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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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Commission File number 0-16898
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ATA Research/ProFutures Diversified Fund, L.P.
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(Exact name of Partnership as specified in charter)
Delaware 75-2197831
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(State of organization) (I.R.S. Employer Identification No.)
ATA Research, Inc. ProFutures, Inc.
8144 Walnut Hill Lane 11612 Bee Cave Road
Suite 300 Suite 100
Dallas, Texas 75231 Austin, Texas 78733
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(Address of principal executive offices)
Partnership's telephone numbers
(214) 346-4900 (800) 348-3601
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Securities registered pursuant to Section 12(b) of the Act
Title of each class. Name of each exchange on which registered.
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Securities registered pursuant to Section 12(g) of the Act
Units of Limited Partnership Interest
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(Title of Class)
Indicate by check mark whether the Partnership (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Partnership was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X
No
State the aggregate market value of the voting stock held by non-affiliates
of the Partnership. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average bid and asked prices
of such stock, as of a specified date within 60 days prior to the date of
filing. (See definition of affiliate in Rule 405, 17 CFR 230.405.)
Not applicable
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Partnership's Prospectus dated July 31, 1994 and
Supplement dated January 31, 1995
Post-Effective Amendment No. 3 dated June 23, 1995
are incorporated by reference in
Part I, Part II, Part III and Part IV of this Form 10-K
PART I
Item 1. Business.
General
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ATA Research/ProFutures Diversified Fund, L.P. (the "Partnership") is a
limited partnership organized on March 10, 1987, under the laws of the
State of Delaware. The business of the Partnership is the speculative
trading of futures contracts on U.S. and non-U.S. exchanges, option
contracts, forward contracts on foreign currencies, and other commodity
interests. The Partnership commenced its business operation in
August 1987.
The Partnership maintains offices at those of its respective co-General
Partners. Specifically, the office of ProFutures, Inc. and an office of
the Partnership is located at 11612 Bee Cave Road, Suite 100, Austin, Texas
78733; the telephone number is (800) 348-3601. The office of ATA Research,
Inc. and the other office of the Partnership is located at 8144 Walnut Hill
Lane, Suite 300, Dallas, Texas 75231; the telephone number is
(214) 346-4900.
Trading Activity
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ATA Research, Inc. and ProFutures, Inc. are the General Partners of the
Partnership. The General Partners administer the business and affairs of
the Partnership (exclusive of its trading operations). Trading decisions
are made by independent Commodity Trading Advisors chosen by the General
Partners. At December 31, 1998 there are eleven Commodity Trading
Advisors: Atlas Capital Management, Inc.; Carat Capital L.L.C.;
Dennis Trading Group, Inc.; Dominion Capital Management, Inc.; Fundamental
Futures, Inc.; Hampton Investors Inc.; Hirst Investment Management;
Hyman Beck & Co., Inc.; Rabar Market Research, Inc.; Rainbow Trading
Corporation; and Willowbridge Associates, Inc. (collectively, the
"Advisors"). All advisory fees are paid by the Partnership. Advisors
may be changed from time to time by the General Partners.
ATA Research, Inc. is a Texas corporation whose sole Director and
stockholder is Aladin T. Abughazaleh. It was organized in 1985 to
perform research and consulting services associated with monitoring
performance of commodity trading advisors. ATA Research, Inc. is
registered with the Commodity Futures Trading Commission (CFTC) as a
Commodity Pool Operator and Commodity Trading Advisor; it is also a
member of the National Futures Association (NFA).
ProFutures, Inc., a Texas corporation, is a guaranteed Introducing Broker of
Internationale Nederlanden (U.S.) Securities, Futures & Options Inc. (ING).
It is also registered with the CFTC as a Commodity Trading Advisor and
Commodity Pool Operator and is a member of the NFA. Gary D. Halbert is the
Chairman and President, and principal stockholder, of ProFutures, Inc., which
was incorporated and began operation in December, 1984, and specializes in
speculative managed futures accounts.
The objective of the Partnership is to achieve appreciation of its assets
through speculative trading in futures and option contracts and other
commodity interests. It ordinarily maintains open positions for a
relatively short period of time. The Partnership's ability to make a
profit depends largely on the success of the Advisors in identifying
market trends and price movements and buying or selling accordingly.
The Partnership's Trading Policies are set forth on Page 59 of Partnership's
Prospectus dated July 31, 1994, which is incorporated herein by reference.
Material changes in the Trading Policies described in the Prospectus must
be approved by a vote of a majority of the outstanding Units of Limited
Partnership Interest. A change in contracts traded, however, will not be
deemed to be a material change in the Trading Policies.
Trading Methods and Advisors
- ----------------------------
Futures traders basically rely on either or both of two types of analysis
for their trading decisions, "technical" or "fundamental". Technical
analysis uses the theory that a study of the markets will provide a means
of anticipating price changes. Technical analysis generally will include a
study of actual daily, weekly and monthly price fluctuations, volume
variations and changes in open interest, utilizing charts and/or computers
for analysis of these items. Fundamental analysis, on the other hand,
relies on a study and evaluation of external factors which affect the price
of a futures contract in order to predict prices. These include political
and economic events, weather, supply and demand and changes in interest
rates.
The respective Advisors' trading strategies attempt to detect trends in
price movements for the commodities monitored by them. They normally seek
to establish positions and maintain such positions while the particular
market moves in favor of the position and to exit the particular market
and/or establish reverse positions when the favorable trend either reverses
or does not materialize. These trading strategies are not normally
successful if a particular market is moving in an erratic and non-trending
manner.
Because of the nature of the commodities markets, prices frequently appear
to be trending when a particular market is, in fact, without a trend. In
addition, the trading strategies may identify a particular market as
trending favorably to a position even though actual market performance
thereafter is the reverse of the trend identified.
None of the Advisors or their respective principals own any Units of the
Partnership. The Partnership's Advisors are independent Commodity Trading
Advisors and are not affiliated with the General Partners; however, all are
also Advisors to other commodity pools with which the General Partners are
currently associated and may own interest in those pools. Each Advisor
is registered with the CFTC and is a member in such capacity with the NFA.
Because of their confidential nature, proprietary trading records of the
Advisors and their respective principals are not available for inspection
by the Limited Partners of the Partnership.
Fees, Compensation and Expenses
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The General Partners receive monthly management fees paid by the
Partnership. ATA Research, Inc. receives 1/12 of 1% of month-end Net Asset
Value (approximately 1% annually). ProFutures, Inc. receives 1/4 of 1% of
month-end Net Asset Value (approximately 3% annually).
Certain Advisors receive management fees ranging from .2% to 2% annually of
Allocated Net Asset Value (as defined in the trading advisory contracts).
Each of the eleven Advisors receives a quarterly incentive fee ranging from
20% to 27.5% of Trading Profits (as defined). The quarterly incentive fees
are payable only on cumulative profits achieved by each Advisor. For
example, if one of the Advisors to the Partnership experiences a loss after
an incentive fee payment is made, that Advisor retains such payments but
receives no further incentive fees until such Advisor has recovered the loss
and then generated subsequent Trading Profits since the last incentive fee
was paid such Advisor. An incentive fee may be paid to one Advisor but the
Partnership may experience no change or a decline in its Net Asset Value
because of the performance of another Advisor. The General Partners may
allocate or reallocate the Partnership's assets at any time among the
current Advisors or any others that may be selected. Upon termination of
an Advisor's contract, or at any other time in the discretion of the
General Partners, the Partnership may employ other advisors whose
compensation may be calculated without regard to the losses which may
be incurred by the present Advisors. Similarly, the Partnership may renew
its relationship with each Advisor on the same or different terms.
Notional Funding Note: As of December 31, 1998, the Partnership has
allocated notional funds to Advisors equal to approximately 13.9% of the
Partnership's cash and/or other margin - qualified assets. Of course, this
percentage may be higher or lower over any given 12 month period. The
management fees paid to an Advisor, if any, are a percentage of the nominal
account size of the account if an account had been notionally funded. The
nominal account size is equal to a specific amount of funds initially
allocated to an Advisor which increases by profits and decreases by losses
in the account, but not by additions to or withdrawals of actual funds from
the account. Some, but not all, Advisors are expected to be allocated
notional funds, and not all of the Advisors allocated notional funds are
expected to be paid management fees. Further, the amount of cash and/or
other margin-qualified assets in an account managed by an Advisor will vary
greatly at various times in the course of the Partnership's business,
depending on the General Partners general allocation strategy and
pertinent margin requirements for the trading strategies undertaken by an
Advisor.
The Partnership is obligated to pay its periodic operating expenses,
consisting substantially of preparation of the limited partners' tax return
information, filing and recording charges, legal, printing, accounting and
auditing fees plus non-recurring expenses. Those periodic recurring
expenses are estimated at approximately .5% of the Partnership's average
annual Net Asset Value. Non-recurring expenses, not included within these
estimates, include expenses associated with significant litigation
including, but not limited to, class action suits, suits involving the
indemnification provisions of the Agreement of the Limited Partnership or
any other agreement to which the Partnership is a party; by their nature,
the dollar amount of non-recurring expenses cannot be estimated.
Additional descriptions and definitions are set forth in "Fees,
Compensation and Expenses" on Pages 30-35 of Partnership's Prospectus,
dated July 31, 1994, which is incorporated herein by reference.
Brokerage Arrangements
- ----------------------
Partnership's brokerage arrangements with ING (formerly Quantum Financial
Services, Inc.) are set forth in "Brokerage Arrangements" on Page 60 of
the Partnership's Prospectus dated July 31, 1994, which is incorporated
herein by reference.
Regulation
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The U.S. futures markets are regulated under the Commodity Exchange Act
(CEA), which is administered by the Commodity Futures Trading Commission
(CFTC), a federal agency created in 1974. The CFTC licenses and regulates
commodity exchanges, commodity brokerage firms (referred to in the industry
as "Futures Commission Merchants"), Commodity Pool Operators, Commodity
Trading Advisors and others. The General Partners are registered by the
CFTC as Commodity Pool Operators and each Advisor is registered as a
Commodity Trading Advisor.
Futures professionals such as the General Partners and the Advisors are
also regulated by the National Futures Association (NFA), a self-regulatory
organization for the futures industry that supervises the dealings between
futures professionals and their customers. If the pertinent CFTC
registrations or NFA memberships were to lapse, be suspended or be revoked,
the General Partners would be unable to act as the Partnership's Commodity
Pool Operators, and the respective Advisors as Commodity Trading Advisors,
to the Partnership.
The CFTC has adopted disclosure, reporting and recordkeeping requirements
for Commodity Pool Operators (such as the General Partners) and disclosure
and recordkeeping requirements for Commodity Trading Advisors. The
reporting rules require pool operators to furnish to the participants in
their pools a monthly statement of account, showing the pool's income or
loss and change in Net Asset Value and an annual financial report, audited
by an independent certified public accountant.
The CFTC and the exchanges have pervasive powers over the futures markets,
including the emergency power to suspend trading and order trading for
liquidation only (i.e., traders may liquidate existing positions but not
establish new positions). The exercise of such powers could adversely
affect the Partnership's trading.
Competition
- -----------
The Partnership may experience increased competition for the same futures or
option contracts. The Advisors may recommend similar or identical trades
to other accounts which they may manage; thus, the Partnership may be in
competition with such accounts for the same or similar positions. Such
competition may also increase due to the widespread utilization of
computerized trend-based trading methods similar to the methods used by
some of the Advisors. This Partnership may also compete with other funds
organized by the General Partners.
The Year 2000 Problem
- ---------------------
Many existing computer systems use only two digits to refer to a year. This
technique can cause the systems to treat the year 2000 as 1900, an effect
commonly known as the "Year 2000 Problem." The Partnership, like other
financial and business organizations, depends on the smooth functioning of
computer systems and could be adversely affected if the computer systems on
which it relies do not properly process and calculate date-related
information concerning dates on or after January 1, 2000.
The General Partners administer the business of the Partnership through
various systems and processes maintained by the General Partners. The
General Partners' modifications for Year 2000 compliance are proceeding
according to plan and are expected to be completed by June 1999. The
expenses incurred to date by the General Partners in preparing for Year
2000 compliance have not had a material adverse impact on the General
Partners' financial position, and the expenses to be incurred in becoming
fully Year 2000 compliant are not expected to be material. The Partnership
itself has no systems or information technology applications relevant to
its operations and, thus, has no expenses related to addressing the Year
2000 Problem.
In addition to the General Partners, the Partnership is dependent on the
capability of the Advisors, the various commodity exchanges, the brokers,
and other third parties with whom the Partnership has material relationships
to prepare adequately for the Year 2000 Problem and its impact on their
systems and processes. The Advisors have taken action to identify any of
their computer systems that are Year 2000 vulnerable and have not reported
any problems to the General Partners. Advisors are expected to notify
the General Partners in a timely manner if they discover a Year 2000
vulnerable system and are unable to correct it by January 1, 2000. Certain
exchanges participated in the Futures Industry Association Y2K Beta Test
during September 1998 and will participate in the Futures Industry
Association Y2K industry-wide test for Year 2000 compliance during the first
and second quarters of 1999. The Futures Industry Association Y2K Tests are
to test links with outside entities. The brokers are addressing their Year
2000 issues and have participated in Year 2000 testing with various
exchanges. The brokers will participate in the Futures Industry Association
Y2K industry-wide test for Year 2000 compliance during the first and second
quarters of 1999. The General Partners are monitoring the progress of the
brokers and the exchanges in addressing their Year 2000 issues.
The most likely and most significant risk to the Partnership associated with
the lack of Year 2000 readiness is the failure of third parties, including
the Advisors, the brokers, the exchanges and various regulators to resolve
their Year 2000 issues in a timely manner. This risk could involve the
temporary inability to transfer funds electronically or to determine the Net
Asset Value of the Partnership, in which case sales could be suspended
and/or redemption payments delayed until the Partnership's assets could be
valued and/or funds could be transferred. If the General Partners believe,
prior to December 31, 1999, that any of the Advisors, the brokers or the
exchanges have failed to resolve a Year 2000 issue likely to have a material
adverse impact on the Partnership, the General Partners could direct the
Advisors to attempt to close any Partnership positions and to remain out of
the market until such issue is resolved.
Item 2. Properties.
The Partnership does not own or lease any real property. The General
Partners currently provide all necessary office space at no additional
charge to the Partnership.
Item 3. Legal Proceedings.
The Partnership is not aware of any material pending legal proceedings to
which it is a party or to which any of its assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fiscal year ended December 31, 1998, no matters were submitted
to a vote of the holders of Units of Limited Partnership Interest ("Units")
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
Matters.
The Partnership has filed a registration statement with the Securities and
Exchange Commission for the sale of up to $38,547,364 in Units of Limited
Partnership Interest. Such registration statement became effective as of
July 31, 1994. This offering was extended on January 31, 1995 and
continued through April 30, 1995. On June 23, 1995, Post-Effective
Amendment No. 3 was filed to deregister $20,721,920 of Units of Limited
Partnership Interest. As of December 31, 1998, a total of 33,427 Units
are outstanding and held by 2,334 Unit holders, including 434 Units of
General Partnership interest. During the calendar year 1998 a total of
5,074 Units were redeemed.
The General Partners have sole discretion in determining what
distributions, if any, the Partnership will make to its Unit holders. The
General Partners made no distributions as of December 31, 1998, or as of
the date hereof. A Limited Partner may request and receive redemption of
Units subject to restrictions in the limited partnership agreement.
Item 6. Selected Financial Data.
Following is a summary of certain financial information for the Partnership
for the calendar years 1998, 1997, 1996, 1995 and 1994.
1998
----
Realized Gains $ 19,109,408
Change in Unrealized
Gains (Losses) on
Open Contracts (3,138,069)
Interest Income 4,335,995
Management Fees 4,309,041
Incentive Fees 4,355,728
Net Income (loss) 8,077,921
General Partner Capital 1,111,029
Limited Partner Capital 84,445,470
Partnership Capital 85,556,499
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,559.49
Net Income (loss) per Unit* 246.05
1997
----
Realized Gains $ 12,910,062
Change in Unrealized
Gains (Losses) on
Open Contracts 2,218,892
Interest Income 4,917,717
Management Fees 4,544,748
Incentive Fees 3,224,784
Net Income (loss) 8,533,713
General Partner Capital 1,328,151
Limited Partner Capital 87,741,893
Partnership Capital 89,070,044
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,313.44
Net Income (loss) per Unit* 208.27
1996
----
Realized Gains $ 19,859,370
Change in Unrealized
Gains (Losses) on
Open Contracts (4,280,980)
Interest Income 4,780,472
Management Fees 4,483,854
Incentive Fees 3,508,326
Net Income (loss) 9,128,038
General Partner Capital 1,208,324
Limited Partner Capital 88,652,837
Partnership Capital 89,861,161
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,104.72
Net Income (loss) per Unit* 197.64
1995
----
Realized Gains $ 4,375,196
Change in Unrealized
Gains (Losses) on
Open Contracts 1,566,823
Interest Income 5,379,779
Management Fees 5,047,834
Incentive Fees 3,372,496
Net Income (loss) (6,415)
General Partner Capital 1,087,286
Limited Partner Capital 92,084,180
Partnership Capital 93,171,466
Net Asset Value per General
and Limited Partner Unit
at End of Year 1,893.89
Net Income (loss) per Unit* (.12)
1994
----
Realized Gains $ 9,310,267
Change in Unrealized
Gains (Losses) on
Open Contracts (1,807,923)
Interest Income 3,955,212
Management Fees 5,046,028
Incentive Fees 3,895,306
Net Income (loss) (651,490)
General Partner Capital 1,079,392
Limited Partner Capital 94,082,138
Partnership Capital 95,161,530
Net Asset Value per General
and Limited Partner Unit
at End of Year 1,880.14
Net Income (loss) per Unit* (12.47)
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* based on weighted average units outstanding during the year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Partnership commenced trading on August 3, 1987. The success of the
Partnership is dependent on the ability of the Advisors to generate profits
through speculative trading sufficient to produce substantial capital
appreciation after payment of all fees and expenses. Future results will
depend in large part upon the futures markets in general, the performance
of the Advisors for the Partnership and the amount of redemptions and
changes in interest rates. Due to the highly leveraged nature of futures
trading, small price movements may result in substantial losses. Because
of the nature of these factors and their interaction, it is impossible to
predict future operating results.
(a) Liquidity. Substantially all of the Partnership's assets are held
in cash or cash equivalents. There are no restrictions on the liquidity
of these assets except for amounts on deposit with the broker needed to
meet margin requirements on open futures contracts.
Most United States exchanges (but generally not foreign exchanges, or banks
or broker-dealer firms in the case of foreign currency forward contracts)
limit by regulation the amount of fluctuation limits. The daily limits
establish the maximum amount the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of
the trading session. Once the "daily limit" has been reached in a
particular commodity, no trades may be made at a price beyond the limit.
Positions in the commodity can then be taken or liquidated only if traders
are willing to effect trades at or within the limit during the period for
trading on such day. Because the "daily limit" rule only governs price
movement for a particular trading day, it does not limit losses. The rule
may, in fact, substantially increase losses because it may prevent the
liquidation of unfavorable positions. Futures prices have occasionally
moved the daily limit for several consecutive trading days, and thereby
prevented prompt liquidation of futures positions on one side of the
market, subjecting those futures traders involved to substantial losses.
Liquidity will be of concern to the Partnership primarily in that the futures
markets in which the Advisors take positions may have periods in which
illiquidity makes it impossible or economically undesirable to execute
trades which its respective trading strategy would otherwise suggest.
Other than in respect of the functioning of the markets in which it trades,
liquidity will be of little relevance to the operation of the Partnership
except insofar as the General Partners are relatively thinly capitalized.
Nonetheless, the General Partners believe they have sufficient funding to
meet both their capital contribution and net worth requirements based on
capital contributions from the respective principals of the General
Partners, alternative funding sources, including the stock subscription
from the Clearing Broker to ProFutures, Inc. and/or a co-general partner or
successor (or some combination thereof).
(b) Capital Resources. The Partnership's initial offering and sale of Units
of Limited Partnership Interest commenced on May 27, 1987 and ended on
July 31, 1987 after having sold $6,130,568 of units at the initial
offering price of $1,000. The Partnership commenced trading August 3,
1987. The Partnership continued offering Units through February 29,
1988. Thereafter additional offerings of the Partnership's Units of
Limited Partnership Interest occurred on April 15, 1988, August 24,
1991, May 14, 1992, November 30, 1992, August 30, 1993 and July 31,
1994. The offering effective July 31, 1994 was extended on January 31,
1995 and continued through April 30, 1995. In June 1995, Post-Effective
Amendment No. 3 was filed to deregister the Partnership's remaining
$20,721,920 of Units of Limited Partnership Interest.
(c) Results of Operations. Due to the speculative nature of trading
commodity interests, the Partnership's income or loss from operations
may vary widely from period to period. Management cannot predict
whether the Partnership's future Net Asset Value per Unit will increase
or experience a decline. Except as it impacts commodity markets,
inflation is not a significant factor in the Partnership's operations.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Year Ended December 31, 1998
----------------------------
Net income for 1998 amounted to $8,077,921 or $224.08 per Unit. At
December 31, 1998, partners' capital totaled $85,556,499, a net decrease
of $3,513,545 from December 31, 1997. Net Asset Value per Unit at
December 31, 1998 amounted to $2,559.49, as compared to $2,313.44 at
December 31, 1997, an increase of 10.64%.
Net income for 1998 resulted primarily from gains in the interest rate
and equity markets, partially offset by losses in agricultural
commodities and metals markets. Net income was offset by redemptions
of Units, resulting in a net decrease in partners' capital.
Year Ended December 31, 1997
----------------------------
Net income for 1997 amounted to $8,533,713 or $208.27 per Unit. At
December 31, 1997, partners' capital totaled $89,070,044, a net decrease
of $791,117 from December 31, 1996. Net Asset Value per Unit at
December 31, 1997 amounted to $2,313.44, as compared with $2,104.72 at
December 31, 1996, an increase of 9.92%.
The Partnership's gains came mostly in the financials, including currencies,
stocks, and debt instruments. Strong gains were also achieved in the
agricultural commodities, including the food & fiber sector and the
grains.
Year Ended December 31, 1996
----------------------------
1996 was the tenth year of operations. Net income for 1996 amounted to
$9,128,038 or $197.64 per Unit. At December 31, 1996, partners' capital
totaled $89,861,161, a net decrease of $3,310,305 from December 31, 1995.
Net Asset Value per Unit at December 31, 1996 amounted to $2,104.72, as
compared with $1,893.89 at December 31, 1995, an increase of 11.13%.
The Partnership's income for 1996 resulted from substantial gains in the
foreign interest rate markets for most of the year, as well as gains in
the energy and metals markets. These gains were slightly offset by early
losses in the bond and interest rate markets.
(d) Possible Changes. The General Partners reserve the right to terminate
current Advisors and/or engage additional Advisors in the future.
Furthermore, the General Partners reserve the right to change any of
the Partnership's clearing arrangements to accommodate any new Advisors.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Introduction
The Partnership is a commodity investment pool engaged in the trading of U.S.
and foreign futures contracts, options on U.S. and foreign futures contracts
and other commodity interests, including forward contracts on currencies
(collectively, "commodity interests"). These market sensitive derivative
instruments are acquired for speculative trading purposes. All, or
substantially all, of the Partnership's assets are, accordingly, subject to
the risk of trading loss. Unlike an operating company, the risks involved in
trading market sensitive derivative instruments is integral, not incidental,
to the Partnership's business.
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including commodity price levels, the level and volatility of interest rates,
foreign currency exchange rates, equity price levels, the market value of
financial instruments and contracts, the diversification effects among the
Partnership's open positions and the liquidity of the markets in which it
trades.
The Partnership acquires and liquidates, generally on a short-term basis, both
long and short positions in a wide range of commodities markets.
Consequently, it is not possible to predict how a particular market scenario
projected into the future will affect performance, and the Partnership's past
performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could
reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the
recurrence in the markets traded by the Partnership of market movements far
exceeding expectations could result in actual trading or non-trading losses
far beyond the indicated Value at Risk or the Partnership's experience to
date. In light of the foregoing, as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantitative
disclosure included in this section should not be considered to constitute
any assurance or representation that the Partnership's losses in any market
sector will be limited to the Value at Risk or by the Partnership's attempts
to manage its market risk.
Materiality, as used in this section, is based on an assessment of reasonably
possible market movements and the potential losses caused by such movements,
taking into account the leverage, optionality and multiplier features of the
Partnership's market sensitive commodity interests.
Quantitative Disclosures About Trading Risk
The following quantitative disclosures regarding the Partnership's market risk
exposures contain "forward-looking statements" within the meaning of the safe
harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor, except for
statements of historical fact (such as the terms and amounts related to
particular contracts and commodity interests held during or at the end of
the reporting period).
Risk exposure in the market sectors traded by the Partnership's various
Advisors is quantified below in terms of Value at Risk. Commodity interests
are recorded in the financial statements at fair market value; therefore, any
loss in the fair value of the Partnership's open positions is directly
reflected in the Partnership's earnings (realized or unrealized) and cash
flow.
The Partnership has used commodity exchange maintenance margin requirements as
the measure of its Value at Risk in a given market sector. Maintenance margin
requirements are set by exchanges to equal or exceed the maximum losses
reasonably expected to be incurred in the fair value of any given contract in
95% - 99% of any one-day intervals. The maintenance margin levels are
established by brokers and exchanges using historical price studies as well
as an assessment of current market volatility (including the implied
volatility of the options on a given futures contract) and economic
fundamentals to provide a probabilistic estimate of the maximum expected
near-term one-day price fluctuation. Maintenance margin has been used rather
than the more generally available initial margin, because initial margin
includes a credit risk component which is not relevant to Value at Risk.
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of December 31, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was approximately $85.6 million.
December 31, 1998
-------------------------------
% of Total
Market Sector Value at Risk Capitalization
------------- ------------- --------------
Agriculture $ 636,000 0.7%
Currency and currency indices $ 856,000 1.0%
Energy and other $ 793,000 1.0%
Equity Indices $2,357,000 2.8%
Interest Rates $2,606,000 3.0%
Metals $ 359,000 0.4%
---------- -----
Total $7,607,000 8.9%
========== =====
The face value of the market sector instruments held by the Partnership is
typically many times the applicable maintenance margin requirement
(maintenance margin requirements generally range between approximately 1%
and 10% of contract face value) as well as many times the capitalization of
the Partnership. The magnitude of the Partnership's open positions creates
a risk of loss not typically found in most other financial instruments.
Because of the size of its positions, certain market conditions - unusual,
but historically recurring from time to time - could cause the Partnership to
incur severe losses over a short period of time. The foregoing Value at Risk
table - as well as the past performance of the Partnership - give no
indication of the magnitude of this risk of loss.
Qualitative Disclosures About Trading Risk
The following qualitative disclosures regarding the Partnership's market risk
exposures - except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Partnership manages its primary
market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partners and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies
and risks, any one of which could cause the actual results of the
Partnership's risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political upheavals,
changes in historical price relationships, an influx of new market
participants, increased regulation and many other factors could result in
material losses as well as in material changes to the risk exposures and the
risk management strategies of the Partnership. There can be no assurance that
the Partnership's current market exposure and/or risk management strategies
will not change materially or that any such strategies will be effective in
either the short- or long-term. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership as
of December 31, 1998, by market sector.
Interest Rates.
- ---------------
Interest rate movements directly affect the value of commodity interests
related to U.S. and foreign bonds and bond indices, and indirectly affect the
value of its equity index and currency positions. Interest rate movements in
one country, as well as relative interest rate movements between countries,
can materially impact the Partnership's profitability. The Partnership's
primary interest rate exposure is to interest rate fluctuations in the United
States and the major European and Asian countries. However, the Partnership
may also take positions affected by interest rates on the government debt of
smaller nations, such as Australia. The General Partners anticipate that
interest rates in such major countries will continue to be a primary market
exposure of the Partnership for the foreseeable future. The General Partners
expect to trade futures contracts on euro-denominated bond interest rates.
The January 1, 1999 conversion of most major European currencies to a single
euro-currency, or reaction to that conversion or any nation's withdrawal from
the European Monetary Union may result in additional trading risk. The
changes in interest rates which have the most effect on the Partnership are
changes in long-term, as opposed to short-term, rates. Most of the financial
instruments underlying the commodity interests held by the Partnership are
medium- to long-term instruments. Consequently, even a material change in
short-term rates might have little effect on the Partnership were medium- to
long-term rates to remain steady.
Currency and Currency Indices.
- ------------------------------
The Partnership's currency exposure is to exchange rate fluctuations,
primarily fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. These fluctuations are
influenced by interest rate changes as well as political and general economic
conditions. The Partnership trades long and short positions in a large number
of currencies, including cross-currency positions between two currencies other
than the U.S. dollar. As of December 31, 1998, the Partnership's primary
exposures were in Eurodollars and Japanese yen. The General Partners
anticipate that the risk profile of the Partnership's currency sector will
predominantly relate to the U.S. and major European and Asian countries,
including risks associated with the conversion of most major European
currencies to a single euro-currency. The currency trading Value at Risk
figure includes foreign margin amounts converted into U.S. dollars with an
incremental adjustment to reflect the exchange rate risk inherent to the
dollar-based Partnership in expressing Value at Risk in a functional currency
other than dollars.
Equity Indices.
- ---------------
The Partnership's primary equity exposure is to fluctuations in equity prices.
The stock index futures traded by the Partnership are by law limited to
futures on broadly based indices. As of December 31, 1998, the Partnership's
primary exposure was to the S&P 500 stock index. The General Partners
anticipate that the Partnership will primarily be exposed to the risk of
adverse price trends or static markets in the major U.S., European and
Japanese indices.
Metals.
- -------
The Partnership's primary metals market exposure is to fluctuations in the
price of both precious and base metals. The General Partners anticipate that
the Partnership will continue to be exposed to the metals markets.
Agriculture.
- ------------
The Partnership's primary agriculture commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Soybeans, grains, hogs and cattle accounted for a
substantial portion of the Partnership's agriculture commodities exposure as
of December 31, 1998. The General Partners anticipate that these will
continue to be the primary agriculture commodities market exposure.
Energy.
- -------
The Partnership's primary energy market exposure is to gas and oil price
movements, often resulting from political developments in the Middle East.
Disclosures About Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not
needed to maintain margin requirements. However, these balances (as well as
the market risk they represent) are immaterial.
The Partnership also has non-trading cash flow risk as a result of investing
a substantial portion of its assets in interest-bearing cash management
accounts and interest-bearing deposits with brokers. If short-term interest
rates decline, then cash flow from interest-income related to cash management
accounts and broker deposits will also decline.
Qualitative Disclosures About Managing Risk Exposure
The means by which the General Partners and the Advisors attempt to manage
the risk of the Partnership's open positions is essentially the same in all
market categories traded. The General Partners attempt to manage market
exposure by (i) diversifying the Partnership's assets among different
Advisors whose strategies focus on different market sectors and trading
approaches, and (ii) monitoring the Partnership's actual market exposures on
a daily basis and reallocating assets away from Advisors, as necessary, if an
over-concentration develops and persists in any one market sector or market
sensitive commodity interest. Each Advisor applies its own risk management
policies to its trading. These Advisor policies generally limit the total
exposure that may be taken per "risk unit" of assets under management. In
addition, many Advisors follow diversification guidelines (often formulated
in terms of the maximum margin which they will commit to positions in any one
contract or group of related contracts), as well as imposing "stop-loss"
points at which open positions must be closed out. Certain Advisors treat
their risk control policies as strict rules; others only as general
guidelines for controlling risk.
Item 8. Financial Statements and Supplementary Data.
Financial statements meeting the requirements of Regulation S-X are listed
on page F-1 of this report. The Supplementary Financial information
specified by Item 302 of Regulation S-K is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On November 11, 1998, the Registrant filed a report on Form 8-K regarding
a change in accountants.
PART III
Item 10. Directors and Executive Officers of the Partnership.
The Partnership is a limited partnership and therefore does not have any
directors or officers. The Partnership's General Partners, ATA Research,
Inc. and ProFutures, Inc., administer and manage the affairs of the
Partnership.
Item 11. Executive Compensation.
As discussed above, the Partnership does not have any officers, directors or
employees. The General Partners receive monthly management fees which
aggregated $3,384,348 for 1998, or approximately 4% of the Partnership's Net
Asset Value.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) As of December 31, 1998, a total of 33,427 Units are issued and
outstanding, representing 2 General Partners and 2,332 Limited
Partners. The Partnership knows of no one person who owns
beneficially more than 5% of the Limited Partners' Units.
(b) The General Partners and their principals owned 434 General
Partnership Units as of December 31, 1998, having an aggregate value
of $1,111,029, which is approximately 1.3% of the Net Asset Value
of the Partnership.
(c) Changes in control. None have occurred and none are expected.
Item 13. Certain Relationships and Related Transactions.
The Partnership's Prospectus, dated July 31, 1994, Pages 16-18, which is
incorporated herein by reference, contains information concerning the
relationships and transactions between the General Partners, the Clearing
Broker and the Partnership.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a)(1) Financial Statements.
See Index to Financial Statements on page F-1.
The financial statements begin on page F-3.
(a)(2) Schedules are omitted for the reason that all required information
is contained in the financial statements included in (a)(1) above
or are not applicable.
(a)(3) Exhibits as required by Item 601 of Regulation S-K.
*1.1 Form of Selling Agreement between the Partnership and
ProFutures Financial Group, Inc.
*1.2 Form of Additional Selling Agents Agreement between
ProFutures Financial Group, Inc. and certain
Additional Selling Agents.
*3.1 Agreement of Limited Partnership (attached to the
Prospectus as Exhibit A).
*3.2 Subscription Agreement and Power of Attorney (attached
to the Prospectus as Exhibit B).
*3.3 Request for Redemption Form (attached to the
Prospectus as Exhibit C).
*5.1 Opinion of Counsel as to the legality of the Units.
*8.1 Tax Opinion of Counsel
*10.2 Form of Brokerage Agreement between the Partnership and
Quantum Financial Services, Inc.
10.3 Form of Stock Subscription Agreement by and between
ING (U.S.) Securities, Futures & Options Inc. and
ProFutures, Inc.
*24.1 Consent of Counsel to the Partnership
*24.2 Consent of Certified Public Accountants, King, Burns
& Company, P.C.
*24.3 Consent of Certified Public Accountants, Arthur F.
Bell, Jr. & Associates, L.L.C.
- -----------------------
* The foregoing forms of exhibits were filed in the April 6, 1987
Registration Statement No. 33-13008 and/or Post-Effective Amendment No. 1
thereto filed March 11, 1988, and/or the June 5, 1991 Registration
Statement No. 33-41073, and/or Pre-Effective Amendment No. 1 thereto filed
August 8, 1991, and/or Post-Effective Amendment No. 1 thereto filed
March 26, 1992; and/or the October 14, 1992 Registration Statement
No. 33-53324, and/or the November 17, 1992 Pre-effective Amendment No. 1
thereto and/or the July 2, 1993 Registration Statement No. 33-65596, and/
or the Pre-Effective Amendment No. 1 thereto filed August 16, 1993, and
Supplement dated December 3, 1993, Post-Effective Amendment No. 2 thereto
filed June 30, 1994 and Supplement dated January 31, 1995, and/or Post-
Effective Amendment No. 3 dated June 23, 1995. Accordingly, such exhibits
are incorporated herein by reference and notified herewith.
(b) Reports on Form 8-K.
On November 11, 1998 the Partnership filed a report on Form 8-K, Item 4.
Change in Registrant's Certifying Accountant.
(c) Exhibits.
Filed herewith:
Exhibit 10.3 Form of Stock Subscription Agreement by and between
ING (U.S.) Securities, Futures & Options Inc. and ProFutures, Inc.
(d) Financial Statement Schedules.
Not Applicable or information included in the financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
(Partnership)
By
- -------------------------- ----------------------------------------------
Date Aladin T. Abughazaleh, President
ATA Research Inc., General Partner
ATA Research/ProFutures Diversified Fund, L.P.
By
- -------------------------- ----------------------------------------------
Date Gary D. Halbert, President
ProFutures, Inc., General Partner
ATA Research/ProFutures Diversified Fund, L.P.
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
-----------------
TABLE OF CONTENTS
-----------------
PAGES
-----
Independent Auditors' Reports F-2
Financial Statements
Statements of Financial Condition
December 31, 1998 and 1997 F-4
Statements of Operations For the Years
Ended December 31, 1998, 1997 and 1996 F-5
Statements of Changes in Partners' Capital (Net Asset Value)
For the Years Ended December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7 - F-11
F-1
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Partners
ATA Research/ProFutures Diversified Fund, L.P.
We have audited the accompanying statement of financial condition of ATA
Research/ProFutures Diversified Fund, L.P. as of December 31, 1998, and the
related statements of operations and changes in partners' capital (net asset
value) for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ATA Research/ProFutures
Diversified Fund, L.P. as of December 31, 1998, and the results of its
operations and the changes in its net asset value for the year then ended,
in conformity with generally accepted accounting principles.
/s/ Arthur F. Bell, Jr. & Associates, L.L.C.
Hunt Valley, Maryland
January 28, 1999
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Partners
ATA Research/ProFutures Diversified Fund, L.P.
We have audited the accompanying statement of financial condition of ATA
Research/ProFutures Diversified Fund, L.P. (a Delaware Limited Partnership)
as of December 31, 1997, and the related statements of operations and changes
in partners' capital (net asset value) for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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 ATA Research/ProFutures
Diversified Fund, L.P. as of December 31, 1997, and the results of its
operations and changes in partners' capital for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ KING, GRIFFIN & ADAMSON P.C.
Dallas, Texas
January 24, 1998
F-3
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
-------------
1998 1997
---- ----
ASSETS
Cash and cash equivalents $69,406,640 $63,629,011
----------- -----------
Equity in broker trading accounts
Cash 19,438,737 24,279,768
Net option premiums (received) (954,350) (394,874)
Unrealized gain on open contracts 933,131 4,071,200
----------- -----------
Deposits with brokers 19,417,518 27,956,094
----------- -----------
Total assets $88,824,158 $91,585,105
=========== ===========
LIABILITIES
Accounts payable $ 7,914 $ 3,970
Commissions and other trading fees
on open contracts 71,578 197,177
Incentive fees payable 1,743,052 453,992
Management fees payable 544,769 531,288
Redemptions payable 900,346 1,328,634
----------- -----------
Total liabilities 3,267,659 2,515,061
----------- -----------
PARTNERS' CAPITAL (Net Asset Value)
General Partners - 434 and 574 units
outstanding at December 31, 1998 and 1997 1,111,029 1,328,151
Limited Partners - 32,993 and 37,927 units
outstanding at December 31, 1998 and 1997 84,445,470 87,741,893
----------- -----------
Total partners' capital
(Net Asset Value) 85,556,499 89,070,044
----------- -----------
$88,824,158 $91,585,105
=========== ===========
See accompanying notes.
F-4
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
-------------
1998 1997 1996
---- ---- ----
INCOME
Trading gains (losses)
Realized $19,109,408 $12,910,062 $19,859,370
Change in unrealized (3,138,069) 2,218,892 (4,280,980)
----------- ----------- -----------
Gain from trading 15,971,339 15,128,954 15,578,390
Interest income 4,335,995 4,917,717 4,780,472
----------- ----------- -----------
Total income 20,307,334 20,046,671 20,358,862
----------- ----------- -----------
EXPENSES
Brokerage commissions 3,224,156 3,389,414 2,849,321
Management fees 4,309,041 4,544,748 4,483,854
Incentive fees 4,355,728 3,224,784 3,508,326
Operating expenses 340,488 354,012 389,323
----------- ----------- -----------
Total expenses 12,229,413 11,512,958 11,230,824
----------- ----------- -----------
NET INCOME $ 8,077,921 $ 8,533,713 $ 9,128,038
=========== =========== ===========
Net income per General and
Limited Partner unit
(based on weighted average
number of units outstanding
during the period of 36,050,
40,974 and 46,185, respectively) $ 224.08 $ 208.27 $ 197.64
=========== =========== ===========
Increase in Net Asset Value
per General and Limited Partner Unit $ 246.05 $ 208.72 $ 210.83
=========== =========== ===========
See accompanying notes.
F-5
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
For the Years Ended December 31, 1998, 1997 and 1996
-------------
Total Partners' Capital
Number of ----------------------------------------
Units General Limited Total
--------- ---------- ------------ ------------
Balances at
December 31, 1995 49,196 $1,087,286 $ 92,084,180 $ 93,171,466
Net income for
the year ended
December 31, 1996 121,038 9,007,000 9,128,038
Redemptions (6,501) 0 (12,438,343) (12,438,343)
------ ---------- ------------ ------------
Balances at
December 31, 1996 42,695 1,208,324 88,652,837 89,861,161
Net income for
the year ended
December 31, 1997 119,827 8,413,886 8,533,713
Redemptions (4,194) 0 (9,324,830) (9,324,830)
------ ---------- ------------ ------------
Balances at
December 31, 1997 38,501 1,328,151 87,741,893 89,070,044
Net income for
the year ended
December 31, 1998 112,878 7,965,043 8,077,921
Redemptions (5,074) (330,000) (11,261,466) (11,591,466)
------ ---------- ------------ ------------
Balances at
December 31, 1998 33,427 $1,111,029 $ 84,445,470 $ 85,556,499
====== ========== ============ ============
Net Asset Value Per Unit
---------------------------------
December 31,
1998 1997 1996
---- ---- ----
$2,559.49 $2,313.44 $2,104.72
========= ========= =========
See accompanying notes.
F-6
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
-------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
A. General Description of the Partnership
ATA Research/ProFutures Diversified Fund, L.P. (the Partnership)
is a Delaware limited partnership which operates as a commodity
investment pool. The Partnership's objective is to achieve
appreciation of its assets through the trading of futures
contracts and other financial instruments.
B. Regulation
As a Partnership with the Securities and Exchange Commission, the
Partnership is subject to the regulatory requirements under the
Securities Acts of 1933 and 1934. As a commodity investment pool,
the Partnership is subject to the regulations of the Commodity
Futures Trading Commission, an agency of the United States (U.S.)
government which regulates most aspects of the commodity futures
industry; rules of the National Futures Association, an industry
self-regulatory organization; and the requirements of commodity
exchanges and Futures Commission Merchants (brokers) through which
the Partnership trades.
C. Method of Reporting
The Partnership's financial statements are presented in accordance
with generally accepted accounting principles, which require the
use of certain estimates made by the Partnership's management.
Transactions are accounted for on the trade date. Gains or losses
are realized when contracts are liquidated. Unrealized gains or
losses on open contracts (the difference between contract purchase
price and market price) are reported in the statement of financial
condition as a net gain or loss, as there exists a right of offset
of unrealized gains or losses in accordance with Financial
Accounting Standards Board Interpretation No. 39 - "Offsetting of
Amounts Related to Certain Contracts." Any change in net
unrealized gain or loss from the preceding period is reported in
the statement of operations.
For purposes of both financial reporting and calculation of
redemption value, Net Asset Value per Unit is calculated by
dividing Net Asset Value by the number of outstanding Units.
D. Cash and Cash Equivalents
Cash and cash equivalents includes cash and short-term investments
in fixed income securities.
E. Brokerage Commissions
Brokerage commissions include other trading fees and are charged
to expense when contracts are opened.
F-7
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
-----------------------------------------------------------
F. Income Taxes
The Partnership prepares calendar year U.S. and state information
tax returns and reports to the partners their allocable shares of
the Partnership's income, expenses and trading gains or losses.
G. Foreign Currency Transactions
The Partnership's functional currency is the U.S. dollar; however,
it transacts business in currencies other than the U.S. dollar.
Assets and liabilities denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in
effect at the date of the statement of financial condition.
Income and expense items denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in
effect during the period. Gains and losses resulting from the
translation to U.S. dollars are reported in income currently.
H. Reclassification
Certain amounts in the 1997 and 1996 financial statements were
reclassified to conform with the 1998 presentation.
Note 2. GENERAL PARTNERS
----------------
The General Partners of the Partnership are ATA Research, Inc. and
ProFutures, Inc., who conduct and manage the business of the
Partnership. The Agreement of Limited Partnership requires the
General Partners to contribute to the Partnership an amount in the
aggregate equal to at least the greater of (i) 3% of the aggregate
initial capital contributions of all partners or $100,000, whichever is
less, or (ii) 1% of the aggregate initial capital contributions of all
partners. As of December 31, 1998, approximately $743,000 has been
contributed to the Partnership by the General Partners and their
principals.
The Agreement of Limited Partnership also requires that the General
Partners maintain in the aggregate a net worth at least equal to (i)
the lesser of $250,000 or 15% of the aggregate initial capital
contributions of any limited partnerships for which they act as general
partners and which are capitalized at less than $2,500,000; and (ii)
10% of the aggregate initial capital contributions of any limited
partnerships for which they act as general partners and which are
capitalized at greater than $2,500,000.
F-8
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------
Note 2. GENERAL PARTNERS (CONTINUED)
----------------------------
ProFutures, Inc. has callable subscription agreements with
Internationale Nederlanden (U.S.) Securities, Futures & Options, Inc.
(ING), the Partnership's primary broker, whereby ING has subscribed
to purchase (up to $14,000,017) the number of shares of common stock
of ProFutures, Inc. necessary to maintain the General Partners' net
worth requirements.
A monthly management fee is paid by the Partnership to each General
Partner. ATA Research, Inc. receives 1/12 of 1% of month-end Net
Asset Value (approximately 1% annually) and ProFutures, Inc. receives
1/4 of 1% of month-end Net Asset Value (approximately 3% annually).
Total management fees earned by ATA Research, Inc. for the years ended
December 31, 1998, 1997 and 1996 were $846,087, $915,561 and $905,191,
respectively. Total management fees earned by ProFutures, Inc. for
the years ended December 31, 1998, 1997 and 1996 were $2,538,261,
$2,746,684 and $2,718,343, respectively.
Note 3. COMMODITY TRADING ADVISORS
--------------------------
The Partnership has trading advisory contracts with several unrelated
commodity trading advisors to furnish management investment services
to the Partnership. Certain advisors receive management fees ranging
from .2% to 2% annually of Allocated Net Asset Value (as defined in
the trading advisory contracts). In addition, the trading advisors
receive quarterly incentive fees ranging from 20% to 27.5% of Trading
Profits (as defined).
Note 4. DEPOSITS WITH BROKERS
---------------------
The Partnership deposits funds with brokers subject to Commodity
Futures Trading Commission regulations and various exchange and
broker requirements. Margin requirements are satisfied by the
deposit of cash with such brokers. The Partnership earns interest
income on its assets deposited with the brokers.
Note 5. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
--------------------------------------------
Investments in the Partnership were made by subscription agreement,
subject to acceptance by the General Partners. The Partnership's most
recent offering of Units of Limited Partnership Interest terminated on
April 30, 1995.
The Partnership is not required to make distributions, but may do so
at the sole discretion of the General Partners. A Limited Partner may
request and receive redemption of units owned, subject to restrictions
in the Agreement of Limited Partnership.
F-9
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------
Note 6. TRADING ACTIVITIES AND RELATED RISKS
------------------------------------
The Partnership engages in the speculative trading of U.S. and foreign
futures contracts and options on U.S. and foreign futures contracts
(collectively, "derivatives"). These derivatives include both
financial and non-financial contracts held as part of a diversified
trading strategy. The Partnership is exposed to both market risk, the
risk arising from changes in the market value of the contracts, and
credit risk, the risk of failure by another party to perform according
to the terms of a contract.
Purchase and sale of futures and options on futures contracts requires
margin deposits with the brokers. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act
requires a broker to segregate all customer transactions and assets
from such broker's proprietary activities. A customer's cash and
other property (for example, U.S. Treasury bills) deposited with a
broker are considered commingled with all other customer funds subject
to the broker's segregation requirements. In the event of a broker's
insolvency, recovery may be limited to a pro rata share of segregated
funds available. It is possible that the recovered amount could be
less than total cash and other property deposited.
The Partnership has a substantial portion of its assets on deposit
with financial institutions in connection with its cash management
activities. In the event of a financial institution's insolvency,
recovery of Partnership assets on deposit may be limited to account
insurance or other protection afforded such deposits. In the normal
course of business, the Partnership does not require collateral from
such financial institutions.
For derivatives, risks arise from changes in the market value of the
contracts. Theoretically, the Partnership is exposed to a market
risk equal to the value of futures contracts purchased and unlimited
liability on such contracts sold short. As both a buyer and seller of
options, the Partnership pays or receives a premium at the outset
and then bears the risk of unfavorable changes in the price of
the contract underlying the option. Written options expose the
Partnership to potentially unlimited liability, and purchased options
expose the Partnership to a risk of loss limited to the premiums paid.
The fair value of derivatives represents unrealized gains and losses
on open futures contracts and long and short options at market value.
The average fair value of derivatives during 1998, 1997 and 1996 was
approximately $1,870,000, $3,300,000 and $4,230,000, respectively, and
the related fair values as of December 31, 1998 and 1997 are
approximately $(21,000) and $3,676,000, respectively.
Net trading results from derivatives for the years ended December 31,
1998, 1997 and 1996 are reflected in the statement of operations and
equal gain from trading less brokerage commissions. Such trading
results reflect the net gain arising from the Partnership's
speculative trading of derivatives.
F-10
ATA RESEARCH/PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------
Note 6. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
------------------------------------------------
Open contracts generally mature within one year, however, the
Partnership intends to close all contracts prior to maturity. At
December 31, 1998 and 1997, the notional amount of open contracts
is as follows:
1998 1997
---- ----
Contracts to Contracts to Contracts to Contracts to
Purchase Sell Purchase Sell
------------ ------------ ------------ ------------
Futures contracts
and written options
thereon:
- Agriculture $ 19,300,000 $ 25,900,000 $ 27,000,000 $ 26,600,000
- Currency and
currency
indices 34,350,000 133,100,000 10,400,000 74,200,000
- Energy 1,100,000 2,900,000 1,200,000 12,500,000
- Equity indices 75,700,000 99,700,000 65,500,000 54,900,000
- Interest rates 279,700,000 61,300,000 756,200,000 288,900,000
- Metals 5,750,000 14,000,000 87,500,000 103,700,000
- Other 50,000 0 500,000 300,000
Purchased options
on futures contracts:
- Agriculture 2,700,000 0 0 0
- Currency and
currency
indices 0 0 0 8,300,000
- Energy 550,000 0 0 0
- Interest rates 0 0 27,000,000 0
- Metals 0 0 4,000,000 0
------------ ------------ ------------ ------------
$419,200,000 $336,900,000 $979,300,000 $569,400,000
============ ============ ============ ============
The above amounts do not represent the Partnership's risk of loss
due to market and credit risk, but rather represent the Partnership's
extent of involvement in derivatives at the date of the statement of
financial condition.
The General Partners have established procedures to actively monitor
and minimize market and credit risk, although there can be no
assurance that they will, in fact, succeed in doing so. The General
Partners' basic market risk control procedures consist of
continuously monitoring the trading activity of the various trading
advisors, with the actual market risk controls being applied by the
advisors themselves. The General Partners seek to minimize credit
risk primarily by depositing and maintaining the Partnership's assets
at financial institutions and brokers which the General Partners
believe to be creditworthy. The Limited Partners bear the risk of
loss only to the extent of the market value of their respective
investments and, in certain specific circumstances, distributions
and redemptions received.
F-11
Exhibit 10.3
STOCK SUBSCRIPTION AGREEMENT
BY AND BETWEEN
ING (U.S.) SECURITIES, FUTURES & OPTIONS INC.
AND
PROFUTURES, INC.
Re: ATA Research/ProFutures Diversified Fund, L.P.
THIS STOCK SUBSCRIPTION AGREEMENT (as it may be amended from time to time,
the "Agreement"), by and between ING Securities, Futures & Options Inc.
("ING") and ProFutures, Inc. (the "General Partner"), is made as of this
1st day of August, 1998.
WHEREAS, the General Partner entered into Stock Subscription Agreements,
dated August 15, 1990, August 15, 1991, and September 1, 1991, respectively,
each substantially in the form hereof, with Virginia Trading Corporation
("VTC"), and the Virginia Trading division of Quantum Financial Services,
Inc. ("Quantum"), respectively;
WHEREAS, the issued and outstanding capital stock of VTC was acquired by
Quantum which operated VTC's business as the Virginia Trading division of
Quantum;
WHEREAS, the issued and outstanding capital stock of Quantum was acquired by
the ING Group on January 7, 1994 and the name of Quantum was ultimately
changed to ING Securities, Futures & Options Inc.;
WHEREAS, the parties desire to enter into this Agreement to reflect (a) that
the respective rights and duties hereunder shall belong to ING, and (b) the
current terms of the stock subscription obligation of ING;
WHEREAS, pursuant to a separate Brokerage Agreement, ING is the futures
commission merchant for the ATA Research/ProFutures Diversified Fund, L.P.,
a Delaware limited partnership (the "Fund");
WHEREAS, the General Partner is obligated by the Fund's Agreement of Limited
Partnership, as amended and restated on December 1, 1993 (the "Agreement of
Limited Partnership'), to maintain a minimum net worth equal to: (i) the
lesser of $250,000 or 15% of the aggregate initial capital contributions of
any limited partnerships for which it acts as general partner capitalized at
$2,500,000 or less; or (ii) 10% of the aggregate capital contributions of
the limited partners of any limited partnerships for which it acts as
general partner capitalized at greater than $2,500,000 (the "Net Worth
Requirement");
WHEREAS, the General Partner has the responsibility for determining the
adequacy of its net worth and the application of this Agreement towards the
Net Worth Requirement; and
WHEREAS, ING has agreed to subscribe for stock of the General Partner to
enable the General Partner to continue to meet the Net Worth Requirement.
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the parties hereto agree as follows:
1. Purchase of Shares. On the date hereof and continuing on a regular
basis as agreed upon by the parties, ING and the General Partner shall
determine the aggregate amount of the subscription for shares of the
General Partner's common stock required to enable the General Partner to
continue to meet the Net Worth Requirement. Based upon such
determination (as confirmed in writing in the form attached as Exhibit
A, each executed original of which is incorporated herein by reference),
ING will subscribe for the total subscription required for the General
Partner to meet the Net Worth Requirement; provided, that in no event
shall the total subscription, in addition to the total subscription
obligation for Alternative Asset Growth Fund, L.P., a Delaware limited
partnership, exceed $7 million. The purchase price for the shares of
common stock subscribed for by ING thereupon shall be equal to book
value per share as determined by an independent certified public
accountant selected and paid by the General Partner on the date(s) this
obligation is met, but in no event less than $.01 per share. In the
event the Fund both exceeds its Trading Suspension Level and, in fact,
exhausts all its assets to satisfy Fund obligations, the subscription
required for the General Partner to satisfy the Net Worth Requirement
shall be callable by the General Partner on demand; provided, however,
that: (a) the General Partner shall use its own capital first to meet
the Net Worth Requirement; and (b) any such demand shall relate only to
capital deficiencies resulting solely from the ordinary, lawful and
necessary operations and activities of the Fund which cause the General
Partner's net worth to fall below the Net Worth Requirement. The
parties expressly acknowledge that, unless otherwise agreed in writing
by both parties in their sole and absolute discretion as to other
specific projects or activities, ING shall not have to subscribe to
satisfy capital deficiencies resulting from activities and operations
of the General Partner other than those associated with the Fund.
Payment for the subscription called shall be made by wire transfer
within thirty (30) days after the date of call. Upon payment, the
General Partner shall issue to ING that number of shares for which full
consideration has been paid.
2. Share Rights. Upon issuance, all shares of the General Partner's common
stock shall be fully paid and non-assessable and shall entitle the
holder to all rights applicable to such shares.
3. Computations. For purposes of meeting the Net Worth Requirement, all
subscriptions for common stock shall be carried at face amount without
deduction or discount. Any interests in the Fund owned by the General
Partner or any of the General Partner's interests in other limited
partnerships of which the General Partner is the general partner shall
not be included in the computation of its net worth for compliance with
the Net Worth Requirements.
4. Lower Net Worth. In the event that, at any time, the Net Worth
Requirement set forth in the Fund's Agreement of Limited Partnership is
amended pursuant thereto so that the Net Worth Requirement for the
General Partner is lowered, the General Partner shall promptly notify
ING and upon demand by ING effect a reduction in its net worth (but not
below that required by the Agreement of Limited Partnership) by
cancellation of such excess subscription amount in appropriate fashion.
5. General Partner Activities. The General Partner agrees, for so long as
this Agreement is in effect, not to engage in any activities unrelated
to its current activities of being: (a) a commodity trading advisor;
(b) co-General Partner of Alternative Asset Growth Fund, L.P.:
(c) General Partner of the Fund; (d) General Partner of ProFutures Bull
& Bear Fund, L.P.; and (e) engaged in a similar activity involving ING
or an associated company thereof; and (f) an introducing broker, without
the consent of ING. Such undertaking shall include the General
Partner's best efforts to conserve capital and avoid expenses to the
extent feasible to minimize the need of the General Partner to call the
subscription, especially as it relates to the Net Worth Requirement
attributable to the Fund. The General Partner also agrees to cooperate
in good faith as to ING in the conduct of its affairs including, without
limitation, its full cooperation in responding to any reasonable request
for information by ING.
6. ING's Activities. ING hereby agrees that it shall: (a) not purchase or
otherwise acquire any Units of Limited Partnership Interest of the Fund;
(b) provide all information which in the opinion of counsel for the
General Partner is required for the General Partner to comply with
federal and state securities and tax laws; and (c) cooperate in good
faith with the General Partner in the conduct of its affairs.
7. Amendments; Assignments. No change or modification to this Agreement
shall be effective unless the same shall be in writing and signed by
each of the parties hereto. However, this Agreement may not be assigned
by either party without the prior written consent of the other, and any
attempted assignment without such consent shall be void. No change in
ownership of either party shall in any way affect its obligation
hereunder or in any related agreements.
8. Third Party Beneficiaries. Third party beneficiary rights, if any,
under this Agreement are expressly limited to the limited partners of
the Fund, to the Net Worth Requirement attributable to the Fund and, for
the period commencing on the date of this Agreement, is accepted until
the termination of this Agreement under any circumstance described in
Paragraph 11 below.
9. Term. This Agreement shall continue in effect for a period of one (1)
year from the date of this Agreement and shall be automatically renewed
for additional one (1) year terms. Notwithstanding the foregoing,
either party may terminate this Agreement at anytime after having given
the other party at least sixty (60) days prior written notice of its
intent to terminate. In the event the Fund terminates ING as its
Clearing Broker, this Agreement will terminate on the same date as the
Brokerage Agreement terminates. In the event that ING terminates its
Brokerage Agreement and ceases to serve as the Fund's Clearing Broker,
or the Brokerage Agreement expires, this Agreement will continue for up
to 60 days after the date such Brokerage Agreement terminates or
expires.
10. Information Requirements of the General Partner. During the term of
this Agreement, the General Partner shall promptly furnish to ING the
following:
(a) copies of all regulatory notices, complaints, legal actions or
proceedings, and other claims involving, relating to or against
the General Partner or against the Fund including, without
limitation, claims by any limited partner of the Fund.
(b) copies of all regulatory notices, complaints, legal actions or
proceedings, and other claims involving, relating to or against
the General Partner or against the Fund including, without
limitation, claims by any limited partner of the fund.
(c) copies of the following financial statements for the Fund:
(i) monthly unaudited balance sheets and income statements;
(ii) monthly asset reports for all assets regardless of where
located; (iii) annual audited financial statements and any other
interim audits available; and (iv) copies of statements from the
other holders of Fund assets when they are received.
(d) copies of the following financial statements for the General
Partner: (i) quarterly and annual unaudited balance sheets and
income statements; and (ii) any audited statements available.
(e) copies of marketing materials used in connection with the Fund
concurrent with their use.
The Clearing Broker shall have the right to review the books and
records of the General Partner (excluding any information on its
trading systems) , at its office on reasonable notice during normal
business hours, and subject to ING's maintaining strict confidentiality
as to the information so reviewed.
11. Other Conditions. In the event the General Partner shall voluntarily
file (or have involuntarily filed against it) a petition seeking
protection from creditors pursuant to the United States Bankruptcy
Code, as amended (the "Code"), or be subjected to the supervision of a
receiver appointed by a state or federal court of competent
jurisdiction, and any debtor in possession, trustee or receiver shall
subsequently make a call upon ING for any cash contributions under
this Agreement, the parties hereto specifically agree that ING shall be
required to contribute such cash to the General Partner as is required
to satisfy the Net Worth Requirement only upon the General Partner's
transfer (free and clear of all liens and encumbrances) of such assets
as are held in the name of the General Partner having a fair market
value equal to, or greater than, the value of the purchase price
required of ING by such debtor in possession, trustee or receiver.
Such transfer of assets shall be in lieu of the General Partner's
issuance of shares in exchange for cash; and further provided, that the
transfer of such assets to ING shall be first approved by a United
States Bankruptcy Court Judge, or the court officer having jurisdiction
over any appointed receiver, and ING shall be awarded fee simple
ownership and possession of such assets pursuant to 363 of the Code.
In the circumstances of this paragraph, only of the required assets
defined above by the General Partner to ING, shall ING be required to
make the payment for any subscription called under this Agreement or
shall the General Partner be required to issue any shares of its stock
to ING.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to
contracts made in that state without reference to its conflict of laws
provisions.
13. Notices. Any notices required or desired to be given under this
Agreement shall be given in writing and shall be effective when given
personally on the date delivered or, when given by mail, overnight
courier or telefacsimile (provided receipt of the latter is orally
confirmed), upon the date of receipt, addressed as follows (or to
such other address as the party entitled to notice shall hereafter
designate in accordance with the terms hereof):
If to the General Partner:
ProFutures, Inc.
1310 Highway 620 South, Suite 200
Austin, Texas 78734
Attn: Gary D. Halbert, President
If to ING:
ING (U.S.) Securities, Futures & Options, Inc.
Sears Tower
233 South Wacker Street
Chicago, Illinois 60606
Attn: Brac Carr, Vice President
14. Entire Agreement. This Agreement contains the entire understanding of
the parties with respect to the matters covered hereby. All prior
subscription agreements and concomitant obligations of the parties are
superceded by this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement under
seal as of the date first above written.
ING (U.S.) SECURITIES, FUTURES & OPTIONS, INC.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
PROFUTURES, INC.
By:
-------------------------------------------
Gary D. Halbert, President
EXHIBIT A
ING (U.S.) SECURITIES, FUTURES & OPTIONS, INC.
Sears Tower
233 South Wacker Street
Chicago, Illinois 60606
(312) 496-7000
August 1, 1998
Gary Halbert, President
ProFutures, Inc.
1310 Highway 620 South, Suite 200
Austin Texas 78734
Dear Mr. Halbert:
This is to confirm to ProFutures, Inc. the obligation of the undersigned
ING (U.S.) Securities, Futures & Options, Inc. ("ING") pursuant to the
August 1, 1998 Stock Subscription Agreement (as amended from time to time,
the "Agreement") between ProFutures, Inc. ("ProFutures") and ING, as
outlined below. As of July 31, 1998, the aggregate relevant capital
contributions by the limited partners of ATA Research/ProFutures Diversified
Fund, L.P. (the "Fund") for Units still outstanding was $61,215,457.
Pursuant to the Agreement, accordingly, ING hereby subscribes to purchase
32,439 shares of ProFutures (at $188.71 per share), being that number of
shares which will enable ProFutures to maintain its Net Worth Requirement
as defined in the Agreement. It is our understanding under the Agreement
that such subscription will be called only if and subject to the conditions
as set forth in the Agreement occur. This subscription commitment supersedes
all prior subscription commitments pursuant to the Agreement.
ING (U.S.) SECURITIES, FUTURES & OPTIONS, INC.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
ACKNOWLEDGED:
PROFUTURES, INC.
By:
-------------------------------------------
Gary D. Halbert, President