POS AM 1 t24758.txt POST EFFECTIVE AMENDMENT #1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 2002. REGISTRATION NO. 333-46550 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SHAFFER DIVERSIFIED FUND, LP (Exact name of registrant as specified in its charter) 6799 13-4132934 DELAWARE (Primary Standard Industrial (I.R.S. Employer (State of Organization) Classification Number) Identification Number) C/O SHAFFER ASSET MANAGEMENT, INC. 925 WESTCHESTER AVENUE SUITE 306 WHITE PLAINS, NEW YORK 10604 (800) 352-5265 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DANIEL S. SHAFFER SHAFFER ASSET MANAGEMENT, INC. 925 WESTCHESTER AVENUE SUITE 306 WHITE PLAINS, NEW YORK 10604 (800) 352-5265 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------- COPY TO: James B. Biery Sidley Austin Brown & Wood Bank One Plaza 10 South Dearborn Street 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. PRELIMINARY PROSPECTUS - SUBJECT TO COMPLETION - DATED OCTOBER 11, 2002 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT AMENDMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SHAFFER DIVERSIFIED FUND, LP $23,839,000 UNITS OF LIMITED PARTNERSHIP INTEREST THE OFFERING The Fund, a Delaware limited partnership, trades speculatively in the United States futures markets. Specifically, the Fund trades a diversified portfolio of futures contracts in the currency, metals, grains, interest rate and energy markets. Shaffer Asset Management, Inc., a professional futures trading advisor, is the general partner and trading advisor of the Fund. Shaffer Asset Management allocates the Fund's assets according to its proprietary trading program. As of September 30, 2002, the net asset value of a Fund Unit that sold for $1,000, minus a 5% sales charge, as of February 14, 2002, when the Fund began trading, was $1,027.67. Units are offered for sale as of the last day of each month at their then current net asset value plus 5%. Berthel Fisher & Company Financial Services, Inc., the Fund's principal selling agent, and any additional selling agents will use their best efforts to sell the units offered but are not obligated to sell any specific number of units. If the total amount of this offering is sold, proceeds to the Fund will be approximately $22,647,050, proceeds to the selling agents will be approximately $953,560 and proceeds to Shaffer Asset Management, as reimbursement for paying the Fund's initial organizational costs, will be approximately $238,390. There is no scheduled termination date of this offering and no escrow account will be used in connection with this offering. THE RISKS THESE ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK. READ THIS PROSPECTUS BEFORE YOU DECIDE TO INVEST. SEE "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS. o You could lose all or substantially all of your investment in the Fund. o The Fund is speculative and highly leveraged. o Shaffer Asset Management has total trading authority over the Fund. Its computerized trading methods could expose the Fund to significant risks and the use of a single advisor could mean lack of diversification and, consequently, higher risk. o There is no secondary market for the units. Redemptions are permitted only at the end of a month. Redemption penalties apply during the first twelve months after a Unit is sold. o Transfers of interest in the Units are subject to limitations. Shaffer Asset Management may deny a transfer request if it determines that the transfer may result in adverse legal or tax consequences for the Fund. o Substantial expenses must be offset by trading profits and interest income. For an investor to breakeven after twelve months following investment, the Fund must generate trading profits of approximately 12.09% if redemption charges apply and of approximately 10.92% if redemption charges do not apply. o The Fund has a limited operating history. MINIMUM INVESTMENT $10,000 initial investment; $5,000 for IRAs and other tax-exempt accounts; $1,000 additional investments -------------------- Investors are required to make representations and warranties relating to their suitability in connection with this investment. Each investor is encouraged to discuss the investment with his/her individual financial, legal and tax advisor. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE ACCOMPANYING STATEMENT OF ADDITIONAL INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS IS IN TWO PARTS: A DISCLOSURE DOCUMENT AND A STATEMENT OF ADDITIONAL INFORMATION. THESE PARTS ARE BOUND TOGETHER, AND BOTH CONTAIN IMPORTANT INFORMATION. THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMODITY FUTURES TRADING COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. ------------------------- SHAFFER ASSET MANAGEMENT, INC. General Partner October ____, 2002 COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 17 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 22. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE 5. ------------------------------------------------------------------------------- This prospectus does not include all of the information or exhibits in the Fund's registration statement. You can read and copy the entire registration statement at the public reference facilities maintained by the Securities and Exchange Commission in Washington, D.C. The Fund files monthly, quarterly and annual reports with the SEC. You can read and copy these reports at the SEC public reference facilities in Washington, D.C. at 450 Fifth Street, N.W. Room 1200, Washington, D.C. 20549 Please call the SEC at 1-800-SEC-0200 for further information. The Fund's filings are posted at the SEC website at http://www.sec.gov. (i) SHAFFER DIVERSIFIED FUND, LP PART ONE TABLE OF CONTENTS PAGE SUMMARY......................................................................1 RISK FACTORS.................................................................5 Possibility of Losing Entire Investment.................................5 Commodity Futures Trading is Speculative................................5 Commodity Futures Trading is Highly Leveraged...........................5 Markets in Which the Fund Trades May Become Illiquid..............................................................5 Automatic Termination...................................................5 Substantial Fees, Commissions and Expenses..............................6 Distortions Produced by Incentive Allocation Arrangement .............. 6 Limitations of Trend-Following, Technical Trading Strategies ...........6 Dependence on Key Personnel..................... .......................6 Limited Operating History....................... ...................... 7 Limited Ability of Limited Partners to Liquidate Investment in the Units .............................................. 7 Possible Effect of Redemptions on Unit Values....................................... ...................... 7 Limited Rights of Investors / Limited Partners Will Not Participate in Management ..............................................7 Unpredictability of Regulatory Changes.......... .......................7 Partners' Tax Liability May Exceed Distributions............................... .......................7 Tax Could be Due From Investors on Their Share of the Fund's Ordinary Income Despite Overall Losses ....................................8 There Could be a Limit on the Deductibility of Brokerage and Performance Fees .................................................8 Conflicts of Interest........................... .......................8 Other Clients of the Fund's Advisor............. .......................9 Expiration of the Advisory Agreement With Shaffer Asset Management .....9 Possible Effects of Speculative Position Limits..................................... .......................9 Possible Effects of Market Limits.......................................9 Limitation on Portfolio Diversification................................10 Lack of Independent Experts............................................10 PAGE POSSIBLE ADVANTAGES OF INVESTMENT IN THE FUND................................10 ORGANIZATIONAL CHART.........................................................12 SUMMARY FINANCIAL INFORMATION................................................13 CONFLICTS OF INTEREST / FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER....................................14 USE OF PROCEEDS..............................................................17 FEES, COMPENSATION AND EXPENSES..............................................17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .....................................23 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...............................................................25 THE GENERAL PARTNER / ADVISOR................................................29 COMMODITY BROKERAGE ARRANGEMENTS.............................................35 PLAN OF DISTRIBUTION.........................................................37 INVESTMENTS BY ERISA ACCOUNTS................................................39 DISTRIBUTIONS AND REDEMPTIONS................................................40 TRADING POLICIES.............................................................41 SUMMARY OF THE ADVISORY AGREEMENT............................................43 SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT.................................................................44 FEDERAL INCOME TAX CONSIDERATIONS............................................48 LEGAL MATTERS................................................................50 EXPERTS......................................................................50 INDEX TO FINANCIAL STATEMENTS................................................51 PART TWO PAGE DESCRIPTION OF COMMODITY TRADING.............................................67 SUPPLEMENTAL PAST PERFORMANCE OF THE ADVISOR.................................70 APPENDIX - GLOSSARY AND DEFINITIONS OF COMMODITY FUTURES TRADING .........APP-1 EXHIBIT A - SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP .. A-1 EXHIBIT B - SUBSCRIPTION REQUIREMENTS...................................... B-1 EXHIBIT C - SUBSCRIPTION INSTRUCTIONS FOR SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY................................................ C-1 EXHIBIT D - REQUEST FOR REDEMPTION......................................... D-1 THE EXECUTION COPY OF THE SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY ACCOMPANIES THIS PROSPECTUS. SHAFFER ASSET MANAGEMENT, INC. General Partner 925 Westchester Avenue, Suite 306 White Plains, NY 10604 800-352-5265 (ii) -------------------------------------------------------------------------------- SUMMARY GENERAL The following summary is intended to highlight the significant information contained in the body of this prospectus and the accompanying statement of additional information. More detailed information is found in the remainder of this prospectus and the accompanying statement of additional information. This summary is qualified in its entirety by the information appearing elsewhere in this prospectus and the accompanying statement of additional information, and the description of any document is qualified in its entirety by reference to such document. RISK FACTORS The following is a summary of the major risks involved in a purchase of the Units. For a further explanation of these and other risks, please read this entire prospectus carefully and consider the "Risk Factors" on page 5. The purchase of Units is speculative and involves a high degree of risk. Purchasers could lose all or substantially all of their investments in the Fund. Shaffer Asset Management uses technical trend-following trading methods which could expose the Fund to significant risks. There is no secondary market for the Units. There are restrictions and possible fees assessed with redemptions of the Units. Transfers of interests in the Units require the consent of Shaffer Asset Management, which consent may be withheld in its sole discretion. Substantial expenses must be offset by trading profits and interest income. Shaffer Asset Management is dependent on its key personnel. The Fund has limited operating history. FEES AND EXPENSES The fees and expenses to be paid with respect to a Unit at the time you purchase Units, during the first year following your purchase, and in subsequent years, are as follows:
LIMITED PARTNER TRANSACTION EXPENSES (1) Sales Charge.............................................4.00% Syndication fee..........................................1.00% ------ TOTAL....................................................5.00% ===== ANNUAL FEES AND EXPENSES PAID DURING FIRST YEAR FOLLOWING PURCHASE OF UNITS (2) (3) (4) Management fee...........................................3.75% Continuing Service fee...................................1.25% Commodities Brokerage Commissions (5)....................1.00% Operating Expenses.......................................0.50% ------ TOTAL....................................................6.50% ===== ANNUAL FEES AND EXPENSES PAID FROM YEAR TWO FOLLOWING PURCHASE OF UNITS THROUGH THE REMAINDER OF THE LIFE OF THE FUND (2) (3) (4) Management fee...........................................1.00% Continuing Service fee...................................4.00% Commodities Brokerage Commissions (5)....................1.00% Operating Expenses.......................................0.50% ------ TOTAL....................................................6.50% ===== ----------- (1) As a percentage of offering price per Unit. (2) As a percentage of average monthly Net Asset Value per Unit. (3) Does not include early redemption fees of up to 4% payable on any redemption of Units made within one year of purchase. (4) Does not include Incentive Allocation to Shaffer Asset Management of 15% of New Trading Profits. (5) Estimated based on the historical trading patterns of Shaffer Asset Management.
-1- THE FUND THE FUND Shaffer Diversified Fund, LP is a limited partnership organized on August 29, 2000 under the Delaware Revised Uniform Limited Partnership Act as an investment vehicle that allows investors to include commodity futures contracts traded on the United States commodity futures markets in their portfolios in the same way that they include mutual funds, money market funds and limited partnerships in other areas. The Fund will terminate on December 31, 2025, or upon an earlier date in certain circumstances as described in the Fund's Agreement of Limited Partnership, attached to this prospectus as Exhibit A. LOCATION AND TELEPHONE NUMBER The principal executive offices of the Fund and Shaffer Asset Management are located at 925 Westchester Avenue, White Plains, New York 10604; telephone number is (800) 352-5265 (toll-free). BUSINESS The business of the Fund is to seek medium and long-term capital appreciation through speculative trading in a diversified portfolio of commodity futures contracts in the United States commodity futures markets pursuant to the trading instructions of Shaffer Asset Management. Specifically, the Fund trades and invests in the markets of currency, interest rate, grain, metals and energy futures. ADMINISTRATION Shaffer Asset Management, in its capacity as the general partner of and the commodity trading advisor to the Fund, administers the business and affairs of the Fund and has sole and exclusive authority over its trading decisions. The Fund's units are offered through Berthel Fisher & Company Financial, Inc., the Fund's principal selling agent, and possibly through additional selling agents introduced by Berthel Fisher & Company, referred to in this prospectus as "selected dealers." Berthel Fisher & Company and the selected dealers are referred to collectively as "selling agents." ADM Investor Services, Inc. serves as the Fund's current commodity broker. FEES AND EXPENSES PAYABLE BY THE FUND The Fund is required to pay substantial charges, such as continuing services fees; management fees and possible incentive allocations; brokerage commissions; legal, accounting, auditing, printing, recording, filing and other periodic fees and expenses; and any extraordinary expenses. Shaffer Asset Management has agreed, however, to pay all such expenses that are, in the aggregate, in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum, except for sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses, which expenses shall be paid by the Fund. A complete description of these charges is set forth below under "Fees, Compensation and Expenses." FEES AND EXPENSES PAYABLE BY THE GENERAL PARTNER Shaffer Asset Management will pay all organizational and initial offering expenses of the Fund, exclusive of selling commissions. In addition, Shaffer Asset Management will pay all operating and other administrative expenses attributable to the Fund that are in the aggregate in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum, except for sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses, which expenses shall be paid by the Fund. BREAK-EVEN THRESHOLD Charges of the Fund that are not offset by trading gains and interest income will deplete the assets of the Fund. In order for an investor to "break even" on his or her investment in the first year of trading, therefore, the Fund will have to earn $1,209, if redemption charges apply, or $1,092 if redemption charges do not apply, 12.09% or 10.92%, respectively, of an initial $10,000 investment. See "Fees, Compensation and Expenses -- Estimate of Break-even Threshold." -2- DISTRIBUTIONS Distributions of profits, if any, will be made at the discretion of Shaffer Asset Management. Investors should be aware, however, that Shaffer Asset Management does not intend to make any distributions of any profits. See "Distribution and Redemptions." REDEMPTION OF UNITS Limited partners of the Fund can redeem some or all of their Units as of the last business day of each month at the then current Net Asset Value per Unit on ten days' prior written notice to Shaffer Asset Management; no redemption which applies to less than all of a partner's interest in the Fund can result, however, in the partner's capital account being reduced below $10,000 ($5,000 in the case of investments by pension, profit-sharing or other employee benefit plans qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension -- IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans) after the redemption is effected. See "Distributions and Redemptions." The Fund charges an early redemption fee, except on redemptions effected to provide funds for the payment of taxes on profits, equal to 4% of the Net Asset Value of the Units redeemed as of or before the end of the third full calendar month after their purchase. This fee will decrease by one percentage point for every three subsequent calendar months so that there will be no early redemption fee charged on redemptions effected after the end of the twelfth full calendar month after their purchase. See "Fees, Compensation and Expenses -- Description of Fees, Compensation and Expenses -- Early Redemption Fees" and "Distributions and Redemptions." FEDERAL TAX TREATMENT For Federal income tax purposes, the Fund is treated as a partnership and not a corporation; however, no ruling from the IRS has been obtained confirming this tax treatment. The Fund's status as a partnership means that investors will be subject to tax on their allocable shares of the Fund's interest income and any gains earned each year, whether or not they redeem any Units or receive any cash distributions from the Fund during such year. Also, an individual who incurs a capital loss in any year may not be able to deduct (for tax purposes) all of that loss in that same year. The amount deductible in any one year is subject to an annual limit. The annual limit is an amount equal to (i) that person's capital gains incurred in the same year, plus (ii) $3,000. However, the rest of the capital loss can be deducted in future years, but subject to the same annual limit. See "Federal Income Tax Considerations." SECURITIES OFFERED During the continuing offering period, units are offered at Net Asset Value as of the last business day of each calendar month at a purchase price equal to the then current Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. See "Plan of Distribution -- Subscription Procedures." The net assets of the Fund are its assets less its liabilities determined in accordance with the Limited Partnership Agreement. The net asset value per unit equals the net assets of the Fund divided by the number of units outstanding as of the date of determination. Investors must submit subscriptions at least ten business days prior to the applicable month-end closing date. Approved subscriptions will be accepted once payments are received and cleared. -3- The Fund accepts subscriptions throughout the continuing offering period, which can be terminated by Shaffer Asset Management at any time. Shaffer Asset Management has no present intention to terminate the offering. The Fund's selling agents will use their best efforts to sell the units offered but are not obligated to sell any specific number of units. INVESTORS ARE REQUIRED TO MAKE REPRESENTATIONS AND WARRANTIES RELATING TO THEIR SUITABILITY TO PURCHASE THE UNITS IN THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY. READ THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY AS WELL AS THIS PROSPECTUS CAREFULLY BEFORE YOU DECIDE WHETHER TO INVEST MINIMUM INVESTMENT AMOUNTS The minimum initial investment in the Fund by any one investor is $10,000. However, the minimum initial investment for pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension -- IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans is $5,000. Additional investments may be made in amounts of not less than $1,000. See "Plan of Distribution -- Subscription Procedure." SUITABILITY STANDARDS Each investor must represent in the Subscription Agreement / Power of Attorney, attached as Exhibit C to the statement of additional information that accompanies this prospectus, that his or her net worth and/or annual gross income satisfy certain requirements, that he or she has received a copy of this prospectus and the accompanying statement of additional information, and that he or she is able to assume the risks inherent in an investment in the Fund. See "Plan of Distribution -- Subscriptions/Investment Requirements/Investor Suitability Requirements." USE OF PROCEEDS The entire offering proceeds, net of initial sales charges and syndication fees, will be credited to the Fund's accounts at JPMorganChase and ADM Investor Services and/or other banks and commodity brokers and will be available to support the Fund's trading in commodity futures contracts pursuant to the instructions of Shaffer Asset Management. See "Use of Proceeds." RISKS AND CONFLICTS OF INTEREST An investment in the Fund involves substantial risks. The risks of investing in the Fund include, but are not limited to, the highly speculative nature of trading in commodity futures contracts and the substantial charges that the Fund will incur regardless of whether any profits are realized. A limited partner of the Fund may lose his or her entire investment in the Fund, including any profits. In addition, the Fund is subject to various conflicts of interest. See "Risk Factors" and "Conflicts of Interest/Fiduciary Responsibility of the General Partner." -4- RISK FACTORS SET FORTH BELOW ARE THE PRINCIPAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. YOU SHOULD CONSIDER THESE RISKS WHEN MAKING YOUR INVESTMENT DECISION. YOU SHOULD ALSO READ THIS ENTIRE PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION CAREFULLY AND DISCUSS YOUR INVESTMENT DECISION WITH YOUR LEGAL, TAX AND FINANCIAL ADVISORS. POSSIBILITY OF LOSING ENTIRE INVESTMENT. An investment in the Fund is a speculative investment. The Fund may not achieve its objectives or avoid substantial losses. For every gain in futures trading, there is an equal and offsetting loss by another. Shaffer Asset Management has, from time to time, incurred substantial losses in trading on behalf of its customers. An investor in the Fund may lose all or substantially all of his or her investment in the Fund. COMMODITY FUTURES TRADING IS SPECULATIVE. Commodity futures prices are highly volatile and are subject to occasional rapid and substantial changes. Price movements for commodity futures contracts and other related interests are influenced by, among other things: government trade, fiscal, monetary and exchange control programs and policies; weather and climate conditions; changing supply and demand relationships; national and international political and economic events; changes in interest rates; and the psychological emotions of the market place. In addition, governments may intervene periodically in certain markets, generally currencies, either directly or by regulation, often with the intent of influencing prices directly. The trading techniques utilized by Shaffer Asset Management are primarily technical in nature, and Shaffer Asset Management does not ordinarily consider fundamental economic factors, such as supply and demand, except to the extent that such factors are reflected in the technical input data analyzed by Shaffer Asset Management. See "The General Partner / Advisor -- Trading Methods" and "Description of Commodity Trading" in the statement of additional information that accompanies this prospectus. COMMODITY FUTURES TRADING IS HIGHLY LEVERAGED. Commodity futures contracts are traded on margins that typically range from about 4% to 20% to the value of the contract. The average margin is less than 10% of the value of the contract. Low margin provides a large amount of leverage -- that is, commodity futures contracts for a large number of units of a commodity interest (bushels, pounds, etc.) having a value substantially greater than the required margin may be traded for a relatively small amount of money. Hence, a relatively small change in the market price of a commodity interest produces a corresponding large profit or loss in relation to the amount of money invested. Thus, if the Fund has invested a substantial portion of its Net Asset Value in such a commodity interest, a substantial change, up or down, in the value of a Unit would result. The Fund may lose more than its initial margin on a trade, up to the entire amount at risk, but a limited partner of the Fund cannot incur net losses greater than the amount of his or her investment. See "Summary of the Limited Partnership Agreement -- Liabilities." MARKETS IN WHICH THE FUND TRADES MAY BECOME ILLIQUID. Unexpected market illiquidity could cause major losses for the Fund. In illiquid markets, the Fund could be unable to close out positions to limit losses or to take positions favorable to the Fund. There are too many different factors that can contribute to market illiquidity to predict when or where illiquid markets may occur. In addition, the Fund may take large positions that become difficult to liquidate or to liquidate at the prices desired by the Fund, possibly causing losses for the Fund. United States commodity exchanges impose limits on the amount the price of some, but not all, futures contracts may change on a single day. Once a futures contract has reached its daily limit, it may be impossible for the Fund to liquidate a position in that contract, if the market has moved adversely to the Fund, until the limit is either raised by the exchange or the contract begins to trade away from the limit price. AUTOMATIC TERMINATION. The Fund will close out all open positions and suspend trading, and may terminate, if the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) on any business day during any given fiscal year decreases to or below 50% of the Net Asset Value per Unit as of the beginning of the fiscal year, provided that such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or if the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) decreases on any business day to or below $350. No assurance can be given, however, that the investor will receive at least one-half of any year's beginning Net Asset Value per Unit or $350 per Unit because there is no assurance that the Fund will be able to liquidate its positions at favorable prices. See "Trading Policies." -5- SUBSTANTIAL FEES, COMMISSIONS AND EXPENSES. The Fund is obligated to pay substantial fees, commissions and expenses without regard to profitability. Therefore, the Fund will have to make substantial gross gains from commodity trading each year in order for the limited partners of the Fund to realize any appreciation in the value of their Units. In addition, the payment by the Fund of such fees, commissions and expenses could cause the Fund to close out all open positions, suspend trading and possibly terminate as described in "Risk Factors--Automatic Termination," above. See "Conflicts of Interest/Fiduciary Responsibility of the General Partner," "Fees, Compensation and Expenses," "Commodity Brokerage Arrangements" and "Summary of the Limited Partnership Agreement -- Termination." DISTORTIONS PRODUCED BY INCENTIVE ALLOCATION ARRANGEMENT. As more fully described under "Plan of Distribution," the purchase price of Units continuously sold vary with the Net Asset Value per Unit. Incentive allocations allocable to the Fund's advisor are contingent on cumulative New Trading Profits (as hereinafter defined), and all Advisory Losses (as hereinafter defined) incurred by Shaffer Asset Management following the allocation of any incentive allocations to it must be recovered by Shaffer Asset Management before any additional incentive allocations are allocable to it. The combination of this arrangement with the withdrawal of existing partners or the admission of new partners will distort the results experienced by the Units. A decline in the Fund's cumulative profits creates, in effect, a "credit" against future incentive allocations. A partner who withdraws from the Fund while such a "credit" remains outstanding forfeits his share thereof. A partner who is admitted to the Fund while such a "credit" remains outstanding acquires a share therein (thereby diluting the existing partners' share therein) even though he has not personally suffered the loss that gave rise to it. In addition, the Fund allocates to Shaffer Asset Management, on a quarterly basis, a percentage of New Trading Profits generated by the fund for such calendar quarter, including unrealized appreciation on open commodity interest positions. Such appreciation may not be realized by the Fund and those open positions might be closed at no profit or even a loss due to adverse market conditions; nevertheless, Shaffer Asset Management would retain the entire amount of such allocation. LIMITATIONS OF TREND-FOLLOWING, TECHNICAL TRADING STRATEGIES. Shaffer Asset Management uses technical, trend-following trading methods based on mathematical analyses of certain technical data regarding past market performance that does not ordinarily consider fundamental factors such as weather, supply, demand and political or economic events except to the extent reflected in technical input data analyzed by Shaffer Asset Management. Inherent in the use of such trend-following, technical trading methods are the following limitations: (i) such technical methods may be unable to respond to fundamental causative events until after their impact has ceased to influence the market, and commodity interest positions dictated by such methods may be incorrect in light of the fundamental factors then affecting the market; (ii) such technical trading methods may not identify a trend on which it can act, or it may react to a minor price movement in establishing a position contrary to the overall price trend if there are no substantial price movements, or if a price movement is erratic or ill-defined; and (iii) such technical trading methods may, for inexplicable reasons, produce profitable results for a period of time, after which further application of such techniques fails to forecast correctly any future price movement. For this reason, commodity trading advisors utilizing such methods may modify and alter their techniques on a periodic basis. Hence, as a result of continued modification, it is possible that the trading methods and strategies used by Shaffer Asset Management may be different in the future from those currently in use. -6- DEPENDENCE ON KEY PERSONNEL. Currently, Daniel S. Shaffer and Bruce I. Greenberg are the sole employees of Shaffer Asset Management. The loss of the services of both Mr. Shaffer and Mr. Greenberg would have a material adverse effect on the operations of Shaffer Asset Management and the Fund. See "The General Partner/Advisor." LIMITED OPERATING HISTORY. The Fund commenced trading February 14, 2002 and, accordingly, has only a limited operating history. Shaffer Asset Management has managed client commodity accounts only since March 1999. Neither Shaffer Asset Management nor any of its principals has prior experience operating or advising a commodity pool. See "The General Partner / Advisor." LIMITED ABILITY OF LIMITED PARTNERS TO LIQUIDATE INVESTMENT IN THE UNITS. An investor in the Fund may not be able immediately to liquidate an investment in the Units. There is no public market for the Units, nor is one likely to develop. In addition, a transferee of a Unit may become a substituted limited partner of the Fund only with the consent of Shaffer Asset Management, which consent may be withheld in its sole discretion. However, a limited partner of the Fund may require the Fund to redeem any or all of his Units at the then current Net Asset Value as of the close of business on the last business day of any calendar month upon ten days' prior written notice to Shaffer Asset Management, subject to an early redemption fee for redemptions of Units effected as of or before the end of the twelfth full calendar month after their purchase, other than redemptions effected to provide funds for the payment of taxes on profits. See "Distributions and Redemptions" and "Summary of the Limited Partnership Agreement -- Redemptions." POSSIBLE EFFECT OF REDEMPTIONS ON UNIT VALUES. Substantial redemptions of Units at the same time could require the Fund to liquidate market positions to raise the necessary cash to fund redemptions. Forced liquidations could adversely affect the value of the Units redeemed and of the Units remaining outstanding. LIMITED RIGHTS OF INVESTORS / LIMITED PARTNERS WILL NOT PARTICIPATE IN MANAGEMENT. Purchasers of the Units become limited partners of the Fund and, as such, are unable to exercise any management functions with respect to its operations. The rights and obligations of the Fund's limited partners are governed by the provisions of the Delaware Revised Uniform Limited Partnership Act and by the Fund's limited partnership agreement, which provides, in part, that a majority in interest of the limited partners of the Fund may: o adopt amendments to the Fund's limited partnership agreement proposed by Shaffer Asset Management or by limited partners of the Fund owning at least 10% of the outstanding Units; o dissolve the Fund; o remove Shaffer Asset Management as the Fund's general partner; o elect a new general partner if Shaffer Asset Management withdraws or is removed; or o cancel any contract for services with Shaffer Asset Management or its affiliates for any reason on sixty days' prior written notice. See "Summary of the Limited Partnership Agreement" and Exhibit A to the statement of additional information that accompanies this prospectus. UNPREDICTABILITY OF REGULATORY CHANGES. The futures markets are subject to comprehensive statutes, regulations and margin requirements. In addition, the CFTC and the exchanges on which commodity futures contracts are traded are authorized to take extraordinary actions in the event of a market emergency, including the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of commodity futures transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action at any time and from time to time. -7- PARTNERS' TAX LIABILITY MAY EXCEED DISTRIBUTIONS. The distribution of cash to partners is subject to the sole discretion of Shaffer Asset Management, and Shaffer Asset Management may determine, and in fact intends, not to make any distributions. However, the Fund's taxable income for a fiscal year, if any, will be taxable to the partners in accordance with their distributive shares of Fund income whether or not any cash has been distributed to the partners. As a result, distributions to the limited partners of the Fund may not equal taxes payable by partners with respect to Fund income. Subject to certain restrictions, however, partners have the right to redeem some or all of their Units as of the last business day of any calendar month upon ten days' prior written notice to Shaffer Asset Management and may be able to exercise such right in order to provide funds for the payment of taxes and other purposes. In addition, the Fund might sustain losses offsetting such profits after the end of the Fund's fiscal year, so a partner might never receive the profits on which he has paid taxes. In addition, due to the complex requirements relating to partnership tax accounting, it is possible that under certain conditions partners may be allocated gains or losses for tax purposes which are greater or less than any actual increase or decrease in the value of their Units. See "Distributions and Redemptions" and "Federal Income Tax Consequences." TAX COULD BE DUE FROM INVESTORS ON THEIR SHARE OF THE FUND'S ORDINARY INCOME DESPITE OVERALL LOSSES. Investors may be required to pay tax on their allocable share of the Fund's ordinary income, which in the case of the Fund is primarily the Fund's interest income, even though the Fund incurs overall losses. Capital losses of individuals can be used only to offset capital gains and $3,000 of ordinary income each year. Consequently, if an investor having no other items of capital gain or loss in a particular year were allocated $5,000 of ordinary income and $10,000 of capital losses from the Fund, the investor would owe tax on $2,000 of ordinary income even though the investor would have economically incurred a $5,000 overall loss for the year. The remaining $7,000 nondeductible capital loss could be used in subsequent years to offset capital gain and ordinary income, but subject to the same annual limitation on its deductibility against ordinary income. THERE COULD BE A LIMIT ON THE DEDUCTIBILITY OF BROKERAGE AND PERFORMANCE FEES. Although Shaffer Asset Management treats the management fees paid to it, and brokerage fees paid to the commodity brokerages, and certain other expenses of the Fund, as ordinary and necessary business expenses, upon audit the Fund may be required to treat such fees as "investment advisory fees" if the Fund's trading activities did not constitute a trade or business for tax purposes. If the expenses were investment advisory expenses, the tax liability of a limited partner of the Fund would likely increase. In addition, upon audit, a portion of the brokerage fees might be treated as a non-deductible syndication cost or might be treated as a reduction in the Fund's capital gain or as an increase in the Fund's capital loss. If the brokerage fees were so treated, the tax liability of a limited partner of the Fund would likely increase. CONFLICTS OF INTEREST. There exist inherent and potential conflicts of interest in the operation of the Fund's business. These include: o the ability of Shaffer Asset Management to increase the amount of the management fees payable to it and the continuing services fees payable to the selling agents (one of which the sole officers, directors and shareholders of Shaffer Asset Management are registered representatives) by limiting the distributions of profits, if any, of the Fund; o competition in making purchases and/or sales of commodity futures contracts among Shaffer Asset Management, its selling agents, its commodity brokers and their respective officers, directors, shareholders, employees, customers and affiliates; o the limited ability of Shaffer Asset Management to prevent itself from violating the trading policies of the Fund and from engaging in excessive trading, and the potential absence of arm's length negotiations with respect to the terms of the advisory agreement entered into between the Fund and Shaffer Asset Management, each caused by Shaffer Asset Management acting as the Fund's general partner and commodity trading advisor; and o the potential absence of arm's length negotiations with respect to the terms of the selling agent agreement entered into between the Fund and Berthel Fisher & Company, caused by the sole officers, directors and shareholders of Shaffer Asset Management being registered representatives of Berthel Fisher & Company. For a complete discussion of the inherent and potential conflicts of interest that may constitute a current risk to potential investors in the Fund, see "Conflicts of Interest / Fiduciary Responsibility of the General Partner." -8- OTHER CLIENTS OF THE FUND'S ADVISOR. Shaffer Asset Management and its sole officers, directors and shareholders, Daniel S. Shaffer and Bruce I. Greenberg, currently manage other trading accounts and trade for their own account, and they and their principals, employees and affiliates will remain free to manage additional accounts, including their own accounts, in the future subject to certain limitations. It is possible that such accounts and any additional accounts managed by Shaffer Asset Management or its principals, employees or affiliates in the future may be in competition with the Fund for the same or similar positions in the futures markets. In addition, Shaffer Asset Management may vary the trading strategies applicable to the Fund from those used for its other managed accounts. No assurance is given that the results of the Fund's trading will be similar to that of other accounts concurrently managed by Shaffer Asset Management or its principals, employees and affiliates. However, in its trading for the Fund's account and such other accounts, Shaffer Asset Management has agreed to use its good faith, best efforts to achieve an equitable treatment of all accounts, including with respect to priorities of order entry and changes in trading strategies or recommendations resulting from the application of speculative position limits. See "Risk Factors -- Possible Effects of Speculative Position Limits." EXPIRATION OF THE ADVISORY AGREEMENT WITH SHAFFER ASSET MANAGEMENT. The advisory agreement between the Fund and Shaffer Asset Management is for a one year term, subject to earlier termination by the Fund or Shaffer Asset Management and subject to automatic renewal on the same terms and conditions for an additional one year term, unless Shaffer Asset Management elects against renewal. Upon the expiration of the advisory agreement, Shaffer Asset Management, on behalf of the Fund, must either attempt to renegotiate the advisory agreement or make other arrangements for providing advisory services to the Fund if the Fund intends to continue trading. No assurance is given that the principals of Shaffer Asset Management will continue their association with Shaffer Asset Management during the term of the advisory agreement or that the services of Shaffer Asset Management or any of its principals will then be available on the terms contained in the current advisory agreement or on any other terms. See "Summary of the Advisory Agreement." POSSIBLE EFFECTS OF SPECULATIVE POSITION LIMITS. The CFTC and certain exchanges have established speculative position limits on the maximum net long or short futures position which any person, or group of persons acting in concert, may hold or control in some, but not all, commodities. All commodity accounts controlled by Shaffer Asset Management and its principal(s) will be aggregated for these speculative position limit purposes. With respect to trading in commodity futures contracts subject to such limits, Shaffer Asset Management may reduce the size of the positions that would otherwise be taken for the Fund in such commodity futures contracts and may not trade commodity futures contracts on certain commodities in order to avoid exceeding such limits. Such modifications of the Fund's trades, if required, could adversely affect the operations and profitability of the Fund. See "Conflicts of Interest / Fiduciary Responsibility of the General Partner" and "Summary of the Advisory Agreement." POSSIBLE EFFECTS OF MARKET LIMITS. It is not always possible to execute a buy or sell order at the desired price or to close out an open position, either due to market conditions or to limits on open positions and/or daily price fluctuation limits imposed by exchanges and approved by the CFTC. When the market price of a commodity futures contract reaches its daily price fluctuation limit, no trades can be executed unless traders are willing to effect trades at or within the limit, which may be unlikely due to movements in the market price of the underlying cash commodity. The holder of a commodity futures contract, including the Fund, may therefore be locked into an adverse price movement for several days or more and lose considerably more than the margin committed to trading the contract. In certain commodities, the daily price fluctuation limits apply throughout the life of the contract, and hence the holder of a futures contract who cannot liquidate his position by the end of trading on the last trading day may be required to make or take delivery of the underlying commodity. Another instance of difficult or impossible execution occurs in thinly traded markets or markets which lack sufficient trading liquidity. Although the Fund purchases and sells actively traded commodities, no assurance can be given that this will always be the case or that the Fund's orders will be executed at or near the desired price. -9- LIMITATION ON PORTFOLIO DIVERSIFICATION. Historically, managed commodity futures contracts have generally not correlated with the performance of other asset classes, such as stocks and bonds. Non-correlation means that (i) there is no statistically valid relationship between the past performance of commodity futures contracts, on the one hand, and stocks or bonds, on the other hand and (ii) the Fund may not necessarily be profitable or unprofitable during unfavorable periods for the stock market. If the Fund does not perform in a manner that is not correlated with the general financial markets or does not perform successfully, an investor will obtain no diversification benefits by investing in the Units. In addition, an investor may have no gains from the Fund to offset losses in the rest of his or her portfolio. LACK OF INDEPENDENT EXPERTS. Shaffer Asset Management has consulted with independent counsel, accountants and other experts regarding the formation and operation of the Fund. The Fund has not, however, engaged separate counsel, accountants or experts to represent investors in connection with this offering. Each investor should, therefore, consult with his or her own legal, tax and financial advisors regarding the desirability of an investment in the Fund. POSSIBLE ADVANTAGES OF INVESTMENT IN THE FUND ALTHOUGH THERE CAN BE NO ASSURANCE THAT SHAFFER ASSET MANAGEMENT WILL TRADE SUCCESSFULLY ON BEHALF OF THE FUND OR THAT THE FUND WILL AVOID LOSSES, IF THE FUND IS SUCCESSFUL, AN INVESTMENT IN THE FUND OFFERS INVESTORS THE FOLLOWING POTENTIAL ADVANTAGES. PROFESSIONAL COMMODITY TRADING MANAGEMENT Trading decisions for the Fund are made by Shaffer Asset Management pursuant to its trend-following, technical trading strategies. The Fund, therefore, enables investors to take advantage of the trading expertise of a professional commodity trading advisor which would not otherwise be available unless substantially more than the minimum investment in the Fund were committed to trading -- in this case, generally a minimum investment of $100,000 per account. INVESTMENT DIVERSIFICATION The Fund allows investors to include commodity futures contracts in their portfolios in the same way that they include mutual funds, money market funds and limited partnerships in other areas, e.g., oil and gas and real estate. A commodity futures investment can be an especially attractive diversification for a portfolio of stocks and bonds because it can be profitable during periods of both favorable and unfavorable economic conditions. Of course, it can also suffer losses during such periods as well. COMMODITY FUTURES MARKET DIVERSIFICATION The Fund will be large enough to enable Shaffer Asset Management to trade in as many different commodity futures markets as it chooses, thereby diversifying risk. Each of the Fund's limited partners will obtain greater diversification in the variety of contracts and markets traded than would otherwise be possible trading individually an account the size of a minimum investment in the Fund. LIMITED LIABILITY Because of the highly leveraged nature of commodity futures trading, an individual who invests directly in commodity futures contracts may lose substantially more than his or her investment. A limited partner of the Fund, however, cannot be individually subjected to margin calls or lose more than his or her investment in the Fund and his or her share of profits, if any, whether or not distributed. LIQUIDITY Limited partners of the Fund can redeem same or all of their Units as of the last business day of each month. partial redemptions may not, however, reduce a limited partner's capital account below the minimum investment amount applicable to such limited partner. Redemption fees apply to Units redeemed during the first full twelve calendar months after their purchase, except for redemptions effected to provide funds for the payment of taxes on profits. See "Distributions and Redemptions." -10- RISK MANAGEMENT The Fund will close out all open positions and suspend trading, and may terminate, if the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) on any business day during any given fiscal year decreases to or below 50% of the Net Asset Value per Unit as of the beginning of the fiscal year, provided that such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or if the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) decreases on any business day to or below $350. See "Trading Policies." FAVORABLE TAX TREATMENT Substantially all of the Fund's commodity futures trading are taxed at a maximum potential Federal income tax rate of 27.64% for individuals with no holding period requirement. Because the Fund is a limited partnership, all tax effects flow through to its limited partners. See "Federal Income Tax Considerations." LEVERAGE Commodity futures contracts are traded on margins that typically range from about 4% to 20% of the value of the contract. As a result, the Fund is able to hold positions in its account with face values equal to several times its net assets. A relatively small change in the market price of a commodity interest, therefore, produces a corresponding large profit or loss in relation to the amount of money invested. In general, Shaffer Asset Management intends to commit between 10% and 40% of the Fund's net assets as margin for commodity trading. INTEREST INCOME Unlike some "alternative investment" funds, the Fund does not borrow money in order to obtain leverage, so the Fund does not incur any interest expense. Rather, the Fund's margin deposits are maintained in cash equivalents, such as U.S. Treasury bills. As a result, the Fund earns interest on approximately 90% of its net assets, even while such assets are committed to trading. ADMINISTRATIVE CONVENIENCE The Fund provides to or obtains for its limited partners many services designed to alleviate the administrative details involved in engaging directly in futures transactions, including maintenance of the books and accounts of trading activities, preparing monthly and annual account statements for its limited partners, and supplying its limited partners with information necessary for individual Federal tax returns. -11- ORGANIZATIONAL CHART The following organizational chart illustrates the relationships among the various service providers of this offering. Shaffer Asset Management is both the general partner of, and the commodity trading advisor to, the Fund. Berthel Fisher & Company, the selected dealers and ADM Investor Services are not affiliated with each other or with Shaffer Asset Management or the Fund, except that Daniel S. Shaffer and Bruce I. Greenberg, the sole officers, directors and shareholders of Shaffer Asset Management are registered representatives of Berthel Fisher & Company, the Fund's principal selling agent. No loans have been, are or will be made between Shaffer Asset Management or any of its principals and the Fund. Descriptions of the dealings between Shaffer Asset Management and the Fund are set forth under "Fees, Compensation and Expenses" beginning on page 17. GENERAL PARTNER/ ADVISOR; SHAFFER ASSET MANAGEMENT, INC. Individual Managed | | Advisory Account Agreements | | Agreement | | Customer INDIVIDUAL SHAFFER Agreement COMMODITY MANAGED ACCOUNT DIVERSIFIED ------------------- BROKER: PROGRAM FUND LP | ADM INVESTOR | SERVICES, INC. | Selling Agent Agreement BERTHEL FISHER & COMPANY | | | Selected Dealer Agreements SELLING DEALERS -12- SUMMARY FINANCIAL INFORMATION SELECTED FINANCIAL DATA
Period Ended September 30, For the year Ended December 31, ----------- -------------------------------------- 2002 2001 2000 ----------- ------------- ------------- Total Assets $1,149,265 $ 413,586 $ 1,916 Total Liabilities 5,786 413,000 0.00 Total Liabilities & Partners' Capital 1,149,265 413,586 1,916 Net Income (Loss) after special allocation to the General Partner 76,986 (1,330) (84) Net Income (Loss) per General and Limited Partner Unit 73.20 (665.00) (42.00) Increase (Decrease) in Net Asset Value per General and Limited Partner Units 77.67 (665.00) (42.00) NOTE: The Fund commenced trading February 14, 2002.
SUPPLEMENTARY FINANCIAL INFORMATION The following summarized quarterly financial information presents the results of operations for the three-month periods ending March 31, 2002 and June 30, 2002.
1st Qtr. 2nd Qtr. 3rd Qtr. 2002 2002 2002 ----------- --------- --------- Gain (loss) from Trading $ 31,104 $ 133,088 $(18,489) Total Income (Loss) 32,665 137,456 (14,016) Net Income (Loss) 16,208 99,190 (38,409) Net Income (Loss) per General and Limited Partner Unit * 15.45 95.65 (35.96) Increase ( Decrease) in Net Asset Value per General and Limited Partner Units 15.45 96.10 (33.88) Net Asset Value per General and Limited Partner Unit at the End of the Period 965.45 1,061.55 1,027.67 * Based on weighted average number of units outstanding during the period.
-13- CONFLICTS OF INTEREST / FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER THE FOLLOWING INHERENT OR POTENTIAL CONFLICTS OF INTEREST SHOULD BE CONSIDERED BY POTENTIAL SUBSCRIBERS BEFORE INVESTING IN THE FUND. POTENTIAL SUBSCRIBERS SHOULD BE AWARE THAT SHAFFER ASSET MANAGEMENT HAS NOT ESTABLISHED ANY FORMAL PROCEDURES TO RESOLVE THE CONFLICTS OF INTEREST DESCRIBED BELOW, AND THAT, CONSEQUENTLY, LIMITED PARTNERS IN THE FUND ARE DEPENDENT ON THE GOOD FAITH OF THE RESPECTIVE PARTIES SUBJECT TO SUCH CONFLICTS TO RESOLVE THEM EQUITABLY. IN ADDITION, POTENTIAL SUBSCRIBERS SHOULD CONSIDER THE FIDUCIARY RESPONSIBILITIES OF SHAFFER ASSET MANAGEMENT TO THE FUND AND THE LIMITED PARTNERS OF THE FUND AS EXPLAINED BELOW. CONFLICTS OF INTEREST DISTRIBUTION OF PROFITS. Under the terms of the Fund's limited partnership agreement, Shaffer Asset Management has discretion as to the distribution of profits, if any, to the limited partners of the Fund. At present, Shaffer Asset Management does not intend to make any distributions of any profits. To the extent that profits are retained by the Fund rather than distributed, the Net Asset Value of the Fund, which is the basis for determining the management fee payable to Shaffer Asset Management and the continuing services fees payable to Berthel Fisher & Company, the selected dealers and their respective registered representatives (including Daniel S. Shaffer and Bruce I. Greenberg, the sole officers, directors, employees and shareholders of General Partner / Advisor who are also registered representatives of Berthel Fisher & Company), will be increased. OTHER TRADING ACCOUNTS OF THE ADVISOR, SELLING AGENTS, COMMODITY BROKER AND THEIR PRINCIPALS AND AFFILIATES. Shaffer Asset Management and its sole officers, directors and shareholders, Daniel S. Shaffer and Bruce I. Greenberg, currently trade for accounts other than the Fund, and they will remain free to trade for such other accounts and to utilize the same trading strategies and formulas in trading for such other accounts that Shaffer Asset Management will utilize in making trading decisions for the Fund; and the selling agents, ADM Investor Services the commodity brokers and their respective shareholders, directors, officers, employees and affiliates may and will be free to trade for their own accounts from time to time. The records of any such trading will not be available for inspection by the limited partners of the Fund except to the extent required by law. In addition, the commodity broker(s) ADM Investor Services are futures commission merchants and effect transactions for customers in addition to the Fund. Since the identities of the purchaser and seller are not disclosed until after the trade, it is possible that transactions could be effected for the Fund in which the other parties to the transactions are shareholders, officers, directors, employees, customers or affiliates of the commodity broker(s) ADM Investor Services. Such persons might also compete with the Fund in making purchases or sales of commodity futures contracts without knowing that the Fund is also bidding on such commodity futures contracts. Since similar orders (e.g., market orders for the same commodity futures contracts) are filled in the order they are received by a particular floor broker, transactions for any of such persons might be effected at less favorable prices. Regulations of the CFTC prohibit futures commission merchants from utilizing their knowledge of Fund trades for their own or their other customers' benefit. Furthermore, all of the positions held by accounts managed by Shaffer Asset Management and its principals and affiliates will be aggregated for purposes of applying speculative position limits. As a result, the Fund might not be able to enter into or maintain certain positions if such positions, when added to the positions already held by the Fund and such other accounts, would exceed the applicable limits. RELATIONSHIP BETWEEN SHAFFER ASSET MANAGEMENT AND THE FUND'S COMMODITY BROKER(S). Under the terms of the Fund's limited partnership agreement, Shaffer Asset Management has the authority to designate commodity broker(s) to execute trades on behalf of the Fund and, at present, Shaffer Asset Management has selected ADM Investor Services, Inc. to act as the commodity broker for the Fund. The Fund pays ADM Investor Services brokerage commissions at the rate of $17.00 per "round-turn" trade for trades executed on domestic exchanges, which amount is reasonable, in the opinion of Shaffer Asset Management, based upon the standard published rates currently being charged by many major brokerage firms to their individual public customers, although such commission rates may change in the future. Potential investors should note that the brokerage commission rates at which the Fund will pay ADM Investor Services may be higher than rates charged by ADM Investor Services to certain of its other customer accounts, including the accounts of its employees, and the rates charged by other brokerage firms. This brokerage arrangement may result; therefore, in the Fund paying brokerage commissions for it's trading at rates that exceed the lowest rates that might otherwise be available. -14- Although the Fund's brokerage arrangement with ADM Investor Services is non-exclusive so that the Fund will have the right to seek lower commission rates from other brokers at any time, Shaffer Asset Management believes that the arrangements between the Fund and ADM Investor Services are fair and reasonable in view of the nature and quality of the services to be provided by ADM Investor Services with respect to the execution of transactions. Shaffer Asset Management intends to seek high quality execution services and financial responsibility and does not generally intend to seek lower commission rates from other brokers or to negotiate with ADM Investor Services for lower commission rates. Shaffer Asset Management intends to cause the Fund to pay a commission which it believes to be fair and reasonable in view of the nature and quality of the services rendered as well as the advantage of an ongoing relationship with a particular broker or brokers who execute trades on behalf of the Fund. In directing transactions to brokers for execution, Shaffer Asset Management considers such factors as commission rates which will be charged to the Fund, the reputation and financial stability of the broker, the ability of the broker to obtain fast quality and accurate executions for the Fund at a fair price, the quality and accuracy of the broker's reporting paperwork, confirmations, and monthly statements, and other services which may be beneficial to the Fund. The Fund, therefore, may pay commission rates that exceed the lowest commission rates available from brokers. However, Shaffer Asset Management will review, at least annually, the commission rates charged to other comparable commodity pools and other relevant factors to determine that the commission rates being paid by the Fund continue to be fair and reasonable. Neither Shaffer Asset Management nor any of its principals directly or indirectly share in the brokerage commissions paid by the Fund for brokerage services. Since Shaffer Asset Management and its principals also have no affiliations or business arrangements, direct or indirect, with any broker or any principal thereof whereby Shaffer Asset Management or its principals may benefit, directly or indirectly, from the maintenance of the Fund's account with such broker, there is no actual or potential conflict of interest between Shaffer Asset Management or any of its principals and any of the brokers with which the Fund may carry its account, including ADM Investor Services, Inc., the Fund's present commodity broker. SELECTION OF THE TRADING ADVISOR(S). Under the terms of the Fund's limited partnership agreement, Shaffer Asset Management selects the trading advisor(s) to direct the Fund's trading. The Fund has entered into an advisory agreement with Shaffer Asset Management, Inc., the Fund's general partner, to manage the Fund's commodity transactions. Since Shaffer Asset Management acts as both the general partner of, and the trading advisor to, the Fund, it has a conflict of interest with respect to its responsibility to prevent the trading advisor from violating the trading policies of the Fund and from engaging in excessive trading that could cause the Fund to pay substantial brokerage commissions. However, neither Shaffer Asset Management nor any of its principal(s) directly or indirectly receive any portion of the brokerage commissions paid by the Fund for brokerage services or otherwise benefit from the maintenance of the Fund's trading accounts with any particular broker or brokers. Shaffer Asset Management may be deemed to have a conflict of interest with respect to its responsibility to review the trading performance of Shaffer Asset Management and to determine whether to terminate the advisory agreement with Shaffer Asset Management on behalf of the Fund. There may also be deemed to be an absence of arm's-length negotiations with respect to the terms of the advisory agreement entered into with Shaffer Asset Management by the Fund. SYNDICATION FEES, SALES COMMISSIONS AND CONTINUING SERVICE FEES. Prospective investors should note as Units are sold and accepted during the continuing offering period, the Fund will pay Shaffer Asset Management, Berthel Fisher & Company, certain selected dealers and their respective registered representatives an amount equal to approximately 5% above the then current Net Asset Value per Unit of each Unit sold by them and accepted by Shaffer Asset Management. Approximately 20% of all sales charges shall be paid to Shaffer Asset Management to reimburse Shaffer Asset Management for the payment of the Fund's organizational and initial offering expenses and the Fund's operating expenses that are payable by Shaffer Asset Management and approximately 80% of all sales charges shall be paid as syndication fees to Berthel Fisher & Company and as selling commissions to the selling agents. The selling agents may in turn pay a portion of such syndication fees and selling commissions to their respective employees who are NASD registered representatives for each Unit sold by them. In addition and subject to the limitations described herein under "Plan of Distribution," the Fund will pay a monthly continuing services fee to Berthel Fisher & Company and, through Berthel Fisher & Company, certain selected dealers who are appropriately registered with the CFTC and/or the NFA and their respective registered representatives equal -15- to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (as defined in "Fees, Compensation and Expense -- Certain Definitions: 2. Net Asset Value per Unit," below) of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees payable or incentive allocations allocable as of such date) with respect to Units purchased within the prior 12-month period and 1/12 of 4% of the Net Asset Value per Unit of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees payable or incentive allocations allocable as of such date) with respect to Units purchased more than 12 months prior thereto. In advising customers whether to purchase or redeem Units, Shaffer Asset Management, the selling agents and their respective registered representatives have a conflict of interest between maximizing their current and on-going compensation, on the one hand, and providing financial advice that is in the best interests of their customers, on the other hand. In addition, investors should note that Daniel S. Shaffer and Bruce I. Greenberg, the sole officers, directors and shareholders of Shaffer Asset Management, are also registered representatives of Berthel Fisher & Company, and in that capacity, may receive a portion of the syndication fees and continuing service fees referred to herein. A conflict of interest may exist, therefore, between Mr. Shaffer's and Mr. Greenberg's interest in Shaffer Asset Management; their interest in maximizing their current and on-going compensation; and the interests of their customers in making an investment decision, such as a decision to purchase and/or redeem Units. There may also be deemed to be an absence of arm's-length negotiations with respect to the terms of the selling agent agreement entered into between the Fund and Berthel Fisher & Company. FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER In evaluating these conflicts of interest, prospective investors should be aware that Shaffer Asset Management has a fiduciary responsibility to the limited partners of the Fund to exercise good faith and fairness in all dealings affecting the Fund. In the event that a limited partner of the Fund believes that Shaffer Asset Management has violated its duty to the limited partners, he may seek legal relief on his behalf or on behalf of the Fund under applicable laws to recover damages from or require an accounting by Shaffer Asset Management. Limited partners of the Fund should be aware that the performance by Shaffer Asset Management of its responsibilities to the Fund will be measured by the terms of the Fund's limited partnership agreement, including the authority of Shaffer Asset Management to enter into the advisory and brokerage agreements, as well as applicable law. Limited partners of the Fund are afforded certain rights to institute reparations proceedings under the Commodity Exchange Act, as amended, for violations of such act or of any rule, regulation or order of the CFTC by Shaffer Asset Management. Excessive trading of the Fund's account may constitute a violation of the CE Act. A limited partner of the Fund is also entitled by statute to bring suit for certain violations of the CE Act. Limited partners of the Fund should be aware that it may be difficult to establish that the Fund's trading has been excessive due to the broad trading discretion given to Shaffer Asset Management under the Fund's advisory agreement, the authority of Shaffer Asset Management to enter into such contract under the Fund's limited partnership agreement and the Fund's subscription agreement / power of attorney, the exculpatory provisions in the Fund's advisory agreement and the Fund's limited partnership agreement, and the absence of judicial or administrative standards defining excessive trading. Although ADM Investor Services provides various services to the Fund, it accepts no responsibility for verifying that any instructions received from Shaffer Asset Management or any of their employees or agents are in conformance with Shaffer Asset Management's authority and ADM Investor Services accepts no responsibility for monitoring the actions of Shaffer Asset Management in this regard, to ensure that such actions are not contrary to the provisions of this prospectus or any amendments thereto. The Fund's limited partnership agreement provides that Shaffer Asset Management shall not be liable to the Fund or to any of the partners except by reason of misconduct or negligence or for not having acted in good faith in the reasonable belief that its actions were taken in, or not opposed to, the best interests of the Fund. The Fund's limited partnership agreement provides that with respect to any action in which Shaffer Asset Management or any of its shareholders, directors, officers, employees, affiliates or any person who controls Shaffer Asset Management is made a party (including an action brought by or in the right of the Fund), the Fund shall indemnify and hold harmless such person, subject to receipt of an independent legal opinion regarding the applicable standard of conduct, against any loss, liability, damage, cost, expense (including, without limitation, attorneys' and accountants' fees and disbursements), judgments and amounts paid in settlement incurred in connection with the investigation, defense or settlement of such action, if the indemnified party acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Fund and if such actions did not involve negligence, misconduct or breach of fiduciary obligations on the part of the person seeking indemnification, unless the court in which such action is brought determines that, in view of all of the circumstances of the case, the indemnified party is fairly and reasonably entitled to indemnification for such amounts as the court shall deem proper. To the extent that the indemnified party has been successful in the defense of any action, no independent legal opinion is necessary. Expenses may be paid by the Fund in advance of the final disposition of any such action if the indemnified person agrees to reimburse the Fund in the event that indemnification is not permitted. -16- The Fund's limited partnership agreement prohibits the Fund from making any loans. The limited partnership agreement also provides that no person who shares or participates in the brokerage commissions paid by the Fund may receive, directly or indirectly, any advisory, management or incentive fees for trading advice or management; that no broker may pay, directly or indirectly, rebates or give ups to Shaffer Asset Management or any trading advisors; and that such prohibitions may not be circumvented by any reciprocal business arrangements. USE OF PROCEEDS During the continuing offering period the Units are sold as of the last business day of each month at a purchase price equal to the then current Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. The entire offering proceeds, net of initial sales charges and syndication fees, are credited to the Fund's bank account(s) at JPMorganChase, and trading account(s) with ADM Investor Services and/or other banks and commodity brokers to engage in trading activities and as reserves for that trading. ADM Investor Services deposits the assets received from the Fund in segregated accounts as required by the regulations promulgated by the CFTC. Under the CFTC's regulations, the assets of other customers of ADM Investor Services, including other commodity pools, may also be deposited in such segregated accounts and thus be commingled with the assets of the Fund. Approximately 10% to 40% of the Fund's net assets normally are committed as required margin for commodity trading, with the remaining 60% to 90% being held in reserve for such trading. The Fund's assets, both those that are deposited to meet margin requirements and those that are held in reserve, may be held in cash, United States Treasury Bills or in any other form permissible under applicable laws and regulations. As of August 31, 2002, the Fund held approximately 79% of such assets in United States Treasury Bills and approximately 6% in money market funds. Interest, if any, earned on such assets, therefore, will inure to the benefit of the Fund. FEES, COMPENSATION AND EXPENSES SUMMARY Shaffer Asset Management believes prospective investors should consider the fees, compensation obligations and expenses to which the Fund is subject, which are described in more detail below, when making their investment decision. The relationship among these entities is described and shown in "Organizational Chart," above. SHAFFER ASSET MANAGEMENT, INC. MONTHLY MANAGEMENT FEE 1/12 of 3.75% of the month-end Net Asset Value per Unit (as defined below) with respect to Units purchased within the prior 12-month period and 1/12 of 1% of the month-end Net Asset Value per Unit with respect to Units held more than 12 months will be paid by the Fund to Shaffer Asset Management as a monthly management fee. QUARTERLY INCENTIVE ALLOCATION 15% of the Fund's New Trading Profits (as defined below) will be allocated by the Fund to Shaffer Asset Management as a quarterly incentive allocation. REIMBURSEMENT OF ORGANIZATIONAL, INITIAL OFFERING AND OPERATING EXPENSES 1% of the Net Asset Value per Unit of Units sold and all early redemption fees charged by the Fund upon redemptions of Units, will be paid by the Fund to Shaffer Asset Management to reimburse Shaffer Asset Management for paying the Fund's organizational, initial offering and operating expenses. -17- OTHER Shaffer Asset Management shares, to the same extent as the limited partners, in the Fund's profits and losses with respect to any units of limited or general partnership interest purchased by Shaffer Asset Management. BERTHEL FISHER & COMPANY SYNDICATION FEE Berthel Fisher & Company receives a syndication fee of 1% of the Net Asset Value of each Unit sold. Berthel Fisher & Company solicits other broker-dealers to become selected dealers for the Fund. Berthel Fisher & Company may reallow a portion of its syndication fee to such selected dealers. SELLING COMMISSIONS 3% of the Net Asset Value per Unit of Units sold by Berthel Fisher & Company will be paid to Berthel Fisher & Company and its registered representatives as a selling commission. MONTHLY CONTINUING SERVICE FEE With respect to sales of Units by registered representatives of Berthel Fisher & Company, 1/12 of 1.25% of the Net Asset Value per Unit with respect to Units purchased within the prior 12-month period and 1/12 of 4% per Unit with respect to Units purchased more than 12 months prior thereto will be paid to Berthel Fisher & Company (which may reallow any portion of such amount to its registered representatives) as a monthly continuing service fee. All such amounts will be paid provided Berthel Fisher & Company and any of its registered representatives to whom such continuing service fee is to be reallowed are appropriately registered with the CFTC and/or NFA. If Berthel Fisher & Company or any of its registered representatives to whom such continuing service fees are reallowed are not appropriately registered with the CFTC and/or NFA, then the fee will be deemed a selling commission and will be paid as long as the aggregate amount of commissions plus additional costs and commissions in connection with the sale of the Units do not exceed 10% of the initial sale price of the Units sold. With respect to sales of Units by registered representatives of selected dealers, 1/12 of .25% of the Net Asset Value per Unit (as defined below) with respect to Units purchased within the prior 12-month period and 1/12 of 1% of the Net Asset Value per Unit with respect to Units purchased more than 12 months prior thereto will be paid by the Fund to Berthel Fisher & Company (which may reallow any portion of such amount to its registered representatives) as a monthly continuing service fee (subject to appropriate CFTC registration). EXPENSE REIMBURSEMENT All expenses of Berthel Fisher & Company incurred in performing its obligations related to this offering will be reimbursed by Shaffer Asset Management. SELECTED DEALERS AND THEIR RESPECTIVE REGISTERED REPRESENTATIVES SELLING COMMISSIONS 3% of the Net Asset Value per Unit of Units sold by the selected dealers will be paid to the selected dealers and their respective registered representatives as a selling commission. MONTHLY CONTINUING SERVICE FEE 1/12 of 1% of the Net Asset Value per Unit (as defined below) of the Fund's assets under management at month's end with respect to Units purchased within the prior 12-month period and 1/12 of 3% of the Net Asset Value per Unit (as defined below) with respect to Units purchased more than 12 months prior thereto will be paid by the Fund to the selected dealers and their respective registered representatives as a monthly continuing service fee, provided the selected dealers and their registered representatives are appropriately registered with the CFTC and/or NFA. If the selected dealers and their registered representatives are not appropriately registered with the CFTC and/or NFA, then the fee will be deemed a selling commission and will be paid as long as the aggregate amount of commissions plus additional costs and commissions in connection with the sale of the Units do not exceed 10% of the initial sale price of the Units sold. -18- ADM INVESTOR SERVICES, INC. COMMODITY BROKERAGE COMMISSIONS Brokerage commissions at a rate of $17 per "round-turn" trade on domestic exchanges will be paid by the Fund to ADM Investor Services. ADM Investor Services is responsible, however, for all other charges relating to the Fund's trading, such as exchange, clearing, transfer and NFA fees. OTHERS LEGAL, ACCOUNTING, AUDITING, PRINTING, RECORDING, FILING AND OTHER PERIODIC FEES AND EXPENSES; AND EXTRAORDINARY EXPENSES Shaffer Asset Management has agreed to supply and pay for such services as are deemed by Shaffer Asset Management to be necessary or desirable and proper for the continuous operations of the Fund that are in the aggregate in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum, except for sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses, which expenses shall be paid by the Fund. One percent of the Net Asset Value per Unit of Units sold and all early redemption fees charged by the Fund upon redemptions of Units will be paid to Shaffer Asset Management to reimburse Shaffer Asset Management for the payment by Shaffer Asset Management of the Fund's organizational and initial offering and the Fund's operating expenses that are payable by Shaffer Asset Management. DETAILED DESCRIPTION OF FEES, COMPENSATION AND EXPENSES MANAGEMENT FEES AND INCENTIVE ALLOCATIONS Pursuant to the terms of the advisory agreement between the Fund and Shaffer Asset Management, the Fund has agreed (i) to pay to Shaffer Asset Management a monthly management fee equal to 1/12 of 3.75% of the Net Asset Value per Unit (see "Certain Definitions: 2. Net Asset Value per Unit," below) of the Fund's assets under management at month's end with respect to Units purchased within the prior twelve-month period and 1/12 of 1% of the Net Asset Value per Unit (as defined below) of the Fund's assets under management at month's end with respect to Units purchased more than twelve months prior thereto, and (ii) to allocate to Shaffer Asset Management, on a quarterly basis, an Incentive Allocation, such Incentive Allocation being defined as an amount equal to 15% of the Fund's New Trading Profits (exclusive of any interest earned by the Fund) achieved by Shaffer Asset Management for such quarter on the Fund's assets under management by Shaffer Asset Management (see "Certain Definitions: 3. New Trading Profits," below). In its sole discretion, Shaffer Asset Management may, during the first twelve months following the Sale of Unit pay a portion of its management fee to the Selling Agents as additional compensation in connection with the sale of the Unit. Such additional compensation would be provided solely from the amount that Shaffer Asset Management would otherwise receive, and would not dilute the interests of Investors in the Fund. Such amount may not be paid to the extent that the amount proposed to be paid, together with all other costs and commissions in connection with the sale of the Units would exceed 10% of the initial sale price of the Units sold. THE MONTHLY MANAGEMENT FEES WILL BE PAID MONTHLY, AND THE QUARTERLY INCENTIVE ALLOCATION, IF EARNED, WILL BE ALLOCATED QUARTERLY, WHETHER OR NOT THE FUND EARNS PROFITS FOR THE YEAR. However, the quarterly incentive allocation is allocable only on cumulative profits achieved by the Fund. SYNDICATION FEES / SELLING COMMISSIONS / SALES CHARGES The Units are being offered and sold at the current Net Asset Value per Unit (as hereinafter defined) plus a charge of 5% of the Net Asset Value per Unit. From that 5% amount, approximately 1% of the sale proceeds is paid to Shaffer Asset Management to reimburse it for the payment of the Fund's organizational, initial offering and operating expenses payable by Shaffer Asset Management, approximately 1% of the sale proceeds is paid to Berthel Fisher & Company as a syndication fee, and approximately 3% of the sale proceeds is paid to the selling agent that sold the Unit as a selling commission. Berthel Fisher & Company may reallow a portion of its syndication fee to the selected dealers. Berthel Fisher & Company and the selected dealers may in turn pay a portion of such syndication fees and selling commissions to their respective employees who are NASD registered representatives for each Unit sold by them. -19- CONTINUING SERVICES FEES The Fund will pay a monthly continuing services fee to Berthel Fisher & Company and its registered representatives and, through Berthel Fisher & Company, to certain selected dealers and their respective registered representatives equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (see "Certain Definitions: 2. Net Asset Value per Unit," below) of the Fund's assets at month's end (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased within the prior twelve-month period and 1/12 of 4% of the Net Asset Value per Unit of the Fund's assets at month's end (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased more than twelve months prior thereto. The monthly continuing services fee will be paid to Berthel Fisher & Company, and certain selected dealers, who may reallow a portion of such fees to their respective registered representatives, provided each is appropriately registered with the CFTC and/or the NFA and agrees to provide the services described below. If any such party is not appropriately registered with the CFTC and/or the NFA or does not agree to provide services, then the fee paid to such party will be deemed a selling commission and will be paid in an amount such that the aggregate amount of commissions plus additional costs paid to such party do not exceed 10% of the initial sale price of the Units sold by such party. Such continuing services fee shall be paid to the selling agents and their respective registered representatives in return for their continuing services to the Fund and the limited partners of the Fund solicited by them. Such services include, without limitation, keeping the limited partners of the Fund apprised of developments affecting the Fund, responding to specific inquiries received from limited partners relating to the Fund and the commodity markets, communicating current valuations of the Fund's Net Asset Value per Unit to the limited partners, assisting in redemptions, transfers and distributions, assisting limited partners in interpreting the Fund's monthly and annual reports, financial statements and the tax information provided to limited partners, and providing such other services as the limited partners from time to time may reasonably request. The continuing services fee will be allocated between Berthel Fisher & Company, its registered representatives to whom it shall reallow any portion of such fee, and the selected dealers and their respective registered representatives based upon the amount of time that each Unit has been outstanding. With respect to Units sold by selected dealers and their representatives, the continuing services fee attributable to a Unit that has been outstanding for twelve or fewer months shall be allocated between Berthel Fisher & Company and the selected dealers and their respective registered representatives as follows: o 20% to Berthel Fisher & Company; and o 80% to the selected dealers and their respective registered representatives that solicited the subscription; and all other continuing services fees shall be allocated as follows: o 25% to Berthel Fisher & Company; and o 75% to the selected dealers and their respective registered representative that solicited the subscription. For this purpose, continuing service fees are deemed to be attributable to Units sold by a selected dealer in the proportion that the number of such Units bears to the number of Units outstanding at any time. For example, if a selected dealer were responsible for the sale of 2,500 Units, and there were 25,000 Units outstanding, the continuing service fees payable to the selected dealer as set forth above would be a percentage of the 10% (2,500 of the 25,000) of the Net Asset Value of the Fund that was attributable to the Units sold by the selected dealer. The continuing service fees will be paid to a selected dealer and its registered representatives for so long as the Units remain outstanding and the selected dealer and its registered representatives are providing the services described above to holders of such Units. -20- COMMODITY BROKERAGE COMMISSIONS The Fund currently pays its commodity broker ADM Investor Services brokerage commissions at the rate of $17.00 per "round-turn" trade executed on domestic exchanges (i.e., when an open position is closed). Based upon the historical trading patterns of Shaffer Asset Management, the Fund expects to pay brokerage commissions of approximately 1% of its average yearly Net Asset Value, although the actual amount could exceed such 1% level and there is no agreement to limit brokerage commission charges to any particular level. Brokerage commissions will be charged only when an open position is closed. The commodity broker ADM Investor Services may change its aggregate commission rates at any time, and a limited partner of the Fund may obtain the current Fund commission rate schedule from Shaffer Asset Management upon request. Shaffer Asset Management, however, must ensure that such charges remain reasonable in light of the nature and quality of services rendered (including, among others, execution services) and the other standards applicable thereto. In no event will the commissions exceed 80% of the published retail rate for such commissions or 14% annually of the Fund's average Net Assets. Shaffer Asset Management will periodically review brokerage commission rates charged to public commodity pools of comparable size and management structure as a factor in determining whether the rates paid by the Fund are comparable and remain reasonable. The Fund, nonetheless, may pay brokerage commission rates exceeding the lowest such rates otherwise available. See "Conflicts of Interest/Fiduciary Responsibility of the General Partner" and "Commodity Brokerage Arrangements." EARLY REDEMPTION FEES The Fund charges an early redemption fee equal to 4% of the Net Asset Value per Unit of the Units redeemed as of or before the end of the third full calendar month after their purchase. This fee decreases by one percentage point for every three subsequent calendar months. Thereafter, no redemption fee is charged. In addition and in order to assure each of the Fund's limited partners the availability of funds to pay taxes on each year's profits, if any, the redemption fee will be waived on redemptions of Units to the extent, if any, distributions in the first quarter of a calendar year are less than 35% of the profits reportable to a limited partner for the prior year. See "Distributions and Redemptions." ORGANIZATIONAL AND INITIAL OFFERING EXPENSES Shaffer Asset Management has agreed to pay all expenses (estimated at $463,000) associated with the organization of the Fund and the initial offering of the Units other than selling commissions. Approximately 1% of all sales proceeds and 100% of all early redemption fees charged by the Fund are paid to Shaffer Asset Management to reimburse Shaffer Asset Management for the payment of the Fund's organizational and initial offering expenses and the Fund's operating expenses that are payable by Shaffer Asset Management. OTHER EXPENSES The Fund is obligated to pay various periodic fees and expenses which are estimated at approximately $30,000 per year for accounting services and auditing charges, $25,000 for legal fees, $15,000 for printing, $20,000 for technical services and $15,000 for filing fees, postage and extraordinary expenses, or, in the aggregate, $105,000 per year at current price levels. Shaffer Asset Management has agreed to supply and pay for such services it deems necessary or desirable and proper for the continuous operations of the Fund that are in the aggregate in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum, except for sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses, which expenses shall be paid by the Fund. Shaffer Asset Management will furnish each of the Fund's limited partners with monthly statements and an annual report covering the Fund's operations and expenses, including its advisory fees, brokerage commissions and other expenses. See "Summary of the Limited Partnership Agreement -- Reports and Accounting." ESTIMATE OF BREAK-EVEN THRESHOLD Assuming an initial investment of $10,000, the Fund must earn approximately $1,092, or 10.92% during the first twelve months after the investment date, provided that no redemption charge is applicable, for an investor to "breakeven" on his investment at the end of his first year as an investor. Redemption fees apply through the first twelve month-ends following purchase as follows: 4% of net asset value per unit redeemed through the third month-end, 3% of net asset value per unit redeemed through the sixth month-end, 2% of net asset value per unit redeemed through the ninth month-end, and 1% of net asset value per unit redeemed through the twelfth month-end. After the twelfth month-end following purchase of a unit, no redemption fees apply. The break-even threshold is calculated on the basis of the fees and expenses described above and is shown in the following table. -21- "BREAK EVEN" ANALYSIS Assumed Initial Investment......................................$10,000 Less: Sales Charges ........................................... 500 Management Fees.......................................... 375 Continuing Service Fees.................................. 125 Brokerage Fees........................................... 100 Operating Expenses....................................... 50 Incentive Allocation *................................... 105 Redemption Charge *...................................... 101 Plus: Interest Income *........................................ (147) Twelve-month break-even point WITH redemption charge................................$ 1,209 Percentage of Assumed Initial Investment.............. 12.09% Twelve-month break-even point WITHOUT redemption charge.............................$ 1,092 Percentage of Assumed Initial Investment.............. 10.92% -------------------- *Estimated. In a break-even year, an incentive allocation on the Fund's trading profits necessary to offset the redemption charge and sales charges would be allocated to Shaffer Asset Management. Interest income is assumed to be 90% of the current 91-day Treasury bill rate. This break even analysis assumes a constant $10,000 Net Asset Value and a break even year. Because the incentive allocation is allocated quarterly, if earned, it is possible for an incentive allocation to be allocated in a losing year. CERTAIN DEFINITIONS USED IN THIS PROSPECTUS Certain of the following terms are used in calculating the purchase price for the Units and the fees, compensation and expenses payable by the Fund described above. 1. NET ASSET VALUE. Net Asset Value means the Fund's total assets less total liabilities determined, except as set forth below, on the basis of generally accepted accounting principles for partnership accounting, consistently applied. Net Asset Value will be calculated daily. For purposes of this calculation: (a) Net Asset Value shall include any unrealized profit or loss on open securities and commodity interest positions. (b) All open securities and commodity interest positions shall be calculated at their then market value which means, with respect to open commodity interest positions, the settlement price as determined by the exchange on which the transaction is effected or the most recent appropriate quotation as supplied by the clearing broker or banks through which the transaction is effected, except that United States Treasury Bills (but not futures contracts for United States Treasury Bills) shall be carried at cost plus accrued interest. If there are no trades on the date of the calculation due to the operation of the daily price fluctuation limits or due to a closing of the exchange on which the transaction is executed, the contract will be valued at fair market value as determined by Shaffer Asset Management. Interest, if any, shall be accrued at least monthly. -22- (c) Brokerage commissions on open positions shall be considered accrued in full (i.e., on a "round-turn" basis) as a liability of the Fund. Management fees and incentive fees shall be accrued daily even though not paid until month's end. Incentive fees shall be accrued, and such accruals shall be reversed to reflect losses, monthly even though not paid until quarter's end. 2. NET ASSET VALUE PER UNIT. Net Asset Value per Unit means the Net Asset Value divided by the number of units of general partnership interest and limited partnership interest outstanding. 3. NEW TRADING PROFITS. The excess, if any, of Net Assets at the end of the Valuation Period over Net Assets at the end of the highest previous Valuation Period or Net Assets at the date trading commences, whichever is higher, and as further adjusted to eliminate the effect on Net Assets resulting from new capital contributions, redemptions, or capital distributions, if any, made during the period decreased by interest or other income, not directly related to trading activity, earned on Fund assets during the period, whether the assets are held separately or in margin account. 4. AFFILIATE. An affiliate of a person means (a) any person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities of such person; (b) any person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote, by such person; (c) any person, directly or indirectly, controlling, controlled by, or under common control of such person; (d) any officer, director or partner of such person; or (e) if such person is an officer, director or partner, any person for which such person acts in any such capacity. 5. SPONSOR. Any person directly or indirectly instrumental in organizing a program or any person who will manage or participate in the management of a program including a commodity broker who pays any portion of the organizational expenses of the program, and the general partner(s) and any other person who regularly performs or selects the persons who perform services for the program. Sponsor does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services rendered in connection with the offering of the units. The term "sponsor" shall be deemed to include its affiliates. 6. NET ASSETS. The total assets, less total liabilities, of the Fund determined on the basis of generally accepted accounting principles. Net Assets shall include any unrealized profits or losses on open positions, and any fee or expense including Net Asset fees accruing to the Fund. 7. VALUATION PERIOD. The preceding calendar quarter. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Shaffer Diversified Fund, LP (the "Partnership" or the "Fund") is a limited partnership organized on August 29, 2000 under the Delaware Revised Uniform Limited Partnership Act as an investment vehicle that allows investors to include commodity futures contracts traded on the United States commodity futures markets in their portfolios in the same way that they include mutual funds, money market funds and limited partnerships. The Fund originally filed a registration statement with the United States Securities and Exchange Commission on September 25, 2000 for the sale of a minimum of $1,000,000 and a maximum of $25,000,000 in Units of Limited Partnership at $1,000.00 each, ($950.00 + $50.00 sales charges & syndication fees), which registration statement was declared effective on October 16, 2001. The Fund's initial offering period lasted approximately 120 days and ended February 13, 2002. During the initial offering the Fund accepted subscriptions for 1,049 Units of Limited Partnership Interests at a selling price of $1,000.00 ($950.00 + $50.00 sales charges & syndication fees) for a total of $1,049,000. Selling charges and expenses of $49,950 were disbursed at closing and the Fund commenced trading activities with net proceeds of $996,550. The Fund commenced trading activities on February 14, 2002. -23- LIQUIDITY The Fund deposits its assets with commodity brokers in a separate futures trading account established for the trading advisor, which assets are used as margin to engage in trading. The assets are held in either non-interest-bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. The Fund's assets held by the commodity broker may be used as margin solely for the Fund's trading. Since the Fund's sole purpose is to trade in futures, it is expected that the Fund will continue to own such liquid assets for margin purposes. The Fund's investment in futures may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as "daily price fluctuations limits" or "daily limits. " Trades may not be executed at prices beyond the daily limit. If the price for a particular futures contract has increased or decreased by an amount equal to the daily limit, positions in that futures contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Fund from promptly liquidating its futures contract and result in restrictions on redemptions. CAPITAL RESOURCES The Fund will raise additional capital only through the sale of Units and does not engage in borrowing due to the nature of the Fund's business, the Fund will make no capital expenditures and will not have any capital assets which are not operating capital or assets. Redemptions, exchanges and sales of additional units in the future will affect the amount of funds available for investments in futures interests in subsequent periods. It is not possible to estimate the amount and therefore the impact of future redemptions. FINANCIAL INSTRUMENTS The Fund is a party to financial instruments with elements of off-balance sheet market and credit risk. The Fund trades futures in interest rates, currencies, energies, grains and precious metals. In entering into these contracts, the Fund is subject to the market risk that such contracts may be significantly influenced by market conditions, such as interest rate volatility, resulting in such contracts being less valuable. If the markets should move against all of the positions held by the Fund at the same time, and if the trading advisor is unable to offset positions of the Fund, the Fund could lose all of its assets and investors would realize a 100% loss. In addition to market risk, in entering into futures contracts there is a credit risk to the Fund that the counterparty on a contract will not be able to meet its obligations to the Fund. The ultimate counterparty of the futures contracts traded on the U.S. exchanges in which the Fund trades are the clearinghouses associated with such exchange. In general, a clearinghouse is backed by the membership of the exchange and will act in the event of non-performance by one of its members or one of its member's customers, which should significantly reduce this credit risk. For example, a clearinghouse may cover a default by drawing upon a defaulting member's mandatory contributions and/or non-defaulting members' contributions to a clearinghouse guarantee fund, established lines or letters of credit with banks, and/or the clearinghouse's surplus capital and other available assets of the exchange and clearinghouse, or assessing its members. There is no assurance that a clearinghouse or exchange will meet its obligations to the Fund, and the general partner and commodity brokers will not indemnify the Fund against a default by such parties. Further, the law is unclear as to whether a commodity broker has any obligation to protect its customers from loss in the event of an exchange or clearinghouse defaulting on trades effected for the broker's customers. Shaffer Asset Management will deal with these credit risks of the Fund in several ways. It will monitor the Fund's credit exposure to each exchange on a daily basis, calculating not only the amount of margin required for it but also the amount of its unrealized gains at each exchange, if any. The commodity brokers inform the Fund, as with all their customers, of its net margin requirements for all its existing open positions, but do not break that net figure down, exchange by exchange. -24- The value of the Fund's cash financial instruments is not materially affected by inflation, although inflation may affect the markets in which the Fund trades giving rise to market conditions that may be either favorable or unfavorable to the trading strategy employed by the Fund. RESULTS OF OPERATIONS The Fund commenced trading operations February 14, 2002. The return for the period ending March 31, 2002 was 1.93%. Trading gains of approximately 3.07% plus interest income of approximately 0.15% were offset by approximately 1.29% due to brokerage fees, performance fees, operating fees and administrative costs. The return for the quarter ending June 30, 2002 was 9.81%. Trading gains of approximately 11.92% plus interest income of approximately 0.39% were offset by approximately 2.50% due to brokerage fees, performance fees, operating fees and administrative costs. The return for the quarter ending September 30, 2002 was (3.19%). Trading losses of approximately (1.62%) plus interest income of approximately 0.39% were offset by approximately 1.96% due to brokerage fees, operating fees and administrative costs. An analysis of the Fund's trading gains and losses by sector is as follows:
% OF GAIN/LOSS % OF GAIN/LOSS % OF GAIN/LOSS % OF GAIN/LOSS PERIOD ENDED QUARTER ENDED QUARTER ENDED NINE MONTHS ENDED SECTOR MARCH 31 JUNE 30 SEPTEMBER 30 SEPTEMBER 30 ------- --------------- ------------- -------------- ----------------- Interest Rates 1.50 0.72 6.16 8.29 Energies 4.15 -2.67 -3.67 -2.25 Currencies -1.64 12.45 -3.64 6.70 Metals -2.07 0.20 0.89 -0.90 Grains 1.13 1.22 -1.35 0.90 ---- ------ ---- ----- 3.07% 11.92% -1.62% 12.74% ===== ====== ====== =====
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE INTRODUCTION The Fund is a commodity pool involved in the speculative trading of futures. The Fund commenced trading activities on February 14, 2002. The market-sensitive instruments held by the Fund are acquired for speculative trading purposes only and, as a result, all or substantially all of the Fund's assets are at risk of trading loss. Unlike an operating company, the risk of market-sensitive instruments is central, not incidental, to the Fund's main business activities. The futures traded by the Fund involve varying degrees of market risk. Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities. Fluctuations in market risk based upon these factors result in frequent changes in the fair value of the Fund's open positions, and, consequently, in its earnings and cash flow. The Fund's total market risk is influenced by a wide variety of factors, including the diversification among the Fund's open positions, the volatility present within the markets, and the liquidity of the markets. At different times, each of these factors may act to increase or decrease the market risk associated with the Fund. Any attempt to numerically quantify a Fund's market risk is limited by the uncertainty of its speculative trading. The Fund's speculative trading may cause future losses and volatility (i.e., "risk of ruin") that far exceed any reasonable expectations based upon historical changes in market value. Market movements result in frequent changes in the fair market value of the Fund's open positions and, consequently, in its earnings and cash flow. The Fund's market risk is influenced by a wide variety of factors, including the level and volatility of exchange rates, interest rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Fund's open positions and the liquidity of the markets in which it trades. -25- The Fund rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Fund's past performance is not necessarily indicative of its future results. Value at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Fund's speculative trading and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Fund's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Fund's losses in any market sector will be limited to Value at Risk or by the Fund's attempts to manage its market risk. STANDARD OF MATERIALITY Materiality as used in this section, "Qualitative and Quantitative Disclosures About Market Risk," is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, and multiplier features of the Fund's market sensitive instruments. QUANTIFYING THE FUND'S TRADING VALUE AT RISK QUANTITATIVE FORWARD-LOOKING STATEMENTS The following quantitative disclosures regarding the Fund's market risk exposures contain "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact (such as the dollar amount of maintenance margin required for market risk sensitive instruments held at the end of the reporting period). The Fund's risk exposure in the various market sectors traded by Shaffer Asset Management is quantified below in terms of Value at Risk. Due to the Fund's mark-to-market accounting, any loss in the fair value of the Fund's open positions is directly reflected in the Fund's earnings (realized or unrealized). Exchange maintenance requirements have been used by the Fund as the measure of its Value at Risk. Maintenance requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day intervals. Dealers and exchanges use historical price studies, as well as an assessment of current market volatility and economic fundamentals, to estimate the maximum expected near-term one-day price fluctuation for establishing maintenance levels. Maintenance has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk. In quantifying the Fund's Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category's aggregate Value at Risk. The diversification effects resulting from the fact that the Fund's positions are rarely, if ever, 100% positively correlated have not been reflected. THE FUND'S TRADING VALUE The following tables indicate the trading Value at Risk associated with the Fund's open positions by market category as of September 30, 2002 and the trading gains/losses by market category for the quarter ended September 30, 2002. All open position-trading risk exposures of the Fund have been included in calculating the figures set forth below. As of September 30, 2002 the Fund's total capitalization was approximately $1,143,479. -26- TRADING MARKET SECTOR VALUE AT RISK CAPITALIZATION GAIN/LOSS ------------- ------------- --------------- --------- Currencies $ 6,480 0.57% 6.70% Interest Rates $25,920 2.27% 8.29% Grains $ -0- 0% 0.90% Energies $40,500 3.54% (2.25%) Metals $39,150 3.42% (0.90%) ------- ------ ------- Total $112,050 9.80% 12.74% ======== ======= ======= MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK The face value of the market sector instruments held by the Fund is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Fund. The magnitude of the Fund's open positions creates a "risk of ruin" not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions -- unusual, but historically recurring from time to time -- could cause the Fund to incur severe losses over a short period of time. The foregoing Value at Risk tables -- as well as the past performance of the Fund -- gives no indication of this "risk of ruin." NON-TRADING RISK The Fund has non-trading market risk as a result of investing a substantial portion of its available assets in U.S. Treasury Bills. The market risk represented by these investments is immaterial. QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES THE FOLLOWING QUALITATIVE DISCLOSURES REGARDING THE FUND'S MARKET RISK EXPOSURES -- EXCEPT FOR (I) THOSE DISCLOSURES THAT ARE STATEMENTS OF HISTORICAL FACT AND (II) THE DESCRIPTIONS OF HOW THE FUND MANAGES ITS PRIMARY MARKET RISK EXPOSURES -- CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT. THE FUND'S PRIMARY MARKET RISK EXPOSURES AS WELL AS THE STRATEGIES USED AND TO BE USED BY SHAFFER ASSET MANAGEMENT FOR MANAGING SUCH EXPOSURES ARE SUBJECT TO NUMEROUS UNCERTAINTIES, CONTINGENCIES AND RISKS, ANY ONE OF WHICH COULD CAUSE THE ACTUAL RESULTS OF THE FUND'S RISK CONTROLS TO DIFFER MATERIALLY FROM THE OBJECTIVES OF SUCH STRATEGIES. GOVERNMENT INTERVENTIONS, DEFAULTS AND EXPROPRIATIONS, ILLIQUID MARKETS, THE EMERGENCE OF DOMINANT FUNDAMENTAL FACTORS, POLITICAL UPHEAVALS, CHANGES IN HISTORICAL PRICE RELATIONSHIPS, AN INFLUX OF NEW MARKET PARTICIPANTS, INCREASED REGULATION AND MANY OTHER FACTORS COULD RESULT IN MATERIAL LOSSES AS WELL AS IN MATERIAL CHANGES TO THE RISK EXPOSURES AND THE RISK MANAGEMENT STRATEGIES OF THE FUND. THERE CAN BE NO ASSURANCE THAT THE FUND'S CURRENT MARKET EXPOSURE AND/OR RISK MANAGEMENT STRATEGIES WILL NOT CHANGE MATERIALLY OR THAT ANY SUCH STRATEGIES WILL BE EFFECTIVE IN EITHER THE SHORT- OR LONG-TERM. INVESTORS MUST BE PREPARED TO LOSE ALL OR SUBSTANTIALLY ALL OF THEIR INVESTMENT IN THE FUND. The following were the primary trading risk exposures of the Fund as of September 30, 2002, by market sector. CURRENCIES The Fund's currency futures contracts exposure fluctuates due to interest-rate changes along with political and economic changes. The Fund trades currency futures on United States Futures Exchanges. Shaffer Asset Management does not anticipate that the risk profile of the Fund's currency sector will change significantly in the future. INTEREST RATES The Fund's interest-rate futures contracts exposure fluctuates due to interest-rate movements in the United States. Shaffer Asset Management anticipates that changes in interest rates which have the most effect on the Fund are changes in medium- to long-term, as opposed to short-term rates. Most of the speculative positions held by the Fund are in medium- to long-term instruments. Consequently, even a material change in short-term rates would have little effect on the Fund were the medium- to long-term rates to remain steady. -27- ENERGIES The Fund's energy futures contracts exposure is influenced by market supply and demand, political instability and seasonality. Shaffer Asset Management anticipates substantial profits and losses due to the current volatile conditions and these conditions are expected to continue in these markets. METALS The Fund's metal futures contracts exposure is influenced by supply and demand in gold, silver and copper. Currently, market volatility in gold and silver has been extremely low compared to periods prior to commencement of the fund. Metals have been in a slow declining period, which can limit trading opportunities until major trend changes begin to develop. GRAINS The Fund's grain futures contracts exposure is influenced by supply and demand along with weather related conditions around the world. Currently, market volatility in the grains sector has been continually low, as these markets have been making slow declines in prices. Limited trading opportunities are present and may continue until a major weather related event transpires which can cause an imbalance in supply and demand. QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE The following were the only non-trading risk exposures of the Fund as of September 30, 2002. TREASURY BILL POSITIONS The Fund's only market exposure in instruments held other than for trading is in its Treasury Bill portfolio. The Fund holds Treasury Bills (interest bearing and credit risk-free) with durations no longer than six months. Violent fluctuations in prevailing interest rates could cause immaterial mark-to-market losses on the Fund's Treasury Bills, although substantially all of these short-term investments are held to maturity. QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE The means by which Shaffer Asset Management attempts to manage the risk of the Fund's open positions is essentially the same in all market categories traded. Shaffer Asset Management applies risk management policies to its trading which generally limit the total exposure that may be taken per "risk unit" of assets under management. In addition, Shaffer Asset Management follows diversification guidelines, as well as imposing "stop-loss" points at which open positions must be closed out. Shaffer Asset controls the risk of the Fund's non-trading instruments (Treasury Bills held for cash management purposes) by limiting the duration of such instruments to no more than six months. GENERAL The Fund is not aware of any (i) demands, commitments or capital expenditures; (ii) material trends, favorable or unfavorable, in its capital resources; or (iii) trends or uncertainties that will have a material effect on operations. From time to time, certain regulatory agencies have proposed increased margin requirements on commodity futures contracts. Because the Fund generally will use a small percentage of assets as margin, the Fund does not believe that any increase in margin requirements, as proposed, will have a material effect on the Fund's operations. -28- PERFORMANCE OF THE FUND FEBRUARY 14, 2002 - SEPTEMBER 30, 2002 Type of Pool ........................................... Publicly offered Inception of Trading:................................... February 14, 2002 Aggregate Gross Capital Subscriptions to the Fund:...... $1,161,000 Current Net Asset Value of the Fund:.................... $1,143,479 Worst Monthly Percentage Drawdown (1): ................. September 2002; 3.25% Worst Peak to Valley Drawdown (1):...................... Aug.-Sept. 2002; 4.75% PERCENTAGE RATE OF RETURN(2) (Computed on a compounded monthly basis) --------------- ------------- -------------- MONTH 2002 YTD --------------- ------------- --------------- ------------- January - --------------- ------------- --------------- ------------- February -2.24% --------------- ------------- --------------- ------------- March 3.96% --------------- ------------- --------------- ------------- April 0.65% --------------- ------------- --------------- ------------- May 4.07% --------------- ------------- --------------- ------------- June 4.83% --------------- ------------- --------------- ------------- July 1.77% --------------- ------------- --------------- ------------- August -1.55% --------------- ------------- --------------- ------------- September -3.25% --------------- ------------- --------------- ------------- October --------------- ------------- --------------- ------------- November --------------- ------------- --------------- ------------- December --------------- ------------- --------------- ------------- Total 8.18% --------------- ------------- PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURES RESULTS (1) "Drawdown" means losses experienced by the fund over a specified period. (2) The "Rate of Return" for a period is calculated by dividing the net profit or loss by the assets at the beginning of such period. Additions and withdrawals occurring during the period are included as an addition to or deduction from beginning net assets in the calculations of "Rates of Return." The Shaffer Diversified Fund, LP is currently one of 14 accounts managed by Shaffer Asset Management, Inc. As of September 30, 2002, Shaffer Asset Management, Inc. managed total assets of 2,534,201. THE GENERAL PARTNER / ADVISOR DESCRIPTION OF THE GENERAL PARTNER / ADVISOR Shaffer Asset Management, Inc., a New York corporation organized on March 16, 1998, is the general partner and commodity trading advisor of the Fund. Shaffer Asset Management is, and has been, registered with the CFTC as a commodity pool operator since July 7, 2000 and as a commodity trading advisor since October 2, 1998, but such registrations do not imply that the CFTC has reviewed or approved the accuracy of the information contained in its application for registration or its qualifications to act as described in this prospectus and the accompanying statement of additional information or that the CFTC supervises the business activities engaged in by Shaffer Asset Management. In addition, Shaffer Asset Management is, and has been, a member of the NFA in its capacity as a commodity pool operator since July 2000 and as a commodity trading advisor since October 1998. Daniel S. Shaffer and Bruce I. Greenberg are currently the sole employees of Shaffer Asset Management. -29- Shaffer Asset Management began managing commodity accounts for others in March 1999. Shaffer Asset Management currently offers trading advice to customers with respect to futures contracts that are traded on United States agricultural, currency, energy, metals, United States Treasury and other markets. As of September 30, 2002, Shaffer Asset Management had approximately $2.5 million in assets under management. The trading results of these individual accounts are separately set forth in Tables A and B under the caption "Past Performance of the Advisor." Although Shaffer Asset Management is not currently organizing, and does not currently sponsor, any other commodity pools, it does plan to organize and sponsor other commodity pools in the future, both publicly and privately offered. Shaffer Asset has agreed to make capital contributions to the Fund equal to at least 1% of the net aggregate capital contributions of all partners. As of September 30, 2002, Shaffer Asset owned 50 units of general partnership interest, an amount equivalent to or 4.49% of the Fund's Net Asset Value. The offices of Shaffer Asset Management are located at 925 Westchester Avenue, White Plains, New York, New York 10604, and its telephone number is (800) 352-5265. The backgrounds of the sole principals of Shaffer Asset Management are as follows: DANIEL S. SHAFFER, age 41. Mr. Shaffer received a Bachelor of Science degree from Syracuse University in December 1982 with a major in Speech Communications and a minor in Finance/Accounting. Mr. Shaffer received a Master of Science degree in Accounting from New York University in June 1986. Mr. Shaffer currently is, and has been, a shareholder and director and the President of Shaffer Asset Management since March 18, 1998. In addition, Mr. Shaffer currently is, and has been, a registered representative with Berthel Fisher & Company since May 2000. Mr. Shaffer's prior experiences include the following:
July 1998 to May 2000....................... Registered representative with Nathan & Lewis Securities, Inc. July 1998 to March 2000..................... Manager with Metropolitan Life Insurance Co. March 1997 to December 2000................. Sole officer, director and shareholder of Shaffer Consulting Group, Inc. (a life, disability and long-term care insurance broker) April 1989 to July 1998..................... Agent with Northwestern Mutual Financial Network and a Registered Representative with Robert W. Baird & Co., Inc. March 1988 to April 1989.................... Registered representative with Hambrecht & Quist October 1987 to March 1988.................. Registered representative with Bear, Stearns & Co., Inc. October 1986 to October 1987................ Senior Accountant with Aaron Gottesman, Public Accountants June 1986 to October 1986................... Representative with Citicorp Investment Services, Inc. January 1986 to June 1986................... Internal Auditor - Special Project with Dean Witter Reynolds June 1984 to January 1986................... Accountant / Auditor with Coopers & Lybrand February 1983 to June 1984.................. Registered representative and commodity broker with Bear, Stearns & Company January 1983 to February 1983............... Floor trader on the New York Futures Exchange
BRUCE I. GREENBERG, age 41. Mr. Greenberg received a Bachelor of Science degree in Accounting from Brooklyn College in September 1983. Mr. Greenberg currently is, and has been, (i) a shareholder and director and the Vice President and Chief Financial Officer of Shaffer Asset Management since January 2001 and (ii) the sole shareholder and director and the President of Bruce I. Greenberg, CPA, PC (an accounting and tax firm) since 1993. In addition, Mr. Greenberg currently is, and has been, a registered representative with Berthel Fisher & Company since May 2000. Mr. Greenberg's prior experiences include the following:
July 1991 to November 2000.................. Partner with the accounting and tax firm of Blaustein, Greenberg & Company May 1999 to May 2000........................ Registered representative with Nathan & Lewis Securities, Inc. July 1995 to May 1999....................... Registered Representative with Trusted Securities Advisors Corp. January 1990 to June 1991................... Manager with MR Weiser & Company December 1987 to December 1999.............. Manager with Siegel, Rich, Patchman & Company September 1982 to November 1987............. Staff Accountant with Solomon, Schneider & Orenstein
-30- Messrs. Shaffer and Greenberg currently invest in commodity interests for their own account, and they may continue to do so in the future. Although Shaffer Asset Management is not currently organizing or sponsoring any other commodity pools, it does plan to sponsor other commodity pools in the future, both publicly and privately offered. There has never been any material civil, criminal or administrative action pending, on appeal or concluded against Shaffer Asset Management or its sole principals. The past performance of Shaffer Asset Management is set forth on pages 29 and 34 and in Table A, beginning on page 72. DUTIES OF THE GENERAL PARTNER Under the terms of the Fund's limited partnership agreement, Shaffer Asset Management is vested with exclusive responsibility for managing the business and affairs of the Fund. Limited partners of the Fund do not participate in management decisions affecting the Fund, and they have no voice in the operation of the Fund. In addition, Shaffer Asset Management is responsible for the preparation and distribution of monthly and annual reports to the limited partners of the Fund; filing reports required by the CFTC, the SEC and any other Federal or state agencies; the calculation of the Net Asset Value of the Fund and the advisory fees; determining whether the Fund will make distributions to the partners; selecting an accountant and causing an annual audit of the Fund's business affairs; executing documents on behalf of the Fund and on behalf of the limited partners of the Fund pursuant to the powers of attorney granted by the limited partners upon execution of the Fund's limited partnership agreement; and supervising the liquidation of the Fund. Shaffer Asset Management provides suitable facilities and procedures for handling redemptions, transfers, distributions of profits, if any, and orderly liquidation of the Fund. In addition, Shaffer Asset Management will pay all operating and other administrative expenses attributable to the Fund that are in the aggregate in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum, except for sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses, which expenses shall be paid by the Fund. Shaffer Asset Management, in its capacity as the general partner of the Fund, shall cause itself, in its capacity as the commodity trading advisor to the Fund, to close out all open positions and suspend trading if the Net Asset Value per Unit (increased by the amount of distribution, if any) on any business day during any given fiscal year decreases to or below 50% of the Net Asset Value per Unit as of the beginning of the fiscal year, provided that such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or if the Net Asset Value per Unit decreases on any business day to or below $350. In addition, Shaffer Asset Management shall give notice of the occurrence of such event within ten business days thereof. Included in such notification shall be a description of the rights of the limited partners of the Fund. See "Trading Policies" and "Summary of the Limited Partnership Agreement -- Reports and Accounting." MINIMUM INVESTMENT AND NET WORTH REQUIREMENTS IMPOSED ON THE GENERAL PARTNER The Fund's limited partnership agreement provides that Shaffer Asset Management must make a capital contribution to the Fund equal to at least the greater of: (i) 1% of the aggregate amount of capital contributions made to the Fund by the partners, including Shaffer Asset Management's capital contribution, or (ii) $25,000. Shaffer Asset Management will share Fund losses and profits with the limited partners of the Fund PRO RATA to the extent of its investment and will maintain its interest in the Fund so long as it is acting as general partner of the Fund. However, Shaffer Asset Management may withdraw or receive a distribution of any portion of its interest in the Fund that is in excess of its minimum investment requirement upon thirty days' prior written notice to the limited partners of the Fund. Except as stated above, neither Shaffer Asset Management, its Selling Agents, Selected Dealers or ADM Investor Services nor any of their respective principals have arranged or committed to purchase any Units but any of them may do so in the future. -31- Under the Fund's limited partnership agreement, Shaffer Asset Management is obligated, for so long as it continues to serve as the general partner of the Fund, to maintain a net worth of at least the greater of (i) $50,000, or (ii) 5% of the aggregate capital contributions made to the Fund by all the partners including Shaffer Asset Management's capital contributions. In addition, to the extent that Shaffer Asset Management serves as the general partner of any other limited partnership in addition to the Fund, the Fund's limited partnership agreement would require Shaffer Asset Management to maintain a net worth at least equal to the net worth required by the preceding sentence plus, for each such additional limited partnership, an amount equal to 5% of the total capital contributions made to such other limited partnership by all partners including Shaffer Asset Management. Notwithstanding the foregoing, Shaffer Asset Management's net worth need not exceed $1,000,000. The calculation of Shaffer Asset Management's net worth shall be based upon fair market values from time to time, shall exclude its interest in the Fund or any other limited partnership of which it is a general partner, and shall otherwise be determined in accordance with generally accepted accounting principles. See the Fund's limited partnership agreement attached as Exhibit A to the statement of additional information that accompanies this prospectus. Daniel S. Shaffer and Bruce I. Greenberg, the sole officers, directors, employees and shareholders of Shaffer Asset Management, have undertaken, jointly and severally, to provide Shaffer Asset Management with capitalization sufficient to meet such net worth requirements during the continuous offering of Units and the closing of the offering of interests in any other limited partnerships for which Shaffer Asset Management acts as general partner. In addition, each of them has agreed not to make any withdrawal of capital from Shaffer Asset Management that would cause Shaffer Asset Management to have an aggregate net worth less than that which they have agreed, jointly and severally, to provide at the time of such closings. TRADING PHILOSOPHY AND METHODS OF THE ADVISOR TRADING STRATEGIES IN GENERAL Commodity traders generally rely on either fundamental or technical analysis or a combination thereof in making trading decisions and attempting to identify price trends. Fundamental analysis looks at factors external to the trading market that affect the supply and demand of a particular commodity in order to predict future prices. As an example, some of the fundamental factors that affect the supply of a commodity such as corn include the acreage planted, crop conditions such as drought, flood and disease, strikes affecting the planting, harvesting and distribution of the commodity, and the previous year's crop carryover. The demand for commodities such as corn consists of domestic consumption and exports and is a product of many things, including general world economic conditions, as well as the cost of corn in relation to the cost of competing products such as soybean meal. Technical analysis is not based on the anticipated supply and demand of the cash (actual) commodity; instead, it is based on the theory that a study of the markets themselves will provide a means of anticipating future prices. Technical analysis of the markets often includes a study of the actual daily, weekly and monthly price fluctuations, volume variations and changes in open interest utilizing charts and/or computers for analysis of these items and other technical market data. Shaffer Asset Management makes commodity trading decisions for the Fund pursuant to trading strategies that include technical trend analysis and technical trading principles as described below. The principal objective of the trading strategies is to participate in major, sustained price movements in the commodities traded. SHAFFER ASSET MANAGEMENT TRADING STRATEGY Shaffer Asset Management's analyses are based generally on technical systems that attempt to detect trends in price movements. The principal technical trading strategies used by Shaffer Asset Management to generate signals for buy and sell points for the various commodities traded have been developed through actual trading experience, and through computer testing against historical commodity futures trading data. Given trends in price of sufficient duration and magnitude, the trading methods employing such strategies may be profitable even though more than half of all individual trades are unprofitable; however, a period of time without such trends may result in substantial losses. The theoretical buy and sell points generated by technical analysis are approximate levels, and as such will require the judgment of Shaffer Asset Management to translate the information into actual orders. Furthermore, decisions whether to trade a particular commodity futures contract are based upon various factors, including liquidity, significance in terms of desired degrees of concentration and diversification and profit potential, both historical and at a given time. These decisions will also require the exercise of judgment by Shaffer Asset Management. The decision not to trade certain commodities for certain periods, or to reduce the number of contracts traded in a particular commodity, may result at times in missing significant profit opportunities which otherwise would be captured by technical strategies. -32- Successful speculative commodity trading depends upon establishing a position and then maintaining `that position while the market moves in favor of the commodity trader. The trading system of Shaffer Asset Management seeks to establish such positions and to exit the market when the favorable trend either reverses or does not materialize. No such system will be successful if the price trend is adverse to the direction detected by each of the systems or if the market is moving in an erratic and non-trending manner. Since turning points and reverses in price movements in the commodity futures markets are generally not predictable and since commodity futures price trends may be short lived, market position entry point signals may be given by the systems at or near the end of a price trend. If the market reverses itself shortly after the trader establishes a position, sizeable losses may be incurred before the exit price signal is reached. The possibility exists that a brief market reversal, which is only a temporary deviation from a long-term price trend, may trigger an exit signal that would prevent the trader from realizing any profits from the long-term price movement. Additionally, such an interim reversal of price trend could conceivably generate a system entry signal to establish an opposite market position, which means that the system would be completely misinterpreting the trend of the market. System misinterpretations of brief changes and reversals in market price trends may cause the Fund to incur trading losses and to pay brokerage commissions on numerous trades that, in retrospect, may appear to have been unnecessary. Subject to the limitations on commodities to be traded and the Fund's trading policies, Shaffer Asset Management may refine or alter its trading methods from time to time, including, without limitation, trading systems, commodity futures contracts and markets traded, and trading principles, without approval by the limited partners of the Fund, if Shaffer Asset Management determines that such change in methods is in the best interests of the Fund. No assurance is given that trades of the Fund implemented in reliance upon Shaffer Asset Management's trading methods will result in profits to the Fund or that such methods will in fact accomplish their intended objectives or reduce the Fund's risk of loss. PAST PERFORMANCE OF THE ADVISOR The table below, sets forth the unaudited composite trading results of all accounts managed by Shaffer Asset Management from March 1999 to September 30, 2002. The number of accounts managed by the Advisor totaled 1, 11, 17, 15 and 13, at March 31, 1999, at December 31, 1999, at December 31, 2000, at December 31, 2001 and at September 30, 2002, respectively. Through September 30, 2002, 7 of such accounts showed net gains and 7 showed net losses. As of September 30, 2002, 6 accounts had closed profitably and 8 had closed unprofitably. Applicable CFTC regulations require disclosure of the "rate of return" for each month of all accounts managed by Shaffer Asset Management or its principal(s). The method of calculation mandated by the CFTC is necessarily subject to potential distortions due to the fact that such method does not account for additions and withdrawals that may occur during the month for which the calculation is made. It should be noted that there are other methods of calculating rate of return and, because of the differences among such methods, the percentage results may vary. The rates of return indicated should not be taken as representative of any rate actually earned by any of the accounts included in the Table or as being indicative of any return the Fund may earn in the future. The information included in the Table has not been audited but, in the opinion of Shaffer Asset Management, such information fairly presents the performance of the accounts managed by Shaffer Asset Management for the periods shown. The results set forth in the Table are not indicative of the results that may be achieved by Shaffer Asset Management since past results are not determinative of future results. No representation is being made that the Fund will or is likely to achieve profits similar to those shown. The composite results set forth in the Table are based upon individual accounts and commodity pool accounts managed by Shaffer Asset Management during the periods shown. The Table does not reflect the actual performance of any one account. Accordingly, investors in specific accounts included in the composite figures may have had more or less favorable results than the Table indicates. All accounts advised by Shaffer Asset Management do not in all instances have parallel performance due to different times of market entry and varying amounts of capital. For example, larger account size may have effects on particular trading decisions, such as the relative size of positions taken, degree of diversification and particular commodity interests traded. In addition, the performance of each account -33- included in the composite figures has varied depending upon the size of the investment, the date the account started trading and the length of time the account was open. The fees and brokerage commissions charged to the Fund may differ from the fees and brokerage commissions actually charged to these accounts, and the commission rate charged to the Fund may also change in the future. In addition, because Shaffer Asset Management has modified its trading methods in the past and will continue to modify its trading methods in the future, the results shown in the Table do not necessarily reflect the trading methods which will be used by Shaffer Asset Management on behalf of the Fund. It should also be noted that the aggregate value of the Fund's account will constitute a significant increase in the assets under Shaffer Asset Management's control if all or a substantial number of the Units being offered are sold. Apart from the effects of a large account size on particular trading decisions, such as the time of entry of orders, the relative size of positions taken, degree of diversification and particular commodities traded, the size of the Fund's assets may affect generally the design and execution of Shaffer Asset Management's trading methods. Please refer to "Past Performance of the Advisor" in the statement of additional information that accompanies this prospectus for additional performance information and historical performance data for accounts individually managed by the Advisor. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. SHAFFER ASSET MANAGEMENT, INC. INDIVIDUALLY MANAGED ACCOUNT PROGRAM SEPTEMBER 30, 2002 Inception of Trading:..................... March 1999 Aggregate Deposits:....................... $1,827,312 Current Net Asset Value:.................. $1,390,722 Worst Monthly Percentage Drawdown (for any single account) (1):............. 2/2002; 44. 52% ** Worst Peak to Valley Drawdown (for any single account) (1):............. 4/2001--2/2002; 63.93% **
PERCENTAGE RATE OF RETURN (2) (COMPUTED ON A COMPOUNDED MONTHLY BASIS) ------------------- MONTH YEAR TO DATE 2001 2000 1999 ----- ------------ ----- ---- ---- January.................................................... -6.63% 0.25% 5.92% -- February...................................................... -17.47% 1.09% 3.54% -- March......................................................... 14.28% 5.62% -6.47% 10.31% April......................................................... -0.92% 1.81% 4.45% 12.77% May........................................................... 4.36% -14.50% 3.21% 0.85% June.......................................................... 9.48% 5.14% 4.30% -0.19% July.......................................................... 0.02% -13.42% -2.64% 11.59% August........................................................ -2.80% -2.28% 8.64% -10.62% September..................................................... -6.30% 2.86% -2.97% 22.50% October....................................................... 9.17% -14.43% -10.90% November...................................................... -8.70% -0.98% 19.21% December...................................................... -3.12% 22.10% 2.41% Year.......................................................... -9.18% -14.74% 22.46% 58.59% ------------ (1) "Drawdown" means losses experienced by any account over a specified period expressed as a percentage of the account's net asset value at the beginning of that period. The "Worst Monthly Percentage Drawdown" is the greatest cumulative percentage decline in month-ending net asset value due to losses sustained by an individual account. The "Worst Peak-to-Valley Drawdown" is the greatest cumulative percentage decline in month-ending net asset value due to losses sustained by an individual account during any period in which the initial month-ending net asset value is not equaled or exceeded by a subsequent month-ending net asset value. (2) The "Rate of Return" for a period is calculated by dividing the net profit or loss of the fully funded accounts in the program on a composite basis for such period by the equity of the program at the beginning of such period, except in periods of significant additions or withdrawals to the accounts in the composite. In such instances, the composite is adjusted to exclude amounts with significant additions or withdrawals, which would materially distort the rate of return. ** These returns are for a single account that was capitalized at an amount less than the normal required minimum by the advisor and was not classified as a notional account. The Worst Monthly Percentage Draw-down (for any single account) and Worst Peak-to-Valley Draw-down (for any single account) for an account funded with the normal required minimum of the advisor would have been February 2002; 22.26% and April 2001-February 2002; 31.97%, respectively.
-34- COMMODITY BROKERAGE ARRANGEMENTS GENERAL Under the Fund's limited partnership agreement, Shaffer Asset Management is responsible for selecting the Fund's commodity broker(s) and has selected ADM Investor Services, Inc. to act as the Fund's commodity broker. In this regard, the Fund has entered into a non-exclusive brokerage agreement with ADM that is terminable by the Fund or ADM Investor Services on sixty days' prior written notice. From time to time, Shaffer Asset Management may engage another or one or more additional firms to act as the Fund's commodity broker, although it has no current intention to do so. DESCRIPTION OF THE COMMODITY BROKER ADM Investor Services is a Delaware corporation and wholly owned subsidiary of Archer Daniels Midland Company. Through its branch office and introducing broker network, ADM Investor Services is engaged primarily in providing individual and institutional clients with services in connection with the purchase and sale of commodity interests throughout the United States and in many foreign countries. ADM Investor Services is a clearing member of the Chicago Board of Trade; the Chicago Mercantile Exchange; the New York Mercantile Exchange and the Commodity Exchange; the New York Board of Trade; the Minneapolis Grain Exchange; and the London International Financial Futures Exchange. ADM Investor Services is registered with the CFTC as a futures commission merchant. Such registration does not imply, however, that the CFTC has approved the accuracy of the information contained in ADM Investor Services' application for registration or the qualifications of ADM Investor Services to act as a futures commission merchant, or that the CFTC supervises the business activities engaged in by ADM Investor Services. ADM Investor Services is also a member of the NFA. ADM Investor Services' principal offices are located at 1600A Board of Trade Building, 141 West Jackson Boulevard, Chicago, Illinois 60604, and its telephone number is (312) 435-7000. CIVIL, CRIMINAL AND ADMINISTRATIVE ACTIONS CFTC NOTICE OF INTENT TO REVOKE, SUSPEND OR RESTRICT REGISTRATION. On May 16, 1997, the CFTC filed a notice of intent to revoke, suspend or restrict the registration of ADM Investor Services as a futures commission merchant based upon a 1996 conviction of ADM Investor Services' parent company, Archer Daniels Midland Company ("Archer Daniels Midland"), for violations of the Sherman Antitrust Act. Specifically, Archer Daniels Midland pled guilty on October 15, 1996 to charges that it participated in a conspiracy to fix the prices of lysine and citric acid. As part of its guilty plea, Archer Daniel Midland agreed to pay fines totaling $100 million. In connection with the CFTC's proceeding against ADM Investor Services, ADM Investor Services accepted an offer of settlement that placed various restrictions on ADM Investor Services' registration as a futures commission merchant. In particular, ADM Investor Services is prohibited from (i) employing any person who was directly or indirectly involved in the conduct of Archer Daniels Midland in the alleged conspiracy, and (ii) employing any person who was employed by Archer Daniels Midland for a period of four years, except for the current president of ADM Investor Services. In addition, ADM Investor Services is required to conduct a weekly review of all trading activities conducted by or on behalf of Archer Daniels Midland for consistency with the CE Act and CFTC regulations. ADM Investor Services has advised Shaffer Asset Management that (i) ADM Investor Services was not cited by the CFTC for any alleged or actual violations of the CE Act or rules and regulations promulgated by the CFTC thereunder, (ii) the CFTC's action against ADM Investor Services was based entirely on the fact that ADM Investor Services was a subsidiary of Archer Daniels Midland, and (iii) the proceeding has not had, and is not expected to have, a material adverse effect on the activities of ADM Investor Services as a futures commission merchant. -35- OTHER ACTIONS. ADM Investor Services is currently a defendant in certain lawsuits incidental to its commodities business. ADM Investor Services has advised Shaffer Asset Management that such actions have not had, and are not expected to have, a material adverse effect on the activities of ADM Investor Services as a futures commission merchant. Other than the foregoing actions, there have been no material civil, criminal or administrative actions pending, on appeal or concluded against ADM Investor Services or any of its principals during the past five years. DESCRIPTION OF BROKERAGE ARRANGEMENTS The Fund maintains a commodity trading account with ADM Investor Services pursuant to a brokerage agreement entered into with ADM Investor Services. Under that agreement, all assets and credits carried for the Fund will be subject to a general lien to discharge its trading obligations; the margins required to initiate or maintain open positions may be increased or decreased at any time at the discretion of ADM Investor Services; open positions may be liquidated or new positions may be rejected if, in the discretion of ADM Investor Services, the margin is deemed insufficient or is required by the emergency rules of any exchange; and reports of trading become conclusive if no written objection thereto is made within stated times. The brokerage agreement also provides that ADM Investor Services and its stockholders, directors, officers, employees, and affiliates shall not be liable to the Fund, its partners, or any of their successors or assigns except for acts or omissions taken or omitted to be taken by them in their capacities as brokers for the Fund if such acts or omissions involved gross negligence or willful, wanton or reckless misconduct. In addition, the brokerage agreement also provides that the Fund shall indemnify ADM Investor Services and its stockholders, directors, officers, employees and affiliates against any or all losses, liabilities, costs, damages, expenses (including, without limitation, attorneys' and accountants' fees and disbursements), judgments and amounts paid in settlement (collectively, "Losses") incurred or suffered by any of them in connection with or relating to their performance of services to the Fund unless such Losses resulted from the gross negligence or willful, wanton or reckless misconduct of ADM Investor Services or its stockholders, directors, officers, employees or affiliates. ADM Investor Services will provide various services to the Fund with respect to the execution, clearance and confirmation of transactions on behalf of the Fund, but will receive direction and instructions in this regard from Shaffer Asset Management. The brokerage agreement provides that, under no circumstances shall ADM Investor Services accept any responsibility for verifying that any of such instructions are in conformance with Shaffer Asset Management's authority and ADM Investor Services will not undertake to monitor the actions of Shaffer Asset Management in this regard to ensure that such actions are not contrary to the provisions of this prospectus, the accompanying statement of additional information or any related agreements or any subsequent amendments thereto. No indemnification of Shaffer Asset Management or its affiliates is permitted for Losses resulting from a violation by Shaffer Asset Management or any of its affiliates of the Securities Act of 1933, as amended, or of any applicable state securities laws in connection with the Registration Statement or the sale of Units. The Fund (or the limited partners of the Fund) or the other parties thereto may terminate the brokerage agreements and close the Fund's commodity accounts at any time on sixty days prior notice. The Fund pays brokerage commissions to ADM Investor Services at the rate of $17 per "round-turn" for trades executed on domestic exchanges. Based upon the rate of the brokerage commissions to be charged the Fund and the anticipated trading patterns of Shaffer Asset Management, the Fund expects to pay brokerage commissions of approximately 1% of its average annual Net Asset Value, though the actual amount may be higher. There is no agreement to limit such commission charges to any particular level. ADM Investor Services will maintain the Fund's assets in segregated accounts as required by CFTC regulations. CFTC regulations permit brokers to retain interest earned on customer funds. Many brokers permit accounts above a certain size to have a portion of their funds held in the form of interest-bearing obligations such as United States Treasury Bills, thereby enabling such accounts to earn interest on assets being used for trading. This advantage would not generally be extended to individuals unless substantially more than the minimum investment required by the Fund was committed to commodity trading. The Fund's assets, both those that are deposited to meet margin requirements and those that are held in reserve, may be held in cash, United States Treasury Bills or in any other form permissible under applicable laws and regulations. Shaffer Asset Management currently intends to cause the Fund to hold not less than 90% of such assets in United States Treasury Bills; interest, if any, earned on such assets, therefore, will inure to the benefit of the Fund. -36- Shaffer Asset Management will review the terms of the brokerage agreement at least annually and determine to the extent possible the brokerage commission rates charged by other brokers to other public commodity funds whose size and management structure is comparable to that of the Fund as a factor in determining that the commission rates paid by the Fund continue to be fair and reasonable in light of the services the Fund receives from ADM Investor Services and its affiliates including, among others, execution services. Investors should note that, notwithstanding the foregoing, the Fund may pay brokerage commission rates exceeding rates which are otherwise available. Commission rates proposed for the Fund, as well as those currently charged to most other public commodity pools by other commodity brokers (to the best of Shaffer Asset Management's knowledge), are ultimately based upon the scheduled retail commission rates charged by most major commodity brokerage houses to regular public customers. While the rates charged to the Fund ostensibly represent a discount from those scheduled rates, the rates charged to the Fund, and other public commodity pools, may exceed the lowest rates negotiable with ADM Investor Services or certain other brokers by an account as large as the Fund's account. See "Conflicts of Interest and Fiduciary Responsibility of the General Partner." PLAN OF DISTRIBUTION SUBSCRIPTION PROCEDURE The Fund is currently offering the Units to the public at the Net Asset Value per Unit as of the close of business on the last business day of each calendar month, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. Any subscription may be rejected by Shaffer Asset Management in whole or in part for any reason, but no subscription may be revoked by a subscriber after 5 days following the subscription date. The minimum investment in the Fund by any one investor is $10,000 (initially 10 Units), except that in the case of investments by pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension -- IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, including but not limited to, those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code, the minimum investment is $5,000. Additional investments in the Fund may be made in amounts of not less than $1,000. Purchases by investors and their spouses and by entities, including retirement plan trusts, that are legally or beneficially owned in their entirety by investors and/or their spouses shall be aggregated for purposes of meeting the minimum purchase requirements. Fractional Units may be sold by the Fund. During the continuing offering period, approximately 20% of all sales charges are paid to Shaffer Asset Management to reimburse Shaffer Asset Management for the payment by Shaffer Asset Management of the Fund's organizational, initial offering and operating expenses payable by Shaffer Asset Management and approximately 80% of all sales charges are paid as syndication fees to the Selling Agents and as selling commissions to the selected dealers. The Selling Agents and the selected dealers may in turn pay a portion of such syndication fees and selling commissions to their respective employees who are NASD registered representatives for each Unit sold by them. All expenses of the Selling Agents incurred in performing its obligations related to the offering will be reimbursed by the Fund (or by Shaffer Asset Management on its behalf). In no event may compensation to the Selling Agents and the selected dealers exceed 10% of the gross proceeds of this offering (excluding, for the purposes of such calculations, the reimbursement to the Selling Agents of actual out-of-pocket expenses). In addition to the syndication fees and selling commissions described above, the Fund will pay a monthly continuing services fee to the Selling Agents and, through the Selling Agents, certain selected dealers who are appropriately registered with the CFTC and/or the NFA and their respective registered representatives equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees payable or incentive allocations allocable as of such date) with respect to Units purchased within the prior twelve-month period and 1/12 of 4% of the Net Asset Value per Unit of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees payable or incentive allocations allocable as of such date) with respect to Units purchased more than twelve months prior thereto. Such continuing services fee shall be paid to the Selling Agents and such selected dealers and their respective registered representatives in return for their continuing services to the Fund and the limited partners of the Fund that were solicited by them. Such services include, without limitation, keeping the limited partners of the Fund apprised of developments affecting the Fund, responding to specific inquiries received from limited partners relating to the Fund and the commodity markets, communicating current valuations of the Fund's Net Asset Value per Unit to the limited partners, assisting in redemptions, transfers and distributions, assisting limited partners in interpreting the Fund's monthly and annual reports, financial statements and the tax information provided to limited partners, and providing such other services as the limited partners from time to time may reasonably request. The continuing services fee may be increased at any time and from time to time by Shaffer Asset Management upon sixty days' prior written notice to the limited partners. -37- Shaffer Asset Management is responsible for all of the Fund's organizational and initial offering expenses, exclusive of selling commissions. Shaffer Asset Management is also required to reimburse the Selling Agents for out-of-pocket expenses incurred by it in connection with this offering. Although the Fund will not be obligated to reimburse Shaffer Asset Management for any of such expenses, approximately 20% of all sales charges imposed by the Fund on Units sold and 100% of all early redemption fees charged by the Fund upon redemptions of Units will be paid to Shaffer Asset Management to reimburse Shaffer Asset Management for the payment by Shaffer Asset Management of the Fund's organizational and initial offering expenses and the Fund's operating expenses that are payable by Shaffer Asset Management. See "Summary -- Fees and Expenses Payable by the General Partner," "Fees, Compensation and Expenses" and "Distributions and Redemptions." Berthel Fisher & Company is, and Shaffer Asset Management may be deemed to be, an "underwriter" in connection with this offering within the meaning of the Securities Act of 1933 and the rules and regulations of the SEC promulgated thereunder. The Fund has agreed to indemnify Berthel Fisher & Company and the selected dealers against certain liabilities that they may incur in connection with the offering and sale of the Units, including liabilities under the Securities Act of 1933 (in the case of the selected dealers only) and the CE Act. The Fund will not indemnify the Selling Agents for any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees and disbursements) resulting from a violation by Shaffer Asset Management or its affiliates of the Securities Act of 1933 or any state securities laws in connection with the Registration Statement or the sale of the Units. The Fund has been advised by Berthel Fisher & Company that neither the Selling Agents nor any of the selected dealers engaged to sell the Units will execute any transaction in the Units in any trading account over which it has discretion, without the prior written approval of the holder of such account. Following acceptance by the Fund of a subscription, Shaffer Asset Management will provide the subscriber with confirmation of the acceptance of the Subscriber's purchase of the Units. SUBSCRIPTIONS / INVESTMENT REQUIREMENTS / INVESTOR SUITABILITY STANDARDS In order to subscribe for Units, a subscriber must (i) complete and execute a Subscription Agreement / Power of Attorney that is attached as Exhibit C to the statement of additional information that accompanies this prospectus, and (ii) deliver or mail such documents to the Fund at the address shown, together with a check, made out in accordance with the instructions of the selected dealer, for the full purchase price of the Units to be purchased, together with any and all applicable sales charges. If the subscription is rejected by Shaffer Asset Management, in whole or in part (which is in the sole discretion of Shaffer Asset Management), the subscription funds or the rejected portion thereof will be returned to the subscriber without interest. Shaffer Asset Management will determine whether to accept or reject a subscription as promptly as possible following its receipt. All subscriptions, once made, are irrevocable by the subscriber after 5 days following the subscription date but may be rejected in whole or in part by Shaffer Asset Management. Each subscriber must represent and warrant in the Subscription Agreement / Power of Attorney, a copy of which is attached as Exhibit C to the statement of additional information that accompanies this prospectus, that o he or she has either (A) a net worth (exclusive of home, furnishings and automobiles) of at least $225,000, or (B) a net worth (similarly calculated) of at least $60,000 and an annual gross income of at least $60,000, and his or her investment in the Fund will not constitute more than 10% of his or her net worth, exclusive of home, furnishings and automobiles; and o If he or she is a resident of Iowa, Kansas, or Missouri, he or she has (i) a net worth of at least $350,000 or (ii) a net worth of at least $100,000 and $100,000 taxable income o If he or she is a resident of Nebraska, he or she has (i) a net worth, or joint net worth with his or her spouse, that exceeds $1,000,000 or (ii) had income in excess of $200,000 in each of the two most recent years or a joint income with his or her spouse in excess of $300,000, and he or she has a reasonable expectation of reaching this same income level in the current year. -38- o he or she has reviewed this prospectus and the accompanying statement of additional information and is aware of and can afford the risks of an investment in the Fund, including the risk of losing his or her entire investment. The administrator of the securities laws of certain states have imposed additional suitability requirements on the residents of such states. These standards, however, are only regulatory minimums. Even if a subscriber meets the suitability requirements described above, an investment in the Units may not be suitable for him or her. only the subscriber can make that determination. See "Subscription Requirements" attached as Exhibit B to the statement of additional information that accompanies this prospectus. In the case of a subscription on behalf of a fiduciary account, the subscription requirements must be met by the account beneficiary. However, in a case where a donor or grantee directly or indirectly supplies the funds to purchase the Units, and the donor or grantee acts as the fiduciary for the account, then the subscription requirements may be met by the donor or grantee. It is the responsibility of Shaffer Asset Management, the Selling Agents and each person selling Units to make every reasonable effort to determine that a purchase of Units is a suitable and appropriate investment for each subscriber. During the continuing offering period, all monies remitted by subscribers are deposited in the Fund's account with JPMorganChase. INVESTMENTS BY ERISA ACCOUNTS GENERAL This section sets forth certain consequences under ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), which a fiduciary of an "employee benefit plan" as defined in and subject to ERISA or of a "plan" as defined in and subject to Section 4975 of the Internal Revenue Code who has investment discretion should consider before deciding to invest the plan's assets in the Fund (such "employee benefit plans" and "plans" being referred to herein as "Plans," and such fiduciaries with investment discretion being referred to herein as "Plan Fiduciaries"). Violations of the rules under ERISA and/or Section 4975 of the Internal Revenue Code by fiduciaries can result in various types of liabilities, including civil penalties and excise taxes. Because of the complexity of these rules, plan fiduciaries are strongly encouraged to consult with their legal advisors prior to causing a plan to invest in the Fund. Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Fund, including the role that an investment in the Fund plays or would play in the Plan's overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the Fund, must be satisfied that such investment is prudent for the Plan, that the investments of the Plan, including in the Fund, are diversified so as to minimize the risk of large losses and that an investment in the Fund complies with the terms of the Plan and related trust. "PLAN ASSETS" A regulation issued under ERISA (the "ERISA Regulation") contains rules for determining when an investment by a Plan in an equity interest of a limited partnership will result in the underlying assets of the partnership being assets of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., "plan assets"). Those rules provide in pertinent part that assets of a limited partnership will not be plan assets of a Plan which purchases an equity interest in the partnership if the equity interest purchased is a "publicly-offered security" (the "Publicly-Offered Security Exception"), or if investment by benefit plan investors is not "significant." If the underlying assets of a partnership are considered to be assets of any Plan for purposes of ERISA or Section 4975 of the Internal Revenue Code, the operations of such partnership would be subject to and, in some cases, limited by, the provisions of ERISA and Section 4975 of the Code. -39- The Publicly-Offered Security Exception applies if the equity is a security that is: (1) "freely transferable" determined based on the applicable facts and circumstances; (2) part of a class of securities that is "widely held" -- meaning that the class of securities is owned by 100 or more investors independent of the issuer and of each other; and (3) either (a) part of a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934,as amended, or (b) sold to the Plan as part of a public offering pursuant to an effective registrationstatement under the Securities Act of 1933, and the class of which such security is a part is registered under the Securities Exchange Act of 1934, within 120 days, or such later time as may be allowed by the SEC, after the end of the fiscal year of the issuer in which the offering of such security occurred. If the Fund does not qualify for the Publicly Offered Security Exception, Shaffer Asset Management shall limit investments by benefit plan investors, in the aggregate, to less than 25% of the total capital of each class of equity interest of the Fund not owned by Shaffer Asset Management or its affiliates (the "25% Limitation"). If Shaffer Asset Management applies the 25% Limitation, investment by benefit plan investors will not be considered "significant" under the ERISA Regulation, and the underlying assets of the Fund will not be considered to constitute assets of any Plan that purchases Units. This 25% Limitation may restrict additional investments by benefit plan investors and cause Shaffer Asset Management to require that some investors withdraw from the Fund in the event other investors withdraw. If, in the opinion of Shaffer Asset Management, a rejection of subscriptions or mandatory withdrawals are necessary to meet the 25% Limitation, Shaffer Asset Management will effect the rejections or withdrawals in a manner determined in the sole discretion of Shaffer Asset Management. However, Shaffer Asset Management will use its best efforts to effect withdrawals on a pro rata basis among all benefit plan investors. As of the date of this prospectus, the Fund is relying on the 25% limitation. INELIGIBLE PURCHASERS In general, Units may not be purchased with the assets of a Plan if Shaffer Asset Management, any of the selling agents, selected dealers, ADM Investor Services or any of their respective employees and/or affiliates or any of its affiliates or employees either: (1) exercise any discretionary authority or discretionary control respecting management of the Plan; (2) exercise any authority or control respecting management or disposition of the assets of the Plan; (3) render investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the Plan; (4) have any authority or responsibility to render investment advice with respect to any moneys or other property of the Plan; or (5) have any discretionary authority or discretionary responsibility in the administration of the Plan. DISTRIBUTIONS AND REDEMPTIONS Distributions of profits, if any, will be made at Shaffer Asset Management's discretion. Investors should be aware, however, that Shaffer Asset Management does not intend to make any distributions of any profits. See "Risk Factors -- Partners' Tax Liability May Exceed Distributions," "Conflicts of Interest and Fiduciary Responsibility of the General Partner," "Summary of the Limited Partnership Agreement -- Profits and Losses; Distributions" and "Federal Income Tax Considerations." A limited partner of the Fund may cause some or all of his Units to be redeemed by the Fund as of the last business day of any month at the then current Net Asset Value per Unit (less the early redemption fee described in the following paragraph for certain redemptions effected during the first twelve full calendar months after their purchase) on ten days' prior written notice to Shaffer Asset Management, provided, however, that no redemption which applies to less than all of a partner's interest in the Fund can result in the partner's capital account being reduced below $10,000 ($5,000 in the case of investments -40- by pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension -- IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, including but not limited to, those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code) after the redemption is effected. Requests for redemption are irrevocable. The Net Asset Value per Unit for purposes of redemption equals the Net Asset Value of the Fund allocated to the capital account of the Fund represented by Units divided by the number of Units outstanding on the date of redemption. Units are redeemed at their Net Asset Value determined as of the day on which they are redeemed, not as of the date on which a request for redemption is made or received. Accordingly, the redemption price actually received for a Unit may differ significantly from that which would have been received at the time when the decision to redeem was made. The Fund will charge an early redemption fee equal to 4% of the Net Asset Value per Unit of the Units redeemed as of or before the end of the third full calendar month after their purchase. This fee will decrease by one percentage point for every three full calendar months thereafter. Accordingly, Units redeemed as of the end of or during the tenth, eleventh and twelfth full calendar months after their purchase will be subject to a redemption fee equal to 1% of the Net Asset Value per Unit of the Unit(s) redeemed. Thereafter, no redemption fee will be charged. In addition and in order to assure each of the Fund's limited partners the availability of funds to pay taxes on each year's profits, if any, the redemption fee will be waived on redemptions of Units to the extent, if any, distributions in the first quarter of a calendar year are less than 35% of the profits reportable to a limited partner for the prior year. The Fund will pay all early redemption fees to Shaffer Asset Management to reimburse Shaffer Asset Management for the payment by Shaffer Asset Management of the Fund's organizational and initial offering expenses and the Fund's operating expenses that are payable by Shaffer Asset Management. Investors should note that the early redemption fees will reduce the redemption value of a Unit significantly below its purchase price unless the Fund achieves significant net New Trading Profits from its trading activities. All requests for redemption in proper form will be honored and payment will be made within ten business days of the effective date of redemption, except as described below. The right to redeem is contingent on the Fund having assets sufficient to discharge its liabilities on the date of redemption. It is also contingent on receipt by Shaffer Asset Management of a request for redemption in the form attached as Exhibit D to the statement of additional information that accompanies this prospectus or any other form approved by Shaffer Asset Management at least ten days (or such shorter period as may be acceptable to Shaffer Asset Management) prior to the date on which redemption is requested. Under special circumstances, including but not limited to default or delay in payments due to the Fund from banks or other persons, the Fund may in turn delay payment to partners requesting redemption of Units of the proportionate part of the Net Asset Value per Unit represented by the sums which are the subject of such default or delay. A limited partner of the Fund will not be liable by operation of law for any sum in excess of his or her capital contribution and profits, if any (including any distributions and amounts received upon redemption of Units and interest thereon), necessary to discharge the Fund's liabilities to all creditors who extended credit or whose claims arose before the return of the cash value of the limited partner's interest. The Fund will not make such a claim with respect to amounts distributed to limited partners and amounts paid upon redemption of Units unless the assets of the Fund are insufficient to discharge the Fund's liabilities to its creditors. TRADING POLICIES THE OBJECTIVE OF THE FUND IS TO ACHIEVE MAXIMUM CAPITAL APPRECIATION OF ITS ASSETS THROUGH SPECULATIVE TRADING IN COMMODITY FUTURES CONTRACTS AND OTHER COMMODITY INTERESTS IN THE UNITED STATES COMMODITY FUTURES MARKETS. NO ASSURANCE CAN BE GIVEN THAT THE FUND'S OBJECTIVES WILL BE MET. THE FUND ATTEMPTS TO ACCOMPLISH ITS OBJECTIVES BY FOLLOWING THE TRADING POLICIES SET FORTH BELOW: (1) Fund monies are invested in futures contracts only of commodities, which are traded in sufficient volume to permit, in the opinion of the Fund's advisor(s), ease of taking and liquidating positions. (2) The Fund does not allow any advisor to acquire, on behalf of the Fund, additional positions in any commodity if such additional positions would result in a net long or short position for any individual commodity requiring as margin more than 25% of the Fund's Net Asset Value at the time. (3) The Fund estimates that between 10% and 40% of the Fund's assets will normally be committed as margin, although such percentage may be outside such range from time to time. As a result, the Fund will not generally be as highly leveraged as permitted for investments by an individual. Margin requirements will be met with cash, through deposits of United States Treasury Bills or in such other manner as may be permitted under applicable laws and regulations. -41- (4) The Fund will ordinarily avoid entering into an open position during a delivery month, except with respect to commodity futures contracts on currencies. (5) The Fund will not employ the trading technique commonly known as "pyramiding," in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or a related commodity. However, the Fund's advisor(s) may take into account the Fund's open trade equity on existing positions in determining generally whether to acquire additional commodity futures contracts on behalf of the Fund in light of the policy described in paragraph 3, above. (6) The Fund will not utilize borrowings, except to finance the Fund's taking delivery of cash commodities. Although the Fund has no current intention to make or accept delivery of cash commodities, the Fund may from time to time make or accept delivery of a cash commodity. Normally, such deliveries will be disposed of promptly by re-tendering to the appropriate clearinghouse the warehouse receipt representing the delivery. (7) Although the Fund has no current intention to employ trading techniques such as spreads or straddles, the Fund may from time to time employ such trading techniques. The term "spread" or "straddle" describes a commodity futures trading transaction involving the simultaneous buying and selling of commodity futures contracts dealing with the same commodity but involving different delivery dates or different markets, and in which the trader expects to earn profits from a widening or narrowing movement of the prices of the different commodity futures contracts. (8) The Fund, under extraordinary circumstances, may establish offsetting positions in foreign currencies through banks or in the inter-bank market to reduce risk exposure due to lack of liquidity on the commodity exchanges and to protect the Fund's capital. (9) The Fund will not permit rebates or give-ups to be received by Shaffer Asset Management or any advisor. (10) The Fund will not buy, sell or trade in securities other than those in which customers' funds are permitted to be invested under the CE Act, nor will it write, purchase, sell or trade in options on securities. Although the Fund has no current intention to trade in options on commodity futures contracts or physical commodities, the Fund may from time to time trade in options on commodity futures contracts or physical commodities. (11) The Fund will not commingle its assets with those of other persons, except as permitted by law. (12) The Fund will not permit the churning of its commodity trading account. (13) The Fund may trade in futures contracts on foreign currencies through domestic commodity exchanges, including the International Monetary Market Division of the Chicago Mercantile Exchange. (14) The Fund will generally maintain approximately 90% of its assets in investment mediums such as United States Treasury Bills and other interest bearing debt obligations or repurchase agreements relating thereto. (15) The Fund will not be a dealer and therefore will not acquire commodity interests as inventory or primarily for sale to customers in the ordinary course of business. Although Shaffer Asset Management is currently serving as the general partner of, and the commodity trading advisor to, the Fund, Shaffer Asset Management will monitor the trading policies of the Fund described above and will impose any additional restrictions upon the trading activities of the Fund's other advisor(s), if any, as Shaffer Asset Management, in the exercise of its prudent business judgment, deems appropriate. In addition, Shaffer Asset Management may change the trading policies described above without notice to or the approval of the limited partners of the Fund if it, in its sole discretion, determines that such change is in the best interests of the Fund. Shaffer Asset Management will not make a material change in the basic investment policy or structure of the Fund unless it obtains an affirmative vote of a majority of the Units. -42- If the Net Asset Value of the Fund (increased by the amount of distributions per Unit, if any) on any business day during any given fiscal year decreases to or below 50% of the Net Asset Value per Unit as of the beginning of that fiscal year, provided that such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or if the Net Asset Value per Unit decreases on any business day to or below $350, the Fund will attempt to liquidate all open positions as expeditiously as possible and suspend trading. No assurance is given that the Fund will be able to close out all open positions without incurring substantial additional losses. Within ten business days after the date of the suspension of trading, Shaffer Asset Management shall either give notice to the limited partners of the Fund of its intention to withdraw from the Fund or shall declare a special redemption date. Such special redemption date, if declared, shall be a business day within thirty business days from the date of suspension of trading by the Fund, and Shaffer Asset Management shall mail notice of such date to each limited partner of the Fund by first class mail, postage prepaid, not later than ten business days prior to such special redemption date, together with instructions as to the procedure such partner must follow to have his Units redeemed on such date by the Fund, if such partner so desires. No redemption fees would be due in respect of a Unit redeemed on the special redemption date. If, after such special redemption date, the Fund's Net Asset Value is at least 50% of the Net Asset Value on the close of business on the day before the special redemption date, the Fund will resume trading unless Shaffer Asset Management elects to withdraw from the Fund. If, after such special redemption date, the Fund's Net Asset Value is less than 50% of the Net Asset Value of the close of business on the day before the special redemption date, the Fund shall terminate. See "Risk Factors." SUMMARY OF THE ADVISORY AGREEMENT The Fund has entered into an advisory agreement with Shaffer Asset Management that provides that Shaffer Asset Management will have sole discretion during the term of the contract to determine the Fund's trades. The advisory agreement has a term ending one year after the end of the month in which the Fund commences trading subject to the Fund's right to automatically renew the advisory agreement on the same terms and conditions for one additional year on ninety days' prior written notice and further subject to Shaffer Asset Management's right to terminate the advisory agreement during the extended term on sixty days' prior written notice. The advisory agreement terminates automatically in the event that the Fund is terminated and may be terminated at any time by the Fund or its general partner upon sixty days' prior written notice to Shaffer Asset Management. The advisory agreement may also be terminated at the election of the Fund's general partner at any time, upon written notice to the Fund, in the event that: (i) Shaffer Asset Management withdraws from the Fund as its general partner; (ii) Shaffer Asset Management's registration as a commodity trading advisor with the CFTC lapses or is suspended or terminated; (iii) the Fund's general partner, in its sole discretion, should determine in good faith that Shaffer Asset Management has violated the Fund's trading policies; (iv) the Fund's Net Asset Value per Unit (increased by the amount of any distributions per Unit, if any) on any business day during any given fiscal year decreases to or below 50% of the Net Asset Value per Unit of the Fund at the beginning of the fiscal year, provided that such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or if the Net Asset Value per Unit (increased by the amount of any distributions per Unit, if any) decreases on any business day to or below $350.00; (v) Mr. Shaffer leaves the employ of Shaffer Asset Management, becomes incapacitated or is otherwise not active in the management of the trading programs of Shaffer Asset Management; (vi) Shaffer Asset Management becomes unable to use its trading strategies for the benefit of the Fund for any reason; or (vii) Shaffer Asset Management merges, consolidates with or sells a substantial portion of its assets, any portion of its trading strategies, trading programs or goodwill to any individual or entity, or becomes bankrupt or insolvent. Under the terms of the advisory agreement, upon the termination or expiration of the advisory agreement, the Fund may retain a new trading advisor or advisors or may renegotiate the advisory agreement with Shaffer Asset Management on the same or different terms. No assurance is given that, after the expiration of such contract, the Fund will be able to retain the trading management services of Shaffer Asset Management or obtain those services on the same terms as those of the current advisory agreement. In addition, Shaffer Asset Management has the right to terminate the advisory agreement with the Fund in certain circumstances, and no assurance is given that the advisory agreement will not be terminated prior to the expiration of the initial twelve-month term. The types of commodity interests that the Fund may trade under the terms of any new advisory agreement may differ from those that Shaffer Asset Management will trade for the Fund under the current advisory agreement. The compensation of a new trading advisor or Shaffer Asset Management under any advisory agreement negotiated in the future may be determined without regard to the previous performance of the Fund. ADM Investor Services has agreed to keep confidential Shaffer Asset Management's trades and trading strategies as disclosed to it, except to the extent necessary to conduct the affairs of the Fund. The compensation payable by the Fund to Shaffer Asset Management is described under "Fees, Compensation and Expenses." -43- The business of Shaffer Asset Management is the management of discretionary commodity trading accounts, and it may manage other accounts during the same period that it is managing the Fund's account. The advisory agreement provides that Shaffer Asset Management and its principals, employees and affiliates shall be free to trade for their own accounts and manage other trading accounts and to use the same information, trading strategies and formulae which it obtains, produces or utilizes in the performance of services for the Fund. The limited partners of the Fund will have no right to inspect the trading records or evaluate the performance of such accounts except to the extent required by law. Shaffer Asset Management has agreed with the Fund that it will not deliberately use any trading strategies for the Fund which it knows are inferior to those employed by it for any other account managed by Shaffer Asset Management or any of its principals or affiliates. In addition, in its trading for the Fund's account and such other accounts, Shaffer Asset Management has agreed to use its good faith, best efforts to achieve an equitable treatment of all accounts including with respect to priorities of order entry and any changes or modifications to Shaffer Asset Management's trading strategies or recommendations resulting from the application of speculative position limits. No assurance is or can be given, however, that the results of the Fund's trading will be similar to those of other accounts concurrently managed by Shaffer Asset Management. See "Conflicts of Interest / Fiduciary Responsibility of the General Partner." The advisory agreement provides that Shaffer Asset Management, its shareholders, directors, officers, employees and other affiliates shall not be liable to the Fund under certain circumstances and further provides that the Fund shall indemnify such persons, subject to certain limitations. The advisory agreement prohibits Shaffer Asset Management from receiving any commission, compensation, remuneration or payment whatsoever by reason of Fund transactions from any commodity broker with whom the Fund carries any account. The Fund will pay Shaffer Asset Management a management fee and allocate to Shaffer Asset Management an incentive allocation as described under the caption "Fees, Compensation and Expenses." SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT The rights and duties of Shaffer Asset Management and the limited partners of the Fund are governed by the provisions of the Delaware Revised Uniform Limited Partnership Act and by the Fund's limited partnership agreement, a copy of which is included as Exhibit A to the statement of additional information that accompanies this prospectus. Certain features of the limited partnership agreement are explained below, but reference is made to the limited partnership agreement for complete details of its terms and conditions. When appropriate, the term "General Partner" herein refers to Shaffer Asset Management, Inc. or any successor general partner of the Fund. ADDITIONAL LIMITED PARTNERS Shaffer Asset Management has the sole discretion to admit additional limited partners. The offering is continuous, and the Fund may offer and sell additional Units, and there is no limitation on the total number of Units that may be outstanding. All Units offered by the Fund may be offered and sold by the Fund at the then current Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit sold. AMENDMENTS; MEETINGS The Fund's limited partnership agreement may be amended in any respect (except to change the Fund to a general partnership, to change the liability of Shaffer Asset Management or any limited partners, to reduce the capital account of a limited partner, to modify the profits, losses or distributions attributable to any limited partner, or to terminate the Fund or to extend its duration) by a vote of the holders of a majority of the outstanding Units (not including Units held by Shaffer Asset Management), either pursuant to a written vote or at a duly called meeting of the limited partners of the Fund. An amendment may be proposed or a meeting may be called by Shaffer Asset Management or by the holders of at least 10% of the outstanding Units. It is not expected that Shaffer Asset Management will call any annual meetings of the Fund's limited partners. CERTIFICATES FOR UNITS The Fund's limited partnership agreement provides that Units need not be evidenced by certificates, but the Fund presently issues certificates to the limited partners of the Fund with respect to Units purchased by them. -44- ELECTION, REMOVAL AND WITHDRAWAL OF THE GENERAL PARTNER Shaffer Asset Management may be removed by a vote of the holders of a majority of the outstanding Units (not including Units held by Shaffer Asset Management, if any), and additional or successor general partner(s) may be elected by a vote of a majority of the outstanding Units (not including Units held by Shaffer Asset Management, if any). Shaffer Asset Management may withdraw as the general partner of the Fund upon one hundred twenty days' notice to the limited partners of the Fund. INDEMNIFICATION The Fund's limited partnership agreement provides that the Fund shall not provide for indemnification of Shaffer Asset Management or its affiliates for any liability or loss suffered by such person, nor shall it provide that such person be held harmless for any loss or liability suffered by the Fund, unless, and Shaffer Asset Management shall have no liability to the Partnership if, all of the following conditions are met: (a) such person has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Fund, and (b) such person was acting on behalf of or performing services for the Fund, and (c) such liability was not the result of negligence or misconduct by such person, and (d) such indemnification or agreement to hold harmless is recoverable only out of the assets of the Fund and not from the holders of the partnership interests. In any action threatened, pending or completed against Shaffer Asset Management or its affiliates involving the management of the Fund, the Fund shall indemnify and hold harmless Shaffer Asset Management and its affiliates, against any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees and disbursements) judgment or amount paid in settlement incurred in connection with the investigation, defense or settlement of such actions. Expenses may be paid by the Fund in advance of the final disposition of such action if the indemnified person shall agree to reimburse the Fund in the event indemnification is not permitted. No indemnification of Shaffer Asset Management or its affiliates is permitted for losses resulting from or arising out of any violation of the Federal securities laws or applicable state securities laws in connection with or related to the registration, offer or sale of the Units, unless (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to Shaffer Asset Management or its affiliates, (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction, or (iii) a court of competent jurisdiction approves a settlement of the claims and finds that indemnification of the settlement and related costs should be made; provided that such court has been advised of the position as to indemnification for violations of securities laws of the SEC and the securities administrators of the jurisdictions in which the claimant alleges to have been offered or sold Units. The position of the SEC is that any such indemnification is contrary to the federal securities laws and therefore unenforceable. The Fund may not incur the cost of that portion of any liability insurance which insures Shaffer Asset Management or any of its personnel for any liability for which Shaffer Asset Management or any of its personnel are prohibited from being indemnified under the Limited Partnership Agreement. LIABILITIES A limited partner of the Fund is not be personally liable for any debts or losses of the Fund beyond the amount of his capital contribution and profits earned thereon, if any, except as indicated above in the event that the limited partner has a negative balance in his Book Capital Account upon liquidation of the Fund. In the event that the Fund is otherwise unable to meet its obligations, the limited partners of the Fund might be required, under applicable law, to repay to the Fund, cash distributions previously received by them (including distributions on partial or complete redemptions, wrongfully distributed profits and distributions deemed to be a return of capital), with interest, to the extent that such distributions were made after the date that the Fund's obligations arose. Each Unit, when issued, will be fully paid and non-assessable. Except as indicated above, losses in excess of the Fund's assets will be the obligation of Shaffer Asset Management. LIMITED PARTNERS' RIGHTS Each limited partner of the Fund or his duly authorized representative may inspect the Fund's books and records during normal business hours. Holders of a majority of the Units (exclusive of any such Units held by Shaffer Asset Management, if any) may (a) adopt amendments to the Fund's limited partnership agreement proposed by Shaffer Asset Management or limited partners of the Fund owning at least 10% of the outstanding Units, (b) elect new general partner(s) if Shaffer Asset Management withdraws or is removed or is otherwise unable to serve, or (c) admit additional general partner(s). In addition, holders of a majority of the outstanding Units (not including Units held by Shaffer Asset Management, if any) may (a) remove Shaffer Asset Management, (b) cancel any contract for services with Shaffer Asset Management or its affiliates for any reason on sixty days' notice or (c) terminate the Fund. In addition, limited partners of the Fund must approve any material change in the Fund's trading policies. See "Trading Policies." -45- PROFIT AND LOSS; DISTRIBUTIONS Shaffer Asset Management may, but need not and, in fact, does not intend to, distribute any portion of the capital or profits of the Fund. Shaffer Asset Management may declare distributions in additional Units of the Fund, in which event limited partners of the Fund will be given at least sixty days' prior written notice and the option to elect to receive cash instead of additional Units. However, a limited partner has the right to redeem a portion or all of his Units in accordance with the redemption procedures described in this prospectus and the accompanying statement of additional information. For purposes of calculating Net Asset Value, any distribution shall become a liability of the Fund as of the date of its declaration. See "Distributions and Redemptions." The allocation of the Fund's income or loss for Federal income tax purposes is discussed under the caption "Federal Income Tax Considerations." REDEMPTIONS The Fund's limited partnership agreement provides that the Fund's limited partners may redeem all or a portion of their Units as of the close of business on the last business day of each calendar month upon at least ten days' prior written notice to Shaffer Asset Management, subject to certain restrictions and in some instances to early redemption fees during the first full twelve calendar months following the purchase of the Units. Notwithstanding the foregoing, partial redemptions shall be in whole Units except as Shaffer Asset Management may permit. See "Distributions and Redemptions." Limited partners of the Fund should note that there are certain tax consequences attendant upon redemptions of their Units. See "Federal Income Tax Considerations." REPORTS AND ACCOUNTING The Fund keeps its books in accordance with generally accepted accounting principles on the accrual basis of accounting. The Fund's fiscal year is a calendar year for all purposes. The books of the Fund shall be audited at least annually at the Fund's expense by an independent public accountant to be designated by Shaffer Asset Management and each limited partner of the Fund shall be furnished with an annual report certified by an independent public accountant containing such information as the CFTC requires. CFTC regulations presently require that an annual report be provided to futures fund participants within ninety days after the close of each fiscal year, setting forth among other matters: (1) the Fund's Net Asset Value as of the end of each of its two preceding fiscal years; (2) the Net Asset Value per Unit outstanding as of the end of each of its two preceding fiscal years; (3) a Statement of Financial Condition as of the close of the Fund's fiscal year and preceding fiscal year; (4) Statements of Income (Loss), Changes in Financial Position and Changes in Ownership Equity for the most recent fiscal year, together with Statements of Income (Loss), Changes in Financial Position and Changes in Ownership Equity for the previous fiscal year; and (5) appropriate footnote disclosure and such further material information as may be necessary to make the required statements not misleading. -46- In addition to the annual report, present CFTC rules require that the Fund furnish each limited partner of the Fund, within thirty days of the end of each month, with an unaudited account statement covering such month, which statement shall be presented in the form of a Statement of Income (Loss) and a Statement of Changes in Net Asset Value. In addition, limited partners of the Fund will be furnished with such additional information as Shaffer Asset Management, in its sole discretion, deems appropriate, as well as any information required to be provided to the limited partners of the Fund by any governmental authority having jurisdiction over the Fund. Shaffer Asset Management will also furnish each limited partner of the Fund, by no later than the 15th day of the third month following the close of the Fund's fiscal year (i.e., March 15) with tax information in a form which may be utilized in the preparation of Federal income tax returns. Each limited partner of the Fund shall be notified within seven business days of the decline in the Net Asset Value per Unit during a month to less than 50% of the Net Asset Value per Unit as of the last business day of the preceding month. Included in such notification shall be a description of the limited partners' voting rights, which rights include (a) the right, upon the initiative of Shaffer Asset Management or the holders of 10% of the outstanding Units and by vote of a simple majority of such Units (exclusive of any Units owned by Shaffer Asset Management, if any), to revise the Fund's limited partnership agreement, or (b) the right by a vote of the holders of at least seventy five percent of the outstanding Units (not including Units held by Shaffer Asset Management, if any) to (i) replace or revise the Fund's arrangements with Shaffer Asset Management or (ii) to terminate the Fund. Shaffer Asset Management shall maintain a list of the names and addresses of, and the number of Units owned by, all limited partners of the Fund at the Fund's principal office. Such list shall be made available for the review of any limited partner of the Fund or his representative at reasonable times and upon request, either in person or by mail. Shaffer Asset Management shall furnish a copy of such list to a limited partner of the Fund or his representative upon payment of the costs of reproduction and mailing; provided, however, that such list shall not be used by the limited partner for commercial purposes. TERMINATION Unless earlier dissolved, the Fund shall cease doing business on December 31, 2025, and shall thereupon be dissolved. The Fund shall also cease doing business and shall thereafter be dissolved if required by law or upon the occurrence of any of the following events: (1) The decrease of the Fund's Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) on any business day during any given fiscal year to or below 50% of the Net Asset Value per Unit as of the beginning of the fiscal year, provided that such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or the decrease of the Fund's Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) on any business day to or below $350; (2) the legal disability, bankruptcy, dissolution or withdrawal of Shaffer Asset Management, provided, however, that the holders of a majority of outstanding Units (not including Units held by Shaffer Asset Management, if any) may elect, within the ninety day period following Shaffer Asset Management's required notice of withdrawal, one or more substitute general partners to continue the Fund; (3) the vote of the holders of at least seventy five percent of the outstanding Units (not including Units held by Shaffer Asset Management, if any) to dissolve the Fund; or (4) the insolvency or bankruptcy of the Fund. Upon the dissolution of the Fund, its affairs shall be wound up, its liabilities discharged and its remaining assets distributed to the Unit holders in accordance with their capital accounts maintained for financial accounting purposes (the "Book Capital Accounts"). To the extent that the Fund has open commodity futures interest positions at such time, it will use its best efforts to close such positions, although no assurance can be given that market conditions might not delay such liquidation. In order that the allocation provisions of the Fund's limited partnership agreement be respected for Federal income tax purposes, a limited partner of the Fund having a negative balance in his Book Capital Account following the distribution of liquidation proceeds will be required to contribute an amount to the Fund sufficient to reduce such negative balance to zero. In the opinion of Shaffer Asset Management, it is unlikely that any limited partner of the Fund will have such a negative balance at such time. -47- TRANSFER OF UNITS A limited partner's Units may be assigned at the election of the limited partner upon notice to Shaffer Asset Management. However, the assignee shall become a substituted limited partner of the Fund only upon the consent of Shaffer Asset Management, which may be granted or withheld in its sole discretion. An assignee who does not become a substituted limited partner of the Fund shall be entitled to be allocated the share of the profits or losses or the return of capital to which his assignor would otherwise be entitled, but he shall not be entitled to vote, to receive an accounting of Fund transactions, to receive tax information, or to inspect the books and records of the Fund. There is not now a public market for the Units, and it is unlikely that one will develop in the future. The Fund has been advised by the selling agents that the selling agents shall inform the prospective transferee of such Units of all pertinent facts relating to the liquidity and marketability of the Units before assisting in the transfer of Units. FEDERAL INCOME TAX CONSIDERATIONS THE FOLLOWING CONSTITUTES THE OPINION OF SIDLEY AUSTIN BROWN & WOOD AND SUMMARIZES THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO INDIVIDUAL INVESTORS IN THE FUND. SIDLEY AUSTIN BROWN & WOOD'S OPINION IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT AMENDMENT OF WHICH THIS PROSPECTUS IS A PART. THE FUND'S PARTNERSHIP TAX STATUS The Fund will be treated as a partnership and, based on the type of income expected to be earned by the Fund, it will not be treated as a "publicly traded partnership." Accordingly, the Fund will not pay any federal income tax. TAXATION OF LIMITED PARTNERS ON PROFITS AND LOSSES OF THE FUND Each limited partner of the Fund must pay tax on his share of the Fund's annual income and gains, if any, even if the Fund does not make any cash distributions. The Fund generally allocates the Fund's gains and losses equally to each unit. However, a limited partner who redeems any units will be allocated such limited partner's share of the Fund's gains and losses in order that the amount of cash the limited partner receives for the redeemed units equals such limited partner's adjusted tax basis in the redeemed units. A limited partner's adjusted tax basis in a unit equals the amount originally paid for the unit, increased by income or gains allocated to the unit and decreased, but not below zero, by distributions, deductions or losses allocated to the unit. FUND LOSSES BY LIMITED PARTNERS A limited partner may deduct such limited partner's Fund losses only to the extent of such limited partner's adjusted tax basis in such limited partner's units. Generally, a limited partner's tax basis is the amount paid for the Units reduced (but not below zero) by such limited partner's share of any Fund distributions, deductions or losses and increased by such limited partner's share of the Fund's income and gains. However, a limited partner subject to the so-called "at-risk" limitations (generally, non-corporate taxpayers and closely-held corporations) can only deduct losses to the extent such limited partner's is "at-risk. " The "at-risk" amount is similar to tax basis, except that it does not include any amount borrowed on a non-recourse basis or from someone with an interest in the Fund. "PASSIVE-ACTIVITY LOSS RULES" AND THEIR EFFECT ON THE TREATMENT OF INCOME AND LOSS The trading activities of the Fund are not a "passive activity. " Accordingly, a limited partner of the Fund can deduct Fund losses from taxable income. However, a limited partner of the Fund cannot offset losses from "passive activities" against Fund gains. CASH DISTRIBUTIONS AND UNIT REDEMPTIONS A limited partner of the Fund who receives cash from the Fund, either through a distribution or a partial redemption, will not pay tax on that cash until such partner's adjusted tax basis in such partner's units has been reduced to zero. -48- GAIN OR LOSS ON SECTION 1256 CONTRACTS AND NON-SECTION 1256 CONTRACTS Section 1256 Contracts are futures and most options traded on U.S. exchanges and certain foreign currency contracts. For tax purposes, Section 1256 Contracts that remain open at year-end are treated as if the position were closed at year-end. The gain or loss on Section 1256 Contracts is characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of how long the position was open. Non-Section 1256 Contracts are, among other things, certain foreign currency transactions, including Section 988 transactions -- transactions in which the amount paid or received is in a foreign currency. Although the Fund does not currently engage in Non-Section 1256 transactions, the Fund expects to make a tax election that will cause gain and loss from Non-Section 1256 Contracts generally to be short-term gain or loss, in the event that it does, in the future, engage in Non-Section 1256 transactions. TAX ON CAPITAL GAINS AND LOSSES Long-term capital gains -- net gain on capital assets held more than one year and 60% of the gain on Section 1256 Contracts -- are taxed at a maximum federal income tax rate of 20% for individuals. Short-term capital gains -- net gain on capital assets held less than one year and 40% of the gain on Section 1256 Contracts -- are subject to tax at the same rates as ordinary income. Individual taxpayers can deduct capital losses in any one year only to the extent of their capital gains in such year plus $3,000. Accordingly, the Fund could suffer significant losses and a limited partner of the Fund could still be required to pay taxes on such limited partner's share of the Fund's interest income. An individual taxpayer can carry back net capital losses on Section 1256 Contracts three years to offset earlier gains on Section 1256 Contracts. To the extent the taxpayer cannot offset past Section 1256 Contract gains, the taxpayer can carry forward such losses indefinitely as losses on Section 1256 Contracts. LIMITED DEDUCTION FOR CERTAIN EXPENSES Shaffer Asset Management does not consider the management fee and incentive allocation, as well as other ordinary expenses of the Fund, to be investment advisory expenses. Accordingly, Shaffer Asset Management treats these expenses as ordinary business deductions not subject to the material deductibility limitations that apply to investment advisory expenses. The IRS could contend otherwise and, to the extent the IRS recharacterizes these expenses, a limited partner of the Fund would have the amount of the ordinary expenses allocated to him reduced accordingly. INTEREST INCOME Interest received by the Fund is taxed as ordinary income. Net capital losses can offset ordinary income only to the extent of $3,000 per year. See "-- Tax on Capital Gains and Losses." SYNDICATION FEES The 5% sales charge will not be deductible by the Fund or the limited partners. INVESTMENT INTEREST DEDUCTIBILITY LIMITATIONS Individual taxpayers can deduct "investment interest" -- interest on indebtedness allocable to property held for investment -- only to the extent that it does not exceed net investment income. Net investment income does not include capital gain taxed at the lower 20% rate. UNRELATED BUSINESS TAXABLE INCOME Tax-exempt limited partners of the Fund will not be required to pay tax on their share of income or gains of the Fund, provided that such limited partners do not purchase units with borrowed funds. -49- IRS AUDITS OF THE FUND AND ITS LIMITED PARTNERS The IRS audits Fund-related items at the Fund level rather than at the limited partner level. Shaffer Asset Management acts as "tax matters partner" with the authority to determine the Fund's responses to an audit. If an audit results in an adjustment, all limited partners may be required to pay additional taxes, interest and penalties. STATE AND OTHER TAXES In addition to the federal income tax consequences described above, the Fund and its limited partners may be subject to various state and other taxes. TAXATION OF FOREIGN LIMITED PARTNERS Subject to the discussion below regarding derivative transactions, a non-resident alien individual not otherwise engaged in a United States trade or business should not be deemed to be engaged in a United States trade or business solely by virtue of an investment as a limited partner of the Fund. Capital gains earned by the Fund and allocated to such a foreign limited partner will, as a general matter, not be subject to United States federal income tax or withholding, but may be subject to tax in the jurisdiction in which the foreign limited partner is resident. Interest income earned by the Fund will, as a general rule, likewise not be subject to United States federal income tax or withholding, but may be subject to tax in other jurisdictions to which the foreign limited partner is connected. With respect to derivative transactions such as swaps or forward contracts, based on current law it is uncertain whether entering into derivative transactions may cause the Fund, and therefore any foreign limited partners, to be treated as engaged in a trade or business within the United States. However, the Treasury has issued proposed regulations, which, if finalized in their current form, would provide that foreign limited partners should not be deemed to be engaged in a United States trade or business solely by virtue of an investment as a limited partner of the Fund even if the Fund enters into derivative transactions. These regulations are proposed to be effective for taxable years beginning 30 days after the date final regulations are published in the Federal Register. Under the terms of the proposed regulations, however, the Fund may elect to apply the final regulations Portfolio interest income (other than so-called "contingent interest") allocable to a foreign limited partner is likewise not subject to United States federal income tax withholding, provided that such partner is not engaged in a trade or business within the United States and provides the Fund with a form W-8BEN or other applicable form. Similarly, a foreign limited partner's allocable share of interest on U.S. bank deposits, certificates of deposit and discount obligations with maturities (from original issue) of 183 days or less is not subject to United States federal income tax withholding. Generally, other interest from United States sources (including original issue discount) paid to the Fund and allocable to foreign limited partners will be subject to United States federal income tax withholding at a statutory rate of 30% (subject to applicable treaty reductions). retroactively once they are finalized. --------------------------------- PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS BEFORE DECIDING WHETHER TO INVEST IN THE FUND. LEGAL MATTERS Sidley Austin Brown & Wood, Chicago, Illinois, has advised Shaffer Asset Management in connection with the offer of Units pursuant to this prospectus. Sidley Austin Brown & Wood does not represent the Fund or the limited partners. Sidley Austin Brown & Wood may continue to advise Shaffer Asset Management, including concerning its responsibilities as general partner of the Fund. Sidley Austin Brown & Wood drafted "Federal Income Tax Considerations." EXPERTS The financial statements of the Fund as of December 31, 2001 and 2000, and for the year ended December 31, 2001 and the period from its inception August 29, 2000 to December 31, 2000, and the balance sheets Shaffer Asset Management as of December 31, 2001 and 2000, each of which is included in this prospectus, have been audited by Anchin, Block & Anchin LLP, independent auditors, as set forth in their reports appearing in the statement of additional information that accompanies this prospectus and are included in such statement of additional information in reliance upon the authority of the firm as experts in auditing and accounting. Information subsequent to December 31, 2001 has not been audited by Anchin, Block & Anchin LLP and accordingly they do not express an opinion on it. -50- INDEX TO FINANCIAL STATEMENTS
SHAFFER DIVERSIFIED FUND, LP Independent Auditors' Report............................................................. 52 Financial Statements: Statements of Financial Condition as of September 30, 2002 (unaudited) and as of December 31, 2001 and 2000........................................... 53 Statements of Operations for the Nine Months Ended September 30, 2002 and 2001 (unaudited) and for the Year Ended December 31, 2001 and for the Period from Inception August 29, 2000 to December 31, 2000........................................... 54 Statements of Cash flows for the Nine Months Ended September 30, 2002 and 2001 (unaudited) and for Year Ended December 31, 2001 and for the Period from Inception August 29, 2000 to December 31, 2000 .......................................... 55 Statements of Changes in Partners' Capital (Net Asset Value) For the Nine Months Ended September 30, 2002 and 2001 (unaudited) And for the Year Ended December 31, 2001 and for the Period Inception August 29, 2000 to December 31, 2000................................. 56 Notes to the Financial Statements................................................... 57 SHAFFER ASSET MANAGEMENT, INC. Independent Auditors' Report............................................................. 62 Financial Statements: Balance Sheets as of September 30, 2002 (unaudited), December 31, 2001, and 2000 ................................................................ 63 Notes to the Financial Statements................................................... 64
-51- INDEPENDENT AUDITORS' REPORT TO THE PARTNERS OF SHAFFER DIVERSIFIED FUND, LP: We have audited the accompanying statements of financial condition of Shaffer Diversified Fund, LP as of December 31, 2001 and 2000 and the related statements of operations, changes in partners' capital and cash flows for the year ended December 31, 2001 and the period from August 29, 2000 (inception) through December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shaffer Diversified Fund, LP at December 31, 2001 and 2000 and the results of its operations and the changes in partners' capital and its cash flows for the year ended December 31, 2001 and the period from August 29, 2000 (inception) through December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Anchin, Block & Anchin LLP New York, New York February 15, 2002 -52-
SHAFFER DIVERSIFIED FUND, LP STATEMENTS OF FINANCIAL CONDITION UNAUDITED AUDITED ----------- --------------------- SEPTEMBER 30, DECEMBER 31, --------------------- 2002 2001 2000 ---- ---- ---- ASSETS: Equity in broker trading accounts Cash and cash equivalents ................ $ 153,255 $ -- $ -- United States government securities At market value (cost $942,485) ....... 948,081 -- -- Unrealized gain on open futures contracts 47,211 -- -- ---------- ---------- ---------- Deposits with broker .................. 1,148,547 -- -- ---------- ---------- ---------- Cash ..................................... 718 586 1,916 Cash in escrow account ................... -- 413,000 -- ---------- ---------- ---------- TOTAL ASSETS ................................ $1,149,265 $ 413,586 $ 1,916 ---------- ---------- ---------- LIABILITIES: Accounts payable ......................... $ 1,676 $ -- $ -- Brokerage fees on open contracts ......... 519 -- -- Management fees payable to General Partner 3,591 -- -- Subscription deposits .................... -- 413,000 -- ---------- ---------- ---------- Total Liabilities ........................ 5,786 413,000 -- ---------- ---------- ---------- PARTNERS' CAPITAL (Net Asset Value): General Partner - 50 units outstanding at September 30, 2002 and 1 unit at December 31, 2001 and 2000 . 51,383 586 916 Limited Partners - 1,062.685 units outstanding at September 30, 2002 and 1 unit at December 31, 2001 and 2000 . 1,092,096 -- 1,000 ---------- ---------- ---------- Total partners' capital (Net Asset Value) ..................... 1,143,479 586 1,916 ---------- ---------- ---------- TOTAL PARTNERS' CAPITAL AND LIABILITIES .............................. $1,149,265 $ 413,586 $ 1,916 ---------- ---------- ----------
See the accompanying Notes to the Financial Statements. -53-
SHAFFER DIVERSIFIED FUND, LP STATEMENTS OF OPERATIONS UNAUDITED AUDITED ---------------- --------------- PERIOD FROM NINE MONTHS AUGUST 29, 2000 ENDED YEAR ENDED (INCEPTION) TO SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ---------------- -------------- -------------- 2002 2001 2001 2000 ---- ---- ---- ---- INCOME: Trading gains Realized $ 98,492 $ -- $ -- $ -- Change in unrealized 47,211 -- -- -- -------- -------- -------- -------- Gains from trading 145,703 -- -- -- Investment income Interest income 10,402 -- -- -- -------- -------- -------- -------- Total income 156,105 -- -- -- -------- -------- -------- -------- OPERATING EXPENSES: Brokerage trading fees 17,918 -- -- -- Management fees 27,143 -- -- -- Operating expenses 15,003 1,232 1,330 84 -------- -------- -------- -------- Total Expenses 60,064 (1,232) 1,330 84 -------- -------- -------- -------- Net Income (Loss) before special Allocation to the General Partner 96,041 (1,232) (1,330) (84) Special allocation to the General Partner 19,052 -- -- -- -------- -------- -------- -------- NET INCOME (LOSS) AVAILABLE FOR PRO RATA DISTRIBUTION $ 76,989 $ (1,232) $ (1,330) $ (84) -------- -------- -------- -------- NET INCOME (LOSS) PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of Units outstanding during the period 1,051.718 2.00 2.00 2.00 --------- -------- -------- -------- Net Income (loss) per unit $ 73.20 $(616.00) $(665.00) $ (42.00) -------- -------- -------- --------
See the accompanying Notes to the Financial Statements. -54-
SHAFFER DIVERSIFIED FUND, LP STATEMENTS OF CASH FLOWS UNAUDITED AUDITED ------------------------ ------------------------------ AUGUST 29, 2000 NINE MONTHS ENDED YEAR ENDED (INCEPTION) TO SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ------------------------- ------------ --------------- 2002 2001 2001 2000 Cash Flows From Operating Activities: Net income (loss) ............................... $ 96,041 $ (1,232) $ (1,330) $ (84) Adjustments to reconcile net income (loss) to net cash used in Operating activities: Net change in unrealized - Futures ......... (47,211) -- -- -- Net change in unrealized - US Gov't Securities ........................ (5,596) -- -- -- Net (purchases) of investments in US Gov't Securities .................. (942,485) -- -- -- Increase in accounts payable and accrued expenses ........................ 5,786 -- -- -- --------- --------- --------- Net Cash Used in Operating Activities ......................... (893,465) (1,232) (1,330) (84) --------- --------- --------- --------- Cash Flows From Financing Activities: Addition of units ............................ 748,000 -- -- 2,000 Sales charges and syndication costs .......... (55,550) -- -- -- Redemption of units and withdrawals .......... (58,598) -- -- -- --------- --------- --------- Net Cash Provided by Financing Activities ......................... 633,852 -- -- 2,000 --------- --------- Net (Decrease) Increase In Cash .................... (259,613) (1,232) (1,330) 1,916 Cash and Cash Equivalents: Beginning of period .......................... 413,586 1,916 1,916 -- --------- --------- --------- --------- End of period ................................ $ 153,973 $ 684 $ 586 $ 1,916 --------- --------- --------- --------- End of period cash and cash equivalents consists of: Cash in broker trading accounts .............. 153,255 -- -- -- Cash in bank ................................. 718 684 586 1,916 --------- --------- --------- Total end of period cash and Cash equivalents ........................ $ 153,973 $ 684 $ 586 $ 1,916 --------- --------- --------- --------- Supplemental Disclosure of Non Cash Financing activities: Subscription deposits received In advance ............................... $ 413,000 $ -- $ -- $ -- --------- --------- --------- ---------
See the accompanying Notes to the Financial Statements. -55-
SHAFFER DIVERSIFIED FUND, LP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL NET ASSET VALUE FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 2001 AND FOR THE PERIOD FROM AUGUST 29, 2000 (INCEPTION) TO DECEMBER 31, 2000 (AUDITED) TOTAL PARTNERS' CAPITAL UNITS GENERAL LIMITED TOTAL ----- ------- ------- ----- Nine Months Ended September 30, 2002 Balances at December 31, 2001 .................... 2.00 (414) 1,000 $ 586 Additions ........................................ 1,150.203 50,000 1,111,000 1,161,000 Allocation of net income For the nine months ended September 30, 2002: Special allocation to the General Partner ... 18.161 19,052 -- 19,052 Net income available for Pro rata distribution ....................... 3,885 73,104 76,989 Sales charges and syndication fees ............... -- (55,550) (55,550) Redemptions and withdrawals ...................... (57.679) (21,140) (37,458) (58,598) --------- ----------- ----------- ----------- Balances, at September 30, 2002 .................... 1,112.685 $ 51,383 $ 1,092,096 $ 1,143,479 --------- ----------- ----------- ----------- Year Ended December 31, 2001 Balances at December 31, 2000 .................... 2.00 916 1,000 $ 1,916 Additions ........................................ -- -- -- -- Net income (loss) available for Pro rata distribution ....................... (1,330) -- (1,330) --------- ----------- ----------- ----------- Balances, at December 31, 2001 ..................... 2.00 $ (414) $ 1,000 $ 586 --------- ----------- ----------- ----------- August 29, 2000 (inception) to December 31, 2000 Balances - beginning ............................. -- -- -- -- Additions ........................................ 2.00 1,000 1,000 2,000 Net income (loss) available for Pro rata distribution ....................... (84) -- (84) --------- ----------- ----------- ----------- Balances, at December 31, 2000 ..................... 2.00 $ 916 $ 1,000 $ 1,916 --------- ----------- ----------- -----------
See the accompanying Notes to the Financial Statements. -56- SHAFFER DIVERSIFIED FUND, LP NOTES TO FINANCIAL STATEMENTS The financial statements are audited for the years ending December 31, 2001 and 2000. Information presented subsequent to that date is unaudited. All information is derived from the Fund's audited and unaudited financial statements and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The financial statements should be read in conjunction with the notes thereto, together with management's discussion and analysis of financial condition and results of operations. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2002, or any future interim period. NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) GENERAL DESCRIPTION Shaffer Diversified Fund, LP (the "Partnership" or the "Fund") is a limited partnership organized on August 29, 2000 under the Delaware Revised Uniform Limited Partnership Act. The Fund is a commodity investment pool, whose purpose is to trade speculatively in the United States futures markets. The business of the Fund is to seek medium and long-term capital appreciation through speculative trading in a diversified portfolio of commodity futures contracts and other related interests in the United States commodity futures markets. Specifically, the Fund invests in a diversified portfolio consisting primarily of currency, interest rate, grain, metal and energy futures contracts. The trading advisor and general partner of the Fund is Shaffer Asset Management, Inc. ("Shaffer Asset"). In addition to making all trading decisions in its capacity as trading advisor, Shaffer Asset controls all aspects of the business and administration of the Fund in its role as general partner. The Fund originally filed a registration statement with the United States Securities and Exchange Commission on September 25, 2000 for the sale of a minimum of $1,000,000 and a maximum of $25,000,000 in Units of Limited Partnership at $1,000.00 each, ($950.00 + $50.00 sales charges & syndication fees), which registration statement was declared effective on October 16, 2001. The Fund's initial offering period lasted approximately 120 days and ended February 13, 2002. During the initial offering the Fund accepted subscriptions for 1,049 Units of Partnership Interests at a selling price of $1,000.00 ($950.00 + $50.00 sales charges & syndication fees) for a total of $1,049,000. Sales charges & syndication fees of $49,950 were disbursed at closing and the Fund commenced trading activities with net proceeds of $996,550. The Fund will continue until December 31, 2025 unless terminated earlier. However, if the Fund's investments experience a substantial decline in value, as defined in the Partnership Agreement, the Partnership will be dissolved. B) FINANCIAL STATEMENT REPORTING The Fund's financial statements are presented in conformity with generally accepted accounting principles, which require using certain estimates and assumptions made by the Fund's management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. Transactions are accounted for on the trade date. Gains or losses are realized when contracts are liquidated. Unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the statement of financial position as a net gain or loss, as there exists a right of offset of unrealized gains or losses in accordance with Financial Accounting Standards Board Interpretation No. 39 - "Offsetting of Amounts Related to Certain Contracts. " Any change in net unrealized gain or loss from the preceding period is reported in the statement of operations. Brokerage expenses and other trading fees paid directly to the broker are included in "brokerage fees" and are charged to expenses when contracts are open. United States government securities are stated at cost plus accrued interest, which approximates market value. -57- C) CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash and money market deposits held at financial institutions and short term securities with maturity dates of less than three months from the date of the financial statements. D) INCOME TAXES The Partnership is not subject to income taxes. The partners report their allocable share of income, expense and trading gains or losses on their own tax returns. E) ORGANIZATION COSTS AND OPERATING EXPENSES The General Partner has agreed to pay all expenses associated with the organization of the Fund. Shaffer Asset Management, Inc. has incurred total costs in connection with the organization of the Fund of approximately $463,000 through September 30, 2002. The General Partner is disputing fees of approximately $183,000 for legal services provided for the organizational and offering costs of the Fund. The General Partner does not believe this dispute has a material effect on the Fund. The General Partner is also responsible for Fund operating expenses, (excluding sales charges, syndication fees, continuing service fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) in excess of 0.5% of the average monthly net asset value of the Fund. The Fund is only liable for payment of operating expenses on a monthly basis as calculated based on the limitations stated above. If the Fund terminates prior to completion of payment of the calculated amounts to Shaffer Asset, Shaffer Asset will not be entitled to any additional payments, and the Fund will have no further obligation to Shaffer Asset. Shaffer Asset has charged the Fund $3,641 for operating expenses through September 30, 2002. F) REGULATION The Fund's operations are regulated by the provisions of the Commodity Exchange Act, the regulations of the Commodity Futures Trading Commission, and the rules of the National Futures Association. The Fund is subject to regulatory requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. As a commodity investment pool, the Fund is subject to the regulations of the Commodity Futures Trading Commission, an agency of the United States ("US") Government which regulates most aspects of the commodity futures industry; the rules of the National Futures Association, an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Fund executes transactions. Additionally, the Fund is subject to the requirements of Futures Commission Merchants or Brokers through which the Fund trades. In addition to such registration requirements, the CFTC and certain commodity exchanges have established limits on the maximum net long and net short positions which any person, including the Fund, may hold or control in particular commodities. Most exchanges also limit the maximum changes in futures contract prices that may occur during a single trading day. G) ALLOCATION OF INCOME The General Partner and each Limited Partner share in the profits and losses of the partnership in proportion to their respective interests in the partnership, except for the incentive allocation to the General Partner. A Limited Partner's loss is limited to the amount of his or her investment. H) NET ASSET VALUE PER UNIT Net Asset Value is calculated by dividing the Net Assets of the Fund at the end of the reporting period by the number of Fund units outstanding at the end of the reporting period. The Net Assets of the Fund is equal to: total assets, less total liabilities, of the Fund determined on the basis of generally accepted accounting principles. Net Assets shall include any unrealized profits or losses on open positions, and any fee or expense including net asset fees accruing to the Fund. NOTE 2. GENERAL PARTNER AND COMMODITY TRADING ADVISOR The General Partner of the Fund is Shaffer Asset Management, Inc., which conducts and manages the business of the Fund. The General Partner is also the commodity trading advisor of the Fund. -58- The Fund pays for management and servicing at an annual rate of 5% of monthly net asset value of the Fund, calculated and payable monthly. Such fees are allocated between the General Partner and the selling agents as follows: 3.75% to the General Partner and 1.25% to the selling agents during the first 12 months after an investment is made and 1% to the General Partner and 4% to the selling agents thereafter for various services performed on an ongoing basis. New investors are charged a 5% sales commission of which the General Partner receives approximately 20%. The General Partner shares in all Fund income and losses to the extent of its interest in the Fund. The General Partner also receives on a quarterly basis an incentive allocation from the Fund equivalent to 15% per year of any increase in the cumulative appreciation of the net asset value of the Fund, as defined in the Partnership Agreement. The General Partner has agreed to maintain a minimum net worth of not less than the greater of $50,000 or 5% of contributions made to the Fund as further defined in the Partnership Agreement. The General Partner is also required to maintain a minimum capital contribution to the Fund of the greater of $25,000 or 1% of contributions made to the Fund as further defined in the Partnership Agreement. The General Partner has agreed to pay all expenses associated with the organization of the Fund and the initial offering of the Units of the limited and general partnership interest in the Fund. The General Partner is responsible for Fund operating expenses, (excluding continuing service fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) in excess of 0.5% of the average monthly net asset value of the Fund. NOTE 3. DEPOSITS WITH BROKER AND FINANCIAL INSTITUTIONS The Fund deposits assets with a broker subject to Commodity Futures Trading Commission regulations and various exchange and broker requirements and other financial institutions. The Fund satisfies margin requirements by depositing U.S. Treasury bills and cash with such broker and other financial institutions. The Fund earns interest income on these assets. NOTE 4. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS Investments in the Fund are made by subscription agreement, subject to acceptance by Shaffer Asset. As of September 30, 2002 funds received from prospective limited partners whom Shaffer Asset has not yet admitted to the Fund were zero. The Fund is not required to make distributions, but a limited partner may request and receive redemption of its units owned, subject to restrictions in the Partnership Agreement. Early redemption fees charged to the limited partner apply through the first twelve months following purchase ranging from 1% to 4% based on length of investment. After twelve months following purchase of a Unit, no redemption fees will be charged. These fees are payable to the General Partner. Shaffer Asset has received $1,458 in redemption fees for the period ended June 30, 2002. NOTE 5. TRADING ACTIVITIES AND RELATED RISKS The Fund engages in the speculative trading of US commodity futures contracts, which are derivative financial instruments. The Fund is exposed to both market risk, the risk arising from changes in the market value of the contracts, and credit risk, the risk of failure by another party to perform. Purchase and sale of futures contracts requires margin deposits with the Commodity Broker. In the event of a broker's insolvency, it is possible that the recovered amount of margin deposits could be less than the total property deposited. The amount of required margin and good faith deposits with the broker usually ranges from 10% to 40% of net asset value. The market value of securities held to satisfy such requirements at September 30, 2002 was $199,196, which equals 17.42% of Net Asset Value. The unrealized gain (loss) on open futures contracts at September 30, 2002 is comprised of the following: Gross unrealized gains $ 48,186 Gross unrealized losses (975) -------- Net unrealized gain $ 47,211 ======== -59- Open contracts generally mature within three months: as of September 30, 2002 the latest maturity date for open futures contracts is December 2002. However the Fund intends to close all contracts prior to maturity. Shaffer Asset has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that they will, in fact, succeed in doing so. Shaffer Asset's basic market risk control procedures consist of continuously monitoring open positions, diversification of the portfolio, protective stop orders and maintenance of a margin-to-equity ratio that rarely exceeds 30%. Shaffer Asset seeks to minimize credit risk primarily by depositing and maintaining the Fund's assets at financial institutions and brokers, which Shaffer Asset believes to be creditworthy. The limited partners bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received. NOTE 6. INTERIM FINANCIAL STATEMENTS In the opinion of management, the unaudited interim financial statements reflect all adjustments, which were of a normal and recurring nature, necessary for a fair presentation of financial position as of September 30, 2002, and the results of operations for the three and nine months ending September 30, 2002 and 2001. NOTE 7. FINANCIAL HIGHLIGHTS The following information contains per unit operating performance data for a unit outstanding during the entire three and nine months ended September 30, 2002, and other supplemental financial data. This information has been derived from information presented in the financial statements. -60-
Three Months Nine Months Ended Ended September 30, 2002 September 30, 2002 (Unaudited) (Unaudited) ------------------------------------- Per Unit Performance (for a unit outstanding from the initial trading period February 14, 2002) Initial Offering Value Per Unit at February 14, 2002 and Net Asset Value per unit at June 30, 2002 $ 1,061.55 $ 1,000.00 Sales charges and syndication fees -- 50.00 ------------- ----------- Net asset value 1,061.55 950.00 Income (loss) from operations: Trading gains (losses) * (15.61) 142.89 Investment income 4.03 9.73 Operating expenses ** (22.30) (74.95) ------------- ----------- Total income from operations (33.88) 77.67 ------------- ----------- Net Asset Value Per Unit at September 30, 2002 $ 1,027.67 $ 1,027.67 ============= =========== Total Return Year to Date *** -3.19% 8.18% ============= =========== SUPPLEMENTAL DATA Ratio to average net assets: Average net assets 1,118,985 572,033 Operating expenses **, + 8.72% 18.44% Investment income + 1.60% 2.42% * Excludes brokerage commissions and other trading fees paid directly to the broker. ** Includes brokerage commissions and other trading fees paid directly to the broker and incentive fees paid to the general partner. *** Not annualized + Annualized
-61- INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF SHAFFER ASSET MANAGEMENT, INC. We have audited the accompanying balance sheets of Shaffer Asset Management, Inc. as of December 31, 2001 and 2000. These balance sheets are the responsibility of the Company's management. Our responsibility is to express an opinion on these balance sheets based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheets are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheets. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the balance sheets referred to above present fairly, in all material respects, the financial position of Shaffer Asset Management, Inc. at December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. The accompanying balance sheet has been revised to reflect certain transactions as described in footnote 6. /s/ Anchin, Block & Anchin LLP New York, New York February 18, 2002 -62-
SHAFFER ASSET MANAGEMENT, INC. BALANCE SHEETS UNAUDITED AUDITED ----------- ------------------------------ SEPTEMBER 30, DECEMBER 31, ------------------------------ 2002 2001 2000 ---- ---- ---- ASSETS CURRENT ASSETS: Cash .................................................... $ 615 $ 73,529 $ 139 Demand note receivable .................................. 273,000 __ __ Fees receivable ......................................... 5,495 -- 15,985 ----------- ----------- ----------- Total Current Assets ....................................... 279,110 73,529 16,124 ----------- ----------- ----------- FIXED ASSETS: Equipment and software .................................. 15,811 11,686 9,392 Less: Accumulated depreciation and amortization ......... (7,806) (6,051) (3,023) ----------- ----------- ----------- Total Fixed Assets ......................................... 8,005 5,635 6,369 ----------- ----------- ----------- OTHER ASSETS: Deferred offering costs (net of amortization of $ 289,548 __ __ __ as of September 30, 2002) ........................... 173,729 446,160 220,774 Due from stockholder .................................... -- -- 66,781 Investment in Shaffer Diversified Fund, LP. ............. 51,353 -- -- Security deposit ........................................ 10,640 10,640 2,675 ----------- ----------- ----------- Total Other Assets ......................................... 235,722 456,800 290,230 ----------- ----------- ----------- TOTAL ASSETS ............................................... $ 522,837 $ 535,964 $ 312,723 =========== =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses ................... $ 317,379 $ 368,459 $ 212,089 Lines of credit payable ................................. 103,810 108,188 96,345 ----------- ----------- ----------- Total Current Liabilities .................................. 421,189 476,647 308,434 ----------- ----------- ----------- STOCKHOLDER'S EQUITY: Capital stock: Class A voting, no par, $2 stated value; 200 shares Authorized, 100 shares issued and outstanding in 2002 and 2001, and 50 in 2000 ...................... 200 200 100 Additional Paid-in Capital .............................. 1,308,886 1,183,187 -- Less: demand note receivable ........................... (727,000) (1,000,000) -- Retained earnings (deficit) ............................. (480,438) (124,070) 4,189 ----------- ----------- ----------- Total Stockholder's Equity ................................. 101,648 59,317 4,289 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 522,837 $ 535,964 $ 312,723 =========== =========== ===========
See the accompanying Notes to the Balance Sheets. -63- SHAFFER ASSET MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS The balance sheets are audited for the years ending December 31, 2001and 2000. Information presented subsequent to that date is unaudited. NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: DESCRIPTION OF BUSINESS: Shaffer Asset Management, Inc. (the "Company") earns fees on managed accounts as a Commodity Trading Advisor registered with and subject to the regulations of the Commodity Futures Trading Commission, an agency of the United States government, which regulates most aspects of the commodity futures industry. It is also subject to the rules of the National Futures Association, an industry self-regulatory organization. In addition the Company will receive additional fees for services performed as General Partner in a Commodity Fund (See Note 4). USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION: Performance fees are earned by achieving defined performance objectives. Performances fees are accrued when the conditions of the performance fee agreement are satisfied. FIXED ASSETS: Fixed assets are stated at cost. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets, which are five years for office equipment and three years for computer software. INCOME TAXES: The Company is taxed as an S corporation for federal and New York State tax purposes, whereby the Company's income is reported by the stockholder. Accordingly, no provision has been made for federal income taxes. The Company remains liable for New York State income taxes on S corporations. DEFERRED OFFERING COSTS: The Company has incurred costs related to the initial offering of units of a Partnership (see Note 4). These deferred offering costs are being amortized over a twelve-month period. Included in accounts payable and accrued expenses is approximately $248,00 at September 30, 2002 and $230,000 and $197,000 at December 31, 2001 and 2000 respectively, of accrued legal fees in connection with the offering. NOTE 2 -- RELATED PARTY TRANSACTIONS: The loan to the stockholder is non-interest bearing and is payable on demand. NOTE 3 -- LINES OF CREDIT PAYABLE: The Company has lines of credit from two financial institutions in the amount of $108,000 and $96,500, respectively. The lines of credit bear interest at rates ranging from 1% to 3.9% over the prime rate and are guaranteed by a stockholder. The average rate of interest was 7.5% for the period ended September 30, 2002 and 10.3% and 12.4% during the years ended December 31, 2001 and 2000, respectively. Management believes the fair value of the debt is equivalent to the recorded amount based on its short-term nature and the interest rates, which fluctuate with prime. -64- SHAFFER ASSET MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 - COMMITMENTS AND CONTINGENCIES: LEASES: The Company lease office space under a lease expiring March 31, 2006. Future minimum lease payments are approximately as follows: YEARS ENDING DECEMBER 31, 2002 $34,587 2003 35,548 2004 35,868 2005 35,868 2006 8,967 ----- Total $150,838 ======== OTHER The accompanying balance sheet reflects current liabilities in excess of current assets of approximately $400,000. The Company is disputing certain unpaid legal fees, included in accounts payable, in connection with the Partnership offering (note 5). Management is in the process of negotiating a settlement of the amounts, however there is no assurance of the ultimate outcome. In order to fund the working capital needs of the Company, the shareholders have agreed to make payments to the Company under a demand promissory note (note 5) as required. NOTE 5 -- AGREEMENT WITH SHAFFER DIVERSIFIED FUND, LP: The Company is the trading advisor and General Partner of the Shaffer Diversified Fund, LP, ("the Partnership or the Fund") a commodity investment pool. The Fund commenced trading February 14, 2002. The Company receives approximately 20% of the 5% sales commission charged to new investors and management fees at an annual rate of 3.75% of the monthly value of the investments during the first twelve months after an investment is made and 1% thereafter. The Company also receives on a quarterly basis a special incentive fee allocation from the Fund equivalent to 15% per year of any increase in the cumulative appreciation of the net asset value of the Fund, as defined in the Fund's Partnership agreement. Additionally, the Company is responsible for expenses of the Fund (excluding continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) in excess of 0.5% of the average monthly net assets of the Fund and expenses associated with the organization of the Fund and initial offering costs. As the General Partner of the Fund, the Company has entered into a net worth agreement with two officers/stockholders of the Company. The officers have agreed to contribute funds to the Company as capital amounts sufficient so that the Company will at all times have a net worth equal to not less than the greater of the five percent of the aggregate capital contributions made by the partners to the Fund or $50,000. The officers/stockholders have also agreed to provide the Company with sufficient capital to enable the Company to purchase and maintain units of interest in the Fund in an amount equal to not less than the greater of one percent of the aggregate capital contributions made by all partners to the Fund or $25,000. As of June 30, 2002, the Company believes it is in compliance with its net worth requirements. -65- The Company received a capital contribution of $1,000,000 from its stockholders in the form of a demand negotiable promissory note. No cash was transferred, nor is it known when and if any will transferred in the future. As such, the demand note is shown as a reduction of stockholders' equity. The note bears interest equivalent to the prime rate charged by JP Morgan Bank and is payable annually commencing one month from the date the demand is made at which time the interest begin to accrue. The Company requested from its stockholders payment of $273,000 under the demand promissory note. On October 4, 2002 the stockholders satisfied this obligation and made the required payment. Accordingly, this portion of the demand promissory note is shown as a current asset in the balance sheet as of September 30, 2002. NOTE 6 -- REVISIONS TO THE BALANCE SHEET The accompanying 2001 balance sheet has been revised to reflect the recording of additional 2001 legal costs associated with the Partnership offering of approximately $172,000 (note 4) and a capital contribution of $1,000,000 in the form of a demand promissory note (note 5) in 2001. -66- PART TWO STATEMENT OF ADDITIONAL INFORMATION THIS PROSPECTUS IS IN TWO PARTS. A DISCLOSURE DOCUMENT AND A STATEMENT OF ADDITIONAL INFORMATION. THESE PARTS ARE BOUND TOGETHER AND MAY NOT BE DISTRIBUTED SEPARATELY. DESCRIPTION OF COMMODITY TRADING GENERAL Commodity futures contracts are made on or through a commodity exchange and provide for future delivery of agricultural and industrial commodities, foreign currencies or financial instruments, or, in more recent instances, the cash equivalent thereof. Such contracts are uniform for each commodity and vary only with respect to price and delivery time. A commodity futures contract to accept delivery (buy) is referred to as a "long" contract; conversely, a contract to make delivery (sell) is referred to as a "short" contract. A long contract may be satisfied either by taking delivery of the commodity and paying the entire purchase price therefore or by offsetting the contractual obligation prior to delivery through the acquisition of a corresponding short contract on the same exchange. A short contract may be satisfied either by making delivery of the commodity (usually by tendering warehouse receipts, shipping certificates or similar documents of title) or by acquiring a corresponding long contract on the same exchange. Commodity exchanges provide a clearing mechanism to facilitate the matching of offsetting trades. Until a commodity futures contract is satisfied by delivery or offset, it is said to be an "open" position. Commodity futures contracts are but one category of organized commodity trading, as it presently exists in the United States. Two other categories of commodity transactions are "spot" contracts and "forward" contracts. Both of these are varieties of cash commodity transactions, as opposed to futures transactions, in that they relate to the purchase and sale of specific actual physical commodities. Whereas futures contracts are uniform except for price and delivery time, cash commodity contracts may differ from each other with respect to such terms as quantity, grade, mode of shipment, terms of payment, penalties, risk of loss and the like. Spot contracts are generally cash commodity contracts for the purchase and sale of a specific physical commodity for immediate delivery. Forward contracts are cash commodity contracts for the purchase and sale of a specific physical commodity for delivery at some future time under terms and conditions specifically negotiated by the parties. Cash commodity transactions may arise in conjunction with commodity futures transactions. For example, if the holder of a long contract satisfies it by taking delivery of the commodity, such holder is said to have a cash commodity position. This cash position, if it is not to be used or processed by the holder, may be sold through spot or forward contracts, or delivered in satisfaction of a commodity futures contract. Another type of commodity contract is the "commodity option" which gives the holder the right (but not the obligation) to buy or sell a specified futures contract or commodity at a future date for a specified price. The prices of commodities fluctuate rapidly and over wide ranges. Except for the effect of government price control and support programs, commodity prices are generally determined by the interaction of supply and demand. The market is subject to the many psychological factors working on each buyer and seller, as well as to crop conditions, deflation or inflation, strikes (especially in the transportation and commodity storage industries), world conditions, war or threats of war, interest rates, and other factors. Any fundamental prediction of commodity prices is necessarily subject to all of these factors, which can change daily if not hourly. Only by constant updating of accurate information as to these fundamental factors or by technical analysis can any reasonable forecasts be made for commodity prices, and, notwithstanding that current and correct information as to substantially all factors is known, prices still may not react as predicted. Prices of commodities are listed in most major daily newspapers and financial journals. The prices of financial instruments and foreign currencies are subject to the factors described above. Some of the other factors that affect financial instrument or foreign currency prices include a country's balance of payments (surplus or deficit), political stability, treaties, government policies and exchange controls, the inflation rate, and interest rates. There are two broad classifications of commodity traders: hedgers and speculators. Hedgers are persons or entities who market or process commodities and utilize the commodity markets for protection against the risk of price variation. For example, a seller or processor is at the risk of market price fluctuations between the time he contracts to sell or process and the time he must perform on the contract. In such cases, at the time of the contract, he will simultaneously enter into futures contracts to buy the necessary equivalent quantity of the commodity he needs or to sell the equivalent quantity of the -67- commodity he intends to market at some later date. To illustrate, a cattle feeder may enter into a futures contract to sell cattle, which can ultimately be satisfied by the delivery of his herd, thus relieving himself of exposure to price variations in either his raw material or ultimate market product. Similarly, a farmer may hedge against the price fluctuations between the day he plants his crop and the day it is ready for delivery. In these examples, the hedger may either make or take delivery in satisfaction of his futures contract, or else close the position prior to delivery and buy or sell the necessary equivalent amount of the physical commodity. In either case, the price of the commodity is established at the time the hedger initiates his futures position. Thus, the commodity markets enable the hedger to shift the risk of price fluctuations to the speculator. See "Mechanics of Commodity Futures Trading," below. A speculator is a person or entity that buys or sells in expectation of a rise or decline in the price of a commodity and assumes the market risk sought to be avoided by the hedger. For instance, the speculator may take the opposite side of a hedger's trade, as in the example above, by acquiring the opposite side of the futures contract sold by the cattle feeder. If the price rises, the speculator can close out his position at a profit, either by taking delivery of the cattle covered by his contract or, more usually, by offsetting his original position by taking an opposite position. If the price falls, the speculator can still liquidate his position, but at a loss. Because the speculator may take either a long or short position in the futures markets, it is possible for him to make profits or incur losses regardless of the direction of price trends. All trades made by the Fund will be for speculative rather than hedging purposes. See "Mechanics of Commodity Futures Trading" below. MECHANICS OF FUTURES TRADING The commodity futures contract is the basic instrument involved in futures trading. Upon entering into or acquiring such a contract, the trader becomes obligated to buy or sell a certain quantity of a specific commodity on a certain date. Thereafter, trading profits or losses result from movements in the price of the commodity underlying the futures contract. For example, if on April 1st a trader enters into a contract to buy for $5.00 a bushel of wheat for delivery in July and the price of July wheat subsequently rises to $7.50 per bushel, then a profit of $2.50 per bushel has been achieved. Conversely, if the price of July wheat falls to $2.50 per bushel, the investor will have lost $2.50 per bushel because he is obligated to pay $5.00 for something worth only half that price. When the trader places an order with a broker, the order is transmitted by the broker to the floor of a commodity futures exchange where the trade is consummated by floor brokers by means of "open outcry" and the details of the transaction are recorded. The individual trader does not appear on the exchange records as buyer or seller; the contract is, rather, executed in the name of the "clearing house member" through which the order has ultimately been placed and the exchange's clearing house itself becomes the opposite party to the contract. At the close of each trading day, cash settlements are made which reflect that day's price movements in all the commodities covered by outstanding futures contracts. The clearinghouse credits the account of the clearing member whose position shows a gain, and debits the account of the clearing member who suffered a loss. In practice, a commodity futures contract seldom results in the taking or making of delivery in accordance with its terms. Usually, the contract will be "offset" with a second futures contract that represents a position that is the opposite of the first. Using the same example given above, if a futures contract provides for the purchase of a bushel of July wheat for $5.00 and the price subsequently rises to $7.50 per bushel, the trader can close out his position and liquidate his profit by entering into or acquiring a contract to sell a bushel of July wheat for $7.50. MARGINS In commodity trading, "margins" are good faith deposits that must be deposited with a broker in order to initiate or maintain an open position in a commodity futures contract. When commodity futures contracts are traded, both buyer and seller are required to post margins with the brokers handling their trades as security for the performance of their buying and selling undertakings and to offset losses in their trades due to daily fluctuations in the markets. Minimum margins are set by the several exchanges and generally range from 4% to 20% of the value of the commodity underlying the contract. For example, wheat valued at $5.00 per bushel may have a margin set at 50 cents per bushel. A speculator with only $2,500 may thus enter into a contract for 5,000 bushels of wheat worth $25,000. A variation of 50 cents per bushel in price would then result in a loss of $2,500 (his entire margin) or a gain of $2,500 (a 100% profit on his margin). If delivery of a commodity is made in satisfaction of a futures contract the entire contract price is generally payable by the buyer. Brokerage firms carrying accounts for traders in commodity futures contracts may increase the amount of required margin as a matter of policy in order to afford further protection for themselves. It is presently contemplated that ADM Investor Services will require the Fund to make margin deposits of at least 100% of the minimum level for all commodity futures contracts. This requirement may be altered from time to time at the discretion of ADM Investor Services. -68- The customer's margin deposit is the "equity" in his account. A change in the market price of a commodity futures contract will increase or decrease the equity. If the equity decreases below the "maintenance margin" amount (generally 75% of the initial margin requirement), the broker may issue a margin call requiring the customer to increase the account's equity. Failure to honor such a margin call may result in the closing out of the open position. If at the time such open position is closed the account equity is negative, then the equities in the customer's open positions in excess of their required margins, as well as the customer's cash reserves, will be used to offset such debit balance. If such equities and reserves are not sufficient, the customer will be liable for the remaining unpaid balance. REGULATION Congress enacted the Commodity Exchange Act, as amended, to regulate trading in commodity futures contracts and other commodity interests, the exchanges on which they are traded, the individual brokers who are members of such exchanges, and commodity professionals and commodity brokerage houses that trade in these commodities. The CFTC is an independent agency that administers the CE Act and is authorized to promulgate rules thereunder. The CE Act is designed to promote the orderly and systematic marketing of commodities and futures contracts while preventing fraud, speculative excess and price manipulations, and makes unlawful any device, scheme or artifice to defraud a customer or participant in a commodity pool. It also prohibits any transaction, practice or course of business that operates as a fraud or deceit upon any current or prospective customer or participant. The CE Act further provides, among other things, that futures trading in commodities must be upon exchanges designated as "contract markets" by the CFTC. The CFTC has adopted regulations covering the designation of contract markets, the monitoring of commodity exchange rules, the establishing of position limits, the registration of brokers and brokerage houses, commodity trading advisors and commodity pool operators, the segregation of customers' funds, minimum financial requirements, record keeping and periodic audits of such registered brokerage houses and professionals. Under the CE Act, the CFTC is empowered, among other things, to (i) hear and adjudicate customer complaints against all individuals and firms registered under the CE Act (reparations), (ii) seek injunctions and restraining orders, (iii) issue orders to cease and desist, (iv) initiate disciplinary proceedings, (v) revoke or suspend registrations, and (vi) levy substantial fines. Shaffer Asset Management, Inc., the Fund's general partner and commodity trading advisor, is a "commodity pool operator" and a "commodity trading advisor" and ADM Investor Services, Inc. is a "futures commission merchant," as those terms are used in the CE Act and, as such, are registered with, and subject to regulation by, the CFTC. If the registration of Shaffer Asset Management as a commodity pool operator were to be suspended or terminated, the Fund would no longer be able to trade until a substitute general partner could be duly elected and registered. If the registration of Shaffer Asset Management as a commodity trading advisor was similarly suspended or revoked, Shaffer Asset Management would not be permitted to advise the Fund. Should the registration of ADM Investor Services as a futures commission merchant be suspended or revoked, the Fund would no longer be able to maintain its account with ADM Investor Services, and a new futures commission merchant would be retained by Shaffer Asset Management. The CE Act and the regulations promulgated thereunder make it unlawful for any commodity pool operator, commodity trading advisor, principal thereof or person who solicits therefore to represent or imply in any manner whatsoever that they have been sponsored, recommended or approved, or that their abilities or qualifications have in any respect been passed upon, by the CFTC, the Federal government, or any agency thereof. The CFTC registrations of Shaffer Asset Management and ADM Investor Services should not be taken by prospective investors as governmental endorsements of the registered entities. The CFTC has in effect a comprehensive scheme for the regulation of commodity pool operators and commodity trading advisors. As now in effect, the rules require commodity pool operators and commodity trading advisors to provide certain disclosures to new customers and to retain certain trading and other records, prohibit pool operators from commingling pool assets with those of the operators or its customers, and require pool operators to provide their customers with periodic account statements and an annual report. Upon request by the CFTC, the names and addresses of the Limited Partners in the Fund would be required to be furnished to the CFTC, along with copies of all transactions with, and reports and other communications to, the Limited Partners. -69- Commodity exchanges are given certain latitude in promulgating rules and regulations to control and regulate their members and clearing houses as well as the trading conducted on their floors. Examples of regulation by an exchange include the establishment of initial and maintenance margins, limits on price fluctuations, size of trading limits and contract specifications. The CFTC reviews such rules, except those relating to margins, and all such rules and regulations relating to the terms and conditions of contracts of sale or to other trading requirements must be approved by the CFTC. In order to prevent excessive speculation and attempted cornering of a market, the various exchanges and the CFTC have imposed speculative position limits on commodity futures transactions, and certain exchanges may have established limits referred to as "daily trading limits" on the maximum number of contracts which any person may trade on a particular trading day. Position limits are subject to certain exemptions, such as bona fide hedging transactions. All futures trades made by Shaffer Asset Management and its principals on behalf of their respective managed accounts, including trades for the Fund, will be aggregated for purposes of determining speculative position limits. Violation of the CE Act and the regulations thereunder subjects the violator to penalties under the CE Act, including revocation of registration, suspension of trading privileges, civil fines and imprisonment. In 1979, the staff of the SEC adopted the position that the trading of futures contracts with respect to financial instruments (other than United States Treasury Notes, United States Treasury Bills, United States Treasury Bonds, Government National Mortgage Association certificates and commercial paper) by a commodity pool such as the Fund would require such pool to register under the Investment Company Act of 1940, as amended, and its trading advisors to register under the Investment Advisors Act of 1940, as amended. Since that time, other financial instrument futures contracts, such as the stock index contract have begun trading. The Futures Trading Act of 1982 expressly granted jurisdiction to the CFTC over stock index contracts and, accordingly, the Fund may trade such contracts. Additionally, as a result of these statutory revisions and a June 1988 "no-action" letter issued by the staff of the SEC, the Fund is permitted to trade in futures contracts on financial instruments and in options on futures contracts without registration under the Investment Company Act of 1940 or the Investment Advisors Act of 1940. In the fall of 1981, the CFTC approved the application of the National Futures Association to become a "registered futures association" under Section 17 of the CE Act, and the NFA became operational in 1982. The NFA acts as a general "self-regulatory" body for the commodity industry, performing a role similar to that played by the NASD with respect to the securities industry. Significant regulatory responsibilities under the CE Act, particularly with respect to the activities of futures commission merchants and introducing brokers, was transferred from the CFTC to the NFA. Shaffer Asset Management/Advisor and ADM Investor Services are members of NFA. The Futures Trading Act of 1982 was signed into law in January 1983. It contains various amendments to the CE Act, including additional regulations for commodity pool operators, such as Shaffer Asset Management, an express, private right of action to bring suit in Federal courts for violations of the CE Act, and additional powers to the NFA to carry out its responsibilities as a self-regulatory organization. SUPPLEMENTAL PAST PERFORMANCE OF THE ADVISOR Table A below sets forth the unaudited composite trading results of all accounts managed by Shaffer Asset Management from March 1999 to August 31, 2002. The number of accounts managed by the Advisor totaled 1, 11, 17, 15 and 14, at March 31, 1999, at December 31, 1999, at December 31, 2000, at December 31, 2001 and at August 31, 2002, respectively. Through August 31, 2002, 7 of such accounts showed net gains and 7 showed net losses. As of August 31, 2002, 6 accounts closed profitability and 8 accounts closed with a loss. Table B below presents a comparison of the actual brokerage commissions and advisory fees charged to the accounts whose performance is set forth in Table A to the "pro forma" amounts of such charges which would have been imposed on these accounts if they had been charged the commissions, fees and allocations proposed to be charged to the Fund. The bases upon which the pro forma amounts were computed are discussed in the notes to Table B. -70- Applicable CFTC regulations require disclosure of the "rate of return" for each month of all accounts managed by Shaffer Asset Management or its principal(s). The method of calculation mandated by the CFTC is necessarily subject to potential distortions due to the fact that such method does not account for additions and withdrawals that may occur during the month for which the calculation is made. It should be noted that there are other methods of calculating rate of return and, because of the differences among such methods, the percentage results may vary. The rates of return indicated should not be taken as representative of any rate actually earned by any of the accounts included in Tables A or B or as being indicative of any return the Fund may earn in the future. The information included in Tables A and B below has not been audited but, in the opinion of Shaffer Asset Management, such information, other than the pro forma results, fairly presents the performance of the accounts managed by Shaffer Asset Management for the periods shown. The results set forth in Table A below are not indicative of the results that may be achieved by Shaffer Asset Management since past results are not determinative of future results. No representation is being made that the Fund will or is likely to achieve profits similar to those shown. The composite results set forth in Table A are based upon individual accounts and commodity pool accounts managed by Shaffer Asset Management during the periods shown. Table A does not reflect the actual performance of any one account. Accordingly, investors in specific accounts included in the composite figures may have had more or less favorable results than Table A indicates. All accounts advised by Shaffer Asset Management do not in all instances, have parallel performance due to different times of market entry and varying amounts of capital. For example, larger account size may have effects on particular trading decisions, such as the relative size of positions taken, degree of diversification and particular commodity interests traded. In addition, the performance of each account included in the composite figures has varied depending upon the size of the investment, the date the account started trading and the length of time the account was open. Such results are presented on a composite basis rather than account-by-account, and each account's experience may differ from the composite figures shown. The fees and brokerage commissions charged to the Fund may differ from the fees and brokerage commissions actually charged to these accounts, and the commission rate charged to the Fund may also change in the future. In addition, because Shaffer Asset Management has modified its trading methods in the past and will continue to modify its trading methods in the future, the results shown in Table A do not necessarily reflect the trading methods which will be used by Shaffer Asset Management on behalf of the Fund. It should also be noted that the aggregate value of the Fund's account will constitute a significant increase in the assets under Shaffer Asset Management's control if all or a substantial number of the Units being offered are sold. Apart from the effects of a large account size on particular trading decisions, such as the time of entry of orders, the relative size of positions taken, degree of diversification and particular commodities traded, the size of the Fund's assets may affect generally the design and execution of Shaffer Asset Management's trading methods. Past results are no guarantee of future results, and no representation is made that the Fund will, or is likely to, achieve results similar to those shown. THE DATA SET FORTH BELOW IS NOT INDICATIVE OF AND HAS NO BEARING ON ANY RESULTS WHICH MAY BE ATTAINED BY THE FUND OR SHAFFER ASSET MANAGEMENT IN THE FUTURE. SHAFFER ASSET MANAGEMENT'S SYSTEM HAS EVOLVED OVER THE YEARS BASED ON ACCUMULATED EXPERIENCE AND FURTHER TESTING OF DATA. AN ACCOUNT TRADED PURSUANT TO SHAFFER ASSET MANAGEMENT'S CURRENT TRADING SYSTEM WOULD NOT HAVE EXPERIENCED THE SAME RESULTS REFLECTED IN THE TABLE DUE TO DIFFERENCES IN BROKERAGE COMMISSIONS AND MANAGEMENT AND INCENTIVE FEES AND CHANGES IN SHAFFER ASSET MANAGEMENT'S TRADING SYSTEM, INCLUDING THE SIZE OF POSITIONS TAKEN IN RELATION TO ACCOUNT SIZE AND THE DEGREE OF DIVERSIFICATION IN TERMS OF THE NUMBER OF COMMODITY INTERESTS TRADED AT A PARTICULAR TIME AND DIFFERENCES IN COMMODITY INTERESTS TRADED. -71-
TABLE A COMPOSITE PERFORMANCE RECORD OF ACCOUNTS MANAGED BY SHAFFER ASSET MANAGEMENT, INC. BASED UPON FULLY FUNDED CLIENT ACCOUNTS (UNAUDITED) --------- ---------- ---------- ---------- ------------ --------- ------------- Gross Actual Nominal Realized Beginning Beginning Additions Withdrawals Profit Brokerage Equity Equity Nominal Nominal (Loss) Commissions (1) (1a) (2) (3) (4) (5) --------- ---------- ---------- ---------- ------------ --------- ------------- 1999 --------- --------- Mar 0 0 50,000 0 (457) 687 --------- Apr 55,156 55,156 100,000 0 3,539 818 --------- May 174,969 174.969 50,096 0 20,170 2,531 --------- Jun 226,970 226,970 300,000 0 4,148 (31,771) --------- Jul 525,992 525,992 0 0 80,573 4,829 --------- Aug 586,935 586,935 150,176 0 (7,240) 5,670 --------- Sep 658,816 658,816 100,000 0 (141,163) 6,939 --------- Oct 929,563 929,563 0 0 237,117 7,754 --------- Nov 828,285 828,285 100,360 0 33,138 10,200 --------- Dec 1,095,616 1,095,616 160,000 0 (38,950) 10,173 --------- --------- 2000 --------- Jan 1,228,789 1,228,789 69,315 0 43,202 6,456 --------- Feb 1,372,714 1,372,714 90,000 58,094 109,649 6,059 --------- Mar 1,454,282 1,454,282 200,000 0 31,032 10,674 --------- Apr 1,549,373 1,549,373 120,000 14,651 (47,630) 6,703 --------- May 1,728,073 1,728,073 450,000 0 111,704 12,350 --------- Jun 2,157,382 2,257,382 0 0 72,829 9,201 --------- Jul 2,256,213 2,356,213 0 0 (27,036) 4,989 --------- Aug 2,196,941 2,296,941 167,451 0 211,841 14,228 --------- Sep 2,577,964 2,677,964 0 0 66,394 11,338 --------- Oct 2,495,948 2,595,948 0 102,732 (414,029) 11,769 --------- Nov 2,033,175 2,133,175 0 50,716 (43,911) 9,425 --------- Dec 1,952,942 2,052,942 75,000 0 239,837 9,908 --------- ----------- -------- ----------- ------------ --------- ---------- ------------ --------- ---------- ------- Net Change in Realized Unrealized Change in Trading Monthly Profit Interest Profit Accrued Advisor's Other Net Ending Rate of (Loss) Income (Loss) Commission Fees Expenses Performance Equity Return Index (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) ----------- -------- ----------- ------------ --------- ---------- ------------ --------- ---------- ------- 1,000 (1,144) 0 7,859 (269) 1,289 0 5,156 55,156 10.31% 1,103 2,720 138 23,011 (1,139) 4,918 0 19,812 174,969 12.77% 1,244 17,639 317 (15,741) 86 396 0 1,904 226,970 0.85% 1,255 (35,919) 696 35,020 (383) 391 0 (977) 525,992 (0.19)% 1,252 75,743 1,515 (2,308) 38 14,047 0 60,942 586,935 11.59% 1,397 (12,910) 1,692 (77,523) (1,756) (12,202) 0 (78,295) 658,816 (10.62)% 1,249 (148,102) 1,833 352,312 (862) 34,433 0 170,747 929,563 22.50% 1,530 229,363 2,511 (336,406) 3,252 0 0 (101,278) 828,285 (10.90)% 1,363 22,937 2,195 161,278 (4,193) 15,246 0 166,971 1,095,616 19.21% 1,625 (49,124) 2,857 11,661 605 (7,173) 0 (28,826) 1,228,789 (2.41)% 1,586 (16) 1999 COMPOUNDED RATE OF RETURN 58.59% 36,745 3,000 52,298 221 17,655 0 74,610 1,372,714 5.92% 1,680 103,590 4,569 (47,633) 563 11,428 0 49,661 1,454,282 3.54% 1,739 20,358 5,150 (151,837) 50 (21,368) 0 (104,908) 1,549,373 (6.47)% 1,627 (54,334) 5,436 136,061 (1,373) 12,437 0 73,351 1,728,073 4.45% 1,699 99,353 6,908 (10,093) 595 17,454 0 79,309 2,257,382 3.21% 1,754 63,628 7,122 49,488 494 21,903 0 98,830 2,356,213 4.30% 1,829 (32,025) 7,503 (34,379) (371) 0 0 (59,272) 2,296,941 (2.64)% 1,781 197,612 7,980 41,652 1,157 34,832 0 213,571 2,677,964 8.64% 1,935 55,055 10,792 (171,810) 2,387 (21,558) 0 (82,015) 2,595,948 (2.97)% 1,877 (425,798) 8,932 59,380 (2,554) 0 0 (360,040) 2,133,175 (14.43)% 1,606 (53,337) 7,722 17,912 (1,813) 0 0 (29,516) 2,052,942 (0.98)% 1,591 229,929 6,314 231,069 690 15,984 0 452,018 2,579,961 22.10% 1,942 (16) 2000 COMPOUNDED RATE OF RETURN 22.46% ----------- -------- ----------- ------------ --------- ---------- ----------- ---------- ---------- -------
The accompanying Notes are an integral part of this Performance Record. Past results are not necessarily indicative of future results. -72-
TABLE A CONTINUED --------- ---------- ---------- ---------- ------------ --------- ------------- ----------- -------- ----------- Gross Net Change in Actual Nominal Realized Realized Unrealized Beginning Beginning Additions Withdrawals Profit Brokerage Profit Interest Profit Equity Equity Nominal Nominal (Loss) Commissions (Loss) Income (Loss) (1) (1a) (2) (3) (4) (5) (6) (7) (8) --------- ---------- ---------- ---------- ------------ --------- ------------- ----------- -------- ----------- 2001 --------- ========= Jan 2,479,961 2,579,961 0 149,418 330,727 10,786 319,940 3,857 (313,573) ========= Feb 2,336,061 2,436,061 100,000 0 47,079 16,839 30,239 7,194 (3,080) --------- Mar 2,466,458 2,566,458 98,002 0 (37,259) 18,201 (55,461) 5,701 245,288 --------- Apr 2,718,515 2,818,515 75,000 44,280 59,490 20,424 39,065 6,323 7,637 --------- May 2,794,049 2,894,049 0 0 (281,088) 33,847 (314,935) 5,245 (126,542) --------- Jun 2,369,024 2,469,024 249,999 98,541 27,413 34,062 (6,648) 5,272 145,419 --------- Jul 2,579,025 2,759,025 10,000 52,097 (216,638) 18,639 (235,277) 4,377 (132,335) --------- Aug 2,173,014 2,353,014 0 54,419 78,472 26,642 51,829 4,541 (118,899) --------- Sep 2,065,521 2,245,521 97,500 48,854 (107,543) 7,694 (115,238) 4,090 184,089 --------- Oct 2,181,176 2,361,176 0 0 168,738 7,556 161,181 3,156 58,105 --------- Nov 2,398,896 2,578,896 0 0 130,129 24,362 105,766 2,693 (339,421) --------- Dec 2,170,441 2,350,441 0 75,695 (279,600) 18,706 (298,307) 2,441 221,044 --------- --------- 2002 --------- Jan 2,022,658 2,202,658 12 181,875 (213,034) 18,161 (231,195) 4,424 89,042 --------- Feb 1,699,129 1,879,129 5,000 161,738 (100,147) 18,205 (118,352) 1,653 (227,292) --------- Mar 1,306,968 1,386,968 0 0 98,344 6,913 91,430 1,316 108,512 --------- Apr 1,507,120 1,587,120 0 0 (13,726) 8,012 (21,738) 1,570 5,230 --------- May 1,492,254 1,572,254 0 0 115,793 7,982 107,810 1,456 (41,795) --------- Jun 1,560,268 1,640,268 100,000 113,364 79,977 9,781 70,195 1,576 82,842 --------- Jul 1,600,658 1,780,658 100,000 0 136,734 8,692 128,042 1,480 (131,492) --------- Aug 1,701,080 1,881,080 0 0 (15,011) 8,482 (23,493) 1,709 (28,844) --------- Sep 1,651,177 1,831,177 0 331,643 (174,417) 11,370 (185,787) 1,574 76,436 --------- Oct --------- Nov --------- Dec --------- --------- ------------ --------- ---------- ------------ --------- ---------- ------- Change in Trading Monthly Accrued Advisor's Other Net Ending Rate of Commission Fees Expenses Performance Equity Return Index (9) (10) (11) (12) (13) (14) (15) ------------ --------- ---------- ------------ --------- ---------- ------- (4,033) 673 0 5,518 2,436,061 0.25% 1,947 (1,852) 2,102 0 30,397 2,566,458 1.09% 1,968 (4,459) 37,013 0 154,054 2,818,515 5.62% 2,079 3,027 11,239 0 44,814 2,894,049 1.81% 2,116 (31) (11,239) 0 (425,024) 2,469,024 (14.50)% 1,810 (426) 5,074 0 138,543 2,759,025 5.14% 1,903 (677) 0 0 (363,913) 2,353,014 (13.42)% 1,647 9,454 0 0 (53,073) 2,245,521 (2.28)% 1,610 (5,932) 0 0 67,009 2,361,176 2.86% 1,656 (2,814) 1,910 0 217,719 2,578,896 9.17% 1,808 742 (1,764) 0 (228,454) 2,350,441 (8.70)% 1,650 2,587 (146) 0 (72,087) 2,202,658 (3.12)% 1,599 (16) 2001 COMPOUNDED RATE OF RETURN (17.67)% (3,937) 0 0 (141,665) 1,879,129 (6.63)% 1,493 8.568 0 0 (335,422) 1,386,968 (17.47)% 1,232 (1,107) 0 0 200,151 1,587,120 14.28% 1,408 71 0 0 (14,865) 1,572,254 (0.92)% 1,395 542 0 0 68,014 1,640,268 4.36% 1,456 (860) 0 0 153,754 1,780,658 9.48% 1,594 2,391 0 0 421 1,881,080 0.02% 1,594 725 0 0 (49,902) 1,831,177 (2.80)% 1,550 (1,036) 0 0 (108,812) 1,390,722 (6.30)% 1,452 (16) 2002 COMPOUNDED RATE OF RETURN (9.18)% ------------ --------- ---------- ----------- ---------- ---------- -------
The accompanying Notes are an integral part of this Performance Record. Past results are not necessarily indicative of future results. -73- NOTES TO TABLE A A summary of the significant accounting policies, which have been followed in preparing the accompanying performance table, is set forth below. The performance represents the actual performance of accounts managed by the CTA, adjusted for management and incentive fees. The CTA uses a method of computing rate of return and performance disclosure, referred to as the "Fully-Funded Subset" method, pursuant to an Advisory published by the Commodity Futures Trading Commission. To qualify for use of the Fully-Funded Subset method, the Advisory requires that certain computations be made in order to arrive at the Fully-Funded Subset. And that the accounts for which the performance is so reported meet two tests which are designed to provide assurance that the Fully-Funded Subset method and the resultant rates of return are representative of the trading program. (1) BEGINNING EQUITY - ACTUAL equals the ending equity of actual client funds from the previous month, if applicable, and includes the sum of all cash, accrued interest income, accrued brokerage commissions and miscellaneous expenses and the current market value of all open commodity positions. (1A) BEGINNING EQUITY - NOMINAL represents amounts included in (1) above and also represents amounts which exceed the amount of actual funds traded. These amounts represent notional funds. (2) ADDITIONS - NOMINAL are the amounts, other than through sources of income, added during the period and are comprised of cash, committed and notional funds. (3) WITHDRAWALS - NOMINAL are the amounts, other than through sources of expense, withdrawn during the period and are comprised of cash, committed and notional funds. (4) GROSS REALIZED PROFIT (LOSS) is the gross realized gain (loss) on closed futures contracts for the month. It is not reduced by brokerage commissions and miscellaneous expenses. (5) BROKERAGE COMMISSIONS are recognized on an accrual basis and represent the commissions charged per round-turn by the futures commission merchant plus charges by certain exchanges and self regulatory organizations and other charges to the account. (6) NET REALIZED PROFIT (LOSS) represents the sum of Gross Realized Profit (Loss) less Brokerage Commissions. (See Notes (4) and (5).) (7) INTEREST INCOME is recognized on an accrual basis and represents interest earned on U.S. Government obligations, if any, held as margin in the trading account, and/or interest earned, if any, on balances at the futures commission merchant. (8) INCREASE (DECREASE) IN UNREALIZED PROFIT (LOSS) represents the total increase (decrease) from the preceding month in open commodity positions. Unrealized gains (losses) on futures contracts are calculated at the end of each month based on contract sizes and the differences between the commodity futures contract closing price and the price at which the contract was initially purchased or sold. (9) CHANGE IN ACCRUED COMMISSION represents the total increase (decrease) from open commodity positions brokerage commissions recognized on an accrual basis and represent the commissions charged per round-turn by the futures commission merchant plus charges by certain exchanges and self regulatory organizations. (10) TRADING ADVISOR'S FEE represents the amount of asset based management and performance based incentive fees, as defined in the agreement, charged to the account, and is recorded on an accrual basis. (11) OTHER EXPENSES represents other charges to the account. (12) NET PERFORMANCE equals net realized profit (loss) plus change in unrealized profit (loss) plus interest income less accrued brokerage commissions and accrued advisor's fees. (13) ENDING EQUITY equals the sum of beginning equity - nominal plus additions - nominal minus withdrawals - nominal plus net performance. (14) MONTHLY RATE OF RETURN for each period is computed by dividing net performance of the Fully-Funded Subset by the beginning equity of the Fully-Funded Subset, except in periods of significant additions or withdrawals to the accounts in the Fully-Funded Subset. In such instances, the Fully-Funded Subset is adjusted to exclude accounts with significant additions or withdrawals which would materially change the rate of return pursuant to the Fully-Funded Subset method. -74- The period rates of return for accounts excluded from the Fully-Funded Subset will often be different from the rate of return for the Fully-Funded Subset. Accounts not included in the Fully-Funded Subset for any particular period may include: accounts opened or closed during the period or accounts which are being phased into the program and, consequently, do not have a complete set of positions that the other accounts in the program have. The rates of return for these excluded accounts may be significantly higher or lower than the rate of return for the Fully-Funded Subset. (15) INDEX is included for informational purposes only and represents the estimated compounded monthly value of each hypothetical $1,000 investment assumed to have been made as of the beginning of the period presented. Index is calculated as (1 plus the Monthly Rate of Return) times the prior month's Index. Index may not be an accurate indicator of performance since it assumes a continuous investment with no subsequent additions, withdrawals or distributions of accumulated profits. (16) COMPOUNDED RATE OF RETURN is listed below the final Monthly Rate of Return for each calendar period presented. It represents the compounded rate of return for each year or portion of the year presented. It is computed by applying successively the respective Monthly Rate of Return for each month beginning with the first month of that calendar period. Compounded Rate of Return may not be an accurate indicator of performance since it assumes a continuous investment throughout the period. -75-
TABLE B PRO FORMA BROKERAGE COMMISSIONS AND ADVISORY FEES BROKERAGE COMMISSIONS MANAGEMENT AND INCENTIVE FEES/ALLOCATIONS ---------------------- ---------------------------------------- ACTUAL OVER ACTUAL OVER (UNDER) PRO (UNDER) PRO PERIOD ACTUAL (1) PRO FORMA (2) FORMA (3) ACTUAL (4) PRO FORMA (5) FORMA (6) ------------------------------ ---------- -------------- ---------- ---------- -------------- ---------- 1999 March.......................... 956 621 335 1,289 783 506 April.......................... 1,957 1,272 685 4,918 3,551 1,367 May............................ 2,445 1,589 856 396 697 (301) June........................... 4,531 2,945 1,586 391 (665) 1,056 July........................... 4,791 3,114 1,677 14,047 13,061 986 August......................... 7,426 4,827 2,599 (12,202) (12,782) 580 September...................... 7,801 5,071 2,730 34,433 33,026 1,407 October........................ 4,502 2,926 1,576 0 (12,779) 12,779 November....................... 14,393 9,355 5,038 15,246 30,061 (14,815) December....................... 9,568 6,219 3,349 (7,173) (2,617) (4,556) ------- -------- -------- -------- -------- -------- TOTAL.......................... 58,370 37,941 20,430 51,345 52,335 (990) ====== ====== ====== ====== ====== ======== 2000 January........................ 6,235 4,053 2,182 17,655 17,506 149 February....................... 5,496 3,572 1,924 11,428 12,827 (1,399) March.......................... 10,624 6,906 3,718 (21,368) (16,157) (5,211) April.......................... 8,076 5,249 2,827 12,437 31,800 (19,363) May............................ 11,755 7,641 4,114 17,454 17,832 (378) June........................... 8,707 5,660 3,047 21,903 25,123 (3,220) July........................... 5,360 3,484 1,876 0 (2,129) 2,129 August......................... 13,071 8,496 4,575 34,832 43,870 (9,038) September...................... 8,951 5,818 3,133 (21,558) (8,833) (12,725) October........................ 14,323 9,310 5,013 0 (47,549) 47,549 November....................... 11,238 7,305 3,933 0 1,779 (1,779) December....................... 9,218 5,992 3,226 15,984 77,379 (61,395) -------- -------- -------- -------- -------- -------- TOTAL.......................... 113,054 73,485 39,569 88,767 153,448 (64,681) ======= ====== ====== ====== ======= ======= 2001 January........................ 14,819 9,632 5,187 673 9,496 (8,823) February....................... 18,791 12,214 6,577 2,102 11,734 (9,632) March.......................... 22,660 14,729 7,931 37,316 37,342 (26) April.......................... 17,397 11,308 6,089 11,239 16,100 (4,861) May............................ 33,878 22,021 11,857 (11,239) (58,342) 47,103 June........................... 34,488 22,417 12,071 5,074 28,360 (23,286) July........................... 19,316 12,555 6,761 0 9,403 (9,403) August......................... 17,188 11,172 6,016 0 8,911 (8,911) September...................... 13,626 8,857 4,769 0 9,359 (9,359) October........................ 10,370 6,741 3,630 0 10,062 (10,062) November....................... 23,620 15,353 8,267 0 9,094 (9,094) December....................... 16,119 10,477 5,642 0 8,769 (8,769) -------- -------- -------- -------- -------- -------- TOTAL.......................... 242,272 157,477 84,795 44,862 169,688 (124,826) ======= ======= ====== ====== ======= ======== 2002 January........................ 22,098 14,364 7,734 0 7,867 (7,867) February....................... 9,637 6,264 3,373 0 5,689 (5,689) March.......................... 8,020 5,213 2,807 0 5,843 (5,843) April.......................... 7,942 5,162 2,780 0 5,767 (5,767) May............................ 7,440 4,836 2,604 0 6,035 (6,035) June........................... 10,641 6,917 3,724 0 6,667 (6,667) July........................... 6,301 4,096 2,205 0 6,960 (6,960) August......................... 7,757 5,042 2,715 0 6,731 (6,731) September...................... 12,406 8,064 4,342 0 6,272 (6,272) October........................ 0 0 0 0 0 0 November....................... 0 0 0 0 0 0 December....................... 0 0 0 0 0 0 -------- -------- -------- -------- -------- -------- TOTAL.......................... 92,241 59,957 32,284 0 58,229 (58,229) -------- -------- -------- -------- -------- --------
-76- NOTES TO TABLE B (1) "Brokerage Commissions (Actual)" represents the actual brokerage commissions charged to the accounts included in Table A. (2) "Brokerage Commissions (Pro Forma") represents brokerage commissions which would have been paid each month if the rates that will initially be charged to the Fund (see "Commodity Brokerage Arrangements") had actually been charged to the accounts included in Table A. (3) "Brokerage Commissions (Actual Over (Under) Pro Forma)" represents the amounts by which actual brokerage commissions after greater (less) than the pro forma. When these amounts are positive, the pro forma brokerage commissions are less than the actual and thus favorable in comparison with the corresponding amount paid by the accounts included in Table A. (4) "Management and Incentive Fees/Allocations (Actual)" represents the actual management and incentive fees paid by the accounts included in Table A. (5) "Management and Incentive Fees/Allocations (Pro Forma)" represents the total management fees and incentive allocations which would have been payable and allocable by the accounts if they had been charged the advisory fees which will be applicable to the Fund. Pro forma management fees are equal to 1/12 of 3.75% of the Net Asset Value per Unit of the Fund's asset under management at month's end with respect to Units purchased within the prior 12-month period and 1/12 of 1% of the Net Asset Value per Unit of the Fund's assets under management at month's end with respect to Units purchased more than twelve months prior thereto, and pro forma incentive allocations are equal to 15% of New Trading Profits. "Brokerage Commissions (Pro Forma)" were not taken into account in determining "Pro Forma Advisory Fees." (6) "Management and Incentive Fees/Allocations (Actual Over (Under) Pro Forma)" represents the amount by which actual advisory fees are greater (less) than the pro forma. When these amounts are positive, the pro forma advisory fees are less than the actual and thus favorable in comparison to the corresponding amounts paid by the accounts included in Table A. -77- APPENDIX GLOSSARY AND DEFINITIONS OF COMMODITY FUTURES TRADING The following glossary may assist the prospective investor in understanding the terms used in the accompanying prospectus of Shaffer Diversified Fund, LP and this statement of additional information: AFFILIATE. See "Fees, Compensation and Expenses-- Certain Definitions" in the accompanying prospectus. CAPITAL CONTRIBUTION. The payment by Shaffer Asset Management, Inc., the Fund's general partner and initial commodity trading advisor or a limited partner of the Fund of the purchase price for units of general partnership interest or units of limited partnership interest in the Fund (the "Units"), respectively. CLEARING BROKER. Certain futures commission merchants and all introducing brokers may not be members of the various organized commodity exchanges, or in the case of futures commission merchants who are members, they may choose not to clear their own trades and are, therefore, not members of the exchange's related clearing house. Such futures commission merchants and introducing brokers use a member firm for clearing and other administrative services. The firm providing this service is known as a "clearing broker" and the firm using this service is known as a "correspondent. " The services usually performed include the clearance and settlement of transactions, ordering executions on the floor and various back-office type functions. CLEARING HOUSE. The agency, associated with a commodity exchange, through which futures contracts are offset or fulfilled and financial settlements are made. COMMISSION. The fee charged by a broker for executing a trade in a commodity trading account of a customer. ADM Investor Services, Inc., the Fund's initial commodity broker, will (as is the industry custom) charge the Fund commissions on a "round-turn" basis (i.e., only upon the closing of an open position). However, for purposes of calculating the Net Asset Value of the Fund, commodity brokerage commissions on open positions will be subtracted from any unrealized profits or added to any unrealized losses on such positions. COMMODITY. The term "commodity" refers to goods, wares, merchandise, produce, and in general everything that is bought and sold in commerce, including financial instruments and currencies. Out of this large class, certain commodities (including the aforesaid "financial" commodities), because of their wide distribution, universal acceptance and marketability in commercial channels, have become the subjects of trading on various national and international exchanges located in principal marketing and commercial areas. Traded commodities include: grains such as wheat corn, oats and soybean products (meal and oil); foods such as livestock and meat, poultry and poultry products, frozen concentrated orange juice, potatoes, sugar, cocoa and coffee; fibers such as cotton, lumber and plywood; metals such as copper, silver, gold, platinum, tin and zinc; financial instruments such as obligations issued by the Government National Mortgage Association (GNMA's), United States Treasury Bills and Treasury Bonds and corporate commercial paper; foreign currencies; such as British pounds, Canadian dollars, Deutche marks, EuroCurrency, Japanese yen and Swiss francs; contracts based on securities indices and groups; and energy supplies such as petroleum and petroleum products (heating oil). Those "physical" commodities that are traded are sold according to uniform, established grade standards, in convenient predetermined lots and quantities such as bushels, pounds, or bales, are fungible (admit of free substitution of one lot for another to satisfy a contract) and, with few exceptions, are storable over periods of time. See "Fees, Compensation and Expenses -- Certain Definitions" in the accompanying prospectus. COMMODITY FUTURES CONTRACT. See "Futures Contract," below. COMMODITY OPTION. See "Option," below. COMMODITY FUTURES TRADING COMMISSION (CFTC). An independent regulatory commission of the United States Government empowered to regulate commodity futures transactions and other commodity interest transactions under the Commodity Exchange Act, as amended. APP-1 COMMODITY POOL OPERATOR. The sponsor or administrator of a commodity pool such as the Fund. Shaffer Asset Management/Advisor is a CFTC-registered commodity pool operator. COMMODITY TRADING ADVISOR. One who analyzes or makes recommendations with respect to commodity values and commodity trading or manages commodity trading accounts for others. The General Partner/Advisor is a CFTC-registered commodity trading advisor. CONTRACT MARKET. A commodity exchange or, more correctly, that specific market within a commodity exchange that is devoted to a particular commodity, upon which the trading of a particular futures contract or commodity option has, been authorized by the CFTC. DAILY PRICE FLUCTUATION LIMIT. The maximum permitted fluctuation, imposed by an exchange and approved by the CFTC, in the price of a commodity futures contract for a given commodity that can occur on a commodity exchange on a given day in relation to the previous day's settlement price, which maximum permitted fluctuation is subject to change by the exchange from time to time. DAILY TRADING LIMIT. The maximum number of futures contracts for a given commodity allowed to be purchased or sold on a given day by any one person or group of persons acting together. In the past, daily trading limits have been established by certain exchanges and may be established again in the future. DAY TRADING. The purchase and sale of the same futures contract during a single day. DELIVERY. The process of satisfying a commodity futures contract by transferring ownership of a specified quantity and grade of a cash commodity (i.e., the actual underlying commodity) to the purchaser thereof. FORWARD CONTRACT. A cash market transaction in which buyer and seller agree to the purchase and sale of a specific quantity of a commodity for delivery at some future time under such terms and conditions as the two may agree upon through negotiation. FULLY DISCLOSED BROKERAGE ARRANGEMENT. An arrangement between a retail broker or an introducing broker and its clearing broker pursuant to which the latter carries the individual accounts of the former's customers on its books. Under this arrangement, the retail broker or introducing broker receives a share of the income generated by the account. FUNDAMENTAL ANALYSIS. Analyzing the price trends of commodities using the underlying factors of supply and demand. Among these are items such as weather, weather forecasts, price support programs, political developments, population, floods, drought, labor problems, the economy, acreage yields, substitutes, and so on. FUTURES CONTRACT. Traditionally, a contract providing for delivery or receipt at a future date of a specified amount and type of a traded commodity at a specified price and delivery point. A commodity futures contract should be distinguished from the actual physical commodity, which is termed a "cash commodity." "Stock index futures," however, are based upon the values of certain stock indices and are settled in cash rather than by delivery of an underlying commodity. FUTURES COMMISSION MERCHANT. A commodity broker. ADM Investor Services is a CFTC-registered futures commission merchant. HEDGING. Reducing or attempting to reduce exposure to changes in the market for a commodity through the establishment of an opposite position in the futures market from that held in the cash or "spot" market therefore. See "Description of Commodity Futures Trading -- General," below. INTRODUCING BROKER. Any person, except an individual who elects to be and is registered as an associated person of a futures commission merchant or introducing broker, engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market who does not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom. APP-2 LIMIT. See "Daily price fluctuation limit," above. LIMIT ORDER. A trading order which sets a limit on either price or time of execution or both. Limit orders (as contrasted with stop orders) do not become market orders (see below). LONG CONTRACT (POSITION). A commodity futures contract to buy a specified amount and grade of a commodity at a future date at a specified price (or the trading position arising therefrom). MARGIN. In commodity trading, "margin" refers to good faith deposits with a broker to assure fulfillment of a purchase or sale of a commodity futures contract. At present, margins generally range from 4% to 20% of the value of the commodity underlying the contract. "Maintenance" margin requirements are generally 75% of initial margin requirements. See `Description of Commodity Futures Trading -- Margins," below. MARGIN CALL. A demand for additional funds after the initial margin deposit required to maintain a customer's account in compliance with the "maintenance margin" requirements of a particular commodity exchange or of a commodity broker. See "Description of Commodity Futures Trading -- Margins," below. MARKET ORDER. An order to execute a trade at the prevailing price as soon as possible. NET ASSET VALUE AND NET ASSET VALUE PER UNIT. See "Fees, Compensation and Expenses -- Certain Definitions" in the accompanying prospectus. OPEN POSITION (OR TRADE). The contractual commitment arising from an outstanding long or short futures contract that has not been extinguished by an offsetting trade or by delivery. OPTION. A contract giving the holder the right, but not the obligation, to buy (a call) or sell (a put) a specified commodity futures contract or commodity at a future date for a specified price. POSITION LIMIT. The maximum number of commodity futures contracts in one commodity on a contract market that can be held or controlled at one time by one person or a group of persons acting together, as allowed by the CFTC or a commodity exchange. POSITION TRADING. Holding futures contracts for an extended period of time, as contrasted with "day trading," above. PYRAMIDING. The use of unrealized profits in an existing position to provide margin for the acquisition of additional commodity futures contracts in the same or a related commodity. ROUND-TURN. The acquisition and subsequent liquidation of a futures contract (i.e., open position). Commodity brokerage commissions are traditionally charged on a "round-turn" basis. SYNDICATION FEES/SELLING COMMISSIONS/SALES CHARGES. During the initial offering period, the Units will be offered at an initial offering price of $1,000 ($950 per Unit, plus an initial sales charge of $50 per Unit). Subsequent to the closing of the initial offering period, unsold Units, if any, may be offered and sold by the Fund at the then current Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. If at least 1,000 Units are sold and accepted by Shaffer Asset Management during the initial offering period, approximately 20% of all sales charges shall be paid to Shaffer Asset Management to reimburse Shaffer Asset Management to reimburse Shaffer Asset Management for the payment of the Fund's organizational and initial offering and the Fund's operating expenses that are payable by Shaffer Asset Management and approximately 80% of all sales charges shall be paid as syndication fees to Berthel Fisher & Company Financial Services, Inc.; and as selling commissions to certain other firms that are members of the NASD and certain foreign dealers and institutions which are not members of the NASD that are participating in the offering. Berthel Fisher & Company and the selected dealers may in turn pay a portion of such syndication fees and selling commissions to their respective employees who are NASD registered representatives for each Unit sold by them. The sales charge may be increased at any time and from time to time by Shaffer Asset Management upon sixty days' prior written notice to the Limited Partners. See "Fees, Compensation and Expenses -- Description of Fees, Compensation and Expenses -- Syndication Fees/Selling Commissions/Sales Charges" and "Plan of Distribution" in the accompanying prospectus. APP-3 SETTLEMENT PRICE. The daily price or value of each futures contract established by a commodity exchange's clearing house after the close of each day's trading, usually the closing price, on the basis of which "maintenance margin" requirements are set. See "Description of Commodity Futures Trading -- Margins," above. SHORT CONTRACT (POSITION). A commodity futures contract to sell a specified amount and grade of a commodity at a future date at a specified price (or the trading position arising therefrom). SPECULATING. In commodity trading, to trade other than for the purpose of hedging; to trade in hopes of profiting from favorable price changes. See "Description of Commodity Futures Trading-- General," below. SPOT CONTRACT. A cash market transaction in which buyer and seller agree to the purchase and sale of a specific commodity lot for immediate delivery. SPREAD. The taking of both long and short positions with respect to the same or related commodities but in different delivery months or on different exchanges. STOP ORDER. An order given to a broker to execute a trade in a commodity futures contract when the market price for the contract reaches the specified stop order price. Stop orders are utilized to protect gains or limit losses on open positions. Stop orders become market orders when the stop order price is reached. STRADDLE. Same as "Spread," above. TECHNICAL ANALYSIS. An approach to forecasting commodity prices based on the study of price movement itself without regard to underlying fundamental market factors. TRADING LIMIT. See "Daily trading limit," above. UNREALIZED PROFIT OR LOSS. The profit or loss which would be realized on an open position if it were closed out at the current settlement price. APP-4 EXHIBIT A SHAFFER DIVERSIFIED FUND, LP (A DELAWARE LIMITED PARTNERSHIP) SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement") made as of September 30, 2002, by and between SHAFFER ASSET MANAGEMENT, INC., a New York corporation having an address at 925 Westchester Avenue, White Plains, NY 10604 (the "General Partner / Advisor"), and DANIEL S. SHAFFER, an individual having an address c/o Shaffer Asset Management, Inc., 925 Westchester Avenue, White Plains, NY 10604 (the "Initial Limited Partner"), and those who hereafter execute this Agreement, whether in counterpart, by separate instrument, by attorney-in-fact or otherwise, with the consent of the General Partner, as limited partners (the "Limited Partners"; the General Partner and the Limited Partners collectively being referred to herein as the "Partners"). WITNESSETH : WHEREAS, the parties hereto have entered into an amended and restated agreement of limited partnership dated as of October 16, 2001 under the provisions of the Delaware Revised Uniform Limited Partnership Act, as amended and in effect on the date hereof (the "Act"), for the purpose of speculatively trading in commodity futures contracts and other commodity interests; the parties now wish to amend and restate such agreement. NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I ORGANIZATION 1.1 FORMATION AND NAME The parties hereto have formed a limited partnership under the name SHAFFER DIVERSIFIED FUND, LP (the "Partnership") under the provisions of the Act and do hereby continue the Partnership pursuant to the terms hereof. The General Partner has heretofore executed and filed with the Office of the Secretary of State of the State of Delaware a Certificate of Limited Partnership of the Partnership (the "Certificate of Limited Partnership") in accordance with the Act, and the General Partner shall execute, file, record and publish as appropriate all other certificates, amendments and documents as the General Partner deems necessary or advisable. Each Limited Partner hereby undertakes to furnish to the General Partner a power of attorney, which may be filed with the Certificate of Limited Partnership and/or this Agreement and any amendment thereto and/or hereto, and such additional information as is required to complete such documents, and to execute and cooperate in the filing, recording or publishing of such documents at the request of the General Partner. 1.2 BUSINESS The Partnership's business and purpose is to buy, sell, trade or otherwise acquire, hold and dispose of commodities, commodity futures contracts (including, without limitation, futures contracts on United States Treasury Bills and other financial instruments), commodity options, other commodity interests, and any other items which are presently or may hereafter become the subject of futures contract trading (hereinafter collectively referred to as "Futures Interests"), and other investments and to engage in any and all activities incidental or related thereto. The objective of the Partnership's business is to achieve appreciation of its assets through the speculative trading of Futures Interests. A-1 1.3 TERM The term of the Partnership commenced upon the execution and filing with the Office of the Secretary of State of the State of Delaware on August 29, 2000 of the Certificate of Limited Partnership and shall continue in existence until December 31, 2025 unless earlier terminated as provided in Section 5.1 hereof or by operation of law. 1.4 FISCAL YEAR; TAX MATTERS PARTNER The fiscal year of the Partnership for all purposes shall commence on January 1 and shall end on December 31 each year, unless the General Partner elects, with the approval of the Internal Revenue Service and the Commodity Futures Trading Commission (the "CFTC"), a different fiscal year. The tax matters partner for the Partnership shall be the General Partner. 1.5 PRINCIPAL OFFICE The Partnership's principal place of business shall be located at 925 Westchester Avenue, White Plains, NY 10604; additional or other places of business may be established at such other locations as may be determined, from time to time, by the General Partner. 1.6 POWER OF ATTORNEY Each Limited Partner, by the execution of this Agreement, whether in counterpart, by separate instrument, by attorney-in-fact or otherwise, does hereby irrevocably constitute and appoint the General Partner, with full power of substitution, his true and lawful attorney and agent, with full power and authority in his name, place and stead, to admit additional Limited Partners, to file, prosecute, defend, settle or compromise any and all actions at law or suits in equity for or on behalf of the Partnership with respect to any claim, demand or liability asserted or threatened by or against the Partnership, and to execute, acknowledge, deliver, file and record on each Limited Partner's behalf in the appropriate public offices (i) all certificates and other instruments (including, without limitation, the Certificate of Limited Partnership, all amendments thereto, all counterparts of this Agreement and all amendments hereto) which the General Partner deems necessary or appropriate to qualify or continue the Partnership as a limited partnership in the jurisdictions in which the Partnership may conduct business or which may be required to be filed by the Partnership or any of the Partners under the laws of any jurisdiction; (ii) all instruments which the General Partner deems appropriate to reflect a change in or modification of the Partnership in accordance with the terms of this Agreement; (iii) all conveyances and other instruments which the General Partner deems appropriate to reflect the termination and dissolution of the Partnership; (iv) certificates of assumed name; (v) the advisory agreement (the "Advisory Agreement") between the Partnership and Shaffer Asset Management, Inc., the Partnership's general partner and initial commodity trading advisor (the "Advisor"), requiring the payment of management fees and advisory allocations described in Section 2.3 hereof, the Prospectus and Statement of Additional Information (as defined in Section 3.1(a) of this Agreement) or such other advisory agreement(s) as the General Partner may deem, from time to time, necessary or desirable; and (vi) the customer agreement (the "Customer Agreement") between the Partnership and ADM Investor Services, Inc., the Partnership's initial commodity broker (the "Commodity Broker"), requiring the payment of the brokerage commissions described in the Prospectus and Statement of Additional Information or such other brokerage agreement(s) as the General Partner may deem, from time to time, necessary or desirable. The Power of Attorney granted herein shall be irrevocable and be deemed to be a power coupled with an interest and shall survive the incapacity or death of any Limited Partner. Each Limited Partner hereby agrees to be bound by any representation made by the General Partner and by any successor(s) thereto acting in good faith pursuant to such Power of Attorney, and each Limited Partner hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner and any successor(s) thereto taken in good faith under such Power of Attorney. In the event of any conflict between this Agreement and any instruments filed by such attorney pursuant to the Power of Attorney granted in this Section 1.6, this Agreement shall control. 1.7 PARTNERSHIP UNITS All partnership interests in the Partnership shall be evidenced by units and as used herein the term "Unit" is defined as an interest in the Partnership acquired upon the making of a capital contribution by either the General Partner or a Limited Partner. The General Partner's capital contribution shall be evidenced by Units of General Partnership Interest and a Limited Partner's capital contribution shall be evidenced by Units of Limited Partnership Interest. When used herein without qualification, the term "Units" shall include both Units of Limited Partnership Interest and Units of General Partnership Interest, PARI PASSU. A-2 1.8 EXPENSES; LIMITS; RESERVES (a) Except as otherwise set forth herein or in the Prospectus or Statement of Additional Information, the Partnership shall be obligated to pay all liabilities incurred by it, including without limitation Continuing Services Fees (as defined in Section 4.4 hereof); Management Fees (as defined in Section 4.4 hereof) and Incentive Allocations (as defined in Section 4.4 hereof); brokerage commissions; legal, accounting, auditing, printing, recording, filing and other periodic fees and expenses; and extraordinary expenses incurred by the Partnership; provided that the sum of the Continuing Services Fees and Management Fees paid by the partnership during any twelve month period shall not exceed 5.00% of the sum of the Net Asset Values of the Partnership assets under management as of the close of business on the last day (without reductions for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) during such twelve month period. Notwithstanding the foregoing, the General Partner shall reimburse the Partnership for all such expenses (except Continuing Services Fees, Management Fees, Incentive Allocations, brokerage commissions and extraordinary expenses incurred by the Partnership) to the extent that such expenses exceed, in a fiscal year, 0.5% of the average monthly Net Asset Value (as defined in Section 4.4 hereof) of the Partnership. In addition, the General Partner shall pay the organizational and initial offering expenses of the public offering and sale of the Units of Limited Partnership Interest described in Section 3.1(a) hereof, and no such expenses shall be deducted from the proceeds of such offering. For the purposes of this Agreement, organization and initial offering expenses shall include all costs paid or incurred by the Partnership or the General Partner in organizing the Partnership and offering the Units of Limited Partnership Interest, including bank and escrow agent charges, blue sky filing fees, filing fees payable upon formation and organization of the Partnership and legal, accounting and printing fees associated with the preparation, filing and printing of the Registration Statement (as defined in Section 3.1 hereof), the Prospectus and the Statement of Additional Information related to such offering. Indirect expenses of the General Partner, such as salaries, rent and other overhead expenses, shall not be liabilities of the Partnership. (b) Compensation to any party, including the General Partner (or any commodity trading advisor that may be retained in the future), shall not exceed the limitations imposed as of the date hereof by the North American Securities Administrators Association. In the event that such compensation exceeds such limitations, the General Partner shall promptly reimburse the Partnership for such excess. (c) Appropriate reserves shall be created, accrued and charged to the Partners' capital accounts for contingent liabilities (in accordance with generally accepted accounting principles), if any, as of the date of any such contingent liability becomes known to the General Partner. 1.9 PROHIBITIONS The Partnership shall not (a) engage in pyramiding, (b) commingle its assets with the assets of any other person, except as permitted by law, (c) make loans to the General Partner, any affiliate thereof or any other person or entity at any time for any reason, (d) pay per-trade compensation to the General Partner, any commodity trading advisor, any affiliate thereof or any other person or entity that receives any other form of compensation from the Partnership, (e) permit rebates or give-ups to be received by the General Partner or any affiliate thereof (nor shall the General Partner participate in any reciprocal business arrangements that would circumvent the foregoing or any other provision of this Agreement) or (f) borrow cash or other assets from the General Partner. ARTICLE II GENERAL PARTNER; ADMINISTRATION 2.1 MANAGEMENT Subject to the limitations of this Agreement, the General Partner shall have full, exclusive and complete authority for and control of the management of the Partnership's affairs for the purposes herein stated, and shall make all decisions affecting the Partnership's affairs, including, without limitation, the decision to enter into contracts for trading advisors' services and A-3 brokerage services. In that regard, the General Partner may, but need not, make trading decisions for the Partnership and may employ one or more affiliated and/or unaffiliated commodity trading advisors to perform that function. The General Partner may take such other actions as it deems necessary or desirable to manage the business and affairs of the Partnership including, but not limited to, the following: opening bank accounts with state or national banks; paying, or authorizing the payment of, distributions to the Partners and expenses of the Partnership such as selling commissions (if any), advisory fees, brokerage commissions, legal and accounting fees, printing fees, and registration and other fees of governmental agencies; and investing or directing the investment of assets of the Partnership, whether or not involving the purchase or sale of Futures Interests. Subject to the terms and conditions set forth in this Agreement, the General Partner may engage and compensate on behalf of the Partnership from assets of the Partnership such persons or entities, including any affiliated person or entity or any other person or entity, as the General Partner in its sole discretion shall deem advisable for the conduct and operation of the business of the Partnership. 2.2 COMPENSATION AND REIMBURSEMENT The General Partner shall share in all Partnership income, gains, losses, deductions and credits to the extent of its interest in the Partnership. In addition, the General Partner, in its capacity as the general partner of the Partnership, shall receive from the Partnership (i) approximately twenty percent (20%) of all Sales Charges (as defined in Section 4.4 hereof), if at least 1,000 Units are sold and accepted by the General Partner during the Initial Offering Period (as defined in Section 3.1(c) hereof); and (ii) all early redemption fees charged by the Partnership upon redemptions of Units of Limited Partnership Interest to reimburse the General Partner for the payment by the General Partner of the Partnership's organizational, initial offering and operating expenses payable by the General Partner. 2.3 INITIAL COMMODITY TRADING ADVISOR The General Partner is hereby authorized, on behalf of the Partnership, to enter into the Advisory Agreement with the Advisor (which also serves as the general partner of the Partnership). The General Partner, in its sole discretion, may employ on behalf of the Partnership the Advisor or other commodity trading advisors on the terms and conditions contained in the Advisory Agreement or on different terms and conditions, and the compensation for such other commodity trading advisors may be negotiated and determined without regard to the Partnership's previous trading performance. No person who receives any advisory, management, incentive or administrative fees or allocations from the Partnership for trading advisory or management services may share or participate, directly or indirectly, in the brokerage commissions paid by the Partnership. 2.4 INITIAL COMMODITY BROKER The General Partner is further authorized, on behalf of the Partnership, to enter into the Customer Agreement with ADM Investor Services and to cause the Partnership to pay to ADM Investor Services brokerage commissions at such rates as may be established and re-established from time to time under the terms of the Customer Agreement, which rates may exceed the lowest rates otherwise available. 2.5 STANDARD OF LIABILITY; INDEMNIFICATION (a) The Partnership shall not provide for indemnification of the General Partner or its affiliates for any liability or loss suffered by such person, nor shall it provide that such person be held harmless for any loss or liability suffered by the Partnership, unless, and the General Partner shall have no liability to the Partnership if, all of the following conditions are met: (a) such person has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Partnership, and (b) such person was acting on behalf of or performing services for the Partnership, and (c) such liability was not the result of negligence or misconduct by such person, and (d) such indemnification or agreement to hold harmless is recoverable only out of the assets of the Partnership and not from the holders of the partnership interests. (b) In any threatened, pending or completed action, suit or proceeding to which the General Partner was, is or is threatened to be made a party by reason of the fact that it is or was a general partner or sponsor of the Partnership (including an action brought by or in the right of the Partnership), the Partnership shall subject to Section 2.5(a) indemnify, defend and hold harmless the General Partner, from and against any loss, liability, damage, cost, expense (including, without limitation, attorneys' and accountants' fees and disbursements), judgments and amounts paid in settlement actually incurred by it in connection with the investigation, defense or settlement of any such action, suit or proceeding. The termination of any action, suit or proceeding by judgment, order or settlement shall not, in and of itself, create a presumption that the General Partner did not act in good faith and in a manner which it reasonably believed to be in or not opposed to the best interests of the Partnership. A-4 (c) To the extent that the General Partner has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 2.5(b) hereof, or in the defense of any claim, issue or matter therein, the Partnership shall indemnify it against the costs and expenses (including, without limitation, attorneys' and accountants' fees and disbursements) actually and reasonably incurred by it in connection therewith. (d) No indemnification of the General Partner by the Partnership shall be permitted to the extent that the General Partner incurs any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees, costs and expenses incurred in investigating or defending any demand, claim, suit or proceeding) resulting from or arising out of any violation by the General Partner of Federal or applicable state securities laws in connection with or related to the Registration Statement or to the offer or sale of the Units, unless (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the General Partner, (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction, or (iii) a court of competent jurisdiction approves a settlement of the claims and finds that indemnification of the settlement and related costs should be made; PROVIDED that such court has been advised of the position as to indemnification for violations of securities laws of the Securities and Exchange Commission (the "SEC") and the securities administrators of the jurisdictions in which the claimant alleges to have been offered or sold Units. (e) Expenses incurred in defending a threatened or pending civil, administrative or criminal action, suit or proceeding against the General Partner may be paid by the Partnership in advance of the final disposition of such action, suit or proceeding if and to the extent that (i) such action, suit or proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of the Partnership, (ii) such action, suit or proceeding is initiated by a party who is not a Limited Partner or, if by a Limited Partner, then such advance payment is specifically approved by a court of competent jurisdiction, and (iii) the General Partner agrees to reimburse the Partnership, together with the applicable legal rate of interest thereon, in the event that indemnification is not permitted under this Section 2.5 upon final disposition. (f) The term "General Partner" as used in this Section 2.5 shall include the General Partner (including any former general partner of the Partnership that has withdrawn from the Partnership), and its stockholders, directors, officers, employees and affiliates and each person who controls the General Partner (including such former general partner), as the case may be. (g) In the event that the Partnership is made a party to any claim, dispute or litigation or otherwise incurs any loss or expense as a result of or in connection with any Partner's (or assignee's) obligations or liabilities unrelated to the Partnership's business, such Partner (or assignees, cumulatively) shall indemnify and reimburse the Partnership for all losses and expenses incurred by the Partnership in connection therewith (including, without limitation, attorneys and accountants' fees and disbursements). (h) The Partnership may not incur the cost of that portion of any liability insurance, which insures the General Partner or any of its officers, agents, employees, directors, members, or managers for any liability for which such parties are prohibited from being indemnified by this Agreement. 2.6 NET WORTH OF THE GENERAL PARTNER The General Partner agrees that, so long as it acts as a general partner of the Partnership, it will maintain its Net Worth (as hereafter defined) at an amount equal to not less than the greater of (i) five percent (5%) of the aggregate capital contributions made to the Partnership by all Partners (including the General Partners' capital contributions) or (ii) Fifty Thousand Dollars ($50,000). The General Partner further agrees that it will not be a general partner of any limited partnership in addition to the Partnership unless at all times when it is a general partner of any such additional limited partnership its Net Worth shall be at least equal to the Net Worth required by the preceding sentence plus, for each such additional limited partnership, an amount equal to five percent (5%) of the total capital contributions made by all the partners to such other limited partnership (including the contributions made by the General Partner). Notwithstanding the foregoing, the General Partner's net worth need not exceed $1,000,000. For purposes of this Section 2.6, "Net Worth" shall reflect the carrying of all assets at fair market value, shall exclude the General Partner's interest in the Partnership or in any other limited partnership of which it is a general partner, and shall otherwise be determined in accordance with generally accepted accounting principles. A-5 2.7 GENERAL PARTNER'S CAPITAL CONTRIBUTION The General Partner shall make a capital contribution to the Partnership by purchasing Units of General Partnership Interest in an amount equal to not less than the greater of: (i) one percent (1%) of the aggregate amount of capital contributions made to the Partnership by the Partners (including the General Partner's capital contributions), or (ii) Twenty Five Thousand Dollars ($25,000). The General Partner may not make any transfer or withdrawal of its contribution to the Partnership or receive any distribution of any portion of its General Partnership Interest in the Partnership while it is a general partner of the Partnership which would reduce its percentage interest in the Partnership to less than its required interest as set forth in the preceding sentence. The General Partner may contribute any greater amount to the Partnership. The General Partner may withdraw or receive a distribution of any portion of its interest in the Partnership that is in excess of its required interest upon thirty (30) days' prior written notice to the Limited Partners. 2.8 OTHER BUSINESS The General Partner and its principals and affiliates may engage in other business activities (including without limitation serving as a general partner of other partnerships) and shall not be required to refrain from any other activity or disgorge any profits derived from any such other activity. Any of the commodity trading advisors to the Partnership, including the Advisor, and their respective principals and affiliates will also be free to manage additional accounts other than the Partnership's account, including for their own account. 2.9 DISTRIBUTIONS (a) The General Partner shall have sole discretion in determining the amount and frequency of any distributions which the Partnership shall make other than distributions made upon the withdrawal of or redemption by any Partner. The General Partner may declare distribution in additional Units of the Fund, in which event Limited Partners will be given at least sixty (60) days' prior written notice and the option to receive cash instead of additional Units. All distributions shall be made pro rata to the number of Units held of record by the respective Partners. (b) Current and liquidating distributions shall be made (i) first, to the General Partner, so that the General Partner receives an amount equal to the aggregate amount of any Incentive Allocation credited to its capital account pursuant to Article V hereof, and (ii) second, to the Partners in the ratio that the capital account of each Partner bears to the capital account of all Partners. 2.10 CONTRACTS WITH THE GENERAL PARTNERS OR ITS AFFILIATES The maximum term of any contract between the Partnership and the General Partner or an affiliate thereof shall be one year (excluding renewals or extensions thereof); PROVIDED that certain provisions in any such contract may expressly survive the termination of the contract if survival would be customary. Agreements between the Partnership and the General Partner or any affiliate thereof shall be terminable by the Partnership without penalty on sixty (60) days' prior written notice. 2.11 WITHDRAWAL The Partnership shall terminate and be dissolved upon the withdrawal of the General Partner (unless in the case of the withdrawal of the General Partner, the actions necessary to continue the Partnership are taken pursuant to Section 5.1 hereof). In that regard, the General Partner shall cease to be, and shall be deemed to have withdrawn as, a general partner of the Partnership upon the occurrence of any of the following events: (i) the legal disability, insolvency, bankruptcy, dissolution or liquidation of the General Partner; (ii) any event of withdrawal prescribed in the Act that is not encompassed in this Article 2.11; or A-6 (iii)on written notice given by the General Partner, at least one hundred twenty (120) days prior thereto, of the intention of the General Partner to withdraw as a general partner of the Partnership. If the General Partner withdraws as general partner of the Partnership, it shall receive the proportionate share of the Net Assets of the Partnership attributable to its general partnership interest as of the close of business on the last business day of the month in which the withdrawal is effective. If the Limited Partners elect to continue the Partnership, the withdrawing General Partner shall pay all Partnership expenses incurred as a result of its withdrawal. Except as provided by this Section 2.11, the General Partner may not sell, assign or otherwise dispose of all or substantially all of its general partnership interest in the Partnership, except for a sale or transfer of all interests of all Partners or a sale of all or substantially all of its general partnership interest to a corporation controlled by the General Partner; PROVIDED that the General Partner may mortgage, pledge, hypothecate or grant a security interest in its general partnership interest as collateral for a loan or loans. Any such assignment of all or any portion of a general partnership interest shall not cause an event of withdrawal with respect to the General Partner pursuant to this Section 2.11. 2.12 TAX ELECTIONS The General Partner, in its sole discretion, may cause the Partnership to make, refrain from making and, once having made, revoke the election referred to in Section 754 of the Internal Revenue Code of 1986, as amended, (the "Internal Revenue Code"), or any other election affecting the computation of Partnership income required to be made by the Partnership pursuant to Section 703(b) of the Internal Revenue Code, and any similar election provided by state or local law or any similar provision enacted in lieu thereof. 2.13 NO PERSONAL LIABILITY FOR RETURN OF CAPITAL Subject to Section 2.5 hereof, the General Partner shall not be personally liable for the return or repayment of all or any portion of the capital or profits of any Partner (or assignee of Unit(s)), it being expressly agreed that any such return or repayment of capital or profits made pursuant to this Agreement shall be made solely from the assets of the Partnership (which shall not include any right of contribution from the General Partner). 2.14 DAILY CALCULATION OF NET ASSET VALUE The General Partner shall calculate Net Asset Value daily and shall make available upon the request of a Limited Partner, the Net Asset Value Per Unit. 2.15 FIDUCIARY DUTY FOR SAFEKEEPING OF FUNDS The General Partner shall have fiduciary responsibilities for the safekeeping and use of all funds and assets of the Partnership, whether or not in its immediate possession or control, and shall not employ or permit another to employ such funds or assets in any other manner except for the exclusive benefit of the Partnership. ARTICLE III LIMITED PARTNERS 3.1 CAPITAL CONTRIBUTIONS AND PUBLIC OFFERING OF UNITS OF LIMITED PARTNERSHIP INTEREST (a) The General Partner, on behalf of the Partnership, shall (i) file or cause to be filed with the SEC such registration statement(s) and such amendments thereto as the General Partner deems advisable from time to time (collectively, the "Registration Statement"), for the registration of the public offering and sale of Units of Limited Partnership Interest; (ii) file or cause to be filed copies of the final prospectus(es) and statement(s) of additional information included as part of the Registration Statement (collectively, the "Prospectus and Statement of Additional Information") with the SEC pursuant to Rule 424(b); (iii) seek to qualify Units of Limited Partnership Interest for sale under the securities laws of such states of the United States or other jurisdictions as the General Partner shall deem necessary or advisable, and (iv) take such action with respect to the matters described in subsections (i) through (iii), above, as it shall deem advisable or necessary. A-7 (b) The General Partner is authorized to take such actions and make such arrangements for the sale of the Units of Limited Partnership Interest as it deems appropriate including, without limitation, the execution on behalf of the Partnership of a Selling Agent agreement appointing Berthel Fisher & Company Investment Services, Inc. (the "Selling Agent") as the Partnership's selling agent for the offer and sale of the Units of Limited Partnership Interest as contemplated in the Prospectus and Statement of Additional Information. The General Partner will keep copies of all Subscription Agreements / Powers of Attorney signed by Limited Partners in connection with the public offerings of the Units of Limited Partnership Interest for a period of at least six years. (c) The General Partner may, on behalf of the Partnership and in accordance with the latest Prospectus and Statement of Additional Information, issue and sell Units of Limited Partnership Interest to investors at any time without the consent of the other Limited Partners. Such additional Limited Partners shall contribute capital to the Partnership and shall be admitted as Limited Partners as of the first business day of the month immediately following the month in which their subscriptions are accepted by the General Partner; it being understood and agreed, however, that the General Partner may reject any subscription for Units at any time and for any reason. Units of Limited Partnership Interest may be sold as of the last business day of each calendar month at a purchase price per Unit equal to the Net Asset Value per Unit (as defined in Section 4.4 hereof) as of the last business day of such month, plus a Sales Charge of five percent (5%) of the Net Asset Value per Unit for each Unit purchased. The General Partner may terminate the offering of Units of Limited Partnership Interest at any time. The aggregate of all capital contributions, plus interest thereon, shall be available to the Partnership to carry on its business, and no interest shall be paid by the Partnership to any Partner on any such contribution. Pursuant to Section 3.5 hereof, the General Partner, in its sole discretion, may consent to and admit any assignee of Units of Limited Partnership Interest as a substituted Limited Partner. (d) All Units of Limited Partnership Interest subscribed for upon receipt of a check or draft of the subscriber are issued subject to the collection of the funds represented by such check or draft. In the event that a check or draft of a subscriber for Units of Limited Partnership Interest representing payment for Units of Limited Partnership Interest is returned unpaid, the Partnership shall cancel the Units of Limited Partnership Interest issued to such subscriber represented by such returned check or draft. Any losses or profits sustained by the Partnership in connection with the Partnership's trading allocable to such cancelled Units of Limited Partnership Interest shall be deemed an increase or decrease in Net Asset Value and allocated among the remaining Partners as described in Article IV hereof. (e) The Units are, but need not be evidenced by certificates. 3.2 ADDITIONAL CAPITAL CONTRIBUTIONS No additional contributions of capital are or shall be required of any Limited Partner. 3.3 RIGHTS AND OBLIGATIONS Each Unit of Limited Partnership Interest owned by a Limited Partner shall be fully paid and non-assessable upon issuance. A Limited Partner shall be liable for the obligations of the Partnership to the extent of the capital contributed by such Limited Partner plus the share of undistributed profits, if any, allocable to such Limited Partner. A Limited Partner who receives a return of any part of the capital contributed by such Limited Partner to the Partnership shall be liable to the Partnership for one year thereafter for the amount of the returned contribution, but only to the extent necessary to discharge liabilities of the Partnership to creditors who extended credit to the Partnership during the period that the capital contribution was held by the Partnership. A Limited Partner shall also be liable to the Partnership for return of any part of his capital contribution returned to him for a period of six (6) years thereafter, if such return was in violation of this Agreement or the Act. A-8 No Limited Partner shall take part in the management of the business or transact any business for the Partnership, and no Limited Partner shall have the power to sign for or bind the Partnership. No salary shall be paid to any Limited Partner, nor shall any Limited Partner have a drawing account or earn interest on his contribution once contributed to the capital of the Partnership. No Limited Partner shall be entitled to the return of his contribution or any profits with respect thereto except (i) to the extent, if any, that distributions made, or deemed to be made, pursuant to this Agreement, may be considered as such by law; (ii) upon dissolution of the Partnership; or (iii) upon redemption and then only to the extent provided for in this Agreement. No Limited Partner shall have priority over any other Limited Partner either as to the return of contributions of capital or as to profits, losses or distributions. In no event shall a Limited Partner be entitled to demand or receive property other than cash in return for capital contributed. 3.4 ASSIGNMENT OF LIMITED PARTNERSHIP INTEREST (S) (a) GENERAL. Each Limited Partner expressly agrees that he will not transfer, assign or dispose of, by gift or otherwise, any of his Units of Limited Partnership Interest or any part or all of his right, title or interest in and to the capital or profits of the Partnership without giving written notice of the assignment, transfer or disposition to the General Partner and without complying with the suitability standards imposed by the Partnership, applicable laws (including, without limitation, state securities or Blue Sky laws) and the rules of any other applicable governmental authority. Each and every transfer, assignment or disposition of Units of Limited Partnership Interest shall be subject to all applicable laws (including, without limitation, state securities or Blue Sky laws). In addition, the transferor or assignor of such Units shall bear all costs, including attorneys' fees and disbursements, incurred in connection with such transfer, assignment or disposition. (b) EFFECTIVENESS; NOTICE. No such transfer, assignment or disposition shall be effective against the Partnership or the General Partner until the General Partner receives the written notice described below. If a transfer, assignment or disposition occurs by reason of the death of a Limited Partner or assignee, such written notice may be given by the duly authorized representative of the estate of the Limited Partner or assignee and shall be supported by such proof of legal authority and valid assignment as may reasonably be requested by the General Partner. The written notice required by this Section 3.5: (i) shall specify (A) the name, address and Social Security or taxpayer identification number of the transferee or assignee, (B) the number of Units of Limited Partnership Interest transferred or assigned, and (C) the date of such transfer or assignment, (ii) shall include a statement by the transferee or assignee that he agrees to give the above-described written notice to the General Partner upon any subsequent transfer, assignment or disposition, (iii) shall contain such other information and be accompanied by such additional documentation as the General Partner may request, and (iv) shall be signed by the assignor and transferee or assignee. The General Partner, in its sole discretion, may waive receipt of the above-described notice or any defect therein. Any transfer, assignment or disposition of Units of Limited Partnership Interest permitted hereunder shall be effective as of the beginning of the month following the month in which the General Partner has received notice of such transfer, assignment or disposition; it being understood, however, that the Partnership need not recognize any transfer, assignment or disposition of Units of Limited Partnership Interest until it has received at least thirty (30) days' prior written notice thereof. Notwithstanding the foregoing, no transfer, assignment or disposition of Units of Limited Partnership Interest shall be effective or recognized by the Partnership if (i) such transfer, assignment or disposition would be in violation of the Act, (ii) the amount of the transfer, assignment or disposition (other than transfers by gift or inheritance or to affiliates, including members of the transferor's or assignor's immediate family) is less than the minimum subscription amount, (iii) as a result of such transfer, assignment or disposition, the Partnership would no longer be treated as a partnership rather than a corporation or an association under the Internal Revenue Code, or (iv) as a result of such transfer or assignment, there would result a termination of the Partnership for United States Federal income tax purposes as provided in Section 708(b) of the Internal Revenue Code. (c) SUBSTITUTED LIMITED PARTNER. No assignee or transferee of Units of Limited Partnership Interest shall become a substituted Limited Partner unless the General Partner consents in writing to such substitution (which consent may be withheld in the sole and absolute discretion of the General Partner). A substituted Limited Partner shall have all the rights and powers and shall be subject to all the restrictions and liabilities of his assignor. Each Limited Partner agrees that, with the consent of the General Partner, any assignee may become a substituted Limited Partner without the further act or consent of any Limited Partner. Each Limited Partner agrees that he has no right to consent to and will not consent to any person or entity becoming a substituted Limited Partner, except as set forth in the preceding sentence. If the General Partner withholds its consent, an assignee shall not become a substituted Limited Partner and shall not have any of the rights of a Limited Partner, except that the assignee shall be entitled to receive that share of the Partnership's capital and profits, if any, and shall have that right of redemption to which his assignor would otherwise have been entitled. An assigning Limited Partner shall remain liable to the Partnership as provided in the Act, regardless of whether his assignee becomes a substituted Limited Partner. A-9 3.5 REDEMPTION OF UNITS OF LIMITED PARTNERSHIP INTEREST (a) GENERAL. A Limited Partner (and the General Partner subject to Sections 2.7 and 2.11 hereof) or any assignee of Units of Limited Partnership Interest of whom the General Partner has received written notice as described in Section 3.5 hereof may withdraw all or any part of his capital contributions and undistributed profits, if any, from the Partnership (such withdrawal being herein referred to as "redemption"), effective as of the last business day of any calendar month, by requiring the Partnership to redeem any or all of his Units of Limited Partnership Interest at the Net Asset Value per Unit (subject to the penalties for early redemption described below), calculated as of the close of business (as determined by the General Partner) on the effective date of redemption; provided that (i) all liabilities, contingent or otherwise, of the Partnership, except any liability to Partners on account of their capital contributions, have been paid or there remains property of the Partnership sufficient to pay them, and (ii) the General Partner shall have timely received a Request for Redemption in the form included as Exhibit D to the Statement of Additional Information. As used herein, Request for Redemption shall mean a letter in the form specified herein sent by a Limited Partner (or any assignee of whom the General Partner has received written notice as described in Section 3.5 hereof) and received by the General Partner at least ten (10) days (or such lesser period as shall be acceptable to the General Partner) in advance of the requested effective date of redemption. Requests for Redemption that are received by the General Partner at least ten (10) days prior to the last business day of a calendar month shall be effected as of the close of business on the last business day of that month. Requests for redemption that are received by the General Partner less than ten (10) days prior to the last business day of a calendar month shall be effected as of the close of business on the last business day of the following month. The General Partner may declare additional redemption dates upon notice to the Limited Partners. Redemptions of fractional Units of Limited Partnership Interest will be permitted. The Partnership shall not be obligated to redeem Units of Limited Partnership Interest that are subject to a pledge or otherwise encumbered in any fashion. (b) PAYMENT. Upon redemption, a Limited Partner (or any assignee of whom the General Partner has received written notice as described above) shall receive from the Partnership for each Unit of Limited Partnership Interest redeemed an amount equal to the Net Asset Value per Unit as of the date of redemption, less (i) any amount owing by such Partner (or assignee) to the Partnership, and (ii) any applicable redemptions fees due under Section 3.5(f) hereof. Redemption payments shall be made within twenty (20) days following the date of redemption. Under special circumstances, however, including but not limited to the inability of the Partnership to liquidate its commodity positions or defaults or delays in payments due to the Partnership from banks or other persons, the Partnership may delay payment to Partners requesting redemptions of Units of the proportionate part of the Net Asset Value thereof represented by the sums which are the subject of such inability to liquidate its positions, default or delay. If the General Partner delays redemption payments for any reason, the General Partner shall cause payments to resume as soon as practicable and shall be make redemption payments in the order in which the requests for redemption were received. The General Partner shall notify any Limited Partner or assignee of Units who requests redemption within ten (10) days after the date of redemption if payment will be delayed. (c) REDEMPTIONS BY ASSIGNEES. If a redemption is requested by an assignee, all amounts owed under Section 3.5(f) by the Partner to whom such Unit was sold by the Partnership as well as all amounts owed by all assignees who owned such Unit shall be deducted from the amount paid to such assignee upon redemption of his Units of Limited Partnership Interest. An assignee shall not be entitled to redemption until the General Partner has received written notice (as described in Section 3.5 hereof) of the assignment, transfer or disposition under which the assignee claims an interest in the Units of Limited Partnership Interest to be redeemed and shall have no claim against the Partnership or the General Partner with respect to distributions or amounts paid on redemption of Units of Limited Partnership Interest prior to the receipt by the General Partner of such notice. A-10 (d) REDEMPTIONS UPON NOTICE OF SUBSTANTIAL DECLINE. If (i) the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) on any business day during any given fiscal year decreases to or below 50% of the Net Asset Value per Unit as of the beginning of the fiscal year, and such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or (ii) if the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) decreases on any business day to or below $350, the Partnership will liquidate all open positions as expeditiously as possible and suspend trading. Within ten (10) business days after the date of the suspension of trading, the General Partner shall either give notice to the Limited Partners of its intention to withdraw from the Partnership or shall declare a special redemption date. Such special redemption date, if declared, shall be a business day within thirty (30) business days from the date of suspension of trading by the Partnership, and the General Partner shall mail notice of such date to each Limited Partner by first class mail, postage prepaid, not later than ten (10) business days prior to such special redemption date, together with instructions as to the procedure such Limited Partner must follow to have his Units redeemed on such date by the Partnership, if such Limited Partner so desires. No redemption fees would be due in respect of a Unit redeemed on the special redemption date. If, after such special redemption date, the Partnership's Net Asset Value is at least 50% of the Partnership's Net Asset Value on the close of business on the day before the special redemption date, the Partnership will resume trading unless the General Partner elects to withdraw from the Partnership. If, after such special redemption date, the Partnership's Net Asset Value is less than 50% of the Net Asset Value of the close of business on the day before the special redemption date, the Partnership shall terminate and dissolve in accordance with the provisions of Article V hereof. (e) MANDATORY REDEMPTION(S). If and to the extent necessary to ensure that the assets of the Partnership are not considered "plan assets" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the General Partner may redeem all or a portion of the Units held by one or more Limited Partners without the consent of such Limited Partners at the Net Asset Value per Unit without the imposition of any redemption fee. Such redemption may be effected from time to time in any manner deemed reasonable in the sole discretion of the General Partner, provided, however, that the General Partner will use its best efforts to cause a redemption of Units of Limited Partnership Interest on a pro rata basis among all "benefit plan investors" in an amount sufficient to reduce the number of Units of Limited Partnership Interest held by all of them to not more than 24.9%. For purposes of this Section, a "benefit plan investor" shall mean a Limited Partner who is (i) an "Employee Benefit Plan," as defined in Section 3(3) of ERISA; (ii) a plan described in Section 4975(e)(1) of the Internal Revenue Code; or (iii) a partnership, the general partner of which has been appointed "investment manager," as defined in Section 3(38) of ERISA, over the assets used by one or more Employee Benefit Plans to purchase limited partnership interests in such partnership. (f) REDEMPTION FEES. Except as set forth in Sections 3.5(d) and (e) hereof, this Section 3.5(f) or as otherwise waived by the General Partner in its discretion, an early redemption fee equal to a percentage of the Net Asset Value of the Units of Limited Partnership Interests redeemed (the "Redemption Fee") shall be charged by the Partnership in the case of redemptions of Units of Limited Partnership Interest that are effected as of or before the end of the twelfth (12th) full calendar month after their purchase. The Redemption Fee shall be four percent (4%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the third (3rd) full calendar month after their purchase; three percent (3%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the sixth (6th) full calendar month after their purchase; two percent (2%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the ninth (9th) full calendar month after their purchase; and one percent (1%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the twelfth (12th) full calendar month after their purchase. There shall be no Redemption Fee charged with respect to Units of Limited Partnership Interest redeemed after the twelfth (12th) full calendar month after their purchase. Notwithstanding the foregoing and in order to assure each Limited Partner the availability of funds to pay taxes on each year's profits, if any, the redemption fee will be waived on redemptions of Units to the extent, if any, distributions in the first quarter on a calendar year are less than thirty-five (35%) of the profits reportable to a Limited Partner for the prior year. Redemption Fees received by the Partnership will be paid over by the Partnership to the General Partner to reimburse the General Partner for the payment by the General Partner of the Partnership's organizational, initial offering and operating expenses payable by the General Partner. A-11 3.6 MAINTENANCE OF RECORDS AND BOOKS OF ACCOUNT (a) BOOKS OF ACCOUNT AND RECORDS. The General Partner shall keep and retain for at least six (6) years such books of account and records relating to the business of the Partnership as it deems necessary or advisable (including without limitation to substantiate the efforts of the Partnership to ensure that Units were sold only to purchasers for whom an investment in the Units was suitable) and as are required by the Commodity Exchange Act, as amended (the "CE Act") and the rules and regulations promulgated thereunder. Such books of account and records shall be kept at the Partnership's principal place of business, and each Limited Partner (or any duly constituted designee of a Limited Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy said books. The books of accounts and records of the Partnership shall be kept on an accrual basis of accounting in accordance with generally accepted accounting principles, consistently applied. The books of account or financial statements of the Partnership shall be audited at least annually at the Partnership's expense by an independent public accountant to be selected by the General Partner. (b) UNIT-HOLDER LISTS. The General Partner shall also maintain at the principal office of the Partnership a list of the names and addresses of, and the number of Units of Limited Partnership Interest owned by, all of the Limited Partners at the Partnership's principal office, and the General Partner shall make such list available for review by any Limited Partner or his personal representative at the offices of the Partnership at reasonable times upon request or by mail upon payment of the costs of reproduction and mailing, provided, however, that such list shall not be used by any Limited Partner for commercial purposes. ARTICLE IV PROFIT AND LOSS 4.1 CAPITAL ACCOUNTS The Partnership shall establish for each Partner, and maintain in accordance with the terms of this Agreement, a capital account. The initial balance of each Partner's capital account shall be the amount of the initial cash contribution to the Partnership of such Partner. 4.2 ADJUSTMENTS TO CAPITAL ACCOUNTS As of the close of business (as determined by the General Partner in its sole discretion) on the last business day of each calendar month, the General Partner shall make the following calculations, payments and allocations and shall redeem and accept subscriptions for Units, each in the following order: (a) the Management Fee (as defined in Section 4.4 hereof) earned with respect to such month shall be calculated and paid; the Continuing Services Fee (as defined in Section 4.4 hereof) earned with respect to such month shall be calculated and paid; other expenses of and reimbursements by the Partnership shall be calculated and paid; and any costs of indemnification to the extent permitted under Section 2.5 shall be paid; (b) Net Assets (as defined in Section 4.4 hereof) shall be calculated; (c) the amount of any Incentive Allocation (as defined in Section 4.4 hereof) shall be calculated and credited to the capital account of the General Partner; (d) any increase (less the amount of any Incentive Allocation) or decrease in Net Assets shall be credited or charged to the capital accounts of the Partners in the ratio that the capital account of each Partner bears to the capital accounts of all Partners; (e) the amount of any distributions or any withdrawn capital during such month, and the amount of any redemption payments in such month shall be charged to the capital accounts of the relevant Partners; A-12 (f) Net Asset Value (as defined in Section 4.4 hereof) shall be calculated; (g) redemptions of Units shall be effected; (h) Syndication Fees / Sales Charges (as defined in Section 4.4 hereof) shall be calculated and paid with respect to any subscriptions for Units that the General Partner intends to accept during such month; and (i) Subscriptions for Units shall be accepted in the sole discretion of the General Partner. 4.3 ALLOCATION OF PROFIT AND LOSS At the end of each taxable year, each item of Partnership income, gain, loss, deduction and credit shall be allocated among the Partners in accordance with the following provisions: (a) Capital Gain (as defined in Section 4.4 hereof) shall be allocated first to each Partner who has redeemed all of his Units or withdrawn all of his capital during the year to the extent that the amount the Partner received on redemption exceeded the amount paid for the redeemed Units or to the extent of the withdrawn capital; (b) Capital Gain shall be allocated second to each Partner who has redeemed some of his Units or withdrawn some of his capital during the year to the extent that the amount that such Partner received on redemption exceeded the amount paid for the redeemed Units or to the extent of the withdrawn capital; (c) Capital Gain remaining after the allocations in Sections 4.3(a) and 4.3(b) hereof shall be allocated among the Partners in the ratio that the capital account of each Partner bears to the capital accounts of all Partners; (d) Capital Loss (as defined in Section 4.4 hereof) shall be allocated first to each Partner who has redeemed all of his Units or withdrawn all of his capital during the year to the extent that the amount that the Partner paid for the redeemed Units exceeded the amount that the Partner received on redemption; (e) Capital Loss shall be allocated second to each Partner who has redeemed some of his Units or withdrawn some of his capital during the year to the extent that the amount that the Partner paid for the redeemed Units exceeded the amount that the Partner received on redemption; (f) Capital Loss remaining after the allocations in Sections 4.3(d) and (e) hereof shall be allocated among the Partners in the ratio that the capital account of each Partner bears to the capital accounts of all Partners; (g) For the purpose of the allocations of Capital Gain and Capital Loss in Sections 4.3(a), (b), (d) and (e) hereof, the amount that each Partner paid for each of his Units shall be deemed to have been increased by the amount of Capital Gain allocated to such Partner with respect to such Unit pursuant to Section 4.3(c) hereof or ordinary income allocated pursuant to Section 4.3(h) hereof, to have been decreased by the amount of any Capital Loss allocated to such Partner with respect to such Unit pursuant to Section 4.3(f) hereof or ordinary expense allocated pursuant to Section 4.3(h) hereof and to have decreased by the amount of any distributions to such Partner with respect to such Unit pursuant to Section 2.9 hereof; (h) Items of ordinary income and expense shall be allocated among the Partners in the ratio that the capital account of each Partner bears to the capital account of all Partners; (i) Notwithstanding Sections 4.3(e), (f) and (h) hereof, to the extent that an allocation of Capital Loss or expense would cause the capital account of a Limited Partner to have a deficit balance, then such loss or expense shall be allocated to the capital account of the General Partner; and (j) Allocations of Capital Gain or Capital Loss shall be made PRO RATA from each category of Capital Gain or Capital Loss determined under Section 1(h) of the Internal Revenue Code and income or loss determined under Section 988 of the Internal Revenue Code. 4.4 DEFINITIONS For purposes of this Article IV, the following terms shall have the following meanings: (a) "CONTINUING SERVICES FEE" shall mean a fee charged to each Unit equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit of the Partnership's assets under management as of the close of business on the last day of each month (without reduction for distributions or redemptions effected as of such date or management A-13 fees or incentive fees payable as of such date) with respect to Units purchased within the prior twelve (12) month period and 1/12 of 4% of the Net Asset Value per Unit of the Partnership's assets under management as of the close of business on the last day of each month (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased more than twelve (12) months prior thereto. Such Continuing Services Fee shall be paid to the Selling Agent and certain selected dealers and their respective registered representatives in return for their continuing services to the Partnership and the Limited Partners solicited by them. Such services include, without limitation, keeping the Limited Partners apprised of developments affecting the Partnership, responding to specific inquiries received from Limited Partners relating to the Partnership and the commodity markets, communicating current valuations of the Partnership's Net Asset Value per Unit to the Limited Partners, assisting in redemptions, transfers and distributions, assisting Limited Partners in interpreting the Partnership's monthly and annual reports, financial statements and the tax information provided to Limited Partners, and providing such other services as the Limited Partners from time to time may reasonably request. With respect to each of the first twelve (12) month-ends during which a Unit is outstanding, the Continuing Services Fee attributable to such Unit shall be paid (i) twenty percent (20%) to the Selling Agent, and (ii) eighty percent (80%) to the selected dealers and their respective registered representatives that solicited the Limited Partner's subscription. After a Unit has been outstanding for twelve (12) month-ends, the preceding sentence shall be amended so that the Continuing Services Fee attributable to such Unit shall be paid twenty-five percent (25%) to the Selling Agent and seventy-five (75%) to the selected dealers and their respective registered representative that solicited the Limited Partner's subscription. Notwithstanding the foregoing, such Continuing Services Fee shall be paid only to, or for the benefit of, persons who are registered with the CFTC and/or the National Futures Association ("NFA") as futures commission merchants or introducing brokers. In the event that the Selling Agent or any selected dealer is not registered with the CFTC and/or the NFA as futures commission merchants or introducing brokers, the Selling Agent's and such selected dealers' portions(s) of such Continuing Services Fee shall be paid to the General Partner. (b) "CAPITAL GAIN" or "CAPITAL LOSS" shall mean gain or loss characterized as gain or loss from the sale or exchange of a capital asset by the Internal Revenue Code, including without limitation gain or loss required to be taken into account pursuant to Sections 988 and 1256 of the Internal Revenue Code. (c) "MANAGEMENT FEE" shall mean a fee equal to 1/12 of 3.75% of the Net Asset Value per Unit of the Partnership's asset under management as of the close of business on the last day of each month with respect to Units purchased within the prior twelve (12) month period and 1/12 of 1% of the Net Asset Value per Unit of the Fund's assets under management as of the close of business on the last day of each month with respect to Units purchased more than twelve (12) months prior thereto which shall be paid to the Advisor. (d) "NET ASSETS" shall mean the total assets, less total liabilities, of the Fund determined on the basis of generally accepted accounting principles. Net Assets shall include any unrealized profits or losses on open positions, and any fee or expense including net asset fees accruing to the program. (e) "NET ASSET VALUE" of the Partnership shall mean the total capital accounts of all Partners. The "Net Asset Value" of a Unit shall be the total capital accounts of all Partners, divided by the number of Units owned by all Partners. (f) "SYNDICATION FEE / SALES CHARGE" shall mean a fee, calculated and paid immediately prior to the acceptance of a subscription, equal to five percent (5%) of the subscription amount for a Unit. The Syndication Fee / Sales Charge attributable to such Unit shall be paid (i) twenty percent (20%) to the General Partner, and (ii) eighty percent (80%) to the Partnership's selling agent, who in turn may pay up to seventy-five percent (75%) of its Syndication Fee / Sales Charge to the selected dealer that solicited the subscription pursuant to the terms of any selected dealer agreement entered into from time to time between the Partnership's selling agent and such selected dealer. (g) "INCENTIVE ALLOCATION" shall mean a quarterly special allocation to the Advisor equal to fifteen percent (15%) of the New Trading Profits. A-14 (h) "NEW TRADING PROFITS" shall mean the excess, if any, of Net Assets on the last business day of the Valuation Period over Net Assets on the last business day of the highest previous Valuation Period or Net Assets at the date trading commences, whichever is higher, and as further adjusted to eliminate the effect on Net Assets resulting from new capital contributions, redemptions, or capital distributions, if any, made during the period decreased by interest or other income, not directly related to trading activity, earned on Fund assets during the period, whether the assets are held separately or in margin account. (i) "VALUATION PERIOD" shall mean the preceding calendar quarter. 4.5 EQUITABLE ALLOCATIONS The General Partner may make such other or additional allocations of income, gain, loss and deduction among the Units as are, in the General Partner's reasonable discretion, equitable in order to allocate income, gain, loss and deduction for Federal income tax purposes among the Partners in accordance with their respective interest in the Partnership. ARTICLE V TERMINATION 5.1 DISSOLUTION The Partnership shall terminate and be dissolved immediately upon (i) the conclusion of the Initial Offering Period without the sale or acceptance of at least 1,000 Units of Limited Partnership Interest, (ii) the withdrawal of the General Partner, as defined in, and subject to the limitation of Section 2.11 hereof, (iii) an election to dissolve the Partnership in accordance with the provisions of Section 6.1 hereof by Limited Partners owning more than fifty percent (50%) of the Units of Limited Partnership Interest, (iv) a reduction in Net Asset Value of the Partnership following a substantial decline in the Net Asset Value per Unit as more fully described in Section 3.5(d) hereof, (v) a determination by the General Partner that the purpose of the Partnership cannot be fulfilled; and (vi) any event that constitutes a dissolution of a limited partnership under the Act or otherwise makes it unlawful for the existence of the Partnership to be continued. The General Partner shall give, prior to its voluntary withdrawal, one hundred twenty (120) days' prior notice to all Limited Partners pursuant to Section 2.11 hereof, who may within such period elect substitute general partner(s) in accordance with Section 6.2 hereof and continue the Partnership. Unless earlier terminated as specified above or by operation of law, the Partnership shall terminate on December 31, 2025. The death, incompetence, incapacity, legal disability, bankruptcy, insolvency, dissolution or withdrawal of any Limited Partner shall not result in the dissolution or termination of the. Partnership, and such Limited Partner, or the estate, custodian or personal representative thereof, shall have no right to withdraw as a limited partner of the Partnership or to have his Units redeemed except as provided in Section 3.5 hereof. Upon the death or legal disability of a Limited Partner, his interest in the Partnership shall pass to his legal representatives. Each Limited Partner (and any assignee of such Limited Partner's interest) expressly agrees that, in the event of his death, he waives on behalf of himself and his estate, and he directs the legal representative of his estate and any person interested therein to waive, the furnishing of any inventory, accounting or appraisal of the assets of the Partnership and any right to a special audit or examination of the books and records of the Partnership. 5.2 FINAL ACCOUNTING Upon the dissolution of and failure to reconstitute the Partnership, an accounting shall be made of the accounts of the Partnership, the capital accounts of each Unit, and the Partnership's assets, liabilities and operations from the date of the last previous accounting to the date of such dissolution. Thereupon, the General Partner (or in the event that the dissolution is caused by the legal disability, bankruptcy, dissolution, liquidation or withdrawal of the General Partner, such person as may be designated by the holders of a majority of the then outstanding Units of Limited Partnership Interest, not including Units of Limited Partnership Interest held by the General Partner) shall act as liquidating trustee and immediately proceed to wind up and terminate the business and affairs of the Partnership and to liquidate the property and assets of the Partnership. 5.3 DISTRIBUTION Upon the winding up and termination of the business and affairs of the Partnership, its liabilities and obligations to creditors and all expenses incurred in its liquidation shall be paid, and its remaining assets shall be distributed to the Partners in accordance with their capital accounts as determined under Article IV hereof. A-15 5.4 USE OF FIRM NAME UPON DISSOLUTION At no time during the operation of the Partnership or upon the termination of and dissolution of the Partnership shall any value be placed on the firm name, the right to its use, or the goodwill, if any, attached thereto, either between the Partners or for the purpose of determining any distributive interest of any Partner in accordance with this Agreement. 5.5 BALANCE OWED BY A PARTNER No Limited Partner shall be required to restore any deficit balance in such Limited Partner's Capital account. ARTICLE VI MISCELLANEOUS 6.1 MEETINGS Meetings of the Partnership for purposes of amending this Agreement or taking any action permitted to be taken by the Limited Partners under this Agreement may be called by the General Partner and shall, subject to the limitations imposed by the final sentence of this Section 6.1, be called by it when requested in writing by the Limited Partners holding ten percent (10%) or more of the Units of Limited Partnership Interest. The General Partner shall deposit the call in the United States mail within fifteen (15) days after receipt of such written requests from the requisite percentage of the Limited Partners. The call shall state the date, place, time and purpose of such meeting, setting forth any amendments to this Agreement proposed to be adopted, and no other business shall be conducted at such meeting except as set forth in the call. The meeting shall be held no less than thirty (30) and no more than sixty (60) days after the date of the mailing of the call. The Limited Partners may vote in person or by proxy at any such meeting. In the event that the Partnership is required to comply with Regulation 14A under the Securities Exchange Act of 1934 (the so-called "Proxy Rules") or any successor regulation, the foregoing time periods may be altered by the General Partner so as not to conflict therewith. 6.2 AMENDMENTS (a) Amendments to this Agreement may be proposed by the General Partner or by Limited Partners owning not less than ten percent (10%) of the Units of Limited Partnership Interest. Within thirty (30) days following such proposal, the General Partner shall submit the proposed amendment to the Limited Partners together with an opinion of counsel as to the legality of such amendment and its effect on the Limited Partners for the Partnership's debts. The General Partner shall make its recommendation with regard to each such proposal advanced by any Limited Partner. A simple majority of the Units of Limited Partnership Interest outstanding (not including Units of Limited Partnership Interest held by the General Partner) shall be required to pass an amendment; provided, however, that no such amendment shall (i) change or alter the terms of this Section 6.2, (ii) cause the Partnership to become a general partnership, (iii) change the liability of the General Partner or the Limited Partners, (iii) reduce the capital account of any Partner, (iv) modify the percentage of profits, losses or distributions to which any Partner is entitled, or (v) extend the duration of the Partnership, in each case without the consent of the General Partner and all of the Limited Partners. For purposes of obtaining a written vote, the General Partner may require response within a specified time. (b) Notwithstanding any provision to the contrary contained herein, the General Partner may, without the consent of the Limited Partners, make such amendments to this Agreement as are necessary: (i) to reflect the admission of an additional or substitute general partner; (ii) to change the name of the Partnership; (iii)to effect any other minor change that the General Partner deems advisable, so long as such amendment is not adverse to the Limited Partners and does not alter the basic investment policies and structure of the Partnership, or that is required by law; (iv) to clarify any inaccuracy or ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or otherwise (including any inconsistency between this Agreement and the Prospectus or Statement of Additional Information), or to make any other provisions with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement; A-16 (v) to delete from or add to this Agreement any provision required to be so deleted or added by representatives of the SEC, the CFTC or any other government authority (including state securities or Blue Sky administrators) having jurisdiction over activities of the Partnership, which addition or deletion is deemed by such agency, authority or administrators to be for the benefit or protection of the Limited Partners; (vi) to attempt to ensure that the Partnership is not treated as an association taxable as a corporation for federal income tax purposes; (vii)to modify, with respect to a taxable year ending after the date of such amendment or for which a tax return of the Partnership has not yet been filed, and to the extent permitted by law, any provision concerning the allocation of profits and losses for Federal income tax purposes, if such modification is deemed, in the General Partner's discretion, necessary to promote an equitable treatment among the Partners with respect to such allocations, as measured by the degree to which the profits and losses allocated to them for tax purposes reflect the actual increase or decrease in the value of their investments; (viii) to effect the intent of the tax allocations proposed herein, including without limitation the allocation of Capital Gain and Capital Loss on a net rather than a gross basis, to the maximum extent possible in the event of a change in the Code or the interpretations thereof affecting such allocations; (ix) to effect any other change that is appropriate or necessary, in the opinion of the General Partner, to prevent the Partnership or the General Partner or its controlling persons from in any manner being subject to the provisions of the Investment Company Act of 1940, as amended, or the "plan asset" regulations adopted under ERISA as a result of their association with the Partnership; and (x) to add to the representations, duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein for the benefit of the Limited Partners. (c) Notwithstanding anything to the contrary contained herein, (i) this Agreement may be amended without the consent of the General Partner in accordance with and only to the extent permissible under the Act; PROVIDED that consent of all Limited Partners shall be required in the case of amendments requiring the consent of all Limited Partners under the Act, (ii) the Partnership may be dissolved, (iii) all or substantially all of the Partnership assets may be sold or pledged, (iv) the General Partner may be removed from office and replaced, (v) a new general partner may be elected if the General Partner withdraws from the Partnership, or (vi) any contract between the Partnership and the General Partner or any of its affiliates may be cancelled upon not more than sixty (60) days' prior written notice and without penalty, in each case by the affirmative vote of the holders of a simple majority of the Units of Limited Partnership Interest (not including any Units of Limited Partnership Interest held by the General Partner), at a meeting called and conducted in accordance with Section 6.1 hereof. However, nothing contained in this Section 6.2(c), or in any other section of this Agreement, shall imply that the Limited Partners have any rights of management or control over the operations of the Partnership. If an action described in the first sentence of subsection (iv) or (v) of this Section 6.2 (c) is taken, the General Partner shall withdraw from the Partnership and shall receive the proportionate share of the Net Assets attributable to its general partnership interest as of the close of business on the last business day of the month in which the withdrawal is effective. (d) Upon any amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such amendment. (e) The General Partner may not make a material change in the basic investment policy or structure unless it shall first obtain the affirmative vote of the holders of a simple majority of the Units of Limited Partnership Interest. A-17 6.3 ANNUAL REPORTS AND MONTHLY STATEMENTS (a) As required by the CE Act, the General Partner shall furnish each Limited Partner with unaudited monthly statements as of the end of each calendar month and with an audited annual report containing financial statements certified by an independent public accountant as of the end of each fiscal year. The General Partner shall also furnish each Limited Partner with such other reports and information (and in such detail) as are required to be given to the Limited Partners by the CFTC or any other governmental authority which has jurisdiction over the activities of the Partnership and as the General Partner, in its sole discretion, deems necessary or appropriate. (b) Annual reports shall be transmitted to the Limited Partners within ninety (90) days after the close of the Partnership's fiscal year (unless a shorter period is provided by applicable law or regulations) containing financial statements of the Partnership certified by an independent public accountant including a balance sheet as of the end of the fiscal year and statements of income, Partners' equity, and changes in financial position for the year then ended, all of which shall be prepared in accordance with generally accepted accounting principles, and a statement showing the total fees, compensation, brokerage commissions and expenses of the Partnership, segregated as to type. Appropriate tax information (adequate to enable each Limited Partner to complete and file his United States Federal income tax return) shall be delivered to each Limited Partner no later than the fifteenth (15th) day of the third month following the end of each fiscal year. 6.4 ENTIRE AGREEMENT This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated by this Agreement and supersedes all prior arrangements or understandings with respect thereto. 6.5 DESCRIPTIVE HEADINGS The descriptive headings of this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. 6.6 NOTICES All notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be considered properly given or made if delivered personally or mailed by registered mail, postage prepaid, return receipt requested, or if telegraphed by prepaid telegram and confirmed by written notice mailed contemporaneously as aforesaid, and addressed, if to the General Partner, to it at 925 Westchester Avenue, White Plains, NY 10604 and if to a Limited Partner, to the address set forth below such Limited Partner's signature on the execution page hereof. Notwithstanding the foregoing, Requests for Redemption and notices of transfer, assignment or disposition of Units of Limited Partnership Interest shall be effective upon receipt by the Partnership or the General Partner; and reports by the General Partner to the Limited Partners may be mailed by unregistered first class mail, postage prepaid, return receipt not requested. Any Limited Partner may change his address by giving notice in writing to the General Partner stating his new address, and the General Partner may change its address by giving such notice to all the Limited Partners. Commencing on the tenth (10th) day after the giving of such notice, such newly designated address shall be such Partner's or Partners' address for the purpose of all notices or other communications required or permitted to be given pursuant to this Agreement. 6.7 GOVERNING LAW THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW; PROVIDED THAT THE FOREGOING CHOICE OF LAW SHALL NOT RESTRICT THE APPLICATION OF ANY STATE'S SECURITIES LAWS TO THE SALE OF UNITS TO ITS RESIDENTS OR WITHIN SUCH STATE. 6.8 ILLEGALITIES In the event that any provision contained in this Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and the remaining provisions of this Agreement shall not, at the election of the party for whose benefit the provision exists, be in any way impaired. A-18 6.9 BINDING EFFECT This Agreement shall be binding upon and inure to the benefit of the Partners, their respective legal representatives, successors, heirs and permitted assigns. Any person hereafter admitted to the Partnership as a general partner or a Limited Partner shall be subject to all of the provisions of this Agreement as if an original signatory thereto. 6.10 THIRD PARTY RIGHTS Notwithstanding any other provision of this Agreement, this Agreement shall not create benefits on behalf of any third party, and this Agreement shall be effective only as between the parties hereto and their respective legal representatives, successors, heirs and permitted assigns. 6.11 COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which taken together shall constitute on and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SHAFFER ASSET MANAGEMENT, INC. By: /S/ DANIEL S. SHAFFER ----------------------- Daniel S. Shaffer PRESIDENT LIMITED PARTNERS Daniel S. Shaffer as attorney-in-fact for the Limited Partners who have agreed by separate instrument to be a party hereto. /S/ DANIEL S. SHAFFER ----------------------------- Daniel S. Shaffer A-19 EXHIBIT B SUBSCRIPTION REQUIREMENTS GENERAL SUITABILITY REQUIREMENTS Unless the subscriber is a resident of a state listed below, the subscriber must have net worth of at least $225,000, exclusive of home, furnishings and automobiles, or an annual gross income of at least $60,000 and a net worth similarly calculated of at least $60,000, and the investment of the subscriber in the Fund must not constitute more than 10% of the net worth, exclusive of home, furnishings and automobiles, of the subscriber. ADDITIONAL STATE LAW SUITABILITY REQUIREMENTS Some jurisdictions impose additional requirements on subscribers, which requirements may change from time to time. The descriptions below are based on unofficial compilations of the blue-sky laws believed to be accurate on the date of the accompanying Prospectus and this Statement of Additional Information. Subscribers who are residents of the following states represent and warrant that they meet the following additional requirements imposed by such states, in each case excluding from their net worth the value of their home, furnishings and automobiles: IOWA: Net worth of at least $350,000 or a net worth of at least $100,000 and $100,000 taxable income. KANSAS: Net worth of at least $350,000 or a net worth of at least $100,000 and $100,000 taxable income. MISSOURI: Net worth of at least $350,000 or a net worth of at least $100,000 and $100,000 taxable income. NEBRASKA: Net worth, or joint net worth with spouse, that exceeds $1,000,000 or income in excess of $200,000 in each of the two most recent years or a joint income with spouse in excess of $300,000, and a reasonable expectation of income of a similar level in the current year. ERISA REQUIREMENTS If a subscriber in the Fund is acting on behalf of an "employee benefit plan" as defined in and subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or a "plan" as defined in Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), the individual signing the Subscription Agreement / Power of Attorney as plan fiduciary further represents and warrants, on behalf of the subscriber, to the Fund, the General Partner, the Selling Agent, the selected dealer(s) that solicited the subscription, and ADM Investor Services that: o the plan fiduciary has considered an investment in the Fund for such plan in light of the risks relating thereto; o the plan fiduciary has determined that, in view of such considerations, the investment in the Fund is consistent with the responsibilities of the plan fiduciary under ERISA; o an investment in the Fund does not violate and is not otherwise inconsistent with the terms of any legal document constituting the plan or any trust agreement thereunder; o an investment in the Fund has been duly authorized and approved by all necessary parties; o none of the General Partner, the Advisor, the Selling Agent, the selected dealer(s) that solicited the subscription, or any of their respective affiliates, agents or employees: - has investment discretion with respect to the plan assets; - has authority or responsibility to give or regularly gives investment advice with respect to the plan assets for a fee and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to the plan assets and that such advice will be based on the particular investment needs of the plan; or - is an employer maintaining or contributing to the plan; o the plan fiduciary: - is authorized to make, and is responsible for, the decision to invest in the Fund, including the determination that the investment is consistent with the requirement imposed by Section 404 of ERISA that plan investments be diversified so as to minimize the risks of large losses; B-1 - is independent of the General Partner, the Advisor, the Selling Agent, the selected dealer(s) that solicited the subscription, ADM Investor Services, and their respective affiliates, agents and employees; and - is qualified to make the investment decision. At the request of the General Partner, the plan fiduciary agrees to furnish the General Partner with any information reasonably required by the General Partner to establish that the purchase of the Units by the plan does not violate any provision of ERISA or the Internal Revenue Code, including without limitation those provisions relating to "prohibited transactions" by "parties in interest" or "disqualified persons." FIDUCIARY ACCOUNTS In the case of a subscription on behalf of a fiduciary account, the account beneficiary must meet the subscription requirements. However, in a case where a donor or grantee directly or indirectly supplies the funds to purchase the Units, and the donor or grantee acts as the fiduciary for the account, then the donor or grantee may meet the subscription requirements. B-2 EXHIBIT C SUBSCRIPTION INSTRUCTIONS FOR SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY Prospective investors in Shaffer Diversified Fund, LP (the "Fund") should carefully read and review a copy of the Fund's most recent Prospectus and Statement of Additional Information. In addition, the Prospectus and Statement of Additional Information should be accompanied by the most recent monthly report of the Fund. 1. Enter the total dollar amount being invested on LINE 1. Initial minimum investment: $10,000 in Units ($5,000 in Units in the case of any pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension - IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, including but not limited to, those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code. Subsequent minimum investment: $1,000. 2. If a customer securities account is to be debited for the investment, enter the account number on LINE 2. 3. Enter the Social Security or Taxpayer Identification Number of the subscriber on LINE 3, and check the appropriate box to indicate ownership type. For individual retirement accounts, enter the Social Security Number of the subscriber and the Taxpayer Identification Number of the custodian. 4. Check the box in LINE 4 if this investment is an addition to an existing account, and complete the account number. 5/6. Enter the name of the subscriber on LINE 5. For UGMA/UTMA accounts, enter the name of the minor on LINE 5, followed by "minor," and enter the name of the custodian on LINE 6. For trusts, enter the name of the trust on LINE 5 and the name(s) of the trustee(s) on LINE 6. For corporations, partnerships and estates enter the name of the entity on LINE 5 and the name of the officer or contact person of such entity on LINE 6. Subscribers who are not individuals must furnish a copy of organizing or other documents evidencing the authority of the entity to invest in the Fund. For example, trusts must furnish a copy of the trust agreement, and corporations must furnish a copy of the corporate charter, bylaws and enabling resolutions. 7. Enter the legal address, which is the residence or domicile address used for tax purposes, of the subscriber on LINE 7. Do not enter post office boxes. 8. If the mailing address of the subscriber is different from the legal address of the subscriber, complete LINE 8. 9. If an individual retirement account, enter the name and address of the custodian on LINE 9. 10. The subscriber must sign and date LINE 10. If a joint account, both subscribers must sign. In an individual retirement account, both the custodian and the subscriber must sign. 11. Financial advisors must complete and sign under "Financial Advisors" below. The financial advisor should send the Subscription Agreements / Power of Attorney, payments and all other required documents to the selling agent: Berthel Fisher & Company Financial Services, Inc. 701 Tama Street PO Box 609 Marion, IA 52302-0609 Phone: (800) 356-5234 or (319) 447-5700 Facsimile: (319) 447-4250 E-mail: danderson@berthel.com Please send all documents and payments early in the month to ensure timely delivery. Subscriptions close on the last business day of each month. The fund administration department of the Selling Agent and the selected dealer(s) that solicited the subscription may have an earlier deadline for subscriptions. C-1 If payment is being made by wire transfer, the financial advisor should contact Berthel Fisher & Company. PAYMENTS MADE BY CHECK MUST BE RECEIVED BY THE FUND AT LEAST THREE BUSINESS DAYS PRIOR TO THE LAST BUSINESS DAY OF THE MONTH, AND PERSONAL CHECKS MUST BE RECEIVED BY THE FUND AT LEAST FIVE BUSINESS DAYS PRIOR TO THE LAST BUSINESS DAY OF THE MONTH. ONLY SUBSCRIPTIONS FOR WHICH PAYMENT HAS CLEARED WILL BE ACCEPTED. A financial advisor having specific questions about the subscription process should call the Berthel Fisher & Company Marketing Department at (800) 356-5234. C-2 SHAFFER DIVERSIFIED FUND, LP (A DELAWARE LIMITED PARTNERSHIP) SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY Shaffer Diversified Fund, LP c/o Shaffer Asset Management, Inc. 925 Westchester Avenue White Plains, NY 10604 Dear Sir or Madam: SUBSCRIPTION FOR UNITS. By executing this Subscription Agreement / Power of Attorney, I hereby irrevocably subscribe for the number of units ("Units") of limited partnership interest in Shaffer Diversified Fund, LP (the "Fund") set forth on page C-4 hereof at a purchase price equal to the Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased, as more fully described in the Fund's prospectus (the "Prospectus") and accompanying Statement of Additional Information (the "Statement of Additional Information"), as the same may be amended or supplemented from time to time. I understand that fractional Units may be purchased. My check payable to "Shaffer Diversified Fund, LP" in the full amount of my subscription accompanies this Subscription Agreement / Power of Attorney, or I have authorized Berthel Fisher & Company Financial Services, Inc. (the "Selling Agent") or the selected dealer(s) that solicited this subscription to debit my customer securities account in the amount set forth herein. REPRESENTATIONS AND WARRANTIES. I represent the following (subscriber to initial as indicated): Initial: _____ I have received a copy of the Prospectus and accompanying Statement of Additional Information. Initial: _____ I am purchasing the Units only for my own account. Initial: _____ This purchase does not exceed more than ten percent (10%) of my net worth. INITIAL ONLY ONE OF THE FOLLOWING: Initial: ______ Except as noted below, I have (i) a net worth (exclusive of home, home furnishings and automobiles) of at least $225,000 or (ii) an annual gross income of at least $60,000 and a net worth similarly calculated of at least $60,000, and my investment in the Fund will not constitute more than 10% of my net worth, exclusive of my home, home furnishings and automobiles. Initial: ______ I am a resident of Iowa, Kansas, or Missouri and I have (i) a net worth of at least $350,000 or (ii) a net worth of at least $100,000 and $100,000 taxable income. Initial: ______ I am a resident of Nebraska, and I have (i) a net worth, or joint net worth with my spouse, that exceeds $1,000,000 or (ii) had income in excess of $200,000 in each of the two most recent years or a joint income with my spouse in excess of $300,000, and I have a reasonable expectation of reaching this same income level in the current year. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, HOWEVER, I UNDERSTAND THAT BY SIGNING THIS SUBSCRIPTION AGREEMENT, I AM NOT WAIVING ANY RIGHTS THAT I MAY HAVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. AGREEMENTS By signing this letter, I shall be deemed to have executed and to agree to be bound by the terms of the Agreement of Limited Partnership, as amended, of the Fund (the "Limited Partnership Agreement") attached as Exhibit A to the Statement of Additional Information. In addition, I agree to reimburse the Fund and Shaffer Asset Management, Inc. (the "General Partner / Advisor") for any expense or loss incurred as a result of my failure to deliver good funds for the subscription amount. I consent to the execution and delivery of an advisory agreement between the Fund and the General Partner /Advisor and to the payment to the General Partner / Advisor of the compensation described in the Prospectus and the Statement of Additional Information. In addition, if I am not a citizen or resident of the United States for federal income tax purposes and not a dealer in commodities, I agree to pay or reimburse the Fund for any taxes imposed as a result of my status as a limited partner in the Fund. C-3 POWER OF ATTORNEY In connection with my purchase of Units, I do hereby irrevocably constitute and appoint the General Partner / Advisor as my true and lawful Attorney-in-Fact, with full power of substitution, in my name, place and stead, (i) to file, prosecute, defend, settle or compromise litigation, claims or arbitration on behalf of the Fund and (ii) to make, execute, sign, acknowledge, swear to, deliver, file and record on my behalf any documents or instruments considered necessary or desirable by the General Partner /Advisor to carry out fully the provisions of the Limited Partnership Agreement, including without limitation the execution of the Certificate of Limited Partnership of the Fund, the Limited Partnership Agreement, and all amendments thereto permitted by the terms thereof to be entered into by the General Partner / Advisor. The power of attorney granted hereby shall be deemed to be coupled with an interest, shall be irrevocable and shall survive and not be affected by my subsequent death, incapacity, disability, insolvency or dissolution or any delivery by me of an assignment of the whole or any portion of my interest in the Fund. IRREVOCABILITY; GOVERNING LAW My subscription for Units will not be complete until the close of business on the day that is five days after I receive a final prospectus of the Fund. I hereby acknowledge that after the expiration of that five-day period I am not entitled to cancel, terminate or revoke this subscription or any of my agreements hereunder after this subscription has been submitted. The laws of the State of Delaware shall govern this Subscription Agreement / Power of Attorney. 1. Amount of subscription: $______________________ 2. If debit is to be made to customer securities account, account number: ____________________. 3. Social Security _______ - ______ - ______ or taxpayer identification number: ______ - __________ Taxable investors (check one): Non-taxable investors (check one): [ ] Individual [ ] Individual retirement account [ ] Joint tenants with right of survivorship [ ] Roth IRA [ ] Tenants in common [ ] IRA rollover [ ] Community property [ ] SEP [ ] Estate [ ] Profit-sharing account [ ] UGMA/UTMA [ ] Defined benefit account [ ] Corporation [ ] Pension [ ] Partnership [ ] Other Retirement Benefit Plan [ ] Grantor or other revocable trust [ ] Other (specify) _____________ [ ] Trust other than grantor or revocable trust 4. [ ] Existing account number: ____________________. 5. Names in which Units are to be registered: __________________ 6. Additional information (see instructions): ___________________ 7. Address: ____________________________________________ Telephone No: ____________________________________________ Facsimile No: ____________________________________________ E-mail Address: ____________________________________________ C-4 8. Mailing address (if different): -------------------------------------------- -------------------------------------------- -------------------------------------------- 9. Custodian name and mailing address: -------------------------------------------- -------------------------------------------- -------------------------------------------- Account Number: _____________________________ 10. Signature of Investor: Date: -------------------------------- ----------------------- Signature of joint investor or Custodian: Date: -------------------------------- ----------------------- UNITED STATES INVESTORS [ ] I have checked the box if I am subject to backup withholding under the provisions of section 3406(a)(1)(C) of the Internal Revenue Code of 1986, as amended. Under penalties of perjury, I hereby certify by signature above that the Social Security or Taxpayer Identification Number above is my true, correct and complete Social Security or Taxpayer Identification Number and that the information given in the immediately preceding sentence is true, correct and complete. NON-UNITED STATES INVESTORS Under penalties of perjury, I hereby certify by signature above that I am not a citizen or resident of the United States and not a United States corporation, partnership, estate or trust. FINANCIAL ADVISORS I hereby certify that I have informed the subscriber herein of all pertinent facts relating to the risks, tax consequences, liquidity, marketability, management and control of the Fund with respect to an investment in the Units, as set forth in the Prospectus and the Statement of Additional Information. I have also informed the subscriber that it is unlikely that a public trading market in the Units will develop. I have reasonable grounds to believe, based on information obtained from the subscriber concerning his or her investment objectives, other investments, financial situation and needs and any other information known by me, that investment in the Fund by the subscriber is suitable for the subscriber in light of his or her financial position, net worth and other suitability characteristics. The financial advisor must sign below to substantiate compliance with NASD Rule 2810. The office manager (if required by the procedures of the Selling Agent or selected dealer(s) that solicited this subscription) must sign below: Financial advisor signature: Date: ----------------------- ----------------------- Office manager signature: Date: ----------------------- ----------------------- Financial advisor name:__________________________________________ Address: __________________________________________ Telephone: __________________________________________ Facsimile: __________________________________________ E-mail address: __________________________________________ C-5 EXHIBIT D SHAFFER DIVERSIFIED FUND, LP (A DELAWARE LIMITED PARTNERSHIP) REQUEST FOR REDEMPTION _________________, 20___ (Please date) PLEASE SEND ORIGINAL TO: Shaffer Asset Management, Inc., as General Partner Shaffer Diversified Fund, LP 925 Westchester Avenue White Plains, NY 10604 Re: Account No: ________________________ Social Security or taxpayer identification number: ____________________ Dear Sir or Madam: I hereby request redemption, as defined in and subject to all of the terms and conditions of the Agreement of Limited Partnership of Shaffer Diversified Fund, LP, a Delaware limited partnership (the "Fund"), as amended, of _______________ [insert number of Units to be redeemed OR write the word "All"] of my Units of limited partnership interest in the Fund at the Net Asset Value per Unit described in the current Prospectus and accompanying Statement of Additional Information of the Fund. I understand that the redemption shall be effective as of the close of business on the last business day of the calendar month in which this request for redemption is received by the General Partner; PROVIDED that this request for redemption is received by the General Partner at least 10 days prior to such effective date, and that if this request for redemption is received by the General Partner less than 10 days prior to a permitted redemption date, my Units may be redeemed on the next succeeding redemption date. I also understand that the redemption fees described in the Prospectus may apply to this redemption. I (either in my individual capacity or as an authorized representative of an entity, if applicable) hereby represent and warrant that I am the true, lawful and beneficial owner of the Units of limited partnership interest to which this request for redemption relates, with full power and authority to request redemption of such Units. Such Units are not subject to any pledge or otherwise encumbered in any fashion. UNITED STATES INVESTORS [ ] I have checked the box if I am subject to backup withholding under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code. Under penalties of perjury, by signature below I hereby certify that the Social Security or taxpayer identification number above is my true, correct and complete Social Security or taxpayer identification number and that the information given in the immediately preceding sentence is true, correct and complete. D-1 NON-UNITED STATES INVESTORS Under penalties of perjury, by signature below I hereby certify that I am not a citizen or resident of the United States and not a United States corporation, partnership, estate or trust. Please forward redemption proceeds by mail to me at: -------------------------------------------- -------------------------------------------- -------------------------------------------- SIGNATURES MUST BE IDENTICAL TO NAME (S) IN, WHICH UNITS ARE REGISTERED. (Duly authorized persons should sign on behalf of entities.) Individual Limited Partner(s) -------------------------------------------- Name(s) (please print) Signature ____________________________________ Signature ____________________________________ Partnership, Trust, Corporate of Other Entity Limited Partner(s): ------------------------------------------ Name of Partnership, Trust, Corporation or Other Entity (please print) By:_________________________________________________ Signature of partner, trustee or authorized officer -------------------------------------------- Name of Partner, Trustee or Other Authorized Officer (please print) -------------------------------------------- Title (please print) THIS REQUEST FOR REDEMPTION MUST BE MAILED TO THE FUND'S OFFICE BY REGISTERED MAIL, RETURN RECEIPT REQUESTED, TOGETHER WITH THE CERTIFICATE (S) REPRESENTING THE UNITS TO BE REDEEMED. D-2 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Shaffer Asset Management, Inc., a New York corporation and the general partner of the Registrant (the "General Partner"), has agreed to pay the initial offering expenses of the Registrant as described in the Prospectus included in this Registration Statement Amendment. The Registrant is responsible for paying the ongoing administrative expenses of Registrant, including costs incurred in connection with the preparation of this Registration Statement Amendment, subject to a cap of 0.5% of Registrant's average monthly net asset value per annum. An estimate of those costs is set forth below. Printing expenses.................................................... $ 25,000 Accounting fees and expenses......................................... 25,000 Blue-sky fees and expenses (excluding legal fees).................... 17,000 Legal fees and expenses.............................................. 25,000 Miscellaneous offering costs......................................... 8,000 Total..................................................... $100,000 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article 2.5 of the Second Amended and Restated Agreement of Limited Partnership of the Registrant, which is included as Exhibit A to the Statement of Additional Information that accompanies the Prospectus which forms a part of this Registration Statement Amendment, provides for the indemnification by the Registrant of the General Partner, its controlling persons and former general partners in specified circumstances. Such indemnification is limited to claims arising from actions or omissions in which the person seeking indemnification was acting on behalf of or providing services to the Registrant, if the person seeking indemnification determined, in good faith, that the course of conduct that caused the loss or liability was in the best interests of the Registrant, if the person seeking the indemnification was acting on behalf of or performing services for the Registrant and if the liability or loss did not result from negligence or misconduct by the person seeking indemnification. Notwithstanding the above, no person will be indemnified by the Registrant for claims arising out of alleged violations of federal or state securities laws unless: o There has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee; o The claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or o A court of competent jurisdiction approves a settlement of the claims and finds that indemnification of the settlement and related costs should be made; PROVIDED that the court has been advised of the position as to indemnification for violations of securities laws of the Securities and Exchange Commission and the securities administrators of the jurisdictions in which the claimant alleges to have been offered or sold units. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On August 30, 2000, one unit of general partnership interest in the Registrant was sold to the General Partner and one unit of limited partnership interest was sold to Daniel S. Shaffer, the sole shareholder and principal of the General Partner, in order to permit the filing with the Secretary of State of the State of Delaware of a Certificate of Limited Partnership for the Registrant. The sale of these Unit was exempt from registration under the Securities Act of 1933, as amended, pursuant to section 4(2) thereof. No discounts or commissions were paid in connection with such sales, and no other purchasers or offerees were solicited. There have been no other unregistered sales of Units. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The following documents are filed herewith and made a part of this Registration Statement Amendment. (a) EXHIBITS EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1 Form of Amendment to Selling Agreement between Berthel Fisher & Company Financial Services, Inc. and Registrant. 3.1 Second Amended and Restated Agreement of Limited Partnership of the Registrant - included as Exhibit A to the Prospectus. 3.2 Form of Request for Redemption - included as Exhibit D to the prospectus. 5.1 Opinion of Sidley Austin Brown & Wood relating to the legality of the Units. 8.1 Opinion of Sidley Austin Brown & Wood relating to federal income tax matters. 10.4 Form of Subscription Agreement/Power of Attorney - included as exhibit C to the prospectus. 23.1 Consent of Sidley Austin Brown & Wood - included in Exhibit 5.1 to this Registration Statement Amendment. 23.2 Consent of Anchin, Block and Anchin LLP. The following Exhibits, as numbered, are included herein by reference to Registrant's Registration Statement on Form S-1 (Reg. No. 33-46550) filed with the Securities and Exchange Commission on September 25, 2000 as amended by Amendment No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4 and Amendment No. 5 thereto filed with the Securities and Exchange Commission on January 24, 2001, April 6, 2001, May 16, 2001, August 17, 2001 and October 11, 2001, respectively. EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1 Form of Selling Agreement between Registrant and Berthel Fisher & Company Financial Services, Inc. (Amend. 5). 1.2 Form of Selected Dealers Agreement (Amend. 1). 1.3 Form of Continuing Service Agreement (Amend. 5). 1.4 Specimen of Unit Certificate (Amend. 1). 3.1 Certificate of Limited Partnership of the Registrant (Reg. Stat.). 10.1 Form of Customer Agreement between the Registrant and ADM Investor Services, Inc. (Amend. 1). 10.2 Commodity Trading Authorization between the Registrant and Shaffer Asset Management, Inc. (Reg. Stat.). 10.2 Form of Advisory Agreement between the Registrant and Shaffer Asset Management, Inc. (Amend. 1). 10.5 Form of Net Worth Agreement among Shaffer Asset Management, Inc., Daniel S. Shaffer and Bruce I. Greenberg (Amend. 1). 10.6 Form of Escrow Agreement between the Registrant and The Chase Manhattan Bank (Amend. 4). (b) FINANCIAL STATEMENT SCHEDULES. No Financial Schedules are required to be filed herewith. ITEM 17. UNDERTAKINGS. (a)(1) The undersigned registrant hereby undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the 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. II-2 (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) Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant had 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 a director, officer or controlling person of the registrant in the successful defense of any such action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the General Partner of the Registrant has duly caused this Post-Effective Amendment No. 1 to Registrant's Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Westchester in the State of New York on the 11th day of October, 2002. SHAFFER DIVERSIFIED FUND, LP By: Shaffer Asset Management, Inc. General Partner By: /s/ DANIEL S. SHAFFER ------------------------------------ Daniel S. Shaffer President Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to the Registration Statement has been signed below by the following persons on behalf of the General Partner of the Registrant in the capacities and on the date indicated. SIGNATURES TITLE WITH REGISTRANT DATE ---------- --------------------- ---- /s/ DANIEL S. SHAFFER Chairman of the Board, October 11, 2002 ---------------------------- President, Chief Executive Daniel S. Shaffer Officer, Secretary and Director (Principal Executive Officer) /s/ BRUCE I. GREENBERG Chief Financial Officer, October 11, 2002 ---------------------------- VP, Treasurer and Bruce I. Greenberg Director (Principal Financial and Accounting Officer) (Being the principal executive officer, the principal financial and accounting officer, and a majority of the directors of Shaffer Asset Management, Inc.) SHAFFER ASSET MANAGEMENT, INC., General Partner of Registrant by: /s/ Daniel S. Shaffer --------------------- Daniel S. Shaffer President date: October 11, 2002 II-4