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, 1997
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
One New York Plaza, 14th 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 2, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
1997 1996
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ASSETS
Equity in commodity trading accounts:
Cash $ 5,762,080 $ 7,947,679
U.S. Treasury bills, at amortized cost 22,336,031 25,015,580
Net unrealized gain on open commodity positions 804,391 658,774
Options, net, at market 25,981 (44,006)
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Total assets $28,928,483 $33,578,027
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------------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 670,604 $ 1,692,233
Management fees payable 120,056 117,811
Due to affiliates 59,541 54,587
Accrued expenses 42,126 49,264
Incentive fees payable 29,589 657,105
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Total liabilities 921,916 2,571,000
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Commitments
Partners' capital
Limited partners (126,106 and 131,697 units outstanding) 27,726,456 30,696,788
General partner (1,274 and 1,331 units outstanding) 280,111 310,239
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Total partners' capital 28,006,567 31,007,027
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Total liabilities and partners' capital $28,928,483 $33,578,027
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Net asset value per limited and general partnership unit ('Units') $ 219.87 $ 233.09
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The accompanying notes are an integral part of these statements
2
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
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REVENUES
Net realized gain (loss) on commodity
transactions $ (473,141) $1,642,326 $(2,252,501) $1,369,240
Change in net unrealized gain on open
commodity positions 148,486 55,792 574,505 (301,569)
Interest from U.S. Treasury bills 595,376 543,940 303,009 271,454
----------- ---------- ----------- ----------
270,721 2,242,058 (1,374,987) 1,339,125
----------- ---------- ----------- ----------
EXPENSES
Commissions 1,306,445 1,308,385 633,918 622,160
Management fees 551,679 549,180 261,645 261,342
Incentive fees 29,590 47,687 29,590 14,719
General and administrative 94,747 80,030 54,018 20,018
----------- ---------- ----------- ----------
1,982,461 1,985,282 979,171 918,239
----------- ---------- ----------- ----------
Net income (loss) $(1,711,740) $ 256,776 $(2,354,158) $ 420,886
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $(1,694,614) $ 262,777 $(2,330,604) $ 416,676
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
General partner $ (17,126) $ (6,001) $ (23,554) $ 4,210
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
NET INCOME (LOSS) PER WEIGHTED AVERAGE
LIMITED AND GENERAL PARTNERSHIP UNIT
Net income (loss) per weighted average
limited and general partnership unit $ (12.99) $ 1.65 $ (18.05) $ 2.81
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Weighted average number of limited and
general partnership units outstanding 131,729 155,791 130,430 149,763
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
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STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
- -----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1996 133,028 $30,696,788 $ 310,239 $31,007,027
Net loss (1,694,614) (17,126) (1,711,740)
Redemptions (5,648) (1,275,718) (13,002) (1,288,720)
-------- ----------- ----------- -----------
Partners' capital--June 30, 1997 127,380 $27,726,456 $ 280,111 $28,006,567
-------- ----------- ----------- -----------
-------- ----------- ----------- -----------
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The accompanying notes are an integral part of these statements
3
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(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 2, L.P. (the
'Partnership') as of June 30, 1997 and the results of its operations for the six
and three months ended June 30, 1997 and 1996. 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, 1996 (the 'Annual Report').
Certain balances from the prior period have been reclassified to conform with
the current financial statement presentation.
B. Related Parties
Prudential Securities 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 six months ended June 30, 1997
and 1996 were:
1997 1996
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Commissions $1,306,445 $1,308,385
General and administrative 41,276 34,302
---------- ----------
$1,347,721 $1,342,687
---------- ----------
---------- ----------
The costs incurred for these services for the three months ended June 30,
1997 and 1996 were:
1997 1996
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Commissions $633,918 $622,160
General and administrative 12,417 5,902
-------- --------
$646,335 $628,062
-------- --------
-------- --------
The General Partner is a wholly-owned subsidiary of Prudential Securities
Incorporated ('PSI'). The Partnership maintains its trading and cash accounts at
PSI, the Partnership's commodity broker. Approximately 75% of the net asset
value 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.
In connection with the Partnership's interbank transactions, PSI engages in
foreign currency forward transactions with the Partnership and an affiliate of
PSI who, as principal, attempts to earn a profit on the bid-ask spreads (which
must be competitive) on any foreign currency forward transactions entered into
between the Partnership and PSI, on the one hand, and PSI and such affiliate on
the other. In connection with its trading of foreign currencies in the interbank
market, PSI may arrange bank lines of credit at major international banks. To
the extent such lines of credit are arranged, PSI does not charge the
Partnership for maintaining such lines of credit, but requires margin deposits
with respect to forward contract transactions.
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 on 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 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 and is not to commingle such assets with other assets of PSI. At
June 30, 1997 and December 31, 1996, such segregated assets totalled $24,556,183
and $24,078,572, 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 $4,853,680 and $9,271,094 at June 30, 1997 and December
31, 1996, respectively. There are no segregation requirements for assets related
to forward trading.
As of June 30, 1997 and December 31, 1996, the Partnership's open futures,
forward and options contracts mature within one year.
5
At June 30, 1997 and December 31, 1996, gross contract amounts of open
futures, forward and options contracts are:
June 30, December 31,
1997 1996
------------ ------------
Currency Forward Contracts:
Commitments to purchase $ 34,376,175 $27,427,116
Commitments to sell $ 22,409,295 $19,223,534
Currency Futures and Options
Contracts:
Commitments to purchase $ 1,390,707 $ 7,651,893
Commitments to sell $ 2,395,850 $15,877,256
Financial Futures and Options
Contracts:
Commitments to purchase $458,227,134 $110,757,098
Commitments to sell $ 42,807,350 $ 38,688,741
Other Futures and Options Contracts:
Commitments to purchase $ 513,319 --
Commitments to sell $ 17,543,692 $ 320,262
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.
6
At June 30, 1997 and December 31, 1996, the fair value of open futures,
forward and options contracts was:
June 30, 1997 December 31, 1996
-------------------------- --------------------------
Fair Value Fair Value
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 311,713 $ (2,063) $ -- $ (55,900)
Currencies 50,651 (3,696) 194,561 (96,820)
Other 531,344 (7,045) 313,497 (6,743)
Foreign exchanges
Financial 468,835 (78,218) 316,218 (238,492)
Other 14,250 -- 4,092 --
Forward Contracts:
Currencies 285,459 (766,839) 535,753 (307,392)
Options Contracts:
Domestic exchanges
Financial -- (20,663) -- (10,000)
Currencies 8,300 (10,925) -- --
Other 51,778 (3,400) -- (23,168)
Foreign exchanges
Financial 2,265 (1,374) -- (10,838)
---------- ----------- ---------- -----------
$1,724,595 $ (894,223) $1,364,121 $ (749,353)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
The following table presents the average fair value of futures, forward and
options contracts during the six months ended June 30, 1997 and 1996,
respectively.
Six months ended Six months ended
June 30, 1997 June 30, 1996
-------------------------- --------------------------
Average Fair Value Average Fair Value
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 105,668 $ (20,566) $ 467,057 $ (20,927)
Currencies 305,963 (47,179) 343,855 (211,024)
Other 261,928 (17,652) 85,594 (47,975)
Foreign exchanges
Financial 365,258 (157,370) 502,418 (57,497)
Other 7,720 (3,680) 319 (6,087)
Forward Contracts:
Currencies 580,379 (666,353) 794,756 (337,127)
Options Contracts:
Domestic exchanges
Financial -- (18,108) -- --
Currencies 1,186 (59,832) 10,752 (4,582)
Other 26,992 (4,537) -- --
Foreign exchanges
Financial 6,390 (8,408) -- --
---------- ----------- ---------- -----------
$1,661,484 $(1,003,685) $2,204,751 $ (685,219)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
7
The following table presents the average fair value of futures, forward
and options contracts during the three months ended June 30, 1997 and 1996,
respectively.
Three months ended Three months ended
June 30, 1997 June 30, 1996
-------------------------- --------------------------
Average Fair Value Average Fair Value
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 174,716 $ (8,617) $ 472,228 $ (36,622)
Currencies 108,608 (47,476) 296,054 (136,585)
Other 175,835 (26,761) 145,461 (16,119)
Foreign exchanges
Financial 347,566 (199,425) 199,238 (55,429)
Other 7,500 (1,391) 558 (10,653)
Forward Contracts:
Currencies 234,800 (784,932) 877,606 (320,994)
Options Contracts:
Domestic exchanges
Financial -- (24,693) -- --
Currencies 2,075 (19,019) 11,472 (4,534)
Other 32,638 (1,163) -- --
Foreign exchanges
Financial 11,182 (9,952) -- --
---------- ----------- ---------- -----------
$1,094,920 $(1,123,429) $2,002,617 $ (580,936)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
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 six months
ended June 30, 1997 and 1996, respectively.
Six months ended June 30, 1997 Six months ended June 30, 1996
----------------------------------------------- -----------------------------------------------
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 $ (498,088) $ 365,550 $ (132,538) $ 1,358,838 $ (587,831) $ 771,007
Currencies 264,004 (50,786) 213,218 679,828 123,779 803,607
Other 432,842 217,545 650,387 (137,394) 494,080 356,686
Foreign exchanges
Financial (412,433) 312,891 (99,542) (1,100,681) (546,496) (1,647,177)
Other 23,409 10,158 33,567 (24,496) 1,794 (22,702)
Forward Contracts:
Currencies (406,663) (709,741) (1,116,404) 792,064 578,704 1,370,768
Options Contracts:
Domestic exchanges
Financial (404) (27,442) (27,846) -- -- --
Currencies 104,600 (19,404) 85,196 74,167 (8,238) 65,929
Other 82,308 54,766 137,074 -- -- --
Foreign exchanges
Financial (62,716) (5,051) (67,767) -- -- --
-------------- -------------- ----------- -------------- -------------- -----------
$ (473,141) $ 148,486 $ (324,655) $ 1,642,326 $ 55,792 $ 1,698,118
-------------- -------------- ----------- -------------- -------------- -----------
-------------- -------------- ----------- -------------- -------------- -----------
8
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 June 30, 1997 and 1996, respectively.
Three months ended June 30, 1997 Three months ended June 30, 1996
----------------------------------------------- -----------------------------------------------
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 $ (48,825) $ 3,687 $ (45,138) $ 955,388 $ (752,000) $ 203,388
Currencies (250,556) 9,928 (240,628) 520,148 (208,919) 311,229
Other 266 505,414 505,680 234,676 506,865 741,541
Foreign exchanges
Financial (510,380) 302,746 (207,634) (1,006,083) (61,038) (1,067,121)
Other 10,125 12,125 22,250 (24,496) 1,794 (22,702)
Forward Contracts:
Currencies (1,460,047) (267,145) (1,727,192) 686,357 243,467 929,824
Options Contracts:
Domestic exchanges
Financial (1,985) (6,615) (8,600) -- -- --
Currencies 37,550 13,560 51,110 3,250 (31,738) (28,488)
Other 40,140 26,595 66,735 -- -- --
Foreign exchanges
Financial (68,789) (25,790) (94,579) -- -- --
-------------- -------------- ----------- -------------- -------------- -----------
$ (2,252,501) $ 574,505 $(1,677,996) $ 1,369,240 $ (301,569) $ 1,067,671
-------------- -------------- ----------- -------------- -------------- -----------
-------------- -------------- ----------- -------------- -------------- -----------
D. Subsequent Event
Effective July 1, 1997, all assets previously managed by Analytic/TSA Capital
Management ('TSA') were reallocated to Eclipse Capital Management, Inc.
('Eclipse'). Eclipse receives management fees at the same rate as TSA (a monthly
fee on traded assets equal to a 2% annual rate). In addition, Eclipse will earn
a quarterly incentive fee equal to 20% of New High Net Trading Profits (as
defined in the Advisory Agreement between the Partnership, the General Partner
and Eclipse) as compared to 15% paid to TSA.
9
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 the inception of the
Partnership, sixty percent of the net proceeds was allocated to commodities
trading activity and forty percent was placed in reserve and invested in
investment grade interest-bearing obligations ('Reserve Assets'). On January 3,
1995, the Reserve Assets matured and the resulting proceeds were allocated to
commodities trading.
At June 30, 1997, 100% of the Partnership's assets are allocated to
commodities trading. A significant portion of the net asset value was held in
U.S. Treasury bills (which represented approximately 78% 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 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 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 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, forwards and options contracts.
Redemptions by limited partners recorded for the six and three months ended
June 30, 1997 were $1,275,718 and $663,788, respectively. Redemptions by the
General Partner recorded for the six and three months ended June 30, 1997 were
$13,002 and $6,816, respectively. Redemptions by limited partners and the
General Partner from commencement of operations, October 6, 1989, through June
30, 1997 totalled $116,555,700 and $1,723,347, respectively. 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.
Effective July 1, 1997, all assets previously managed by TSA were reallocated
to Eclipse. Eclipse receives management fees at the same rate as TSA (a monthly
fee on traded assets equal to a 2% annual rate). In addition, Eclipse will earn
a quarterly incentive fee equal to 20% of New High Net Trading Profits (as
defined in the Advisory Agreement between the Partnership, the General Partner
and Eclipse) as compared to 15% paid to TSA.
Results of Operations
The net asset value per Unit as of June 30, 1997 was $219.87, a decrease of
5.67% from the December 31, 1996 net asset value per Unit of $233.09.
10
April's negative performance resulted from losses in the financial, grain,
energy and meat sectors. Positions in the currency, soft, metal, energy and
stock index sectors were profitable. Global equity markets tracked the downward
movement of U.S. bond and stock prices as economic reports seemed to strengthen
the argument for another short-term rate increase by the U.S. Federal Reserve
Bank during the first two weeks of the month. However, bearish sentiment gave
way to exuberance in the second half of April as new data, strong corporate
earnings and a budget deal in Washington restored investor confidence. This
sharp shift in the interest rate markets incurred losses for the Partnership, as
U.S., Australian, Japanese, Canadian, British, German, Italian and French bond
positions were unprofitable. In the currency sector, the Partnership benefited
from continued trends. There was little to shift the U.S. dollar from its
position of strength in world markets. Talk of central bank intervention to stem
the dollar's rise against the Japanese yen ruffled the markets throughout the
month. However, the dollar continued to rise in the weeks leading up to the
meeting of G-7 finance ministers on April 27, 1997, reaching new highs against
both the yen and German mark. In the final week of trading, new economic data
dampened expectations for a second U.S. rate hike and the dollar sagged against
its major counterparts. Positions in Canadian dollar, French franc, Japanese yen
and Swiss franc posted gains. In the stock index sector, S&P 500 and Nikkei
positions were profitable. In the soft sector, supply concerns continued to push
coffee prices upward. Long coffee positions were profitable.
May's negative performance resulted from losses in the currency, metal,
financial and meat sectors. Positions in the index, soft, energy and grain
sectors were profitable. Volatile trading conditions in key currency markets
generated losses for the Partnership. With the exception of the Australian
dollar, all other currency trading was unprofitable. European currencies were
buffeted by upset elections in France and England as well as feuding in Germany
over the revaluation of gold reserves. All of these events present serious
implications for the prospect of a single European currency. In Japan, officials
generated a considerable amount of trading activity as they initially judged the
yen too weak against the U.S. dollar and then too strong later in the month. In
the metal sector, losses were suffered as gold prices, which had languished for
several months, became more volatile reflecting world events. In the soft
sector, profits were experienced in coffee and cotton. The Partnership benefited
from coffee's continuous upward trend as intermittent labor unrest and heavy
rains in major producing countries threatened to reduce already tight
inventories. Gains were achieved in the index sector from profitable positions
in the Nikkei.
June's positive performance resulted from gains in the metal, financial and
index sectors. Positions in the currency and soft sectors were unprofitable. In
the metal sector, the Partnership profited as gold prices fell to a four year
low and the U.S. dollar strengthened, while inflation indicators remained
favorable. Positions in both gold and silver were profitable. In the financial
sector, continued uncertainty surrounding the European Monetary Union (EMU)
benefited bond markets outside and inside the circle of EMU nations. Italian
bonds gained on improved prospects for Italy's entry into the EMU. Profits were
achieved in U.S. Treasuries, British long gilts, Italian bonds, Eurodollar and
Australian bonds. In the currency sector, the Swiss Monetary Authority's
determination to keep the franc from appreciating against major currencies
succeeded in pushing the price of that currency down. As a result, the
Partnership incurred losses in Swiss franc, Japanese yen and German mark, which
were slightly mitigated by gains in the British pound and Australian dollar.
Interest income from U.S. Treasury bills for the six and three months ended
June 30, 1997 increased by approximately $51,000 and $32,000 as compared to the
same period in 1996. This increase was due to a greater amount of funds invested
in U.S. Treasury bills during early 1997 following a strong 1996 fourth quarter.
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 by approximately $2,000 for the six months ended June 30,
1997, but increased by approximately $11,000 for the three months ended June 30,
1997 as compared to the same periods in 1996. These variances principally
reflect the impact of 1996 and 1997 redemptions on the monthly net asset values,
offset by strong trading performance in the last quarter of 1996 and early 1997.
All trading decisions are currently being made by John W. Henry & Co., Inc.,
Welton Investment System Corp. ('Welton') and Eclipse (Eclipse replaced TSA
effective July 1, 1997 as discussed in Liquidity and Capital Resources above).
Management fees are calculated on the net asset value allocated to each trading
manager as of the end of each month and, therefore, are affected by trading
performance and redemptions.
11
Management fees increased by approximately $2,000 for the six month period ended
June 30, 1997 and remained the same for the three months ended June 30, 1997 as
compared to the same periods in 1996.
Incentive fees are based on the New High Net Trading Profits generated by
each trading manager, as defined in the Advisory Agreement between the
Partnership, the General Partner and each trading manager. Welton generated
sufficient trading profits (despite an overall loss for the Partnership) to earn
incentive fees of approximately $30,000 for the six and three months ended June
30, 1997. During the six and three months ended June 30, 1996, trading
performance resulted in incentive fees of approximately $48,000 and $15,000,
respectively.
General and administrative expenses increased by approximately $15,000 and
$34,000 for the six and three month periods ended June 30, 1997, respectively,
as compared to the same periods in 1996. These expenses include reimbursement 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.
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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)
10.15 Advisory Agreement, dated July 1, 1997,
among the Registrant, Prudential
Securities Futures Management Inc. and
Eclipse Capital Management, Inc. (filed
herewith)
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--
No reports on Form 8-K were filed during the quarter.
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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 hereunto duly authorized.
Prudential-Bache Capital Return Futures Fund 2, L.P.
By: Prudential Securities Futures Management Inc.
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: August 14, 1997
----------------------------------------
Steven Carlino
Vice President
Chief Accounting Officer for the Registrant
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