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 March 31, 1999
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.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3544867
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One New York Plaza, 13th Floor, New York, New York 10292
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check CK whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _CK_ No __
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, December 31,
1999 1998
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ASSETS
Equity in commodity trading accounts:
Cash $ 2,915,754 $ 2,838,700
U.S. Treasury bills, at amortized cost 9,691,875 10,175,171
Net unrealized gain on open commodity positions 359,850 494,136
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Total assets $12,967,479 $13,508,007
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 834,615 $ 712,663
Accrued expenses 55,326 66,586
Due to affiliates 32,237 14,709
Management fees payable 21,467 22,378
Incentive fee payable 23,927 --
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Total liabilities 967,572 816,336
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Commitments
Partners' capital
Limited partners (77,786 and 83,196 units outstanding) 11,879,866 12,564,659
General partner (786 and 841 units outstanding) 120,041 127,012
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Total partners' capital 11,999,907 12,691,671
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Total liabilities and partners' capital $12,967,479 $13,508,007
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Net asset value per limited and general partnership unit ('Units') $ 152.72 $ 151.02
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The accompanying notes are an integral part of these statements.
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
----------------------
1999 1998
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REVENUES
Net realized gain on commodity transactions $ 553,950 $ 370,561
Change in net unrealized gain on open commodity positions (134,286) (302,688)
Interest from U.S. Treasury bills 105,478 182,166
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525,142 250,039
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EXPENSES
Commissions 237,767 333,091
Other transaction fees 16,462 57,348
Management fees 63,797 111,225
Incentive fees 23,927 --
General and administrative 40,338 44,595
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382,291 546,259
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Net income (loss) $ 142,851 $(296,220)
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ALLOCATION OF NET INCOME (LOSS)
Limited partners $ 141,422 $(293,257)
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General partner $ 1,429 $ (2,963)
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NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED AND GENERAL PARTNERSHIP
UNIT
Net income (loss) per weighted average limited and general partnership
unit $ 1.70 $ (2.85)
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Weighted average number of limited and general partnership units
outstanding 84,037 104,074
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STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
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Partners' capital--December 31, 1998 84,037 $12,564,659 $127,012 $12,691,671
Net income -- 141,422 1,429 142,851
Redemptions (5,465) (826,215) (8,400) (834,615)
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Partners' capital--March 31, 1999 78,572 $11,879,866 $120,041 $11,999,907
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The accompanying notes are an integral part of these statements.
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(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 March 31, 1999 and the results of its operations for the
three months ended March 31, 1999 and 1998. 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, 1998 (the 'Annual Report').
In accordance with the Agreement of Limited Partnership, if the Partnership's
net asset value declines below $10 million, the Partnership will dissolve.
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 three months ended March 31,
1999 and 1998 were:
1999 1998
-----------------------------------------------------------------------------------
Commissions $237,767 $333,091
General and administrative 20,350 25,650
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$258,117 $358,741
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The Partnership's assets are maintained either in trading or cash accounts
with Prudential Securities Incorporated ('PSI'), the Partnership's commodity
broker, 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
positions of the Partnership.
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 or 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
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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
March 31, 1999, such segregated assets totalled $4,784,900. 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 $8,101,448 at March 31,
1999. There are no segregation requirements for assets related to forward
trading.
As of March 31, 1999, the Partnership's open futures and forward contracts
generally mature within one year.
At March 31, 1999 and December 31, 1998, gross contract amounts of open
futures and forward contracts were:
1999 1998
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Financial Futures Contracts:
Commitments to purchase $78,058,421 $42,939,543
Commitments to sell 10,259,445 70,231,314
Currency Futures Contracts:
Commitments to purchase 3,023,490 4,047,975
Commitments to sell 10,507,293 6,715,726
Other Futures Contracts:
Commitments to purchase 3,009,712 1,180,941
Commitments to sell 2,211,046 5,823,477
Currency Forward Contracts:
Commitments to purchase 14,255,292 8,606,922
Commitments to sell 18,377,913 8,306,752
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
and forward contracts to be the net unrealized gain or loss on the contracts.
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
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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.
At March 31, 1999 and December 31, 1998, the fair value of open futures and
forward contracts was:
1999 1998
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Assets Liabilities Assets Liabilities
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Futures Contracts:
Domestic exchanges
Financial $ -- $ 13,367 $ 17,975 $ 3,591
Currencies 106,327 18,923 239,260 37,299
Other 90,226 15,425 155,300 36,717
Foreign exchanges
Financial 127,646 16,276 462,890 72,197
Other 37,185 18,674 84,761 52,321
Forward Contracts:
Currencies 214,219 133,088 -- 263,925
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$575,603 $215,753 $960,186 $466,050
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The following table presents the average fair value of futures, forward and
options contracts during the three months ended March 31, 1999 and 1998,
respectively.
1999 1998
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Assets Liabilities Assets Liabilities
-------- ------------ ---------- ------------
Futures Contracts:
Domestic exchanges
Financial $ 45,020 $ 5,577 $ 162,289 $ 38,893
Currencies 128,313 39,837 201,153 30,952
Other 131,716 23,143 155,886 101,500
Foreign exchanges
Financial 216,110 51,334 552,424 32,279
Other 67,724 47,821 77,135 80,815
Forward Contracts:
Currencies 284,502 261,891 -- 95,466
Other -- -- 95,096 575
Options Contracts:
Domestic exchanges
Financial -- -- 18,313 --
Currencies -- -- 33,963 --
Foreign exchanges
Financial -- -- 3,979 --
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$873,385 $429,603 $1,300,238 $380,480
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The following table presents trading revenues from futures, forward and
options contracts for the three months ended March 31, 1999 and 1998.
1999 1998
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Futures Contracts:
Domestic exchanges
Financial $ (29,969) $ (259,713)
Currencies (226,939) (171,104)
Other (29,191) (347,872)
Foreign exchanges
Financial (79,651) 1,115,381
Other (31,147) (198,049)
Forward Contracts:
Currencies 816,561 (124,937)
Other -- 194,234
Options Contracts:
Domestic exchanges
Financial -- (46,735)
Currencies -- (88,275)
Foreign exchanges
Other -- (5,057)
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$ 419,664 $ 67,873
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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 March 31, 1999, 100% of the Partnership's net assets were allocated to
commodities trading. At March 31, 1999, a significant portion of the net assets
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 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 Partnership's exposure to market risk is
influenced by a number of factors including the volatility of interest rates and
foreign currency exchange rates, the liquidity of the markets in which the
contracts are traded and the relationships among the contracts held. The
inherent uncertainty of the Partnership's speculative trading as well as the
development of drastic market occurrences could result in monthly losses
considerably beyond the Partnership's experience to date and could ultimately
lead to a loss of all or substantially all of investors' capital. 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 and forward contracts.
The Partnership does not have, nor does it expect to have, any capital
assets.
Redemptions by limited partners and the General Partner recorded for the
three months ended March 31, 1999 were $826,215, and $8,400, respectively.
Redemptions by limited partners and the General Partner recorded from
commencement of operations, May 30, 1990, through March 31, 1999 totalled
$65,994,467 and $772,972, respectively. Future redemptions will impact the
amount of funds available for investment in commodity contracts in subsequent
periods.
In accordance with the Agreement of Limited Partnership, if the Partnership's
net asset value declines below $10 million, the Partnership will dissolve.
Results of Operations
The net asset value per Unit as of March 31, 1999 was $152.72, an increase of
1.13% from the December 31, 1998 net asset value per Unit of $151.02.
First quarter trading resulted in net profits for the Partnership. Gains were
experienced in the currency, energy and grain sectors. Losses were incurred in
the financial, soft, index and metal sectors.
8
During the quarter, the U.S. dollar continued its surge, supported by strong
economic statistics and fueled by interest rate differentials. Additionally, the
Brazil-International Monetary Fund agreement released some pressure off the U.S.
dollar as some level of confidence seemed to be restored in Latin America. As a
result, the U.S. dollar posted significant gains against the Euro and Swiss
franc, which contributed to Partnership profits.
The Partnership profited from energy sector positions as those markets
continued to set new highs, propelled by OPEC's announcement to make substantial
cuts in crude oil exports. Prospects of large global bean surpluses resulting
from weak Asian demand benefited the Partnership as bean positions recorded
gains.
Most European and Asian stock indices experienced solid gains following the
Dow Jones Industrial Average as it rose through the 10,000 level. As a result,
short index sector positions incurred losses.
The metal sector rallied during the first half of the quarter until events in
Kosovo led to NATO military attacks on Yugoslavia. As a result, silver and gold
positions recorded losses for the Partnership.
Interest income is earned on the Partnership's investments in U.S. Treasury
bills and varies monthly according to interest rates, trading performance and
redemptions. Interest income from U.S. Treasury bills decreased by $77,000 for
the three months ended March 31, 1999 as compared to 1998. This decrease was
primarily due to the effect of declining interest rates as well as the effect of
fewer funds available for investment in U.S. Treasury bills resulting from the
liquidation of such investments for the payment of redemptions and poor trading
performance during 1998.
Commissions are calculated on the net asset value on the first day of each
month and, therefore, vary based on monthly trading performance and redemptions.
Commissions decreased by $95,000 for the three months ended March 31, 1999 as
compared to 1998 due primarily to the effect on the monthly net asset values of
poor trading performance and redemptions during 1998.
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 as well as the exchange, clearing firm or bank on, or
through, which the contract is traded. Other transaction fees decreased by
$41,000 for the three months ended March 31, 1999 as compared to 1998 due to
lower trading volume. Additionally, beginning in August 1998, the Partnership
experienced a higher concentration of interbank trading, which does not generate
other transactions fees, as a result of a change in trading managers as further
discussed below.
All trading decisions are currently being made by Sjo, Inc. and Robert M.
Tamiso (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 $47,000 for the three months ended March 31, 1999 as compared to
1998. This decrease was primarily due to redemptions and poor trading
performance during 1998. Additionally, this decrease was due to a reduction from
a 3% annual rate to 2% when Willowbridge Associates, Inc. ('Willowbridge')
ceased to serve as a Trading Manager to the Partnership and the portion of the
net assets traded by Willowbridge were reallocated to Robert M. Tamiso during
July 1998.
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. Robert M. Tamiso generated
sufficient profits to earn incentive fees of $24,000 during the three months
ended March 31, 1999.
General and administrative expenses decreased by $4,000 for the three months
ended March 31, 1999 as compared to 1998. 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. This decrease was due
to a reduction in overall costs associated with administering the Partnership
including continuing declines in printing and postage costs as limited partners
redeem their units.
9
Year 2000 Risk
A discussion of Year 2000 risk and its effect on the operations of the
Partnership is included in the Partnership's Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.
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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--Effective April 1999, Eleanor L. Thomas and Joseph
A. Filicetti were elected by the Board of Directors
of the General Partner as directors. In addition, Ms.
Thomas has also been elected by the Board of
Directors as President of the General Partner
replacing Thomas M. Lane. Ms. Thomas joined
Prudential Securities Incorporated in February 1993
and is primarily responsible for origination, asset
allocation, and due diligence for Managed Futures.
Mr. Filicetti was elected by the Board of Directors
of the General Partner as Executive Vice President.
Mr. Filicetti joined Prudential Securities
Incorporated in September 1998 and is the Director of
Sales and Marketing for Managed Futures.
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: May 14, 1999
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Steven Carlino
Vice President and Treasurer
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