-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BBZV3X8U96hIzki+YeAnopz7azUhn7uX21u++4Fyi0iKpW47lgZ3qLe45qrQSlLo BlI56Y42ErkhTKhcxc4/JA== 0000930413-01-000107.txt : 20010125 0000930413-01-000107.hdr.sgml : 20010125 ACCESSION NUMBER: 0000930413-01-000107 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20010124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHAFFER DIVERIFIED FUND LP CENTRAL INDEX KEY: 0001123429 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 134132934 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-46550 FILM NUMBER: 1514415 BUSINESS ADDRESS: STREET 1: 70 WEST RED OAK LANE CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146977558 MAIL ADDRESS: STREET 1: 70 WEST RED OAK LANE CITY: WHITE PLAINS STATE: NY ZIP: 10604 S-1/A 1 0001.txt PRE-EFFECTIVE AMENDMENT NO. 1 As filed with the Securities and Exchange Commission on January 24, 2001 Registration No. 333-46550 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-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) Delaware 6799 13-4132934 (State or other jurisdiction (Primary Standard (IRS employer of incorporation Industrial Classification identification number) or organization) Code Number) 70 West Red Oak Lane White Plains, NY 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. 70 West Red Oak Lane White Plains, NY 10604 (800) 352-5265 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy of communications to: Kevin J. Lake, Esq. Lee D. Unterman, Esq. Kurzman Karelsen & Frank, LLP 230 Park Avenue New York, NY 10169 (212) 867-9500 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] __________________
CALCULATION OF REGISTRATION FEE ==================================================================================================== Proposed maximum aggregate Amount of Title of each class of securities to be registered offering price (1) registration fee - ---------------------------------------------------------------------------------------------------- Units of limited partner interest ................ $25,000,000 $6,600.00 ====================================================================================================
(1) Estimated, pursuant to Rule 457(o) under the Securities Act, solely for purposes of calculating the registration fee. Of this fee, $3,960.00 was paid in connection with the initial filing of this registration statement on September 25, 2000. 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 the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. -2- SHAFFER DIVERSIFIED FUND, L.P. CROSS REFERENCE SHEET
Item No. Item Prospectus Heading - -------- ---- ------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.............. Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Cover Page; Table of Contents 3. Summary Information, Risk Factors and Commodity Futures Trading Commission Ratio of Earnings to Fixed Charges.................. Risk Disclosure Statement; Summary; Financial Information; Risk Factors; Fees, Compensation and Expenses 4. Use of Proceeds..................................... Summary - The Offering - Use of Proceeds; Use of Proceeds 5. Determination of Offering Price..................... Cover Page; Inside Cover Page; Summary - The Offering - Securities Offered; Plan of Distribution - The Offering 6. Dilution............................................ Not Applicable 7. Selling Security Holders............................ Not Applicable 8. Plan of Distribution................................ Cover Page; Inside Cover Page; Summary - The Offering - Plan of Distribution; Plan of Distribution 9. Description of Securities to be Registered.......... Cover Page; Summary - Possible Advantages of Investment in the Fund - Liquidity; - Limited Liability; Summary - The Fund - Distributions; - Redemption of Units; Summary - The Offering - Securities Offered; Distributions and Redemptions; Summary of the Limited Partnership Agreement 10. Interests of Named Experts and Counsel.............. Legal Matters; Experts 11. Information with Respect to the Registrant.......... Cover Page; Organizational Chart; Summary - The Fund - The Fund; - Location and Telephone Number; - Termination of the Fund; - Business; - Administration; Financial Information; Risk Factors; Conflicts of Interest/Fiduciary Responsibility of the General Partner; Fees, Compensation and Expenses; The General Partner/Advisor; Distributions and Redemptions; Trading Policies; Summary of the Limited Partnership Agreement; Selected Financial Data/Capitalization; Index to Financial Statements 12. Disclosure of Commission Position on Summary of the Limited Partnership Agreement - Indemnification for Securities Act Liabilities...... Indemnification
-3- The information contained in this Prospectus and the accompanying Statement of Additional Information is not complete and may be changed. The Fund may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This Prospectus and the accompanying Statement of Additional Information is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any state in which the offer or sale of these securities is not permitted. SUBJECT TO COMPLETION, DATED __________, 2001 PROSPECTUS SHAFFER DIVERSIFIED FUND, LP (A Delaware limited partnership) 25,000 UNITS OF LIMITED PARTNERSHIP INTEREST THESE UNITS ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK Shaffer Diversified Fund, L.P. (the "Fund") is a Delaware limited partnership organized in August 2000 to seek medium- and long-term capital appreciation through speculative trading in a diversified portfolio of commodity futures contracts and other commodity interests in the United States commodity futures markets. Trading decisions for the Fund will be made by Shaffer Asset Management, Inc. (the "General Partner / Advisor"), which will serve as the Fund's general partner and commodity trading advisor. There can, of course, be no assurance that the Fund's investment objectives will be achieved or that losses will not be sustained. A DESCRIPTION OF THE MATERIAL RISK FACTORS RELATING TO AN INVESTMENT IN THE FUND APPEARS IN THIS PROSPECTUS UNDER THE HEADING "RISK FACTORS" ON PAGE 16 OF THIS PROSPECTUS This offering consists of up to 25,000 units (the "Units") of limited partnership interest of the Fund. During the initial offering period, the Units will be offered at an initial offering price of $1,000 per Unit ($950 per Unit, plus an initial sales charge of $50 per Unit). Subsequent to the closing of the initial offering period, unsold Units (if any) may be offered and sold by the Fund at the then current Net Asset Value per Unit (as hereinafter defined), plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. Each investor in the Fund is required to purchase a minimum of $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). In some states, however, greater minimum purchase requirements may be applicable. Purchases by investors and their spouses and by entities (including retirement and deferred compensation and annuity plans and trusts) which 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. No public market for the Units exists, and none is likely to develop. Units may be redeemed as of the last business day of each calendar month at the then current Net Asset Value per Unit on ten days' prior written notice to the General Partner, subject to certain restrictions. Units redeemed as of or before the end of the first three full calendar months after their purchase will be charged a 4% early redemption fee, which fee shall decrease by one percentage point for every three months thereafter. The Units are being offered for sale through Berthel Fisher & Company Financial Services, Inc., the Fund's selling agent (the "Selling Agent"), on a best efforts basis. The Selling Agent may select other firms that are members of the National Association of Securities Dealers, Inc. ("NASD") and certain foreign dealers and institutions that are not members of the NASD ("selected dealers") to participate in this offering. There can be no assurance that any or all of the Units being offered will be sold. Information about the Fund and this offering is contained in two parts--this Prospectus and a separate Statement of Additional Information. Both this Prospectus and the Statement of Additional Information must be provided to investors prior to investment in the Fund. Investors should carefully read both this Prospectus and the accompanying Statement of Additional Information prior to making an investment in the Fund. In addition, each investor is encouraged to discuss investment in the Fund with his or her own legal, tax and financial advisors. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
- ------------------------------------------------------------------------------------------------ Price to Public Selling Commissions Proceeds to Fund (1) (1)(4) (1)(2)(3) - ------------------------------------------------------------------------------------------------ Per Initial Unit (Minimum Purchase: $10,000 - see Note 1) $ 1,000 $ 50 $ 950 - ------------------------------------------------------------------------------------------------ Total Minimum (1,000 Initial Units) 1,000,000 50,000 950,000 - ------------------------------------------------------------------------------------------------ Total Maximum (25,000 Initial Units) 25,000,000 1,250,000 23,750,000 - ------------------------------------------------------------------------------------------------
(Notes are on Page 2) _______________, 2001 -2- NOTES: (1) The public offering price of the Units has been determined arbitrarily by the General Partner. The Units are being offered through the Selling Agent on a best efforts basis, and the Selling Agent may select other firms that are members of the NASD and certain foreign dealers and institutions which are not members of the NASD (the "Selected Dealers") to participate in this offering. There can be no assurance that any or all of the Units being offered will be sold. The minimum purchase by each investor is $10,000 (initially 10 Units), except that in the case of purchases 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 purchase is $5,000 (initially 5 Units). In some states, however, greater minimum purchase requirements may be applicable. Subsequent to the initial offering period, the Fund may sell unsold Units (if any) subject to the minimum purchase requirements described above, 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. If at least 1,000 Units are sold and accepted by the General Partner during the initial offering period, approximately 20% of all sales charges shall be paid to the General Partner to reimburse the General Partner for the payment of the Fund's organizational and initial offering and the Fund's operating expenses that are payable by the General Partner and approximately 80% of all sales charges shall be paid as syndication fees to the Selling Agent and as selling commissions to the Selected Dealers. The Selling Agent and the Selected Dealers may in turn pay a portion of such syndication fees and selling commissions to their respective employees who are NASD registered representatives for each Unit sold by them. (See "Fees, Compensation and Expenses" and "Plan of Distribution".) (2) The Fund's organizational and initial offering expenses (exclusive of selling commissions) are currently estimated at $200,000, and the amount of such expenses will be borne and paid by the General Partner. The Fund will not be obligated to reimburse the General Partner for any organizational and initial offering expenses paid by it; instead, 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 the General Partner to reimburse the General Partner for the payment of such organizational and initial offering expenses, as well as the operating expenses of the Fund for which the General Partner has agreed to pay. (See "Summary - Fees and Expenses Payable by the General Partner", "Fees, Compensation and Expenses", "Plan of Distribution" and "Distributions and Redemptions".) (3) The proceeds from the sale of the Units will be deposited in an escrow account with The Chase Manhattan Bank, 1214 Mamaroneck Avenue, White Plains, NY 10605. The escrow deposits will be terminated upon the conclusion of the initial offering period. If at least 1,000 Units have been sold and accepted by the General Partner, the proceeds will be contributed to the capital of the Fund, and all interest earned on the proceeds of the subscriptions during the initial offering period will be distributed to the subscribers on a pro rata basis (taking into account both the time and the amount of the deposit). In the event that 1,000 Units have not been sold or accepted by the General Partner within sixty days from the date of this Prospectus (subject to a possible extension for up to an additional sixty days at the discretion of the General Partner), subscribers for Units will be refunded 100% of the purchase price and sales charges paid, plus their respective pro rata share (as defined above) of any interest -3- earned thereon, within fifteen days following the expiration of the escrow period. (See "Plan of Distribution"). (4) See "Plan of Distribution" concerning indemnification arrangements entered into by the Fund with respect to the Selling Agent and the Selected Dealers. The Fund has agreed to indemnify the Selling Agent and the Selected Dealers against certain liabilities, including only with respect to the Selected Dealers liabilities under the Securities Act of 1933, as amended (the "Securities Act of 1933"). NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF ITS ISSUE. THIS PROSPECTUS AND THE ACCOMPANYING STATEMENT OF ADDITIONAL INFORMATION DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE FUND'S REGISTRATION STATEMENT. YOU CAN READ THE ENTIRE REGISTRATION STATEMENT AT THE PUBLIC REFERENCE FACILITIES MAINTAINED BY THE SECURITIES AND EXCHANGE COMMISSION IN WASHINGTON, D.C. Until __________, 2001 (ninety days after the date hereof), all dealers effecting transactions in the Units, whether or not participating in this distribution, are required to deliver a current copy of this Prospectus and the accompanying Statement of Additional Information. This is in addition to the obligation of dealers to deliver a Prospectus and accompanying Statement of Additional Information when acting as underwriters and with respect to their unsold allotments or subscriptions. -4- COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTION MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND FOR 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 28 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 33. 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 16. -5- SHAFFER DIVERSIFIED FUND, L.P. ORGANIZATIONAL CHART The following organizational chart illustrates the relationships among the various service providers of this offering. Shaffer Asset Management, Inc. is both the general partner of, and the commodity trading advisor to, the Fund. The Selling Agent, the Selected Dealers and ADM Investor Services, the Fund's initial commodity broker (the "Commodity Broker"), are not affiliated with the General Partner / Advisor or the Fund, except that Daniel S. Shaffer, the sole officer, director and shareholder of the General Partner / Advisor is a registered representative of the Selling Agent. ------------------------ Selling Agent: Berthel Fisher & Company Financial Services, Inc. ------------------------ Selling Agent Agreement ------------------------ Selected Dealers ------------------------ Selected Dealers Agreement - ---------------- -------------- General Partner/ Commodity Advisor: Advisory ------------------- Customer Broker: Shaffer Asset Agreement Shaffer Diversified Agreement ADM Investor Management, Fund, L.P. Services, Inc. Inc. ------------------- -------------- - ---------------- Individual Managed Account Agreements - ---------------- Individual Managed Account Program - ---------------- -6- PART ONE - PROSPECTUS TABLE OF CONTENTS Page Certain Terms and Definitions................................................ 9 Investment Requirements...................................................... 9 Summary...................................................................... 10 Potential Advantages of Investment......................................... 10 The Fund................................................................... 11 The Offering............................................................... 14 Financial Information........................................................ 16 Risk Factors................................................................. 16 Conflicts of Interest / Fiduciary Responsibility of the General Partner...... 24 Use of Proceeds.............................................................. 28 Fees, Compensation and Expenses.............................................. 28 Summary.................................................................... 28 Description of Fees, Compensation and Expenses............................. 30 Estimate of Break-Even Threshhold.......................................... 33 Certain Definitions........................................................ 35 The General Partner / Advisor................................................ 36 Description of the General Partner / Advisor............................... 36 Duties of the General Partner / Advisor.................................... 37 Minimum Investment and Net Worth Requirements Imposed on the General Partner................................................... 38 Trading Philosophy and Methods of the Advisor.............................. 39 Past Performance of the Advisor............................................ 40 Commodity Brokerage Arrangements............................................. 48 General.................................................................... 48 Description of the Commodity Broker........................................ 48 Civil, Criminal and Administrative Actions................................. 48 Description of Brokerage Arrangements...................................... 49 Plan of Distribution......................................................... 50 The Offering............................................................... 50 Subscriptions / Investment Requirements.................................... 52 Investments by ERISA Accounts................................................ 53 General ................................................................... 53 Special Investment Considerations ......................................... 53 The Fund Should Not Be Deemed To Hold "Plan Assets" ....................... 54 Ineligible Purchasers ......................................................55 Distributions and Redemptions................................................ 55 Trading Policies............................................................. 56 Summary of the Advisory Agreement............................................ 58 Summary of the Limited Partnership Agreement................................. 60 Additional Limited Partners ............................................... 60 Amendments; Meetings ...................................................... 60 Certificates for Units .................................................... 61 Election, Removal and Withdrawal of the General Partner ................... 61 Indemnification............................................................ 61 Liabilities................................................................ 62 Limited Partners' Rights................................................... 62 Profit and Loss; Distributions............................................. 62 Redemptions................................................................ 62 Reports and Accounting..................................................... 63 Termination................................................................ 64 Transfer of Units.......................................................... 64 Capitalization / Selected Financial Data..................................... 65 Federal Income Tax Considerations............................................ 66 Forward-Looking Statements................................................... 69 Legal Matters................................................................ 69 Experts...................................................................... 69 Additional Information....................................................... 69 Index to Financial Statements................................................F-1 -7- PART TWO - STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Page Glossary and Definitions of Commodity Futures Trading........................ 3 Description of Commodity Futures Trading..................................... 7 General.................................................................... 7 Mechanics of Commodity Futures Trading..................................... 8 Margins.................................................................... 9 Regulation.................................................................10 Exhibits - Limited Partnership Agreement..............................................A-1 Subscription Requirements..................................................B-1 Subscription Instructions; Subscription Agreement / Power of Attorney......C-1 Request for Redemption.....................................................D-1 -8- CERTAIN TERMS AND DEFINITIONS Knowledge of various terms and concepts relating to trading in commodity futures contracts and this offering is necessary for a potential investor to determine whether to invest in the Fund. Definitions and/or descriptions of relevant terms and concepts are included in the "Glossary and Definitions of Commodity Futures Trading" which is included in the Statement of Additional Information that accompanies this Prospectus. INVESTMENT REQUIREMENTS The minimum investment in the Fund is $10,000 (initially 10 Units), except that in the case of investments by pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension - IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, including but not limited to, those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code, the minimum investment is $5,000 (initially 5 Units). Purchases by investors and their spouses and by entities (including retirement and deferred compensation and annuity plans and trusts) which 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. (See "Plan of Distribution".) 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, each subscriber must represent and warrant that: (i) he or she has either (A) a net worth (exclusive of home, furnishings and automobiles) of at least $150,000, or (B) a net worth (similarly calculated) of at least $45,000 and an annual gross income of at least $45,000, 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 (ii) he or she has received 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 administrators of the securities laws of certain states have imposed greater minimum investment and/or additional suitability requirements on the residents of such states. (See "Subscription Requirements" attached as Exhibit B to the Statement of Additional Information that accompanies this Prospectus.) These standards, however, are only regulatory minimums. Even if a subscriber meets the minimum investment and/or suitability requirements described above, an investment in the Units may not be suitable for him or her. Only the subscriber can make that determination. All subscriptions, once made, are irrevocable by the subscriber but may be rejected in whole or in part by the General Partner. Subscribers should read this Prospectus, the accompanying Statement of Additional Information and the Subscription Agreement / Power of Attorney carefully before investing in the Fund. -9- SUMMARY The following summary is intended to highlight certain 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. POSSIBLE ADVANTAGES OF INVESTMENT IN THE FUND Investment The Fund allows investors to include commodity futures Diversification contracts in their portfolios in the same way that they include mutual funds, money market funds and limited partnerships in other areas, e.g., oil gas and real estate. A commodity futures investment is an especially attractive diversification because it can be profitable during both favorable and unfavorable economic conditions. Commodity The Fund will be large enough to enable the Advisor to trade Futures Market in as many different commodity futures markets as it Diversification chooses, thereby reducing risk and increasing the probability of success. Each limited partner of the Fund ("Limited Partner") will obtain greater diversification in the variety of contracts and markets traded than would be possible trading individually, unless substantially more than the minimum investment in the Fund was committed to the commodity futures markets. Liquidity Although an investor in the Fund should consider his or her investment to be long-term, Limited Partners can redeem their Units as of the last business day of each month, provided, however, that no redemption which applies to less than all of a Limited Partner's interest in the Fund can result in the Limited Partner's capital account being reduced below $10,000 ($5,000 in the case of investments by pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension - IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, 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. A redemption fee will be charged for Units redeemed (except for any redemptions to provide funds for payment of taxes on profits) during the first full twelve calendar months after their purchase. (See "Plan of Distribution" and "Distributions and Redemptions".) 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 in the Fund, however, cannot be individually subjected to margin calls -10- or lose more than his or her investment in the Fund and his or her share of profits, if any, whether or not distributed. Professional Trading decisions for the Fund will be made by the Advisor Commodity Trading pursuant to its trend-following, technical trading Management 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. Favorable A significant portion of substantially all of the Fund's Tax Treatment commodity futures trading will receive a favorable, maximum potential Federal income tax rate of 27.84% for individuals with no holding period requirement. Because the Fund is a limited partnership, all tax effects flow through to its Limited Partners. Leverage The Fund's portfolio will be highly leveraged providing an extraordinary profit potential as well as risk of loss. Interest Income The Fund will earn interest on approximately 90% of its assets, even while such assets are committed to trading. 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"). Administrative The Fund provides to or obtains for the Limited Partners Convenience 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 the Limited Partners, and supplying the Limited Partners with information necessary for individual Federal tax returns. THE FUND The Fund Shaffer Diversified Fund, L.P. (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 in other areas. -11- Location and The principal executive offices of the Fund and the General Telephone Number Partner / Advisor are located at 70 West Red Oak Lane, White Plains, New York 10604, and their telephone number at such address is (800) 352-5265 (toll-free). Termination The Fund will terminate its existence on December 31, 2025, of the Fund or upon an earlier date in certain circumstances. (See "Summary of the Limited Partnership Agreement - Termination".) Business The business of the Fund is to seek medium- and long-term capital appreciation through speculative trading in a diversified portfolio of commodity futures contracts and other related interests in the United States commodity futures markets pursuant to the trading instructions of the Advisor. Administration The General Partner / Advisor, in its capacity as the general partner of and commodity trading advisor to the Fund, will administer the business and affairs of the Fund and have sole and exclusive authority over its trading decisions. Berthel Fisher & Company Financial Services, Inc. (the "Selling Agent") will act as the Fund's selling agent and ADM Investor Services, Inc. (the "Commodity Broker") will act as the Fund's initial commodity broker. (See "Conflicts of Interest and Fiduciary Responsibility of the General Partner", "The General Partner / Advisor", "Commodity Brokerage Arrangements", and "Plan of Distribution"). Distributions Distributions of profits, if any, will be made at the General Partner's discretion. Investors should be aware, however, that the General Partner 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", "Distributions and Redemptions", "Summary of the Limited Partnership Agreement - Profits and Losses; - Distributions" and "Federal Income Tax Consequences".) Fees and Expenses The Fund will be required to pay substantial charges, such Payable by the as continuing services fees; management fees and possible Fund; Break-even incentive allocations; brokerage commissions; legal, Threshold accounting, auditing, printing, recording, filing and other periodic fees and expenses; and extraordinary expenses. The General Partner has agreed, however, to pay all such expenses (other than continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) that are in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum. A complete description of these charges is set forth under the caption "Fees, Compensation and Expenses". Charges that are not offset by trading gains and interest income will deplete the assets of the Fund. In order for an investor to "break even" on his or her investment in the first year of trading, therefore, the Fund will have to earn $750 per Unit, or 7.5%, assuming an initial investment of $10,000. (See "Fees, Compensation and Expenses" and "Distributions and Redemptions") -12- Fees and Expenses The General Partner will pay all organizational and initial Payable by the offering expenses (exclusive of selling commissions) of the General Partner Fund. In addition, the General Partner will pay all operating and other administrative expenses attributable to the Fund which are in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum, except for continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses, which expenses will be paid by the Fund. Redemption Although an investor in the Fund should consider his of Units investment to be long-term, Limited Partners 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 the General Partner, provided, however, that no redemption which applies to less than all of a partner's interest in the Fund can result in the partner's capital account being reduced below $10,000 ($5,000 in the case of investments by pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension - IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, including but not limited to, those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code) after the redemption is effected. The Fund will charge an early redemption fee (except for any redemptions to provide funds for 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. Accordingly, Units redeemed as of the end of or during the tenth, eleventh and twelfth full calendar months after their purchase will be subject to a redemption fee equal to 1% of the Net Asset Value of the Unit(s) redeemed. In addition 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 of a calendar year are less than 35% of the profits reportable to a Limited Partner for the prior year. All early redemption fees charged by the Fund upon redemptions of Units will be paid to the General Partner to reimburse the General Partner for the payment of the Fund's organizational and initial offering and the Fund's operating expenses that are payable by the General Partner. (See "Distributions and Redemptions".) The early redemption fees, while in effect, and the reduction of the Fund's Net Asset Value due to operating expenses payable by the -13- Fund, will reduce the redemption value of each Unit significantly below its purchase price unless the Fund achieves significant trading profits from its trading activities. Accordingly, the initial redemption value of a Unit as of the end of and during the first, second and third calendar months of trading (after deducting the 4% early redemption fee but without adjusting for operating expenses payable, trading profits which might be achieved or interest income earned during such periods) would be approximately $8,959. Federal Tax For Federal income tax purposes, the Fund will be treated as Treatment a partnership and not as an association taxable as a corporation as long as the Fund operates in the manner described in this Prospectus and the accompanying Statement of Additional Information and 90% or more of the gross income of the Fund in each taxable year consists of "qualifying income" for federal income tax purposes. The Fund has not obtained a ruling from the Internal Revenue Service (the "IRS") confirming this tax treatment, and the General Partner / Advisor does not intend to request any such a ruling. If the Fund is treated as a partnership for Federal income tax purposes, United States taxpayers will be taxed each year on interest income earned and any gains recognized by the Fund, whether or not the taxpayer redeems any Units or receives any distributions. In addition, United States taxpayers who are individuals may deduct capital losses only to the extent of their capital gains plus $3,000. Such taxpayers may, however, carry forward capital losses that cannot be deducted in the current taxable year. THE OFFERING Securities Offered 25,000 units of limited partnership interest ("Units"). During the initial offering period, the Units will be offered at an initial offering price of $1,000 per Unit ($950 per Unit, plus an initial sales charge of $50 per Unit). The initial offering of the Units will extend from the date of this Prospectus until sixty days thereafter (subject to the General Partner's right to extend this offering for up to an additional sixty days). Thereafter, unsold Units (if any) may be sold as of the last business day of each calendar month at a purchase price equal to the then current Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. (See "Plan of Distribution".) Minimum The minimum purchase by any one investor is $10,000 Investment Amounts (initially 10 Units), except that in the case of investments by pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension - IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, including but not limited to, those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code, the minimum investment is $5,000 (initially 5 Units). In some states, however, greater -14- minimum purchase requirements may be applicable. Purchases by investors and their spouses and by entities (including retirement and deferred compensation and annuity plans and trusts) which 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. (See "Plan of Distribution"). Plan of The Units are being offered through the Selling Agent on a Distribution best efforts basis. Before trading can commence, the initial offering hereunder must have concluded, and at least 1,000 Units must have been sold and accepted by the General Partner. All subscriptions received and accepted by the General Partner will be deposited in an escrow account with The Chase Manhattan Bank, 1214 Mamaroneck Avenue, White Plains, NY 10605 until the conclusion of the initial offering period. If the minimum number of Units is not sold and accepted by the General Partner prior to the expiration of the initial offering period, plus any extensions, all subscription monies and sales charges will be returned to the subscribers. Each subscriber will receive the interest earned on his or her subscription while held in escrow whether or not the minimum number of Units is sold and accepted. (See "Plan of Distribution".) Any subscription may be rejected by the General Partner in whole or in part for any reason, but no subscription may be revoked by the subscriber. Use of Proceeds The proceeds of this offering ($950,000 if the minimum number of Units is sold and $23,750,000 if the maximum number of Units is sold) will be deposited in a bank account with The Chase Manhattan Bank, a trading account with the Commodity Broker and/or other banks and commodity brokers and used to trade in commodity futures contracts and other related interests pursuant to the instructions of the Advisor. The Advisor believes that approximately 10% to 40% of the assets of the Fund will normally be committed as margin for trading. The actual percentage of assets committed as margin, however, may be more or less than such range from time to time. (See "Use of Proceeds" and "The General Partner / Advisor - Trading Policies".) Risks and An investment in the Fund involves substantial risks. The Conflicts of risks of investing in the Fund include, but are not limited Interest 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 may lose his or her entire investment in the Fund, including any profits earned thereon, whether or not distributed. (See "Risk Factors".) In addition, reference is made to the existence of various conflicts of interest. (See "Conflicts of Interest and Fiduciary Responsibility of the General Partner".) Suitability Each investor must represent in the Subscription Agreement / Standards 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 -15- Statement of Additional Information, and that he or she is able to assume the risks inherent in an investment in the Fund. (See "Investment Requirements"). FINANCIAL INFORMATION Balance Sheet of the Fund at August 31, 2000. (1) Total Assets (cash)........................ $2,000 Partnership Capital........................ $2,000 (1) The Fund has not commenced trading activities. The only transactions to date have been the organization of the Fund, the preparation of the offering and the capital contributions of $1,000 by the General Partner / Advisor and $1,000 by Daniel S. Shaffer, the initial limited partner and the sole officer, director and shareholder of the General Partner / Advisor. See "Financial Statements". RISK FACTORS The Fund is a new venture in a high risk business. Investors should (i) read this Prospectus and the accompanying Statement of Additional Information carefully, and (ii) consult with independent, qualified sources of legal, tax and financial advice, before deciding whether to invest in the Fund. Possibility of Losing Entire Investment. Futures contracts have a high degree of price variability and are subject to occasional rapid and substantial changes. The Fund may not achieve its objectives or avoid substantial losses. For every gain in futures trading, there is an equal and offsetting loss. The Advisor has, from time to time, incurred substantial losses in trading on behalf of its customers. An investor in the Fund may lose all or substantially all of his or her investment in the Fund. Commodity Futures Trading is Speculative. Commodity futures prices are highly volatile. Price movements for commodity futures contracts and other related interests are influenced by, among other things: government trade, fiscal, monetary and exchange control programs and policies; weather and climate conditions; changing supply and demand relationships; national and international political and economic events; changes in interest rates; and the psychological emotions of the market place. In addition, governments may intervene periodically in certain markets, either directly or by regulation, often with the intent of influencing prices directly. The effects of governmental intervention may be particularly significant at certain times in financial instrument markets, and such intervention (as well as other factors) may cause these markets to move rapidly in the same direction at certain times. (See "Description of Commodity Futures Trading" in the Statement of Additional Information that accompanies this Prospectus.) The trading techniques utilized by the Advisor are primarily technical in nature, and the Advisor does not ordinarily consider "fundamental" factors except to the extent that such factors are reflected in the technical input data analyzed by the Advisor. (See "The General Partner / Advisor - Trading Methods".) 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, but may range from 10% to 40%. 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 -16- 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 cannot incur net losses greater than the amount of his investment. (See "Limited Partnership Agreement - Liabilities".) 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. However, no assurance can be given that the investor will receive at least one-half of any year's beginning Net Asset Value per Unit or $350 per Unit, since the impossibility of executing trades under all conditions, together with the expenses of liquidation, may deplete the Fund's assets below such amounts. (See "Trading Policies".) Substantial Fees, Commissions and Expenses. The Fund is obligated to pay substantial fees, commissions and expenses without regard to profitability. Such fees, commissions and expenses include continuing services fees; management fees and possible incentive allocations; brokerage commissions; legal, accounting, auditing, recording, filing and other periodic fees and expenses; and extraordinary expenses. Therefore, the Fund will have to make substantial gross gains from commodity trading each year, probably in an amount equal to approximately 7.5% of the Fund's Net Asset Value, in order for the Limited Partners to realize any appreciation in the value of their Units. In addition, the Fund will allocate to the Advisor, on a quarterly basis, an amount equal to 15% of the Advisory Profits generated by the Advisor for such calendar quarter, including unrealized appreciation on open commodity interest positions. Such appreciation may never be realized by the Fund due to adverse market conditions occurring between the date such allocation is made and the date the open position is closed out. For example, if at the end of a quarter the Advisor has achieved aggregate Advisory Profits composed of realized profits of $100,000 and unrealized profits on open positions of $100,000, the amount allocable to the Advisor would be $30,000. Immediately following such allocation, those open positions might, due to adverse market conditions, be closed at no profit or even a loss; nevertheless, the Advisor would retain the entire amount of such allocation. In addition, the Fund will initially pay the Commodity Broker brokerage commissions at the rate of $17.00 per "round-turn" trade for trades executed on domestic exchanges. Investors should note that the brokerage commission rates at which the Fund will pay the Commodity Broker may be higher than rates charged by the Commodity Broker to certain of its other customer accounts (including the accounts of its employees), and the rates charged by other brokerage firms. This brokerage arrangement may result, therefore, in the Fund paying brokerage commissions for its trading at rates which exceed the lowest rates which might otherwise be available. (See "Conflicts of Interest and Fiduciary Responsibility of the General Partner", "Fees, Compensation and Expenses" and "Commodity Brokerage Arrangements".) In addition, 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. As a result, amounts paid by the Fund for continuing -17- services fees; management fees and possible incentive allocations; brokerage commissions; legal, accounting, auditing, recording, filing and other periodic fees and expenses; and extraordinary expenses could cause the Fund to close out all open positions, suspend trading and possibly terminate. (See "Summary of the Limited Partnership Agreement - Termination"). Distortions Produced by Incentive Allocation Arrangement. As more fully described under the caption "Plan of Distribution", the purchase price of Units sold after trading operations commence will vary with the Net Asset Value per Unit. Incentive allocations allocable to the Advisor are contingent on cumulative Advisory Profits, and all Advisory Losses (as defined) incurred by the Advisor following the allocation of any incentive allocations to it must be recovered by the Advisor 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 Fund's 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. Limitations of Trend-Following, Technical Trading Strategies. Pursuant to the terms of the advisory agreement entered into between the Fund and the Advisor (the "Advisory Agreement") and subject to rights of termination, all trading decisions for the first twelve months of the Fund's trading operations will be made by the Advisor. The Advisor uses technical, trend-following methods based on mathematical analyses of certain technical data regarding past market performance. This kind of trading strategy 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 the Advisor. Thus, 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. A further limitation inherent in such trading strategies is the need for price movements that can be interpreted by the techniques utilized and the need for price trends sufficient to dictate entry or exit decisions. If there is no substantial price movements, or if a price movement is erratic or ill-defined, the trading method 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. In the past, there have been periods when certain commodities have not experienced major price movements, and instead, price movement have been erratic or ill-defined; such periods may recur in the future. The Net Asset Value of the Units may decrease materially during periods in which events external to the markets themselves have an important impact on prices. During these periods, the historic price analysis used by the Advisor may cause the Fund to establish positions on the wrong side of the price movements caused by external events. Finally, trend-following, technical techniques 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 the Advisor may be different in the future from those presently in use. Limited Operating History. The Fund is a newly formed entity with no operating history, and the General Partner / Advisor has only a limited operating history. THE COMMODITY FUTURES TRADING COMMISSION REQUIRES A COMMODITY POOL OPERATORS TO DISCLOSE TO PROSPECTIVE POOL PARTICIPANTS THE ACTUAL PERFORMANCE RECORD OF THE POOL FOR WHICH THE OPERATOR IS SOLICITING -18- PARTICIPANTS. YOU SHOULD NOTE THAT THIS POOL HAS NOT YET BEGUN TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY. The General Partner / Advisor has been registered with the Commodity Futures Trading Commission (the "CFTC") as a commodity trading advisor since October 2, 1998, and as a commodity pool operator since July 7, 2000. In addition, the General Partner /Advisor has been a member of the National Futures Association (the "NFA") as a commodity trading advisor since October 1998 and as a commodity pool operator since July 2000. The General Partner / Advisor has managed commodity accounts for others since March 1999. The General Partner / Advisor and its sole officer, director and shareholder, Daniel S. Shaffer, do, however, currently manage commodity accounts for others and have done so since March 1999. The trading results of such other accounts are separately set forth in Tables A and B under the caption "Past Performance of the General Partner / Advisor" at page 40 of this Prospectus. Although the General Partner / Advisor 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. Special Characteristics of the Start-Up Period. The Fund will encounter a start-up period during which it will incur certain risks relating to the initial investing of its assets. First, the Fund may commence trading at an unpropitious time, such as after sustained price moves in a number of commodity interests. Second, the start-up period represents a special risk in that diversification may be substantially lower than in a fully committed portfolio. Although the Advisor has established procedures for preserving capital while moving to a fully invested position, these procedures are based on market judgment, and no assurance is given that they are optimal or will be successful. No Assurance That Units Will Be Sold. Since there is no firm commitment for the purchase of the Units which are being offered to the public, there can be no assurance that the Fund will sell 1,000 of the Units offered by this Prospectus and the accompanying Statement of Additional Information, which are required as a minimum at the conclusion of the initial offering period to commence operation of the Fund. Subscribers' funds may thus be retained in escrow for up to approximately four months following the date of this Prospectus and the accompanying Statement of Additional Information and then returned. (See "Plan of Distribution".) Liquidity Restrictions / Limited Ability 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 only with the consent of the General Partner, which consent may be withheld in the its sole discretion. However, a Limited Partner 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 the General Partner, subject to a 4% early redemption fee (except for any redemptions to provide funds for payment of taxes on profits) for redemptions of Units effected as of or before the end of the third full calendar month after their purchase and certain other restrictions. The early redemption fee shall decrease by one percentage point for every three calendar months thereafter so that there is no early redemption fee on redemptions of Units effected after the twelfth full calendar month after their purchase. In addition and in order to assure each Limited Partner the availability of funds to pay taxes on each year's profits, 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" and "Summary of the Limited Partnership Agreement - Redemptions".) -19- Possible Effect of Redemptions on Unit Values. Substantial redemptions of Units could require the Fund to liquidate positions more rapidly than otherwise desirable to raise the necessary cash to fund redemptions and achieve a market position appropriately reflecting a smaller asset base. These factors could adversely affect the value of the Units redeemed and of the Units remaining outstanding. Limited Rights of Investors / Limited Partners Will Not Participate in Management. Purchasers of the Units will become Limited Partners in the Fund and, as such, will be unable to exercise any management functions with respect to its operations. The rights and obligations of the Limited Partners are governed by the provisions of the Delaware Revised Uniform Limited Partnership Act and by the Limited Partnership Agreement, which provides, in part, that a majority in interest of the Limited Partners may (a) adopt amendments to the Limited Partnership Agreement proposed by the General Partner or by Limited Partners owning at least 10% of the outstanding Units, (b) dissolve the Fund, (c) remove the General Partner as the Fund's general partner, (d) elect a new general partner if the General Partner withdraws or is removed, or (e) cancel any contract for services with the General Partner 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.) Absence of Regulation Applicable to Securities Mutual Funds and Their Advisers. The Fund is not registered as a securities investment company, or "mutual fund", subject to the extensive regulation imposed by the Securities and Exchange Commission (the "SEC") upon such entities under the Investment Company Act of 1940, as amended. In addition, the Advisor is not registered as an investment adviser, subject to the extensive regulation by the SEC upon such entities under the Investment Advisers Act of 1940, as amended (or any similar state law). Therefore, investors may not be afforded the protective measures provided by such legislation. The General Partner / Advisor is, however, a commodity pool operator and commodity trading advisor registered as such with the CFTC. Such registrations do not imply, however, that the CFTC has reviewed or approved the accuracy of the information contained in the General Partner / Advisor's application for registration or its qualifications to act as described in this Prospectus and the accompanying Statement of Additional Information or that the CFTC supervises the business activities engaged in by the General Partner / Advisor. Unpredictability of Regulatory Changes. The futures markets are subject to comprehensive statutes, regulations and margin requirements. In addition, the CFTC and the exchanges on which commodity futures contracts are traded are authorized to take extraordinary actions in the event of a market emergency, including the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of commodity futures transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action at any time and from time to time. Partners' Tax Liability May Exceed Distributions. The distribution of cash to partners will be in the sole discretion of the General Partner, and the General Partner 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 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 the General Partner and may be able to exercise such right in order to provide funds for the payment of taxes and other purposes. (See "Redemptions".) 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 -20- purposes which are greater or less than any actual increase or decrease in the value of their Units. (See "Federal Income Tax Consequences".) Possibility of Taxation as a Corporation. While Morrison Cohen Singer & Weinstein, LLP, special tax counsel to the Fund, has indicated to the Fund that, in such counsel's opinion, the Fund will be classified as a partnership for Federal income tax purposes, no ruling has been obtained from the IRS regarding whether the Fund will be classified as a partnership rather than as an association taxable as a corporation, and the Fund does not intend to apply for any such ruling. If the Fund should be treated as a corporation for Federal income tax purposes, income or loss of the Fund would not be passed through to the partners, and the Fund would be subject to tax on its income at the rate of tax applicable to corporations. In addition, all or a portion of the distributions of Fund income, if any, would generally be taxable to the partners as corporate dividends, and the partners' tax on such distributions would be in addition to the corporate tax paid by the Fund on the same income. Tax Could Be Due From Investors On Their Share Of The Fund's Ordinary Income Despite Overall Losses. Investors may be required to pay tax on their allocable share of the Fund's ordinary income, which in the case of the Fund is primarily the Fund's interest income, even though the Fund incurs overall losses. Capital losses of individuals can be used only to offset capital gains and $3,000 of ordinary income each year. Consequently, if an investor having no other items of capital gain or loss in a particular year were allocated $5,000 of ordinary income and $10,000 of capital losses from the Fund, the investor would owe tax on $2,000 of ordinary income even though the investor would have economically incurred a $5,000 overall loss for the year. The remaining $7,000 undeducted capital loss could be used in subsequent years to offset capital gain and ordinary income, but subject to the same annual limitation on its deductibility against ordinary income. There Could Be A Limit On The Deductibility Of Brokerage And Performance Fees. Although the General Partner expects to treat the management fees paid to it, and brokerage fees paid to ADM Investor Services, Inc., 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, a Limited Partner's tax liability 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, a Limited Partner's tax liability would likely increase. Conflicts of Interest. There exist inherent and potential conflicts of interest in the operation of the Fund's business. These include the possible competition with the Fund by the General Partner / Advisor, the Selling Agent, the Commodity Broker and their respective shareholders, directors, officers, employees, customers and affiliates. (See "Conflicts of Interest / Fiduciary Responsibility of the General Partner".) Other Clients of the Advisor. The Advisor and its sole officer, director and shareholder, Daniel S. Shaffer, 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 the Advisor 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, the Advisor may vary the trading strategies applicable to the Fund from those used for its other managed -21- accounts. No assurance is given that the results of the Fund's trading will be similar to that of other accounts concurrently managed by the Advisor or its principals, employees and affiliates. However, in its trading for the Fund's account and such other accounts, the Advisor has agreed to use its good faith, best efforts to achieve an equitable treatment of all accounts, including with respect to priorities of order entry and changes in trading strategies or recommendations resulting from the application of speculative position limits. (See "Risk Factors - Changes in Trading Strategies" and " - Possible Effects of Speculative Position Limits".) Expiration of the Advisory Agreement with the Advisor. The Advisory Agreement is for a one year term, subject to earlier termination by the Fund or the Advisor and subject to automatic renewal (unless the General Partner / Advisor elects against renewal) on the same terms and conditions for an additional one year term. Upon the expiration of the Advisory Agreement, the General Partner, 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 sole principal of the Advisor will continue his association with the Advisor during the term of the Advisory Agreement or that the services of the Advisor or any of its principal(s) will then be available on the terms contained in the current Advisory Agreement or on any other terms. (See "Summary of the Advisory Agreement"). Possible Effects of Speculative Position Limits. The CFTC and certain exchanges have established speculative position limits on the maximum net long or short futures position which any person, or group of persons acting in concert, may hold or control in particular commodities. In addition, the CFTC requires each domestic exchange to set speculative position limits, subject to CFTC approval, for all commodity futures contracts traded on such exchange which are not already subject to speculative position limits established by the CFTC or such exchange. The CFTC has jurisdiction to establish speculative position limits with respect to all commodity futures contracts traded on exchanges located in the United States, and any exchange may impose additional limits on positions on the exchange. All commodity accounts controlled by the Advisor 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, the Advisor may thus reduce the size of the positions that would otherwise be taken for the Fund in such commodity futures contracts and not trade commodity futures contracts on certain commodities in order to avoid exceeding such limits. Such modifications of the Fund's trades, if required, could adversely affect the operations and profitability of the Fund. However, in its trading for the Fund's account and such other accounts, the Advisor 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 recommendation resulting from the application of speculative position limits. (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. -22- Although the Fund intends to purchase and sell actively traded commodities, no assurance can be given that this will always be the case or that the Fund's orders will be executed at or near the desired price. Limitation on Portfolio Diversification. Historically, managed commodity futures contracts have generally not correlated with the performance of other asset classes, such as stocks and bonds. Non-correlation means that 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. Non-correlation should not be confused with negative correlation, where the performance of two asset classes is exactly opposite. For example, non-correlation means that the Fund may not necessarily be profitable or unprofitable during unfavorable periods for the stock market. The commodity futures markets are fundamentally different from the securities markets because, for every gain in futures trading, there is an equal and offsetting loss. If the Fund does not perform in a manner that is not correlated with the general financial markets or does not perform successfully, an investor will obtain no diversification benefits by investing in the Units. In addition, an investor may have no gains from the Fund to offset losses in the rest of his or her portfolio. Restrictions on Investment by Benefit Plan Investors. A Benefit Plan Investor means an entity that is (i) an "Employee Benefit Plan," as defined in Section 3(3) of the Employee Retirement Security Act of 1974, as amended ("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. When considering an investment in the Fund, a fiduciary with respect to a benefit plan should consider among other things (i) the definition of "plan assets" under ERISA, (ii) whether the investment satisfies the diversification requirements of Section 404(a)(1) of ERISA, (iii) whether the investment satisfies the prudence requirements of Section 404(a)(1) of ERISA, (iv) whether income derived from the Fund could constitute "unrelated business income" subject to Federal income taxation in the ERISA Account, and (v) that there may be no market in which such fiduciary can sell or otherwise dispose of the Units. The General Partner / Advisor recommends that any purchase of Units be considered accordingly by each investor and his legal, tax and financial advisers. Lack of Independent Experts. The General Partner / Advisor 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. The foregoing list of Risk Factors, although considered by the General Partner / Advisor to be representative of the most significant risks related to an investment in the Fund, does not purport to be a complete list or explanation of the risks involved in this offering. Prospective investors should read -23- this Prospectus and the accompanying Statement of Additional Information in their entirety before determining whether to invest in the Fund. CONFLICTS OF INTEREST/ FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER The following inherent or potential conflicts of interest should be considered by potential subscribers before investing in the Fund. In addition, potential subscribers should consider the fiduciary responsibilities of the General Partner / Advisor to the Fund and the Limited Partners as explained below. Conflicts of Interest Distribution of Profits. Under the terms of the Limited Partnership Agreement, the General Partner has discretion as to the distribution of profits, if any, to the Limited Partners. At present, the General Partner 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 the Advisor and the continuing services fees payable to the Selling Agent, the Selected Dealers and their respective registered representatives (including Daniel S. Shaffer, the sole officer, director and shareholder of the General Partner / Advisor who is also a registered representative of the Selling Agent), will be increased thereby increasing the amount of the management fee and continuing services fees. Independent Review. In connection with this offering, the Fund and the General Partner / Advisor have been represented by single counsel. Therefore, to the extent that the Fund and this offering could benefit by further independent review, such benefit will not be available in this offering. Other Trading Accounts of the Advisor, Selling Agent, Commodity Broker and their Principals and Affiliates. The Advisor and its sole officer, director and shareholder, Daniel S. Shaffer, 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 which the Advisor will utilize in making trading decisions for the Fund; and the Selling Agent, the Commodity Broker 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 Limited Partners except to the extent required by law. In addition, the Commodity Broker is a futures commission merchant and effects transactions for customers in addition to the Fund. Since the identities of the purchaser and seller are not disclosed until after the trade, it is possible that transactions could be effected for the Fund in which the other parties to the transactions are shareholders, officers, directors, employees, customers or affiliates of the Commodity Broker. 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 the Advisor 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. -24- Relationship between the General Partner / Advisor and the Fund's Commodity Broker(s). Under the terms of the Limited Partnership Agreement, the General Partner has the authority to designate commodity broker(s) to execute trades on behalf of the Fund and, at present, the General Partner has selected ADM Investor Services, Inc. to act as the initial commodity broker for the Fund. The Fund will initially pay the Commodity Broker brokerage commissions at the rate of $17.00 per "round-turn" trade for trades executed on domestic exchanges, which amount represents a substantial discount from its standard public customer rates and from the standard published rates currently being charged by many major brokerage firms to their individual public customers, although such commission rates and therefore the applicable discount rate may change in the future. Potential investors should note that the brokerage commission rates at which the Fund will pay the Commodity Broker may be higher than rates charged by the Commodity Broker to certain of its other customer accounts (including the accounts of its employees), and the rates charged by other brokerage firms. This brokerage arrangement may result, therefore, in the Fund paying brokerage commissions for its trading at rates which exceed the lowest rates which might otherwise be available. Although the Fund's brokerage arrangement with the Commodity Broker is non-exclusive so that the Fund will have the right to seek lower commission rates from other brokers at any time, the General Partner believes that the arrangements between the Fund and the Commodity Broker are fair and reasonable in view of the nature and quality of the services to be provided by the Commodity Broker with respect to the execution of transactions. The General Partner 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 negotiation with the Commodity Broker for lower commission rates. The General Partner 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, the General Partner 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, the General Partner 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 the General Partner / Advisor not any of its principals directly or indirectly share in the brokerage commissions paid by the Fund for brokerage services. Since the General Partner / Advisor and its principals also have no affiliations or business arrangements, direct or indirect, with any broker or any principal thereof whereby the General Partner / Advisor 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 the General Partner / Advisor 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 Limited Partnership Agreement, the General Partner 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 the General Partner / Advisor acts as both the general partner of, and the trading advisor to, the Fund, the General Partner / Advisor 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 which could cause the Fund to pay substantial brokerage commissions. However, neither the General Partner / Advisor nor any of its principal(s) will directly or indirectly -25- 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. The General Partner may be deemed to have a conflict of interest with respect to its responsibility to review the trading performance of the Advisor and to determine whether to terminate the Advisory Agreement with the Advisor 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 the Advisor by the Fund. Syndication Fees, Sales Commissions and Continuing Service Fees. Prospective investors should note that if the minimum number of Units is sold and accepted during the initial offering period, the Fund will pay the General Partner / Advisor, the Selling Agent, certain Selected Dealers and their respective registered representatives an amount equal to approximately 5% of the then current Net Asset Value per Unit of each Unit sold by them and accepted by the General Partner. Approximately 20% of all sales charges shall be paid to the General Partner to reimburse the General Partner for the payment of the Fund's organizational and initial offering and the Fund's operating expenses that are payable by the General Partner and approximately 80% of all sales charges shall be paid as syndication fees to the Selling Agent and as selling commissions to the Selected Dealers. The Selling Agent and the Selected Dealers may in turn pay a portion of such syndication fees and selling commissions to their respective employees who are NASD registered representatives for each Unit sold by them. In addition and subject to the limitations described herein under "Plan of Distribution", the Fund will pay a monthly continuing services fee to the Selling Agent and, through the Selling Agent, certain Selected Dealers who are appropriately registered with the CFTC and/or the NFA and their respective registered representatives equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (as defined in "Fees, Compensation and Expense - Certain Definitions: 2. Net Asset Value per Unit", below) of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees payable or incentive allocations allocable as of such date) with respect to Units purchased within the prior 12-month period and 1/12 of 4% of the Net Asset Value per Unit of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees payable or incentive allocations allocable as of such date) with respect to Units purchased more than 12 months prior thereto. In advising customers whether to purchase or redeem Units, the General Partner / Advisor, the Selling Agent, the Selected Dealers and their respective registered representatives may have a conflict of interest between maximizing their current and on-going compensation, on the one hand, and providing financial advice that is in the best interests of their customers, on the other hand. In addition, investors should note that Daniel S. Shaffer, the sole officer, director and shareholder of the General Partner / Advisor, is also a registered representative of the Selling Agent, 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 interest in the General Partner / Advisor; his interest in maximizing his current and on-going compensation; and the interests of his 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 the Selling Agent. Fiduciary Responsibility of the General Partner In evaluating these conflicts of interest, prospective investors should be aware that the General Partner has a fiduciary responsibility to the Limited Partners to exercise good faith and fairness in all dealings affecting the Fund. In the event that a Limited Partner believes that the General Partner 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 the General Partner. Limited Partners should be aware that the performance by the General Partner of its responsibilities to the Fund -26- will be measured by the terms of the Limited Partnership Agreement, including the authority of the General Partner to enter into the advisory and brokerage agreements, as well as applicable law. Limited Partners are afforded certain rights to institute reparations proceedings under the Commodity Exchange Act, as amended (the "CE Act"), for violations of such act or of any rule, regulation or order of the CFTC by the General Partner. Excessive trading of the Fund's account may constitute a violation of the CE Act . A Limited Partner is also entitled by statute to bring suit for certain violations of the CE Act. Limited Partners 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 the Advisor under the Advisory Agreement, the authority of the General Partner to enter into such contract under the Limited Partnership Agreement and the Subscription Agreement / Power of Attorney, the exculpatory provisions in the Advisory Agreement and the Limited Partnership Agreement, and the absence of judicial or administrative standards defining excessive trading. Although the Commodity Broker provides various services to the Fund, it accepts no responsibility for verifying that any instructions received from the General Partner / Advisor or any of their employees or agents are in conformance with the General Partner / Advisor's authority and the Commodity Broker accepts no responsibility for monitoring the actions of the General Partner / Advisor in this regard, to ensure that such actions are not contrary to the provisions of this Prospectus or any amendments thereto. The Limited Partnership Agreement provides that the General Partner 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 Limited Partnership Agreement provides that with respect to any action in which the General Partner or any of its shareholders, directors, officers, employees, affiliates or any person who controls the General Partner 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. The 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 the General Partner or any trading advisors; and that such prohibitions may not be circumvented by any reciprocal business arrangements. -27- USE OF PROCEEDS The gross proceeds of this offering will depend upon the prices at which the Fund's Units are sold. During the initial offering period of sixty days (which may be extended for up to an additional sixty days at the General Partner's discretion), the Units will be sold for $950 each, plus an initial sales charge of $50 per Unit; thereafter, unsold Units (if any) may be sold as of the last business day of each month at a purchase price equal to the then current Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. If at least the minimum number of Units is sold during the initial offering period at an initial purchase price of $950 per Unit, the net proceeds to the Fund will be $950,000. The net proceeds will be $23,750,000 in the event that the maximum number of Units is sold during the initial offering period. This is without giving effect to the contributions of the General Partner and the initial limited partner. (See "Capitalization/Selected Financial Data".) The net proceeds from the sale of the Units will be used to trade in commodity futures contracts and other commodity interests in the United States commodity futures markets. While the Advisor generally intends to commit between 10% and 40% of the Fund's net assets as margin for commodity trading, the Advisor is limited in the amount of the Fund's net assets that may be used to margin commodity futures contracts to 40% of such assets under normal circumstances. (See "Trading Policies".) The Fund's net assets will be deposited in bank account(s) with The Chase Manhattan Bank and trading account(s) with the Commodity Broker and/or other banks or commodity brokers. The Commodity Broker will deposit the assets received from the Fund in segregated accounts as required by the regulations promulgated by the CFTC. Under the CFTC's regulations, the assets of other customers of the Commodity Broker, including other commodity pools, may also be deposited in such segregated accounts and thus be commingled with the assets of the Fund. The Fund's assets, both those which are deposited to meet margin requirements and those which are held in reserve, may be held in cash, United States Treasury Bills or in any other form permissible under applicable laws and regulations. The General Partner / Advisor 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. FEES, COMPENSATION AND EXPENSES Summary The following entities will receive the following compensation, which is described in more detail below:
Entity Form of Fee, Compensation or Amount of Fee, Compensation or Expense Expense Shaffer Asset Management, Inc., Reimbursement of organizational, (i) 1% of the Net Asset Value per Unit of Units in its capacity as the Fund's initial offering and operating sold and (ii) all early redemption fees charged by general partner expenses the Fund upon redemptions of Units, will be paid by the Fund to the General Partner to reimburse the General Partner for the payment by the
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General Partner of the Fund's organizational, initial offering and operating expenses payable by the General Partner. Other In addition, the General Partner will share to the same extent as the Limited Partners in the Fund's profits and losses with respect to any units of limited and/or general partnership interest in the Fund that are purchased by the General Partner. Shaffer Asset Management, Inc., Monthly management fees based on 1/12 of 3.75% of the Net Asset Value per Unit in its capacity as the Fund's the Net Asset Value of assets (as defined below) of the Fund's asset under commodity trading advisor under management management at month's end with respect to Units purchased within the prior 12-month period and 1/12 of 1% of the Net Asset Value per Unit (as defined below) of the Fund's assets under management at month's end with respect to Units purchased more than 12 months prior thereto Quarterly incentive allocation 15% of the Fund's Advisory Profits (as on Advisory Profits (as defined defined below) achieved on the Fund's below) achieved on assets under assets based under management management Berthel Fisher & Company Syndication fees 1% of the Net Asset Value per Unit of Financial Services, Inc., in its Units sold capacity as the Fund's selling agent Monthly continuing service fee 1/12 0f .25% of the Net Asset Value per Unit based on Net Asset Value under (as defined below) with respect to Units management purchased within the prior 12-month period and 1/12 of 1% of the Net Asset Value per Unit (as defined below) with respect to Units purchased more than 12 months prior thereto Selected dealers and their Selling commissions 3% of the Net Asset Value per Unit of Units respective registered sold representatives Monthly continuing service fee 1/12 of 1% of the Net Asset Value per Unit based on Net Asset Value under (as defined below) of the Fund's assets under management 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
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more than 12 months prior thereto ADM Investor Services, Inc., in Commodity brokerage commissions Brokerage commissions at an initial rate of its capacity as the Fund's $17 per "round-turn" trade on domestic commodity broker exchanges; the Commodity Broker is responsible for all other charges relating to the Fund's trading, such as exchange, clearing, transfer and NFA fees Others Legal, accounting, auditing, Estimated at $95,000 at current price levels, printing, recording, filing and ranging from about 0.4% of the proceeds of other periodic fees and the offering if the maximum number of 25,000 expenses; and extraordinary Units is sold during the initial offering expenses. period to about 10% thereof if only the minimum number of 1,000 Units is sold; the General Partner has agreed to supply and pay for such services as are deemed by the General Partner to be necessary or desirable and proper for the continuous operations of the Fund (excluding sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) which are in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum. 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 the General Partner to reimburse the General Partner for the payment by the General Partner of the Fund's organizational and initial offering and the Fund's operating expenses that are payable by the General Partner.
Description of Fees, Compensation and Expenses 1. Management Fees and Incentive Allocations. Pursuant to the terms of the Advisory Agreement, the Fund has agreed (i) to pay to the Advisor 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 the Advisor, on a quarterly basis, an amount equal to 15% of the Fund's Advisory Profits (exclusive of any interest earned by the Fund) achieved by the Advisor for such quarter on the Fund's assets under management by the Advisor (see "Certain Definitions: 3. Advisory Profits", below). The monthly management fees will be paid, and the quarterly incentive allocation will be -30- allocated, whether or not the Fund earns profits. However, the quarterly incentive allocation is allocable only on cumulative profits achieved on assets under management by the Advisor. 2. Syndication Fees / Selling Commissions / Sales Charges. During the initial offering period, the Units will be offered at an initial offering price of $1,000 ($950 per Unit, plus an initial sales charge of $50 per Unit). Subsequent to the closing of the initial offering period, unsold Units (if any) may be offered and sold by the Fund at the then current Net Asset Value per Unit (as hereinafter defined), plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. If at least 1,000 Units are sold and accepted by the General Partner during the initial offering period, approximately 20% of all sales charges shall be paid to the General Partner to reimburse the General Partner for the payment by the General Partner of the Fund's organizational, initial offering and operating expenses payable by the General Partner and approximately 80% of all sales charges shall be paid as syndication fees to the Selling Agent and as selling commissions to the Selected Dealers. The Selling Agent 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 the General Partner upon sixty days' prior written notice to the Limited Partners. (See "Plan of Distribution"). 3. Continuing Services Fees. The Fund will pay a monthly continuing services fee to the Selling Agent and, through the Selling Agent, certain Selected Dealers who are appropriately registered with the CFTC and/or the NFA and their respective registered representatives equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (see "Certain Definitions: 2. Net Asset Value per Unit", below) of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased within the prior twelve-month period and 1/12 of 4% of the Net Asset Value per Unit of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased more than twelve months prior thereto. Such continuing services fee shall be paid to the Selling Agent and such Selected Dealers and their respective registered representatives in return for their continuing services to the Fund and the Limited Partners solicited by them. Such services include, without limitation, keeping the Limited Partners 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 the General Partner upon sixty days' prior written notice to the Limited Partners. (See "Plan of Distribution".) The continuing services fee will be allocated between the Selling Agent and the Selected Dealers and their respective registered representatives based upon the amount of time that each Unit has been outstanding. The continuing services fee attributable to a Unit which has been outstanding for twelve or fewer month shall be allocated between the Selling Agent and the Selected Dealers and their respective registered representatives as follows: o 20% to the Selling Agent; and o 80% to the Selected Dealers and their respective registered representatives that solicited the subscription; -31- and all other continuing services fees shall be allocated as follows: o 25% to the Selling Agent; and o 75% to the Selected Dealers and their respective registered representative that solicited the subscription. For this purpose, commissions are deemed to be attributable to Units sold by a Selected Dealer in the proportion which the number of such Units bears to the number of all Units outstanding at any time. For example, if a Selected Dealer were responsible for the sale of 1,000 Units, and there were 100,000 Units outstanding, 1% (1,000 divided by 100,000) of the continuing services fees paid by the Fund would be deemed to be attributable to the Units sold by that Selected Dealer, and such Selected Dealer would receive 1% of the commissions paid by the Fund to the Selected Dealers and their respective registered representatives for so long as the Units remain outstanding and the Selected Dealer and its registered representative agreed to provide the services described above to the holders of such Units. 4. Commodity Brokerage Commissions. The Fund will pay the Commodity Broker brokerage commissions initially at the rate of $17.00 per "round-turn" trade executed on domestic exchanges. (See "Glossary".) Based upon the historical trading patterns of the Advisor, the Fund may expect to pay brokerage commissions which may approximate 1% or more of its average yearly Net Asset Value. There is no agreement to limit such commission charges to any particular level. Brokerage commissions will be charged only when an open position is closed (i.e., on a "round-turn" basis). The Commodity Broker may change their aggregate commission rates at any time, and a Limited Partner may obtain the current Fund commission rate schedule from the General Partner upon request. The General Partner, 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. The General Partner will periodically review brokerage commission rates charged to public commodity pools of comparable size and management structure as a factor in determining whether the rates paid by the Fund are comparable and remain reasonable. The Fund, nonetheless, may pay brokerage commission rates exceeding the lowest such rates otherwise available. (See "Conflicts of Interest and Fiduciary Responsibility of the General Partner" and "Commodity Brokerage Arrangements".) 5. Early Redemption Fees. The Fund will charge an early redemption fee equal to 4% of the Net Asset Value per Unit of the Units redeemed as of or before the end of the third full calendar month after their purchase. This fee will decrease by one percentage point for every three subsequent calendar months. Accordingly, Units redeemed as of the end of or during the tenth, eleventh and twelfth full calendar months after their purchase will be subject to a redemption fee equal to 1% of the Net Asset Value of the Unit(s) redeemed. Thereafter, no redemption fee will be charged. In addition 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 of a calendar year are less than 35% of the profits reportable to a Limited Partner for the prior year. All early redemption fees charged by the Fund upon redemptions of Units will be paid to the General Partner to reimburse the General Partner for the payment by the General Partner of the Fund's organizational, initial offering and operating expenses payable by the General Partner. 6. Organizational and Initial Offering Expenses. The General Partner will pay all expenses (estimated at $200,000) associated with the organization of the Fund and the initial offering of the Units (other than selling commissions). Approximately 20% of all sales charges imposed by the Fund on Units sold and 100% of all early redemption fees charged by the Fund upon redemptions of Units will be paid to the General Partner to reimburse the General Partner for the payment by the General Partner of the -32- Fund's organizational and initial offering expenses and the Fund's operating expenses that are payable by the General Partner. 7. Other Expenses. After trading operations commence, the Fund shall be obligated to pay various periodic fees and expenses which are estimated at approximately $30,000 per year for accounting services and auditing charges, $15,000 for legal fees, $15,000 for printing, $20,000 for technical services and $15,000 for filing fees, postage and extraordinary expenses, or, in the aggregate, $95,000 per year (at current price levels). This would amount to approximately 0.4% of the proceeds of the offering if the maximum number of 25,000 Units was sold during the initial offering period, and about 10% thereof if the minimum number of 1,000 Units was sold. The General Partner has agreed to supply and pay for such services as are deemed by the General Partner to be necessary or desirable and proper for the continuous operations of the Fund (excluding sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) which are in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum. The General Partner will furnish each Limited Partner 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 gross trading profits of $750 or 7.50% per Unit on an annualized basis in order for an investor to "break even" on his or her investment in the first year of trading. The foregoing statement is based upon the following assumptions (any one of which may vary depending upon the actuality of the Fund's size and trading): (i) the initial sales charge per Unit is $50; (ii) the historical trading patterns of the Advisor and its principal(s) should generate annual brokerage commissions of approximately 1% of the average annual Net Asset Value of the assets under management by the Advisor; (iii) the continuing services fees should equal approximately 4% of average Net Asset Value annually; (iv) the management fees payable to the Advisor should equal approximately 1% of average Net Asset Value annually; (v) Units redeemed as of the end of or during the twelfth full calendar months after their purchase will be subject to a redemption fee equal to 1% of the Net Asset Value of the Unit(s) redeemed; and (vi) the foregoing fixed expenses should be partially or completely offset by the interest received on the Fund's assets on deposit with The Chase Manhattan Bank, the Commodity Broker and/or other banks and commodity brokers. The effect of the incentive allocation, if any, allocable to the Advisor is not included in the calculation of the break-even threshold because, by definition, no advisory profits are generated at the "break-even"point upon which an incentive allocation would be allocable to the Advisor. The break-even threshold is calculated as shown in the following table: "BREAK EVEN" ANALYSIS Initial purchase price (1)........................... $10,000 Less: Sales charges (1).............................. 500 Management fees (2)................................ 375 Continuing service fees (3) ....................... 125 Brokerage fees (4) ................................ 100 Operating expenses (5)............................. 50 Redemption fees (6)................................ 100 Plus: Interest income (7)............................ (500) Amount of trading income required for the Net Asset Value per Unit at the end of one year to equal the initial offering price............................... $ 750 Percentage of assumed initial offering price......... 7.50% -33- (1) During the initial offering period, the Units will be offered at an initial offering price of $1,000 ($950 per Unit, plus an initial sales charge of $50 per Unit). Subsequent to the closing of the initial offering period, unsold Units (if any) may be offered and sold by the Fund at the then current Net Asset Value per Unit (as hereinafter defined), plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. This illustration assumes that an investor purchases 10 Units during the initial offering period. (2) The Fund has agreed to pay to the Advisor (i) a monthly management fee equal 1/12 of 3.75% of the Net Asset Value per Unit (see "Certain Definitions: 2. Net Asset Value per Unit", below) of the Fund's asset under management at month's end with respect to Units purchased within the prior twelve-month period and 1/12 of 1% of the Net Asset Value per Unit (as defined below) of the Fund's assets under management at month's end with respect to Units purchased more than twelve months prior thereto. (3) The Fund will pay a monthly continuing services fee to the Selling Agent and, through the Selling Agent, certain Selected Dealers who are appropriately registered with the CFTC and/or the NFA and their respective registered representatives equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit (see "Certain Definitions: 2. Net Asset Value per Unit", below) of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased within the prior twelve-month period and 1/12 of 4% of the Net Asset Value per Unit of the Fund's assets under management at month's end (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased more than twelve months prior thereto. (4) Estimated at approximately 1% of the average daily Net Asset Value of the Fund per year based upon the historical trading patterns of the Advisor and its principal(s). (5) After trading operations commence, the Fund shall be obligated to pay various periodic fees and expenses that are estimated at approximately $95,000 per year (at current price levels). This would amount to approximately 0.4% of the proceeds of the offering if the maximum number of 25,000 Units was sold during the initial offering period, and about 10% thereof if the minimum number of 1,000 Units was sold. The General Partner has agreed to supply and pay for such services as are deemed by the General Partner to be necessary or desirable and proper for the continuous operations of the Fund (excluding sales charges, continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) which are in excess of 0.5% of the average monthly Net Asset Value of the Fund per annum. This illustration assumes operating expenses in an amount equal to 0.5% of the average daily Net Asset Value of the Fund per year. -34- (6) The Fund will charge an early redemption fee equal to 4% of the Net Asset Value per Unit of the Units redeemed as of or before the end of the third full calendar month after their purchase. This fee will decrease by one percentage point for every three subsequent calendar months. Accordingly, Units redeemed as of the end of or during the tenth, eleventh and twelfth full calendar months after their purchase will be subject to a redemption fee equal to 1% of the Net Asset Value of the Unit(s) redeemed. Thereafter, no redemption fee will be charged. This illustration assumes a redemption fee, therefore, of 1%. (7) The Fund's assets, both those that are deposited to meet margin requirements and those that are held in reserve, may be held in cash, United States Treasury Bills or in any other form permissible under applicable laws and regulations. The General Partner / Advisor currently intends to cause the Fund to hold not less than 90% of such assets in United States Treasury Bills; interest, if any, earned on such assets, therefore, will inure to the benefit of the Fund. This illustration assumes that the Fund will receive interest at the rate of 5% on the Fund's average daily assets on deposit with The Chase Manhattan Bank, the Commodity Broker and/or other banks and commodity brokers. Certain Definitions 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 therefor) 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 the General Partner. Interest, if any, shall be accrued at least monthly. (c) Brokerage commissions on open positions shall be considered accrued in full (i.e., on a "round-turn" basis) as a liability of the Fund. Management fees and incentive fees shall be accrued daily even though not paid until month's end. 2. Net Asset Value per Unit. Net Asset Value per Unit means the Net Asset Value divided by the number of units of general partnership interest and limited partnership interest outstanding. 3. Advisory Profits. Advisory Profits (for purposes of calculating the Advisor's incentive allocation only) during a calendar quarter means (i) the net of profits and losses resulting from all commodity interest trades closed out by the Advisor during such quarter, plus (ii) the net of any profits and losses on commodity interest trades initiated by the Advisor and open as of the end of such quarter (after deduction for accrued round-turn brokerage commissions), minus (iii) the net of any profits and losses carried forward on open commodity interest trades initiated by the Advisor and carried forward from the preceding quarter -35- (after deduction for accrued round-turn brokerage commissions), minus (iv) the Advisor's "Carryforward Loss" (as defined in the following sentence), if any, as of the beginning of the quarter. If the total of items (i) to (iv), above, is negative at the end of a calendar quarter, such amount (reduced by the trading loss attributable to redeemed Units, distributions and reallocations of assets away from the General Partner, if any) shall be the Advisor's "Carryforward Loss" for the next quarter. In accordance with the foregoing formula, the Fund will allocate to the Advisor an incentive allocation whenever it experiences Advisory Profits. If the Advisor experiences Carryforward Losses thereafter, the Advisor will retain all incentive allocations previously allocated, but no further incentive allocations will be allocable until the Advisor recoups the Carryforward Losses (except losses attributable to redeemed Units, distributions and reallocations of assets away from the Advisor, if any) and incurs additional Advisory Profits. Thus, the incentive allocation is allocable to the Advisor only on cumulative profits earned by the Advisor. Upon termination or expiration of the Advisor's contract, the Fund may employ other advisory services, the compensation for which may be calculated without regard to any losses incurred by the Advisor, or the Fund may renew its relationship with the Advisor on the same or different terms. In addition, since the incentive allocation on Advisory Profits is calculated and paid on a quarterly basis, the Fund may pay substantial incentive fees during the year even though subsequent losses result in a yearly net loss for the Fund. THE GENERAL PARTNER / ADVISOR Description of the General Partner / Advisor Shaffer Asset Management, Inc., a New York corporation organized on March 16, 1998, will act as the general partner and commodity trading advisor of the Fund. The General Partner / Advisor is registered with the CFTC as a commodity pool operator and commodity trading advisor, 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 the General Partner / Advisor. In addition, the General Partner / Advisor is a member of the NFA in its capacities as a commodity pool operator and commodity trading adviser. The General Partner / Advisor began managing commodity accounts for others in March 1999. The General Partner / Advisor 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, 2000, the General Partner / Advisor had approximately $2.6 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 General Partner / Advisor". Although the General Partner / Advisor is not currently organizing, and does not currently sponsor, any other commodity pools, it does plan to organize and sponsor other commodity pools in the future, both publicly and privately offered. The offices of the General Partner / Advisor are located at 70 West Red Oak Lane, White Plains, New York, New York 10604, and its telephone number is (800) 352-5265. The background of the sole principal of the General Partner / Advisor is as follows: -36- Daniel S. Shaffer, age 39. Mr. Shaffer graduated from Syracuse University in December 1982 with a Bachelor of Science in Speech Communications (major) and Finance/Accounting (minor); he received a Master of Science in Accounting degree from New York University in Accounting in June 1986. Mr. Shaffer currently is, and have been the sole officer, director and shareholder of the General Partner / Advisor and Shaffer Consulting Group, Inc. (a life, disability and long-term care insurance broker) since March 1998 and March 1997, respectively, and currently is, and has been, a registered representative with the Selling Agent since May 2000. Prior to that, Mr. Shaffer was a Manager with Metropolitan Life Insurance Co. from July 1998 through March 2000; a registered representative with Nathan & Lewis Securities, Inc. from July 1998 through May 2000; an agent with Northwestern Mutual Financial Network and a registered representative with Robert W. Baird & Co., Inc. from April 1989 through July 1998; a registered representative with Hambrecht & Quist from March 1988 through April 1989; a registered representative with Bear, Stearns & Co., Inc. from October 1987 through March 1988; a Senior Accountant with Aaron Gottesman, Public Accountants from October 1986 through October 1987; a representative with Citicorp Investment Services, Inc. from June 1986 through October 1986; an Internal Auditor - Special Project with Dean Witter Reynolds from January 1986 through June 1986; an Accountant / Auditor with Coopers & Lybrand from June 1984 through January 1986; a registered representative and commodity broker with Bear, Stearns & Company from February 1983 through June 1984; and an independent floor trader on the New York Futures Exchange from January 1983 through February 1983. Mr. Shaffer currently invests in commodity interests for his own account, and he may continue to do so in the future. There has never been any material civil, criminal or administrative action pending, on appeal or concluded against the General Partner / Advisor or its sole principal. Duties of the General Partner Under the terms of the Limited Partnership Agreement, the General Partner is vested with exclusive responsibility for managing the business and affairs of the Fund. Limited Partners will not participate in management decisions affecting the Fund, and they will have no voice in the operation of the Fund. In addition, the General Partner is responsible for the preparation and distribution of monthly and annual reports to the Limited Partners; 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 pursuant to the powers of attorney granted by the Limited Partners upon execution of the Limited Partnership Agreement; and supervising the liquidation of the Fund. The General Partner will provide suitable facilities and procedures for handling redemptions, transfers, distributions of profits (if any) and orderly liquidation of the Fund. In addition, the General Partner will pay all operating and other administrative expenses attributable to the Fund which are 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 will be paid by the Fund. The General Partner shall cause the Advisor 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, -37- or if the Net Asset Value per Unit decreases on any business day to or below $350. (See "Trading Policies"). In addition, the General Partner shall give notice of the occurrence of such event within ten business days thereof. Included in such notification shall be a description of the Limited Partners' rights. (See "Limited Partnership Agreement - Reports and Accounting".) Minimum Investment and Net Worth Requirements Imposed on the General Partner The Limited Partnership Agreement provides that the General Partner 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 the General Partner's capital contribution), or (ii) $25,000. The application of this formula would require the General Partner to purchase, in the aggregate, approximately 26.21 units of general partnership interest in the event that the minimum number of 1,000 Units is sold and accepted by the General Partner during the initial offering period and approximately 249.63 units of general partnership interest in the event that the maximum number of 25,000 Units is sold and accepted by the General Partner during the initial offering period. The General Partner will pay $950 for each unit of general partnership interest purchased by it during the initial offering period (other than the initial unit of general partnership interest which was purchased by the General Partner for $1,000), and thereafter a purchase price equal to the Fund's then current Net Asset Value per Unit. The General Partner will share Fund losses and profits with the Limited Partners 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, the General Partner 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. Except as state above, neither the General Partner / Advisor, the Selling Agent or the Commodity Broker nor any of their respective principals have arranged or committed to purchase any Units but any of them may do so in the future. Under the Limited Partnership Agreement, the General Partner 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 the General Partner's capital contributions. In addition, to the extent that the General Partner serves as the general partner of any other limited partnership in addition to the Fund, the Limited Partnership Agreement would require the General Partner 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 the General Partner. Notwithstanding the foregoing, the General Partner's net worth need not exceed $1,000,000. The calculation of the General Partner'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 Limited Partnership Agreement attached as Exhibit A to the Statement of Additional Information that accompanies this Prospectus.) Daniel S. Shaffer, the sole officer, director and shareholder of the General Partner / Advisor, and Bruce B. Greenberg, an employee of the General Partner, have undertaken, jointly and severally, to provide the General Partner with capitalization sufficient to meet such net worth requirements at the time of the closing of the initial and any subsequent offering of Units and the closing of the offering of interests in any other limited partnerships for which the General Partner acts as general partner. In addition, each of them has agreed not to make any withdrawal of capital from the General Partner that would cause the General Partner to have an aggregate net worth less than that which they have agreed, jointly and severally, to provide at the time of such closings. -38- Trading Philosophy and Methods of the Advisor Commodity traders generally rely on either fundamental or technical analysis or a combination thereof in making trading decisions and attempting to identify price trends. Fundamental analysis looks at factors external to the trading market that affect the supply and demand of a particular commodity in order to predict future prices. As an example, some of the fundamental factors that affect the supply of a commodity such as corn include the acreage planted, crop conditions such as drought, flood and disease, strikes affecting the planting, harvesting and distribution of the commodity, and the previous year's crop carryover. The demand for commodities such as corn consists of domestic consumption and exports and is a product of many things, including general world economic conditions, as well as the cost of corn in relation to the cost of competing products such as soybean meal. Technical analysis is not based on the anticipated supply and demand of the cash (actual) commodity; instead, it is based on the theory that a study of the markets themselves will provide a means of anticipating future prices. Technical analysis of the markets often includes a study of the actual daily, weekly and monthly price fluctuations, volume variations and changes in open interest utilizing charts and/or computers for analysis of these items and other technical market data. The Advisor will make commodity trading decisions for the Fund pursuant to trading strategies that include technical trend analysis and technical trading principles as described below. The principal objective of the trading strategies is to participate in major, sustained price movements in the commodities traded. The principal technical trading strategies used by the Advisor 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 the Advisor to translate the information in 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 the Advisor. 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. The Advisor's analyses are based generally on technical systems that attempt to detect trends in price movements. All successful speculative commodity trading depends upon establishing a position and then maintaining that position while the market moves in favor of the commodity trader. The trading system of the Advisor, like all technical systems, seeks to establish such positions and to exit the market when the favorable trend either reverse 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 -39- 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, the Advisor 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, if the Advisor 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 the Advisor'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 Table A, below, sets forth the unaudited composite trading results of all accounts managed by the Advisor from March 1999 to September 30, 2000. The number of accounts managed by the Adviser totaled 1, 11 and 19 in March 1999, December 1999 and as at September 30, 2000, respectively. Through September 30, 2000, 18 of such accounts showed net gains and 2 showed net losses. The profit made by these accounts showing net gains amounted to approximately $567,223, and the losses incurred by those account showing net losses amounted to approximately $5,929. As of September 30, 2000, one account had been closed with a net gain of approximately $7,918. Applicable CFTC regulations require disclosure of the "rate of return" for each month of all accounts managed by the Advisor 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 Table A or as being indicative of any return the Fund may earn in the future. 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. The information included in Tables A and B, below, has not been audited but, in the opinion of the Advisor, such information, other than the pro forma results, fairly presents the performance of the accounts managed by the Advisor for the periods shown. The results set forth in Table A, below, are not indicative of the results that may be achieved by the Advisor 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 the Advisor during the periods shown. Table A does not reflect the actual performance of any one account. -40- 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 the Advisor 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 the Advisor 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 the Advisor 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 the Advisor'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 the Advisor'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 THE ADVISOR IN THE FUTURE. THE ADVISOR'S SYSTEM HAS EVOLVED OVER THE YEARS BASED ON ACCUMULATED EXPERIENCE AND FURTHER TESTING OF DATA. AN ACCOUNT TRADED PURSUANT TO THE ADVISOR'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 SAM'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. -41- TABLE A COMPOSITE PERFORMANCE RECORD OF ACCOUNTS MANAGED BY SHAFFER ASSET MANAGEMENT, INC. BASED UPON NOMINAL CLIENT ACCOUNTS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ Gross Net Change in Beginning Beginning Realized Realized Unrealized Change in Trading Equity Equity Additions Withdrawals Profit Brokerage Profit Interest Profit Accrued Advisor's Actual Nominal Nominal Nominal (Loss) Commissions (Loss) Income (Loss) Commission Fees (1a) (1b) (2) (3) (4) (5) (6) (7) (8) (9) (10) - ------------------------------------------------------------------------------------------------------------------------------------ 1999 Mar 0 0 50,000 0 (457) 687 (1,144) 0 7,859 (269) 1,289 Apr 55,156 55,156 100,000 0 3,539 818 2,720 138 23,011 (1,139) 4,918 May 174,969 174.969 50,096 0 20,170 2,531 17,639 317 (15,741) 86 396 Jun 226,970 226,970 300,000 0 (31,771) 4,148 (35,919) 696 35,020 (383) 391 Jul 525,992 525,992 0 0 80,573 4,829 75,743 1,515 (2,308) 38 14,047 Aug 586,935 586,935 150,176 0 (7,240) 5,670 (12,910) 1,692 (77,523) (1,756) (12,202) Sep 658,816 658,816 100,000 0 (141,163) 6,939 (148,102) 1,833 352,312 (862) 34,433 Oct 929,563 929,563 0 0 237,117 7,754 229,363 2,511 (336,406) 3,252 0 Nov 828,285 828,285 100,360 0 33,138 10,200 22,937 2,195 161,278 (4,193) 15,246 Dec 1,095,616 1,095,616 160,000 0 (38,950) 10,173 (49,124) 2,857 11,661 605 (7,173) 2000 Jan 1,228,789 1,228,789 69,315 0 43,202 6,456 36,745 3,000 52,298 221 17,655 Feb 1,372,714 1,372,714 90,000 58,094 109,649 6,059 103,590 4,569 (47,633) 563 11,428 Mar 1,454,282 1,454,282 200,000 0 31,032 10,674 20,358 5,150 (151,837) 50 (21,368) Apr 1,549,373 1,549,373 120,000 14,651 (47,630) 6,703 (54,334) 5,436 136,061 (1,373) 12,437 May 1,728,073 1,728,073 450,000 0 111,704 12,350 99,353 6,908 (10,093) 595 17,454 Jun 2,157,382 2,257,382 0 0 72,829 9,201 63,628 7,122 49,488 494 21,903 Jul 2,256,213 2,356,213 0 0 (27,036) 4,989 (32,025) 7,503 (34,379) (371) 0 Aug 2,196,941 2,296,941 167,451 0 211,841 14,228 197,612 7,980 41,652 1,157 34,832 Sep 2,577,964 2,677,964 0 0 66,394 11,338 55,055 10,792 (171,810) 2,387 (21,558) Oct 2,495,948 2,595,948 0 102,732 (414,029) 11,769 (425,798) 8,932 59,380 (2,554) 0 Nov 2,033,175 2,133,175 0 50,716 (43,911) 9,425 (53,337) 7,722 17,912 (1,813) 0 Dec 1,952,942 2,052,942 75,000 0 239,837 9,908 229,929 6,314 231,069 690 15,984 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------- Monthly Other Net Ending Rate of Expenses Performance Equity Return Index (11) (12) (13) (14) (15) - ------------------------------------------------------- 1,000 0 5,156 55,156 10.31% 1,103 0 19,812 174,969 12.77% 1,244 0 1,904 226,970 0.85% 1,255 0 (977) 525,992 (0.19)% 1,252 0 60,942 586,935 11.59% 1,397 0 (78,295) 658,816 (10.62)% 1,249 0 170,747 929,563 22.50% 1,530 0 (101,278) 828,285 (10.90)% 1,363 0 166,971 1,095,616 19.21% 1,625 0 (28,826) 1,228,789 (2.41)% 1,586 1999 Compounded Rate of Return (16) 58.59% 0 74,610 1,372,714 5.92% 1,680 0 49,661 1,454,282 3.54% 1,739 0 (104,908) 1,549,373 (6.47)% 1,627 0 73,351 1,728,073 4.45% 1,699 0 79,309 2,257,382 3.21% 1,754 0 98,830 2,356,213 4.30% 1,829 0 (59,272) 2,296,941 (2.64)% 1,781 0 213,571 2,677,964 8.64% 1,935 0 (82,015) 2,595,948 (2.97)% 1,877 0 (360,040) 2,133,175 (14.43)% 1,606 0 (29,516) 2,052,942 (0.98)% 1,591 0 452,018 2,579,912 22.10% 1,942 2000 Compounded Rate of Return (16) 22.46% - -------------------------------------------------------
-42- Notes to Table A A summary of the significant accounting policies, which have been followed in preparing the accompanying Table A, above, is set forth below. The performance represents the actual performance of accounts managed by the Advisor. The Advisor uses a method of computing rate of return and performance disclosure, referred to as the "Fully-Funded Subset" method, pursuant to an advisory entitled "Computation and Presentation of Rate-of-Return Information and Other Disclosures Regarding Partially Funded Accounts Managed by Commodity Trading Advisors" dated February 8, 1993 published by the CFTC (the "CFTC Advisory"). To qualify for use of the Fully-Funded Subset method, the CFTC Advisory requires that certain computations be made in order to arrive at the Fully-Funded Subset and that the accounts for which the performance is so reported meet two tests which are designed to provide assurance that the Fully-Funded Subset method and the resultant rates of return are representative of the trading program. (1a) "Beginning Equity - Actual" equals the "Ending Equity" of the prior period (except for the first period shown (March 1999) which represents the total equity of all accounts managed by the Advisor on that date), excluding notional amounts (i.e., amounts that exceed the amount of actual funds traded). (1b) "Beginning Equity - Nominal" equals "Ending Equity" (except for the first period shown (March 1999) which represents the total equity of all accounts managed by the Advisor on that date). (2) "Additions - Nominal" equals the amount of all additions to the account(s) each month, other than through sources of income, and are comprised of cash and committed and notional funds. (3) "Withdrawals - Nominal" equals the amount of all withdrawals, redemptions, distributions and account terminations each month, other than through sources of expense, and are comprised of cash, committed and notional funds. (4) "Gross Realized Profit (Loss)" is the gross realized gain (loss), before brokerage commissions and Other Expenses, on all commodity futures transactions closed out during the month. (5) "Brokerage Commissions" are recognized on an accrual basis and represent the total amount of all commissions charged per "round-turn" trade by the applicable futures commission merchant(s) on all commodity futures transactions closed out during the month, plus certain other charges, including exchange fees and the fees and charges of certain self-regulatory organizations. (6) "Net Realized Profit (Loss)" equals "Gross Realized Profit (Loss)" minus "Brokerage Commissions". (7) "Interest Income" is recognized on an accrual basis and represents interest earned on U.S. Government obligations, if any, held as margin in the trading account(s), and/or interest earned, if any, on balances at the futures commission merchant. (8) "Increase (Decrease) in Unrealized Profit (Loss)" represents the total increase (decrease) in the unrealized profit or loss on open commodity positions at the end -43- of the month as compared with the end of the previous month. Unrealized gains (losses) on futures contracts are calculated at the end of each month based on contract sizes and the differences between the commodity futures contract closing price and the price at which the contract was initially purchased or sold. (9) "Change in Accrued Commission" represents the total increase (decrease) from open commodity positions brokerage commissions recognized on an accrual basis and represent the commissions charged per round-turn by the futures commission merchant plus charges by certain exchanges and self-regulatory organizations. (10) "Trading Advisor's Fee" represents the amount of all paid and accrued asset based management and performance based incentive fees charged to the account(s) in accordance with the applicable advisory agreement(s). (11) "Other Expenses" represents other charges to the account(s) presented on an accrual basis. (12) "Net Performance" equals "Net Realized Profit (Loss)" plus "Increase (Decrease) in Unrealized Profit (Loss)" plus "Interest Income" minus "Trading Advisor's Fee" and "Other Expenses". (13) "Ending Equity" equals "Beginning Equity - Nominal" plus "Additions - Nominal" minus "Withdrawals - Nominal" plus or minus "Net Performance". (14) "Monthly Rate of Return" for each period is computed by dividing "Net Performance" of the Fully-Funded Subset by the "Beginning Equity" of the Fully-Funded Subset, except in periods of significant "Additions - Nominal" or Withdrawals - Nominal" to the account(s) in the Fully-Funded Subset. In such instances, the Fully-Funded Subset is adjusted to exclude accounts with significant "Additions - Nominal" or "Withdrawals - Nominal" which would materially change the rate of return pursuant to the Fully-Funded Subset method. The period rates of return for accounts excluded from the Fully-Funded Subset will often be different from the rate of return for the Fully-Funded Subset. Accounts not included in the Fully-Funded Subset for any particular period may include: accounts opened or closed during the period or accounts which are being phased into the program 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" represents the estimated change in Net Asset Value of an initial $1,000 deposit at the end of each period shown assuming that such deposit remained invested without additions, withdrawals or distributions through the periods covered by Table A. The calculations were derived by multiplying the "Rate of Return" (carried out to two decimal places) by $1,000 initially, and continuing month by month. The performance of this initial $1,000 deposit does not represent the actual performance of any particular account and is included for informational purposes only. In addition, "Index" may not be an accurate -44- indicator of performance since it assumes a continuous investment throughout the period with no subsequent additions, withdrawals or distributions. (16) "Compounded Rate of Return" is listed below the final Monthly Rate of Return for each calendar period presented. It represents the compounded rate of return for each year or portion of the year presented. It is computed by applying successively the respective Monthly Rate of Return for each month beginning with the first month of that calendar period. Compounded Rate of Return may not be an accurate indicator of performance since it assumes a continuous investment throughout the period with no subsequent additions, withdrawals or distributions of accumulated profits. -45- 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 - ------------------------------------------------------------------------------------------------------------------- Mar 956 621 335 1,289 783 506 - ------------------------------------------------------------------------------------------------------------------- Apr 1,957 1,272 685 4,918 3,551 1,367 - ------------------------------------------------------------------------------------------------------------------- May 2,445 1,589 856 396 697 (301) - ------------------------------------------------------------------------------------------------------------------- Jun 4,531 2,945 1,586 391 (665) 1,056 - ------------------------------------------------------------------------------------------------------------------- Jul 4,791 3.114 1,677 14,047 13,061 986 - ------------------------------------------------------------------------------------------------------------------- Aug 7,426 4,827 2,599 (12,202) (12,782) 580 - ------------------------------------------------------------------------------------------------------------------- Sep 7,801 5,071 2,730 34,433 33,026 1,407 - ------------------------------------------------------------------------------------------------------------------- Oct 4,502 2,926 1,576 0 (12,779) 12,779 - ------------------------------------------------------------------------------------------------------------------- Nov 14,393 9,355 5,038 15,246 30,061 (14,815) - ------------------------------------------------------------------------------------------------------------------- Dec 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 - ------------------------------------------------------------------------------------------------------------------- Jan 6,235 4,053 2,182 17,655 17,506 149 - ------------------------------------------------------------------------------------------------------------------- Feb 5,496 3,572 1,924 11,428 12,827 (1,399) - ------------------------------------------------------------------------------------------------------------------- Mar 10,624 6,906 3,718 (21,368) (16,157) (5,211) - ------------------------------------------------------------------------------------------------------------------- Apr 8,076 5,249 2,827 12,437 31,800 (19,363) - ------------------------------------------------------------------------------------------------------------------- May 11,755 7,641 4,114 17,454 17,832 (378) - ------------------------------------------------------------------------------------------------------------------- Jun 8,707 5,660 3,047 21,903 25,123 (3,220) - ------------------------------------------------------------------------------------------------------------------- Jul 5,360 3,484 1,876 0 (2,129) 2,129 - ------------------------------------------------------------------------------------------------------------------- Aug 13,071 8,496 4,575 34,832 43,870 (9,038) - ------------------------------------------------------------------------------------------------------------------- Sep 8,951 5,818 3,133 (21,558) (8,833) (12,725) - ------------------------------------------------------------------------------------------------------------------- Oct 14,323 9,310 5,013 0 (47,549) 47,549 - ------------------------------------------------------------------------------------------------------------------- Nov 11,238 7,305 3,933 0 1,779 (1,779) - ------------------------------------------------------------------------------------------------------------------- Dec 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) - -------------------------------------------------------------------------------------------------------------------
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. -46- (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 "Advisory Profits" in each quarter. "Advisory Profits" for these purposes are deemed to be the "Net Realized and Unrealized Gain" (if any) for the quarter from Table B minus cumulative "Net Realized and Unrealized Gain", if any (reduced by any trading losses attributable to amounts withdrawn), carried forward from all preceding quarters since the last quarter for which an incentive allocation was accrued. For purposes of the pro forma computations, cash deposits and withdrawals were deemed to occur at the end of each month after computations of the management fee for such month. "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. -47- COMMODITY BROKERAGE ARRANGEMENTS General Under the Limited Partnership Agreement, the General Partner is responsible for selecting the Fund's commodity broker(s) and has selected ADM Investor Services, Inc. (the "Commodity Broker") to act as the Fund's initial commodity broker. In this regard, the Fund has entered into a non-exclusive brokerage agreement with ADM that is terminable by the Fund or the Commodity Broker on sixty days' prior written notice. From time to time, the General Partner 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 The Commodity Broker is a Delaware corporation and wholly owned subsidiary of Archer Daniels Midland Company. Through its branch office and introducing broker network, the Commodity Broker 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. The Commodity Broker is a clearing member of the Chicago Board of Trade; the Chicago Merchantile Exchange; the New York Merchantile Exchange and the Commodity Exchange; the New York Board of Trade; the Minneapolis Grain Exchange; and the London International Financial Futures Exchange. The Commodity Broker 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 the Commodity Broker's application for registration or the qualifications of the Commodity Broker to act as a futures commission merchant, or that the CFTC supervises the business activities engaged in by the Commodity Broker. The Commodity Broker is also a member of the NFA. The Commodity Broker's 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 the Commodity Broker as a futures commission merchant based upon a 1996 conviction of the Commodity Broker's 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 the Commodity Broker, the Commodity Broker accepted an offer of settlement that placed various restrictions on the Commodity Broker's registration as a futures commission merchant. In particular, the Commodity Broker 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 the Commodity Broker. In addition, the Commodity Broker 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. The Commodity Broker has advised the General Partner / Advisor that (i) the Commodity Broker was not cited by the CFTC for any alleged or actual violations of the CE Act or rules and regulations promulgated -48- by the CFTC thereunder, (ii) the CFTC's action against the Commodity Broker was based entirely on the fact that the Commodity Broker 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 as a futures commission merchant. Other Actions. The Commodity Broker is currently a defendant in certain lawsuits incidental to its commodities business. The Commodity Broker has advised the General Partner / Advisor that such actions have not had, and are not expected to have, a material adverse effect on the activities of the Commodity Broker 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 the Commodity Broker or any of its principals during the past five years. Description of Brokerage Arrangements Upon the successful completion of the initial offering, the Fund will open a commodity trading account with the Commodity Broker pursuant to a brokerage agreement entered into with the Commodity Broker. 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 the Commodity Broker; open positions may be liquidated or new positions may be rejected if, in the discretion of the Commodity Broker, 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 the Commodity Broker 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 the Commodity Broker 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 the Commodity Broker or its stockholders, directors, officers, employees or affiliates. The Commodity Broker 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 the Advisor and/or the Advisor's employees or agents. The brokerage agreement provides that, under no circumstances shall the Commodity Broker accept any responsibility for verifying that any of such instructions are in conformance with the Advisor's authority and the Commodity Broker will not undertake to monitor the actions of the Advisor 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 the General Partner / Advisor or its affiliates is permitted for Losses resulting from a violation by the General Partner / Advisor or any of its affiliates of the Securities Act of 1933 or of any applicable state securities laws in connection with the Registration Statement or the sale of Units. The Fund (or the Limited Partners) or the other parties -49- thereto may terminate the brokerage agreements and close the Fund's commodity accounts at any time on sixty days prior notice. The Fund will initially pay brokerage commissions to the Commodity Broker 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 the Advisor, the Fund may pay brokerage commissions totaling 1% or more of its average annual Net Asset Value. There is no agreement to limit such commission charges to any particular level. The Commodity Broker 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. The General Partner / Advisor 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. The General Partner 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 the Commodity Broker (and generally from their 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 the General Partner'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 the Commodity Broker or certain other brokers by an account as large as the Fund's account (see "Conflicts of Interest and Fiduciary Responsibility of the General Partner"). PLAN OF DISTRIBUTION The Offering The Units will be offered for sale on a best efforts basis by the Fund through Berthel Fisher & Company Financial Services, Inc., an Iowa corporation (the "Selling Agent"). The Selling Agent may select other member firms of the NASD and certain foreign dealers that agree in making sales of Units to abide by the NASD Rules of Fair Practice to participate in this offering. This offering may be terminated at any time by agreement of the General Partner and the Selling Agent. The initial offering of Units will be made at a purchase price of $950 per Unit, plus an initial sales charge of $50 per Unit, for a period of sixty days after the date of this Prospectus (subject to a possible extension of the offering period for up to sixty days at the election of the General Partner). At the end of the initial offering period, if the minimum of 1,000 Units has been sold and accepted by the General -50- Partner, the Fund may commence trading. Subsequent to the initial offering period, the Fund may continue to sell unsold Units (if any) as of the last business day of each calendar month. The purchase price for such Units will be the then current Net Asset Value per Unit as of the close of business on the last business day of each calendar month, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. At all times, subscribers must purchase a minimum of $10,000 in Units (initially 10 Units), except that a minimum of $5,000 in Units (initially 5 Units) may be purchased through 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. In some states, greater minimum purchase requirements may be applicable. Purchases by investors and their spouses and by entities (including retirement plan trusts) which are legally or beneficially owned in their entirety by investors and/or their spouses shall be aggregated for purposes of meeting the minimum purchase requirements. Fractional Units may be sold by the Fund. If at least 1,000 Units are sold and accepted by the General Partner during the initial offering period, approximately 20% of all sales charges shall be paid to the General Partner to reimburse the General Partner for the payment by the General Partner of the Fund's organizational, initial offering and operating expenses payable by the General Partner and approximately 80% of all sales charges shall be paid as syndication fees to the Selling Agent and as selling commissions to the Selected Dealers. The Selling Agent and the Selected Dealers may in turn pay a portion of such syndication fees and selling commissions to their respective employees who are NASD registered representatives for each Unit sold by them. In addition to the syndication fees and selling commissions described above, the Fund will pay a monthly continuing services fee to the Selling Agent and, through the Selling Agent, 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 Agent and such Selected Dealers and their respective registered representatives in return for their continuing services to the Fund and the Limited Partners solicited by them. Such services include, without limitation, keeping the Limited Partners 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 the General Partner upon sixty days' prior written notice to the Limited Partners. The General Partner is responsible for all of the Fund's organizational and initial offering expenses (exclusive of selling commissions) that are currently estimated at $200,000. Although the Fund will not be obligated to reimburse the General Partner 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 -51- Fund upon redemptions of Units will be paid to the General Partner to reimburse the General Partner for the payment by the General Partner of the Fund's organizational and initial offering expenses and the Fund's operating expenses that are payable by the General Partner. See "Summary - Fees and Expenses Payable by the General Partner", "Fees, Compensation and Expenses" and "Redemptions". The Selling Agent is, and the General Partner / Advisor 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 the Selling Agent 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 Agent for any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees and disbursements) resulting from a violation by the General Partner 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. Subscriptions / Investment Requirements In order to subscribe for Units, a subscriber must (i) complete and execute a Subscription Agreement / Power of Attorney (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 (which should be 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 the General Partner, in whole or in part (which is in the sole discretion of the General Partner), the subscription funds or the rejected portion thereof will be returned to the subscriber without interest. The General Partner will determine whether to accept or reject a subscription as promptly as possible following its receipt. Each subscriber must represent in the Subscription Agreement / Power of Attorney that (i) he or she has either a net worth (exclusive of home, furnishings and automobiles) of at least $150,000, or a net worth (similarly calculated) of at least $45,000 and an annual gross income of at least $45,000; (ii) he or she has read this Prospectus and the accompanying Statement of Additional Information; and (iii) he or she is aware of and can afford the risks of his or her investment in the Fund, including the risk of losing his or her entire investment. Residents of certain states may be required to meet greater net income, net worth or minimum purchase requirements. (See Exhibit C attached to the Statement of Additional Information that accompanies this Prospectus.) During the initial offering period, all monies remitted by subscribers will be deposited in an escrow account with The Chase Manhattan Bank, 1214 Mamaroneck Avenue, White Plains, NY 10605. In the event that 1,000 or more Units are sold to the public and accepted by the General Partner, all interest earned on the proceeds of subscriptions during the initial offering period will not be retained by the Fund but will be distributed to subscribers on a pro rata basis (taking into account both the time and the amount of the deposit) following the conclusion of the initial offering period. If 1,000 Units are not so sold and accepted, the amount of each subscription together with any interest earned (allocated on the same pro rata basis) will be distributed to the subscribers within fifteen days after the end of the initial offering period. -52- INVESTMENTS BY ERISA ACCOUNTS General This section sets forth certain consequences under ERISA and the Internal Revenue Code which a fiduciary of an "employee benefit plan" as defined in and subject to ERISA or of a "plan" as defined in and subject to Section 4975 of the 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 Code by fiduciaries can result in various types of liabilities, including civil penalties and excise taxes. Because of the complexity of these rules, plan fiduciaries are strongly encouraged to consult with their legal advisors prior to causing a plan to invest in the Fund. Special Investment Considerations Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Fund, including the role that an investment in the Fund plays or would play in the Plan's overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the -53- Fund, must be satisfied that such investment is prudent for the Plan, that the investments of the Plan, including in the Fund, are diversified so as to minimize the risk of large losses and that an investment in the Fund complies with the terms of the Plan and related trust. The Fund Should Not be Deemed to Hold "Plan Assets" A regulation issued under ERISA (the "ERISA Regulation") contains rules for determining when an investment by a Plan in an equity interest of a limited partnership will result in the underlying assets of the partnership being assets of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., "plan assets"). Those rules provide in pertinent part that assets of a limited partnership will not be plan assets of a Plan which purchases an equity interest in the partnership if the equity interest purchased is a "publicly-offered security" (the "Publicly-Offered Security Exception"), or if investment by benefit plan investors is not "significant". If the underlying assets of a partnership are considered to be assets of any Plan for purposes of ERISA or Section 4975 of the Code, the operations of such partnership would be subject to and, in some cases, limited by, the provisions of ERISA and Section 4975 of the Code. The Publicly-Offered Security Exception applies if the equity is a security that is: 1) "freely transferable" (determined based on the applicable facts and circumstances); 2) part of a class of securities that is "widely held" (meaning that the class of securities is owned by 100 or more 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 registration statement under the Securities Act of 1933, as amended, and the class of which such security is a part is registered under the Securities Exchange Act of 1934, as amended, within 120 days (or such later time as may be allowed by the SEC) after the end of the fiscal year of the issuer in which the offering of such security occurred. It appears that all of the conditions described above will be satisfied with respect to the Units and, therefore, the Units should constitute "publicly offered securities". The underlying assets of the Fund should therefore not be considered to constitute assets of any Plan that purchases Units. If, however, the Fund does not qualify for the Publicly Offered Security Exception, the General Partner may limit investments by benefit plan investors, in the aggregate, to less than 25% of the total capital of each class of equity interest of the Fund not owned by its affiliates (the "25% Limitation"). If the General Partner 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 the General Partner to require that some investors withdraw from the Fund in the event other investors withdraw. If, in the opinion of the General Partner, a rejection of subscriptions or mandatory withdrawals are necessary to avoid causing the assets of the Fund to meet the 25% Limitation, the General Partner will effect the rejections or withdrawals in a manner determined in the sole discretion of the General Partner. However, the General Partner will use its best efforts to effect withdrawals on a pro rata basis among all benefit plan investors. -54- Ineligible Purchasers In general, Units may not be purchased with the assets of a Plan if the General Partner, the Selling Agent, the Commodity Broker 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 the General Partner's discretion. Investors should be aware, however, that the General Partner does not intend to make any distributions of any profits. (See "Risk Factors - Partners' Tax Liability May Exceed Distributions", "Conflicts of Interest and Fiduciary Responsibility of the General Partner", "Summary of the Limited Partnership Agreement - Profits and Losses; - Distributions" and "Federal Income Tax Consequences".) A Limited Partner 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 the General Partner, provided, however, that no redemption which applies to less than all of a partner's interest in the Fund can result in the partner's capital account being reduced below $10,000 ($5,000 in the case of investments by pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, IRAs, Education IRAs, Roth IRAs, SIMPLE IRAs, Simplified Employee Pension - IRA plans and retirement and deferred compensation and annuity plans and trusts used to fund those plans, including but not limited to, those defined in Sections 401(a), 403(b) or 457 of the Internal Revenue Code) after the redemption is effected. Requests for redemption are irrevocable. The Net Asset Value per Unit for purposes of redemption equals the Net Asset Value of the Fund allocated to the capital account of the Fund represented by Units divided by the number of Units outstanding on the date of redemption. Units are redeemed at their Net Asset Value determined as of the day on which they are redeemed, not as of the date on which a request for redemption is made or received. Accordingly, the redemption price actually received for a Unit may differ significantly from that which would have been received at the time when the decision to redeem was made. The Fund will charge an early redemption fee equal to 4% of the Net Asset Value per Unit of the Units redeemed as of or before the end of the third full calendar month after their purchase. This fee will decrease by one percentage point for every three full calendar months thereafter. Accordingly, Units -55- 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 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 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 the General Partner to reimburse the General Partner for the payment by the General Partner of the Fund's organizational and initial offering expenses and the Fund's operating expenses that are payable by the General Partner. Investors should not 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 the General Partner 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 the General Partner) at least ten days (or such shorter period as may be acceptable to the General Partner) 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 can be met. The Fund will attempt to accomplish its objectives by following the trading policies set forth below: 1. Fund monies will be invested in futures contracts only of commodities which are traded in sufficient volume to permit, in the opinion of the Fund's advisor(s), ease of taking and liquidating positions. 2. The Fund will not allow any advisor to acquire, on behalf of the Fund, additional positions in any commodity if such additional positions would result in a net long or short position for any individual commodity requiring as margin more than 25% of the Fund's Net Asset Value at the time. 3. The Fund estimates that between 10% and 40% of the Fund's assets will normally be committed as margin (although the percentage may be outside such range from time to time). As a result, the Fund will not generally be as highly -56- leveraged as permitted for investments by an individual. Margin requirements will be met with cash, through deposits of United States Treasury Bills or in such other manner as may be permitted under applicable laws and regulations. 4. The Fund will ordinarily avoid entering into an open position during a delivery month, except with respect to commodity futures contracts on currencies. 5. The Fund will not employ the trading technique commonly known as "pyramiding", in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or a related commodity. However, the Fund's advisor(s) may take into account the Fund's open trade equity on existing positions in determining generally whether to acquire additional commodity futures contracts on behalf of the Fund in light of the policy described in paragraph 3, above. 6. The Fund will not utilize borrowings, except to finance the Fund's taking delivery of cash commodities. Although the Fund has no current intention to make or accept delivery of cash commodities, the Fund may from time to time make or accept delivery of a cash commodity. Normally, such deliveries will be disposed of promptly by re-tendering to the appropriate clearing house the warehouse receipt representing the delivery. 7. Although the Fund has no current intention to employ trading techniques such as spreads or straddles, the Fund may from time to time employ trading techniques such as spreads or straddles. 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 the General Partner 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 -57- 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 the General Partner / Advisor is currently serving as the general partner of, and the commodity trading advisor to, the Fund, the General Partner 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 the General Partner, in the exercise of its prudent business judgment, deems appropriate. In addition, the General Partner may change the trading policies described above without notice to or the approval of the Limited Partners if it, in its sole discretion, determines that such change is in the best interests of the Fund. 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. (See "Risk Factors".) Within ten 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 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 the General Partner shall mail notice of such date to each Limited Partner 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 the General Partner 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. SUMMARY OF THE ADVISORY AGREEMENT The Fund has entered into an advisory agreement (the "Advisory Agreement") with the Advisor that provides that the Advisor 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 the Advisor'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 General Partner or the Fund upon sixty days' prior written notice to the Advisor. The Advisory Agreement may also be terminated at the election of the -58- General Partner at any time, upon written notice to the Advisor, in the event that: (i) the General Partner withdraws from the Fund as its general partner; (ii) the Advisor's registration as a commodity trading advisor with the CFTC lapses or is suspended or terminated; (iii) the General Partner, in its sole discretion, should determine in good faith that the Advisor 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 the Advisor, becomes incapacitated or is otherwise not active in the management of the trading programs of the Advisor; (vi) the Advisor becomes unable to use its trading strategies for the benefit of the Fund for any reason; or (vii) the Advisor 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 the Advisor 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 the Advisor or obtain those services on the same terms as those of the current advisory agreement. In addition, the Advisor 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 which the Advisor will trade for the Fund under the current advisory agreement. The compensation of a new trading advisor or the Advisor under any advisory agreement negotiated in the future may be determined without regard to the previous performance of the Fund. The Commodity Broker has agreed to keep confidential the Advisor'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 the Advisor is described under "Fees, Compensation and Expenses". The business of the Advisor 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 the Advisor 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. See "Conflicts of Interest / Fiduciary Responsibility of the General Partner". The Limited Partners will have no right to inspect the trading records or evaluate the performance of such accounts except to the extent required by law. The Advisor 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 the Advisor or any of its principals or affiliates. In addition, in its trading for the Fund's account and such other accounts, the Advisor 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 the Advisor'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 the Advisor. The Advisory Agreement provides that the Advisor, its shareholders, directors, officers, employees and other affiliates shall not be liable to the Fund or to its partners except by reason of acts or omissions due to bad faith, misconduct, negligence or for not having acted in good faith in the reasonable belief that their actions were taken in, or not opposed to, the best interests of the Fund. The Advisory Agreement further provides that with respect to any action in which the Advisor or any of such affiliates is made a party alleging claims arising out of or in connection with the management of the Fund's assets -59- (other than 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, if the indemnified person 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 gross negligence, willful, wanton or reckless misconduct, or a breach of fiduciary obligations on the part of the person seeking indemnification. In any action brought by or in the right of the Fund against the Advisor or any of its affiliates, the Fund shall also 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 or expense (including, without limitation, attorneys' and accountants' fees and disbursements) 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 a breach of fiduciary obligations on the part of the person seeking indemnification (unless the court in which such action was brought shall determine that, in view of all of the circumstances of the case, such person 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 such action if the indemnified person agrees to reimburse the Fund in the event that indemnification is not permitted. The Fund has also agreed to indemnify the Advisor and its affiliates under certain circumstances with respect to claims, if any, arising under the Securities Act of 1933 in connection with the Fund's Registration Statement and the sale of the Units. The Advisory Agreement prohibits the Advisor 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 the Advisor a management fee and allocate to the Advisor an incentive allocation as described under the caption "Fees, Compensation and Expenses". SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT The rights and duties of the General Partner and the Limited Partners are governed by the provisions of the Delaware Revised Uniform Limited Partnership Act and by the Limited Partnership Agreement (the "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 The General Partner has the sole discretion to admit additional Limited Partners. Subsequent to this offering, the Fund may offer and sell additional Units, and there is no limitation on the total number of Units that may be outstanding. All Units offered by the Fund after the conclusion of this offering must be sold for no less than the Fund's then current Net Asset Value per Unit. Amendments; Meetings The Limited Partnership Agreement may be amended in any respect (except to change the Fund to a general partnership, to change the liability of the General Partner or any Limited Partners, to remove -60- the General Partner, 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 the General Partner), either pursuant to a written vote or at a duly called meeting of the Limited Partners. An amendment may be proposed or a meeting may be called by the General Partner or by the holders of at least 10% of the outstanding Units. It is not expected that the General Partner will call any annual meetings of the Limited Partners. Certificates for Units The Limited Partnership Agreement provides that Units need not be evidenced by certificates, but it is presently contemplated that certificates will be issued to the Limited Partners with respect to Units purchased by them. Election, Removal and Withdrawal of the General Partner The General Partner may be removed by a vote of the holders of at least seventy five percent of the outstanding Units (not including Units held by the General Partner, 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 the General Partner, if any). The General Partner may withdraw as the general partner of the Fund upon ninety days' notice to the Limited Partners. Indemnification The Limited Partnership Agreement provides that with respect to any action in which the General Partner or its affiliates are made a party (other than an action brought by or in the right of the Fund), the Fund shall indemnify and hold harmless such persons, 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, if the indemnified person 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 gross negligence, willful, wanton or reckless misconduct, or a breach of fiduciary obligations. In any action brought by or in the right of the Fund against the General Partner or its affiliates involving the management of the internal affairs of the Fund, the Fund shall indemnify and hold harmless the General Partner and its affiliates, subject to receipt of an independent legal opinion regarding the applicable standard of conduct, against any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees and disbursements) incurred in connection with the investigation, defense or settlement of such actions 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 a breach of fiduciary obligations on the part of the person seeking indemnification (unless the court in which such action was brought shall determine that, in view of all circumstances of the case, such person(s) are nevertheless 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 such action if the indemnified person shall agree to reimburse the Fund in the event indemnification is not permitted. No indemnification of the General Partner or its affiliates is permitted for losses resulting from or arising out of any violation of the Securities Act of 1933 or applicable state securities laws in connection with or related to the registration, issuance, 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 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 -61- 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. Liabilities A Limited Partner will not be personally liable for any debts or losses of the Fund beyond the amount of his capital contribution and profits earned thereon, if any, except as indicated above in the event that a 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 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 the General Partner. Limited Partners' Rights Each Limited Partner 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 the General Partner, if any) may (a) adopt amendments to the Limited Partnership Agreement proposed by the General Partner or Limited Partners owning at least 10% of the outstanding Units, (b) elect new general partner(s) if the General Partner withdraws or is removed or is otherwise unable to serve, or (c) admit additional general partner(s). In addition, holders of at least seventy five percent of the outstanding Units (not including Units held by the General Partner, if any) may (a) remove the General Partner, (b) cancel any contract for services with the General Partner or its affiliates for any reason on sixty days' notice or (c) terminate the Fund. In addition, Limited Partners must approve any material change in the Fund's trading policies. (See "Trading Policies".) Profit and Loss; Distributions The General Partner may, but need not and, in fact, does not intend to, distribute any portion of the capital or profits of the Fund. The General Partner may declare distributions in additional Units of the Fund, in which event Limited Partners 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. (See "Redemptions".) For purposes of calculating Net Asset Value, any distribution shall become a liability of the Fund as of the date of its declaration. The allocation of the Fund's income or loss for Federal income tax purposes is discussed under the caption "Federal Income Tax Consequences." Redemptions The Limited Partnership Agreement provides that Limited Partners may redeem all or a portion of their Units (but partial redemptions shall be in whole Units except as the General Partner may permit) as of the close of business on the last business day of each calendar month upon at least ten days' prior written notice to the General Partner, subject to certain restrictions and in some instances to early -62- redemption fees during the first full twelve calendar months following the purchase of the Units. (See "Redemptions".) Limited Partners should note that there are certain tax consequences attendant upon redemptions of their Units. (See "Federal Income Tax Consequences".) Reports and Accounting The Fund will keep its books in accordance with generally accepted accounting principles on the accrual basis of accounting. The Fund's fiscal year shall be the calendar year for all purposes. The books of the Fund shall be audited at least annually at the Fund's expense by an independent public accountant to be designated by the General Partner and each Limited Partner shall be furnished with an annual report certified by an independent public accountant containing such information as the CFTC requires. CFTC regulations presently require that an annual report be provided to futures fund participants within ninety days after the close of each fiscal year, setting forth among other matters: (1) the Fund's Net Asset Value as of the end of each of its two preceding fiscal years; (2) the Net Asset Value per Unit outstanding as of the end of each of its two preceding fiscal years; (3) a Statement of Financial Condition as of the close of the Fund's fiscal year and preceding fiscal year; (4) Statements of Income (Loss), Changes in Financial Position and Changes in Ownership Equity for the most recent fiscal year, together with Statements of Income (Loss), Changes in Financial Position and Changes in Ownership Equity for the previous fiscal year; and (5) appropriate footnote disclosure and such further material information as may be necessary to make the required statements not misleading. In addition to the annual report, present CFTC rules require that the Fund furnish each Limited Partner, 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. Limited Partners will also be furnished with such additional information as the General Partner, in its sole discretion, deems appropriate, as well as any information required to be provided to the Limited Partners by any governmental authority having jurisdiction over the Fund. The General Partner will also furnish each Limited Partner, 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 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 the General Partner 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 the General Partner, if any), to revise the 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 the General Partner, if any) to (i) replace or revise the Fund's arrangements with the General Partner or (ii) to terminate the Fund. -63- The General Partner shall maintain a list of the names and addresses of, and the number of Units owned by, all Limited Partners at the Fund's principal office. Such list shall be made available for the review of any Limited Partner or his representative at reasonable times and upon request, either in person or by mail. The General Partner shall furnish a copy of such list to a Limited Partner 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 the General Partner, provided, however, that the holders of a majority of outstanding Units (not including Units held by the General Partner, if any) may elect, within the ninety day period following the General Partner'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 the General Partner, 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 Limited Partnership Agreement be respected for Federal income tax purposes, a Limited Partner 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 the General Partner, it is unlikely that any Limited Partner will have such a negative balance at such time. Transfer of Units A Limited Partner's Units may be assigned at the election of the Limited Partner upon notice to the General Partner. However, the assignee shall become a substituted Limited Partner in the Fund only upon the consent of the General Partner (which may be granted or withheld in its sole discretion) and upon the execution and filing of an amended certificate of limited partnership. An assignee who does not -64- become a substituted Limited Partner 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. CAPITALIZATION / SELECTED FINANCIAL DATA The table below shows the capitalization of the Fund on the date hereof and as adjusted for the sale, within the initial offering period, of the minimum (1,000) and maximum (25,000) number of Units offered hereby:
- ---------------------------------------------------------------------------------------------------------------------- As Adjusted (1)(2) - ---------------------------------------------------------------------------------------------------------------------- Title of Class Outstanding (1) Minimum Mid-Point Maximum - ---------------------------------------------------------------------------------------------------------------------- Units of General Partnership Interest 1 26.21 137.92 249.63 - ---------------------------------------------------------------------------------------------------------------------- Units of Limited Partnership Interest 1 1,000 12,500 25,000 - ---------------------------------------------------------------------------------------------------------------------- Total Partners' Contribution (including the General Partner's capital contribution) $2,000 $951,000 $12,826,000 $23,751,000 - ----------------------------------------------------------------------------------------------------------------------
(1) One Unit of limited partnership interest has been issued to Daniel S. Shaffer, the sole officer, director and shareholder of the General Partner and the initial limited partner of the Fund, for $1,000 to permit the Fund to be organized, and the General Partner has purchased one Unit of general partnership interest for $1,000. The Fund intends to redeem the one Unit of limited partnership interest issued to the initial limited partner at the end of the initial offering period. (2) Subsequent to the initial offering period, unsold Units (if any) may be sold at the then Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit. (See "Plan of Distribution"). The proceeds from such sales, before and after selling commissions, will depend upon the Fund's Net Asset Value per Unit from time to time and thus the particular purchase prices charged for those Units. The Fund has only recently been organized (August 29, 2000) and has no financial history. Its total assets, consisting entirely of a cash account, and total partners' equity as of September 30, 2000, were $2,000.00. The information is derived from, and qualified by reference to, the audited statement of financial condition of the Fund included elsewhere in this Prospectus and the accompanying Statement of Additional Information. -65- FEDERAL INCOME TAX CONSIDERATIONS The following discussion constitutes the opinion of Morrison Cohen Singer & Weinstein, LLP, special tax counsel to the Fund, and summarizes the material federal income tax consequences to individual investors in the Fund, as so stated in a formal opinion letter filed as an exhibit to the Registration Statement to which this Prospectus is a part. The opinion is premised upon the continuing accuracy of various assumptions and representations as to certain factual matters made by the General Partner, chief among which is that the Fund will continuously operate solely in the manner described in this prospectus. The opinion is also based upon present tax law, which is subject to change at any time (possibly even retroactively). Because the specific tax consequences to an investor resulting from an investment in the Fund will also be affected by such investor's own personal tax situation, prospective investors are urged to consult their tax advisers before deciding whether to invest. The Fund's Partnership Tax Status The Fund is organized as a partnership, and so the Fund does not pay any federal income tax. Based on the expected income of the Fund, the Fund will not be taxed as a corporation by reason of being a "publicly traded partnership." Taxation Of Limited Partners On Profits And Losses Of The Fund Each Limited Partner must pay tax on his share of the Fund's annual income and gains, if any, even if the Fund does not make any cash distributions. The Fund generally allocates the Fund's income, gains and losses among the partners in proportion to their respective capital accounts in the Fund which, as among the Limited Partners, generally results in income, gains or losses being allocated equally to each unit. However, a Limited Partner who redeems any units will be allocated his share of the Fund's gains and losses in order that the amount of cash he receives for the redeemed units equals his adjusted tax basis in the redeemed units. A Limited Partner's adjusted tax basis in a unit equals the amount originally paid for the unit, increased by income or gains allocated to the unit and decreased (but not below zero) by distributions, deductions or losses allocated to the unit. Fund Losses By Limited Partners A Limited Partner may deduct his share of Fund losses only to the extent of his adjusted tax basis in his units. However, a Limited Partner subject to the so-called "at-risk" limitations (generally, non-corporate taxpayers and closely-held corporations) can only deduct losses to the extent he is "at-risk." The "at-risk" amount is similar to tax basis, except that it does not include any amount borrowed on a non-recourse basis or from someone with an interest in the Fund. Effect of the "Passive-Activity Loss Rules" The trading activities of the Fund are not a "passive activity." Accordingly, a Limited Partner can deduct Fund losses from taxable income. However, a Limited Partner cannot offset losses from "passive activities" against Fund gains. -66- Cash Distributions And Unit Redemptions A Limited Partner who receives cash from the Fund, either through a distribution or a partial redemption, will not pay tax on that cash until his adjusted tax basis in his units has been reduced to zero. Gain Or Loss On Section 1256 Contracts And Non-Section 1256 Contracts Section 1256 Contracts are futures and most options traded on U.S. exchanges and certain foreign currency contracts. For tax purposes, Section 1256 Contracts that remain open at year-end are treated as if the position were closed at year-end. The gain or loss on Section 1256 Contracts is characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of how long the position was open. Non-Section 1256 Contracts are, among other things, certain foreign currency transactions, including Section 988 transactions -- transactions in which the amount paid or received is in a foreign currency. The Fund expects to make a tax election that will cause gain and loss from these Non-Section 1256 Contracts generally to be short-term gain or loss. Tax On Capital Gains And Losses Long-term capital gains -- net gain on capital assets held more than one year and 60% of the gain on Section 1256 Contracts -- are taxed at a maximum federal income tax rate of 20% for individuals. Short-term capital gains -- net gain on capital assets held less than one year and 40% of the gain on Section 1256 Contracts -- are subject to tax at the same rates as ordinary income, with a maximum federal income tax rate of 39.6% for individuals. Individual taxpayers can deduct capital losses in any one year only to the extent of their capital gains in such year plus $3,000. Excess capital losses can be carried forward and deducted in future years, subject to the same limitation. An individual taxpayer can carry back net capital losses on Section 1256 Contracts three years to offset earlier gains on Section 1256 Contracts. To the extent the taxpayer cannot offset past Section 1256 Contract gains, he can carry forward such losses indefinitely as losses on Section 1256 Contracts. As a result of the limitations on the tax deductibility of capital losses, the Fund could suffer significant losses and a Limited Partner could still be required to pay taxes on his share of the Fund's interest income. Limited Deduction For Certain Expenses The General Partner does not consider the management and brokerage fees, as well as other ordinary expenses of the Fund, to be investment advisory expenses. Accordingly, the General Partner treats these expenses as ordinary business deductions not subject to the material deductibility limitations which apply to investment advisory expenses. The IRS could contend otherwise and, to the extent the IRS recharacterizes these expenses, a Limited Partner would have the amount of the ordinary expenses allocated to him reduced accordingly. Interest Income Interest received by the Fund is taxed as ordinary income. Net capital losses can offset ordinary income only to the extent of $3,000 per year. Syndication Fees Neither the Fund nor any Limited Partner is entitled to any deduction for syndication expenses, nor can these expenses be amortized by the Fund or any Limited Partner even though the payment of such expenses reduces net asset value. The IRS could take the position that a portion of the brokerage fees -67- paid by the Fund to ADM Investor Services, Inc. or part or all of any redemption fees paid by a Limited Partner constitute non-deductible syndication expenses. Investment Interest Deductibility Limitations Individual taxpayers can deduct "investment interest" -- interest on indebtedness allocable to property held for investment -- only to the extent that it does not exceed net investment income. Net investment income does not include adjusted net capital gain taxed at the lower 20% rate. Unrelated Business Taxable Income Tax-exempt Limited Partners will not be required to pay tax on their share of income or gains of the Fund, provided that such Limited Partners do not purchase units with borrowed funds. IRS Audits Of The Fund And Its Limited Partners The IRS audits Fund-related items at the Fund level rather than at the Limited Partner level. The General Partner 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 the 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 in 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 United States trade or business. However, the Treasury has issued proposed regulations which, if finalized in their current form, would provide that foreign limited partners should not be deemed to be engaged in a United States trade or business solely by virtue of an investment as a limited partner in the Fund even if the Fund enters into derivative transactions. These regulations are proposed to be effective for taxable years beginning 30 days after the date final regulations are published in the Federal Register. The Fund may, however elect to apply the final regulations retroactively once they are finalized. -68- FORWARD-LOOKING STATEMENTS This Prospectus and the accompanying Statement of Additional Information includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements use words like "believes," "intends," "expects," "may," "will," "should" or "anticipates," or the negative equivalents of those words or comparable terminology, and discuss strategies that involve risks and uncertainties. The General Partner / Advisor based all forward-looking statements upon estimates and assumptions about future events that were derived from information available to it on the date of this Prospectus and the accompanying Statement of Additional Information. Given the risks and uncertainties of the business of the Fund, actual events and results may differ materially from those expressed or implied by forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking statements included in this Prospectus and the accompanying Statement of Additional Information may not occur. Risks, uncertainties and assumptions that may affect the business, financial condition and results of operations of the Fund include changes in the financial markets generally, increased competition, risks associated with leverage, changes in general economic conditions and the risks discussed in "Risk Factors" beginning on page _____. LEGAL MATTERS Certain legal matters in connection with this offering and the securities being offered hereby will be passed upon for the General Partner / Advisor and the Fund by Kurzman Karelsen & Frank, LLP, 230 Park Avenue, New York, NY 10169. Morrison Cohen Singer & Weinstein, LLP has provided the statements under "Federal Income Tax Considerations." EXPERTS The statements of financial condition of (i) the General Partner / Advisor as of December 31, 1998 and 1999 and for the period from inception (March 16, 1998) to December 31, 1998 and the year ended December 31, 1999, and (ii) the Fund as of August 31, 2000, each of which is included in the Statement of Additional Information that accompanies this Prospectus, have been audited by Anchin, Block & Anchin, LLP, independent auditors, as set forth in their reports appearing in the Statement of Additional Information that accompanies this Prospectus and are included in such Statement of Additional Information in reliance upon the authority of the firm as experts in auditing and accounting. ADDITIONAL INFORMATION This Prospectus and the accompanying Statement of Additional Information constitutes part of the Registration Statement filed by the Fund with the Securities and Exchange Commission ("SEC") in Washington, D.C. This Prospectus and the accompanying Statement of Additional Information does not contain all the information set forth in such Registration Statement and the exhibits thereto, certain portions of which have been omitted pursuant to the rules and regulations of the SEC. Such Registration Statement and exhibits may be inspected without charge at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or part thereof may be obtained from the SEC upon payment of the prescribed fees. -69- INDEX TO FINANCIAL STATEMENTS Shaffer Diversified Fund, L.P. Independent Auditors' Report............................................... F-2 Financial Statements: Statement of Financial Condition as of August 31, 2000............ F-3 Notes to the Statement of Financial Condition..................... F-4 Shaffer Asset Management, Inc. Independent Auditors' Report............................................... F-6 Financial Statements: Balance Sheets as of December 31, 1999 and 1998................... F-7 Statements of Operations and Retained Earnings (Deficit) for the Year Ended December 31, 1999 and for the Period from Inception (March 16, 1998) to December 31, 1998........ F-8 Statements of Cash Flows for the Year Ended December 31, 1999 and for the Period from Inception (March 16, 1998) to December 31, 1998........................................ F-9 Notes to the Financial Statements................................. F-10 SHAFFER DIVERSIFIED FUND, LP INDEPENDENT AUDITORS' REPORT To the Partners of Shaffer Diversified Fund, L.P.: We have audited the accompanying statement of financial condition of Shaffer Diversified Fund, L.P. as of August 31, 2000. The financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of financial condition is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of financial condition. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the statement of financial condition referred to above presents fairly, in all material respects, the financial position of Shaffer Diversified Fund, L.P. at August 31, 2000, in conformity with generally accepted accounting principles. /s/ Anchin, Block & Anchin, LLP New York, New York September 7, 2000 -2- SHAFFER DIVERSIFIED FUND, LP STATEMENT OF FINANCIAL CONDITION August 31, 2000 Assets: Cash............................................................$1,000 Partners' Capital........................................................$1,000 See the accompanying Notes to the Statement of Financial Condition. -3- SHAFFER DIVERSIFIED FUND, LP NOTES TO THE STATEMENT OF FINANCIAL CONDITION Note 1. Organization Shaffer Diversified Fund, L.P. (the "Partnership") is a Delaware limited partnership formed on August 29, 2000 that intends to operate as a commodity investment pool. The Partnership's objective will be the appreciation of its assets through speculative trading of commodity futures contracts. As of August 31, 2000, the Partnership has not commenced operations. The Partnership intends to register with the Securities and Exchange Commission, and will be subject to regulatory requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. As a commodity investment pool, the Partnership will be subject to the regulations of the Commodity Futures Trading Commission, an agency of the United States "U.S.") government which regulates most aspects of the commodity future industry; the rules of the National Futures Association, an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Partnership executes transactions. Additionally, the Partnership will be subject to the requirements of Futures Commission Merchants (brokers) through which the Partnership will trade. Note 2. Related Party Transactions The general partner of the Partnership is Shaffer Asset Management, Inc. (the "General Partner"), which will conduct and manage the business of the Partnership. The General Partner is also the commodity trading advisor of the Partnership. The Partnership will pay for management and servicing at an annual rate of 5% of the monthly net asset value of the Partnership, calculated and payable monthly. Such fees will be allocated between the General Partner and the selling agents as follows: 3.75% to the General Partner and 1.25% to the selling agents during the first twelve months after an investment is made; and 1% to the General Partner and 4% to the selling agents thereafter. Investors will be charged a 5% sales commissions of which the General Partner will receive approximately 20%. The General Partner will also receive, on a quarterly basis, a special allocation from the Partnership equivalent to 15% per year of any increase in the cumulative appreciation of the net asset value of the Partnership without regard to interest income. The General Partner will pay all expenses associated with the organization of the Partnership and the initial offering of the units ("Units") of limited and general partnership interest in the Partnership (other than selling commissions). Partnership operating expenses (excluding continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) in excess of 0.5% of the average monthly net asset value of the Partnership at year end will be reimbursed by the General Partner. All early redemption fees charged by the Partnership upon redemptions of Units will be paid to the General Partner. Note 3. Redemptions A limited partner may request and receive redemption of its Units owned, subject to restrictions in the Limited Partnership Agreement. Redemption fees charged to the limited partner apply through the first twelve month-ends following purchase ranging from 1% to 4% based on length of investment. After -4- SHAFFER DIVERSIFIED FUND, LP NOTES TO THE STATEMENT OF FINANCIAL CONDITION (continued) twelve month-ends following purchase of a Unit, no redemption fees will apply. These fees will be paid to the General Partner. Note 4. Trading Activities and Related Risks The Partnership will engage in the speculative trading of U.S. commodity futures contracts, which are derivative financial instruments. The Partnership will be exposed to both market risk, the risk arising from changes in the market value of the contracts, and credit risk, the risk of failure by another party to perform according to the terms of a contract. Purchase and sale of futures contracts requires margin deposits with the broker. The Commodity Exchange Act requires a broker to segregate all customer transactions and assets from such broker's proprietary activities. A customer's cash and other property (for example, U.S. Treasury bills) deposited with a broker are considered commingled with all other customer funds subject to the broker's segregation requirements. In the event of a broker's insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total cash and other property deposited. The amount of required margin and good faith deposits with the broker usually ranges from 10% to 40% of net asset value. Note 5. 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. Note 6. Subsequent Event In September 2000, the sole stockholder of the General Partner contributed $1,000 as the Partnership's initial limited partner. -5- SHAFFER ASSET MANAGEMENT, INC. INDEPENDENT AUDITORS' REPORT To the Stockholder and Directors of Shaffer Asset Management, Inc.: We have audited the accompanying balance sheets of Shaffer Asset Management, Inc. as of December 31, 1999 and 1998 and the related statements of operations and retained earnings (deficit) and cash flows for the year ended December 31, 1999 and the period from March 16, 1998 (inception) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shaffer Asset Management, Inc. at December 31, 1999 and 1998 and the results of its operations and its cash flows for the year and period, respectively, then ended, in conformity with generally accepted accounting principles. /s/ Anchin, Block & Anchin LLP New York, New York September 5, 2000 -6- SHAFFER ASSET MANAGEMENT, INC. BALANCE SHEETS
December 31, ------------ 1999 1998 ------- ------- Assets: Current Assets: Cash $ 4,516 $ 54 Fee receivable 8,073 -- ------- ------- Total Current Assets 12,589 54 ------- ------- Fixed Assets: Office equipment 3,392 -- Computer software 6,000 -- ------- ------- 9,392 -- Less: accumulated depreciation and amortization 339 -- ------- ------- Total Fixed Assets 9,053 -- ------- ------- Total Assets $21,642 $ 54 ------- ------- Liabilities and Stockholder's Equity (Deficiency): Current Liabilities: Accounts payable and accrued expenses $11,399 $ -- Loan payable-stockholder -- 5,710 ------- ------- Total Current Liabilities 11,399 5,710 ------- ------- Stockholder's Equity (Deficiency) Capital stock: Class A voting, no par, $2 stated value; 200 shares authorized; 50 shares issued and outstanding 100 100 Retained earnings (deficit) 10,143 (5,756) ------- ------- Total Stockholder's Equity (Deficiency) 10,243 (5,656) ------- ------- Total Liabilities and Stockholder's Equity (Deficiency) $21,642 $ 54 ------- -------
See the accompanying Notes to the Financial Statements. -7- SHAFFER ASSET MANAGEMENT, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) Period from March 16, 1998 Year Ended (inception) to December 31, 1999 December 31, 1998 ----------------- ----------------- Income from Fees $ 51,446 $ -- -------- ------- Expenses: Automobile expense 12,901 -- Dues and subscriptions 4,278 -- Offices supplies and expense 2,261 521 Printing and reproduction 5,583 319 Professional development 3,432 -- Professional fees -- 2,653 Travel and entertainment 2,265 222 Other expenses 4,827 2,041 -------- ------- Total Expenses 35,547 5,756 -------- ------- Net Income (Loss) 15,899 (5,756) Retained Earnings (Deficit) Balance, beginning of period (5,756) -- -------- ------- Balance, end of period $ 10,143 $(5,756) -------- ------- See the accompanying Notes to the Financial Statements. -8- SHAFFER ASSET MANAGEMENT, INC. STATEMENTS OF CASH FLOWS
Period from March 16, 1998 Year Ended (inception) to December 31, 1999 December 31, 1998 ----------------- ----------------- Cash Flows from Operating Activities: $ 15,899 $(5,756) -------- ------- Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 339 -- Increase in: Fees receivable (8,073) -- Increase in: Accounts payable and accrued expenses 6,899 -- -------- ------- Total adjustments (835) -- -------- ------- Net Cash Provided by (Used in) Operating Activities 15,064 (5,756) -------- ------- Cash Flows from Investing Activities: Purchase of fixed assets (4,892) -- -------- ------- Cash Flows from Financing Activities: Repayment of stockholder loan (5,710) -- Loan from stockholder -- 5,710 Proceeds from issuance of common stock -- 100 -------- ------- Net Cash Provided by (Used in) Financing Activities: (5,710) 5,810 -------- ------- Net Increase in Cash 4,462 54 Cash: Beginning of period 54 -- -------- ------- End of period $ 4,516 $ 54 ======== ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Income taxes $ 625 $ -- Supplemental Schedule of Noncash Investing and Financing Activities: Incurred liability for acquisition of computer software $ 4,500 $ --
See the accompanying Notes to the Financial Statements. -9- SHAFFER ASSET MANAGEMENT, INC. NOTES TO THE FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Description of Business: Shaffer Asset Management, Inc. (the "Company") earns fees on managed accounts as a Commodity Trading Advisor registered with and subject to the regulations of the Commodity Futures Trading Commission, an agency of the United States government, which regulates most aspects of the commodity futures industry. It is also subject to the rules of the National Futures Association, an industry self-regulatory organization. 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 may be 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. 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. Note 2. Related Party Transactions The loan from the stockholder was non-interest bearing. Note 3. Subsequent Event The Company will be the trading advisor for a newly formed commodity pool, Shaffer Diversified Fund, L.P. (the "Partnership"). The Company became the general partner of the Partnership and made a capital contribution of $1,000 during August 2000. The Company will receive approximately 20% of the 5% sales commission charged to investors and management fees at an annual rate of 3.75% during the first twelve months after an investment is made and 1% thereafter, based on the monthly net asset value of the Partnership. The Company will also receive, on a quarterly basis, a special allocation from the Partnership equivalent to 15% per year of any increase in the cumulative appreciation of the net asset value of the Partnership without regard to interest income. Additionally, the Company will be responsible for expenses (excluding continuing services fees, management fees, incentive allocations, brokerage commissions and extraordinary expenses) in excess of 0.5% of the average monthly net assets at year end of the Partnership and expenses associated with the organization of the Partnership and initial offering costs. -10- STATEMENT OF ADDITIONAL INFORMATION SHAFFER DIVERSIFIED FUND, LP (A Delaware limited partnership) 25,000 UNITS OF LIMITED PARTNERSHIP INTEREST 70 West Red Oak Lane White Plains, NY 10604 Telephone Number: (800) 352-5265 _______________, 2001 This Statement of Additional Information is not a prospectus and should be read in conjunction with the Fund's Prospectus dated _______________, 2001, a copy of which accompanies this Statement of Additional Information. PART TWO - STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Page ---- Glossary and Definitions of Commodity Futures Trading.........................3 Description of Commodity Futures Trading......................................7 General...................................................................7 Mechanics of Commodity Futures Trading....................................8 Margins...................................................................9 Regulation...............................................................10 Exhibits Limited Partnership Agreement...........................................A-1 Subscription Requirements...............................................B-1 Subscription Instructions; Subscription Agreement / Power of Attorney...C-1 Request for Redemption..................................................D-1 -2- GLOSSARY AND DEFINITIONS OF COMMODITY FUTURES TRADING The following glossary may assist the prospective investor in understanding the terms used in the accompanying Prospectus of Shaffer Diversified Fund, L.P. (the "Fund") and this Statement of Additional Information: Advisory Profits. See "Fees, Compensation and Expenses - Certain Definitions" in the accompanying Prospectus. Affiliate. A person that directly or indirectly controls, or is controlled by, or is under common control with, another person. Capital contribution. The payment by Shaffer Asset Management, Inc., the Fund's general partner and initial commodity trading advisor (the "General Partner") or a limited partner of the Fund ("Limited Partner") 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 (the "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 -3- 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. Commodity futures contract. See "Futures contract" (below). Commodity option. See "Option" (below). Commodity Futures Trading Commission (the "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 (the "CE Act"). Commodity pool operator. The sponsor or administrator of a commodity pool such as the Fund. The General Partner/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, -4- 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. The Commodity Broker is a CFTC-registered futures commission merchant. Hedging. Reducing (or attempting to reduce) exposure to changes in the market for a commodity through the establishment of an opposite position in the futures market from that held in the cash or "spot" market therefore. (See "Description of Commodity Futures Trading - General", below). Introducing broker. Any person, except an individual who elects to be and is registered as an associated person of a futures commission merchant or introducing broker, engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market who does not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom. Limit. See "Daily price fluctuation limit", above. Limit order. A trading order which sets a limit on either price or time of execution or both. Limit orders (as contrasted with stop orders) do not become market orders (see below). Long contract (position). A commodity futures contract to buy a specified amount and grade of a commodity at a future date at a specified price (or the trading position arising therefrom). Margin. In commodity trading, "margin" refers to good faith deposits with a broker to assure fulfillment of a purchase or sale of a commodity futures contract. At present, margins generally range from 4% to 20% of the value of the commodity underlying the contract. "Maintenance" margin requirements are generally 75% of initial margin requirements. (See 'Description of Commodity Futures Trading - Margins", below). 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. -5- 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 the General Partner during the initial offering period, approximately 20% of all sales charges shall be paid to the General Partner to reimburse the General Partner to reimburse the General Partner for the payment of the Fund's organizational and initial offering and the Fund's operating expenses that are payable by the General Partner and approximately 80% of all sales charges shall be paid as syndication fees to Berthel Fisher &Company Financial Services, Inc. (the "Selling Agent"); and as selling commissions to certain other firms that are members of the National Association of Securities Dealers, Inc. ("NASD") and certain foreign dealers and institutions which are not members of the NASD (the "Selected Dealers") that are participating in the offering. The Selling Agent 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 the General Partner upon sixty days' prior written notice to the Limited Partners. (See "Fees, Compensation and Expenses - Description of Fees, Compensation and Expenses - Syndication Fees / Selling Commissions / Sales Charges" and "Plan of Distribution" in the accompanying Prospectus). Settlement price. The daily price or value of each futures contract established by a commodity exchange's clearing house after the close of each day's trading, usually the closing price, on the basis of which "maintenance margin" requirements are set. (See "Description of Commodity Futures Trading - Margins", above). Short contract (position). A commodity futures contract to sell a specified amount and grade of a commodity at a future date at a specified price (or the trading position arising therefrom). Speculating. In commodity trading, to trade other than for the purpose of hedging; to trade in hopes of profiting from favorable price changes. (See "Description of Commodity Futures Trading - General", below). Spot contract. A cash market transaction in which buyer and seller agree to the purchase and sale of a specific commodity lot for immediate delivery. Spread. The taking of both long and short positions with respect to the same or related commodities but in different delivery months or on different exchanges. -6- 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. DESCRIPTION OF COMMODITY TRADING General Commodity futures contracts are made on or through a commodity exchange and provide for future delivery of agricultural and industrial commodities, foreign currencies or financial instruments, or, in more recent instances, the cash equivalent thereof. Such contracts are uniform for each commodity and vary only with respect to price and delivery time. A commodity futures contract to accept delivery (buy) is referred to as a "long" contract; conversely, a contract to make delivery (sell) is referred to as a "short" contract. A long contract may be satisfied either by taking delivery of the commodity and paying the entire purchase price therefor or by offsetting the contractual obligation prior to delivery through the acquisition of a corresponding short contract on the same exchange. A short contract may be satisfied either by making delivery of the commodity (usually by tendering warehouse receipts, shipping certificates or similar documents of title) or by acquiring a corresponding long contract on the same exchange. Commodity exchanges provide a clearing mechanism to facilitate the matching of offsetting trades. Until a commodity futures contract is satisfied by delivery or offset, it is said to be an "open" position. Commodity futures contracts are but one category of organized commodity trading as it presently exists in the United States. Two other categories of commodity transactions are "spot" contracts and "forward" contracts. Both of these are varieties of cash commodity transactions, as opposed to futures transactions, in that they relate to the purchase and sale of specific actual physical commodities. Whereas futures contracts are uniform except for price and delivery time, cash commodity contracts may differ from each other with respect to such terms as quantity, grade, mode of shipment, terms of payment, penalties, risk of loss and the like. Spot contracts are generally cash commodity contracts for the purchase and sale of a specific physical commodity for immediate delivery. Forward contracts are cash commodity contracts for the purchase and sale of a specific physical commodity for delivery at some future time under terms and conditions specifically negotiated by the parties. Cash commodity transactions may arise in conjunction with commodity futures transactions. For example, if the holder of a long contract satisfies it by taking delivery of the commodity, such holder is said to have a cash commodity position. This cash position, if it is not to be used or processed by the holder, may be sold through spot or forward contracts, or delivered in satisfaction of a commodity futures contract. Another type of commodity contract is the "commodity option" which gives the holder the right (but not the obligation) to buy or sell a specified futures contract or commodity at a future date for a specified price. -7- 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 which affect financial instrument or foreign currency prices include a country's balance of payments (surplus or deficit), political stability, treaties, government policies and exchange controls, the inflation rate, and interest rates. There are two broad classifications of commodity traders: hedgers and speculators. Hedgers are persons or entities who market or process commodities and utilize the commodity markets for protection against the risk of price variation. For example, a seller or processor is at the risk of market price fluctuations between the time he contracts to sell or process and the time he must perform on the contract. In such cases, at the time of the contract, he will simultaneously enter into futures contracts to buy the necessary equivalent quantity of the commodity he needs or to sell the equivalent quantity of the commodity he intends to market at some later date. To illustrate, a cattle feeder may enter into a futures contract to sell cattle, which can ultimately be satisfied by the delivery of his herd, thus relieving himself of exposure to price variations in either his raw material or ultimate market product. Similarly, a farmer may hedge against the price fluctuations between the day he plants his crop and the day it is ready for delivery. In these examples, the hedger may either make or take delivery in satisfaction of his futures contract, or else close the position prior to delivery (see "Mechanics of Commodity Futures Trading", below) 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. A speculator is a person or entity who 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 (see "Mechanics of Commodity Futures Trading, below). 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. 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 -8- rises to $7.50 per bushel, then a profit of $2.50 per bushel has been achieved. Conversely, if the price of July wheat falls to $2.50 per bushel, the investor will have lost $2.50 per bushel because he is obligated to pay $5.00 for something worth only half that price. When the trader places an order with a broker, the order is transmitted by the broker to the floor of a commodity futures exchange where the trade is consummated by floor brokers by means of "open outcry" and the details of the transaction are recorded. The individual trader does not appear on the exchange records as buyer or seller; the contract is, rather, executed in the name of the "clearing house member" through which the order has ultimately been placed and the exchange's clearing house itself becomes the opposite party to the contract. At the close of each trading day, cash settlements are made which reflect that day's price movements in all the commodities covered by outstanding futures contracts. The clearing house credits the account of the clearing member whose position shows a gain, and debits the account of the clearing member who suffered a loss. In practice, a commodity futures contract seldom results in the taking or making of delivery in accordance with its terms. Usually, the contract will be "offset" with a second futures contract that represents a position that is the opposite of the first. Using the same example given above, if a futures contract provides for the purchase of a bushel of July wheat for $5.00 and the price subsequently rises to $7.50 per bushel, the trader can close out his position and liquidate his profit by entering into or acquiring a contract to sell a bushel of July wheat for $7.50. Margins In commodity trading, "margins" are good faith deposits that must be deposited with a broker in order to initiate or maintain an open position in a commodity futures contract. When commodity futures contracts are traded, both buyer and seller are required to post margins with the brokers handling their trades as security for the performance of their buying and selling undertakings and to offset losses in their trades due to daily fluctuations in the markets. Minimum margins are set by the several exchanges and generally range from 4% to 20% of the value of the commodity underlying the contract (see "Regulation", below). 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 the Commodity Broker 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 the Commodity Broker. 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. -9- Regulation Congress enacted the Commodity Exchange Act, as amended (the "CE Act"), 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 Commodity Futures Trading Commission (the "CFTC") is an independent agency which 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 (the "General Partner / Advisor"), is a "commodity pool operator" and a "commodity trading advisor" and the Commodity Broker 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 the General Partner 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 the General Partner / Advisor as a commodity trading advisor was similarly suspended or revoked, the Advisor would not be permitted to advise the Fund. Should the registration of the Commodity Broker as a futures commission merchant be suspended or revoked, the Fund would no longer be able to maintain its account with the Commodity Broker, and a new futures commission merchant would be retained by the General Partner. The CE Act and the regulations promulgated thereunder make it unlawful for any commodity pool operator, commodity trading advisor, principal thereof or person who solicits therefor to represent or imply in any manner whatsoever that they have been sponsored, recommended or approved, or that their abilities or qualifications have in any respect been passed upon, by the CFTC, the Federal government, or any agency thereof. The CFTC registrations of the General Partner / Advisor and the Commodity Broker 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 -10- would be required to be furnished to the CFTC, along with copies of all transactions with, and reports and other communications to, the Limited Partners. Commodity exchanges are given certain latitude in promulgating rules and regulations to control and regulate their members and clearing houses as well as the trading conducted on their floors. Examples of regulation by an exchange include the establishment of initial and maintenance margins, limits on price fluctuations, size of trading limits and contract specifications. The CFTC reviews such rules, except those relating to margins, and all such rules and regulations relating to the terms and conditions of contracts of sale or to other trading requirements must be approved by the CFTC. In order to prevent excessive, speculation and attempted cornering of a market, the various exchanges and the CFTC have imposed speculative position 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 the Advisor 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 Securities and Exchange Commission (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 Advisers 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 Advisers 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. The General Partner/Advisor and the Commodity Broker 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 the General Partner, 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. -11- Exhibit A SHAFFER DIVERSIFIED FUND, L.P. (A Delaware Limited Partnership) Amended and Restated Agreement of Limited Partnership AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement") made as of __________, 200_, by and between SHAFFER ASSET MANAGEMENT, INC., a New York corporation having an address at 70 West Red Oak Lane, White Plains, NY 10604 (the "General Partner / Advisor"), and DANIEL S. SHAFFER, an individual having an address c/o Shaffer Asset Management, Inc., 70 West Red Oak Lane, 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"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the parties hereto have formed a limited partnership 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; 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, L.P. (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 to 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. 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 located be at 70 West Red Oak Lane, 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. -A-2- 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. 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. Notwithstanding the foregoing, the General Partner shall reimburse the Partnership for all such expenses (except Continuing Services Fees, Management Fees, Advisory Allocations, brokerage commissions and extraordinary expenses incurred by the Partnership) to the extent that such expenses exceed, in a fiscal year, 0.5% of the average monthly Net Asset Value (as defined in Section 4.4 hereof) of the Partnership. In addition, the General Partner shall pay the organizational and initial offering expenses of the public offering and sale of the Units of Limited Partnership Interest described in Section 3.1(a) hereof, and no such expenses shall be deducted from the proceeds of such offering. For the purposes of this Agreement, organization and initial offering expenses shall include all costs paid or incurred by the Partnership or the General Partner in organizing the Partnership and offering the Units of Limited Partnership Interest, including bank and escrow agent charges, blue sky filing fees, filing fees payable upon formation and organization of the Partnership and legal, accounting and printing fees associated with the preparation, filing and printing of the Registration Statement (as defined in Section 3.1 hereof), the Prospectus and the Statement of Additional Information related to such offering. Indirect expenses of the General Partner, such as salaries, rent and other overhead expenses, shall not be liabilities of the Partnership. (b) Compensation to any party, including the General Partner (or any commodity trading advisor that may be retained in the future), shall not exceed the limitations imposed as of the date hereof by the North American Securities Administrators Association. In the event that such compensation exceed such limitations, the General Partner shall promptly reimburse the Partnership for such excess. (c) Appropriate reserves shall be created, accrued and charged to the Partners' capital accounts for contingent liabilities (in accordance with generally accepted accounting principles), if any, as of the date of any such contingent liability becomes known to the General Partner. 1.9 Prohibitions. The Partnership shall not (a) engage in pyramiding, (b) commingle its assets with the assets of any other person, except as permitted by law, (c) make loans to the General Partner, any affiliate thereof or any other person or entity at any time for any reason, (d) pay per-trade compensation to the General Partner, any commodity trading advisor, any affiliate thereof or any other person or entity that receives any other form of compensation from the Partnership, (e) permit rebates or give-ups to be received by the General Partner or any affiliate thereof (nor shall the General Partner participate in any reciprocal business arrangements that would circumvent the foregoing or any other provision of this Agreement) or (f) borrow cash or other assets from the General Partner. -A-3- ARTICLE II GENERAL PARTNER; ADMINISTRATION 2.1 Management. Subject to the limitations of this Agreement, the General Partner shall have full, exclusive and complete authority for and control of the management of the Partnership's affairs for the purposes herein stated, and shall make all decisions affecting the Partnership's affairs, including, without limitation, the decision to enter into contracts for trading advisors' services and brokerage services. In that regard, the General Partner may, but need not, make 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(a) 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 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 the Commodity Broker and to cause the Partnership to pay to the Commodity Broker 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 General Partner and its controlling persons shall have no liability to the Partnership or any Limited Partner for any liability or loss suffered by the Partnership that arises out of any action of the General Partner if the General Partner acted in good faith and in a manner it reasonably believed to be in or not opposed to the best interests of the Partnership, if the General Partner was acting on behalf of or performing services for the Partnership, and if the -A-4- General Partner's conduct did not constitute negligence, misconduct, or a breach of its fiduciary obligations to the Partnership and the Limited Partners. (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 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 if the General Partner acted in good faith and in a manner it reasonably believed to be in or not opposed to the best interests of the Partnership, if the General Partner was acting on behalf of or performing services for the Partnership, and if the General Partner's conduct did not constitute negligence, misconduct, or a breach of its fiduciary obligations to the Partnership and the Limited Partners. No indemnification shall be made with respect to any claim, issue or matter as to which the General Partner shall have been adjudged to be liable for negligence, misconduct or breach of its fiduciary obligations in the performance of its duties to the Partnership and the Limited Partners, unless and only to the extent that the court in which such action, suit or proceeding was brought shall determine upon application by the General Partner that, despite the adjudication of liability and in view of all of the circumstances of the case, the General Partner is nevertheless fairly and reasonably entitled to indemnification for such amounts as such court shall deem proper. The termination of any action, suit or proceeding by judgment, order or settlement shall not, in and of itself, create a presumption that the General Partner did not act in good faith and in a manner which it reasonably believed to be in or not opposed to the best interests of the Partnership. (c) To the extent that the General Partner has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 2.5(b) hereof, or in the defense of any claim, issue or matter therein, the Partnership shall indemnify it against the costs and expenses (including, without limitation, attorneys' and accountants' fees and disbursements) actually and reasonably incurred by it in connection therewith. (d) No indemnification of the General Partner by the Partnership shall be permitted to the extent that the General Partner incurs any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees, costs and expenses incurred in investigating or defending any demand, claim, suit or proceeding) resulting from or arising out of any violation by the General Partner of Federal or applicable state securities laws in connection with or related to the Registration Statement or to the offer or sale of the Units, unless (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the General Partner, (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction, or (iii) a court of competent jurisdiction approves a settlement of the claims and finds that indemnification of the settlement and related costs should be made; provided that such court has been advised of the position as to indemnification for violations of securities laws of the Securities and Exchange Commission (the "SEC") and the securities administrators of the jurisdictions in which the claimant alleges to have been offered or sold Units. (e) Expenses incurred in defending a threatened or pending civil, administrative or criminal action, suit or proceeding against the General Partner may be paid by the Partnership in advance of the final disposition of such action, suit or proceeding if and to the extent that (i) such action, suit or proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of the Partnership, (ii) such action, suit or proceeding is initiated by a party who is not a Limited Partner or, if by a Limited Partner, then such advance payment is specifically approved by a court of competent jurisdiction, and (iii) the General Partner agrees to reimburse the Partnership, together with the applicable -A-5- 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). 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. 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 -A-6- 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 Special 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. 2.11 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. 2.12 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 2.12; or (c) 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 2.12, 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 2.12. 2.13 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. -A-7- 2.14 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). 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. (b) The General Partner is authorized to take such actions and make such arrangements for the sale of the Units of Limited Partnership Interest as it deems appropriate including, without limitation, the execution on behalf of the Partnership of a Selling Agent agreement appointing Berthel Fisher & Company Investment Services, Inc. (the "Selling Agent") as the Partnership's selling agent for the offer and sale of the Units of Limited Partnership Interest as contemplated in the Prospectus and Statement of Additional Information. The General Partner will keep copies of all Subscription Agreements / Powers of Attorney signed by Limited Partners in connection with the public offerings of the Units of Limited Partnership Interest for a period of at least six years. (c) The Initial Limited Partner has contributed $1,000 in cash to the capital of the Partnership in consideration for one (1) Unit of Limited Partnership Interest. The General Partner may, on behalf of the Partnership and in accordance with the latest Prospectus and Statement of Additional Information, issue and sell Units of Limited Partnership Interest to other persons (which other persons may include the General Partner) at any time without the consent of the other Limited Partners. Such additional Limited Partners shall contribute capital to the Partnership and shall be admitted as Limited Partners as of the first business day of the month immediately following the month in which their subscriptions are accepted by the General Partner; it being understood and agreed, however, that the General Partner may reject any subscription for Units at any time and for any reason. During the Initial Offering Period (as hereinafter defined), (i) the purchase price for each Unit of Limited Partnership Interest shall be $1,000 per Unit ($950 per Unit, plus an initial Sales Charge (as defined in Section 4.4 hereof) of $50 per Unit) and (ii) the purchase price for each Unit of General Partnership Interest shall be $1,000. Thereafter, Units of Limited Partnership Interest may be sold as of the last business day of each calendar month at a purchase price per Unit equal to the Net Asset Value per Unit (as defined in Section 4.4 hereof) as of the last business day of such month, plus a Sales Charge of five percent (5%) of the Net Asset Value per Unit for each Unit purchased. The purchase price for each Unit of General Partnership Interest after the Initial Offering Period shall be the then current Net Asset Value per Unit. -A-8- The initial offering period (the "Initial Offering Period") of the Units will extend from the date of the Prospectus and Statement of Additional Information until sixty (60) days thereafter (subject to the General Partner's right to extend the offering period for up to an additional sixty (60) days). Notwithstanding anything to the contrary contained herein, the General Partner, in its sole discretion, may terminate the Initial Offering Period at any time for any reason. In addition, if the General Partner shall not have received and accepted subscriptions for at least 1,000 Units of Limited Partnership Interest during the Initial Offering Period, this Agreement shall terminate, and all subscription monies shall be promptly returned to the subscriber(s) together with any interest earned thereon. Any interest earned on the contributions of the General Partner and the Initial Limited Partner prior to the expiration or sooner termination of the Initial Offering Period shall be paid to such contributors pro rata. The Partnership shall not commence trading operations unless and until the General Partner has received and accepted subscriptions (which may include Units of Limited Partnership Interest subscribed for by the General Partner, the Partnership's commodity trading advisor(s), the Partnership's selling agent and selected dealers, the Partnership's commodity broker(s) or any affiliate of any of the foregoing) for at least 1,000 Units of Limited Partnership Interest (excluding the one initial Unit of Limited Partnership Interest). The General Partner may terminate the offering of Units of Limited Partnership Interest at any time. The aggregate of all capital contributions shall be available to the Partnership to carry on its business, and no interest shall be paid by the Partnership to any Partner on any such contribution except as set forth above. Pursuant to Section 3.5 hereof, the General Partner, in its sole discretion, may consent to and admit any assignee of Units of Limited Partnership Interest as a substituted Limited Partner. (d) All Units of Limited Partnership Interest subscribed for upon receipt of a check or draft of the subscriber are issued subject to the collection of the funds represented by such check or draft. In the event that a check or draft of a subscriber for Units of Limited Partnership Interest representing payment for Units of Limited Partnership Interest is returned unpaid, the Partnership shall cancel the Units of Limited Partnership Interest issued to such subscriber represented by such returned check or draft. Any losses or profits sustained by the Partnership in connection with the Partnership's trading allocable to such cancelled Units of Limited Partnership Interest shall be deemed an increase or decrease in Net Asset Value and allocated among the remaining Partners as described in Article IV hereof. (e) The Units may but need not be evidenced by certificates. 3.2 Additional Capital Contributions. No additional contributions of capital are or shall be required of any Limited Partner during the term of the Partnership. 3.3 Rights and Obligations. Each Unit of Limited Partnership Interest owned by a Limited Partner shall be fully paid and non-assessable upon issuance. A Limited Partner shall be liable for the obligations of the Partnership to the extent of the capital contributed by such Limited Partner plus the share of undistributed profits, if any, allocable to such Limited Partner. A Limited Partner who receives a return of any part of the capital contributed by such Limited Partner to the Partnership shall be liable to the Partnership for one year thereafter for the amount of the returned contribution, but only to the extent necessary to discharge liabilities of the Partnership to creditors who extended credit to the Partnership during the period that the capital contribution was held by the Partnership. A Limited Partner shall also be liable to the Partnership for return of any part of his capital contribution returned to him for a period of six (6) years thereafter, if such return was in violation of this Agreement or the Act. -A-9- 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. 3.5 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-10- a corporation or an association under the Internal Revenue Code, or (iv) as a result of such transfer or assignment, there would result a termination of the Partnership for United States Federal income tax purposes as provided in Section 708(b) of the Internal Revenue Code. (c) Substituted Limited Partner. No assignee or transferee of Units of Limited Partnership Interest shall become a substituted Limited Partner unless the General Partner consents in writing to such substitution (which consent may be withheld in the sole and absolute discretion of the General Partner). A substituted Limited Partner shall have all the rights and powers and shall be subject to all the restrictions and liabilities of his assignor. Each Limited Partner agrees that, with the consent of the General Partner, any assignee may become a substituted Limited Partner without the further act or consent of any Limited Partner. Each Limited Partner agrees that he has no right to consent to and will not consent to any person or entity becoming a substituted Limited Partner, except as set forth in the preceding sentence. If the General Partner withholds its consent, an assignee shall not become a substituted Limited Partner and shall not have any of the rights of a Limited Partner, except that the assignee shall be entitled to receive that share of the Partnership's capital and profits, if any, and shall have that right of redemption to which his assignor would otherwise have been entitled. An assigning Limited Partner shall remain liable to the Partnership as provided in the Act, regardless of whether his assignee becomes a substituted Limited Partner. 3.6 Redemption of Units of Limited Partnership Interest. (a) General. A Limited Partner (and the General Partner subject to Sections 2.7 and 2.12 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 C to the Statement of Additional Information. As used herein, Request for Redemption shall mean a letter in the form specified by the General Partner 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 3.6(f) hereof. Redemption payments shall be made within -A-11- 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 2.5(g) by the Partner to whom such Unit was sold by the Partnership as well as all amounts owned by all assignees who owned such Unit shall be deducted from the amount paid to such assignee upon redemption of his Units of Limited Partnership Interest. An assignee shall not be entitled to redemption until the General Partner has received written notice (as described in Section 3.5 hereof) of the assignment, transfer or disposition under which the assignee claims an interest in the Units of Limited Partnership Interest to be redeemed and shall have no claim against the Partnership or the General Partner with respect to distributions or amounts paid on redemption of Units of Limited Partnership Interest prior to the receipt by the General Partner of such notice. (d) Redemptions Upon Notice of Substantial Decline. If (i) the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) on any business day during any given fiscal year decreases to or below 50% of the Net Asset Value per Unit as of the beginning of the fiscal year, and such 50% decrease results in a Net Asset Value per Unit of less than $1,000, or (ii) if the Net Asset Value per Unit (increased by the amount of distributions per Unit, if any) decreases on any business day to or below $350, the Partnership will liquidate all open positions as expeditiously as possible and suspend trading. Within ten (10) business days after the date of the suspension of trading, the General Partner shall either give notice to the Limited Partners of its intention to withdraw from the Partnership or shall declare a special redemption date. Such special redemption date, if declared, shall be a business day within thirty (30) business days from the date of suspension of trading by the Partnership, and the General Partner shall mail notice of such date to each Limited Partner by first class mail, postage prepaid, not later than ten (10) business days prior to such special redemption date, together with instructions as to the procedure such Limited Partner must follow to have his Units redeemed on such date by the Partnership, if such Limited Partner so desires. No redemption fees would be due in respect of a Unit redeemed on the special redemption date. If, after such special redemption date, the Partnership's Net Asset Value is at least 50% of the Partnership's Net Asset Value on the close of business on the day before the special redemption date, the Partnership will resume trading unless the General Partner elects to withdraw from the Partnership. If, after such special redemption date, the Partnership's Net Asset Value is less than 50% of the Net Asset Value of the close of business on the day before the special redemption date, the Partnership shall terminate and dissolve in accordance with the provisions of Article V hereof. (e) Mandatory Redemption(s). The Unit of Limited Partnership Interest of the Initial Limited Partner shall be automatically redeemed for $1,000, without the imposition of any redemption fee, as of the date that an additional Limited Partner is first admitted to the Partnership. If and to the extent necessary to ensure that the assets of the Partnership are not considered "plan assets" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the General Partner may redeem all or a portion of the Units held by one or more Limited Partners without the consent of such Limited Partners at the Net Asset Value per Unit without the imposition of any redemption fee. Such redemption may be effected from time to time in any manner deemed reasonable in the sole -A-12- 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 3.6(d) and (e) hereof, this Section 3.6(f) or as otherwise waived by the General Partner in its discretion, an early redemption fee equal to a percentage of the Net Asset Value of the Units of Limited Partnership Interests redeemed (the "Redemption Fee") shall be charged by the Partnership in the case of redemptions of Units of Limited Partnership Interest that are effected as of or before the end of the twelfth (12th) full calendar month after their purchase. The Redemption Fee shall be four percent (4%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the third (3rd) full calendar month after their purchase; three percent (3%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the sixth (6th) full calendar month after their purchase; two percent (2%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the ninth (9th) full calendar month after their purchase; and one percent (1%) of the Net Asset Value of the Units of Limited Partnership Interest redeemed for such redemptions occurring as of or before the end of the twelfth (12th) full calendar month after their purchase. There shall be no Redemption Fee charged with respect to Units of Limited Partnership Interest redeemed after the twelfth (12th) full calendar month after their purchase. Notwithstanding the foregoing and in order to assure each Limited Partner the availability of funds to pay taxes on each year's profits, if any, the redemption fee will be waived on redemptions of Units to the extent, if any, distributions in the first quarter on a calendar year are less than thirty-five (35%) of the profits reportable to a Limited Partner for the prior year. Redemption Fees received by the Partnership will be paid over by the Partnership to the General Partner to reimburse the General Partner for the payment by the General Partner of the Partnership's organizational, initial offering and operating expenses payable by the General Partner. 3.8 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 -A-13- 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 Special 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 Special Allocation) or decrease in Net Assets shall be credited or charged to the capital accounts of the Partners in the ratio that the capital account of each Partner bears to the capital accounts of all Partners; (e) the amount of any distributions or any withdrawn capital during such month, and the amount of any redemption payments in such month shall be charged to the capital accounts of the relevant Partners; (f) Net Asset Value (as defined in Section 4.4 hereof) shall be calculated; (g) redemptions of Units shall be effected; -A-14- (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. -A-15- (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. (j) Allocations of Capital Gain or Capital Loss shall be made pro rata from each category of Capital Gain or Capital Loss determined under Section 1(h) of the Internal Revenue Code and income or loss determined under Section 988 of the Internal Revenue Code. 4.4 Definitions. For purposes of this Article IV, the following terms shall have the following meanings: (a) "Continuing Services Fee" shall mean a fee charged to each Unit equal to, in the aggregate, 1/12 of 1.25% of the Net Asset Value per Unit of the Partnership's assets under management as of the close of business on the last day of each month (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased within the prior twelve (12) month period and 1/12 of 4% of the Net Asset Value per Unit of the Partnership's assets under management as of the close of business on the last day of each month (without reduction for distributions or redemptions effected as of such date or management fees or incentive fees payable as of such date) with respect to Units purchased more than twelve (12) months prior thereto. Such Continuing Services Fee shall be paid to the Selling Agent and certain selected dealers and their respective registered representatives in return for their continuing services to the Partnership and the Limited Partners solicited by them. Such services include, without limitation, keeping the Limited Partners apprised of developments affecting the Partnership, responding to specific inquiries received from Limited Partners relating to the Partnership and the commodity markets, communicating current valuations of the Partnership's Net Asset Value per Unit to the Limited Partners, assisting in redemptions, transfers and distributions, assisting Limited Partners in interpreting the Partnership's monthly and annual reports, financial statements and the tax information provided to Limited Partners, and providing such other services as the Limited Partners from time to time may reasonably request. With respect to each of the first twelve (12) month-ends during which a Unit is outstanding, the Continuing Services Fee attributable to such Unit shall be paid (i) twenty percent (20%) to the Selling Agent, and (ii) eighty percent (80%) to the selected dealers and their respective registered representatives that solicited the Limited Partner's subscription. After a Unit has been outstanding for twelve (12) month-ends, the preceding sentence shall be amended so that the Continuing Services Fee attributable to such Unit shall be paid twenty-five percent (25%) to the Selling Agent and seventy-five (75%) to the selected dealers and their respective registered representative that solicited the Limited Partner's subscription. Notwithstanding the foregoing, such Continuing Services Fee shall be paid only to, or for the benefit of, persons who are registered with the CFTC and/or the National Futures Association ("NFA") as futures commission merchants or introducing brokers. In the event that the Selling Agent or any selected -A-16- dealer is not registered with the CFTC and/or the NFA as futures commission merchants or introducing brokers, the Selling Agent's and such selected dealers' portions(s) of such Continuing Services Fee shall be paid to the General Partner. The General Partner may increase the amount of the Continuing Services Fee payable by the Partnership at any time and from time to time upon sixty (60) days' prior written notice to the Limited Partners, which notice shall set forth the redemption and voting rights of the Units; provided that prior to the effectiveness of the increased Continuing Services Fee, the Limited Partners shall have an opportunity to redeem their Units on the last business day of the month in which such notice is sent without the imposition of any redemption fee. (b) "Capital Gain" or "Capital Loss" shall mean gain or loss characterized as gain or loss from the sale or exchange of a capital asset by the Internal Revenue Code, including without limitation gain or loss required to be taken into account pursuant to Sections 988 and 1256 of the Internal Revenue Code. (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 value of the assets of the Partnership, including all cash and cash equivalents (valued at cost), plus accrued interest thereon, and the market value of all open commodity positions and other assets of the Partnership, less the liabilities of the Partnership. Net Assets shall be determined in accordance with this Section 4.4(d) or, if no principle is specified, in accordance with generally accepted accounting principles consistently applied under the accrual basis of accounting. The market value of a commodity or commodity futures contract traded on an exchange, or through a clearing firm or bank, shall mean the most recent available settlement price or closing quotation, as appropriate on the exchange, or of the clearing firm or bank, on or through which the commodity or contract is traded by the Partnership on the date with respect to which Net Assets are being determined. If such contract cannot be liquidated due to the operation of daily limits or otherwise on such date, the liquidating value on the first subsequent date on which the contract could be liquidated, or such other value as the General Partner deems fair and reasonable, shall be used. (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 -A-17- that solicited the subscription pursuant to the terms of any selected dealer agreement entered into from time to time between the Partnership's selling agent and such selected dealer. The General Partner may increase the amount of the Syndication Fee / Sales Charge at any time and from time to time upon sixty (60) days' prior written notice to the Limited Partners. (g) "Special Allocation" shall mean a quarterly special allocation to the Advisor equal to (i) fifteen percent (15%) of the increase in Net Assets, calculated as the amount by which the value of the Net Assets on the last business day of calendar quarter exceeds the value of the Net Assets on the last business day of the preceding calendar quarter, less (ii) the amount of any decrease in Net Assets in any prior calendar quarter, calculated as the amount by which Net Assets on the last business day of the prior calendar quarter is less than Net Assets on the last business day of the calendar quarter preceding such calendar quarter, but only to the extent that such amount has not offset an increase in Net Assets in any prior calendar quarter. The amount of any Special Allocation shall be adjusted to exclude the effect of interest income, redemptions, the issuance of additional Units, withdrawn capital and distributions. 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 2.12 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 3.6(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, ninety (90) days' prior notice to all Limited Partners pursuant to Section 2.12 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 3.6 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 -A-18- of any inventory, accounting or appraisal of the assets of the Partnership and any right to a special audit or examination of the books and records of the Partnership. 5.2 Final Accounting. Upon the dissolution of and failure to reconstitute the Partnership, an accounting shall be made of the accounts of the Partnership, the capital accounts of each Unit, and the Partnership's assets, liabilities and operations from the date of the last previous accounting to the date of such dissolution. Thereupon, the General Partner (or in the event that the dissolution is caused by the legal disability, bankruptcy, dissolution, liquidation or withdrawal of the General Partner, such person as may be designated by the holders of a majority of the then outstanding Units of Limited Partnership Interest, not including Units of Limited Partnership Interest held by the General Partner) shall act as liquidating trustee and immediately proceed to wind up and terminate the business and affairs of the Partnership and to liquidate the property and assets of the Partnership. 5.3 Distribution. Upon the winding up and termination of the business and affairs of the Partnership, its liabilities and obligations to creditors and all expenses incurred in its liquidation shall be paid, and its remaining assets shall be distributed to the Partners in accordance with their capital accounts as determined under Article IV hereof. 5.4 Use of Firm Name Upon Dissolution. At no time during the operation of the Partnership or upon the termination of and dissolution of the Partnership shall any value be placed on the firm name, the right to its use, or the goodwill, if any, attached thereto, either between the Partners or for the purpose of determining any distributive interest of any Partner in accordance with this Agreement. 5.5 Balance Owed by a Partner. In the event that a Partner has a negative balance in his capital account after all adjustments to capital accounts have been made hereunder, whether by reason of losses in liquidating Partnership assets or otherwise, the negative balance shall represent an obligation from such Partner to the Partnership to be paid in cash within thirty (30) days after written demand and shall be distributed to creditors of the Partnership or to Partners with a positive balance in their capital accounts in accordance with Section 5.3 hereof. ARTICLE VI MISCELLANEOUS 6.1 Meetings. Meetings of the Partnership for purposes of amending this Agreement or taking any action permitted to be taken by the Limited Partners under this Agreement may be called by the General Partner and shall, subject to the limitations imposed by the final sentence of Section 6.2(b) hereof, 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 -A-19- 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; (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; -A-20- (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. 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. 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 -A-21- 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. (b) 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. (c) 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. (d) 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 70 West Red Oak Lane, 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. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. (f) 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. (h) 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. (i) 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. -A-22- (j) 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:__________________________________________ Daniel S. Shaffer President --------------------------------------------- Daniel S. Shaffer, as initial Limited Partner --------------------------------------------- Daniel S. Shaffer, as attorney-in-fact for the Limited Partners -A-23- Exhibit B SUBSCRIPTION REQUIREMENTS General Representations and Warranties By executing the Subscription Agreement / Power of Attorney for Shaffer Diversified Fund, L.P. (the "Fund"), a subscriber in units of limited partnership interest ("Units") in the Fund represents and warrants to the Fund, the General Partner, the Selling Agent, the Selected Dealer(s) that solicited the subscription, and the Commodity Broker that: o the subscriber is of legal age to execute the Subscription Agreement / Power of Attorney and is legally competent to do so; o all information furnished by the subscriber or set forth in the Subscription Agreement / Power of Attorney submitted by the subscriber is correct and complete as of the date set forth next to the signature of the subscriber, and the subscriber will revise or correct such information if any change in such information occurs prior to acceptance of the subscription by the General Partner; o unless one of the next two provisions applied, the subscription is made for the account of the subscriber and not as trustee, custodian or nominee for another; o the subscription, if made as custodian for a minor, is a gift that the subscriber has made to the minor and is not made with funds of the minor or, if not a gift, the representations as to net worth and annual income set forth below apply only to the minor; o if the subscriber is subscribing in a representative capacity, the subscriber has full power and authority to purchase the units and enter into and be bound by the Subscription Agreement / Power of Attorney on behalf of the entity for which he or she is purchasing the Units, and the entity has full right and power to purchase the Units, to enter into and be bound by the Subscription Agreement / Power of Attorney and to become a limited partner in the Fund pursuant to the Limited Partnership Agreement; o the subscriber either is not required to be registered with the Commodity Futures Trading Commission (the "CFTC") or to be a member of the National Futures Association (the "NFA") or, if required to be so registered, is duly registered with the CFTC and a member in good standing of the NFA; and o the subscriber has net worth of at least $150,000, exclusive of home, furnishings and automobiles, or an annual gross income of at least $45,000 and a net worth similarly calculated of at least $45,000, and the investment of the subscriber in the Fund will 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: Alabama: The investment may not exceed 20% of net worth. Alaska: Net worth of at least $225,000 or net worth of at least $60,000 and an annual taxable income of at least $60,000. Arizona: Net worth of at least $225,000 or net worth of at least $75,000 and an annual taxable income of at least $75,000. Arkansas: The investment may not exceed 20% of net worth. California: Net worth of at least $500,000 or net worth of at least $250,000 and an annual taxable income of at least $100,000, together with a reasonable expectation of taxable income of at least $100,000 in the current year. Florida: Net worth of at least $1,000,000 or an annual taxable income of at least $200,000 individually or $300,000 with spouse in each of the two most recent years, together with a reasonable expectation of income of a similar level in the current year. Idaho: Net worth of at least $1,000,000 or an annual taxable income of at least $200,000 individually or $300,000 with spouse in each of the two most recent years, together with a reasonable expectation of income of a similar level in the current year. Illinois: Net worth of at least $1,000,000 or an annual taxable income of at least $200,000 in each of the two most recent years, together with a reasonable expectation of income of a similar level in the current year. Indiana: The investment may not exceed 10% of net worth. Iowa: Net worth of at least $1,000,000 or an annual taxable income of at least $200,000 individually or $300,000 with spouse in each of the two most recent years, together with a reasonable expectation of taxable income of a similar level in the current year. Kansas: The investment may not exceed 20% of net worth. Louisiana: The investment may not exceed 25% of net worth. Maine: Net worth of at least $200,000 or net worth of $50,000 and an annual taxable income of at least $50,000. Michigan: For purchases of more than $50,000 in units, net worth of at least $1,000,000 or a taxable income during the preceding year of at least $100,000 and the ability to bear the financial risk of the investment. Minnesota: Net worth of at least $1,000,000. Mississippi: The investment may not exceed 10% of net worth. -B-2- Missouri: Net worth of at least $75,000 or net worth of at least $30,000 and an annual taxable income of at least $30,000. Montana: The investment may not exceed 10% of net worth. Nebraska: Net worth of at least $150,000 or net worth of at least $45,000 and an annual taxable income of at least $45,000. Nevada: The investment may not exceed 10% of net worth. New Hampshire: Net worth of at least $250,000 or net worth of at least $125,000 and an annual taxable income of at least $50,000. New Mexico: Net worth of at least $150,000 or net worth of at least $65,000 and an annual taxable income of at least $65,000. New York: Net worth equal to five times the total investment or net worth equal to three times the total investment and an annual taxable income equal to the total investment. North Carolina: Net worth of at least $225,000 or net worth of at least $60,000 and an annual taxable income of at least $60,000. Ohio: Net worth of at least $150,000 or net worth of at least $45,000 and an annual taxable income of at least $45,000. Oregon: Net worth of at least $1,000,000 or an annual income of at least $200,000 individually or $300,000 with spouse in each of the two most recent years, together with a reasonable expectation of income of a similar level in the current year. Rhode Island: Net worth of at least $1,000,000 or an annual taxable income of at least $200,000 individually or $300,000 with spouse in each of the two most recent years, together with a reasonable expectation of income of a similar level in the current year. South Carolina: Net worth of at least $150,000 or net worth of at least $65,000 and an annual taxable income of at least $65,000. South Dakota: Net worth of at least $1,000,000 or an annual taxable income of at least $200,000 individually or $300,000 with spouse in each of the two most recent years, together with a reasonable expectation of income of a similar level in the current year. Texas: Net worth of at least $150,000 or net worth of at least $50,000 and an annual taxable income of at least $50,000. Utah: The investment may not exceed 10% of net worth. Vermont: The investment may not exceed 10% of net worth. Washington: Net worth of at least $1,000,000 or an annual taxable income of at least $200,000 individually or $300,000 with spouse in each of the two most recent years, together with a reasonable expectation of income of a similar level in the current year -B-3- Wisconsin: Net worth of at least $150,000 or net worth of at least $45,000 and an annual taxable income of at least $45,000. Wyoming: The investment may not exceed 10% of net worth. 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 the Commodity Broker 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: o has investment discretion with respect to the plan assets; o 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 o is an employer maintaining or contributing to the plan; o the plan fiduciary: o 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; o is independent of the General Partner, the Advisor, the Selling Agent, the Selected Dealer(s) that solicited the subscription, the Commodity Broker, and their respective affiliates, agents and employees; and -B-4- o 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." -B-5- Exhibit C SUBSCRIPTION INSTRUCTIONS FOR SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY Prospective investors in Shaffer Diversified Fund, L.P. (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. The date printed on the front of the Prospectus and at the top of the Subscription Agreement / Power of Attorney should be no more than nine months ago. If such date is more than nine months ago, new materials are available and should be utilized. 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 in Units.] 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. 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. 6. 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. 7. If the mailing address of the subscriber is different from the legal address of the subscriber, complete LINE 8. 8. If an individual retirement account, enter the name and address of the custodian on LINE 9. 9. 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. 10. Financial advisors must complete and sign under "Financial Advisors" below. The financial advisor should send the Subscription Agreements / Powers of Attorney, payments and all other required documents to: o the administration or fund administration office of the Selling Agent or Selected Dealer(s) that solicited the subscription , if firm procedures require; o the custodial firm, if one is required; or o the Fund at 70 West Red Oak Lane, White Plains, New York 10604, Attention: Fund Administration. 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. If payment is being made by wire transfer, the financial advisor should contact his or her fund administration department or the administration department of the Fund for instructions. Payments made by check must be received at least three business days prior to the last business day of the month, and personal checks must be received 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 administration department of the Fund at (800) 352-5265 or his or her fund administration department. -C-2- SHAFFER DIVERSIFIED FUND, L.P. (A Delaware Limited Partnership) SUBSCRIPTION AGREEMENT / POWER OF ATTORNEY DATED _______________, 200__ Shaffer Diversified Fund, L.P. c/o Shaffer Asset Management, Inc. 70 West Red Oak Lane 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, L.P. (the "Fund") set forth on page D-4 hereof at a purchase price equal to (i) $1,000 per Unit ($950 per Unit, plus an initial sales charge of $50 per Unit) during the initial offering period of the Fund, and (ii) at the Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased, thereafter, each as more fully described in the Fund's prospectus (the "Prospectus") and accompanying Statement of Additional Information (the "Statement of Additional Information"), as the same may be amended or supplemented from time to time. I understand that only whole Units may be purchased during the initial offering period of the Fund, but that fractional Units may be purchased thereafter. My check payable to "Shaffer Diversified Fund, L.P." 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 have received a copy of the Prospectus and accompanying Statement of Additional Information. By signing this letter, I make the representations and warranties set forth in Exhibit C to the Statement of Additional Information entitled "Subscription Requirements." In particular, I represent that I meet all applicable financial standards described in the Prospectus and the Statement of Additional Information, including the net worth and annual income requirements. 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. 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 -C-3- 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. I hereby acknowledge that 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 [ ] IRA rollover [ ] Tenants in common [ ] SEP [ ] Community property [ ] Profit-sharing account [ ] Estate [ ] Defined benefit account [ ] UGMA/UTMA [ ] Pension [ ] Corporation [ ] Other Retirement Benefit Plan [ ] Partnership [ ] Other (specify) _____________ [ ] Grantor or other revocable trust [ ] Trust other than grantor or revocable trust
4. [ ] Existing account number: ____________________. 5. Name: _________________________________________________________. 6. Additional information (see instructions): _________________________. 7. Address: __________________________________________ __________________________________________ __________________________________________ 8. Mailing address (if different): __________________________________________ -C-4- __________________________________________ __________________________________________ 9. Custodian name and mailing address: __________________________________________ __________________________________________ __________________________________________ 10. Signature: Date: ___________________________ _______________ Signature of joint investor: 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. -C-5- The financial advisor must sign below to substantiate compliance with NASD Rule 2810. Financial advisor signature: Date: ______________________________ ___________________ Office manager signature (if required Date: by the procedures of the Selling Agent or selected dealer(s) that solicited this subscription): ______________________________ ___________________ Financial advisor name: ____________________________________________ Address: ____________________________________________ ____________________________________________ ____________________________________________ Telephone: ____________________________________________ Facsimile: ____________________________________________ E-mail address: ____________________________________________ -C-6- Exhibit D SHAFFER DIVERSIFIED FUND, L.P. (A Delaware Limited Partnership) REQUEST FOR REDEMPTION ____________________, 20___ (Please date) Please send original to: Shaffer Asset Management, Inc., as General Partner Shaffer Diversified Fund, L.P. 70 West Red Oak Lane White Plains, NY 10604 Re: Account No: _______________ Social Security or taxpayer identification number: ___________ Dear Sir or Madam: I hereby request redemption, as defined in and subject to all of the terms and conditions of the Amended and Restated Agreement of Limited Partnership of Shaffer Diversified Fund, L.P., a Delaware limited partnership (the "Fund"), of _______________ (insert number of Units to be redeemed) of my Units of limited partnership interest in the Fund (if no number is entered, the General Partner will assume that you wish to redeem all of your Units) at the Net Asset Value per Unit described in the Prospectus and accompanying Statement of Additional Information of the Fund dated _______________, 2001. I understand that the redemption shall be effective as of the close of business on the last business day of the calendar month in which this request for redemption is received by the General Partner; provided that this request for redemption is received by the General Partner at least 10 days prior to such effective date, and that if this request for redemption is received by the General Partner less than 10 days prior to a permitted redemption date, my Units may be redeemed on the next succeeding redemption date. I also understand that the redemption fees described in the Prospectus may apply to this redemption. I (either in my individual capacity or as an authorized representative of an entity, if applicable) hereby represent and warrant that I am the true, lawful and beneficial owner of the Units of limited partnership interest to which this request for redemption relates, with full power and authority to request redemption of such Units. Such Units are not subject to any pledge or otherwise encumbered in any fashion. United States Investors [ ] I have checked the box if I am subject to backup withholding under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code. Under penalties of perjury, by signature below I hereby certify that the Social Security or taxpayer identification number above is my true, correct and complete Social Security or taxpayer identification number and that the information given in the immediately preceding sentence is true, correct and complete. 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") will pay initial offering expenses of the Registrant as described in the Prospectus included in this Registration Statement. Securities and Exchange Commission registration fee.................... $ 6,600 National Association of Securities Dealers, Inc. filing fee............ 2,000 Printing expenses...................................................... 20,000 Accounting fees and expenses........................................... 45,000 Blue-sky fees and expenses (excluding legal fees)...................... 5,000 Legal fees and expenses................................................ 120,000 Miscellaneous offering costs........................................... 1,400 Total............................................................. $200,000 Item 14..Indemnification of Directors and Officers. Article 14 of the 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, 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 -II-1- 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. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits. The following documents, unless indicated, are filed herewith and made a part of this Registration Statement. Exhibit Number Description 1.1 Form of Selling Agent Agreement between Registrant and Berthel Fisher & Company Financial Services, Inc. 1.2 Form of Selected Dealers Agreement 1.3 Form of Continuing Services Agreement 3.1* Certificate of Limited Partnership of the Registrant. 3.2 Form of Amended and Restated Agreement of Limited Partnership of the Registrant (included as Exhibit A to the Statement of Additional Information that accompanies the Prospectus included in this Registration Statement). 3.3 Form of Request for Redemption (included as Exhibit D to the Statement of Additional Information that accompanies the Prospectus included in this Registration Statement). 4.1 Specimen of Unit Certificate. 4.2 Exhibits 3.1, 3.2, 3.3 and 4.1 define the rights of security holders. 5.1 Form of Opinion of Kurzman, Karelsen & Frank, LLP relating to the legality of the Units. 8.1 Form of Opinion of Morrison Cohen Singer & Weinstein, LLP relating to federal income tax matters. 10.1 Form of Customer Agreement between the Registrant and ADM Investor Services, Inc. 10.2* Commodity Trading Authorization between the Registrant and Shaffer Asset Management, Inc. 10.3 Form of Advisory Agreement between the Registrant and Shaffer Asset Management, Inc. 10.4 Form of Subscription Agreement / Power of Attorney (included as Exhibit C to the Statement of Additional Information that accompanies the Prospectus included in this Registration Statement). 10.5 Form of Net Worth Agreement between Shaffer Asset Management, Inc., Daniel S. Shaffer and Bruce I. Greenberg. 10.6** Form of Escrow Agreement between the Registrant and The Chase Manhattan Bank. 24.1 Consent of Kurzman Karelsen & Frank, LLP (included in Exhibit 5.1 to this Registration Statement). 24.2 Consent of Morrison Cohen Singer & Weinstein, LLP (included in Exhibit 8.1 to this Registration Statement). 24.2 Consent of Anchin Block & Anchin LLP. - ---------- * Previously filed and not filed herewith. ** To be filed by amendment. -II-2- (b) Financial Statement Schedules. No Financial Schedules are required to be filed herewith. Item 17. Undertakings. Subject to the limitations set forth in Item 512 of Regulation S-K under the Securities Act of 1933, as amended, the undersigned Registrant hereby undertakes: (i) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (A) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended; (B) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and (C) 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; (ii) that, for the purpose of determining any liability under the Securities Act of 1933, as amended, 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; (iii) 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; (iv) that, for purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1), 424(b)(4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (v) that, for the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus 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-3- Insofar as indemnification for liabilities under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 512(h) 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, as amended, 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 Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused Pre-Effective Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of White Plains, State of New York on January 23, 2001. 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, as amended, Pre-Effective Amendment No. 1 to this Registration Statement has been signed below by the following person in the capacities and on the dates indicated.
Signature Name Title Date --------- ---- ----- ---- /s/ Daniel S. Shaffer Daniel S. Shaffer President of General Partner January 23, 2001 (chief executive officer) /s/ Daniel S. Shaffer Daniel S. Shaffer President of General Partner January 23, 2001 (chief accounting officer)
-II-4- SHAFFER DIVERSIFIED FUND, L.P. (A Delaware Limited Partnership) Exhibit Index Exhibit Number Description - ------ ----------- 1.1 Form of Selling Agent Agreement between Registrant and Berthel Fisher & Company Financial Services, Inc. 1.2 Form of Selected Dealers Agreement. 1.3 Form of Continuing Services Agreement. 3.1* Certificate of Limited Partnership of the Registrant. 3.2 Form of Amended and Restated Agreement of Limited Partnership of the Registrant (included as Exhibit A to the Statement of Additional Information that accompanies the Prospectus included in this Registration Statement). 3.3 Form of Request for Redemption (included as Exhibit D to the Statement of Additional Information that accompanies the Prospectus included in this Registration Statement). 4.1 Specimen of Unit Certificate. 4.2 Exhibits 3.1, 3.2, 3.3 and 4.1 define the rights of security holders. 5.1 Form of Opinion of Kurzman, Karelsen & Frank, LLP relating to the legality of the Units. 8.1 Form of Opinion of Morrison Cohen Singer & Weinstein, LLP relating to federal income tax matters. 10.1 Form of Customer Agreement between the Registrant and ADM Investor Services, Inc. 10.2* Commodity Trading Authorization between the Registrant and Shaffer Asset Management, Inc. 10.3 Form of Advisory Agreement between the Registrant and Shaffer Asset Management, Inc. 10.4 Form of Subscription Agreement / Power of Attorney (included as Exhibit C to the Statement of Additional Information that accompanies the Prospectus included in this Registration Statement). 10.5 Form of Net Worth Agreement among Shaffer Asset Management, Inc., Daniel S. Shaffer and Bruce I. Greenberg. 10.6** Form of Escrow Agreement between the Registrant and The Chase Manhattan Bank. 24.1 Consent of Kurzman Karelsen & Frank, LLP (included in Exhibit 5.1 to this Registration Statement). 24.2 Consent of Morrison Cohen Singer & Weinstein, LLP (included in Exhibit 8.1 to this Registration Statement). 24.2 Consent of accountants. - ---------- * Previously filed and not filed herewith. ** To be filed by amendment. EX-1.1 2 0002.txt FORM OF SELLING AGENT AGREEMENT Exhibit 1.1 Form of Selling Agent Agreement SHAFFER DIVERSIFIED FUND, L.P. (A Delaware Limited Partnership) _______________, 2001 Berthel Fisher & Company Financial Services, Inc. P.O. Box 74250 Cedar Rapids, IA 52407-4250 Gentlemen: Shaffer Asset Management, Inc., a New York corporation (the "General Partner"), is the sole general partner of Shaffer Diversified Fund, L.P. (the "Fund"), a limited partnership organized under the Delaware Revised Uniform Limited Partnership Act to speculatively trade in commodity futures contracts and related interests as described in the Prospectus and accompanying Statement of Additional Information (as defined in Section 1(a) hereof). The Fund proposes to offer publicly for subscription and to sell to subscribers acceptable to the General Partner, upon the terms and subject to the conditions set forth in this Agreement and the Registration Statement (as defined in Section 1(a) hereof) and the Prospectus and Statement of Additional Information included therein, as either or both may from time to time be amended or supplemented, a minimum of one thousand (1,000) and a maximum of twenty five thousand (25,000) units of limited partnership interest ("Units") in the Fund at a purchase price equal to (i) $1,000 per Unit ($950 per Unit, plus an initial sales charge of $50 per Unit) during the initial offering period of the Fund, and (ii) at the Net Asset Value per Unit, plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased, thereafter, each as more fully described in the Prospectus and Statement of Additional Information. Berthel Fisher & Company Financial Services, Inc., an Iowa corporation (the "Selling Agent"), will act as the syndicator and sales agent for the Fund on a best efforts basis. 1. Representations and Warranties of the General Partner and the Fund. The General Partner and the Fund jointly and severally represent and warrant to the Selling Agent that: (a) A registration statement on Form S-1 (File No. 333-46550), and as a part thereof a prospectus and statement of additional information relating to the Units, prepared in conformity with the applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the rules and regulations promulgated thereunder, have been filed with the Securities and Exchange Commission (the "SEC") in the form heretofore delivered to the Selling Agent (which registration statement at the time and in the form it is declared effective by the SEC shall be referred to herein as the "Registration Statement", which prospectus in the form filed with the SEC pursuant to Rule 424(b) shall be referred to herein as the "Prospectus", and which statement of additional information in the form filed with the SEC pursuant to Rule 424(b) shall be referred to herein as the "Statement of Additional Information"); provided that (i) if the Fund files a post-effective amendment to such registration statement, then the term "Registration Statement" shall refer to the registration statement as amended by such post-effective amendment, and the term "Prospectus" shall refer to the amended prospectus then on file with the SEC, and the term "Statement of Additional Information" shall refer to the amended statement of additional information then on file with the SEC, (ii) if a prospectus filed by the Fund pursuant to either Rule 424(b) or (c) promulgated under the 1933 Act shall differ from the prospectus on file at the time the Registration Statement or any post-effective amendment thereof shall have become effective, the term "Prospectus" shall refer to the prospectus filed pursuant to Rule 424(b) or (c), from and after the date on which it shall have been filed, and (iii) if a statement of additional information filed by the Fund pursuant to either Rule 424(b) or (c) promulgated under the 1933 Act shall differ from the statement of additional information on file at the time the Registration Statement or any post-effective amendment thereof shall have become effective, the term "Statement of Additional Information" shall refer to the statement of additional information filed pursuant to Rule 424(b) or (c), from and after the date on which it shall have been filed; (b) Copies of the Registration Statement have also been filed with: (i) the Commodity Futures Trading Commission (the "CFTC"), (ii) the National Association of Securities Dealers, Inc. (the "NASD"); and (iii) the National Futures Association (the "NFA"). (c) No order preventing or suspending the use of the SEC or any previous prospectus or statement of additional information with respect to the Units has been issued by the SEC. The Registration Statement contains all statements which are required to be made therein, conforms in all material respects to the requirements of the 1933 Act, and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (d) The Fund has been duly organized and is validly existing as a limited partnership in good standing under the Delaware Revised Uniform Limited Partnership 1933 Act, with full power and authority to carry out its obligations under this Agreement, its Certificate of Limited Partnership (the "Partnership Certificate") and its Agreement of Limited Partnership (the "Limited Partnership Agreement"), and to own its properties, conduct its business and engage in the activities as described in the Prospectus and the Statement of Additional Information; and the Fund conducts no business and owns or leases no properties that would require it to qualify to do business as a foreign limited partnership in any jurisdiction except the State of New York, where the Fund will qualify to do business on or before the Initial Closing Date (as defined in Section 7(d) hereof); (e) The offer and sale of the Units have been duly authorized by the Fund, and the Units constitute valid limited partnership interests in the Fund which conform to the description thereof contained in the Prospectus and the Statement of Additional Information; the liability of each limited partner of the Fund ("Limited Partner") will be limited as set forth in the Prospectus and the Statement of Additional Information, and no Limited Partner will be subject to personal liability for the debts, obligations, or liabilities of the Fund by reason of his being a limited partner of the Fund other than as described in the Prospectus and the Statement of Additional Information; -2- (f) The offer and sale of the Units and the performance by the Fund and the General Partner of all of the provisions of this Agreement will not conflict with or result in a breach of any of the terms or provisions of, or in the imposition of any lien, charge or encumbrance upon any of the property or assets of the Fund pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Fund is a party or by which the Fund is bound or to which any of the property or assets of the Fund are subject, nor will any such action or performance result in a violation of the provisions of the Partnership Certificate or the Limited Partnership Agreement or any statute or any order, rule or regulation of any court or governmental authority or body having jurisdiction over the Fund or any of its properties; and no consent, approval, authorization, order, registration or qualification of or with any court or any such governmental authority or other governmental body is required for the issuance and sale of the Units or the consummation of the other transactions contemplated by this Agreement, except the registration of the General Partner with the CFTC as a commodity pool operator, the registration under the 1933 Act of the Units and such consents, approvals, authorizations, registrations or qualifications as may be required by the CFTC and state securities or blue sky laws in connection with the offer and sale of the Units; (g) Anchin Block & Anchin LLP, who has examined certain financial statements of the General Partner and the Fund, are independent certified public accountants as required by the 1933 Act; (h) The Fund has been capitalized as set forth in the Prospectus and the Statement of Additional Information; (i) The Fund has complied, and will continue to comply, with all laws, rules and regulations applicable to its business, including regulations promulgated by the CFTC, the violation of which would materially and adversely affect the business, financial condition or earnings of the General Partner or the Fund; and there are no actions, suits or proceedings pending or, to the knowledge of the General Partner or the Fund, threatened against the Fund, at law or in equity, before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, or before or by any commodity exchange, in which an adverse decision would materially and adversely affect the business, financial condition or earnings of the General Partner or the and which are not adequately disclosed in the Prospectus or the Statement of Additional Information; (j) The General Partner shall have, from time to time, purchased or subscribed to the number of units of general partnership interest required by it to be purchased or subscribed for by the Limited Partnership Agreement and shall have a Net Worth (as defined in the Limited Partnership Agreement) equal to or in excess of the requirements thereof; (k) The financial statements of the Fund contained in the Registration Statement, the Prospectus and the Statement of Additional Information fairly present the financial condition and the results of operations of the Fund as of the dates and for the periods therein specified, and such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as is otherwise noted or reported therein; -3- (l) There are no contracts or other documents that are required to be filed as exhibits to the Registration Statement by the 1933 Act which will not have been so filed prior to the declaration of the effectiveness of the Registration Statement by the SEC; (m) The Registration Statement, including the Prospectus and Statement of Additional Information, contains all statements and information required to be included therein by the Commodity Exchange Act (the "CE Act") and the rules and regulations promulgated thereunder by the CFTC (the "CFTC Rules"); (n) When the Registration Statement becomes effective under the 1933 Act and at all times subsequent thereto, up to and including each closing hereunder, the Registration Statement and the Prospectus and Statement of Additional Information therein will comply in all material respects with the requirements of the 1933 Act and the regulations promulgated thereunder, the CE Act, the CFTC Rules, and the rules of the NASD and the NFA. As of its effective date, the Registration Statement will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and Statement of Additional Information therein, as of its date of issue and as of each closing, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading. Any supplemental sales literature employed in offering the Units (the "Sales Literature"), when read in conjunction with the Prospectus and Statement of Additional Information therein, as of its date of issue and as of each closing, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading. The Sales Literature will comply with the 1933 Act, the regulations promulgated thereunder, the CE Act, the CFTC Rules, and the rules of the NASD and the NFA. This representation and warranty shall not, however, apply to any statement or omission in the Registration Statement, Prospectus and Statement of Additional Information therein or Sales Literature relating to the Selling Agent or made in reliance upon and in conformity with information furnished in writing by the Selling Agent for inclusion in such Registration Statement, Prospectus and Statement of Additional Information therein or the Sales Literature. (o) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and Statement of Additional Information therein, except as may otherwise be stated in or contemplated by the Registration Statement and the Prospectus and Statement of Additional Information therein, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the General Partner or the Fund, whether or not arising in any ordinary course of business. (p) The Limited Partnership Agreement, the Advisory Agreement between the Fund and the General Partner (the "Advisory Agreement") and this Agreement have each been duly and validly authorized, executed, and delivered by the General Partner, individually and on behalf of the Fund, as the case may be, and each constitutes a valid and binding agreement of the Fund and of the General Partner, as the case may be, enforceable against the Fund and the General Partner, as the case may be, in accordance with its terms. The Escrow Agreement (the "Escrow Agreement") between the Fund, The Chase Manhattan Bank (the "Escrow Agent") and the Selling Agent has been duly and validly authorized, executed, and delivered by the General Partner on behalf of the -4- Fund, and constitutes a valid and binding agreement of the Fund, enforceable against the Fund in accordance with its terms. (q) Except as set forth in the Registration Statement or the Prospectus and Statement of Additional Information therein, there has not been in the five years preceding the date of the Prospectus and there is not pending or, to the best of the General Partner's knowledge, threatened, any action, suit, or proceeding at law or in equity before or by any court, governmental body, administrative agency, panel, or self-regulatory organization to which the General Partner, any of the "principals" of the General Partner, as defined in CFTC Rule 4.10(e) (the "General Partner Principals"), or the Fund is or was a party, or to which any of the assets of the General Partner or the Fund is or was subject; and neither the General Partner nor any General Partner Principal has received any notice of an investigation by the SEC, CFTC, NASD or NFA regarding non-compliance by the General Partner, the General Partner Principals or the Fund with the 1933 Act, the 1934 Act, any other federal securities laws, rules or regulations, the CE Act, the CFTC Rules, or the rules of the NASD or the NFA, which action, suit, proceeding, or investigation resulted or might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, business or prospects of the General Partner or the Fund, or which could be material to an investor's decision to invest in the Fund. 2. Representations and Warranties of the General Partner. The General Partner represents and warrants to the Selling Agent that: (a) It has been duly incorporated and is validly existing as a corporation under the laws of the State of New York with full power and authority to conduct its business as described in the Prospectus and the Statement of Additional Information; and it is duly qualified to conduct business as a foreign corporation and is in good standing in every jurisdiction in which the character of such business requires such qualification; (b) It has complied, and will continue to comply, with all laws, rules and regulations applicable to its business, including regulations promulgated by the CFTC, the violation of which would materially and adversely affect the business, financial condition or earnings of the Fund or the General Partner; and there are no actions, suits or proceedings pending or, to its knowledge, threatened against the General Partner, at law or in equity, before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, or before or by any commodity exchange, in which an adverse decision would materially and adversely affect the business, financial condition or earnings of the Fund or the General Partner and which are not adequately disclosed in the Prospectus or the Statement of Additional Information; (c) Its financial statements contained in the Registration Statement, the Prospectus and the Statement of Additional Information fairly present its financial condition and the results of its operations as of the dates and for the periods therein specified, and such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as is otherwise noted or reported therein. (d) The General Partner and each "principal" of the General Partner, as defined in CFTC Rule 3.1(a), have all federal, state, and foreign governmental, regulatory, self-regulatory, and exchange approvals, licenses, registrations, and memberships, and have effected all filings with federal, state, and foreign governmental -5- regulators, self-regulatory organizations, and exchanges required to conduct their business and to act as described in the Registration Statement and the Prospectus and Statement of Additional Information therein, or required to perform their obligations under the Limited Partnership Agreement, the Advisory Agreement, the Escrow Agreement and this Agreement. The General Partner is registered as a commodity pool operator under the CE Act and is a member of the NFA as a commodity pool operator. The General Partner's principals identified in the Prospectus are all of the General Partner Principals. (e) To the extent required under CFTC Rules and applicable CFTC staff no-action letters, the actual performance of all pools "operated" within the meaning of the CE Act by the General Partner and of the General Partner Principals is disclosed in the Prospectus and Statement of Additional Information therein. 3. (a) Appointment of the Selling Agent. Subject to the terms and conditions and upon the basis of the representations and warranties set forth herein, the Fund hereby appoints the Selling Agent as its selling agent, and the Selling Agent agrees to use its best efforts, without any commitment on the part of the Selling Agent to purchase any Units, to procure subscribers for the Units at an initial purchase price of One Thousand Dollars ($1,000) per Unit ($950 per Unit, plus an initial sales charge of $50 per Unit) and will continue such efforts to and including that day which is sixty (60) days after the date on which the Registration Statement is declared effective by the SEC, subject to a possible extension for up to an additional sixty (60) days at the discretion of the General Partner (the "Initial Offering Period") and thereafter (if at least 1,000 Units have been sold during the Initial Offering Period and the Fund continues to offer Units to the public) at a purchase price equal to the then current Net Asset Value per Unit (as defined in the Prospectus and the Statement of Additional Information), plus a sales charge of 5% of the Net Asset Value per Unit for each Unit purchased. (b) All proceeds from the sale of Units during the Initial Offering Period shall be deposited by the General Partner in an escrow account with The Chase Manhattan Bank, 1214 Mamaroneck Avenue, White Plains, NY 10605, for the benefit of the subscribers, and thereafter shall be paid to the Fund on the appropriate date of purchase of Units. If subscriptions for at least one thousand (1,000) Units shall not have been received and accepted by the General Partner by the conclusion of the Initial Offering Period, then each subscriber shall have returned to him one hundred percent (100%) of his subscription within fifteen (15) days following the termination of the offering, plus any interest accrued thereon (pro rata taking in account the amount and the time of deposit). (c) The Selling Agent may appoint as its agent to make offers and sales of the Units any securities broker/dealer which is a member in good standing of the NASD and foreign broker/dealers and institutions which are not members of the NASD but which agree to abide by the NASD Rules of Fair Practice in making sales of the Units (hereinafter collectively referred to as the "Selected Dealers"). The Selling Agent and the Selected Dealers will make offers to sell Units to, or solicit offers to subscribe for any Units from, only those persons who meet the suitability requirements set forth in the Prospectus and the Statement of Additional Information and persons in only those states where the Fund has registered or qualified the offering of Units for sale or under circumstances where the offering of Units for sale is exempt from registration and qualification. (d) In consideration of the services to be rendered by the Selling Agent hereunder, if at least 1,000 Units are sold and accepted by the General Partner during the Initial Offering Period, the Fund shall pay the Selling Agent selling commissions equal to eighty percent (80%) of the sales charges imposed by the Fund and described in the Prospectus and Statement of Additional Information with respect to each Unit sold by or though the Selling Agent and the Selected -6- Dealers (as defined in Section 3(c) hereof) and accepted by the General Partner if at least 1,000 Units are sold and accepted by the General Partner during the Initial Offering Period. (e) If at least 1,000 Units are sold and accepted by the General Partner during the Initial Offering Period, the Selling Agent may pay to each Selected Dealer an amount up to sixty percent (60%) of the sales charges imposed by the Fund and described in the Prospectus and Statement of Additional Information with respect to each Unit sold by such Selected Dealer and accepted by the General Partner. Such amount will be paid by the Selling Agent to the Selected Dealers only out of the compensation received by the Selling Agent in respect of the sale of Units hereunder and described in Section 3(d) hereof. The arrangements, if any, between the Selling Agent and any Selected Dealer shall be set forth in a Selected Dealer Agreement in substantially the form filed as an Exhibit to the Registration Statement, unless the Fund shall consent to other arrangements. 4. Representations and Warranties of the Selling Agent. (a) The Selling Agent represents and warrants to the Fund and the General Partner that: (i) All references to and information concerning the Selling Agent contained in the Registration Statement, the Prospectus and the Statement of Additional Information are accurate in all material respects, and, as to the Selling Agent, the Registration Statement, the Prospectus and the Statement of Additional Information do not contain any misleading or untrue statement of a material fact or omit to state a material fact which is necessary to prevent the statements made therein, in light of the circumstances in which they were made, from being misleading; (ii) The Selling Agent is a corporation duly organized and validly existing under the laws of the State of Iowa, is a member in good standing of the NASD and has full power and authority to act as selling agent in the manner contemplated by this Agreement and as described in the Registration Statement, the Prospectus and the Statement of Additional Information; (iii) The Selling Agent is in good standing and in compliance with all applicable broker/dealer registration requirements in the places where the Units will be sold by it, and any use or distribution of the Registration Statement, the Prospectus and the Statement of Additional Information by the Selling Agent will comply with the terms and conditions for use and/or distribution set forth in the Prospectus and the Statement of Additional Information, with the procedures set forth in this Agreement, and with the 1933 Act, the 1934 Act, the CE Act, all applicable state securities and commodity laws, the rules and regulations promulgated under all such acts and all such laws, and all applicable rules and regulations of the NASD and other self-regulatory organizations; (iv) The Selling Agent has obtained all required governmental and regulatory approvals and licenses to perform its obligations under this Agreement and to act as described in the Registration Statement, the Prospectus and the Statement of Additional Information, and the performance of its obligations under this Agreement and its acting as described in the Registration Statement, the Prospectus and the Statement of Additional Information will not -7- violate or result in a breach of any provisions of its Articles of Incorporation or by-laws or any agreement, order, law or regulation binding upon it; and (v) This Agreement and the Escrow Agreement have each been duly and validly authorized, executed and delivered on behalf of the Selling Agent, and is a valid and binding agreement of the Selling Agent enforceable against the Selling Agent in accordance with its terms. (b) The Selling Agent agrees that, except as specifically set forth herein, neither the Fund nor the General Partner shall be liable for any underwriting compensation in connection with the offer or sale of Units, and any compensation payable in respect thereof, except as specifically set forth herein, shall be the sole responsibility of the Selling Agent. 5. Covenants of the Fund and the Selling Agent. The Fund agrees with the Selling Agent: (a) To advise the Selling Agent, promptly after it receives notice thereof, of (i) the time when the Registration Statement or any amended Registration Statement has become effective or any amended or supplemented Prospectus or Statement of Additional Information has been filed, (ii) the issuance by the SEC of any stop order or of any other order preventing or suspending the use of the Prospectus or the Statement of Additional Information or any amended or supplemented Prospectus or Statement of Additional Information, (iii) the initiation or threatening of any proceeding for any such purpose, or (iv) any request by the SEC for the amending or supplementing of the Registration Statement, the Prospectus or the Statement of Additional Information or for additional information; and in the event of the issuance of any stop order or of any order preventing or suspending the use of the Prospectus or the Statement of Additional Information or any amended or supplemented Prospectus or Statement of Additional Information or suspending any such qualification of the Units, promptly to use its best efforts to obtain its withdrawal; (b) To furnish the Selling Agent with copies of the Prospectus and the Statement of Additional Information in such quantities as the Selling Agent may from time to time reasonably request, and if delivery of a Prospectus or Statement of Additional Information is required at any time prior to the expiration of nine (9) months after the date of the Prospectus or the Statement of Additional Information and at any such time any event shall have occurred as a result of which the Prospectus or the Statement of Additional Information, as then amended or supplemented, would include an untrue statement of a material fact or omit to state any material fact necessary to be stated therein in order to make the statements therein, in light of the circumstances under which they were made when such Prospectus or Statement of Additional Information is delivered, not misleading, or if for any other reason it shall be necessary to amend or supplement the Prospectus or the Statement of Additional Information in order to comply with the 1933 Act, to notify the Selling Agent and, upon the Selling Agent's request, to prepare and furnish, without charge to the Selling Agent, as many copies as the Selling Agent may from time to time reasonably request of an amended Prospectus and Statement of Additional Information or a supplement to the Prospectus and Statement of Additional Information which will correct such statement or omission or otherwise effect such compliance; (c) Promptly from time to time to take such action as the Selling Agent may reasonably request to qualify the Units for offering and sale under the securities or blue sky laws of such jurisdictions as the Selling Agent may request and in which such qualification -8- is possible and to comply with such laws so as to permit the continuance of sales in such jurisdictions for so long as may be necessary to complete the distribution; provided, however, that in connection therewith the Fund shall not be required to qualify as a foreign limited partnership (except in the State of New York) or to file a general consent to service of process in any jurisdiction; (d) To make generally available to the holders of Units as soon as practicable, but in any event not later than ____________, an earnings statement of the Fund (which need not be audited) complying with Section 11(a) of the 1933 Act and covering a period of at least twelve (12) consecutive months beginning after the effective date of the Registration Statement; (e) During a period of five (5) years from the effective date of the Registration Statement, to furnish the Selling Agent with copies of all reports or other communications (financial or otherwise) furnished to the Limited Partners, and to deliver to the Selling Agent, as soon as they are available, copies of any reports and financial statements furnished to or filed with the SEC; and (f) To furnish, without charge, to the Selling Agent one (1) signed copy of the Registration Statement and of each amendment thereto, including all financial statements and exhibits, and such number of conformed copies of the Registration Statement and of each amendment thereto, including all financial statements but excluding exhibits to the Registration Statement, as the Selling Agent may reasonably request. 6. Conditions to the Obligations of the Selling Agent. The obligations of the Selling Agent hereunder shall be subject, in its discretion, to the condition that all representations and warranties and other statements of the Fund and the General Partner herein are, at and as of the time of effectiveness of the Registration Statement, true and correct, to the condition that each of the Fund and the General Partner shall have performed all of its obligations hereunder theretofore to be performed, and to the following additional conditions: (a) The Registration Statement shall have become effective, and the Selling Agent shall have received notice thereof; no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the SEC; and all requests for additional information on the part of the SEC shall have been complied with to the reasonable satisfaction of the Selling Agent and its counsel. (b) The Selling Agent shall have received a certificate of the General Partner, dated the Initial Closing Date, and each subsequent date as of which subscriptions to Units are accepted, to the effect that: (i) On and as of the date of such certificate, the representations and warranties of each of the Fund and the General Partner contained herein are true and correct, and each of the Fund and the General Partner has complied with all the agreements and satisfied all the conditions required to be performed or satisfied on its or their part at or prior to such date; (ii) No stop order suspending the effectiveness of the registration Statement has been issued and no proceedings for that purpose have been -9- instituted or, to the best of its knowledge, are pending or contemplated under the 1933 Act with respect to the Registration Statement, the Prospectus or the Statement of Additional Information; and (iii) Neither the Registration Statement, the Prospectus, the Statement of Additional Information nor any amendments or supplements thereto contain an untrue statement of a material fact or omit to state any material fact required c to be stated therein or necessary to be stated therein to make the statements made therein, in light of the circumstances in which they were made, not misleading and, since the effective date of the Registration Statement, no event has occurred or been discovered which is required to which is required to be set forth in an amended or supplemental Prospectus or Statement of Additional Information which has not been so set forth. (c) Kurzman Karelsen & Frank, LLP shall have furnished the Selling Agent with their written opinion, dated the Initial Closing Date, and each subsequent date as of which subscriptions to Units are accepted, to the effect that: (i) The Fund has been duly organized and is validly existing in good standing under the Delaware Revised Uniform Limited Partnership Act with full power and authority to carry out its obligations under this Agreement, the Partnership Certificate and the Limited Partnership Agreement and to own properties and conduct business as described in the Prospectus and the Statement of Additional Information, and the Fund is duly qualified to conduct business as a foreign limited partnership and is in good standing in the State of New York; (ii) The General Partner has been duly incorporated and is validly existing in good standing as a corporation under the laws of its state of incorporation with full power and authority to carry out its obligations under this Agreement, the Partnership Certificate and the Limited Partnership Agreement and to conduct its businesses as described in the Prospectus and the Statement of Additional Information, and it is duly qualified to conduct business as a foreign corporation and is in good standing in every jurisdiction in which the character of such business requires such qualification; (iii) The Partnership Certificate and the Limited Partnership Agreement, as each shall have been amended at the time of such opinion, have been duly and validly authorized, executed and delivered by the General Partner and Daniel S. Shaffer (the "Initial Limited Partner"), and each constitutes the legal, valid and binding obligation of the Partnership and the General Partner, enforceable in accordance with its terms, except (A) as rights under the exculpation and indemnification provisions thereof may be limited by applicable law, (B) as enforcement may be limited by equitable principles applicable to the granting or withholding of equitable remedies including specific performance, and (C) subject to any applicable bankruptcy, insolvency, reorganization or other law generally affecting the enforcement of creditors' rights generally from time to time in effect; (iv) The offer and sale of the Units have been duly authorized by the General Partner on behalf of the Fund; -10- (v) Upon the filing with the Secretary of State of the State of Delaware of an amendment to the Partnership Certificate which states the names and addresses of the purchasers of the Units, specifies their contributions and designates them as Limited Partners of the Fund, (A) such purchasers will be limited partners under the Delaware Revised Uniform Limited Partnership Act, and (B) the Units will constitute valid limited partnership interests in the Fund which conform to the description thereof contained in the Prospectus and the Statement of Additional Information, (C) the liability of each Limited Partner will be limited as set forth in the Prospectus and the Statement of Additional Information, and (D) no Limited Partner will be subject to personal liability for liabilities of the Fund by reason of his being a limited partner except as set forth in the Prospectus and the Statement of Additional Information; (vi) This Agreement has been duly and validly authorized, executed and delivered by each of the Partnership and the General Partner and constitutes the legal, valid and binding obligation of each of them, enforceable in accordance with its terms, except (A) as rights under the exculpation and indemnification provisions thereof may be limited by applicable law, (B) as enforcement may be limited by equitable principles applicable to the granting or withholding of equitable remedies including specific performance, (C) subject to any applicable bankruptcy, insolvency or reorganization or other law generally affecting the enforcement of creditors' rights from time to time in effect, and (D) except that no opinion is required to be expressed as to the enforceability of this Agreement, including the provisions relating to indemnification, in the event that the Registration Statement, the Prospectus or the Statement of Additional Information contains a material untrue statement or omission; (vii) The offer and sale of the Units and the compliance by the Fund with all of the provisions of this Agreement will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Partnership Certificate or Limited Partnership Agreement, or, to the extent of such counsel's knowledge (without any independent investigation), any indenture, mortgage, deed of trust or other instrument or agreement to which the Fund is a party or by which it is bound, or any statute, order, rule or regulation applicable to the Fund of any court or other governmental authority; (viii) The Registration Statement has become effective under the 1933 Act and, to the extent of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued nor has any proceeding for the issuance of such an order been initiated or threatened; (ix) The Registration Statement, the Prospectus and the Statement of Additional Information comply as to form in all material respects with the requirements of the 1933 Act and the rules and regulations under the 1933 Act, and such counsel has no reason to believe that the Registration Statement, the Prospectus or the Statement of Additional Information contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to be stated therein to make the statements made therein, in light of the circumstances under which they were made, not misleading, except that such counsel is not required to express any opinion as to the financial statements or other financial, statistical or performance data, tables or -11- information contained in the Registration Statement, the Prospectus or the Statement of Additional Information; (x) Such counsel does not know of any pending or threatened litigation or governmental proceedings against the Fund or the General Partner required to be described in the Registration Statement which are not so described, nor of any contract or other document required to be described in or filed as an exhibit to the Registration Statement which has not been described and filed as required; (xi) The Units have been registered under the securities or blue sky laws of certain states, [naming them], and, to the extent of such counsel's knowledge, may lawfully be offered and sold to residents thereof or from places of business therein in the amounts specified and subject to such conditions and limitations as may be noted in the opinion. (d) _______________ shall have furnished the Selling Agent with their written opinion, dated the Initial Closing Date, and each subsequent date as of which subscriptions to Units are accepted, to the effect that: (i) Such counsel has no reason to believe that the Registration Statement, the Prospectus or the Statement of Additional Information contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to be stated therein to make the statements made therein, in light of the circumstances under which they were made, not misleading, except that such counsel is not required to express any opinion as to the financial statements or other financial, statistical or performance data, tables or information contained in the Registration Statement, the Prospectus or the Statement of Additional Information; and (ii) The statements in the Prospectus under the caption "Federal Income Tax Consequences" have been reviewed by such counsel and such statements are correct as to matters of law and legal conclusions and they have rendered the legal opinion referred to therein. (e) Anchin Block & Anchin LLP shall have furnished to the Selling Agent a letter, dated the Initial Closing Date, in form and substance satisfactory to the Selling Agent, to the effect that: (i) They are independent public accountants with respect to the Fund and the General Partner, within the meaning of the 1933 Act and the applicable published instructions, rules and regulations thereunder, and the answer to Item 10 of the Registration Statement as set forth under the caption "Experts" in the Prospectus is correct insofar as it relates to them; (ii) In their opinion, the financial statements of the Fund and the General Partner examined by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published instructions, rules and regulations hereunder; and -12- (iii) On the basis of limited procedures, not constituting an audit, including a reading of the latest available interim financial statements of the General Partner, consultations with officers of the General Partner responsible for financial and auditing matters, and review of such other documents as they requited, and other specified inquiries, nothing has come to their attention which would give them reason to believe that, during the period subsequent to the effective date of the Registration Statement to a specified date not more than five (5) business days prior to the date of such letter, there has been any decrease in the shareholders' equity of the General Partner or any decrease in the net assets of the General Partner (other than due to a decrease in the quoted market value for securities, if any, held by the General Partner), all as compared with the amounts shown in the balance sheet of the General Partner included in the Prospectus, or that the General Partner or the Fund have incurred any long-term liabilities, except changes, increases or decreases specified in said letter or which the Registration Statement discloses have occurred or may occur. (f) There shall have been furnished to the Fund, the General Partner, the Selling Agent and ADM Investor Services, Inc. (the "Commodity Broker") a letter from one or more firms of certified public accountants acceptable to the Fund, the General Partner, the Selling Agent and the Commodity Broker, dated the Initial Closing Date, and any subsequent date relating to an amended Registration Statement, Prospectus and Statement of Additional Information which includes performance data of the General Partner subsequent to that contained in the prior effective Registration Statement, Prospectus and Statement of Additional Information, in form and substance satisfactory to the Fund, the General Partner, the Selling Agent and the Commodity Broker and their respective counsel, with respect to the General Partner to the effect that: (i) They are independent public accountants with respect to the General Partner; and (ii) They have applied certain agreed upon, limited procedures with respect to the information contained in the tables (including tables relating to "pro forma" brokerage and management and incentive fee / allocation amounts) under the caption "The General Partner / Advisor - Past Performance" in the Prospectus (the "Tables") relating to the General Partner, and that, in connection with such procedures, no facts came to their attention to cause them to believe that the information set forth therein does not represent in all material respects the past performance and the composite past performance of accounts managed by the General Partner and their respective predecessors, affiliates and principals for the periods indicated. It is understood that the letter referred to in this subsection (e) is solely for the information of, and assistance to, the Fund, the General Partner, the Selling Agent and the Commodity Broker in conducting and documenting their investigation of the affairs of the General Partner and for the presentation of its past performance histories in the Prospectus and the Statement of Additional Information, and it is not to be used, circulated, quoted or otherwise referred to for any other purpose, including but not limited to, the registration, purchase or transfer of Units, nor is it to be referred to in whole or in part in the Registration Statement (other than in this Agreement which will be included as an exhibit to the Registration Statement). -13- (g) All documents required to be delivered to the Selling Agent by the General Partner on the Initial Closing Date, or any subsequent date, have been delivered in form and substance satisfactory to the Selling Agent and its counsel. 7. Termination. (a) If at least 1,000 Units have not been sold to the public prior to the conclusion of the Initial Offering Period specified in Section 3(a), above, this Agreement shall be terminated at the Initial Closing Date (as hereinafter defined in Section 7(d)). Otherwise this Agreement shall be terminated at the Final Closing Date (as hereinafter defined in Section 7(d)). (b) Until such time as this Agreement shall terminate pursuant to subsection (a), above, this Agreement may be terminated by the Selling Agent, at the Selling Agent's option, by giving notice to the Fund and the General Partner, if: (i) there shall have been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition, financial or otherwise, of the Fund or the General Partner, which change in the judgment of the Selling Agent shall render it inadvisable to proceed with the offering and sale of the Units; or (ii) any event shall occur which, in the opinion of counsel for the Selling Agent, should be set forth in the Registration Statement, the Prospectus or the Statement of Additional Information in order to make the statements therein not misleading, and the Fund does not concur and fails or refuses to amend or supplement the Registration Statement, the Prospectus or the Statement of Additional Information promptly after written request by the Selling Agent to it to do so; or (iii) any of the conditions specified in Section 6 hereof shall not have been fulfilled when and as required by this Agreement to be fulfilled; or (iv) there shall have been an outbreak of hostilities between the United States and any foreign sovereign, or there shall have occurred any insurrection or other armed conflict involving the United States which, in the opinion of the Selling Agent, makes it impractical or inadvisable to offer or sell the Units. (c) In addition to subsection 7(b), above, this Agreement may be terminated by written agreement between the Selling Agent and the General Partner or the Fund. The termination of this Agreement for any reason set forth in this Section 7 shall not affect the obligations of the Fund contained in Section 5 hereof. (d) The "Initial Closing Date" shall be a date selected by the Selling Agent (by written or telegraphic notice to the General Partner) not less than five (5) and not more than ten (10) business days following the termination of the Initial Offering Period referred to in Section 3(a), above. The initial closing shall be held on the date set forth in the notice. Subsequent Closing Dates shall be determined by agreement between the Selling Agent and the General Partner. Each closing shall be held at 10:00 a.m. at the offices of Kurzman Karelsen & Frank, LLP, 230 Park Avenue, New York, NY 10169, or at the option of the Fund, at the offices of the General Partner, 70 West Red Oak Lane, White Plains, NY 10604. -14- 8. Indemnification. (a) The Fund agrees to indemnify and hold harmless the Selling Agent and the selected dealers and their respective officers, directors, employees, affiliates and each person who controls the Selling Agent and the selected dealers from and against any loss, claim, damage, cost, expense (including, without limitation, attorneys' and accountants' fees and disbursements), judgments and liabilities (including, without limitation, civil liabilities under the 1933 Act or any applicable state securities law) (collectively "Loss") which arises out of or results from the inclusion in the Registration Statement, the Prospectus or the Statement of Additional Information of an untrue statement of a material fact or the omission to state therein a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, and will reimburse any and all persons indemnified herein for any legal or other expenses reasonably incurred by them in connection with investigating or defending any actions or claims in respect thereof; provided, however, that no such indemnification or reimbursement shall be made with respect to the Selling Agent or its officers, directors, employees, affiliates or controlling persons for any Loss which results from any violation by the General Partner or its respective affiliates of the 1933 Act or any applicable state securities law in connection with the Registration Statement or the sale of the Units or any untrue statement or omission of any information or material facts in the Registration Statement or the Prospectus relating to or concerning the Selling Agent. (b) The Selling Agent agrees to indemnify and hold harmless the Fund, the General Partner and their respective officers, directors, employees, affiliates, partners and controlling persons against any Loss incurred by them which arises out of or results from the Selling Agent's failure to deliver the Prospectus, or any amendment or supplement thereto, as required by the 1933 Act and the rules and regulations thereunder, or the inclusion in the Registration Statement, the Prospectus or the Statement of Additional Information of an untrue statement of a material fact relating to the Selling Agent or the omission to state a material fact relating to the Selling Agent required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. (c) Promptly after receipt by an indemnified party under subsection (a), above, of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party or parties under such subsection, notify the indemnifying party or parties in writing of the commencement thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and to assume the defense thereof, with counsel satisfactory to such indemnified party (which shall include, in the event of conflicts of interest between such indemnified party and other defendants and/or the availability to such indemnified party of defenses which are not available to other defendants, separate counsel for such indemnified party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, other than reasonable costs of investigation requested by the indemnifying party, subsequently incurred by such indemnified party in connection with the defense thereof. 9. Miscellaneous. (a) All representations, warranties and agreements contained in this Agreement shall be deemed restated as of each dated subsequent to the Initial Closing Date as of which subscriptions to Units are accepted and shall remain operative and in full force and effect regardless of {a) any investigations made by or on behalf of the Selling Agent, the Fund or the General Partner, {b) the delivery of any payment for the Units, or (c) the termination of this Agreement. (b) This Agreement is made solely for the benefit of, and shall be binding upon, the Selling Agent, the Fund and the General Partner and their respective successors and assigns, and no other person -15- shall have any right or obligation under this Agreement. The terms "successors" and "assigns" shall not include any purchasers, as such, of Units. (c) Whenever notice is required by the provisions of this Agreement to be given, such notice shall be effective only if in writing and delivered personally or by registered mail, postage prepaid, return receipt requested, addressed as follows: If to the Selling Agent, to it at: Berthel Fisher & Company Financial Services, Inc. P.O. Box 74250 Cedar Rapids, IA 52407-4250 Attention: _______________ If to the General Partner or the Fund, to it at: Shaffer Asset Management, Inc. 70 West Red Oak Lane White Plains, NY 10604 Attention: Daniel S. Shaffer (d) The Selling Agent and the Selected Dealers sellers are not authorized by the Fund to give any information or make any representation in connection with the offering of Units other than those contained in the Prospectus, the Statement of Additional Information and such sales literature as has been authorized in writing by the Fund. (e) This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without giving effect to the principles of conflict of laws. Very truly yours, SHAFFER DIVERSIFIED FUND, L.P. By: Shaffer Asset Management, Inc., the General Partner By:___________________________ Daniel S. Shaffer President SHAFFER ASSET MANAGEMENT, INC. By:_______________________________ Daniel S. Shaffer President Accepted and agreed to as of the date first written above: BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. By: ______________________________ Name: Title: EX-1.2 3 0003.txt FORM OF SELECTED DEALERS AGREEMENT Exhibit 1.2 Form of Selected Dealers Agreement [Letterhead of Berthel Fisher& Company Financial Services Inc. ___________ , 2001 To: The Selected Dealer _________________________ _________________________ _________________________ Shaffer Diversified Fund, L.P. Gentlemen: Shaffer Diversified Fund, L.P., a Delaware limited partnership (the "Fund"), proposes to offer and sell to the public a minimum of 1,000 and a maximum of 25,000 units of limited partnership interest of the Fund ("Units") upon the terms and subject to the conditions set forth in (i) the selling agent agreement dated as of __________, 2001 (the "Selling Agent Agreement") entered into among Shaffer Asset Management, Inc., the general partner of the Fund (the "General Partner"), the Fund and Berthel Fisher & Company Financial Services, Inc. (the "Selling Agent") and (ii) the Registration Statement, Prospectus and Statement of Additional Information of the Fund (as defined in Section 1(a) of the Selling Agent Agreement). Pursuant to the terms of the Selling Agent Agreement, the Selling Agent has agreed to use its best efforts to obtain subscribers for the Units. The Fund has agreed that the Selling Agent may, in its discretion, use the services of other members of the National Association of Securities Dealers, Inc. (the "NASD") and any foreign broker/dealer or institution which is not eligible for membership in the NASD but which agrees to abide by the NASD's Rules of Fair Practice (hereinafter collectively referred to as "Selected Dealers") in connection with the offer and sale of the Units. You are invited to become one of the Selected Dealers and to use your best efforts to obtain subscribers for the Units in accordance with the Selling Agent Agreement and the terms and conditions contained herein. 1. Solicitation and Solicitation Material. Solicitation and other activities by Selected Dealers hereunder shall be undertaken only in accordance with applicable laws and regulations and the terms hereof. Each person desiring to purchase Units will be required to complete and execute a Subscription Agreement / Power of Attorney as described in the Prospectus and Statement of Additional Information and to return such Subscription Agreement / Power of Attorney, together with a check made payable to "Shaffer Diversified Fund, L.P. Escrow Account No. __________" in an amount equal to $1,000 per Unit ($950 per Unit, plus an initial sales charge of $50 per Unit) multiplied by the number of Units subscribed for prior to the Initial Closing Date (as defined in Section 7(d) of the Selling Agent Agreement). After the Initial Closing Date, checks should be made payable to "Shaffer Diversified Fund, L.P." in the amount of the desired subscription, plus a sales charge of five percent (5%) of the desired subscription. The appropriate number of Units will be issued at a purchase price per Unit equal to the then current Net Asset Value per Unit (as defined in the Prospectus and Statement of Additional Information). You shall ascertain that each such Subscription Agreement / Power of Attorney has been completed and executed by such prospective purchaser and shall then mail or deliver such Subscription Agreements / Powers of Attorney, together with the checks and such other documents as may be required by the Selling Agent or under any Federal or state securities law, to the Selling Agent at 701 Tama Street, Building B, P.O. Box 609, Marion, IA 52302-0609, to the attention of Diane M. Anderson, by noon of the next business day following your receipt of such Subscription Agreement / Power of Attorney and check. The Selling Agent will arrange for the opening of a customer account with you, for each subscriber of Units you procure that is accepted by the General Partner, for the purpose, among other things, of crediting interest thereon, redeeming Units with respect thereto, and receiving distributions thereon. If the subscription for Units is not accepted, the subscriber's monies will be returned directly to the subscriber, without interest, and notice will be given to you of such rejection. Accompanying this letter is a copy of the Prospectus and Statement of Additional Information. Additional copies of the Prospectus and Statement of Additional Information are being sent to you under separate cover and further additional copies will be sent to you in reasonable quantities upon your request. Public advertisement of the offering shall be made by the Selling Agent on such date(s), if any, as it shall determine. No Selected Dealer is authorized to publish or circulate any advertising or solicitation material ("Sales Literature") other than the Prospectus and Statement of Additional Information without the prior written consent of the Fund and the Selling Agent, and any such advertising made by a Selected Dealer pursuant to such written consent shall be at the expense, responsibility and risk of the Selected Dealer. You agree to maintain and produce for the Selling Agent at its request a full and complete record showing all persons to whom copies of any preliminary prospectus, Prospectus, Statement of Additional Information or Sales Literature have been delivered or mailed at any time. Upon receipt by you from time to time of notices from the Selling Agent that an amended or supplemented Prospectus or Statement of Additional Information is required to be delivered in connection with the offer and sale of the Units, you shall immediately cease making deliveries of the non-amended or non-supplemented Prospectus or Statement of Additional Information, as the case may be, and shall also cease making offers and sales of Units until such time as (i) you shall have received the consent of the Selling Agent to resume such offers and sales; and (ii) you shall have received copies of the amended or supplemented Prospectus or Statement of Additional Information , as the case may be. 2. Compensation. As compensation for your services in soliciting and obtaining purchasers of the Units, the Selling Agent agrees to pay to you a selling commission equal to _____ percent of the sales charges paid to the Selling Agent with respect to the subscriptions for Units paid for through your efforts and accepted by the General Partner; provided, however, that subscriptions for at least 1,000 Units offered by the Prospectus and Statement of Additional Information are received and accepted by the General Partner on or before sixty (60) days after the date of the Prospectus and Statement of Additional Information (subject to the right of the General Partner, in its sole discretion, to extend such offering period for up to an additional sixty (60) days) and further subject to the conditions set forth in the Prospectus and the Statement of Additional Information. Determination by the Selling Agent of the amount payable to each Selected Dealer shall be conclusive. A Selected Dealer is not entitled to any selling commissions or other compensation in any case in which it is determined by the Selling Agent that the solicitation engaged in by such Selected Dealer was made in violation of the applicable securities laws of any jurisdiction. The selling commissions payable to a -2- Selected Dealer shall be paid by the Selling Agent within seven (7) business days after both (i) the General Partner has accepted the subscription for the Units for which such commissions are payable and (ii) such subscription has been contributed to the, capital of the Fund. Acceptance of such selling commissions shall constitute a representation by you that you have complied with all of the provisions of this Agreement. You understand that the General Partner of the Fund, in its discretion, may reject any tendered subscription in whole or in part for any reason. You hereby authorize the Selling Agent to deduct from the compensation you are to receive under this Section 2 all transfer taxes, if any, paid by the Selling Agent for your account with respect to sales of Units made through your efforts. In the event that you agree to provide the continuing services to the Fund and its limited partners in the Continuing Services Agreement attached to the Registration Statement as Exhibit 1.3 (the "Continuing Services Agreement"), the Selling Agent will pay, or cause the Fund to pay, to your firm (i) 1/12 of 1.0% 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 which are held by persons who are being serviced by your firm pursuant to the terms of the Continuing Services Agreement, and (ii) 1/12 of 3.0% 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 which are held by persons who are being serviced by your firm pursuant to the terms of the Continuing Services Agreement. 3. Unauthorized Information and Representations. Neither you nor any other person is authorized by the Selling Agent, the General Partner or the Fund to give any information or make any representations in connection with this Agreement or the offering of Units other than those contained in the Prospectus and the Statement of Additional Information and in sales literature, the content, publication and circulation of which has been approved in writing by the Selling Agent and the Fund. You understand that you are not authorized to act as an agent of the Selling Agent or the Fund in any connection or transaction, and you agree not to act as such agent and not to purport to do so. 4. Blue Sky Qualification. Upon application to the Selling Agent, you will be informed of the jurisdictions in which it is believed that solicitations and sales of Units may be legally made under the applicable securities or blue sky laws, but neither the Selling Agent nor the Fund assumes any responsibility as to such legality or as to the qualification of any Selected Dealer to offer or sell Units in any jurisdiction. Solicitations are to be made only by Selected Dealers qualified to act as such for such purpose within the jurisdiction(s) in which they act. You understand and agree that under no circumstances will you engage in any activities hereunder in any state or jurisdiction unless (i) the Units have been registered or qualified for sale under the securities or blue sky laws thereof, or are exempt therefrom, and (ii) you may lawfully engage in such activities therein. -3- 5. General. In soliciting purchasers of Units, you agree to comply with any applicable requirements of the Securities Exchange Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Commodity Exchange Act, as amended (the "CE Act"), and the published rules and regulations under each of the Acts (hereinafter collectively referred to as the "Acts"), and in particular, without limiting any of the foregoing, you agree not to deliver any Sales Literature to any person unless preceded or accompanied by a Prospectus and Statement of Additional Information. You also confirm that you are familiar with the Statement of Policy of the North American Securities Administrators Association, Inc., adopted on September 21, 1983 (effective January 1, 1984), as amended and adopted on August 30, 1990, establishing guidelines for the registration of commodity pool programs, and you agree to observe the requirements of such Statement of Policy, or of any regulatory provisions comparable thereto, with respect to offers and sales of Units in any jurisdictions in which such Statement of Policy or comparable provisions have been adopted or are in effect to the extent that the Prospectus and Statement of Additional Information are not inconsistent with such Statement of Policy and comparable provisions. 6. Termination. This Agreement may be terminated by either party upon written or telegraphic notice to the other and in any case it will terminate upon termination of the Selling Agent Agreement; provided, however, that all selling commissions and other compensation payable to you under the terms and conditions hereof shall be paid when due although this Agreement shall have theretofore been terminated. Upon termination of this Agreement, all authorizations, rights and obligations hereunder shall cease except for the indemnification obligations set forth in Section 9 hereof, and the obligations to settle accounts hereunder. 7. Liability of the Selling Agent. Nothing herein contained shall constitute the Selected Dealers, inter se, or any of the Selected Dealers and the Selling Agent an association, partnership, unincorporated business, joint venture or any other separate entity. The Selling Agent shall be under no liability to make any payment to you except as provided in Section 2 hereof. The Selling Agent shall not be under any liability for or in respect of the value or validity of the Units, the performance by any other person of any agreement on its part, or for or in respect of any matter connected with this Agreement, except for lack of good faith and for obligations expressly assumed by the Selling Agent under the terms of this Agreement. You agree to pay your proportionate share of any amount asserted against and discharged by the Selling Agent or the Selected Dealers, or any of them, based upon the claim that the Selling Agent and the Selected Dealers constitute an association, partnership, unincorporated business, joint venture or any other separate entity, including any expense incurred in defending against any and all such claims. 8. Representations and Warranties. (a) You represent and warrant that (i) if you are located within the United States, you are a member in good standing of the NASD, and if you are not located within the United States, you will conform to the rules of the NASD contained in its Rules of Fair Practice in connection with all offers and sales of Units; (ii) your registered representatives who offer and sell Units are duly registered representatives of your firm; (iii) you have examined the Registration Statement and the Prospectus as amended to date and are familiar with the terms of the offering of the Units; (iv) you are willing to accept the responsibilities of a Selected Dealer under the Acts; (v) you are willing to proceed with the offering of the Units in the manner contemplated in the Registration Statement, the Prospectus, the Statement of Additional Information, the Selling Agent Agreement and this Agreement; and (vi) your commitment to use your best efforts to find purchasers for Units will not result in a violation of the 1934 -4- Act or any rule or regulation thereunder, or of any rules of any securities or commodity exchange to which the Selling Agent or the Fund is subject, or of any restriction imposed upon the Selling Agent or the Fund by any such exchange or governmental authority. (b) You further represent and warrant that, in recommending to a participant the purchase, sale or exchange of Units, you shall: (i) have reasonable grounds to believe, on the basis of information obtained from the purchaser concerning his investment objectives, his other investments, his financial situation and needs, and any other information known by you, that: (A) the purchaser is or will be in a financial position appropriate to enable him to realize, to a significant extent, the benefits described in the Prospectus and the Statement of Additional Information; (B) the purchaser has a fair market net worth sufficient to sustain the risks inherent in an investment in the Fund, including the loss of his entire investment and the lack of liquidity; and (C) investment in the Fund is otherwise suitable for the participant; and (ii) maintain in your files documents disclosing the basis upon which the determination of suitability was reached as to each purchaser. (c) Notwithstanding the provisions of Section 8(b)(i)(B) hereof, you shall not execute any transaction without prior written approval of the transaction by the purchaser. (d) You shall have reasonable grounds to believe, based on information made available to you by the General Partner through the Prospectus, the Statement of Additional Information or other materials, that all material facts relating to an investment in the Fund are adequately and accurately disclosed and provide a basis for evaluating the investment. (e) In determining the adequacy of disclosed facts pursuant to Section 8(b)(i)(D) hereof, you shall obtain information on material facts relating, at a minimum, to (i) the items of compensation to be paid by the Fund; (ii) the tax aspects of an investment in the Fund; (iii) the financial stability and experience of the sponsors of the Fund; (iv) the conflicts of interest and risk factors inherent in an investment in the Fund; and (v) other pertinent reports, including financial statements. (f) For purposes of Sections 8(b)(i)(D) and (E) hereof, you may rely upon the results of an inquiry conducted by another member or members of the NASD, provided that (i) you have reasonable grounds to believe that such inquiry was conducted with due care; (ii) the results of the inquiry were provided to you with the consent of the member or members conducting or directing the inquiry; and (iii) no member that participated in the inquiry is a sponsor of the Fund or an affiliate of such sponsor. (g) Prior to executing a purchase transaction for Units, you shall inform the prospective purchaser of all pertinent facts relating to the liquidity and marketability of the Units during the term of the investment. -5- 9. Indemnity. You agree to indemnify and hold harmless the Fund, the General Partner, the Selling Agent, and their respective shareholders, directors, officers, employees and affiliates and each person, if any, who controls the Fund, the General Partner or the Selling Agent within the meaning of the 1933 Act against any and all losses, claims, damages, liabilities, costs and expenses (including, without limitation, costs of investigation and attorneys' fees and disbursements) arising directly or indirectly out of or based directly or indirectly upon (i) your failure to send or deliver a copy of the Prospectus or Statement of Additional Information (or any correcting amendment or supplement thereto of the kind described in Section 1 hereof) furnished to you by the Selling Agent, the Fund or the General Partner to any purchaser of Units at the time of or prior to the written confirmation of the sale of Units to such purchaser or your failure to send or deliver to any purchaser, at the time of or prior to the written confirmation of the sale of Units to such purchaser, any correcting amendment or supplement to the Prospectus or Statement of Additional Information of which you were informed as to the necessity of such delivery in accordance with said Section 1, and (ii) any violation by you of any of the Acts or any state "blue sky" laws. Without limitation, any loss of the Selling Agent's right of indemnification under Section 8 of the Selling Agent Agreement shall be deemed a loss indemnified against by you under this Section 9. The indemnification agreements in this Section 9 shall be in addition to any liability that you may otherwise have. Nothing contained in this Section 9 or elsewhere in this Agreement shall be construed as an admission that you are an "underwriter" of the Units within the meaning of the 1933 Act. 10. Miscellaneous. (a) 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. (b) 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. (c) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, addressed to the respective parties hereto at the following addresses: Party: Address: The Selling Agent __________________________________ __________________________________ Attention: _______________________ The Selected Dealer At the address specified by such Additional Seller in the Confirmation of Acceptance Any party may by notice change the address to which notices or other communications to such party are to be delivered or mailed. (d) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (e) Arbitration. Any controversy or claim arising out of, resulting from or relating to this Agreement shall be settled exclusively by arbitration conducted in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association (or organization which is -6- the successor thereto). The parties hereto agree that service of process or notice of motion or other application in connection with any arbitration may be served by the means by which notices are to be given under this Agreement, provided that a reasonable time for appearance is allowed. Any award in such arbitration may be enforced on application of either party by the order or judgment of any Federal or state court in the State of New York as the party making such application shall elect, having jurisdiction over the subject matter thereof. Each of the parties hereto hereby submits itself to the jurisdiction of any such court and agree that service of process on it in any action, suit or proceeding to enforce any such award may be effected by the means by which notices are to be given to it under this Agreement. The fees and expenses of any arbitration shall be borne by the parties equally, but each party shall bear the expenses of its own attorneys and experts and the additional expenses of presenting its own proof. (f) 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. (g) Assignability. This Agreement shall not be assignable by either party hereto without the prior written consent of the other party hereto, and any purported assignment by any party without such consent shall be void. (h) Third Party Rights. Notwithstanding any other provision of this Agreement, this Agreement shall not create benefits on behalf of any third party (other than those third parties referred to in Section 9 hereof), and this Agreement shall be effective only as between the parties hereto, the third parties referred to in Section 9 hereof and their respective successors, heirs and permitted assigns. (i) Amendments and Waivers. Any term or provision of this Agreement may be waived at any time by the party which is entitled to the benefits thereof, and any term or provision of this Agreement may be amended or supplemented at any time by the mutual consent of the parties hereto, except that any waiver of any term or condition, or any amendment or supplementation, of this Agreement shall be effective only if in writing and, in the case of any waiver by the Corporation and any amendment or supplementation to which the Corporation consents, if approved by resolution of a majority of the disinterested members of the Board of Directors of the Corporation. 11. Confirmation. Please confirm your agreement to become one of the Selected Dealers under the terms and conditions set forth herein by signing the Confirmation of Acceptance attached hereto and made a part hereof and returning this letter to the Selling Agent. The enclosed duplicate of this letter is for your files. Very truly yours, BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. By:______________________________ Name: Title: -7- Confirmation of Acceptance The undersigned hereby confirms its acceptance of the terms and conditions of the foregoing Selected Dealers Agreement. The undersigned understands that no selling commissions will be payable to it for sales of Units by it except as expressly set forth in Section 2 of said agreement. The undersigned hereby acknowledges receipt of the Prospectus and Statement of Additional Information referred to in the foregoing Selected Dealers Agreement and confirms that in executing this Confirmation of Acceptance it has relied solely upon such Prospectus and Statement of Additional Information and upon no other statements or representations whatsoever, written or oral. Dated:_______________, 2001 ______________________________ Name of Firm By:___________________________ Name: Title: ______________________________ Street Address ______________________________ City, State, Zip Code -8- EX-1.3 4 0004.txt FORM OF CONTINUING SERVICES AGREEMENT Exhibit 1.3 Form of Continuing Services Agreement [Letterhead of Berthel Fisher & Company Financial Services, Inc.] _____________, 200_ ______________________ ______________________ ______________________ Re: Continuing Services Agreement for Investors In The Shaffer Diversified Fund, L.P. Dear ______________: This is to reflect our agreement pursuant to which you will provide continuing services to the limited partners (the "Limited Partners") of Shaffer Diversified Fund, L.P. (the "Fund") with whom you have a relationship (i.e., those limited partners to whom units of limited partnership interest of the Fund ("Units") were sold through your firm). These continuing services include, without limitation, (i) keeping the Limited Partners apprised of developments affecting the Fund, (ii) responding to specific inquiries received from Limited Partners relating to the Fund and the futures markets, (iii) communicating current valuations of the Fund's Net Asset Value per Unit (as defined in the Amended and Restated Agreement of Limited Partnership of the Fund, as amended) to the Limited Partners, (iv) assisting in redemptions, transfers and distributions, (v) assisting Limited Partners in interpreting the Fund's monthly and annual reports, financial statements and the tax information provided to Limited Partners, and (vi) providing such other services as the Limited Partners from time to time may reasonably request. In consideration of your firm providing such services, the undersigned, Berthel Fisher & Company Financial Services, Inc. (the "Selling Agent") will pay, or cause the Fund to pay, to your firm (i) 1/12 of 1.0% 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 which are held by persons who are being serviced by your firm pursuant to the terms of this agreement, and (ii) 1/12 of 3.0% 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 which are held by persons who are being serviced by your firm pursuant to the terms of this agreement. You further agree to assign particular account executives of your firm to provide these services to particular Limited Partners. In the event that a particular account executive of yours who is responsible for providing these services to a particular Limited Partner leaves the employ of your firm, you will assign another account executive to such duties unless the Limited Partner involved transfers his account from your firm to a different firm. You understand that according to the position presently being taken by the National Association of Securities Dealers, Inc. ("NASD"), we and the Fund are permitted to pay the compensation herein contemplated only to, or for the benefit of, persons who are appropriately registered with the Commodity Futures Trading Commission ("CFTC") and/or the National Futures Association ("NFA"). Acceptance of compensation hereunder shall constitute a representation by you to us and the Fund that, unless the Fund informs you that CFTC/NFA registration is no longer required, your firm and any account executives who participate in the continuing compensation are currently registered, as required, with the CFTC/NFA, and you agree to comply with the provisions contained in this letter for so long as you continue to receive any compensation hereunder. You shall not be entitled to such compensation with respect to any Limited Partners who are no longer being serviced by your firm in any case in which it is determined by us or the Fund that the continuing services contemplated herein are not being provided or in the event that the required registrations are not in effect. Please confirm your agreement to the above terms and conditions by signing the Confirmation of Acceptance below and returning this letter to us. The enclosed duplicate of this letter is for your files. Very truly yours, BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. By: ______________________________ Name: Title: -2- Confirmation of Acceptance We hereby confirm that we are appropriately registered with the CFTC/NFA and accept the terms and conditions of the compensation as set forth above. Dated:____________________, 200_ ______________________________ Name of Firm By:___________________________ Name: Title: ______________________________ Street Address ______________________________ City, State, Zip Code -3- EX-1.4 5 0005.txt SPECIMEN OF UNIT CERTIFICATE Exhibit 4.1 Specimen of Unit Certificate Certificate No. _____ _________ Units Certificate of Limited Partnership Interest SHAFFER DIVERSIFIED FUND, L.P. This certifies that ______________________________ is the record owner and holder of ______________________________ (__________) units of limited partnership interest in Shaffer Diversified Fund, L.P., a Delaware limited partnership (the "Fund"). This Certificate is issued by the Fund and accepted by the holder, subject to all of the terms and conditions contained in the Amended and Restated Agreement of Limited Partnership dated __________, 200_, as it may be amended from time to time (the "Limited Partnership Agreement"), copies of which are on file in the principal office of the Fund. Transferability of the Units represented hereby is subject to the restrictions set forth in said Limited Partnership Agreement, and no transfer of Units shall be valid or effective unless and until the terms and conditions of the Limited Partnership Agreement shall have been complied with. The limited partnership interest represented by this Certificate may not be redeemed without surrendering this Certificate to the Fund. Dated: _______________ Attest: SHAFFER DIVERSIFIED FUND, L.P. ______________________________ By: Shaffer Asset Management, Inc., Secretary Its General Partner By:_________________________ Daniel S. Shaffer President ASSIGNMENT As and for value received, the undersigned hereby transfers and assigns to ________________________________________________ ______________________________ Name of Assignee (please print) Social Security or Tax Identification Number ________________________________________________________________________________ Street Address City State Zip Code ____________________ units of limited partnership interest ("Units") in Shaffer Diversified Fund, L.P., a Delaware limited partnership (the "Fund"), represented by the within Certificate, and hereby irrevocably constitutes and appoints Shaffer Asset Management, Inc., the general partner of the Fund (the "General Partner"), as Attorney with full power of substitution, to transfer said Units on the books of the Fund. The undersigned acknowledges and understands that the foregoing transfer will not become effective unless and until approved by the General Partner. Dated:__________________ __________________________________________ Signature of Assignor (exactly as shown on the face of this Certificate) ACCEPTANCE OF ASSIGNMENT The undersigned hereby accepts the assignment of units of limited partnership interest in Shaffer Diversified Fund, L.P. (the "Fund") and agrees to be bound by the provisions of the Certificate of Limited Partnership of the Fund, as amended, and the Amended and Restated Agreement of Limited Partnership of the Fund, as amended. The undersigned hereby acknowledges and understands that the foregoing transfer will not become effective unless and until approved by Shaffer Asset Management, Inc., the general partner of the Fund. Dated:__________________ ________________________________________ Signature of Assignee ________________________________________ Name of Assignee (please print) APPROVAL OF GENERAL PARTNER Shaffer Asset Management, Inc., the general partner of Shaffer Diversified Fund, L.P., a Delaware limited partnership, hereby approves the transfer of units of limited partnership interest in the Fund hereinabove set forth. Dated:__________________ SHAFFER ASSET MANAGEMENT, INC. By:_____________________________________ Daniel S. Shaffer President -2- EX-5.1 6 0006.txt FORM OF OPINION OF KURZMAN KARELSEN AND FRANK, LLP Exhibit 5.1 Form of Opinion of Kurzman Karelsen and Frank, LLP (relating to the legality of the Units) Kurzman Karelsen & Frank, LLP 230 Park Avenue New York, NY 10169 _______________, 2001 Shaffer Asset Management, Inc. General Partner of Shaffer Diversified Fund, L.P. 70 West Red Oak Lane White Plains, NY 10604 Shaffer Diversified Fund, L.P. Registration Statement on SEC Form S-1; SEC File No. 333-46550 Dear Sirs: We have acted as special counsel to Shaffer Diversified Fund, L.P., a Delaware limited partnership (the "Fund"), in connection with preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended, of a registration statement on Form S-1 (the "Registration Statement") relating to the issuance and sale of a maximum of 25,000,000 units of limited partnership interest (the "Units") in the Fund. In connection therewith, we have examined such records, documents and questions of law, and satisfied ourselves as to such matters of fact, as we have considered relevant and necessary as a basis of this opinion. For the purposes of rendering this opinion, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity and completeness of all documents submitted to us as originals, the conformity to authentic original documents of all documents submitted to us as certified, conformed or photostatic copies, and the authenticity of the originals of such latter documents. As to any facts relevant to such opinions that were not independently established, we have relied upon information and representations given to us jointly and severally by the Fund and Shaffer Asset Management, Inc., a New York corporation and the general partner of the Fund (the "General Partner"). Based on the foregoing and subject to the assumptions, limitations and qualifications set forth herein, we are of the opinion that: 1. The Fund is a limited partnership duly organized, validly existing and in good standing as such under the Revised Uniform Limited Partnership Act of the State of Delaware (the "Act"). 2. Shaffer Asset Management, Inc., a New York corporation and the general partner of the Fund (the "General Partner") has taken all corporate action required to be taken by it to authorize the issuance and sale of Units to the Subscribers (as defined below) and to authorize the admission to the Fund of the limited partners of the Fund. 3. Assuming (i) the due authorization, execution and delivery by each subscriber for Units (each, a "Subscriber; collectively, the "Subscribers") of the subscription agreement / power of attorney in substantially the form attached as Exhibit C to the Statement of Additional Information forming part of the Registration Statement (the "Statement of Additional Information"), (ii) the due acceptance by the General Partner of the admission to the Fund of the Subscribers as limited partners of the Fund, (iii) the payment by each Subscriber to the Fund of the full consideration due from it for the Units subscribed to by it, (iv) the due authorization, execution and delivery by all parties thereto of the Limited Partnership Agreement in substantially the form attached as Exhibit A to the Statement of Additional Information, (v) that the books and records of the Fund set forth all information required by the Limited Partnership Agreement and the Act, including all information with respect to all persons and entities to be admitted as partners and their contributions to the Fund, (vi) that the Subscribers, as limited partners of the Fund, do not participate in the control of the business of the Fund, and (vii) that the Units are offered and sold as described in the Registration Statement and the Limited Partnership Agreement, the Units to be issued to the Subscribers will be legally issued when sold and will represent valid limited partnership interests in the Fund, and subject to the qualifications set forth herein, will be fully paid and non-assessable limited partnership interests in the Fund. We express no opinion as to the application of the securities or blue sky laws of the various states (including the State of Delaware) to the sale of the Units. We are members of the Bar of the State of New York and we do not purport to be experts in, and do not opine with respect to, the laws of any jurisdiction other than the laws of the State of New York and the General Corporation Law of the State of Delaware. This opinion is given as of the date hereof. We assume no obligation to update or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in laws that may hereafter occur. -2- This opinion is solely for your benefit and may not be relied upon by any person or for any other purpose without the prior written consent of this firm. Without our prior written consent, you are not authorized to release or quote this letter, or any part thereof, to any third party, nor is it to be filed with any governmental agency or other person; notwithstanding the foregoing, we hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the use of our name under the heading "Experts" in the Prospectus. Sincerely, -3- EX-8.1 7 0007.txt OPINION OF MORRISON COHEN SINGER & WEINSTEIN, LLP Exhibit 8.1 Form of Opinion of Morrison Cohen Singer & Weinstein, LLP (relating to federal income tax matters) _____________, 2001 Shaffer Asset Management, Inc. 70 West Red Oak Lane White Plains, New York 10604 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have acted as your special tax counsel in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933 of Amendment No. 1 to a registration statement on Form S-1 on or about January __, 2001 (the "Registration Statement") relating to units of limited partner interest in Shaffer Diversified Fund, LP, a Delaware limited partnership (the "Partnership"). We have reviewed such data, documents, questions of law and fact and other matters as we have deemed pertinent for the purpose of this opinion, including the Registration Statement and the proposed form of Amended and Restated Agreement of Limited Partnership of the Partnership to be executed by the general partner and all limited partners (the "Limited Partnership Agreement"). We have assumed that the Registration Statement and the Limited Partnership Agreement contain an accurate and complete description of all facts and circumstances relevant to the activities of the Partnership and that the activities of the Partnership will be conducted in accordance with the terms of the Limited Partnership Agreement. Our opinions are based upon the Internal Revenue Code of 1986, as currently in effect, Treasury Regulations promulgated or proposed thereunder, and judicial decisions, all of which are subject to change either prospectively or retroactively. Any change in applicable law, or in any of the facts or circumstances described in the Registration Statement, or inaccuracies in any of the statements or assumptions on which we relied, may affect the conclusions expressed herein. We also note that the tax matters relating to the operation of the Partnership described in the Registration Statement are complex and are subject to varying interpretations. Thus, there can be no assurance that the Internal Revenue Service would not take positions in conflict with the opinions we express herein, which positions might ultimately be sustained by the courts. Based upon the foregoing, we hereby confirm our opinion expressed under the caption "Federal Income Tax Considerations" in the prospectus included within the Registration Statement that the Partnership will be treated as a partnership for federal income tax purposes in any taxable year as long as 90 percent or more of the Partnership's gross income for such year and for all prior years in which it otherwise would have been treated as a "publicly traded partnership" consists of "qualifying income" as defined in Section 7704 of the Internal Revenue Code of 1986, as amended. We also advise you that in our opinion the description set forth under the caption "Federal Income Tax Considerations" in the prospectus correctly describes, subject to the uncertainties referred to therein, the material federal income tax consequences to an individual taxpayer who is a United States resident resulting from an investment in the Partnership. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to all references to our firm including in or made a part of the Registration Statement. Very truly yours, -2- EX-10.1 8 0008.txt FORM OF CUSTOMER AGREEMENT Exhibit 10.1 Form of Customer Agreement To: ADM Investor Services, Inc. 141 West Jackson Blvd. Chicago, IL 60604 Gentlemen: In consideration of the acceptance by ADM Investor Services, Inc. ("ADMIS") acting as broker, of one or more accounts of the undersigned ("Customer") for the purchase or sale of commodity futures, commodity options, forward contracts, foreign exchange, physical or cash commodities, and exchange for physical ("EFP") transactions (collectively "contracts") it is agreed as follows: 1. Customer acknowledges the following: (a) The purchase and sale of commodity futures contracts, exchange-traded and dealer options (commodity options) is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits or of the entire option cost. Customer understands that because of the law margin normally required in commodity futures trading, price changes in commodity futures contracts may result in significant Customer losses, which losses may substantially exceed Customer's margin deposits and any other deposits he may make. Customer also acknowledges that he has received, has read and understands this agreement. (b) Customer authorizes ADMIS to execute such transactions for the Customer's account and exercise commodity options for Customer's account in accordance with Customer's oral or written instructions. ADMIS shall have the right to refuse to accept any orders. ADMIS shall also have the right to tape record all telephone conversations with Customer. (c) Customer understands that ADMIS or its affiliates will at times act as principal in regard to cash, forward, or foreign exchange transactions. (d) ADMIS shall not be responsible to Customer in any case for a floor brokers' inability to execute orders, or for error or negligence on the part of floor brokers who are not employees of ADMIS. Furthermore, ADMIS is not obligated to quote a price for any principal transaction. (e) The Customer acknowledges that the execution of a futures contract always anticipates making or accepting delivery. Customer hereby authorizes ADMIS to take all action deemed necessary by ADMIS in the event ADMIS takes physical delivery for Customer and Customer hereby agrees to indemnify ADMIS from all costs associated therewith. ADMIS may, in its sole discretion, liquidate any short position in Customer's account if Customer has not delivered to ADMIS certificates, receipts, or other appropriate instruments of delivery at least seven days prior to the last trading day of the futures contract. (f) Customer acknowledges the right of ADMIS to limit, without notice to Customer, the number of open positions which Customer may maintain or acquire through ADMIS. 2. Customer shall deposit with ADMIS (1) the applicable initial and maintenance requirements; pay interest, commission charges in effect from time to time (which commissions may be shared by more than one of Customer's agents) and other costs to ADMIS occasioned by carrying the account of the Customer; (2) deposit the amount of any deficit balance that may result from transactions executed by ADMIS for Customer's account, and (3) pay the interest and service charges on any Customer deficit balances at the rates customarily charged by ADMIS together with ADMIS's cost and attorneys' fees incurred in collecting any such deficit or defending claims brought by Customer in which ADMIS is the prevailing party. 3. Customer understands and acknowledges that ADMIS acts as agent for all transactions which are executed on commodity futures exchanges and among other requirements, is financially liable to the exchange clearing houses of which it is a member and to the clearing members through which it clears transactions on exchanges of which it is not a clearing member, for deficit balances occurring in the Customer's accounts; because of this, ADMIS is the guarantor of the financial responsibility of the Customer. Therefore, Customer agrees to hold ADMIS harmless with respect to any and all losses sustained by ADMIS resulting from deficit balances which may occur in the Customer's account. 4. Customer shall, without notice or demand from ADMIS, at all times, maintain adequate margins, so as continually to meet the margin requirements established by ADMIS. Such margin requirements established by ADMIS, in its sole and absolute discretion, may exceed the margin requirements set by any commodity exchange, or other regulatory authority. Customer agrees, when required, to wire transfer margins to ADMIS or any monies so required, and to furnish ADMIS with names of bank officers for immediate verification of such transfers. 5. If, at any time, Customer's account does not contain the amount of margin required by ADMIS, or by any exchange, clearing house or other regulatory authority, ADMIS may, at its sole and absolute discretion, at any time or from time to time, without notice to Customer, close out Customer's open positions in whole or in part or take any other action it deems necessary to satisfy such requirements, including, but not necessarily limited to, transferring funds form other accounts of Customer including transfers between CFTC Segregated and other accounts. Failure of ADMIS to so act in such circumstances, in whole or in part, shall not constitute a waiver of its rights so to do any time or from time to time thereafter, nor shall ADMIS be subject to any liability to Customer or its failure so to act. In addition, ADMIS has the right but not the obligation, to liquidate the account(s) upon receipt of notice of the death of Customer (if applicable). 6. All monies, securities, negotiable instruments, forward contracts, foreign exchange contracts, physical or cash contracts, commodity options, open position in futures contracts and commodities, or other property now or at any future time in Customer's account, or held by ADMIS or its affiliates for Customer, are hereby pledged with ADMIS, and shall be subject to a security interest in ADMIS's favor to secure any indebtedness, at any time, owing from Customer to ADMIS without regard to whether or not ADMIS or its affiliates had made advances with respect to such property. Customer will not cause or allow any of the property held in his accounts to be subject to any other liens, security interests, mortgages or other encumbrances without the express written approval of ADMIS. 7. Customer understands that obligations arising out of transactions denominated and/or paid for in currencies other than U.S. Dollars may be converted at the discretion of ADMIS at an exchange rate -2- determined by ADMIS at its discretion based on prevailing market rates and Customer will be required to pay ADMIS in U.S. Dollars. 8. Customer acknowledges that: (1) any market recommendations and information communicated to Customer by ADMIS do not constitute an offer to sell, or the solicitation of an offer to buy any commodity, or any commodity futures contract; (2) such recommendations and information, although based upon information obtained from sources believed by ADMIS to be reliable, may be incomplete and may not be verified; and (3) ADMIS makes no representation, warranty or guarantee as to, and shall be responsible for, the accuracy or completeness of any information or trading recommendation furnished to Customer. Customer understands that ADMIS and/or its officers, directors, affiliates, stockholders or representatives may have a position or positions in and may intend to buy or sell commodities or commodity futures contracts, which are the subject of market recommendations furnished to Customer, and that the position or positions of ADMIS or any such officer, director, affiliate, stockholder, or representative may or may not be consistent with the recommendations furnished to Customer by ADMIS. 9. All transactions by ADMIS on Customer's behalf shall be subject to the applicable constitution, rules, regulations, customs, usages, rulings and interpretations of the exchanges or markets on which such transactions are executed by ADMIS or its agents for Customer's account (such as the Board of Trade of the City of Chicago, The Chicago Mercantile Exchange, and the MidAmerica Commodity Exchange and the clearing houses affiliated with each, if any) and to all applicable governmental acts and statutes (such as the Commodity Exchange Act of the Commodity Futures Trading Commission Act of 1974) and to rules and regulations mad thereunder; ADMIS shall not be liable to Customer as a result of any action taken by ADMIS, or its agents, to comply with any such constitution, rule, regulation, custom, usage, ruling, interpretation, act or statute. If Customer is subject to regulation, Customer agrees that ADMIS has no duty to ascertain or ensure that Customer is in compliance with any governing statutes or rules. 10. If, any time, Customer shall be unable to deliver to ADMIS any security, commodity or other property previously bought or sold by ADMIS on Customer's behalf, Customer authorizes ADMIS, in its discretion, to borrow or to buy any security, commodity, or other property necessary to make delivery thereof, and Customer shall pay and indemnify ADMIS for any cost, loss, and damage (including consequential costs, losses and damages) which ADMIS may sustain thereby and any premiums which ADMIS may be required to pay thereon, and for any cost, loss and damage (including consequential costs, losses and damages) which ADMIS may sustain thereby and any premiums which ADMIS may be required to pay thereon, and for any cost, loss and damage (including consequential costs, losses and damages) which ADMIS may sustain from its inability to borrow or buy any such security, commodity or other property. 11. Customer acknowledges and agrees that ADMIS shall not be responsible to Customer for any losses resulting from conduct or advice (including but not limited to errors and negligence) on the part of any broker/dealer, futures commission merchant, introducing broker, commodity trading advisor, or any other person or entity introducing Customer to ADMIS or having trading authority over the account of Customer at ADMIS. Customer specifically agrees that ADMIS shall have no obligation to supervise the activities of any such person or entity and Customer will indemnify ADMIS and hold ADMIS harmless from and against al losses, liabilities, and damages (including attorneys' fees) incurred by ADMIS as a result of any actions taken or not taken by such person or entity. 12. Customer authorizes ADMIS to contact such banks, financial institutions, credit agencies and other references as ADMIS shall deem appropriate from time to time verify the information regarding Customer which may be provided by Customer. Customer understands that an investigation may be -3- made pertaining to his personal and business credit standing and that Customer may make a written request within a reasonable period of time for complete and accurate disclosure of its nature and scope. 13. ADMIS shall not be responsible for delays in the execution of orders due to breakdown, or failure of transmission, or communication facilities, or to any other cause beyond ADMIS's control. 14. Confirmation of trades, contracts statements of account, margin calls, and any other notices sent by ADMIS to Customer shall be sent to the address shown in and to the attention of the person(s) named in the "Commodity Agreement" and they shall be conclusively deemed accurate and complete, if not objected to, in writing, prior to the opening of trading on the contract market on which such transaction occurred on the next business day following the day on which such communication was first received. The price at which an order is executed shall be binding notwithstanding the fact an erroneous report is made. An order which was executed but in error reported as not executed shall be binding. Customer shall direct all objections to ADM Investor Services, Inc., 141 West Jackson Boulevard, Suite #1600A, Chicago, Illinois 60604, Phone No. (312) 435-7000. 15. All transactions for or on Customer's behalf shall be deemed to be included in a single account whether or not such transactions are segregated on ADMIS's records into separate accounts, either severally or jointly with others, for purposes including reportable positions as required by regulatory authorities. 16. The Agreement, including all authorizations, shall insure to the benefit of ADMIS, its successors and assigns and shall be binding upon Customer and Customer's personal representatives, executors, trustees, administrators, agents, successors, and assigns. In the event that Customer's financial condition becomes unsatisfactory to ADMIS, in its sole discretion, or that a petition, voluntary or involuntary, in bankruptcy to reorganize, or to effect a composition or extension, is filed by or against Customer, or in the event a receiver is appointed of Customer's property or business in any proceeding whatsoever, state or federal, or in the event of Customer's legal incapacity or death (and whenever the Customer consists of more than one person, then upon the occurrence or any of the aforementioned contingencies to any of them), ADMIS may, at its sole and absolute discretion, either continue to carry or close and liquidate the account of Customer, including the covering of short positions, exercise of options or offset of forward contracts and foreign exchanges subject to no liability to the personal representatives, executors, trustee, administrators, agents, successors or assigns of Customer for the use of such discretion. 17. The rights and remedies conferred upon the parties hereto shall be cumulative, and the exercise or waiver of any thereof shall not preclude or inhibit the exercise of additional rights or remedies. 18. Customer agrees that ADMIS may, from time to time, change the account number assigned to any account covered by this Agreement, and that this Agreement shall remain in full force and effect. Customer agrees further that this account, as well as all additional accounts opened by him at ADMIS, shall be covered by this same Agreement with the exception of any new account for which a new Customer Agreement is signed. 19. All actions or proceedings arising directly, indirectly or otherwise in connection with, out of, related to, or from this Agreement or any transaction covered hereby shall be governed by the law of Illinois and may, at the discretion and election of ADMIS, be litigated in courts whose situs is within Illinois. 20. Customer represents that (1) he/she is (or, if Customer is a corporation, that each officer and director is, if Customer is a partnership, that each partner is) an adult of sound mind and is under no legal disability which would prevent him/her from trading in commodities, commodity futures contracts, -4- options contracts, forward contracts, foreign exchange or other physical or case contracts therein or entering into this Agreement; (2) he/she is (or its officers and directors or its partners are) authorized to enter into this Agreement. Name (Print)____________________________ Name (Print)________________________ Name (Signature)________________________ Name (Signature)____________________ Customer/Officer/Partner Customer/Officer/Partner Date___________________ Date___________________ -5- EX-10.2 9 0009.txt FORM OF ADVISORY AGREEMENT Exhibit 10.2 Form of Advisory Agreement ADVISORY AGREEMENT dated as of _______________, 2000 (this "Agreement") by and between SHAFFER DIVERSIFIED FUND, L.P., a Delaware limited partnership having an address c/o Shaffer Asset Management, Inc., 70 West Red Oak Lane, White Plains, NY 10604 (the "Fund"), and SHAFFER ASSET MANAGEMENT, INC., a New York corporation having an address at 70 West Red Oak Lane, White Plains, NY 10604 (the "Advisor"). W I T N E S S E T H: WHEREAS, Shaffer Asset Management, Inc., a New York corporation having an address at 70 West Red Oak Lane, White Plains, NY 10604 (the "General Partner"), is the general partner of the Fund; WHEREAS, the Fund was organized for the purpose of engaging in, among other things, the business of speculatively trading in commodities, commodity futures contracts (including, without limitation, futures contracts on United States Treasury Bills and other financial instruments), other commodity interests, any other items that are presently, or may hereafter become, the subject of futures trading (hereinafter collectively referred to as "Commodity Interests"); WHEREAS, the General Partner is required to utilize the services of professional commodity trading advisor(s) in connection with the Fund's Commodity Interest trading activities pursuant to the terms of the Amended and Restated Agreement of Limited Partnership governing the Fund, a copy of which is attached to the Statement of Additional Information (as hereinafter defined) that accompanies the Prospectus (as hereinafter defined) as Exhibit A (the "Limited Partnership Agreement"); WHEREAS, the Fund proposes to make a public offering (the "Offering") of a minimum of one million (1,000,000) and a maximum of twenty five million (25,000,000) units of limited partnership interest ("Units") through Berthel Fisher & Company Financial Services, Inc., and may engage in an offering of additional Units thereafter; WHEREAS, in connection with such Offering, the Fund has filed with the Securities and Exchange Commission (the "SEC"), pursuant to the Securities Act of 1933, as amended (the "1933 Act"), a registration statement on Form S-1 (File No. 333-46550), and as a part thereof a prospectus and statement of additional information, which registration statement, together with all amendments thereto, shall be referred to herein as the "Registration Statement"; which prospectus, when included as a part of the Registration Statement, together with all amendments and supplements thereto in the forms filed with the SEC pursuant to Rule 424 under the Act, shall be referred to herein as the "Prospectus; and which statement of additional information, when included as a part of the Registration Statement, together with all amendments and supplements thereto in the forms filed with the SEC pursuant to Rule 424 under the Act, shall be referred to herein as the "Statement of Additional Information; WHEREAS, the Advisor is registered as a commodity trading advisor with the Commodity Futures Trading Commission (the "CFTC") and is a member of the National Futures Association (the "NFA"); WHEREAS, the Advisor's present business is making trading decisions and recommendations on behalf of itself, its affiliates and other investors in the purchase and sale of Commodity Interests; and WHEREAS, the Fund and the Advisor wish to enter into this Agreement in order to set forth the terms and conditions upon which the Advisor will render and implement trading advisory services in connection with the conduct by the Fund of its trading in Commodity Interests during the term of this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Duties of the Advisor. (a) During the term and on the terms and conditions of this Agreement, the Advisor shall have sole authority and responsibility for managing the Fund's Commodity Interests trading account and for directing the investment and reinvestment of the assets and funds of the Fund, except that if the Advisor if legally unable to perform its functions hereunder or if some emergency should arise as a result of which the Advisor is unable or becomes unwilling to perform under this Agreement, the Fund may procure the services of another trading advisor to manage the investment and reinvestment of such assets and funds until such time as the Advisor is able or willing to resume its management responsibilities hereunder. (b) The Advisor will determine the investments on behalf of the Fund in accordance with the trading policies set forth in the Prospectus and the Statement of Additional Information under the caption "Trading Policies" (the "Trading Policies"). The Advisor will exercise its good faith (best efforts) judgment in determining the trades in Commodity Interests which are to be made on behalf of the Fund in accordance with such Trading Policies and, to the extent that the Advisor is notified in writing thereof, and agrees in writing thereto, in accordance with revisions of such policies, from time to time, by the Fund. The Advisor is not, however, obligated to trade any fixed portion of the Fund's assets under the Advisor's management, and there may be times when, under the Advisor's trading system, no open positions will be maintained. (c) The Advisor also agrees to give the Fund prior written notice of any proposed material change in its trading strategies, systems and methods as described in the Prospectus and Statement of Additional Information under the caption "Trading Philosophy and Methods of the Advisor" (the "Trading Strategies"), and agrees not to make any material change in such Trading Strategies (as they are applied to trading for the Fund) without the prior express written approval of the Fund, it being understood that the Advisor shall be free to institute non-material changes in its Trading Strategies (as they are applied to trading for the Fund) without such prior written approval- Neither refinements of its Trading Strategies nor any change in the number or type of Commodity Interests traded in the Fund's portfolio within the limits imposed by the Fund's trading policies shall be deemed a material change in Trading Strategies, and prior approval of the Fund shall not be required therefor provided, however, that the Advisor will not render advice to the Fund with respect to trading in securities or in any futures contracts or options relating thereto if trading therein would require the Fund to register under the Investment Company Act of 1940, as amended, and/or would require the Advisor to register under the Investment Advisers Act of 1940, as amended, unless counsel to the Fund has advised the Fund to the effect that such acts are not applicable to such trading. (d) All purchases and sales of Commodity Interests shall be for the account of and at the risk of the Fund and neither the Advisor nor any of its directors, officers, shareholders, employees or affiliates shall in any way be personally liable in connection with any orders for such purchases and sales except as otherwise expressly set forth in this Agreement. All brokerage commissions arising from the trading of the Fund's account shall be charged to the Fund's account. (e) The Advisor agrees to make all necessary disclosures regarding itself, its principals, employees and affiliates, its trading performance and Trading Strategies, its customer accounts and otherwise as are required in the judgment of the Fund to be made in the Registration Statement, -2- Prospectus and Statement of Additional Information and such state applications and other filings as may be required by federal or state law. (f) Nothing herein contained shall be deemed to require the Fund to take any action contrary to its Certificate of Limited Partnership, the Limited Partnership Agreement or any applicable statute, regulation or exchange or self-regulatory organization rule. (g) Notwithstanding the foregoing, the Fund (or the General Partner on its behalf) may withdraw the Registration Statement or terminate the registration of the Units at any time. Upon any such withdrawal or termination, or if the Registration Statement shall not have become effective on or before __________, or if the minimum number of Units offered by the Prospectus and Statement of Additional Information, as amended or supplemented, is not sold and accepted by the General Partner during the initial offering period of up to sixty (60) days from the date of the Prospectus and Statement of Additional Information (subject to a possible extension for up to an additional sixty (60) days at the discretion of the General Partner), this Agreement shall terminate. In such event, the Fund shall not have any obligation to the Advisor with respect to this Agreement; nor shall the Advisor have any obligation to the Fund with respect to this Agreement. (h) No assurance is given and no representation is made that the Advisor's trading advice will result in profitable trades or that losses will not be incurred or that the Fund will achieve capital appreciation. 2. Independence of the Advisor. For all purposes herein, the Advisor shall be deemed to be an independent contractor. Except as otherwise expressly provided or authorized herein, the Advisor, in its capacity as the Advisor to the Fund, shall have no authority to act for or represent the Fund in any way and shall not be deemed to be an agent of the Fund. 3. Commodity Brokers. All Commodity Interests traded for the account of the Fund shall be made through such commodity broker or brokers as the Fund directs. The Advisor shall have no authority or responsibility in selecting or supervising any broker for the execution of trades of the Fund or for negotiating the commission rates to be charged therefor. At the present time, it is contemplated that the Fund will execute all trades through ADM Investor Services, a CFTC-registered futures commission merchant. 4. Management Fees / Incentive Allocations. (a) In consideration of and in compensation for the performance of its services under this Agreement, the Advisor shall receive from the Fund (i) a monthly management fee calculated at the rate of 1/12 of 3.75% of the Net Asset Value per Unit (as defined in the Limited Partnership Agreement) of the Fund's assets under the Advisor's 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 of the Fund's assets under the Advisor's management at month's end with respect to Units purchased more than twelve months prior thereto, and (ii) a quarterly incentive allocation equal to fifteen percent (15%) of the Fund's Advisory Profits (as hereinafter defined), if any, achieved each calendar quarter which are derived from trades initiated by the Advisor for the Fund's account. In determining the monthly management fee for any month, Net Asset Value per Unit shall not be reduced to reflect any (i) distributions, redemptions or reallocations of assets payable or effected as of such date, (ii) management fees accrued or payable as of such date, or (iii) incentive allocations accrued or allocable as of such date. (b) Advisory Profits (for purposes of calculating the Advisor's incentive allocation only) during a calendar quarter shall mean (i) the net of profits and losses resulting from all Commodity Interest trades initiated by the Advisor for the Fund's account which are closed out during such quarter, plus (ii) -3- the net of any profits and losses on Commodity Interest trades initiated by the Advisor for the Fund's account which are open as of the end of such quarter (after deduction for accrued round-turn brokerage commissions), minus (iii) the net of any profits and losses carried forward on open Commodity Interest trades initialed by the Advisor for the Fund's account from the preceding calendar quarter (after deduction for accrued round-turn brokerage commissions), minus (iv) the Advisor's "Carryforward Loss" (as defined in the following sentence), if any, as of the beginning of such calendar quarter. If the total of items (i) to (iv), above, is negative at the end of a calendar quarter, such amount (reduced by the trading loss attributable to distributions, redeemed Units and reallocations of assets away from the Advisor, if any) shall be the Advisor's "Carryforward Loss" for the next calendar quarter. (c) If any incentive allocation shall have been allocated by the Fund to the Advisor during any calendar quarter and the Advisor shall, during any following calendar quarter, incur an Advisory Loss for such quarter, the Advisor shall be nevertheless entitled to retain such amounts previously allocated by the Fund. "Advisory Loss" for these purposes is defined as the opposite of Advisory Profits, as hereinabove defined, measured for the preceding calendar quarter. (d) Payment of the monthly management fee shall be made on or about the first day of the month following the end of the month to which it relates, and in any event within fifteen (15) days of the end of each month; allocation of the quarterly incentive allocation shall be made on or about the first day of the quarter following the end of the quarter to which it relates, and in any event within fifteen (15) day of the end of each quarter. In calculating the first management fee payable, the management fee shall be prorated for the number of days in the month during which the Advisor has Fund assets under its management. In the event of termination or expiration of this Agreement as of any date that is not the last day of a month, the monthly management fee shall be calculated and paid as of such date pro rata for the number of days of such month that have elapsed to the date of termination or expiration. In the event of the termination or expiration of this Agreement as of any date that is not the last day of a calendar quarter, the quarterly incentive allocation shall be calculated and paid as if the effective date of termination were at quarter end. (e) The Advisor and its shareholders, directors, officers, employees and affiliates are prohibited from receiving, directly or indirectly, any share of the brokerage commissions paid by the Fund to any commodity broker or its employees or representatives, whether in the form of rebates or otherwise. The foregoing shall not be construed to prevent a shareholder, director, officer, employee or affiliate of the Advisor from owning one percent (1%) or less of the publicly traded shares of common stock of any commodity broker receiving brokerage commissions from the Fund. 5. Term and Termination. (a) This Agreement shall commence on the date hereof and continue in effect for a term of twelve (12) months after the date on which the Fund shall commence trading in Commodity Interests (the "Initial Term"). Thereafter, the Fund shall have the option of automatically renewing this Agreement for an additional twelve (12) months on the same terms and conditions by written notice to the Advisor ninety (90) days prior to the expiration of the Initial Term, subject to the right of the Advisor to terminate this Agreement at any time after the conclusion of the Initial Term upon giving written notice as set forth below. (b) This Agreement (i) shall terminate automatically in the event of the Fund's termination in accordance with the terms of the Limited Partnership Agreement; (ii) may be terminated at the election of the Fund or the General Partner at any time upon sixty (60) days' prior written notice to the Advisor; and (iii) may also be terminated at the election of the General Partner at any time, upon written notice to the Advisor, in the event that: (A) the Advisor is unable to use its Trading Strategies as in effect on the date hereof, and as such Trading Strategies may be revised, refined or modified in the future for the benefit of the Fund and in accordance with the terms of this Agreement, for any reason; (B) the Advisor's -4- registration as a commodity trading advisor with the CFTC is suspended, terminated or not renewed; (C) the General Partner, in its sole discretion, shall determine in good faith that the Advisor has violated the Trading Policies as they may be revised or modified in accordance with Section 1 hereof; (D) there is an assignment of this Agreement by the Advisor in violation of Section 13 hereof; (E) the Net Asset Value per Unit (increased by the amount of any distributions per Unit, if any) on any business day during a fiscal year decreases to fifty percent (50%) or less of the Net Asset Value per Unit as of the beginning of the fiscal year, provided that such decrease results in a Net Asset Value per Unit of less than One Thousand Dollars($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; (F) the Advisor merges, consolidates with or sells a substantial potion of its assets, any portion of its Trading Strategies, systems or programs or its business goodwill or becomes bankrupt or insolvent; (G) Daniel S. Shaffer (1) ceases to direct the administration or advisory policies of, or ceases to be an officer or employee or, the Advisor, (2) dies, or (3) becomes incapacitated; or (H) the General Partner withdraws from the Fund. Notwithstanding the foregoing, the Advisor may transfer all of its assets, Trading Strategies, trading programs or goodwill to, or merge or consolidate with, any corporation or partnership controlled by Mr. Shaffer and may assign this Agreement to any such corporation or partnership provided that such corporation or partnership (i) expressly assumes all the rights and obligations of the Advisor under this Agreement in a written instrument in forma acceptable to counsel to the Fund and (ii) is entitled and agrees to sue the Trading Strategies and the programs of the Advisor for the benefit of the Fund. (c) This Agreement may be terminated at the election of the Advisor at any time after the conclusion of the Initial Term (if any) upon sixty (60) days' prior written notice to the Fund. In addition, this Agreement may be terminated at the election of the Advisor at any time, upon written notice to the Fund, in the event that: (i) the Advisor receives an opinion of legal counsel, satisfactory to the Advisor and the Fund, that by reason of its being a trading advisor to the Fund, it is required to register as an investment adviser under the Investment Advisers Act of 1940, as amended; (ii) the registration of the General Partner as a commodity pool operator is suspended, terminated or not renewed, or (iii) Daniel S. Shaffer dies or becomes incapacitated. 6. Standard of Liability and Indemnity. (a) In any action in which the Advisor was, is or is threatened to be made a party, alleging claims arising out of or in connection with the management of all or any portion of the Fund's assets (other than an action brought by or in the right of the Fund), the Fund shall indemnify and hold harmless the Advisor, subject to receipt of a legal opinion of independent counsel 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, if the Adviser acted in good faith and in an manner it reasonably believed to be in or not opposed to the best interests of the Fund, and if such actions did not involve gross negligence, willful, wanton, or reckless misconduct, or a breach of fiduciary obligations to the Fund. In any action brought by or in the right of the Fund against the Adviser, subject to receipt of a legal opinion of independent counsel regarding the applicable standard of conduct, against any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees and disbursements), judgments or amounts paid in settlement incurred in connection with the investigation, defense or settlement of such action, if the Advisor acted in good faith and in a manner it reasonably believed to be in or not opposed to the best interests of the Fund, and if such action did not involve negligence, misconduct, or breach of fiduciary obligations to the Fund (unless the court or administrative forum in which such action was brought shall determine that, in view of all circumstances of the case, the Advisor is nevertheless fairly and reasonably entitled to indemnification for such amounts as the court or administrative forum shall deem proper). To the extent that the indemnified party has been successful in the defense of any action, no legal opinion of independent counsel is needed. 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 hereunder. As used in this paragraph, the term "Advisor" shall include -5- the Advisor, its shareholders, directors, officers, employees and affiliates and each person who controls the Advisor, as the case may be. (b) The Advisor agrees to indemnify, defend and hold harmless the Fund and its affiliates against any loss, liability, damage, cost or expense (including, without limitation, attorneys' and accountants' fees and disbursements) incurred by them by reason of any act or omission of the Advisor or its affiliates relating to the Fund if there has been a final judicial or regulatory determination that such acts or omissions violated the terms of this Agreement or involved gross negligence, willful, wanton or reckless misconduct on the part of the Advisor, or a breach of the Advisor's fiduciary obligations to the Fund. (c) In addition, in the event that any claim, dispute or litigation arises between the Advisor or its affiliates and any party other than the Fund or any of its affiliates, which claim, dispute or litigation is unrelated to the Fund's business, and if the Fund or any of its affiliates are made a party to such claim, dispute or litigation by such other party, the Advisor and its affiliates shall defend any actions brought in connection therewith on behalf of the Fund and its affiliates, each of whom agrees to cooperate in such defense, and the Advisor and its affiliates shall indemnify and hold harmless the Fund and its affiliates from and with respect to any amounts awarded to such other party. (d) In the event that any claim, dispute or litigation arises between the Fund or its affiliates and any party other than the Advisor or any of its affiliates, which claim, dispute or litigation is unrelated to the responsibilities of the Advisor under this Agreement, and if the Advisor or any of its affiliates is made a party to such claim, dispute or litigation by such other party, the Fund shall defend any actions brought in connection therewith on behalf of the Advisor and its affiliates, each of whom agrees to cooperate in such defense, and the fund shall indemnify and hold harmless the Advisor, its affiliates and their respective shareholders, directors, officers and employees from and with respect to any amounts awarded to such other party. (e) None of the indemnifications contained in this Section 6 shall be applicable with respect to default judgments, confessions of judgment or settlements entered into by the party claiming indemnification without the prior written consent of the party obligated to indemnify the other party. (f) Except as otherwise set forth herein, the Advisor, its shareholders, directors, officers, employees and affiliates shall not be liable to the Fund, its partners or any of their respective successors or permitted assigns except by reason of its or their acts or omissions taken or omitted due to bad faith, misconduct or negligence or for not having acted in good faith in the reasonable belief that its or their actions were taken in, or not opposed to, the best interests of the Fund. The foregoing sentence is intended to limit the liability of the persons enumerated therein, and nothing in the foregoing sentence shall expressly or impliedly create any liability, duty or responsibility on the part of any person. (g) The provisions of this Section 6 shall survive the termination or other expiration of this Agreement. 7. Right to Engage in Other Activities. (a) The Advisor's present business includes managing its assets, the assets of its principals and affiliates and discretionary accounts for investors in the purchase and sale of Commodity Interests, and it will be managing such accounts and assets during the same period that it is managing the Fund's account. The services provided by the Advisor hereunder are not to be deemed exclusive. The Fund acknowledges that, subject to the terms of this Agreement, the Advisor and its shareholders, directors, officers, employees and affiliates may render advisory, consulting and management services to other clients and accounts. The Advisor and its shareholder, directors, officers, employees and affiliates shall be free to trade for their own accounts and to advise other clients -6- and manage other Commodity Interests trading accounts (including other public and private commodity funds) during the term of this Agreement and to use for such other clients and accounts the same or other information, Trading Strategies, programs and formulas which they obtain, produce or utilize in the performance of services for the Fund. In that connection, however, the Advisor represents and warrants that the management of such other accounts by the foregoing persons will not be incompatible with the performance of the Advisor's obligations and duties to the Fund under this Agreement and will not prevent the Advisor from rendering services to the Fund of the quality and nature contemplated by this Agreement. (b) If, at any time during the term of this Agreement, the Advisor is required to aggregate the Fund's positions in Commodity Interests with the positions of any other person for purposes of applying the speculative position or daily trading limits of the CFTC or any exchange, self-regulatory body or governmental authority and its trading recommendations are altered because of the application of any such limit, the Advisor will modify its trading decisions and Trading Strategies for the Fund and its other accounts in a good faith effort to achieve an equitable treatment of all accounts under management by the Advisor and such persons, including with respect to priorities of order entry. (c) Upon the request at the General Partner, the Advisor shall provide to it such information as it may reasonably request for the purpose of confirming that the Fund has been treated equitably with respect to the trading engaged in during the term of this Agreement by the Advisor or its shareholders, directors, officers, employees and affiliates for other accounts, which the parties acknowledge to mean that the General Partner may inspect all records of the Advisor related to its or their management of Commodity Interest trading accounts; provided, however, that the Advisor may, in its discretion, withhold from any such report or inspection the name of the client for whom any such account is maintained. 8. Representations, Warranties and Covenants of the Fund. (a) The Fund represents, warrants and covenants that: (i) The Fund is a limited partnership duly organized and validly existing under the laws of the State of Delaware, is duly qualified to transact business as a foreign corporation under the laws of all jurisdictions in which such qualification is necessary for the purposes hereof and has full power and authority to perform its obligations under this Agreement. (ii) This Agreement has been duly and validly authorized, executed and delivered by the Fund and, when executed and delivered by each of the other parties hereto, will be a valid and binding agreement of the Fund enforceable in accordance with its terms. The performance of the Fund's obligations and duties under this Agreement will not result in any violation or breach of default under or conflict with (A) the Certificate of Limited Partnership of the Fund or the Limited Partnership Agreement or (B) any term or prevision of any undertaking, contract, agreement, statute, law, rule or regulation by which the Fund is bound or to which it is a party, which in either case would limit or materially affect the performance of its duties under this Agreement. (iii) The General Partner is registered as a commodity pool operator under the Commodity Exchange Act, as amended (the "CE Act") and is a member of the NFA, and it will maintain and renew such registration and membership during the term of this Agreement. (b) The foregoing representations, warranties and covenants shall be continuing during the term of this Agreement, and if at any time any event has occurred which would make or tend to make any of the foregoing not true, the Advisor agrees to promptly notify the Fund. -7- 9. Representations, Warranties and Covenants of the Advisor. (a) The Advisor represents, warrants and covenants that: (i) The Advisor is a corporation duly organized and validly existing under the laws of the State of New York, is duly qualified to transact business as a foreign corporation under the laws of all jurisdictions in which such qualification is necessary for the purposes hereof and has full power and authority to perform its obligations under this Agreement and to act as described in the Registration Statement, Prospectus and Statement of Additional Information. (ii) This Agreement has been duly and validly authorized, executed and delivered by the Advisor and, when executed and delivered by each of the other parties hereto, will be a valid and binding agreement of the Advisor enforceable in accordance with its terms. The performance of the Advisor's obligations and duties under this Agreement will not result in any violation or breach of default under or conflict with (A) the charter or by-laws of the Advisor or (B) any term or prevision of any undertaking, contract, agreement, statute, law, rule or regulation by which the Advisor is bound or to which it is a party, which in either case would limit or materially affect the performance of its duties under this Agreement; (iii) All references to the Advisor, its principals and affiliates contained in the Registration Statement, Prospectus and Statement of Additional Information are complete and accurate in all material respects, and, as to each of them, the Registration Statement, Prospectus and Statement of Additional Information does not contain any misleading or untrue statement of a material fact or omit to state a material fact which is necessary to be stated therein in order to prevent the statements therein, in light of the circumstances under which they are mane, from being misleading; (iv) Any use or distribution of the Registration Statement, Prospectus or Statement of Additional Information by the Advisor to date has complied with, and in the future will continue to comply with, the 1933 Act, the Securities Exchange Act of 1934, as amended, the Commodity Exchange Act, as amended (the "CE Act"), and the rules and regulations promulgated by the SEC and the CFTC under such statutes, and all applicable state securities and commodities laws, as well as the rules and regulations promulgated under such laws The fact that clients or affiliates of the Advisor become limited partners in the Fund shall not constitute a breach of the warranties, representations and covenants contained herein. (v) The Advisor has obtained all required governmental and regulatory licenses and approvals required to perform its obligations under this Agreement and to act or perform its obligations as described in the Registration Statement, Prospectus and Statement of Additional Information (including, without limitation, registration as a commodity trading advisor under the CE Act and membership as a commodity trading advisor in the NFA, and it will maintain and renew such registration and membership during the term of this Agreement). (vi) Neither the Advisor nor any of its principals or affiliates has managed or directed on an overall discretionary basis the trading for any Commodity Investments or commodities trading account other than as set forth in the Registration Statement, Prospectus and Statement of Additional Information. -8- (vii) As of the date hereof, there has been no material change in the performance data included in Tables A and B in the Registration Statement and Prospectus and the notes thereto, and the information set forth therein fairly presents the results of accounts traded pursuant to trading strategies of the Advisor as in effect from time to time and as utilized by the Advisor for the periods covered by such tables. (b) At any time during the term of this Agreement that a Registration Statement, Prospectus or Statement of Additional Information relating to the Interests is required to be delivered in connection with the offer and sale thereof, the Advisor agrees upon the request of the Fund to provide the Fund with such information as shall be necessary so that, as to itself, the Registration Statement, Prospectus and Statement of Additional Information is complete and accurate in all material respects and does not contain any untrue or misleading statement of a material fact or omit to state a material fact which is necessary to make the statements therein not misleading. (c) The foregoing representations, warranties and covenants shall be continuing during the term of this Agreement, and if at any time any event has occurred which would make or tend to make any of the foregoing not true, the Advisor agrees to promptly notify the Fund. (d) In connection with its activities on behalf of the Fund, the Advisor will comply with all applicable rules and regulations of the CFTC and/or the commodity exchange or board of trade on which any particular transaction is executed. (e) In the placement of orders for the Fund's account and for the accounts of any other client, the Advisor will utilize a fair and reasonable order entry system, which shall, on an overall basis, be no less favorable to the Fund than to any other account managed by the Advisor or its directors, officers, shareholders, employees or affiliates. 9. Miscellaneous. (a) Survival. The provisions of this Agreement shall survive the termination or expiration of this Agreement with respect to any matter arising while this Agreement was in effect. (b) 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. (c) 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. (d) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, addressed as set forth in the initial paragraph of this Agreement. Any party may by notice change the address to which notices or other communications to such party are to be delivered or mailed. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (f) Arbitration. Any controversy or claim arising out of, resulting from or relating to this Agreement shall be settled exclusively by arbitration conducted in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association (or organization which is the successor thereto). The parties hereto agree that service of process or notice of motion or other -9- application in connection with any arbitration may be served by the means by which notices are to be given under this Agreement, provided that a reasonable time for appearance is allowed. Any award in such arbitration may be enforced on application of either party by the order or judgment of any Federal or state court in the State of New York as the party making such application shall elect, having jurisdiction over the subject matter thereof. Each of the parties hereto hereby submits itself to the jurisdiction of any such court and agree that service of process on it in any action, suit or proceeding to enforce any such award may be effected by the means by which notices are to be given to it under this Agreement. The fees and expenses of any arbitration shall be borne by the parties equally, but each party shall bear the expenses of its own attorneys and experts and the additional expenses of presenting its own proof. (g) 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. (h) Assignability. This Agreement shall not be assignable by either party hereto without the prior written consent of the other party hereto, and any purported assignment by any party without such consent shall be void. (i) 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 successors, heirs and permitted assigns. (j) Amendments and Waivers. Any term or provision of this Agreement may be waived at any time by the party which is entitled to the benefits thereof, and any term or provision of this Agreement may be amended or supplemented at any time by the mutual consent of the parties hereto, except that any waiver of any term or condition, or any amendment or supplementation, of this Agreement shall be effective only if in writing and, in the case of any waiver by the Corporation and any amendment or supplementation to which the Corporation consents, if approved by resolution of a majority of the disinterested members of the Board of Directors of the Corporation. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. SHAFFER DIVERSIFIED FUND, L.P. By: Shaffer Asset Management, Inc., its General Partner By:______________________________ Daniel S. Shaffer President SHAFFER ASSET MANAGEMENT, INC. By:______________________________ Daniel S. Shaffer President -10- EX-10.5 10 0010.txt FORM OF NET WORTH AGREEMENT Exhibit 10.5 Form of Net Worth Agreement NET WORTH AGREEMENT dated as of _______________, 2001 by and among SHAFFER ASSET MANAGEMENT, INC., a New York corporation having an address at 70 West Red Oak Lane, White Plains, NY 10604 (the "General Partner"), BRUCE I. GREENBERG, an individual having an address c/o Shaffer Asset Management, Inc., ("Greenberg"), and DANIEL S. SHAFFER, an individual having an address c/o Shaffer Asset Management, Inc., 70 West Red Oak Lane, White Plains, NY 10604 ("Shaffer"). W I T N E S S E T H : WHEREAS, Shaffer is the sole officer, director and shareholder of the General Partner, Greenberg is an employee of the General Partner and the General Partner is the general partner of SHAFFER DIVERSIFIED FUND, L.P., a Delaware limited partnership (the "Fund"); WHEREAS, there will be registered with the Securities and Exchange Commission (the "SEC") certain units of limited partnership interest ("Units") in the Fund pursuant to a registration statement on Form S-1 (the "Registration Statement") filed with the SEC (File No.33-46550); WHEREAS, the General Partner is required to maintain a minimum "net worth" pursuant to the Amended and Restated Agreement of Limited Partnership, as amended, governing the Fund (the "Limited Partnership Agreement") and the requirements imposed by the administrators of the securities laws in certain jurisdictions as a condition to approval of the offering of the Units therein; WHEREAS, the General Partner is also required to make certain minimum purchases of units of general partnership interest in the Fund pursuant to the Limited Partnership Agreement and the aforesaid requirements; and WHEREAS, the parties hereto desire to make certain provisions relating to contributions to the capital of the General Partner in connection with the General Partner's "net worth" obligations to the Fund and to enable the General Partner to purchase units of general partnership interest in the Fund; NOW, THEREFORE, the parties hereto hereby jointly and severally agree as follows: 1. Greenberg and Shaffer hereby jointly and severally agree that within five (5) days following the consummation of the initial offering of the Units under the Registration Statement (provided that at least 1,000 Units have been sold to the public and accepted by the General Partner), and within five (5) days following the consummation of any and all subsequent offerings of Units under the Registration Statement, Greenberg and Shaffer will contribute funds, promissory notes or capital to the General Partner as capital, in an amount sufficient so that the General Partner will at all such times have a "net worth," calculated in accordance with Generally Accepted Accounting Principles ("GAAP") , equal to not less than the greater of (i) five percent (5%) of the aggregate capital contributions made by all the partners to the Fund (including the contribution made by the General Partner), or (ii) Fifty Thousand Dollars ($50,000). In addition, with respect to each other limited partnership for which the General Partner acts as the general partner, Greenberg and Shaffer hereby jointly and severally agree to contribute funds, promissory notes or capital to the General Partner as capital, in an amount sufficient so that the General Partner will have at all such times 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 five percent (5%) of the total capital contributions made by all the partners to such other limited partnership (including the contribution made by the General Partner). Notwithstanding the foregoing, the General Partner's net worth need not exceed $1,000,000. For purposes of this Agreement, in computing the "net worth" of the General Partner, the capital contributions of the General Partner to the Fund and to the other limited partnerships of which it acts as a general partner will be disregarded. 2. The General Partner agrees that Greenberg and Shaffer shall have the absolute right to determine the manner in which and the form by which they will provide the funds, notes or capital contributions that they is required to make pursuant to Section 1, above, including, but not limited to, demand promissory notes in the form of Exhibit A attached hereto and made a part hereof in exchange for demand promissory notes in the form of Exhibit B attached hereto and made a part hereof. 3. So long as the General Partner is the general partner of the Fund, the General Partner agrees that it will not, and Greenberg and Shaffer agree that they will not, cause the General Partner to (i) declare any distribution, or (ii) intentionally take any other formal corporate action which would cause the General Partner's net worth to fall below a level required to satisfy the criteria of Section 1, above. 4. As soon as practicable after at least 1,000 Units shall have been sold pursuant to the Registration Statement and accepted by the General Partner, and at all times thereafter when Units are sold and accepted by the General Partner, Greenberg and Shaffer hereby jointly and severally agree to provide the General Partner with sufficient capital so as to enable the General Partner to purchase units of general partnership interest in the Fund in an amount equal to not less than the greater of (i) one percent (1%) of the aggregate capital contributions made by all partners to the Fund (including the contributions of the General Partner) or (ii) Twenty Five Thousand Dollars ($25,000). The General Partner agrees that Greenberg and Shaffer shall have the absolute right to determine the form in and the terms upon which they will provide funds to the General Partner pursuant to this Section 4, including, but not limited to, loans upon such terms as Greenberg and Shaffer may deem necessary or advisable in their sole discretion. 5. This Agreement, which is intended solely for the benefit of the parties hereto and the limited partners of the Fund, shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 6. This Agreement constitutes the entire understanding between the parties hereto with respect to the matters referred to herein and no waiver or modification of the terms hereof shall be valid unless in writing signed by the party to be charged therewith. 7 This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without giving effect to principles of conflicts of laws. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the day and year first above written. SHAFFER ASSET MANAGEMENT, INC. By:______________________________ Daniel S. Shaffer President _________________________________ Bruce I. Greenberg _________________________________ Daniel S. Shaffer -2- Exhibit A Demand Negotiable Promissory Note White Plains, New York Dated: _______________, 20_ FOR VALUE RECEIVED, the undersigned, BRUCE I. GREENBERG and DANIEL S. SHAFFER, individuals having an address c/o Shaffer Asset Management, Inc., 70 West Red Oak Lane, White Plains, NY 10604, hereby jointly and severally promise to pay to the order of SHAFFER ASSET MANAGEMENT, INC., a New York corporation having an address at 70 West Red Oak Lane, White Plains, NY 10604 (the "Holder"), or any subsequent holder hereof, the principal sum of _________________________ Dollars ($______), on demand, in lawful currency of the United States of America, with interest (computed on the basis of a 360 day year of twelve 30 day months) at the prime rate as of the end of each month charged by The Chase Manhattan Bank to its best commercial customers for 90 day unsecured loans. Simple interest is to be calculated monthly at such rate. Payment of both principal and interest is to be made at the offices of the Holder, which are located at 70 West Red Oak Lane, White Plains, NY 10604. Interest is to be paid annually commencing ________, 20__. ______________________________ Bruce I. Greenberg ______________________________ Daniel S. Shaffer -3- Exhibit B Demand Negotiable Promissory Note White Plains, New York Dated: _______________, 20_ FOR VALUE RECEIVED, the undersigned, SHAFFER ASSET MANAGEMENT, INC., a New York corporation having an address at 70 West Red Oak Lane, White Plains, NY 10604, hereby promises to pay to the order of BRUCE I. GREENBERG and DANIEL S. SHAFFER, individuals having an address c/o Shaffer Asset Management, Inc., 70 West Red Oak Lane, White Plains, NY 10604 (collectively, the "Holders"), or any subsequent holder hereof, the principal sum of _________________________ Dollars ($______), on demand, in lawful currency of the United States of America, with interest (computed on the basis of a 360 day year of twelve 30 day months) at the prime rate as of the end of each month charged by The Chase Manhattan Bank to its best commercial customers for 90 day unsecured loans. Simple interest is to be calculated monthly at such rate. Payment of both principal and interest is to be made at the offices of the Holders, which are located c/o Shaffer Asset Management, Inc., 70 West Red Oak Lane, White Plains, NY 10604. Interest is to be paid annually commencing ________, 20__. ______________________________ Bruce I. Greenberg ______________________________ Daniel S. Shaffer -4- EX-23.2 11 0011.txt CONSENT OF ANCHIN, BLOCK & ANCHIN, LLP Exhibit 23.2 Consent of Accountants We consent to the use in the prospectus constituting part of this Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 of our report dated September 7, 2000 on the balance sheet of Shaffer Diversified Fund, LP as of August 31, 2000 and our report dated September 5, 2000 on the financial statements of Shaffer Asset Management, Inc. as of and for the years ending December 31, 1998 and 1999. We also consent to the statements with respect to us as appearing under the heading "Experts" in the Prospectus. /s/ Anchin, Block & Anchin, LLP New York, New York January 8, 2001 -----END PRIVACY-ENHANCED MESSAGE-----