURANCE THAT UNITS WILL BE SOLD. Since there is no firm commitment
for the purchase of the Units which are being offered to the public, there can
be no assurance that the Fund will sell 1,000 of the Units offered by this
prospectus and the accompanying statement of additional information, which are
required as a minimum at the conclusion of the initial offering period to
commence operation of the Fund. Subscribers' funds may thus be retained in
escrow for up to approximately four months following the date of this prospectus
and the accompanying statement of additional information and then returned. See
"Plan of Distribution".
LIMITED ABILITY OF LIMITED PARTNERS TO LIQUIDATE INVESTMENT IN THE UNITS.
An investor in the Fund may not be able immediately to liquidate an investment
in the Units. There is no public market for the Units, nor is one likely to
develop. In addition, a transferee of a Unit may become a substituted limited
partner of the Fund only with the consent of Shaffer Asset Management, which
consent may be withheld in its sole discretion. However, a limited partner of
the Fund may require the Fund to redeem any or all of his Units at the then
current Net Asset Value as of the close of business on the last business day of
any calendar month upon ten days' prior written notice to Shaffer Asset
Management, subject to an early redemption fee for redemptions of Units effected
as of or before the end of the twelfth full calendar month after their purchase,
other than redemptions effected to provide funds for the payment of taxes on
profits. See "Distributions and Redemptions" and "Summary of the Limited
Partnership Agreement -- Redemptions".
POSSIBLE EFFECT OF REDEMPTIONS ON UNIT VALUES. Substantial redemptions of
Units could require the Fund to liquidate positions more rapidly than otherwise
desirable to raise the necessary cash to fund redemptions and achieve a market
position appropriately reflecting a smaller asset base. These factors could
adversely affect the value of the Units redeemed and of the Units remaining
outstanding.
LIMITED RIGHTS OF INVESTORS / LIMITED PARTNERS WILL NOT PARTICIPATE IN
MANAGEMENT. Purchasers of the Units will become limited partners of the Fund
and, as such, will be unable to exercise any management functions with respect
to its operations. The rights and obligations of the Fund's limited partners are
governed by the provisions of the Delaware Revised Uniform Limited Partnership
Act and by the Fund's limited partnership agreement, which provides, in part,
that a majority in interest of the limited partners of the Fund may:
o adopt amendments to the Fund's limited partnership agreement proposed
by Shaffer Asset Management or by limited partners of the Fund owning
at least 10% of the outstanding Units;
o dissolve the Fund;
o remove Shaffer Asset Management as the Fund's general partner;
o elect a new general partner if Shaffer Asset Management withdraws or
is removed; or
o cancel any contract for services with Shaffer Asset Management or its
affiliates for any reason on sixty days' prior written notice.
See "Summary of the Limited Partnership Agreement" and Exhibit A to the
statement of additional information that accompanies this prospectus.
7
ABSENCE OF REGULATION APPLICABLE TO SECURITIES MUTUAL FUNDS AND THEIR
ADVISORS. The Fund is not registered as a securities investment company, or
"mutual fund", subject to the extensive regulation imposed by the SEC upon such
entities under the Investment Company Act of 1940, as amended. In addition,
Shaffer Asset Management is not registered as an investment advisor, subject to
the extensive regulation by the SEC upon such entities under the Investment
Advisors Act of 1940, as amended, or any similar state law. Therefore, investors
may not be afforded the protective measures provided by such legislation.
Shaffer Asset Management is, however, a commodity pool operator and commodity
trading advisor registered as such with the CFTC. Such registrations do not
imply, however, that the CFTC has reviewed or approved the accuracy of the
information contained in Shaffer Asset Management's application for registration
or its qualifications to act as described in this prospectus and the
accompanying statement of additional information or that the CFTC supervises the
business activities engaged in by Shaffer Asset Management.
UNPREDICTABILITY OF REGULATORY CHANGES. The futures markets are subject to
comprehensive statutes, regulations and margin requirements. In addition, the
CFTC and the exchanges on which commodity futures contracts are traded are
authorized to take extraordinary actions in the event of a market emergency,
including the retroactive implementation of speculative position limits or
higher margin requirements, the establishment of daily price limits and the
suspension of trading. The regulation of commodity futures transactions in the
United States is a rapidly changing area of law and is subject to modification
by government and judicial action at any time and from time to time.
PARTNERS' TAX LIABILITY MAY EXCEED DISTRIBUTIONS. The distribution of cash
to partners will be in the sole discretion of Shaffer Asset Management, and
Shaffer Asset Management may determine, and in fact intends, not to make any
distributions. However, the Fund's taxable income for a fiscal year, if any,
will be taxable to the partners in accordance with their distributive shares of
Fund income whether or not any cash has been distributed to the partners. AS A
RESULT, DISTRIBUTIONS TO THE LIMITED PARTNERS OF THE FUND MAY NOT EQUAL TAXES
PAYABLE BY PARTNERS WITH RESPECT TO FUND INCOME. Subject to certain
restrictions, however, partners have the right to redeem some or all of their
Units as of the last business day of any calendar month upon ten days' prior
written notice to Shaffer Asset Management and may be able to exercise such
right in order to provide funds for the payment of taxes and other purposes. In
addition, the Fund might sustain losses offsetting such profits after the end of
the Fund's fiscal year, so a partner might never receive the profits on which he
has paid taxes. In addition, due to the complex requirements relating to
partnership tax accounting, it is possible that under certain conditions
partners may be allocated gains or losses for tax purposes which are greater or
less than any actual increase or decrease in the value of their Units. See
"Redemptions" and "Federal Income Tax Consequences".
POSSIBILITY OF TAXATION AS A CORPORATION. While Morrison Cohen Singer &
Weinstein, LLP, special tax counsel to the Fund, has indicated to the Fund that,
in such counsel's opinion, the Fund will be classified as a partnership for
Federal income tax purposes, no ruling has been obtained from the IRS regarding
whether the Fund will be classified as a partnership rather than as an
association taxable as a corporation, and the Fund does not intend to apply for
any such ruling. If the Fund should be treated as a corporation for Federal
income tax purposes, income or loss of the Fund would not be passed through to
the partners, and the Fund would be subject to tax on its income at the rate of
tax applicable to corporations. In addition, all or a portion of the
distributions of Fund income, if any, would generally be taxable to the partners
as corporate dividends, and the partners' tax on such distributions would be in
addition to the corporate tax paid by the Fund on the same income.
TAX COULD BE DUE FROM INVESTORS ON THEIR SHARE OF THE FUND'S ORDINARY
INCOME DESPITE OVERALL LOSSES. Investors may be required to pay tax on their
allocable share of the Fund's ordinary income, which in the case of the Fund is
primarily the Fund's interest income, even though the Fund incurs overall
losses. Capital losses of individuals can be used only to offset capital gains
and $3,000 of ordinary income each year. Consequently, if an investor having no
other items of capital gain or loss in a particular year were allocated $5,000
of ordinary income and $10,000 of capital losses from the Fund, the investor
would owe tax on $2,000 of ordinary income even though the investor would have
economically incurred a $5,000 overall loss for the year. The remaining $7,000
undeducted capital loss could be used in subsequent years to offset capital gain
and ordinary income, but subject to the same annual limitation on its
deductibility against ordinary income.
THERE COULD BE A LIMIT ON THE DEDUCTIBILITY OF BROKERAGE AND PERFORMANCE
FEES. Although Shaffer Asset Management expects to treat the management fees
paid to it, and brokerage fees paid to ADM Investor Services, and certain other
expenses of the Fund, as ordinary and necessary business expenses, upon audit
the
8
Fund may be required to treat such fees as "investment advisory fees" if the
Fund's trading activities did not constitute a trade or business for tax
purposes. If the expenses were investment advisory expenses, the tax liability
of a limited partner of the Fund would likely increase. In addition, upon audit,
a portion of the brokerage fees might be treated as a non-deductible syndication
cost or might be treated as a reduction in the Fund's capital gain or as an
increase in the Fund's capital loss. If the brokerage fees were so treated, the
tax liability of a limited partner of the Fund would likely increase.
CONFLICTS OF INTEREST. There exist inherent and potential conflicts of
interest in the operation of the Fund's business. These include:
o the ability of Shaffer Asset Management to increase the amount of the
management fees payable to it and the continuing services fees payable
to Berthel Fisher & Company (of which the sole officers, directors and
shareholders of Shaffer Asset Management are registered
representatives) by limiting the distributions of profits, if any, of
the Fund;
o competition in making purchases and/or sales of commodity futures
contracts among Shaffer Asset Management, Berthel Fisher & Company, ADM
Investor Services and their respective officers, directors,
shareholders, employees, customers and affiliates;
o the limited ability of Shaffer Asset Management to prevent itself from
violating the trading policies of the Fund and from engaging in
excessive trading, and the potential absence of arm's length
negotiations with respect to the terms of the advisory agreement
entered into between the Fund and Shaffer Asset Management, each caused
by Shaffer Asset Management acting as the Fund's general partner and
commodity trading advisor; and
o the potential absence of arm's length negotiations with respect to the
terms of the selling agent agreement entered into between the Fund and
Berthel Fisher & Company, caused by the sole officers, directors and
shareholders of Shaffer Asset Management being registered
representatives of Berthel Fisher & Company.
For a complete discussion of the inherent and potential conflicts of interest
that may constitute a current risk to potential investors in the Fund, see
"Conflicts of Interest / Fiduciary Responsibility of the General Partner".
OTHER CLIENTS OF THE FUND'S ADVISOR. Shaffer Asset Management and its sole
officers, directors and shareholders, Daniel S. Shaffer and Bruce I. Greenberg,
currently manage other trading accounts and trade for their own account, and
they and their principals, employees and affiliates will remain free to manage
additional accounts, including their own accounts, in the future subject to
certain limitations. It is possible that such accounts and any additional
accounts managed by Shaffer Asset Management or its principals, employees or
affiliates in the future may be in competition with the Fund for the same or
similar positions in the futures markets. In addition, Shaffer Asset Management
may vary the trading strategies applicable to the Fund from those used for its
other managed accounts. No assurance is given that the results of the Fund's
trading will be similar to that of other accounts concurrently managed by
Shaffer Asset Management or its principals, employees and affiliates. However,
in its trading for the Fund's account and such other accounts, Shaffer Asset
Management has agreed to use its good faith, best efforts to achieve an
equitable treatment of all accounts, including with respect to priorities of
order entry and changes in trading strategies or recommendations resulting from
the application of speculative position limits. See "Risk Factors -- Changes in
Trading Strategies" and " -- Possible Effects of Speculative Position Limits".
EXPIRATION OF THE ADVISORY AGREEMENT WITH SHAFFER ASSET MANAGEMENT. The
advisory agreement between the Fund and Shaffer Asset Management is for a one
year term, subject to earlier termination by the Fund or Shaffer Asset
Management and subject to automatic renewal on the same terms and conditions for
an additional one year term, unless Shaffer Asset Management elects against
renewal. Upon the expiration of the advisory agreement, Shaffer Asset
Management, on behalf of the Fund, must either attempt to renegotiate the
advisory agreement or make other arrangements for providing advisory services to
the Fund if the Fund intends to continue trading. No assurance is given that the
principals of Shaffer Asset Management will continue their association with
Shaffer Asset Management during the term of the advisory agreement or that the
services of Shaffer Asset Management or any of its principals will then be
available on the terms contained in the current advisory agreement or on any
other terms. See "Summary of the Advisory Agreement".
POSSIBLE EFFECTS OF SPECULATIVE POSITION LIMITS. The CFTC and certain
exchanges have established speculative position limits on the maximum net long
or short futures position which any person, or group of persons acting in
concert, may hold or control in particular commodities. In addition, the CFTC
requires each domestic
9
exchange to set speculative position limits, subject to CFTC approval, for all
commodity futures contracts traded on such exchange which are not already
subject to speculative position limits established by the CFTC or such exchange.
All commodity accounts controlled by Shaffer Asset Management and its
principal(s) will be aggregated for these speculative position limit purposes.
With respect to trading in commodity futures contracts subject to such limits,
Shaffer Asset Management may thus reduce the size of the positions that would
otherwise be taken for the Fund in such commodity futures contracts and not
trade commodity futures contracts on certain commodities in order to avoid
exceeding such limits. Such modifications of the Fund's trades, if required,
could adversely affect the operations and profitability of the Fund. See
"Conflicts of Interest / Fiduciary Responsibility of the General Partner" and
"Summary of the Advisory Agreement".
POSSIBLE EFFECTS OF MARKET LIMITS. It is not always possible to execute a
buy or sell order at the desired price or to close out an open position, either
due to market conditions or to limits on open positions and/or daily price
fluctuation limits imposed by exchanges and approved by the CFTC.
When the market price of a commodity futures contract reaches its daily
price fluctuation limit, no trades can be executed unless traders are willing to
effect trades at or within the limit, which may be unlikely due to movements in
the market price of the underlying cash commodity. The holder of a commodity
futures contract, including the Fund, may therefore be locked into an adverse
price movement for several days or more and lose considerably more than the
margin committed to trading the contract. In certain commodities, the daily
price fluctuation limits apply throughout the life of the contract, and hence
the holder of a futures contract who cannot liquidate his position by the end of
trading on the last trading day may be required to make or take delivery of the
underlying commodity.
Another instance of difficult or impossible execution occurs in thinly
traded markets or markets which lack sufficient trading liquidity. Although the
Fund intends to purchase and sell actively traded commodities, no assurance can
be given that this will always be the case or that the Fund's orders will be
executed at or near the desired price.
LIMITATION ON PORTFOLIO DIVERSIFICATION. Historically, managed commodity
futures contracts have generally not correlated with the performance of other
asset classes, such as stocks and bonds. Non-correlation means that (i) there is
no statistically valid relationship between the past performance of commodity
futures contracts, on the one hand, and stocks or bonds, on the other hand and
(ii) the Fund may not necessarily be profitable or unprofitable during
unfavorable periods for the stock market. If the Fund does not perform in a
manner that is not correlated with the general financial markets or does not
perform successfully, an investor will obtain no diversification benefits by
investing in the Units. In addition, an investor may have no gains from the Fund
to offset losses in the rest of his or her portfolio.
RESTRICTIONS ON INVESTMENT BY BENEFIT PLAN INVESTORS. A Benefit Plan
Investor means an entity that is:
o an "Employee Benefit Plan," as defined in Section 3(3) of Employee
Retirement Security Act of 1974, as amended;
o a plan described in Section 4975(e)(1) of the Internal Revenue Code; or
o a partnership or other entity whose underlying assets are considered "Plan
assets" by reason of Plan investment in the entity.
When considering an investment in the Fund, a Plan fiduciary should
consider:
o the definition of "plan assets" under the ERISA;
o whether the investment satisfies the diversification requirements of
ERISA;
o whether the investment satisfies the prudence requirements of ERISA;
o whether income derived from the Fund could constitute "unrelated business
income" subject to Federal income taxation in the Plan account; and that
there may be no market in which the fiduciary can sell or otherwise
dispose of the Units.
10
Shaffer Asset Management recommends that any purchase of Units be
considered not only by the investor but also the investor's legal, tax and
financial advisors.
LACK OF INDEPENDENT EXPERTS. Shaffer Asset Management has consulted with
independent counsel, accountants and other experts regarding the formation and
operation of the Fund. The Fund has not, however, engaged separate counsel,
accountants or experts to represent investors in connection with this offering.
Each investor should, therefore, consult with his or her own legal, tax and
financial advisors regarding the desirability of an investment in the Fund.
11
POSSIBLE ADVANTAGES OF INVESTMENT IN THE FUND
The following summary is intended to highlight the possible advantages of
investing in the Fund. Potential investors should note, however, that there may
exist significant disadvantages of investing in the Fund encompassed in the
risks of investing in the Fund. See "Risk Factors".
PROFESSIONAL COMMODITY TRADING MANAGEMENT
Trading decisions for the Fund will be made by Shaffer Asset Management
pursuant to its trend-following, technical trading strategies. The Fund,
therefore, enables investors to take advantage of the trading expertise of a
professional commodity trading advisor which would not otherwise be available
unless substantially more than the minimum investment in the Fund were committed
to trading -- in this case, generally a minimum investment of $100,000 per
account.
INVESTMENT DIVERSIFICATION
The Fund allows investors to include commodity futures contracts in their
portfolios in the same way that they include mutual funds, money market funds
and limited partnerships in other areas, e.g., oil gas and real estate. A
commodity futures investment is an especially attractive diversification because
it can be profitable during both favorable and unfavorable economic conditions.
COMMODITY FUTURES MARKET DIVERSIFICATION
The Fund will be large enough to enable Shaffer Asset Management to trade
in as many different commodity futures markets as it chooses, thereby reducing
risk. Each of the Fund's limited partners will obtain greater diversification in
the variety of contracts and markets traded than would be possible trading
individually.
LIMITED LIABILITY
Because of the highly leveraged nature of commodity futures trading, an
individual who invests directly in commodity futures contracts may lose
substantially more than his or her investment. A limited partner of the Fund,
however, cannot be individually subjected to margin calls or lose more than his
or her investment in the Fund and his or her share of profits, if any, whether
or not distributed.
LIQUIDITY
Limited partners of the Fund can redeem their Units as of the last
business day of each month; no redemption that applies to less than all of a
limited partner's interest in the Fund can result, however, in the limited
partner's capital account being reduced below $10,000 ($5,000 in the case of
investments by pension, profit-sharing or other employee benefit plan qualified
under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs,
SIMPLE IRAs, Simplified Employee Pension -- IRA plans and retirement and
deferred compensation and annuity plans and trusts used to fund those plans). In
addition, a redemption fee will be charged for Units redeemed during the first
full twelve calendar months after their purchase, except for redemptions
effected to provide funds for the payment of taxes on profits. See
"Distributions and Redemptions".
RISK MANAGEMENT
The Fund will close out all open positions and suspend trading, and may
terminate, if the Net Asset Value per Unit (increased by the amount of
distributions per Unit, if any) on any business day during any given fiscal year
decreases to or below 50% of the Net Asset Value per Unit as of the beginning of
the fiscal year, provided that such 50% decrease results in a Net Asset Value
per Unit of less than $1,000, or if the Net Asset Value per Unit (increased by
the amount of distributions per Unit, if any) decreases on any business day to
or below $350. See "Trading Policies".
FAVORABLE TAX TREATMENT
Substantially all of the Fund's commodity futures trading will be taxed at
a maximum potential Federal income tax rate of 27.84% for individuals with no
holding period requirement. Because the Fund is a limited partnership, all tax
effects flow through to its limited partners. See "Federal Income Tax
Consequences".
12
LEVERAGE
Commodity futures contracts are traded on margins that typically range
from about 4% to 20% of the value of the contract. As a result, the Fund is able
to hold positions in its account with face values equal to several times its net
assets. A relatively small change in the market price of a commodity interest,
therefore, produces a corresponding large profit or loss in relation to the
amount of money invested. In general, Shaffer Asset Management intends to commit
between 10% and 40% of the Fund's net assets as margin for commodity trading.
INTEREST INCOME
Unlike some "alternative investment" funds, the Fund does not borrow money
in order to obtain leverage, so the Fund does not incur any interest expense.
Rather, the Fund's margin deposits are maintained in cash equivalents, such as
U.S. Treasury bills. As a result, the Fund will earn interest on approximately
90% of its net assets, even while such assets are committed to trading.
ADMINISTRATIVE CONVENIENCE
The Fund provides to or obtains for its limited partners many services
designed to alleviate the administrative details involved in engaging directly
in futures transactions, including maintenance of the books and accounts of
trading activities, preparing monthly and annual account statements for its
limited partners, and supplying its limited partners with information necessary
for individual Federal tax returns.
13
SHAFFER DIVERSIFIED FUND, LP
ORGANIZATIONAL CHART
The following organizational chart illustrates the relationships among the
various service providers of this offering. Shaffer Asset Management is both the
general partner of, and the commodity trading advisor to, the Fund. Berthel
Fisher & Company, the selected dealers and ADM Investor Services are not
affiliated with Shaffer Asset Management or the Fund, except that Daniel S.
Shaffer and Bruce I. Greenberg, the sole officers, directors and shareholders of
Shaffer Asset Management are registered representatives of Berthel Fisher &
Company.
-------------------
| GENERAL PARTNER/ |
| ADVISOR: |
| |
| SHAFFER ASSET |
| MANAGEMENT, |
| INC. |
------------------
| |
Individual Managed | | Advisory
Account Agreements | | Agreement
--------------------------------- ------------------------ ---------------------
| INDIVIDUAL | | SHAFFER DIVERSIFIED | Customer | COMMODITY |
| MANAGED ACCOUNT | | FUND, LP | Agreement | BROKER: |
| PROGRAM | | | | |
| | | | ------------- | ADM INVESTOR |
| | | | | SERVICES, INC.|
--------------------------------- ------------------------- --------------------
|
| Selling Agent Agreement
|
|
----------------------------
| SELLING AGENT: |
| |
| BERTHEL FISHER & COMPANY |
| FINANCIAL SERVICES, INC. |
----------------------------|
|
| Selected Dealers Agreement
|
|
--------------------------
| SELLING DEALERS |
| |
--------------------------
14
FINANCIAL INFORMATION
Balance Sheet of the Fund at December 31, 2000. (1)
Total Assets (cash)................................................. $1,916
Partnership Capital................................................. $1,916
---------------------------------------
(1) The Fund has not commenced trading activities. The only transactions to
date have been the organization of the Fund, the preparation of the
offering, the capital contributions of $1,000 by Shaffer Asset Management
and $1,000 by Daniel S. Shaffer, the initial limited partner and an
officer, director and shareholder of Shaffer Asset Management, and the
payment of certain bank expenses. See "Financial Statements".
CONFLICTS OF INTEREST/FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The following inherent or potential conflicts of interest should be
considered by potential subscribers before investing in the Fund. In addition,
potential subscribers should consider the fiduciary responsibilities of Shaffer
Asset Management to the Fund and the limited partners of the Fund as explained
below.
CONFLICTS OF INTEREST
DISTRIBUTION OF PROFITS. Under the terms of the Fund's limited partnership
agreement, Shaffer Asset Management has discretion as to the distribution of
profits, if any, to the limited partners of the Fund. At present, Shaffer Asset
Management does not intend to make any distributions of any profits. To the
extent that profits are retained by the Fund rather than distributed, the Net
Asset Value of the Fund, which is the basis for determining the management fee
payable to Shaffer Asset Management and the continuing services fees payable to
Berthel Fisher & Company, the selected dealers and their respective registered
representatives (including Daniel S. Shaffer and Bruce I. Greenberg, the sole
officers, directors, employees and shareholders of General Partner / Advisor who
are also registered representatives of Berthel Fisher & Company), will be
increased.
INDEPENDENT REVIEW. In connection with this offering, the Fund and Shaffer
Asset Management have been represented by single counsel. Therefore, to the
extent that the Fund and this offering could benefit by further independent
review, such benefit will not be available in this offering.
OTHER TRADING ACCOUNTS OF THE ADVISOR, SELLING AGENT, COMMODITY BROKER AND
THEIR PRINCIPALS AND AFFILIATES. Shaffer Asset Management and its sole officers,
directors and shareholders, Daniel S. Shaffer and Bruce I. Greenberg, currently
trade for accounts other than the Fund, and they will remain free to trade for
such other accounts and to utilize the same trading strategies and formulas in
trading for such other accounts that Shaffer Asset Management will utilize in
making trading decisions for the Fund; and Berthel Fisher & Company, ADM
Investor Services and their respective shareholders, directors, officers,
employees and affiliates may and will be free to trade for their own accounts
from time to time. The records of any such trading will not be available for
inspection by the limited partners of the Fund except to the extent required by
law. In addition, ADM Investor Services is a futures commission merchant and
effects transactions for customers in addition to the Fund. Since the identities
of the purchaser and seller are not disclosed until after the trade, it is
possible that transactions could be effected for the Fund in which the other
parties to the transactions are shareholders, officers, directors, employees,
customers or affiliates of ADM Investor Services. Such persons might also
compete with the Fund in making purchases or sales of commodity futures
contracts without knowing that the Fund is also bidding on such commodity
futures contracts. Since similar orders (e.g., market orders for the same
commodity futures contracts) are filled in the order they are received by a
particular floor broker, transactions for any of such persons might be effected
at less favorable prices. Regulations of the CFTC prohibit futures commission
merchants from utilizing their knowledge of Fund trades for their own or their
other customers' benefit. Furthermore, all of the positions held by accounts
managed by Shaffer Asset Management and its principals and affiliates will be
aggregated for purposes of applying speculative position limits. As a result,
the Fund might not be able to enter into or maintain certain positions if such
positions, when added to the positions already held by the Fund and such other
accounts, would exceed the applicable limits.
RELATIONSHIP BETWEEN SHAFFER ASSET MANAGEMENT AND THE FUND'S COMMODITY
BROKER(S). Under the terms of the Fund's limited partnership agreement, Shaffer
Asset Management has the authority to designate commodity broker(s) to execute
trades on behalf of the Fund and, at present, Shaffer Asset
15
Management has selected ADM Investor Services, Inc. to act as the initial
commodity broker for the Fund. The Fund will initially pay ADM Investor Services
brokerage commissions at the rate of $17.00 per "round-turn" trade for trades
executed on domestic exchanges, which amount is reasonable, in the opinion of
Shaffer Asset Management, based upon the standard published rates currently
being charged by many major brokerage firms to their individual public
customers, although such commission rates may change in the future. Potential
investors should note that the brokerage commission rates at which the Fund will
pay ADM Investor Services may be higher than rates charged by ADM Investor
Services to certain of its other customer accounts, including the accounts of
its employees, and the rates charged by other brokerage firms. This brokerage
arrangement may result, therefore, in the Fund paying brokerage commissions for
its trading at rates which exceed the lowest rates which might otherwise be
available.
Although the Fund's brokerage arrangement with ADM Investor Services is
non-exclusive so that the Fund will have the right to seek lower commission
rates from other brokers at any time, Shaffer Asset Management believes that the
arrangements between the Fund and ADM Investor Services are fair and reasonable
in view of the nature and quality of the services to be provided by ADM Investor
Services with respect to the execution of transactions. Shaffer Asset Management
intends to seek high quality execution services and financial responsibility and
does not generally intend to seek lower commission rates from other brokers or
to negotiate with ADM Investor Services for lower commission rates. Shaffer
Asset Management intends to cause the Fund to pay a commission which it believes
to be fair and reasonable in view of the nature and quality of the services
rendered as well as the advantage of an ongoing relationship with a particular
broker or brokers who execute trades on behalf of the Fund. In directing
transactions to brokers for execution, Shaffer Asset Management considers such
factors as commission rates which will be charged to the Fund, the reputation
and financial stability of the broker, the ability of the broker to obtain fast
quality and accurate executions for the Fund at a fair price, the quality and
accuracy of the broker's reporting paperwork, confirmations, and monthly
statements, and other services which may be beneficial to the Fund. The Fund,
therefore, may pay commission rates that exceed the lowest commission rates
available from brokers. However, Shaffer Asset Management will review, at least
annually, the commission rates charged to other comparable commodity pools and
other relevant factors to determine that the commission rates being paid by the
Fund continue to be fair and reasonable.
Neither Shaffer Asset Management nor any of its principals directly or
indirectly share in the brokerage commissions paid by the Fund for brokerage
services. Since Shaffer Asset Management and its principals also have no
affiliations or business arrangements, direct or indirect, with any broker or
any principal thereof whereby Shaffer Asset Management or its principals may
benefit, directly or indirectly, from the maintenance of the Fund's account with
such broker, there is no actual or potential conflict of interest between
Shaffer Asset Management or any of its principals and any of the brokers with
which the Fund may carry its account, including ADM Investor Services, Inc., the
Fund's present commodity broker.
SELECTION OF THE TRADING ADVISOR(S). Under the terms of the Fund's limited
partnership agreement, Shaffer Asset Management selects the trading advisor(s)
to direct the Fund's trading. The Fund has entered into an advisory agreement
with Shaffer Asset Management, Inc., the Fund's general partner, to manage the
Fund's commodity transactions. Since Shaffer Asset Management acts as both the
general partner of, and the trading advisor to, the Fund, it has a conflict of
interest with respect to its responsibility to prevent the trading advisor from
violating the trading policies of the Fund and from engaging in excessive
trading that could cause the Fund to pay substantial brokerage commissions.
However, neither Shaffer Asset Management nor any of its principal(s) will
directly or indirectly receive any portion of the brokerage commissions paid by
the Fund for brokerage services or otherwise benefit from the maintenance of the
Fund's trading accounts with any particular broker or brokers. Shaffer Asset
Management may be deemed to have a conflict of interest with respect to its
responsibility to review the trading performance of Shaffer Asset Management and
to determine whether to terminate the advisory agreement with Shaffer Asset
Management on behalf of the Fund. There may also be deemed to be an absence of
arm's-length negotiations with respect to the terms of the advisory agreement
entered into with Shaffer Asset Management by the Fund.
SYNDICATION FEES, SALES COMMISSIONS AND CONTINUING SERVICE FEES.
Prospective investors should note that if the minimum number of Units is sold
and accepted during the initial offering period, the Fund will pay Shaffer Asset
Management, Berthel Fisher & Company, certain selected dealers and their
respective registered representatives an amount equal to approximately 5% of the
then current Net Asset Value per Unit of each Unit sold by them and accepted by
Shaffer Asset Management. Approximately 20% of all sales charges shall be paid
to Shaffer Asset Management to reimburse Shaffer Asset Management for the
payment of the Fund's organizational and initial offering and the Fund's
operating expenses that are payable by Shaffer Asset Management and
approximately 80% of
16
all sales charges shall be paid as syndication fees to Berthel Fisher & Company
and as selling commissions to the selected dealers. Berthel Fisher & Company and
the selected dealers may in turn pay a portion of such syndication fees and
selling commissions to their respective employees who are NASD registered
representatives for each Unit sold by them. In addition and subject to the
limitations described herein under "Plan of Distribution", the Fund will pay a
monthly continuing services fee to Berthel Fisher & Company and, through Berthel
Fisher & Company, certain selected dealers who are appropriately registered with
the CFTC and/or the NFA and their respective registered representatives equal
to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (as defined
in "Fees, Compensation and Expense -- Certain Definitions: 2. Net Asset Value
per Unit", below) of the Fund's assets under management at month's end (without
reduction for distributions or redemptions effected as of such date or
management fees payable or incentive allocations allocable as of such date) with
respect to Units purchased within the prior 12-month period and 1/12 of 4% of
the Net Asset Value per Unit of the Fund's assets under management at month's
end (without reduction for distributions or redemptions effected as of such date
or management fees payable or incentive allocations allocable as of such date)
with respect to Units purchased more than 12 months prior thereto. In advising
customers whether to purchase or redeem Units, Shaffer Asset Management, Berthel
Fisher & Company, the selected dealers and their respective registered
representatives may have a conflict of interest between maximizing their current
and on-going compensation, on the one hand, and providing financial advice that
is in the best interests of their customers, on the other hand. In addition,
investors should note that Daniel S. Shaffer and Bruce I. Greenberg, the sole
officers, directors and shareholders of Shaffer Asset Management, are also
registered representatives of Berthel Fisher & Company, and in that capacity,
may receive a portion of the syndication fees and continuing service fees
referred to herein. A conflict of interest may exist, therefore, between Mr.
Shaffer's and Mr. Greenberg's interest in Shaffer Asset Management; their
interest in maximizing their current and on-going compensation; and the
interests of their customers in making an investment decision, such as a
decision to purchase and/or redeem Units. There may also be deemed to be an
absence of arm's-length negotiations with respect to the terms of the selling
agent agreement entered into between the Fund and Berthel Fisher & Company.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
In evaluating these conflicts of interest, prospective investors should be
aware that Shaffer Asset Management has a fiduciary responsibility to the
limited partners of the Fund to exercise good faith and fairness in all dealings
affecting the Fund. In the event that a limited partner of the Fund believes
that Shaffer Asset Management has violated its duty to the limited partners, he
may seek legal relief on his behalf or on behalf of the Fund under applicable
laws to recover damages from or require an accounting by Shaffer Asset
Management. Limited partners of the Fund should be aware that the performance by
Shaffer Asset Management of its responsibilities to the Fund will be measured by
the terms of the Fund's limited partnership agreement, including the authority
of Shaffer Asset Management to enter into the advisory and brokerage agreements,
as well as applicable law. Limited partners of the Fund are afforded certain
rights to institute reparations proceedings under the Commodity Exchange Act, as
amended, for violations of such act or of any rule, regulation or order of the
CFTC by Shaffer Asset Management. Excessive trading of the Fund's account may
constitute a violation of the CE Act. A limited partner of the Fund is also
entitled by statute to bring suit for certain violations of the CE Act. Limited
partners of the Fund should be aware that it may be difficult to establish that
the Fund's trading has been excessive due to the broad trading discretion given
to Shaffer Asset Management under the Fund's advisory agreement, the authority
of Shaffer Asset Management to enter into such contract under the Fund's limited
partnership agreement and the Fund's subscription agreement / power of attorney,
the exculpatory provisions in the Fund's advisory agreement and the Fund's
limited partnership agreement, and the absence of judicial or administrative
standards defining excessive trading. Although ADM Investor Services provides
various services to the Fund, it accepts no responsibility for verifying that
any instructions received from Shaffer Asset Management or any of their
employees or agents are in conformance with Shaffer Asset Management's authority
and ADM Investor Services accepts no responsibility for monitoring the actions
of Shaffer Asset Management in this regard, to ensure that such actions are not
contrary to the provisions of this prospectus or any amendments thereto.
The Fund's limited partnership agreement provides that Shaffer Asset
Management shall not be liable to the Fund or to any of the partners except by
reason of misconduct or negligence or for not having acted in good faith in the
reasonable belief that its actions were taken in, or not opposed to, the best
interests of the Fund.
The Fund's limited partnership agreement provides that with respect to any
action in which Shaffer Asset Management or any of its shareholders, directors,
officers, employees, affiliates or any person who controls Shaffer Asset
Management is made a party (including an action brought by or in the right of
the Fund), the Fund shall indemnify and hold harmless such person, subject to
receipt of an independent legal opinion regarding the applicable
17
standard of conduct, against any loss, liability, damage, cost, expense
(including, without limitation, attorneys' and accountants' fees and
disbursements), judgments and amounts paid in settlement incurred in connection
with the investigation, defense or settlement of such action, if the indemnified
party acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the Fund and if such actions did not involve
negligence, misconduct or breach of fiduciary obligations on the part of the
person seeking indemnification, unless the court in which such action is brought
determines that, in view of all of the circumstances of the case, the
indemnified party is fairly and reasonably entitled to indemnification for such
amounts as the court shall deem proper. To the extent that the indemnified party
has been successful in the defense of any action, no independent legal opinion
is necessary. Expenses may be paid by the Fund in advance of the final
disposition of any such action if the indemnified person agrees to reimburse the
Fund in the event that indemnification is not permitted. The Fund's limited
partnership agreement prohibits the Fund from making any loans. The limited
partnership agreement also provides that no person who shares or participates in
the brokerage commissions paid by the Fund may receive, directly or indirectly,
any advisory, management or incentive fees for trading advice or management;
that no broker may pay, directly or indirectly, rebates or give ups to Shaffer
Asset Management or any trading advisors; and that such prohibitions may not be
circumvented by any reciprocal business arrangements.
USE OF PROCEEDS
The gross proceeds of this offering will depend upon the prices at which
the Units are sold. During the initial offering period of sixty days (which may
be extended for up to an additional sixty days at Shaffer Asset Management's
discretion), the Units will be sold for $950 each, plus an initial sales charge
of $50 per Unit; after the initial offering period, unsold Units, if any, may be
sold as of the last business day of each month at a purchase price equal to the
then current Net Asset Value per Unit, plus a sales charge of 5% of the Net
Asset Value per Unit for each Unit purchased. If the minimum number of 1,000
Units is sold during the initial offering period at an initial purchase price of
$950 per Unit, the net proceeds to the Fund will be $950,000, without giving
effect to the contributions of Shaffer Asset Management and the initial limited
partner of the Fund. Similarly, if the maximum number of 25,000 Units is sold
during the initial offering period at the initial purchase price of $950.00 per
Unit, the net proceeds to the Fund will be $23,750,000, without giving effect to
the contributions of Shaffer Asset Management and the initial limited partner of
the Fund. See "Capitalization".
The net proceeds from the sale of the Units will be used to trade in
commodity futures contracts and other commodity interests in the United States
commodity futures markets. Specifically, the Fund intends to invest in a
diversified portfolio consisting primarily of currency, interest rate, grain,
metal and energy futures contracts.
The Fund's net assets will be deposited in account(s) with The Chase
Manhattan Bank and trading account(s) with ADM Investor Services and/or other
banks or commodity brokers to be used for trading in commodity futures contracts
and other commodity interests and as reserves for such trading. ADM Investor
Services will deposit the assets received from the Fund in segregated accounts
as required by the regulations promulgated by the CFTC. Under the CFTC's
regulations, the assets of other customers of ADM Investor Services, including
other commodity pools, may also be deposited in such segregated accounts and
thus be commingled with the assets of the Fund. Shaffer Asset Management intends
to commit between 10% and 40% of the Fund's net assets as margin for commodity
trading, with the remaining 60% to 90% being held in reserve for such trading.
The Fund's assets, both those that are deposited to meet margin requirements and
those that are held in reserve, may be held in cash, United States Treasury
Bills or in any other form permissible under applicable laws and regulations.
Shaffer Asset Management currently intends to cause the Fund to hold not less
than 90% of such assets in United States Treasury Bills. Interest, if any,
earned on such assets, therefore, will inure to the benefit of the Fund.
Gross Proceeds
During Initial Offering Period
----------------------------------------------------------------------------------------------
Net Proceeds Net Proceeds Net Proceeds Held in
to the Fund* Committted as Margin United States Treasury Bills
------------ ------------------------------------- -------------------------------------
Minimum Number of Units (1,000)... $ 950,000 10%--40% (i.e., $95,000--380,000) Approximately 90% (i.e., $855,000)
Maximum Number of Units (25,000).. $23,750,000 10%--40% (i.e., $2,375,000--9,500,000) Approximately 90% (i.e., $21,375,000)
---------------------------------------
* Without giving effect to the contributions of Shaffer Asset Management and the
initial limited partner of the Fund.
18
FEES, COMPENSATION AND EXPENSES
SUMMARY
The following entities will receive the following compensation, which is
described in more detail below. The relationship among these entities is
described and shown in "Shaffer Diversified Fund, L.P. Organizational Chart",
above.
SHAFFER ASSET MANAGEMENT, INC.
Monthly management fee:
1/12 of 3.75% of the Net Asset Value per Unit (as defined below) of the
Fund's asset under management at month's end with respect to Units purchased
within the prior 12-month period and 1/12 of 1% of the Net Asset Value per Unit
(as defined below) of the Fund's assets under management at month's end with
respect to Units purchased more than 12 months prior thereto will be paid by the
Fund to Shaffer Asset Management as a monthly management fee.
Quarterly incentive allocation:
15% of the Fund's New Trading Profits (as defined below) achieved on the
Fund's assets under management will be allocated by the Fund to Shaffer Asset
Management as a quarterly incentive allocation.
Reimbursement of organizational, initial offering and operating expenses:
1% of the Net Asset Value per Unit of Units sold and all early redemption
fees charged by the Fund upon redemptions of Units, will be paid by the Fund to
Shaffer Asset Management to reimburse Shaffer Asset Management for the payment
by Shaffer Asset Management of the Fund's organizational, initial offering and
operating expenses payable by Shaffer Asset Management.
Other:
Shaffer Asset Management will share to the same extent as the limited
partners of the Fund in the Fund's profits and losses with respect to any units
of limited and/or general partnership interest in the Fund that are purchased by
Shaffer Asset Management.
BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC.
Syndication Fee:
1% of the Net Asset Value per Unit of Units sold will be paid by the Fund
to Berthel Fisher & Company as a syndication fee.
Monthly Continuing Service Fee:
With respect to sales of Units by registered representatives of soliciting
dealers, 1/12 of .25% of the Net Asset Value per Unit (as defined below) with
respect to Units purchased within the prior 12-month period and 1/12 of 1% of
the Net Asset Value per Unit (as defined below) with respect to Units purchased
more than 12 months prior thereto will be paid by the Fund to Berthel Fisher &
Company (which may reallow any portion of such amount to its registered
representatives) as a monthly continuing service fee. With respect to sales of
Units by registered representatives of Berthel Fisher & Company, 1/12 of 1.25%
of the Net Asset Value per Unit with respect to Units purchased within the prior
12-month period and 1/12 of 4% per Unit with respect to Units purchased more
than 12 months prior thereto will be paid to Berthel Fisher & Company (which may
reallow any portion of such amount to its registered representatives) as a
monthy continuing service fee. All such amounts will be paid provided Berthel
Fisher and Company and any of its registered representatives to whom such
continuing service fee is to be reallowed are appropriately registered with the
CFTC and/or NFA. If Berthel Fisher or any of its registered representatives to
whom such continuing service fee is to be reallowed are not appropriately
registered with the CFTC and/or NFA, then the fee will be deemed a selling
commission and will be paid as long as the aggregate amount of commissions plus
additional costs and commissions in connection with the sale of the Units do not
exceed 10% of the initial sale price of the Units sold.
19
Expense Reimbursement:
All expenses of Berthel Fisher & Company incurred in performing its
obligations related to this offering will be reimbursed by the Fund (or Shaffer
Asset Management on its behalf).
SELECTED DEALERS AND
THEIR RESPECTIVE REGISTERED REPRESENTATIVES
Selling Commissions:
3% of the Net Asset Value per Unit of Units sold will be paid to the
selected dealers and their respective registered representatives as a selling
commission.
Monthly Continuing Service Fee:
1/12 of 1% of the Net Asset Value per Unit (as defined below) of the
Fund's assets under management at month's end with respect to Units purchased
within the prior 12-month period and 1/12 of 3% of the Net Asset Value per Unit
(as defined below) with respect to Units purchased more than 12 months prior
thereto will be paid by the Fund to the selected dealers and their respective
registered representatives as a monthly continuing service fee, provided the
selected dealers and their registered representatives are appropriately
registered with the CFTC and/or NFA. If the selected dealers and their
registered representatives are not appropriately registered with the CFTC and/or
NFA, then the fee will be deemed a selling commission and will be paid as long
as the aggregate amount of commissions plus additional costs and commissions in
connection with the sale of the Units do not exceed 10% of the initial sale
price of the Units sold.
ADM INVESTOR SERVICES, INC.
Commodity brokerage commissions:
Brokerage commissions at an initial rate of $17 per "round-turn" trade on
domestic exchanges will be paid by the Fund to ADM Investor Services. ADM
Investor Services is responsible, however, for all other charges relating to the
Fund's trading, such as exchange, clearing, transfer and NFA fees.
OTHERS
Legal,accounting, auditing, printing, recording, filing and other periodic
fees and expenses; and extraordinary expenses:
Estimated at $95,000 at current price levels, ranging from about 0.4% of the
proceeds of the offering if the maximum number of 25,000 Units is sold during
the initial offering period to about 10% thereof if only the minimum number of
1,000 Units is sold. Shaffer Asset Management has agreed to supply and pay for
such services as are deemed by Shaffer Asset Management to be necessary or
desirable and proper for the continuous operations of the Fund that are in the
aggregate in excess of 0.5% of the average monthly Net Asset Value of the Fund
per annum, except for sales charges, continuing services fees, management fees,
incentive allocations, brokerage commissions and extraordinary expenses, which
expenses shall be paid by the Fund. One percent of the Net Asset Value per Unit
of Units sold and all early redemption fees charged by the Fund upon redemptions
of Units will be paid to Shaffer Asset Management to reimburse Shaffer Asset
Management for the payment by Shaffer Asset Management of the Fund's
organizational and initial offering and the Fund's operating expenses that are
payable by Shaffer Asset Management.
DESCRIPTION OF FEES, COMPENSATION AND EXPENSES
1. MANAGEMENT FEES AND INCENTIVE ALLOCATIONS.
Pursuant to the terms of the advisory agreement between the Fund and
Shaffer Asset Management, the Fund has agreed (i) to pay to Shaffer Asset
Management a monthly management fee equal to 1/12 of 3.75% of the Net Asset
Value per Unit (see "Certain Definitions: 2. Net Asset Value per Unit", below)
of the Fund's assets under management at month's end with respect to Units
purchased within the prior twelve-month period and 1/12 of 1% of the Net Asset
Value per Unit (as defined below) of the Fund's assets under management at
month's end with respect to Units purchased more than twelve months prior
thereto, and (ii) to allocate to Shaffer Asset Management, on a quarterly basis,
an Incentive Allocation, such Incentive Allocation being defined as an amount
equal to 15% of the Fund's New Trading Profits (exclusive of any interest earned
by the Fund) achieved by Shaffer Asset Management for such quarter
20
on the Fund's assets under management by Shaffer Asset Management (see "Certain
Definitions: 3. New Trading Profits", below). In its sole discretion, Shaffer
Asset Management may during the first twelve months, pay a portion of its
management fee to Berthel Fisher & Company as additional compensation in
connection with the sale of the Units. Such additional compensation would be
provided solely from the amount that Shaffer Asset Management would otherwise
receive, and would not dilute the interests of Investors in the Fund. Such
amount may not be paid to the extent that the amount proposed to be paid,
together with all other costs and commissions in connection with the sale of the
Units would exceed 10% of the initial sale price of the Units sold. THE MONTHLY
MANAGEMENT FEES WILL BE PAID, AND THE QUARTERLY INCENTIVE ALLOCATION WILL BE
ALLOCATED, WHETHER OR NOT THE FUND EARNS PROFITS. However, the quarterly
incentive allocation is allocable only on cumulative profits achieved on assets
under management by Shaffer Asset Management.
2. SYNDICATION FEES / SELLING COMMISSIONS / SALES CHARGES.
During the initial offering period, the Units will be offered at an
initial offering price of $1,000 ($950 per Unit, plus an initial sales charge of
$50 per Unit). Subsequent to the closing of the initial offering period, unsold
Units, if any, may be offered and sold by the Fund at the then current Net Asset
Value per Unit (as hereinafter defined), plus a sales charge of 5% of the Net
Asset Value per Unit for each Unit purchased. If at least 1,000 Units are sold
and accepted by Shaffer Asset Management during the initial offering period,
approximately 20% of all sales charges shall be paid to Shaffer Asset Management
to reimburse Shaffer Asset Management for the payment by Shaffer Asset
Management of the Fund's organizational, initial offering and operating expenses
payable by Shaffer Asset Management and approximately 80% of all sales charges
shall be paid as syndication fees to Berthel Fisher & Company and as selling
commissions to the selected dealers. Berthel Fisher & Company and the selected
dealers may in turn pay a portion of such syndication fees and selling
commissions to their respective employees who are NASD registered
representatives for each Unit sold by them. Shaffer Asset Management may
increase the sales charge at any time and from time to time upon sixty days'
prior written notice to the limited partners of the Fund. See "Plan of
Distribution".
3. CONTINUING SERVICES FEES.
The Fund will pay a monthly continuing services fee to Berthel Fisher &
Company and, through Berthel Fisher & Company, to registered representatives of
Berthel Fisher & Company to whom it shall reallow any portion of such fee, and
to certain selected dealers and their respective registered representatives
equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (see
"Certain Definitions: 2. Net Asset Value per Unit", below) of the Fund's assets
under management at month's end (without reduction for distributions or
redemptions effected as of such date or management fees or incentive fees
payable as of such date) with respect to Units purchased within the prior
twelve-month period and 1/12 of 4% of the Net Asset Value per Unit of the Fund's
assets under management at month's end (without reduction for distributions or
redemptions effected as of such date or management fees or incentive fees
payable as of such date) with respect to Units purchased more than twelve months
prior thereto. The monthly continuing services fee will be paid to Berthel
Fisher & Company, its registered representatives to whom it shall reallow such
fee, the selected dealers and their respective registered representatives,
provided each is appropriately registered with the CFTC and/or the NFA. If any
such party is not appropriately registered with the CFTC and/or the NFA, then
the fee paid to such party will be deemed a selling commission and will be paid
until the aggregate amount of commissions paid plus additional costs and
commissions do not exceed 10% of the initial sale price of the Units sold.
Furthermore, if any such party is not appropriately registered with the CFTC
and/or the NFA, then at such time as the aggregate amount of commissions paid
plus additional costs and commissions equals or exceeds 10% of the initial sales
price of the Units sold, the continuing service fee will be paid to Berthel
Fisher & Company so long as it is appropriately registered with the CFTC and/or
NFA. Such continuing services fee shall be paid to Berthel Fisher & Company, its
registered representatives to whom it shall reallow any portion of such fee, and
the selected dealers and their respective registered representatives in return
for their continuing services to the Fund and the limited partners of the Fund
solicited by them. Such services include, without limitation, keeping the
limited partners of the Fund apprised of developments affecting the Fund,
responding to specific inquiries received from limited partners relating to the
Fund and the commodity markets, communicating current valuations of the Fund's
Net Asset Value per Unit to the limited partners, assisting in redemptions,
transfers and distributions, assisting limited partners in interpreting the
Fund's monthly and annual reports, financial statements and the tax information
provided to limited partners, and providing such other services as the limited
partners from time to time may reasonably request. Shaffer Asset Management may
increase the continuing services fee at any time and from time to time upon
sixty days' prior written notice to the limited partners of the Fund. See "Plan
of Distribution".
21
The continuing services fee will be allocated between Berthel Fisher &
Company, its registered representatives to whom it shall reallow any portion of
such fee, and the selected dealers and their respective registered
representatives based upon the amount of time that each Unit has been
outstanding. With respect to Units sold by selected sales agents and their
representatives, the continuing services fee attributable to a Unit that has
been outstanding for twelve or fewer months shall be allocated between Berthel
Fisher & Company and the selected dealers and their respective registered
representatives as follows:
o 20% to Berthel Fisher & Company; and
o 80% to the selected dealers and their respective registered
representatives that solicited the subscription;
and all other continuing services fees shall be allocated as follows:
o 25% to Berthel Fisher & Company; and
o 75% to the selected dealers and their respective registered
representative that solicited the subscription.
For this purpose, continuing service fees are deemed to be attributable to
Units sold by a selected dealer in the proportion that the number of such Units
bears to the number of Units outstanding at any time. For example, if a selected
dealer were responsible for the sale of 2,500 Units, and there were 25,000 Units
outstanding, the continuing service fees payable to the selected dealer as set
forth above would be a percentage of the 10% (2,500 of the 25,000) of the Net
Asset Value of the Fund that was attributable to the Units sold by the selected
dealer. The continuing service fees will be paid to a selected dealer and its
registered representatives for so long as the Units remain outstanding and the
selected dealer and its registered representatives are providing the services
described above to holders of such Units.
4. COMMODITY BROKERAGE COMMISSIONS.
The Fund will pay ADM Investor Services brokerage commissions initially at
the rate of $17.00 per "round-turn" trade executed on domestic exchanges (i.e.,
when an open position is closed). Based upon the historical trading patterns of
Shaffer Asset Management, the Fund may expect to pay brokerage commissions that
may approximate 1% or more of its average yearly Net Asset Value. There is no
agreement to limit such commission charges to any particular level. Brokerage
commissions will be charged only when an open position is closed. ADM Investor
Services may change its aggregate commission rates at any time, and a limited
partner of the Fund may obtain the current Fund commission rate schedule from
Shaffer Asset Management upon request. Shaffer Asset Management, however, must
ensure that such charges remain reasonable in light of the nature and quality of
services rendered (including, among others, execution services) and the other
standards applicable thereto. In no event will the commissions exceed 80% of the
published retail rate for such commissions or 14% annually of the average Net
Assets. Shaffer Asset Management will periodically review brokerage commission
rates charged to public commodity pools of comparable size and management
structure as a factor in determining whether the rates paid by the Fund are
comparable and remain reasonable. The Fund, nonetheless, may pay brokerage
commission rates exceeding the lowest such rates otherwise available. See
"Conflicts of Interest and Fiduciary Responsibility of the General Partner" and
"Commodity Brokerage Arrangements".
5. EARLY REDEMPTION FEES.
The Fund will charge an early redemption fee equal to 4% of the Net Asset
Value per Unit of the Units redeemed as of or before the end of the third full
calendar month after their purchase. This fee will decrease by one percentage
point for every three subsequent calendar months. Thereafter, no redemption fee
will be charged. In addition and in order to assure each of the Fund's limited
partners the availability of funds to pay taxes on each year's profits, if any,
the redemption fee will be waived on redemptions of Units to the extent, if any,
distributions in the first quarter of a calendar year are less than 35% of the
profits reportable to a limited partner for the prior year. See "Distributions
and Redemptions".
6. ORGANIZATIONAL AND INITIAL OFFERING EXPENSES.
Shaffer Asset Management will pay all expenses (estimated at $200,000)
associated with the organization of the Fund and the initial offering of the
Units other than selling commissions. Approximately 20% of all sales charges
imposed by the Fund on Units sold and 100% of all early redemption fees charged
by the Fund upon redemptions of Units will be paid to Shaffer Asset Management
to reimburse Shaffer Asset Management for the payment by Shaffer Asset
Management of the Fund's organizational and initial offering expenses and the
Fund's operating expenses that are payable by Shaffer Asset Management.
22
7. OTHER EXPENSES.
After trading operations commence, the Fund shall be obligated to pay
various periodic fees and expenses which are estimated at approximately $30,000
per year for accounting services and auditing charges, $15,000 for legal fees,
$15,000 for printing, $20,000 for technical services and $15,000 for filing
fees, postage and extraordinary expenses, or, in the aggregate, $95,000 per year
at current price levels. This would amount to approximately 0.4% of the proceeds
of the offering if the maximum number of 25,000 Units was sold during the
initial offering period, and about 10% thereof if the minimum number of 1,000
Units was sold. Shaffer Asset Management has agreed to supply and pay for such
services as are deemed by Shaffer Asset Management to be necessary or desirable
and proper for the continuous operations of the Fund that are in the aggregate
in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum,
except for sales charges, continuing services fees, management fees, incentive
allocations, brokerage commissions and extraordinary expenses, which expenses
shall be paid by the Fund.
Shaffer Asset Management will furnish each of the Fund's limited partners
with monthly statements and an annual report covering the Fund's operations and
expenses, including its advisory fees, brokerage commissions and other expenses.
See "Summary of the Limited Partnership Agreement -- Reports and Accounting".
The following is a chart of fees to be paid by the Fund.
--------------------------------------------------------------------------------
| --> up to 1% to commodity broker |
| |
| |
| --> 4% to selling agents |
| |
| |
| Fund --> Up to 6.5% Fee --> .5% to Shaffer Asset |
| Management, Inc. (as trading advisor) |
| |
| --> .5% to Shaffer Asset |
| |
--------------------------------------------------------------------------------
ESTIMATE OF BREAK-EVEN THRESHOLD
Assuming an initial investment of $10,000, the Fund must earn gross
trading profits of $750 or 7.50% per initial investment (i.e., 10 Units) on an
annualized basis in order for an investor to "break even" on his or her
investment in the first year of trading. The foregoing statement is based upon
the following assumptions, any one of which may vary depending upon the
actuality of the Fund's size and trading: (i) the initial sales charge per Unit
is $50; (ii) the historical trading patterns of Shaffer Asset Management and its
principal(s) should generate annual brokerage commissions of approximately 1% of
the average annual Net Asset Value of the assets under management by Shaffer
Asset Management; (iii) the continuing services fees should equal approximately
1.25% of average Net Asset Value during the twelve-month period following the
offering, and 4% annually thereafter; (iv) the management fees payable to
Shaffer Asset Management should equal approximately 3.75% of average Net Asset
Value during the twelve-month period following the offering, and 1% annually
thereafter; (v) Units redeemed as of the end of or during the twelfth full
calendar months after their purchase will be subject to a redemption fee equal
to 1% of the Net Asset Value of the Unit(s) redeemed; and (vi) the foregoing
fixed expenses should be partially or completely offset by the interest received
on the Fund's assets on deposit with The Chase Manhattan Bank, ADM Investor
Services and/or other banks and commodity brokers. The effect of the incentive
allocation, if any, allocable to Shaffer Asset Management is not included in the
calculation of the break-even threshold because, by definition, no New Trading
Profits are generated at the "break-even" point upon which an incentive
allocation would be allocable to Shaffer Asset Management. The break-even
threshold is calculated as shown in the following table:
23
"BREAK EVEN" ANALYSIS
Initial purchase price (1).......................................... $10,000
Less: Sales charges (1)............................................. 500
Management fees (2)......................................... 375
Continuing service fees (3)................................. 125
Brokerage fees (4).......................................... 100
Operating expenses (5)...................................... 50
Redemption fees (6)......................................... 100
Plus: Interest income (7)........................................... (500)
Amount of trading income required for the Net Asset
Value per Unit for 10 Units at the end of one year
to equal the initial offering price, in the aggregate,
for such 10 Units................................................... $ 750
Percentage of assumed initial offering price........................ 7.50%
---------------------------------------
(1) During the initial offering period,1 the Units will be offered at an
initial offering price of $1,000 ($950 per Unit, plus an initial sales
charge of $50 per Unit). Subsequent to the closing of the initial offering
period, unsold Units, if any, may be offered and sold by the Fund at the
then current Net Asset Value per Unit (as hereinafter defined), plus a
sales charge of 5% of the Net Asset Value per Unit for each Unit
purchased. This illustration assumes that an investor purchases 10 Units
during the initial offering period.
(2) The Fund has agreed to pay to Shaffer Asset Management (i) a monthly
management fee equal 1/12 of 3.75% of the Net Asset Value per Unit (see
"Certain Definitions: 2. Net Asset Value per Unit", below) of the Fund's
asset under management at month's end with respect to Units purchased
within the prior twelve-month period and 1/12 of 1% of the Net Asset Value
per Unit (as defined below) of the Fund's assets under management at
month's end with respect to Units purchased more than twelve months prior
thereto.
(3) The Fund will pay a monthly continuing services fee to Berthel Fisher &
Company and, through Berthel Fisher & Company, certain selected dealers
who are appropriately registered with the CFTC and/or the NFA and their
respective registered representatives equal to, in the aggregate, 1/12 of
1.25% of the Net Asset Value per Unit (see "Certain Definitions: 2. Net
Asset Value per Unit", below) of the Fund's assets under management at
month's end (without reduction for distributions or redemptions effected
as of such date or management fees or incentive fees payable as of such
date) with respect to Units purchased within the prior twelve-month period
and 1/12 of 4% of the Net Asset Value per Unit of the Fund's assets under
management at month's end (without reduction for distributions or
redemptions effected as of such date or management fees or incentive fees
payable as of such date) with respect to Units purchased more than twelve
months prior thereto.
(4) Estimated at approximately 1% of the average daily Net Asset Value of the
Fund per year based upon the historical trading patterns of Shaffer Asset
Management and its principal(s).
(5) After trading operations commence, the Fund shall be obligated to pay
various periodic fees and expenses that are estimated at approximately
$95,000 per year. at current price levels. This would amount to
approximately 0.4% of the proceeds of the offering if the maximum number
of 25,000 Units was sold during the initial offering period, and about 10%
thereof if the minimum number of 1,000 Units was sold. Shaffer Asset
Management has agreed to supply and pay for such services as are deemed by
Shaffer Asset Management to be necessary or desirable and proper for the
continuous operations of the Fund that are in the aggregate in excess of
0.5% of the average monthly Net Asset Value of the Fund per annum, except
for sales charges, continuing services fees, management fees, incentive
allocations, brokerage commissions and extraordinary expenses, which
expenses shall be paid by the Fund. This illustration assumes operating
expenses in an amount equal to 0.5% of the average daily Net Asset Value
of the Fund per year.
(6) The Fund will charge an early redemption fee equal to 4% of the Net Asset
Value per Unit of the Units redeemed as of or before the end of the third
full calendar month after their purchase. This fee will decrease by one
percentage point for every three subsequent calendar months. Accordingly,
Units redeemed as of the end of or during the tenth, eleventh and twelfth
full calendar months after their purchase will be subject to a redemption
fee equal to 1% of the Net Asset Value of the Unit(s) redeemed.
Thereafter, no redemption fee will be charged. This illustration assumes a
redemption fee, therefore, of 1%.
24
(7) The Fund's assets, both those that are deposited to meet margin
requirements and those that are held in reserve, may be held in cash,
United States Treasury Bills or in any other form permissible under
applicable laws and regulations. Shaffer Asset Management currently
intends to cause the Fund to hold not less than 90% of such assets in
United States Treasury Bills; interest, if any, earned on such assets,
therefore, will inure to the benefit of the Fund. This illustration
assumes that the Fund will receive interest at the rate of 5% on the
Fund's average daily assets on deposit with The Chase Manhattan Bank,
ADM Investor Services and/or other banks and commodity brokers.
CERTAIN DEFINITIONS USED IN THIS PROSPECTUS
Certain of the following terms are used in calculating the purchase price
for the Units and the fees, compensation and expenses payable by the Fund
described above.
1. NET ASSET VALUE. Net Asset Value means the Fund's total assets less total
liabilities determined, except as set forth below, on the basis of
generally accepted accounting principles for partnership accounting,
consistently applied. Net Asset Value will be calculated daily. For
purposes of this calculation:
(a) Net Asset Value shall include any unrealized profit or loss on open
securities and commodity interest positions.
(b) All open securities and commodity interest positions shall be
calculated at their then market value which means, with respect to
open commodity interest positions, the settlement price as determined
by the exchange on which the transaction is effected or the most
recent appropriate quotation as supplied by the clearing broker or
banks through which the transaction is effected, except that United
States Treasury Bills (but not futures contracts for United States
Treasury Bills) shall be carried at cost plus accrued interest. If
there are no trades on the date of the calculation due to the
operation of the daily price fluctuation limits or due to a closing
of the exchange on which the transaction is executed, the contract
will be valued at fair market value as determined by Shaffer Asset
Management. Interest, if any, shall be accrued at least monthly.
(c) Brokerage commissions on open positions shall be considered accrued
in full (i.e., on a "round-turn" basis) as a liability of the Fund.
Management fees and incentive fees shall be accrued daily even though
not paid until month's end.
2. NET ASSET VALUE PER UNIT. Net Asset Value per Unit means the Net Asset
Value divided by the number of units of general partnership interest and
limited partnership interest outstanding.
3. NEW TRADING PROFITS. The excess, if any, of Net Assets at the end of the
Valuation Period over Net Assets at the end of the highest previous
Valuation Period or Net Assets at the date trading commences, whichever is
higher, and as further adjusted to eliminate the effect on Net Assets
resulting from new capital contributions, redemptions, or capital
distributions, if any, made during the period decreased by interest or
other income, not directly related to trading activity, earned on Fund
assets during the period, whether the assets are held separately or in
margin account.
4. AFFILIATE. An affiliate of a person means (a) any person directly or
indirectly owning, controlling or holding with power to vote 10% or more
of the outstanding voting securities of such person; (b) any person 10% or
more of whose outstanding voting securities are directly or indirectly
owned, controlled or held with power to vote, by such person; (c) any
person, directly or indirectly, controlling, controlled by, or under
common control of such person; (d) any officer, director or partner of
such person; or (e) if such person is an officer, director or partner, any
person for which such person acts in any such capacity.
5. SPONSOR. Any person directly or indirectly instrumental in organizing a
program or any person who will manage or participate in the management of
a program including a commodity broker who pays any portion of the
organizational expenses of the program, and the general partner(s) and any
other person who regularly performs or selects the persons who perform
services for the program. Sponsor does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services rendered in connection with the
offering of the units. The term "sponsor" shall be deemed to include its
affiliates.
6. NET ASSETS. The total assets, less total liabilities, of the Fund
determined on the basis of generally accepted accounting principles. Net
Assets shall include any unrealized profits or losses on open positions,
and any fee or expense including Net Asset fees accruing to the Fund.
7. VALUATION PERIOD. The preceding calendar quarter.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Shaffer Diversified Fund, LP is a limited partnership organized on August
29, 2000 under the Delaware Revised Uniform Limited Partnership Act as an
investment vehicle that allows investors to include commodity futures contracts
traded on the United States commodity futures markets in their portfolios in the
same way that they include mutual funds, money market funds and limited
partnerships in other areas. The Fund has not commenced trading activities. The
only transactions to date have been the organization of the Fund, the
preparation of the offering and the capital contributions by Shaffer Asset
Management and by Daniel S. and Shaffer, the initial limited partner. The Fund
has no operating history.
LIQUIDITY
The Fund will deposit its assets with the commodity brokers in a separate
futures trading account established for the trading advisor, which assets are
used as margin to engage in trading. The assets are held in either
non-interest-bearing bank accounts or in securities and instruments permitted by
the CFTC for investment of customer segregated or secured funds. The Fund's
assets held by the commodity broker may be used as margin solely for the Fund's
trading. Since the Fund's sole purpose is to trade in futures, it is expected
that the Fund will continue to own such liquid assets for margin purposes.
The Fund's investment in futures may, from time to time, be illiquid. Most
U.S. futures exchanges limit fluctuations in prices during a single day by
regulations referred to as "daily price fluctuations limits" or "daily limits."
Trades may not be executed at prices beyond the daily limit. If the price for a
particular futures contract has increased or decreased by an amount equal to the
daily limit, positions in that futures contract can neither be taken nor
liquidated unless traders are willing to effect trades at or within the limit.
Futures prices have occasionally moved the daily limit for several consecutive
days with little or no trading. These market conditions could prevent the Fund
from promptly liquidating its futures contract and result in restrictions on
redemptions.
CAPITAL RESOURCES
The Fund does not have, or expect to have, any capital assets.
Redemptions, exchanges and sales of additional units in the future will affect
the amount of funds available for investments in futures interests in subsequent
periods. It is not possible to estimate the amount and therefore the impact of
future redemptions.
FINANCIAL INSTRUMENTS
The Fund will be a party to financial instruments with elements of
off-balance sheet market and credit risk. The Fund may trade futures in interest
rates, currencies, energies, grains and precious metals. In entering into these
contracts, the Fund will be subject to the market risk that such contracts may
be significantly influenced by market conditions, such as interest rate
volatility, resulting in such contracts being less valuable. If the markets
should move against all of the positions held by the Fund at the same time, and
if the trading advisors were unable to offset positions of the Fund, the Fund
could lose all of its assets and investors would realize a 100% loss.
In addition to market risk, in entering into futures contracts there is a
credit risk to the Fund that the counterparty on a contract will not be able to
meet its obligations to the Fund. The ultimate counterparty or guarantor of the
Fund for futures contracts traded on the U.S. exchanges in which the Fund trades
is the clearinghouse associated with such exchange. In general, a clearinghouse
is backed by the membership of the exchange and will act in the event of
non-performance by one of its members or one of its member's customers, which
should significantly reduce this credit risk. For example, a clearinghouse may
cover a default by drawing upon a defaulting member's mandatory contributions
and/or non-defaulting members' contributions to a clearinghouse guarantee fund,
established lines or letters of credit with banks, and/or the clearinghouse's
surplus capital and other available assets of the exchange and clearinghouse, or
assessing its members.
There is no assurance that a clearinghouse or exchange will meet its
obligations to the Fund, and the general partner and commodity brokers will not
indemnify the Fund against a default by such parties. Further, the law is
unclear as to whether a commodity broker has any obligation to protect its
customers from loss in the event of an exchange or clearinghouse defaulting on
trades effected for the broker's customers.
26
Shaffer Asset Management will deal with these credit risks of the Fund in
several ways. It will monitor the Fund's credit exposure to each exchange on a
daily basis, calculating not only the amount of margin required for it but also
the amount of its unrealized gains at each exchange, if any. The commodity
brokers will inform the Fund, as with all their customers, of its net margin
requirements for all its existing open positions, but do not break that net
figure down, exchange by exchange.
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Fund is a commodity pool involved in the speculative trading of
futures. The market sensitive instruments to be held by the Fund will be
acquired for speculative trading purposes only and, as a result, all or
substantially all of the Fund's assets will be at risk of trading loss. Unlike
an operating company, the risk of market sensitive instruments is central, not
incidental, to the Fund's main business activities.
The futures traded by the Fund involve varying degrees of market risk.
Market risk is often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial instruments and
commodities. Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Fund's open positions, and,
consequently, in its earnings and cash flow.
The Fund's total market risk will be influenced by a wide variety of
factors, including the diversification among the Fund's open positions, the
volatility present within the markets, and the liquidity of the markets. At
different times, each of these factors may act to increase or decrease the
market risk associated with the Fund.
Any attempt to numerically quantify a Fund's market risk is limited by the
uncertainty of its speculative trading. The Fund's speculative trading may cause
future losses and volatility (i.e. "risk of ruin") that far exceed any
reasonable expectations based upon historical changes in market value.
27
THE GENERAL PARTNER / ADVISOR
DESCRIPTION OF THE GENERAL PARTNER / ADVISOR
Shaffer Asset Management, Inc., a New York corporation organized on March
16, 1998, will act as the general partner and commodity trading advisor of the
Fund. Shaffer Asset Management is, and has been, registered with the CFTC as a
commodity pool operator since July 7, 2000 and as a commodity trading advisor
since October 2, 1998, but such registrations do not imply that the CFTC has
reviewed or approved the accuracy of the information contained in its
application for registration or its qualifications to act as described in this
prospectus and the accompanying statement of additional information or that the
CFTC supervises the business activities engaged in by Shaffer Asset Management.
In addition, Shaffer Asset Management is, and has been, a member of the NFA in
its capacity as a commodity pool operator since July 2000 and as a commodity
trading advisor since October 1998. Daniel S. Shaffer and Bruce I. Greenberg are
currently the sole employees of Shaffer Asset Management.
Shaffer Asset Management began managing commodity accounts for others in
March 1999. Shaffer Asset Management currently offers trading advice to
customers with respect to futures contracts that are traded on United States
agricultural, currency, energy, metals, United States Treasury and other
markets. As of September 30, 2001, Shaffer Asset Management had approximately
$2.3 million in assets under management. The trading results of these individual
accounts are separately set forth in Tables A and B under the caption "Past
Performance of the Advisor". Although Shaffer Asset Management is not currently
organizing, and does not currently sponsor, any other commodity pools, it does
plan to organize and sponsor other commodity pools in the future, both publicly
and privately offered.
The offices of Shaffer Asset Management are located at 925 Westchester
Avenue, White Plains, New York, New York 10604, and its telephone number is
(800) 352-5265.
The background of the sole principals of Shaffer Asset Management are as
follows:
DANIEL S. SHAFFER, age 40. Mr. Shaffer received a Bachelor of Science
degree from Syracuse University in December 1982 with a major in Speech
Communications and a minor in Finance/Accounting. Mr. Shaffer received a Master
of Science degree in Accounting from New York University in June 1986.
Mr. Shaffer currently is, and has been, a shareholder and director and the
President of Shaffer Asset Management since March 18, 1998. In addition, Mr.
Shaffer currently is, and has been, a registered representative with Berthel
Fisher & Company since May 2000.
Mr. Shaffer's prior experiences include the following:
July 1998 to May 2000....................... Registered representative with Nathan & Lewis Securities, Inc.
July 1998 to March 2000..................... Manager with Metropolitan Life Insurance Co.
March 1997 to December 2000................. Sole officer, director and shareholder of Shaffer Consulting Group,
Inc. (a life, disability and long-term care insurance broker)
April 1989 to July 1998..................... Agent with Northwestern Mutual Financial Network and a Registered Representative
with Robert W. Baird & Co., Inc.
March 1988 to April 1989.................... Registered representative with Hambrecht & Quist
October 1987 to March 1988.................. Registered representative with Bear, Stearns & Co., Inc.
October 1986 to October 1987................ Senior Accountant with Aaron Gottesman, Public Accountants
June 1986 to October 1986................... Representative with Citicorp Investment Services, Inc.
January 1986 to June 1986................... Internal Auditor - Special Project with Dean Witter Reynolds
June 1984 to January 1986................... Accountant / Auditor with Coopers & Lybrand
February 1983 to June 1984.................. Registered representative and commodity broker with Bear, Stearns
& Company
January 1983 to February 1983............... Floor trader on the New York Futures Exchange
BRUCE I. GREENBERG, age 40. Mr. Greenberg received a Bachelor of Science
degree in Accounting from Brooklyn College in September 1983.
Mr. Greenberg currently is, and has been, (i) a shareholder and director
and the Vice President and Chief Financial Officer of Shaffer Asset Management
since January 2001 and (ii) the sole shareholder and director and the President
of Bruce I. Greenberg, CPA, PC (an accounting and tax firm) since 1993. In
addition, Mr. Greenberg currently is, and has
28
been, a registered representative with Berthel Fisher & Company since May 2000.
Mr. Greenberg's prior experiences include the following:
July 1991 to November 2000.................. Partner with the accounting and tax firm of Blaustein, Greenberg & Company
May 1999 to May 2000........................ Registered representative with Nathan & Lewis Securities, Inc.
July 1995 to May 1999....................... Registered Representative with Trusted Securities Advisors Corp.
January 1990 to June 1991................... Manager with MR Weiser & Company
December 1987 to December 1999.............. Manager with Siegel, Rich, Patchman & Company
September 1982 to November 1987............. Staff Accountant with Solomon, Schneider & Orenstein
Messrs. Shaffer and Greenberg currently invest in commodity interests for
their own account, and they may continue to do so in the future. Although
Shaffer Asset Management is not currently organizing or sponsoring any other
commodity pools, it does plan to sponsor other commodity pools in the future,
both publicly and privately offered.
There has never been any material civil, criminal or administrative action
pending, on appeal or concluded against Shaffer Asset Management or its sole
principals.
DUTIES OF THE GENERAL PARTNER
Under the terms of the Fund's limited partnership agreement, Shaffer Asset
Management is vested with exclusive responsibility for managing the business and
affairs of the Fund. Limited partners of the Fund will not participate in
management decisions affecting the Fund, and they will have no voice in the
operation of the Fund. In addition, Shaffer Asset Management is responsible for
the preparation and distribution of monthly and annual reports to the limited
partners of the Fund; filing reports required by the CFTC, the SEC and any other
Federal or state agencies; the calculation of the Net Asset Value of the Fund
and the advisory fees; determining whether the Fund will make distributions to
the partners; selecting an accountant and causing an annual audit of the Fund's
business affairs; executing documents on behalf of the Fund and on behalf of the
limited partners of the Fund pursuant to the powers of attorney granted by the
limited partners upon execution of the Fund's limited partnership agreement; and
supervising the liquidation of the Fund.
Shaffer Asset Management will provide suitable facilities and procedures
for handling redemptions, transfers, distributions of profits, if any, and
orderly liquidation of the Fund. In addition, Shaffer Asset Management will pay
all operating and other administrative expenses attributable to the Fund that
are in the aggregate in excess of 0.5% of the average monthly Net Asset Value of
the Fund per annum, except for sales charges, continuing services fees,
management fees, incentive allocations, brokerage commissions and extraordinary
expenses, which expenses shall be paid by the Fund.
Shaffer Asset Management, in its capacity as the general partner of the
Fund, shall cause itself, in its capacity as the commodity trading advisor to
the Fund, to close out all open positions and suspend trading if the Net Asset
Value per Unit (increased by the amount of distribution, if any) on any business
day during any given fiscal year decreases to or below 50% of the Net Asset
Value per Unit as of the beginning of the fiscal year, provided that such 50%
decrease results in a Net Asset Value per Unit of less than $1,000, or if the
Net Asset Value per Unit decreases on any business day to or below $350. In
addition, Shaffer Asset Management shall give notice of the occurrence of such
event within ten business days thereof. Included in such notification shall be a
description of the rights of the limited partners of the Fund. See "Trading
Policies" and "Summary of the Limited Partnership Agreement -- Reports and
Accounting".
MINIMUM INVESTMENT AND NET WORTH REQUIREMENTS IMPOSED ON THE GENERAL PARTNER
The Fund's limited partnership agreement provides that Shaffer Asset
Management must make a capital contribution to the Fund equal to at least the
greater of: (i) 1% of the aggregate amount of capital contributions made to the
Fund by the partners, including Shaffer Asset Management's capital contribution,
or (ii) $25,000. The application of this formula would require Shaffer Asset
Management to purchase, in the aggregate, approximately 26.32 units of general
partnership interest in the event that the minimum number of 1,000 Units is sold
and accepted by Shaffer Asset Management during the initial offering period,
126.26 units of general partnership interest in the event that the median number
of 12,500 Units is sold and accepted by Shaffer Asset Management during the
initial offering period, and approximately 252.53 units of general partnership
interest in the event that the maximum number of 25,000 Units is sold and
accepted by Shaffer Asset Management during the initial offering period. Shaffer
Asset Management will pay
29
$950 for each unit of general partnership interest purchased by it during the
initial offering period (other than the initial unit of general partnership
interest which was purchased by Shaffer Asset Management for $1,000), and
thereafter a purchase price equal to the Fund's then current Net Asset Value per
Unit. Shaffer Asset Management will share Fund losses and profits with the
limited partners of the Fund PRO RATA to the extent of its investment and will
maintain its interest in the Fund so long as it is acting as general partner of
the Fund. However, Shaffer Asset Management may withdraw or receive a
distribution of any portion of its interest in the Fund that is in excess of its
minimum investment requirement upon thirty days' prior written notice to the
limited partners of the Fund.
Except as stated above, neither Shaffer Asset Management, Berthel Fisher &
Company or ADM Investor Services nor any of their respective principals have
arranged or committed to purchase any Units but any of them may do so in the
future.
Under the Fund's limited partnership agreement, Shaffer Asset Management
is obligated, for so long as it continues to serve as the general partner of the
Fund, to maintain a net worth of at least the greater of (i) $50,000, or (ii) 5%
of the aggregate capital contributions made to the Fund by all the partners
including Shaffer Asset Management's capital contributions. In addition, to the
extent that Shaffer Asset Management serves as the general partner of any other
limited partnership in addition to the Fund, the Fund's limited partnership
agreement would require Shaffer Asset Management to maintain a net worth at
least equal to the net worth required by the preceding sentence plus, for each
such additional limited partnership, an amount equal to 5% of the total capital
contributions made to such other limited partnership by all partners including
Shaffer Asset Management. Notwithstanding the foregoing, Shaffer Asset
Management's net worth need not exceed $1,000,000. The calculation of Shaffer
Asset Management's net worth shall be based upon fair market values from time to
time, shall exclude its interest in the Fund or any other limited partnership of
which it is a general partner, and shall otherwise be determined in accordance
with generally accepted accounting principles. See the Fund's limited
partnership agreement attached as Exhibit A to the statement of additional
information that accompanies this prospectus.
Daniel S. Shaffer and Bruce I. Greenberg, the sole officers, directors,
employees and shareholders of Shaffer Asset Management, have undertaken, jointly
and severally, to provide Shaffer Asset Management with capitalization
sufficient to meet such net worth requirements at the time of the closing of the
initial and any subsequent offering of Units and the closing of the offering of
interests in any other limited partnerships for which Shaffer Asset Management
acts as general partner. In addition, each of them has agreed not to make any
withdrawal of capital from Shaffer Asset Management that would cause Shaffer
Asset Management to have an aggregate net worth less than that which they have
agreed, jointly and severally, to provide at the time of such closings.
TRADING PHILOSOPHY AND METHODS OF THE ADVISOR
Commodity traders generally rely on either fundamental or technical
analysis or a combination thereof in making trading decisions and attempting to
identify price trends. Fundamental analysis looks at factors external to the
trading market that affect the supply and demand of a particular commodity in
order to predict future prices. As an example, some of the fundamental factors
that affect the supply of a commodity such as corn include the acreage planted,
crop conditions such as drought, flood and disease, strikes affecting the
planting, harvesting and distribution of the commodity, and the previous year's
crop carryover. The demand for commodities such as corn consists of domestic
consumption and exports and is a product of many things, including general world
economic conditions, as well as the cost of corn in relation to the cost of
competing products such as soybean meal. Technical analysis is not based on the
anticipated supply and demand of the cash (actual) commodity; instead, it is
based on the theory that a study of the markets themselves will provide a means
of anticipating future prices. Technical analysis of the markets often includes
a study of the actual daily, weekly and monthly price fluctuations, volume
variations and changes in open interest utilizing charts and/or computers for
analysis of these items and other technical market data.
Shaffer Asset Management will make commodity trading decisions for the
Fund pursuant to trading strategies that include technical trend analysis and
technical trading principles as described below. The principal objective of the
trading strategies is to participate in major, sustained price movements in the
commodities traded.
The principal technical trading strategies used by Shaffer Asset
Management to generate signals for buy and sell points for the various
commodities traded have been developed through actual trading experience, and
through computer testing against historical commodity futures trading data.
Given trends in price of sufficient duration and magnitude, the trading methods
employing such strategies may be profitable even though more than half of all
individual trades are unprofitable; however, a period of time without such
trends may result in substantial losses.
30
The theoretical buy and sell points generated by technical analysis are
approximate levels, and as such will require the judgment of Shaffer Asset
Management to translate the information into actual orders. Furthermore,
decisions whether to trade a particular commodity futures contract are based
upon various factors, including liquidity, significance in terms of desired
degrees of concentration and diversification and profit potential, both
historical and at a given time. These decisions will also require the exercise
of judgment by Shaffer Asset Management. The decision not to trade certain
commodities for certain periods, or to reduce the number of contracts traded in
a particular commodity, may result at times in missing significant profit
opportunities which otherwise would be captured by technical strategies.
Shaffer Asset Management's analyses are based generally on technical
systems that attempt to detect trends in price movements. All successful
speculative commodity trading depends upon establishing a position and then
maintaining that position while the market moves in favor of the commodity
trader. The trading system of Shaffer Asset Management, like all technical
systems, seeks to establish such positions and to exit the market when the
favorable trend either reverses or does not materialize. No such system will be
successful if the price trend is adverse to the direction detected by each of
the systems or if the market is moving in an erratic and non-trending manner.
Since turning points and reverses in price movements in the commodity futures
markets are generally not predictable and since commodity futures price trends
may be short lived, market position entry point signals may be given by the
systems at or near the end of a price trend. If the market reverses itself
shortly after the trader establishes a position, sizeable losses may be incurred
before the exit price signal is reached. The possibility exists that a brief
market reversal, which is only a temporary deviation from a long-term price
trend, may trigger an exit signal that would prevent the trader from realizing
any profits from the long-term price movement. Additionally, such an interim
reversal of price trend could conceivably generate a system entry signal to
establish an opposite market position, which means that the system would be
completely misinterpreting the trend of the market. System misinterpretations of
brief changes and reversals in market price trends may cause the Fund to incur
trading losses and to pay brokerage commissions on numerous trades that, in
retrospect, may appear to have been unnecessary.
Subject to the limitations on commodities to be traded and the Fund's
trading policies, Shaffer Asset Management may refine or alter its trading
methods from time to time, including, without limitation, trading systems,
commodity futures contracts and markets traded, and trading principles, without
approval by the limited partners of the Fund, if Shaffer Asset Management
determines that such change in methods is in the best interests of the Fund.
No assurance is given that trades of the Fund implemented in reliance upon
Shaffer Asset Management's trading methods will result in profits to the Fund or
that such methods will in fact accomplish their intended objectives or reduce
the Fund's risk of loss.
PAST PERFORMANCE OF THE ADVISOR
The Table, below, sets forth the unaudited composite trading results of
all accounts managed by Shaffer Asset Management from March 1999 to September
30, 2001. The number of accounts managed by the Advisor totaled 1, 11, 17 and 18
in March 1999 and as at December 31, 1999, December 31, 2000 and September 30,
2001, respectively. Through September 30, 2001, 10 of such accounts showed net
gains and 8 showed a net loss. The profit made by these accounts showing net
gains amounted to approximately $192,855, and the losses incurred by those
account showing net losses amounted to approximately $49,010. As of September
30, 2001, 9 accounts had been closed with a net gain of approximately $77,833.
Applicable CFTC regulations require disclosure of the "rate of return" for
each month of all accounts managed by Shaffer Asset Management or its
principal(s). The method of calculation mandated by the CFTC is necessarily
subject to potential distortions due to the fact that such method does not
account for additions and withdrawals that may occur during the month for which
the calculation is made. It should be noted that there are other methods of
calculating rate of return and, because of the differences among such methods,
the percentage results may vary. The rates of return indicated should not be
taken as representative of any rate actually earned by any of the accounts
included in the Table or as being indicative of any return the Fund may earn in
the future.
The information included in the Table has not been audited but, in the
opinion of Shaffer Asset Management, such information fairly presents the
performance of the accounts managed by Shaffer Asset Management for the periods
shown.
The results set forth in the Table are not indicative of the results that
may be achieved by Shaffer Asset Management since past results are not
determinative of future results. No representation is being made that the Fund
31
will or is likely to achieve profits similar to those shown. The composite
results set forth in the Table are based upon individual accounts and commodity
pool accounts managed by Shaffer Asset Management during the periods shown. The
Table does not reflect the actual performance of any one account. Accordingly,
investors in specific accounts included in the composite figures may have had
more or less favorable results than the Table indicates. All accounts advised by
Shaffer Asset Management do not in all instances have parallel performance due
to different times of market entry and varying amounts of capital. For example,
larger account size may have effects on particular trading decisions, such as
the relative size of positions taken, degree of diversification and particular
commodity interests traded. In addition, the performance of each account
included in the composite figures has varied depending upon the size of the
investment, the date the account started trading and the length of time the
account was open. Such results are presented on a composite basis rather than
account-by-account, and each account's experience may differ from the composite
figures shown. The fees and brokerage commissions charged to the Fund may differ
from the fees and brokerage commissions actually charged to these accounts, and
the commission rate charged to the Fund may also change in the future. In
addition, because Shaffer Asset Management has modified its trading methods in
the past and will continue to modify its trading methods in the future, the
results shown in the Table do not necessarily reflect the trading methods which
will be used by Shaffer Asset Management on behalf of the Fund. It should also
be noted that the aggregate value of the Fund's account will constitute a
significant increase in the assets under Shaffer Asset Management's control if
all or a substantial number of the Units being offered are sold. Apart from the
effects of a large account size on particular trading decisions, such as the
time of entry of orders, the relative size of positions taken, degree of
diversification and particular commodities traded, the size of the Fund's assets
may affect generally the design and execution of Shaffer Asset Management's
trading methods. Past results are no guarantee of future results, and no
representation is made that the Fund will, or is likely to, achieve results
similar to those shown.
Please refer to "Past Performance of the Advisor" in the statement of
additional information that accompanies this prospectus for additional
performance information and historical performance data for accounts
individually managed by the Advisor.
THE DATA SET FORTH BELOW IS NOT INDICATIVE OF AND HAS NO BEARING ON ANY
RESULTS WHICH MAY BE ATTAINED BY THE FUND OR SHAFFER ASSET MANAGEMENT IN THE
FUTURE. SHAFFER ASSET MANAGEMENT'S SYSTEM HAS EVOLVED OVER THE YEARS BASED ON
ACCUMULATED EXPERIENCE AND FURTHER TESTING OF DATA. AN ACCOUNT TRADED PURSUANT
TO SHAFFER ASSET MANAGEMENT'S CURRENT TRADING SYSTEM WOULD NOT HAVE EXPERIENCED
THE SAME RESULTS REFLECTED IN THE TABLE DUE TO DIFFERENCES IN BROKERAGE
COMMISSIONS AND MANAGEMENT AND INCENTIVE FEES AND CHANGES IN SHAFFER ASSET
MANAGEMENT'S TRADING SYSTEM, INCLUDING THE SIZE OF POSITIONS TAKEN IN RELATION
TO ACCOUNT SIZE AND THE DEGREE OF DIVERSIFICATION IN TERMS OF THE NUMBER OF
COMMODITY INTERESTS TRADED AT A PARTICULAR TIME AND DIFFERENCES IN COMMODITY
INTERESTS TRADED.
32
CAPSULE PERFORMANCE OF INDIVIDUAL ACCOUNTS
MANAGED BY THE GENERAL PARTNER / ADVISOR UNDER THE
SHAFFER ASSET MANAGEMENT, INC.
INDIVIDUALLY MANAGED ACCOUNT PROGRAM
Inception of Trading:......................... March 1999
Aggregate Deposits:........................... $2,216,931
Current Net Asset Value:...................... $2,361,176
Worst Monthly Percentage Drawdown
(for any single account) (1):................. 7/2001; 25.29%
Worst Peak to Valley Drawdown
(for any single account) (1):................. 4/2001 -- 8/2001; 29.72%
Worst Percentage Rate of Return(2)
Monthly Worst Peak- (computed on a compounded
Percentage to-Valley monthly basis)
Drawdown Drawdown ------------------------------
Inception Aggregate Current (for any (for any Year to
Name Type of Trading Deposits Total NAV single account)(1) single account)(1) 1999 2000 Date
-------- ---- ---------- -------- --------- ------------------ ------------------ ---- ---- --------
Individual 1 3/99 $2,217,000 $2,361,000 25.29% 29.22% 58.59% 22.46% (14.74)%
Managed 7/01 4/01-8/01 (9 months)
Accounts
---------------------------------------
Key to type:
1 = Individually managed accounts
Percentage Rate of Return(2)
(computed on a compounded
monthly basis)
---------------------------
Month Year to Date 2000 1999
----- ------------ ---- ----
January........................................... 0.25 5.92
February.......................................... 1.09 3.54
March............................................. 5.62 (6.47) 10.31
April............................................. 1.81 4.45 12.77
May............................................... (14.50) 3.21 0.85
June.............................................. 5.14 4.30 (0.19)
July.............................................. (13.42) (2.64) 11.59
August............................................ (2.28) 8.64 (10.62)
September......................................... 2.86 (2.97) 22.50
October........................................... (14.43) (10.90)
November.......................................... (0.98) 19.21
December.......................................... 22.10 2.41
Year.............................................. (14.74) 22.46 58.59
---------------------------------------
(1) "Drawdown" means losses experienced by any account over a specified period
expressed as a percentage of the account's net asset value at the
beginning of that period. The "Worst Monthly Percentage Drawdown" is the
greatest cumulative percentage decline in month-ending net asset value due
to losses sustained by an individual account. The "Worst Peak-to-Valley
Drawdown" is the greatest cumulative percentage decline in month-ending
net asset value due to losses sustained by an individual account during
any period in which the initial month-ending net asset value is not
equaled or exceeded by a subsequent month-ending net asset value.
(2) The "Rate of Return" for a period is calculated by dividing the net profit
or loss of the fully-funded accounts in the program on a composite basis
for such period by the equity of the program at the beginning of such
period, except in periods of significant additions or withdrawals to the
accounts in the composite. In such instances, the composite is adjusted to
exclude amounts with significant additions or withdrawals which would
materially distort the rate of return.
33
COMMODITY BROKERAGE ARRANGEMENTS
GENERAL
Under the Fund's limited partnership agreement, Shaffer Asset Management
is responsible for selecting the Fund's commodity broker(s) and has selected ADM
Investor Services, Inc. to act as the Fund's initial commodity broker. In this
regard, the Fund has entered into a non-exclusive brokerage agreement with ADM
that is terminable by the Fund or ADM Investor Services on sixty days' prior
written notice. From time to time, Shaffer Asset Management may engage another
or one or more additional firms to act as the Fund's commodity broker, although
it has no current intention to do so.
DESCRIPTION OF THE COMMODITY BROKER
ADM Investor Services is a Delaware corporation and wholly owned
subsidiary of Archer Daniels Midland Company. Through its branch office and
introducing broker network, ADM Investor Services is engaged primarily in
providing individual and institutional clients with services in connection with
the purchase and sale of commodity interests throughout the United States and in
many foreign countries. ADM Investor Services is a clearing member of the
Chicago Board of Trade; the Chicago Merchantile Exchange; the New York
Merchantile Exchange and the Commodity Exchange; the New York Board of Trade;
the Minneapolis Grain Exchange; and the London International Financial Futures
Exchange.
ADM Investor Services is registered with the CFTC as a futures commission
merchant. Such registration does not imply, however, that the CFTC has approved
the accuracy of the information contained in ADM Investor Services' application
for registration or the qualifications of ADM Investor Services to act as a
futures commission merchant, or that the CFTC supervises the business activities
engaged in by ADM Investor Services. ADM Investor Services is also a member of
the NFA.
ADM Investor Services' principal offices are located at 1600A Board of
Trade Building, 141 West Jackson Boulevard, Chicago, Illinois 60604, and its
telephone number is (312) 435-7000.
CIVIL, CRIMINAL AND ADMINISTRATIVE ACTIONS
CFTC NOTICE OF INTENT TO REVOKE, SUSPEND OR RESTRICT REGISTRATION. On May
16, 1997, the CFTC filed a notice of intent to revoke, suspend or restrict the
registration of ADM Investor Services as a futures commission merchant based
upon a 1996 conviction of ADM Investor Services' parent company, Archer Daniels
Midland Company ("Archer Daniels Midland"), for violations of the Sherman
Antitrust Act. Specifically, Archer Daniels Midland pled guilty on October 15,
1996 to charges that it participated in a conspiracy to fix the prices of lysine
and citric acid. As part of its guilty plea, Archer Daniel Midland agreed to pay
fines totaling $100 million.
In connection with the CFTC's proceeding against ADM Investor Services,
ADM Investor Services accepted an offer of settlement that placed various
restrictions on ADM Investor Services' registration as a futures commission
merchant. In particular, ADM Investor Services is prohibited from (i) employing
any person who was directly or indirectly involved in the conduct of Archer
Daniels Midland in the alleged conspiracy, and (ii) employing any person who was
employed by Archer Daniels Midland for a period of four years, except for the
current president of ADM Investor Services. In addition, ADM Investor Services
is required to conduct a weekly review of all trading activities conducted by or
on behalf of Archer Daniels Midland for consistency with the CE Act and CFTC
regulations. ADM Investor Services has advised Shaffer Asset Management that (i)
ADM Investor Services was not cited by the CFTC for any alleged or actual
violations of the CE Act or rules and regulations promulgated by the CFTC
thereunder, (ii) the CFTC's action against ADM Investor Services was based
entirely on the fact that ADM Investor Services was a subsidiary of Archer
Daniels Midland, and (iii) the proceeding has not had, and is not expected to
have, a material adverse effect on the activities of ADM Investor Services as a
futures commission merchant.
OTHER ACTIONS. ADM Investor Services is currently a defendant in certain
lawsuits incidental to its commodities business. ADM Investor Services has
advised Shaffer Asset Management that such actions have not had, and are not
expected to have, a material adverse effect on the activities of ADM Investor
Services as a futures commission merchant.
Other than the foregoing actions, there have been no material civil,
criminal or administrative actions pending, on appeal or concluded against ADM
Investor Services or any of its principals during the past five years.
34
DESCRIPTION OF BROKERAGE ARRANGEMENTS
Upon the successful completion of the initial offering, the Fund will open
a commodity trading account with ADM Investor Services pursuant to a brokerage
agreement entered into with ADM Investor Services. Under that agreement, all
assets and credits carried for the Fund will be subject to a general lien to
discharge its trading obligations; the margins required to initiate or maintain
open positions may be increased or decreased at any time at the discretion of
ADM Investor Services; open positions may be liquidated or new positions may be
rejected if, in the discretion of ADM Investor Services, the margin is deemed
insufficient or is required by the emergency rules of any exchange; and reports
of trading become conclusive if no written objection thereto is made within
stated times. The brokerage agreement also provides that ADM Investor Services
and its stockholders, directors, officers, employees, and affiliates shall not
be liable to the Fund, its partners, or any of their successors or assigns
except for acts or omissions taken or omitted to be taken by them in their
capacities as brokers for the Fund if such acts or omissions involved gross
negligence or willful, wanton or reckless misconduct. In addition, the brokerage
agreement also provides that the Fund shall indemnify ADM Investor Services and
its stockholders, directors, officers, employees and affiliates against any or
all losses, liabilities, costs, damages, expenses (including, without
limitation, attorneys' and accountants' fees and disbursements), judgments and
amounts paid in settlement (collectively, "Losses") incurred or suffered by any
of them in connection with or relating to their performance of services to the
Fund unless such Losses resulted from the gross negligence or willful, wanton or
reckless misconduct of ADM Investor Services or its stockholders, directors,
officers, employees or affiliates. ADM Investor Services will provide various
services to the Fund with respect to the execution, clearance and confirmation
of transactions on behalf of the Fund, but will receive direction and
instructions in this regard from Shaffer Asset Management. The brokerage
agreement provides that, under no circumstances shall ADM Investor Services
accept any responsibility for verifying that any of such instructions are in
conformance with Shaffer Asset Management's authority and ADM Investor Services
will not undertake to monitor the actions of Shaffer Asset Management in this
regard to ensure that such actions are not contrary to the provisions of this
prospectus, the accompanying statement of additional information or any related
agreements or any subsequent amendments thereto. No indemnification of Shaffer
Asset Management or its affiliates is permitted for Losses resulting from a
violation by Shaffer Asset Management or any of its affiliates of the Securities
Act of 1933, as amended, or of any applicable state securities laws in
connection with the Registration Statement or the sale of Units. The Fund (or
the limited partners of the Fund) or the other parties thereto may terminate the
brokerage agreements and close the Fund's commodity accounts at any time on
sixty days prior notice.
The Fund will initially pay brokerage commissions to ADM Investor Services
at the rate of $17 per "round-turn" for trades executed on domestic exchanges.
Based upon the rate of the brokerage commissions to be charged the Fund and the
anticipated trading patterns of Shaffer Asset Management, the Fund may pay
brokerage commissions totaling 1% or more of its average annual Net Asset Value.
There is no agreement to limit such commission charges to any particular level.
ADM Investor Services will maintain the Fund's assets in segregated accounts as
required by CFTC regulations.
CFTC regulations permit brokers to retain interest earned on customer
funds. Many brokers permit accounts above a certain size to have a portion of
their funds held in the form of interest-bearing obligations such as United
States Treasury Bills, thereby enabling such accounts to earn interest on assets
being used for trading. This advantage would not generally be extended to
individuals unless substantially more than the minimum investment required by
the Fund was committed to commodity trading. The Fund's assets, both those that
are deposited to meet margin requirements and those that are held in reserve,
may be held in cash, United States Treasury Bills or in any other form
permissible under applicable laws and regulations. Shaffer Asset Management
currently intends to cause the Fund to hold not less than 90% of such assets in
United States Treasury Bills; interest, if any, earned on such assets,
therefore, will inure to the benefit of the Fund.
Shaffer Asset Management will review the terms of the brokerage agreement
at least annually and determine to the extent possible the brokerage commission
rates charged by other brokers to other public commodity funds whose size and
management structure is comparable to that of the Fund as a factor in
determining that the commission rates paid by the Fund continue to be fair and
reasonable in light of the services the Fund receives from ADM Investor Services
and its affiliates including, among others, execution services. Investors should
note that, notwithstanding the foregoing, the Fund may pay brokerage commission
rates exceeding rates which are otherwise available. Commission rates proposed
for the Fund, as well as those currently charged to most other public commodity
pools by other commodity brokers (to the best of Shaffer Asset Management's
knowledge), are ultimately based upon the scheduled retail commission rates
charged by most major commodity brokerage houses to regular public customers.
While the rates charged to the Fund ostensibly represent a discount from those
scheduled rates, the rates charged to the Fund, and
35
other public commodity pools, may exceed the lowest rates negotiable with ADM
Investor Services or certain other brokers by an account as large as the Fund's
account. See "Conflicts of Interest and Fiduciary Responsibility of the General
Partner".
PLAN OF DISTRIBUTION
THE OFFERING
The Units will be offered for sale on a best efforts basis by the Fund
through Berthel Fisher & Company Financial Services, Inc., an Iowa corporation.
Berthel Fisher & Company may select other member firms of the NASD and certain
foreign dealers that agree in making sales of Units to abide by the NASD Rules
of Fair Practice to participate in this offering. This offering may be
terminated at any time by agreement of Shaffer Asset Management and Berthel
Fisher & Company.
The initial offering of Units will be made at a purchase price of $950 per
Unit, plus an initial sales charge of $50 per Unit, for a period of 60 days from
the date of this prospectus, subject to the right of Shaffer Asset Management to
extend this offering for up to an additional 60 days. At the end of the initial
offering period, if the minimum of 1,000 Units has been sold and accepted by
Shaffer Asset Management, the Fund may commence trading. Subsequent to the
initial offering period, the Fund may continue to sell unsold Units, if any, as
of the last business day of each calendar month. The purchase price for such
Units will be the then current Net Asset Value per Unit as of the close of
business on the last business day of each calendar month, plus a sales charge of
5% of the Net Asset Value per Unit for each Unit purchased. Any subscription may
be rejected by Shaffer Asset Management in whole or in part for any reason, but
no subscription may be revoked by the subscriber. Shaffer Asset Management is
required to make a capital contribution to the Fund equal to at least the
greater of (i) 1% of the aggregate amount of capital contributions made to the
Fund by the partners, including Shaffer Asset Management's capital contribution,
or (ii) $25,000. In connection therewith and otherwise, Shaffer Asset Management
and its principals are permitted to purchase Units, and all such Units so
purchased shall be included in determining the number of Units sold and accepted
by Shaffer Asset Management hereunder.
The minimum investment in the Fund by any one investor is $10,000
(initially 10 Units), except that in the case of investments by pension,
profit-sharing or other employee benefit plan qualified under Section 401 of the
Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified
Employee Pension -- IRA plans and retirement and deferred compensation and
annuity plans and trusts used to fund those plans, including but not limited to,
those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code,
the minimum investment is $5,000 (initially 5 Units). Additional investments in
the Fund may be made in amounts of not less than $1,000. Purchases by investors
and their spouses and by entities, including retirement plan trusts, that are
legally or beneficially owned in their entirety by investors and/or their
spouses shall be aggregated for purposes of meeting the minimum purchase
requirements. Fractional Units may be sold by the Fund.
If at least 1,000 Units are sold and accepted by Shaffer Asset Management
during the initial offering period, approximately 20% of all sales charges shall
be paid to Shaffer Asset Management to reimburse Shaffer Asset Management for
the payment by Shaffer Asset Management of the Fund's organizational, initial
offering and operating expenses payable by Shaffer Asset Management and
approximately 80% of all sales charges shall be paid as syndication fees to
Berthel Fisher & Company and as selling commissions to the selected dealers.
Berthel Fisher & Company and the selected dealers may in turn pay a portion of
such syndication fees and selling commissions to their respective employees who
are NASD registered representatives for each Unit sold by them. All expenses of
Berthel Fisher & Company incurred in performing its obligations related to the
offering will be reimbursed by the Fund (or by Shaffer Asset Management on its
behalf). In no event may compensation to Berthel Fisher & Company and the
selected dealers exceed 10% of the gross proceeds of this offering (excluding,
for the purposes of such calculations, the reimbursement to Berthel Fisher &
Company of actual out-of-pocket expenses).
In addition to the syndication fees and selling commissions described
above, the Fund will pay a monthly continuing services fee to Berthel Fisher &
Company and, through Berthel Fisher & Company, certain selected dealers who are
appropriately registered with the CFTC and/or the NFA and their respective
registered representatives equal to, in the aggregate, 1/12 of 1.25% of the Net
Asset Value per Unit of the Fund's assets under management at month's end
(without reduction for distributions or redemptions effected as of such date or
management fees payable or incentive allocations allocable as of such date) with
respect to Units purchased within the prior twelve-month period and 1/12 of 4%
of the Net Asset Value per Unit of the Fund's assets under management at month's
end (without reduction for distributions or redemptions effected as of such date
or management fees payable or incentive allocations allocable as
36
of such date) with respect to Units purchased more than twelve months prior
thereto. Such continuing services fee shall be paid to Berthel Fisher & Company
and such selected dealers and their respective registered representatives in
return for their continuing services to the Fund and the limited partners of the
Fund that were solicited by them. Such services include, without limitation,
keeping the limited partners of the Fund apprised of developments affecting the
Fund, responding to specific inquiries received from limited partners relating
to the Fund and the commodity markets, communicating current valuations of the
Fund's Net Asset Value per Unit to the limited partners, assisting in
redemptions, transfers and distributions, assisting limited partners in
interpreting the Fund's monthly and annual reports, financial statements and the
tax information provided to limited partners, and providing such other services
as the limited partners from time to time may reasonably request. The continuing
services fee may be increased at any time and from time to time by Shaffer Asset
Management upon sixty days' prior written notice to the limited partners.
Shaffer Asset Management is responsible for all of the Fund's
organizational and initial offering expenses, exclusive of selling commissions,
that are currently estimated at $200,000. Shaffer Asset Management is also
required to reimburse Berthel Fisher & Company for out-of-pocket expenses
incurred by it in connection with this offering. Although the Fund will not be
obligated to reimburse Shaffer Asset Management for any of such expenses,
approximately 20% of all sales charges imposed by the Fund on Units sold and
100% of all early redemption fees charged by the Fund upon redemptions of Units
will be paid to Shaffer Asset Management to reimburse Shaffer Asset Management
for the payment by Shaffer Asset Management of the Fund's organizational and
initial offering expenses and the Fund's operating expenses that are payable by
Shaffer Asset Management. See "Summary -- Fees and Expenses Payable by the
General Partner", "Fees, Compensation and Expenses" and "Redemptions".
Berthel Fisher & Company is, and Shaffer Asset Management may be deemed to
be, an "underwriter" in connection with this offering within the meaning of the
Securities Act of 1933 and the rules and regulations of the SEC promulgated
thereunder.
The Fund has agreed to indemnify Berthel Fisher & Company and the selected
dealers against certain liabilities that they may incur in connection with the
offering and sale of the Units, including liabilities under the Securities Act
of 1933 (in the case of the selected dealers only) and the CE Act. The Fund will
not indemnify Berthel Fisher & Company for any loss, liability, damage, cost or
expense (including, without limitation, attorneys' and accountants' fees and
disbursements) resulting from a violation by Shaffer Asset Management or its
affiliates of the Securities Act of 1933 or any state securities laws in
connection with the Registration Statement or the sale of the Units.
The Fund has been advised by Berthel Fisher & Company that neither Berthel
Fisher & Company nor any of the selected dealers engaged to sell the Units will
execute any transaction in the Units in any trading account over which it has
discretion, without the prior written approval of the holder of such account.
Following acceptance by the Fund of a subscription, Shaffer Asset
Management will provide the subscriber with written confirmation of the
acceptance of the Subscriber's purchase of the Units.
SUBSCRIPTIONS / INVESTMENT REQUIREMENTS / INVESTOR SUITABILITY STANDARDS
In order to subscribe for Units, a subscriber must (i) complete and
execute a Subscription Agreement / Power of Attorney that is attached as Exhibit
C to the statement of additional information that accompanies this prospectus,
and (ii) deliver or mail such documents to the Fund at the address shown,
together with a check, made out in accordance with the instructions of the
selected dealer, for the full purchase price of the Units to be purchased,
together with any and all applicable sales charges. If the subscription is
rejected by Shaffer Asset Management, in whole or in part (which is in the sole
discretion of Shaffer Asset Management), the subscription funds or the rejected
portion thereof will be returned to the subscriber without interest. Shaffer
Asset Management will determine whether to accept or reject a subscription as
promptly as possible following its receipt. All subscriptions, once made, are
irrevocable by the subscriber but may be rejected in whole or in part by Shaffer
Asset Management.
Each subscriber must represent and warrant in the Subscription Agreement /
Power of Attorney, a copy of which is attached as Exhibit C to the statement of
additional information that accompanies this prospectus, that
o he or she has either (A) a net worth (exclusive of home, furnishings
and automobiles) of at least $225,000, or (B) a net worth (similarly
calculated) of at least $60,000 and an annual gross income of at least
$60,000, and his or her investment in the Fund will not constitute more
than 10% of his or her net worth, exclusive of home, furnishings and
automobiles; and
o If he or she is a resident of Iowa, Kansas, or Missouri, he or she has
(i) a net worth of at least $350,000 or (ii) a net worth of at least
$100,000 and $100,000 taxable income
37
o If he or she is a resident of Nebraska, he or she has (i) a net worth,
or joint net worth with his or her spouse, that exceeds $1,000,000 or
(ii) had income in excess of $200,000 in each of the two most recent
years or a joint income with his or her spouse in excess of $300,000,
and he or she has a reasonable expectation of reaching this same income
level in the current year.
o he or she has reviewed this prospectus and the accompanying statement
of additional information and is aware of and can afford the risks of
an investment in the Fund, including the risk of losing his or her
entire investment.
THE ADMINISTRATION OF THE SECURITIES LAWS OF CERTAIN STATES HAVE IMPOSED
ADDITIONAL SUITABILITY REQUIREMENTS ON THE RESIDENTS OF SUCH STATES. THESE
STANDARDS, HOWEVER, ARE ONLY REGULATORY MINIMUMS. EVEN IF A SUBSCRIBER MEETS THE
SUITABILITY REQUIREMENTS DESCRIBED ABOVE, AN INVESTMENT IN THE UNITS MAY NOT BE
SUITABLE FOR HIM OR HER. ONLY THE SUBSCRIBER CAN MAKE THAT DETERMINATION. SEE
"SUBSCRIPTION REQUIREMENTS" ATTACHED AS EXHIBIT B TO THE STATEMENT OF ADDITIONAL
INFORMATION THAT ACCOMPANIES THIS PROSPECTUS.
In the case of a subscription on behalf of a fiduciary account, the
subscription requirements must be met by the account beneficiary. However, in a
case where a donor or grantee directly or indirectly supplies the funds to
purchase the Units, and the donor or grantee acts as the fiduciary for the
account, then the subscription requirements may be met by the donor or grantee.
It is the responsibility of Shaffer Asset Management, Berthel Fisher &
Company and each person selling Units to make every reasonable effort to
determine that a purchase of Units is a suitable and appropriate investment for
each subscriber.
During the initial offering period, all monies remitted by subscribers
will be deposited in an escrow account with The Chase Manhattan Bank, 450 West
33rd Street, 15th floor, New York, NY 10001. In the event that 1,000 or more
Units are sold to the public and accepted by Shaffer Asset Management during the
initial offering period, all interest earned on the proceeds of subscriptions
during the initial offering period will not be retained by the Fund but will be
distributed to subscribers on a pro rata basis (taking into account both the
time and the amount of the deposit) following the conclusion of the initial
offering period. If 1,000 Units are not so sold and accepted, the amount of each
subscription together with any interest earned (allocated on the same pro rata
basis) will be distributed to the subscribers within fifteen days after the end
of the initial offering period.
38
INVESTMENTS BY ERISA ACCOUNTS
GENERAL
This section sets forth certain consequences under ERISA and the Internal
Revenue Code which a fiduciary of an "employee benefit plan" as defined in and
subject to ERISA or of a "plan" as defined in and subject to Section 4975 of the
Internal Revenue Code who has investment discretion should consider before
deciding to invest the plan's assets in the Fund (such "employee benefit plans"
and "plans" being referred to herein as "Plans," and such fiduciaries with
investment discretion being referred to herein as "Plan Fiduciaries").
Violations of the rules under ERISA and/or Section 4975 of the Internal
Revenue Code by fiduciaries can result in various types of liabilities,
including civil penalties and excise taxes. Because of the complexity of these
rules, plan fiduciaries are strongly encouraged to consult with their legal
advisors prior to causing a plan to invest in the Fund.
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 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 the equity interest purchased is a "publicly-offered
security" (the "Publicly-Offered Security Exception"), or if investment by
benefit plan investors is not "significant". If the underlying assets of a
partnership are considered to be assets of any Plan for purposes of ERISA or
Section 4975 of the Internal Revenue Code, the operations of such partnership
would be subject to and, in some cases, limited by, the provisions of ERISA and
Section 4975 of the Code.
The Publicly-Offered Security Exception applies if the equity is a
security that is:
(1) "freely transferable" determined based on the applicable facts and
circumstances;
(2) part of a class of securities that is "widely held" -- meaning that
the class of securities is owned by 100 or more investorsindependent
of the issuer and of each other; and
(3) either (a) part of a class of securities registered under Section
12(b) or 12(g) of the Securities Exchange Act of 1934,as amended, or
(b) sold to the Plan as part of a public offering pursuant to an
effective registrationstatement under the Securities Act of 1933, and
the class of which such security is a part is registered under the
Securities Exchange Act of 1934, within 120 days, or such later time
as may be allowed by the SEC, after the end of the fiscal year of the
issuer in which the offering of such security occurred.
It appears that all of the conditions described above will be satisfied
with respect to the Units and, therefore, the Units should constitute "publicly
offered securities". The underlying assets of the Fund should therefore not be
considered to constitute assets of any Plan that purchases Units.
If, however, the Fund does NOT qualify for the Publicly Offered Security
Exception, Shaffer Asset Management may limit investments by benefit plan
investors, in the aggregate, to less than 25% of the total capital of each class
of equity interest of the Fund not owned by its affiliates (the "25%
Limitation"). If Shaffer Asset Management applies the 25% Limitation, investment
by benefit plan investors will not be considered "significant" under the ERISA
Regulation, and the underlying assets of the Fund will not be considered to
constitute assets of any Plan that purchases Units. This 25% Limitation may
restrict additional investments by benefit plan investors and cause Shaffer
Asset Management to require that some investors withdraw from the Fund in the
event other investors withdraw. If, in the opinion of Shaffer Asset Management,
a rejection of subscriptions or mandatory withdrawals are necessary to meet the
25% Limitation, Shaffer Asset Management will effect the rejections or
withdrawals in a manner determined in the sole discretion of Shaffer Asset
Management. However, Shaffer Asset Management will use its best efforts to
effect withdrawals on a pro rata basis among all benefit plan investors.
39
INELIGIBLE PURCHASERS
In general, Units may not be purchased with the assets of a Plan if
Shaffer Asset Management, Berthel Fisher & Company, ADM Investor Services or any
of their respective employees and/or affiliates or any of its affiliates or
employees either:
(1) exercise any discretionary authority or discretionary control
respecting management of the Plan;
(2) exercise any authority or control respecting management or
disposition of the assets of the Plan;
(3) render investment advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other property of the Plan;
(4) have any authority or responsibility to render investment advice with
respect to any moneys or other property of the Plan; or
(5) have any discretionary authority or discretionary responsibility in
the administration of the Plan.
40
DISTRIBUTIONS AND REDEMPTIONS
Distributions of profits, if any, will be made at Shaffer Asset
Management's discretion. Investors should be aware, however, that Shaffer Asset
Management does not intend to make any distributions of any profits. See "Risk
Factors -- Partners' Tax Liability May Exceed Distributions", "Conflicts of
Interest and Fiduciary Responsibility of the General Partner", "Summary of the
Limited Partnership Agreement -- Profits and Losses; -- Distributions" and
"Federal Income Tax Consequences".
A limited partner of the Fund may cause some or all of his Units to be
redeemed by the Fund as of the last business day of any month at the then
current Net Asset Value per Unit (less the early redemption fee described in the
following paragraph for certain redemptions effected during the first twelve
full calendar months after their purchase) on ten days' prior written notice to
Shaffer Asset Management, provided, however, that no redemption which applies to
less than all of a partner's interest in the Fund can result in the partner's
capital account being reduced below $10,000 ($5,000 in the case of investments
by pension, profit-sharing or other employee benefit plan qualified under
Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs,
SIMPLE IRAs, Simplified Employee Pension -- IRA plans and retirement and
deferred compensation and annuity plans and trusts used to fund those plans,
including but not limited to, those defined in Sections 401(a), 403(b) or 457 of
the Internal Revenue Code) after the redemption is effected. Requests for
redemption are irrevocable. The Net Asset Value per Unit for purposes of
redemption equals the Net Asset Value of the Fund allocated to the capital
account of the Fund represented by Units divided by the number of Units
outstanding on the date of redemption. Units are redeemed at their Net Asset
Value determined as of the day on which they are redeemed, not as of the date on
which a request for redemption is made or received. Accordingly, the redemption
price actually received for a Unit may differ significantly from that which
would have been received at the time when the decision to redeem was made.
The Fund will charge an early redemption fee equal to 4% of the Net Asset
Value per Unit of the Units redeemed as of or before the end of the third full
calendar month after their purchase. This fee will decrease by one percentage
point for every three full calendar months thereafter. Accordingly, Units
redeemed as of the end of or during the tenth, eleventh and twelfth full
calendar months after their purchase will be subject to a redemption fee equal
to 1% of the Net Asset Value per Unit of the Unit(s) redeemed. Thereafter, no
redemption fee will be charged. In addition and in order to assure each of the
Fund's limited partners the availability of funds to pay taxes on each year's
profits, if any, the redemption fee will be waived on redemptions of Units to
the extent, if any, distributions in the first quarter of a calendar year are
less than 35% of the profits reportable to a limited partner for the prior year.
The Fund will pay all early redemption fees to Shaffer Asset Management to
reimburse Shaffer Asset Management for the payment by Shaffer Asset Management
of the Fund's organizational and initial offering expenses and the Fund's
operating expenses that are payable by Shaffer Asset Management. Investors
should note that the early redemption fees will reduce the redemption value of a
Unit significantly below its purchase price unless the Fund achieves significant
net New Trading Profits from its trading activities.
All requests for redemption in proper form will be honored and payment
will be made within ten business days of the effective date of redemption,
except as described below. The right to redeem is contingent on the Fund having
assets sufficient to discharge its liabilities on the date of redemption. It is
also contingent on receipt by Shaffer Asset Management of a request for
redemption in the form attached as Exhibit D to the statement of additional
information that accompanies this prospectus or any other form approved by
Shaffer Asset Management at least ten days (or such shorter period as may be
acceptable to Shaffer Asset Management) prior to the date on which redemption is
requested. Under special circumstances, including but not limited to default or
delay in payments due to the Fund from banks or other persons, the Fund may in
turn delay payment to partners requesting redemption of Units of the
proportionate part of the Net Asset Value per Unit represented by the sums which
are the subject of such default or delay.
A limited partner of the Fund will not be liable by operation of law for
any sum in excess of his or her capital contribution and profits, if any
(including any distributions and amounts received upon redemption of Units and
interest thereon), necessary to discharge the Fund's liabilities to all
creditors who extended credit or whose claims arose before the return of the
cash value of the limited partner's interest. The Fund will not make such a
claim with respect to amounts distributed to limited partners and amounts paid
upon redemption of Units unless the assets of the Fund are insufficient to
discharge the Fund's liabilities to its creditors.
41
TRADING POLICIES
The objective of the Fund is to achieve maximum capital appreciation of
its assets through speculative trading in commodity futures contracts and other
commodity interests in the United States commodity futures markets. No assurance
can be given that the Fund's objectives can be met. The Fund will attempt to
accomplish its objectives by following the trading policies set forth below:
(1) Fund monies will be invested in futures contracts only of commodities
which are traded in sufficient volume to permit, in the opinion of
the Fund's advisor(s), ease of taking and liquidating positions.
(2) The Fund will not allow any advisor to acquire, on behalf of the
Fund, additional positions in any commodity if such additional
positions would result in a net long or short position for any
individual commodity requiring as margin more than 25% of the Fund's
Net Asset Value at the time.
(3) The Fund estimates that between 10% and 40% of the Fund's assets will
normally be committed as margin, although such percentage may be
outside such range from time to time. As a result, the Fund will not
generally be as highly leveraged as permitted for investments by an
individual. Margin requirements will be met with cash, through
deposits of United States Treasury Bills or in such other manner as
may be permitted under applicable laws and regulations.
(4) The Fund will ordinarily avoid entering into an open position during
a delivery month, except with respect to commodity futures contracts
on currencies.
(5) The Fund will not employ the trading technique commonly known as
"pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchase or sale of additional
positions IN THE SAME OR A RELATED COMMODITY. However, the Fund's
advisor(s) may take into account the Fund's open trade equity on
existing positions in determining generally whether to acquire
additional commodity futures contracts on behalf of the Fund in light
of the policy described in paragraph 3, above.
(6) The Fund will not utilize borrowings, except to finance the Fund's
taking delivery of cash commodities. Although the Fund has no current
intention to make or accept delivery of cash commodities, the Fund
may from time to time make or accept delivery of a cash commodity.
Normally, such deliveries will be disposed of promptly by
re-tendering to the appropriate clearing house the warehouse receipt
representing the delivery.
(7) Although the Fund has no current intention to employ trading
techniques such as spreads or straddles, the Fund may from time to
time employ such trading techniques. The term "spread" or "straddle"
describes a commodity futures trading transaction involving the
simultaneous buying and selling of commodity futures contracts
dealing with the same commodity but involving different delivery
dates or different markets, and in which the trader expects to earn
profits from a widening or narrowing movement of the prices of the
different commodity futures contracts.
(8) The Fund, under extraordinary circumstances, may establish offsetting
positions in foreign currencies through banks or in the inter-bank
market to reduce risk exposure due to lack of liquidity on the
commodity exchanges and to protect the Fund's capital.
(9) The Fund will not permit rebates or give-ups to be received by
Shaffer Asset Management or any advisor.
(10) The Fund will not buy, sell or trade in securities other than those
in which customers' funds are permitted to be invested under the CE
Act, nor will it write, purchase, sell or trade in options on
securities. Although the Fund has no current intention to trade in
options on commodity futures contracts or physical commodities, the
Fund may from time to time trade in options on commodity futures
contracts or physical commodities.
(11) The Fund will not commingle its assets with those of other persons,
except as permitted by law.
(12) The Fund will not permit the churning of its commodity trading
account.
(13) The Fund may trade in futures contracts on foreign currencies through
domestic commodity exchanges, including the International Monetary
Market Division of the Chicago Mercantile Exchange.
(14) The Fund will generally maintain approximately 90% of its assets in
investment mediums such as United States Treasury Bills and other
interest bearing debt obligations or repurchase agreements relating
thereto.
42
(15) The Fund will not be a dealer and therefore will not acquire
commodity interests as inventory or primarily for sale to customers
in the ordinary course of business.
Although Shaffer Asset Management is currently serving as the general
partner of, and the commodity trading advisor to, the Fund, Shaffer Asset
Management will monitor the trading policies of the Fund described above and
will impose any additional restrictions upon the trading activities of the
Fund's other advisor(s), if any, as Shaffer Asset Management, in the exercise of
its prudent business judgment, deems appropriate. In addition, Shaffer Asset
Management may change the trading policies described above without notice to or
the approval of the limited partners of the Fund if it, in its sole discretion,
determines that such change is in the best interests of the Fund. Shaffer Asset
Management will not make a material change in the basic investment policy or
structure of the Fund unless it obtains an affirmative vote of a majority of the
Units.
If the Net Asset Value of the Fund (increased by the amount of
distributions per Unit, if any) on any business day during any given fiscal year
decreases to or below 50% of the Net Asset Value per Unit as of the beginning of
that fiscal year, provided that such 50% decrease results in a Net Asset Value
per Unit of less than $1,000, or if the Net Asset Value per Unit decreases on
any business day to or below $350, the Fund will attempt to liquidate all open
positions as expeditiously as possible and suspend trading. No assurance is
given that the Fund will be able to close out all open positions without
incurring substantial additional losses. Within ten business days after the date
of the suspension of trading, Shaffer Asset Management shall either give notice
to the limited partners of the Fund of its intention to withdraw from the Fund
or shall declare a special redemption date. Such special redemption date, if
declared, shall be a business day within thirty business days from the date of
suspension of trading by the Fund, and Shaffer Asset Management shall mail
notice of such date to each limited partner of the Fund by first class mail,
postage prepaid, not later than ten business days prior to such special
redemption date, together with instructions as to the procedure such partner
must follow to have his Units redeemed on such date by the Fund, if such partner
so desires. No redemption fees would be due in respect of a Unit redeemed on the
special redemption date. If, after such special redemption date, the Fund's Net
Asset Value is at least 50% of the Net Asset Value on the close of business on
the day before the special redemption date, the Fund will resume trading unless
Shaffer Asset Management elects to withdraw from the Fund. If, after such
special redemption date, the Fund's Net Asset Value is less than 50% of the Net
Asset Value of the close of business on the day before the special redemption
date, the Fund shall terminate. See "Risk Factors".
43
SUMMARY OF THE ADVISORY AGREEMENT
The Fund has entered into an advisory agreement with Shaffer Asset
Management that provides that Shaffer Asset Management will have sole discretion
during the term of the contract to determine the Fund's trades. The advisory
agreement has a term ending one year after the end of the month in which the
Fund commences trading subject to the Fund's right to automatically renew the
advisory agreement on the same terms and conditions for one additional year on
ninety days' prior written notice and further subject to Shaffer Asset
Management's right to terminate the advisory agreement during the extended term
on sixty days' prior written notice. The advisory agreement terminates
automatically in the event that the Fund is terminated and may be terminated at
any time by the Fund or its general partner upon sixty days' prior written
notice to Shaffer Asset Management. The advisory agreement may also be
terminated at the election of the Fund's general partner at any time, upon
written notice to the Fund, in the event that: (i) Shaffer Asset Management
withdraws from the Fund as its general partner; (ii) Shaffer Asset Management's
registration as a commodity trading advisor with the CFTC lapses or is suspended
or terminated; (iii) the Fund's general partner, in its sole discretion, should
determine in good faith that Shaffer Asset Management has violated the Fund's
trading policies; (iv) the Fund's Net Asset Value per Unit (increased by the
amount of any distributions per Unit, if any) on any business day during any
given fiscal year decreases to or below 50% of the Net Asset Value per Unit of
the Fund at the beginning of the fiscal year, provided that such 50% decrease
results in a Net Asset Value per Unit of less than $1,000, or if the Net Asset
Value per Unit (increased by the amount of any distributions per Unit, if any)
decreases on any business day to or below $350.00; (v) Mr. Shaffer leaves the
employ of Shaffer Asset Management, becomes incapacitated or is otherwise not
active in the management of the trading programs of Shaffer Asset Management;
(vi) Shaffer Asset Management becomes unable to use its trading strategies for
the benefit of the Fund for any reason; or (vii) Shaffer Asset Management
merges, consolidates with or sells a substantial portion of its assets, any
portion of its trading strategies, trading programs or goodwill to any
individual or entity, or becomes bankrupt or insolvent. Under the terms of the
advisory agreement, upon the termination or expiration of the advisory
agreement, the Fund may retain a new trading advisor or advisors or may
renegotiate the advisory agreement with Shaffer Asset Management on the same or
different terms. No assurance is given that, after the expiration of such
contract, the Fund will be able to retain the trading management services of
Shaffer Asset Management or obtain those services on the same terms as those of
the current advisory agreement. In addition, Shaffer Asset Management has the
right to terminate the advisory agreement with the Fund in certain
circumstances, and no assurance is given that the advisory agreement will not be
terminated prior to the expiration of the initial twelve-month term. The types
of commodity interests that the Fund may trade under the terms of any new
advisory agreement may differ from those that Shaffer Asset Management will
trade for the Fund under the current advisory agreement. The compensation of a
new trading advisor or Shaffer Asset Management under any advisory agreement
negotiated in the future may be determined without regard to the previous
performance of the Fund. ADM Investor Services has agreed to keep confidential
Shaffer Asset Management's trades and trading strategies as disclosed to it,
except to the extent necessary to conduct the affairs of the Fund. The
compensation payable by the Fund to Shaffer Asset Management is described under
"Fees, Compensation and Expenses".
The business of Shaffer Asset Management is the management of
discretionary commodity trading accounts, and it may manage other accounts
during the same period that it is managing the Fund's account. The advisory
agreement provides that Shaffer Asset Management and its principals, employees
and affiliates shall be free to trade for their own accounts and manage other
trading accounts and to use the same information, trading strategies and
formulae which it obtains, produces or utilizes in the performance of services
for the Fund. The limited partners of the Fund will have no right to inspect the
trading records or evaluate the performance of such accounts except to the
extent required by law. Shaffer Asset Management has agreed with the Fund that
it will not deliberately use any trading strategies for the Fund which it knows
are inferior to those employed by it for any other account managed by Shaffer
Asset Management or any of its principals or affiliates. In addition, in its
trading for the Fund's account and such other accounts, Shaffer Asset Management
has agreed to use its good faith, best efforts to achieve an equitable treatment
of all accounts including with respect to priorities of order entry and any
changes or modifications to Shaffer Asset Management's trading strategies or
recommendations resulting from the application of speculative position limits.
No assurance is or can be given, however, that the results of the Fund's trading
will be similar to those of other accounts concurrently managed by Shaffer Asset
Management. See "Conflicts of Interest / Fiduciary Responsibility of the General
Partner".
The advisory agreement provides that Shaffer Asset Management, its
shareholders, directors, officers, employees and other affiliates shall not be
liable to the Fund under certain circumstances and further provides that the
Fund shall indemnify such persons, subject to certain limitations.
44
The advisory agreement prohibits Shaffer Asset Management from receiving
any commission, compensation, remuneration or payment whatsoever by reason of
Fund transactions from any commodity broker with whom the Fund carries any
account. The Fund will pay Shaffer Asset Management a management fee and
allocate to Shaffer Asset Management an incentive allocation as described under
the caption "Fees, Compensation and Expenses".
45
SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT
The rights and duties of Shaffer Asset Management and the limited partners
of the Fund are governed by the provisions of the Delaware Revised Uniform
Limited Partnership Act and by the Fund's limited partnership agreement, a copy
of which is included as Exhibit A to the statement of additional information
that accompanies this prospectus. Certain features of the limited partnership
agreement are explained below, but reference is made to the limited partnership
agreement for complete details of its terms and conditions. When appropriate,
the term "General Partner" herein refers to Shaffer Asset Management, Inc. or
any successor general partner of the Fund.
ADDITIONAL LIMITED PARTNERS
Shaffer Asset Management has the sole discretion to admit additional
limited partners. Subsequent to this offering, the Fund may offer and sell
additional Units, and there is no limitation on the total number of Units that
may be outstanding. All Units offered by the Fund after the conclusion of this
offering may be offered and sold by the Fund at the then current Net Asset Value
per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each
Unit sold.
AMENDMENTS; MEETINGS
The Fund's limited partnership agreement may be amended in any respect
(except to change the Fund to a general partnership, to change the liability of
Shaffer Asset Management or any limited partners, to reduce the capital account
of a limited partner, to modify the profits, losses or distributions
attributable to any limited partner, or to terminate the Fund or to extend its
duration) by a vote of the holders of a majority of the outstanding Units (not
including Units held by Shaffer Asset Management), either pursuant to a written
vote or at a duly called meeting of the limited partners of the Fund. An
amendment may be proposed or a meeting may be called by Shaffer Asset Management
or by the holders of at least 10% of the outstanding Units. It is not expected
that Shaffer Asset Management will call any annual meetings of the Fund's
limited partners.
CERTIFICATES FOR UNITS
The Fund's limited partnership agreement provides that Units need not be
evidenced by certificates, but it is presently contemplated that certificates
will be issued to the limited partners of the Fund with respect to Units
purchased by them.
ELECTION, REMOVAL AND WITHDRAWAL OF THE GENERAL PARTNER
Shaffer Asset Management may be removed by a vote of the holders of a
majority of the outstanding Units (not including Units held by Shaffer Asset
Management, if any), and additional or successor general partner(s) may be
elected by a vote of a majority of the outstanding Units (not including Units
held by Shaffer Asset Management, if any). Shaffer Asset Management may withdraw
as the general partner of the Fund upon one hundred twenty days' notice to the
limited partners of the Fund.
INDEMNIFICATION
The Fund's limited partnership agreement provides that the Fund shall not
provide for indemnification of Shaffer Asset Management or its affiliates for
any liability or loss suffered by such person, nor shall it provide that such
person be held harmless for any loss or liability suffered by the Fund, unless,
and Shaffer Asset Management shall have no liability to the Partnership if, all
of the following conditions are met: (a) such person has determined, in good
faith, that the course of conduct which caused the loss or liability was in the
best interests of the Fund, and (b) such person was acting on behalf of or
performing services for the Fund, and (c) such liability was not the result of
negligence or misconduct by such person, and (d) such indemnification or
agreement to hold harmless is recoverable only out of the assets of the Fund and
not from the holders of the partnership interests. In any action threatened,
pending or completed against Shaffer Asset Management or its affiliates
involving the management of the Fund, the Fund shall indemnify and hold harmless
Shaffer Asset Management and its affiliates, against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees and disbursements) judgment or amount paid in settlement
incurred in connection with the investigation, defense or settlement of such
actions. Expenses may be paid by the Fund in advance of the final disposition of
such action if the indemnified person shall agree to reimburse the Fund in the
event indemnification is not permitted. No indemnification of Shaffer Asset
Management or its affiliates is permitted for losses resulting from or arising
out of any violation of the Federal securities laws or applicable state
securities laws in connection with or related to the registration, offer or sale
of the Units, unless (i) there has been a
46
successful adjudication on the merits of each count involving alleged securities
law violations as to Shaffer Asset Management or its affiliates, (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction, or (iii) a court of competent jurisdiction approves a settlement
of the claims and finds that indemnification of the settlement and related costs
should be made; PROVIDED that such court has been advised of the position as to
indemnification for violations of securities laws of the SEC and the securities
administrators of the jurisdictions in which the claimant alleges to have been
offered or sold Units. The position of the SEC is that any such indemnification
is contrary to the federal securities laws and therefore unenforceable. The Fund
may not incur the cost of that portion of any liability insurance which insures
Shaffer Asset Management or any of its personnel for any liability for which
Shaffer Asset Management or any of its personnel are prohibited from being
indemnified under the Limited Partnership Agreement.
LIABILITIES
A limited partner of the Fund will not be personally liable for any debts
or losses of the Fund beyond the amount of his capital contribution and profits
earned thereon, if any, except as indicated above in the event that the limited
partner has a negative balance in his Book Capital Account upon liquidation of
the Fund. In the event that the Fund is otherwise unable to meet its
obligations, the limited partners of the Fund might be required, under
applicable law, to repay to the Fund, cash distributions previously received by
them (including distributions on partial or complete redemptions, wrongfully
distributed profits and distributions deemed to be a return of capital), with
interest, to the extent that such distributions were made after the date that
the Fund's obligations arose. Each Unit, when issued, will be fully paid and
non-assessable. Except as indicated above, losses in excess of the Fund's assets
will be the obligation of Shaffer Asset Management.
LIMITED PARTNERS' RIGHTS
Each limited partner of the Fund or his duly authorized representative may
inspect the Fund's books and records during normal business hours. Holders of a
majority of the Units (exclusive of any such Units held by Shaffer Asset
Management, if any) may (a) adopt amendments to the Fund's limited partnership
agreement proposed by Shaffer Asset Management or limited partners of the Fund
owning at least 10% of the outstanding Units, (b) elect new general partner(s)
if Shaffer Asset Management withdraws or is removed or is otherwise unable to
serve, or (c) admit additional general partner(s). In addition, holders of a
majority of the outstanding Units (not including Units held by Shaffer Asset
Management, if any) may (a) remove Shaffer Asset Management, (b) cancel any
contract for services with Shaffer Asset Management or its affiliates for any
reason on sixty days' notice or (c) terminate the Fund. In addition, limited
partners of the Fund must approve any material change in the Fund's trading
policies. See "Trading Policies".
PROFIT AND LOSS; DISTRIBUTIONS
Shaffer Asset Management may, but need not and, in fact, does not intend
to, distribute any portion of the capital or profits of the Fund. Shaffer Asset
Management may declare distributions in additional Units of the Fund, in which
event limited partners of the Fund will be given at least sixty days' prior
written notice and the option to elect to receive cash instead of additional
Units. However, a limited partner has the right to redeem a portion or all of
his Units in accordance with the redemption procedures described in this
prospectus and the accompanying statement of additional information. For
purposes of calculating Net Asset Value, any distribution shall become a
liability of the Fund as of the date of its declaration. See "Redemption".
The allocation of the Fund's income or loss for Federal income tax
purposes is discussed under the caption "Federal Income Tax Consequences".
REDEMPTIONS
The Fund's limited partnership agreement provides that the Fund's limited
partners may redeem all or a portion of their Units as of the close of business
on the last business day of each calendar month upon at least ten days' prior
written notice to Shaffer Asset Management, subject to certain restrictions and
in some instances to early redemption fees during the first full twelve calendar
months following the purchase of the Units. Notwithstanding the foregoing,
partial redemptions shall be in whole Units except as Shaffer Asset Management
may permit. See "Redemptions".
Limited partners of the Fund should note that there are certain tax
consequences attendant upon redemptions of their Units. See "Federal Income Tax
Consequences".
47
REPORTS AND ACCOUNTING
The Fund will keep its books in accordance with generally accepted
accounting principles on the accrual basis of accounting. The Fund's fiscal year
shall be the calendar year for all purposes. The books of the Fund shall be
audited at least annually at the Fund's expense by an independent public
accountant to be designated by Shaffer Asset Management and each limited partner
of the Fund shall be furnished with an annual report certified by an independent
public accountant containing such information as the CFTC requires. CFTC
regulations presently require that an annual report be provided to futures fund
participants within ninety days after the close of each fiscal year, setting
forth among other matters:
(1) the Fund's Net Asset Value as of the end of each of its two preceding
fiscal years;
(2) the Net Asset Value per Unit outstanding as of the end of each of its
two preceding fiscal years;
(3) a Statement of Financial Condition as of the close of the Fund's
fiscal year and preceding fiscal year;
(4) Statements of Income (Loss), Changes in Financial Position and
Changes in Ownership Equity for the most recent fiscal year, together
with Statements of Income (Loss), Changes in Financial Position and
Changes in Ownership Equity for the previous fiscal year; and
(5) appropriate footnote disclosure and such further material information
as may be necessary to make the required statements not misleading.
In addition to the annual report, present CFTC rules require that the Fund
furnish each limited partner of the Fund, within thirty days of the end of each
month, with an unaudited account statement covering such month, which statement
shall be presented in the form of a Statement of Income (Loss) and a Statement
of Changes in Net Asset Value. In addition, limited partners of the Fund will be
furnished with such additional information as Shaffer Asset Management, in its
sole discretion, deems appropriate, as well as any information required to be
provided to the limited partners of the Fund by any governmental authority
having jurisdiction over the Fund. Shaffer Asset Management will also furnish
each limited partner of the Fund, by no later than the 15th day of the third
month following the close of the Fund's fiscal year (i.e., March 15) with tax
information in a form which may be utilized in the preparation of Federal income
tax returns.
Each limited partner of the Fund shall be notified within seven business
days of the decline in the Net Asset Value per Unit during a month to less than
50% of the Net Asset Value per Unit as of the last business day of the preceding
month. Included in such notification shall be a description of the limited
partners' voting rights, which rights include (a) the right, upon the initiative
of Shaffer Asset Management or the holders of 10% of the outstanding Units and
by vote of a simple majority of such Units (exclusive of any Units owned by
Shaffer Asset Management, if any), to revise the Fund's limited partnership
agreement, or (b) the right by a vote of the holders of at least seventy five
percent of the outstanding Units (not including Units held by Shaffer Asset
Management, if any) to (i) replace or revise the Fund's arrangements with
Shaffer Asset Management or (ii) to terminate the Fund.
Shaffer Asset Management shall maintain a list of the names and addresses
of, and the number of Units owned by, all limited partners of the Fund at the
Fund's principal office. Such list shall be made available for the review of any
limited partner of the Fund or his representative at reasonable times and upon
request, either in person or by mail. Shaffer Asset Management shall furnish a
copy of such list to a limited partner of the Fund or his representative upon
payment of the costs of reproduction and mailing; provided, however, that such
list shall not be used by the limited partner for commercial purposes.
TERMINATION
Unless earlier dissolved, the Fund shall cease doing business on December
31, 2025, and shall thereupon be dissolved. The Fund shall also cease doing
business and shall thereafter be dissolved if required by law or upon the
occurrence of any of the following events:
(1) The decrease of the Fund's Net Asset Value per Unit (increased by the
amount of distributions per Unit, if any) on any business day during
any given fiscal year to or below 50% of the Net Asset Value per Unit
as of the beginning of the fiscal year, provided that such 50%
decrease results in a Net Asset Value per Unit of less than $1,000,
or the decrease of the Fund's Net Asset Value per Unit (increased by
the amount of distributions per Unit, if any) on any business day to
or below $350;
48
(2) the legal disability, bankruptcy, dissolution or withdrawal of
Shaffer Asset Management, provided, however, that the holders of a
majority of outstanding Units (not including Units held by Shaffer
Asset Management, if any) may elect, within the ninety day period
following Shaffer Asset Management's required notice of withdrawal,
one or more substitute general partners to continue the Fund;
(3) the vote of the holders of at least seventy five percent of the
outstanding Units (not including Units held by Shaffer Asset
Management, if any) to dissolve the Fund; or
(4) the insolvency or bankruptcy of the Fund.
Upon the dissolution of the Fund, its affairs shall be wound up, its
liabilities discharged and its remaining assets distributed to the Unit holders
in accordance with their capital accounts maintained for financial accounting
purposes (the "Book Capital Accounts"). To the extent that the Fund has open
commodity futures interest positions at such time, it will use its best efforts
to close such positions, although no assurance can be given that market
conditions might not delay such liquidation.
In order that the allocation provisions of the Fund's limited partnership
agreement be respected for Federal income tax purposes, a limited partner of the
Fund having a negative balance in his Book Capital Account following the
distribution of liquidation proceeds will be required to contribute an amount to
the Fund sufficient to reduce such negative balance to zero. In the opinion of
Shaffer Asset Management, it is unlikely that any limited partner of the Fund
will have such a negative balance at such time.
TRANSFER OF UNITS
A limited partner's Units may be assigned at the election of the limited
partner upon notice to Shaffer Asset Management. However, the assignee shall
become a substituted limited partner of the Fund only upon the consent of
Shaffer Asset Management, which may be granted or withheld in its sole
discretion. An assignee who does not become a substituted limited partner of the
Fund shall be entitled to be allocated the share of the profits or losses or the
return of capital to which his assignor would otherwise be entitled, but he
shall not be entitled to vote, to receive an accounting of Fund transactions, to
receive tax information, or to inspect the books and records of the Fund. There
is not now a public market for the Units, and it is unlikely that one will
develop in the future.
The Fund has been advised by Berthel Fisher & Company that Berthel Fisher
& Company shall inform the prospective transferee of such Units of all pertinent
facts relating to the liquidity and marketability of the Units before assisting
in the transfer of Units.
49
CAPITALIZATION / SELECTED FINANCIAL DATA
The Fund's limited partnership agreement provides that Shaffer Asset
Management must make a capital contribution to the Fund equal to at least the
greater of (i) 1% of the aggregate amount of capital contributions to the Fund
by the partners (including Shaffer Asset Management's capital contribution), or
(ii) $25,000. As shown in the following table, the application of this formula
would require Shaffer Asset Management to purchase, in the aggregate, $25,000 in
units of general partnership interest valued at $950.00 per unit (26.32 units of
general partnership interest) in the event that the minimum number of 1,000
Units is sold and accepted by Shaffer Asset Management during the initial
offering period, 126.26 in units of general partnership interest (1% of
$11,994,949) valued at $950.00 per unit in the event that the median number of
12,500 Units is sold and accepted by Shaffer Asset Management during the initial
offering period, and 252.53 units of general partnership interest (1% of
$23,989,898) in the event that the maximum number of 25,000 Units is sold and
accepted by Shaffer Asset Management during the initial offering period.
Accordingly, the table below shows the capitalization of the Fund on the date
hereof and as adjusted for the sale, within the initial offering period, of the
minimum (1,000), median (12,500) and maximum (25,000) number of Units offered
hereby:
AS ADJUSTED(1)(2)
------------------------------------------------------------------
TITLE OF CLASS OUTSTANDING(1) MINIMUM MID-POINT MAXIMUM
---------------- ---------------- --------- ------------ ------------
Units of General Partnership Interest...... 1 26.32 126.26 252.53
Units of Limited Partnership Interest...... 1 1,000 12,500 25,000
Total Partners' Contribution (including
Shaffer Asset Management's capital
contribution) ......................... $2,000 $975,000 $11,994,949 $23,989,898
---------------------------------------
(1) One Unit of limited partnership interest has been issued to Daniel S.
Shaffer, an officer, director and shareholder of Shaffer Asset Management
and the initial limited partner of the Fund, for $1,000 to permit the Fund
to be organized, and Shaffer Asset Management has purchased one Unit of
general partnership interest for $1,000. The Fund intends to redeem the
one Unit of limited partnership interest issued to the initial limited
partner at the end of the initial offering period.
(2) Subsequent to the initial offering period, unsold Units, if any, may be
sold at the then Net Asset Value per Unit, plus a sales charge of 5% of
the Net Asset Value per Unit. The proceeds from such sales, before and
after selling commissions, will depend upon the Fund's Net Asset Value per
Unit from time to time and thus the particular purchase prices charged for
those Units. See "Plan of Distribution".
The Fund was recently organized on August 29, 2000 and has no financial
history. Its total assets, consisting entirely of a cash account, and total
partners' equity as of December 31, 2000, were $1,916. The information is
derived from, and qualified by reference to, the audited statement of financial
condition of the Fund included elsewhere in this prospectus and the accompanying
statement of additional information.
50
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion constitutes the opinion of Morrison Cohen Singer
& Weinstein, LLP, special tax counsel to the Fund, and summarizes the material
federal income tax consequences to individual investors in the Fund, as so
stated in a formal opinion letter filed as an exhibit to the Registration
Statement to which this prospectus is a part. The opinion is premised upon the
continuing accuracy of various assumptions and representations as to certain
factual matters made by Shaffer Asset Management, chief among which is that the
Fund will continuously operate solely in the manner described in this
prospectus. The opinion is also based upon present tax law, which is subject to
change at any time, possibly even retroactively.
Because the specific tax consequences to an investor resulting from an
investment in the Fund will also be affected by such investor's own personal tax
situation, prospective investors are urged to consult their tax advisors before
deciding whether to invest.
THE FUND'S PARTNERSHIP TAX STATUS
The Fund is organized as a partnership, and so the Fund does not pay any
federal income tax. Based on the expected income of the Fund, the Fund will not
be taxed as a corporation by reason of being a "publicly traded partnership".
TAXATION OF LIMITED PARTNERS ON PROFITS AND LOSSES OF THE FUND
Each limited partner of the Fund must pay tax on his share of the Fund's
annual income and gains, if any, even if the Fund does not make any cash
distributions. The Fund generally allocates the Fund's income, gains and losses
among the partners in proportion to their respective capital accounts in the
Fund which, as among the limited partners, generally results in income, gains or
losses being allocated equally to each unit. However, a limited partner of the
Fund who redeems any units will be allocated his share of the Fund's gains and
losses in order that the amount of cash he receives for the redeemed units
equals his adjusted tax basis in the redeemed units. A limited partner's
adjusted tax basis in a unit equals the amount originally paid for the unit,
increased by income or gains allocated to the unit and decreased, but not below
zero, by distributions, deductions or losses allocated to the unit.
FUND LOSSES BY LIMITED PARTNERS
A limited partner of the Fund may deduct his share of Fund losses only to
the extent of his adjusted tax basis in his units. However, a limited partner
subject to the so-called "at-risk" limitations (generally, non-corporate
taxpayers and closely-held corporations) can only deduct losses to the extent he
is "at-risk." The "at-risk" amount is similar to tax basis, except that it does
not include any amount borrowed on a non-recourse basis or from someone with an
interest in the Fund.
EFFECT OF THE "PASSIVE-ACTIVITY LOSS RULES"
The trading activities of the Fund are not a "passive activity."
Accordingly, a limited partner of the Fund can deduct Fund losses from taxable
income. However, a limited partner of the Fund cannot offset losses from
"passive activities" against Fund gains.
CASH DISTRIBUTIONS AND UNIT REDEMPTIONS
A limited partner of the Fund who receives cash from the Fund, either
through a distribution or a partial redemption, will not pay tax on that cash
until his adjusted tax basis in his units has been reduced to zero.
GAIN OR LOSS ON SECTION 1256 CONTRACTS AND NON-SECTION 1256 CONTRACTS
Section 1256 Contracts are futures and most options traded on U.S.
exchanges and certain foreign currency contracts. For tax purposes, Section 1256
Contracts that remain open at year-end are treated as if the position were
closed at year-end. The gain or loss on Section 1256 Contracts is characterized
as 60% long-term capital gain or loss and 40% short-term capital gain or loss
regardless of how long the position was open. Non-Section 1256 Contracts are,
among other things, certain foreign currency transactions, including Section 988
transactions -- transactions in which the amount paid or received is in a
foreign currency. The Fund expects to make a tax election that will cause gain
and loss from these Non-Section 1256 Contracts generally to be short-term gain
or loss.
51
TAX ON CAPITAL GAINS AND LOSSES
Long-term capital gains -- net gain on capital assets held more than one
year and 60% of the gain on Section 1256 Contracts -- are taxed at a maximum
federal income tax rate of 20% for individuals. Short-term capital gains -- net
gain on capital assets held less than one year and 40% of the gain on Section
1256 Contracts -- are subject to tax at the same rates as ordinary income, with
a maximum federal income tax rate for individuals of 39.1% in year 2001 (38.6%
in 2002 and 2003, 37.6% in 2004 and 2005, and 35.0% in 2006 and thereafter).
Individual taxpayers can deduct capital losses in any one year only to the
extent of their capital gains in such year plus $3,000. Excess capital losses
can be carried forward and deducted in future years, subject to the same
limitation. An individual taxpayer can carry back net capital losses on Section
1256 Contracts three years to offset earlier gains on Section 1256 Contracts. To
the extent the taxpayer cannot offset past Section 1256 Contract gains, he can
carry forward such losses indefinitely as losses on Section 1256 Contracts. As a
result of the limitations on the tax deductibility of capital losses, the Fund
could suffer significant losses and a limited partner of the Fund could still be
required to pay taxes on his share of the Fund's interest income.
LIMITED DEDUCTION FOR CERTAIN EXPENSES
Shaffer Asset Management does not consider the management and brokerage
fees, as well as other ordinary expenses of the Fund, to be investment advisory
expenses. Accordingly, Shaffer Asset Management treats these expenses as
ordinary business deductions not subject to the material deductibility
limitations that apply to investment advisory expenses. The IRS could contend
otherwise and, to the extent the IRS recharacterizes these expenses, a limited
partner of the Fund would have the amount of the ordinary expenses allocated to
him reduced accordingly.
INTEREST INCOME
Interest received by the Fund is taxed as ordinary income. Net capital
losses can offset ordinary income only to the extent of $3,000 per year.
SYNDICATION FEES
Neither the Fund nor any limited partner of the Fund is entitled to any
deduction for syndication expenses, nor can these expenses be amortized by the
Fund or any limited partner of the Fund even though the payment of such expenses
reduces net asset value. The IRS could take the position that a portion of the
brokerage fees paid by the Fund to ADM Investor Services or part or all of any
redemption fees paid by a limited partner of the Fund constitute non-deductible
syndication expenses.
INVESTMENT INTEREST DEDUCTIBILITY LIMITATIONS
Individual taxpayers can deduct "investment interest" -- interest on
indebtedness allocable to property held for investment -- only to the extent
that it does not exceed net investment income. Net investment income does not
include adjusted net capital gain taxed at the lower 20% rate.
UNRELATED BUSINESS TAXABLE INCOME
Tax-exempt limited partners of the Fund will not be required to pay tax on
their share of income or gains of the Fund, provided that such limited partners
do not purchase units with borrowed funds.
IRS AUDITS OF THE FUND AND ITS LIMITED PARTNERS
The IRS audits Fund-related items at the Fund level rather than at the
limited partner level. Shaffer Asset Management acts as "tax matters partner"
with the authority to determine the Fund's responses to an audit. If an audit
results in an adjustment, all of the Fund's limited partners may be required to
pay additional taxes, interest and penalties.
STATE AND OTHER TAXES
In addition to the federal income tax consequences described above, the
Fund and its limited partners may be subject to various state and other taxes.
52
TAXATION OF FOREIGN LIMITED PARTNERS
Subject to the discussion below regarding derivative transactions, a
non-resident alien individual not otherwise engaged in a United States trade or
business should not be deemed to be engaged in a United States trade or business
solely by virtue of an investment as a limited partner of the Fund. Capital
gains earned by the Fund and allocated to such a foreign limited partner will,
as a general matter, not be subject to United States federal income tax or
withholding, but may be subject to tax in the jurisdiction in which the foreign
limited partner is resident. Interest income earned by the Fund will, as a
general rule, likewise not be subject to United States federal income tax or
withholding, but may be subject to tax in other jurisdictions to which the
foreign limited partner is connected.
With respect to derivative transactions such as swaps or forward
contracts, based on current law it is uncertain whether entering into derivative
transactions may cause the Fund, and therefore any foreign limited partners of
the Fund, to be treated as engaged in a United States trade or business.
However, the Treasury has issued proposed regulations, which, if finalized in
their current form, would provide that foreign limited partners should not be
deemed to be engaged in a United States trade or business solely by virtue of an
investment as a limited partner of the Fund even if the Fund enters into
derivative transactions. These regulations are proposed to be effective for
taxable years beginning 30 days after the date final regulations are published
in the Federal Register. The Fund may, however elect to apply the final
regulations retroactively once they are finalized.
53
FORWARD-LOOKING STATEMENTS
This prospectus and the accompanying statement of additional information
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements use words like "believes," "intends," "expects,"
"may," "will," "should" or "anticipates," or the negative equivalents of those
words or comparable terminology, and discuss strategies that involve risks and
uncertainties.
Shaffer Asset Management based all forward-looking statements upon
estimates and assumptions about future events that were derived from information
available to it on the date of this prospectus and the accompanying statement of
additional information. Given the risks and uncertainties of the business of the
Fund, actual events and results may differ materially from those expressed or
implied by forward-looking statements. In light of these risks, uncertainties
and assumptions, the forward-looking statements included in this prospectus and
the accompanying statement of additional information may not occur. Risks,
uncertainties and assumptions that may affect the business, financial condition
and results of operations of the Fund include changes in the financial markets
generally, increased competition, risks associated with leverage, changes in
general economic conditions and the risks discussed in "Risk Factors" beginning
on page 5.
LEGAL MATTERS
Certain legal matters in connection with this offering and the securities
being offered hereby will be passed upon for Shaffer Asset Management and the
Fund by Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York,
NY 10022. Morrison Cohen Singer & Weinstein, LLP has also provided the
statements under "Federal Income Tax Considerations".
EXPERTS
The statements of financial condition of (i) Shaffer Asset Management as
of December 31, 1998, 1999 and 2000 and for the period from its inception on
March 16, 1998 to December 31, 1998 and the years ended December 31, 1999 and
December 31, 2000, and (ii) the Fund as of December 31, 2000, each of which is
included in the statement of additional information that accompanies this
prospectus, have been audited by Anchin, Block & Anchin, LLP, independent
auditors, as set forth in their reports appearing in the statement of additional
information that accompanies this prospectus and are included in such statement
of additional information in reliance upon the authority of the firm as experts
in auditing and accounting. Information subsequent to December 31, 2000 has not
been audited by Anchin, Block & Anchin, LLP and accordingly they do not express
an opinion on it.
ADDITIONAL INFORMATION
This prospectus and the accompanying statement of additional information
constitutes part of the Registration Statement filed by the Fund with the SEC in
Washington, D.C. This prospectus and the accompanying statement of additional
information does not contain all the information set forth in such Registration
Statement and the exhibits thereto, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. Such Registration Statement
and exhibits may be inspected without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or part thereof may be obtained from the SEC upon payment of the
prescribed fees.
54
SHAFFER ASSET MANAGEMENT, INC.
SHAFFER DIVERSIFIED FUND, LP
INDEX TO FINANCIAL STATEMENTS
SHAFFER ASSET MANAGEMENT, INC.
Independent Auditors' Report........................................................................... F-2
Financial Statements:
Balance Sheets as of June 30, 2001 (unaudited), December 31,
2000, 1999 and 1998.......................................................................... F-3
Statements of Operations and Retained Earnings (Deficit)
for the Six Months Ended June 30, 2001 and 2000 (unaudited) and
for the Years Ended December 31, 2000 and 1999 and for the
Period from Inception (March 16, 1998) to December 31, 1998.................................. F-4
Statement of Stockholders' Equity and (Deficiency) for the
Six Months Ended June 30, 2001 (unaudited) and for
the Period from Inception (March 16, 1998) to
December 31, 2000 (audited).................................................................. F-5
Statements of Cash Flows for the Six Months Ended June 30,
2001 and 2000 (unaudited) and for the Years Ended
December 31, 2000 and 1999 and for the Period from
Inception (March 16, 1998) to December 31, 1998.............................................. F-6
Notes to the Financial Statements................................................................. F-7
SHAFFER DIVERSIFIED FUND, LP
Independent Auditors' Report........................................................................... F-9
Financial Statements:
Statement of Financial Condition as of June 30, 2001 (unaudited)
and as of December 31, 2000.................................................................. F-10
Notes to the Statement of Financial Condition..................................................... F-11
F-1
SHAFFER ASSET MANAGEMENT, INC.
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND DIRECTORS OF SHAFFER ASSET MANAGEMENT, INC.
We have audited the accompanying balance sheets of Shaffer Asset
Management, Inc. as of December 31, 2000, 1999 and 1998 and the related
statements of operations and retained earnings (deficit), statement of
stockholders' equity and (deficiency) and cash flows for the years ended
December 31, 2000 and 1999 and the period from March 16, 1998 (inception) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Shaffer Asset
Management, Inc. at December 31, 2000, 1999 and 1998 and the results of its
operations and its cash flows for the years and period, respectively, then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Anchin, Block & Anchin LLP
New York, New York
March 19, 2001
F-2
SHAFFER ASSET MANAGEMENT, INC.
BALANCE SHEETS
Audited
Unaudited ----------------------------------------
------------ December 31,
June 30, ----------------------------------------
2001 2000 1999 1998
----------- ------------ -------- ----------
ASSETS
CURRENT ASSETS:
Cash .................................................... $ 147 $ 139 $ 4,516 $ 54
Fees receivable ......................................... 5,074 15,985 8,073 --
--------- --------- --------- ---------
Total Current Assets ....................................... 5,221 16,124 12,589 54
--------- --------- --------- ---------
FIXED ASSETS:
Office equipment ........................................ 10,289 3,392 3,392 --
Computer software ....................................... 6,000 6,000 6,000 --
--------- --------- --------- ---------
16,289 9,392 9,392 --
Less: Accumulated depreciation and amortization ......... (4,365) (3,023) (339) --
--------- --------- --------- ---------
Total Fixed Assets ......................................... 11,924 6,369 9,053 --
--------- --------- --------- ---------
OTHER ASSETS:
Deferred offering costs ................................. 264,698 220,774 -- --
Due from stockholder .................................... 74,740 66,781 -- --
Security deposit ........................................ 10,504 2,675 -- --
--------- --------- --------- ---------
Total Other Assets ......................................... 349,942 290,230 -- --
--------- --------- --------- ---------
TOTAL ASSETS ............................................... $ 367,087 $ 312,723 $ 21,642 $ 54
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................... $ 211,641 $ 212,089 $ 11,399 $ --
Lines of credit payable ................................. 97,373 96,345 -- --
Loan payable-- stockholder .............................. 36,628 -- -- 5,710
--------- --------- --------- ---------
Total Current Liabilities .................................. 345,642 308,434 11,399 5,710
--------- --------- --------- ---------
STOCKHOLDER'S EQUITY (DEFICIENCY):
Capital stock:
Class A voting, no par, $2 stated value; 200 shares
Authorized .............................................. 150 100 100 100
Paid-in Capital ......................................... 24,950 -- -- --
Retained earnings (deficit) ............................. (3,655) 4,189 10,143 (5,756)
--------- --------- --------- ---------
Total Stockholder's Equity (Deficiency) .................... 21,445 4,289 10,243 (5,656)
--------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) ..................................... $ 367,087 $ 312,723 $ 21,642 $ 54
========= ========= ========= =========
See the accompanying Notes to the Financial Statements.
F-3
SHAFFER ASSET MANAGEMENT, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
Unaudited Audited
-------------------- -------------------------------------
Six Months Period from
Ended Years Ended March 16, 1998
June 30, December 31, (Inception) to
-------------------- -------------------- December 31,
2001 2000 2000 1999 1998
-------- -------- -------- -------- --------
INCOME FROM FEES ...................... $ 46,509 $ 59,411 $ 88,670 $ 51,446 $ --
-------- -------- -------- -------- --------
EXPENSES:
Automobile expense ................. 7,168 5,872 12,088 12,901
Computer expense ................... 772 20 2,859 --
Depreciation ....................... 1,342 1,342 2,684 339
Dues and subscriptions ............. 2,561 1,195 4,804 4,278
Insurance .......................... 8,354 2,310 6,597 -- --
Interest expense ................... 5,048 1,014 5,188 --
Office supplies and expense ........ 5,763 4,798 7,003 2,261 521
Organization costs ................. -- 1,175 2,500 --
Printing and reproduction .......... 857 507 1,241 5,583 319
Professional development ........... 81 1,138 1,357 3,432 --
Professional fees .................. -- 3,049 17,452 -- 2,653
Rent ............................... 15,764 6,182 17,032 -- --
Travel and entertainment ........... 3,067 2,516 9,611 2,265 222
Other expenses ..................... 3,576 1,517 4,208 4,488 2,041
-------- -------- -------- -------- --------
Total Expenses ..................... 54,353 32,635 94,624 35,547 5,756
-------- -------- -------- -------- --------
NET INCOME (LOSS) ..................... (7,844) 26,776 (5,954) 15,899 (5,756)
RETAINED EARNINGS (DEFICIT):
Balance, beginning of period ....... 4,189 10,143 10,143 (5,756) --
-------- -------- -------- -------- --------
Balance, end of period ............. $ (3,655) $ 36,919 $ 4,189 $ 10,143 $ (5,756)
======== ======== ======== ======== ========
See the accompanying Notes to the Financial Statements.
F-4
SHAFFER ASSET MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY AND (DEFICIENCY)
Six Months Ended June 30, 2001 (unaudited) and
Period from March 16, 1998 (Inception) to December 31, 2000 (audited)
Retained
Number of Class A Voting Paid-in Earnings
Shares Common Stock Capital (Deficit) Total
---------- -------------- -------- --------- --------
Issuance of Common Stock ..................... 50 $ 100 $ -- $ -- $ 100
Net Loss ..................................... -- (5,756) (5,756)
-------- -------- -------- -------- --------
Balance, December 31, 1998 .................. 50 100 -- (5,756) (5,656)
Net Income ................................... -- -- -- 15,899 15,899
-------- -------- -------- -------- --------
Balance, December 31, 1999 .................. 50 100 -- 10,143 10,243
Net Loss ..................................... -- -- -- (5,954) (5,954)
-------- -------- -------- -------- --------
Balance, December 31, 2000 .................. 50 100 -- 4,189 4,289
Stock Dividend ............................... 25 -- -- -- --
Proceeds of Sale of Common
Stock ..................................... 25 50 24,950 -- 25,000
Net Loss ..................................... -- -- -- (7,844) (7,844)
-------- -------- -------- -------- --------
Balance, June 30, 2001 ....................... 100 $ 150 $ 24,950 $ (3,655) $ 21,445
======== ======== ======== ======== ========
See the accompanying Notes to the Financial Statements.
F-5
SHAFFER ASSET MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
Unaudited Audited
---------------------- -----------------------------------
March 16, 1998
Six Months Ended Years Ended (Inception) to
June 30, December 31, December 31,
--------- --------- --------- --------- ---------
2001 2000 2000 1999 1998
--------- --------- --------- --------- ---------
Cash flows from operating activities:
Net income (loss) ........................ $ (7,844) $ 26,776 $ (5,954) $ 15,899 $ (5,756)
--------- --------- --------- --------- ---------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization ........ 1,342 1,342 2,684 339 --
Increase in:
Deferred offering costs ................ (43,924) (220,774) (220,774) -- --
Fees receivable ........................ 10,911 (43,723) (7,912) (8,073) --
Security deposit ....................... (7,829) (2,674) (2,675) -- --
Increase in:
Accounts payable and accrued
expenses ............................. (448) 213,884 205,190 6,899 --
--------- --------- --------- --------- ---------
Total adjustments ...................... (39,948) (51,945) (23,487) (835) --
--------- --------- --------- --------- ---------
Net Cash Provided by (Used in)
Operating Activities ................... (47,792) (25,169) (29,441) 15,064 (5,756)
--------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Purchases of fixed assets .............. (6,897) -- -- (4,892) --
Advances to stockholder ................ (73,134) (52,313) (100,261)
Payments from stockholder .............. 65,175 2,800 33,480 -- --
--------- --------- --------- --------- ---------
Net Cash Used in Investing
Activities ........................... (14,856) (49,513) (66,781) (4,892) --
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayment of stockholder loan .......... -- -- -- (5,710) --
Loan from stockholder .................. 36,628 -- -- -- 5,710
Proceeds from issuance of common
stock ................................ 25,000 -- -- -- 100
Increase in lines of credit ............ 57,318 92,309 136,295 -- --
Repayments on lines of credit .......... (56,290) (21,902) (39,950) -- --
Repayment of liability for acquisition
of computer software ................. -- -- (4,500) -- --
--------- --------- --------- --------- ---------
Net Cash Provided by (Used in)
Financing Activities ................... 62,656 70,407 91,845 (5,710) 5,810
--------- --------- --------- --------- ---------
Net Increase (Decrease) In Cash ............. 8 (4,275) (4,377) 4,462 54
Cash:
Beginning of period .................... 139 4,516 4,516 54 --
--------- --------- --------- --------- ---------
End of period .......................... $ 147 $ 241 $ 139 $ 4,516 $ 54
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosures of cash flow
information
Cash paid during the period for:
Interest ............................... $ 5,048 $ 1,014 $ 5,188 $ -- $ --
Income taxes ........................... $ 100 $ -- $ 400 $ 625 $ --
Supplemental schedule of noncash investing
and financing activities:
Incurred liability for acquisition
of computer software ................. $ -- $ -- $ -- $ 4,500 $ --
See the accompanying Notes to the Financial Statements.
F-6
SHAFFER ASSET MANAGEMENT, INC.
Notes To Financial Statements
Note 1 -- Summary of Significant Accounting Policies:
Description of Business:
Shaffer Asset Management, Inc. (the "Company") earns fees on managed
accounts as a Commodity Trading Advisor registered with and subject to the
regulations of the Commodity Futures Trading Commission, an agency of the United
States government, which regulates most aspects of the commodity futures
industry. It is also subject to the rules of the National Futures Association,
an industry self-regulatory organization. In addition the Company will receive
additional fees for services performed as General Partner in a Commodity Fund
(See Note 4).
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition:
Performance fees are earned by achieving defined performance
objectives. Performances fees are accrued when the conditions of the performance
fee agreement are satisfied.
Fixed Assets:
Fixed assets are stated at cost. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives of the
assets, which are five years for office equipment and three years for computer
software.
Income Taxes:
The Company is taxed as an S corporation for federal and New York
State tax purposes, whereby the Company's income is reported by the stockholder.
Accordingly, no provision has been made for federal income taxes. The Company
remains liable for New York State income taxes on S corporations.
Deferred Offering Costs:
The Company has incurred costs related to the initial offering of
units of a Partnership (see Note 4). Once the initial offering occurs the
deferred offering costs will be amortized over a twelve month period. A
liability, which is in dispute of approximately $159,000, has been recorded for
offering costs and is included in accounts payable and accrued expenses on the
balance sheet.
Included in accounts payable and accrued expenses is approximately
$197,000 of accrued legal fees in connection with the offering.
Note 2 -- Related Party Transactions:
The loan to the stockholder is non-interest bearing and is payable
on demand.
Note 3 -- Lines of Credit Payable:
The Company has lines of credit from two financial institutions in
the amount of $98,500. The lines of credit bear interest at rates ranging from
1% to 3.9% over the prime rate and are guaranteed by a stockholder. The average
rate of interest was 12.4% during the year ended December 31, 2000. Management
believes the fair value of the debt is equivalent to the recorded amount based
on its short term nature and the interest rates which fluctuate with prime.
F-7
SHAFFER ASSET MANAGEMENT, INC.
Notes To Financial Statements -- (Continued)
Note 4 -- Agreement with Shaffer Diversified Fund, LP:
The Company will be the trading advisor of a newly formed commodity
pool, Shaffer Diversified Fund, LP (the "Partnership"). The Company became the
general partner of the Partnership and made a capital contribution of $1,000
during the year ended December 31, 2000. The Company will receive approximately
20% of the 5% sales commission charged to investors and management fees at an
annual rate of 3.75% of the monthly value of the investments during the first
twelve months after an investment is made and 1% thereafter. The Company will
also receive on a quarterly basis an incentive allocation from the Partnership
equivalent to 15% per year of any increase in the cumulative appreciation of the
net asset value of the Partnership, as defined. Additionally, the Company will
be responsible for expenses (excluding continuing services fees, management
fees, incentive allocations, brokerage commissions and extraordinary expenses)
in the aggregate in excess of 0.5% of the average monthly net assets of the
Partnership and expenses associated with the organization of the Partnership and
initial offering costs.
As the General Partner of the Partnership, the Company has entered
into a net worth agreement with two officers/stockholders of the Company. The
officers have agreed within five days following the consummation of the initial
offering of units of the Partnership to contribute funds to the Company as
capital amounts sufficient so that the Company will at all times have a net
worth equal to not less than the greater of 5% of the aggregate capital
contributions made by the partners to the Partnership or $50,000. The
officers/stockholders also agree to provide the Company with sufficient capital
to enable the Company to purchase and maintain units of interest in the
Partnership in an amount equal to not less than the greater of one percent of
the aggregate capital contributions made by all partners to the Partnership or
$25,000.
F-8
SHAFFER DIVERSIFIED FUND, LP
INDEPENDENT AUDITORS' REPORT
To the Partners of
Shaffer Diversified Fund, LP:
We have audited the accompanying statement of financial condition of Shaffer
Diversified Fund, LP as of December 31, 2000. The financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statement of
financial condition is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of financial condition. 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 statement of financial condition referred to above presents
fairly, in all material respects, the financial position of Shaffer Diversified
Fund, LP at December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Anchin, Block & Anchin LLP
New York, New York
March 19, 2001
F-9
SHAFFER DIVERSIFIED FUND LP
STATEMENT OF FINANCIAL CONDITION
Unaudited Audited
--------- ------------
June 30, December 31,
2001 2000
------ ------
ASSETS:
Cash ................................. $1,393 $1,916
------ ------
------ ------
PARTNERS' CAPITAL..................... $1,393 $1,916
------ ------
------ ------
See the accompanying Notes to the Statement of Financial Condition.
F-10
SHAFFER DIVERSIFIED FUND, LP
Notes To Statement Of Financial Condition
ORGANIZATION Shaffer Diversified Fund, LP (the
"Partnership") is a Delaware limited
partnership formed on August 29, 2000 that
intends to operate as a commodity investment
pool. The Partnership's objective will be
the appreciation of its assets through
speculative trading of commodity futures
contracts and related instruments. As of
December 31, 2000, the Partnership has not
commenced operations.
The Partnership will continue until December
31, 2025 unless earlier terminated. However,
if the Partnership's investments experience
a substantial decline in value, as defined
in the Partnership Agreement, (the
"Agreement") the Partnership will be
dissolved.
The Partnership is presently in registration
with the Securities and Exchange Commission,
and will be subject to regulatory
requirements under the Securities Act of
1933 and the Securities Exchange Act of
1934. As a commodity investment pool, the
Partnership will be 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; the rules of
the National Futures Association, an
industry self-regulatory organization; and
the requirements of the various commodity
exchanges where the Partnership executes
transactions. Additionally, the Partnership
will be subject to the requirements of
Futures Commission Merchants (brokers)
through which the Partnership will trade.
RELATED PARTY The General Partner of the Partnership is
TRANSACTIONS Shaffer Asset Management, Inc. (the "General
Partner") which will conduct and manage the
business of the Partnership. The General
Partner is also the commodity trading
advisor of the Partnership.
The Partnership will pay for management and
servicing at an annual rate of 5% of monthly
net asset value of the Partnership,
calculated and payable monthly. Such fees
will be allocated between the General
Partner and the selling agents as follows:
3.75% to the General Partner and 1.25% to
the selling agents during the first 12
months after an investment is made and 1% to
the General Partner and 4% to the selling
agents thereafter for various services
performed on an ongoing basis.
Investors will be charged a 5% sales
commission of which the General Partner will
receive approximately 20%.
The General Partner will share in all
Partnership income and losses to the extent
of its interest in the Partnership. The
General Partner will also receive on a
quarterly basis an incentive allocation from
the Partnership equivalent to 15% per year
of any increase in the cumulative
appreciation of the net asset value of the
Partnership, as defined in the Partnership
Agreement.
The General Partner has agreed to maintain a
minimum net worth of not less than the
greater of $50,000 or 5% of contributions
made to the Partnership as further defined
in the Agreement. The General Partner will
also be required to maintain a minimum
capital contribution to the Partnership of
the greater of $25,000 or 1% of
contributions made to the Partnership as
further defined in the Agreement.
F-11
SHAFFER DIVERSIFIED FUND, LP
Notes To Statement Of Financial Condition -- (Continued)
The General Partner will pay all expenses
associated with the organization of the
Partnership and the initial offering of the
Units ("Units") of the limited and general
partnership interest in the Partnership.
Partnership operating expenses (excluding
continuing services fees, management fees,
incentive allocations, brokerage commissions
and extraordinary expenses) in excess of
0.5% of the average monthly net asset value
of the Partnership will be reimbursed by the
General Partner.
REDEMPTIONS A limited partner may request and receive
redemption of its Units owned, subject to
restrictions in the Agreement of Limited
Partnership. Early redemption fees charged
to the limited partner apply through the
first twelve months following purchase
ranging from 1% to 4% based on length of
investment. After twelve months following
purchase of a Unit, no redemption fees will
be charged. These fees will be paid to the
General Partner.
TRADING ACTIVITIES The Partnership will engage in the
AND RELATED RISKS speculative trading of U.S. commodity
futures contracts, which are derivative
financial instruments. The Partnership will
be 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. In
the event of a broker's insolvency, it is
possible that the recovered amount of margin
deposits could be less than the total
property deposited.
The amount of required margin and good faith
deposits with the broker usually ranges from
10% to 40% of net asset value.
INCOME TAXES The Partnership is not subject to income
taxes. The partners report their allocable
share of income, expense and trading gains
or losses on their own tax returns.
F-12
STATEMENT OF ADDITIONAL INFORMATION
SHAFFER DIVERSIFIED FUND, LP
(A DELAWARE LIMITED PARTNERSHIP)
25,000 UNITS OF LIMITED PARTNERSHIP INTEREST
925 WESTCHESTER AVENUE
WHITE PLAINS, NY 10604
TELEPHONE NUMBER: (800) 352-5265
October 16, 2001
This statement of additional information is not a prospectus and should be read
in conjunction with the Fund's prospectus dated October 16, 2001, a copy of
which accompanies this statement of additional information.
PART TWO -- STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
-----
Glossary and Definitions of Commodity Futures Trading................... 3
Description of Commodity Trading........................................ 7
General............................................................ 7
Mechanics of Futures Trading....................................... 8
Margins............................................................ 8
Regulation......................................................... 9
Past Performance of the Advisor......................................... 11
Exhibits--
Limited Partnership Agreement...................................... A-1
Subscription Requirements.......................................... B-1
Subscription Instructions; Subscription Agreement/Power of Attorney C-1
Request for Redemption............................................. D-1
2
GLOSSARY AND DEFINITIONS OF COMMODITY FUTURES TRADING
The following glossary may assist the prospective investor in
understanding the terms used in the accompanying prospectus of Shaffer
Diversified Fund, LP and this statement of additional information:
Affiliate. See "Fees, Compensation and Expenses-- Certain Definitions" in
the accompanying prospectus.
Capital Contribution. The payment by Shaffer Asset Management, Inc., the
Fund's general partner and initial commodity trading advisor or a limited
partner of the Fund of the purchase price for units of general partnership
interest or units of limited partnership interest in the Fund (the "Units"),
respectively.
Clearing Broker. Certain futures commission merchants and all introducing
brokers may not be members of the various organized commodity exchanges, or in
the case of futures commission merchants who are members, they may choose not to
clear their own trades and are, therefore, not members of the exchange's related
clearing house. Such futures commission merchants and introducing brokers use a
member firm for clearing and other administrative services. The firm providing
this service is known as a "clearing broker" and the firm using this service is
known as a "correspondent." The services usually performed include the clearance
and settlement of transactions, ordering executions on the floor and various
back-office type functions.
Clearing House. The agency, associated with a commodity exchange, through
which futures contracts are offset or fulfilled and financial settlements are
made.
Commission. The fee charged by a broker for executing a trade in a
commodity trading account of a customer. ADM Investor Services, Inc., the Fund's
initial commodity broker, will (as is the industry custom) charge the Fund
commissions on a "round-turn" basis (i.e., only upon the closing of an open
position). However, for purposes of calculating the Net Asset Value of the Fund,
commodity brokerage commissions on open positions will be subtracted from any
unrealized profits or added to any unrealized losses on such positions.
Commodity. The term "commodity" refers to goods, wares, merchandise,
produce, and in general everything that is bought and sold in commerce,
including financial instruments and currencies. Out of this large class, certain
commodities (including the aforesaid "financial" commodities), because of their
wide distribution, universal acceptance and marketability in commercial
channels, have become the subjects of trading on various national and
international exchanges located in principal marketing and commercial areas.
Traded commodities include: grains such as wheat corn, oats and soybean products
(meal and oil); foods such as livestock and meat, poultry and poultry products,
frozen concentrated orange juice, potatoes, sugar, cocoa and coffee; fibers such
as cotton, lumber and plywood; metals such as copper, silver, gold, platinum,
tin and zinc; financial instruments such as obligations issued by the Government
National Mortgage Association (GNMA's), United States Treasury Bills and
Treasury Bonds and corporate commercial paper; foreign currencies; such as
British pounds, Canadian dollars, Deutche marks, EuroCurrency, Japanese yen and
Swiss francs; contracts based on securities indices and groups; and energy
supplies such as petroleum and petroleum products (heating oil). Those
"physical" commodities that are traded are sold according to uniform,
established grade standards, in convenient predetermined lots and quantities
such as bushels, pounds, or bales, are fungible (admit of free substitution of
one lot for another to satisfy a contract) and, with few exceptions, are
storable over periods of time. See "Fees, Compensation and Expenses -- Certain
Definitions" in the accompanying prospectus.
Commodity Futures Contract. See "Futures Contract", below.
Commodity Option. See "Option", below.
Commodity Futures Trading Commission (CFTC). An independent regulatory
commission of the United States Government empowered to regulate commodity
futures transactions and other commodity interest transactions under the
Commodity Exchange Act, as amended.
Commodity Pool Operator. The sponsor or administrator of a commodity pool
such as the Fund. Shaffer Asset Management/Advisor is a CFTC-registered
commodity pool operator.
Commodity Trading Advisor. One who analyzes or makes recommendations with
respect to commodity values and commodity trading or manages commodity trading
accounts for others. The General Partner/Advisor is a CFTC-registered commodity
trading advisor.
3
Contract Market. A commodity exchange or, more correctly, that specific
market within a commodity exchange that is devoted to a particular commodity,
upon which the trading of a particular futures contract or commodity option has,
been authorized by the CFTC.
Daily Price Fluctuation Limit. The maximum permitted fluctuation, imposed
by an exchange and approved by the CFTC, in the price of a commodity futures
contract for a given commodity that can occur on a commodity exchange on a given
day in relation to the previous day's settlement price, which maximum permitted
fluctuation is subject to change by the exchange from time to time.
Daily Trading Limit. The maximum number of futures contracts for a given
commodity allowed to be purchased or sold on a given day by any one person or
group of persons acting together. In the past, daily trading limits have been
established by certain exchanges and may be established again in the future.
Day Trading. The purchase and sale of the same futures contract during a
single day.
Delivery. The process of satisfying a commodity futures contract by
transferring ownership of a specified quantity and grade of a cash commodity
(i.e., the actual underlying commodity) to the purchaser thereof.
Forward Contract. A cash market transaction in which buyer and seller
agree to the purchase and sale of a specific quantity of a commodity for
delivery at some future time under such terms and conditions as the two may
agree upon through negotiation.
Fully Disclosed Brokerage Arrangement. An arrangement between a retail
broker or an introducing broker and its clearing broker pursuant to which the
latter carries the individual accounts of the former's customers on its books.
Under this arrangement, the retail broker or introducing broker receives a share
of the income generated by the account.
Fundamental Analysis. Analyzing the price trends of commodities using the
underlying factors of supply and demand. Among these are items such as weather,
weather forecasts, price support programs, political developments, population,
floods, drought, labor problems, the economy, acreage yields, substitutes, and
so on.
Futures Contract. Traditionally, a contract providing for delivery or
receipt at a future date of a specified amount and type of a traded commodity at
a specified price and delivery point. A commodity futures contract should be
distinguished from the actual physical commodity, which is termed a "cash
commodity". "Stock index futures", however, are based upon the values of certain
stock indices and are settled in cash rather than by delivery of an underlying
commodity.
Futures Commission Merchant. A commodity broker. ADM Investor Services is
a CFTC-registered futures commission merchant.
Hedging. Reducing or attempting to reduce exposure to changes in the
market for a commodity through the establishment of an opposite position in the
futures market from that held in the cash or "spot" market therefore. See
"Description of Commodity Futures Trading -- General", below.
Introducing Broker. Any person, except an individual who elects to be and
is registered as an associated person of a futures commission merchant or
introducing broker, engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery on or subject to the rules
of any contract market who does not accept any money, securities, or property
(or extend credit in lieu thereof) to margin, guarantee, or secure any trades or
contracts that result or may result therefrom.
Limit. See "Daily price fluctuation limit", above.
Limit Order. A trading order which sets a limit on either price or time of
execution or both. Limit orders (as contrasted with stop orders) do not become
market orders (see below).
Long Contract (Position). A commodity futures contract to buy a specified
amount and grade of a commodity at a future date at a specified price (or the
trading position arising therefrom).
Margin. In commodity trading, "margin" refers to good faith deposits with
a broker to assure fulfillment of a purchase or sale of a commodity futures
contract. At present, margins generally range from 4% to 20% of the value of the
commodity underlying the contract. "Maintenance" margin requirements are
generally 75% of initial margin requirements. See "Description of Commodity
Futures Trading -- Margins", below.
4
Margin Call. A demand for additional funds after the initial margin
deposit required to maintain a customer's account in compliance with the
"maintenance margin" requirements of a particular commodity exchange or of a
commodity broker. See "Description of Commodity Futures Trading -- Margins",
below.
Market Order. An order to execute a trade at the prevailing price as soon
as possible.
Net Asset Value and Net Asset Value Per Unit. See "Fees, Compensation and
Expenses -- Certain Definitions" in the accompanying prospectus.
Open Position (or Trade). The contractual commitment arising from an
outstanding long or short futures contract that has not been extinguished by an
offsetting trade or by delivery.
Option. A contract giving the holder the right, but not the obligation, to
buy (a call) or sell (a put) a specified commodity futures contract or commodity
at a future date for a specified price.
Position Limit. The maximum number of commodity futures contracts in one
commodity on a contract market that can be held or controlled at one time by one
person or a group of persons acting together, as allowed by the CFTC or a
commodity exchange.
Position Trading. Holding futures contracts for an extended period of
time, as contrasted with "day trading", above.
Pyramiding. The use of unrealized profits in an existing position to
provide margin for the acquisition of additional commodity futures contracts in
the same or a related commodity.
Round-Turn. The acquisition and subsequent liquidation of a futures
contract (i.e., open position). Commodity brokerage commissions are
traditionally charged on a "round-turn" basis.
Syndication Fees/Selling Commissions/Sales Charges. During the initial
offering period, the Units will be offered at an initial offering price of
$1,000 ($950 per Unit, plus an initial sales charge of $50 per Unit). Subsequent
to the closing of the initial offering period, unsold Units, if any, may be
offered and sold by the Fund at the then current Net Asset Value per Unit, plus
a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. If
at least 1,000 Units are sold and accepted by Shaffer Asset Management during
the initial offering period, approximately 20% of all sales charges shall be
paid to Shaffer Asset Management to reimburse Shaffer Asset Management to
reimburse Shaffer Asset Management for the payment of the Fund's organizational
and initial offering and the Fund's operating expenses that are payable by
Shaffer Asset Management and approximately 80% of all sales charges shall be
paid as syndication fees to Berthel Fisher & Company Financial Services, Inc.;
and as selling commissions to certain other firms that are members of the NASD
and certain foreign dealers and institutions which are not members of the NASD
that are participating in the offering. Berthel Fisher & Company and the
selected dealers may in turn pay a portion of such syndication fees and selling
commissions to their respective employees who are NASD registered
representatives for each Unit sold by them. The sales charge may be increased at
any time and from time to time by Shaffer Asset Management upon sixty days'
prior written notice to the Limited Partners. See "Fees, Compensation and
Expenses -- Description of Fees, Compensation and Expenses -- Syndication
Fees/Selling Commissions/Sales Charges" and "Plan of Distribution" in the
accompanying prospectus.
Settlement Price. The daily price or value of each futures contract
established by a commodity exchange's clearing house after the close of each
day's trading, usually the closing price, on the basis of which "maintenance
margin" requirements are set. See "Description of Commodity Futures Trading --
Margins", above.
Short Contract (Position). A commodity futures contract to sell a
specified amount and grade of a commodity at a future date at a specified price
(or the trading position arising therefrom).
Speculating. In commodity trading, to trade other than for the purpose of
hedging; to trade in hopes of profiting from favorable price changes. See
"Description of Commodity Futures Trading -- General", below.
Spot Contract. A cash market transaction in which buyer and seller agree
to the purchase and sale of a specific commodity lot for immediate delivery.
Spread. The taking of both long and short positions with respect to the
same or related commodities but in different delivery months or on different
exchanges.
5
Stop Order. An order given to a broker to execute a trade in a commodity
futures contract when the market price for the contract reaches the specified
stop order price. Stop orders are utilized to protect gains or limit losses on
open positions. Stop orders become market orders when the stop order price is
reached.
Straddle. Same as "Spread", above.
Technical Analysis. An approach to forecasting commodity prices based on
the study of price movement itself without regard to underlying fundamental
market factors.
Trading Limit. See "Daily trading limit", above.
Unrealized Profit or Loss. The profit or loss which would be realized on
an open position if it were closed out at the current settlement price.
6
DESCRIPTION OF COMMODITY TRADING
General
Commodity futures contracts are made on or through a commodity exchange
and provide for future delivery of agricultural and industrial commodities,
foreign currencies or financial instruments, or, in more recent instances, the
cash equivalent thereof. Such contracts are uniform for each commodity and vary
only with respect to price and delivery time. A commodity futures contract to
accept delivery (buy) is referred to as a "long" contract; conversely, a
contract to make delivery (sell) is referred to as a "short" contract. A long
contract may be satisfied either by taking delivery of the commodity and paying
the entire purchase price therefor or by offsetting the contractual obligation
prior to delivery through the acquisition of a corresponding short contract on
the same exchange. A short contract may be satisfied either by making delivery
of the commodity (usually by tendering warehouse receipts, shipping certificates
or similar documents of title) or by acquiring a corresponding long contract on
the same exchange. Commodity exchanges provide a clearing mechanism to
facilitate the matching of offsetting trades. Until a commodity futures contract
is satisfied by delivery or offset, it is said to be an "open" position.
Commodity futures contracts are but one category of organized commodity trading
as it presently exists in the United States. Two other categories of commodity
transactions are "spot" contracts and "forward" contracts. Both of these are
varieties of cash commodity transactions, as opposed to futures transactions, in
that they relate to the purchase and sale of specific actual physical
commodities. Whereas futures contracts are uniform except for price and delivery
time, cash commodity contracts may differ from each other with respect to such
terms as quantity, grade, mode of shipment, terms of payment, penalties, risk of
loss and the like. Spot contracts are generally cash commodity contracts for the
purchase and sale of a specific physical commodity for immediate delivery.
Forward contracts are cash commodity contracts for the purchase and sale of a
specific physical commodity for delivery at some future time under terms and
conditions specifically negotiated by the parties. Cash commodity transactions
may arise in conjunction with commodity futures transactions. For example, if
the holder of a long contract satisfies it by taking delivery of the commodity,
such holder is said to have a cash commodity position. This cash position, if it
is not to be used or processed by the holder, may be sold through spot or
forward contracts, or delivered in satisfaction of a commodity futures contract.
Another type of commodity contract is the "commodity option" which gives the
holder the right (but not the obligation) to buy or sell a specified futures
contract or commodity at a future date for a specified price.
The prices of commodities fluctuate rapidly and over wide ranges. Except
for the effect of government price control and support programs, commodity
prices are generally determined by the interaction of supply and demand. The
market is subject to the many psychological factors working on each buyer and
seller, as well as to crop conditions, deflation or inflation, strikes
(especially in the transportation and commodity storage industries), world
conditions, war or threats of war, interest rates, and other factors. Any
fundamental prediction of commodity prices is necessarily subject to all of
these factors, which can change daily if not hourly. Only by constant updating
of accurate information as to these fundamental factors or by technical analysis
can any reasonable forecasts be made for commodity prices, and, notwithstanding
that current and correct information as to substantially all factors is known,
prices still may not react as predicted. Prices of commodities are listed in
most major daily newspapers and financial journals.
The prices of financial instruments and foreign currencies are subject to
the factors described above. Some of the other factors that affect financial
instrument or foreign currency prices include a country's balance of payments
(surplus or deficit), political stability, treaties, government policies and
exchange controls, the inflation rate, and interest rates.
There are two broad classifications of commodity traders: hedgers and
speculators. Hedgers are persons or entities who market or process commodities
and utilize the commodity markets for protection against the risk of price
variation. For example, a seller or processor is at the risk of market price
fluctuations between the time he contracts to sell or process and the time he
must perform on the contract. In such cases, at the time of the contract, he
will simultaneously enter into futures contracts to buy the necessary equivalent
quantity of the commodity he needs or to sell the equivalent quantity of the
commodity he intends to market at some later date. To illustrate, a cattle
feeder may enter into a futures contract to sell cattle, which can ultimately be
satisfied by the delivery of his herd, thus relieving himself of exposure to
price variations in either his raw material or ultimate market product.
Similarly, a farmer may hedge against the price fluctuations between the day he
plants his crop and the day it is ready for delivery. In these examples, the
hedger may either make or take delivery in satisfaction of his futures contract,
or else close the position prior to delivery and buy or sell the necessary
equivalent amount of the physical commodity. In either case, the price of the
commodity is established at the time the hedger initiates his futures position.
7
Thus, the commodity markets enable the hedger to shift the risk of price
fluctuations to the speculator. See "Mechanics of Commodity Futures Trading",
below.
A speculator is a person or entity that buys or sells in expectation of a
rise or decline in the price of a commodity and assumes the market risk sought
to be avoided by the hedger. For instance, the speculator may take the opposite
side of a hedger's trade, as in the example above, by acquiring the opposite
side of the futures contract sold by the cattle feeder. If the price rises, the
speculator can close out his position at a profit, either by taking delivery of
the cattle covered by his contract or, more usually, by offsetting his original
position by taking an opposite position. If the price falls, the speculator can
still liquidate his position, but at a loss. Because the speculator may take
either a long or short position in the futures markets, it is possible for him
to make profits or incur losses regardless of the direction of price trends. All
trades made by the Fund will be for speculative rather than hedging purposes.
See "Mechanics of Commodity Futures Trading" below.
Mechanics of Futures Trading
The commodity futures contract is the basic instrument involved in futures
trading. Upon entering into or acquiring such a contract, the trader becomes
obligated to buy or sell a certain quantity of a specific commodity on a certain
date. Thereafter, trading profits or losses result from movements in the price
of the commodity underlying the futures contract. For example, if on April 1st a
trader enters into a contract to buy for $5.00 a bushel of wheat for delivery in
July and the price of July wheat subsequently rises to $7.50 per bushel, then a
profit of $2.50 per bushel has been achieved. Conversely, if the price of July
wheat falls to $2.50 per bushel, the investor will have lost $2.50 per bushel
because he is obligated to pay $5.00 for something worth only half that price.
When the trader places an order with a broker, the order is transmitted by
the broker to the floor of a commodity futures exchange where the trade is
consummated by floor brokers by means of "open outcry" and the details of the
transaction are recorded. The individual trader does not appear on the exchange
records as buyer or seller; the contract is, rather, executed in the name of the
"clearing house member" through which the order has ultimately been placed and
the exchange's clearing house itself becomes the opposite party to the contract.
At the close of each trading day, cash settlements are made which reflect that
day's price movements in all the commodities covered by outstanding futures
contracts. The clearing house credits the account of the clearing member whose
position shows a gain, and debits the account of the clearing member who
suffered a loss.
In practice, a commodity futures contract seldom results in the taking or
making of delivery in accordance with its terms. Usually, the contract will be
"offset" with a second futures contract that represents a position that is the
opposite of the first. Using the same example given above, if a futures contract
provides for the purchase of a bushel of July wheat for $5.00 and the price
subsequently rises to $7.50 per bushel, the trader can close out his position
and liquidate his profit by entering into or acquiring a contract to sell a
bushel of July wheat for $7.50.
Margins
In commodity trading, "margins" are good faith deposits that must be
deposited with a broker in order to initiate or maintain an open position in a
commodity futures contract. When commodity futures contracts are traded, both
buyer and seller are required to post margins with the brokers handling their
trades as security for the performance of their buying and selling undertakings
and to offset losses in their trades due to daily fluctuations in the markets.
Minimum margins are set by the several exchanges and generally range from 4% to
20% of the value of the commodity underlying the contract. For example, wheat
valued at $5.00 per bushel may have a margin set at 50 cents per bushel. A
speculator with only $2,500 may thus enter into a contract for 5,000 bushels of
wheat worth $25,000. A variation of 50 cents per bushel in price would then
result in a loss of $2,500 (his entire margin) or a gain of $2,500 (a 100%
profit on his margin). If delivery of a commodity is made in satisfaction of a
futures contract the entire contract price is generally payable by the buyer.
Brokerage firms carrying accounts for traders in commodity futures contracts may
increase the amount of required margin as a matter of policy in order to afford
further protection for themselves. It is presently contemplated that ADM
Investor Services will require the Fund to make margin deposits of at least 100%
of the minimum level for all commodity futures contracts. This requirement may
be altered from time to time at the discretion of ADM Investor Services.
The customer's margin deposit is the "equity" in his account. A change in
the market price of a commodity futures contract will increase or decrease the
equity. If the equity decreases below the "maintenance margin" amount (generally
75% of the initial margin requirement), the broker may issue a margin call
requiring the customer to increase the account's equity. Failure to honor such a
margin call may result in the closing out of the open position. If at the time
such open position is closed the account equity is negative, then the equities
8
in the customer's open positions in excess of their required margins, as well as
the customer's cash reserves, will be used to offset such debit balance. If such
equities and reserves are not sufficient, the customer will be liable for the
remaining unpaid balance.
Regulation
Congress enacted the Commodity Exchange Act, as amended, to regulate
trading in commodity futures contracts and other commodity interests, the
exchanges on which they are traded, the individual brokers who are members of
such exchanges, and commodity professionals and commodity brokerage houses that
trade in these commodities. The CFTC is an independent agency that administers
the CE Act and is authorized to promulgate rules thereunder. The CE Act is
designed to promote the orderly and systematic marketing of commodities and
futures contracts while preventing fraud, speculative excess and price
manipulations, and makes unlawful any device, scheme or artifice to defraud a
customer or participant in a commodity pool. It also prohibits any transaction,
practice or course of business that operates as a fraud or deceit upon any
current or prospective customer or participant.
The CE Act further provides, among other things, that futures trading in
commodities must be upon exchanges designated as "contract markets" by the CFTC.
The CFTC has adopted regulations covering the designation of contract markets,
the monitoring of commodity exchange rules, the establishing of position limits,
the registration of brokers and brokerage houses, commodity trading advisors and
commodity pool operators, the segregation of customers' funds, minimum financial
requirements, record keeping and periodic audits of such registered brokerage
houses and professionals. Under the CE Act, the CFTC is empowered, among other
things, to (i) hear and adjudicate customer complaints against all individuals
and firms registered under the CE Act (reparations), (ii) seek injunctions and
restraining orders, (iii) issue orders to cease and desist, (iv) initiate
disciplinary proceedings, (v) revoke or suspend registrations, and (vi) levy
substantial fines.
Shaffer Asset Management, Inc., the Fund's general partner and commodity
trading advisor, is a "commodity pool operator" and a "commodity trading
advisor" and ADM Investor Services, Inc. is a "futures commission merchant", as
those terms are used in the CE Act and, as such, are registered with, and
subject to regulation by, the CFTC. If the registration of Shaffer Asset
Management as a commodity pool operator were to be suspended or terminated, the
Fund would no longer be able to trade until a substitute general partner could
be duly elected and registered. If the registration of Shaffer Asset Management
as a commodity trading advisor was similarly suspended or revoked, Shaffer Asset
Management would not be permitted to advise the Fund. Should the registration of
ADM Investor Services as a futures commission merchant be suspended or revoked,
the Fund would no longer be able to maintain its account with ADM Investor
Services, and a new futures commission merchant would be retained by Shaffer
Asset Management.
The CE Act and the regulations promulgated thereunder make it unlawful for
any commodity pool operator, commodity trading advisor, principal thereof or
person who solicits therefor to represent or imply in any manner whatsoever that
they have been sponsored, recommended or approved, or that their abilities or
qualifications have in any respect been passed upon, by the CFTC, the Federal
government, or any agency thereof. The CFTC registrations of Shaffer Asset
Management and ADM Investor Services should not be taken by prospective
investors as governmental endorsements of the registered entities.
The CFTC has in effect a comprehensive scheme for the regulation of
commodity pool operators and commodity trading advisors. As now in effect, the
rules require commodity pool operators and commodity trading advisors to provide
certain disclosures to new customers and to retain certain trading and other
records, prohibit pool operators from commingling pool assets with those of the
operators or its customers, and require pool operators to provide their
customers with periodic account statements and an annual report. Upon request by
the CFTC, the names and addresses of the Limited Partners in the Fund would be
required to be furnished to the CFTC, along with copies of all transactions
with, and reports and other communications to, the Limited Partners.
Commodity exchanges are given certain latitude in promulgating rules and
regulations to control and regulate their members and clearing houses as well as
the trading conducted on their floors. Examples of regulation by an exchange
include the establishment of initial and maintenance margins, limits on price
fluctuations, size of trading limits and contract specifications. The CFTC
reviews such rules, except those relating to margins, and all such rules and
regulations relating to the terms and conditions of contracts of sale or to
other trading requirements must be approved by the CFTC.
In order to prevent excessive speculation and attempted cornering of a
market, the various exchanges and the CFTC have imposed speculative position
9
limits on commodity futures transactions, and certain exchanges may have
established limits referred to as "daily trading limits" on the maximum number
of contracts which any person may trade on a particular trading day. Position
limits are subject to certain exemptions, such as bona fide hedging
transactions. All futures trades made by Shaffer Asset Management and its
principals on behalf of their respective managed accounts, including trades for
the Fund, will be aggregated for purposes of determining speculative position
limits.
Violation of the CE Act and the regulations thereunder subjects the
violator to penalties under the CE Act, including revocation of registration,
suspension of trading privileges, civil fines and imprisonment.
In 1979, the staff of the SEC adopted the position that the trading of
futures contracts with respect to financial instruments (other than United
States Treasury Notes, United States Treasury Bills, United States Treasury
Bonds, Government National Mortgage Association certificates and commercial
paper) by a commodity pool such as the Fund would require such pool to register
under the Investment Company Act of 1940, as amended, and its trading advisors
to register under the Investment Advisors Act of 1940, as amended. Since that
time, other financial instrument futures contracts, such as the stock index
contract have begun trading. The Futures Trading Act of 1982 expressly granted
jurisdiction to the CFTC over stock index contracts and, accordingly, the Fund
may trade such contracts. Additionally, as a result of these statutory revisions
and a June 1988 "no-action" letter issued by the staff of the SEC, the Fund is
permitted to trade in futures contracts on financial instruments and in options
on futures contracts without registration under the Investment Company Act of
1940 or the Investment Advisors Act of 1940.
In the fall of 1981, the CFTC approved the application of the National
Futures Association to become a "registered futures association" under Section
17 of the CE Act, and the NFA became operational in 1982. The NFA acts as a
general "self-regulatory" body for the commodity industry, performing a role
similar to that played by the NASD with respect to the securities industry.
Significant regulatory responsibilities under the CE Act, particularly with
respect to the activities of futures commission merchants and introducing
brokers, was transferred from the CFTC to the NFA. Shaffer Asset
Management/Advisor and ADM Investor Services are members of NFA.
The Futures Trading Act of 1982 was signed into law in January 1983. It
contains various amendments to the CE Act, including additional regulations for
commodity pool operators, such as Shaffer Asset Management, an express, private
right of action to bring suit in Federal courts for violations of the CE Act,
and additional powers to the NFA to carry out its responsibilities as a
self-regulatory organization.
10
PAST PERFORMANCE OF THE ADVISOR
Table A below sets forth the unaudited composite trading results of all
accounts managed by Shaffer Asset Management from March 1999 to September 30,
2001. The number of accounts managed by the Advisor totaled 1, 11, 17 and 18 in
March 1999 and as at December 31, 1999, December 31, 2000 and September 30,
2001, respectively. Through September 30, 2001, 10 of such accounts showed net
gains and 8 showed net losses. The profit made by these accounts showing net
gains amounted to approximately $192,855, and the losses incurred by those
accounts showing net losses amounted to approximately $49,010. As of September
30, 2001, 9 accounts had been closed with a net gain of approximately $77,833.
Table B below presents a comparison of the actual brokerage commissions
and advisory fees charged to the accounts whose performance is set forth in
Table A to the "pro forma" amounts of such charges which would have been imposed
on these accounts if they had been charged the commissions, fees and allocations
proposed to be charged to the Fund. The bases upon which the pro forma amounts
were computed are discussed in the notes to Table B.
Applicable CFTC regulations require disclosure of the "rate of return" for
each month of all accounts managed by Shaffer Asset Management or its
principal(s). The method of calculation mandated by the CFTC is necessarily
subject to potential distortions due to the fact that such method does not
account for additions and withdrawals that may occur during the month for which
the calculation is made. It should be noted that there are other methods of
calculating rate of return and, because of the differences among such methods,
the percentage results may vary. The rates of return indicated should not be
taken as representative of any rate actually earned by any of the accounts
included in Tables A or B or as being indicative of any return the Fund may earn
in the future.
The information included in Tables A and B below has not been audited but,
in the opinion of Shaffer Asset Management, such information, other than the pro
forma results, fairly presents the performance of the accounts managed by
Shaffer Asset Management for the periods shown.
The results set forth in Table A below are not indicative of the results
that may be achieved by Shaffer Asset Management since past results are not
determinative of future results. No representation is being made that the Fund
will or is likely to achieve profits similar to those shown. The composite
results set forth in Table A are based upon individual accounts and commodity
pool accounts managed by Shaffer Asset Management during the periods shown.
Table A does not reflect the actual performance of any one account. Accordingly,
investors in specific accounts included in the composite figures may have had
more or less favorable results than Table A indicates. All accounts advised by
Shaffer Asset Management do not in all instances, have parallel performance due
to different times of market entry and varying amounts of capital. For example,
larger account size may have effects on particular trading decisions, such as
the relative size of positions taken, degree of diversification and particular
commodity interests traded. In addition, the performance of each account
included in the composite figures has varied depending upon the size of the
investment, the date the account started trading and the length of time the
account was open. Such results are presented on a composite basis rather than
account-by-account, and each account's experience may differ from the composite
figures shown. The fees and brokerage commissions charged to the Fund may differ
from the fees and brokerage commissions actually charged to these accounts, and
the commission rate charged to the Fund may also change in the future. In
addition, because Shaffer Asset Management has modified its trading methods in
the past and will continue to modify its trading methods in the future, the
results shown in Table A do not necessarily reflect the trading methods which
will be used by Shaffer Asset Management on behalf of the Fund. It should also
be noted that the aggregate value of the Fund's account will constitute a
significant increase in the assets under Shaffer Asset Management's control if
all or a substantial number of the Units being offered are sold. Apart from the
effects of a large account size on particular trading decisions, such as the
time of entry of orders, the relative size of positions taken, degree of
diversification and particular commodities traded, the size of the Fund's assets
may affect generally the design and execution of Shaffer Asset Management's
trading methods. Past results are no guarantee of future results, and no
representation is made that the Fund will, or is likely to, achieve results
similar to those shown.
11
THE DATA SET FORTH BELOW IS NOT INDICATIVE OF AND HAS NO BEARING ON ANY RESULTS
WHICH MAY BE ATTAINED BY THE FUND OR SHAFFER ASSET MANAGEMENT IN THE FUTURE.
SHAFFER ASSET MANAGEMENT'S SYSTEM HAS EVOLVED OVER THE YEARS BASED ON
ACCUMULATED EXPERIENCE AND FURTHER TESTING OF DATA. AN ACCOUNT TRADED PURSUANT
TO SHAFFER ASSET MANAGEMENT'S CURRENT TRADING SYSTEM WOULD NOT HAVE EXPERIENCED
THE SAME RESULTS REFLECTED IN THE TABLE DUE TO DIFFERENCES IN BROKERAGE
COMMISSIONS AND MANAGEMENT AND INCENTIVE FEES AND CHANGES IN SHAFFER ASSET
MANAGEMENT'S TRADING SYSTEM, INCLUDING THE SIZE OF POSITIONS TAKEN IN RELATION
TO ACCOUNT SIZE AND THE DEGREE OF DIVERSIFICATION IN TERMS OF THE NUMBER OF
COMMODITY INTERESTS TRADED AT A PARTICULAR TIME AND DIFFERENCES IN COMMODITY
INTERESTS TRADED.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
TABLE A
COMPOSITE PERFORMANCE RECORD OF ACCOUNTS
MANAGED BY SHAFFER ASSET MANAGEMENT, INC.
BASED UPON NOMINAL CLIENT ACCOUNTS
(UNAUDITED)
Gross Net Change in Change in
Beginning Beginning Realized Realized Unrealized Trading
Equity Equity Additions-Withdrawals Profit Brokerage Profit Interest Profit Accrued Advisor's
Actual Nominal Nominal Nominal (Loss) Commissions (Loss) Income (Loss) Commission Fees
(1a) (1b) (2) (3) (4) (5) (6) (7) (8) (9) (10)
-------- -------- -------- ---------- -------- ---------- -------- -------- --------- -------- ----------
1999
Mar..... 0 0 50,000 0 (457) 687 (1,144) 0 7,859 (269) 1,289
Apr..... 55,156 55,156 100,000 0 20,170 818 2,720 138 23,011 (1,139) 4,918
May..... 174,969 174,969 50,096 0 3,539 2,531 17,639 317 (15,741) 86 396
Jun..... 226,970 226,970 300,000 0 (31,771) 4,148 (35,919) 696 35,020 (383) 391
Jul..... 525,992 525,992 0 0 80,573 4,829 75,743 1,515 (2,308) 38 14,047
Aug..... 586,935 586,935 150,176 0 (7,240) 5,670 (12,910) 1,692 (77,523) (1,756) (12,202)
Sep..... 658,816 658,816 100,000 0 (141,163) 6,939 (148,102) 1,833 352,312 (862) 34,433
Oct..... 929,563 929,563 0 0 237,117 7,754 229,363 2,511 (336,406) 3,252 0
Nov..... 828,285 828,285 100,360 0 33,138 10,200 22,937 2,195 161,278 (4,193) 15,246
Dec.....1,095,616 1,095,616 160,000 0 (38,950) 10,173 (49,124) 2,857 11,661 605 (7,173)
1999 Compouded Rate of Return (16) 59.58%
2000
Jan.....1,228,789 1,228,789 69,315 0 43,202 6,456 36,745 3,000 52,298 221 17,655
Feb.....1,372,714 1,372,714 90,000 58,094 109,649 6,059 103,590 4,569 (47,633) 563 11,428
Mar.....1,454,282 1,454,282 200,000 0 31,032 10,674 20,358 5,150 (151,837) 50 (21,368)
Apr.....1,549,373 1,549,373 120,000 14,651 (47,630) 6,703 (54,334) 5,436 136,061 (1,373) 12,437
May.....1,728,073 1,728,073 450,000 0 111,704 12,350 99,353 6,908 (10,093) 595 17,454
Jun.....2,157,382 2,257,382 0 0 72,829 9,201 63,628 7,122 49,488 494 21,903
Jul.....2,256,213 2,356,213 0 0 (27,036) 4,989 (32,025) 7,503 (34,379) (371) 0
Aug.....2,196,941 2,296,941 167,451 0 211,841 14,228 197,612 7,980 41,652 1,157 34,832
Sep.....2,577,964 2,677,964 0 0 66,394 11,338 55,055 10,792 (171,810) 2,387 (21,558)
Oct.....2,495,948 2,595,948 0 102,732 (414,029) 11,769 (425,798) 8,932 59,380 (2,554) 0
Nov.....2,033,175 2,133,175 0 50,716 (43,911) 9,425 (53,337) 7,722 17,912 (1,813) 0
Dec.....1,952,942 2,052,942 75,000 0 239,837 9,908 229,929 6,314 231,069 690 15,984
2000 Compounded Rate of Return (16) 22.46%
2001
Jan.....2,479,961 2,579,961 0 149,418 330,727 10,786 319,940 3,857 (313,573) (4,033) 673
Feb.....2,336,061 2,436,061 100,000 0 47,079 16,839 30,239 7,194 (3,080) (1,852) 2,102
Mar.....2,466,458 2,566,458 98,002 0 (37,259) 18,201 (55,461) 5,701 245,288 (4,459) 37,013
Apr.....2,718,515 2,818,515 75,000 44,280 59,490 20,424 39,065 6,323 7,637 3,027 11,239
May.....2,794,049 2,894,049 0 0 (281,088) 33,847 (314,935) 5,245 (126,542) (31) (11,239)
Jun.....2,369,024 2,469,024 249,999 98,541 27,413 34,062 (6,648) 5,272 145,419 (426) 5,074
Jul.....2,579,025 2,579,025 10,000 52,097 (216,638) 18,639 235,277 4,377 (132,355) (677) 0
Aug.....2,173,014 2,353,014 0 54,419 78,472 26,642 51,829 2,541 (118,889) 9,454 0
Sep.....2,065,521 2,245,521 97,500 48,854 107,542 7,684 115,238 4,090 184,089 (5,932) 0
2001 Year to Date Compounded Rate of Return (16) (14.74)%
Monthly Index
Other Net Ending Rate of
Expenses Performance Equity Return
(11) (12) (13) (14) (15)
-------- ---------- --------- ---------- ------
1999
Mar..... 0 5,156 55,156 10.31% 1,103
Apr..... 0 19,812 174,969 12.77% 1,244
May..... 0 1,904 226,970 0.85% 1,255
Jun..... 0 (977) 525,992 (0.19)% 1,252
Jul..... 0 60,942 586,935 11.59% 1,397
Aug..... 0 (78,295) 658,816 (10.62)% 1,249
Sep..... 0 170,747 929,563 22.50% 1,530
Oct..... 0 (101,278) 828,285 (10.90)% 1,363
Nov..... 0 166,971 1,095,616 19.21% 1,625
Dec..... 0 (28,826) 1,228,789 (2.41)% 1,586
1999 Compouded Rate of Return (16) 59.58%
2000
Jan..... 0 74,610 1,372,714 5.92% 1,680
Feb..... 0 49,661 1,454,282 3.54% 1,739
Mar..... 0 (104,908) 1,549,373 (6.47)% 1,627
Apr..... 0 73,351 1,728,073 4.45% 1,699
May..... 0 79,309 2,257,382 3.21% 1,754
Jun..... 0 98,830 2,356,213 4.30% 1,829
Jul..... 0 (59,272) 2,296,941 (2.64)% 1,781
Aug..... 0 213,571 2,677,964 8.64% 1,935
Sep..... 0 (82,015) 2,595,948 (2.97)% 1,877
Oct..... 0 (360,040) 2,133,175 (14.43%) 1,606
Nov..... 0 (29,516) 2,052,942 (0.98)% 1,591
Dec..... 0 452,018 2,579,912 22.10% 1,942
2000 Compounded Rate of Return (16) 22.46%
2001
Jan..... 0 5,518 2,436,061 0.25% 1,947
Feb..... 0 30,397 2,566,458 1.09% 1,968
Mar..... 0 154,054 2,818,515 5.62% 2,079
Apr..... 0 44,814 2,894,049 1.81% 2,116
May..... 0 (425,024) 2,469,024 (14.50)% 1,810
Jun..... 0 138,543 2,759,025 5.14% 1,903
Jul..... 0 (363,913) 2,353,014 (13.42)% 1,647
Aug..... 0 (53,073) 2,245,521 (2.28)% 1,610
Sep..... 0 67,009 2,361,176 2.86% 1,656
2001 Year to Date Compounded Rate of Return (16) (14.74)%
(Footnotes follow on next page)
13
NOTES TO TABLE A
A summary of the significant accounting policies, which have been followed
in preparing the accompanying Table A, above, is set forth below. The
performance represents the actual performance of accounts managed by Shaffer
Asset Management.
Shaffer Asset Management uses a method of computing rate of return and
performance disclosure, referred to as the "Fully-Funded Subset" method,
pursuant to an advisory entitled "Computation and Presentation of Rate-of-Return
Information and Other Disclosures Regarding Partially Funded Accounts Managed by
Commodity Trading Advisors" dated February 8, 1993 published by the CFTC (the
"CFTC Advisory"). To qualify for use of the Fully-Funded Subset method, the CFTC
Advisory requires that certain computations be made in order to arrive at the
Fully-Funded Subset and that the accounts for which the performance is so
reported meet two tests which are designed to provide assurance that the
Fully-Funded Subset method and the resultant rates of return are representative
of the trading program.
(1a) "Beginning Equity - Actual" equals the "Ending Equity" of the prior
period (except for the first period shown (March 1999) which
represents the total equity of all accounts managed by Shaffer Asset
Management on that date), excluding notional amounts (i.e., amounts
that exceed the amount of actual funds traded).
(1b) "Beginning Equity - Nominal" equals "Ending Equity" (except for the
first period shown (March 1999) which represents the total equity of
all accounts managed by Shaffer Asset Management on that date).
(2) "Additions - Nominal" equals the amount of all additions to the
account(s) each month, other than through sources of income, and are
comprised of cash and committed and notional funds.
(3) "Withdrawals - Nominal" equals the amount of all withdrawals,
redemptions, distributions and account terminations each month, other
than through sources of expense, and are comprised of cash, committed
and notional funds.
(4) "Gross Realized Profit (Loss)" is the gross realized gain (loss),
before brokerage commissions and Other Expenses, on all commodity
futures transactions closed out during the month.
(5) "Brokerage Commissions" are recognized on an accrual basis and
represent the total amount of all commissions charged per
"round-turn" trade by the applicable futures commission merchant(s)
on all commodity futures transactions closed out during the month,
plus certain other charges, including exchange fees and the fees and
charges of certain self-regulatory organizations.
(6) "Net Realized Profit (Loss)" equals "Gross Realized Profit (Loss)"
minus "Brokerage Commissions".
(7) "Interest Income" is recognized on an accrual basis and represents
interest earned on U.S. Government obligations, if any, held as
margin in the trading account(s), and/or interest earned, if any, on
balances at the futures commission merchant.
(8) "Increase (Decrease) in Unrealized Profit (Loss)" represents the
total increase (decrease) in the unrealized profit or loss on open
commodity positions at the end of the month as compared with the end
of the previous month. Unrealized gains (losses) on futures contracts
are calculated at the end of each month based on contract sizes and
the differences between the commodity futures contract closing price
and the price at which the contract was initially purchased or sold.
(9) "Change in Accrued Commission" represents the total increase
(decrease) from open commodity positions brokerage commissions
recognized on an accrual basis and represent the commissions charged
per round-turn by the futures commission merchant plus charges by
certain exchanges and self-regulatory organizations.
(10) "Trading Advisor's Fee" represents the amount of all paid and accrued
asset based management and performance based incentive fees charged
to the account(s) in accordance with the applicable advisory
agreement(s).
(11) "Other Expenses" represents other charges to the account(s)
presented on an accrual basis.
(12) "Net Performance" equals "Net Realized Profit (Loss)" plus "Increase
(Decrease) in Unrealized Profit (Loss)" plus "Interest Income" minus
"Trading Advisor's Fee" and "Other Expenses".
14
(13) "Ending Equity" equals "Beginning Equity - Nominal" plus "Additions -
Nominal" minus "Withdrawals - Nominal" plus or minus "Net
Performance".
(14) "Monthly Rate of Return" for each period is computed by dividing "Net
Performance" of the Fully-Funded Subset by the "Beginning Equity" of
the Fully-Funded Subset, except in periods of significant "Additions
- Nominal" or Withdrawals - Nominal" to the account(s) in the
Fully-Funded Subset. In such instances, the Fully-Funded Subset is
adjusted to exclude accounts with significant "Additions - Nominal"
or "Withdrawals - Nominal" which would materially change the rate of
return pursuant to the Fully-Funded Subset method.
The period rates of return for accounts excluded from the
Fully-Funded Subset will often be different from the rate of return
for the Fully-Funded Subset. Accounts not included in the
Fully-Funded Subset for any particular period may include: accounts
opened or closed during the period or accounts which are being phased
into the program an d, consequently, do not have a complete set of
positions that the other accounts in the program have. The rates of
return for these excluded accounts may be significantly higher or
lower than the rate of return for the Fully-Funded Subset.
(15) "Index" represents the estimated change in Net Asset Value of an
initial $1,000 deposit at the end of each period shown assuming that
such deposit remained invested without additions, withdrawals or
distributions through the periods covered by Table A. The
calculations were derived by multiplying the "Rate of Return"
(carried out to two decimal places) by $1,000 initially, and
continuing month by month. The performance of this initial $1,000
deposit does not represent the actual performance of any particular
account and is included for informational purposes only. In addition,
"Index" may not be an accurate indicator of performance since it
assumes a continuous investment throughout the period with no
subsequent additions, withdrawals or distributions.
(16) "Compounded Rate of Return" is listed below the final Monthly Rate of
Return for each calendar period presented. It represents the
compounded rate of return for each year or portion of the year
presented. It is computed by applying successively the respective
Monthly Rate of Return for each month beginning with the first month
of that calendar period. Compounded Rate of Return may not be an
accurate indicator of performance since it assumes a continuous
investment throughout the period with no subsequent additions,
withdrawals or distributions of accumulated profits.
15
TABLE B
PRO FORMA BROKERAGE COMMISSIONS AND ADVISORY FEES
Brokerage Commissions Management and Incentive Fees/Allocations
-------------------------------------- --------------------------------------
Actual Over Actual Over
(Under) Pro (Under) Pro
Period Actual (1) Pro Forma (2) Forma (3) Actual (4) Pro Forma (5) Forma (6)
------ -------- -------- -------- -------- -------- --------
1999
March.......................... 956 621 335 1,289 783 506
April.......................... 1,957 1,272 685 4,918 3,551 1,367
May............................ 2,445 1,589 856 396 697 (301)
June........................... 4,531 2,945 1,586 391 (665) 1,056
July........................... 4,791 3,114 1,677 14,047 13,061 986
August......................... 7,426 4,827 2,599 (12,202) (12,782) 580
September...................... 7,801 5,071 2,730 34,433 33,026 1,407
October........................ 4,502 2,926 1,576 0 (12,779) 12,779
November....................... 14,393 9,355 5,038 15,246 30,061 (14,815)
December....................... 9,568 6,219 3,349 (7,173) (2,617) (4,556)
-------- -------- -------- -------- -------- --------
Total.......................... 58,370 37,941 20,430 51,345 52,335 (990)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
2000
January........................ 6,235 4,053 2,182 17,655 17,506 149
February....................... 5,496 3,572 1,924 11,428 12,827 (1,399)
March.......................... 10,624 6,906 3,718 (21,368) (16,157) (5,211)
April.......................... 8,076 5,249 2,827 12,437 31,800 (19,363)
May............................ 11,755 7,641 4,114 17,454 17,832 (378)
June........................... 8,707 5,660 3,047 21,903 25,123 (3,220)
July........................... 5,360 3,484 1,876 0 (2,129) 2,129
August......................... 13,071 8,496 4,575 34,832 43,870 (9,038)
September...................... 8,951 5,818 3,133 (21,558) (8,833) (12,725)
October........................ 14,323 9,310 5,013 0 (47,549) 47,549
November....................... 11,238 7,305 3,933 0 1,779 (1,779)
December....................... 9,218 5,992 3,226 15,984 77,379 (61,395)
-------- -------- -------- -------- -------- --------
Total.......................... 113,054 73,485 39,569 88,767 153,448 (64,681)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
2001
January........................ 14,819 9,632 5,187 673 9,496 (8,823)
February....................... 18,791 12,214 6,577 2,102 11,734 (9,632)
March.......................... 22,660 14,729 7,931 37,316 37,342 (26)
April.......................... 17,397 11,308 6,089 11,239 16,100 (4,861)
May............................ 33,878 22,021 11,857 (11,239) (58,342) 47,103
June........................... 34,488 22,417 12,071 5,074 28,360 (23,286)
July........................... 19,316 12,555 6,761 0 9,403 (9,403)
August......................... 17,188 11,172 6,016 0 8,911 (8,911)
September...................... 13,626 8,857 4,769 0 9,359 (9,359)
October........................ 0 0 0 0 0 0
November....................... 0 0 0 0 0 0
December....................... 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Total.......................... 192,163 124,906 67,257 44,862 141,763 (96,901)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
(Footnotes follow on next page)
NOTES TO TABLE B
(1) "Brokerage Commissions (Actual)" represents the actual brokerage
commissions charged to the accounts included in Table A.
(2) "Brokerage Commissions (Pro Forma") represents brokerage commissions which
would have been paid each month if the rates that will initially be
charged to the Fund (see "Commodity Brokerage Arrangements") had actually
been charged to the accounts included in Table A.
(3) "Brokerage Commissions (Actual Over (Under) Pro Forma)" represents the
amounts by which actual brokerage commissions after greater (less) than
the pro forma. When these amounts are positive, the pro forma brokerage
commissions are less than the actual and thus favorable in comparison with
the corresponding amount paid by the accounts included in Table A.
(4) "Management and Incentive Fees/Allocations (Actual)" represents the actual
management and incentive fees paid by the accounts included in Table A.
(5) "Management and Incentive Fees/Allocations (Pro Forma)" represents the
total management fees and incentive allocations which would have been
payable and allocable by the accounts if they had been charged the
advisory fees which will be applicable to the Fund. Pro forma management
fees are equal to 1/12 of 3.75% of the Net Asset Value per Unit of the
Fund's asset under management at month's end with respect to Units
purchased within the prior 12-month period and 1/12 of 1% of the Net Asset
Value per Unit of the Fund's assets under management at month's end with
respect to Units purchased more than twelve months prior thereto, and pro
forma incentive allocations are equal to 15% of New Trading Profits.
"Brokerage Commissions (Pro Forma)" were not taken into account in
determining "Pro Forma Advisory Fees".
(6) "Management and Incentive Fees/Allocations (Actual Over (Under) Pro
Forma)" represents the amount by which actual advisory fees are greater
(less) than the pro forma. When these amounts are positive, the pro forma
advisory fees are less than the actual and thus favorable in comparison to
the corresponding amounts paid by the accounts included in Table A.
17
EXHIBIT A
SHAFFER DIVERSIFIED FUND, LP
(A Delaware Limited Partnership)
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement")
made as of October 16, 2001, by and between SHAFFER ASSET MANAGEMENT, INC., a
New York corporation having an address at 925 Westchester Avenue, White Plains,
NY 10604 (the "General Partner / Advisor"), and DANIEL S. SHAFFER, an individual
having an address c/o Shaffer Asset Management, Inc., 925 Westchester Avenue,
White Plains, NY 10604 (the "Initial Limited Partner"), and those who hereafter
execute this Agreement, whether in counterpart, by separate instrument, by
attorney-in-fact or otherwise, with the consent of the General Partner, as
limited partners (the "Limited Partners"; the General Partner and the Limited
Partners collectively being referred to herein as the "Partners").
WITNESSETH :
WHEREAS, the parties hereto have entered into an agreement of limited
partnership dated as of August 29, 2000 (the "Old Agreement") under the
provisions of the Delaware Revised Uniform Limited Partnership Act, as amended
and in effect on the date hereof (the "Act"), for the purpose of speculatively
trading in commodity futures contracts and other commodity interests; the
parties now wish to amend and restate the Old Agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
ORGANIZATION
1.1 FORMATION AND NAME
The parties hereto have formed a limited partnership under the name
SHAFFER DIVERSIFIED FUND, LP (the "Partnership") under the provisions of the Act
and do hereby continue the Partnership pursuant to the terms hereof. The General
Partner has heretofore executed and filed with the Office of the Secretary of
State of the State of Delaware a Certificate of Limited Partnership of the
Partnership (the "Certificate of Limited Partnership") in accordance with the
Act, and the General Partner shall execute, file, record and publish as
appropriate all other certificates, amendments and documents as the General
Partner deems necessary or advisable. Each Limited Partner hereby undertakes to
furnish to the General Partner a power of attorney, which may be filed with the
Certificate of Limited Partnership and/or this Agreement and any amendment
thereto and/or hereto, and such additional information as is required to
complete such documents, and to execute and cooperate in the filing, recording
or publishing of such documents at the request of the General Partner.
1.2 BUSINESS
The Partnership's business and purpose is to buy, sell, trade or otherwise
acquire, hold and dispose of commodities, commodity futures contracts
(including, without limitation, futures contracts on United States Treasury
Bills and other financial instruments), commodity options, other commodity
interests, and any other items which are presently or may hereafter become the
subject of futures contract trading (hereinafter collectively referred to as
"Futures Interests"), and other investments and to engage in any and all
activities incidental or related thereto. The objective of the Partnership's
business is to achieve appreciation of its assets through the speculative
trading of Futures Interests.
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1.3 TERM
The term of the Partnership commenced upon the execution and filing with
the Office of the Secretary of State of the State of Delaware on August 29, 2000
of the Certificate of Limited Partnership and shall continue in existence until
December 31, 2025 unless earlier terminated as provided in Section 5.1 hereof or
by operation of law.
1.4 FISCAL YEAR; TAX MATTERS PARTNER
The fiscal year of the Partnership for all purposes shall commence on
January 1 and shall end on December 31 each year, unless the General Partner
elects, with the approval of the Internal Revenue Service and the Commodity
Futures Trading Commission (the "CFTC"), a different fiscal year. The tax
matters partner for the Partnership shall be the General Partner.
1.5 PRINCIPAL OFFICE
The Partnership's principal place of business shall be located at 925
Westchester Avenue, White Plains, NY 10604; additional or other places of
business may be established at such other locations as may be determined, from
time to time, by the General Partner.
1.6 POWER OF ATTORNEY
Each Limited Partner, by the execution of this Agreement, whether in
counterpart, by separate instrument, by attorney-in-fact or otherwise, does
hereby irrevocably constitute and appoint the General Partner, with full power
of substitution, his true and lawful attorney and agent, with full power and
authority in his name, place and stead, to admit additional Limited Partners, to
file, prosecute, defend, settle or compromise any and all actions at law or
suits in equity for or on behalf of the Partnership with respect to any claim,
demand or liability asserted or threatened by or against the Partnership, and to
execute, acknowledge, deliver, file and record on each Limited Partner's behalf
in the appropriate public offices (i) all certificates and other instruments
(including, without limitation, the Certificate of Limited Partnership, all
amendments thereto, all counterparts of this Agreement and all amendments
hereto) which the General Partner deems necessary or appropriate to qualify or
continue the Partnership as a limited partnership in the jurisdictions in which
the Partnership may conduct business or which may be required to be filed by the
Partnership or any of the Partners under the laws of any jurisdiction; (ii) all
instruments which the General Partner deems appropriate to reflect a change in
or modification of the Partnership in accordance with the terms of this
Agreement; (iii) all conveyances and other instruments which the General Partner
deems appropriate to reflect the termination and dissolution of the Partnership;
(iv) certificates of assumed name; (v) the advisory agreement (the "Advisory
Agreement") between the Partnership and Shaffer Asset Management, Inc., the
Partnership's general partner and initial commodity trading advisor (the
"Advisor"), requiring the payment of management fees and advisory allocations
described in Section 2.3 hereof, the Prospectus and Statement of Additional
Information (as defined in Section 3.1(a) of this Agreement) or such other
advisory agreement(s) as the General Partner may deem, from time to time,
necessary or desirable; and (vi) the customer agreement (the "Customer
Agreement") between the Partnership and ADM Investor Services, Inc., the
Partnership's initial commodity broker (the "Commodity Broker"), requiring the
payment of the brokerage commissions described in the Prospectus and Statement
of Additional Information or such other brokerage agreement(s) as the General
Partner may deem, from time to time, necessary or desirable. The Power of
Attorney granted herein shall be irrevocable and be deemed to be a power coupled
with an interest and shall survive the incapacity or death of any Limited
Partner. Each Limited Partner hereby agrees to be bound by any representation
made by the General Partner and by any successor(s) thereto acting in good faith
pursuant to such Power of Attorney, and each Limited Partner hereby waives any
and all defenses which may be available to contest, negate or disaffirm the
action of the General Partner and any successor(s) thereto taken in good faith
under such Power of Attorney. In the event of any conflict between this
Agreement and any instruments filed by such attorney pursuant to the Power of
Attorney granted in this Section 1.6, this Agreement shall control.
1.7 PARTNERSHIP UNITS
All partnership interests in the Partnership shall be evidenced by units
and as used herein the term "Unit" is defined as an interest in the Partnership
acquired upon the making of a capital contribution by either the General Partner
or a Limited Partner. The General Partner's capital contribution shall be
evidenced by Units of General Partnership Interest and a Limited Partner's
capital contribution shall be evidenced by Units of Limited Partnership
Interest. When used herein without qualification, the term "Units" shall include
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both Units of Limited Partnership Interest and Units of General Partnership
Interest, pari passu.
1.8 EXPENSES; LIMITS; RESERVES
(a) Except as otherwise set forth herein or in the Prospectus or
Statement of Additional Information, the Partnership shall be
obligated to pay all liabilities incurred by it, including without
limitation Continuing Services Fees (as defined in Section 4.4
hereof); Management Fees (as defined in Section 4.4 hereof) and
Incentive Allocations (as defined in Section 4.4 hereof); brokerage
commissions; legal, accounting, auditing, printing, recording, filing
and other periodic fees and expenses; and extraordinary expenses
incurred by the Partnership; provided that the sum of the Continuing
Services Fees and Management Fees paid by the partnership during any
twelve month period shall not exceed 5.00% of the sum of the Net
Asset Values of the Partnership assets under management as of the
close of business on the last day (without reductions for
distributions or redemptions effected as of such date or management
fees or incentive fees payable as of such date) during such twelve
month period. Notwithstanding the foregoing, the General Partner
shall reimburse the Partnership for all such expenses (except
Continuing Services Fees, Management Fees, Incentive Allocations,
brokerage commissions and extraordinary expenses incurred by the
Partnership) to the extent that such expenses exceed, in a fiscal
year, 0.5% of the average monthly Net Asset Value (as defined in
Section 4.4 hereof) of the Partnership. In addition, the General
Partner shall pay the organizational and initial offering expenses of
the public offering and sale of the Units of Limited Partnership
Interest described in Section 3.1(a) hereof, and no such expenses
shall be deducted from the proceeds of such offering. For the
purposes of this Agreement, organization and initial offering
expenses shall include all costs paid or incurred by the Partnership
or the General Partner in organizing the Partnership and offering the
Units of Limited Partnership Interest, including bank and escrow
agent charges, blue sky filing fees, filing fees payable upon
formation and organization of the Partnership and legal, accounting
and printing fees associated with the preparation, filing and
printing of the Registration Statement (as defined in Section 3.1
hereof), the Prospectus and the Statement of Additional Information
related to such offering. Indirect expenses of the General Partner,
such as salaries, rent and other overhead expenses, shall not be
liabilities of the Partnership.
(b) Compensation to any party, including the General Partner (or any
commodity trading advisor that may be retained in the future), shall
not exceed the limitations imposed as of the date hereof by the North
American Securities Administrators Association. In the event that
such compensation exceed such limitations, the General Partner shall
promptly reimburse the Partnership for such excess.
(c) Appropriate reserves shall be created, accrued and charged to the
Partners' capital accounts for contingent liabilities (in accordance
with generally accepted accounting principles), if any, as of the
date of any such contingent liability becomes known to the General
Partner.
1.9 PROHIBITIONS
The Partnership shall not (a) engage in pyramiding, (b) commingle its
assets with the assets of any other person, except as permitted by law, (c) make
loans to the General Partner, any affiliate thereof or any other person or
entity at any time for any reason, (d) pay per-trade compensation to the General
Partner, any commodity trading advisor, any affiliate thereof or any other
person or entity that receives any other form of compensation from the
Partnership, (e) permit rebates or give-ups to be received by the General
Partner or any affiliate thereof (nor shall the General Partner participate in
any reciprocal business arrangements that would circumvent the foregoing or any
other provision of this Agreement) or (f) borrow cash or other assets from the
General Partner.
ARTICLE II
GENERAL PARTNER; ADMINISTRATION
2.1 MANAGEMENT
Subject to the limitations of this Agreement, the General Partner shall
have full, exclusive and complete authority for and control of the management of
the Partnership's affairs for the purposes herein stated, and shall make all
decisions affecting the Partnership's affairs, including, without limitation,
the decision to enter into contracts for trading advisors' services and
brokerage services. In that regard, the General Partner may, but need not, make
A-3
trading decisions for the Partnership and may employ one or more affiliated
and/or unaffiliated commodity trading advisors to perform that function. The
General Partner may take such other actions as it deems necessary or desirable
to manage the business and affairs of the Partnership including, but not limited
to, the following: opening bank accounts with state or national banks; paying,
or authorizing the payment of, distributions to the Partners and expenses of the
Partnership such as selling commissions (if any), advisory fees, brokerage
commissions, legal and accounting fees, printing fees, and registration and
other fees of governmental agencies; and investing or directing the investment
of assets of the Partnership, whether or not involving the purchase or sale of
Futures Interests. Subject to the terms and conditions set forth in this
Agreement, the General Partner may engage and compensate on behalf of the
Partnership from assets of the Partnership such persons or entities, including
any affiliated person or entity or any other person or entity, as the General
Partner in its sole discretion shall deem advisable for the conduct and
operation of the business of the Partnership.
2.2 COMPENSATION AND REIMBURSEMENT
The General Partner shall share in all Partnership income, gains, losses,
deductions and credits to the extent of its interest in the Partnership. In
addition, the General Partner, in its capacity as the general partner of the
Partnership, shall receive from the Partnership (i) approximately twenty percent
(20%) of all Sales Charges (as defined in Section 4.4 hereof), if at least 1,000
Units are sold and accepted by the General Partner during the Initial Offering
Period (as defined in Section 3.1(c) hereof); and (ii) all early redemption fees
charged by the Partnership upon redemptions of Units of Limited Partnership
Interest to reimburse the General Partner for the payment by the General Partner
of the Partnership's organizational, initial offering and operating expenses
payable by the General Partner.
2.3 INITIAL COMMODITY TRADING ADVISOR
The General Partner is hereby authorized, on behalf of the Partnership, to
enter into the Advisory Agreement with the Advisor (which also serves as the
general partner of the Partnership). The General Partner, in its sole
discretion, may employ on behalf of the Partnership the Advisor or other
commodity trading advisors on the terms and conditions contained in the Advisory
Agreement or on different terms and conditions, and the compensation for such
other commodity trading advisors may be negotiated and determined without regard
to the Partnership's previous trading performance. No person who receives any
advisory, management, incentive or administrative fees or allocations from the
Partnership for trading advisory or management services may share or
participate, directly or indirectly, in the brokerage commissions paid by the
Partnership.
2.4 INITIAL COMMODITY BROKER
The General Partner is further authorized, on behalf of the Partnership,
to enter into the Customer Agreement with ADM Investor Services and to cause the
Partnership to pay to ADM Investor Services brokerage commissions at such rates
as may be established and re-established from time to time under the terms of
the Customer Agreement, which rates may exceed the lowest rates otherwise
available.
2.5 STANDARD OF LIABILITY; INDEMNIFICATION
(a) The Partnership shall not provide for indemnification of the General
Partner or its affiliates for any liability or loss suffered by such
person, nor shall it provide that such person be held harmless for
any loss or liability suffered by the Partnership, unless, and the
General Partner shall have no liability to the Partnership if, all of
the following conditions are met: (a) such person has determined, in
good faith, that the course of conduct which caused the loss or
liability was in the best interests of the Partnership, and (b) such
person was acting on behalf of or performing services for the
Partnership, and (c) such liability was not the result of negligence
or misconduct by such person, and (d) such indemnification or
agreement to hold harmless is recoverable only out of the assets of
the Partnership and not from the holders of the partnership
interests.
(b) In any threatened, pending or completed action, suit or proceeding to
which the General Partner was, is or is threatened to be made a party
by reason of the fact that it is or was a general partner or sponsor
of the Partnership (including an action brought by or in the right of
the Partnership), the Partnership shall subject to Section 2.5(a)
indemnify, defend and hold harmless the General Partner, from and
against any loss, liability, damage, cost, expense (including,
without limitation, attorneys' and accountants' fees and
disbursements), judgments and amounts paid in settlement actually
incurred by it in connection with the investigation, defense or
A-4
settlement of any such action, suit or proceeding. The termination of
any action, suit or proceeding by judgment, order or settlement shall
not, in and of itself, create a presumption that the General Partner
did not act in good faith and in a manner which it reasonably
believed to be in or not opposed to the best interests of the
Partnership.
(c) To the extent that the General Partner has been successful on the
merits or otherwise in defense of any action, suit or proceeding
referred to in Section 2.5(b) hereof, or in the defense of any claim,
issue or matter therein, the Partnership shall indemnify it against
the costs and expenses (including, without limitation, attorneys' and
accountants' fees and disbursements) actually and reasonably incurred
by it in connection therewith.
(d) No indemnification of the General Partner by the Partnership shall be
permitted to the extent that the General Partner incurs any loss,
liability, damage, cost or expense (including, without limitation,
attorneys' and accountants' fees, costs and expenses incurred in
investigating or defending any demand, claim, suit or proceeding)
resulting from or arising out of any violation by the General Partner
of Federal or applicable state securities laws in connection with or
related to the Registration Statement or to the offer or sale of the
Units, unless (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as
to the General Partner, (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction, or
(iii) a court of competent jurisdiction approves a settlement of the
claims and finds that indemnification of the settlement and related
costs should be made; PROVIDED that such court has been advised of
the position as to indemnification for violations of securities laws
of the Securities and Exchange Commission (the "SEC") and the
securities administrators of the jurisdictions in which the claimant
alleges to have been offered or sold Units.
(e) Expenses incurred in defending a threatened or pending civil,
administrative or criminal action, suit or proceeding against the
General Partner may be paid by the Partnership in advance of the
final disposition of such action, suit or proceeding if and to the
extent that (i) such action, suit or proceeding relates to acts or
omissions with respect to the performance of duties or services on
behalf of the Partnership, (ii) such action, suit or proceeding is
initiated by a party who is not a Limited Partner or, if by a Limited
Partner, then such advance payment is specifically approved by a
court of competent jurisdiction, and (iii) the General Partner agrees
to reimburse the Partnership, together with the applicable legal rate
of interest thereon, in the event that indemnification is not
permitted under this Section 2.5 upon final disposition.
(f) The term "General Partner" as used in this Section 2.5 shall include
the General Partner (including any former general partner of the
Partnership that has withdrawn from the Partnership), and its
stockholders, directors, officers, employees and affiliates and each
person who controls the General Partner (including such former
general partner), as the case may be.
(g) In the event that the Partnership is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a
result of or in connection with any Partner's (or assignee's)
obligations or liabilities unrelated to the Partnership's business,
such Partner (or assignees, cumulatively) shall indemnify and
reimburse the Partnership for all losses and expenses incurred by the
Partnership in connection therewith (including, without limitation,
attorneys and accountants' fees and disbursements).
(h) The Partnership may not incur the cost of that portion of any
liability insurance which insures the General Partner or any of its
officers, agents, employees, directors, members, or managers for any
liability for which such parties are prohibited from being
indemnified by this Agreement.
2.6 NET WORTH OF THE GENERAL PARTNER
The General Partner agrees that, so long as it acts as a general partner
of the Partnership, it will maintain its Net Worth (as hereafter defined) at an
amount equal to not less than the greater of (i) five percent (5%) of the
aggregate capital contributions made to the Partnership by all Partners
(including the General Partners' capital contributions) or (ii) Fifty Thousand
Dollars ($50,000). The General Partner further agrees that it will not be a
general partner of any limited partnership in addition to the Partnership unless
at all times when it is a general partner of any such additional limited
partnership its Net Worth shall be at least equal to the Net Worth required by
the preceding sentence plus, for each such additional limited partnership, an
amount equal to five percent (5%) of the total capital contributions made by all
the partners to such other limited partnership (including the contributions made
by the General Partner). Notwithstanding the foregoing, the General Partner's
net worth need not exceed $1,000,000. For purposes of this Section 2.6, "Net
A-5
Worth" shall reflect the carrying of all assets at fair market value, shall
exclude the General Partner's interest in the Partnership or in any other
limited partnership of which it is a general partner, and shall otherwise be
determined in accordance with generally accepted accounting principles.
2.7 GENERAL PARTNER'S CAPITAL CONTRIBUTION
The General Partner shall make a capital contribution to the Partnership
by purchasing Units of General Partnership Interest in an amount equal to not
less than the greater of: (i) one percent (1%) of the aggregate amount of
capital contributions made to the Partnership by the Partners (including the
General Partner's capital contributions), or (ii) Twenty Five Thousand Dollars
($25,000). The General Partner may not make any transfer or withdrawal of its
contribution to the Partnership or receive any distribution of any portion of
its General Partnership Interest in the Partnership while it is a general
partner of the Partnership which would reduce its percentage interest in the
Partnership to less than its required interest as set forth in the preceding
sentence. The General Partner may contribute any greater amount to the
Partnership. The General Partner may withdraw or receive a distribution of any
portion of its interest in the Partnership that is in excess of its required
interest upon thirty (30) days' prior written notice to the Limited Partners.
2.8 OTHER BUSINESS
The General Partner and its principals and affiliates may engage in other
business activities (including without limitation serving as a general partner
of other partnerships) and shall not be required to refrain from any other
activity or disgorge any profits derived from any such other activity. Any of
the commodity trading advisors to the Partnership, including the Advisor, and
their respective principals and affiliates will also be free to manage
additional accounts other than the Partnership's account, including for their
own account.
2.9 DISTRIBUTIONS
(a) The General Partner shall have sole discretion in determining the
amount and frequency of any distributions which the Partnership shall
make other than distributions made upon the withdrawal of or
redemption by any Partner. The General Partner may declare
distribution in additional Units of the Fund, in which event Limited
Partners will be given at least sixty (60) days' prior written notice
and the option to receive cash instead of additional Units. All
distributions shall be made pro rata to the number of Units held of
record by the respective Partners.
(b) Current and liquidating distributions shall be made (i) first, to the
General Partner, so that the General Partner receives an amount equal
to the aggregate amount of any Incentive Allocation credited to its
capital account pursuant to Article V hereof, and (ii) second, to the
Partners in the ratio that the capital account of each Partner bears
to the capital account of all Partners.
2.10 CONTRACTS WITH THE GENERAL PARTNERS OR ITS AFFILIATES
The maximum term of any contract between the Partnership and the General
Partner or an affiliate thereof shall be one year (excluding renewals or
extensions thereof); PROVIDED that certain provisions in any such contract may
expressly survive the termination of the contract if survival would be
customary. Agreements between the Partnership and the General Partner or any
affiliate thereof shall be terminable by the Partnership without penalty on
sixty (60) days' prior written notice.
2.11 WITHDRAWAL
The Partnership shall terminate and be dissolved upon the withdrawal of
the General Partner (unless in the case of the withdrawal of the General
Partner, the actions necessary to continue the Partnership are taken pursuant to
Section 5.1 hereof). In that regard, the General Partner shall cease to be, and
shall be deemed to have withdrawn as, a general partner of the Partnership upon
the occurrence of any of the following events:
(i) the legal disability, insolvency, bankruptcy, dissolution or
liquidation of the General Partner;
(ii) any event of withdrawal prescribed in the Act that is not
encompassed in this Article 2.11; or
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(iii) on written notice given by the General Partner, at least one hundred
twenty (120) days prior thereto, of the intention of the General
Partner to withdraw as a general partner of the Partnership.
If the General Partner withdraws as general partner of the Partnership, it
shall receive the proportionate share of the Net Assets of the Partnership
attributable to its general partnership interest as of the close of business on
the last business day of the month in which the withdrawal is effective. If the
Limited Partners elect to continue the Partnership, the withdrawing General
Partner shall pay all Partnership expenses incurred as a result of its
withdrawal. Except as provided by this Section 2.11, the General Partner may not
sell, assign or otherwise dispose of all or substantially all of its general
partnership interest in the Partnership, except for a sale or transfer of all
interests of all Partners or a sale of all or substantially all of its general
partnership interest to a corporation controlled by the General Partner;
PROVIDED that the General Partner may mortgage, pledge, hypothecate or grant a
security interest in its general partnership interest as collateral for a loan
or loans. Any such assignment of all or any portion of a general partnership
interest shall not cause an event of withdrawal with respect to the General
Partner pursuant to this Section 2.11.
2.12 TAX ELECTIONS
The General Partner, in its sole discretion, may cause the Partnership to
make, refrain from making and, once having made, revoke the election referred to
in Section 754 of the Internal Revenue Code of 1986, as amended, (the "Internal
Revenue Code"), or any other election affecting the computation of Partnership
income required to be made by the Partnership pursuant to Section 703(b) of the
Internal Revenue Code, and any similar election provided by state or local law
or any similar provision enacted in lieu thereof.
2.13 NO PERSONAL LIABILITY FOR RETURN OF CAPITAL
Subject to Section 2.5 hereof, the General Partner shall not be personally
liable for the return or repayment of all or any portion of the capital or
profits of any Partner (or assignee of Unit(s)), it being expressly agreed that
any such return or repayment of capital or profits made pursuant to this
Agreement shall be made solely from the assets of the Partnership (which shall
not include any right of contribution from the General Partner).
2.14 DAILY CALCULATION OF NET ASSET VALUE
The General Partner shall calculate Net Asset Value daily and shall make
available upon the requires of a Limited Partner, the Net Asset Value Per Unit.
2.15 FIDUCIARY DUTY FOR SAFEKEEPING OF FUNDS
The General Partner shall have fiduciary responsibilities for the
safekeeping and use of all funds and assets of the Partnership, whether or not
in its immediate possession or control, and shall not employ or permit another
to employ such funds or assets in any other manner except for the exclusive
benefit of the Partnership.
ARTICLE III
LIMITED PARTNERS
3.1 CAPITAL CONTRIBUTIONS AND PUBLIC OFFERING OF UNITS OF LIMITED
PARTNERSHIP INTEREST
(a) The General Partner, on behalf of the Partnership, shall (i) file or
cause to be filed with the SEC such registration statement(s) and
such amendments thereto as the General Partner deems advisable from
time to time (collectively, the "Registration Statement"), for the
registration of the public offering and sale of Units of Limited
Partnership Interest; (ii) file or cause to be filed copies of the
final prospectus(es) and statement(s) of additional information
included as part of the Registration Statement (collectively, the
"Prospectus and Statement of Additional Information") with the SEC
pursuant to Rule 424(b); (iii) seek to qualify Units of Limited
Partnership Interest for sale under the securities laws of such
states of the United States or other jurisdictions as the General
Partner shall deem necessary or advisable, and (iv) take such action
with respect to the matters described in subsections (i) through
(iii), above, as it shall deem advisable or necessary.
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(b) The General Partner is authorized to take such actions and make such
arrangements for the sale of the Units of Limited Partnership
Interest as it deems appropriate including, without limitation, the
execution on behalf of the Partnership of a Selling Agent agreement
appointing Berthel Fisher & Company Investment Services, Inc. (the
"Selling Agent") as the Partnership's selling agent for the offer and
sale of the Units of Limited Partnership Interest as contemplated in
the Prospectus and Statement of Additional Information. The General
Partner will keep copies of all Subscription Agreements / Powers of
Attorney signed by Limited Partners in connection with the public
offerings of the Units of Limited Partnership Interest for a period
of at least six years.
(c) The Initial Limited Partner has contributed $1,000 in cash to the
capital of the Partnership in consideration for one (1) Unit of
Limited Partnership Interest. The General Partner may, on behalf of
the Partnership and in accordance with the latest Prospectus and
Statement of Additional Information, issue and sell Units of Limited
Partnership Interest to other persons (which other persons may
include the General Partner) at any time without the consent of the
other Limited Partners. Such additional Limited Partners shall
contribute capital to the Partnership and shall be admitted as
Limited Partners as of the first business day of the month
immediately following the month in which their subscriptions are
accepted by the General Partner; it being understood and agreed,
however, that the General Partner may reject any subscription for
Units at any time and for any reason.
During the Initial Offering Period (as hereinafter defined), (i) the
purchase price for each Unit of Limited Partnership Interest shall be
$1,000 per Unit ($950 per Unit, plus an initial Sales Charge (as
defined in Section 4.4 hereof) of $50 per Unit) and (ii) the purchase
price for each Unit of General Partnership Interest shall be $1,000.
Thereafter, Units of Limited Partnership Interest may be sold as of
the last business day of each calendar month at a purchase price per
Unit equal to the Net Asset Value per Unit (as defined in Section 4.4
hereof) as of the last business day of such month, plus a Sales
Charge of five percent (5%) of the Net Asset Value per Unit for each
Unit purchased. The purchase price for each Unit of General
Partnership Interest after the Initial Offering Period shall be the
then current Net Asset Value per Unit.
The initial offering period (the "Initial Offering Period") of the
Units will extend from the date of the Prospectus and Statement of
Additional Information until sixty (60) days thereafter (subject to
the General Partner's right to extend the offering period for up to
an additional sixty (60) days). Notwithstanding anything to the
contrary contained herein, the General Partner, in its sole
discretion, may terminate the Initial Offering Period at any time for
any reason. In addition, if the General Partner shall not have
received and accepted subscriptions for at least 1,000 Units of
Limited Partnership Interest during the Initial Offering Period, this
Agreement shall terminate, and all subscription monies shall be
promptly returned to the subscriber(s) together with any interest
earned thereon. Any interest earned on the contributions of the
General Partner and the Initial Limited Partner prior to the
expiration or sooner termination of the Initial Offering Period shall
be paid to such contributors pro rata.
The Partnership shall not commence trading operations unless and
until the General Partner has received and accepted subscriptions
(which may include Units of Limited Partnership Interest subscribed
for by the General Partner, the Partnership's commodity trading
advisor(s), the Partnership's selling agent and selected dealers, the
Partnership's commodity broker(s) or any affiliate of any of the
foregoing) for at least 1,000 Units of Limited Partnership Interest
(excluding the one initial Unit of Limited Partnership Interest). The
General Partner may terminate the offering of Units of Limited
Partnership Interest at any time. The aggregate of all capital
contributions shall be available to the Partnership to carry on its
business, and no interest shall be paid by the Partnership to any
Partner on any such contribution except as set forth above.
Pursuant to Section 3.5 hereof, the General Partner, in its sole
discretion, may consent to and admit any assignee of Units of Limited
Partnership Interest as a substituted Limited Partner.
(d) All Units of Limited Partnership Interest subscribed for upon receipt
of a check or draft of the subscriber are issued subject to the
collection of the funds represented by such check or draft. In the
event that a check or draft of a subscriber for Units of Limited
Partnership Interest representing payment for Units of Limited
Partnership Interest is returned unpaid, the Partnership shall cancel
the Units of Limited Partnership Interest issued to such subscriber
represented by such returned check or draft. Any losses or profits
sustained by the Partnership in connection with the Partnership's
trading allocable to such cancelled Units of Limited Partnership
Interest shall be deemed an increase or decrease in Net Asset Value
and allocated among the remaining Partners as described in Article IV
hereof.
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(e) The Units may but need not be evidenced by certificates.
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS
No additional contributions of capital are or shall be required of any
Limited Partner during the term of the Partnership.
3.3 RIGHTS AND OBLIGATIONS
Each Unit of Limited Partnership Interest owned by a Limited Partner shall
be fully paid and non-assessable upon issuance. A Limited Partner shall be
liable for the obligations of the Partnership to the extent of the capital
contributed by such Limited Partner plus the share of undistributed profits, if
any, allocable to such Limited Partner. A Limited Partner who receives a return
of any part of the capital contributed by such Limited Partner to the
Partnership shall be liable to the Partnership for one year thereafter for the
amount of the returned contribution, but only to the extent necessary to
discharge liabilities of the Partnership to creditors who extended credit to the
Partnership during the period that the capital contribution was held by the
Partnership. A Limited Partner shall also be liable to the Partnership for
return of any part of his capital contribution returned to him for a period of
six (6) years thereafter, if such return was in violation of this Agreement or
the Act.
No Limited Partner shall take part in the management of the business or
transact any business for the Partnership, and no Limited Partner shall have the
power to sign for or bind the Partnership. No salary shall be paid to any
Limited Partner, nor shall any Limited Partner have a drawing account or earn
interest on his contribution once contributed to the capital of the Partnership.
No Limited Partner shall be entitled to the return of his contribution or any
profits with respect thereto except (i) to the extent, if any, that
distributions made, or deemed to be made, pursuant to this Agreement, may be
considered as such by law; (ii) upon dissolution of the Partnership; or (iii)
upon redemption and then only to the extent provided for in this Agreement. No
Limited Partner shall have priority over any other Limited Partner either as to
the return of contributions of capital or as to profits, losses or
distributions. In no event shall a Limited Partner be entitled to demand or
receive property other than cash in return for capital contributed.
3.4 ASSIGNMENT OF LIMITED PARTNERSHIP INTEREST(S)
(a) General. Each Limited Partner expressly agrees that he will not
transfer, assign or dispose of, by gift or otherwise, any of his
Units of Limited Partnership Interest or any part or all of his
right, title or interest in and to the capital or profits of the
Partnership without giving written notice of the assignment, transfer
or disposition to the General Partner and without complying with the
suitability standards imposed by the Partnership, applicable laws
(including, without limitation, state securities or Blue Sky laws)
and the rules of any other applicable governmental authority. Each
and every transfer, assignment or disposition of Units of Limited
Partnership Interest shall be subject to all applicable laws
(including, without limitation, state securities or Blue Sky laws).
In addition, the transferor or assignor of such Units shall bear all
costs, including attorneys' fees and disbursements, incurred in
connection with such transfer, assignment or disposition.
(b) Effectiveness; Notice. No such transfer, assignment or disposition
shall be effective against the Partnership or the General Partner
until the General Partner receives the written notice described
below. If a transfer, assignment or disposition occurs by reason of
the death of a Limited Partner or assignee, such written notice may
be given by the duly authorized representative of the estate of the
Limited Partner or assignee and shall be supported by such proof of
legal authority and valid assignment as may reasonably be requested
by the General Partner. The written notice required by this Section
3.5: (i) shall specify (A) the name, address and Social Security or
taxpayer identification number of the transferee or assignee, (B) the
number of Units of Limited Partnership Interest transferred or
assigned, and (C) the date of such transfer or assignment, (ii) shall
include a statement by the transferee or assignee that he agrees to
give the above-described written notice to the General Partner upon
any subsequent transfer, assignment or disposition, (iii) shall
contain such other information and be accompanied by such additional
documentation as the General Partner may request, and (iv) shall be
signed by the assignor and transferee or assignee. The General
Partner, in its sole discretion, may waive receipt of the
above-described notice or any defect therein.
Any transfer, assignment or disposition of Units of Limited
Partnership Interest permitted hereunder shall be effective as of the
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beginning of the month following the month in which the General
Partner has received notice of such transfer, assignment or
disposition; it being understood, however, that the Partnership need
not recognize any transfer, assignment or disposition of Units of
Limited Partnership Interest until it has received at least thirty
(30) days' prior written notice thereof.
Notwithstanding the foregoing, no transfer, assignment or disposition
of Units of Limited Partnership Interest shall be effective or
recognized by the Partnership if (i) such transfer, assignment or
disposition would be in violation of the Act, (ii) the amount of the
transfer, assignment or disposition (other than transfers by gift or
inheritance or to affiliates, including members of the transferor's
or assignor's immediate family) is less than the minimum subscription
amount, (iii) as a result of such transfer, assignment or
disposition, the Partnership would no longer be treated as a
partnership rather than a corporation or an association under the
Internal Revenue Code, or (iv) as a result of such transfer or
assignment, there would result a termination of the Partnership for
United States Federal income tax purposes as provided in Section
708(b) of the Internal Revenue Code.
(c) Substituted Limited Partner. No assignee or transferee of Units of
Limited Partnership Interest shall become a substituted Limited
Partner unless the General Partner consents in writing to such
substitution (which consent may be withheld in the sole and absolute
discretion of the General Partner). A substituted Limited Partner
shall have all the rights and powers and shall be subject to all the
restrictions and liabilities of his assignor. Each Limited Partner
agrees that, with the consent of the General Partner, any assignee
may become a substituted Limited Partner without the further act or
consent of any Limited Partner. Each Limited Partner agrees that he
has no right to consent to and will not consent to any person or
entity becoming a substituted Limited Partner, except as set forth in
the preceding sentence. If the General Partner withholds its consent,
an assignee shall not become a substituted Limited Partner and shall
not have any of the rights of a Limited Partner, except that the
assignee shall be entitled to receive that share of the Partnership's
capital and profits, if any, and shall have that right of redemption
to which his assignor would otherwise have been entitled. An
assigning Limited Partner shall remain liable to the Partnership as
provided in the Act, regardless of whether his assignee becomes a
substituted Limited Partner.
3.5 REDEMPTION OF UNITS OF LIMITED PARTNERSHIP INTEREST
(a) General. A Limited Partner (and the General Partner subject to
Sections 2.7 and 2.11 hereof) or any assignee of Units of Limited
Partnership Interest of whom the General Partner has received written
notice as described in Section 3.5 hereof may withdraw all or any
part of his capital contributions and undistributed profits, if any,
from the Partnership (such withdrawal being herein referred to as
"redemption"), effective as of the last business day of any calendar
month, by requiring the Partnership to redeem any or all of his Units
of Limited Partnership Interest at the Net Asset Value per Unit
(subject to the penalties for early redemption described below),
calculated as of the close of business (as determined by the General
Partner) on the effective date of redemption; provided that (i) all
liabilities, contingent or otherwise, of the Partnership, except any
liability to Partners on account of their capital contributions, have
been paid or there remains property of the Partnership sufficient to
pay them, and (ii) the General Partner shall have timely received a
Request for Redemption in the form included as Exhibit D to the
Statement of Additional Information. As used herein, Request for
Redemption shall mean a letter in the form specified herein sent by a
Limited Partner (or any assignee of whom the General Partner has
received written notice as described in Section 3.5 hereof) and
received by the General Partner at least ten (10) days (or such
lesser period as shall be acceptable to the General Partner) in
advance of the requested effective date of redemption. Requests for
Redemption that are received by the General Partner at least ten (10)
days prior to the last business day of a calendar month shall be
effected as of the close of business on the last business day of that
month. Requests for redemption that are received by the General
Partner less than ten (10) days prior to the last business day of a
calendar month shall be effected as of the close of business on the
last business day of the following month. The General Partner may
declare additional redemption dates upon notice to the Limited
Partners. Redemptions of fractional Units of Limited Partnership
Interest will be permitted. The Partnership shall not be obligated to
redeem Units of Limited Partnership Interest that are subject to a
pledge or otherwise encumbered in any fashion.
(b) Payment. Upon redemption, a Limited Partner (or any assignee of whom
the General Partner has received written notice as described above)
shall receive from the Partnership for each Unit of Limited
Partnership Interest redeemed an amount equal to the Net Asset Value
per Unit as of the date of redemption, less (i) any amount owing by
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such Partner (or assignee) to the Partnership, and (ii) any
applicable redemptions fees due under Section 3.5(f) hereof.
Redemption payments shall be made within twenty (20) days following
the date of redemption. Under special circumstances, however,
including but not limited to the inability of the Partnership to
liquidate its commodity positions or defaults or delays in payments
due to the Partnership from banks or other persons, the Partnership
may delay payment to Partners requesting redemptions of Units of the
proportionate part of the Net Asset Value thereof represented by the
sums which are the subject of such inability to liquidate its
positions, default or delay. If the General Partner delays redemption
payments for any reason, the General Partner shall cause payments to
resume as soon as practicable and shall be make redemption payments
in the order in which the requests for redemption were received. The
General Partner shall notify any Limited Partner or assignee of Units
who requests redemption within ten (10) days after the date of
redemption if payment will be delayed.
(c) Redemptions by Assignees. If a redemption is requested by an
assignee, all amounts owed under Section 3.5(f) by the Partner to
whom such Unit was sold by the Partnership as well as all amounts
owed by all assignees who owned such Unit shall be deducted from the
amount paid to such assignee upon redemption of his Units of Limited
Partnership Interest. An assignee shall not be entitled to redemption
until the General Partner has received written notice (as described
in Section 3.5 hereof) of the assignment, transfer or disposition
under which the assignee claims an interest in the Units of Limited
Partnership Interest to be redeemed and shall have no claim against
the Partnership or the General Partner with respect to distributions
or amounts paid on redemption of Units of Limited Partnership
Interest prior to the receipt by the General Partner of such notice.
(d) Redemptions Upon Notice of Substantial Decline. If (i) the Net Asset
Value per Unit (increased by the amount of distributions per Unit, if
any) on any business day during any given fiscal year decreases to or
below 50% of the Net Asset Value per Unit as of the beginning of the
fiscal year, and such 50% decrease results in a Net Asset Value per
Unit of less than $1,000, or (ii) if the Net Asset Value per Unit
(increased by the amount of distributions per Unit, if any) decreases
on any business day to or below $350, the Partnership will liquidate
all open positions as expeditiously as possible and suspend trading.
Within ten (10) business days after the date of the suspension of
trading, the General Partner shall either give notice to the Limited
Partners of its intention to withdraw from the Partnership or shall
declare a special redemption date. Such special redemption date, if
declared, shall be a business day within thirty (30) business days
from the date of suspension of trading by the Partnership, and the
General Partner shall mail notice of such date to each Limited
Partner by first class mail, postage prepaid, not later than ten (10)
business days prior to such special redemption date, together with
instructions as to the procedure such Limited Partner must follow to
have his Units redeemed on such date by the Partnership, if such
Limited Partner so desires. No redemption fees would be due in
respect of a Unit redeemed on the special redemption date. If, after
such special redemption date, the Partnership's Net Asset Value is at
least 50% of the Partnership's Net Asset Value on the close of
business on the day before the special redemption date, the
Partnership will resume trading unless the General Partner elects to
withdraw from the Partnership. If, after such special redemption
date, the Partnership's Net Asset Value is less than 50% of the Net
Asset Value of the close of business on the day before the special
redemption date, the Partnership shall terminate and dissolve in
accordance with the provisions of Article V hereof.
(e) Mandatory Redemption(s). The Unit of Limited Partnership Interest of
the Initial Limited Partner shall be automatically redeemed for
$1,000, without the imposition of any redemption fee, as of the date
that an additional Limited Partner is first admitted to the
Partnership.
If and to the extent necessary to ensure that the assets of the
Partnership are not considered "plan assets" for purposes of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the General Partner may redeem all or a portion of the
Units held by one or more Limited Partners without the consent of
such Limited Partners at the Net Asset Value per Unit without the
imposition of any redemption fee. Such redemption may be effected
from time to time in any manner deemed reasonable in the sole
discretion of the General Partner, provided, however, that the
General Partner will use its best efforts to cause a redemption of
Units of Limited Partnership Interest on a pro rata basis among all
"benefit plan investors" in an amount sufficient to reduce the number
of Units of Limited Partnership Interest held by all of them to not
more than 24.9%. For purposes of this Section, a "benefit plan
investor" shall mean a Limited Partner who is (i) an "Employee
Benefit Plan," as defined in Section 3(3) of ERISA; (ii) a plan
described in Section 4975(e)(1) of the Internal Revenue Code; or
(iii) a partnership, the general partner of which has been appointed
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"investment manager," as defined in Section 3(38) of ERISA, over the
assets used by one or more Employee Benefit Plans to purchase limited
partnership interests in such partnership.
(f) Redemption Fees. Except as set forth in Sections 3.5(d) and (e)
hereof, this Section 3.5(f) or as otherwise waived by the General
Partner in its discretion, an early redemption fee equal to a
percentage of the Net Asset Value of the Units of Limited Partnership
Interests redeemed (the "Redemption Fee") shall be charged by the
Partnership in the case of redemptions of Units of Limited
Partnership Interest that are effected as of or before the end of the
twelfth (12th) full calendar month after their purchase. The
Redemption Fee shall be four percent (4%) of the Net Asset Value of
the Units of Limited Partnership Interest redeemed for such
redemptions occurring as of or before the end of the third (3rd) full
calendar month after their purchase; three percent (3%) of the Net
Asset Value of the Units of Limited Partnership Interest redeemed for
such redemptions occurring as of or before the end of the sixth (6th)
full calendar month after their purchase; two percent (2%) of the Net
Asset Value of the Units of Limited Partnership Interest redeemed for
such redemptions occurring as of or before the end of the ninth (9th)
full calendar month after their purchase; and one percent (1%) of the
Net Asset Value of the Units of Limited Partnership Interest redeemed
for such redemptions occurring as of or before the end of the twelfth
(12th) full calendar month after their purchase. There shall be no
Redemption Fee charged with respect to Units of Limited Partnership
Interest redeemed after the twelfth (12th) full calendar month after
their purchase. Notwithstanding the foregoing and in order to assure
each Limited Partner the availability of funds to pay taxes on each
year's profits, if any, the redemption fee will be waived on
redemptions of Units to the extent, if any, distributions in the
first quarter on a calendar year are less than thirty-five (35%) of
the profits reportable to a Limited Partner for the prior year.
Redemption Fees received by the Partnership will be paid over by the
Partnership to the General Partner to reimburse the General Partner
for the payment by the General Partner of the Partnership's
organizational, initial offering and operating expenses payable by
the General Partner.
3.6 MAINTENANCE OF RECORDS AND BOOKS OF ACCOUNT
(a) Books of Account and Records. The General Partner shall keep and
retain for at least six (6) years such books of account and records
relating to the business of the Partnership as it deems necessary or
advisable (including without limitation to substantiate the efforts
of the Partnership to ensure that Units were sold only to purchasers
for whom an investment in the Units was suitable) and as are required
by the Commodity Exchange Act, as amended (the "CE Act") and the
rules and regulations promulgated thereunder. Such books of account
and records shall be kept at the Partnership's principal place of
business, and each Limited Partner (or any duly constituted designee
of a Limited Partner) shall at all times during reasonable business
hours have free access to and the right to inspect and copy said
books. The books of accounts and records of the Partnership shall be
kept on an accrual basis of accounting in accordance with generally
accepted accounting principles, consistently applied. The books of
account or financial statements of the Partnership shall be audited
at least annually at the Partnership's expense by an independent
public accountant to be selected by the General Partner.
(b) Unit-Holder Lists. The General Partner shall also maintain at the
principal office of the Partnership a list of the names and addresses
of, and the number of Units of Limited Partnership Interest owned by,
all of the Limited Partners at the Partnership's principal office,
and the General Partner shall make such list available for review by
any Limited Partner or his personal representative at the offices of
the Partnership at reasonable times upon request or by mail upon
payment of the costs of reproduction and mailing, provided, however,
that such list shall not be used by any Limited Partner for
commercial purposes.
ARTICLE IV
PROFIT AND LOSS
4.1 CAPITAL ACCOUNTS
The Partnership shall establish for each Partner, and maintain in
accordance with the terms of this Agreement, a capital account. The initial
balance of each Partner's capital account shall be the amount of the initial
cash contribution to the Partnership of such Partner.
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4.2 ADJUSTMENTS TO CAPITAL ACCOUNTS
As of the close of business (as determined by the General Partner in its
sole discretion) on the last business day of each calendar month, the General
Partner shall make the following calculations, payments and allocations and
shall redeem and accept subscriptions for Units, each in the following order:
(a) the Management Fee (as defined in Section 4.4 hereof) earned with
respect to such month shall be calculated and paid; the Continuing
Services Fee (as defined in Section 4.4 hereof) earned with respect
to such month shall be calculated and paid; other expenses of and
reimbursements by the Partnership shall be calculated and paid; and
any costs of indemnification to the extent permitted under Section
2.5 shall be paid;
(b) Net Assets (as defined in Section 4.4 hereof) shall be calculated;
(c) the amount of any Incentive Allocation (as defined in Section 4.4
hereof) shall be calculated and credited to the capital account of
the General Partner;
(d) any increase (less the amount of any Incentive Allocation) or
decrease in Net Assets shall be credited or charged to the capital
accounts of the Partners in the ratio that the capital account of
each Partner bears to the capital accounts of all Partners;
(e) the amount of any distributions or any withdrawn capital during such
month, and the amount of any redemption payments in such month shall
be charged to the capital accounts of the relevant Partners;
(f) Net Asset Value (as defined in Section 4.4 hereof) shall be
calculated;
(g) redemptions of Units shall be effected;
(h) Syndication Fees / Sales Charges (as defined in Section 4.4 hereof)
shall be calculated and paid with respect to any subscriptions for
Units that the General Partner intends to accept during such month;
and
(i) subscriptions for Units shall be accepted in the sole discretion of
the General Partner.
4.3 ALLOCATION OF PROFIT AND LOSS
At the end of each taxable year, each item of Partnership income, gain,
loss, deduction and credit shall be allocated among the Partners in accordance
with the following provisions:
(a) Capital Gain (as defined in Section 4.4 hereof) shall be allocated
first to each Partner who has redeemed all of his Units or withdrawn
all of his capital during the year to the extent that the amount the
Partner received on redemption exceeded the amount paid for the
redeemed Units or to the extent of the withdrawn capital;
(b) Capital Gain shall be allocated second to each Partner who has
redeemed some of his Units or withdrawn some of his capital during
the year to the extent that the amount that such Partner received on
redemption exceeded the amount paid for the redeemed Units or to the
extent of the withdrawn capital;
(c) Capital Gain remaining after the allocations in Sections 4.3(a) and
4.3(b) hereof shall be allocated among the Partners in the ratio that
the capital account of each Partner bears to the capital accounts of
all Partners;
(d) Capital Loss (as defined in Section 4.4 hereof) shall be allocated
first to each Partner who has redeemed all of his Units or withdrawn
all of his capital during the year to the extent that the amount that
the Partner paid for the redeemed Units exceeded the amount that the
Partner received on redemption;
(e) Capital Loss shall be allocated second to each Partner who has
redeemed some of his Units or withdrawn some of his capital during
the year to the extent that the amount that the Partner paid for the
redeemed Units exceeded the amount that the Partner received on
redemption;
(f) Capital Loss remaining after the allocations in Sections 4.3(d) and
(e) hereof shall be allocated among the Partners in the ratio that
the capital account of each Partner bears to the capital accounts of
all Partners;
(g) For the purpose of the allocations of Capital Gain and Capital Loss
in Sections 4.3(a), (b), (d) and (e) hereof, the amount that each
Partner paid for each of his Units shall be deemed to have been
increased by the amount of Capital Gain allocated to such Partner
with respect to such Unit pursuant to Section 4.3(c) hereof or
ordinary income allocated pursuant to Section 4.3(h) hereof, to have
been decreased by the amount of any Capital Loss allocated to such
Partner with respect to such Unit pursuant to Section 4.3(f) hereof
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or ordinary expense allocated pursuant to Section 4.3(h) hereof and
to have decreased by the amount of any distributions to such Partner
with respect to such Unit pursuant to Section 2.9 hereof;
(h) Items of ordinary income and expense shall be allocated among the
Partners in the ratio that the capital account of each Partner bears
to the capital account of all Partners;
(i) Notwithstanding Sections 4.3(e), (f) and (h) hereof, to the extent
that an allocation of Capital Loss or expense would cause the capital
account of a Limited Partner to have a deficit balance, then such loss
or expense shall be allocated to the capital account of the General
Partner; and
(j) Allocations of Capital Gain or Capital Loss shall be made PRO RATA
from each category of Capital Gain or Capital Loss determined under
Section 1(h) of the Internal Revenue Code and income or loss
determined under Section 988 of the Internal Revenue Code.
4.4 DEFINITIONS
For purposes of this Article IV, the following terms shall have the
following meanings:
(a) "CONTINUING SERVICES FEE" shall mean a fee charged to each Unit equal
to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit
of the Partnership's assets under management as of the close of
business on the last day of each month (without reduction for
distributions or redemptions effected as of such date or management
fees or incentive fees payable as of such date) with respect to Units
purchased within the prior twelve (12) month period and 1/12 of 4% of
the Net Asset Value per Unit of the Partnership's assets under
management as of the close of business on the last day of each month
(without reduction for distributions or redemptions effected as of
such date or management fees or incentive fees payable as of such
date) with respect to Units purchased more than twelve (12) months
prior thereto. Such Continuing Services Fee shall be paid to the
Selling Agent and certain selected dealers and their respective
registered representatives in return for their continuing services to
the Partnership and the Limited Partners solicited by them. Such
services include, without limitation, keeping the Limited Partners
apprised of developments affecting the Partnership, responding to
specific inquiries received from Limited Partners relating to the
Partnership and the commodity markets, communicating current
valuations of the Partnership's Net Asset Value per Unit to the
Limited Partners, assisting in redemptions, transfers and
distributions, assisting Limited Partners in interpreting the
Partnership's monthly and annual reports, financial statements and
the tax information provided to Limited Partners, and providing such
other services as the Limited Partners from time to time may
reasonably request.
With respect to each of the first twelve (12) month-ends during which
a Unit is outstanding, the Continuing Services Fee attributable to
such Unit shall be paid (i) twenty percent (20%) to the Selling
Agent, and (ii) eighty percent (80%) to the selected dealers and
their respective registered representatives that solicited the
Limited Partner's subscription. After a Unit has been outstanding for
twelve (12) month-ends, the preceding sentence shall be amended so
that the Continuing Services Fee attributable to such Unit shall be
paid twenty-five percent (25%) to the Selling Agent and seventy-five
(75%) to the selected dealers and their respective registered
representative that solicited the Limited Partner's subscription.
Notwithstanding the foregoing, such Continuing Services Fee shall be
paid only to, or for the benefit of, persons who are registered with
the CFTC and/or the National Futures Association ("NFA") as futures
commission merchants or introducing brokers. In the event that the
Selling Agent or any selected dealer is not registered with the CFTC
and/or the NFA as futures commission merchants or introducing
brokers, the Selling Agent's and such selected dealers' portions(s)
of such Continuing Services Fee shall be paid to the General Partner.
The General Partner may increase the amount of the Continuing
Services Fee payable by the Partnership at any time and from time to
time upon sixty (60) days' prior written notice to the Limited
Partners, which notice shall set forth the redemption and voting
rights of the Units; PROVIDED that prior to the effectiveness of the
increased Continuing Services Fee, the Limited Partners shall have an
opportunity to redeem their Units on the last business day of the
month in which such notice is sent without the imposition of any
redemption fee.
(b) "CAPITAL GAIN" or "CAPITAL LOSS" shall mean gain or loss
characterized as gain or loss from the sale or exchange of a capital
asset by the Internal Revenue Code, including without limitation gain
or loss required to be taken into account pursuant to Sections 988
and 1256 of the Internal Revenue Code.
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(c) "MANAGEMENT FEE" shall mean a fee equal to 1/12 of 3.75% of the Net
Asset Value per Unit of the Partnership's asset under management as
of the close of business on the last day of each month with respect
to Units purchased within the prior twelve (12) month period and 1/12
of 1% of the Net Asset Value per Unit of the Fund's assets under
management as of the close of business on the last day of each month
with respect to Units purchased more than twelve (12) months prior
thereto which shall be paid to the Advisor.
(d) "NET ASSETS" shall mean the total assets, less total liabilities, of
the Fund determined on the basis of generally accepted accounting
principles. Net Assets shall include any unrealized profits or losses
on open positions, and any fee or expense including net asset fees
accruing to the program.
(e) "NET ASSET VALUE" of the Partnership shall mean the total capital
accounts of all Partners. The "Net Asset Value" of a Unit shall be
the total capital accounts of all Partners, divided by the number of
Units owned by all Partners.
(f) "SYNDICATION FEE / SALES CHARGE" shall mean a fee, calculated and
paid immediately prior to the acceptance of a subscription, equal to
five percent (5%) of the subscription amount for a Unit. The
Syndication Fee / Sales Charge attributable to such Unit shall be
paid (i) twenty percent (20%) to the General Partner, and (ii) eighty
percent (80%) to the Partnership's selling agent, who in turn may pay
up to seventy-five percent (75%) of its Syndication Fee / Sales
Charge to the selected dealer that solicited the subscription
pursuant to the terms of any selected dealer agreement entered into
from time to time between the Partnership's selling agent and such
selected dealer. The General Partner may increase the amount of the
Syndication Fee / Sales Charge at any time and from time to time upon
sixty (60) days' prior written notice to the Limited Partners.
(g) "INCENTIVE ALLOCATION" shall mean a quarterly special allocation to
the Advisor equal to fifteen percent (15%) of the New Trading
Profits.
(h) "NEW TRADING PROFITS" shall mean the excess, if any, of Net Assets on
the last business day of the Valuation Period over Net Assets on the
last business day of the highest previous Valuation Period or Net
Assets at the date trading commences, whichever is higher, and as
further adjusted to eliminate the effect on Net Assets resulting from
new capital contributions, redemptions, or capital distributions, if
any, made during the period decreased by interest or other income,
not directly related to trading activity, earned on Fund assets
during the period, whether the assets are held separately or in
margin account.
(i) "VALUATION PERIOD" shall mean the preceding calendar quarter.
4.5 EQUITABLE ALLOCATIONS
The General Partner may make such other or additional allocations of
income, gain, loss and deduction among the Units as are, in the General
Partner's reasonable discretion, equitable in order to allocate income, gain,
loss and deduction for Federal income tax purposes among the Partners in
accordance with their respective interest in the Partnership.
ARTICLE V
TERMINATION
5.1 DISSOLUTION
The Partnership shall terminate and be dissolved immediately upon (i) the
conclusion of the Initial Offering Period without the sale or acceptance of at
least 1,000 Units of Limited Partnership Interest, (ii) the withdrawal of the
General Partner, as defined in, and subject to the limitation of Section 2.11
hereof, (iii) an election to dissolve the Partnership in accordance with the
provisions of Section 6.1 hereof by Limited Partners owning more than fifty
percent (50%) of the Units of Limited Partnership Interest, (iv) a reduction in
Net Asset Value of the Partnership following a substantial decline in the Net
Asset Value per Unit as more fully described in Section 3.5(d) hereof, (v) a
determination by the General Partner that the purpose of the Partnership cannot
be fulfilled; and (vi) any event that constitutes a dissolution of a limited
partnership under the Act or otherwise makes it unlawful for the existence of
the Partnership to be continued. The General Partner shall give, prior to its
voluntary withdrawal, one hundred twenty (120) days' prior notice to all Limited
Partners pursuant to Section 2.11 hereof, who may within such period elect
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substitute general partner(s) in accordance with Section 6.2 hereof and continue
the Partnership. Unless earlier terminated as specified above or by operation of
law, the Partnership shall terminate on December 31, 2025.
The death, incompetence, incapacity, legal disability, bankruptcy,
insolvency, dissolution or withdrawal of any Limited Partner shall not result in
the dissolution or termination of the. Partnership, and such Limited Partner, or
the estate, custodian or personal representative thereof, shall have no right to
withdraw as a limited partner of the Partnership or to have his Units redeemed
except as provided in Section 3.5 hereof. Upon the death or legal disability of
a Limited Partner, his interest in the Partnership shall pass to his legal
representatives. Each Limited Partner (and any assignee of such Limited
Partner's interest) expressly agrees that, in the event of his death, he waives
on behalf of himself and his estate, and he directs the legal representative of
his estate and any person interested therein to waive, the furnishing of any
inventory, accounting or appraisal of the assets of the Partnership and any
right to a special audit or examination of the books and records of the
Partnership.
5.2 FINAL ACCOUNTING
Upon the dissolution of and failure to reconstitute the Partnership, an
accounting shall be made of the accounts of the Partnership, the capital
accounts of each Unit, and the Partnership's assets, liabilities and operations
from the date of the last previous accounting to the date of such dissolution.
Thereupon, the General Partner (or in the event that the dissolution is caused
by the legal disability, bankruptcy, dissolution, liquidation or withdrawal of
the General Partner, such person as may be designated by the holders of a
majority of the then outstanding Units of Limited Partnership Interest, not
including Units of Limited Partnership Interest held by the General Partner)
shall act as liquidating trustee and immediately proceed to wind up and
terminate the business and affairs of the Partnership and to liquidate the
property and assets of the Partnership.
5.3 DISTRIBUTION
Upon the winding up and termination of the business and affairs of the
Partnership, its liabilities and obligations to creditors and all expenses
incurred in its liquidation shall be paid, and its remaining assets shall be
distributed to the Partners in accordance with their capital accounts as
determined under Article IV hereof.
5.4 USE OF FIRM NAME UPON DISSOLUTION
At no time during the operation of the Partnership or upon the termination
of and dissolution of the Partnership shall any value be placed on the firm
name, the right to its use, or the goodwill, if any, attached thereto, either
between the Partners or for the purpose of determining any distributive interest
of any Partner in accordance with this Agreement.
5.5 BALANCE OWED BY A PARTNER
In the event that a Partner has a negative balance in his capital account
after all adjustments to capital accounts have been made hereunder, whether by
reason of losses in liquidating Partnership assets or otherwise, the negative
balance shall represent an obligation from such Partner to the Partnership to be
paid in cash within thirty (30) days after written demand and shall be
distributed to creditors of the Partnership or to Partners with a positive
balance in their capital accounts in accordance with Section 5.3 hereof.
ARTICLE VI
MISCELLANEOUS
6.1 MEETINGS
Meetings of the Partnership for purposes of amending this Agreement or
taking any action permitted to be taken by the Limited Partners under this
Agreement may be called by the General Partner and shall, subject to the
limitations imposed by the final sentence of this Section 6.1, be called by it
when requested in writing by the Limited Partners holding ten percent (10%) or
more of the Units of Limited Partnership Interest. The General Partner shall
deposit the call in the United States mail within fifteen (15) days after
receipt of such written requests from the requisite percentage of the Limited
Partners. The call shall state the date, place, time and purpose of such
meeting, setting forth any amendments to this Agreement proposed to be adopted,
and no other business shall be conducted at such meeting except as set forth in
the call. The meeting shall be held no less than thirty (30) and no more than
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sixty (60) days after the date of the mailing of the call. The Limited Partners
may vote in person or by proxy at any such meeting. In the event that the
Partnership is required to comply with Regulation 14A under the Securities
Exchange Act of 1934 (the so-called "Proxy Rules") or any successor regulation,
the foregoing time periods may be altered by the General Partner so as not to
conflict therewith.
6.2 AMENDMENTS
(a) Amendments to this Agreement may be proposed by the General Partner
or by Limited Partners owning not less than ten percent (10%) of the
Units of Limited Partnership Interest. Within thirty (30) days
following such proposal, the General Partner shall submit the
proposed amendment to the Limited Partners together with an opinion
of counsel as to the legality of such amendment and its effect on the
Limited Partners for the Partnership's debts. The General Partner
shall make its recommendation with regard to each such proposal
advanced by any Limited Partner. A simple majority of the Units of
Limited Partnership Interest outstanding (not including Units of
Limited Partnership Interest held by the General Partner) shall be
required to pass an amendment; provided, however, that no such
amendment shall (i) change or alter the terms of this Section 6.2,
(ii) cause the Partnership to become a general partnership, (iii)
change the liability of the General Partner or the Limited Partners,
(iii) reduce the capital account of any Partner, (iv) modify the
percentage of profits, losses or distributions to which any Partner
is entitled, or (v) extend the duration of the Partnership, in each
case without the consent of the General Partner and all of the
Limited Partners. For purposes of obtaining a written vote, the
General Partner may require response within a specified time.
(b) Notwithstanding any provision to the contrary contained herein, the
General Partner may, without the consent of the Limited Partners,
make such amendments to this Agreement as are necessary:
(i) to reflect the admission of an additional or substitute
general partner;
(ii) to change the name of the Partnership;
(iii) to effect any other minor change that the General Partner
deems advisable, so long as such amendment is not adverse to
the Limited Partners and does not alter the basic investment
policies and structure of the Partnership, or that is required
by law;
(iv) to clarify any inaccuracy or ambiguity, to correct or
supplement any provision herein which may be inconsistent with
any other provision herein or otherwise (including any
inconsistency etween this Agreement and the Prospectus or
Statement of Additional Information), or to make any other
provisions with respect to matters or questions arising under
this Agreement which will not be inconsistent with the
provisions of this Agreement;
(v) to delete from or add to this Agreement any provision required
to be so deleted or added by representatives of the SEC, the
CFTC or any other government authority (including state
securities or Blue Sky administrators) having jurisdiction
over activities of the Partnership, which addition or deletion
is deemed by such agency, authority or administrators to be
for the benefit or protection of the Limited Partners;
(vi) to attempt to ensure that the Partnership is not treated as an
association taxable as a corporation for federal income tax
purposes;
(vii) to modify, with respect to a taxable year ending after the
date of such amendment or for which a tax return of the
Partnership has not yet been filed, and to the extent
permitted by law, any provision concerning the allocation of
profits and losses for Federal income tax purposes, if such
modification is deemed, in the General Partner's discretion,
necessary to promote an equitable treatment among the Partners
with respect to such allocations, as measured by the degree to
which the profits and losses allocated to them for tax
purposes reflect the actual increase or decrease in the value
of their investments;
(viii) to effect the intent of the tax allocations proposed herein,
including without limitation the allocation of Capital Gain
and Capital Loss on a net rather than a gross basis, to the
maximum extent possible in the event of a change in the Code
or the interpretations thereof affecting such allocations;
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(ix) to effect any other change that is appropriate or necessary,
in the opinion of the General Partner, to prevent the
Partnership or the General Partner or its controlling persons
from in any manner being subject to the provisions of the
Investment Company Act of 1940, as amended, or the "plan
asset" regulations adopted under ERISA as a result of their
association with the Partnership; and
(x) to add to the representations, duties or obligations of the
General Partner or surrender any right or power granted to the
General Partner herein for the benefit of the Limited
Partners.
(c) Notwithstanding anything to the contrary contained herein, (i) this
Agreement may be amended without the consent of the General Partner
in accordance with and only to the extent permissible under the Act;
PROVIDED that consent of all Limited Partners shall be required in
the case of amendments requiring the consent of all Limited Partners
under the Act, (ii) the Partnership may be dissolved, (iii) all or
substantially all of the Partnership assets may be sold or pledged,
(iv) the General Partner may be removed from office and replaced, (v)
a new general partner may be elected if the General Partner withdraws
from the Partnership, or (vi) any contract between the Partnership
and the General Partner or any of its affiliates may be cancelled
upon not more than sixty (60) days' prior written notice and without
penalty, in each case by the affirmative vote of the holders of a
simple majority of the Units of Limited Partnership Interest (not
including any Units of Limited Partnership Interest held by the
General Partner), at a meeting called and conducted in accordance
with Section 6.1 hereof. However, nothing contained in this Section
6.2(c), or in any other section of this Agreement, shall imply that
the Limited Partners have any rights of management or control over
the operations of the Partnership.
If an action described in the first sentence of subsection (iv) or
(v) of this Section 6.2 (c) is taken, the General Partner shall
withdraw from the Partnership and shall receive the proportionate
share of the Net Assets attributable to its general partnership
interest as of the close of business on the last business day of the
month in which the withdrawal is effective.
(d) Upon any amendment of this Agreement, the Certificate of Limited
Partnership shall also be amended if necessary to reflect such
amendment.
(e) The General Partner may not make a material change in the basic
investment policy or structure unless it shall first obtain the
affirmative vote of the holders of a simple majority of the Units of
Limited Partnership Interest.
6.3 ANNUAL REPORTS AND MONTHLY STATEMENTS
(a) As required by the CE Act, the General Partner shall furnish each
Limited Partner with unaudited monthly statements as of the end of
each calendar month and with an audited annual report containing
financial statements certified by an independent public accountant as
of the end of each fiscal year. The General Partner shall also
furnish each Limited Partner with such other reports and information
(and in such detail) as are required to be given to the Limited
Partners by the CFTC or any other governmental authority which has
jurisdiction over the activities of the Partnership and as the
General Partner, in its sole discretion, deems necessary or
appropriate.
(b) Annual reports shall be transmitted to the Limited Partners within
ninety (90) days after the close of the Partnership's fiscal year
(unless a shorter period is provided by applicable law or
regulations) containing financial statements of the Partnership
certified by an independent public accountant including a balance
sheet as of the end of the fiscal year and statements of income,
Partners' equity, and changes in financial position for the year then
ended, all of which shall be prepared in accordance with generally
accepted accounting principles, and a statement showing the total
fees, compensation, brokerage commissions and expenses of the
Partnership, segregated as to type. Appropriate tax information
(adequate to enable each Limited Partner to complete and file his
United States Federal income tax return) shall be delivered to each
Limited Partner no later than the fifteenth (15th) day of the third
month following the end of each fiscal year.
6.4 ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties hereto
with respect to the transactions contemplated by this Agreement and supersedes
all prior arrangements or understandings with respect thereto.
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6.5 DESCRIPTIVE HEADINGS
The descriptive headings of this Agreement are for convenience only and
shall not control or affect the meaning or construction of any provision of this
Agreement.
6.6 NOTICES
All notices or other communications required or permitted to be given
pursuant to this Agreement shall be in writing and shall be considered properly
given or made if delivered personally or mailed by registered mail, postage
prepaid, return receipt requested, or if telegraphed by prepaid telegram and
confirmed by written notice mailed contemporaneously as aforesaid, and
addressed, if to the General Partner, to it at 925 Westchester Avenue, White
Plains, NY 10604 and if to a Limited Partner, to the address set forth below
such Limited Partner's signature on the execution page hereof. Notwithstanding
the foregoing, Requests for Redemption and notices of transfer, assignment or
disposition of Units of Limited Partnership Interest shall be effective upon
receipt by the Partnership or the General Partner; and reports by the General
Partner to the Limited Partners may be mailed by unregistered first class mail,
postage prepaid, return receipt not requested. Any Limited Partner may change
his address by giving notice in writing to the General Partner stating his new
address, and the General Partner may change its address by giving such notice to
all the Limited Partners. Commencing on the tenth (10th) day after the giving of
such notice, such newly designated address shall be such Partner's or Partners'
address for the purpose of all notices or other communications required or
permitted to be given pursuant to this Agreement.
6.7 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware.
6.8 ILLEGALITIES
In the event that any provision contained in this Agreement shall be
determined to be invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and the remaining provisions of this Agreement shall not, at the
election of the party for whose benefit the provision exists, be in any way
impaired.
6.9 BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the
Partners, their respective legal representatives, successors, heirs and
permitted assigns. Any person hereafter admitted to the Partnership as a general
partner or a Limited Partner shall be subject to all of the provisions of this
Agreement as if an original signatory thereto.
6.10 THIRD PARTY RIGHTS
Notwithstanding any other provision of this Agreement, this Agreement
shall not create benefits on behalf of any third party, and this Agreement shall
be effective only as between the parties hereto and their respective legal
representatives, successors, heirs and permitted assigns.
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6.11 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute on and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SHAFFER ASSET MANAGEMENT, INC.
By: /s/ Daniel S. Shaffer
-----------------------------------
Daniel S. Shaffer
President
/s/ Daniel S. Shaffer
-----------------------------------
Daniel S. Shaffer,
as initial Limited Partner
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EXHIBIT B
SUBSCRIPTION REQUIREMENTS
General Suitability Requirements
Unless the subscriber is a resident of a state listed below, the
subscriber must have net worth of at least $225,000, exclusive of home,
furnishings and automobiles, or an annual gross income of at least $60,000 and a
net worth similarly calculated of at least $60,000, and the investment of the
subscriber in the Fund must not constitute more than 10% of the net worth,
exclusive of home, furnishings and automobiles, of the subscriber.
Additional State Law Suitability Requirements
Some jurisdictions impose additional requirements on subscribers, which
requirements may change from time to time. The descriptions below are based on
unofficial compilations of the blue-sky laws believed to be accurate on the date
of the accompanying Prospectus and this Statement of Additional Information.
Subscribers who are residents of the following states represent and warrant that
they meet the following additional requirements imposed by such states, in each
case excluding from their net worth the value of their home, furnishings and
automobiles:
Iowa: Net worth of at least $350,000 or a net worth of at least $100,000
and $100,000 taxable income.
Kansas: Net worth of at least $350,000 or a net worth of at least $100,000
and $100,000 taxable income.
Missouri: Net worth of at least $350,000 or a net worth of at least
$100,000 and $100,000 taxable income.
Nebraska: Net worth, or joint net worth with spouse, that exceeds
$1,000,000 or income in excess of $200,000 in each of the two most recent years
or a joint income with spouse in excess of $300,000, and a reasonable
expectation of income of a similar level in the current year.
Erisa Requirements
If a subscriber in the Fund is acting on behalf of an "employee benefit
plan" as defined in and subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or a "plan" as defined in Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code"), the individual signing
the Subscription Agreement / Power of Attorney as plan fiduciary further
represents and warrants, on behalf of the subscriber, to the Fund, the General
Partner, the Selling Agent , the selected dealer(s) that solicited the
subscription, and ADM Investor Services that:
o the plan fiduciary has considered an investment in the Fund for such plan
in light of the risks relating thereto;
o the plan fiduciary has determined that, in view of such considerations,
the investment in the Fund is consistent with the responsibilities of the
plan fiduciary under ERISA;
o an investment in the Fund does not violate and is not otherwise
inconsistent with the terms of any legal document constituting the plan or
any trust agreement thereunder;
o an investment in the Fund has been duly authorized and approved by all
necessary parties;
o none of the General Partner, the Advisor, the Selling Agent, the selected
dealer(s) that solicited the subscription, or any of their respective
affiliates, agents or employees:
- has investment discretion with respect to the plan assets;
- has authority or responsibility to give or regularly gives investment
advice with respect to the plan assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary
basis for investment decisions with respect to the plan assets and
that such advice will be based on the particular investment needs of
the plan; or
- is an employer maintaining or contributing to the plan;
B-1
o the plan fiduciary:
- is authorized to make, and is responsible for, the decision to invest
in the Fund, including the determination that the investment is
consistent with the requirement imposed by Section 404 of ERISA that
plan investments be diversified so as to minimize the risks of large
losses;
- is independent of the General Partner, the Advisor, the Selling
Agent, the selected dealer(s) that solicited the subscription, ADM
Investor Services, and their respective affiliates, agents and
employees; and
- is qualified to make the investment decision.
At the request of the General Partner, the plan fiduciary agrees to
furnish the General Partner with any information reasonably required by the
General Partner to establish that the purchase of the Units by the plan does not
violate any provision of ERISA or the Internal Revenue Code, including without
limitation those provisions relating to "prohibited transactions" by "parties in
interest" or "disqualified persons."
Fiduciary Accounts
In the case of a subscription on behalf of a fiduciary account, the
subscription requirements must be met by the account beneficiary. However, in a
case where a donor or grantee directly or indirectly supplies the funds to
purchase the Units, and the donor or grantee acts as the fiduciary for the
account, then the subscription requirements may be met by the donor or grantee.
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EXHIBIT C
SUBSCRIPTION INSTRUCTIONS FOR
SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY
Prospective investors in Shaffer Diversified Fund, LP (the "Fund") should
carefully read and review a copy of the Fund's most recent Prospectus and
Statement of Additional Information. In addition, the Prospectus and Statement
of Additional Information should be accompanied by the most recent monthly
report of the Fund.
1. Enter the total dollar amount being invested on LINE 1. Initial minimum
investment: $10,000 in Units ($5,000 in Units in the case of any pension,
profit-sharing or other employee benefit plan qualified under Section 401
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue
Code"), IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee
Pension - IRA plans and retirement and deferred compensation and annuity
plans and trusts used to fund those plans, including but not limited to,
those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue
Code. Subsequent minimum investment: $1,000.
2. If a customer securities account is to be debited for the investment,
enter the account number on LINE 2.
3. Enter the Social Security or Taxpayer Identification Number of the
subscriber on LINE 3, and check the appropriate box to indicate ownership
type. For individual retirement accounts, enter the Social Security Number
of the subscriber and the Taxpayer Identification Number of the custodian.
4. Check the box in LINE 4 if this investment is an addition to an existing
account, and complete the account number.
5/6. Enter the name of the subscriber on LINE 5. For UGMA/UTMA accounts, enter
the name of the minor on LINE 5, followed by "minor," and enter the name
of the custodian on LINE 6. For trusts, enter the name of the trust on
LINE 5 and the name(s) of the trustee(s) on LINE 6. For corporations,
partnerships and estates, enter the name of the entity on LINE 5 and the
name of the officer or contact person of such entity on LINE 6.
Subscribers who are not individuals must furnish a copy of organizing or
other documents evidencing the authority of the entity to invest in the
Fund. For example, trusts must furnish a copy of the trust agreement, and
corporations must furnish a copy of the corporate charter, bylaws and
enabling resolutions.
7. Enter the legal address, which is the residence or domicile address used
for tax purposes, of the subscriber on LINE 7. Do not enter post office
boxes.
8. If the mailing address of the subscriber is different from the legal
address of the subscriber, complete LINE 8.
9. If an individual retirement account, enter the name and address of the
custodian on LINE 9.
10. The subscriber must sign and date LINE 10. If a joint account, both
subscribers must sign. In an individual retirement account, both the
custodian and the subscriber must sign.
11. Financial advisors must complete and sign under "Financial
Advisors" below.
The financial advisor should send the Subscription Agreements / Power of
Attorney, payments and all other required documents to the placement agent:
Berthel Fisher & Company
Financial Services, Inc.
701 Tama Street
PO Box 609
Marion, IA 52302-0609
Phone: (800) 356-5234 or
(319) 447-5700
Facsimile: (319) 447-4250
E-mail: danderson@berthel.com
Please send all documents and payments early in the month to ensure timely
delivery. Subscriptions close on the last business day of each month. The fund
administration department of the Selling Agent and the selected dealer(s) that
solicited the subscription may have an earlier deadline for subscriptions.
C-1
If payment is being made by wire transfer, the financial advisor should
contact Berthel Fisher & Company. PAYMENTS MADE BY CHECK MUST BE RECEIVED BY THE
FUND AT LEAST THREE BUSINESS DAYS PRIOR TO THE LAST BUSINESS DAY OF THE MONTH,
AND PERSONAL CHECKS MUST BE RECEIVED BY THE FUND AT LEAST FIVE BUSINESS DAYS
PRIOR TO THE LAST BUSINESS DAY OF THE MONTH. ONLY SUBSCRIPTIONS FOR WHICH
PAYMENT HAS CLEARED WILL BE ACCEPTED.
A financial advisor having specific questions about the subscription
process should call the Berthel Fisher & Company Marketing Department at (800)
356-5234.
C-2
SHAFFER DIVERSIFIED FUND, LP
(A DELAWARE LIMITED PARTNERSHIP)
SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY
Shaffer Diversified Fund, LP
c/o Shaffer Asset Management, Inc.
925 Westchester Avenue
White Plains, NY 10604
Dear Sir or Madam:
SUBSCRIPTION FOR UNITS. By executing this Subscription Agreement / Power
of Attorney, I hereby irrevocably subscribe for the number of units ("Units") of
limited partnership interest in Shaffer Diversified Fund, LP (the "Fund") set
forth on page D-4 hereof at a purchase price equal to (i) $1,000 per Unit ($950
per Unit, plus an initial sales charge of $50 per Unit) during the initial
offering period of the Fund, and (ii) at the Net Asset Value per Unit, plus a
sales charge of 5% of the Net Asset Value per Unit for each Unit purchased,
thereafter, each as more fully described in the Fund's prospectus (the
"Prospectus") and accompanying Statement of Additional Information (the
"Statement of Additional Information"), as the same may be amended or
supplemented from time to time. I understand that only whole Units may be
purchased during the initial offering period of the Fund, but that fractional
Units may be purchased thereafter. My check payable to "Shaffer Diversified
Fund, LP" in the full amount of my subscription accompanies this Subscription
Agreement / Power of Attorney, or I have authorized Berthel Fisher & Company
Financial Services, Inc. (the "Selling Agent") or the selected dealer(s) that
solicited this subscription to debit my customer securities account in the
amount set forth herein.
REPRESENTATIONS AND WARRANTIES. I represent the following (subscriber to
initial as indicated):
Initial: _____ I have received a copy of the Prospectus and accompanying
Statement of Additional Information.
Initial: _____ I am purchasing the Units only for my own account.
Initial: _____ This purchase does not exceed more than ten percent (10%)
of my net worth.
INITIAL ONLY ONE OF THE FOLLOWING:
Initial: ______ Except as noted below, I have (i) a net worth (exclusive
of home, home furnishings and automobiles) of at least $225,000 or (ii) an
annual gross income of at least $60,000 and a net worth similarly calculated of
at least $60,000, and my investment in the Fund will not constitute more than
10% of my net worth, exclusive of my home, home furnishings and automobiles.
Initial: ______ I am a resident of Iowa, Kansas, or Missouri and I have
(i) a net worth of at least $350,000 or (ii) a net worth of at least $100,000
and $100,000 taxable income.
Initial: ______ I am a resident of Nebraska, and I have (i) a net worth,
or joint net worth with my spouse, that exceeds $1,000,000 or (ii) had income in
excess of $200,000 in each of the two most recent years or a joint income with
my spouse in excess of $300,000, and I have a reasonable expectation of reaching
this same income level in the current year.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, HOWEVER, I
UNDERSTAND THAT BY SIGNING THIS SUBSCRIPTION AGREEMENT, I AM NOT WAIVING ANY
RIGHTS THAT I MAY HAVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER.
Agreements
By signing this letter, I shall be deemed to have executed and to agree to
be bound by the terms of the Agreement of Limited Partnership, as amended, of
the Fund (the "Limited Partnership Agreement") attached as Exhibit A to the
Statement of Additional Information. In addition, I agree to reimburse the Fund
and Shaffer Asset Management, Inc. (the "General Partner / Advisor") for any
expense or loss incurred as a result of my failure to deliver good funds for the
subscription amount. I consent to the execution and delivery of an advisory
agreement between the Fund and the General Partner /Advisor and to the payment
to the General Partner / Advisor of the compensation described in the Prospectus
C-3
and the Statement of Additional Information. In addition, if I am not a citizen
or resident of the United States for federal income tax purposes and not a
dealer in commodities, I agree to pay or reimburse the Fund for any taxes
imposed as a result of my status as a limited partner in the Fund.
Power of Attorney
In connection with my purchase of Units, I do hereby irrevocably
constitute and appoint the General Partner / Advisor as my true and lawful
Attorney-in-Fact, with full power of substitution, in my name, place and stead,
(i) to file, prosecute, defend, settle or compromise litigation, claims or
arbitration on behalf of the Fund and (ii) to make, execute, sign, acknowledge,
swear to, deliver, file and record on my behalf any documents or instruments
considered necessary or desirable by the General Partner /Advisor to carry out
fully the provisions of the Limited Partnership Agreement, including without
limitation the execution of the Certificate of Limited Partnership of the Fund,
the Limited Partnership Agreement, and all amendments thereto permitted by the
terms thereof to be entered into by the General Partner / Advisor. The power of
attorney granted hereby shall be deemed to be coupled with an interest, shall be
irrevocable and shall survive and not be affected by my subsequent death,
incapacity, disability, insolvency or dissolution or any delivery by me of an
assignment of the whole or any portion of my interest in the Fund.
Irrevocability; Governing Law
My susbcription for Units will not be complete until the close of business
on the day that is five days after I receive a final prospectus of the Fund. I
hereby acknowledge that after the expiration of that five day period I am not
entitled to cancel, terminate or revoke this subscription or any of my
agreements hereunder after this subscription has been submitted. The laws of the
State of Delaware shall govern this Subscription Agreement / Power of Attorney.
1. Amount of subscription: $______________________
2. If debit is to be made to customer securities account,
account number: ____________________.
3. Social Security _______ - ______ - ______ or taxpayer
identification number: ______ - __________
Taxable investors (check one): Non-taxable investors (check one):
[ ] Individual [ ] Individual retirement account
[ ] Joint tenants with right [ ] Roth IRA
of survivorship
[ ] Tenants in common [ ] IRA rollover
[ ] Community property [ ] SEP
[ ] Estate [ ] Profit-sharing account
[ ] UGMA/UTMA [ ] Defined benefit account
[ ] Corporation [ ] Pension
[ ] Partnership [ ] Other Retirement Benefit Plan
[ ] Grantor or other [ ] Other (specify) _____________
revocable trust
[ ] Trust other than grantor
or revocable trust
4. [ ] Existing account number: ____________________.
5. Names in which Units are to be registered: __________________
6. Additional information (see instructions): ___________________
7. Address: ____________________________________________
Telephone No: ____________________________________________
Facsimile No: ____________________________________________
E-mail Address: ____________________________________________
C-4
8. Mailing address (if different):
--------------------------------------------
--------------------------------------------
--------------------------------------------
9. Custodian name and mailing address:
--------------------------------------------
--------------------------------------------
--------------------------------------------
Account Number: _____________________________
10. Signature of Investor: Date:
-------------------------------- -----------------------
Signature of joint investor or Custodian: Date:
-------------------------------- -----------------------
United States Investors
[ ] I have checked the box if I am subject to backup withholding under the
provisions of section 3406(a)(1)(C) of the Internal Revenue Code of 1986,
as amended. Under penalties of perjury, I hereby certify by signature
above that the Social Security or Taxpayer Identification Number above is
my true, correct and complete Social Security or Taxpayer Identification
Number and that the information given in the immediately preceding
sentence is true, correct and complete.
Non-United States Investors
Under penalties of perjury, I hereby certify by signature above that I am
not a citizen or resident of the United States and not a United States
corporation, partnership, estate or trust.
Financial Advisors
I hereby certify that I have informed the subscriber herein of all
pertinent facts relating to the risks, tax consequences, liquidity,
marketability, management and control of the Fund with respect to an investment
in the Units, as set forth in the Prospectus and the Statement of Additional
Information. I have also informed the subscriber that it is unlikely that a
public trading market in the Units will develop.
I have reasonable grounds to believe, based on information obtained from
the subscriber concerning his or her investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the Fund by the subscriber is suitable for the subscriber in light
of his or her financial position, net worth and other suitability
characteristics.
The financial advisor must sign below to substantiate compliance with NASD
Rule 2810. The office manager (if required by the procedures of the Selling
Agent or selected dealer(s) that solicited this subscription) must sign below:
Financial advisor signature: Date:
----------------------- -----------------------
Office manager signature: Date:
----------------------- -----------------------
Financial advisor name:__________________________________________
Address: __________________________________________
Telephone: __________________________________________
Facsimile: __________________________________________
E-mail address: __________________________________________
C-5
EXHIBIT D
SHAFFER DIVERSIFIED FUND, LP
(A DELAWARE LIMITED PARTNERSHIP)
REQUEST FOR REDEMPTION
_________________, 20___
(Please date)
PLEASE SEND ORIGINAL TO:
Shaffer Asset Management, Inc.,
as General Partner
Shaffer Diversified Fund, LP
925 Westchester Avenue
White Plains, NY 10604
Re: Account No: ________________________
Social Security or taxpayer
identification number: ____________________
Dear Sir or Madam:
I hereby request redemption, as defined in and subject to all of the terms
and conditions of the Amended and Restated Agreement of Limited Partnership of
Shaffer Diversified Fund, LP, a Delaware limited partnership (the "Fund"), of
_______________ [insert number of Units to be redeemed OR write the word "All"]
of my Units of limited partnership interest in the Fund at the Net Asset Value
per Unit described in the Prospectus and accompanying Statement of Additional
Information of the Fund dated October 16, 2001. I understand that the redemption
shall be effective as of the close of business on the last business day of the
calendar month in which this request for redemption is received by the General
Partner; PROVIDED that this request for redemption is received by the General
Partner at least 10 days prior to such effective date, and that if this request
for redemption is received by the General Partner less than 10 days prior to a
permitted redemption date, my Units may be redeemed on the next succeeding
redemption date. I also understand that the redemption fees described in the
Prospectus may apply to this redemption.
I (either in my individual capacity or as an authorized representative of
an entity, if applicable) hereby represent and warrant that I am the true,
lawful and beneficial owner of the Units of limited partnership interest to
which this request for redemption relates, with full power and authority to
request redemption of such Units. Such Units are not subject to any pledge or
otherwise encumbered in any fashion.
UNITED STATES INVESTORS
[ ] I have checked the box if I am subject to backup withholding under the
provisions of Section 3406(a)(1)(C) of the Internal Revenue Code. Under
penalties of perjury, by signature below I hereby certify that the Social
Security or taxpayer identification number above is my true, correct and
complete Social Security or taxpayer identification number and that the
information given in the immediately preceding sentence is true, correct and
complete.
D-1
NON-UNITED STATES INVESTORS
Under penalties of perjury, by signature below I hereby certify that I am
not a citizen or resident of the United States and not a United States
corporation, partnership, estate or trust.
Please forward redemption proceeds by mail to me at:
--------------------------------------------
--------------------------------------------
--------------------------------------------
SIGNATURES MUST BE IDENTICAL TO NAME(S) IN WHICH UNITS ARE REGISTERED. (Duly
authorized persons should sign on behalf of entities.)
Individual Limited Partner(s)
--------------------------------------------
Name(s) (please print)
Signature ____________________________________
Signature ____________________________________
Partnership, Trust, Corporate of Other Entity Limited Partner(s):
--------------------------------------------
Name of Partnership, Trust, Corporation or
Other Entity (please print)
By:_________________________________________________
Signature of partner, trustee or authorized officer
--------------------------------------------
Name of Partner, Trustee or Other Authorized Officer
(please print)
--------------------------------------------
Title (please print)
THIS REQUEST FOR REDEMPTION MUST BE MAILED TO THE FUND'S OFFICE BY
REGISTERED MAIL, RETURN RECEIPT REQUESTED, TOGETHER WITH THE CERTIFICATE(S)
REPRESENTING THE UNITS TO BE REDEEMED.
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
SHAFFER DIVERSIFIED FUND, LP
(A DELAWARE LIMITED PARTNERSHIP)
A MINIMUM OF 1,000 AND A MAXIMUM OF
25,000 UNITS OF LIMITED PARTNERSHIP INTEREST
PART ONE --- PROSPECTUS
TABLE OF CONTENTS
Page
Summary 1
Risk Factors 5
Organizational Chart 14
Financial Information 15
Conflicts of Interest/Fiduciary
Responsibility of the General Partner 15
Use of Proceeds 18
Fees, Compensation and Expenses 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
Qualitative Disclosure About Market Risk 27
The General Partner/Advisor 28
Commodity Brokerage Arrangements 34
Plan of Distribution 36
Investments by ERISA Accounts 39
Distributions and Redemptions 41
Trading Policies 42
Summary of the Advisory Agreement 44
Summary of the Limited Partnership Agreement 46
Capitalization/Selected Financial Data 50
Federal Income Tax Considerations 51
Forward-Looking Statements 54
Legal Matters 54
Experts 54
Additional Information 54
Index to Financial Statements F-1
PART TWO --- STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
Glossary and Definitions of Commodity Trading 3
Description of Commodity Trading 7
Past Performance of the Advisor 11
Exhibits --
Limited Partnership Agreement A-1
Subscription Requirements B-1
Subscription Instructions;
Subscription Agreement / Power of Attorney C-1
Request for Redemption D-1
Until January 14, 2002 (ninety days after the date hereof), all dealers
effecting transactions in the Units, whether or not participating in this
distribution, are required to deliver a current copy of this Prospectus and the
accompanying Statement of Additional Information. This is in addition to the
obligation of dealers to deliver a Prospectus and accompanying Statement of
Additional Information when acting as underwriters and with respect to their
unsold allotments or subscriptions.
October 16, 2001