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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number: 0-18418
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3533120
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One New York Plaza, 13th Floor New York, New York
10292
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check CK whether the Registrant (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
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes CK No __
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<Table>
<Caption>
June 30, December 31,
2001 2000
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash $ 4,625,034 $ 2,989,531
U.S. Treasury bills, at amortized cost (pledged at broker) 7,901,807 9,890,040
Net unrealized gain on open futures and options contracts 57,952 1,179,039
Net unrealized gain on open forward contracts 131,135 265,456
----------- ------------
Total assets $12,715,928 $14,324,066
----------- ------------
----------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 375,360 $ 473,514
Due to affiliates 52,694 74,303
Accrued expenses payable 34,602 57,254
Management fees payable 17,287 24,772
Premiums received on options -- 7,506
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Total liabilities 479,943 637,349
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Commitments
Partners' capital
Limited partners (56,895 and 60,808 units outstanding) 12,113,560 13,549,677
General partner (575 and 615 units outstanding) 122,425 137,040
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Total partners' capital 12,235,985 13,686,717
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Total liabilities and partners' capital $12,715,928 $14,324,066
----------- ------------
----------- ------------
Net asset value per limited and general partnership unit ('Units') $ 212.91 $ 222.83
----------- ------------
----------- ------------
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</Table>
The accompanying notes are an integral part of these statements.
2
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Six Months Three Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2001 2000 2001 2000
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REVENUES
Net realized gain (loss) on commodity
transactions $ 1,234,025 $ (655,387) $ (196,021) $ (364,991)
Change in net unrealized gain/loss on open
commodity positions (1,255,408) (669,726) (584,153) (465,670)
Interest from U.S. Treasury bills 231,197 349,112 106,026 167,639
----------- ----------- ----------- -----------
209,814 (976,001) (674,148) (663,022)
----------- ----------- ----------- -----------
EXPENSES
Commissions 516,901 688,877 246,242 316,058
Management fees 133,341 178,760 61,703 81,495
Incentive fees 60,570 -- -- --
General and administrative 70,543 68,112 33,428 34,729
----------- ----------- ----------- -----------
781,355 935,749 341,373 432,282
----------- ----------- ----------- -----------
Net loss $ (571,541) $(1,911,750) $(1,015,521) $(1,095,304)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
ALLOCATION OF NET LOSS
Limited partners $ (565,819) $(1,892,623) $(1,005,354) $(1,084,345)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
General partner $ (5,722) $ (19,127) $ (10,167) $ (10,959)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER WEIGHTED AVERAGE LIMITED
AND GENERAL PARTNERSHIP UNIT
Net loss per weighted average limited
and general partnership unit $ (9.47) $ (24.57) $ (17.14) $ (14.99)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of limited
and general partnership units outstanding 60,328 77,806 59,233 73,047
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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</Table>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
<Table>
<Caption>
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
- -----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 2000 61,423 $13,549,677 $ 137,040 $13,686,717
Net loss (565,819) (5,722) (571,541)
Redemptions (3,953) (870,298) (8,893) (879,191)
-------- ----------- --------- -----------
Partners' capital--June 30, 2001 57,470 $12,113,560 $ 122,425 $12,235,985
-------- ----------- --------- -----------
-------- ----------- --------- -----------
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</Table>
The accompanying notes are an integral part of these statements.
3
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of Prudential Securities Futures Management Inc. (the 'General Partner'), the
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to state fairly the financial position of
Prudential-Bache Capital Return Futures Fund 2, L.P. (the 'Partnership') as of
June 30, 2001 and the results of its operations for the six and three months
ended June 30, 2001 and 2000. However, the operating results for the interim
periods may not be indicative of the results expected for a full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. It is suggested that
these financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
2000.
Certain balances from 2000 have been reclassified to conform with the current
financial statement presentation.
Welton Investment Corporation ('Welton'), a trading manager to the
Partnership, was terminated effective May 31, 2001 due to performance not
meeting expectations relative to its peers. The assets previously managed by
Welton (the 'Welton Assets'), which totalled approximately $2,189,000 as of June
30, 2001, were reallocated to commodities trading on July 8, 2001 as more fully
discussed in Note E. The Welton Assets earned interest but were not subject to
management fees or commissions during the period that the assets were not
allocated to trading.
B. Related Parties
The General Partner is a wholly-owned subsidiary of Prudential Securities
Incorporated ('PSI'). 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 six and three months ended June
30, 2001 and 2000 were:
<Table>
<Caption>
For the six months For the three months
ended June 30, ended June 30,
--------------------- ---------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------
Commissions $516,901 $688,877 $246,242 $316,058
General and administrative 39,996 35,054 18,155 17,735
-------- -------- -------- --------
$556,897 $723,931 $264,397 $333,793
-------- -------- -------- --------
-------- -------- -------- --------
</Table>
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 managers, may execute
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.
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C. Derivative Instruments and Associated Risks
The Partnership is exposed to various types of risk associated with the
derivative instruments and related markets in which it invests. These risks
include, but are not limited to, risk of loss from fluctuations in the value of
derivative instruments held (market risk) and the inability of counterparties to
perform under the terms of the Partnership's investment activities (credit
risk).
Market risk
Trading in futures and forward (including foreign exchange) contracts
involves entering into contractual commitments to purchase or sell a particular
commodity at a specified date and price. The gross or face amount of the
contracts, which is typically many times that of the Partnership's net assets
being traded, significantly exceeds the Partnership's future cash requirements
since the Partnership intends to close out its open positions prior to
settlement. As a result, the Partnership 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. The market risk associated
with the Partnership's commitments to purchase commodities is limited to the
gross or face amount of the contracts held. However, when the Partnership enters
into a contractual commitment to sell commodities, it must make delivery of the
underlying commodity at the contract price and then repurchase the contract at
prevailing market prices. Since the repurchase price to which a commodity can
rise is unlimited, entering into commitments to sell commodities exposes the
Partnership to unlimited risk.
Trading in options involves the payment or receipt of a premium and the
corresponding right or obligation, as the case may be, to either purchase or
sell the underlying commodity for a specified price during a limited period of
time. Purchasing options involves the risk that the underlying commodity does
not change price as expected, so that the option expires worthless and the
premium is lost. On the other hand, selling options involves unlimited risk
because the Partnership is exposed to the potentially unlimited price movement
in the underlying commodity.
Market risk is influenced by a wide variety of factors including government
programs and policies, political and economic events, the level and volatility
of interest rates, foreign currency exchange rates, the diversification effects
among the derivative instruments the Partnership holds and the liquidity and
inherent volatility of the markets in which the Partnership trades.
Credit risk
When entering into futures, forward and options contracts, the Partnership is
exposed to credit risk that the counterparty to the contract will not meet its
obligations. The counterparty for futures and options contracts traded on United
States and most foreign futures and options exchanges is the clearinghouse
associated with such exchanges. In general, clearinghouses are backed by their
corporate members who are required to share any financial burden resulting from
the nonperformance by one of their members and, as such, should significantly
reduce this credit risk. In cases where the clearinghouse is not backed by the
clearing members (i.e., some foreign exchanges), it is normally backed by a
consortium of banks or other financial institutions. On the other hand, the sole
counterparty to the Partnership's forward transactions is PSI, the Partnership's
commodity broker. The Partnership has entered into a master netting agreement
with PSI and, as a result, presents unrealized gains and losses on open forward
positions as a net amount in the statements of financial condition. The amount
at risk associated with counterparty nonperformance of all of the Partnership's
contracts is the net unrealized gain (plus premiums paid on options) included in
the statements of financial condition. There can be no assurance that any
counterparty, clearing member or clearinghouse will meet its obligations to the
Partnership.
The General Partner attempts to minimize both credit and market risks by
requiring the Partnership and its trading managers 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, 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, pursuant to each Advisory Agreement among the Partnership, the
General Partner and each trading manager, the General Partner shall
automatically terminate a trading manager if the net asset value allocated to
the trading manager declines by 33 1/3% since the commencement of its trading
activities or from the value at the beginning of any year. Furthermore, the
Amended and Restated Agreement of Limited Partnership provides
5
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that the Partnership will liquidate its positions, and eventually dissolve, if
the Partnership experiences a decline in the net asset value to less than 50% of
the value at commencement of trading activities. In each case, the decline in
net asset value is after giving effect for distributions and redemptions. The
General Partner may impose additional restrictions (through modifications of
trading limitations and policies) upon the trading activities of the trading
managers as it, in good faith, deems to be in the best interest 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 (subject to the recent opt out provisions discussed below) and
is not allowed to commingle such assets with other assets of PSI. At June 30,
2001, such segregated assets totalled $10,378,755. 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 $2,206,038 at June 30, 2001.
There are no segregation requirements for assets related to forward trading.
The CFTC recently promulgated rules that allow futures commission merchants
to permit certain customers, including the Partnership, to opt out of
segregation with regard to trading on certain exchanges, but PSI has not done so
to date. If the Partnership were to opt out, its funds could be held in a
broader and riskier range of investments.
As of June 30, 2001, the Partnership's open futures and forward contracts
mature within one year.
At June 30, 2001 and December 31, 2000, the fair value of open futures,
forward and options contracts was:
<Table>
<Caption>
2001 2000
------------------------ --------------------------
Assets Liabilities Assets Liabilities
-------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 12,750 $ 27,061 $ 342,034 $ --
Stock indices 500 -- 9,940 --
Currencies 48,959 10,205 524,721 4,640
Commodities 62,663 3,350 77,160 25,700
Foreign exchanges
Interest rates 36,186 23,215 259,017 493
Stock indices 18,492 3,126 46,489 --
Commodities 18,943 73,584 9,819 62,840
Forward Contracts:
Currencies 183,839 52,704 436,854 171,398
Options Contracts:
Domestic exchanges
Interest rates -- -- -- 1,219
Currencies -- -- -- 1,875
Commodities -- -- -- 880
-------- ----------- ---------- -----------
$382,332 $ 193,245 $1,706,034 $ 269,045
-------- ----------- ---------- -----------
-------- ----------- ---------- -----------
</Table>
6
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D. Financial Highlights
<Table>
<Caption>
Six Months Ended Three Months Ended
June 30, 2001 June 30, 2001
------------------ ------------------
Performance per Unit
Net asset value, beginning of period $ 222.83 $ 230.06
------------------ ------------------
Net realized gain (loss) and change in net
unrealized gain/loss on commodity
transactions (0.83) (13.18)
Interest from U.S. Treasury bills 3.83 1.79
Expenses (12.92) (5.76)
------------------ ------------------
Decrease for the period (9.92) (17.15)
------------------ ------------------
Net asset value, end of period $ 212.91 $ 212.91
------------------ ------------------
------------------ ------------------
Total return (4.45)% (7.45)%
Ratio to average net assets
Interest income 3.50% 3.28%
Expenses, including .92% and 0% of incen-
tive fees 11.84% 10.55%
</Table>
E. Subsequent Events
During July 2001, the Partnership entered into agreements to reallocate the
Welton Assets evenly between two of the Partnership's trading managers--Appleton
Capital Management ('Appleton') and Eclipse Capital Management, Inc.
('Eclipse'). Appleton and Eclipse will receive monthly management fees on their
portion of the reallocated assets equal to 1/6 of 1% (2% annually) as compared
to management fees paid to Welton ranging between 1/6 of 1% (2% annually) and
1/3 of 1% (4% annually). Appleton and Eclipse will earn a quarterly incentive
fee equal to 20% of the 'New High Net Trading Profits' (as defined in each
advisory agreement among the Partnership, the General Partner and each trading
manager) as compared to the range of 15% to 20% for Welton. Additionally,
Appleton must recoup 100% (or $964,000) of Welton's cumulative trading losses
associated with its portion of the reallocated assets and Eclipse must recoup
only 50% (or $482,000) of its portion, before earning any incentive fees.
7
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced trading operations on October 6, 1989 with gross
proceeds of $101,010,000. After accounting for organizational and offering
costs, the Partnership's net proceeds were $99,010,000.
At June 30, 2001, 82% of the Partnership's total net assets was allocated to
commodities trading. The remaining Partnership net assets were not allocated to
commodities trading after Welton, one of the Partnership's trading managers, was
terminated effective May 31, 2001 due to performance not meeting expectations
relative to its peers. The Welton Assets were reallocated evenly between two of
the Partnership's trading managers during July 2001 as further discussed in Note
E to the financial statements.
A significant portion of the net asset value as of June 30, 2001 was held in
U.S. Treasury bills (which represented approximately 63% 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 total net assets varies
each day, and from month to month, as the market values of commodity interests
change. The balance of the net assets is held in cash. All interest earned on
the Partnership's interest-bearing funds is paid to the Partnership. For the
month of June 2001, the Partnership earned interest on the assets previously
managed by Welton (the 'Welton Assets').
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 certain 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 relationships 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 managers to abide by various trading limitations and policies, which
include limiting margin amounts, trading only in liquid markets and permitting
the use of stop loss provisions. See Note C to the financial statements for a
further discussion of the credit and market risks associated with the
Partnership's futures, forward and options contracts.
Redemptions recorded for the six and three months ended June 30, 2001 were
$870,298 and $371,528, respectively, for the limited partners and $8,893 and
$3,832, respectively, for the general partner, and from commencement of
operations, October 6, 1989, through June 30, 2001, totalled $132,261,846 for
the limited partners and $1,881,995 for the general partner. Future redemptions
will impact the amount of funds available for investment in commodity contracts
in subsequent periods.
The Partnership does not have, nor does it expect to have, any capital
assets.
8
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Results of Operations
The net asset value per Unit as of June 30, 2001 was $212.91, a decrease of
4.45% from the December 31, 2000 net asset value per Unit of $222.83 and a
decrease of 7.45% from the March 31, 2001 net asset value per Unit of $230.06.
Past performance is not necessarily indicative of future results.
The Partnership had gross trading losses of approximately $21,000 and
$780,000 during the six and three months ended June 30, 2001, respectively,
compared to losses of $1,325,000 and $831,000 for the corresponding periods in
the prior year. Due to the nature of the Partnership's trading activities, a
period to period comparison of its trading results is not meaningful. However, a
detailed discussion of the Partnership's current quarter trading results is
presented below.
Quarterly Market Overview
The global economy remained sluggish during the second quarter of 2001 and as
a result, U.S. and global stock markets continued their downward trend. In the
U.S., heightened concerns regarding cutbacks in industrial production and future
sales caused downward revisions of corporate earnings. Business investment and
capital spending were weak and appeared to be decreasing further, reflecting in
part the downtrend in manufacturing output. Labor demand weakened considerably
and unemployment rose. Consumer spending held up relatively well despite
deceleration in income, reduced household net worth, and deterioration in
consumer sentiment. Economic activity in foreign industrial countries
decelerated as well, due in part to softening of the U.S. economy, weakness in
world high-tech markets and the downward adjustment in global equity prices.
Expansion in Europe, including the United Kingdom, and Canada slowed
significantly, while the Japanese economy slowed after a brief rebound late last
year. In addition, economic growth in many developing countries softened,
reflecting, in part, weaker external demand. In the U.S., overall inflation, as
measured by the Consumer Price Index (CPI), increased slightly, but was held
down by a deceleration in energy prices.
As a result of weak global economies, equity markets continued to perform
poorly during most of the quarter. In April, U.S. equity markets, particularly
the NASDAQ, rallied briefly after the U.S. Federal Reserve (Fed) called an
unscheduled meeting to lower interest rates before falling once again amid
continuing softening economies and fears of weak corporate earnings. Markets
rose briefly once again in June following the U.S. Federal Reserve's 25 basis
point interest rate cut. This smaller than anticipated rate reduction seemed to
signal a cessation of the Fed's recent series of aggressive rate cuts and caused
many investors to exit the bond market and invest in equities.
Interest rate instruments trended upward throughout most of the quarter as
major central banks cut short-term interest rates in an attempt to bolster
slowing economies. The U.S. Federal Reserve cut rates three times during the
quarter lowering rates from 4.50% to 3.75%. The European Central Bank and the
Bank of England cut interest rates by 25 basis points in May. This was the third
interest rate reduction in five months for the Bank of England. Global bonds
reversed downward towards quarter-end as the Fed cut rates by only 25 basis
points, driving many investors out of interest rate instruments and into
equities.
In foreign exchange markets, the Japanese yen started the quarter strong
before weakening against the U.S. dollar and other foreign currencies. This
followed a government report that Japan's GDP shrank in the first quarter,
generating fears that the Japanese economy may be slipping into recession. The
Canadian dollar posted gains against the U.S. dollar as economic reports showed
a 1.7% increase in exports to the U.S. in June. The British pound reached a 15
year low against the U.S. dollar in June amid concern that England would join
the European Monetary Union. The euro declined against the U.S. dollar as well,
amid signs of continuing weakness in the European economy.
Energy prices fell in response to growing inventory levels of crude oil and
related products. The American Petroleum Institute reported that the U.S.
gasoline supply had reached its highest level in two years. Swelling energy
inventories fed fears of an overall weakening demand for fuels in the slowing
global economy. Additionally, the market fell when tropical storm Allison caused
less damage along the Gulf Coast than was originally feared.
Quarterly Partnership Performance
The following is a summary of performance for the major sectors in which the
Partnership traded:
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Currencies (-): After a strong start, the Japanese yen declined against the
U.S. dollar and many European currencies as the Japanese economy exhibited signs
of weakness. Long Japanese yen and yen cross-rate positions resulted in losses.
The euro declined against the U.S. dollar, Swiss franc and other foreign
currencies amid fears of weakening European economies resulting in losses for
euro cross-rate positions.
Interest rates (-): Prices of most interest rate instruments trended upward
throughout most of the quarter due to short-term interest rate cuts by major
central banks in an attempt to bolster slowing economies. Short positions in
U.S. government and euro bonds resulted in losses for the Partnership.
Metals (-): Gold prices rallied to a ten month high in May before reversing
course amid rumors that Russia would sell a portion of its gold reserve. Long
gold positions incurred losses for the Partnership. Rate cuts by U.S. and
European central banks stirred fears of inflation driving metal prices higher.
Short positions in nickel, aluminum and copper incurred losses for the
Partnership.
Stock indices (-): Weak global economies and concerns regarding corporate
earnings resulted in continued poor performance in the equity markets. London
FTSE and Nikkei Dow positions resulted in losses for the Partnership.
Energies (+): Short natural gas positions resulted in gains as increased
inventories and weakening demand drove prices downward.
Interest income is earned on the Partnership's investment in U.S. Treasury
bills and varies monthly according to interest rates as well as the effect of
trading performance and redemptions on the level of interest-bearing funds.
Interest income from U.S. Treasury bills decreased by approximately $118,000 and
$62,000, respectively, for the six and three months ended June 30, 2001 compared
to the same periods in 2000. These declines in interest income were the result
of fewer funds being invested in U.S. Treasury bills principally due to
redemptions as well as lower interest rates during the six and three months
ended June 30, 2001 versus the corresponding periods in 2000.
Commissions paid to PSI are calculated on the Partnership's net asset value
on the first day of each month and, therefore, vary monthly according to trading
performance and redemptions. Commissions decreased by approximately $172,000 and
$70,000, respectively, for the six and three months ended June 30, 2001 as
compared to the same periods in 2000 principally due to the effect of
redemptions on the monthly net asset values. Additionally, a portion of the
Partnership's assets were not allocated to commodities trading during June 2001
(as more fully discussed in Notes A and E to the financial statements) and,
therefore, were not subject to commissions for that month.
All trading decisions are currently being made by Eclipse Capital Management,
Inc., Trendlogic Associates, Inc. and Appleton Capital Management ('Appleton').
Welton made trading decisions on the Welton Assets until their termination,
effective May 31, 2001. Management fees are calculated on the portion of the
Partnership's net asset value allocated to each trading manager as of the end of
each month and, therefore, are affected by trading performance and redemptions.
Management fees decreased by approximately $45,000 and $20,000, respectively,
for the six and three months ended June 30, 2001 as compared to the same periods
in 2000 primarily due to the fluctuations in monthly net asset values as
described in the discussion on commissions above. Additionally, the portion of
assets which were not allocated to commodities trading during June 2001, as
referred to in the discussion on commissions above, were not subject to
management fees.
Incentive fees are based on the 'New High Net Trading Profits' generated by
each trading manager, as defined in each advisory agreement among the
Partnership, the General Partner and each trading manager. Appleton generated
sufficient trading profits during the first quarter of 2001 to earn incentive
fees of approximately $61,000 for the six months ended June 30, 2001. No
incentive fees were incurred by the Partnership during the six and three months
ended June 30, 2000.
General and Administrative expenses for the six and three months ended June
30, 2001 were relatively comparable to the corresponding periods in 2000. 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.
10
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.
11
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings--There are no material legal proceedings pending by
or against the Registrant or the General Partner.
Item 2. Changes in Securities--None
Item 3. Defaults Upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
4.1 Agreement of Limited Partnership of the Registrant, dated as
of June 8, 1989 as amended and restated as of July 21, 1989
(incorporated by reference to Exhibits 3.1 and 4.1 to the
Registrant's Annual Report on Form 10-K for the period ended
December 31, 1989)
4.2 Subscription Agreement (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement
on Form S-1, File No. 33-29039)
4.3 Request for Redemption (incorporated by
reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1, File No.
33-29039)
10.19 Addendum to Advisory Agreement, dated
July 6, 2001, among the Registrant,
Prudential Securities Futures Management
Inc. and Eclipse Capital Management, Inc.
(filed herewith)
10.20 Addendum to Advisory Agreement,
dated July 6, 2001, among the
Registrant, Prudential Securities
Futures Management Inc. and
Appleton Capital Management (filed
herewith)
(b) Reports on Form 8-K--
No reports on Form 8-K were filed during the quarter.
12
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Prudential-Bache Capital Return Futures Fund 2, L.P.
By: Prudential Securities Futures ManagementInc.
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: August 14, 2001
----------------------------------------
Steven Carlino
Vice President and Treasurer
13
PRUDENTIAL BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
ADDENDUM TO ADVISORY AGREEMENT
Addendum, effective as of the 6th day of July, 2001, to the Advisory
Agreement, effective as of the 1st day of July, 1997 (the "Advisory
Agreement"), by and among Prudential-Bache Capital Return Futures Fund 2, L.P.,
a Delaware limited partnership (the "Partnership"), Prudential Securities
Futures Management Inc., a Delaware corporation (the "General Partner") and
Eclipse Capital Management, Inc., a Kentucky corporation (the "Advisor").
1. The Partnership will reallocate approximately $1,100,000 of the assets
of the Partnership (the "Reallocated Assets") previously under the management
of another trading advisor (the "Prior Advisor") to the Advisor as of the
effective date of this Addendum, and the Advisor hereby consents to such
reallocation.
2. For all purposes, including fee calculations, the assets currently
allocated to the Advisor ("Current Assets") and the Reallocated Assets will
be treated as a single amount.
3. Notwithstanding any other provision of this Addendum or of the Advisory
Agreement which may be interpreted to the contrary, in addition to any
cumulative losses attributable to the Current Assets ("Current Losses"), it
is the intent of the parties that approximately $482,000, which is equal to
50% of the total cumulative losses existing as of the date of this Addendum
attributable to the Reallocated Assets and accumulated while they were under
the management of the Prior Advisor (the "Reallocated Losses") will be
reallocated to the Advisor. Therefore, the full amount of Current Losses and
the Reallocated Losses must be recouped consistent with the calculations
and provisions of
Section 5 of the Advisory Agreement before the next Incentive Fee under
the Advisory Agreement will be due and owing on any assets allocated
to the Advisor.
4. This Addendum shall be incorporated into, and become a part of, the
Advisory Agreement. All capitalized terms used herein and not defined shall
have the meaning given to them in the Advisory Agreement.
IN WITNESS WHEREOF, this Addendum has been executed for and on
behalf of the undersigned.
PRUDENTIAL-BACHE CAPITAL RETURN PRUDENTIAL SECURITIES
FUTURES FUND 2, L.P. INCORPORATED
By: PRUDENTIAL SECURITIES FUTURES By: /s/ Guy Scarpaci
MANAGEMENT INC. -----------------------------------
Guy Scarpaci, Senior Vice President
By: /s/ Eleanor L. Thomas
-----------------------------
Eleanor L. Thomas, President
ECLIPSE CAPITAL MANAGEMENT, INC.
By: /s/ Thomas W. Moller
-----------------------------
Name: Thomas W. Moller
Title: President
PRUDENTIAL BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
ADDENDUM TO ADVISORY AGREEMENT
Addendum, effective as of the 6th day of July, 2001, to the Advisory
Agreement, effective as of the 1st day of September, 1998 (the "Advisory
Agreement"), by and among Prudential-Bache Capital Return Futures Fund 2,
L.P., a Delaware limited partnership (the "Partnership"), Prudential
Securities Futures Management Inc., a Delaware corporation (the "General
Partner") and Appleton Capital Management Limited (formerly known as
Gaiacorp Ireland Limited), an Irish company (the "Advisor").
1. The Partnership will reallocate approximately $1,100,000 of the
assets of the Partnership (the "Reallocated Assets") previously under the
management of another trading advisor (the "Prior Advisor") to the Advisor
as of the effective date of this Addendum, and the Advisor hereby consents
to such reallocation.
2. For all purposes, including fee calculations, the assets currently
allocated to the Advisor ("Current Assets") and the Reallocated Assets will
be treated as a single amount.
3. Notwithstanding any other provision of this Addendum or of the
Advisory Agreement which may be interpreted to the contrary, in addition to
any cumulative losses of the Partnership being carried forward for purposes
of calculating the Advisor's Incentive Fee ("Current Losses"), it is the
intent of the parties that approximately $970,000, which is equal to 100%
of the total cumulative losses existing as of the date of this Addendum
attributable to the Reallocated Assets and accumulated while they were
under the management of the Prior Advisor (the "Reallocated Losses") will
be reallocated
to the Advisor. Therefore, the full amount of Current Losses and the
Reallocated Losses must be recouped consistent with the calculations
and provisions of Section 5 of the Advisory Agreement before the next
Incentive Fee under the Advisory Agreement will be due and owing on any
assets allocated to the Advisor.
4. This Addendum shall be incorporated into, and become a part of, the
Advisory Agreement. All capitalized terms used herein and not defined
shall have the meaning given to them in the Advisory Agreement.
IN WITNESS WHEREOF, this Addendum has been executed for and on
behalf of the undersigned.
PRUDENTIAL-BACHE CAPITAL RETURN PRUDENTIAL SECURITIES
FUTURES FUND 2, L.P. INCORPORATED
By: PRUDENTIAL SECURITIES FUTURES By: /s/ Guy Scarpaci
MANAGEMENT INC., ----------------------------------
Guy Scarpaci, Senior Vice President
By: /s/ Eleanor L. Thomas
----------------------------
Eleanor L. Thomas, President
APPLETON CAPITAL MANAGEMENT
LIMITED
By: /s/ Louise McKenna
----------------------------
Name: Louise McKenna
Title: Compliance Officer