-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QNDZB8tRuvCVb2TxN0iHN/K6BiPkDDsX0+ZONt6qtcB2Y3crddYUma6Xh/GGZ+z2 8mLynHD5dkWAkZ4nYz9h/Q== 0000950134-98-009891.txt : 19981228 0000950134-98-009891.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950134-98-009891 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19981223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFUTURES LONG/SHORT GROWTH FUND LP CENTRAL INDEX KEY: 0001045702 STANDARD INDUSTRIAL CLASSIFICATION: [6221] IRS NUMBER: 742849862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-63129 FILM NUMBER: 98774479 BUSINESS ADDRESS: STREET 1: 1310 HIGHWAY 620 SOUTH STREET 2: SUITE 200 CITY: AUSTIN STATE: TX ZIP: 78734 BUSINESS PHONE: 5122633800 MAIL ADDRESS: STREET 1: 1310 HIGHWAY 620 SOUTH STREET 2: SUITE 200 CITY: AUSTIN STATE: TX ZIP: 78734 FORMER COMPANY: FORMER CONFORMED NAME: PROFUTURES BULL & BEAR FUND L P DATE OF NAME CHANGE: 19980827 S-1/A 1 AMENDMENT NO. 1 TO FORM S-1 1 As filed with the Securities and Exchange Commission on December 23, 1998 REGISTRATION NO. 333-63129 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------------- PROFUTURES LONG/SHORT GROWTH FUND, L.P. (Exact name of registrant as specified in its charter) DELAWARE 6799 74-2849862 (State of Organization) (Primary Standard Industrial (IRS Employer Classification Code Number) Identification Number) C/O PROFUTURES, INC. 11612 BEE CAVE ROAD SUITE 100 AUSTIN, TEXAS 78733 (800) 348-3601 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) GARY D. HALBERT C/O PROFUTURES, INC. 11612 BEE CAVE ROAD SUITE 100 AUSTIN, TEXAS 78733 (800) 348-3601 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------------- COPIES TO: William D. Kerr Bradley D. Howard Sidley & Austin One First National Plaza Chicago, Illinois 60603 --------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. --------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 PROFUTURES LONG/SHORT GROWTH FUND, L.P. $60,000,000 LIMITED PARTNERSHIP UNITS THE FUND ProFutures Long/Short Growth Fund, L.P. was organized in August 1997. The Fund's primary objective is appreciation of Fund assets through the speculative trading of stock index futures contracts. Stock index futures are cash settled futures contracts on the future value of a stock index such as the S&P 500. Stock index futures trading offers several features that are not widely available when using traditional securities, such as additional leverage, higher liquidity in active market conditions and the potential to profit from stock market downturns by selling short. The Fund's trading operations began on November 20, 1997. THE ADVISOR Hampton Investors, Inc., a professional managed futures advisor, trades the Fund's assets in the S&P 500 Stock Index futures contract on the Chicago Mercantile Exchange. THE UNITS The Fund's Limited Partnership Units may be purchased at a price equal to 101% of the Net Asset Value per Unit on the last day of each month. Approximately 99% of the purchase price, an amount equal to 100% of Unit Net Asset Value, is contributed to the Fund. ProFutures, Inc., the Fund's general partner (the "General Partner"), retains 1% to pay organizational and offering expenses. If the total amount of this offering, $60,000,000, is sold, the proceeds to the Fund will be $59,400,000 and the proceeds to the General Partner will be $600,000. No selling commissions are paid by investors or the Fund. As of October 31, 1998, Units initially sold pursuant to a private offering at $1,010 per Unit had increased in Net Asset Value to $1,544.54 per Unit, an increase of approximately 52.93%. Past performance is not necessarily indicative of future results. The minimum purchase for first-time investors is $10,000; $5,000 for IRAs, other tax-exempt accounts and current investors. THE RISKS THESE ARE SPECULATIVE SECURITIES. BEFORE YOU DECIDE WHETHER TO INVEST, READ THIS ENTIRE PROSPECTUS CAREFULLY AND CONSIDER "THE RISKS YOU FACE" BEGINNING ON PAGE 10. o You could lose all or substantially all of your investment in the Fund. o The Fund is speculative and employs initial leverage of up to three times its total equity. o Performance has been volatile and the Net Asset Value per Unit may fluctuate significantly within a single day or month. o The Units are not liquid as no secondary market exists for the Units and redemption rights are limited. o The use of a single advisor trading only stock index futures contracts reduces diversification and increases risk of loss relative to a fund using multiple advisors trading a diversified portfolio of futures contracts. o The Fund is subject to substantial expenses regardless of profitability, including a 3% annual management fee and brokerage, legal, audit and other administrative expenses estimated at approximately 1.70% of average annual net assets, as well as a quarterly incentive fee equal to 20% of net new profits. o In order to offset the organizational charge and Fund fees and expenses during the first year after a Unit is sold, the Fund must earn trading profits of approximately 1.85% of its average annual net assets (assuming interest on its assets at an annual rate of approximately 4.20%). o The Fund may be subject to conflicts of interest of the General Partner, the Advisor and the Futures Broker. SUBSCRIBERS TO THE FUND WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY. SUBSCRIBERS ARE ENCOURAGED TO DISCUSS THEIR INVESTMENT DECISION WITH THEIR FINANCIAL, TAX AND LEGAL ADVISORS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. -------------------- PROFUTURES, INC. GENERAL PARTNER PROFUTURES FINANCIAL GROUP, INC. SELLING AGENT ______ , 1998 3 COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECES SARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGES 27 TO 30 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 8. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGES 10 TO 16. -------------------------- THIS PROSPECTUS DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE FUND'S REGISTRATION STATEMENT. YOU CAN READ AND COPY THE ENTIRE REGISTRATION STATEMENT AT THE PUBLIC REFERENCE FACILITIES MAINTAINED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") IN WASHINGTON, D.C. THE FUND WILL FILE QUARTERLY AND ANNUAL REPORTS WITH THE SEC. YOU CAN READ AND COPY THESE REPORTS AT THE SEC PUBLIC REFERENCE FACILITIES IN CHICAGO, NEW YORK OR WASHINGTON, D.C. PLEASE CALL THE SEC AT 1-800-SEC-0300 FOR FURTHER INFORMATION. THE FUND'S FILINGS WILL BE POSTED AT THE SEC WEBSITE AT HTTP://WWW.SEC.GOV. PROFUTURES LONG/SHORT GROWTH FUND, L.P. IS NOT A MUTUAL FUND OR ANY OTHER TYPE OF INVESTMENT COMPANY WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, AND IS NOT SUBJECT TO REGULATION THEREUNDER. UNTIL ___, 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------- PROFUTURES, INC. GENERAL PARTNER 11612 BEE CAVE ROAD SUITE 100 AUSTIN, TEXAS 78733 (800) 348-3601 -1- 4 PROFUTURES LONG/SHORT GROWTH FUND, L.P. ORGANIZATIONAL CHART [CHART] None of the entities indicated in this organizational chart are related except ProFutures, Inc. and ProFutures Financial Group, Inc. See "Conflicts of Interest" beginning on page 43. NO LOANS HAVE BEEN, ARE OR WILL BE MADE BETWEEN A PROFUTURES ENTITY OR ANY PRINCIPAL OF A PROFUTURES ENTITY AND THE FUND. DESCRIPTIONS OF THE DEALINGS BETWEEN THE PROFUTURES ENTITIES, THE FUND AND INVESTORS ARE SET FORTH UNDER THE SUB-HEADINGS "-MANAGEMENT FEE" AND "-- ORGANIZATIONAL CHARGE" UNDER "ANALYSIS OF FEES AND EXPENSES PAID BY THE FUND" BEGINNING ON PAGE 27. -2- 5 PROFUTURES LONG/SHORT GROWTH FUND, L.P. TABLE OF CONTENTS
PROSPECTUS SECTION PAGE - ------------------ ---- SUMMARY.......................................... 5 THE RISKS YOU FACE............................... 10 (1) Possible Total Loss of an Investment in the Fund........................... 10 (2) Stock Index Futures Trading Involves Substantial Leverage.................. 10 (3) Stock Index Futures Trading Is Speculative, Highly Volatile and Can Result in Large Losses............ 10 (4) The Units Are Not Liquid................. 10 (5) Investors Must Not Rely on the Past Performance of Either the Advisor or the Fund in Deciding Whether to Buy Units.......................... 10 (6) The Fund May Receive Margin Calls................................. 10 (7) Substantial Expenses Will Cause Losses for the Fund Unless Offset by Profits and Interest Income........... 11 (8) Unit Values Are Unpredictable and Vary Significantly Month- to-Month.............................. 11 (9)Importance of Market Conditions to Profitability...................... 11 (10) Futures Markets Investments Are Different from Securities Markets Investments........................... 11 (11) The Large Size of the Fund's Trading Positions Increases the Risk of Sudden, Major Losses............... 12 (12) Illiquid Markets Could Make It Impossible for the Fund to Realize Profits or Limit Losses............... 12 (13) Speculative Position Limits May Require the Advisor to Modify Its Trading to the Detriment of the Fund ............................. 12 (14) The Advisor Alone Directs the Fund's Trading........................ 12 (15) The Advisor May Have Unexpected Problems in Executing Trades.......... 12 (16) The Advisor May Not Be Successful in "Downward" Equity Markets.......... 13 (17) Trading Suspension Policy Is Not a Limit on Losses............................ 13 (18) Trading in Options on Stock Index Futures Is Speculative and Highly Leveraged............................. 13 (19) Limitation of the Markets Traded by the Advisor Also Reduces Diversification, Increasing the Risk of Loss............................... 13 (20) Investing in the Units May Not Diversify an Overall Portfolio........ 13 (21) The Advisor's Increased Equity Under Management Could Lead to Diminished Returns.................... 14 (22) The Advisor May Change Its Trading Approach and/or Futures Contracts Traded................................ 13 (23) The Fund's Cash Management Strategies Could Lose Both Yield and Principal........................ 14 (24) The Fund Could Lose Assets and Have Its Trading Disrupted Due to the Bankruptcy of Its Broker or Others... 14 (25) Units May Be Subject to Incentive Fees Despite Having Declined in Value................................. 14 (26) The Fund May Be Subject to Certain Conflicts of Interest................ 15 (27) Investors Should Not Rely on the Futures Broker's Guarantee of the General Partner's Net Worth......... 15 (28) Investors Are Taxed Every Year on Their Share of the Fund's Profits-- Not Only When They Redeem as Would Be the Case If They Held Stocks or Bonds...................... 15 (29) The Management Fee and Incentive Fee May Be Recharacterized as "Investment Advisory Fees"........... 15 (30) The Fund's Trading Gains May Be Taxed at Higher Rates......... 16 (31) Tax Could Be Due from Investors on Their Share of the Fund's Interest Income Despite Overall Losses............................... 16
-3- 6 PROFUTURES LONG/SHORT GROWTH FUND, L.P. TABLE OF CONTENTS (CONT.)
PROSPECTUS SECTION PAGE - ------------------ ---- FUND OPERATIONS.................................. 16 PERFORMANCE OF THE FUND.......................... 21 SELECTED FINANCIAL DATA.......................... 22 MANAGEMENT'S ANALYSIS OF OPERATIONS.............. 23 USE OF PROCEEDS; INTEREST INCOME ARRANGEMENTS .............................. 26 ANALYSIS OF FEES AND EXPENSES PAID BY THE FUND................................ 27 THE ADVISOR...................................... 30 THE GENERAL PARTNER.............................. 39 BROKERAGE ARRANGEMENTS........................... 42 NET ASSET VALUE.................................. 43 CONFLICTS OF INTEREST............................ 43 THE STOCK INDEX FUTURES MARKETS.................. 45 SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT ................................ 48 TAX CONSEQUENCES................................ 49 PURCHASES BY EMPLOYEE BENEFIT PLANS.............. 51 GENERAL.......................................... 53 FINANCIAL STATEMENTS............................. 54 EXHIBIT A -- LIMITED PARTNERSHIP AGREEMENT.................................. LPA-1 EXHIBIT B -- SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY.......................... B-1 EXHIBIT C -- REQUEST FOR REDEMPTION................................. C-1
-4- 7 SUMMARY GENERAL The ProFutures Long/Short Growth Fund, L.P. offers individual investors a way to participate in the equity markets through stock index futures, specifically, the S&P 500 Stock Index (the "Index") futures contract on the Chicago Mercantile Exchange, under the guidance of an experienced, professional commodity trading advisor. The Index is based on the stock prices of 500 large-capitalization companies. The market value of the 500 companies is equal to about 80% of the value of all stocks listed on the New York Stock Exchange. Use of the S&P 500 stock index contract (the "S&P 500 Contract") permits investors to trade the Index at various multiples, thus creating, in effect, a highly-leveraged stock portfolio. The S&P 500 Contract may also offer greater liquidity than the underlying stocks in active market conditions and the potential to profit from stock market downturns by selling short, a trading technique where the futures contract is first sold and then, later, bought back. Until December 8, 1998, the Fund's name was "ProFutures Bull & Bear Fund, L.P." PROFUTURES, INC. ProFutures, Inc., the General Partner and commodity pool operator of the Fund, began operations in 1984 and specializes in the management of speculative futures funds. The General Partner currently operates three futures funds -- the Fund and two multi-advisor, widely diversified public futures funds -- having an aggregate capitalization as of October 31, 1998 of approximately $118 million. HAMPTON INVESTORS, INC. General Hampton Investors, Inc., the commodity trading advisor for the Fund, has been managing investor accounts and its own capital in the securities markets since 1985 and began trading investor capital in the futures markets in May 1995. The Advisor trades for the Fund pursuant to its Leverage 3 trading program which, since July 1995, has focused on trading only the S&P 500 Contract. Trading Strategy The Advisor's Leverage 3 trading program uses several indicators that examine relevant information relating to the S&P 500 Contract. These indicators are broken down into three categories: monetary, market-action based and price-based. The Leverage 3 trading program attempts to take a position in the S&P 500 Contract of up to approximately three times that of a fully-funded S&P 500 Contract. The value of a fully-funded S&P 500 Contract equals the contract multiplier, currently $250 times the Index level. The Index level fluctuates daily but assume for purposes of this example that it is 1,100. In this example, a fully-funded S&P 500 Contract is worth $275,000 ($250 x 1,100). If you wanted to trade without the use of leverage, you could deposit $275,000 in cash and buy one S&P 500 Contract. Your account would then go up and down in line with the Index. When the Advisor's system is in its most bullish position, the Advisor will establish a long position by buying three S&P 500 Contracts for each approximately $275,000 in the Fund. That means that when the Index moves 1%, the value of the Fund should move approximately 3% in the same direction. In other words, the Fund will be approximately three times leveraged. -5- 8 The Advisor's system increases and decreases the leverage of long positions as its signal becomes stronger or weaker. If, in the above example, a certain number of the indicators turn negative, the Advisor would reduce its position so as to be only two times leveraged. If more indicators turn negative, the Advisor would liquidate the entire position and be neutral (100% cash, no S&P 500 Contract position). And if more indicators became negative, the Advisor would "short" the market by selling S&P 500 Contracts, again at three times leverage. In that scenario, the Fund would gain approximately 3% for each 1% the Index falls -- assuming the Advisor remains in the position. In summary, the program has four positions: maximum leverage long (three times leverage long), long (two times leverage long), neutral (100% cash) and maximum leverage short (three times leverage short). The Advisor's program provides significant leverage, well above what one can accomplish in a margin account with a stock broker, but well below that of trading futures contracts at an exchange's minimum margin. While the Fund uses considerably less margin than many futures funds, there has been considerable short-term volatility in the program. Investors should be prepared for sudden, substantial changes in Unit value and rates of return. Leverage amplifies both gains and losses. The Advisor may also trade other stock index futures contracts, and options thereon, including the S&P 500/BARRA indices, the S&P Midcap 400, the Dow Jones Industrial Average, the NASDAQ 100, the Russell 2000, and similar U.S. stock index futures contracts which may become available in the future. However, the Advisor currently expects to limit its trading to the S&P 500 Contract. BROKERAGE ARRANGEMENTS ING (U.S.) Securities, Futures & Options Inc. (the "Futures Broker") currently acts as the Fund's futures clearing broker. MAJOR RISKS OF THE FUND o Investors must be prepared to lose all or substantially all of their investment in the Units. The Fund utilizes substantial leverage, up to three times its total equity when initiating a position, which magnifies the impact of profits and losses. o The Fund is a speculative investment. It is not possible to predict how the Fund will perform over either the long or short term. Investors must not rely on the past performance of either the Fund or the Advisor in deciding whether to purchase Units. o The Net Asset Value per Unit may vary substantially within a single day or month. Because investors must submit irrevocable subscriptions at least 5 days before the purchase as well as redemption notices at least 10 days before the redemption of Units-- and can do so up to approximately a month before-- they cannot know the Net Asset Value at which they will acquire or redeem Units. The Fund could incur material losses between the time investors subscribe and the time they receive their Units. In addition, investors, when redeeming, cannot control losses on their Units because they cannot be sure of the redemption value of their Units after requesting redemption. o The Units are not liquid as no secondary market exists for the Units and none will develop. Redemptions may be made only as of a month end. o The use of a single trading advisor trading only one type of contract reduces diversification and increases risk of loss relative to a fund using multiple advisors trading a diversified portfolio of futures contracts. -6- 9 o The Fund is subject to substantial charges regardless of profitability, including a 3% annual management fee and brokerage, legal, audit and other administrative expenses estimated at approximately 1.70% of average annual net assets, as well as a 20% quarterly incentive fee. During the first year of an investor's participation in the Fund, the Fund must earn trading profits of approximately 1.85% of its average Net Asset Value (assuming interest on its assets at a 4.2% annual rate) simply to break even after all fees and expenses. o The General Partner and the Advisor manage other funds and accounts and may have an incentive to favor such funds or accounts over the Fund's account. The Futures Broker guarantees the net worth of the General Partner. Thus the General Partner has an incentive to retain the Futures Broker as the Fund's futures broker. o As limited partners, investors have no voice in the operation of the Fund; they are entirely dependent on the management of the General Partner and the Advisor for the success of their investment. USE OF PROCEEDS Substantially all of the Fund's assets are held in the Fund's trading account at the Futures Broker and are available to support the Fund's trading. The Futures Broker invests the Fund's assets and credits the account with interest at the average 91-day Treasury bill rate for the month on the average equity in the Fund's account for the month. Any interest earned on such assets in excess of such amount, not expected to exceed 0.50% per annum, is retained by the Futures Broker for its own account. The Fund may engage a cash manager to manage the Fund's assets not required to be deposited with the Futures Broker to margin the Fund's futures positions. If it does, a portion of the Fund's assets will be held in a custodial account at a major U.S. bank and will be invested in U.S. Treasury instruments and similar, highly liquid, interest bearing investments. NET ASSET VALUE The Net Asset Value of the Fund equals its assets less its liabilities. The Net Asset Value of a Unit is determined by dividing the Net Asset Value of the Fund by the total number of Units outstanding. The General Partner's interest is treated on a Unit-equivalent basis. FEES AND EXPENSES A breakdown and description of the Fund's fees and expenses is set forth in the Break-Even Table and Explanatory Notes on the following page. The incentive fee payable to the Advisor is calculated on a quarterly basis and could be substantial even in a break-even or losing year. The Fund's other expenses are its management fees, brokerage commissions, and operating and administrative expenses -- estimated at approximately $725,000 per year if no additional Units are sold and at approximately $3,200,000 if the total amount of this offering is sold. Further, investors pay a one-time organizational charge. If the Fund's Net Asset Value increases, the absolute dollar amount of any percentage-of-assets fees will also increase, but they will have the same effect on the Fund's rate of return. Other than as disclosed in this Summary section, and more fully described on the following page and under "Fund Operations" beginning on page 16, "Use of Proceeds; Interest Income Arrangements" beginning on page 26 and "Analysis of Fees and Expenses Paid by the Fund" beginning on page 27, there are no fees, expenses or items of compensation paid or received in connection with this offering of the Units or the operation of the Fund. -7- 10
- -------------------------------------------------------------------------------- BREAK-EVEN TABLE - -------------------------------------------------------------------------------- Twelve-month TWELVE-MONTH Dollar PERCENTAGE Break-Even BREAK-EVEN EXPENSES ($10,000 Initial Investment)(1) - -------------------------------------------------------------------------------- Organizational and offering(2) $ 100.00 1.00% expenses - -------------------------------------------------------------------------------- Management fee(3) $ 312.37 3.12% - -------------------------------------------------------------------------------- Accounting, audit and legal $ 65.96 0.66% expenses(4) - -------------------------------------------------------------------------------- Administrative expenses(5) $ 50.00 0.50% - -------------------------------------------------------------------------------- Round-turn brokerage commissions and other transactional charges(6) $ 50.00 0.50% - -------------------------------------------------------------------------------- Incentive fee(7) $ 27.08 0.27% - -------------------------------------------------------------------------------- Interest income(8) $(420.00) (4.20)% - -------------------------------------------------------------------------------- TWELVE MONTH BREAK-EVEN $185.41 1.85% - --------------------------------------------------------------------------------
SEE "ANALYSIS OF FEES AND EXPENSES PAID BY THE FUND" AT PAGE 27. Explanatory Notes: (1) The foregoing break-even analysis is an approximation only. It assumes that the Units have constant month-end Net Asset Value. All fees and expenses summarized herein are described more fully under "Analysis of Fees and Expenses Paid by the Fund." Calculations are based on $10,000 as the Net Asset Value of the Units. (2) Units are sold at 101% of Net Asset Value, and are subject to an organizational charge of 1% of Net Asset Value which also must be recovered for an investor to break-even after 12 months since investing. This break-even table assumes that the gross subscription price of Units was $10,100. The organizational charge of $100 was calculated by multiplying $10,000 by 1%. (3) The Fund pays a management fee to the General Partner equal to 3% per annum of month-end Net Assets. The amount shown above includes the management fee payable on Fund income earned in a break-even year. (4) The Fund pays its ongoing accounting, auditing and legal expenses. The General Partner estimates that these expenses will not exceed $100,000 per annum. Actual expenses could, however, substantially exceed this level. The amount shown above is based on the Fund's October 31, 1998 Net Asset Value of $15,161,529. (5) The Fund pays its other administrative and operating expenses. The General Partner does not expect these expenses to exceed 0.50% per annum of average annual Net Assets assuming the Fund's Net Asset Value is at least equal to the Fund's October 31, 1998 Net Asset Value of $15,161,529. Actual expenses could, however, exceed this level. (6) The Fund pays round-turn brokerage commissions to the Futures Broker of $8.00 per round-turn trade, plus National Futures Association ("NFA") fees and any "give-up" fees. The General Partner estimates round-turn commissions and related charges at approximately 0.50% of average annual Net Assets based on the Advisor's historical and anticipated trading velocity. Actual round-turn commissions could, however, substantially exceed this level. (7) The Fund pays the Advisor a quarterly incentive fee equal to 20% of the Fund's net new profits, excluding interest income, after subtraction of brokerage commissions paid or accrued during the quarter. The $27.08 incentive fee figure shown above reflects the incentive fee that would be earned on the $185.41 trading profits needed to break-even minus the $50 brokerage commissions (20% x ($185.41 - $50)) and assumes a break-even year. (8) The General Partner estimates interest income at 4.20% of average month-end Net Assets per annum based on current Treasury bill rates. Actual interest income could be more or less than this level. -8- 11 PRINCIPAL TAX ASPECTS OF OWNING UNITS Investors are taxed each year on any gains recognized by the Fund whether or not they redeem any Units or receive any distributions from the Fund. 40% of any trading profits on U.S. exchange-traded futures contracts are taxed as short-term capital gains at the individual investor's ordinary income tax rate (39.6% maximum), while 60% of such gains are taxed as long-term capital gain at a 20% maximum rate for individuals. The Fund's trading gains from other contracts, if any, will likely be primarily short-term capital gain. This tax treatment applies regardless of how long an investor holds Units. If, on the other hand, an investor held a stock or bond for longer than 12 months, all the gain realized on its sale would generally be taxed at a 20% maximum rate. Losses on the Units may be deducted against capital gains. Any losses in excess of capital gains may only be deducted against ordinary income by individuals to the extent of $3,000 per year. Consequently, investors could pay tax on the Fund's interest income even though they have lost money on their Units. See "Tax Consequences" beginning at page 49. LIQUIDITY OF THE UNITS Units may be redeemed at any month-end upon 10 days' written notice to the General Partner. There is no required minimum holding period; however, the General Partner believes that investors should consider the Units at least a 3-year commitment. There are no redemption charges. IS THE FUND A SUITABLE INVESTMENT FOR YOU? You should consider investing in the Fund only if you are an aggressive investor interested in a leveraged exposure to up or down U.S. stock market movements. You should be prepared to risk significant losses, up to the total amount of your investment plus undistributed profits, and to withstand sudden and substantial variation in monthly rates of return. No one should invest more than 10% of his or her liquid net worth in the Fund. State law investor suitability standards apply. See Exhibit B - -- Subscription Agreement and Power of Attorney, beginning at page B-3. -9- 12 THE RISKS YOU FACE SET FORTH BELOW ARE THE PRINCIPAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. YOU SHOULD CONSIDER THESE RISKS IN MAKING YOUR INVESTMENT DECISION. (1) POSSIBLE TOTAL LOSS OF AN INVESTMENT IN THE FUND You could lose all or substantially all of your investment in the Fund. (2) STOCK INDEX FUTURES TRADING INVOLVES SUBSTANTIAL LEVERAGE Stock index futures are typically traded on margin. This means that a small amount of capital can be used to invest in contracts of much greater total value. The initial margin on the S&P 500 Contract is currently approximately 6% of contract value. The resulting leverage enhances the Fund's sensitivity to market movements which can result in greater profits when the Advisor anticipates the direction of the move correctly, or greater losses when the Advisor is incorrect. The Advisor generally uses leverage of up to three times the Fund's equity when initiating a position. For example, if the market price of the S&P 500 Contract were to change by 1% and the Fund was fully leveraged, the Fund would likely experience a gain or loss of 3%. The exact leverage level of the Fund varies, however, with the gains or losses in the Fund's position. A losing position may cause the Fund's leverage level to increase above three times the Fund's equity, and a winning position may cause the leverage level to decrease. (3) STOCK INDEX FUTURES TRADING IS SPECULATIVE, HIGHLY VOLATILE AND CAN RESULT IN LARGE LOSSES A principal risk in stock index futures trading is the rapid fluctuation in the market prices of stock index futures contracts. If the Advisor incorrectly predicts the movement of futures prices, the Fund could experience large losses. For example, a 20% drop in the Index in a single day could cause a drawdown of 60% for the Fund had the Advisor predicted that the market would rise. Price movements of futures contracts are influenced by such factors as: changing supply and demand relationships; government trade, fiscal, monetary and exchange control programs and policies; national and international political and economic events; and speculative frenzy and the emotions of the marketplace. (4) THE UNITS ARE NOT LIQUID The Units are not a liquid investment as no market exists for the Units and none will develop. However, redemptions may be made as of a month-end on 10 days' written notice. (5) INVESTORS MUST NOT RELY ON THE PAST PERFORMANCE OF EITHER THE ADVISOR OR THE FUND IN DECIDING WHETHER TO BUY UNITS The future performance of the Fund is entirely unpredictable, and the past performance of the Fund as well as of the Advisor is not necessarily indicative of their future results. (6) THE FUND MAY RECEIVE MARGIN CALLS If the Fund's futures position shows a loss in excess of the minimum margin amount required by the Futures Broker to maintain the position, the Fund, but not the investors, will be required to deposit additional margin money with the Futures Broker. If the Fund fails or is unable to do so, the Futures Broker will close the Fund's position and the Fund will realize losses. -10- 13 (7) SUBSTANTIAL EXPENSES WILL CAUSE LOSSES FOR THE FUND UNLESS OFFSET BY PROFITS AND INTEREST INCOME In addition to the one-time 1% organizational charge payable by investors, the Fund pays annual expenses (net of interest income) of approximately 1% of its average annual Net Asset Value. Additionally, the Fund is subject to a 20% quarterly incentive fee during its profitable quarters. Because the incentive fee is calculated quarterly, it could represent a substantial expense to the Fund even in a break-even or losing year. The Fund's expenses could, over time, result in significant losses. Except for the incentive fee, these expenses are not contingent and are payable whether or not the Fund is profitable. See "Summary -- Fees and Expenses" at page 7 and "Analysis of Fees and Expenses Paid by the Fund" beginning on page 27. It will be necessary for the Fund to achieve gains from trading and interest income in excess of its charges in order for limited partners to realize increases in the Net Asset Value of their Units. No assurance can be given that the Fund will be able to achieve such, or any, appreciation of its assets. (8) UNIT VALUES ARE UNPREDICTABLE AND VARY SIGNIFICANTLY MONTH-TO-MONTH The Net Asset Value per Unit varies significantly from month-to-month. For example, in August 1998 there was over a 30% change in the value of a Unit. Investors cannot know at the time they submit a redemption request what the redemption value of their Units will be. The only way to take money out of the Fund is to redeem Units. You can only redeem Units at month-end upon at least 10 days' advance notice. The restrictions imposed on redemptions limit your ability to protect yourself against major losses by redeeming part or all of your Units. In addition, because investors must subscribe for Units in advance of their issue date investors are unable to know whether they are purchasing Units after the Fund has suffered significant losses. (9) IMPORTANCE OF MARKET CONDITIONS TO PROFITABILITY Although there can be no assurance that they will, most futures traders are more likely to trade profitably during periods when major price movements occur. Such movements generally occur in any given market only infrequently. During periods of static markets or markets with frequent, rapid reversals which cause the Advisor incorrectly to identify major price movements, it is unlikely that the Advisor will achieve profits for the Fund and the Fund may suffer significant losses. Overall market or economic conditions may have a material effect on performance. (10) FUTURES MARKETS INVESTMENTS ARE DIFFERENT FROM SECURITIES MARKETS INVESTMENTS An investment in the Fund is very different from a typical securities investment (stocks and/or bonds) in which there is an expectation of some consistency of yield (in the case of bonds) or participation over time in general economic growth (in the case of stocks). Futures trading is a "zero-sum" economic activity, meaning for every gain there is an equal and offsetting loss (without considering transaction costs). See "The Stock Index Futures Markets" beginning at page 45. -11- 14 (11) THE LARGE SIZE OF THE FUND'S TRADING POSITIONS INCREASES THE RISK OF SUDDEN, MAJOR LOSSES The Fund takes positions with face values up to as much as approximately 3 times its total equity. Consequently, even small price movements against the Fund's position can cause major losses. (12) ILLIQUID MARKETS COULD MAKE IT IMPOSSIBLE FOR THE FUND TO REALIZE PROFITS OR LIMIT LOSSES It is not always possible to execute a buy or sell order at the desired price, or to close out an open position, due to market conditions. Daily price fluctuation limits are established by the exchanges and approved by the Commodity Futures Trading Commission (the "CFTC"). When the market price of a futures contract reaches its daily price fluctuation limit, no trades can be executed at prices outside such limit. The holder of a commodity futures contract (including the Fund) may therefore be locked into an adverse price movement for several days or more and lose considerably more than the initial margin put up to establish the position. Another instance of difficult or impossible execution occurs in thinly traded or illiquid markets. While the S&P 500 Contract is generally considered to be an extremely liquid contract, no assurance can be given that Fund orders will be executed at or near the desired price. (13) SPECULATIVE POSITION LIMITS MAY REQUIRE THE ADVISOR TO MODIFY ITS TRADING TO THE DETRIMENT OF THE FUND The exchanges have established and the CFTC has approved speculative position limits (referred to as "position limits") on the maximum futures position which any person, or group of persons acting in concert, may hold or control in particular futures contracts. For stock index futures contracts, such position limits are set by the exchanges. The position limit for the S&P 500 Contract is currently 10,000 contracts, which is very high in comparison to other stock indices. While unlikely, the Advisor may be required to reduce the size of the futures positions which would otherwise be taken in order to avoid exceeding such limits. Such modification of the Fund's trades, if required, could adversely affect the operations and profitability of the Fund. (14) THE ADVISOR ALONE DIRECTS THE FUND'S TRADING As the sole advisor to the Fund, the Advisor alone directs the Fund's futures trading. The application of a single trading program to the leveraged and volatile futures markets involves a greater risk of loss than the diversified, multi-advisor approach employed by many futures funds, often specifically for risk control purposes. In addition, if the Advisor were for any reason unable to continue to manage the Fund's assets, although the General Partner most likely would attempt to replace the Advisor after due notice to the limited partners, there can be no assurance that a replacement advisor would be found or that a replacement advisor would manage the Fund's assets on the same compensation terms as the Advisor. (15) THE ADVISOR MAY HAVE UNEXPECTED PROBLEMS IN EXECUTING TRADES The Advisor relies on computer, telephone and related electronic equipment for the execution of its trades. If such equipment fails and/or the firms handling the Advisor's computer and communications facilities are adversely affected due to uncontrollable factors such as weather problems, the Advisor may not be able to execute trades for the Fund, which could cause the Fund to incur losses. The Advisor intends to use back-up systems to try to minimize the impact of such potential execution problems. -12- 15 (16) THE ADVISOR MAY NOT BE SUCCESSFUL IN "DOWNWARD" EQUITY MARKETS The Advisor's past performance record has been compiled during a period of predominantly rising equity markets. A static leveraged long position in such markets would have been certain to generate substantial profits. While the Advisor can and does take short positions, there is no assurance that its strategy will be successful in down or "bear" markets. (17) TRADING SUSPENSION POLICY IS NOT A LIMIT ON LOSSES The Fund's trading suspension policy provides no assurance that the Net Assets of the Fund will not drop below fifty percent (50%) of its previous month-end level, since there can be no assurance that the Fund will not incur additional losses in attempting to liquidate open positions. Should the Fund liquidate its positions pursuant to the trading suspension policy and the market were to subsequently recover, the Fund would realize losses it would not have realized in the absence of the trading suspension policy. (18) TRADING IN OPTIONS ON STOCK INDEX FUTURES IS SPECULATIVE AND HIGHLY LEVERAGED Although it does not do so at present, the Advisor may trade options on stock index futures contracts. An option is a right, purchased for a certain price, to either buy or sell the underlying stock index futures contract during a certain period of time for a fixed price. Trading options on stock index futures is speculative and highly leveraged. Specific market movements of the stock index futures contracts underlying an option cannot accurately be predicted. If the Fund purchases an option, it will be subject to the risk of losing the entire purchase price of the option. On the other hand, if the Fund writes (sells) an option it will be subject to the risk of loss resulting from the difference between the amount received for the option and the price of the futures contract underlying the option which the Fund must purchase or deliver upon exercise of the option. (19) LIMITATION OF THE MARKETS TRADED BY THE ADVISOR ALSO REDUCES DIVERSIFICATION, INCREASING THE RISK OF LOSS The Advisor's program currently concentrates on only one contract -- the S&P 500 Stock Index futures contract on the Chicago Mercantile Exchange. Market concentration increases the risk of major losses and unstable Unit values relative to diversification in multiple commodities markets. Further, the S&P 500 Contract has historically been quite volatile relative to many other futures contracts. As it is impossible to predict when price trends will occur, certain futures managers attempt to maximize the chance of exploiting such trends by taking positions in as many different markets and market sectors as feasible. The Fund does not follow this approach and, as a result, will not capture trends occurring in other markets which might have been highly profitable. (20) INVESTING IN THE UNITS MAY NOT DIVERSIFY AN OVERALL PORTFOLIO Because the Fund focuses on the S&P 500 Contract, its returns may be correlated with equity market returns. The use of leverage and short selling may reduce this correlation at certain times, especially in a falling market. An investment in the Fund may or may not result in diversification of an investor's overall portfolio, depending on what other assets the investor owns and the Advisor's ability to correctly react to stock market trends. -13- 16 (21) THE ADVISOR'S INCREASED EQUITY UNDER MANAGEMENT COULD LEAD TO DIMINISHED RETURNS The more money the Advisor manages, the more difficult it may be for the Advisor to trade profitably because of the potential difficulty of trading larger positions without adversely affecting prices and performance. Large trades generally result in more price slippage than do smaller orders. (22) THE ADVISOR MAY CHANGE ITS TRADING APPROACH AND/OR FUTURES CONTRACTS TRADED The Advisor may change its trading approach and/or the stock index futures contracts traded. If the Advisor adds additional stock index futures contracts, or options thereon, to its program, there can be no assurance that its methods will be successful in trading such other contracts. Under the terms of the Fund's Limited Partnership Agreement, any material change to the Fund's basic investment policies or structure requires the approval of a majority of Units. The addition of additional stock index futures contracts and options thereon to the Advisor's program would not be considered to be a material change to the Fund's basic investment policies or structure so no limited partner approval would be required. (23) THE FUND'S CASH MANAGEMENT STRATEGIES COULD LOSE BOTH YIELD AND PRINCIPAL If a cash manager is engaged by the Fund, the cash manager will try to generate yields on non-margin assets in excess of the 91-day Treasury bill rate. However, there can be no assurance that the securities the cash manager invests in for the Fund will not lose value. If this occurs, the Fund could lose not only the interest it hopes to gain, but also a portion of the principal it originally invested with the cash manager. (24) THE FUND COULD LOSE ASSETS AND HAVE ITS TRADING DISRUPTED DUE TO THE BANKRUPTCY OF ITS BROKER OR OTHERS The Fund is subject to the risk of broker, exchange or clearinghouse insolvency. Fund assets could be lost or impounded in such an insolvency during lengthy bankruptcy proceedings. Were a substantial portion of the Fund's capital tied up in a bankruptcy, the General Partner might suspend or limit trading, perhaps causing the Fund to miss significant profit opportunities. (25) UNITS MAY BE SUBJECT TO INCENTIVE FEES DESPITE HAVING DECLINED IN VALUE Investors will purchase Units at different times and will, accordingly, recognize different amounts of profit and loss on their investments. However, incentive fees are calculated on the basis of the cumulative trading profits recognized by the Fund as a whole and will reduce the Net Asset Value of all Units equally. Consequently, certain Units could have their Net Asset Value reduced by an incentive fee despite having actually declined in value since their date of purchase. Additionally, Units may incur losses generating a loss carryforward for purposes of calculating subsequent incentive fees. The benefit of any such loss carryforward will be diluted by the admission of new limited partners. Similarly, Units purchased during a calendar quarter at a Net Asset Value reduced by accrued incentive fees will benefit from any reversal of such accruals, and the benefit of such reversals to Units outstanding at the time of such intra-quarter purchase will be diluted. -14- 17 (26) THE FUND MAY BE SUBJECT TO CERTAIN CONFLICTS OF INTEREST The General Partner and the Advisor may have a conflict of interest in rendering advice to the Fund because their respective benefits from managing some other commodity pool or account may exceed their benefit from managing the Fund's account and thus provide an incentive to favor such other accounts. In addition, the Futures Broker serves as the primary futures broker for other commodity pools the General Partner manages, and has agreed, so long as it remains the futures brokers for these commodity pools, to purchase, under specified conditions, shares of common stock of the General Partner. Thus, the General Partner has an incentive to retain the Futures Broker as the primary futures broker for the Fund. Additional conflicts of interest may arise because: (1) the General Partner, the Advisor or their respective principals may trade in the futures markets for their own accounts and may take positions similar to or opposite from the Fund's positions; (2) the Selling Agent has an incentive to sell Units because the General Partner, its affiliate, receives a percentage of assets management fee; (3) an investment adviser affiliate of the General Partner recommends the Advisor's mutual fund trading program to its advisory clients and receives a fee for doing so; and (4) the Futures Broker may have an incentive to favor some other account over the account of the Fund or may have conflicting duties with respect to the Fund and the exchanges or clearinghouses of which the Futures Broker is a member. See "Conflicts of Interest" beginning on page 43. (27) INVESTORS SHOULD NOT RELY ON THE FUTURES BROKER'S GUARANTEE OF THE GENERAL PARTNER'S NET WORTH In order to meet certain states' net worth requirements with respect to general partners of publicly offered commodity pools, the General Partner has entered into an agreement with the Futures Broker which requires the Futures Broker to purchase shares of the General Partner's common stock under certain specified conditions. Investors in the Fund acquire no interest in the General Partner, and, moreover, the net worth of the General Partner is irrelevant to the tax status of the Fund or the legality of its securities. Therefore, prospective investors are not beneficiaries of this agreement with the Futures Broker and should not rely on it in making their investment decision. (28) INVESTORS ARE TAXED EVERY YEAR ON THEIR SHARE OF THE FUND'S PROFITS -- NOT ONLY WHEN THEY REDEEM AS WOULD BE THE CASE IF THEY HELD STOCKS OR BONDS Investors are taxed each year on their investment in the Fund, irrespective of whether they redeem any Units. In contrast, an investor holding stocks or bonds generally pays no tax on their capital appreciation until the securities are sold. Over time, the deferral of tax on stock and bond appreciation has a compounding effect. All performance information included in this Prospectus is presented on a pre-tax basis; the investors who experienced such performance had to pay the related taxes from other sources. (29) THE MANAGEMENT FEE AND INCENTIVE FEE MAY BE RECHARACTERIZED AS "INVESTMENT ADVISORY FEES" Investors could be required to treat the management and incentive fees, as well as certain other expenses of the Fund, as "investment advisory fees," which are subject to substantial restrictions on deductibility for individual taxpayers. The General Partner has not, to date, been classifying the management and incentive fees or such expenses as "investment advisory fees," a position to which the Internal Revenue Service (the "IRS") might object. Should the IRS -15- 18 recharacterize the management and incentive fee or other expenses as "investment advisory fees," investors may be required to pay additional taxes, interest and, possibly, penalties. See "Tax Consequences -- Limited Deductibility for Certain Expenses" at page 49. (30) THE FUND'S TRADING GAINS MAY BE TAXED AT HIGHER RATES Investors are taxed on their share of any trading profits of the Fund at both short-and long-term capital gain rates. These tax rates are determined irrespective of how long an investor holds Units. Consequently, the tax rate on the Fund's trading gains may be higher than those applicable to other investments held by an investor for a comparable period. (31) TAX COULD BE DUE FROM INVESTORS ON THEIR SHARE OF THE FUND'S INTEREST INCOME DESPITE OVERALL LOSSES Investors may be required to pay tax on their allocable share of the Fund's interest income, even if the Fund incurs overall losses. Trading losses can only be used by individuals to offset trading gains and $3,000 of interest income each year. Consequently, if an investor were allocated $5,000 of interest income and $10,000 of net trading losses, the investor would owe tax on $2,000 of interest income even though the investor would have a $5,000 loss for the year. The remaining $7,000 capital loss would carry forward, but subject to the same limitation on its deductibility against interest income. FUND OPERATIONS BUYING UNITS You may buy whole Units (or fractions thereof calculated to eight decimal places) as of the last business day of any month at Net Asset Value plus a 1% organizational charge. Your subscription should be submitted by the 25th day of such month. Subscriptions submitted after the 25th day of the month may be applied to Unit sales as of the end of the following month. In order to purchase Units initially, you must mail or deliver the following items to ProFutures Financial Group, Inc. (the "Selling Agent"): (1) a completed and executed copy of the Subscription Agreement and Power of Attorney (attached as Exhibit B); and (2) a check for the amount of your investment, plus the 1% organizational charge, made payable to ProFutures Long/Short Growth Fund, L.P. Investors whose subscriptions are accepted will receive written purchase confirmations. Proceeds from the sale of Units received prior to the closing date will be held in a Fund account with a major financial institution until the last business day of the month. All interest earned on subscriptions pending their month-end acceptance will be paid to the Fund, not the individual subscribers. Similarly, if the subscription is rejected, in whole or in part (in the sole discretion of the General Partner), the subscription funds or the rejected portion thereof will be returned within 20 days to the subscriber along with any interest. No sale of Units will be completed until at least five (5) business days after delivery of this Prospectus to the investor. Only first-time investors need to submit Subscription Agreements, unless the Selling Agent believes it is necessary to reconfirm an investor's suitability in writing. To purchase additional Units, contact the General Partner or the Selling Agent. The minimum purchase for first-time investors is $10,000; $5,000 for IRAs, other tax-exempt accounts and current investors. -16- 19 The Subscription Agreement and Power of Attorney requires you to make the following representations and warranties. Accompanying the text of each representation and warranty below is an explanation of the Fund's and/or the General Partner's intent in requiring such representation and warranty and the circumstances under which the Fund and/or the General Partner would assert such representation and warranty. (1) You have received the current Prospectus of the Fund along with a recent monthly report. The Regulations of the CFTC require the General Partner to receive from a prospective investor a signed acknowledgment of receipt of the Fund's Prospectus before accepting funds from such investor. The General Partner will assert this representation in the event that the investor, or any other person, claims that the investor did not receive the Prospectus. (2) You are of legal age and legally competent to execute the Subscription Agreement. Because contracts with minors or other legally incompetent persons are generally not enforceable, the Fund and the General Partner require the assurance that the investor will, in fact, be bound by the Subscription Agreement and the Limited Partnership Agreement. The General Partner will assert this representation in the event that the investor, or any other person, claims that the investor was not legally competent to enter into a contract. (3) You satisfy all the applicable requirements relating to net worth and annual income set forth in the Subscription Agreement; and (4) your subscription, if made as custodian for a minor, is a gift you have made to such minor or, if not a gift, the representations as to net worth and annual income apply to such minor personally. State securities regulators require that investors in publicly-offered commodity funds meet minimum net worth and/or income standards. The Fund and the General Partner require the assurance that the investor does, in fact, meet the applicable standard. The General Partner will assert this representation in the event that the investor, or any other person, claims that the investor was not qualified on the basis of net worth and/or income to invest in the Fund. (5) If you are subscribing in a representative capacity, you have full power and authority to purchase the Units on behalf of the entity for which you are acting, and such entity has full power and authority to purchase such Units. Because entities can only act through their representatives, the Fund and the General Partner require the assurance that the representative is, in fact, authorized to cause the entity to invest in the Fund and, further, that investing in the Fund is not beyond the scope of the powers of the entity investor. The General Partner will assert this representation in the event that the investor, or any other person, claims that the representative was not authorized to cause the entity to invest in the Fund or that an investment in the Fund was not a permitted investment for the entity. (6) If required to be, you are registered with the CFTC or a member of the NFA. The Bylaws of the NFA prohibit members from doing business with persons required to be but who are not CFTC registrants or NFA members. The General Partner, as a member of NFA, requires the assurance that the investor or representative of an entity investor, if required to be, is a CFTC registrant or NFA member. The General Partner will assert this representation in the event that the investor, or any other person, claims that the investor or representative of an entity investor is required to be but is not a CFTC registrant or NFA member. You should carefully read Exhibit B --Subscription Agreement and Power of Attorney and the Subscription Agreement and Power of Attorney Signature Page which accompanies -17- 20 this Prospectus in addition to reviewing this entire Prospectus carefully before you decide whether to invest in the Fund. SELLING AGENT COMPENSATION The Selling Agent will use its best efforts to sell the Units. Neither the Fund nor any investor pays a sales commission to the Selling Agent. However, the General Partner will pay to the Selling Agent the excess of the 1% organizational charge over the actual expense of conducting this offering of the Units. The General Partner estimates such offering expense to be approximately $400,000. The amount paid to the Selling Agent may be deemed by the National Association of Securities Dealers to be underwriting compensation. The Selling Agent, with the consent of the General Partner, may engage Additional Selling Agents to sell the Units. Neither the Fund nor any investor pays a sales commission to an Additional Selling Agent, and purchases through an Additional Selling Agent will not increase the cost of an investment in the Fund. Each Additional Selling Agent will receive an upfront selling commission of up to 3% of the Net Asset Value of the Units it sells. The General Partner will pay the selling commission, through the Selling Agent, from its own funds. If an Additional Selling Agent is registered with the NFA as a futures commission merchant or introducing broker and its registered representatives engaged in the sale of the Fund's Units are registered as associated persons of the futures commission merchant or introducing broker, such Additional Selling Agent may receive ongoing compensation if it and its registered representatives agree to provide additional services to the purchasers of Units sold by them. Such services include, but are not limited to: (1) inquiring of the General Partner, at the request of Limited Partners, as to the Net Asset Value of a Unit; (2) inquiring of the General Partner, at the request of the Limited Partners, as to the stock index futures markets and the activities of the Fund; (3) assisting, at the request of the General Partner, in the redemption of Units; (4) responding to questions of Limited Partners with respect to reports and financial statements furnished to Limited Partners; and (5) providing such other services as the General Partner may request. Ongoing compensation may range up to 2% per annum of the Net Asset Value of Units, which remain outstanding after one year, sold by such Additional Selling Agent. Ongoing compensation, if any, will be paid by the General Partner, through the Selling Agent, from its own funds. The receipt of ongoing compensation is an incentive for an Additional Selling Agent not to advise an investor who purchased Units from such Additional Selling Agent to redeem the Units, even if doing so would be in the best interests of the investor. If the Additional Selling Agent is not registered with the CFTC or if its registered representatives engaged in the sale of Units are not registered as associated persons of a CFTC registrant or do not agree to provide the services described above, the Additional Selling Agent may receive installment selling commissions. Installment selling commissions will be calculated on the same basis as the continuing compensation described above. However, no Additional Selling Agent may receive upfront selling commissions plus installment selling commissions in excess of 9% of the initial Net Asset Value of the Units sold by such Additional Selling Agent. Installment selling commissions are paid by the General Partner, through the Selling Agent, from its own funds. If a wholesaler introduces an Additional Selling Agent to the Selling Agent, The General Partner will compensate the wholesaler, through the Selling Agent, with a portion of the upfront selling commissions, ongoing compensation or installment selling commissions otherwise payable to such Additional Selling Agent. The wholesaler's compensation shall not exceed 9% of the initial Net Asset Value of the Units sold by such Additional Selling Agent. If Additional Selling Agents utilize correspondent selling agents, such correspondents will be compensated by the Additional Selling Agents from their own funds. -18- 21
- -------------------------------------------------------------------------------- SELLING AGENT COMPENSATION TABLE - -------------------------------------------------------------------------------- RECIPIENT NATURE AND AMOUNT OF COMPENSATION --------- --------------------------------- The Selling Agent The excess of the 1% organizational charge over the actual costs of conducting this offering -- paid by the General Partner. Additional Selling Upfront selling commissions of up to 3% of the Net Agents Asset Value of Units sold by such Additional Selling Agents -- paid by the General Partner. If CFTC qualified: ongoing compensation of up to 2% per annum of the Net Asset Value of Units sold by such Additional Selling Agents which remain outstanding after one year -- paid by the General Partner. If not CFTC qualified: installment selling commissions of up to 2% per annum of the Net Asset Value of Units sold by such Additional Selling Agents which remain outstanding after one year not to exceed 9%, when aggregated with upfront selling commissions, of the initial Net Asset Value of such Units -- paid by the General Partner. Wholesalers A portion of the compensation otherwise payable to an Additional Selling Agent not to exceed 9% of the initial Net Asset Value of the Units sold by the Additional Selling Agent -- paid by the General Partner. Correspondents A portion of the compensation paid to Additional Selling Agents -paid by Additional Selling Agents.
The Selling Agent anticipates engaging few, if any, Additional Selling Agents. USE OF PROCEEDS; INTEREST INCOME After payment of the 1% organizational charge, approximately 99% of all subscription proceeds, an amount equal to 100% of the Net Asset Value of all Units sold, are invested directly into the Fund. All of the Fund's assets are available to margin its speculative futures trading, as well as to pay trading losses, fees and expenses. Currently, substantially all of the Fund's assets are held in the Fund's trading account at the Futures Broker. The Futures Broker invests the Fund's assets and credits the account with interest as if 100% of the average monthly cash balance of the account was invested in Treasury bills paying 100% of the average 91-day Treasury bill rate for the month. The Fund may engage a cash manager, registered with the SEC as an investment adviser, to manage the Fund's assets not required to be deposited with the Futures Broker to margin the Fund's futures positions. If it does, the Fund will receive 100% of the interest earned on its assets managed by such cash manager minus a management fee and minor incidental charges. REDEEMING UNITS You can redeem Units at each month-end upon ten (10) days' advance written notice by forwarding the completed Request for Redemption (included herein as Exhibit C) to the General -19- 22 Partner, Attention: Fund Administration, ProFutures, Inc., 11612 Bee Cave Road, Suite 100, Austin, Texas 78733. There are no redemption charges or penalties. The General Partner will make redemption payments by mailing a check as promptly as practicable after the effective date of redemption, but in no event more than thirty (30) days thereafter, barring unusual circumstances. UNCERTAIN SUBSCRIPTION AND REDEMPTION VALUE OF UNITS The Fund sells and redeems Units at subscription or redemption date Net Asset Value (plus the 1% organizational charge in the case of subscriptions), not at the Net Asset Value as of the date that subscriptions or redemption requests are submitted. Investors must submit irrevocable subscriptions and redemption requests at least 10 days prior to the effective date of subscription or redemption. Because of the volatility of Unit values, this delay means that investors cannot know the value at which they will purchase or redeem their Units. Materially adverse changes in the Fund's financial position could occur between the time an investor irrevocably commits to acquire or redeem Units and the time the purchase or redemption is made. MANDATORY TRADING SUSPENSION IF UNIT VALUE FALLS 50% SINCE LAST MONTH-END In the event that the Net Asset Value per Unit declines 50% or more since the last month-end, the Fund must attempt to liquidate all open positions, suspend trading and offer all limited partners an opportunity to redeem their Units before trading resumes. Only if sufficient capital remained in the Fund after any such special redemption date would the Fund continue operations. DISTRIBUTIONS The Fund does not anticipate making any distributions to investors. No distributions have been made to date. SMALL MINIMUM INVESTMENT The current minimum size for an individually managed account with the Advisor is generally $500,000. By investing in the Fund, you participate in the Advisor's trading program with a minimum investment of only $10,000; $5,000 for IRAs, other tax-exempt accounts and existing investors. LIMITED LIABILITY FOR FUND INVESTORS Investors who open individual futures accounts are personally liable for all losses, including margin calls potentially in excess of their investment. As a limited partner of the Fund, you can never lose more than your investment in the Fund and your share of the Fund's profits. ADMINISTRATIVE CONVENIENCE The General Partner provides all administrative services needed for the Fund, including financial and tax reporting. Investors receive monthly financial summaries and annual audited financials. Investors may telephone the General Partner during its normal business hours at (800) 348-3601 for the Net Asset Value per Unit. -20- 23 PERFORMANCE OF THE FUND The following are the monthly rates of return from the inception of the Fund through October 31, 1998. The Fund was privately offered through August 1998. THERE CAN BE NO ASSURANCE THAT THE FUND WILL CONTINUE TO PERFORM IN THE FUTURE THE WAY IT HAS IN THE PAST. PROFUTURES LONG/SHORT GROWTH FUND, L.P. NOVEMBER 1997-OCTOBER 1998 TYPE OF POOL: PUBLICLY OFFERED INCEPTION OF TRADING: NOVEMBER 1997 AGGREGATE SUBSCRIPTIONS: $12,490,566 CURRENT NET ASSET VALUE: $15,161,530 WORST MONTHLY DRAWDOWN (MONTH/YEAR): (16.80)% (9/98) WORST PEAK-TO-VALLEY DRAWDOWN (MONTH/YEAR): (16.80)% (9/98)
- -------------------------------------------------------------------------------- MONTH MONTHLY RATES OF RETURN - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- January 2.77% -- - -------------------------------------------------------------------------------- February 10.43% -- - -------------------------------------------------------------------------------- March 9.56% -- - -------------------------------------------------------------------------------- April 2.44% -- - -------------------------------------------------------------------------------- May 0.37% -- - -------------------------------------------------------------------------------- June (0.84)% -- - -------------------------------------------------------------------------------- July (2.26)% -- - -------------------------------------------------------------------------------- August 30.56% -- - -------------------------------------------------------------------------------- September (16.80)% -- - -------------------------------------------------------------------------------- October 19.87% -- - -------------------------------------------------------------------------------- November 1.92% - -------------------------------------------------------------------------------- December (6.06)% - -------------------------------------------------------------------------------- 61.32% (4.25)% - -------------------------------------------------------------------------------- COMPOUND RATE OF RETURN (10 months) (2 months) - --------------------------------------------------------------------------------
THE FUND'S PERFORMANCE DURING 1998 HAS RESULTED FROM A COMBINATION OF HIGHLY VOLATILE EQUITY MARKETS AND GENERALLY ACCURATE PREDICTIONS OF MARKET MOVEMENTS BY THE ADVISOR'S PROGRAM. THERE CAN BE NO ASSURANCE THAT EITHER SUCH VOLATILITY OR ACCURATE PREDICTIONS WILL CONTINUE. BOTH THE GENERAL PARTNER AND THE ADVISOR BELIEVE THE FUND'S 1998 RETURNS HAVE BEEN SUBSTANTIALLY ABOVE THE RETURNS ONE CAN REASONABLY EXPECT FROM AN INVESTMENT SUCH AS THE FUND. THE FUND IS SPECULATIVE AND INVOLVES SUBSTANTIAL RISK OF LOSS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. NOTES TO PERFORMANCE OF THE FUND MONTHLY RATES OF RETURN are calculated by dividing the Fund's net performance during a month by the Fund's Net Asset Value as of the beginning of such month. COMPOUND RATE OF RETURN is calculated by compounding the monthly rates of return. For example, the compound rate of return of (4.25)% for 1997 was calculated by multiplying (1.0192 x 0.9394) -1 = (4.25)%. DRAWDOWN means losses experienced by the Fund over a specified period. WORST PEAK-TO-VALLEY DRAWDOWN means the greatest cumulative percentage decline in month-end Net Asset Value due to losses sustained by the Fund during any period in which the initial month-end Net Asset Value is not equaled or exceeded by a subsequent month-end Net Asset Value. -21- 24 SELECTED FINANCIAL DATA The following selected financial data is derived from the audited financial statements of the Fund as of December 31, 1997 and for the period August 21, 1997 (inception of the Fund, but not commencement of operations) to December 31, 1997 and the unaudited financial statements of the Fund as of and for the nine months ended September 30, 1998. The Fund commenced trading operations on November 20, 1997 under the name "ProFutures Bull & Bear Fund, L.P." See "Financial Statements" beginning at page 54. --------------------
January 1, 1998 August 21, 1997 to to September 30, 1998 December 31, 1997 ------------------ ----------------- TOTAL ASSETS $ 12,833,654 $ 2,932,764 ============== ============== TOTAL PARTNERS' CAPITAL $ 12,788,885 $ 2,914,736 ============== ============== INCOME Trading gains (losses) Realized $ 1,588,994 $ (116,342) Change in unrealized (978,675) 2,175 -------------- -------------- Gain (loss) from trading 610,319 (114,167) Interest income 254,997 19,520 -------------- -------------- Total gain (loss) 865,316 (94,647) -------------- -------------- EXPENSES Brokerage commissions 6,138 564 General Partner management fee 140,053 9,826 Advisor incentive fee 171,310 0 Operating expenses 42,262 11,704 -------------- -------------- Total expenses 359,763 22,094 -------------- -------------- NET INCOME (LOSS) $ 505,553 $ (116,741) ============== ============== NET INCOME (LOSS) PER GENERAL AND LIMITED PARTNER UNIT (based on weighted average number of Units outstanding during the period of 4,959.2859 and 2,421.6801, respectively) $ 101.94 $ (48.21) ============== ============== INCREASE (DECREASE) IN NET ASSET VALUE PER GENERAL AND LIMITED PARTNER UNIT $ 331.10 $ (42.55) ============== ==============
-22- 25 MANAGEMENT'S ANALYSIS OF OPERATIONS RESULTS OF OPERATIONS General The Advisor utilizes a totally technical and mechanical trading system by which it speculatively trades the S&P 500 Contract. The theory behind a technical trader's strategy is that a study of the markets themselves will provide a means of anticipating future prices. Thus, the Advisor does not engage in fundamental economic supply or demand analysis to attempt to identify mispricings in the stock market, nor does it conduct a macroeconomic assessment of the relative strengths of the national economy or economic sectors. Instead, the Advisor's trading program applies a proprietary computer model to analyze historical stock market data and certain monetary indicators, and from this information alone attempts to determine whether the stock market is in position to trend. If the Advisor's model anticipates a trend, it signals the resulting position. When the model identifies the trend as likely to end or reverse, the position is either closed out or reversed. The Advisor's program is not designed to forecast the long-term direction of the stock market or whether it will be higher or lower at the end of a year than it was at the beginning. Rather, its objective is to anticipate price trends in the S&P 500 Stock Index futures market and to profit from them by taking either a long or short position consistent with the anticipated trend. Only historical market data and certain monetary factors are directly relevant to the Advisor's trading results. There is no direct connection between particular market conditions and price trends. The likelihood of the Advisor's strategy being profitable is materially diminished during periods when events external to the markets themselves, rather than historical market data, have an important impact on prices. In such instances, the Advisor's historical price analysis, as opposed to its monetary indicators, could indicate positions on the wrong side of the price movements caused by such external events. The performance summary set forth below is an outline description of how the Fund performed in the past trading only the S&P 500 Contract. Futures contract prices are marked-tomarket every trading day, and the Fund's trading account is credited or debited with its daily gains or losses. Accordingly, there is no material economic distinction between realized gains or losses on closed positions and unrealized gains or losses on open positions. The Fund's past performance is not necessarily indicative of how it will perform in the future. Performance Summary 1998 (10 MONTHS) The Fund had a very successful first quarter of 1998 as the Advisor's trading model correctly anticipated a strongly rising stock market and remained in the leveraged long position that had been initiated in December 1997. The Fund showed a profit in all three months of the first quarter and the Net Asset Value per Unit climbed over 24%. In the second quarter of 1998, the stock market began showing signs of instability and the Fund earned only a small gain of approximately 2%. As the third quarter began in July, the Fund remained in a long position, resulting in a small loss when the stock market began to fall. In late July, the Advisor's system issued a sell-short signal in anticipation of further market declines. The months of August and September saw considerable volatility in both the stock market and the performance of the Fund. During August, as the stock market fell sharply, the Fund was in a short position and realized a gain of 30.56%. During early September, the Fund remained in its short position as the stock market rose resulting in loss of 16.80%. In late September, the Fund established a long position in anticipation of higher market prices, although the Fund continued to lose value trough October 8, 1998. At that point, the Fund -23- 26 was up 8.7% for the year. Early in the fourth quarter, the stock market continued to be volatile as it began a strong up-trend. The Fund remained in its long position during October and realized a gain of 19.87% for the month and a 61.32% gain for the first ten months of 1998. 1997 (2 MONTHS) The Fund commenced trading in November 1997 with a short position in the S&P 500 Contract. That initial position resulted in a small profit in the Fund's first month of operation. However, a December stock market rally then caused a loss on the short position. The Advisor's system reversed and went long in the month of December, but as of month-end the Fund still showed a loss of approximately 6%. The long position was still open and subsequently became profitable as the stock market rallied into 1998. LIQUIDITY AND CAPITAL RESOURCES The amount of assets invested in the Fund generally does not affect its performance, as typically this amount is not a limiting factor on the positions acquired by the Advisor, and the Fund's expenses are primarily charged as a fixed percentage of its asset base, however large. The Fund raises additional capital only through the sale of Units and trading profits (if any) and does not engage in borrowing. The Fund sells no securities other than the Units. The Fund's assets are held primarily in U.S. Treasury bills or other high-quality, interest earning obligations, as well as in cash. The value of the Fund's cash and financial instruments is not materially affected by inflation. Changes in interest rates, which are often associated with inflation, could cause the value of certain of the Fund's debt securities to decline, but only to a limited extent. More important, changes in interest rates could cause periods of strong up or down stock market price trends, during which the Fund's profit potential generally increases. The Fund's assets are held in cash and highly liquid U.S. government securities. If the Fund employs a cash manager, as it has in the past, the cash manager will invest up to approximately 90% of the Fund's assets in readily marketable investments such as: U.S. Treasury securities, instruments issued by or one-day time deposits with banks with long-term credit rating of at least AA, money market mutual funds and/or commercial paper (rated AP-1). Accordingly, except in very unusual circumstances, the Fund should be able to close out any or all of its open trading positions and liquidate any cash management investments quickly and at market prices. This permits the Advisor to limit losses as well as reduce market exposure on short notice should its program direct it to do so in order to reduce market exposure. In addition, because there is a readily available market value for the Fund's positions and assets, the Fund's monthly Net Asset Value calculations are precise. The Fund trades exchange-traded futures and options contracts on stock indices, currently only the S&P 500. Risk arises from changes in the value of these contracts (market risk) and the potential inability of counterparties or brokers to perform under the terms of their contracts (credit risk). The General Partner seeks to control market risk by monitoring, on a daily basis, the Advisor's trading on behalf of the Fund. The Advisor seeks to control market risk by applying its trading program systematically and by limiting the number of futures contracts it buys or sells for the Fund at any time. Credit risk associated with exchange-traded contracts is generally considered to be quite low because exchanges typically provide clearing arrangements in which the collective credit of the clearing members is pledged to support the financial integrity of the exchange. The General Partner seeks to minimize credit risk associated with banks and brokers by depositing and maintaining the Fund's assets only with large, well capitalized financial institutions. -24- 27 THE YEAR 2000 PROBLEM Many existing computer systems use only two digits to refer to a year. This technique can cause the systems to treat the year 2000 as 1900, an effect commonly known as the "Year 2000 Problem." The Fund, like other financial and business organizations, depends on the smooth functioning of computer systems and could be adversely affected if the computer systems on which it relies do not properly process and calculate date-related information concerning dates on or after January 1, 2000. The General Partner administers the business of the Fund through various systems and processes maintained by the General Partner. The General Partner's modifications for Year 2000 compliance are proceeding according to plan and are expected to be completed by June 1999. The expenses incurred to date by the General Partner in preparing for Year 2000 compliance have not had a material adverse impact on the General Partner's financial position, and the expenses to be incurred in becoming fully Year 2000 compliant are not expected to be material. The Fund itself has no systems or information technology applications relevant to its operations and, thus, has no expenses related to addressing the Year 2000 Problem. In addition to the General Partner, the Fund is dependent on the capability of the Advisor, the Chicago Mercantile Exchange, the Futures Broker and other third parties with whom the Fund has material relationships to prepare adequately for the Year 2000 Problem and its impact on their systems and processes. The Advisor has taken action to identify any of its computer systems that are Year 2000 vulnerable and has, to date, found none. The Advisor will notify the General Partner in a timely manner if it should discover a Year 2000 vulnerable system it is unable to correct by January 1, 2000. The Chicago Mercantile Exchange participated in the Futures Industry Association Y2K Beta Test during September 1998 and will participate in the Futures Industry Association Y2K industry-wide test for Year 2000 compliance during the first and second quarters of 1999. The Futures Industry Association Y2K Tests are to test links with outside entities. The Chicago Mercantile Exchange anticipates full Year 2000 compliance with internal testing completed by March 31, 1999. The Futures Broker is addressing its Year 2000 issues and has participated in Year 2000 testing with various exchanges. The Futures Broker will participate in the Futures Industry Association Y2K industry-wide test for Year 2000 compliance during the first and second quarters of 1999. The General Partner is monitoring the progress of the Futures Broker and the Chicago Mercantile Exchange in addressing their Year 2000 issues. The most likely and most significant risk to the Fund associated with the lack of Year 2000 readiness is the failure of third parties, including the Advisor, the Futures Broker, the Chicago Mercantile Exchange and various regulators to resolve their Year 2000 issues in a timely manner. This risk could involve the temporary inability to transfer funds electronically or to determine the Net Asset Value of the Fund, in which case sales could be suspended and/or redemption payments delayed until the Fund's assets could be valued and/or funds could be transferred. If the General Partner believes, prior to December 31, 1999, that any of the Advisor, the Futures Broker or the Chicago Mercantile Exchange has failed to resolve a Year 2000 issue likely to have a material adverse impact on the Fund, the General Partner will direct the Advisor to attempt to close any Fund positions and to remain out of the market until such issue is resolved. -25- 28 USE OF PROCEEDS; INTEREST INCOME ARRANGEMENTS CUSTODY OF FUND ASSETS After payment of the 1% organizational charge covering its organization and offering expenses, substantially all of the net proceeds of this offering are deposited in the Fund's trading account with the Futures Broker and are maintained as segregated funds pursuant to the Commodity Exchange Act, as amended (the "CEA"). The Fund may maintain assets with one or more unaffiliated banks for normal payment of bills and money management purposes. Substantially all of the Fund's assets are expected to be used for speculative trading in financial futures contracts, currently only the S&P 500 Contract. It is expected that 9% to 15% of the Fund's assets will be used as original margin under the trading program currently used by the Fund. The Fund will not: (a) invest in any debt instruments, other than those incident to a cash manager's management of the Fund's assets and any other CFTC-authorized investments; (b) invest in any equity security without prior notice to limited partners; or (c) make loans to entities affiliated with the Fund or the General Partner. The General Partner will not commingle the Fund's property with the property of any other person or entity. INTEREST INCOME The Futures Broker invests the Fund's assets and credits the Fund's account with interest as if 100% of the average monthly cash balance of the account was invested in U.S. Treasury bills paying 100% of the average 91-day Treasury bill rate for the month. Any interest earned on such assets in excess of such amount, not expected to exceed 0.50% per annum, is retained by the Futures Broker for its own account. The Fund's interest income, as well as the assets on which such interest is credited, is subject to the risk of trading losses. CASH MANAGEMENT The Fund may engage a cash manager, registered with the SEC as an investment adviser, to manage the Fund's assets not required to be held by the Futures Broker to margin the Fund's futures positions. If it does, the Fund will receive 100% of the interest earned on its assets managed by such cash manager minus a management fee of between approximately 0.25% and 0.50% per annum of the Fund's average daily assets under management and minor incidental charges associated with maintaining a bank custodial account. The Fund will engage a cash manager only if the General Partner determines that the interest benefit to the Fund, after payment of such cash manager's management fee and the costs associated with maintaining a custodial account, is likely to be greater than the interest credit received from the Futures Broker. If the Fund engages a cash manager, a portion of the Fund's assets will be held in custody in a cash management account at a major U.S. bank and will be managed by the cash manager. These assets will be committed for margin calls on the Fund's account(s) at the Futures Broker. The cash manager, on behalf of the Fund, may direct the investment of these funds in items such as: (a) U.S. Treasury securities, bankers' acceptances and certificates of deposit (banks with a long-term credit rating of at least AA); (b) time deposits (one day only -- banks with a long-term credit rating of at least AA); (c) interests in money market funds regulated under U.S. securities laws and regulations; and/or (d) commercial paper (rated AP-1 of top issuers). The cash manager's objective will be for the Fund's account to earn net interest income and/or profits in excess of short-term Treasury bill rates, net of its fees; however, there is no guarantee a cash manager can produce -26- 29 any income or profits on the Fund's account. The remaining assets will be held at the Futures Broker for margin purposes and will earn interest at short-term Treasury bill rates. The assets held in a cash management account and/or a Fund bank account are not subject to the segregation standards of the CEA. Such assets are, however, subject to the risk of trading losses. GENERAL Subscriptions that are received on a timely basis and are accepted become effective on the first day of the month following receipt. No interest will be credited on subscription amounts prior to the first day of the month. ANALYSIS OF FEES AND EXPENSES PAID BY THE FUND FEES AND EXPENSES TO DATE
01/01/98 - 11/20/97- Fees and Expenses 09/30/98 12/31/97 ----------------- ---------- -------- Management fees $140,053 $ 9,826 Operating and administrative expenses 42,262 11,704 Brokerage commissions and transactional charges 6,138 564 Incentive fees 171,310 0 TOTAL $359,763 $ 22,094
FEES AND EXPENSES PAYABLE BY THE FUND Brokerage Commissions ING (U.S.) Securities, Futures & Options Inc. serves as the futures broker for the Fund. Futures brokerage commissions for trades upon exchanges are often paid only after a futures position has been both initiated and closed-out. Such commissions are referred to as "round-turn commissions," as they cover both the initial purchase (or sale) of a commodity futures contract and the subsequent offsetting sale (or purchase). Under the brokerage agreement between the Futures Broker and the Fund, the Fund pays brokerage commissions to the Futures Broker in respect of all futures and option trades executed or cleared on behalf of the Fund, on Chicago exchanges, at $8.00 per round-turn plus NFA fees and any "give-up" fees. Any futures trades executed on other U.S. exchanges would be charged at comparable rates. Give-up fees paid to executing brokers that "give-up" the trades for clearing through the Futures Broker are expected to range from $2.00 to $4.00 per "round-turn" trade. The Futures Broker receives a half-turn commission on each purchase or sale of an option by the Fund. In addition, in the event that an option contract is exercised, the Fund pays the Futures Broker a round-turn commission just as it would upon any other acquisition of a futures position. No commission is payable upon the expiration of an outstanding option. The Fund reimburses the Futures Broker for all delivery, insurance, storage and other charges incidental to its trading (which are not expected to be significant). The commission charge includes exchange and clearing fees (see below) and floor brokerage charges. Although the -27- 30 Fund pays commissions on a round-turn basis, the Net Asset Value of the Fund (for all purposes, including redemptions) reflects an accrued liability for the round-turn commissions payable upon the liquidation of each of the Fund's open contracts. The Fund's brokerage commission rates do not include the transaction fee assessed by the NFA upon all options and futures trades on U.S. and foreign commodity exchanges. These fees have currently been established at $0.20 per round-turn trade of each futures contract and $0.10 per each option trade (a $0.10 fee is charged upon the purchase and upon the exercise, but not upon the expiration, of an option, and an additional $0.20 fee upon the liquidation of the futures position acquired upon such exercise). The General Partner estimates round-turn commissions and related charges to be approximately 0.50% of average annual Net Assets based on the Advisor's historical and anticipated trading velocity. Actual round-turn commissions could, however, substantially exceed this level. The brokerage rates may only be increased upon notice to the limited partners providing them sufficient time to redeem Units prior to such increase becoming effective. Management Fee The General Partner is paid a management fee equal to 1/4 of 1% of month-end Net Assets (3% annually). Such fee shall be accrued monthly, and paid as soon as practicable, but no later than the end of the month following the month in which the fee accrued. The management fee is pro-rated for partial periods and any interim subscriptions and redemptions. Net Assets for this purpose are calculated after brokerage commissions, operating and administrative expenses and incentive fees, as described below, paid or accrued as of such month-end. Incentive Fee The Advisor is paid a quarterly incentive fee equal to 20% of any New Trading Profit, as defined below, recognized during each calendar quarter. New Trading Profit is the net profits (realized and unrealized, determined according to generally accepted accounting principles), if any, from the Fund's trading through the end of each calendar quarter, after subtraction of the brokerage commissions (including the difference, positive or negative, in accrued commissions on open positions between the end of such period and the end of the previous period). New Trading Profit does not include interest income. Any trading losses from prior periods must be recouped before New Trading Profit, and thus new incentive fees to the Advisor, can again be generated. For example, assume that the Fund paid an incentive fee at the end of the fourth quarter of 1998 and assume that the Fund recognized trading profits of $201,000 during the first quarter of 1999. After subtracting brokerage commissions, assumed to be $1,000, the New Trading Profit for the quarter would be $200,000 and the Advisor's incentive fee would be $40,000 (0.2 x $200,000). Now assume that the Fund paid an incentive fee at the end of the third quarter of 1998 but did not pay an incentive fee at the end of the fourth quarter of 1998 because it had trading losses of $100,000. If the Fund recognized trading profits of $201,000 at the end of the first quarter of 1999 and brokerage commissions were $1,000, the New Trading Profit for the quarter would be $100,000 ($201,000 - $1,000 - $100,000 loss carryforward) and the Advisor's incentive fee would be $20,000 (0.2 x $100,000). New Trading Profit is not reduced by operating and administrative expenses, management fees, upfront organizational charges or any cash manager's fee. Accordingly, the Fund may be required to pay the Advisor an incentive fee for a quarter (based on New Trading Profit) even though the Fund has a net loss for the quarter (after deduction of all such fees and expenses). -28- 31 Further, because the incentive fee is calculated quarterly, the Fund may pay substantial incentive fees during a year despite having net losses for the year as a whole. Accrued incentive fees on redeemed Units are paid to the Advisor. Redemption of Units will result in a reduction in any loss carryforward existing for incentive fee purposes on the redemption date in proportion to the percentage of the total capital redeemed. Organizational Charge An organizational charge of 1% of the subscription amount will be paid to the General Partner (or the Selling Agent, its affiliated broker-dealer) by each subscriber. The General Partner has paid for all actual costs of organizing the Fund and conducting the public offering of Units. To the extent that the aggregate 1% organizational charge collected is less than these actual costs, the General Partner will pay the costs. To the extent that the aggregate 1% organizational charge collected exceeds these actual costs, the excess amount will be paid to the Selling Agent. Such payment could be deemed to be a selling commission. Operating and Administrative Expenses The Fund pays its operating and administrative expenses, such as ongoing accounting, audit, legal, printing, computer and other administrative fees and expenses. The General Partner estimates that accounting, audit, and legal expenses will not exceed $100,000 per annum and that remaining administrative expenses will not exceed 0.50% per annum of average annual Net Assets. Actual expenses could, however, exceed these levels, although the Fund's administrative expenses are expected to decrease as a percentage of Net Assets if the Fund's total assets increase. Cash Management The Fund has, in the past, employed the services of a cash manager to manage Fund assets not required to be deposited with the Futures Broker but does not do so currently. The Fund may engage a cash manager if the General Partner determines that by doing so the interest benefit to the Fund is likely to be greater, after fees and expenses, than the interest credited to the Fund's account by the Futures Broker. Cash management fees would range between 0.25% and 0.50% annually of the Fund's average daily assets managed by the cash manager and there would be minor incidental charges associated with maintaining a custodial account. Extraordinary Expenses The Fund will be required to pay any extraordinary charges (such as taxes, if any) incidental to its trading or otherwise. It is anticipated that there will either be no extraordinary charges or that they will not be material in amount. Extraordinary charges will be assessed to Units on a pro rata basis. General It will be necessary for the Fund to experience gains from futures trading (and interest income) in excess of such expenses in order for limited partners to realize increases in the Net Asset Value of their Units. No assurance can be given that the Fund will be able to achieve any appreciation of its assets. The General Partner will send each limited partner monthly and annual statements, complying with applicable CFTC regulations, which will include a description of the performance of -29- 32 the Fund and set forth, among other things, the aggregate incentive fee, brokerage commissions, management fees, and other expenses incurred or accrued by the Fund during the preceding month or year, as the case may be. The monthly statements will contain unaudited and the annual statements audited financial information. THE ADVISOR BACKGROUND AND PRINCIPALS The Advisor's place of business is located at 2519 Avenue U, Brooklyn, New York 11229. The telephone number is (800) 524-4832. All books and records pertaining to its business will be maintained at the above address. The Advisor, incorporated in New York in February 1985, is an investment adviser registered with the SEC. In August 1995, the Advisor registered with the CFTC as a commodity trading advisor and is a member of the NFA in such capacity. The sole principals of the Advisor are Charles Mizrahi and Gary Mizrahi. The Advisor started managing client assets in mutual funds in 1985 pursuant to its Risk Avoidance Model, a mathematical trading model. Its expansion into futures resulted from the fact that mutual funds have certain inherent limitations including lack of leverage and the inability at that time to go short. Moreover, a mutual fund account could only trade once per day. Realizing these limitations, the Advisor developed a modified version of its model to take advantage of its stock market signals. The Advisor's specialty in stock market trading, encompassing a period of over twelve years, found a natural outlet in the S&P stock index futures market. Charles Mizrahi, born 1962, has been the Advisor's President and is responsible for its trading activities since he founded the firm in February 1985. From January 1988 through July 1994, he was also an officer and registered representative of Hampton Management, Inc. ("Hampton Management"), an SEC-registered broker-dealer. Mr. Mizrahi was registered with the CFTC as a sole proprietor commodity pool operator from July 1986 to July 1987, managing several small pools whose assets were allocated to third- party advisors. He also was a Vice President of Sales for Comart, Inc., an introducing broker, from June 1984 until February 1985. Mr. Mizrahi attended Brooklyn College in September 1981 prior to beginning his career as a floor trader at the New York Futures Exchange ("NYFE"), trading NYFE stock index futures. Gary Mizrahi, born 1963, has been the Advisor's Treasurer since February 1988 and is primarily responsible for its back office and administrative operations. Mr. Mizrahi was the Advisor's controller from December 1986 until February 1988. He also was Treasurer of Hampton Management from February 1988 through July 1994. Mr. Mizrahi assists in trading execution and is instrumental in the ongoing research and development of the Advisor's proprietary systems. DESCRIPTION OF TRADING METHODS AND STRATEGIES The Advisor's Leverage 3 trading program is based on its Risk Avoidance Model. The objective of the Advisor's Leverage 3 trading program is to achieve appreciation of the Fund's assets through speculative trading in futures contracts. The Advisor's system in the Leverage 3 trading program is totally technical and mechanical. Technical analysis of the markets often includes a study of the actual daily, weekly and monthly price, volume and open interest data, utilizing charts and/or computers for analysis of these items. -30- 33 The Advisor currently trades only the S&P 500 Contract on the Chicago Mercantile Exchange. An index represents a "basket" or portfolio of stocks or commodities, grouped in a particular way. How a particular stock or commodity index tracks the market depends on the composition of the stocks or commodities included in the index, the percentage weight of each component, and the method of calculating each index. The S&P 500 Stock Index has long been the benchmark by which professionals measure equity portfolio performance. The Standard & Poor's Corporation designed and maintains the Index to be an accurate proxy for a diversified stock portfolio. The Index is based on the stock prices of 500 large-capitalization companies. The market value of the 500 companies is equal to about 80% of the value of all stocks listed on the New York Stock Exchange. These companies' stocks are chosen for market size, liquidity and various industry representation. The Index is capitalization weighted, representing the market value of all outstanding common shares of the companies listed (share price multiplied by the number of shares outstanding). This means that a change in the price of any one stock influences the index in proportion to the relative market value of that company's outstanding shares. The trading of futures contracts on a stock index such as the S&P 500 Stock Index permits an investor to trade the Index at a multiple thus creating, in effect, a highly-leveraged stock portfolio. The S&P 500 Contract is valued at an amount which equals the multiplier (currently $250) times the Index level (which fluctuates daily but for these purposes is assumed to equal 1,100). In such example the S&P 500 Contract is worth $275,000 ($250 x 1,100). The Advisor's Leverage 3 trading program attempts to take a position in the S&P 500 Contract of up to three times the size of a fully-funded S&P 500 Contract. For example, if the program is maximum leverage long, the program would take a position size of up to $825,000 (3 x $275,000) for each $275,000 in Fund capital. There are also variations on the S&P 500 Contract, such as the S&P 500/BARRA Growth Index and S&P 500/BARRA Value Index futures contracts, as well as several other stock index futures contracts covering stock values in the United States and worldwide. The Chicago Mercantile Exchange has recently decreased the multiplier for the S&P 500 Contract from $500 to $250. It has also introduced an electronic mini S&P 500 Stock Index futures contract (the "E-Mini") that makes it possible to process small orders through an entirely electronic order entry and execution system. With a multiplier of only $50 times the S&P 500 Stock Index, the E-Mini gives more investors the opportunity to trade the Index, theoretically creating a very liquid market. The E-Mini futures contract features the same 500 stocks, the same benchmark standards, the same liquid index complex, but with a $50 multiplier. Although it is not currently anticipated, the Advisor may, in the future, trade any of these variations or other U.S. stock index contracts on behalf of the Fund utilizing the same, or similar, trading approach as it utilizes in trading the S&P 500 Contract. The addition of additional stock index futures and options thereon to the Advisor's trading program would not be considered to be a material change to the Fund's basic policies or structure and would not require the approval of the limited partners. Since the Advisor employs a systematic approach to trading the S&P 500 Contract, and signals are generated at 4:00 p.m., New York City time, most orders are entered as "market on close." On occasion when data is not accurate due to updates made by the exchanges after the markets close, the Advisor will run its systems and place orders on the GLOBEX exchange overnight or enter orders on the market open of the next day. Rollover of contracts can be executed during the trading day. The Advisor's model uses ten key indicators that examine three market components: price action; broader market action and changes in monetary policy. The indicators for price action are the S&P 500, the Kansas City Value Line and the Dow Jones industrial average. These indicators center on selective market advances or declines, which can be pertinent to future market activity. In addition, they help pinpoint more precise short term entry and exit points for -31- 34 implementing trades. For example, when these markets are not trading in tandem, the model is alerted to divergences in the marketplace which will be reflected in the model's signals. The model evaluates broader market action by three tertiary indicators; the number of stocks advancing versus declining, up and down stock volume and the number of stocks reaching 52-week new highs versus new lows. These indicators are used to determine market direction in the short term as they tend to reflect the market's actual strength regardless of price action and are essential in permitting the system to stay with a trend, notwithstanding day-to-day volatility. Monetary indicators such as the prime rate, discount rate, Federal funds rate and 90-day U.S. Treasury bill rate are used to provide a long term view of the environment for increases or decreases in the stock market. The Advisor's program tries to anticipate trends in the stock market and indicates a trade only when it identifies a high probability of a trend. The Advisor effects the trades indicated by its system in a wholly systematic and non-discretionary manner. The system has four positions: maximum leverage long (+3 leverage), long (+2 leverage), neutral (100% cash) and maximum leverage short (-3 leverage). The system requires the Advisor to scale up into a long position as the number of indicators indicating a buy increase or scale down out of a long position as indicators indicating a buy turn negative. For example, if the Advisor's system is giving a buy signal, but not a strong buy signal, the Advisor will enter the market using +2 leverage. If more indicators turn positive, the Advisor will increase the position to +3 leverage. Likewise, if the system generates a strong buy signal and a +3 position, but subsequently some of the indicators turn negative, the position may be reduced to +2 leverage. Thus, the leverage on the long side may be adjusted from +2 to +3 and vice versa from time to time. On the short side, since market downturns tend to be of shorter duration but greater magnitude, the Advisor's trading strategy attempts to take advantage of major downturns by executing a maximum -3 leverage position whenever it takes a short position. The trading methods utilized by the Advisor are proprietary and confidential. The description set forth herein is not intended to be exhaustive. Also, the trading methods used by the Advisor for an account may differ from those used with respect to other accounts managed by the Advisor or the trading methods used by the Advisor in trading its own account or those of its principals. THE ADVISORY AGREEMENT The First Amendment and Restatement to Advisory Contract (the "Advisory Agreement") between the Fund and the Advisor terminates on August 31, 1999 and is subject to one-year renewals on the same terms, at the option of the Fund unless terminated by the Advisor or the Fund as set forth herein. The Advisory Agreement terminates automatically without notice in the event that: (i) the Fund is terminated or liquidated; or (ii) the registration of the Advisor as a commodity trading advisor or the membership in the NFA is terminated or suspended. In addition, the Fund may terminate the Advisory Agreement at any time for any reason by providing the Advisor with at least thirty (30) days' advance notice of its intent to terminate. Further, the Fund may terminate the Advisory Agreement immediately if there has been any material breach by the Advisor of any provision of the Advisory Agreement, in particular, without limitation, a material breach of any of the representations and warranties set forth therein. The Advisor may terminate the Advisory Agreement (i) immediately if there has been any material breach of the Advisory Agreement by the Fund or (ii) at its discretion upon ninety (90) days' notice following the initial one- year term of the Advisory Agreement. In addition, the Advisor may terminate the Agreement upon thirty (30) days' notice to the Fund as of any month-end if (i) the Advisor notifies the General Partner of a proposed material change to the strategy to be used in trading the Fund's assets and the General Partner has instructed the Advisor not to implement such change or (ii) the Advisor has determined to cease managing customer accounts pursuant to the Leverage 3 trading strategy used on behalf of the Fund. -32- 35 The Fund has agreed to indemnify the Advisor and related persons for any claims or proceedings involving the business or activities of the Fund, provided that the conduct of such persons does not constitute negligence, misconduct or breach of the Advisory Agreement or of any fiduciary obligation to the Fund and was done in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Fund. The Advisor and related persons will not be liable to the Fund or any of the partners in connection with its management of the Fund's assets except (i) by reason of acts or omissions in breach of the Advisory Agreement, (ii) due to their misconduct or negligence, or (iii) by reason of not having acted in good faith and in the reasonable belief that such actions or omissions were in, or not opposed to, the best interests of the Fund. YEAR 2000 COMPLIANCE The Advisor has taken action to identify any of its computer systems that are Year 2000 vulnerable and, to date, has found none. If the Advisor should identify a system problem likely to affect its services (e.g., trade details, fee information), the Advisor will take immediate action to correct the problem, extensively test the systems internally and with other parties (if appropriate) to ensure that system interdependencies have been adequately addressed, and establish contingency plans and implement such plans in the event of a malfunction of any part of the systems. If the Advisor learns that it has a Year 2000 vulnerable system which is material to the Fund and which is unable to be corrected by the year 2000, it will notify the General Partner in a timely manner and the General Partner will promptly notify investors. LITIGATION There has not been any material administrative, civil or criminal action (whether pending, on appeal or concluded) against the Advisor or its principals within the five-year period preceding the date of this Prospectus, except as follows: On September 20, 1995, the Advisor, acting as a registered investment adviser, entered into a Consent Order with and agreed to the imposition of a Cease and Desist Order and a fine of $10,000 by the Arizona Corporation Commission (neither admitting nor denying the findings of fact and conclusions of law) at Docket No. 3080-I. The order stemmed from an alleged improper use of solicitors who were registered as investment advisers with the SEC but who had not previously been qualified as investment adviser representatives with the Arizona Corporation Commission. PERFORMANCE OF THE ADVISOR Capsule A below reflects the performance of the Leverage 3 trading program managed by the Advisor as of October 31, 1998 for the entire history of the program (July 1995 through October 1998), on a monthly and annual basis (year-to-date for partial years). Management fees are charged at rates of 0% to 0.5% (2% annually) of month-end or quarter-end account equity. Incentive fees are charged at rates of 20% to 30% of trading profits. Capsule A presents the composite performance of all accounts managed by the Advisor in the Leverage 3 trading program, including both the Fund and other investors. While the performance of the Fund has been similar, investors should not expect the Fund to always experience the same gains or losses as the Leverage 3 composite performance summary. There can be significant differences between the two for reasons such as differing fee structures for other clients, leverage, use of notional funds, and cash flows into and out of the Fund or the composite. For example, in early 1998 the Fund received substantial additional investments from limited partners, which the Advisor was unable to add to a profitable futures trade that was already in place. The presence of this uninvested cash had the effect of reducing the Fund's overall leverage and therefore -33- 36 the returns. Of course, had that particular trade experienced a loss, the uninvested cash might have reduced the Fund's overall loss. Capsule B below reflects the performance of the Leverage 2 trading program managed by the Advisor as of October 31, 1996 for the entire history of the program (May 1995 through October 1996), on a monthly and year-to-date basis. The Leverage 2 trading program has been terminated and is no longer offered to clients. The management fee was charged at a rate of 0.5% (2% annually) of quarter-end account equity. The incentive fee was charged at a rate of 20% of trading profits. The accounts reflected in the capsules were charged different fees than the Fund and the capsules have not been adjusted to reflect the fees and expenses payable by the Fund. In the following capsules "Drawdown" means losses experienced by an account over a specified period and "Worst Peak-to-Valley Drawdown" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by any account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. Monthly "Rate of Return" is calculated, pursuant to the Fully-Funded Subset method, by dividing the aggregate of net monthly performance of each account funded entirely with actual funds by the aggregate net asset value of all such accounts as of the beginning of the month for which performance is being calculated. PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE PERFORMANCE INFORMATION SET FORTH BELOW IS NOT NECESSARILY INDICATIVE OF, AND HAS NO NECESSARY BEARING ON, ANY TRADING RESULTS WHICH MAY BE ATTAINED IN THE FUTURE BY THE ADVISOR, SINCE PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE CAN BE NO ASSURANCE THAT A PARTICIPATING INVESTOR WILL MAKE ANY PROFITS AT ALL OR AVOID INCURRING SUBSTANTIAL LOSSES. FURTHER, THE RATES OF RETURN EARNED WHEN AN ADVISOR IS MANAGING A LIMITED AMOUNT OF EQUITY MAY BEAR LITTLE RELATIONSHIP TO THOSE WHICH SUCH ADVISOR IS ABLE TO ACHIEVE MANAGING GREATER AMOUNTS OF EQUITY. -34- 37 CAPSULE A COMMODITY TRADING ADVISOR: Hampton Investors, Inc. NAME OF PROGRAM: Leverage 3 Program INCEPTION OF TRADING CLIENT ACCOUNTS: May 1995 INCEPTION OF TRADING PROGRAM: July 1995 NUMBER OF OPEN ACCOUNTS: 21 TOTAL ACTUAL ASSETS UNDER MANAGEMENT OVERALL: $29,662,705 TOTAL ASSETS INCLUDING NOTIONAL FUNDS UNDER MANAGEMENT OVERALL: $38,050,232 TOTAL ACTUAL ASSETS UNDER MANAGEMENT IN PROGRAM: $29,662,705 TOTAL ASSETS INCLUDING NOTIONAL FUNDS UNDER MANAGEMENT IN PROGRAM: $38,050,232 WORST MONTHLY DRAWDOWN: (19.27)% (9/98) WORST PEAK-TO-VALLEY DRAWDOWN: (19.27)% (9/98) ACCOUNTS CLOSED WITH POSITIVE NET PERFORMANCE: 2 ACCOUNTS CLOSED WITH NEGATIVE NET PERFORMANCE: 1
======================================================================== Rate of Return (Computed on a compounded monthly basis) ======================================================================== Month 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------- January 2.85% 12.07% 11.88% -- - -------------------------------------------------------------------------------------------- February 15.79% 3.80% 0.02% -- - -------------------------------------------------------------------------------------------- March 11.90% 10.94% 3.33% -- - -------------------------------------------------------------------------------------------- April 3.51% (10.73)% 4.26% -- - -------------------------------------------------------------------------------------------- May 0.11% 9.14% 4.77% -- - -------------------------------------------------------------------------------------------- June (0.82)% 10.02% 1.81% -- - -------------------------------------------------------------------------------------------- July (2.62)% 14.57% (3.65)% (1.11)% - -------------------------------------------------------------------------------------------- August 36.62% (9.96)% 0.57% (0.29)% - -------------------------------------------------------------------------------------------- September (18.92)% 11.19% 9.34% 6.82% - -------------------------------------------------------------------------------------------- October 18.09% (8.42)% 3.43% 1.61% - -------------------------------------------------------------------------------------------- November 5.88% 4.51% (9.65)% - -------------------------------------------------------------------------------------------- December (7.76)% (7.31)% 2.08% ============================================================================================ Year 74.46% 41.91% 36.48% (1.29)% ============================================================================================
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -35- 38 CAPSULE B COMMODITY TRADING ADVISOR: Hampton Investors, Inc. NAME OF PROGRAM: Leverage 2 Program INCEPTION OF TRADING CLIENT ACCOUNTS: May 1995 INCEPTION OF TRADING PROGRAM: May 1995 NUMBER OF OPEN ACCOUNTS: 0 TOTAL ACTUAL ASSETS UNDER MANAGEMENT OVERALL: $29,662,705 TOTAL ASSETS INCLUDING NOTIONAL FUNDS UNDER MANAGEMENT OVERALL: $38,050,232 TOTAL ACTUAL ASSETS UNDER MANAGEMENT IN PROGRAM: $0 TOTAL ASSETS INCLUDING NOTIONAL FUNDS UNDER MANAGEMENT IN PROGRAM: $0 WORST MONTHLY DRAWDOWN: (6.63)% 11/95 WORST PEAK-TO-VALLEY DRAWDOWN: (6.63)% 11/95 ACCOUNTS CLOSED WITH POSITIVE NET PERFORMANCE: 1 ACCOUNTS CLOSED WITH NEGATIVE NET PERFORMANCE: 0
=========================================================== Rate of Return (Computed on a compounded monthly basis) =========================================================== Month 1996 1995 - ------------------------------------------------------------------------------- January 8.55% -- - ------------------------------------------------------------------------------- February 0.06% -- - ------------------------------------------------------------------------------- March 1.63% -- - ------------------------------------------------------------------------------- April 2.48% -- - ------------------------------------------------------------------------------- May 3.46% (0.08)% - ------------------------------------------------------------------------------- June 1.57% (0.04)% - ------------------------------------------------------------------------------- July (1.92)% (0.51)% - ------------------------------------------------------------------------------- August 0.31% (0.12)% - ------------------------------------------------------------------------------- September 5.05% 3.43% - ------------------------------------------------------------------------------- October 1.52% 0.87% - ------------------------------------------------------------------------------- November (6.63)% - ------------------------------------------------------------------------------- December 1.10% =============================================================================== Year 16.59% (2.25)% ===============================================================================
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -36- 39 SUPPLEMENTAL PERFORMANCE INFORMATION The performance shown below is the actual results, net of fees, of the Fund, for the period from November 20, 1997 through November 30, 1998. Performance from July 1, 1995 through October 31, 1997 is the pro forma composite performance of all fully-funded accounts traded pursuant to the Advisor's Leverage 3 trading program during the period presented. The historical performance of the Leverage 3 trading program composite has been retroactively adjusted on a pro forma basis approximately to reflect the cost/fee structure of the Fund. The purpose of this pro forma presentation is to provide an approximation of the rates of return such composite accounts would have achieved had they been traded pursuant to the Fund's cost/fee structure from July 1, 1995. However, there are material limitations inherent in pro forma comparisons. It is not feasible to make all the pro forma adjustments necessary to reflect the effect of all the business terms of the Fund on the actual performance of the accounts in the composite. The pro forma performance of the composite accounts should not be considered to be indicative of how any one account in the composite would have performed had it been subject to the Fund's cost/fee structure. The pro forma calculations were made on a month-to-month basis. That is, the adjustments to fees and income in one month do not affect the actual figures used in the following month for making similar pro forma calculations. Accordingly, the pro forma performance does not reflect on a cumulative basis the effect of the differences between the fees charged and interest earned by the Fund and the fees charged and interest earned by the accounts in the composite. The following assumptions were made in calculating the pro forma rates of return: a General Partner management fee of 3% per annum of month-end Net Assets; a quarterly Advisor incentive fee of 20% of New Trading Profits; operating and administrative expenses of 1% per annum of average annual Net Assets; actual brokerage commissions, ranging from $13.00 to $30.00 per contract per round-turn trade, and actual interest income earned by the accounts in the Leverage 3 trading program composite. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. ADVISOR'S PRO FORMA COMPOSITE AND FUND PERFORMANCE FROM JULY 1, 1995 THROUGH NOVEMBER 30, 1998 [CHART] DATA POINTS FOR MOUNTAIN CHART 6/95 $1000.00 7/95 987.20 8/95 982.76 9/95 1046.54 10/95 1061.29 11/95 957.71 12/95 976.00 1/96 1088.93 2/96 1086.97 3/96 1121.10 4/96 1166.50 5/96 1219.70 6/96 1239.46 7/96 1192.93 8/96 1199.03 9/96 1311.02 10/96 1351.92 11/96 1409.65 12/96 1300.26 1/97 1451.74 2/97 1501.97 3/97 1660.73 4/97 1478.55 5/97 1609.40 6/97 1764.70 7/97 2014.94 8/97 1808.21 9/97 2003.85 10/97 1829.12 11/97 1864.26 12/97 1751.29 1/98 1799.72 2/98 1987.50 3/98 2177.44 4/98 2230.48 5/98 2238.73 6/98 2220.02 7/98 2169.81 8/98 2832.94 9/98 2356.91 10/98 2825.15 11/98 3160.26
-37- 40
ADVISOR'S PRO FORMA COMPOSITE AND FUND PERFORMANCE FROM JULY 1, 1995 THROUGH NOVEMBER 30, 1998 - -------------------------------------------------------------------------- 1998 1997 1996 1995 - -------------------------------------------------------------------------- January 2.8% 11.7% 11.6% - -------------------------------------------------------------------------- February 10.4% 3.5% (0.2)% - -------------------------------------------------------------------------- March 9.6% 10.6% 3.1% - -------------------------------------------------------------------------- April 2.4% (11.0)% 4.1% - -------------------------------------------------------------------------- May 0.4% 8.9% 4.6% - -------------------------------------------------------------------------- June (0.8)% 9.7% 1.6% - -------------------------------------------------------------------------- July (2.3)% 14.2% (3.8)% (1.3)% - -------------------------------------------------------------------------- August 30.6% (10.3)% 0.6% (0.5)% - -------------------------------------------------------------------------- September (16.8)% 10.8% 9.3% 6.5% - -------------------------------------------------------------------------- October 19.9% (8.7)% 3.1% 1.4% - -------------------------------------------------------------------------- November 11.9% 1.9% 4.3% (9.8)% - -------------------------------------------------------------------------- December (6.1)% (7.8)% 1.9% - -------------------------------------------------------------------------- Year 80.5% 34.7% 33.2% (2.4)% (11 mos.) (6 mos.) - --------------------------------------------------------------------------
ADVISOR'S PRO FORMA COMPOSITE AND FUND PERFORMANCE FROM JULY 1, 1995 THROUGH NOVEMBER 30, 1998 PERFORMANCE VS. INDEX ---------------------
Composite S&P and Fund 500* --------- ---- Total Return 216.0% 127.4% Annualized Return 40.0% 27.2% Worst Drawdown (16.8)% (15.4)% Average Month 3.2% 2.1% Best Month 30.6% 8.1% Worst Month (16.8)% (14.5)% Best 12 Months 69.5% 51.9% Worst 12 Months 7.7% 8.1% Positive Months 28 32 Negative Months 13 9 *Dividends reinvested
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -38- 41 THE GENERAL PARTNER BACKGROUND AND PRINCIPALS ProFutures, Inc., a Texas corporation, began operations in December 1984 and specializes in the management of speculative managed futures accounts and funds. The General Partner has been registered with the CFTC as a commodity pool operator since January 1987 and as a commodity trading advisor and introducing broker since December 1984. The General Partner is a member of the NFA in such capacities. Its office address is 11612 Bee Cave Road, Suite 100, Austin, Texas 78733. Its telephone numbers are (800) 348-3601 and (512) 263-3800. The principals of the General Partner are Gary D. Halbert, Debi B. Halbert and Patrick W. Watson. The General Partner is also the commodity pool operator of two multi-advisor, diversified public commodity pools. Gary D. Halbert, born 1952, is a Director, President and majority stockholder of the General Partner. Mr. Halbert is also the Chairman, President and controlling stockholder of: (a) the Selling Agent; (b) ProFutures Fund Management, Inc., which serves as a co-general partner in private investment companies primarily engaged in the trading of securities; (c) ProFutures Capital Management, Inc. ("PCM"), a registered investment adviser; and (d) ProFutures International, Ltd., a Bahamian corporation. Mr. Halbert has 22 years of continuous experience in the futures industry. Mr. Halbert, who has served as an arbitrator on several occasions for the NFA, holds a Master's degree in International Management from the American Graduate School (Thunderbird) and a Bachelor of Science degree from Texas Tech University. Debi B. Halbert, born 1955, is a Director, the Chief Financial Officer, Treasurer and minority shareholder of the General Partner. She is also: (a) the Chief Financial Officer and Treasurer of ProFutures Fund Management, Inc.; and (b) the Chief Financial Officer, Treasurer and Director of ProFutures Financial Group, Inc., the Selling Agent, and ProFutures Capital Management, Inc. Ms. Halbert, the wife of Gary D. Halbert, attended Richland College (Texas). She has over 15 years of experience in the futures industry. Ms. Halbert's principal responsibility is serving as Chief Financial Officer and compliance officer. She manages back-office operations and administration of the Fund and other accounts. Patrick W. Watson, born 1964, is Vice President of the General Partner and is involved in business development, management information systems and investor relations. Mr. Watson joined the General Partner in October 1991. He has also served as Vice President of the Selling Agent and ProFutures Capital Management, Inc. since February 1996. Mr. Watson has a Bachelor of Arts degree from Howard Payne University and a Master of Arts degree from Rice University. YEAR 2000 COMPLIANCE The General Partner's modifications for Year 2000 systems compliance are proceeding according to plan and are expected to be completed on or before June 30, 1999. These modifications will include all systems which substantially affect the operations of the Fund. Based on information currently available, the remaining expenditures are estimated at less than $5,000 and will cover any hardware and software upgrades, systems consulting and computer maintenance. These expenditures are not expected to have a material adverse impact on the General Partner's financial position, results of operations or cash flows in future periods. However, the failure of the General Partner's futures exchanges, clearing organizations, vendors, clients or regulators to resolve their own processing issues in a timely manner could result in a material financial risk. The General Partner is devoting the necessary resources to address its Year 2000 issues in a timely manner. -39- 42 GENERAL PARTNER'S INVESTMENT The General Partner, together with its principals and affiliates, is required by the Limited Partnership Agreement to maintain an aggregate investment in the Fund equal to at least 1% of the total contributions of all partners to the Fund. The General Partner, its principals and affiliates may make withdrawals of such investment as of the end of any month, but at all times their aggregate capital accounts must equal at least 1% of the Fund's Net Assets. The General Partner's general partnership interest in the Fund will, for purposes of allocating Fund expenses, be treated as Units. As of October 31, 1998, the value of the General Partner's investment in the Fund was approximately $94,639, and the principals of the General Partner owned Units with an aggregate value of approximately $316,702. PERFORMANCE OF THE FUND AND THE GENERAL PARTNER The past performance of the Fund is set forth on page 21. The past performance of the General Partner's other commodity pools is set forth below. The General Partner is a co-general partner of ATA Research/ProFutures Diversified Fund, L.P. (the "Diversified Fund") and is the general partner of Alternative Asset Growth Fund, L.P. (the "Alternative Fund"). These pools are multi-advisor, widely-diversified commodity pools that have previously sold interests on a public basis. The CFTC requires commodity pool operators to disclose the performance of other pools they operate for only the past five years, although the CFTC permits older performance to be included on a supplemental basis. The past performance of the General Partner's other commodity pools since inception through October 31, 1998 is set forth in the capsule performance table on the following page. Each of the following funds is a materially different investment than the Fund. CFTC regulations require their performance to be included in this Prospectus. In the following capsules "Drawdown" means losses experienced by the pool over a specified period and "Worst Peak-to-Valley Drawdown" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the pool during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURES RESULTS -40- 43
- -------------------------------------------------------------------------------------------------------- SUMMARY OF CAPSULE PERFORMANCE OF OTHER POOLS OPERATED BY PROFUTURES, INC. AS OF OCTOBER 31, 1998 - -------------------------------------------------------------------------------------------------------- ATA Research/ProFutures Alternative Asset Name of Pool Diversified Fund L.P. Growth Fund, L.P. - -------------------------------------------------------------------------------------------------------- Type of Pool: Publicly Offered Publicly Offered - -------------------------------------------------------------------------------------------------------- Inception of Trading: August 1987 March 1990 - -------------------------------------------------------------------------------------------------------- Aggregate Subscriptions: $128,636,643 $37,373,069 - -------------------------------------------------------------------------------------------------------- Current Net Asset Value: $86,309,999 $16,811,876 - -------------------------------------------------------------------------------------------------------- Largest Monthly Percentage (7.26)% (4/98) (6.72)% (2/96) Drawdown: (Inception of Trading to Date) (Inception of Trading to Date) - -------------------------------------------------------------------------------------------------------- (7.26)% (4/98) (6.72)% (2/96) (Past Five Years and Year-to-Date) (Past Five Years and Year-to-Date) - -------------------------------------------------------------------------------------------------------- Worst Peak-to-Valley (17.23)% (7/93 to 10/95) (16.13)% (7/93 to 10/95) Drawdown: (Inception of Trading to Date) (Inception of Trading to Date) - -------------------------------------------------------------------------------------------------------- (17.23)% (7/93 to 10/95) (16.13)% (7/93 to 10/95) (Past Five Years and Year-to-Date) (Past Five Years and Year-to-Date) - -------------------------------------------------------------------------------------------------------- Rates of Return: - -------------------------------------------------------------------------------------------------------- 1998 through October 9.73% 11.04% - -------------------------------------------------------------------------------------------------------- 1997 9.92% 9.43% - -------------------------------------------------------------------------------------------------------- 1996 11.13% 4.83% - -------------------------------------------------------------------------------------------------------- 1995 0.73% (3.49)% - -------------------------------------------------------------------------------------------------------- 1994 (0.50)% 0.85% - -------------------------------------------------------------------------------------------------------- 1993 6.54% 8.09% - -------------------------------------------------------------------------------------------------------- 1992 2.83% (4.86)% - -------------------------------------------------------------------------------------------------------- 1991 7.65% 6.05% - -------------------------------------------------------------------------------------------------------- 1990 38.66% 12.44% - -------------------------------------------------------------------------------------------------------- 1989 11.57% -- - -------------------------------------------------------------------------------------------------------- 1988 2.18% -- - -------------------------------------------------------------------------------------------------------- 1987 1.36% -- - --------------------------------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE GENERAL PARTNER'S COMMODITY POOLS INCLUDED IN THE FOREGOING TABLE ARE MATERIALLY DIFFERENT INVESTMENTS THAN THE FUND. -41- 44 BROKERAGE ARRANGEMENTS The Fund's brokers are responsible for holding and maintaining the Fund's funds, securities, commodities and other assets on deposit, the execution or clearance of transactions, the recordkeeping, preparation and transmittal to the Fund of daily confirmations of transactions and monthly statements of account, the calculation of the balance and margin requirements of the Fund's accounts maintained at such brokers, and similar administrative functions. Substantially all of the Fund's assets are deposited primarily in one brokerage account with the Futures Broker. Such assets may, however, be deposited in more than one brokerage account with various futures commission merchants. The General Partner has sole responsibility for selection of the Fund's futures brokers. The designation of clearing brokers may change at any time and limited partners will receive notice of such change in the Fund's monthly reports. The General Partner also has the sole authority to negotiate brokerage rates for the Fund. The Futures Broker is a duly registered futures commission merchant and a member of the NFA. The Futures Broker is also registered as a broker-dealer and is a member of the NASD. The Futures Broker, which was formed in 1990, operates under the trade name ING BARINGS Futures & Options Clearing Services and is a clearing firm of each of the principal U.S. futures exchanges and the Chicago Board of Options Exchange. The Futures Broker is a wholly-owned subsidiary of ING Bank N.V. in Amsterdam, one of the largest financial institutions in the world. The Futures Broker is an Illinois corporation with a principal place of business at 233 South Wacker Drive, Suite 5200, Chicago, Illinois 60606; telephone (312) 496-7000. At any given time, the Futures Broker may be involved in legal actions, some of which may seek significant damages. With the exception of the action noted below, during the past five years preceding the date hereof, there have been no administrative, civil or criminal actions against the Futures Broker or any of its principals -- whether pending, on appeal or concluded -- which is material in light of all the circumstances. In 1998, a former client filed a demand for arbitration at the NFA seeking a significant award. It is alleged that the claimants' liquidation of positions on a foreign futures exchange in the volatile period of October 1997 resulted in losses. The Futures Broker is vigorously defending the claim, which it believes to be baseless. Under the customer agreement between the Futures Broker and the Fund, the Fund has agreed to maintain at all times such collateral and/or margin in accordance with exchange minimum margin requirements as established by the exchange on which the transaction is executed and has agreed to pay immediately on demand any amount owing with respect to any of the Fund's accounts. Margin requirements may be increased at the Futures Broker's sole and absolute discretion, and may differ from those established by the exchange on which the transaction is executed. If the Fund fails to deposit sufficient funds to pay for any commodities and/or to satisfy any demands for original and/or variation margin, or whenever in the Futures Broker's sole and absolute discretion the Futures Broker considers it necessary, the Futures Broker may, without prior demand or notice, when and if it deems appropriate, notwithstanding any rule of any exchange, liquidate the positions in the Fund's account(s), hedge and/or offset those positions in the cash market or otherwise, sell any property belonging to the Fund or in which the Fund has an interest, cancel any open orders for the purchase and sale of any property, or borrow or buy any property required to make delivery against any sales, including a short sale, effected for the Fund, all for the Fund's sole account and risk. The Fund has agreed that the Futures Broker has no duty and is not required to liquidate positions in the Fund's account(s). -42- 45 The Fund has obtained the foregoing information from the Futures Broker. Other than providing this information, the Futures Broker is not a party to and has not reviewed or passed upon the merits of this Prospectus nor will the Futures Broker participate in the Fund beyond its clearing duties pursuant to a brokerage agreement, so long as that agreement is in effect. NET ASSET VALUE The Net Asset Value of the Fund equals its assets less its liabilities, as determined in accordance with Generally Accepted Accounting Principles, including any unrealized profits and losses on its open positions. More specifically, the Net Asset Value of the Fund equals the sum of all cash, the liquidating value (or cost of liquidation, as the case may be) of all futures and options on futures positions and the fair market value of all other assets of the Fund, less all liabilities of the Fund (including accrued liabilities, irrespective of whether such liabilities -- for example, incentive fees -- may in fact never be paid), in each case, as determined by the General Partner generally in accordance with Generally Accepted Accounting Principles. The Net Asset Value of a Unit equals the Net Asset Value of the Fund divided by the total number of Units outstanding. The General Partner's investment is treated on a Unit-equivalent basis. CONFLICTS OF INTEREST Neither the General Partner, the Advisor, nor their respective principals and affiliates (the "Associated Parties") has established any formal procedures to resolve the following conflicts of interest. Consequently, investors cannot rely on an independent control on how the Associated Parties will resolve these conflicts to ensure that the Fund is treated equitably with other clients of the Associated Parties. Because no formal procedures are in place for resolving conflicts, they may be resolved by the Associated Parties in a manner which causes the Fund losses. The value of limited partners' investment may be diminished by actions or omissions which independent third parties could have prevented or corrected. Although the following conflicts of interest are present in the operation of the Fund, the General Partner does not believe that they are likely to have a material adverse effect on its performance. This belief is based on a number of factors, including the following: (i) The Advisor trades all similarly situated accounts in parallel, placing bulk orders which are allocated among the Advisor's accounts pursuant to pre-established procedures. Consequently, the Advisor has little opportunity to prefer another client over the Fund. (ii) The Futures Broker simply receives and executes the Advisor's bulk orders based on pre-established procedures. The Futures Broker has no ability in allocating positions to favor one account over another. (iii) The General Partner, as a fiduciary, is prohibited from benefiting itself at the expense of the Fund. Any of the Associated Parties are free to manage and advise commodity pools and commodity trading accounts in addition to the Fund's account. The General Partner or the Advisor may -43- 46 have a conflict of interest in rendering advice to the Fund because their respective benefit from managing some other commodity pools or commodity accounts may exceed their benefit from managing the Fund's account and, therefore, may provide an incentive to favor such other accounts. Moreover, if any of the Associated Parties makes trading decisions for such other accounts and the Fund's account at or about the same time, the Fund may be competing with such other pools or accounts for the same or similar positions. No Associated Party will enter into transactions where it knowingly and deliberately favors itself or another client over the Fund; however, the Associated Parties each have considerable flexibility to trade for other accounts, and each intends to do so to a significant extent. Accordingly, no assurance is given that the performance of all accounts controlled and managed by the Associated Parties will be identical or even similar. The Associated Parties may trade in the futures markets for their own accounts. An Associated Party may, as a result of a neutral allocation system or testing a new trading system, trade proprietary accounts more aggressively, or take any other actions that would not constitute a violation of applicable duties to the Fund, which includes taking positions in their proprietary accounts which are the same as, similar to or opposite from those positions taken for a client, including the Fund. The records of such trading will not be made available to limited partners. The Selling Agent will have an incentive to sell Units (despite receiving no direct compensation other than possibly any excess of the aggregate organizational charge) since the management fee received by the General Partner (its affiliate) will be greater should the Fund's capitalization increase. The General Partner is an affiliate of PCM, a registered investment adviser. Under its AdvisorLink program, PCM has selected the Advisor's mutual fund trading program as one of a few it recommends to its clients. PCM receives a portion of the fees paid to the Advisor by clients which PCM referred to the Advisor's mutual fund trading program. The General Partner operates two multi-advisor, diversified commodity pools. The General Partner is a co-general partner of the Diversified Fund and is the general partner of the Alternative Fund. The General Partner has selected the Futures Broker to serve as the primary futures broker for both of these pools. The Futures Broker has agreed, so long as it remains the futures broker for these pools and the Fund, to purchase, under specified conditions, shares of common stock of the General Partner sufficient to meet the net worth requirement imposed on the General Partner in connection with its publicly-offered funds (including the Fund). Accordingly, there is an incentive for the General Partner to retain the Futures Broker as the primary futures broker for the Fund. In addition, the Advisor is a trading advisor to the Diversified Fund and the Alternative Fund. The Futures Broker acts as commodity broker for accounts other than the Fund, including accounts of the Futures Broker's affiliates and of limited partnerships of which the Futures Broker or one of its affiliates is general partner, and may have financial and other incentives to favor certain of such accounts over the Fund. The compensation received by the Futures Broker from such accounts may be more or less than the compensation the Futures Broker will receive for its services to the Fund. Certain employees of the Futures Broker are, and will in the future be, members of United States commodities exchanges and are and will serve on the governing bodies and standing committees of such exchanges and of their clearinghouses. In such capacities, these employees have a fiduciary duty to the exchanges and their clearinghouses which will compel such employees to act in the best interests of these entities, perhaps to the detriment of the Fund. -44- 47 THE STOCK INDEX FUTURES MARKETS STOCK INDEX FUTURES CONTRACTS Stock index futures contracts are contracts made on a commodity exchange and call for cash settlement, at the close of business on the expiration date of the contract, based on the level of the index in question at such time. In addition, under the daily marked-to-market procedure employed by commodity exchanges, there is a cash settlement each day that a trader holds an open position whereby the trader either pays or receives variation margin based on the change in the value of his position since the close of trading on the previous day. STOCK INDEX OPTIONS An option on a stock index futures contract gives the purchaser of the option the right (but not the obligation) to take a position at a specified price (the "striking," "strike" or "exercise" price) in the underlying stock index futures contract. Options have limited life spans, usually tied to the delivery or settlement date of the underlying futures contract. The value of an option at any given point in time is a function of market volatility and the price level of the underlying stock index futures contract. STOCK INDEX FUTURES MARKET PARTICIPANTS The two broad classifications of persons who trade in stock index futures are "hedgers" and "speculators." Financial institutions, pension plans and corporations with large equity portfolios use the stock index futures markets to hedge such portfolios against declines in overall stock index levels. In doing so, such hedgers typically accept the "delta" risk -- i.e., the risk that their actual equity portfolio will perform somewhat differently from the overall market -- for their own account. A pension plan might, for example, decide during a run-up in the S&P 500 Stock Index, that it is prudent to hedge 50% of a $100 million stock portfolio against the risk of the S&P 500 Stock Index level dropping below a certain level. Accordingly, the plan would acquire short positions in the S&P 500 Contract with an aggregate face value of $50 million when the market was at such pre-determined level. For every decline of the Index below such level, the plan would earn $1 on its short futures position for every $2 it lost in its equity portfolio -- plus or minus the extent to which such portfolio overperformed or underperformed the S&P 500 Stock Index. The objective of the hedger is to protect all or a portion of the value of his equity holdings from price declines, rather than to profit from his futures trading. The speculator, on the other hand, risks his capital with the hope of making profits from fluctuations in the price of stock index futures contracts. The speculator is, in effect, the risk bearer who assumes the risks which the hedger seeks to avoid. The stock index futures markets are also used by a number of market participants as a means of establishing "proxy" or "surrogate" equity portfolios which will be replaced in due course by the acquisition of actual stocks. For example, a money manager might determine that it was appropriate to rebalance an investment company's portfolio by allocating 10% of such fund's overall holdings out of fixed income instruments and into common stocks. To purchase stocks comprising the S&P 500 Stock Index and in a manner which will minimize execution costs might take several days, whereas the manager may believe that a major stock market movement is imminent. In such circumstances, the manager could acquire stock index futures contracts with a gross value equal to 10% of the investment company's portfolio, thereby immediately positioning the fund to take advantage of upward movements in overall equity price levels, and gradually close out futures positions as the fund's brokers gradually acquired the "cash" equity positions in what they considered to be the most advantageous manner. -45- 48 Another group of market participants in the stock index futures markets are institutions which engage in the arbitrage strategy commonly referred to as "program trading." Program trading involves the purchase or sale of a cash equity portfolio and the simultaneous offsetting sale or purchase of stock index futures contracts of the same aggregate face value. The purpose is to capture the pricing differentials which develop between the cash and the futures markets, whereby one is from time to time over- or under-priced with respect to the other, after taking into account the dividends one earns on actual stocks (as opposed to futures) held and the interest one earns on the assets which one would otherwise have to spend to acquire a "cash" equity position, but which one is able to retain if such position is established in the futures markets, in which it is not necessary to acquire any actual stocks. Barring execution "slippage" the arbitrage position established in a classic program trade should be riskless because upon the expiration of the stock index futures contracts acquired, the value of such contracts would equal the value of the "cash" stock index, thereby causing the program traders' futures and cash positions exactly to offset each other. SPECULATIVE POSITION LIMITS The exchanges have established, and the CFTC has approved, limits, referred to as "speculative position limits," on the maximum net long or net short position that any person (other than a hedger) may hold or control in stock index futures contracts. The position limit for the S&P 500 Contract is very high relative to other stock indices. The principal purpose of speculative position limits is to prevent a "corner" on a market or undue influence on prices by any single trader or group of traders. DAILY LIMITS The exchanges have established, and the CFTC has approved, regulations which limit the amount of fluctuation in stock index futures contract prices during a single trading day. These regulations specify what are referred to as "daily price fluctuation limits" or more commonly "daily limits." The daily limits establish the maximum amount by which the price of a stock index futures contract may vary either up or down from the previous day's settlement price at the end of the trading session. Once the daily limit has been reached in a particular commodity for delivery in a particular month, it may be difficult, costly or impossible to liquidate positions in that futures contract. Since "daily limits" restrict price movements only for a given trading day, they do not limit ultimate losses. REGULATION Commodity exchanges in the United States, and trading thereon, are subject to regulation by the CFTC under the CEA. In addition, the various commodity exchanges themselves exercise regulatory and supervisory authority over their members. The CFTC also regulates the activities of "commodity trading advisors" and "commodity pool operators" and has adopted regulations with respect to certain of such persons' activities. Under the CEA, a registered commodity pool operator, such as the General Partner, is required to make annual filings with the CFTC describing its organization, capital structure, management and controlling persons. In addition, the CEA authorizes the CFTC to require the maintenance of specified books and records and the preparation of disclosure documents by registered commodity pool operators. Pursuant to such authority, the CFTC requires a commodity pool operator to keep accurate, current and orderly records with respect to each pool it operates. The CFTC has delegated substantial authority to review such books, records and documents to the NFA. The CFTC may suspend the registration of a commodity pool operator (i) if the CFTC finds that the operator's trading practices tend to disrupt orderly market conditions, (ii) if any controlling person of the pool operator is subject to an order of the CFTC denying such person trading privileges on any exchange and (iii) in certain other circumstances. -46- 49 Suspension or termination of the General Partner's registration as a commodity pool operator would prevent it, until such time (if any) as such registration were reinstated, from acting as general partner of the Fund, and would be likely to result in the termination of the Fund. The CEA gives similar authority to the CFTC with respect to the activities of "commodity trading advisors," such as the Advisor. If the Advisor's registration as a commodity trading advisor were to be terminated or suspended, it would be unable, until such time (if any) as such registration was reinstated, to render trading advice to the Fund and the Fund's trading activities would be suspended unless the General Partner selected another trading advisor, which would be unlikely. The CEA requires all "futures commission merchants," such as the Futures Broker, to meet and maintain specified financial requirements, account separately for all customers' funds and positions, and maintain specified books and records open to inspection by the staff of the CFTC. The CFTC has, in effect, delegated responsibility to audit compliance with such financial requirements to the commodity exchanges and the NFA. The CEA authorizes the CFTC to regulate trading by futures commission merchants and their officers and directors, permits the CFTC to require action by exchanges in the event of market emergencies, and establishes a reparations procedure under which commodity customers may institute complaints for damages arising from alleged violations of the CEA by persons required to be registered thereunder. The CEA also gives the states certain powers to enforce its provisions and the regulations of the CFTC. Limited partners are afforded certain rights to institute reparation proceedings under the CEA for violations of the CEA or of any rule, regulation or order of the CFTC by the General Partner, the Advisor or the Futures Broker. The NFA is a "registered futures association" under Section 17 of the CEA. At the present time, the NFA is the only non-exchange, self-regulatory organization for commodities industry professionals. The NFA also arbitrates disputes between members and their customers and conducts registration and fitness screening of applicants for membership. The regulations of the CFTC and the NFA prohibit any representation by a person registered with the CFTC or by a member of the NFA, respectively, that such registration or membership in any respect indicates that the CFTC or the NFA, as the case may be, has approved or endorsed such person or such person's trading program or objectives. The registrations and memberships described above must not be considered as constituting any such approval or endorsement. The regulation of futures contract trading in the United States and other countries is a constantly changing area of the law. The various statements made herein are subject to modification by legislative action and changes in the rules and regulations of the CFTC, the NFA, commodity exchanges and other regulatory bodies. MARGIN Initial margin is the minimum amount of funds that must be deposited by a commodity futures trader with his commodity broker in order to initiate futures trading. Maintenance margin is the minimum which must remain on deposit with the broker to maintain the trader's open positions in futures contracts. A margin deposit, like a cash performance bond, helps assure the commodity trader's performance of his obligations under his open positions. The initial margin on the S&P 500 Contract is currently set at approximately 6% of contract value. -47- 50 The minimum amount of margin required to acquire or maintain a particular futures contract is set from time to time by the exchange upon which such commodity futures contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms carrying accounts for traders in commodity futures contracts may increase the amount of margin required as a matter of policy in order to further protect themselves. Such increased margin requirements may apply to existing positions held by the Fund as well as to positions acquired in the future. When the market value of a particular open commodity futures or option position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call will be made by the trader's commodity broker. If the margin call is not met within a reasonable time, the broker is generally required to close out the trader's position. Margin requirements are computed each day by the trader's commodity broker. With respect to the Fund's trading, the Fund, and not the limited partners personally, will be subject to margin calls. THE FOREGOING DESCRIPTION OF THE STOCK INDEX FUTURES MARKETS IS INTENDED TO PROVIDE ONLY A SUMMARY OF SELECTED ASPECTS OF THIS INDUSTRY AND SHOULD NOT BE VIEWED AS BEING EITHER COMPREHENSIVE OR EXHAUSTIVE. PROSPECTIVE INVESTORS SHOULD HAVE A GENERAL FAMILIARITY WITH THE STOCK INDEX FUTURES MARKETS AND MAY CONSULT AN INDEPENDENT ADVISER OR CONTACT THE GENERAL PARTNER FOR FURTHER INFORMATION. SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT The Fund's Limited Partnership Agreement effectively gives the General Partner full control over the management of the Fund. Limited partners have no voice in its operations. In addition, the General Partner in its operation of the Fund is specifically authorized to engage in the transactions described herein, and is exculpated and indemnified by the Fund against claims sustained in connection with the Fund, provided that such claims were not the result of the General Partner's negligence or misconduct and that the General Partner determined that such conduct was in the best interests of the Fund. Although limited partners have no right to participate in the control or management of the Fund, they are entitled to: (i) vote on a variety of different matters; (ii) receive annual audited financial statements, unaudited monthly reports and timely tax information; (iii) inspect the Fund's books and records; (iv) redeem Units; and (v) not have the business terms of the Fund changed in a manner which increases the compensation received by the General Partner or its affiliates without the consent of a majority of the limited partners. Limited partners' voting rights extend to any proposed change in the Limited Partnership Agreement which would adversely affect them, as well as to their right to terminate the Fund's contracts with affiliates of the General Partner. Limited partners also have the right to call meetings of the Fund in order to permit limited partners to vote on any matter on which they are entitled to vote, including the removal of the General Partner as general partner of the Fund. Limited partners or their duly authorized representatives may inspect the Fund's books and records, for a purpose related to their status as limited partners in the Fund, during normal business hours upon reasonable written notice to the General Partner. They may also obtain copies of such records upon payment of reasonable reproduction costs; provided, however, that such limited partners represent that the inspection and/or copies of such records will not be for commercial purposes unrelated to such limited partners' interest in the Fund. -48- 51 The Limited Partnership Agreement provides for the economic and tax allocations of the Fund's profit and loss. Economic allocations are based on investors' capital accounts, and the tax allocations generally attempt to equalize tax and capital accounts by, for example, making a priority allocation of taxable income to limited partners who redeem at a profit. The General Partner may amend the Limited Partnership Agreement in any manner not adverse to the limited partners without need of obtaining their consent. TAX CONSEQUENCES The following constitutes the opinion of Sidley & Austin and summarizes the material federal income tax consequences to United States taxpayers who are individuals. PARTNERSHIP TAX STATUS OF THE FUND The Fund is a partnership for federal income tax purposes and, based on the type of income expected to be earned by the Fund, it will not be treated as a "publicly-traded partnership." Therefore, the Fund will not pay federal income tax. TAXATION OF PARTNERS ON PROFITS OR LOSSES OF THE FUND Each Partner must pay tax on his share of the Fund's income and gains. Such share must be included each year in a Partner's taxable income whether or not such Partner has redeemed Units. In addition, a Partner may be subject to paying taxes on the Fund's interest income even though the Net Asset Value per Unit has decreased due to trading losses. See "-- Tax on Capital Gains and Losses; Interest Income," below. The Fund provides each Partner with an annual schedule of his share of tax items. The Fund generally allocates these items equally to each Unit. However, when a Partner redeems Units, the Fund allocates capital gains or losses so as to reduce or eliminate any difference between the redemption proceeds and the tax accounts of such Units. LIMITED DEDUCTIBILITY OF FUND LOSSES AND DEDUCTIONS A Partner may not deduct Fund losses or deductions in excess of his tax basis in his Units as of year-end. Generally, a Partner's tax basis in his Units is the amount paid for such Units reduced (but not below zero) by his share of any Fund distributions, losses and deductions and increased by his share of the Fund's income and gains. LIMITED DEDUCTIBILITY FOR CERTAIN EXPENSES Individual taxpayers are subject to material limitations on their ability to deduct investment advisory fees, unreimbursed expenses of an employee, and certain other expenses of producing income not resulting from the conduct of a trade or business. There is substantial uncertainty as to whether various expenses incurred in connection with the type of trading strategies conducted by the Fund should be considered investment expenses or business expenses in applying this tax provision. For tax reporting purposes, the General Partner currently intends to treat the ordinary expenses of the Fund as ordinary business expenses not subject to the limitations described below. However, the IRS might contend that the management fees, the incentive fee and other expenses of the Fund constitute "investment advisory fees" subject to the limitations. -49- 52 For individuals who itemize deductions, the expenses of producing income, including "investment advisory fees," are to be aggregated with unreimbursed employee business expenses and certain other expenses of producing income (collectively, the "Aggregate Investment Expenses"), and such Aggregate Investment Expenses will be deductible only to the extent in excess of 2% of the individual's adjusted gross income. In addition, Aggregate Investment Expenses in excess of the 2% threshold, when combined with certain other itemized deductions, are subject to a reduction generally equal to 3% of the individual's adjusted gross income in excess of a certain threshold amount. Moreover, such Aggregate Investment Expenses are miscellaneous itemized deductions, which are not deductible by an individual in calculating his or her alternative minimum tax liability. If the management fees, the incentive fee and other expenses of the Fund were determined to constitute "investment advisory fees," an individual Partner's pro rata share of the amounts so characterized would be included in Aggregate Investment Expenses potentially subject to the deduction limitations described above. In addition, each individual Partner's share of income from the Fund would be increased (solely for tax purposes) by such Partner's pro rata share of the amounts so characterized. Any such characterization by the IRS could require Partners to file amended tax returns and pay additional taxes, plus interest. It is unlikely that tax penalties would be imposed on account of such an IRS characterization. YEAR-END MARK-TO-MARKET OF OPEN POSITIONS Section 1256 Contracts are futures, futures options traded on U.S. exchanges and stock index options. Currently, all of the Fund's open positions are Section 1256 Contracts. Section 1256 Contracts that remain open at the end of each year are treated for tax purposes as if such positions had been sold and any gain or loss recognized. The gain or loss on Section 1256 Contracts is characterized as 40% short-term capital gain or loss and 60% long-term capital gain or loss regardless of how long any given position has been held. Non-U.S. exchange-traded futures are generally non-Section 1256 Contracts. Gain or loss on any non-Section 1256 Contracts will be recognized when sold by the Fund and will be primarily short-term gain or loss. TAX ON CAPITAL GAINS AND LOSSES; INTEREST INCOME As described under "-- Year-End Mark-to-Market of Open Positions," the Fund's trading, not including its cash management which generates primarily ordinary income, generates 60% long-term capital gains or losses and 40% short-term capital gains or losses from its Section 1256 Contracts and primarily short-term capital gain or loss from any non-Section 1256 Contracts. Individuals pay tax on long-term capital gains at a maximum rate of 20%. Short-term capital gains are subject to tax at the same rates as ordinary income, with a maximum rate of 39.6% for individuals. Individual taxpayers may deduct capital losses only to the extent of their capital gains plus $3,000. Accordingly, the Fund could incur significant losses but a limited partner could be required to pay taxes on his share of the Fund's interest income. If an individual taxpayer incurs a net capital loss for a year, he may elect to carry back (up to three years) the portion of such loss which consists of a net loss on Section 1256 Contracts. A taxpayer may deduct such losses only against net capital gain for a carryback year to the extent that such gain includes gains on Section 1256 Contracts. To the extent that a taxpayer could not use such losses to offset gains on Section 1256 Contracts in a carryback year, the taxpayer may carry forward such losses indefinitely as losses on Section 1256 Contracts. -50- 53 SYNDICATION EXPENSES Neither the Fund nor any limited partner will be entitled to any deduction for the Fund's syndication expenses, including the one-time upfront organizational charge paid to the General Partner and any amount paid by the General Partner to any Additional Selling Agents, nor can such expenses be amortized by the Fund or any limited partner. UNRELATED BUSINESS TAXABLE INCOME Tax-exempt limited partners will not be required to pay tax on their share of income or gains of the Fund, provided that such limited partners do not purchase Units with borrowed funds. IRS AUDITS OF THE FUND AND ITS PARTNERS The IRS is required to audit Fund-related items at the Fund level rather than the partner level. The General Partner is the Fund's "tax matters partner" with general authority to determine the Fund's responses to a tax audit. If an audit of the Fund results in an adjustment, all partners may be required to pay additional taxes plus interest as well as penalties. STATE AND OTHER TAXES In addition to the federal income tax consequences described above, the Fund and the partners may be subject to various state and other taxes. -------------------- PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS BEFORE DECIDING WHETHER TO INVEST. PURCHASES BY EMPLOYEE BENEFIT PLANS IN GENERAL This section sets forth certain consequences under the Employee Retirement Income Security Act of 1974 ("ERISA") and the Code which a fiduciary of an "employee benefit plan" as defined in and subject to ERISA or of a "plan" as defined in Section 4975 of the Code who has investment discretion should consider before deciding to invest the plan's assets in the Fund (such "employee benefit plans" and "plans" being referred to herein as "Plans," and such fiduciaries with investment discretion being referred to herein as "Plan Fiduciaries"). Furthermore, all potential investors should read the following disclosure because it describes certain issues that could affect the Fund as a consequence of Plans purchasing Units. The terms "employee benefit plans" and "plans" include, but are not limited to, corporate pension and profit sharing plans, "simplified employee pension plans," KEOGH plans for self-employed individuals (including partners), individual retirement accounts described in Section 408 of the Code and medical benefit plans. SPECIAL INVESTMENT CONSIDERATIONS Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Fund, including the role that an investment in the Fund plays or would play in the Plan's overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the Fund, must be satisfied that such investment is prudent for the Plan, that the investments of the Plan, -51- 54 including the investment in the Fund, are diversified so as to minimize the risk of large losses and that an investment in the Fund complies with the terms of the Plan and related trust. THE FUND SHOULD NOT BE DEEMED TO HOLD "PLAN ASSETS" A regulation issued under ERISA (the "ERISA Regulation") contains rules for determining when an investment by a Plan in an equity interest of a limited partnership will result in the underlying assets of the partnership being assets of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., "plan assets"). Those rules provide in pertinent part that assets of a limited partnership will not be plan assets of a Plan which purchases an equity interest in the partnership if (i) investment by all "benefit plan investors" is not significant (the "Participation Exception"), or (ii) the equity interest purchased is a "publicly-offered security" (the "Publicly-Offered Security Exception"). If the underlying assets of a partnership are considered to be assets of any Plan for purposes of ERISA or Section 4975 of the Code, the operations of such partnership would be subject to and, in some cases, limited by, the provisions of ERISA and Section 4975 of the Code. The Participation Exception applies if, immediately after the most recent acquisition of an equity interest of the partnership, "benefit plan investors" (defined as any Plan, any other employee benefit plan as defined in, but not subject to, ERISA and any entity deemed for any purpose of ERISA or Section 4975 of the Code to hold assets of any employee benefit plan or plan) own, in the aggregate, less than 25% of the value of each class of equity interests of the partnership (determined by not including the investments of persons with discretionary authority or control over the assets of such partnership, certain other persons and their "affiliates" (as defined in the ERISA Regulation)). The Publicly-Offered Security Exception applies if the equity interest is a security that is (1) "freely transferable" (determined based on the applicable facts and circumstances), (2) part of a class of securities that is "widely held" (meaning that the class of securities is owned by 100 or more investors independent of the issuer and of each other) and (3) either (a) part of a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, or (b) sold to the Plan as part of a public offering pursuant to an effective registration statement under the Securities Act of 1933 and the class of which such security is a part is registered under the Securities Exchange Act of 1934 within 120 days (or such later time as may be allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer in which the offering of such security occurred. Prior to the date of this Prospectus, the General Partner relied upon the Participation Exception to avoid having the underlying assets of the Fund be plan assets. As of the date of this Prospectus, the General Partner believes that the Publicly-Offered Security Exception will apply with respect to the Units and, accordingly, will rely upon such exception, instead of the Participation Exception, to avoid having the underlying assets of the Fund be plan assets. In the event that the number of investors holding Units who are independent of the Fund and of each other drops below 100, the Publicly-Offered Security Exception may no longer apply and, therefore, the General Partner intends, in such situation, to thereafter comply with the Participation Exception. In addition, if it is determined for any other reason that the Units do not qualify as publicly-offered securities under the ERISA Regulation, the General Partner intends to thereafter comply with the Participation Exception. Such Exception would require the General Partner to restrict the aggregate investment by benefit plan investors to under 25% of the total capital of each class of equity interests of the Fund (not including any investments of the General Partner, the Advisor, any cash manager and certain other persons). Furthermore, because the 25% test is ongoing, it not only restricts additional investment by benefit plan investors, but also can cause the General Partner to require that existing benefit plan investors withdraw from the Fund in the event that other investors withdraw. -52- 55 If rejection of subscriptions or such mandatory withdrawals are necessary, as determined by the General Partner, so that the assets of the Fund will not be plan assets, the General Partner will effect such rejections or withdrawals in such manner as the General Partner, in its sole discretion, determines. INELIGIBLE PURCHASERS Units may not be purchased with the assets of a Plan if the General Partner, the Advisor, the Selling Agent, any Additional Selling Agents, the Futures Broker, any cash manager or any of their respective affiliates either: (a) has investment discretion with respect to the investment of such plan assets; (b) has authority or responsibility to give or regularly gives investment advice with respect to such plan assets, for a fee, and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such plan assets and that such advice will be based on the particular investment needs of the plan; or (c) is an employer maintaining or contributing to such Plan. ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF ANY PLAN IS IN NO RESPECT A REPRESENTATION BY THE GENERAL PARTNER OR THE ADVISOR THAT AN INVESTMENT IN THE UNITS IS APPROPRIATE OR AUTHORIZED FOR SUCH PLAN. EACH PLAN FIDUCIARY CONSIDERING ACQUIRING UNITS MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO. GENERAL Sidley & Austin has advised the General Partner on the offering of the Units. Sidley & Austin drafted "Tax Consequences." Sidley & Austin does not serve as counsel to the Fund or to the limited partners. The balance sheet of the General Partner as of June 30, 1998 and the financial statements of the Fund as of December 31, 1997 and for the period August 21, 1997 (inception) to December 31, 1997 included herein have been audited by Arthur F. Bell, Jr. & Associates, L.L.C. -53- 56 FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
PAGE ---- PROFUTURES LONG/SHORT GROWTH FUND, L.P. Independent Auditor's Report..........................................................................55 Statements of Financial Condition as of September 30, 1998 (Unaudited) and December 31, 1997 (Audited)....................................................................56 Statements of Operations for the Nine Months Ended September 30, 1998 (Unaudited) and For the Period August 21, 1997 (Inception) to December 31, 1997 (Audited)......................57 Statements of Changes in Partners' Capital (Net Asset Value) For the Nine Months Ended September 30, 1998 (Unaudited) and For the Period August 21, 1997 (Inception) to December 31, 1997 (Audited)..........................58 Notes to Financial Statements For the Nine Months Ended September 30, 1998 (Unaudited) and For the Period August 21, 1997 (Inception) to December 31, 1997 (Audited)......................59 PROFUTURES, INC. Independent Auditor's Report..........................................................................63 Balance Sheets as of September 30, 1998 (Unaudited) and June 30, 1998 (Audited) ......................64 Notes to Balance Sheets...............................................................................65
---------------------- Schedules are omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto. --------------- -54- 57 INDEPENDENT AUDITOR'S REPORT TO THE PARTNERS PROFUTURES LONG/SHORT GROWTH FUND, L.P. We have audited the accompanying statement of financial condition of ProFutures Long/Short Growth Fund, L.P. as of December 31, 1997, and the related statements of operations and changes in partners' capital (net asset value) for the period August 21, 1997 (inception) to December 31, 1997. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ProFutures Long/Short Growth Fund, L.P. as of December 31, 1997, and the results of its operations and the changes in its net asset value for the period August 21, 1997 (inception) to December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C. March 9, 1998, except for Note 7, as to which the date is December 8, 1998. Lutherville, Maryland -55- 58 PROFUTURES LONG/SHORT GROWTH FUND, L.P. STATEMENTS OF FINANCIAL CONDITION September 30, 1998 (unaudited) and December 31, 1997 (audited)
September 30, December 31, 1998 1997 (Unaudited) (Audited) -------------- -------------- ASSETS Equity in broker trading account Cash $ 2,383,550 $ 585,732 Unrealized gain (loss) on open contracts (976,500) 2,175 -------------- -------------- Deposits with broker 1,407,050 587,907 Cash and cash equivalents 11,426,604 2,275,163 Subscriptions receivable 0 69,694 -------------- -------------- Total assets $ 12,833,654 $ 2,932,764 ============== ============== LIABILITIES Accounts payable $ 11,322 $ 11,744 Commissions and other trading fees on open contracts 1,271 189 General Partner management fee 32,176 6,095 -------------- -------------- Total liabilities 44,769 18,028 -------------- -------------- PARTNERS' CAPITAL (NET ASSET VALUE) General Partner - 61.4461 and 30.6159 units outstanding at September 30, 1998 and December 31, 1997 79,176 29,313 Limited Partners - 9,863.6045 and 3,013.6483 units outstanding at September 30, 1998 and December 31, 1997 12,709,709 2,885,423 -------------- -------------- Total partners' capital (Net Asset Value) 12,788,885 2,914,736 -------------- -------------- Total liabilities and partners' capital $ 12,833,654 $ 2,932,764 ============== ==============
See accompanying notes. -------------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -56- 59 PROFUTURES LONG/SHORT GROWTH FUND, L.P. STATEMENTS OF OPERATIONS for the nine months ended September 30, 1998 (unaudited) and for the period August 21, 1997 (inception) to December 31, 1997 (audited) - --------------------------------------------------------------------------------
Nine Months Ended Period Ended September 30, December 31, 1998 1997 (Unaudited) (Audited) -------------- -------------- INCOME Trading gains (losses) Realized $ 1,588,994 $ (116,342) Change in unrealized (978,675) 2,175 -------------- -------------- Gain (loss) from trading 610,319 (114,167) Interest income 254,997 19,520 -------------- -------------- Total gain (loss) 865,316 (94,647) -------------- -------------- EXPENSES Brokerage commissions 6,138 564 General Partner management fee 140,053 9,826 Advisor incentive fee 171,310 0 Operating expenses 42,262 11,704 -------------- -------------- Total expenses 359,763 22,094 -------------- -------------- NET INCOME (LOSS) $ 505,553 $ (116,741) ============== ============== NET INCOME (LOSS) PER GENERAL AND LIMITED PARTNER UNIT (based on weighted average number of units outstanding during the period of 4,959.2859 and 2,421.6801, respectively) $ 101.94 $ (48.21) ============== ============== INCREASE (DECREASE) IN NET ASSET VALUE PER GENERAL AND LIMITED PARTNER UNIT $ 331.10 $ (42.55) ============== ==============
See accompanying notes. ---------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -57- 60 PROFUTURES LONG/SHORT GROWTH FUND, L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE) for the nine months ended September 30, 1998 (unaudited) and for the period August 21, 1997 (inception) to December 31, 1997 (audited) - --------------------------------------------------------------------------------
Total Partners' Capital Number of ------------------------------------------------ Units General Limited Total ------------ ------------ ------------ ------------ Audited Balances at August 21, 1997 (inception) 0.0000 $ 0 $ 0 $ 0 Additions 3,044.2642 30,198 3,001,279 3,031,477 Net (loss) for the period August 21, 1997 (inception) to December 31, 1997 (885) (115,856) (116,741) ------------ ------------ ------------ ------------ Balances at December 31, 1997 3,044.2642 29,313 2,885,423 2,914,736 Unaudited Net income for the nine months ended September 30, 1998 12,932 492,621 505,553 Additions 6,959.8881 36,931 9,422,159 9,459,090 Redemptions (79.1017) 0 (90,494) (90,494) ------------ ------------ ------------ ------------ Balances at September 30, 1998 9,925.0506 $ 79,176 $ 12,709,709 $ 12,788,885 ============ ============ ============ ============
Net Asset Value Per Unit -------------------------------- September 30, December 31, 1998 1997 ----------- ----------- (Unaudited) (Audited) $ 1,288.55 $ 957.45 =========== ===========
See accompanying notes. ---------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -58- 61 PROFUTURES LONG/SHORT GROWTH FUND, L.P. NOTES TO FINANCIAL STATEMENTS For the nine months ended September 30, 1998 (unaudited) and for the period August 21, 1997 (inception) to December 31, 1997 (audited) - -------------------------------------------------------------------------------- NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. GENERAL DESCRIPTION OF THE FUND ProFutures Long/Short Growth Fund, L.P. (the "Fund"), (formerly ProFutures Bull & Bear Fund, L.P.) (see Note 7) is a Delaware limited partnership which operates as a commodity investment pool. It is subject to the regulations of the Commodity Futures Trading Commission, an agency of the United States (U.S.) government which regulates most aspects of the commodity futures industry, rules of the National Futures Association, an industry self-regulatory organization, and the requirements of commodity exchanges and Futures Commission Merchants (brokers) through which the Fund trades. The Fund was organized on August 21, 1997 and commenced trading on November 20, 1997. B. METHOD OF REPORTING The Fund's financial statements are presented in accordance with generally accepted accounting principles, which require the use of certain estimates made by the Fund's management. Transactions are accounted for on the trade date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts (the difference between contract purchase price and market price) are reported in the statement of financial condition as a net gain or loss, as there exists a right of offset of unrealized gains or losses in accordance with Financial Accounting Standards Board Interpretation No. 39 -- "Offsetting of Amounts Related to Certain Contracts." Any change in net unrealized gain or loss from the preceding period is reported in the statement of operations. For purposes of both financial reporting and calculation of redemption value, Net Asset Value per Unit is calculated by dividing Net Asset Value by the total number of Units outstanding. C. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash and short-term investments in fixed income securities. D. BROKERAGE COMMISSIONS Brokerage commissions include other trading fees and are charged to expense when contracts are opened. ---------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -59- 62 PROFUTURES LONG/SHORT GROWTH FUND, L.P. NOTES TO FINANCIAL STATEMENTS (continued) for the nine months ended September 30, 1998 (unaudited) and for the period August 21, 1997 (inception) to December 31, 1997 (audited) - -------------------------------------------------------------------------------- NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. INCOME TAXES The Fund prepares calendar year U.S. and state information tax returns and reports to the partners their allocable shares of the Fund's income, expenses and trading gains or losses. F. ORGANIZATIONAL CHARGE The General Partner pays all organizational and offering costs of the Fund. As reimbursement for such costs, the General Partner (or the Distributor, ProFutures Financial Group, Inc., a broker/dealer affiliate of the General Partner) receives an organizational charge of 1% of the subscription amount of each subscriber to the Fund. Additions are reflected in the statement of changes in partners' capital (net asset value) net of such organizational charge totaling $94,591 for the nine months ended September 30, 1998 and $30,315 for the period August 21, 1997 (inception) to December 31, 1997. G. STATEMENTS OF CASH FLOWS The Fund has elected not to provide statements of cash flows as permitted by Statement of Financial Accounting Standards No. 102 -- "Statement of Cash Flows -- Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale." NOTE 2. GENERAL PARTNER The General Partner of the Fund is ProFutures, Inc., which conducts and manages the business of the Fund. The Limited Partnership Agreement requires the General Partner to maintain a capital account equal to at least 1% of the total capital of the Fund. The General Partner is paid a monthly management fee equal to 1/4 of 1% (3% annually) of month-end Net Assets (as defined in the Limited Partnership Agreement). NOTE 3. COMMODITY TRADING ADVISOR The Fund has an advisory contract with Hampton Investors, Inc. ("Hampton") pursuant to which the Fund pays a quarterly incentive fee equal to 20% of New Trading Profits (as defined in the advisory contract). ---------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -60- 63 PROFUTURES LONG/SHORT GROWTH FUND, L.P. NOTES TO FINANCIAL STATEMENTS (continued) for the nine months ended September 30, 1998 (unaudited) and for the period August 21, 1997 (inception) to December 31, 1997 (audited) - -------------------------------------------------------------------------------- NOTE 4. DEPOSITS WITH BROKER The Fund deposits funds with ING (U.S.) Securities, Futures & Options Inc. to act as broker subject to Commodity Futures Trading Commission regulations and various exchange and broker requirements. The Fund earns interest income on its cash deposited with the broker. Margin requirements are satisfied by the deposit of cash with such broker, and at September 30, 1998 and December 31, 1997, substantially all of the cash deposited with the broker was used to satisfy such margin requirements. NOTE 5. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS Investments in the Fund are made by subscription agreement, subject to acceptance by the General Partner. The subscriptions receivable at December 31, 1997 of $69,694 were received by the Fund on or before January 7, 1998. The Fund is not required to make distributions, but may do so at the sole discretion of the General Partner. A Limited Partner may require the Fund to redeem any or all of such Limited Partner's units at the Net Asset Value as of the close of business on the last day of any month upon advance written notice to the General Partner. The Limited Partnership Agreement contains a complete description of the Fund's redemption policies and procedures. NOTE 6. TRADING ACTIVITIES AND RELATED RISKS The Fund engages in the speculative trading of stock index futures contracts ("derivatives") on U.S. exchanges. The Fund is exposed to both market risk, the risk arising from changes in the market value of the contracts, and credit risk, the risk of failure by another party to perform according to the terms of a contract. Purchase and sale of futures contracts requires margin deposits with the broker. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires a broker to segregate all customer transactions and assets from such broker's proprietary activities. A customer's cash and other property (for example, U.S. Treasury bills) deposited with a broker are considered commingled with all other customer funds subject to the broker's segregation requirements. In the event of a broker's insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than total cash and other property deposited. The Fund has a substantial portion of its assets on deposit with financial institutions in connection with its cash management activities. In the event of a financial institution's insolvency, recovery of Fund assets on deposit may be limited to account insurance or other protection afforded such deposits. In the normal course of business, the Fund does not require collateral from such financial institutions. ---------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -61- 64 PROFUTURES LONG/SHORT GROWTH FUND, L.P. NOTES TO FINANCIAL STATEMENTS (continued) for the nine months ended September 30, 1998 (unaudited) and for the period August 21, 1997 (inception) to December 31, 1997 (audited) - -------------------------------------------------------------------------------- NOTE 6. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED) For derivatives, risks arise from changes in the market value of the contracts. Theoretically, the Fund is exposed to a market risk equal to the value of futures contracts purchased and unlimited liability on such contracts sold short. The fair value of derivatives represents unrealized gains and losses on open futures contracts. The average fair value of derivatives for the nine months ended September 30, 1998 and for the period November 20, 1997 (commencement of trading) to December 31, 1997 was approximately $340,000 and $30,000, respectively, and the related values at September 30, 1998 and December 31, 1997 were approximately $(977,000) and $2,000, respectively. Net trading results from derivatives for the nine months ended September 30, 1998 and for the period August 21, 1997 (inception) to December 31, 1997 are reflected in the statement of operations and equal gain (loss) from trading less brokerage commissions. Such trading results reflect the net gain (loss) arising from the Fund's speculative trading of futures contracts. Open contracts generally mature within three months; however, the Fund intends to close all contracts prior to maturity. At September 30, 1998, the maturity date for all open contracts is December 1998, and at December 31, 1997, the maturity date for all open contracts is March 1998. At September 30, 1998 and December 31, 1997, the notional amount of open contracts to purchase totaled approximately $40,700,000 and $5,600,000, respectively, and there were no open contracts to sell. These amounts do not represent the Fund's risk of loss due to market and credit risk, but rather represent the Fund's extent of involvement in derivatives at the date of the statement of financial condition. The General Partner has established procedures to actively monitor and minimize market and credit risk, although there can be no assurance that they will, in fact, succeed in doing so. The General Partner's basic market risk control procedures consist of continuously monitoring Hampton's trading activity with the actual market risk controls being applied by Hampton itself. The General Partner seeks to minimize credit risk primarily by depositing and maintaining the Fund's assets at financial institutions and brokers which the General Partner believes to be credit worthy. The Limited Partners bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received. ---------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -62- 65 PROFUTURES LONG/SHORT GROWTH FUND, L.P. NOTES TO FINANCIAL STATEMENTS (continued) for the nine months ended September 30, 1998 (unaudited) and for the period August 21, 1997 (inception) to December 31, 1997 (audited) - -------------------------------------------------------------------------------- NOTE 7. SUBSEQUENT EVENTS The General Partner of the Fund commenced procedures to register the Fund's units with the Securities and Exchange Commission under the Securities Act of 1933. The General Partner filed an initial Registration Statement on Form S-1 in September 1998. In connection with this registration, the General Partner anticipates amending and restating the Limited Partnership Agreement to comply with state law guidelines regarding publicly offered commodity pools. No substantive changes to the provisions of the existing Limited Partnership Agreement are anticipated in connection with its amendment and restatement. On December 8, 1998, the Fund changed its name from ProFutures Bull & Bear Fund, L.P. to ProFutures Long/Short Growth Fund, L.P. NOTE 8. INTERIM FINANCIAL STATEMENTS The statement of financial condition as of September 30, 1998 and the statements of operations and changes in partners' capital (net asset value) for the nine months ended September 30, 1998 are unaudited. In the opinion of management, such financial statements reflect all adjustments, which were of a normal and recurring nature, necessary for a fair presentation of financial position as of September 30, 1998 and the results of operations for the nine months ended September 30, 1998. ---------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -63- 66 INDEPENDENT AUDITOR'S REPORT TO THE STOCKHOLDERS AND BOARD OF DIRECTORS PROFUTURES, INC. We have audited the accompanying balance sheet of ProFutures, Inc. as of June 30, 1998. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of ProFutures, Inc. as of June 30, 1998, in conformity with generally accepted accounting principles. ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C. August 21, 1998 Lutherville, Maryland -64- 67 PROFUTURES, INC. BALANCE SHEETS September 30, 1998 (Unaudited) and June 30, 1998 (Audited)
SEPTEMBER 30, JUNE 30, 1998 1998 (UNAUDITED) (AUDITED) ------------ ------------ ASSETS Cash and cash equivalents $ 346,089 $ 420,231 Management fees receivable 276,858 237,248 General partner interests in commodity pools 350,435 308,679 Other assets 20,115 8,574 ------------ ------------ 993,497 974,732 ------------ ------------ Fixed Assets Furniture and fixtures 40,018 13,866 Office equipment 135,332 122,124 Leasehold improvements 28,398 1,900 ------------ ------------ 203,748 137,890 Less: Accumulated depreciation 141,258 128,906 ------------ ------------ 62,490 8,984 ------------ ------------ Total assets $ 1,055,987 $ 983,716 ============ ============ LIABILITIES Accounts payable $ 148,558 $ 14,952 Franchise tax payable 28,457 17,530 ------------ ------------ Total liabilities 177,015 32,482 ------------ ------------ STOCKHOLDERS' EQUITY Common stock - no par value; 1,000,000 shares authorized; 5,251 shares issued and outstanding 1,000 1,000 Retained earnings 877,972 950,234 ------------ ------------ Total stockholders' equity 878,972 951,234 ------------ ------------ Total liabilities and stockholders' equity $ 1,055,987 $ 983,716 ============ ============
See accompanying notes. PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -65- 68 PROFUTURES, INC. NOTES TO BALANCE SHEETS -------------------- NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. GENERAL ProFutures, Inc. (the "Company") is a Texas corporation, organized on December 3, 1984, which specializes in speculative managed futures accounts. The Company is a Commodity Trading Advisor, Commodity Pool Operator and a Guaranteed Introducing Broker registered with and subject to the regulations of the Commodity Futures Trading Commission, an agency of the United States government which regulates most aspects of the commodity futures industry. It is also a member of and subject to the rules of the National Futures Association, an industry self-regulatory organization. B. METHOD OF ACCOUNTING The balance sheets are presented in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheets. Actual results could differ from those estimates, and such differences may be material to the financial statements. C. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and a money market mutual fund account. D. MANAGEMENT FEES Management fees are accrued based on the terms of the related agreements. E. GENERAL PARTNER INTERESTS IN COMMODITY POOLS The Company is the general partner or co-general partner of several commodity pools formed as limited partnerships, collectively referred to as partnerships. The Company's investments in partnerships are carried at its share of the underlying equity in the net asset value of the limited partnerships. The partnerships carry their assets and liabilities at fair value as required by generally accepted accounting principles for such entities. As a general partner, the Company has a fiduciary responsibility to the limited partnerships and potential liability beyond amounts recognized as an asset in the balance sheets. PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -66- 69 PROFUTURES, INC. NOTES TO BALANCE SHEETS (CONTINUED) -------------------- NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. FIXED ASSETS Fixed assets are stated at cost. Depreciation and amortization is provided for using straight-line and accelerated methods with lives that range from 5 to 31 years. G. INCOME TAXES The Company has elected "S" corporation status under the Internal Revenue Code, pursuant to which the Company does not pay U.S. corporate income tax on its taxable income. Instead, the stockholders are liable for individual income tax on the Company's taxable income. However, the Company is liable for Texas Franchise tax, which has been reflected in the balance sheets. NOTE 2. GENERAL PARTNER INTERESTS IN COMMODITY POOLS ProFutures, Inc. is a general partner and commodity pool operator of ATA Research/ProFutures Diversified Fund, L.P., Alternative Asset Growth Fund, L.P. and ProFutures Long/Short Growth Fund, L.P. (formerly, ProFutures Bull & Bear Fund, L.P.), collectively referred to as partnerships. Summarized activity for the Company's investments in partnerships is as follows:
ATA Research/ Alternative ProFutures ProFutures Diversified Asset Growth Long/Short Growth Fund, L.P. Fund, L.P. Fund, L.P. ---------------------- ------------ ----------------- Net asset value at December 31, 1997 $ 131,712 $ 119,749 $ 29,313 Additions 0 0 37,158 Net income (loss) for the six months ended June 30, 1998 (9,790) (7,570) 8,107 ------------ ------------ ------------ Net asset value at June 30, 1998 $ 121,922 $ 112,179 $ 74,578 Net income for the three months ended September 30, 1998 19,350 17,808 4,598 ------------ ------------ ------------ Net asset value at September 30, 1998 $ 141,272 $ 129,987 $ 79,176 ============ ============ ============
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -67- 70 PROFUTURES, INC. NOTES TO BALANCE SHEETS (CONTINUED) NOTE 2. GENERAL PARTNER INTERESTS IN COMMODITY POOLS (CONTINUED) Summarized financial information with respect to the partnerships as of and for the nine months ended September 30, 1998 and the six months ended June 30, 1998 is as follows:
September 30, 1998 ------------------------------------------------------------- ATA Research/ Alternative ProFutures ProFutures Diversified Asset Growth Long/Short Growth Fund, L.P. Fund, L.P. Fund, L.P. ---------------------- ------------ ----------------- Balance Sheet Data Assets $ 87,830,751 $ 17,101,285 $ 12,833,654 Liabilities (2,763,430) (592,579) (44,769) -------------- -------------- -------------- Net Asset Value $ 85,067,321 $ 16,508,706 $ 12,788,885 ============== ============== ============== Operating Data Total income $ 14,183,494 $ 3,241,634 $ 865,316 Total expenses (8,770,137) (1,980,946) (359,763) -------------- -------------- -------------- Net income $ 5,413,357 $ 1,260,688 $ 505,553 ============== ============== ==============
June 30, 1998 ------------------------------------------------------ Balance Sheet Data Assets $ 78,935,514 $ 15,423,257 $ 7,403,045 Liabilities (2,189,548) (776,391) (39,154) -------------- -------------- -------------- Net Asset Value $ 76,745,966 $ 14,646,866 $ 7,363,891 ============== ============== ============== Operating Data Total income (loss) $ (1,145,101) $ 194,655 $ 1,088,962 Total expenses (5,266,614) (1,217,047) (265,123) -------------- -------------- -------------- Net income (loss) $ (6,411,715) $ (1,022,392) $ 823,839 ============== ============== ==============
For managing the businesses of the partnerships, the Company earns management fees and administrative fees based on the terms of the respective limited partnership agreements. September 30, 1998 and June 30, 1998 management fees receivable represent management fees owed by the partnerships for the months of September, 1998 and June, 1998, respectively. The agreements of limited partnership of ATA Research/ProFutures Diversified Fund, L.P. and Alternative Asset Growth Fund, L.P. requires the Company to maintain in the aggregate a net worth not less than the sum of (i) the lesser of $250,000 or 15% of the aggregate capital contributions of any limited partnership for which it acts as a general partner or co-general partner if such contributions are equal to or less than $2,500,000; and (ii) 10% of the aggregate capital contributions of any limited partnership for which it shall act as a general partner or co-general partner if such contributions exceed $2,500,000. PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -68- 71 PROFUTURES, INC. NOTES TO BALANCE SHEETS (CONTINUED) ---------------- NOTE 2. GENERAL PARTNER INTERESTS IN COMMODITY POOLS (CONTINUED) The Company has callable subscription agreements with Internationale Nederlanden (U.S.) Securities, Futures & Options Inc. (ING), whereby ING agrees to purchase or subscribe, up to $14,000,017, for the number of shares of common stock of the Company necessary to maintain these general partner net worth requirements. In the opinion of the Company's management, ING has the ability to meet its obligations under such callable subscription agreements and, accordingly, the Company is in compliance with such net worth requirements as of September 30, 1998 and June 30, 1998. ING is the broker for the partnerships for which the Company is the general partner. The agreements of limited partnership also require the Company to maintain minimum investments in the partnerships. NOTE 3. RELATED PARTIES The Company is one of a group of corporations that are commonly controlled. The Company shares facilities and other resources with these corporations, which are related through common ownership and management. A portion of the costs for these shared facilities and other resources are paid for by the Company and allocated to such affiliated entities. NOTE 4. TRADING ACTIVITIES AND RELATED RISKS The partnerships for which the Company is either the sole general partner or co-general partner engage in the speculative trading of U.S. and foreign futures contracts and options on U.S. and foreign futures contracts (collectively, "derivatives"). These derivatives include both financial and non-financial contracts held as part of a diversified trading strategy. ProFutures Long/Short Growth Fund, L.P. engages primarily in the speculative trading of stock index futures contracts. The partnerships are exposed to both market risk, the risk arising from changes in the market value of the contracts and credit risk, the risk of failure by another party to perform according to the terms of a contract. Theoretically, the partnerships and the Company, as a general partner are exposed to a market risk equal to the notional value of futures contracts purchased and unlimited liability on such contracts sold short. As both a buyer and seller of options, the partnerships pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the partnerships and the Company, as a general partner, to potentially unlimited liability, and purchased options expose the partnerships to a risk of loss limited to the premiums paid. The average fair value of derivatives held by the partnerships during the nine months ended September 30, 1998 was approximately $3,210,000, and the fair values as of September 30, 1998 and June 30, 1998 are approximately $6,188,000 and $1,245,000, respectively. The fair value of derivatives represents unrealized gains and losses on open futures contracts and long and short options at market value. At September 30, 1998 June 30, 1998, the notional amounts of the partnerships' open contracts are as follows:
September 30, 1998 June 30, 1998 --------------------------------- --------------------------------- Contracts to Contracts to Contracts to Contracts to Purchase Sell Purchase Sell -------------- -------------- -------------- -------------- Derivatives (excluding purchased options) $ 952,500,000 $ 330,000,000 $ 914,000,000 $ 673,150,000 Purchased options 3,700,000 2,500,000 15,200,000 8,500,000
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -69- 72 PROFUTURES, INC. NOTES TO BALANCE SHEETS (CONTINUED) ---------------- NOTE 4. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED) The above amounts do not represent the partnerships' risk of loss due to market and credit risk, but rather represent the partnerships' extent of involvement in derivatives at the balance sheet dates. The Company, as general partner or co-general partner, has established procedures to actively monitor and minimize market and credit risks. NOTE 5. LEASE COMMITMENT The Company leases space in an office building in Austin, Texas under a lease expiring September 30, 2003. At September 30, 1998, the annual minimum future lease payments are $84,429, totaling $422,147 over the term of the lease. NOTE 6. INTERIM FINANCIAL STATEMENTS The balance sheet as of September 30, 1998 is unaudited. In the opinion of management, such financial statement reflects all adjustments, which were of a normal and recurring nature, necessary for a fair presentation of financial position as of September 30, 1998. PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -70- 73 EXHIBIT A PROFUTURES LONG/SHORT GROWTH FUND, L.P. FORM OF SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT DATED AS OF ______, 1998 PROFUTURES, INC. GENERAL PARTNER 74 PROFUTURES LONG/SHORT GROWTH FUND, L.P. FORM OF SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT TABLE OF CONTENTS
PAGE ---- 1. Continuation and Name.................................................................... LPA-1 2. Principal Office......................................................................... LPA-1 3. Business................................................................................. LPA-1 4. Term, Fiscal Year and Net Assets......................................................... LPA-1 (a) Term............................................................................. LPA-1 (b) Fiscal Year...................................................................... LPA-2 (c) Net Assets....................................................................... LPA-2 5. Net Worth of General Partner............................................................. LPA-2 6. Capital Contributions.................................................................... LPA-2 7. Allocation of Profits and Losses......................................................... LPA-3 (a) Capital Accounts ................................................................ LPA-3 (b) Allocations; Valuation Dates..................................................... LPA-3 (c) Allocation of Profit and Loss for Federal Income Tax Purposes.................... LPA-3 (d) Expenses......................................................................... LPA-5 (e) Limited Liability of Limited Partners............................................ LPA-6 8. Management of the Fund................................................................... LPA-6 (a) General.......................................................................... LPA-6 (b) Fiduciary Duties................................................................. LPA-7 (c) Brokerage Arrangements........................................................... LPA-8 (d) Loans; Investments............................................................... LPA-8 (e) Certain Conflicts of Interest Prohibited......................................... LPA-8 (f) Certain Agreements.............................................................. LPA-8 (g) No "Pyramiding".................................................................. LPA-8 (h) Other Activities................................................................. LPA-8 9. Audits and Reports........................................................................ LPA-8 10. Assigning Units........................................................................... LPA-9 11. Redeeming Units........................................................................... LPA-10 12. Offering of Units ........................................................................ LPA-11 13. Power of Attorney......................................................................... LPA-11 14. Withdrawal of a Partner................................................................... LPA-11 15. Standard of Liability; Indemnification.................................................... LPA-12 (a) Standard of Liability for the General Partner.................................... LPA-12 (b) Indemnification of the General Partner by the Fund............................... LPA-12 (c) Indemnification of the Fund by the Partners...................................... LPA-13 16. Amendments; Meetings...................................................................... LPA-14 (a) Amendments with Consent of the General Partner................................... LPA-14 (b) Amendments and Actions without Consent of the General Partner.................... LPA-14 (c) Meetings; Other Voting Matters................................................... LPA-14 17. Benefit Plan Investors.................................................................... LPA-15 18. GOVERNING LAW............................................................................. LPA-16 19. Miscellaneous............................................................................. LPA-16 (a) Notices......................................................................... LPA-16 (b) Binding Effect................................................................... LPA-16 (c) Captions......................................................................... LPA-16 (d) Close of Business................................................................ LPA-16
---------------------------------------------- PROFUTURES, INC. GENERAL PARTNER LPA-(i) 75 PROFUTURES LONG/SHORT GROWTH FUND, L.P. SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT THIS SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (this "Agreement") is made as of _________, 1998, by and among PROFUTURES, INC., a Texas corporation, as general partner (the "General Partner"), and each other party who shall execute a counterpart of this Limited Partnership Agreement as a limited partner or who becomes a party to this agreement as a limited partner by execution of a Subscription Agreement and Power of Attorney or other instrument or otherwise and who is shown on the books and records of the Partnership as a limited partner (individually, a "Limited Partner" and collectively, "Limited Partners") (the General Partner and Limited Partners are collectively referred to herein as "Partners"). WITNESSETH: 1. CONTINUATION AND NAME. The parties hereby form and continue PROFUTURES LONG/SHORT GROWTH FUND, L.P. (the "Fund"), formerly, ProFutures Bull & Bear Fund, L.P., under the Delaware Revised Uniform Limited Partnership Act (the "Act"). This Agreement amends and restates all previous Limited Partnership Agreements of the Fund. 2. PRINCIPAL OFFICE. The principal office of the Fund is c/o the General Partner, 11612 Bee Cave Road, Suite 100, Austin, Texas 78733. The registered office and agent for service of process in the State of Delaware is c/o Corporation Service Company, 1013 Centre Road, Wilmington, New Castle County, Delaware 19805. 3. BUSINESS. The Fund's business and purpose is to trade, buy, sell or otherwise acquire, hold or dispose of futures contracts on commodities, financial instruments and currencies, spot and forward currency contracts, commodities and options on any of the foregoing, and to engage in all activities incidental thereto on domestic and foreign exchanges and/or through over-the-counter markets. The objective of the Fund's business is appreciation of its assets through speculative trading. The Fund may engage in such business directly or through partnerships, joint ventures or similar arrangements; provided, however, that the Limited Partners' rights granted under this agreement shall not be impaired should the Fund enter any partnership, joint venture or similar business arrangement. 4. TERM, FISCAL YEAR AND NET ASSETS. (a) Term. The Fund began on August 21, 1997 and will dissolve on the earlier of: (1) December 31, 2035; (2) receipt by the General Partner of 90 days' notice to dissolve from Limited Partners owning more than 50% of the outstanding Units; (3) withdrawal, insolvency or dissolution of the General Partner, or any other event that causes the General Partner to cease to be a general partner of the Fund unless (i) at the time of such event there is at least one remaining general partner of the Fund who carries on the business of the Fund, or (ii) within 90 days after such event a majority in interest of the Limited Partners agree in writing to continue the business of the Fund and to the appointment, effective as of the date of such event, of one or more general partners of the LPA-1 76 Fund; (4) dissolution of the Fund as otherwise provided in this Agreement; or (5) any other event requiring dissolution. Upon dissolution of the Fund, the General Partner, or another person approved by a majority of the Units, shall act as liquidator trustee. (b) Fiscal Year. January 1 through December 31. (c) Net Assets. The "Net Assets" of the Fund are its assets less its liabilities, determined in accordance with Generally Accepted Accounting Principles, including any unrealized profits and losses on its open positions. More specifically, the Net Asset Value of the Fund equals the sum of all cash, the liquidating value (or cost of liquidation, as the case may be) of all futures and options on futures positions and the fair market value of all other assets of the Fund, less all liabilities of the Fund (including accrued liabilities, irrespective of whether such liabilities -- for example, incentive fees -- may in fact never be paid), in each case as determined by the General Partner generally in accordance with Generally Accepted Accounting Principles. The General Partner's interest in the Fund shall be represented by Units of General Partnership Interest. Interests in the Fund, other than the Units of General Partnership Interest of the General Partner, shall be Units of Limited Partnership Interest ("Units" or, individually, a "Unit"). The "Net Asset Value per Unit" shall mean the Net Assets divided by the number of Units outstanding. The Fund may issue an unlimited number of Units of Limited Partnership Interest at the Net Asset Value per Unit. 5. NET WORTH OF GENERAL PARTNER. The General Partner agrees that it will maintain a net worth of not less than the greater of $50,000 or at least 5% of the total contributions to the Fund and all other partnerships of which the General Partner is general partner. For these purposes, Net Worth shall be calculated in accordance with generally accepted accounting principles, consistently applied, with all current assets valued at then current fair market values, and may include promissory notes or stock subscriptions issued to the General Partner by its affiliates or other persons, including the Fund's commodity broker. In no event shall the General Partner be required to maintain a net worth in excess of $1,000,000. This net worth agreement may be modified if such change meets applicable state securities laws or guidelines. 6. CAPITAL CONTRIBUTIONS. The General Partner and/or its principals and affiliates shall make contributions to the capital of the Fund in amounts which equal at least 1% of the aggregate capital contributions to the Fund (including the General Partner's contribution). The General Partner and/or its principals and affiliates shall not reduce by withdrawal the aggregate interest in the capital of the Fund to less than a 1% interest in the capital, income and losses of the Fund from time to time. The General Partner and/or its principals and affiliates may withdraw any portion of its interest in the Fund which is in excess of its required interest described above. The Partners' contributions to the capital of the Fund shall be as shown in the books and records of the Fund. The General Partner may on behalf of the Fund admit additional Limited Partners to the Fund in compliance with applicable law and may issue and sell Units to them. After the admission of each new Partner, the General Partner's (and its principals and affiliates) interest in the capital, income and losses of the Fund shall always be at least 1%. The General Partner is authorized to take such action and make such arrangements for the issue and sale of such Units, if any, as it deems appropriate. LPA-2 77 All Units subscribed for upon receipt of a check or draft of the subscriber are issued subject to the collection of the funds represented by such check or draft. In the event a check or draft of a subscriber for Units representing payment for Units is returned unpaid, the Fund shall cancel the Units issued to such subscriber represented by such returned check or draft. Any losses or profits sustained by the Fund in connection with the Fund's commodity trading allocable to such canceled Units shall be deemed an increase or decrease in Net Assets and allocated among the remaining Partners as described in Section 7. The Fund may require a Partner to reimburse the Fund for any expense or loss (including any trading loss) incurred in connection with the issuance and cancellation of any such Limited Partnership Interests issued to him. The Partners' respective capital contributions shall be as shown on the books and records of the Fund. 7. ALLOCATION OF PROFITS AND LOSSES. (a) Capital Accounts. A capital account shall be established for each Partner. The initial balance of each capital account shall be the amount initially contributed to the Fund with respect to Units allocated to that account, net of organizational or other similar charges. For purposes of this Section, the general partnership interest of the General Partner shall be treated on a Unit-equivalent basis. (b) Allocations; Valuation Dates. As of the close of business (as determined by the General Partner) on the last day of each month and on each redemption date (including any Special Redemption Date), the following determinations and allocations shall be made. (1) The Net Assets of the Fund shall be determined. (2) Any increase or decrease in the Net Assets of the Fund as compared to the last such determination of Net Assets shall be credited or charged to the capital accounts of each Partner in the ratio that the balance of each account bears to the balance of all accounts. (3) The amount of any distribution to a Partner, any amount paid upon redemption of Units and any amount paid to the General Partner on withdrawal of its interest in the Fund shall be charged to the Partner's capital account. (4) The Net Asset Value of a Unit shall be determined. (c) Allocation of Profit and Loss for Federal Income Tax Purposes. As of the end of each fiscal year, the Fund's profit or loss shall be allocated among the Partners for federal income tax purposes pursuant to the following subparagraphs. If the allocations contained herein were determined to lack "substantial economic effect," each Limited Partner's distributive share of items of Fund income, gain, loss, deduction or credit shall be determined in accordance with such Partner's interest in the Fund (taking into account all the facts and circumstances). (1) Items of operating income, including, without limitation, interest and items of operating expense, including, if applicable, legal, accounting and administrative expenses shall be allocated to each Partner by allocating such items which accrued during each month among the persons who were Partners during such month in the ratio that each such Partner's capital account bears to all such Partners' capital accounts at the end of such month. LPA-3 78 (2) Net realized capital gain or loss and any net gain or loss from Section 988 of the Internal Revenue Code of 1986, as amended (the "Code"), transactions associated with the Fund's trading activities shall be allocated in the following manner: (aa) For the purpose of allocating the Fund's net realized capital gain or loss and any net gain or loss from Code Section 988 among the Partners, there shall be established a tax allocation account with respect to each outstanding Unit. The initial balance of each allocation account shall be the amount paid to the Fund for the Units (net of any organization and offering charges). Allocation accounts shall be adjusted as of the end of each fiscal year as follows. (i) Each allocation account shall be increased by the amount of income allocated to the holder of the Unit with respect to the Unit pursuant to subparagraph (c)(1) above and subparagraphs (bb) and (cc) below. (ii) Each allocation account shall be decreased by the amount of expense or loss allocated to the holder of the Unit with respect to the Unit pursuant to subparagraphs (c)(1) above and subparagraphs (dd) and (ee) below and by the amount of any distribution the holder of the Unit has received with respect to the Unit (other than on redemption of the Unit). (iii) When a Unit is redeemed, the allocation account with respect to such Unit shall be eliminated. (bb) Net realized capital gain shall be allocated first to each Partner who has redeemed a Unit during the fiscal year up to the excess, if any, of the amount received upon redemption of the Unit over the allocation account attributable to the redeemed Unit. If the gain to be so allocated to all Partners who have redeemed Units during a fiscal year is less than the excess of all such amounts received upon redemption over all such allocation accounts, the entire capital gain for such fiscal year shall be allocated among all such Partners in the ratio that each such Partner's excess bears to the aggregate excess of all such Partners who redeemed Units during such fiscal year. (cc) Net realized capital gain remaining after the allocation thereof pursuant to subparagraph (bb) shall be allocated next among all Partners whose capital accounts are in excess of the Units' tax allocation accounts (after the adjustments in subsection (bb)) in the ratio that each such Partner's excess bears to all such Partners' excesses. In the event that gain to be allocated pursuant to this subsection (cc) is greater than the excess of all such Partners' capital accounts over all such allocation accounts, the excess will be allocated among all Partners in the ratio that each Partner's capital account bears to all Partners' capital accounts. (dd) Net realized capital loss shall be allocated first to each Partner who has redeemed a Unit during the fiscal year up to the excess, if any, of the allocation account attributable to the redeemed Unit over the amount received upon redemption of the Unit. If the loss to be so allocated to all Partners who have redeemed Units during a fiscal year is less than the excess of all such allocation accounts over all such amounts received upon redemption, the entire capital loss for such fiscal year shall be allocated among all such Partners in the ratio that each such LPA-4 79 Partner's excess bears to the aggregate excess of all such Partners who redeemed Units during such fiscal year. (ee) Net realized capital loss remaining after the allocation thereof pursuant to subsection (dd) shall be allocated next among all Partners whose tax allocation accounts (after the adjustments in subsection (dd)) are in excess of their capital accounts in the ratio that each such Partner's excess bears to all such Partners' excesses. In the event that loss to be allocated pursuant to this subsection (ee) is greater than the excess of all such allocation accounts over all such Partners' capital accounts, the excess loss will be allocated among all Partners in the ratio that each Partner's capital account bears to all Partners' capital accounts. (ff) In the event that Units have been assigned with the consent of the General Partner, the allocations prescribed by this Section 7(c) shall be made with respect to such Units without regard to the assignment except that in the year of assignment the allocations prescribed by Section 7(c)(1) shall be divided between the assignor and the assignee based on the number of whole months each held the assigned Units. For purposes of this Section 7(c), tax allocations shall be made to the General Partner's general partnership interest on a Unit-equivalent basis. (gg) The allocations of profit and loss to the Partners in respect of the Units shall not exceed the allocations permitted under Subchapter K of the Code, as determined by the General Partner, whose determination shall be binding. The purpose of the foregoing allocations is to allocate taxable income so as nearly as possible to have Limited Partners' tax basis accounts equal to their capital accounts as provided by the Code, including without limitation a "Qualified Income Offset." (3) For the purposes of this Section 7(c), net realized capital gain or loss shall include any gain or loss required to be taken into account under Section 1256 of the Code. (d) Expenses. Operating, administration and all other expenses and liabilities of the Fund shall be paid by the Fund. The General Partner shall be reimbursed for any such expenses incurred on behalf of the Fund. The Fund shall pay any extraordinary charges (such as taxes) incidental to its trading or otherwise. The General Partner shall be entitled to charge Limited Partners upon admission to the Fund an organizational charge of 1% of Net Asset Value to reimburse the General Partner or an affiliate thereof for any and all costs and expenses paid by it which are related to the organization of the Fund, as well as the initial and any future offering of Units. Such organizational and offering expenses shall include all expenses incurred by the Fund in connection with and in preparing the Fund's Units for registration or exemption therefrom, and subsequently offering and distributing its Units to investors, on a public or private basis including, but not limited to, expenses for printing, engraving, mailing, charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, expenses of qualification of the sale of its Units under federal and state law, including taxes and fees, accountants' and attorneys' fees. The Fund shall pay to the General Partner a management fee equal to 1/4 of 1% of month-end Net Assets (3% annually). Net Assets for this purpose are calculated after brokerage commissions, operating and administrative expenses and incentive fees paid or accrued as of such month-end. The management fee shall be accrued as required herein and paid as soon as practicable, but no later than the end of the month following the month in which the fee accrued. The LPA-5 80 management fee will be pro-rated for partial periods and any interim capital contributions and capital withdrawals. The Fund shall pay all routine charges incidental to trading (including, without limitation, brokerage commissions, exchange, clearinghouse, regulatory, floor brokerage and "give-up" fees) and any extraordinary charges incidental to trading (for example insurance or delivery charges). The General Partner shall be reimbursed promptly for any operating, administration and other expenses and liabilities incurred on behalf of the Fund. None of the General Partner's "overhead" expenses (including, but not limited to, salaries, rent and travel expenses) may be charged to the Fund. The General Partner pays the costs of the continuous offering of the Units. The General Partner pays the selling commissions (if any) and ongoing compensation due on the Units. Any goods and services provided to the Fund by the General Partner shall be provided at rates and terms at least as favorable as those which may be obtained from third parties in arm's-length negotiations. All of the expenses which are for the Fund's account shall be billed directly to the Fund. The Fund will pay any taxes applicable to it and any charges incidental to its trading. The Fund's brokerage commissions shall not exceed 14% of the Fund's average month-end Net Assets during the preceding year. The Fund's organizational and offering expenses, including underwriting compensation paid to selling agents, shall not exceed 15% of the capital contributions to the Fund. No item of compensation, as described in Section IV.C. of the North American Securities Administrators Association, Inc. Guidelines (the "NASAA Guidelines"), paid by the Fund to any party may be increased without prior written notice to Limited Partners within sufficient time for them to redeem prior to such increase becoming effective. Such notification shall contain a description of Limited Partners' voting and redemption rights as well as a description of any material effect of such increase. (e) Limited Liability of Limited Partners. Each Unit, when purchased in accordance with this Agreement, shall be fully-paid and nonassessable, except as otherwise provided by law. Any provisions of this Limited Partnership Agreement to the contrary notwithstanding, no Limited Partner shall be liable for Fund obligations in excess of the capital contributed by him, plus his share of undistributed profits and assets (including his obligation, as required by law, under certain circumstances to return to the Fund distributions and returns of contributions). 8. MANAGEMENT OF THE FUND. (a) General. The General Partner shall manage the business of the Fund. The General Partner shall determine what distributions, if any, shall be made to the Partners. LPA-6 81 The General Partner may take such actions relating to the business of the Fund as the General Partner deems necessary or advisable and which are consistent with the terms of this Agreement. In addition to any specific contract or agreements described herein, the Fund, and the General Partner on behalf of the Fund, may enter into any other contracts or agreements specifically described in or contemplated by the Prospectus for the Units current at the time the General Partner entered into such contract (the "Prospectus") without any further act, approval or vote of any Partner other than the General Partner, notwithstanding any other provisions of this Agreement, the Act or any applicable law, rule or regulations; provided, however, that such contracts or agreements are entered only in the normal course of the Fund's business as described in the Prospectus. The General Partner is specifically authorized, without limitation, by each Limited Partner to enter into the cash management arrangements described under "Use of Proceeds, Interest Income Arrangements" in the Prospectus. The General Partner is hereby specifically authorized to enter into, deliver and perform on behalf of the Fund, the business arrangements referred to in the Prospectus. The General Partner may engage such persons as the General Partner in its sole judgment shall deem advisable for operating the business of the Fund; provided, that no such arrangement shall allow brokerage commissions above those described in the Prospectus or permitted under applicable NASAA Guidelines in effect as of the date of the Prospectus, whichever is higher. Any material change in the Fund's basic investment policies or structure requires the approval of a majority of the Units. The General Partner is the "tax matters partner" of the Fund. The General Partner has authority to cause the Fund to take such actions as it may deem appropriate, subject to the fiduciary obligations and other restrictions applicable to the General Partner as general partner of the Fund. (b) Fiduciary Duties. The General Partner shall be under a fiduciary duty to conduct the affairs of the Fund in the best interests of the Fund, provided that the General Partner shall not be obligated to engage in any conduct on behalf of the Fund to the detriment of any other commodity pool to which the General Partner owes similar fiduciary duties. The Limited Partners will under no circumstances be deemed to have contracted away the fiduciary obligations owed to them by the General Partner under the common law. The General Partner shall have fiduciary responsibility for, among other things, the safekeeping and use of all Fund assets, whether or not in its immediate control; and the General Partner shall not employ, or permit another to employ, such assets other than for the benefit of the Fund. The interest arrangements with the Futures Broker shall not be deemed a violation of the General Partner's fiduciary duties provided they comply with NASAA Guideline IV.C.4.a (2). The General Partner shall at all times act with integrity and good faith and exercise due diligence in all activities relating to the conduct of the business of the Fund and in resolving conflicts of interest. The General Partner will take no actions with respect to the property of the Fund which do not benefit the Fund. LPA-7 82 (c) Brokerage Arrangements. The Fund's brokerage arrangements shall be non-exclusive, and the brokerage commissions paid by the Fund shall be competitive. The Fund shall seek the best price and services available for its commodity transactions. The brokerage fees paid by the Fund may not exceed the amount permitted under applicable NASAA Guidelines in effect as of the date hereof. (d) Loans; Investments. The Fund shall not make loans, and the funds of the Fund will not be commingled with the funds of any other person or entity (deposit of funds with a commodity or securities broker or clearinghouse or entering into joint ventures or partnerships shall not be deemed to constitute "commingling" for these purposes). (e) Certain Conflicts of Interest Prohibited. No person or entity may receive, directly or indirectly, any advisory fees or incentive fees from entities in which the Fund participates, for investment advice or management who shares or participates in any commodity brokerage commissions paid by the Fund; and no broker may pay, directly or indirectly, rebates or give-ups to any trading advisor, the General Partner or any of their respective affiliates. Such prohibitions may not be circumvented by any reciprocal business arrangements. No trading advisor for the Fund shall be affiliated with the Fund's commodity broker, the General Partner or any of their affiliates. (f) Certain Agreements. Any agreements between the Fund and the General Partner or any affiliate of the General Partner shall be terminable by the Fund on no more than 60 days' written notice. All trading advisors used by the Fund must satisfy the experience requirements of the NASAA Guidelines. The maximum period covered by any contract entered into by the Fund, except for the various provisions of the Selling Agreement which survive the final closing of the sale of the Units, shall not exceed one year. (g) No "Pyramiding." The Fund is prohibited from "pyramiding," as such term is defined in section I.B. of the NASAA Guidelines. (h) Other Activities. The General Partner engages in other business activities and shall not be required to refrain from any such activities, whether or not in competition with the Fund. Neither the Fund nor any of the Partners shall have any rights in such activities. Limited Partners may similarly engage in any such other business activities. The General Partner shall devote to the Fund such time as the General Partner deems advisable to conduct the Fund's business. 9. AUDITS AND REPORTS. The Fund's books shall be audited annually by an independent certified public accountant. The Fund will use its best efforts to cause each Limited Partner to receive (i) within 90 days after the close of each fiscal year certified financial statements of the Fund for the fiscal year then ended, (ii) in no event later than March 15 of each year all tax information relating to the prior fiscal year necessary to complete his federal income tax return and (iii) such other information as the CFTC may by regulation require. LPA-8 83 The General Partner shall include in the annual financial statements sent to Limited Partners an estimate of the brokerage rate paid by the Fund during the preceding year as a percentage of average Net Assets. The Fund will seek the best price and services available on its commodity brokerage transactions and will, with the assistance of the Fund's commodity broker, make an annual review of the Fund's commodity brokerage arrangements. In connection with such review, the General Partner will determine, to the extent practicable, the commodity brokerage rates charged to other major commodity pools whose trading and operations are, in the opinion of the General Partner, comparable to those of the Fund, in order to assess whether the rates charged to the Fund are reasonable in light of the services it receives. If, as a result of such review, the General Partner determines that such rates are not so reasonable, the General Partner will notify the Limited Partners, describing the rates charged to the Fund and several funds which are, in the General Partner's opinion, comparable to the Fund. Limited Partners or their duly authorized representatives may inspect the Fund's books and records, for any purpose reasonably related to their status as Limited Partners in the Fund, during normal business hours upon reasonable written notice to the General Partner. They may also obtain copies of such records upon payment of reasonable reproduction costs; provided, however, that such Limited Partners shall represent that the inspection and/or copies of such records will not be for commercial purposes unrelated to such Limited Partners' interest in the Fund. The General Partner shall calculate the Net Asset Value per Unit on a daily basis and furnish such information upon request to any Limited Partner. The General Partner will send written notice to each Limited Partner within seven days of (i) any decline in the Fund's Net Asset Value per Unit to 50% or less of such Net Asset Value as of the previous month-end, (ii) any material change in its agreement with the Advisor or any modification in connection with the method of calculating the incentive fee due to the Advisor or (iii) any material change affecting the compensation of any party. Any such notice shall contain a description of Limited Partners' voting rights. The General Partner shall maintain and preserve all Fund records for a period of not less than 6 years. In particular, and not by way of limitation, the General Partner will retain all Subscription Agreement and Power of Attorney Signature Pages submitted by persons admitted as Limited Partners, and all other records necessary to substantiate that Units are sold only to purchasers for whom the Units are a suitable investment, for at least six (6) years after Units are sold to such persons. 10. ASSIGNING UNITS. Each Limited Partner agrees that he will not assign, transfer or otherwise dispose of any interest in his Units in violation of any applicable federal or state securities laws or without giving written notice to the General Partner. No assignment, transfer or disposition of Units shall be effective against the Fund or the General Partner until the first day of the month following the month in which the General Partner receives such notice. The General Partner may, in its sole discretion, waive any such notice. The General Partner will send written confirmation to both the transferors and transferees of Units that the transfers in question have been duly recorded on the Fund's books and records. LPA-9 84 Each Limited Partner agrees that any transferee may become a substituted Limited Partner without the consent of any Limited Partner. 11. REDEEMING UNITS. Units may be redeemed as of the close of business (as determined by the General Partner) in Austin, Texas on the last day of any month, provided that (i) all liabilities, contingent or otherwise, of the Fund have been paid or there remains property of the Fund sufficient to pay them and (ii) the Fund has received written notice of redemption at least ten (10) days before the last day of such month, or such lesser period as shall be acceptable to the General Partner. Any number of whole Units may be redeemed. Fractional Units may only be redeemed upon redemption of a Limited Partner's entire interest in the Fund. Redemption requests must be in writing, unless the General Partner determines otherwise. In the event that the Net Assets of the Fund has, as of the close of business on any business day, declined to a level equal to less than fifty percent (50%) of the Net Assets of the Fund at the end of the preceding month (adjusted for contributions, redemptions and distributions), the General Partner shall so notify the Limited Partners within seven (7) business days thereafter and shall suspend new trading and liquidate all positions as promptly as practicable. The General Partner, in its notification, will set a date ten (10) business days after the notice date as of which Limited Partners may redeem their Units. The General Partner shall mail notice of such date to each Limited Partner and assignee of Units of whom it has received written notice, by first class mail, postage prepaid, together with instructions as to the procedure such Limited Partner or assignee must follow to have such Limited Partner's or assignee's interest (only entire, not partial, interests may be so redeemed unless otherwise determined by the General Partner) in the Fund redeemed on such date. Upon redemption pursuant to a Special Redemption Date, a Limited Partner or any other assignee of whom the General Partner has received written notice, shall receive from the Fund an amount equal to the Net Asset Value of such Limited Partner's interest, determined as of the close of business (as determined by the General Partner) on such Special Redemption Date. No redemption charges shall be assessed on any such Special Redemption Date. As in the case of a regular redemption, an assignee shall not be entitled to redemption on any Special Redemption Date until the General Partner has received written notice of the assignment, transfer or disposition under which the assignee claims an interest in the Units to be redeemed. After such Special Redemption Date, the Fund may, in the discretion of the General Partner, resume trading. If the General Partner determines not to resume trading, the Fund will be terminated. The General Partner may, in its discretion, declare additional regular redemption dates for Units, permit certain Limited Partners to redeem at other than month-end and waive the 10- day notice period otherwise required to effect redemptions. The General Partner may declare additional Special Redemption Dates upon notice to the Partners and assignees of whom the General Partner has received notice. In the event the General Partner does, in its discretion, declare a Special Redemption Date, the General Partner may, in its notice of such Special Redemption Date modify the circumstances under which the General Partner is again required to declare a Special Redemption Date, as set forth in the preceding paragraph. The General Partner may require a Limited Partner to redeem all or part of such Limited Partner's Units if the General Partner considers doing so to be desirable for the protection of the Fund, and will use best efforts to do so to the extent necessary to prevent the Fund from being LPA-10 85 deemed to hold "plan asset" under the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") or the Code. Payment in respect of Units redeemed will be made (by mailing a check) as promptly as practicable after the effective date of redemption or the Special Redemption Date, but in no event more than thirty (30) days thereafter. However, under special circumstances including, but not limited to, inability to liquidate commodity positions due to the operation of daily limits or otherwise as of such redemption or Special Redemption Date, or default or delay in payments due the Fund from futures brokers, banks, dealers or other persons, the Fund may, in turn, delay payment to Partners requesting redemption of Units of the proportionate part of the Net Asset Value of the Units being redeemed represented by the sums which are the subject of such circumstances. All redemptions will be made at Net Asset Value as of the effective day of redemption. 12. OFFERING OF UNITS. The General Partner may, in its discretion, continue or terminate the offering of the Units on a public or private basis. All sales of Units in the United States will be conducted by registered brokers. 13. POWER OF ATTORNEY. Each Limited Partner hereby irrevocably appoints the General Partner and each officer of the General Partner, with full power of substitution, as his true and lawful attorney-in-fact, in his name, place and stead, to execute, acknowledge, swear to, deliver and file, record in public offices and publish: (i) this Agreement, including any amendments; (ii) certificates of limited partnership or assumed name, including amendments, with respect to the Fund; (iii) all conveyances and other instruments which the General Partner deems appropriate to qualify or continue the Fund in the State of Delaware and any other jurisdictions in which the Fund may conduct business, or which may be required to be filed by the Fund or the Partners under the laws of any jurisdiction; and (iv) to file, prosecute, defend, settle or compromise litigation, claims or arbitrations on behalf of the Fund. The Power of Attorney granted herein shall be deemed to be coupled with an interest, shall survive and shall not be affected by the subsequent incapacity, disability or death of a Limited Partner. 14. WITHDRAWAL OF A PARTNER. The Fund shall be dissolved upon the withdrawal, dissolution, insolvency or removal of the General Partner, or any other event that causes the General Partner to cease to be a general partner under the Act, unless the Fund is continued pursuant to the terms of Section 4(a)(3). In addition, the General Partner may withdraw from the Fund, without any breach of this Agreement, at any time upon 120 days' written notice by first class mail, postage prepaid, to each Limited Partner and each assignee of whom the General Partner has notice. If the General Partner withdraws as general partner, and the Fund's business is continued pursuant to the terms of Section 4(a)(3)(ii), the withdrawing General Partner shall pay all expenses incurred by the Fund as a result of its withdrawal. LPA-11 86 The General Partner may not assign its general partner interest or its obligation to direct the trading of the Fund's assets without the consent of each Limited Partner. The General Partner will notify all Limited Partners of any change in the principals of the General Partner. A Limited Partner ceasing to be a Limited Partner will not terminate or dissolve the Fund. No Limited Partner, including such Limited Partner's estate, custodian or personal representative, shall have any right to redeem or value such Limited Partner's interest in the Fund except as provided in Section 11. Each Limited Partner agrees that in the event of his death, he waives on behalf of himself and of his estate, and directs the legal representatives of his estate and any person interested therein to waive, any inventory, accounting or appraisal of the assets of the Fund and any right to an audit or examination of the books of the Fund; provided, however, that nothing in this Section 14 shall waive any right for a Limited Partner, including such Limited Partner's estate, custodian or personal representative, to be informed of the Net Asset Value of his Units, to receive periodic reports, audited financial statements and other pertinent information from the General Partner or the Fund, to redeem or transfer Units or to exercise any other right granted to Limited Partners under this Agreement. 15. STANDARD OF LIABILITY; INDEMNIFICATION. (a) Standard of Liability for the General Partner. The General Partner and its Affiliates, as defined below, shall have no liability to the Fund or to any Partner for any loss suffered by the Fund which arises out of any action or inaction of the General Partner or its Affiliates, if the General Partner, in good faith, determined that such course of conduct was in the best interests of the Fund, and such course of conduct did not constitute negligence or misconduct on behalf of the General Partner or its Affiliates. (b) Indemnification of the General Partner by the Fund. To the fullest extent permitted by law, subject to this Section 15, the General Partner and its Affiliates shall be indemnified by the Fund against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Fund; provided, that such claims were not the result of negligence or misconduct on the part of the General Partner or its Affiliates, and the General Partner, in good faith, determined that such conduct was in the best interests of the Fund; and provided further, that Affiliates of the General Partner shall be entitled to indemnification only for losses incurred by such Affiliates in performing the duties of the General Partner and acting wholly within the scope of the authority of the General Partner. Notwithstanding anything to the contrary contained in the preceding paragraph, none of the General Partner, its Affiliates or any persons acting as selling agent for the Units shall be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and the court approves indemnification of the litigation costs, or (2) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and the court approves indemnification of the litigation costs, or (3) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. In any claim for indemnification for federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission, the California Department of Corporations, the Massachusetts Securities Division, the Pennsylvania Securities Commission, the Tennessee Securities Division, the Texas Securities Board, LPA-12 87 the Missouri Securities Division and any other state or applicable regulatory authority with respect to the issue of indemnification for securities law violations. The Fund shall not bear the cost of that portion of any insurance which insures any party against any liability the indemnification of which is herein prohibited. For the purposes of this Section 15, the term, "Affiliates," shall mean any person acting on behalf of or performing services on behalf of the Fund who: (1) directly or indirectly controls, is controlled by, or is under common control with the General Partner; or (2) owns or controls 10% or more of the outstanding voting securities of the General Partner; or (3) is an officer or director of the General Partner; or (4) if the General Partner is an officer, director, partner or trustee, is any entity for which the General Partner acts in any such capacity. Advances from Fund assets to the General Partner and its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner by a Limited Partner are prohibited. Advances from Fund assets to the General Partner and its Affiliates for legal expenses and other costs incurred as a result of a legal action will be made only if the following three conditions are satisfied: (1) the legal action relates to the performance of duties or services by the General Partner or its Affiliates on behalf of the Fund; (2) the legal action is initiated by a third party who is not a Limited Partner; and (3) the General Partner or its Affiliates undertake to repay the advanced funds, with interest from the initial date of such advance, to the Fund in cases in which they would not be entitled to indemnification under the standard of liability set forth in Section 15(a). In no event shall any indemnity or exculpation provided for herein be more favorable to the General Partner or any Affiliate than that contemplated by the NASAA Guidelines as in effect on the date of this Agreement. In no event shall any indemnification permitted by this Section 15(b) be made by the Fund unless all provisions of this Section for the payment of indemnification have been complied with in all respects. Furthermore, it shall be a precondition of any such indemnification that the Fund receive a determination of qualified independent legal counsel in a written opinion that the party which seeks to be indemnified hereunder has met the applicable standard of conduct set forth herein. Receipt of any such opinion shall not, however, in itself, entitle any such party to indemnification unless indemnification is otherwise proper hereunder. Any indemnification payable by the Fund hereunder shall be made only as provided in the specific case. In no event shall any indemnification obligations of the Fund under this Section 15(b) subject a Limited Partner to any liability in excess of that contemplated by Section 7(e). (c) Indemnification of the Fund by the Partners. In the event the Fund is made a party to any claim, dispute or litigation or otherwise incurs any loss or expense as a result of or in connection with any Limited Partner's activities, obligations or liabilities unrelated to the Fund's business, or as a result of or in connection with a transfer, assignment or other disposition or an attempted transfer, assignment or other disposition by a Limited Partner or an assignee of its Units or of any part of its right, title and interest in the capital or profits of the Fund in violation of this Agreement, such Limited Partner shall indemnify and reimburse the Fund for all such loss and expense incurred, including reasonable attorneys' fees. LPA-13 88 16. AMENDMENTS; MEETINGS. (a) Amendments with Consent of the General Partner. The General Partner may amend this Agreement with the approval of the majority of the Units. No meeting procedure or specified notice period is required in the case of amendments made with the consent of the General Partner, mere receipt of an adequate number of unrevoked written consents being sufficient. Such vote shall be taken at least 30 but not more than 60 days after delivery by the General Partner to each Limited Partner of record by certified mail of notice of the proposed amendment and voting procedures. The General Partner may also amend this Agreement without the consent of the Limited Partners in order: (i) to clarify any clerical inaccuracy or ambiguity or reconcile any clerical inconsistency (including any inconsistency between this Agreement and the Prospectus); (ii) to effect the intent of the allocations proposed herein to the maximum extent possible in the event of a change in the Code or the interpretations thereof affecting such allocations; (iii) to attempt to ensure that the Fund is taxed as a partnership; (iv) to qualify or maintain the qualification of the Fund as a limited partnership in any jurisdiction; (v) to change this Agreement as required by the Staff of the Securities and Exchange Commission, any other federal agency or any state "Blue Sky" official or in order to opt to be governed by any amendment or successor statute to the Act; (vi) to make any amendment to this Agreement which the General Partner deems advisable, provided that such amendment is not adverse to the Limited Partners; (vii) to make any amendment that is appropriate or necessary, in the opinion of the General Partner, to avoid causing the assets of the Fund from being considered for any purpose of ERISA or Section 4975 of the Code to constitute assets of any Plan; and (viii) to make any amendment to this Agreement required by law. (b) Amendments and Actions without Consent of the General Partner. In any vote called by the General Partner or pursuant to Section 16(c), upon the affirmative vote of a majority of the Units, the following actions may be taken, irrespective of whether the General Partner concurs: (i) this Agreement may be amended, provided, however, that the approval of all Limited Partners shall be required in the case of amendments changing or altering this Section 16, extending the term of the Fund or materially changing the Fund's basic investment policies; (ii) the Fund may be dissolved; (iii) the General Partner may be removed and replaced; (iv) a new general partner may be elected if the General Partner withdraws from the Fund; (v) the sale of all or substantially all of the assets of the Fund may be approved; and (vi) any contract with the General Partner or any of its affiliates may be disapproved of and terminated without penalty upon 60 days' notice. No reduction of any Limited Partner's capital account or modification of the percentage of profits, losses or distributions to which a Limited Partner is entitled shall be made without such Limited Partner's written consent; (c) Meetings; Other Voting Matters. Any Limited Partner may for a purpose related to his status as a Limited Partner obtain from the General Partner, provided that reasonable copying and mailing costs are paid in advance, a list of the names, addresses and number of Units held by each Limited Partner. Such list will be mailed by the General Partner within ten days of the receipt of the request; provided, that the General Partner may require any Limited Partner requesting such information to submit written confirmation that such information will not be used for commercial purposes. Upon receipt of a written proposal, signed by Limited Partners owning at least 10% of the Units, that a meeting of the Fund be called to vote on any matter on which the Limited Partners are entitled to vote, the General Partner will, by written notice to each Limited Partner of record sent by certified mail within 15 days after such receipt, call the meeting. Such meeting shall be held at least 30 but not more than 60 days after the mailing of such notice, and such notice shall specify the LPA-14 89 date, a reasonable place and time for such meeting, as well as its purpose. Such notice shall establish a record date for Limited Partners entitled to vote at the meeting, which shall be not more than 15 days prior to the date established for such meeting. In determining whether a majority of the Units has approved an action or amendment, only Units owned by Limited Partners shall be counted. Any Units acquired by the General Partner or any of its Affiliates will be non-voting, and will not be considered outstanding for purposes of determining whether the majority approval of the outstanding Units has been obtained. The General Partner may not restrict the voting rights of Limited Partners as set forth herein. In the event that this Agreement is to be amended in any material respect, the amendment will not become effective prior to all Limited Partners having an opportunity to redeem their Units. 17. BENEFIT PLAN INVESTORS. (a) INVESTMENT IN ACCORDANCE WITH LAW. Each Limited Partner that is an "employee benefit plan" as defined in and subject to ERISA, a "plan" as defined in Section 4975 of the Code (collectively, a "Plan"), and each fiduciary who has caused a Plan to become a Limited Partner (a "Plan Fiduciary"), represents and warrants that: (a) the Plan Fiduciary has considered an investment in the Fund in light of the risks relating thereto; (b) the Plan Fiduciary has determined that the investment in the Fund is consistent with the Plan Fiduciary's responsibilities under ERISA; (c) the investment in the Fund does not violate the terms of any legal document constituting the Plan or any trust agreement thereunder; (d) the Plan's investment in the Fund has been duly authorized and approved by all necessary parties; (e) none of the General Partner, the Fund's advisor(s), any cash manager, the Fund's futures broker, any selling agents and any of their respective affiliates or any of their respective agents or employees: (i) has investment discretion with respect to the assets of the Plan used to purchase Units; (ii) has authority or responsibility to or regularly gives investment advice with respect to the assets of the Plan used to purchase Units for a fee and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to the Plan and that such advice will be based on the particular investment needs of the Plan; or (iii) is an employer maintaining or contributing to the Plan; and (f) the Plan Fiduciary: (i) is authorized to make, and is responsible for, the decision of the Plan to invest in the Fund, including the determination that such investment is consistent with the requirement imposed by Section 404 of ERISA that Plan investments be diversified so as to minimize the risks of large losses; (ii) is independent of the General Partner, the Fund's advisor(s), any cash manager, the Fund's futures broker, any selling agents and any of their respective affiliates; and (iii) is qualified to make such investment decision. (b) DISCLOSURES AND RESTRICTIONS REGARDING BENEFIT PLAN INVESTORS. Each Limited Partner that is a "benefit plan investor" (defined as any Plan, any other employee benefit plan as defined in but not subject to ERISA and any entity deemed for any purpose of ERISA or Section 4975 of the Code to hold assets of any employee benefit plan or plan) represents that the individual signing the Subscription Agreement and Power of Attorney has disclosed such Limited Partner's status as a benefit plan investor in the Subscription Agreement and Power of Attorney. Each Limited Partner that is not a "benefit plan investor" represents and agrees that if at a later date such Limited Partner becomes a benefit plan investor, such Limited Partner will immediately notify the General Partner of such change of status. Notwithstanding anything herein to the contrary, the General Partner, on behalf of the Fund, may take any and all action including, but LPA-15 90 not limited to, refusing to admit persons as Limited Partners or refusing to accept additional capital contributions, and requiring the redemption of the Units of any Limited Partner in accordance with Section 11 hereof, as may be necessary or desirable to avoid having the assets of the Fund be considered for any purpose of ERISA or Section 4975 of the Code to constitute assets of any Plan. 18. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW; PROVIDED, THAT THE FOREGOING CHOICE OF LAW SHALL NOT RESTRICT THE APPLICATION OF ANY STATE'S SECURITIES LAWS TO THE SALE OF UNITS TO ITS RESIDENTS OR WITHIN SUCH STATE. 19. MISCELLANEOUS. (a) Notices. All notices under this Agreement must be in writing and will be effective upon personal delivery, or if sent by first class mail, postage prepaid, upon the deposit of such notice in the United States mail. (b) Binding Effect. This Agreement shall inure to and be binding upon all of the parties hereto and all parties indemnified under Section 15, as well as their respective successors and assigns, custodians, estates, heirs and personal representatives. For purposes of determining the rights of any Partner or assignee hereunder, the Fund and the General Partner may rely upon the Fund records as to who are Partners and assignees, and all Partners and assignees agree that their rights shall be determined and they shall be bound thereby. (c) Captions. Captions are not part of this Agreement. (d) Close of Business. The General Partner will decide when the close of business occurs. THE PARTIES HEREBY EXECUTE THIS SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN. GENERAL PARTNER: LIMITED PARTNERS: PROFUTURES, INC. PROFUTURES, INC. Attorney-in-Fact By /s/ GARY D. HALBERT By /s/ GARY D. HALBERT --------------------------- ----------------------------- Gary D. Halbert Gary D. Halbert President President LPA-16 91 EXHIBIT B SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY PROFUTURES LONG/SHORT GROWTH FUND, L.P. (TO BE EXECUTED BY ALL PURCHASERS) SUBSCRIPTION INSTRUCTIONS Fill in all of the boxes and blanks on pages B-6 and B-7 as follows: Part 1 o Indicate if this is an addition to an existing account; if so, enter your Limited Partner account number. o Indicate if you are a Benefit Plan Investor (see page B-3). o Enter your Social Security Number or Taxpayer ID Number and check the appropriate box to indicate the nature of the subscriber. In case of joint ownership, either Social Security Number may be used. o Enter the exact name in which the Units are to be held based on ownership type, and other information. o If there is a Co-Purchaser, Trustee or Custodian, complete the applicable information. IRA OR KEOGH PLAN INVESTMENTS MAY ONLY BE ACCEPTED IF RECEIVED FROM A THIRD PARTY CUSTODIAN. CALL THE GENERAL PARTNER FOR DETAILS. Part 2 o Enter the dollar amount of the subscription. MAKE YOUR CHECK PAYABLE TO PROFUTURES LONG/SHORT GROWTH FUND, L.P. (THE "FUND"). Part 3 o You must execute the Subscription Agreement and Power of Attorney Signature Page. Each joint tenant or tenant in common must sign in the space provided. If purchaser is a trust, partnership, corporation or other business association, the signing trustee, partner or officer represents and warrants that he/she/it has full power and authority to execute this Agreement on its behalf. IF PURCHASER IS A TRUST OR PARTNERSHIP, PLEASE ATTACH A COPY OF THE TRUST INSTRUMENT OR PARTNERSHIP AGREEMENT. IF PURCHASER IS A CORPORATION, PLEASE ATTACH CERTIFIED CORPORATE RESOLUTION AUTHORIZING SIGNATURE. MAIL EXECUTED SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY TO: PROFUTURES LONG/SHORT GROWTH FUND, L.P. C/O PROFUTURES FINANCIAL GROUP, INC. 11612 BEE CAVE ROAD, SUITE 100 AUSTIN, TEXAS 78733 B-1 92 SUBSCRIPTION FOR UNITS By executing pages B-6 and B-7 of this Subscription Agreement and Power of Attorney (hereafter, the "Subscription Agreement"), you irrevocably subscribe for Units of Limited Partnership Interest in the Fund. You have enclosed the sum indicated on page B-6 (minimum $10,000 or $5,000 for IRAs and retirement plans). Subscriptions, whether checks or wire transfers, should be made payable to "ProFutures Long/Short Growth Fund, L.P." If this Subscription Agreement is accepted, you agree to contribute the amount enclosed to the Fund and to be bound by the terms of the Second Amended and Restated Limited Partnership Agreement, as it may be amended from time to time. You understand and agree that this subscription may be accepted or rejected by the General Partner, in whole or in part, in its sole and absolute discretion. You hereby acknowledge and agree that this Subscription Agreement shall survive: (i) changes in the transactions, documents and instruments described in the Prospectus which are not material; (ii) your death or disability; and (iii) the acceptance of this subscription by the General Partner. Your subscription should be submitted by the 25th of the month preceding the month in which you plan to invest. REPRESENTATIONS AND WARRANTIES By executing this Subscription Agreement, you represent and warrant to the Fund, the General Partner and their respective affiliates (i) that you have received the current Prospectus of the Fund together with a recent monthly report; (ii) that you are of legal age and legally competent to execute this Subscription Agreement; (iii) that you satisfy the applicable requirements relating to net worth and annual income set forth below under "Investor Suitability Requirements"; (iv) that your subscription, if made as custodian for a minor, is a gift you have made to such minor or, if not a gift, the following representations as to net worth and annual income apply to such minor personally; (v) if you are subscribing in a representative capacity, that you have full power and authority to purchase the Units on behalf of the entity for which you are acting, and such entity has full power and authority to purchase such Units; and (vi) if required to be, that you are registered with the Commodity Futures Trading Commission or a member of the National Futures Association. The foregoing information which has been provided to the General Partner is true and accurate as of the date hereof and shall be true and accurate as of the date of your admission to the Fund as a limited partner. If in any respect such representations, warranties or information shall not be true and accurate at any time prior to your admission as a limited partner, you will give written notice of such fact to the General Partner, specifying which representation, warranty or information is not true and accurate and the reason therefor. POWER OF ATTORNEY By executing this Subscription Agreement below, you: (i) acknowledge the accuracy of all statements herein and (ii) appoint the General Partner to act as your true and lawful attorney and agent to execute the Limited Partnership Agreement and to file any documents or take any action required for the Fund to carry out its business activities. In addition, by executing this Subscription Agreement you waive on behalf of yourself and your estate the furnishing of any inventory, accounting or appraisal of the assets of the Fund; provided that such waiver does not extend to any rights granted a Limited Partner under the Limited Partnership Agreement. B-2 93 BENEFIT PLAN INVESTORS The undersigned must check the box on page B-6 if the Purchaser is a "benefit plan investor." The term "benefit plan investor" refers to (i) any "employee benefit plan" as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), regardless of whether it is subject to ERISA, (ii) any "plan" as defined in section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), and (iii) any entity deemed for any purpose of ERISA or Section 4975 of the Code to hold assets of any such employee benefit plan or plan. If the undersigned is not a benefit plan investor, on the date this Subscription Agreement and Power of Attorney is signed, the undersigned agrees to notify the General Partner immediately if the undersigned becomes a benefit plan investor. INVESTOR SUITABILITY REQUIREMENTS YOU UNDERSTAND THAT THE PURCHASE OF UNITS MAY BE MADE ONLY BY PERSONS WHO, AT A MINIMUM, HAVE (I) A NET WORTH OF AT LEAST $150,000 (EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES) OR (II) AN ANNUAL GROSS INCOME OF AT LEAST $45,000 AND A NET WORTH (SIMILARLY CALCULATED) OF AT LEAST $45,000. RESIDENTS OF THE FOLLOWING STATES MUST MEET THE SPECIFIC REQUIREMENTS SET FORTH BELOW (NET WORTH IS, IN ALL CASES, TO BE CALCULATED EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES). 1. Alaska -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual income of at least $60,000. 2. Arizona -- Net worth of at least $225,000 or a net worth of at least $60,000 and annual taxable income of at least $60,000. 3. California -- Net worth of at least $225,000 or a net worth of at lest $60,000 and an annual taxable income of at least $60,000. 4. Iowa -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual taxable income of at least $60,000. Minimum purchase for individual retirement accounts and employee benefit plans in Iowa is $2,500. 5. Kansas -- Net worth of at least $225,000 or a net worth of at lest $60,000 and an annual taxable income of at least $60,000. 6. Maine -- Net worth of at least $200,000 or a net worth of at least $50,000 and an annual income of at least $50,000. All Maine residents, including existing Limited Partners in the Fund subscribing for additional Units, must execute a Subscription Agreement and Power of Attorney Signature Page. Maine residents must sign a Subscription Agreement and Power of Attorney Signature Page specifically prepared for Maine residents, a copy of which shall accompany this Prospectus and be delivered to all Maine residents. 7. Massachusetts -- Net worth of at least $225,000 or a net worth of at least $60,000 and annual taxable income of at least $60,000. 8. Michigan -- Net worth of at least $225,000 or a net worth of at least $60,000 and taxable income during the preceding year of at least $60,000. B-3 94 9. Minnesota -- Except as provided in the immediately following sentence, each Minnesota purchaser must be an "accredited investor" as defined in Regulation D under the Securities Act of 1933 and must, either alone or together with a purchaser representative, have sufficient financial knowledge and experience to be capable of evaluating the risks and merits of an investment in the Units. The Fund may effect no more than 35 sales of Units to non-accredited investors in Minnesota in any consecutive 12-month period. Each non-accredited investor must have a net worth of at least $225,000 or a net worth of at least $60,000 and an annual income of at least $60,000. Minnesota residents must sign a Subscription Agreement and Power of Attorney Signature Page specifically prepared for Minnesota residents, a copy of which shall accompany this Prospectus delivered to Minnesota residents. 10. Mississippi -- Net worth of at least $225,000 or a net worth of at least $60,000 and annual taxable income of at least $60,000. 11. Missouri -- Net worth of at least $225,000 or a net worth of at least $60,000 and annual taxable income of at least $60,000. 12. New Hampshire -- Net worth of at least $250,000 or a net worth of at least $125,000 and an annual taxable income of at least $50,000. 13. North Carolina -- Net worth of at least $225,000 or a net worth of at least $60,000 and annual taxable income of at least $60,000. 14. Oklahoma -- Net worth of at least $225,000 or a net worth of $60,000 and an annual income of at least $60,000. 15. Oregon -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual income of at least $60,000. 16. Pennsylvania -- Net worth of at least $175,000 or a net worth of at least $100,000 and an annual income of at least $50,000. No individual Pennsylvania purchaser may invest more than 10% of his or her net worth (exclusive of home, furnishings and automobiles) in the Fund. 17. South Carolina -- Net worth of at least $100,000 or a net income in the preceding year some portion of which was subject to maximum federal and state income tax. 18. South Dakota -- Net worth of at least $225,000 or a net worth of at least $60,000 and annual taxable income of at least $60,000. 19. Tennessee -- Net worth of at least $250,000 or a net worth of at least $65,000 and annual taxable income of at least $65,000. 20. Texas -- Net worth of at least $225,000 or a net worth of at least $60,000 and annual taxable income of at least $60,000. ------------------------- In the case of IRA and SEP plans, the foregoing suitability standards are applicable to the owner of the plan for whose account the Units are being acquired. The foregoing suitability standards are regulatory minimums only. No one should invest more than 10% of his or her liquid net worth in the Fund. B-4 95 BINDING AGREEMENT; GOVERNING LAW This Subscription Agreement and the representations and warranties contained herein shall be binding upon you, your heirs, executors, administrators and other successors. If there is more than one signatory hereto, your obligations, representations, warranties and agreements are made jointly and severally. This Subscription Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to principles of conflicts of law. MAIL SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY AND CHECK TO: PROFUTURES LONG/SHORT GROWTH FUND, L.P. PROFUTURES FINANCIAL GROUP, INC. 11612 BEE CAVE ROAD, SUITE 100 AUSTIN, TEXAS 78733 1-800-348-3601 B-5 96 SIGNATURE PAGE BY EXECUTING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY, SUBSCRIBERS ARE NOT WAIVING ANY RIGHTS UNDER THE FEDERAL SECURITIES LAWS. PART 1 - SUBSCRIBER Is this an addition to an existing Fund account? [ ] Yes [ ] No If so, enter LP# _____________________________________________________ NATURE OF SUBSCRIBER (PLEASE CHECK): [ ] Individual [ ] Non-Profit Organization* [ ] Joint Tenants w/Rights of Survivorship (JTWROS)* [ ] Trust* [ ] Joint Tenants in common (TENCOM)* [ ] UGMA (Gift to Minor) [ ] Partnership* [ ] Pension Plan* [ ] Corporation* [ ] Other (Specify)
- ------------------------ *NOTE: Please refer to instructions on page B-1 of this Subscription Agreement. [ ] Benefit Plan Investor? (See page B-3) - ------------------------------------------------ -------------------------------- Print Purchaser's Full Name or Name of Trust or Social Security or Taxpayer ID # Custodian Account - ------------------------------------------------ -------------------------------- Print Name of Co-Purchaser or Authorized Person, Date of Birth of Purchaser if an Institutional Trust ( ) - ------------------------------------------------ -------------------------------- Street Address of Purchaser Business Phone (Day) ( ) - ------------------------------------------------ -------------------------------- City, State and Zip Code Home Phone PART 2 - SUBSCRIPTION MAKE YOUR CHECK PAYABLE ONLY TO: Subscription Amount $______________ PROFUTURES LONG/SHORT GROWTH FUND, L.P.
B-6 97 PART 3 - SIGNATURE I have checked the box if I am subject to back up withholding tax under the provisions of the Internal Revenue Code o. I hereby certify that the Social Security or Taxpayer ID number above is my true and complete Social Security or Taxpayer ID number and that the information given in the preceding sentence is true and complete. By executing this Subscription Agreement, you acknowledge the representations and warranties set forth above on Page B-2. The Units are speculative securities. No market exists for the Units and none will develop. Redemptions may be made only as of a month-end. DATE: _______________ Signature of Purchaser or Authorized Person Signature of Co-Purchaser - -------------------------------------- -------------------------- TO BE COMPLETED BY REGISTERED REPRESENTATIVE LP #_________ The undersigned certifies that he has informed the Purchaser of all pertinent facts relating to the liquidity and marketability of the Units as set forth in the Prospectus. The undersigned has reasonable grounds to believe on the basis of information obtained from the Purchaser concerning his investment objectives, other investments, financial situation and needs, and any other information known by the undersigned, that: (i) the Purchaser is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the Prospectus; (ii) the Purchaser has a fair market net worth sufficient to sustain the risks inherent in the Fund, including losses of investment and lack of liquidity; and (iii) the Fund is otherwise a suitable investment for the Purchaser. ACCEPTED _____________ BY: PROFUTURES FINANCIAL GROUP, INC. PROFUTURES INC. AUSTIN, TEXAS CRD #24328 GENERAL PARTNER OF GARY D. HALBERT, REGISTERED REPRESENTATIVE PROFUTURES LONG/SHORT GROWTH FUND, L.P. - ------------------------------------------ --------------------------------- GARY D. HALBERT, REGISTERED REPRESENTATIVE GARY D. HALBERT, PRESIDENT B-7 98 EXHIBIT C REQUEST FOR REDEMPTION _______________________, 199_ PROFUTURES LONG/SHORT GROWTH FUND, L.P. c/o ProFutures, Inc. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 The undersigned hereby requests redemption of _____ Units. The undersigned hereby represents and warrants that he is the true and lawful owner of the Unit(s) to which this request relates with full power and authority to request redemption of such Unit(s). Such Unit(s) are not subject to any pledge or otherwise encumbered in any fashion. This redemption shall be governed by the terms of the Fund's Limited Partnership Agreement. Please forward to the undersigned at the address below. Name____________________________________________ Address ________________________________________ City, State, Zip Code___________________________ PARTNER'S SIGNATURE MUST BE IDENTICAL TO NAME IN WHICH UNITS ARE REGISTERED. By: ____________________________________________ (Signature of Owner) Name:___________________________________________ Partnership, Trust, Plan or Corporation By: ____________________________________________ (Signature of Authorized Representative) Name: __________________________________________ Title: _________________________________________ C-1 99 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. An organizational charge of 1% of the subscription amount is paid to the General Partner (or the Selling Agent, its affiliated broker-dealer) by each subscriber. The General Partner will pay for all actual costs of conducting the public offering of Units. To the extent that the aggregate 1% organizational charge collected is less than these actual costs, the General Partner will pay the costs. To the extent that the aggregate 1% organizational charge collected exceeds these actual costs, the excess amount will be paid to the Selling Agent. Such payment could be deemed to be a selling commission. The following is an estimate of such costs:
Approximate Amount ------------------ Securities and Exchange Commission Registration Fee.................................. $ 20,690* National Association of Securities Dealers, Inc. Filing Fee.......................... 6,500* Printing Expenses.................................................................... 40,000 Fees of Certified Public Accountants................................................. 25,000 Blue Sky Expenses (Excluding Legal Fees)............................................. 50,000 Fees of Counsel...................................................................... 230,000 Miscellaneous Offering Costs......................................................... 20,000 -------- Total............................................................................. $392,190 ========
- ----------------------- * Fees marked with an asterisk are exact rather than estimated and approximate. -------------------- ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 15 of the Limited Partnership Agreement (attached as Exhibit A to the prospectus which forms a part of the Registration Statement) provides for the indemnification of the General Partner and certain of its Affiliates by the Registrant. "Affiliates" shall mean any person performing services on behalf of the Partnership who: (1) directly or indirectly controls, is controlled by, or is under common control with the General Partner; or (2) owns or controls 10% or more of the outstanding voting securities of the General Partner; or (3) is an officer or director of the General Partner; or (4) if the General Partner is an officer, director, partner or trustee, is any entity for which the General Partner acts in any such capacity. Indemnification is to be provided for any loss suffered by the Registrant which arises out of any action or inaction, if the party, in good faith, determined that such course of conduct was in the best interest of the Registrant and such conduct did not constitute negligence or misconduct. The General Partner and its Affiliates will only be entitled to indemnification for losses incurred by such Affiliates in performing the duties of the General Partner and acting wholly within the scope of the authority of the General Partner. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Beginning on September 1, 1997 and until August 31, 1998, the Registrant sold, at month-end closings, Units of Limited Partnership Interest to accredited investors and less than 35 unaccredited investors pursuant to a private offering which was exempt under Section 4(2) of the Securities Act of 1933. Such Units were sold by the General Partner and/or the Selling Agent. II-1 100 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: (a) Exhibits.
Exhibit Number Description of Document - ------ ----------------------- 1.01 Form of Amended and Restated Selling Agreement among the Registrant, the General Partner, the Selling Agent and the Advisor. 3.01 Amended Certificate of Limited Partnership of the Registrant 3.02 Form of Second Amended and Restated Limited Partnership Agreement of the Registrant (included as Exhibit A to the Prospectus). 5.01 Opinion of Sidley & Austin relating to the legality of the Units. 8.01 Opinion of Sidley & Austin with respect to federal income tax consequences. 10.01 Amendment to Customer Agreement between the Registrant and the Futures Broker. 10.02 Form of Subscription Agreement and Power of Attorney (included as Exhibit B to the Prospectus). 23.01 Consent of Sidley & Austin (included in Exhibit 5.01). 23.02 Consent of Arthur F. Bell, Jr. & Associates, L.L.C. 27.01 Financial Data Schedule
The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed with the Registrant's Registration Statement on Form S-1, as filed with the Commission on September 10, 1998 (Reg. No. 333-63129): 3.01 Certificate of Limited Partnership of the Registrant. 10.01 First Amendment and Restatement of Advisory Contract between the Registrant and the Advisor. 10.02 Customer Agreement between the Registrant and the Futures Broker. ITEM 17. The undersigned registrant hereby undertakes: (a) Rule 415 Offerings (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; II-2 101 (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Equity Offerings of Nonreporting Registrants Note: The Units are not certificated. (c) Indemnification Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to officers, directors or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by an officer, director, or controlling person of the registrant in the successful defense of any such action, suit or proceeding) is asserted by such officer, director or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 102 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the General Partner of the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Austin in the State of Texas on the 22nd day of December, 1998. ProFutures Long/Short Growth Fund, L.P. By: ProFutures, Inc. By: /s/ GARY D. HALBERT, JR. ---------------------------------- Gary D. Halbert, Jr. President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following person on behalf of ProFutures, Inc., General Partner of the Registrant, in the capacities and on the date indicated. /s/ GARY D. HALBERT President and Director December 22, 1998 ---------------------------------- (Principal Executive Gary D. Halbert Officer) /s/ DEBI B. HALBERT Chief Financial Officer, December 22, 1998 ---------------------------------- Treasurer and Director Debi B. Halbert (Principal Financial and Accounting Officer) (Being the principal executive officer, the principal financial and accounting officer and a majority of the directors of ProFutures, Inc.) PROFUTURES, INC. General Partner of Registrant By /s/ GARY D.HALBERT December 22, 1998 ------------------------------- Gary D. Halbert President
103 PROFUTURES LONG/SHORT GROWTH FUND, L.P. EXHIBIT INDEX Number Description of Document 1.01 Form of Amended and Restated Selling Agreement among the Registrant, the General Partner, the Selling Agent and the Advisor. 3.01 Amended Certificate of Limited Partnership of the Registrant 3.02 Form of Second Amended and Restated Limited Partnership Agreement of the Registrant (included as Exhibit A to the Prospectus). 5.01 Opinion of Sidley & Austin relating to the legality of the Units. 8.01 Opinion of Sidley & Austin with respect to federal income tax consequences. 10.01 Amendment to Customer Agreement between the Registrant and the Futures Broker. 10.02 Form of Subscription Agreement and Power of Attorney (included as Exhibit B to the Prospectus). 23.01 Consent of Sidley & Austin (included in Exhibit 5.01). 23.02 Consent of Arthur F. Bell, Jr. & Associates, L.L.C. 27.01 Financial Data Schedule EX-1.01 2 FORM OF AMENDED/RESTATED SELLING AGREEMENT 1 EXHIBIT 1.01 FORM OF AMENDED AND RESTATED SELLING AGREEMENT PROFUTURES LONG/SHORT GROWTH FUND, L.P. (A DELAWARE LIMITED PARTNERSHIP) UNITS OF LIMITED PARTNERSHIP INTEREST Dated as of ________, 1998 2 PROFUTURES LONG/SHORT GROWTH FUND, L.P. AMENDED AND RESTATED SELLING AGREEMENT TABLE OF CONTENTS
Page ---- Section 1. Representations and Warranties of the General Partner ...................................... 2 Section 2. Representations and Warranties of the Selling Agent.......................................... 5 Section 3. Representations and Warranties of the Trading Advisor....................................... 7 Section 4. Representations and Warranties of the Broker................................................ 9 Section 5. Offering and Sale of Units.................................................................. 11 Section 6. Covenants of the General Partner............................................................ 15 Section 7. Covenants of the Trading Advisor............................................................ 17 Section 8. Covenants of the Broker..................................................................... 17 Section 9. Payment of Expenses and Fees................................................................ 17 Section 10. Conditions of Closing...................................................................... 18 Section 11. Indemnification and Exculpation............................................................. 27 Section 12. Status of Parties........................................................................... 30 Section 13. Representations, Warranties and Agreements to Survive Delivery.............................. 31 Section 14. Termination................................................................................. 31 Section 15. Notices and Authority to Act................................................................ 31 Section 16. Parties..................................................................................... 32 Section 17. Governing Law............................................................................... 32 Section 18. Requirements of Law......................................................................... 32
-2- 3 PROFUTURES LONG/SHORT GROWTH FUND, L.P. (A DELAWARE LIMITED PARTNERSHIP) $60,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST (SUBSCRIPTION PRICE: 101% OF NET ASSET VALUE PER UNIT) FORM OF AMENDED AND RESTATED SELLING AGREEMENT _______, 1998 PROFUTURES FINANCIAL GROUP, INC. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 Dear Sirs: Your affiliate, ProFutures, Inc., a Texas corporation (referred to herein in its individual corporate capacity and as general partner as the "General Partner"), and an initial limited partner have caused the formation of a limited partnership pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware ("DRULPA") under the name ProFutures Long/Short Growth Fund, L.P. (the "Fund"), for the purpose of engaging in speculative trading of futures and forward contracts and commodity options. As described in the Prospectus referred to below, the Fund has entered into the First Amendment and Restatement of Advisory Contract (the "Advisory Agreement") with Hampton Investors, Inc., a New York corporation (the "Trading Advisor"). The Fund engages in speculative trading in the commodities markets under the direction of the Trading Advisor pursuant to its Leverage 3 Trading Program (the "Trading Strategy"). You shall serve as lead selling agent for the Fund (herein referred to as the "Selling Agent") and you may select, with the consent of the General Partner, other selling agents (the "Additional Selling Agents") (including those introduced by wholesalers ("Wholesalers")) to act as selling agents for the Fund in accordance with the terms of the Additional Selling Agent Agreement attached hereto as Exhibit A. In addition, the Additional Selling Agents may also, with the consent of the Selling Agent and the General Partner, distribute Units through the use of "introducing broker" Correspondents ("Correspondents"). 4 ING (U.S.) Securities, Futures & Option, Inc. (the "Broker") acts as broker for the Fund pursuant to a customer agreement (the "Customer Agreement") between the Broker and the Fund. Capitalized terms used herein, unless otherwise indicated, shall have the meanings attributed to them in the Prospectus referred to below. Section 1. Representations and Warranties of the General Partner. The General Partner represents and warrants to the Trading Advisor, the Broker and the Selling Agent, as follows: (a) The Fund has provided to the Trading Advisor and to the Selling Agent and filed with the Securities and Exchange Commission (the "SEC") a registration statement on Form S-1 (Registration No. 333-63129), as initially filed with the SEC on Sept. 10, 1998 and Amendment No. 1 thereto as filed on _______, 1998 for the registration of Units of Limited Partnership Interests (the "Units") in the Fund under the Securities Act of 1933, as amended (the "1933 Act"), has filed two copies thereof with the Commodity Futures Trading Commission (the "CFTC") under the Commodity Exchange Act (the "Commodity Act") and one copy with the National Futures Association (the "NFA") in accordance with NFA Compliance Rule 2-13. The Registration Statement became effective with the SEC as of the date hereof. (The Registration Statement, in the form in which it became effective, and the Prospectus included therein as first filed pursuant to Rule 424(b) of the rules and regulations of the SEC under the 1933 Act (the "SEC Regulations") are hereinafter referred to as the "Registration Statement" and the "Prospectus," respectively.) If the Fund files a subsequent post-effective amendment to the Registration Statement, then the term Registration Statement shall, from and after the declaration of the effectiveness of such post-effective amendment, refer to the Registration Statement as amended by such post-effective amendment thereto, and the term Prospectus shall refer to the amended prospectus then on file with the SEC as part of the Registration Statement, or if a subsequent prospectus is filed by the Fund pursuant to Rule 424 of the SEC Regulations, the term Prospectus shall refer to the prospectus most recently filed pursuant to such Rule from and after the date on which it shall have been first used. Except as required by law, the Fund will not file any amendment to the Registration Statement or any amendment or supplement to the Prospectus which shall be reason ably objected to in writing by the Trading Advisor or by counsel to the Trading Advisor, upon reasonable prior notice. (b) The Fund will not utilize any promotional brochure or other marketing materials (collectively, "Promotional Material"), including "Tombstone Ads" or other communications qualifying under Rule 134 of the SEC Regulations, which are reasonably objected to by the Selling Agent. No reference to the Selling Agent may be made in the Registration Statement, Prospectus or in any Promotional Material which has not been approved in writing by the Selling Agent, which approval the Selling Agent may withhold in its sole and absolute discretion. The Fund will file all Promotional Material with the National Association of Securities Dealers, Inc. (the -2- 5 "NASD"), and will not use any such Promotional Material to which the NASD has objected without first revising such Promotional Material to address such objection(s). The Fund will file all Promotional Material in all state jurisdictions where such filing is required, and will not use any such Promotional Material in any state which has expressed any objection thereto (except pursuant to agreed-upon modifications to the Promotional Material). (c) The Certificate of Limited Partnership (the "Certificate of Limited Partnership") pursuant to which the Fund has been formed and the Second Amended and Restated Limited Partnership Agreement of the Fund (the "Limited Partnership Agreement") each provides for the subscription for and sale of the Units; all action required to be taken by the General Partner and the Fund as a condition to the sale of the Units to qualified subscribers therefor has been, or prior to the Initial Public Closing Time and Subsequent Public Closing Times, as defined in Section 5 hereof, will have been taken; and, upon payment of the consideration therefor specified in all accepted Subscription Agreements and Powers of Attorney, the Units will constitute valid limited partnership interests in the Fund. (d) The Fund is a limited partnership duly organized pursuant to the Certificate of Limited Partnership, the Limited Partnership Agreement and the DRULPA and validly existing under the laws of the State of Delaware with full power and authority to engage in the trading of futures, forward and option contracts, as described in the Prospectus, and the Fund has qualified to do business in the State of Texas. (e) The General Partner is duly organized and validly existing and in good standing as a corporation under the laws of the State of Texas and in good standing as a foreign corporation in any other jurisdiction in which the nature or conduct of its business requires such qualification and the failure to so qualify would materially adversely affect the Fund or the General Partner's ability to perform its obligations hereunder. (f) The Fund and the General Partner have partnership or corporate power and authority under applicable law to perform their respective obligations under the Limited Partnership Agreement, the Customer Agreement, the Investment Advisory Agreement, the Additional Selling Agents Agreement, the Advisory Agreement and this Agreement, as described in the Registration Statement and Prospectus. (g) The Registration Statement and Prospectus contain all statements and information required to be included therein by the Commodity Act and the rules and regulations thereunder. When the Registration Statement became effective under the 1933 Act and at all times subsequent thereto up to and including the Initial Public Closing Time, the Registration Statement and Prospectus will comply in all material respects with the requirements of the 1933 Act, the Commodity Act and the rules and regulations under such Acts. The Registration Statement as of its effective date did -3- 6 not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not mislead ing. The Prospectus as of its date of issue and at the Initial Public Closing Time did not and will not contain an untrue statement of a material fact or omit to state a mate rial fact necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading. This representation and warranty shall not, however, apply to any statement or omission in the Registration Statement or Prospectus made in reliance upon and in conformity with information relating to the Trading Advisor, the Broker or any cash manager and furnished or approved in writing by the Trading Advisor, the Broker or any cash manager. (h) Arthur F. Bell, Jr. & Associates, L.L.C., the accountants who certified the financial statements of the General Partner and the Fund filed with the SEC as part of the Registration Statement, are independent public accountants with respect to the General Partner and the Fund as required by the 1933 Act and the SEC Regulations. (i) The financial statements filed as part of the Registration Statement and those included in the Prospectus present fairly the financial position of the Fund and of the General Partner as of the dates indicated; and said financial statements have been prepared in conformity with generally accepted accounting principles (as described therein), or, in the case of unaudited financial statements, in substantial conformity with generally accepted accounting principles, applied on a basis which is consistent in all material respects for each balance sheet date presented. (j) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the General Partner or the Fund, whether or not arising in the ordinary course of business. (k) The Advisory Agreement, the Limited Partnership Agreement, the Additional Selling Agents Agreement and this Agreement have each been duly and validly authorized, executed and delivered by the General Partner for itself and on behalf of the Fund, and each constitutes a legal, valid and binding agreement of the Fund and the General Partner enforceable in accordance with its terms. The Investment Advisory Agreement and the Customer Agreement have both been duly and validly authorized, executed and delivered by the General Partner on behalf of the Fund. (l) The execution and delivery of the Limited Partnership Agreement, the Customer Agreement, the Investment Advisory Agreement, the Additional Selling Agents Agreement, the Advisory Agreement and this Agreement, the incurrence of the obligations set forth in each of such agreements and the consummation of the transactions contemplated therein and in the Prospectus will not constitute a breach of, or default under, any instrument by which either the General Partner or the Fund, as the case may be, is bound or any order, rule or regulation applicable to the General -4- 7 Partner or the Fund of any court or any governmental body or administrative agency having jurisdiction over the General Partner or the Fund. (m) There is not pending, or, to the best of the General Partner's knowledge threatened, any action, suit or proceeding before or by any court or other governmental body to which the General Partner or the Fund is a party, or to which any of the assets of the General Partner or the Fund is subject, which is not referred to in the Prospectus and which might reasonably be expected to result in any material adverse change in the condition (financial or otherwise), business or prospects of the General Partner or the Fund or is required to be disclosed in the Prospectus pursuant to applicable CFTC regulations. The General Partner has not received any notice of an investigation or warning letter from the NFA or the CFTC regarding non-compliance by the General Partner with the Commodity Act or the regulations thereunder. (n) The General Partner has all federal and state governmental, regulatory and commodity exchange approvals and licenses, and has effected all filings and registrations with federal and state governmental agencies required to conduct its business and to act as described in the Registration Statement and Prospectus or required to perform its obligations as described under the Limited Partnership Agreement and this Agreement (including, without limitation, registration as a commodity pool operator under the Commodity Act and membership in the NFA as a commodity pool operator), and the performance of such obligations will not contravene or result in a breach of any provision of its certificate of incorporation, by-laws or any agreement, order, law or regulation binding upon it. The principals of the General Partner identified in the Registration Statement are all of the principals of the General Partner, as "principals" is defined by the CFTC regulations. Such principals are duly registered as such on the General Partner's commodity pool operator Form 7-R registration. (o) The Fund does not require any federal or state governmental, regulatory or commodity exchange approvals or licenses, or need to effect any filings or registrations with any federal or state governmental agencies in order to conduct its businesses and to act as contemplated by the Registration Statement and Prospectus and to issue and sell the Units (other than filings relating solely to the offering of the Units), and to trade in the commodity markets. (p) None of the General Partner or any principal or affiliate thereof has "operated," since January 1, 1991, any commodity pool, within the meaning of the CFTC's Part 4 Regulations, the performance of which is not included in the Prospectus. Section 2. Representations and Warranties of the Selling Agent. The Selling Agent represents and warrants to the Fund, the General Partner, the Trading Advisor and the Broker as follows: -5- 8 (a) The Selling Agent is a corporation duly organized and validly existing and in good standing under the laws of the State of Texas and in good standing and qualified to do business in each jurisdiction in which the nature or conduct of its business requires such qualification and the failure to be duly qualified would materially adversely affect the Selling Agent's ability to perform its obligations hereunder. The Selling Agent has full corporate power and authority to perform its obligations under this Agreement and as described in the Registration Statement and Prospectus. (b) All references to the Selling Agent and its principals in the Registration Statement and Prospectus are accurate and complete in all material respects, and set forth in all material respects the information required to be disclosed therein under the Commodity Act and the rules and regulations thereunder. As to the Selling Agent and its principals, (i) the Registration Statement and Prospectus contain all statements and information required to be included therein under the Commodity Act and the rules and regulations thereunder, (ii) the Registration Statement as of its effective date did not contain any misleading or untrue statement of a material fact or omit to state a material fact which is required to be stated therein or necessary to make the statements therein not misleading and (iii) the Prospectus at its date of issue and as of the Initial Public Closing Time did not and will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which such statements were made. (c) The Selling Agent has all federal and state governmental, regulatory and commodity exchange licenses and approvals, and has effected all filings and registrations with federal and state governmental and regulatory agencies required to conduct its business and to act as described in the Registration Statement and Prospectus or required to perform its obligations under this Agreement, and the performance of such obligations will not violate or result in a breach of any provision of the Selling Agent's certificate of incorporation, by-laws or any agreement, instrument, order, law or regulation binding upon the Selling Agent. (d) This Agreement has been duly authorized, executed and delivered by the Selling Agent and constitutes a valid, binding and enforceable agreement of the Selling Agent in accordance with its terms. (e) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as may otherwise be stated in or contemplated by the Registration Statement and the Prospectus, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the Selling Agent, whether or not arising in the ordinary course of business. -6- 9 (f) In the ordinary course of its business, the Selling Agent may be engaged in civil litigation and subject to administrative proceedings. Neither the Selling Agent nor any of its principals have been the subject of any administrative, civil, or criminal actions within the five years preceding the date hereof that would be material to an investor's decision to purchase the Units which are not disclosed in the Prospectus. (g) The execution and delivery of this Agreement, the incurrence of the obligations set forth herein and the consummation of the transactions contemplated herein and in the Prospectus will not constitute a breach of, or default under, any instrument by which the Selling Agent is bound or any order, rule or regulation applicable to the Selling Agent of any court or any governmental body or administra tive agency having jurisdiction over the Selling Agent. Section 3. Representations and Warranties of the Trading Advisor. The Trading Advisor represents and warrants to the Fund, the Selling Agent, the Broker and the General Partner as follows: (a) The Trading Advisor is a corporation duly organized and validly existing and in good standing under the laws of the State of New York and in good standing as a foreign corporation in each other jurisdiction in which the nature or conduct of its business requires such qualification and the failure to be duly qualified would materially affect the Trading Advisor's ability to perform its obligations under this Agreement and the Advisory Agreement. The Trading Advisor has full corporate power and authority to perform its obligations under this Agreement and the Advisory Agreement as described in the Registration Statement and Prospectus. (b) All references to the Trading Advisor and its principals, and its trading systems, methods and performance in the Registration Statement and the Prospectus are accurate and complete in all material respects. As to the Trading Advisor, each of the principals of the Trading Advisor, the Trading Strategy and the Trading Advisor's trading systems, strategies and performance, (i) the Registration Statement and Prospectus contain all statements and information required to be included therein under the Commodity Act and the rules and regulations thereunder, (ii) the Registration Statement (with respect to the information relating to the Trading Advisor) as of its effective date did not contain any misleading or untrue statement of a material fact or omit to state a material fact which is required to be stated therein or necessary to make the statements therein not misleading and (iii) the Prospectus (with respect to information relating to the Trading Advisor) at its date of issue and as of the Initial Public Closing Time, as supplemented, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which such statements were made. Except as otherwise disclosed in the Prospectus or identified in writing to the General Partner on or prior to the date hereto, the actual performance of each discretionary account directed by the Trading Advisor or any principal or affiliate of the Trading Advisor for the periods covered by the perform- -7- 10 ance summaries set forth in the Prospectus is disclosed in accordance with the requirements of the Commodity Act and the rules and regulations thereunder (or as otherwise permitted by the Staff of the Division of Trading and Markets). The information, performance summaries and monthly rates of return relating to the performance of the Trading Advisor comply in all material respects with the disclosure requirements of the rules and regulations of the CFTC under the Commodity Act. The performance summaries in the Prospectus (as applicable to the Trading Advisor) have been calculated in the manner set forth in the notes thereto. (c) The Advisory Agreement and this Agreement have each been duly and validly authorized, executed and delivered on behalf of the Trading Advisor and both constitute valid, binding and enforceable agreements of the Trading Advisor in accordance with their terms. (d) The Trading Advisor has all federal and state governmental, regulatory and commodity exchange licenses and approvals and has effected all filings and registrations with federal and state governmental and regulatory agencies required to conduct its business and to act as described in the Registration Statement and Prospectus or required to perform its obligations under this Agreement and the Advisory Agreement (including, without limitation, registration of the Trading Advisor as a commodity trading advisor under the Commodity Act and membership of the Trading Advisor as a commodity trading advisor in the NFA), and the performance of such obligations will not violate or result in a breach of any provision of the Trading Advisor's Certificate of Incorporation, By-laws or any agreement, instrument, order, law or regulation binding on the Trading Advisor. The principals of the Trading Advisor are duly listed as such on the Trading Advisor's commodity trading advisor Form 7-R registration. (e) Management by the Trading Advisor of an account for the Fund in accordance with the terms hereof and of the Advisory Agreement, and as described in the Prospectus, will not require any registration under, or violate any of the provisions of, the Investment Advisers Act of 1940. (f) Neither the Trading Advisor nor any principal of the Trading Advisor will use or distribute any preliminary prospectus, Prospectus, amended or supplemented Prospectus or selling literature nor engage in any selling activities whatsoever in connection with the offering of the Units. (g) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as may otherwise be stated in or contemplated by the Registration Statement and the Prospectus, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the Trading Advisor, whether or not arising in the ordinary course of business. -8- 11 (h) The execution and delivery of this Agreement and the Advisory Agreement, the incurrence of the obligations herein and therein set forth and the consummation of the transactions contemplated herein and therein and in the Prospectus will not constitute a breach of, or default under, any instrument by which the Trading Advisor is bound or any order, rule or regulation applicable to the Trading Advisor of any court or any governmental body or administrative agency having jurisdiction over the Trading Advisor. (i) There is not pending, or to the best of the Trading Advisor's knowledge threatened, any action, suit or proceeding before or by any court or other govern mental body to which the Trading Advisor is a party, or to which any of the assets of the Trading Advisor is subject, which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, business or prospects of the Trading Advisor. The Trading Advisor has not received any notice of an investigation or warning letter from the NFA or the CFTC regarding non-compliance by the Trading Advisor with the Commodity Act or the regulations thereunder. (j) The Trading Advisor has not received, and is not entitled to receive, directly or indirectly, any commission, finder's fee, similar fee or rebate from any person in connection with the organization or operation of the Fund. Section 4. Representations and Warranties of the Broker. The Broker represents and warrants to the Fund, the General Partner, the Trading Advisor and the Selling Agent, as follows: (a) The Broker is a corporation duly organized and validly existing and in good standing under the laws of the State of Illinois and in good standing and qualified to do business in each jurisdiction in which the nature or conduct of its business requires such qualification and the failure to be duly qualified would materially adversely affect the Broker's ability to perform its obligations hereunder or under the Customer Agreement. The Broker has full corporate power and authority to perform its obligations under the Customer Agreement and this Agreement and as described in the Registration Statement and Prospectus. (b) All references to the Broker in the Registration Statement and Prospectus are accurate and complete in all material respects, and set forth in all material respects the information required to be disclosed therein under the Commodity Act and the rules and regulations thereunder. As to the Broker, (i) the Registration Statement and Prospectus contain all statements and information required to be included therein under the Commodity Act and the rules and regulations thereunder, (ii) the Registration Statement as of its effective date did not contain any misleading or untrue statement of a material fact or omit to state a material fact which is required to be stated therein or necessary to make the statements therein not misleading and (iii) the Prospectus at its date of issue and as of the Initial Public Closing Time did not and will not contain an untrue statement of a material fact or omit to state a material fact -9- 12 necessary to make the statements therein not misleading, in light of the circumstances under which such statements were made. (c) The Broker has all federal and state governmental, regulatory and commodity exchange licenses and approvals, and has effected all filings and registrations with federal and state governmental and regulatory agencies required to conduct its business and to act as described in the Registration Statement and Prospectus or required to perform its obligations under the Customer Agreement and this Agreement (including, without limitation, registration of the Broker as a futures commission merchant under the Commodity Act and membership of the Broker as a futures commission merchant in the NFA), and the performance of such obligations will not violate or result in a breach of any provision of the Broker's certificate of incorporation, by-laws or any agreement, instrument, order, law or regulation binding upon the Broker. (d) This Agreement and the Customer Agreement have been duly authorized, executed and delivered by the Broker, and constitute valid, binding and enforceable agreements of the Broker in accordance with their terms. (e) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as may otherwise be stated in or contemplated by the Registration Statement and the Prospectus, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the Broker, whether or not arising in the ordinary course of business. (f) In the ordinary course of its business, the Broker is engaged in civil litigation and subject to administrative proceedings. Neither the Broker nor any of its principals have been the subject of any administrative, civil, or criminal actions within the five years preceding the date hereof that would be material to an investor's decision to purchase the Units which are not disclosed in the Prospectus. (g) The execution and delivery of the Customer Agreement and this Agreement, the incurrence of the obligations set forth herein and therein and the con summation of the transactions contemplated herein and therein and in the Prospectus will not constitute a breach of, or default under, any instrument by which the Broker is bound or any order, rule or regulation applicable to the Broker of any court or any governmental body or administrative agency having jurisdiction over the Broker. -10- 13 Section 5. Offering and Sale of Units. (a) The Selling Agent is hereby appointed the principal selling agent of the Fund (although as described herein it is contemplated that certain Additional Selling Agents (including those introduced to the Selling Agent by Wholesalers), Wholesalers and Correspondents may also market Units provided each of such Additional Selling Agents, Wholesalers and Correspondents is duly registered as a broker-dealer in each jurisdiction in which such person markets Units) during the term herein specified for the purpose of finding acceptable subscribers for the Fund through a public offering. The Initial Public Offering Period shall continue until the first full month after the Registration Statement has been declared effective (the "Initial Public Offering Period"; such date being hereafter referred to as the "Initial Public Offering Termination Date"). Thereafter, Units may be sold as of the beginning of each month, as determined by the General Partner (the "Ongoing Public Offering Period"; such subsequent sale dates being hereinafter referred to as "Subsequent Public Closing Times"). The Initial Public Offering Period and the Ongoing Public Offering Period shall be referred to herein as the "Public Offering Period." Subject to the performance by the General Partner of all its obligations to be performed hereunder, and to the completeness and accuracy in all material respects of all the representations and warranties of the General Partner, the Broker and the Trading Advisor contained herein, the Selling Agent hereby accepts such agency and agrees on the terms and conditions herein set forth to use its best efforts during the Public Offering Period to find acceptable subscribers for the Units at a public offering price of 101% of Net Asset Value (including the 1% organizational charge referred to below), each subscriber being required to make a minimum subscription of at least $10,000, except for (i) trustees or custodians of eligible tax-exempt accounts and individual retirement accounts and (ii) Limited Partners subscribing for additional Units, where the minimum subscription is $5,000. It is understood that the Selling Agent's agreement to use its best efforts to find acceptable subscribers for the Units shall not prevent it from acting as a selling agent or underwriter for the securities of other issuers which may be offered or sold during the Public Offering Period. (b) At the Initial Public Offering Closing Time the General Partner shall notify the Selling Agent of the aggregate number of Units for which the General Partner has received acceptable subscriptions and payment of the purchase price for the Units may, if the General Partner so elects, be made at the office of ProFutures, Inc., 11612 Bee Cave Road, Suite 100, Austin, Texas 78733, or at such other place as shall be agreed upon between the Selling Agent and the General Partner, at 10:00 A.M., Texas time, on the fifth full business day after the day on which the General Partner notifies the Selling Agent of the number of Units for which subscriptions have been accepted or such other day and time as shall be agreed upon between the Selling Agent and the General Partner (the "Initial Public Closing Time"). (c) An organizational charge of 1% of the Net Asset Value of the Units subscribed for will be paid to the General Partner by each subscriber. The General -11- 14 Partner has paid all actual costs of organizing the Fund and conducting the public offering of the Units. To the extent that the aggregate 1% organizational charge is less than the actual costs, the General Partner will pay the costs. To the extent that the aggregate 1% organizational charge collected exceeds the actual costs, the excess amount will be paid to the Selling Agent. Such payment could be deemed to be a selling commission. The Additional Selling Agents, if any, shall be compensated as set forth in the Additional Selling Agents Agreement attached hereto as Exhibit A. (d) The Selling Agent will compensate its own Registered Representatives pursuant to the Selling Agent's standard compensation procedures. The Selling Agent will pay, from funds received from the General Partner, Additional Selling Agents initial selling commissions of up to 3% of the Net Asset Value of each Unit sold by the Registered Representatives of each such Additional Selling Agent. In the case of an Additional Selling Agent introduced by a Wholesaler, the Selling Agent will pay such Wholesaler a portion of the up to 3% per Unit selling commissions depending upon the Wholesaler's arrangements with the Additional Selling Agent. Ongoing compensation, of up to 2% per annum of the month-end Net Asset Value of the Units attributable to Units sold by a Registered Representative of the Additional Selling Agent which remain outstanding for more than twelve months (including the month as of the end of which such Units are redeemed) will also be paid to the Selling Agent, from funds received from the General Partner, provided that such Additional Selling Agent is and remains registered with the CFTC as a futures commission merchant or introducing broker and is a member in good standing with NFA in such capacity and agrees to provide the additional services described below. For purposes of determining when ongoing compensation should begin to accrue, Units sold during the Initial Offering Period shall not be deemed to be outstanding until the Initial Closing Time. The ongoing compensation described in the foregoing paragraph shall be paid only in respect of Registered Representatives registered with the CFTC as associated persons of the Additional Selling Agent who have satisfied all applicable proficiency requirements (including those imposed by the NASD as a condition of receiving such ongoing compensation) by either passing the Series 3 National Commodity Futures Exam or the Series 31 exam or being "grandfathered" from having to do so who sold outstanding Units in their capacity as registered representatives of an Additional Selling Agent and who agree to provide additional services in connection with such Units, including but not limited to: (i) inquiring of the General Partner from time to time, at the request of a Limited Partner, as to the Net Asset Value of a Unit; (ii) inquiring of the General Partner from time to time, at the request of a Limited Partner, regarding the commodities markets and the Fund; (iii) assisting, at the request of the General Partner, in the redemption of Units sold by such Registered Representative; and (iv) responding to questions of Limited Partners from time to time with respect to monthly account statements, annual reports and financial statements furnished to Limited Partners; and (v) providing such services to the Limited Partners as the General Partner may, from time to time, reasonably request. -12- 15 Ongoing compensation shall be credited and paid only in respect of Units sold by Registered Representatives who are eligible to receive such ongoing compensation as described above. No ongoing compensation whatsoever shall be credited, paid or accrued on any Units sold by Registered Representatives not then eligible to receive such ongoing compensation. The Additional Selling Agent may receive such ongoing compensation with respect to particular Units where substitute Registered Representatives who are appropriately registered agree in writing to perform the services described in this Section 5(d) above with respect to such Units ("Substitute Registered Representatives"). Such ongoing compensation shall be paid monthly. In the event that the payment of ongoing compensation is restricted by the NASD, the Selling Agent's payments of such ongoing compensation shall be limited to the maximum amount permissible pursuant to such restrictions. Additional Selling Agents will receive an installment selling commission of up to 2% per annum of the month-end Net Asset Value of Units remaining outstanding after the twelfth month following their sale by such Additional Selling Agent if: (i) the Additional Selling Agents are not registered with NFA as futures commissions merchants or introducing brokers; (ii) the Registered Representatives engaged in the sale of Units are not registered as associated persons of a futures commissions merchant or introducing broker; or (iii) the Additional Selling Agents or their registered representatives engaged in the sale of Units do not agree to provide ongoing services to the purchasers of Units. Installment selling commissions, if any, will be paid by the Selling Agent from funds received from the General Partner. Installment selling commissions are limited such that the sum of the initial selling commission and the aggregate installment selling commissions paid such Additional Selling Agents may not exceed 9% of the Net Asset Value, at the time of sale, of Units sold by such Additional Selling Agents. In the case of an Additional Selling Agent introduced by a Wholesaler, the Selling Agent will pay a portion of the up to 2% per annum monthly ongoing compensation or installment selling commissions to the Wholesaler depending upon the Wholesaler's arrangement with the Additional Selling Agent; provided, however, that such wholesaler shall not receive in excess of 9% of the initial Net Asset Value of the Units sold by such Additional Selling Agent when aggregated with the selling commissions and/or ongoing compensation payed to such Additional Selling Agent. In respect of Correspondents selected by an Additional Selling Agent (with the consent of the General Partner and the Selling Agent), the Selling Agent shall pay such Additional Selling Agent selling commissions and ongoing compensation or installment sales commissions as set forth above, a portion (as agreed between such Additional Selling Agent and each such Correspondent) of which shall be passed on by the Additional Selling Agent to such Correspondents. -13- 16 (e) The Selling Agent will use its best efforts to find eligible persons to purchase the Units on the terms stated herein and in the Registration Statement and Prospectus. It is understood that the Selling Agent has no commitment with regard to the sale of the Units other than to use its best efforts. In connection with the offer and sale of the Units, the Selling Agent represents that it will comply fully with all applicable laws, and the rules of the NASD, the SEC, the CFTC, state securities administrators and any other regulatory body. In particular, and not by way of limitation, the Selling Agent represents and warrants that it is aware of Rule 2810 of the NASD and that it will comply fully with all the terms thereof in connection with the offering and sale of the Units. The Selling Agent shall not execute any sales of Units from a discretionary account over which it has control without prior written approval of the customer in whose name such discretionary account is maintained. The Selling Agent agrees not to recommend the purchase of Units to any subscriber unless the Selling Agent shall have reasonable grounds to believe, on the basis of information obtained from the subscriber concerning, among other things, the subscriber's investment objectives, other investments, financial situation and needs, that the subscriber is or will be in a financial position appropriate to enable the subscriber to realize to a significant extent the benefits of the Fund, including tax benefits described in the Prospectus; the subscriber has a fair market net worth sufficient to sustain the risks inherent in participating in the Fund, including loss of investment and lack of liquidity; and the Units are otherwise a suitable investment for the subscriber. The Selling Agent agrees to maintain files of information disclosing the basis upon which the Selling Agent determined that the suitability requirements of Section (b)(2) of Rule 2810 of the NASD were met as to each subscriber (the basis for determining suitability may include the Subscription Agreements and Powers of Attorney and other certificates submitted by subscribers). The Selling Agent represents and warrants that it has reasonable grounds to believe, based on information in the Prospectus and information to which the Selling Agent has had access due to its affiliation with the General Partner, that all material facts relating to an investment in the Units are adequately and accurately disclosed in the Prospectus. In connection with making the foregoing representations and warranties, the Selling Agent further represents and warrants that it has, among other things, examined the Prospectus and obtained such additional information from the General Partner and the Trading Advisor regarding the information set forth thereunder as the Selling Agent has deemed necessary or appropriate to determine whether the Prospectus adequately and accurately discloses all material facts relating to an investment in the Fund and provides an adequate basis to subscribers for evaluating an investment in the Units. In connection with making the representations and warranties set forth in this paragraph, the Selling Agent has not relied on inquiries made by or on behalf of any other parties. The Selling Agent agrees to inform all prospective purchasers of Units of all pertinent facts relating to the liquidity and marketability of the Units as set forth in the Prospectus. -14- 17 (f) None of the Selling Agent, the Fund or the General Partner shall, directly or indirectly, pay or award any finder's fees, commissions or other compensation to any person engaged by a potential investor for investment advice as an inducement to such advisor to advise the purchase of Units; provided, however, the normal sales commissions payable to a registered broker-dealer or other properly licensed person for selling Units shall not be prohibited hereby. (g) All payments for subscriptions shall be made by deposit of check or transfer of funds to the custodial account of the Fund as described in the Prospectus. (h) The General Partner agrees to cause its counsel to prepare and deliver to the Selling Agent a Blue Sky Survey which shall set forth, for the guidance of the Selling Agent, in which United States jurisdictions the Units may be offered and sold. It is understood and agreed that the Selling Agent may rely, in connection with the offering and sale of Units in any jurisdiction, on advice given by such counsel as to the legality of the offer or sale of the Units in such jurisdiction, provided, however, that the Selling Agent shall be responsible for compliance with all applicable laws, rules and regulations with respect to the actions of its employees, acting as such, in connection with sales of Units in any jurisdiction. Section 6. Covenants of the General Partner. (a) The General Partner will notify the Selling Agent, the Broker and the Trading Advisor immediately and confirm such notification in writing (i) when any amendment to the Registration Statement shall have become effective, (ii) of the receipt of any comments from the SEC, CFTC or any other Federal or state regulatory body with respect to the Registration Statement, (iii) of any request by the SEC, CFTC or any other Federal or state regulatory body for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information relating thereto and (iv) of the issuance by the SEC, CFTC or any other Federal or state regulatory body of any order suspending the effectiveness of the Registration Statement under the 1933 Act, the CFTC registration or NFA membership of the General Partner as a commodity pool operator, or the registration of Units under the Blue Sky or securities laws of any state or other jurisdiction or any order or decree enjoining the offering or the use of the then current Prospectus or of the institution, or notice of the intended institution, of any action or proceeding for that purpose. (b) The General Partner will deliver to the Selling Agent, as soon as available, a conformed copy of each amendment to the Registration Statement as originally filed including the Exhibits thereto, and will also deliver to the Selling Agent such additional number of conformed copies of the Registration Statement as originally filed and of each amendment thereto (including Exhibits) as the Selling Agent shall reasonably require. -15- 18 (c) The General Partner will deliver to the Selling Agent as promptly as practicable from time to time during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as the Selling Agent, Wholesalers, Additional Selling Agents and Correspondents may reasonably request for the purposes contemplated by the 1933 Act or the SEC Regulations. (d) During the period when the Prospectus is required to be delivered pursuant to the 1933 Act, the General Partner and the Fund will use best efforts to comply with all requirements imposed upon them by the 1933 Act and the Commodity Act, each as now and hereafter amended, and by the SEC Regulations and rules and regulations of the CFTC, as from time to time in force, so far as necessary to permit the continuance of sales of, or dealings in, the Units during such period in accordance with the provisions hereof and as set forth in the Prospectus. (e) If any event relating to or affecting the General Partner or the Fund shall occur as a result of which it is necessary, in the reasonable opinion of the Selling Agent, to amend or supplement the Prospectus in order to make the Prospectus not materially misleading in light of the circumstances existing at the time it is delivered to a subscriber, the General Partner and the Fund will forthwith prepare and furnish to the Selling Agent, at the expense of the General Partner, a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Prospectus which will amend or supplement the Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a subscriber, not misleading. No such amendment or supplement shall be filed without the approval of the Selling Agent, the Broker and the Trading Advisor. (f) The General Partner will use best efforts to qualify the Units for offer and sale under applicable securities or "Blue Sky" laws and continue such qualification throughout the Offering Period, provided that in no event shall the General Partner or the Fund be obligated to (i) take any action which would subject it to service of process in suits other than those arising out of the offering or sale of the Units, or taxes, in any jurisdiction where either is not now so subject, (ii) change any material term in the Registration Statement or (iii) expend a sum of money considered unreasonable by the General Partner. -16- 19 Section 7. Covenants of the Trading Advisor. (a) The Trading Advisor agrees to cooperate, to the extent reasonably requested by the General Partner, in the preparation of any amendments or supplements relating to itself to the Registration Statement and the Prospectus. (b) During the period when the Prospectus is required to be delivered under the 1933 Act, the Trading Advisor agrees to notify the General Partner immediately upon discovery of any untrue or misleading statement regarding it, its operations or any of its principals or of the occurrence of any event or change in circumstances which would result in there being any untrue or misleading statement or an omission in the Prospectus or Registration Statement regarding it, its operations or any of its principals or result in the Prospectus not including all information relating to the Trading Advisor and its principals required pursuant to CFTC regulations. During such period, the Trading Advisor shall promptly inform the General Partner if it is necessary to amend or supplement the Prospectus in order to make the Prospectus not materially misleading in light of the circumstances existing at the time the Prospectus is delivered to a subscriber. Section 8. Covenants of the Broker. (a) The Broker agrees to cooperate, to the extent reasonably requested by the General Partner, in the preparation of any amendments or supplements relating to itself to the Registration Statement and the Prospectus. (b) During the period when the Prospectus is required to be delivered under the 1933 Act, the Broker agrees to notify the General Partner immediately upon discovery of any untrue or misleading statement regarding it, its operations or any of its principals or of the occurrence of any event or change in circumstances which would result in there being any untrue or misleading statement or an omission in the Prospectus or Registration Statement regarding it, its operations or any of its principals or result in the Prospectus not including all information relating to the Broker and its principals required pursuant to CFTC regulations. During such period, the Broker shall promptly inform the General Partner if it is necessary to amend or supplement the Prospectus in order to make the Prospectus not materially misleading in light of the circumstances existing at the time the Prospectus is delivered to a subscriber. Section 9. Payment of Expenses and Fees. The General Partner will pay all expenses incident to the performance of the obligations of the General Partner and the Fund hereunder, including: (i) the printing and delivery to the Selling Agent in quantities as hereinabove stated of copies of the Registration Statement and all amendments thereto, of the Prospectus and any supplements or amendments thereto, and of any supplemental sales materials; (ii) the reproduction of this Agreement and the printing and filing of the Registration Statement and the Prospectus (and, in certain cases, the exhibits thereto) with the SEC, CFTC and NFA; (iii) the qualification of the Units -17- 20 under the securities or "Blue Sky" laws in the various jurisdictions, including filing fees and the fees and disbursements of the General Partner's counsel incurred in connection therewith; (iv) the services of counsel and accountants for the General Partner and the Fund, including certain services of Arthur F. Bell, Jr. & Associates, L.L.C. in connection with their review of the performance records in the Prospectus; (v) the printing or reproduction and delivery to the Selling Agent of such number of copies as it may reasonably request of the Blue Sky Survey; and (vi) "road show" presentations (not including the expenses of the Trading Advisor and their personnel which shall be borne by the Trading Advisor). The General Partner and the Selling Agent are each aware of the limitations imposed by Rule 2810 of the NASD on the aggregate selling commissions which may be received by the Selling Agent in connection with the offering and sale of the Units. The General Partner will in no event make any payments deemed by the NASD to constitute underwriting compensation to the Selling Agent nor shall the Selling Agent make any such payments to its own Registered Representatives or any Additional Selling Agents as described above, which would exceed 9.9% of the gross proceeds of the Units sold to the public. The General Partner shall not reimburse the Selling Agent for any due diligence expenses in connection with the offering. Section 10. Conditions of Closing. The obligations of each of the parties hereunder are subject to the accuracy of the representations and warranties of the other parties hereto, to the performance by such other parties of their respective obligations hereunder and to the following further conditions: (a) At the Initial Public Closing Time and each Subsequent Public Closing Time no order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceeding therefor initiated or threatened by the SEC and no objection to the content thereof shall have been expressed or threatened by the CFTC or the NFA. (b) At the Initial Closing Time, Sidley & Austin, counsel to the General Partner, shall deliver to all the parties hereto its opinion, in form and substance satisfactory to each of the parties hereto, to the effect that: (i) The Certificate of Limited Partnership pursuant to which the Fund has been formed and the Limited Partnership Agreement each provides for the subscription for and sale of the Units; all action required to be taken by the General Partner and the Fund as a condition to the subscription for and sale of the Units to qualified subscribers therefor has been taken; and, upon payment of the consideration therefor specified in the accepted Subscription Agreements and Powers of Attorney, the Units will constitute valid limited partnership interests in the Fund and each subscriber who pur chases Units will become a Limited Partner, subject to the requirement that each such purchaser shall have duly completed, executed and delivered to the Fund a Subscription Agreement and Power of -18- 21 Attorney relating to the Units purchased by such party, that such purchaser meets all applicable suitability standards as set forth in the Prospectus and that the representations and warranties of such purchaser in the Subscription Agreement and Power of Attorney are true and correct. (ii) The Fund is a limited partnership duly organized pursuant to the Certificate of Limited Partnership, the Limited Partnership Agreement and DRULPA and validly existing under the laws of the State of Delaware with partnership power and authority to conduct the business in which it proposes to engage as described in the Prospectus; the Fund has qualified to do business in Texas and need not effect any other filings or qualifications under the laws of the United States and the States of Illinois, New York, Texas and California and the District of Columbia in order to preserve the status of the Fund as a limited partnership or to enable the Fund to perform its obligations under the Advisory Agreement and this Agreement and to conduct the business in which it proposes to be engaged as described in the Prospectus. (iii) The General Partner is duly organized and validly existing and in good standing as a corporation under the laws of the State of Texas with corporate power and authority to act as general partner of the Fund, and is qualified to do business and is in good standing as a foreign corporation in each other jurisdiction in which the failure to so qualify might, in their opinion, reasonably be expected to result in material adverse consequences to the Fund. The General Partner has full corporate power and authority to perform its obligations as described in the Registration Statement and Prospectus. (iv) Each of the General Partner (including the principals, as defined in the Commodity Act, of the General Partner) and the Fund has all Federal and state governmental and regulatory licenses and approvals and has received or made all filings and registrations with Federal and state governmental and regulatory agencies necessary in order for each of the General Partner and the Fund to conduct its business as described in the Registration Statement and Prospectus, and, to the best of their knowledge, none of such approvals, licenses or registrations have been rescinded or revoked. (v) Each of the Limited Partnership Agreement, the Advisory Agreement, the Customer Agreement, the Investment Advisory Agreement, the Additional Selling Agents Agreement and this Agreement has been duly and validly authorized, executed and delivered by or on behalf of the General Partner or the Fund (as the case -19- 22 may be) and assuming that such agreements are legal, valid and binding on the other parties hereto and thereto, each of the Limited Partnership Agreement, the Advisory Agreement, the Customer Agreement, the Investment Advisory Agreement, the Additional Selling Agents Agreement and this Agreement constitutes a legal, valid and binding agreement of the General Partner or the Fund (as the case may be) enforceable in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). (vi) The execution and delivery of this Agreement, the Limited Partnership Agreement, the Customer Agreement, the Investment Advisory Agreement, the Additional Selling Agents Agreement and the Advisory Agreement and the incurrence of the obligations herein and therein set forth and the consummation of the transactions contemplated herein and therein and in the Prospectus will not be in contravention of any of the provisions of the General Partner's certificate of incorporation or by-laws, of the Limited Partnership Agreement, and, to their knowledge, will not constitute a breach of, or default under, any instrument by which the General Partner or the Fund is bound or any order, rule or regulation applicable to the General Partner or the Fund of any court or any governmental body or administrative agency having jurisdiction over the General Partner or the Fund. (vii) To their knowledge, there are no actions, claims or proceedings pending or threatened in any court or before or by any governmental or administrative body, nor have there been any such suits, claims or proceeding within the last five years, to which the General Partner (or any principal of the General Partner) or the Fund is or was a party, or to which any of their assets is or was subject, which are required to be, but are not disclosed in, the Registration Statement or Prospectus or which might reasonably be expected to materially adversely affect the condition (financial or otherwise), business or prospects of the General Partner or the Fund. (viii) No authorization, approval or consent of any governmental authority or agency is necessary in connection with the subscription for and sale of the Units, except such as may be required under the 1933 Act, the Commodity Act, NFA compliance rules or applicable securities or "Blue Sky" laws. -20- 23 (ix) The terms and provisions of the Limited Partnership Agreement, the Customer Agreement, the Advisory Agreement, the Investment Advisory Agreement, the Additional Selling Agents Agreement and this Agreement conforms in all material respects to descriptions thereof contained in the Prospectus. (x) The Registration Statement is effective under the 1933 Act and, to the best of their knowledge, no proceedings for a stop order are pending or threatened under Section 8(d) of the 1933 Act. (xi) At the time the Registration Statement initially became effective and at the time any post-effective amendment thereto became effective, the Registration Statement, and at the time the Prospectus and any amendments or supplements thereto were first issued, the Prospectus, complied as to form in all material respects with the requirements of the 1933 Act, the SEC Regulations under the 1933 Act and CFTC regulations. Nothing has come to their attention that would lead them to believe that with respect to the General Partner and the Selling Agent (a) at the time the Registration Statement initially became effective and at the time any post-effective amendment thereto became effective, the Registration Statement contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Prospectus as first issued or as subsequently issued or at the Initial Public Closing Time contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that such counsel need express no opinion (A) as to the financial statements, notes thereto and other financial or statistical data set forth in the Registration Statement and Prospectus or (B) as to any performance data set forth in the Registration Statement, and Prospectus, including the performance summaries (and the notes thereto) in the Registration Statement and Prospectus, except that such counsel shall opine, without rendering any opinion as to the accuracy of the information in the performance summaries, that such the performance summaries comply as to form in all material respects with applicable CFTC rules. (xii) Such counsel confirm their opinion, a form of which appears as Exhibit 8.01 to the Registration Statement, that the sum mary of Federal income tax consequences to Limited Partners set forth under the caption "Tax Consequences" in the Prospectus accurately describes the material tax consequences set forth therein -21- 24 and that such counsel further confirm their advice to the General Partner explicitly set forth therein and in such Exhibit 8.01. (xiii) To the best of their knowledge, (a) there are no contracts, indentures, mortgages, loan agreements, leases or other documents of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement other than those described or referred to therein or filed as exhibits thereto, and with respect to the existing contracts, indentures, mortgages, loan agreements, leases and other documents so described, referred to or filed, the descriptions thereof, references thereto or copies so filed are correct in all material respects, and (b) no material default on the part of the General Partner or the Fund exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract or lease so described or filed. (xiv) Assuming operation in accordance with the Prospectus, the Fund, at Closing Time, is not an "investment company" as that term is defined in the Investment Company Act of 1940, as amended. In rendering the opinions set forth above, Sidley & Austin may rely as to certain matters relating to the General Partner on Fishman, Jones, Walsh & Gray, P.C. (c) Counsel to the Selling Agent shall deliver to all the parties hereto, an opinion to the effect that: (i) The Selling Agent is duly organized and validly existing and in good standing as a corporation under the laws of the State of Texas and is qualified to do business and in good standing as a foreign corporation in each jurisdiction in which such qualification is required and in which the failure to so qualify might, in such counsel's opinion, reasonably be expected to result in material adverse consequences to the Fund. The Selling Agent has full corporate power and authority to perform its obligations as described in the Registration Statement and Prospectus. (ii) This Agreement has been duly authorized, executed and delivered by the Selling Agent, and constitutes a legal, valid and binding agreement of the Selling Agent enforceable in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered). -22- 25 (iii) The Selling Agent has all Federal and state governmental and regulatory licenses and approvals and has received or made all filings and registrations with Federal and state governmental and regulatory agencies necessary in order for the Selling Agent to conduct its business as described in the Registration Statement and Prospectus, and, to such counsel's knowledge, none of such approvals, licenses or registrations has been rescinded or revoked. (iv) The execution and delivery of this Agreement, the incurrence of the obligations herein set forth and the consummation of the transactions contemplated herein and in the Prospectus will not, to the best of such counsel's knowledge, constitute a breach of, or default under, any instrument known to such counsel by which the Selling Agent is bound or, any order, rule or regulation applicable to the Selling Agent, of any court or any governmental body or administrative agency having jurisdiction over the Broker. (v) To such counsel's knowledge, there are no actions, claims or proceedings pending or threatened in any court or before or by a governmental or administrative body, nor have there been any suits, claims or proceedings within the last five years, to which the Selling Agent (or any principal of the Selling Agent) is or was a party or to which any of its assets is or was subject, which are required to be disclosed in the Registration Statement or Prospectus or which might reasonably be expected to materially adversely affect the business of the Selling Agent. (vi) Nothing has come to such counsel's attention that would lead such counsel to believe that (a) at the time the Registration Statement initially became effective and at the time any post- effective amendment thereto became effective, insofar as the Selling Agent and its principals are concerned, the Registration Statement contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Prospectus as first filed pursuant to Rule 424(b) or as subsequently filed pursuant to Rule 424 or at the Initial Public Closing Time contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein relating to the Selling Agent or its principals, in light of the circumstances under which they were made, not mis leading. (d) Counsel to the Trading Advisor shall deliver to the General Partner, the Broker and the Selling Agent an opinion as of the Initial Public Closing Time to the effect that: -23- 26 (i) The Trading Advisor is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and is in good standing in each jurisdiction in which the nature or conduct of its business requires such qualification and in which the failure to so qualify might reasonably be expected to materially adversely affect the Fund, as described in the Registration Statement and Prospectus, and its ability to discharge its obligations under the Advisory Agreement and this Agreement. (ii) Each of the Advisory Agreement and this Agreement has been duly authorized, executed and delivered by the Trading Advisor and constitutes a valid, binding and enforceable agreement of the Trading Advisor in accordance with its terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability generally of rights of creditors and except as enforceability of the indemnification provisions contained in such Agreements may be limited by applicable law and the enforcement of specific terms or remedies may be unavailable. (iii) The Trading Advisor (including the principals of the Trading Advisor) has all material Federal and state governmental and regulatory licenses and approvals and has received or made all filings and registrations with Federal and state governmental and regulatory authorities necessary in order for the Trading Advisor to conduct its business as described in the Registration Statement and Prospectus (including, without limitation, performance of this Agreement and the Advisory Agreement) and, to the best of such counsel's knowledge, none of such approvals, licenses or registrations has been rescinded or revoked. (iv) There is not pending or, to the best of such counsel's knowledge, threatened any actions, suits or proceedings before or by any court or other governmental or administrative body, nor have there been any such suits, claims or proceedings within the last five years to which the Trading Advisor, or any of its principals, is or was a party, or to which any of their assets is or was subject, which are required to be, but are not disclosed in the Registration Statement or Prospectus or which might reasonably be expected to result in any material adverse change in the condition (financial or otherwise), business or prospects of the Trading Advisor. (v) The execution and delivery of this Agreement and the Advisory Agreement, the incurrence of the obligations herein and therein set forth and the consummation of the transactions contemplated herein, therein and in the Prospectus will not be in contraven- -24- 27 tion of any of the provisions of the certificate of incorporation or by-laws of the Trading Advisor, or, to the best of such counsel's knowledge, constitute a breach of, or default under, any instrument by which the Trading Advisor is bound or any order, rule or regulation applicable to the Trading Advisor of any court or any governmental body or administrative agency having jurisdiction over the Trading Advisor. (vi) Nothing has come to such counsel's attention that would lead such counsel to believe that (a) at the time the Registration Statement initially became effective and at the time any post-effective amendment thereto became effective, insofar as the Trading Advisor and its principals are concerned, the Registration Statement contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Prospectus as first filed pursuant to Rule 424(b) or as subsequently filed pursuant to Rule 424 or at the Initial Public Closing Time contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein relating to the Trading Advisor or its principals, in light of the circumstances under which they were made, not misleading; provided, however, that no counsel for the Trading Advisor need express an opinion or belief (A) as to the financial statements, notes thereto and other financial or statistical data and notes or descriptions thereto set forth in the Registration Statement and Prospectus or (B) as to the performance data and notes or descriptions thereto set forth in the Registration Statement, except that such counsel shall opine, without rendering any opinion as to the accuracy of the information in such performance summaries, that the performance summaries relating to the Trading Advisor set forth in the Prospectus comply as to form in all material respects with CFTC rules. (e) At the Initial Public Closing Time, the General Partner shall deliver a certificate to the effect that: (i) no order suspending the effectiveness of the Registration Statement has been issued and to the best of its knowledge no proceedings therefor have been instituted or threatened by the SEC, the CFTC or other regulatory body; (ii) the representations and warranties of the General Partner contained herein are true and correct with the same effect as though expressly made at the Initial Closing Time and in respect of the Registration Statement as in effect at the Initial Public Closing Time; and (iii) the General Partner has performed all covenants and agreements herein contained to be performed on its part at or prior to the Initial Public Closing Time. Such certificate may state that the General Partner has relied upon the Trading Advisor to provide certain information relating to the Trading Advisor for use in the Registration Statement. -25- 28 (f) The Trading Advisor shall deliver a report dated as of the Initial Public Closing Time which shall present, for the period from the date after the last day covered by the performance summaries in the Prospectus to the latest practicable day before the Initial Public Closing Time, figures which shall be a continuation of such performance records and which shall certify that such figures are accurate in all material respects. The Trading Advisor shall also certify that such performance summaries have been calculated in accordance with the notes to the applicable performance summaries in the Prospectus. (g) If requested by the General Partner, at the time the Registration Statement initially becomes effective, Arthur F. Bell, Jr. & Associates, L.L.C. shall have delivered a letter, substantially in the form previously agreed upon by the Selling Agent and the General Partner. (h) If requested by the General Partner, at the Initial Public Closing Time, Arthur F. Bell, Jr. & Associates, L.L.C. shall deliver a letter in a form satisfactory to the Selling Agent and the General Partner, substantially the same in scope and substance as the letter described in paragraph (h) of this Section 10, dated as of Initial Public Closing Time. (i) At the Initial Public Closing Time, the Trading Advisor shall make an investment in the Units in accordance with the Advisory Agreement. (j) At the Initial Public Closing Time, the Trading Advisor shall deliver a certificate to the effect that (i) the representations and warranties of contained herein are true and correct with the same effect as though expressly made at the Initial Public Closing Time, (ii) the Trading Advisor has performed all covenants and agreements herein contained to be performed on its part at or prior to the Initial Public Closing Time and (iii) since the date of the most recent financial information relating to the Trading Advisor prior to the date of this Agreement there has been no material adverse change, or development involving a prospective material adverse change, in the financial condition, business or business prospects of the Trading Advisor. (k) At the Initial Public Closing Time, the Broker shall deliver a certificate to the effect that the representations and warranties of the Broker contained herein are true and correct with the same effect as though expressly made at the Initial Public Closing Time and in respect of the Registration Statement as in effect at the Initial Public Closing Time. (l) At the Initial Public Closing Time, the Selling Agent shall deliver a certificate to the effect that the representations and warranties of the Selling Agent contained herein are true and correct with the same effect as though expressly made at the Initial Public Closing Time and in respect of the Registration Statement as in effect at the Initial Public Closing Time. -26- 29 (m) The parties hereto shall have been furnished with such additional information, opinions and documents, including supporting documents relating to parties described in the Prospectus and certificates signed by such parties with regard to information relating to them and included in the Prospectus as they may reasonably require for the purpose of enabling them to pass upon the sale of the Units as herein contemplated and related proceedings, in order to evidence the accuracy or completeness of any of the representations or warranties or the fulfillment of any of the conditions herein contained; and all actions taken by the parties hereto in connection with the sale of the Units as herein contemplated shall be reasonably satisfactory in form and substance to counsel to the Trading Advisor, counsel to the Broker, counsel to the Selling Agent and Sidley & Austin. If any of the conditions specified in this Section 10 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement and all obligations hereunder may be canceled by any party hereto by notifying the other parties hereto of such cancellation in writing or by telegram at any time at or prior to the Initial Public Closing Time, and any such cancellation or termination shall be without liability of any party to any other party except as otherwise provided in Section 9. (n) The representations and warranties set forth herein shall be restated as of each Subsequent Closing Time as if made as of the date thereof. The conditions of closing set forth in this Section 10 shall, at the option of the General Partner, apply at each Subsequent Closing Time. Section 11. Indemnification and Exculpation. (a) Indemnification by the General Partner. The General Partner agrees to indemnify and hold harmless the Selling Agent, the Broker, any Wholesaler, any Additional Selling Agent, any Correspondent, and the Trading Advisor and each person, if any, who controls the Selling Agent, the Broker or the Trading Advisor within the meaning of Section 15 of the 1933 Act, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto) or any omission or alleged omission therefrom of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not mislead ing, unless (a) in the case of the Trading Advisor, such untrue -27- 30 statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with information relating to the Trading Advisor furnished or approved in writing by the Trading Advisor, (b) in the case of the Selling Agent, such untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with information relating to the Selling Agent or furnished or approved by the Selling Agent, (c) in the case of the Broker, such untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with information relating to the Broker furnished or approved by the Broker or (d) in the case of any Wholesaler, Additional Selling Agent or Correspondent, such untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with information relating to such Wholesaler, Additional Selling Agent or Correspondent furnished or approved by such Wholesaler, Additional Selling Agent or Correspondent; (ii) against any and all loss, liability, claim, damage and expense whatsoever to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission or any such alleged untrue statement or omission (any settlement to be subject to indemnity hereunder only if effected with the written consent of the General Partner); and (iii) against any and all expense whatsoever (including the fees and disbursements of counsel) reasonably incurred in investigating, preparing or defending against litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under clauses (i) or (ii) above. In no case shall the General Partner be liable under this indemnity agreement with respect to any claim made against any indemnified party unless the General Partner shall be notified in writing of the nature of the claim within a reasonable time after the assertion thereof, but failure to so notify the General Partner shall not relieve the General Partner from any liability which it may have otherwise than on account of this indemnity agreement. The General Partner shall be entitled to participate at its own expense in the defense or, if it so elects within a reasonable time after receipt of such notice, to assume the defense of that portion of any suit so brought relating to the General Partner's indemnification obligations hereunder, which defense shall be con ducted by counsel chosen by it and satisfactory to the indemnified party or parties, -28- 31 defendant or defendants therein. In the event that the General Partner elects to assume the defense of any such suit and retain such counsel, the indemnified party or parties, defendant or defendants in the suit, shall, in the absence of conflicting claims, bear the fees and expenses of any additional counsel thereafter retained by it or them. In no event, however, shall the General Partner be obligated to indemnify the Selling Agent hereunder, and the Selling Agent agrees not to attempt to obtain any indemnity from the General Partner hereunder, to the extent that the General Partner and the Selling Agent are advised by counsel reasonably satisfactory to the General Partner and the Selling Agent that payment of such indemnity could adversely affect the classification of the Fund as a partnership for Federal income tax purposes. The General Partner agrees to notify the Trading Advisor, the Broker and the Selling Agent within a reasonable time of the assertion of any claim in connection with the sale of the Units against it or any of its officers or directors or any person who controls the General Partner within the meaning of Section 15 of the 1933 Act. (b) Indemnification by the Trading Advisor. The Trading Advisor agrees to indemnify and hold harmless the Selling Agent, the Broker, the General Partner, the Fund and each person, if any, who controls the Selling Agent, the Broker, the Fund or the General Partner within the meaning of Section 15 of the 1933 Act (and, in the case of the General Partner and the Fund, each person who signed the Registration Statement or is a director of the General Partner), to the same extent as the indemnity from the General Partner set forth in Section 11(a) hereof, but only insofar as the losses, claims, damages, liabilities or expenses indemnified against arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission relating or with respect to the Trading Advisor or any principal of the Trading Advisor, or their operations, trading systems, methods or performance, which was made in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto and furnished by or approved by the Trading Advisor for inclusion therein. (c) Indemnification by the Broker. The Broker agrees to indemnify and hold harmless the Selling Agent, the Trading Advisor, the General Partner, the Fund and each person, if any, who controls the Selling Agent, the Trading Advisor, the Fund or the General Partner within the meaning of Section 15 of the 1933 Act (and, in the case of the General Partner and the Fund, each person who signed the Registration Statement or is a director of the General Partner), to the same extent as the indemnity from the General Partner set forth in Section 11(a) hereof, but only insofar as the losses, claims, damages, liabilities or expenses indemnified against arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission relating or with respect to Broker, which was made in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto and furnished by or approved by the Broker for inclusion therein. -29- 32 (d) Indemnification by the Selling Agent. The Selling Agent agrees to indemnify and hold harmless the Broker, the General Partner, the Fund, the Trading Advisor and each person, if any, who controls the Broker, the General Partner, the Fund or the Trading Advisor within the meaning of Section 15 of the 1933 Act (and in the case of the General Partner and the Fund, each person who signed the Registration Statement or is a director of the General Partner), (i) to the same extent as the indemnify from the General Partner set forth in Section 11(a) hereof, but only insofar as the losses, claims, damages, liabilities or expenses indemnified against arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission relating or with respect to the Selling Agent or any of its principals, or their operations, which was made in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto and furnished by or approved by the Selling Agent for inclusion therein and (ii) against any and all loss, liability, claim, damage and expense whatsoever resulting from a demand, claim, lawsuit, action or proceeding relating to the actions or capacities of the Selling Agent (including a breach of its obligations hereunder) and any Wholesaler, Additional Selling Agent or Correspondent relating to the offering of Units under this Agreement or any Wholesaling Agreement, Additional Selling Agent Agreement or Correspondent Selling Agent Agreement as the case may be. (e) Contribution. If the indemnification provided for in this Section 11 is not permitted under applicable law under subsection (a), (b), (c) or (d) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Trading Advisor, on the one hand, and, the Selling Agent, the Broker and the General Partner, on the other, from the offering of the Units. (f) Limitation on Certain Indemnifications and Exculpations. The exculpation provisions in the Advisory Agreement shall not relieve the Trading Advisor from any liability it may have or incur to the Fund, the General Partner, the Selling Agent or the Broker under this Agreement (including, without limitation, pursuant to the provisions of Section 11(b) hereof). Nor shall the Trading Advisor be entitled to be indemnified by the General Partner, pursuant to the indemnification provisions contained in the Advisory Agreement, against any loss, liability, damage, cost or expense it may incur under this Agreement. The General Partner shall not be entitled to be indemnified by the Fund, pursuant to the indemnification provisions contained in the Limited Partner ship Agreement against any loss, liability, damage, cost or expense it may incur under this Agreement. Section 12. Status of Parties. In selling the Units for the Fund, the Selling Agent is acting solely as an agent for the Fund and not as a principal. The Selling Agent will use its best efforts to assist the Fund in obtaining performance by each purchaser whose offer to purchase Units from the Fund has been accepted on behalf of the Fund, but the Selling Agent shall not have any -30- 33 liability to the Fund in the event that Subscription Agreements and Powers of Attorney are improperly completed or any such purchase is not consummated for any reason. Although the Trading Advisor and the Fund have entered into the Advisory Agreement, all parties hereto acknowledge that none of such parties has the power to act for another in any respect, except as set forth in the Advisory Agreement, and that in no event shall the Fund be held responsible hereunder for the acts and omissions of the Trading Advisor (or, conversely, the Trading Advisor be held responsible for acts and omissions of the Fund) as a consequence of the Advisory Agreement. Section 13. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of any party hereto submitted pursuant hereto shall remain operative and in full force and effect, regardless of any investigation made by, or on behalf of, the Selling Agent, the General Partner, the Fund, the Broker, the Trading Advisor or any person who controls any of the foregoing and shall survive the Initial Public Closing Time. Section 14. Termination. The General Partner shall have the right to terminate this Agreement at any time prior to the Initial Public Closing Time by giving written notice of such termination to the Trading Advisor, the Selling Agent and the Broker. Section 15. Notices and Authority to Act. All communications hereunder shall be in writing and, if sent to the Selling Agent, the General Partner, the Broker, the Trading Advisor or the Fund, shall be mailed, delivered or telegraphed and confirmed as set forth below and shall be effective when actually received. If to the General Partner: ProFutures Inc. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 Attention: Gary Halbert Phone: (512) 263-3800 Telecopier: (512) 263-3459 If to the Fund: ProFutures Long/Short Growth Fund, L.P. c/o ProFutures, Inc. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 Attention: Gary Halbert Phone: (512) 263-3800 Telecopier: (512) 263-3459 -31- 34 If to the Selling Agent: ProFutures Financial Group, Inc. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 Attention: Gary Halbert Phone: (512) 263-3800 Telecopier: (512) 263-3459 If to the Broker: ING (U.S.) Securities, Futures & Options, Inc. 233 S. Wacker Drive Suite 5200 Chicago, IL 60606 Attention: Legal Counsel Phone: (312) 496-7000 Facsimile: (312) 496-7214 If to the Advisor: Hampton Investors, Inc. 2519 Avenue U Brooklyn, New York 11229 Attention: Charles & Gary Mizrahi Phone: (800) 524-4832 Telecopier: (718) 891-2455 Section 16. Parties. This Agreement shall inure to the benefit of and be binding upon the Selling Agent, the Fund, the General Partner, the Broker, the Trading Advisor and such parties' respective successors to the extent provided herein. This Agreement and the conditions and provisions hereof are intended to be and are for the sole and exclusive benefit of the parties hereto and their respective successors, assigns and controlling persons and parties indemnified hereunder, and for the benefit of no other person, firm or corporation. No purchaser of a Unit shall be considered to be a successor or assign solely on the basis of such purchase. Section 17. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES CREATED HEREBY SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. Section 18. Requirements of Law. Whenever in this Agreement it is stated that a party will take or refrain from taking a particular action, such party may nevertheless refrain from taking or take such action if advised by counsel that doing so is required by law or advisable to ensure -32- 35 compliance with law, and shall not be subject to any liability hereunder for doing so, although such action shall permit termination of the Agreement by the other parties hereto. If the foregoing is in accordance with each party's understanding of its agreement, each party is requested to sign and return to the General Partner a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement among them in accordance with its terms. Very truly yours, PROFUTURES LONG/SHORT GROWTH FUND, L.P. BY: PROFUTURES, INC., General Partner By: --------------------------------------- Name: Title: HAMPTON INVESTORS, INC., Trading Advisor By: --------------------------------------- Name: Title: ING. (U.S.) SECURITIES, FUTURES & OPTIONS, INC., Broker By: --------------------------------------- Name: Title: -33- 36 PROFUTURES, INC., General Partner By: --------------------------------------- Name: Title: Confirmed and accepted as of the date first above written: PROFUTURES FINANCIAL GROUP, INC., Selling Agent By: --------------------------------------- Name: Title: -34- 37 EXHIBIT A PROFUTURES LONG/SHORT GROWTH FUND, L.P. (A DELAWARE LIMITED PARTNERSHIP) $60,000,000 OF UNITS OF LIMITED PARTNERSHIP INTEREST (SUBSCRIPTION PRICE: 101% OF NET ASSET VALUE PER UNIT) FORM OF ADDITIONAL SELLING AGENTS AGREEMENT _________, 1998 Name of Selling Agent Street Address City, State, Zip Code Dear Sirs: ProFutures, Inc., a Texas corporation (the "General Partner"), has caused the formation of a limited partnership pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware ("DRULPA") under the name ProFutures Long/Short Growth Fund, L.P. (the "Fund"), for the purpose of engaging in speculative trading of futures and forward contracts and com modity options. As described in the Prospectus referred to below, the Fund has entered into the First Amendment and Restatement of Advisory Contract (the "Advisory Agreement") with Hampton Investors, Inc., a New York corporation (the "Trading Advisor"). The Fund engages in speculative trading in the commodities markets under the direction of the Trading Advisor pursuant to its Leverage 3 Trading Program (the "Trading Strategy"). The Fund proposes to make a public offering of units of limited partnership interest in the Fund (the "Units") through us, ProFutures Financial Group, Inc. (the "Lead Selling Agent"), on a best-efforts basis pursuant to the Selling Agreement dated as of _______, 1998 among us, the Fund and others (the "Selling Agreement"), a copy of which has been furnished to you. In connection with the proposed public offering, the Fund has filed with the United States Securities and Exchange Commission (the "SEC"), pursuant to the United States Securities Act of 1933, as amended (the "1933 Act"), a registration statement on Form S-1 to register the Units, and as part thereof a prospectus (Registration No. 333-63129) (which registration statement, together with all amendments thereto, shall be referred to herein as the "Registration Statement" and which prospectus together with all amendments and supplements thereto in the forms filed with the SEC pursuant to Rule 424 under the Act shall be referred to herein as the "Prospectus"). Other selling agents, including those introduced by wholesalers ("Wholesalers") to us (the "Additional Selling Agents" and together with the Lead Selling Agent and the Wholesalers, the "Selling Agents"), may be selected by us with the consent of the General Partner. We have so 38 selected you as an Additional Selling Agent. We confirm our agreement with you as follows. Capitalized terms used but otherwise not defined herein shall have the meanings ascribed to them in the Selling Agreement unless the context indicates otherwise. 1. Appointment and Undertakings of the Additional Selling Agent (a) Subject to the terms and conditions set forth in this Agreement, the Selling Agreement and the Registration Statement, the Additional Selling Agent is hereby appointed, and hereby accepts such appointment, as one of the Fund's non-exclusive selling agents to offer and sell the Units on a best-efforts basis without any commitment on the Additional Selling Agent's part to purchase any Units. It is understood and agreed that the Lead Selling Agent, with the consent of the General Partner, may retain other selling agents (including those introduced by Wholesalers) and that the Additional Selling Agent or any other Additional Selling Agent, with the consent of the Lead Selling Agent and General Partner in their sole discretion, may retain correspondent selling agents ("Correspondents"). The Additional Selling Agent agrees to comply with the terms and conditions of this Agreement and any terms and conditions of the Selling Agreement applicable to Additional Selling Agents. The Additional Selling Agent from time to time will provide the Lead Selling Agent with a list of prospective Correspondents. Unless the prospective Correspondent has a verifiable preexisting relationship with the Lead Selling Agent (including previously having approached or been approached by the Lead Selling Agent about being an Additional Selling Agent for the Fund) as notified to the Additional Selling Agent in writing, such Correspondent shall only be permitted to offer Units as a Correspondent of the Additional Selling Agent pursuant to a Correspondent Selling Agreement in a form agreed to by the Additional Selling Agent. (b) The Additional Selling Agent agrees to use its reasonable efforts to procure subscriptions for the Units as long as this Agreement and the Selling Agreement remain in effect and to make the offering of Units at the offering price and minimum amounts and on the other terms and conditions set forth in the Prospectus and the Selling Agreement. (c) The Additional Selling Agent shall offer and sell Units only to persons and entities who satisfy the suitability and/or investment requirements set forth in the Prospectus and the subscription agreements attached thereto and who, to the General Partner's satisfaction, complete the subscription agreements and related subscription documents used in connection with the offering of the Units (the "Subscription Documents") and remit good funds for the full subscription price. The Additional Selling Agent shall conduct a thorough review of the suitability of each subscriber for Units that it solicits and of the Subscription Documents. The Additional Selling Agent shall not forward to the General Partner any Subscription Documents that are not in conformity with the requirements specified in the Prospectus and in the Subscription Documents appropriate for the particular subscriber, or that are illegible in any respect or are not fully completed, dated, or signed, or that represent the subscription of a person or entity not satisfying the suitability and/or investment requirements applicable to such person or entity. The Additional Selling Agent shall not execute any transactions in Units in a discretionary account over which it has control without prior written approval of the customer in whose name such discretionary account is maintained. -2- 39 The Additional Selling Agent agrees not to recommend the purchase of Units to any subscriber unless the Additional Selling Agent shall have reasonable grounds to believe, on the basis of information obtained from the subscriber concerning, among other things, the subscriber's investment objectives, other investments, financial situation and needs, that the subscriber is or will be in a financial position appropriate to enable the subscriber to realize to a significant extent the benefits of the Fund, including the tax benefits (if any) described in the Prospectus; the subscriber has a fair market net worth sufficient to sustain the risks inherent in participating in the Fund, including loss of investment and lack of liquidity; and the Units are otherwise a suitable investment for the subscriber. In addition to submitting such information to the General Partner, the Additional Selling Agent agrees to maintain files of information disclosing the basis upon which the Additional Selling Agent determined that the suitability requirements of Section (b)(2) of Rule 2810 of the National Association of Securities Dealers, Inc. ("NASD") were met as to each subscriber (the basis for determining suitability may include the Subscription Documents and other certificates submitted by subscribers). In connection with making the foregoing representations and warranties, the Additional Selling Agent further represents and warrants that it has received copies of the Registration Statement, as amended to the date hereof, and the Prospectus and has, among other things, examined the Prospectus and obtained such additional information from the General Partner regarding the information set forth therein as the Additional Selling Agent has deemed necessary or appropriate to determine whether the Prospectus adequately and accurately discloses all material facts relating to an investment in the Fund and provides an adequate basis to subscribers for evaluating an investment in the Units. In connection with making the representations and warranties set forth in this paragraph, the Additional Selling Agent has not relied on inquiries made by or on behalf of any other parties. The Additional Selling Agent agrees to inform all prospective purchasers of Units of all pertinent facts relating to the liquidity and marketability of the Units as set forth in the Prospectus. The Additional Selling Agent shall offer and sell Units in compliance with the requirements set forth in the Registration Statement (particularly the "Subscription Agreement and Power of Attorney" attached as Exhibit B thereto), this Agreement and the Blue Sky Survey delivered to the Lead Selling Agent by the General Partner's counsel, a copy of which has been provided to the Additional Selling Agent. The Additional Selling Agent represents and warrants that it shall comply fully at all times with all applicable federal and state securities and commodities laws (including without limitation the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act, as amended (the "CEA"), and the securities and Blue Sky laws of the jurisdictions in which the Additional Selling Agent solicits subscriptions, all applicable rules and regulations under such laws, and all applicable requirements, rules, policy statements and interpretations of the NASD, and the securities and commodities exchanges and other governmental and self-regulatory authorities and organizations having jurisdiction over it or the offering of Units). The Additional Selling Agent shall under no circumstances engage in any activities hereunder in any jurisdiction (i) in which the General Partner has not informed the Additional Selling Agent that counsel's advice has been received that the Units are qualified for sale or are exempt under the applicable securities or Blue Sky laws thereof or (ii) in which the Additional Selling Agent may not lawfully engage. -3- 40 The Additional Selling Agent further agrees to comply with the requirement under applicable federal and state securities laws to deliver to each offeree a Prospectus and any amendments or supplements thereto. Neither the Additional Selling Agent nor any of its employees, agents or representatives will use or distribute any marketing material or information other than that prepared by the Fund and the General Partner. It is, however, understood that the Additional Selling Agent may use documents that it prepares solely for the purpose of communicating with its Registered Representatives and Correspondents provided that the Lead Selling Agent and the General Partner have provided the written consent to the use of each such document. (d) The additional services that the Additional Selling Agent will provide on an ongoing basis to Limited Partners will include but not be limited to: (i) inquiring of the General Partner from time to time, at the request of Limited Partners, as to the Net Asset Value of a Unit, (ii) inquiring of the General Partner from time to time at the request of the Limited Partners, as to the commodities markets and the activities of the Fund, (iii) assisting, at the request of the General Partner, in the redemption of Units sold by the Additional Selling Agent, (iv) responding to questions of Limited Partners from time to time with respect to monthly account statements, annual reports and financial statements furnished to Limited Partners, and (v) providing such other services to the owners of Units as the General Partner may, from time to time, reasonably request. All payments for subscriptions shall be made as described in the Prospectus. (e) The Additional Selling Agent (i) acknowledges that, other than as set forth herein, it is not authorized to act as the agent of the Lead Selling Agent in any connection or transaction and (ii) agrees not to so act or to purport to so act. 2. Compensation (a) In consideration for the Additional Selling Agent performing the obligations under this Agreement, the Lead Selling Agent shall pay the Additional Selling Agent an initial selling commission of __% of the subscription value of the Unit(s) sold by the Additional Selling Agent. Such commissions will be paid in respect of each subscription as promptly as practicable after the relevant month-end closing. (b) The Additional Selling Agent shall receive ongoing compensation, payable monthly by the Lead Selling Agent, of __% per annum of the month-end Net Asset Value of the Units sold by a Registered Representative of the Additional Selling Agent which remain outstanding for more than twelve months (including the month as of the end of which such Unit is redeemed) assuming (i) the Additional Selling Agent's continued registration with the Commodity Futures Trading Commission (the "CFTC") as a futures commission merchant or introducing broker and continued membership with the National Futures Association ("NFA") in such capacity and (ii) the Registered Representative's compliance with the additional requirements described in subsection 1(d), registration with the CFTC and compliance with all applicable proficiency requirements (including those imposed by the NASD as a condition of receiving "trailing commissions") by either passing the Series 3 National Commodity Futures Exam or the Series 31 exam or being "grandfathered" from having to do so. Such ongoing compensation shall begin to accrue with respect to each Unit only -4- 41 after the end of the twelfth full month after the sale of such Unit. For purposes of determining when ongoing compensation should begin to accrue, Units shall not be deemed to be sold until the day Units are issued, and in either case not the day when subscriptions are accepted by the General Partner or subscriptions funds are deposited in escrow. Furthermore, the Lead Selling Agent shall not compensate the Additional Selling Agent, and the Additional Selling Agent shall not compensate its employees or other persons, unless the recipient thereof is legally qualified and permitted to receive such compensation. Also, such ongoing compensation may be paid by the Lead Selling Agent to the Additional Selling Agent and by the Additional Selling Agent to its employees or other persons, only in respect of outstanding Units sold by such persons to Limited Partners and only so long as the additional services described in Section 1(d) above are provided by such person to Limited Partners. With respect to particular Units, substitute Registered Representatives who are appropriately registered and who agree to perform the services described in Section 1(d) above with respect to such Units ("Substitute Registered Representatives") may also receive ongoing compensation with respect to such Units. Additional Selling Agents shall receive an installment selling commission of up to __% per annum of the month-end Net Asset Value of Units remaining outstanding after the twelfth month following their sale by such Additional Selling Agent if: (i) the Additional Selling Agents are not registered with the National Futures Association as futures commissions merchants or introducing brokers; (ii) the Registered Representatives engaged in the sale of Units are not registered as associated persons of futures commissions merchants or introducing brokers; (iii) the Additional Selling Agents do not agree to provide ongoing services to the purchasers of Units; provided, that no such installment selling commissions shall be payable until the General Partner and the Lead Selling Agent determine that the payment of such installment selling commission is in compliance with Rule 2810 of the NASD on aggregate compensation which may be received by Selling Agents. Installment selling commissions, if any, will be paid by the Lead Selling Agent from funds received from the General Partner. Installment selling commissions are limited such that the sum of the initial selling commission and the aggregate installment selling commissions paid such Additional Selling Agents may not exceed 9% of the Net Asset Value, at the time of sale, of Units sold by such Additional Selling Agents. In respect of Correspondents, if any, selected by the Additional Selling Agent (with the consent of the Lead Selling Agent and the General Partner), the Lead Selling Agent shall pay to the Additional Selling Agent selling commissions and ongoing compensation or installment sales commissions as set forth above, a portion (as agreed between the Additional Selling Agent and each such Correspondent) of which shall be passed on by the Additional Selling Agent to such Correspondents. The Additional Selling Agent agrees that it will promptly pass on to its Registered Representatives and Correspondents the applicable portions of the selling commissions received from the Lead Selling Agent to which such Registered Representatives and Correspondents are entitled pursuant to, respectively, the Additional Selling Agent's standard compensation procedures and the Additional Selling Agent's agreement with each such Correspondent. -5- 42 The Additional Selling Agent, although otherwise entitled to ongoing compensation, will not be entitled to receipt thereof with respect to particular Units (but may continue to receive installment selling commissions) for any month during any portion of which the Registered Representative who is receiving such ongoing compensation is at any time not properly registered with the CFTC or does not agree to provide the ongoing services described above. However, the Lead Selling Agent agrees that Substitute Registered Representatives may receive such ongoing compensation. The Lead Selling Agent shall supply to the Additional Selling Agent at its reasonable request reports concerning all currently outstanding Units sold by the Additional Selling Agent or any Correspondent. The Additional Selling Agent shall, at the reasonable request of the Lead Selling Agent, inform the Lead Selling Agent of currently outstanding Units sold by the Additional Selling Agent or any Correspondent with respect to which ongoing compensation may not be paid. The Additional Selling Agent shall not, directly or indirectly, pay or award any finder's fees, commissions or other compensation to any person engaged by a potential investor for investment advice as an inducement to such advisor to advise the purchase of Units; provided, however, the normal sales commissions payable to a registered broker-dealer or other properly licensed person for selling Units shall not be prohibited hereby. (c) Notwithstanding any other provision of this Agreement to the contrary, the General Partner shall have sole discretion to accept or reject any subscription for the Units in whole or in part. (d) The Lead Selling Agent agrees to make all payments from funds received from the General Partner to the Additional Selling Agent pursuant to this Section 2 within 15 days following the end of a monthly period in which compensation is earned. Notwithstanding anything above to the contrary, the Lead Selling Agent shall be liable to make ongoing compensation payments to the Additional Selling Agent only after the Lead Selling Agent has actually received its fee from the General Partner. 3. Representations and Warranties of the Lead Selling Agent The Lead Selling Agent hereby represents and warrants as follows: (a) The Lead Selling Agent is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and has power and authority to enter into and carry out its obligations under this Agreement. (b) The Lead Selling Agent has all governmental and regulatory registrations, qualifications, approvals and licenses required to perform its obligations under this Agreement (including, but not limited to, registration as a broker-dealer with the SEC, membership in such capacity in the NASD, and registration or qualification under the laws of each state in which Lead Selling Agent will offer and sell Units); the performance by the Lead Selling Agent of its obligations under this Agreement will not violate or result in a breach of any provision of its certificate of incorporation or by-laws or any agreement, order, law, or regulation binding upon it. -6- 43 (c) This Agreement has been duly and validly authorized, executed, and delivered on behalf of the Lead Selling Agent and is a valid and binding agreement of the Lead Selling Agent enforceable against the Lead Selling Agent in accordance with its terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability generally of rights of creditors except as enforceability of the indemnification provisions contained in this Agreement may be limited by applicable law and the enforcement of specific terms or remedies may be unavailable. 4. Representations and Warranties of the Additional Selling Agent The Additional Selling Agent hereby represents and warrants as follows: (a) The Additional Selling Agent is a corporation duly organized, validly existing, and in good standing under the laws of the state of its incorporation and has power and authority to enter into and carry out its obligations under this Agreement. (b) The Additional Selling Agent has all governmental and regulatory registrations, qualifications, approvals and licenses required to perform its obligations under this Agreement (including, but not limited to, registration as a broker-dealer with the SEC, membership in such capacity in the NASD, registration as a futures commission merchant or introducing broker under the CEA and membership with NFA, and registration or qualification under the laws of each state in which Additional Selling Agent will offer and sell Units); the performance by the Additional Selling Agent of its obligations under this Agreement will not violate or result in a breach of any provision of its certificate of incorporation or by-laws or any agreement, order, law, or regulation binding upon it. (c) This Agreement has been duly and validly authorized, executed, and delivered on behalf of the Additional Selling Agent and is a valid and binding agreement of the Additional Selling Agent enforceable against the Additional Selling Agent in accordance with its terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability generally of rights of creditors except as enforceability of the indemnification provisions contained in this Agreement may be limited by applicable law and the enforcement of specific terms or remedies may be unavailable. (d) Neither the Additional Selling Agent nor any of its principals have been the subject of any administrative, civil, or criminal actions within the five years preceding the date hereof that would be material for an investor's decision to purchase the Units which have not been disclosed to the Fund, the General Partner or the Lead Selling Agent in writing. (e) The information, if any, relating to the Additional Selling Agent which the Additional Selling Agent has furnished to the Fund and the General Partner for use in the Registration Statement is correct. (f) In respect of purchasers of Units that are not individuals, the Additional Selling Agent shall have received, prior to sale of Units to each such purchaser, evidence that the purchaser -7- 44 is authorized to invest in the Units and shall provide the Lead Selling Agent with copies of such evidence upon reasonable request of the Lead Selling Agent. 5. Authorization Under the Selling Agreement The Additional Selling Agent agrees to be bound by any action taken by the Lead Selling Agent or the General Partner, in accordance with the provisions of the Selling Agreement of which the Additional Selling Agent has received notice, to terminate the Selling Agreement or the offering of the Units, to consent to changes in the Selling Agreement or to approve of or object to further amendments to the Registration Statement or amendments or supplements to the Prospectus, if, in the judgment of the Lead Selling Agent or the General Partner, such action would be advisable, provided that the Additional Selling Agent shall not be bound by any such action that adversely affects the Additional Selling Agent unless the Additional Selling Agent shall have consented to such action. The Lead Selling Agent agrees that, at the Additional Selling Agent's request, the Lead Selling Agent will require any documents required to be delivered to or by the Lead Selling Agent pursuant to Section 10 of the Selling Agreement to be addressed and delivered to the Additional Selling Agent. 6. Covenants of the Lead Selling Agent (a) The Lead Selling Agent will notify the Additional Selling Agent immediately (i) when any amendment to the Registration Statement shall have become effective and (ii) of the issuance by the SEC, CFTC or any other Federal or state regulatory body of any order suspending the effectiveness of the Registration Statement under the 1933 Act, the CFTC registration or NFA membership of the General Partner as a commodity pool operator, the CFTC registration or NFA membership of the Lead Selling Agent as a futures commission merchant, or the registration of Units under the Blue Sky or securities laws of any state or other jurisdiction or any order or decree enjoining the offering or the use of the then current Prospectus or of the institution, or notice of the intended institution, of any action, investigation or proceeding for that purpose. (b) The Lead Selling Agent will cause the General Partner to deliver to the Additional Selling Agent as promptly as practicable from time to time during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as the Additional Selling Agent may reasonably request for the purposes contemplated by the 1933 Act or the SEC Regulations. (c) The Lead Selling Agent will cause the General Partner to furnish to the Additional Selling Agent a reasonable number of copies of any amendment or amendments of, or supplement or supplements to, the Prospectus which will amend or supplement the Prospectus. (d) The Lead Selling Agent will cause the General Partner to deliver to the Additional Selling Agent copies of all written communications to any Limited Partner (other than tax information) whose Units were sold by the Additional Selling Agent or its Correspondents. -8- 45 7. Indemnification and Contribution (a) The Lead Selling Agent shall indemnify, hold harmless, and defend the Additional Selling Agent and any person who controls the Additional Selling Agent within the meaning of Section 15 of the 1933 Act, to the same extent, and subject to the same conditions and procedural requirements, that the General Partner agrees to indemnify the Lead Selling Agent pursuant to Section 11 of the Selling Agreement; provided that, in no case shall the Lead Selling Agent be liable under this indemnity to the Additional Selling Agent if the loss, liability, claim, damages or expense of the Additional Selling Agent arises out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or any omission or alleged omission therefrom of a material fact required to be stated therein or necessary in order to make the statements therein not misleading made in reliance upon and in conformity with information relating to the Additional Selling Agent and furnished or approved by the Additional Selling Agent. In addition, the Lead Selling Agent shall indemnify, hold harmless and defend the Additional Selling Agent (and any controlling person) for any loss, liability, claim, damage or expense incurred by the Additional Selling Agent arising from any breach of this Agreement by the Lead Selling Agent. (b) Hampton Investors, Inc. (the "Trading Advisor") agrees to indemnify and hold harmless the Additional Selling Agent, and each person, if any, who controls the Additional Selling Agent within the meaning of Section 15 of the 1933 Act, to the same extent as the indemnity from the Trading Advisor set forth in Section 11(b) of the Selling Agreement, but only insofar as the losses, claims, damages, liabilities or expenses indemnified against, arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission relating or with respect to the Trading Advisor or any principal of the Trading Advisor, or their operations, trading systems, methods or performance, which was made in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto and furnished by or approved by the Trading Advisor for inclusion therein. (c) The Additional Selling Agent shall indemnify, hold harmless, and defend the Fund, the General Partner, the Lead Selling Agent, the Trading Advisor, the Broker and any person who controls any of the foregoing within the meaning of Section 15 of the 1933 Act against any and all loss, liability, claim, damage and expense whatsoever incurred by any such party arising from any material breach by the Additional Selling Agent of its representations, warranties, obligations and undertakings set forth in this Agreement. The Fund, the General Partner, the Trading Advisor and the Broker are expressly made third party beneficiaries of this Agreement. (d) If the indemnification provided for in this Section 7 shall not be permitted under applicable law in respect of any loss, liability, claim, damage or expense referred to herein, then the indemnitor shall, in lieu of indemnifying the indemnified party contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense, (A) in such proportion as shall be appropriate to reflect the relative benefits received by the Lead Selling Agent on the one hand and the Additional Selling Agent on the other from the offering of the Units by the Additional Selling Agent or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred -9- 46 to in clause (A) above but also the relative fault of the Lead Selling Agent on the one hand the Additional Selling Agent on the other with respect to the statements or omissions which resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. Relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Lead Selling Agent on the one hand or the Additional Selling Agent on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this Section 7 were to be determined by a pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by the indemnified party as a result of the loss, liability, claim, damage or expense referred to above in this Section 7, shall be deemed to include, for purpose of this Section 7, any legal or other expenses reasonably incurred by such otherwise indemnified party in connection with investigating or defending any such action or claim. 8. Termination (a) This Agreement shall terminate on the earlier of (i) such date as the Lead Selling Agent may determine by giving 30 days' prior written notice to the Additional Selling Agent, (ii) the termination of the Selling Agreement or the offering of the Units or (iii) by the Lead Selling Agent, without notice, upon breach by the Additional Selling Agent of, or non-compliance by the Additional Selling Agent with, any material term of this Agreement. (b) The Additional Selling Agent shall have the right to terminate its participation under this Agreement (i) at any time upon breach by the Lead Selling Agent of or non-compliance with, any material term of this Agreement; and (ii) at any time upon thirty business days' prior written notice of such termination to the Lead Selling Agent and the Fund. (c) The termination of this Agreement shall not affect (i) the ongoing obligations of the Lead Selling Agent to pay selling commissions, ongoing compensation or installment selling commissions with respect to Units sold prior to the termination hereof, (ii) the Additional Selling Agent's obligations under Section 1(d) hereof or (iii) the indemnification obligations under Section 7 hereof. 9. Confidentiality (a) The Lead Selling Agent hereby covenants and agrees that under no circumstances will it solicit any of the Additional Selling Agent's customers whose names become known to the Lead Selling Agent in connection with the offering of the Units. The Lead Selling Agent agrees that it will take such steps to ensure the confidentiality of the Additional Selling Agent's client list as the Additional Selling Agent may reasonably request. (b) The Additional Selling Agent hereby covenants and agrees that under no circumstances will it solicit any customer of the Lead Selling Agent or any other Additional Selling Agent for the Fund whose name becomes known to the Additional Selling Agent in connection with the offering of the Units. The Additional Selling Agent agrees that it will take such steps to ensure the confidentiality of the Lead Selling Agent's or any other Additional Selling Agent's client list as -10- 47 the owner of such list may reasonably request. The Additional Selling Agent further covenants and agrees not to solicit any selling agent which has been introduced to the Lead Selling Agent by any Wholesaler or any other Additional Selling Agent. 10. Miscellaneous (a) This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the parties hereto; provided, however, that a party hereto may not assign any rights, obligations, or liabilities hereunder without the prior written consent of the other parties. (b) All notices required or desired to be delivered under this Agreement shall be in writing and shall be effective when delivered personally on the day delivered or, when given by registered mail, postage prepaid, return receipt requested, on the day of receipt, addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): if to the Lead Selling Agent: ProFutures Financial Group, Inc. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 if to the Additional Selling Agent: --------------------- --------------------- --------------------- (c) This Agreement shall be governed by, and construed in accordance with, the law of the State of New York without regard to the principles of choice of law thereof. (d) All captions used in this Agreement are for convenience only, are not a part hereof, and are not to be used in construing or interpreting any aspect hereof. (e) This Agreement may be executed in counterparts, each such counterpart to be deemed an original, but which all together shall constitute one and the same instrument. (f) This Agreement may not be amended except by the express written consent of the parties hereto. No waiver of any provision of this Agreement may be implied from any course of dealing between or among any of the parties hereto or from any failure by any party hereto to assert its rights under this Agreement on any occasion or series of occasions. (g) The provisions of this Agreement shall survive the termination of this Agreement with respect to any matter arising while this Agreement was in effect. -11- 48 If the foregoing is in accordance with your understanding of our agreement, please sign and return a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between us in accordance with its terms. Very truly yours, PROFUTURES FINANCIAL GROUP, INC. By: ------------------------------ Name: ------------------------- Title: ------------------------ CONFIRMED AND ACCEPTED [ADDITIONAL SELLING AGENT] By: ------------------------------ Name: ------------------------- Title: ------------------------ HAMPTON INVESTORS, INC. (with respect to Section 7(b) hereof) By: ------------------------------ Name: ------------------------- Title: ------------------------ -12- EX-3.01 3 AMENDED CERTIFICATE OF LIMITED PARTNERSHIP 1 EXHIBIT 3.01 CERTIFICATE OF AMENDMENT (NO. 1) TO THE CERTIFICATE OF LIMITED PARTNERSHIP OF PROFUTURES BULL & BEAR FUND, L.P. The undersigned, desiring to amend the Certificate of Limited Partnership of ProFutures Bull & Bear Fund, L.P. pursuant to the provisions of Section 17-202 of the Revised Uniform Limited Partnership Act of the State of Delaware, does hereby certify as follows: FIRST: Article 1 of the Certificate of Limited Partnership shall be amended and restated as follows: The name of the limited partnership formed pursuant to this Certificate is "ProFutures Long/Short Growth Fund, L.P." SECOND: Article 4 of the Certificate of Limited Partnership shall be amended and restated as follows: The name and business address of the general partner of the Partnership are: PROFUTURES, INC. 11612 Bee Cave Road - Suite 100 Austin, Texas 78733 IN WITNESS WHEREOF, the undersigned executed this Amendment (No. 1) to the Certificate of Limited Partnership on this December 7, 1998. PROFUTURES BULL & BEAR FUND, L.P. By: ProFutures, Inc., the General Partner By: /s/ Gary D. Halbert ----------------------------- Gary D. Halbert, President EX-5.01 4 OPINION/CONSENT OF SIDLEY & AUSTIN - LEGALITY 1 EXHIBIT 5.01 [SIDLEY & AUSTIN LETTERHEAD] December 22, 1998 ProFutures, Inc. as general partner of ProFutures Long/Short Growth Fund, L.P. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 RE: PROFUTURES LONG/SHORT GROWTH FUND, L.P. $60,000,000 OF UNITS OF LIMITED PARTNERSHIP INTEREST (THE "UNITS") Dear Sir or Madam: We refer to the Registration Statement on Form S-1 (Reg. No. 333-63129) filed by ProFutures Long/Short Growth Fund, L.P., formerly ProFutures Bull & Bear Fund, L.P., (the "Registration Statement"), a Delaware limited partnership (the "Partnership"), on or about September 10, 1998 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), and Amendment No. 1 thereto filed with the Commission on or about December 22, 1998 relating to the registration of $60,000,000 of Units of the Partnership. Capitalized terms not defined herein have the meanings specified in the Registration Statement. We are familiar with the proceedings to date with respect to the proposed issuance and sale of the Units pursuant to the Prospectus and have examined such records, documents and questions of law, and satisfied ourselves as to such matters of fact, as we have considered relevant and necessary as a basis for this opinion. For purposes of rendering this opinion, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such copies. Based on the foregoing, we are of the opinion that: 1. The Partnership has been duly formed and is validly existing in good standing as a limited partnership under the Delaware Revised Uniform Limited Partnership Act (the "Act"). 2. The General Partner has taken all corporate action required to be taken by it to authorize the issuance and sale of the Units to prospective investors and to authorize the admission to the Partnership of the persons purchasing Units as Limited Partners of the Partnership. 3. Assuming (i) the due authorization, execution and delivery to the General Partner of a Subscription Agreement and Power of Attorney (the "Subscription Agreement") by each subscriber for Units (the "Subscribers"), (ii) the due acceptance by the General Partner of each Subscription Agreement and the due acceptance by the General Partner of the admission of each of the Subscribers as a Limited Partner of the Partnership, (iii) the payment by each Subscriber to the Partnership of the full consideration due for the Units to which such Subscriber has subscribed, (iv) that the books and 2 ProFutures, Inc. December 22, 1998 Page 2 records of the Partnership set forth all information required by the Limited Partnership Agreement and the Act, including all information with respect to all persons and entities to be admitted as Limited Partners and their contributions to the Partnership, (v) that the Subscribers, as Limited Partners of the Partnership, do not participate in the control of the business of the Partnership within the meaning of the Act, (vi) that the Units are offered and sold as described in the Prospectus and the Limited Partnership Agreement and (vii) that the representations and warranties of the Subscribers in their respective Subscription Agreements are true and correct, the Units to be issued to the Subscribers will represent valid and legally issued limited partner interests in the Partnership and, subject to the qualifications set forth below, will be fully paid and nonassessable limited partner interests in the Partnership, as to which the Subscribers, as limited partners of the Partnership, will have no liability in excess of their obligations to make contributions to the Partnership, their obligations to make other payments provided for in the Limited Partnership Agreement and their share of the Partnership's assets and undistributed profits (subject to the obligation of a Limited Partner to repay funds distributed to such Limited Partners by the Partnership in certain circumstances). 4. There are no provisions in the Limited Partnership Agreement the inclusion of which, subject to the terms and conditions set forth therein, would cause the Limited Partners, as limited partners of the Partnership, to be deemed to be participating in the control of the business of the Partnership within the meaning of the Act. This opinion is limited to the Act and the General Corporation Law of the State of Delaware. We express no opinion as to the application of the securities or blue sky laws of the various states (including the State of Delaware) to the sale of the Units. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to all references to our firm included in or made a part of the Registration Statement. Very truly yours, SIDLEY & AUSTIN EX-8.01 5 OPINION OF SIDLEY & AUSTIN - FEDERAL INCOME TAX 1 EXHIBIT 8.01 [SIDLEY & AUSTIN LETTERHEAD] December 21, 1998 ProFutures, Inc. General Partner of ProFutures Long/Short Growth Fund, L.P. 11612 Bee Cave Road Suite 100 Austin, Texas 78733 Re: Amendment No.1 to the Registration Statement on Form S-1 Dear Sir or Madam: We have acted as your counsel in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended, of the Registration Statement on Form S-1 (Reg. No. 333-63129) filed with the Securities and Exchange Commission on or about September 10, 1998 (the "Registration Statement"), and Amendment No. 1 Thereto filed with the Commission on or about December 22, 1998 relating to Units of Limited Partnership Interest ("Units") of ProFutures Long/Short Growth Fund, L.P., formerly, ProFutures Bull & Bear Fund, L.P. (the "Fund"), a limited partnership organized under the Delaware Revised Uniform Limited Partnership Act. We have reviewed such data, documents, questions of law and fact and other matters as we have deemed pertinent for the purpose of this opinion. Based upon the foregoing, we hereby confirm our opinion set forth under the caption "Tax Consequences" in the Prospectus (the "Prospectus") constituting a part of the Registration Statement and confirm that it accurately summarizes (subject to the uncertainties referred to therein) the material aspects of the federal income tax treatment to a United States individual taxpayer, as of the date hereof, of an investment in the Fund. Very truly yours, SIDLEY & AUSTIN EX-10.01 6 AMENDMENT TO CUSTOMER AGREEMENT 1 EXHIBIT 10.01 ING (U.S.) SECURITIES, FUTURES & OPTIONS, INC. SEARS TOWER 233 SOUTH WACKER STREET CHICAGO, ILLINOIS 60606 (312) 496-7000 December 8, 1998 ProFutures Long/Short Growth Fund, L.P. Gary Halbert, President ProFutures, Inc. 11612 Bee Cave Road -- Suite 100 Austin Texas 78733 Re: Customer Account No. Q 740R 2574020 First Amendment to Commodity Agreement Dear Mr. Halbert: Reference is made to the Commodity Agreement, dated October 22, 1997 (the "Agreement"). We acknowledge the new name (previously "ProFutures Bull & Bear Fund, L.P.") and address of Customer as set forth above. The eighth (8th) sentence of Section 10 of the Agreement is hereby amended and restated as follows: Customer shall be credited with an amount equal to: (a) the average of the 91-day U.S. Treasury bill rate for such month; multiplied by (b) the average total equity of Customer's account for such month. To the extent that any interest earned on such total equity exceeds such amount, ING will retain it. Capitalized terms not otherwise defined in this Amendment shall have the respective meanings ascribed to them in the Agreement. All other terms and conditions set forth in the Agreement shall remain in full force and effect. Sincerely, ING (U.S.) SECURITIES, FUTURES & OPTIONS, INC. By: /s/ James A. Gabriele ------------------------------------------- Name: James A. Gabriele Title: Controller ACKNOWLEDGED AND AGREED: PROFUTURES LONG/SHORT GROWTH FUND, L.P. By: ProFutures, Inc., its General Partner By: /s/ Gary D. Halbert ------------------------------------- Gary D. Halbert, President EX-23.02 7 CONSENT OF ARTHUR F. BELL, JR. & ASSOCIATES 1 EXHIBIT 23.02 INDEPENDENT AUDITOR'S CONSENT We consent to the use in this Registration Statement of ProFutures Long/Short Growth Fund, L.P., formerly ProFutures Bull & Bear Fund, L.P., on Amendment No. 1 to Form S-1 filed on or about December 22, 1998 of our report dated March 9, 1998, except for Note 7, as to which the date is December 8, 1998, on the financial statements of ProFutures Long/Short Growth Fund, L.P. as of December 31, 1997 and for the period August 21, 1997 (inception) to December 31, 1997 and of our report dated August 21, 1998 on the balance sheet of ProFutures, Inc., as of June 30, 1998, appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading "General" in such Prospectus. ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C. December 22, 1998 Hunt Valley, Maryland EX-27.01 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PROFUTURES LONG/SHORT GROWTH FUND, L.P. STATEMENTS OF FINANCIAL CONDITION AND STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 2,383,550 11,426,604 0 0 0 12,833,654 0 0 12,833,654 44,769 0 0 0 0 12,788,885 12,833,654 0 865,316 0 359,763 0 0 0 505,553 505,553 0 0 0 0 505,553 101.94 101.94
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