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 / / 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: 0-18417 PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 13-3516796 - -------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 778-7866 N/A - -------------------------------------------------------------------------------- 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 L.P. (a limited partnership) STATEMENTS OF FINANCIAL CONDITION (Unaudited) March 31, December 31, 1999 1998 - --------------------------------------------------------------------------------------------------- ASSETS Equity in commodity trading accounts: Cash $ 2,841,561 $ 3,166,467 U.S. Treasury bills, at amortized cost 11,228,584 11,092,586 Net unrealized gain on open commodity positions 459,524 1,007,956 ----------- ------------ Total assets $14,529,669 $15,267,009 ----------- ------------ ----------- ------------ LIABILITIES AND PARTNERS' CAPITAL Liabilities Redemptions payable $ 499,963 $ 408,971 Management fees payable 48,187 50,656 Accrued expenses 46,959 57,613 Due to affiliates 26,593 12,481 ----------- ------------ Total liabilities 621,702 529,721 ----------- ------------ Commitments Partners' capital Limited partners (96,282 and 99,743 units outstanding) 13,768,823 14,589,844 General partner (973 and 1,008 units outstanding) 139,144 147,444 ----------- ------------ Total partners' capital 13,907,967 14,737,288 ----------- ------------ Total liabilities and partners' capital $14,529,669 $15,267,009 ----------- ------------ ----------- ------------ Net asset value per limited and general partnership unit ('Units') $ 143.01 $ 146.27 ----------- ------------ ----------- ------------ - --------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 2 PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND L.P. (a limited partnership) STATEMENTS OF OPERATIONS (Unaudited) Three months ended March 31, ------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------- REVENUES Net realized gain (loss) $ 565,224 $ (25,194) Change in net unrealized gain (548,432) (715,090) Interest from U.S. Treasury bills 121,712 167,740 --------- ----------- 138,504 (572,544) --------- ----------- EXPENSES Commissions 289,136 330,047 Management fees 143,951 161,878 General and administrative 34,775 41,097 --------- ----------- 467,862 533,022 --------- ----------- Net loss $(329,358) $(1,105,566) --------- ----------- --------- ----------- ALLOCATION OF NET LOSS Limited partners $(326,063) $(1,094,504) --------- ----------- --------- ----------- General partner $ (3,295) $ (11,062) --------- ----------- --------- ----------- NET LOSS PER WEIGHTED AVERAGE LIMITED AND GENERAL PARTNERSHIP UNIT Net loss per weighted average limited and general partnership unit $ (3.27) $ (9.61) --------- ----------- --------- ----------- Weighted average number of limited and general partnership units outstanding 100,751 115,031 --------- ----------- --------- ----------- - --------------------------------------------------------------------------------------------------- STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited) LIMITED GENERAL UNITS PARTNERS PARTNER TOTAL - ---------------------------------------------------------------------------------------------------- Partners' capital--December 31, 1998 100,751 $14,589,844 $147,444 $14,737,288 Net loss -- (326,063) (3,295) (329,358) Redemptions (3,496) (494,958) (5,005) (499,963) -------- ----------- -------- ----------- Partners' capital--March 31, 1999 97,255 $13,768,823 $139,144 $13,907,967 -------- ----------- -------- ----------- -------- ----------- -------- ----------- - ---------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 3 PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 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 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 as 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 $289,136 $330,047 General and administrative 16,350 22,950 -------- -------- $305,486 $352,997 -------- -------- -------- -------- 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 manager, 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 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. 4 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 manager 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 manager 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 $5,007,431. 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 $9,333,317 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 mature within one year. At March 31, 1999 and December 31, 1998, gross contract amounts of open futures and forward contracts were: 1999 1998 ----------- ------------ Currency Forward Contracts: Commitments to purchase $ 6,783,402 $ 546,406 Commitments to sell 16,142,262 1,960,358 Currency Futures Contracts: Commitments to purchase -- 5,617,987 Commitments to sell 12,466,363 4,238,887 Financial Futures Contracts: Commitments to purchase 24,771,405 39,193,849 Commitments to sell 77,574,672 83,475,164 Other Futures Contracts: Commitments to purchase 1,464,125 1,139,330 Commitments to sell 4,876,693 3,588,609 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 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 5 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 ------------------------ -------------------------- Assets Liabilities Assets Liabilities -------- ----------- ---------- ----------- Futures Contracts: Domestic exchanges Financial $ 98,999 $ -- $ 9,844 $ 106,650 Currencies 100,362 53,950 178,225 41,112 Other 113,996 35,387 114,222 42,294 Foreign exchanges Financial 116,243 102,265 1,080,633 88,960 Other 34,981 2,376 29,238 4,015 Forward Contracts: Currencies 273,960 85,039 6,297 127,472 -------- ----------- ---------- ----------- $738,541 $ 279,017 $1,418,459 $ 410,503 -------- ----------- ---------- ----------- -------- ----------- ---------- ----------- The following table presents the average fair value of futures and forward contracts during the three months ended March 31, 1999 and 1998, respectively. 1999 1998 -------------------------- -------------------------- Assets Liabilities Assets Liabilities ---------- ----------- ---------- ----------- Futures Contracts: Domestic exchanges Financial $ 55,901 $ 38,588 $ 98,410 $ 14,055 Currencies 150,512 32,634 -- -- Other 105,071 32,302 316,654 69,025 Foreign exchanges Financial 655,915 82,533 270,487 65,498 Other 26,092 4,108 19,106 6,624 Forward Contracts: Currencies 292,878 279,427 478,610 437,927 ---------- ----------- ---------- ----------- $1,286,369 $ 469,592 $1,183,267 $ 593,129 ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- The following table presents the Partnership's trading revenues for the three months ended March 31, 1999 and 1998, respectively. 1999 1998 --------- ----------- Futures Contracts: Domestic exchanges Financial $ 311,127 $ (75,954) Currencies (58,518) -- Other (151,029) (329,100) Foreign exchanges Financial (747,818) (99,682) Other 50,305 51,284 Forward Contracts: Currencies 612,725 (286,832) --------- ----------- $ 16,792 $ (740,284) --------- ----------- --------- ----------- 6 PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 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 12, 1989 with gross proceeds of $139,151,000. After accounting for organizational and offering costs, the Partnership's net proceeds were $137,151,000. At March 31, 1999, 100% of the Partnership's total net assets were allocated to commodities trading. A significant portion of the net asset value was held in U.S. Treasury bills (which represented approximately 78% of the net asset value prior to redemptions payable) and cash, which are used as margin for the Partnership's trading in commodities. Inasmuch as the sole business of the Partnership is to trade in commodities, the Partnership continues to own such liquid assets to be used as margin. The percentage that U.S. Treasury bills bears to the net asset value varies each day, and from month to month, as the market value of commodity interests change. 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 manager 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. Redemptions by limited partners and the General Partner recorded for the three months ended March 31, 1999 were $494,958 and $5,005, respectively. Redemptions by limited partners and the General Partner from commencement of operations, May 12, 1989, through March 31, 1999 totalled $142,822,971 and $1,623,929, 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. 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 $143.01, a decrease of 2.23% from the December 31, 1998 net asset value per Unit of $146.27. First quarter trading resulted in net losses for the Partnership. Profits accumulated in the currency, energy, and index sectors failed to offset losses incurred in the financial, metal, soft, grain, and meat sectors. 7 In the financial sector, the bear market trend in Japanese bonds reversed when the Ministry of Finance announced that the Bank of Japan would continue supporting the bond market by purchasing sizable quantities of Japanese government bonds ('JGBs'). As a result, the Partnership sustained sizable losses in JGBs. In reaction to the International Monetary Fund's threat to sell gold, gold prices declined during the quarter leading to losses in the metal sector. The Partnership profited from the strength of the U.S. dollar as it benefited from the considerable slow down in European growth and market sentiment that the European Central Bank will have to smooth the transition to the Euro by cutting rates. As a result, profits were derived from long U.S. dollar crossrate positions against the Deutsche mark and Swiss franc. Additional gains were generated from long positions in the energy sector as OPEC announced substantial cuts in crude oil exports. Interest income is earned on the Partnership's investment 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 approximately $46,000 for the three months ended March 31, 1999 as compared to the same period in 1998 due to the effect of declining interest rates as well as the effect of fewer funds available for investments in U.S. Treasury bills resulting from the liquidation of such investments for the payment of redemptions. Commissions are calculated on the net asset value on the first day of each month and, therefore, vary based on monthly trading performance and redemptions. Commissions decreased by approximately $41,000 for the three months ended March 31, 1999 as compared to the same period in 1998 primarily due to the effect of redemptions on the monthly net asset values and poor trading performance during the first three months of 1999. All trading decisions are currently made by John W. Henry & Company, Inc. (the 'Trading Manager'). Management fees are calculated on the net asset value as of the end of each month and, therefore, are affected by trading performance and redemptions. Management fees decreased by approximately $18,000 for the three months ended March 31, 1999 as compared to the same period in 1998 for the same reasons commissions decreased as discussed above. Incentive fees are based on New High Net Trading Profits generated by the Trading Manager, as defined in the Advisory Agreement among the Partnership, the General Partner and the Trading Manager. No incentive fees were earned for the three months ended March 31, 1999 and 1998. General and administrative expenses decreased by approximately $6,000 for the three months ended March 31, 1999 as compared to the same period in 1998. These expenses include reimbursements of cost 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. 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. 8 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 January 26, 1989 as amended and restated as of March 15, 1989. (incorporated by reference to Exhibits 3.1 and 4.1 to the Registrant's Annual Report on Form 10-K for the period ended December 31, 1989) 4.2 Subscription Agreement (incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the period ended December 31, 1989) 4.3 Request for Redemption (incorporated by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the period ended December 31, 1989) 27.1 Financial Data Schedule (filed herewith) (b) Reports on Form 8-K No reports on Form 8-K were filed for the period covered by this report. 9 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 L.P. By: Seaport Futures Management, Inc. A Delaware corporation, General Partner By: /s/ Steven Carlino Date: May 14, 1999 ---------------------------------------- Steven Carlino Vice President and Treasurer 10