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 September 30, 1996
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: 0-19070
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3544867
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 __
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
1996 1995
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ASSETS
Equity in commodity trading accounts:
Cash $ 3,384,947 $ 5,764,135
U.S. Treasury bills, at amortized cost 14,805,554 15,124,874
Net unrealized gain on open commodity positions 2,862,501 1,340,794
Options, at market 58,794 41,162
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Total assets $21,111,796 $22,270,965
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 613,978 $ 877,911
Incentive fees payable 165,413 74,959
Accrued expenses 57,249 63,404
Management fees payable 50,827 53,350
Due to affiliates 41,753 77,692
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Total liabilities 929,220 1,147,316
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Commitments
Partners' capital
Limited partners (120,412 and 131,345 units outstanding) 19,980,633 20,572,015
General partner (1,217 and 3,522 units outstanding) 201,943 551,634
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Total partners' capital 20,182,576 21,123,649
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Total liabilities and partners' capital $21,111,796 $22,270,965
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Net asset value per limited and general partnership unit
(``Units'') $ 165.94 $ 156.63
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The accompanying notes are an integral part of these statements
2
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
------------------------ -------------------------
1996 1995 1996 1995
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REVENUES
Net realized gain (loss) on commodity
transactions $1,251,202 $2,317,831 $ 576,004 $(1,381,327)
Change in net unrealized gain/loss on open
commodity positions 1,436,842 651,474 2,073,205 838,515
Interest from U.S. Treasury bills 557,683 592,658 182,820 257,669
Realized gain on reserve assets -- 7,370 -- --
Change in net unrealized gain on reserve
assets -- (91,359) -- --
Interest from reserve assets -- 506,190 -- --
---------- ---------- ---------- -----------
3,245,727 3,984,164 2,832,029 (285,143)
---------- ---------- ---------- -----------
EXPENSES
Commissions 1,111,501 836,609 343,899 385,924
Other transaction fees 140,868 171,801 47,111 49,434
Letter of credit fees -- 103,003 -- --
Management fees 435,410 348,858 138,928 146,177
Incentive fees 340,835 131,688 165,413 --
General and administrative 103,208 121,840 4,592 43,887
Amortization of organizational costs -- 6,245 -- --
---------- ---------- ---------- -----------
2,131,822 1,720,044 699,943 625,422
---------- ---------- ---------- -----------
Net income (loss) $1,113,905 $2,264,120 $2,132,086 $ (910,565)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $1,111,830 $2,223,982 $2,110,754 $ (888,551)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
General partner $ 2,075 $ 40,138 $ 21,332 $ (22,014)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED
AND GENERAL PARTNERSHIP UNIT
Net income (loss) per weighted average limited
and general partnership unit $ 8.59 $ 13.27 $ 17.01 $ (6.25)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Weighted average number of limited and general
partnership units outstanding 129,742 170,642 125,329 145,679
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
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STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
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Partners' capital--December 31, 1995 134,867 $20,572,015 $551,634 $21,123,649
Net income -- 1,111,830 2,075 1,113,905
Redemptions (13,238) (1,703,212) (351,766) (2,054,978)
------- ----------- -------- -----------
Partners' capital--September 30, 1996 121,629 $19,980,633 $201,943 $20,182,576
------- ----------- -------- -----------
------- ----------- -------- -----------
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The accompanying notes are an integral part of these statements
3
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of Prudential-Bache Capital Return Futures Fund 3, L.P. (the
``Partnership'') as of September 30, 1996 and the results of its operations for
the nine and three months ended September 30, 1996 and 1995. 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 generally accepted accounting
principles 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, 1995 (the ``Annual
Report'').
Certain balances for prior periods have been reclassified to conform with
current financial statement presentation.
B. Related Parties
Seaport Futures Management, Inc. (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 nine months ended
September 30, 1996 and 1995 were:
1996 1995
----------------------------------------------------------------------------------------
Commissions and letter of credit fees $1,111,501 $ 859,496
General and administrative 53,675 71,074
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$1,165,176 $ 930,570
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------------ -----------
The costs incurred for these services for the three months ended September
30, 1996 and 1995 were:
1996 1995
----------------------------------------------------------------------------------------
Commissions $343,899 $ 385,924
General and administrative 3,428 24,364
------------ -----------
$347,327 $ 410,288
------------ -----------
------------ -----------
The Partnership maintains its trading and cash accounts with Prudential
Securities Incorporated (``PSI''), the Partnership's commodity broker and an
affiliate of the General Partner. Approximately 75% of the Partnership's trading
assets is invested 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. As described in the
Annual Report, all commissions for brokerage services are paid to PSI.
When the Partnership engages in forward foreign currency transactions it
trades with PSI who simultaneously engages in back-to-back transactions with an
affiliate who, pursuant to the Partnership's prospectus, is obligated to charge
a competitive price.
Additionally, the Partnership maintained a 9.16% guaranteed investment
contract (``GIC'') which matured on June 30, 1995 with The Prudential Asset
Management Company, Inc., an affiliate of the General Partner. Interest earned
on the GIC for the six months ended June 30, 1995 was $502,511.
4
C. 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 of 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 commodity 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 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's 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 (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. The General Partner
may impose additional restrictions (through modifications of such trading
limitations and policies) upon the trading activities of the trading managers 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
September 30, 1996 and December 31, 1995, such segregated assets totalled
$17,218,342 and $20,592,976, respectively. 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 $3,893,454 and $1,677,989 at September 30,
1996 and December 31, 1995, respectively. There are no segregation requirements
for assets related to forward trading.
As of September 30, 1996 and December 31, 1995, the Partnership's open
futures, forward and options contracts mature within nine months and one year,
respectively.
At September 30, 1996 and December 31, 1995, gross contract amounts of open
futures and options contracts are:
September 30, December 31,
1996 1995
------------- ------------
Currency Futures Contracts:
Commitments to sell $ 25,470,538 $ --
Financial Futures Contracts:
Commitments to purchase $ 424,633,123 $211,622,618
Commitments to sell $ -- $109,152,492
Other Futures
and Options Contracts:
Commitments to purchase $ 12,642,808 $ 19,550,940
Commitments to sell $ 1,607,650 $ 1,851,942
5
The 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). The gross
contract amounts significantly exceed the 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, forward and options contracts to be the net unrealized gain or loss on
the contracts (plus premiums on options). 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.
At September 30, 1996 and December 31, 1995, the fair value of futures and
options contracts was:
September 30, 1996 December 31, 1995
-------------------------------- --------------------------
Fair Value Fair Value
-------------------------------- --------------------------
Assets Liabilities Assets Liabilities
-------------- -------------- ---------- ------------
Futures Contracts:
Domestic exchanges
Financial $ 162,225 $ 26,250 $ 247,938 $210,938
Currencies 580,288 -- -- --
Other 188,455 529,432 831,073 169,415
Foreign exchanges
Financial 2,513,208 4,304 701,932 3,725
Other -- 21,689 20,892 76,963
Options Contracts:
Domestic exchanges
Other 58,794 -- 41,162 --
-------------- -------------- ---------- ------------
$3,502,970 $581,675 $1,842,997 $461,041
-------------- -------------- ---------- ------------
-------------- -------------- ---------- ------------
The following table presents the average fair value of futures, forward and
options contracts during the nine months ended September 30, 1996 and 1995,
respectively.
Nine months ended Nine months ended
September 30, 1996 September 30, 1995
-------------------------------- ------------------------
Average Fair Value Average Fair Value
-------------------------------- ------------------------
Assets Liabilities Assets Liabilities
-------------- -------------- -------- ------------
Futures Contracts:
Domestic exchanges
Financial $ 65,326 $ 37,777 $ -- $ --
Currencies 160,742 42,268 -- --
Other 664,376 157,810 85,385 12,642
Foreign exchanges
Financial 521,029 20,942 662,251 50,704
Other 41,701 62,340 12,092 47,855
Forward Contracts:
Other 1,643 11,590 -- --
Options Contracts:
Domestic exchanges
Financial 11,421 -- -- --
Currencies 43,968 -- -- 51,985
Other 34,678 -- 5,707 --
Foreign Exchanges
Financial 4,133 -- -- --
Other -- -- 13,970 --
-------------- -------------- -------- ------------
$1,549,017 $332,727 $779,405 $163,186
-------------- -------------- -------- ------------
-------------- -------------- -------- ------------
6
The following table presents the average fair value of futures, forward and
options contracts during the three months ended September 30, 1996 and 1995,
respectively.
Three months ended Three months ended
September 30, 1996 September 30, 1995
-------------------------- ------------------------
Average Fair Value Average Fair Value
-------------------------- ------------------------
Assets Liabilities Assets Liabilities
---------- ----------- -------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 49,470 $ 8,622 $ -- $ --
Currencies 164,163 91,488 -- --
Other 302,922 161,621 213,462 31,604
Foreign exchanges
Financial 1,005,985 27,200 223,204 42,521
Other -- 5,422 30,230 119,639
Forward Contracts:
Other 138 21,060 -- --
Options Contracts:
Domestic exchanges
Financial 28,555 -- -- --
Currencies 109,919 -- -- 129,963
Other 29,342 -- 14,268 --
Foreign exchanges
Financial exchanges 10,332 -- -- --
Other -- -- 34,924 --
---------- ----------- -------- -----------
$1,700,826 $ 315,413 $516,088 $ 323,727
---------- ----------- -------- -----------
---------- ----------- -------- -----------
The following table presents the net realized gains (losses) and the change
in net unrealized gains/losses of futures, forward and options contracts during
the nine months ended September 30, 1996 and 1995, respectively:
Nine months ended September 30, 1996 Nine months ended September 30, 1995
------------------------------------------------ -------------------------------------------------
Change in Change in
Net Realized Net Unrealized Net Realized Net Unrealized
Gains (Losses) Gains/Losses Total Gains (Losses) Gains/Losses Total
-------------- -------------- ---------- --------------- -------------- ----------
Futures Contracts:
Domestic exchanges
Financial $ 397,965 $ 98,975 $ 496,940 $ (73,894) $ -- $ (73,894)
Currencies 1,815 580,288 582,103 (38,447) -- (38,447)
Other 1,778,288 (1,002,635) 775,653 (320,585) 589,316 268,731
Foreign exchanges
Financial (243,602) 1,810,697 1,567,095 2,952,372 369,676 3,322,048
Other (162,630) 34,382 (128,248) -- (295,459) (295,459)
Forward Contracts:
Other 10,020 -- 10,020 -- -- --
Options Contracts:
Domestic exchanges
Financial (134,985) -- (134,985) -- -- --
Currencies (148,763) -- (148,763) -- 16,100 16,100
Other (150,516) (104,553) (255,069) (200,820) (18,580) (219,400)
Foreign exchanges
Financial (76,702) -- (76,702) -- -- --
Other (19,688) 19,688 -- (795) (9,579) (10,374)
-------------- -------------- ---------- --------------- -------------- ----------
$1,251,202 $ 1,436,842 $2,688,044 $ 2,317,831 $ 651,474 $2,696,305
-------------- -------------- ---------- --------------- -------------- ----------
-------------- -------------- ---------- --------------- -------------- ----------
7
The following table presents the net realized gains (losses) and the change
in net unrealized gains/losses of futures, forward and options contracts during
the three months ended September 30, 1996 and 1995, respectively:
Three months ended September 30, 1996 Three months ended September 30, 1995
------------------------------------------------ -----------------------------------------------
Change in Change in
Net Realized Net Unrealized Net Realized Net Unrealized
Gains (Losses) Gains/Losses Total Gains (Losses) Gains/Losses Total
-------------- -------------- ---------- -------------- -------------- ---------
Futures Contracts:
Domestic exchanges
Financial $ 409,131 $ 135,972 $ 545,103 $ (73,894) $ -- $ (73,894)
Currencies (434,902) 631,525 196,623 (127,781) -- (127,781)
Other 287,862 (1,028,586) (740,724) (320,585) 589,316 268,731
Foreign exchanges
Financial 715,504 2,394,686 3,110,190 (657,452) 556,717 (100,735)
Other (42,724) (21,689) (64,413) -- (295,459) (295,459)
Forward Contracts:
Other (660) 42,724 42,064 -- -- --
Options Contracts:
Domestic exchanges
Financial (134,985) -- (134,985) -- -- --
Currencies (114,638) -- (114,638) -- 16,100 16,100
Other (31,883) (81,427) (113,310) (200,820) (18,580) (219,400)
Foreign Exchange
Financial (76,701) -- (76,701) -- -- --
Other -- -- -- (795) (9,579) (10,374)
-------------- -------------- ---------- -------------- -------------- ---------
$ 576,004 $ 2,073,205 $2,649,209 $ (1,381,327) $ 838,515 $(542,812)
-------------- -------------- ---------- -------------- -------------- ---------
-------------- -------------- ---------- -------------- -------------- ---------
8
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, 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 operations on May 30, 1990 with gross proceeds of
$65,520,000. After accounting for organizational and offering costs, the
Partnership's net proceeds were $64,222,750. At the inception of the
Partnership, sixty percent of the net proceeds was allocated to trading activity
and forty percent was placed in reserve and invested in investment grade
interest-bearing obligations (``Reserve Assets'').
On June 30, 1995, the letter of credit expired and the Reserve Assets became
available for commodities trading. During July 1995, these assets were allocated
for trading to Willowbridge Associates Inc. (``Willowbridge''), a new
independent commodity trading manager to the Partnership. As such, at September
30, 1996, 100% of the Partnership's net assets were allocated to commodities
trading (the ``Adjusted Net Asset Value''). A significant portion of the
Adjusted Net Asset Value was held in U.S. Treasury bills (which represented
approximately 71% of the Adjusted 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 value of commodity interests
change. The balance of the total net assets is held in cash. 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 General Partner attempts to minimize these
risks by requiring the Partnership's trading managers to abide by various
trading limitations and policies. See Note C to the financial statements for a
further discussion on the credit and market risks associated with the
Partnership's futures, forward and options contracts.
The Partnership does not have, nor does it expect to have, any capital
assets.
Redemptions by limited partners recorded for the nine and three months ended
September 30, 1996 were $1,703,212 and $607,838, respectively. Redemptions by
the General Partner recorded for the nine and three months ended September 30,
1996 were $351,766 and $6,140, respectively. Redemptions by limited partners and
the General Partner from commencement of operations, May 30, 1990, through
September 30, 1996 totalled $59,000,403 and $702,311, respectively. Future
redemptions will impact the amount of funds available for investment in
commodity contracts in subsequent periods.
Results of Operations
The net asset value per Unit as of September 30, 1996 was $165.94, an
increase of 5.94% from the December 31, 1995 net asset value per Unit of
$156.63.
The Partnership's performance during the month of July resulted in an overall
decline in the net asset value per Unit. Profits earned in the financials sector
were offset by losses in the grains, energies, currencies and metals sectors.
World bond prices traded higher in July, affected by a combination of lower U.S.
interest rates, moderate inflation and slow economic growth. Gains were made in
long Australian, British and
9
German bond positions. Australian bond prices continued an upward movement based
on an expected interest rate cut and an increased unemployment report. British
bond prices were lifted based on slow growth in both Gross Domestic Product and
manufacturing output. German bond prices moved upward due to a lower than
expected German producer price index figure. Long positions in corn, soybean
by-products and wheat were unprofitable. Despite a rise in international demand
for grains and historically low reserves, grain prices fell as higher rainfall
benefitted Midwest growing conditions. In the energy markets, profits in light
crude oil were offset by losses in natural gas futures. Natural gas prices had
been on the upswing due to higher demand and drained reserves, yet prices fell
in July as reserves were replenished and more supply prospects became available.
Short gold positions proved unprofitable as did positions in the German mark and
Japanese yen.
The Partnership's performance was positive in the month of August. Profits
earned in the financials, grains, energies and metals sectors offset losses in
the currencies and softs sectors. In the financials sector, gains were made in
long Australian, Canadian, German and Japanese bond positions. Global bond
prices traded higher due to a combination of central bank interest rate cuts and
a bullish U.S. employment report. Australian bond prices rallied on a discount
rate cut and the Bank of Japan's continued easy monetary policy stimulated the
rise in Japanese bond prices. In the grains sector, positions in soybean
by-products were profitable as prices staged a technical recovery and advanced
further as the USDA estimated a 9% decline in the soybean harvest as compared to
the prior year. Long positions in light crude oil were profitable with supplies
remaining tight and demand strong. In the currencies sector, losses were
incurred in Japanese yen, German mark and Swiss franc positions. Early in the
month, currency market prices reversed. In the softs sector, long positions in
coffee were unprofitable. After coffee reached a one year high late in the
month, fears of short supplies suddenly eased and prices retreated.
The Partnership's performance was positive in the month of September. Profits
earned in the financials, currencies, stock indices, energies and metals sectors
offset losses in the grains and softs sectors. In the financials sector, gains
were made in long Australian, Canadian, German, Italian and Japanese bond
positions. Global bond prices continued to trend higher in September. In Europe,
long positions in German, French, Italian and Spanish bonds benefited from no
change in the U.S. Federal Reserve's interest rate policy. The anticipation of
the passage of a restrictive Italian budget helped push Italian bond prices
higher as Italy is making a strong effort to meet the requirements for a single
European currency. Canadian and Australian bond prices moved higher off of the
U.S. employment report and no change in the U.S. Federal Reserve's interest rate
policy. Long positions in Canadian and Australian bonds benefited from this
rally. Japanese bond prices traded higher on the continued perception of no
growth in the Japanese economy thereby benefiting long positions in Japanese
bonds. In the currencies sector, the rising value of the U.S. dollar benefited
German mark, Japanese yen and Swiss franc positions. In the stock indices
sector, long positions in the Standard & Poor's stock index futures market were
profitable as the U.S. stock market rose during the month. In the energies
sector, heating and light crude oil positions were profitable as tight supplies
in relation to market demand caused crude oil futures to gain value.
As discussed in Liquidity and Capital Resources above, the letter of credit
expired on June 30, 1995. As a result, there were no letter of credit fees
charged during 1996. With the expiration of the letter of credit, Reserve Assets
were allocated to commodities trading thus increasing the Partnership's Adjusted
Net Asset Value, including its investments in U.S. Treasury bills. However, poor
trading performance in the first half of 1996 as well as redemptions reduced the
amount of funds available for investment in U.S. Treasury bills. These factors,
coupled with a decrease in interest rates in 1996 versus 1995, resulted in a
decrease in interest income from U.S. Treasury bills of $34,975 and $74,849,
respectively, for the nine and three months ended September 30, 1996 as compared
to the same periods in 1995. Additionally, interest income from Reserve Assets,
which totalled $506,190 for the six months ended June 30, 1995, was eliminated
following the allocation of Reserve Assets to commodities trading.
Commissions are calculated on the Adjusted Net Asset Value on the first day
of each month and, therefore, vary based on monthly trading performance and
redemptions. The Adjusted Net Asset Value increased when the letter of credit
expired and Reserve Assets were allocated to commodities trading as discussed
above. However, the commission rate decreased by 1/2 of 1% from 8% (inclusive of
letter of credit fees) to 7.5% effective July 1, 1995. The combination of these
factors caused commissions plus letter of credit fees to increase by $171,889
for the nine months ended September 30, 1996 but decrease by $42,025 for the
three months ended September 30, 1996 as compared to the same periods in 1995.
10
Other transaction fees consist of National Futures Association, exchange,
floor brokerage and clearing fees which are based on the number of trades the
trading managers execute. Other transaction fees decreased by $30,933 and
$2,323, respectively, for the nine and three months ended September 30, 1996 as
compared to the same periods in 1995 primarily due to decreased trading volume.
All trading decisions are currently being made by Sjo, Inc. and Willowbridge
(the ``Trading Managers''). Management fees are calculated on the Adjusted Net
Asset Value allocated to each Trading Manager as of the end of each month and,
therefore, are affected by trading performance and redemptions. Additionally,
the Adjusted Net Asset Value increased when Reserve Assets were allocated to
commodities trading as discussed above. As a result, management fees increased
by $86,552 for the nine months ended September 30, 1996 but decreased by $7,249
for the three months ended September 30, 1996 as compared to the same periods in
1995.
Incentive fees are based on New High Net Trading Profits generated by each
Trading Manager, as defined in the Advisory Agreements between the Partnership,
the General Partner and each Trading Manager. Willowbridge generated profits
during 1996, earning incentive fees of $340,835 and $165,413, respectively, for
the nine and three months ended September 30, 1996. Incentive fees earned by
Sjo, Inc. during the three months ended June 30, 1995 were $131,688.
General and administrative expenses decreased by $18,632 and $39,295,
respectively, for the nine and three months ended September 30, 1996 as compared
to the same periods in 1995. 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. These decreases were primarily due
to the timing of certain expense accruals recorded in the respective periods.
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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 November 27, 1989 as amended and restated as of January
30, 1990 (incorporated by reference to Exhibits 3.1 and 4.1
to the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1990)
4.2 Subscription Agreement (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration
Statement on Form S-1, File No. 33-32355)
4.3 Request for Redemption (incorporated by
reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1, File No.
33-32355)
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--None
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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 thereunto duly authorized.
Prudential-Bache Capital Return Futures Fund 3, L.P.
By: Seaport Futures Management,
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: November 14, 1996
----------------------------------------
Steven Carlino
Vice President
Chief Accounting Officer for the
Registrant
13