1997
- --------------------------------------------------------------------------------
Prudential-Bache Annual
Capital Return Futures Report
Fund 2, L.P.
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
March 1998
Dear Limited Partner:
Enclosed is the Annual Report of Prudential-Bache Capital Return Futures Fund
2, L.P. (the 'Fund') for the year ended December 31, 1997, including the audited
financial statements for the Fund which contain, among other things, the
operating results for the year.
The Fund posted a gain of 11.40% in 1997, outperforming the MAR (Managed
Account Reports) Fund/Pool Index return of 9.34%. MAR tracked the performance of
315 futures funds in 1997. At year-end, the Fund's net asset value per unit was
$259.66*. Past performance is not necessarily indicative of future results.
The Fund was profitable in 1997 as gains were achieved in all sectors
including the financial, metal, index, soft, energy, grain and meat sectors.
Further information with respect to the Fund's performance is included in the
section of the report entitled 'Management's Discussion and Analysis of
Financial Condition and Results of Operations'.
As of July 1, 1997, Analytic/TSA Capital Management no longer served as a
Trading Advisor to the Fund. Assets of the Fund formerly managed by Analytic/TSA
Capital Management were reallocated to the Global Monetary Program managed by
Eclipse Capital Management, Inc. We believe that this program more effectively
complements the performance of the Fund.
We value your continued participation as a Limited Partner of the Fund.
Should you have any questions, please contact your Prudential Securities
Financial Advisor. For account status inquiries, contact Prudential Securities
Client Services at 1-800-535-2077.
Sincerely,
Thomas M. Lane, Jr.
President and Director
Prudential Securities Futures Management Inc.
* As of March 25, 1998, the estimated net asset value per unit was $239.95.
1
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10036 Facsimile 212 596 8910
Price Waterhouse LLP (LOGO)
Report of Independent Accountants
January 26, 1998
To the General Partner and
Limited Partners of
Prudential-Bache Capital Return Futures Fund 2, L.P.
In our opinion, the accompanying statements of financial condition and the
related statements of operations and changes in partners' capital present
fairly, in all material respects, the financial position of Prudential-Bache
Capital Return Futures Fund 2, L.P. at December 31, 1997 and 1996, and the
results of its operations for the years then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the general partner; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the general
partner, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
2
Deloitte &
Touche LLP
(LOGO)
- ------------------------------------------------------------------------------
Two World Financial Center Telephone: (212) 436-2000
New York, New York 10281-1414 Facsimile: (212) 436-5000
INDEPENDENT AUDITORS' REPORT
To the Partners of
Prudential-Bache Capital Return Futures Fund 2, L.P.
We have audited the accompanying statements of operations and of changes in
partners' capital of Prudential-Bache Capital Return Futures Fund 2, L.P. for
the year ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and changes in partners' capital of
Prudential-Bache Capital Return Futures Fund 2, L.P. for the year ended December
31, 1995 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 29, 1996
2A
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------------------
1997 1996
- --------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash $ 6,552,063 $ 7,947,679
U.S. Treasury bills, at amortized cost 24,241,834 25,015,580
Net unrealized gain on open commodity positions 1,584,684 658,774
----------- -----------
Total assets $32,378,581 $33,622,033
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 740,550 $ 1,692,233
Incentive fees payable 226,348 657,105
Management fees payable 97,818 117,811
Accrued expenses 55,038 49,264
Due to affiliates 7,663 54,587
Options, at market 3,600 44,006
----------- -----------
Total liabilities 1,131,017 2,615,006
----------- -----------
Commitments
Partners' capital
Limited partners (119,135 and 131,697 units outstanding) 30,934,928 30,696,788
General partner (1,204 and 1,331 units outstanding) 312,636 310,239
----------- -----------
Total partners' capital 31,247,564 31,007,027
----------- -----------
Total liabilities and partners' capital $32,378,581 $33,622,033
----------- -----------
----------- -----------
Net asset value per limited and general partnership unit ('Units') $ 259.66 $ 233.09
----------- -----------
----------- -----------
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
3
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
REVENUES
Net realized gain on commodity transactions $ 5,486,720 $ 8,858,731 $12,172,603
Change in net unrealized gain on open commodity
positions 919,014 (212,725) (955,977)
Interest from U.S. Treasury bills 1,219,506 1,114,103 1,399,945
--------------- --------------- ---------------
7,625,240 9,760,109 12,616,571
--------------- --------------- ---------------
EXPENSES
Commissions 2,602,752 2,566,587 2,795,106
Management fees 1,124,398 1,101,928 1,200,458
Incentive fees 433,379 704,792 365,699
General and administrative 156,283 139,510 168,794
--------------- --------------- ---------------
4,316,812 4,512,817 4,530,057
--------------- --------------- ---------------
Net income $ 3,308,428 $ 5,247,292 $ 8,086,514
--------------- --------------- ---------------
--------------- --------------- ---------------
ALLOCATION OF NET INCOME
Limited partners $ 3,275,346 $ 5,203,383 $ 7,663,099
--------------- --------------- ---------------
--------------- --------------- ---------------
General partner $ 33,082 $ 43,909 $ 423,415
--------------- --------------- ---------------
--------------- --------------- ---------------
NET INCOME PER WEIGHTED AVERAGE
LIMITED AND GENERAL PARTNERSHIP UNIT
Net income per weighted average
limited and general partnership unit $ 25.75 $ 35.04 $ 44.84
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average number of limited and
general partnership units outstanding 128,507 149,733 180,338
--------------- --------------- ---------------
--------------- --------------- ---------------
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
- -----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1994 196,940 $28,733,798 $ 1,553,260 $30,287,058
Net income 7,663,099 423,415 8,086,514
Redemptions (35,122) (6,704,103) -- (6,704,103)
-------- ----------- ----------- -----------
Partners' capital--December 31, 1995 161,818 29,692,794 1,976,675 31,669,469
Net income 5,203,383 43,909 5,247,292
Redemptions (28,790) (4,199,389) (1,710,345) (5,909,734)
-------- ----------- ----------- -----------
Partners' capital--December 31, 1996 133,028 30,696,788 310,239 31,007,027
Net income 3,275,346 33,082 3,308,428
Redemptions (12,689) (3,037,206) (30,685) (3,067,891)
-------- ----------- ----------- -----------
Partners' capital--December 31, 1997 120,339 $30,934,928 $ 312,636 $31,247,564
-------- ----------- ----------- -----------
-------- ----------- ----------- -----------
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
4
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential-Bache Capital Return Futures Fund 2, L.P. (the 'Partnership') is a
Delaware limited partnership formed on June 8, 1989 which will terminate on
December 31, 2009 unless terminated sooner under the provisions of its Amended
and Restated Agreement of Limited Partnership (the 'Partnership Agreement'). On
October 6, 1989, the Partnership completed its offering having raised
$101,010,000 from the sale of 1,000,000 units of limited partnership interest
and 10,100 units of general partnership interest (collectively, 'Units') and
commenced operations. The Partnership was formed to engage in the speculative
trading of commodity futures, forward and options contracts. Physical
commodities may also be traded from time to time. The general partner of the
Partnership is Prudential Securities Futures Management Inc. (the 'General
Partner'), a wholly owned subsidiary of Prudential Securities Group Inc.
('PSGI'). Prudential Securities Incorporated ('PSI'), a wholly owned subsidiary
of PSGI, was the principal underwriter of the Units and is the commodity broker.
The General Partner is required to maintain at least a 1% interest in the
Partnership as long as it is acting as the Partnership's general partner.
The General Partner generally maintains not less than 75% of the
Partnership's net asset value ('NAV') in interest-bearing U.S. Government
obligations (primarily U.S. Treasury bills), a significant portion of which is
utilized for margin purposes for the Partnership's commodity trading activities.
The remaining 25% of NAV is held in cash in the Partnership's commodity trading
accounts.
All trading decisions for the Partnership since July 1, 1997 are made by
Welton Investment Services Corporation, Eclipse Capital Management, Inc.
('Eclipse') and John W. Henry & Company, Inc., independent commodity trading
managers. Eclipse replaced Analytic/TSA Capital Management ('TSA') as a trading
manager effective July 1, 1997. Eclipse receives management fees at the same
rate as did TSA (a monthly fee on traded assets equal to a 2% annual rate). In
addition, Eclipse earns a quarterly incentive fee equal to 20% of New High Net
Trading Profits (as defined in the Advisory Agreement among the Partnership, the
General Partner and Eclipse) as compared to 15% paid to TSA. Except for the July
1, 1997 replacement of TSA, there were no changes in trading managers during the
three years ended December 31, 1997. (The independent commodity trading managers
are each a 'Trading Manager'.) The General Partner retains the authority to
override trading instructions that violate the Partnership's trading policies.
B. Summary of Significant Accounting Policies
Basis of accounting
The books and records of the Partnership are maintained on the accrual basis
of accounting in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the General Partner to make estimates and
assumptions that affect the reported amounts of liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
Commodity futures and forward transactions are reflected in the accompanying
statements of financial condition on trade date. The difference between the
original contract amount and market value of futures and forward contracts is
reflected as net unrealized gain or loss. Options transactions are reflected in
the statements of financial condition at market value which is inclusive of the
net unrealized gain or loss. The market value of each contract is based upon the
closing quotation on the exchange, clearing firm or bank on, or through, which
the contract is traded.
To the extent practicable, the Partnership invests a significant portion of
its NAV in U.S. Treasury bills to fulfill original margin requirements. U.S.
Treasury bills are carried at amortized cost, which approximates market value.
Interest on these obligations accrues for the benefit of the Partnership.
The weighted average number of limited and general partnership units
outstanding was computed for purposes of disclosing net income per weighted
average limited and general partnership unit. The weighted
5
average limited and general partnership units are equal to the number of Units
outstanding at year end, adjusted proportionately for Units redeemed based on
their respective time outstanding during such year.
The Partnership has elected not to provide a Statement of Cash Flows as
permitted by Statement of Financial Accounting Standards No. 102, 'Statement of
Cash Flows--Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale.'
Certain balances from prior years have been reclassified to conform with the
current financial statement presentation.
Income taxes
The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from the Partnership's operations
are passed directly to the individual partners. The Partnership may be subject
to other state and local taxes in jurisdictions in which it operates.
Profit and loss allocations, distributions and redemptions
Net realized profits or losses for tax purposes are allocated first to
partners who redeem Units to the extent the amounts received on redemption are
greater than or are less than the amounts paid for the redeemed Units by the
partners. Net income or loss for financial reporting purposes is allocated
quarterly to all partners on a pro rata basis based on each partner's number of
Units outstanding during the quarter.
Distributions (other than on redemptions of Units) are made at the sole
discretion of the General Partner on a pro rata basis in accordance with the
respective capital accounts of the partners. No distributions have been made
since inception.
The Partnership Agreement provides that a limited partner may redeem its
units as of the last business day of any full calendar quarter at the then
current net asset value per Unit.
C. Costs, Fees and Expenses
Commissions
The General Partner, on behalf of the Partnership, entered into an agreement
with PSI to act as commodity broker for the Partnership. The Partnership pays
PSI commissions at a flat rate of .7083% per month (an 8.5% annual rate) of the
Partnership's NAV as of the first day of each month.
Management and incentive fees
The Partnership pays John W. Henry & Company, Inc. and Welton Investment
Services Corporation monthly management fees equal to 1/3 of 1% (a 4% annual
rate) and Eclipse monthly management fees equal to 1/6 of 1% (a 2% annual rate)
of the portion of the Partnership's NAV allocated to that Trading Manager as of
the end of each month.
In addition, the Partnership also pays John W. Henry & Company, Inc. and
Welton Investment Services Corporation a quarterly incentive fee equal to 15% of
the 'New High Net Trading Profits' generated by each Trading Manager (as defined
in each Advisory Agreement among the Partnership, the General Partner and each
Trading Manager) and pays Eclipse a quarterly incentive fee equal to 20%.
See Note A for further information concerning changes to incentive fees
during 1997.
General and administrative expenses
In addition to the costs, fees and expenses previously discussed, the
Partnership reimburses the General Partner and its affiliates for actual
Partnership operating expenses payable by, or allocable to, the Partnership. The
amount of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. The Partnership also pays amounts directly to unrelated
parties for certain operating expenses.
D. Related Parties
The General Partner and its affiliates perform services for the Partnership
which include, but are not limited to: brokerage services, accounting and
financial management, registrar, transfer and assignment functions, investor
communications, printing and other administrative services.
6
The costs incurred for the years ended December 31, 1997, 1996 and 1995 were:
1997 1996 1995
---------- ---------- ----------
Commissions $2,602,752 $2,566,587 $2,795,106
General and administrative 86,018 87,997 109,661
---------- ---------- ----------
$2,688,770 $2,654,584 $2,904,767
---------- ---------- ----------
---------- ---------- ----------
The Partnership maintains its trading and cash accounts at PSI. Except for
the portion of assets that is deposited as margin to maintain forward currency
contract positions as further discussed below, the Partnership's assets are
maintained either with PSI or, for margin purposes, with the various exchanges
on which the Partnership is permitted to trade.
The Partnership, acting through its Trading Managers, executes
over-the-counter, spot, forward and/or option foreign exchange transactions with
PSI. PSI then engages in back-to-back trading with an affiliate,
Prudential-Bache Global Markets Inc. ('PBGM'). PBGM attempts to earn a profit on
such transactions. PBGM keeps its prices on foreign currency competitive with
other interbank trading desks. All over-the-counter currency transactions are
conducted between PSI and the Partnership pursuant to a line of credit. PSI may
require that collateral be posted against the market-to-market position of the
Partnership.
E. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for tax reporting purposes for the years ended December
31, 1997, 1996 and 1995, respectively:
1997 1996 1995
---------- ---------- ----------
Net income per financial statements $3,308,428 $5,247,292 $8,086,514
Change in unrealized gain/loss on
nonregulated commodity positions 263,932 (216,909) (38,580)
---------- ---------- ----------
Tax basis net income $3,572,360 $5,030,383 $8,047,934
---------- ---------- ----------
---------- ---------- ----------
The differences between the tax and book bases of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments.
F. Credit and Market Risk
Since the Partnership's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk).
Futures, forward and options contracts involve varying degrees of off-balance
sheet risk; and changes in the level 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
7
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
December 31, 1997 and 1996, such segregated assets totalled $22,947,166 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 $9,499,572 and $9,271,094 at December 31, 1997 and 1996,
respectively. There are no segregation requirements for assets related to
forward trading.
As of December 31, 1997, the Partnership's open futures, forward and option
contracts mature within one year.
At December 31, 1997 and 1996, gross contract amounts of open futures,
forward and options contracts are:
1997 1996
------------ ------------
Currency Forward Contracts:
Commitments to purchase $ 318,066 $ 27,427,116
Commitments to sell 24,765,572 19,223,534
Currency Futures and Options Contracts:
Commitments to purchase 1,232,952 7,651,893
Commitments to sell 4,626,480 15,877,256
Financial Futures and Options Contracts:
Commitments to purchase 183,537,088 110,757,098
Commitments to sell 126,817,265 38,688,741
Other Futures and Options Contracts:
Commitments to purchase 2,876,350 --
Commitments to sell 14,809,027 320,262
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.
8
At December 31, 1997 and 1996, the fair value of open futures, forward and
options contracts was:
1997 1996
------------------------- -------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 178,094 $ (4,700) $ -- $ (55,900)
Currencies 41,016 (6,677) 194,561 (96,820)
Other 1,020,252 (1,810) 313,497 (6,743)
Foreign exchanges
Financial 493,686 (229,030) 316,218 (238,492)
Other 170,110 (4,500) 4,092 --
Forward Contracts:
Currencies 374,665 (446,422) 535,753 (307,392)
Options Contracts:
Domestic exchanges
Financial -- (3,600) -- (10,000)
Other -- -- -- (23,168)
Foreign exchanges
Financial -- -- -- (10,838)
---------- ----------- ---------- -----------
$2,277,823 $(696,739) $1,364,121 $(749,353)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
The following table presents the average fair value of futures, forward and
options contracts during the years ended December 31, 1997 and 1996,
respectively.
1997 1996
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 253,723 $ (32,496) $ 308,869 $ (56,271)
Currencies 222,701 (35,346) 282,498 (167,813)
Other 338,062 (21,850) 184,711 (33,855)
Foreign exchanges
Financial 917,265 (112,232) 1,378,782 (59,216)
Other 39,112 (18,236) 2,004 (3,411)
Forward Contracts:
Currencies 669,467 (591,182) 938,567 (344,856)
Options Contracts:
Domestic exchanges
Financial -- (20,186) -- (1,379)
Currencies 1,969 (32,900) 20,116 (12,341)
Other 14,323 (2,642) -- (3,283)
Foreign exchanges
Financial 3,441 (4,528) -- (1,174)
---------- ----------- ---------- -----------
$2,460,063 $(871,598) $3,115,547 $(683,599)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
9
The following table presents the trading revenues from futures, forward and
options contracts during the three years ended December 31, 1997:
1997 1996 1995
---------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 574,788 $ 222,713 $ 2,210,236
Currencies 102,452 831,840 1,622,468
Other 1,699,643 1,245,429 (941,830)
Foreign exchanges
Financial 2,972,822 4,029,715 3,509,431
Other 217,780 (16,314) 122,152
Forward Contracts:
Currencies 660,518 2,205,953 5,704,962
Options Contracts:
Domestic exchanges
Financial 40,668 27,225 --
Currencies 110,600 100,225 (1,010,793)
Other 98,356 10,749 --
Foreign exchanges
Financial (71,893) (11,529) --
---------- ---------- -----------
$6,405,734 $8,646,006 $11,216,626
---------- ---------- -----------
---------- ---------- -----------
10
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on 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 December 31, 1997, 100% of the Partnership's total net assets (the 'Net
Asset Value') was allocated to commodities trading. A significant portion of the
Net Asset Value was held in U.S. Treasury bills (which represented approximately
76% 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 F 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 years ended December 31,
1997, 1996 and 1995 were $3,037,206, $4,199,389 and $6,704,103, respectively.
Additionally, redemptions by the General Partner recorded during the years ended
December 31, 1997 and 1996 were $30,685 and $1,710,345, respectively.
Redemptions by limited partners and the General Partner recorded from the
commencement of operations, October 6, 1989, through December 31, 1997 totalled
$118,317,188 and $1,741,030, 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 did TSA (a
monthly fee on traded assets equal to a 2% annual rate). In addition, Eclipse
earns a quarterly incentive fee equal to 20% of New High Net Trading Profits (as
defined in the Advisory Agreement among 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 December 31, 1997 was $259.66, an increase
of 11.40% from the December 31, 1996 net asset value per Unit of $233.09, which
was an increase of 19.10% from the December 31, 1995 net asset value per Unit of
$195.71. The Partnership outperformed the MAR (Managed Account Reports)
Fund/Pool Index, which tracked the performance of 315 futures funds for the year
ended December 31, 1997 and had a return of 9.34%. Past performance is not
necessarily indicative of future results.
11
The Partnership was profitable in 1997 as gains were achieved in all sectors
including the financial, metal, index, soft, energy, grain and meat sectors.
Over the course of the year, the financial sector recorded gains, due, in
part, to investors' flight to higher quality fixed income investments amongst
increasingly volatile worldwide markets. Specifically, gains were seen in
Australian, U.S., Japanese, Italian, Euromark and German bond positions. In the
metal sector, as gold prices fell throughout the year, the Partnership was able
to generate profits in its short positions. Conversely, the continuous rise in
silver prices led to gains in the Partnership's long positions.
Index sector positions profited as trends in the Japanese Nikkei and the U.S.
S&P 500 diverged significantly throughout the year. Long S&P 500 positions were
quite profitable for the Partnership as the U.S. stock market experienced yet
another double digit year while short Nikkei positions gained as the Nikkei
continued to decline as a result of the Asian economic crisis.
Interest income from U.S. Treasury bills increased by approximately $105,000
for the year ended December 31, 1997 compared to 1996 primarily due to an
increase in funds available for investment in U.S. Treasury bills following a
strong 1996 fourth quarter and a profitable 1997 year. Interest income from U.S.
Treasury bills decreased by approximately $286,000 for the year ended December
31, 1996 compared to 1995 primarily due to lower interest rates in 1996 and less
funds available for investment in U.S. Treasury bills as a result of redemptions
and lackluster trading performance in the first three quarters of 1996.
Commissions paid to PSI are calculated on the Partnership's Net Asset Value
on the first day of each month and, therefore, vary monthly according to trading
performance and redemptions. Commissions increased by approximately $36,000 for
the year ended December 31, 1997 as compared to 1996 principally reflecting the
effect of strong trading performance since the last quarter of 1996 on monthly
Net Asset Values, offset by 1996 and 1997 redemptions. Commissions decreased by
$229,000 during 1996 versus 1995 as monthly Net Asset Values were lower in 1996
as a result of redemptions.
All trading decisions are currently being made by John W. Henry & Company,
Inc., Welton Investment System Corp. and Eclipse. Management fees are calculated
on the Partnership's Net Asset Value allocated to each Trading Manager as of the
end of each month and, therefore, are affected by trading performance and
redemptions. Management fees increased by approximately $22,000 for the year
ended December 31, 1997 as compared to 1996 but decreased by approximately
$99,000 for the year ended December 31, 1996 as compared to 1995 primarily due
to fluctuations in monthly Net Asset Values as described above.
Incentive fees are based on the New High Net Trading Profits generated by
each Trading Manager, as defined in each Advisory Agreement among the
Partnership, the General Partner and each Trading Manager. John W. Henry &
Company, Inc. generated sufficient trading profits to earn incentive fees of
approximately $273,000, $657,000 and $366,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Also during the year ended December 31, 1997,
Welton Investment System Corp. earned incentive fees of approximately $50,000
and Eclipse earned approximately $110,000. Additionally, TSA earned incentive
fees of approximately $48,000 during the year ended December 31, 1996. See
Liquidity and Capital Resources above for information concerning changes to
incentive fees during 1997.
General and administrative expenses increased by approximately $17,000 for
the year ended December 31, 1997 as compared to 1996 but decreased by
approximately $29,000 for the year ended December 31, 1996 as compared to 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.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Partnership from inception through December 31, 1997.
12
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I hereby affirm that, to the best of my knowledge and belief, the information
contained herein relating to Prudential-Bache Capital Return Futures Fund 2,
L.P. is accurate and complete.
PRUDENTIAL SECURITIES FUTURES
MANAGEMENT INC.
(General Partner)
by: Barbara J. Brooks
Treasurer and Chief Financial Officer
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OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 1997 was $112.
The Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
Prudential-Bache Capital Return
Futures Fund 2, L.P.
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
14
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PBCR2/171781