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, 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: 0-19070
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 (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 3, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
1997 1996
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ASSETS
Equity in commodity trading accounts:
Cash and cash equivalents $18,734,248 $22,358,921
Net unrealized gain on open commodity positions 167,775 341,870
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Total assets $18,902,023 $22,700,791
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 668,962 $ 991,115
Accrued expenses 54,367 62,974
Due to affiliates 42,716 77,638
Management fees payable 39,123 54,531
Incentive fees payable -- 256,496
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Total liabilities 805,168 1,442,754
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Commitments
Partners' capital
Limited partners (106,485 and 115,048 units outstanding) 17,915,821 21,045,294
General partner (1,076 and 1,163 units outstanding) 181,034 212,743
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Total partners' capital 18,096,855 21,258,037
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Total liabilities and partners' capital $18,902,023 $22,700,791
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Net asset value per limited and general partnership unit ('Units') $ 168.25 $ 182.93
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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,
------------------------- -------------------------
1997 1996 1997 1996
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REVENUES
Net realized gain on commodity transactions $ 21,351 $1,251,202 $1,285,308 $ 576,004
Change in net unrealized gain on open
commodity positions (189,095) 1,436,842 (701,415) 2,073,205
Interest from U.S. Treasury bills 576,254 557,683 194,160 182,820
----------- ---------- ---------- -----------
408,510 3,245,727 778,053 2,832,029
----------- ---------- ---------- -----------
EXPENSES
Commissions 1,128,980 1,111,501 370,392 343,899
Other transaction fees 181,642 140,868 60,082 47,111
Management fees 428,860 435,410 138,026 138,928
Incentive fees 226,785 340,835 -- 165,413
General and administrative 121,716 103,208 43,236 4,592
----------- ---------- ---------- -----------
2,087,983 2,131,822 611,736 699,943
----------- ---------- ---------- -----------
Net income (loss) $(1,679,473) $1,113,905 $ 166,317 $ 2,132,086
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $(1,662,646) $1,111,830 $ 164,653 $ 2,110,754
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
General partner $ (16,827) $ 2,075 $ 1,664 $ 21,332
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED
AND GENERAL PARTNERSHIP UNIT
Net income (loss) per weighted average limited
and general partnership unit $ (14.75) $ 8.59 $ 1.49 $ 17.01
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Weighted average number of limited and general
partnership units outstanding 113,876 129,742 111,537 125,329
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
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STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
- ----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1996 116,211 $21,045,294 $212,743 $21,258,037
Net loss -- (1,662,646) (16,827) (1,679,473)
Redemptions (8,650) (1,466,827) (14,882) (1,481,709)
------- ----------- -------- -----------
Partners' capital--September 30, 1997 107,561 $17,915,821 $181,034 $18,096,855
------- ----------- -------- -----------
------- ----------- -------- -----------
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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, 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 3, L.P. (the
'Partnership') as of September 30, 1997 and the results of its operations for
the nine and three months ended September 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').
Effective September 1, 1997 Sjo, Inc. ('Sjo'), a trading manager to the
Partnership, implemented their Global Diversified Program. This program replaced
the Foreign Financials Program. Additionally, the fee structure of the assets
under Sjo's management was modified. All assets managed by Sjo are subject to a
monthly management fee at an annual rate of 2% and a quarterly incentive fee of
17% of New High Net Trading Profits, as defined in the Advisory Agreements
between the Partnership, the General Partner and Sjo. Prior to the change, Sjo
was paid a monthly management fee at an annual rate ranging from 2-3% and a
quarterly incentive fee ranging from 15-17%.
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, 1997 and 1996 were:
1997 1996
---------------------------------------------------------------------------------------
Commissions $1,128,980 $ 1,111,501
General and administrative 75,680 53,675
------------ -----------
$1,204,660 $ 1,165,176
------------ -----------
------------ -----------
The costs incurred for these services for the three months ended September
30, 1997 and 1996 were:
1997 1996
---------------------------------------------------------------------------------------
Commissions $ 370,392 $ 343,899
General and administrative 25,227 3,428
------------ -----------
$ 395,619 $ 347,327
------------ -----------
------------ -----------
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 seventy-five percent (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.
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
4
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.
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, 1997 and December 31, 1996, such segregated assets totalled
$12,907,821 and $20,318,217, 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 $5,992,427 and $2,382,574 at September 30,
1997 and December 31, 1996, respectively. There are no segregation requirements
for assets related to forward trading.
As of September 30, 1997 and December 31, 1996, the Partnership's open
futures and options contracts mature within one year.
5
At September 30, 1997 and December 31, 1996, gross contract amounts of open
futures and forward contracts are:
September 30, December 31,
1997 1996
------------- ------------
Financial Futures Contracts:
Commitments to purchase $ 100,127,415 $229,278,898
Commitments to sell $ 52,822,402 $ 41,744,989
Currency Futures Contracts:
Commitments to purchase $ 4,742,263 $ --
Commitments to sell $ 4,623,027 $ --
Other Futures Contracts:
Commitments to purchase $ 6,793,074 $ 6,484
Commitments to sell $ 5,487,464 $ 227,403
Currency Forward Contracts:
Commitments to purchase $ 1,211,150 $ --
Other Forward Contracts:
Commitments to purchase $ 2,402,986 $ --
Commitments to sell $ 1,181,784 $ --
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 or forward 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, 1997 and December 31, 1996, the fair value of futures and
forward contracts was:
September 30, 1997 December 31, 1996
-------------------------------- ------------------------
Fair Value Fair Value
-------------------------------- ------------------------
Assets Liabilities Assets Liabilities
-------------- -------------- -------- ------------
Futures Contracts:
Domestic exchanges
Financial $ 25,349 $ 3,775 $ -- $ --
Currencies 14,799 39,013 -- --
Other 228,385 76,517 -- --
Foreign exchanges
Financial 172,144 88,166 333,578 212,627
Other 186,708 253,914 227,403 6,484
Forward Contracts:
Currencies 14,515 54,882 -- --
Other 42,142 -- -- --
-------------- -------------- -------- ------------
$684,042 $516,267 $560,981 $219,111
-------------- -------------- -------- ------------
-------------- -------------- -------- ------------
6
The following table presents the average fair value of futures, forward and
options contracts during the nine months ended September 30, 1997 and 1996,
respectively.
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
-------------------------------- --------------------------
Average Fair Value Average Fair Value
-------------------------------- --------------------------
Assets Liabilities Assets Liabilities
-------------- -------------- ---------- ------------
Futures Contracts:
Domestic exchanges
Financial $ 107,206 $ 378 $ 65,326 $ 37,777
Currencies 159,818 9,009 160,742 42,268
Other 176,225 54,958 664,376 157,810
Foreign exchanges
Financial 329,687 129,496 521,029 20,942
Other 393,602 116,327 41,701 62,340
Forward Contracts:
Currencies 1,452 5,488 -- --
Other 4,214 -- 1,643 11,590
Options Contracts:
Domestic exchanges
Financial 8,008 -- 11,421 --
Currencies 940 -- 43,968 --
Other 7,629 -- 34,678 --
Foreign exchanges
Financial -- -- 4,133 --
Other 26,989 -- -- --
-------------- -------------- ---------- ------------
$1,215,770 $315,656 $1,549,017 $332,727
-------------- -------------- ---------- ------------
-------------- -------------- ---------- ------------
The following table presents the average fair value of futures, forward and
options contracts during the three months ended September 30, 1997 and 1996,
respectively.
Three months ended Three months ended
September 30, 1997 September 30, 1996
-------------------------- --------------------------
Average Fair Value Average Fair Value
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 88,127 $ 944 $ 49,470 $ 8,622
Currencies 376,800 21,972 164,163 91,488
Other 58,106 21,223 302,922 161,621
Foreign exchanges
Financial 426,070 77,517 1,005,985 27,200
Other 288,894 233,224 -- 5,422
Forward Contracts:
Currencies 3,629 13,721 -- --
Other 10,536 -- 138 21,060
Options Contracts:
Domestic exchanges
Financial 20,019 -- 28,555 --
Currencies 2,350 -- 109,919 --
Other -- -- 29,342 --
Foreign exchanges
Financial -- -- 10,332
Other 66,782 -- -- --
---------- ----------- ---------- -----------
$1,341,313 $ 368,601 $1,700,826 $ 315,413
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
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 nine months ended September 30, 1997 and 1996, respectively:
Nine months ended September 30, 1997 Nine months ended September 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 $ (1,060,470) $ 21,574 $(1,038,896) $ 397,965 $ 98,975 $ 496,940
Currencies 1,375,901 (24,214) 1,351,687 1,815 580,288 582,103
Other 203,828 151,868 355,696 1,778,288 (1,002,635) 775,653
Foreign exchanges
Financial (1,360,576) (36,973) (1,397,549) (243,602) 1,810,697 1,567,095
Other 977,109 (288,125) 688,984 (162,630) 34,382 (128,248)
Forward Contracts:
Currencies -- (40,367) (40,367) -- -- --
Other -- 42,142 42,142 10,020 -- 10,020
Options Contracts:
Domestic exchanges
Financial 144,101 -- 144,101 (134,985) -- (134,985)
Currencies (113,416) -- (113,416) (148,763) -- (148,763)
Other (71,738) -- (71,738) (150,516) (104,553) (255,069)
Foreign exchanges
Financial -- -- -- (76,702) -- (76,702)
Other (73,388) (15,000) (88,388) (19,688) 19,688 --
-------------- -------------- ----------- -------------- -------------- ----------
$ 21,351 $ (189,095) $ (167,744) $1,251,202 $ 1,436,842 $2,688,044
-------------- -------------- ----------- -------------- -------------- ----------
-------------- -------------- ----------- -------------- -------------- ----------
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, 1997 and 1996, respectively:
Three months ended September 30, 1997 Three months ended September 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 $ (537,664) $ 21,574 $ (516,090) $ 409,131 $ 135,972 $ 545,103
Currencies 1,097,046 (41,189) 1,055,857 (434,902) 631,525 196,623
Other (1,740) 147,823 146,083 287,862 (1,028,586) (740,724)
Foreign exchanges
Financial 548,147 (296,301) 251,846 715,504 2,394,686 3,110,190
Other 383,794 (522,991) (139,197) (42,724) (21,689) (64,413)
Forward Contracts:
Currencies -- (40,367) (40,367) -- -- --
Other -- 42,142 42,142 (660) 42,724 42,064
Options Contracts:
Domestic exchanges
Financial (39,836) -- (39,836) (134,985) -- (134,985)
Currencies (102,216) (775) (102,991) (114,638) -- (114,638)
Other (13,557) -- (13,557) (31,883) (81,427) (113,310)
Foreign exchange
Financial -- -- -- (76,701) -- (76,701)
Other (48,666) (11,331) (59,997) -- -- --
-------------- -------------- ----------- -------------- -------------- ----------
$1,285,308 $ (701,415) $ 583,893 $ 576,004 $ 2,073,205 $2,649,209
-------------- -------------- ----------- -------------- -------------- ----------
-------------- -------------- ----------- -------------- -------------- ----------
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.
At September 30, 1997, 100% of the Partnership's net assets were allocated to
commodities trading. A significant portion of the net asset value was held in
U.S. Treasury bills (which represented approximately 82% 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 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, 1997 were $1,466,827 and $662,232, respectively. Redemptions by
the General Partner recorded for the nine and three months ended September 30,
1997 were $14,882 and $6,730, respectively. Redemptions by limited partners and
the General Partner from commencement of operations, May 30, 1990, through
September 30, 1997 totalled $61,448,467 and $727,071, 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, 1997 was $168.25, a decrease
of 8.02% from the December 31, 1996 net asset value per Unit of $182.93.
The Partnership's positive performance in the month of July resulted from
gains in the currency, financial, index and metal sectors. Gains were offset
somewhat by losses in the soft and energy sectors. In the currency sector,
strong gains were seen in the Deutsche mark and the Japanese yen as the U.S.
dollar soared in response to investors exchanging the mark and yen for U.S.
dollars. Positions in the British pound were unprofitable. A bullish U.S. bond
market set the tone for a rise in global bond prices, as U.S. long-term interest
rates fell from 7.0% to 6.5%. Continued signs of a slowdown in economic growth
in France, Germany and Italy coupled with low inflation levels pushed European
bond prices higher. Positions in
9
French, German, Italian and British bonds benefited from this price movement.
The Australian bond market anticipated another easing of monetary policy by the
Reserve Bank of Australia due to slow economic growth and a high level of
unemployment. On July 30th, the Reserve Bank cut rates by 50 basis points,
helping the Partnership's Australian bond and bank bill positions. Japanese bond
prices rose strongly as the Nikkei Dow fell below 20,000 and economic data
showed a very slow recovery from the recent recession. This scenario boosted
gains in Japanese bonds. In the index sector, the Partnership benefited from
positions in the French CAC 40 and the S&P 500 as both indices experienced
gains. In the metal sector, the Partnership saw gains in aluminum, zinc and
nickel. Losses were experienced in the soft sector as shifting inventory
expectations and fickle weather patterns altered investor sentiment,
specifically in cotton. Additionally, the Partnership incurred losses in light
crude energy positions.
The Partnership's negative performance in August resulted from losses in all
sectors traded which included the financial, currency, metal, index and soft
sectors. A turnaround in the U.S. bull bond market in August, as yields rose
back above 6.5%, caused European, Australian, and Canadian bond prices to
retreat. This turnaround in the upward bond markets drove Partnership losses in
French, German and Swiss bond positions. The exceptions were long positions in
Japanese government bonds and euroyen, which rallied as the Nikkei Dow dropped
below 19,000 to new lows for the year. The currency markets proved to be a major
detractor to the Partnership's overall performance. The Deutsche mark's weakness
over the past few months contributed to some decent gains, but its strength in
August against several currencies, including the U.S. dollar, Japanese yen and
British pound contributed to the Partnership's negative performance. In the
metal sector, the Partnership incurred losses in aluminum and nickel positions
and S&P 500 and CAC 40 positions were unprofitable in the stock index sector.
The Partnership's negative performance in September resulted from losses in
the index, currency, grain and energy sectors which were somewhat offset by
gains in the metal, financial and soft sectors. In September, foreign and
domestic indices were volatile, leading to losses for the Partnership,
specifically the S&P 500, Hang Seng, Nikkei and CAC 40. In the currency sector,
the Partnership incurred losses in the Japanese yen, Deutsche mark, and British
pound as well as cross rate positions in the U.S. dollar/Spanish paseta,
Japanese yen/Deutsche mark and Canadian dollar/Deutsche mark. In the energy
sector, the price of crude oil fell in response to the buildup of inventories
from summer lows, driving losses in natural gas and light crude oil positions.
Long metal positions profited as precious metals prices, including gold and
silver, rose on indications of strengthening demand. Non-precious metals,
specifically zinc, experienced gains as well. In the financial sector, Italian,
Japanese, German and Euroyen bond positions gained as global bond markets
reacted to the drop in long-term U.S. interest rates.
Effective September 1, 1997 Sjo, Inc. ('Sjo'), a trading manager to the
Partnership, implemented their Global Diversified Program. This program replaced
the Foreign Financials Program. Additionally, the fee structure of the assets
under Sjo's management was modified. All assets managed by Sjo are subject to a
monthly management fee at an annual rate of 2% and a quarterly incentive fee of
17% of New High Net Trading Profits, as defined in the Advisory Agreements
between the Partnership, the General Partner and Sjo. Prior to the change, Sjo
was paid a monthly management fee at an annual rate ranging from 2-3% and a
quarterly incentive fee ranging from 15-17%.
Interest income from U.S. Treasury bills increased by $18,571 and $11,340 for
the nine and three months ended September 30, 1997 as compared to the same
periods in 1996. These increases were due to strong trading performance in
September 1996 through November 1996 resulting in increased net assets and
therefore, higher amounts invested in U.S. Treasury bills during 1997 versus
1996.
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 increased by $17,479 and $26,493 for the nine and three months ended
September 30, 1997 as compared to the same periods in 1996. Similar to the
increase in interest income discussed above, these increases in commissions
resulted from strong trading performance from September 1996 through November
1996, partially offset by the effect of redemptions on the monthly net asset
values.
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 increased by $40,774 and
$12,971 for the nine and three months ended September 30, 1997 as compared to
the same periods in 1996 primarily due to increased trading volume. The increase
in trading volume is partially attributable to the change in the Partnership's
trading programs as previously discussed above.
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All trading decisions are currently being made by Sjo, Inc. and Willowbridge
Associates Inc. (the 'Trading Managers'). 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. Management
fees decreased by $6,550 and $902 for the nine and three months ended September
30, 1997 as compared to the same periods in 1996 primarily due to strong trading
performance in the prior year as discussed above, as well as the effect of
redemptions on the monthly net asset values.
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. Despite overall net trading losses
for the Partnership, Willowbridge Associates Inc. generated profits during each
of the first three quarters of 1996 and the first quarter of 1997, earning
incentive fees of $67,355, $108,067, $165,413 and $226,785, respectively.
General and administrative expenses increased by $18,508 and $38,644 for the
nine and three months ended September 30, 1997 as compared to the same periods
in 1996. 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 increases were primarily due to the timing of certain
expense accruals recorded in the prior year 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, Inc.
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: November 13, 1997
----------------------------------------
Steven Carlino
Vice President
Chief Accounting Officer for the
Registrant
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