LETTER TO LIMITED OWNERS FOR
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
1
PricewaterhouseCoopers (LOGO)
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Telephone (212) 596 8000
Facsimile (212) 596 8910
Report of Independent Accountants
To the General Partner and
Limited Partners of
Prudential-Bache Capital Return Futures Fund L.P.
In our opinion, the accompanying statements of financial condition and the
related statements of operations and changes in partners' capital present
fairly, in all material respects, the financial position of Prudential-Bache
Capital Return Futures Fund L.P. at December 31, 1999 and 1998, and the results
of its operations for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the General
Partner; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
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, assessing the accounting principles
used and significant estimates made by the General Partner, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 28, 2000
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------------------
1999 1998
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ASSETS
Cash $ 2,746,277 $ 3,166,467
U.S. Treasury bills, at amortized cost 8,532,471 11,092,586
Net unrealized gain on open futures contracts 287,516 1,129,131
Net unrealized gain on open forward contracts 74,828 --
----------- -----------
Total assets $11,641,092 $15,388,184
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 301,577 $ 408,971
Net unrealized loss on open forward contracts -- 121,175
Management fees payable 38,444 50,656
Accrued expenses 62,651 57,613
Due to affiliates 45,198 12,481
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Total liabilities 447,870 650,896
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Commitments
Partners' capital
Limited partners (85,245 and 99,743 units outstanding) 11,081,169 14,589,844
General partner (862 and 1,008 units outstanding) 112,053 147,444
----------- -----------
Total partners' capital 11,193,222 14,737,288
----------- -----------
Total liabilities and partners' capital $11,641,092 $15,388,184
----------- -----------
----------- -----------
Net asset value per limited and general partnership unit ('Units') $ 129.99 $ 146.27
----------- -----------
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The accompanying notes are an integral part of these statements.
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
REVENUES
Net realized gain $ 496,859 $1,301,509 $1,602,156
Change in net unrealized gain/loss (645,612) (169,565) 1,234,209
Interest from U.S. Treasury bills 470,148 572,873 676,690
----------- ---------- ----------
321,395 1,704,817 3,513,055
----------- ---------- ----------
EXPENSES
Commissions 1,084,856 1,214,818 1,377,622
Management fees 539,392 608,574 695,451
Incentive fees -- -- 12,998
General and administrative 147,286 140,001 148,399
----------- ---------- ----------
1,771,534 1,963,393 2,234,470
----------- ---------- ----------
Net income (loss) $(1,450,139) $ (258,576) $1,278,585
----------- ---------- ----------
----------- ---------- ----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $(1,435,625) $ (255,983) $1,265,788
----------- ---------- ----------
----------- ---------- ----------
General partner $ (14,514) $ (2,593) $ 12,797
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----------- ---------- ----------
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED AND
GENERAL PARTNERSHIP UNIT
Net income (loss) per weighted average limited and
general partnership unit $ (15.31) $ (2.39) $ 10.34
----------- ---------- ----------
----------- ---------- ----------
Weighted average number of limited and general
partnership units outstanding 94,717 108,183 123,618
----------- ---------- ----------
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STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
- -----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1996 130,609 $17,716,405 $ 179,079 $17,895,484
Net income -- 1,265,788 12,797 1,278,585
Redemptions (15,578) (2,141,221) (21,663) (2,162,884)
-------- ----------- --------- -----------
Partners' capital--December 31, 1997 115,031 16,840,972 170,213 17,011,185
Net loss -- (255,983) (2,593) (258,576)
Redemptions (14,280) (1,995,145) (20,176) (2,015,321)
-------- ----------- --------- -----------
Partners' capital--December 31, 1998 100,751 14,589,844 147,444 14,737,288
Net loss -- (1,435,625) (14,514) (1,450,139)
Redemptions (14,644) (2,073,050) (20,877) (2,093,927)
-------- ----------- --------- -----------
Partners' capital--December 31, 1999 86,107 $11,081,169 $ 112,053 $11,193,222
-------- ----------- --------- -----------
-------- ----------- --------- -----------
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The accompanying notes are an integral part of these statements.
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential-Bache Capital Return Futures Fund L.P. (the 'Partnership') is a
Delaware limited partnership formed on January 26, 1989 to engage in the
speculative trading of commodity futures, forward and options contracts. On May
12, 1989, the Partnership completed its offering having raised $139,151,000 from
the sale of 1,377,053 units of limited partnership interest and 14,457 units of
general partnership interest.
The general partner of the Partnership is Seaport Futures Management, Inc.
(the 'General Partner') which is an affiliate of Prudential Securities
Incorporated ('PSI'), the Partnership's commodity broker. Both the General
Partner and PSI are wholly owned subsidiaries of Prudential Securities Group
Inc. ('PSGI'). The General Partner is required to maintain at least a 1%
interest in the Partnership as long as it is acting as the Partnership's general
partner.
During the three years ended December 31, 1999, 100% of the Partnership's
assets were allocated for commodity trading purposes. The General Partner
generally maintains not less than 75% of the Partnership's net assets in
interest-bearing U.S. Government obligations (primarily U.S. Treasury bills), a
significant portion of which is utilized for margin purposes for the
Partnership's commodity trading activities. The remaining 25% of the net assets
is held in cash in commodity trading accounts.
Since July 1994, all trading decisions for the Partnership have been made by
John W. Henry & Company, Inc. (the 'Trading Manager'), an independent
commodities trading manager. The General Partner retains the authority to
override trading instructions that violate the Partnership's trading policies.
Termination of the Partnership
The Partnership will terminate on December 31, 2009 unless terminated sooner
under the provisions of the Amended and Restated Agreement of Limited
Partnership (the 'Partnership Agreement'). These provisions, as set forth in
Article XVII of the Partnership Agreement, include the dissolution of the
Partnership if the Partnership's net asset value declines to less than $10
million as of the end of any business day. Consequently, given the Partnership's
net asset value at December 31, 1999, subsequent poor trading performance and/or
redemptions may cause the Partnership's net asset value to fall below $10
million as early as March 31, 2000 and, therefore, would result in the ultimate
liquidation and dissolution of the Partnership.
B. Summary of Significant Accounting Policies
Basis of accounting
The financial statements of the Partnership are prepared in accordance with
generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the General Partner to make estimates and
assumptions that affect the reported amounts of liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
Commodity futures and forward transactions are reflected in the accompanying
statements of financial condition on trade date. The difference between the
original contract amount and market value is reflected as net unrealized gain or
loss. The market value of each contract is based upon the closing quotation on
the exchange, clearing firm or bank on, or through, which the contract is
traded.
To the extent practicable, the Partnership invests a significant portion of
its net assets in U.S. Treasury bills, which are often used to fulfill margin
requirements. U.S. Treasury bills are carried at amortized cost which
approximates market. Interest on these obligations accrues for the benefit of
the Partnership.
The weighted average number of limited and general partnership units
outstanding was computed for purposes of disclosing net income (loss) per
weighted average limited and general partnership unit. The weighted average
limited and general partnership units are equal to the number of Units
outstanding at
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year-end, adjusted proportionately for the Units redeemed based on their
respective time outstanding during such year.
The Partnership has elected not to provide a Statement of Cash Flows as
permitted by Statement of Financial Accounting Standard No. 102, 'Statement of
Cash Flows--Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale.'
Certain balances from the prior year have been reclassified to conform with
the current financial statement presentation.
Income taxes
The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from the Partnership's operations
are passed directly to the individual partners. The Partnership may be subject
to other state and local taxes in jurisdictions in which it operates.
Profit and loss allocations, distributions and redemptions
Net realized profits or losses for tax purposes are allocated first to
partners who redeem Units to the extent the amounts received on redemption are
greater than or are less than the amounts paid for the redeemed Units by the
partners. Net realized profits or losses remaining after these allocations are
allocated to each partner in proportion to such partner's capital account at
year-end. Net income or loss for financial reporting purposes is allocated
quarterly to all partners on a pro rata basis based on each partner's number of
Units outstanding during the quarter.
Distributions (other than redemptions of Units) are made at the sole
discretion of the General Partner on a pro rata basis in accordance with the
respective capital accounts of the partners. No distributions have been made
since inception.
The Partnership Agreement provides that a partner may redeem its Units as of
the last business day of any full calendar quarter at the then current net asset
value per Unit.
Accounting for Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ('SFAS') No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Partnership adopted effective
October 1, 1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities and requires that an entity
recognize all derivatives as assets or liabilities measured at fair value. SFAS
No. 133 supersedes SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments and SFAS No. 105, Disclosure
of Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk which required the
disclosure of average aggregate fair values and contract/notional values,
respectively, of derivative financial instruments for an entity like the
Partnership which carries its assets at fair value. The General Partner does not
believe the adoption of SFAS No. 133 has a material effect on the carrying value
of assets and liabilities within the financial statements.
C. Costs, Fees and Expenses
Commissions
The General Partner, on behalf of the Partnership, entered into an agreement
with PSI to act as commodity broker for the Partnership. The Partnership pays
PSI monthly fees equal to 2/3 of 1% (an 8% annual rate) of the Partnership's net
asset value as of the first day of each month.
Management and incentive fees
The Partnership pays the Trading Manager a monthly management fee of 1/3 of
1% (a 4% annual rate) of the Partnership's net asset value as of the last day of
each month and a quarterly incentive fee of 15% of the 'New High Net Trading
Profits' (as defined in the Advisory Agreement among the Partnership, the
General Partner and the Trading Manager).
6
General and administrative expenses
In addition to the costs, fees and expenses previously discussed, the
Partnership reimburses the General Partner and its affiliates for actual
Partnership operating expenses payable by, or allocable to, the Partnership. The
amount of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. The Partnership also pays amounts directly to unrelated
parties for certain operating expenses.
D. Related Parties
The General Partner and its affiliates perform services for the Partnership
which include, but are not limited to: brokerage services; accounting and
financial management; registrar, transfer and assignment functions; investor
communications; printing and other administrative services.
The costs incurred for these services for the years ended December 31, 1999,
1998 and 1997 were:
1999 1998 1997
----------------------------------------
Commissions $1,084,856 $1,214,818 $1,377,622
General and administrative 72,450 65,400 91,077
---------- ---------- ----------
Total $1,157,306 $1,280,218 $1,468,699
---------- ---------- ----------
---------- ---------- ----------
The Partnership's assets are maintained either in trading or cash accounts
with PSI, the Partnership's commodity broker, or for margin purposes, with the
various exchanges on which the Partnership is permitted to trade.
The Partnership, acting through its Trading Manager, executes
over-the-counter, spot, forward and/or option foreign exchange transactions with
PSI. PSI then engages in back-to-back trading with an affiliate,
Prudential-Bache Global Markets Inc. ('PBGM'). PBGM attempts to earn a profit on
such transactions. PBGM keeps its prices on foreign currency competitive with
other interbank currency trading desks. All over-the-counter currency
transactions are conducted between PSI and the Partnership pursuant to a line of
credit. PSI may require that collateral be posted against the marked-to-market
positions of the Partnership.
E. Income Taxes
The following is a reconciliation of net income (loss) for financial
reporting purposes to net income (loss) for tax reporting purposes for the years
ended December 31, 1999, 1998 and 1997, respectively:
1999 1998 1997
----------------------------------------
Net income (loss) per financial statements $(1,450,139) $(258,576) $1,278,585
Change in unrealized gain/loss on nonregulated
commodity positions and foreign currencies 103,661 (51,990) (532,445)
----------- --------- ----------
Tax basis net income (loss) $(1,346,478) $(310,566) $ 746,140
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The differences between the tax and book bases of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments.
F. Credit and Market Risk
Since the Partnership's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk).
Futures, forward and options contracts involve varying degrees of off-balance
sheet risk; and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the contracts (or commodities
underlying the contracts) frequently result in changes in the Partnership's
unrealized gain (loss) on open futures and forward positions reflected in the
statements of financial condition. The Partnership's exposure to market risk is
influenced by a number of factors including the relationships among the
contracts held by the Partnership as well as the liquidity of the markets in
which the contracts are traded.
Futures and options contracts are traded on organized exchanges and are thus
distinguished from forward contracts which are entered into privately by the
parties. The credit risks associated with futures and options contracts are
typically perceived to be less than those associated with forward contracts,
because
7
exchanges typically provide clearinghouse arrangements in which the collective
credit (subject to certain limitations) of the members of the exchanges is
pledged to support the financial integrity of the exchange. On the other hand,
the Partnership must rely solely on the credit of its broker (PSI) with respect
to forward transactions. The Partnership presents unrealized gains and losses on
open forward positions as a net amount in the statements of financial condition
because it has a master netting agreement with PSI.
The General Partner attempts to minimize both credit and market risks by
requiring the Partnership and its Trading Manager to abide by various trading
limitations and policies. The General Partner monitors compliance with these
trading limitations and policies which include, but are not limited to,
executing and clearing all trades with creditworthy counterparties (currently,
PSI is the sole counterparty or broker); limiting the amount of margin or
premium required for any one commodity or all commodities combined; and
generally limiting transactions to contracts which are traded in sufficient
volume to permit the taking and liquidating of positions. Additionally, the
Advisory Agreement among the Partnership, the General Partner and the Trading
Manager may be terminated if the net asset value allocated to the Trading
Manager as of the last day of the then current year declines by 40% from the
beginning of any year and will terminate automatically if the net asset value
declines by 33 1/3% since the initial allocation of assets to the Trading
Manager (September 1, 1990). Furthermore, the Agreement of Limited Partnership
provides that the Partnership will liquidate its positions, and eventually
dissolve, if the Partnership experiences a decline in the net asset value of 50%
since the commencement of trading activities. In each case, the decline in the
net asset value is after giving effect for distributions and redemptions. The
General Partner may impose additional restrictions (through modifications of
such trading limitations and policies) upon the trading activities of the
Trading Manager as it, in good faith, deems to be in the best interests of the
Partnership.
PSI, when acting as the Partnership's futures commission merchant in
accepting orders for the purchase or sale of domestic futures and options
contracts, is required by Commodity Futures Trading Commission ('CFTC')
regulations to separately account for and segregate as belonging to the
Partnership all assets of the Partnership relating to domestic futures and
options trading and is not to commingle such assets with other assets of PSI. At
December 31, 1999 such segregated assets totalled $6,836,293. Part 30.7 of the
CFTC regulations also requires PSI to secure assets of the Partnership related
to foreign futures and options trading which totalled $4,729,971 at December 31,
1999. There are no segregation requirements for assets related to forward
trading.
As of December 31, 1999, the Partnership's open forward contracts mature
within three months and open futures contracts mature within one year.
Gross contract amounts represent the Partnership's potential involvement in a
particular class of financial instrument (if it were to take or make delivery on
an underlying futures, forward or options contract). Gross contract amounts
significantly exceed future cash requirements as the Partnership intends to
close out open positions prior to settlement and thus is generally subject only
to the risk of loss arising from the change in the value of the contracts. As
such, the Partnership considers the 'fair value' of its futures and forward
contracts to be the net unrealized gain or loss on the contracts. Thus, the
amount at risk associated with counterparty nonperformance of all contracts is
the net unrealized gain included in the statements of financial condition. The
market risk associated with the Partnership's commitments to purchase
commodities is limited to the gross contract amounts involved, while the market
risk associated with its commitments to sell is unlimited since the
Partnership's potential involvement is to make delivery of an underlying
commodity at the contract price; therefore, it must repurchase the contract at
prevailing market prices.
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At December 31, 1998, gross contract amounts of open futures and forward
contracts were:
1998
-----------
Currency Forwards:
Commitments to purchase $ 546,406
Commitments to sell 1,960,358
Currency Futures:
Commitments to purchase 5,617,987
Commitments to sell 4,238,887
Interest Rate Futures:
Commitments to purchase 37,950,345
Commitments to sell 83,475,164
Stock Index Futures:
Commitments to purchase 1,243,504
Commodity Futures:
Commitments to purchase 1,139,330
Commitments to sell 3,588,609
At December 31, 1999 and 1998, the fair value of open futures and forward
contracts was:
1999 1998
----------------------- -------------------------
Assets Liabilities Assets Liabilities
-------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $101,013 $ -- $ 9,844 $ 106,650
Currencies 121,537 38,060 178,225 41,112
Commodities 104,468 59,741 114,222 42,294
Foreign exchanges
Interest rates 49,056 24,607 1,068,363 43,340
Stock indices 22,927 -- 12,270 45,620
Commodities 20,908 9,985 29,238 4,015
Forward Contracts:
Currencies 116,345 41,517 6,297 127,472
-------- ----------- ---------- -----------
$536,254 $ 173,910 $1,418,459 $ 410,503
-------- ----------- ---------- -----------
-------- ----------- ---------- -----------
The following table presents the average fair value of futures and forward
contracts during the year ended December 31, 1998.
1998
--------------------------
Assets Liabilities
---------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 134,577 $ 26,687
Currencies 13,710 4,526
Commodities 222,938 59,529
Foreign exchanges
Interest rates 428,420 41,763
Stock indices 31,587 19,168
Commodities 22,255 9,947
Forward Contracts:
Currencies 563,410 481,174
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$1,416,897 $ 642,794
---------- -----------
---------- -----------
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The following table presents the Partnership's trading revenues for the years
ended December 31, 1998 and 1997.
1998 1997
---------- ----------
Future Contracts:
Domestic exchanges
Interest rates $ 145,038 $ 210,426
Currencies 76,951 24,502
Commodities (457,560) (555,667)
Foreign exchanges
Interest rates 2,018,258 897,749
Stock indices (424,088) 230,698
Commodities 93,497 (109,842)
Forward Contracts:
Currencies (320,152) 2,131,390
Foreign Currencies: -- 7,109
---------- ----------
$1,131,944 $2,836,365
---------- ----------
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I hereby affirm that, to the best of my knowledge and belief, the information
contained herein relating to Prudential-Bache Capital Return Futures Fund L.P.
is accurate and complete.
SEAPORT FUTURES
MANAGEMENT, INC.
(General Partner)
By: Barbara J. Brooks
Chief Financial Officer
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11
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P.
(a limited partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on May 12, 1989 with gross proceeds of
$139,151,000. After accounting for organizational and offering costs, the
Partnership's net proceeds were $137,151,000.
The Partnership Agreement provides that a partner may redeem its Units as of
the last business day of any full calendar quarter at the then current net asset
value per Unit. Redemptions by limited partners recorded for the years ended
December 31, 1999, 1998 and 1997 were $2,073,050, $1,995,145 and $2,141,221,
respectively. Redemptions by the General Partner for the years ended December
31, 1999, 1998 and 1997 were $20,877, $20,176 and $21,663, respectively.
Redemptions by limited partners and the General Partner from the commencement of
operations, May 12, 1989, through December 31, 1999 totalled $144,401,063 and
$1,639,801, respectively. Future redemptions will impact the amount of funds
available for investment in commodity contracts in subsequent periods.
As of March 28, 2000, the Partnership's estimated net asset value was
approximately $10,432,000. Additionally, the General Partner has received
first quarter 2000 redemption requests from limited partners, which when
recorded on March 31, 2000, at $121.15 per Unit (the estimated net asset value
per unit as of March 28, 2000), would cause the Partnership's net asset value
to fall below $10 million and, in accordance with the provisions of the
Partnership Agreement, would require the General Partner to dissolve the
Partnership and begin its orderly liquidation. However, the net asset value as
of March 31, 2000 is subject to the Partnership's trading results of March 29
through March 31, 2000.
At December 31, 1999, 100% of the Partnership's total net assets was
allocated to commodities trading. A significant portion of the net asset value
was held in U.S. Treasury bills (which represented approximately 74% of the net
asset value prior to redemptions payable) and cash, which are used as margin for
the Partnership's trading in commodities. Inasmuch as the sole business of the
Partnership is to trade in commodities, the Partnership continues to own such
liquid assets to be used as margin.
The percentage that U.S. Treasury bills bears to the net asset value varies
each day, and from month to month, as the market value of commodity interests
changes. All interest earned on the Partnership's interest-bearing funds is paid
to the Partnership.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in commodity futures contract prices
during a single day by regulations referred to as 'daily limits.' During a
single day, no trades may be executed at prices beyond the daily limit. Once the
price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its commodity
futures positions.
Since the Partnership's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk). The Partnership's exposure to market risk is
influenced by a number of factors including the volatility of interest rates and
foreign currency exchange rates, the liquidity of the markets in which the
contracts are traded and the relationship among the contracts held. The inherent
uncertainty of the Partnership's speculative trading as well as the development
of drastic market occurrences could result in monthly losses considerably beyond
the Partnership's experience to date and could ultimately lead to a loss of all
or substantially all of investors' capital. The General Partner attempts to
minimize these risks by requiring the Partnership and its Trading Manager to
abide by various trading limitations and policies which include limiting margin
amounts, trading only in liquid markets and utilizing stop loss provisions. See
Note F to the financial statements for a further discussion on the credit and
market risks associated with the Partnership's futures and forward contracts.
12
The Partnership does not have, nor does it expect to have, any capital
assets.
Results of Operations
The net asset value per Unit as of December 31, 1999 was $129.99, a decrease
of 11.13% from the December 31, 1998 net asset value per Unit of $146.27, which
was an decrease of 1.09% from the December 31, 1997 net asset value per Unit of
$147.88. The MAR (Managed Account Reports) Fund/Pool Index, which tracked the
performance of 317 and 281 futures funds in 1999 and 1998, returned gains of
1.48% and 6.81%, respectively, outperforming the Partnership. Past performance
is not necessarily indicative of future results.
The Partnership's unfavorable performance in 1999 was attributed to losses
from positions in the metal, financial, soft and index sectors. The currency and
energy sectors incurred gains.
The Partnership incurred losses in the metal sector primarily due to gold and
silver positions. In the first quarter as the International Monetary Fund
threatened to sell gold, prices declined causing losses for the Partnership's
long positions. Further losses were incurred in September when the European
Central Bank decided to limit sales and lending of gold, thus triggering strong
market movement. Gold prices rose to 2-year highs over a 10-day period, causing
short positions to incur losses. Silver moved in conjunction with gold as prices
rallied towards the end of the third quarter and into the fourth quarter also
generating losses.
In the financial sector, the bear market trend in Japanese government bonds
reversed when the Ministry of Finance announced that the Bank of Japan would
continue supporting the bond market by purchasing sizable quantities of Japanese
government bonds (JGBs). As a result, the Partnership sustained sizable losses
from long JGB positions in the first quarter. JGBs added profits during the
second quarter when long-term Japanese interest rates rose on concerns that more
government bonds may be issued to finance the bailout of weaker Japanese banks.
Volatile market action during the third and fourth quarters caused the
Partnership's JGB positions to end the year at an overall net loss. In the third
quarter long-term interest rates rose early on from concerns that more
government bonds may be issued to finance the bailout of weaker Japanese banks.
In the fourth quarter, JGBs benefited from a strong yen through November, but
declined in price when a major rating agency was rumored to be considering a
downgrade.
Currency sector positions in the euro, Japanese yen and Swiss franc provided
substantial profits for the Partnership. In the first quarter, the Partnership
gained from the strength of the U.S. dollar as it benefited from the
considerable slowdown in European growth and market sentiment that the European
Central Bank would have to smooth the transition to the euro by cutting rates.
As a result, gains were derived from long U.S. dollar crossrate positions
against the Deutsche mark and Swiss franc. The euro's weakness continued into
the second quarter due to deteriorating confidence in that currency and Italy's
possible retraction from the European Economic Union. Consequently, the European
Central Bank was rumored to be considering an interest rate hike in June. With
the exception of the third quarter, short euro positions provided profits
throughout the year. Strong profits were earned from Swiss franc positions in
the first half of the year. Mid-year, the Swiss franc fell in value versus the
U.S. dollar when the U.S. Federal Reserve increased interest rates by 0.25%. In
Japan, the economy showed signs of a recovery during the second quarter, but
Japanese officials feared a premature strengthening of the yen might dampen
growth. The Bank of Japan intervened at various points throughout the year by
selling yen. During November, the Japanese yen surged to a 4-year high against
the U.S. dollar. Consequently, from the second through the fourth quarters, long
yen positions benefited the Partnership.
Long positions in the energy sector, specifically crude oil and derivative
products, provided gains as prices rose throughout 1999. In the first quarter,
energy markets surged as OPEC announced substantial cuts in crude oil exports.
Crude oil prices continued to rally into the second quarter as extremely hot
U.S. weather drove increased utility demand during June and following statements
by Saudi Arabian and Mexican oil ministers reporting a high degree of compliance
with OPEC production cuts. These production cuts continued to prove beneficial
for oil markets throughout the third and fourth quarters.
Interest income is earned on the Partnership's investment in U.S. Treasury
bills and, therefore, varies monthly based on interest rates as well as the
effect of trading performance and redemptions on the level of funds available
for investment in U.S. Treasury bills. Interest income from U.S. Treasury bills
declined approximately $103,000 and $104,000 for the years ended December 31,
1999 and 1998 compared to the prior years. These decreases are due to
redemptions and poor trading performance as well as declining interest rates
during 1999 and 1998.
13
Commissions are calculated on the net asset value on the first day of each
month and, therefore, vary based on monthly trading performance and redemptions.
Commissions decreased approximately $130,000 and $163,000 for the years ended
December 31, 1999 and 1998 compared to the prior years primarily due to the
effect of redemptions and poor trading performance on the monthly net asset
values.
All trading decisions are currently made by John W. Henry & Company, Inc.
(the 'Trading Manager'). Management fees are calculated on the net asset value
as of the end of each month and, therefore, are affected by trading performance
and redemptions. Management fees decreased by approximately $69,000 and $87,000
during the years ended December 31, 1999 and 1998 compared to the prior years
for the same reasons commissions decreased as discussed above.
Incentive fees are based on New High Net Trading Profits generated by the
Trading Manager, as defined in the Advisory Agreement among the Partnership, the
General Partner and the Trading Manager. Trading performance resulted in
incentive fees of approximately $13,000 for the year ended December 31, 1997. No
incentive fees were earned during 1999 and 1998.
General and administrative expenses increased by approximately $7,000 for the
year ended December 31, 1999 compared to 1998 but decreased approximately $8,000
for the year ended December 31, 1998 compared to 1997. These expenses include
reimbursements of costs incurred by the General Partner on behalf of the
Partnership in addition to accounting, audit, tax and legal fees as well as
printing and postage costs related to reports sent to limited partners.
Accounting for Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ('SFAS') No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Partnership adopted effective
October 1, 1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities and requires that an entity
recognize all derivatives as assets or liabilities measured at fair value. SFAS
No. 133 supersedes SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments and SFAS No. 105, Disclosure
of Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk which required the
disclosure of average aggregate fair values and contract/notional values,
respectively, of derivative financial instruments for an entity like the
Partnership which carries its assets at fair value. The adoption of SFAS No. 133
has not had a material effect on the carrying value of assets and liabilities
within the financial statements.
Year 2000 Risk
The arrival of year 2000 was much anticipated and raised serious concerns
about whether or not computer systems around the world would continue to
function properly and the degree of 'Year 2000 Problems' that would have to be
resolved.
The Partnership engages third parties to perform primarily all of the
services it needs and also relies on other third parties such as governments,
exchanges, clearinghouses, vendors and banks. The Partnership has not
experienced any material adverse impact on operations related to Year 2000
Problems. While the Partnership believes that it has mitigated its Year 2000
risk, the Partnership cannot guarantee that an as yet unknown Year 2000 failure
will not have a material adverse effect on the Partnership's operations.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Partnership from inception through December 31, 1999.
14
OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 1999 was $125.
The Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
Prudential Securities Incorporated
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
15
1999
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