1997
- --------------------------------------------------------------------------------
Prudential-Bache Annual
Capital Return Futures Report
Fund 3, L.P.
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
March 1997
Dear Limited Partner:
Enclosed is the annual report of Prudential-Bache Capital Return Futures Fund
3, 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 loss of 7.97% in 1997 The MAR (Managed Account Reports)
Fund/Pool Index which tracked the performance of 315 futures funds in 1997,
returned 9.34%, outperforming the Fund. At year-end, the Fund's net asset value
per unit was $168.35*. Past performance is not necessarily indicative of future
results.
The Fund did not have a profitable year in 1997. Over the course of the year,
the Fund lost in the financial, index, energy and soft sectors. Losses were
somewhat offset by gains in the currency, metal and grain 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 September 1, 1997, Sjo implemented their Global Diversified Program
which replaced their Foreign Financials Program. We believe that this program
will more effectively complement 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
Seaport Futures Management, Inc.
*As of March 25, 1998 the estimated net asset value per unit was $163.44.
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 3, 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 3, 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 3, L.P.
We have audited the accompanying statements of operations and of changes in
partners' capital of Prudential-Bache Capital Return Futures Fund 3, 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 3, 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 3, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash and cash equivalents $17,311,223 $22,358,921
Net unrealized gain on open commodity positions 795,209 341,870
Options, at market 124,575 --
------------ ------------
Total assets $18,231,007 $22,700,791
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 587,036 $ 991,115
Accrued expenses 64,500 62,974
Management fees payable 37,646 54,531
Due to affiliates 20,512 77,638
Incentive fees payable -- 256,496
------------ ------------
Total liabilities 709,694 1,442,754
------------ ------------
Commitments
Partners' capital
Limited partners (103,033 and 115,048 units outstanding) 17,346,056 21,045,294
General partner (1,041 and 1,163 units outstanding) 175,257 212,743
------------ ------------
Total partners' capital 17,521,313 21,258,037
------------ ------------
Total liabilities and partners' capital $18,231,007 $22,700,791
------------ ------------
------------ ------------
Net asset value per limited and general partnership unit ('Units') $ 168.35 $ 182.93
------------ ------------
------------ ------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
3
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
REVENUES
Net realized gain (loss) on commodity transactions $ (294,359 ) $ 6,497,225 $ 3,827,887
Change in net unrealized gain on open commodity
positions 497,262 (1,002,361) 1,180,234
Interest from U.S. Treasury bills 750,962 753,904 804,638
Realized gain on reserve assets -- -- 7,370
Change in net unrealized gain on reserve assets -- -- (91,359)
Interest from reserve assets -- -- 506,191
------------ ----------- ---------------
953,865 6,248,768 6,234,961
------------ ----------- ---------------
EXPENSES
Commissions 1,458,094 1,518,807 1,225,644
Other transaction fees 235,087 191,327 202,922
Letter of credit fees -- -- 103,003
Management fees 538,158 600,463 503,036
Incentive fees 226,785 597,331 206,647
General and administrative 163,720 160,359 187,320
Amortization of organizational costs -- -- 6,245
------------ ----------- ---------------
2,621,844 3,068,287 2,434,817
------------ ----------- ---------------
Net income (loss) $(1,667,979 ) $ 3,180,481 $ 3,800,144
------------ ----------- ---------------
------------ ----------- ---------------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $(1,651,267 ) $ 3,157,728 $ 3,721,494
------------ ----------- ---------------
------------ ----------- ---------------
General partner $ (16,712 ) $ 22,753 $ 78,650
------------ ----------- ---------------
------------ ----------- ---------------
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED AND
GENERAL PARTNERSHIP UNIT
Net income (loss) per weighted average limited and
general partnership unit $ (14.85 ) $ 24.90 $ 23.30
------------ ----------- ---------------
------------ ----------- ---------------
Weighted average number of limited and general
partnership units outstanding 112,297 127,714 163,100
------------ ----------- ---------------
------------ ----------- ---------------
- --------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
- ----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1994 188,338 $24,819,722 $472,984 $25,292,706
Net income -- 3,721,494 78,650 3,800,144
Redemptions (53,471) (7,969,201) -- (7,969,201)
------- ----------- -------- -----------
Partners' capital--December 31, 1995 134,867 20,572,015 551,634 21,123,649
Net income -- 3,157,728 22,753 3,180,481
Redemptions (18,656) (2,684,449) (361,644) (3,046,093)
------- ----------- -------- -----------
Partners' capital--December 31, 1996 116,211 21,045,294 212,743 21,258,037
Net loss -- (1,651,267) (16,712) (1,667,979)
Redemptions (12,137) (2,047,971) (20,774) (2,068,745)
------- ----------- -------- -----------
Partners' capital--December 31, 1997 104,074 $17,346,056 $175,257 $17,521,313
------- ----------- -------- -----------
------- ----------- -------- -----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
4
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential-Bache Capital Return Futures Fund 3, L.P. (the 'Partnership') is a
Delaware limited partnership formed on November 27, 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
May 30, 1990, the Partnership completed its offering having raised $65,520,000
from the sale of 648,625 units of limited partnership interest and 6,575 units
of general partnership interest and commenced operations. The Partnership was
formed to engage in the speculative trading of commodity futures, forward and
options contracts. The general partner of the Partnership is Seaport Futures
Management, Inc. (the 'General Partner') which is an affiliate of Prudential
Securities Incorporated ('PSI'), the Partnership's commodity broker. Both the
General Partner and PSI are wholly owned subsidiaries of Prudential Securities
Group Inc. ('PSGI'). 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.
Initially, 60% of the net proceeds of the offering was deposited in the
Partnership's trading accounts for commodity trading purposes (referred to as
the Partnership's 'Traded Assets'). The General Partner generally maintains not
less than 75% of the Traded Assets 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 the Traded Assets is held in cash in the Partnership's
commodity trading accounts. As a protective device in conjunction with the
letter of credit (see further discussion below), the remaining 40% of the net
proceeds was placed in reserve (the 'Reserve Assets') and was not committed to
commodities trading until June 30, 1995 (the 'Capital Return Date'). On the
Capital Return Date, the letter of credit expired and the Reserve Assets were
allocated for commodities trading to Willowbridge Associates Inc.
('Willowbridge'), an independent commodities trading manager.
Since July 1995, all trading decisions have been made by Sjo, Inc. ('Sjo')
and Willowbridge (the 'Trading Managers'). All trading decisions for the
Partnership from August 1992 through June 1995 were made by Sjo. The General
Partner retains the authority to override trading instructions that violate the
Partnership's trading policies.
An irrevocable letter of credit ('Letter of Credit') was issued in favor of
the Partnership by Citibank, N.A. (the 'Bank') on May 30, 1990. The Letter of
Credit was intended to provide protection to the limited partners against loss
of their initial investment as of the Capital Return Date when the limited
partners had the option to redeem their units and receive the greater of the
then current net asset value per Unit or 100% of their initial investment. As
described above, the Letter of Credit expired on June 30, 1995 (with no payment
required by the Bank) and does not provide protection thereafter.
Effective September 1, 1997, Sjo implemented their Global Diversified Program
which replaced their Foreign Financials Program. Additionally, the fee structure
of the assets under Sjo's management was changed to a monthly management fee at
an annual rate of 2% of Traded Assets allocated to Sjo and a quarterly incentive
fee of 17% of New High Net Trading Profits (as defined in the Advisory Agreement
among 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. 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.
5
Commodity futures 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. Option 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 Traded Assets in U.S. Treasury bills to fulfill original margin
requirements. Reserve Assets were invested in U.S. Treasury strips and a
guaranteed investment contract ('GIC'). U.S. Treasury bills are carried at
amortized cost, which approximates market value, while the U.S. Treasury strips
and the GIC were carried at their market values. 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 (loss) per
weighted average limited and general partnership unit. The weighted average
limited and general partnership units are equal to the number of Units
outstanding at year end, adjusted proportionately for the 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 Standard No. 102, 'Statement of
Cash Flows--Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale.'
The Partnership considers U.S. Treasury bills to be cash equivalents.
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 realized profits or losses remaining after these allocations are
allocated to each partner in proportion to such partner's capital account at
year-end. Net income or loss for financial reporting purposes is allocated
quarterly based on the weighted average 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 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 reduced by each Unit's pro rata portion of unamortized
organizational costs.
C. Costs, Fees and Expenses
Organizational costs
Costs incurred to organize the Partnership, including but not limited to
legal, accounting, registration fees and certain printing costs, are considered
deferred organizational costs. These costs were capitalized and amortized over a
60-month period ending in 1995.
Commissions and Letter of Credit fees
The General Partner, on behalf of the Partnership, entered into an agreement
with PSI to act as commodity broker for the Partnership. The Partnership paid
PSI fees comprised of brokerage and Letter of Credit fees at an initial rate of
5/6 of 1% (a 10% annual rate) of the Partnership's Traded Assets as of the first
day of each month. Such rate declined 1/2% per year until it reached an annual
rate of 7.5% effective July 1, 1995 in accordance with the scheduled rate
adjustment outlined in the Partnership's prospectus.
6
Through June 30, 1995, the portion of the monthly fee paid to PSI
representing Letter of Credit fees was calculated as follows: (i) .0007291 (an
.875% annual rate) of the outstanding Letter of Credit amount as of the first
day of each month was due to the Bank for issuing and maintaining the Letter of
Credit and (ii) .0002083 (a .25% annual rate) of the outstanding Letter of
Credit amount as of the first day of each month was due to PSGI for being
obligated to make payment of a portion of the General Partner's repayment
obligation in the event the General Partner was unable to do so. Following the
expiration of the Letter of Credit on June 30, 1995 (see Note A), the
Partnership was no longer obligated to pay these fees.
Management and incentive fees
The Partnership pays each Trading Manager monthly management fees ranging
from 1/6 of 1% (a 2% annual rate) to 1/4 of 1% (a 3% annual rate) of the portion
of the Partnership's Traded Assets allocated to that Trading Manager as of the
end of each month.
In addition, the Partnership also pays the Trading Managers quarterly
incentive fees ranging from 17% to 20% of the 'New High Net Trading Profits'
generated by each Trading Manager (as defined in the Advisory Agreement among
the Partnership, the General Partner and each Trading Manager).
See Note A for information concerning changes to management and incentive
fees paid to Sjo.
General and administrative fees
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 services and other administrative services.
The costs incurred for these services for the years ended December 31, 1997,
1996 and 1995 were:
1997 1996 1995
----------------------------------------
Commissions $1,458,094 $1,518,807 $1,225,644
Letter of Credit fees -- -- 22,887
General and administrative 93,899 104,370 110,599
---------- ---------- ----------
$1,551,993 $1,623,177 $1,359,130
---------- ---------- ----------
---------- ---------- ----------
The Partnership maintains its trading and cash accounts at PSI, the
Partnership's commodity broker. Except for the portion of Traded Assets that is
deposited as margin to maintain forward currency contract positions as further
discussed below, the Partnership's Traded 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 currency trading desks. All over-the-counter currency
transactions are conducted between PSI and the Partnership pursuant to a line of
credit. PSI may require that collateral be posted against the marked-to-market
position of the Partnership.
Additionally, the Partnership maintained a 9.16% GIC which matured on June
30, 1995 with The Prudential Asset Management Company Inc., an affiliate of the
General Partner. Interest earned on the GIC for the year ended December 31, 1995
was $502,511. The realized gain on the GIC was $7,370 and the change in
unrealized gain on the GIC was $(91,070) for the year ended December 31, 1995.
7
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 (loss) per financial
statements $(1,667,979) $3,180,481 $3,800,144
Change in net unrealized gain on
Reserve Assets -- -- 91,359
Change in unrealized gain/loss on
nonregulated commodity positions 227,676 (304,542) 78,309
Original issue discount adjustments
to
interest income -- -- 214
Treasury strip gain -- -- (6,720)
----------- ---------- ----------
Tax basis net income (loss) $(1,440,303) $2,875,939 $3,963,306
----------- ---------- ----------
----------- ---------- ----------
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 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
December 31, 1997 and 1996, such segregated assets totalled $13,304,825 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 $4,996,751 and $2,382,574 at
8
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 options
contracts mature within one year.
At December 31, 1997 and 1996, gross contract amounts of open futures,
forward and options contracts are:
1997 1996
------------ ------------
Financial Futures and Options Contracts:
Commitments to purchase $232,456,787 $229,278,898
Commitments to sell 3,415,906 41,744,989
Currency Futures and Options Contracts:
Commitments to purchase 3,813,407 --
Commitments to sell 20,598,159 --
Other Futures Contracts:
Commitments to purchase 3,477,900 6,484
Commitments to sell 7,212,160 227,403
Currency Forward Contracts:
Commitments to purchase 2,621,143 --
Commitments to sell 477,804 --
Other Forward Contracts:
Commitments to purchase 333,510 --
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, 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.
9
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 $ 204,288 $ 83,550 $ -- $ --
Currencies 171,503 10,585 -- --
Other 279,386 41,549 -- --
Foreign exchanges
Financial 396,408 9,479 333,578 212,627
Other 63,081 103,725 227,403 6,484
Forward Contracts:
Currencies -- 68,270 -- --
Other -- 2,299 -- --
Options Contracts:
Domestic exchanges
Financial 23,375 -- -- --
Currencies 101,200 -- -- --
---------- ------------ -------- ------------
$1,239,241 $319,457 $560,981 $219,111
---------- ------------ -------- ------------
---------- ------------ -------- ------------
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 $ 123,796 $ 14,567 $ 56,153 $ 29,059
Currencies 199,120 28,543 123,647 32,513
Other 177,680 56,170 514,655 121,392
Foreign exchanges
Financial 346,591 110,195 745,771 36,408
Other 327,551 108,966 69,393 54,244
Forward Contracts:
Currencies 3,491 30,363 -- --
Other 3,394 6,792 1,264 8,915
Options Contracts:
Domestic exchanges
Financial 8,823 -- 8,786 --
Currencies 16,610 -- 33,821 --
Other 5,868 -- 26,675 --
Foreign exchanges
Financial -- -- 3,179 --
Other 20,761 -- -- --
---------- ------------ ---------- ------------
$1,233,685 $355,596 $1,583,344 $282,531
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
10
The following table presents trading revenues from futures, forward and
options contracts for the three years ended December 31, 1997:
1997 1996 1995
----------- ---------- ----------
Futures Contracts:
Domestic exchanges
Financial $(1,634,928) $ 801,008 $ 65,300
Currencies 1,893,243 758,643 (98,113)
Other 369,626 684,445 1,107,851
Foreign exchanges
Financial (729,244) 3,797,346 4,317,618
Currencies -- -- 87,125
Other 800,586 92,879 (351,592)
Forward Contracts:
Currencies (113,089) -- --
Other (49,419) 10,020 --
Options Contracts:
Domestic exchanges
Financial (9,303) (134,985) (4,047)
Currencies (155,643) (148,763) 134,400
Other (80,538) (289,027) (237,676)
Foreign exchanges
Financial -- (76,702) --
Other (88,388) -- (12,745)
----------- ---------- ----------
$ 202,903 $5,494,864 $5,008,121
----------- ---------- ----------
----------- ---------- ----------
11
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, 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 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, 60% of the net proceeds was allocated to trading activity ('Traded
Assets'). In conjunction with a letter of credit ('Letter of Credit'), the
remaining 40% 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 December 31, 1997, 100% of the Partnership's net assets were allocated to
commodities trading. At December 31, 1997, a significant portion of the Traded
Assets was held in U.S. Treasury bills (which represented approximately 78% of
the Traded Assets 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 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 and options contracts.
The Partnership does not have, nor does it expect to have, any capital
assets.
Redemptions by limited partners recorded for the years ended December 31,
1997, 1996 and 1995 were $2,047,971, $2,684,449 and $7,969,201, respectively.
Additionally, redemptions by the General Partner recorded for the years ended
December 31, 1997 and 1996 were $20,774 and $361,644, respectively. Redemptions
by limited partners and the general partner recorded from commencement of
operations, May 30, 1990, through December 31, 1997 totalled $62,029,611 and
$732,963, respectively. Future redemptions will impact the amount of funds
available for investment in commodity contracts in subsequent periods.
Effective September 1, 1997, Sjo, Inc. ('Sjo') implemented their Global
Diversified Program which replaced their Foreign Financials Program.
Additionally, the fee structure of the assets under Sjo's management was changed
to a monthly management fee at an annual rate of 2% of Traded Assets allocated
to Sjo and a quarterly incentive fee of 17% of New High Net Trading Profits (as
defined in the Advisory Agreement among 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%.
Results of Operations
The net asset value per Unit as of December 31, 1997 was $168.35, a decrease
of 7.97% from the December 31, 1996 net asset value per Unit of $182.93, which
was an increase of 16.79% from the December 31, 1995 net asset value per Unit of
$156.63. The MAR (Managed Account Reports) Fund/Pool
12
Index, which tracked the performance of 315 futures funds in 1997, returned
9.34%, outperforming the Partnership. Past performance is not necessarily
indicative of future results.
The Partnership did not have a profitable year in 1997. Over the course of
the year, the Partnership lost in the financial, index, energy and soft sectors.
Losses were somewhat offset by gains in the currency, metal and grain sectors.
Global interest rate markets failed to make significant trends throughout the
year resulting in losses for the Partnership in the financial sector. From
January to May, the global bond markets continued to sell-off, causing the
Partnership to liquidate long positions at a loss. June and July saw a
resumption of the global bull bond market which halted in August causing profits
made in July to be given back.
Index sector positions were unprofitable primarily in the S&P 500 which were
partially offset by gains in other positions including the dollar index and CAC
40.
As tensions began to mount in the Middle East, volatility in energy prices
began to increase resulting in losses primarily in the Partnership's light crude
positions.
The Partnership was able to capitalize on price moves in the Japanese yen,
Deutsche mark, Australian dollar and Canadian dollar, somewhat offsetting
losses. These price moves were due, in part, to the flight to quality that
occurred in response to the Asian crisis. Profits were also made in copper and
gold positions.
Interest income from U.S. Treasury bills decreased by $2,942 for the year
ended December 31, 1997 as compared to 1996 due to poor trading performance in
1997, which was partially offset by a higher amount of funds invested in U.S.
Treasury bills in the current year. In the prior year, poor trading performance
during the first half of the year as well as redemptions reduced the amount of
funds available for investment in U.S. Treasury bills. These factors, as well as
a decrease in interest rates in 1996 versus 1995, resulted in a decrease in
interest income from U.S. Treasury bills of $50,734 for the year ended December
31, 1996 as compared to 1995. Additionally, interest income from Reserve Assets
was eliminated following the allocation of Reserve Assets to commodities
trading.
Commissions are calculated on the Traded Assets on the first day of each
month and, therefore, vary based on monthly trading performance and redemptions.
Commissions decreased by $60,713 for the year ended December 31, 1997 as
compared to 1996 primarily due to a decrease in Traded Assets as a result of
poor trading performance and redemptions in 1997. In July 1995, Traded Assets
increased when the Letter of Credit expired and Reserve Assets were allocated to
commodities trading resulting in an increase in commissions. However, the
commission rate decreased by 1/2 of 1% from 8% (inclusive of Letter of Credit
fees) to 7.5% effective July 1, 1995. The combination of these factors caused
commissions plus Letter of Credit fees to increase by $190,160 for the year
ended December 31, 1996 as compared to 1995.
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 $43,760 for the
year ended December 31, 1997 as compared to 1996 due to increased trading volume
which, in turn, is partially attributable to the implementation of a new trading
strategy by Sjo as discussed above. However, lower trading volume during the
year ended December 31, 1996 as compared to 1995 resulted in a decrease in other
transaction fees of $11,595.
All trading decisions are currently being made by Sjo and Willowbridge
Associates Inc. (the 'Trading Managers'). Management fees are calculated on the
Traded Assets 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 $62,305 for the year ended December 31, 1997 as compared to 1996
primarily due to poor trading performance and redemptions in 1997. In 1996,
management fees increased by $97,427 as compared to 1995 due to the increase in
Traded Assets during July 1995 as discussed above as well as strong trading
performance during the latter part of 1996.
Incentive fees are based on New High Net Trading Profits generated by each
Trading Manager, as defined in the Advisory Agreements among the Partnership,
the General Partner and each Trading Manager. Although the Partnership ended the
1997 year with a loss, the Partnership paid incentive fees of $226,785. These
fees were primarily attributable to strong trading performance during the latter
part of 1996 capped off by positive trading performance during the first three
months of 1997. The payment of these fees is not contingent upon future trading
performance and, therefore, is unaffected by the Partnership's poor trading
13
performance during the remainder of the year. Incentive fees of $597,331 and
$206,647 were paid during the years ended December 31, 1996 and 1995,
respectively.
General and administrative expenses increased by $3,361 for the year ended
December 31, 1997 as compared to 1996 but decreased by $26,961 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. The 1996
decline was primarily due to higher costs in 1995 associated with the
appointment of Willowbridge Associates Inc. as a new trading manager to the
Partnership and other costs relating to the expiration of the Letter of Credit.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Partnership from inception through December 31, 1997.
14
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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 3, L.P. is accurate and complete.
SEAPORT FUTURES
MANAGEMENT, INC.
(General Partner)
By: Barbara J. Brooks
Treasurer and Chief Financial Officer
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15
OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 1997 was $34.
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 3, L.P.
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
16
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PBCR3/171879