<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
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 0-18418
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3533120
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One New York Plaza, 14th Floor, New York, New York 10292
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(Title of class)
Indicate by check mark 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__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [CK]
DOCUMENTS INCORPORATED BY REFERENCE
Agreement of Limited Partnership of the Registrant, dated June 8, 1989,
included as part of the Registration Statement on Form S-1 (File No. 33-29039)
filed with the Securities and Exchange Commission on June 9, 1989 pursuant to
Rule 424(b) of the Securities Act of 1933, and amended and restated as of July
21, 1989, is incorporated by reference into Part IV of this Annual Report on
Form 10-K
Registrant's Annual Report to Limited Partners for the year ended December
31, 1996 is incorporated by reference into Parts II and IV of this Annual Report
on Form 10-K
Index to exhibits can be found on pages 8 through 10.
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1 Business......................................................................... 3
Item 2 Properties....................................................................... 4
Item 3 Legal Proceedings................................................................ 4
Item 4 Submission of Matters to a Vote of Limited Partners.............................. 4
PART II
Item 5 Market for the Registrant's Units and Related Limited Partner Matters............ 4
Item 6 Selected Financial Data.......................................................... 5
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 5
Item 8 Financial Statements and Supplementary Data...................................... 5
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 5
PART III
Item 10 Directors and Executive Officers of the Registrant............................... 5
Item 11 Executive Compensation........................................................... 6
Item 12 Security Ownership of Certain Beneficial Owners and Management................... 7
Item 13 Certain Relationships and Related Transactions................................... 7
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements and Financial Statement Schedules........................... 8
Exhibits......................................................................... 8
Reports on Form 8-K.............................................................. 10
SIGNATURES.................................................................................. 11
</TABLE>
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PART I
Item 1. Business
General
Prudential-Bache Capital Return Futures Fund 2, L.P. (the ``Registrant''), a
Delaware limited partnership, was formed on June 8, 1989 and will terminate on
December 31, 2009 unless terminated sooner under the provisions of the Amended
and Restated Agreement of Limited Partnership (the ``Partnership Agreement'').
The Registrant was formed to engage primarily in the speculative trading of a
portfolio consisting primarily of commodity futures, forward and options
contracts. Physical commodities also may be traded from time to time. On October
6, 1989, the Registrant completed its offering and raised $101,010,000 from the
sale of 1,000,000 units of limited partnership interest and 10,100 units of
general partnership interest (collectively, ``Units'') which resulted in net
proceeds to the Registrant of $99,010,000. The Registrant's fiscal year for book
and tax purposes ends on December 31.
At the inception of the Registrant, sixty percent of the net asset value was
allocated to commodities trading. As a protective device in conjunction with the
letter of credit (see further discussion below), the remaining forty percent of
the net asset value was placed in reserve (the ``Reserve Assets'') and was not
committed to commodities trading until December 31, 1994 (the ``Capital Return
Date''). On the Capital Return Date, the letter of credit expired. Additionally,
on January 3, 1995 the Reserve Assets matured and the resulting proceeds were
allocated for commodities trading to Analytic/TSA Investors Inc. (formerly known
as TSA Capital Management), an independent commodities trading manager.
All trading decisions for the Registrant are currently being made by Welton
Investment Services Corporation, Analytic/TSA Investors Inc. and John W. Henry &
Co., Inc., independent commodity trading managers. Through April 30, 1994,
several other independent commodity trading managers shared responsibilities for
the Registrant's trading decisions. (The independent commodity trading managers
are each a ``Trading Manager''). The General Partner retains the authority to
override trading instructions that violate the Registrant's trading policies.
The Registrant is engaged solely in the business of commodity futures,
forward and options trading; therefore, presentation of industry segment
information is not applicable.
General partner
The general partner of the Registrant is Prudential Securities Futures
Management Inc. (the ``General Partner'') which is a wholly-owned subsidiary of
Prudential Securities Incorporated (``PSI''), the Registrant's commodity broker.
PSI is a wholly-owned subsidiary of Prudential Securities Group Inc. (``PSGI'').
The General Partner is required to maintain at least a 1% interest in the
Registrant as long as it is acting as the Registrant's general partner.
Letter of Credit
An irrevocable letter of credit (``Letter of Credit'') was issued in favor of
the Registrant by Barclays Bank plc (the ``Bank'') on October 6, 1989. 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 at the close of business on
December 31, 1994 (with no payment required of the Bank) and does not provide
protection thereafter.
Competition
The General Partner and its affiliates have formed and may continue to form
various entities to engage in the speculative trading of futures, forward and
options contracts which, in part, have certain of the same investment policies
as the Registrant.
The Registrant is a closed-end fund which does not currently, and does not
intend in the future to, solicit the sale of additional Units. As such, the
Registrant does not compete with other entities to attract new fund
participants. However, to the extent that the Trading Managers recommend similar
or identical trades to the
3
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Registrant and the other accounts which they manage, the Registrant may compete
with those accounts for the execution of the same or similar trades.
Employees
The Registrant has no employees. Management and administrative services for
the Registrant are performed by the General Partner and its affiliates pursuant
to the Partnership Agreement. See Notes A, C and D to the Registrant's annual
report to limited partners for the year ended December 31, 1996 (``Registrant's
1996 Annual Report'') which is filed as an exhibit hereto.
Item 2. Properties
The Registrant does not own or lease any property.
Item 3. Legal Proceedings
There are no material legal proceedings pending by or against the Registrant
or the General Partner.
Item 4. Submission of Matters to a Vote of Limited Partners
None
PART II
Item 5. Market for the Registrant's Units and Related Limited Partner Matters
As of March 3, 1997, there were 1,487 holders of record owning 133,028 Units,
including 1,331 units of general partnership interest. A significant secondary
market for the Units has not developed, and it is not expected that one will
develop in the future. There are also certain restrictions set forth in the
Partnership Agreement limiting the ability of a partner to transfer Units. The
Partnership Agreement provides that a limited partner may only redeem units as
of the last business day of any full calendar quarter at the then current net
asset value per Unit. Consequently, holders of Units may not be able to
liquidate their investments in the event of an emergency or for any other
reason.
There are no material restrictions upon the Registrant's present or future
ability to make distributions in accordance with the provisions of the
Partnership Agreement. No distributions have been made since inception and no
distributions are anticipated in the future.
4
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Item 6. Selected Financial Data
The following table presents selected financial data of the Registrant. This
data should be read in conjunction with the financial statements of the
Registrant and the notes thereto on pages 2 through 10 of the Registrant's 1996
Annual Report which is filed as an exhibit hereto.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net realized gain (loss) on
commodity transactions $ 8,858,731 $12,172,603 $ (567,322) $15,946,092 $ 15,680,541
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Change in net unrealized gain
on open commodity positions $ (212,725) $ (955,977) $ 193,155 $ 725,326 $(15,355,059)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Commissions $ 2,566,587 $ 2,795,106 $ 2,453,619 $ 3,593,450 $ 3,305,613
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Management fees $ 1,101,928 $ 1,200,458 $ 1,077,040 $ 1,651,948 $ 1,461,066
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Incentive fees $ 704,792 $ 365,699 $ 269,470 $ 1,246,742 $ 236,571
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 5,247,292 $ 8,086,514 $(3,196,076) $12,070,026 $ (776,342)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Allocation of net income
(loss):
Limited partners $ 5,203,383 $ 7,663,099 $(3,059,652) $11,773,064 $ (783,107)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
General partner $ 43,909 $ 423,415 $ (136,424) $ 296,962 $ 6,765
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income (loss) per weighted
average Unit $ 35.04 $ 44.84 $ (12.31) $ 29.92 $ (1.60)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total assets $33,622,033 $33,022,442 $37,316,402 $64,971,990 $ 61,475,583
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Redemptions $ 5,909,734 $ 6,704,103 $13,205,896 $23,534,310 $ 13,596,177
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net asset value per Unit $ 233.09 $ 195.71 $ 153.79 $ 167.30 $ 137.89
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information is incorporated by reference to pages 11 and 12 of the
Registrant's 1996 Annual Report which is filed as an exhibit hereto.
Item 8. Financial Statements and Supplementary Data
The financial statements are incorporated by reference to pages 2 through 10
of the Registrant's 1996 Annual Report which is filed as an exhibit hereto.
Supplementary data specified by Item 302 of Regulation S-K (selected
quarterly financial data) is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Reference is made to the Registrant's Current Report on Form 8-K dated May
14, 1996, as filed with the Securities and Exchange Commission on May 16, 1996
regarding the change in the Registrant's certifying accountant from Deloitte &
Touche LLP to Price Waterhouse LLP.
PART III
Item 10. Directors and Executive Officers of the Registrant
There are no directors or executive officers of the Registrant. The
Registrant is managed by the General Partner.
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The General Partner's directors and executive officers and any persons
holding more than ten percent of the Registrant's Units (``Ten Percent Owners'')
are required to report their initial ownership of such Units and any subsequent
changes in that ownership to the Securities and Exchange Commission on Forms 3,
4, or 5. Such executive officers, directors and Ten Percent Owners are required
by Securities and Exchange Commission regulations to furnish the Registrant with
copies of all Forms 3, 4 and 5 they file. All of these filing requirements were
satisfied on a timely basis. In making these disclosures, the Registrant has
relied solely on written representations of the General Partner's directors and
executive officers or copies of the reports that they have filed with the
Securities and Exchange Commission during and with respect to its most recent
fiscal year.
The directors and executive officers of Prudential Securities Futures
Management Inc. and their positions with respect to the Registrant are as
follows:
Name Position
- ---------------------------- -------------------------------------
James M. Kelso President and Director
Barbara J. Brooks Treasurer and Chief Financial Officer
Steven Carlino Vice President and Chief Accounting Officer
A. Laurence Norton, Jr. Director
Guy S. Scarpaci Director
JAMES M. KELSO, age 42, is the President and a Director of Prudential
Securities Futures Management Inc. He is a Senior Vice President of Futures
Administration of PSI. He is also the President and a Director of Seaport
Futures Management, Inc. and serves in various capacities for other affiliated
companies. He has held several positions within PSI since July 1981.
BARBARA J. BROOKS, age 48, is the Treasurer and Chief Financial Officer of
Prudential Securities Futures Management Inc. She is a Senior Vice President of
PSI. She is also the Treasurer and Chief Financial Officer of Seaport Futures
Management, Inc. and serves in various capacities for other affiliated
companies. She has held several positions within PSI since April 1983. Ms.
Brooks is a certified public accountant.
STEVEN CARLINO, age 33, is a Vice President of Prudential Securities Futures
Management Inc. He is a First Vice President of PSI. He is also a Vice President
of Seaport Futures Management, Inc. and serves in various capacities for other
affiliated companies. Prior to joining PSI in October 1992, he was with Ernst &
Young for six years. Mr. Carlino is a certified public accountant.
A. LAURENCE NORTON, JR., age 58, is a Director of Prudential Securities
Futures Management Inc. He is an Executive Vice President of PSI and head of its
Futures Division. He is also a Director of Seaport Futures Management, Inc. Most
recently, he held the position of Executive Director of Retail Development and
Retail Strategies at Prudential Securities Incorporated. Prior to joining PSI in
1991, Mr. Norton was a Senior Vice President and Branch Manager of Shearson
Lehman Brothers.
GUY S. SCARPACI, age 50, is a Director of Prudential Securities Futures
Management Inc. He is a First Vice President of the Futures Division of PSI. He
is also a Director of Seaport Futures Management, Inc. Mr. Scarpaci has been
employed by PSI in positions of increasing responsibility since August 1974.
There are no family relationships among any of the foregoing directors or
executive officers. All of the foregoing directors and/or executive officers
have indefinite terms.
Item 11. Executive Compensation
The Registrant does not pay or accrue any fees, salaries or any other form of
compensation to directors and officers of the General Partner for their
services. Certain directors and officers of the General Partner receive
compensation from affiliates of the General Partner, not from the Registrant,
for services performed for various affiliated entities, which may include
services performed for the Registrant; however, the General Partner believes
that any compensation attributable to services performed for the Registrant is
immaterial. (See also Item 13, Certain Relationships and Related Transactions,
for information regarding compensation to the General Partner.)
6
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Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 3, 1997, no director or officer of the General Partner owns
directly or beneficially any interest in the voting securities of the General
Partner.
As of March 3, 1997, no director or officer of the General Partner owns
directly or beneficially any of the Units issued by the Registrant.
As of March 3, 1997, no partner beneficially owns more than five percent (5%)
of the limited partnership units issued by the Registrant.
Item 13. Certain Relationships and Related Transactions
The Registrant has and will continue to have certain relationships with the
General Partner and its affiliates. However, there have been no direct financial
transactions between the Registrant and the directors or officers of the General
Partner.
Reference is made to Notes A, C and D to the financial statements in the
Registrant's 1996 Annual Report which is filed as an exhibit hereto, which
identify the related parties and discuss the services provided by these parties
and the amounts paid or payable for their services.
7
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Page in
Annual Report
<S> <C> <C> <C>
(a) 1. Financial Statements and Reports of Independent
Accountants--Incorporated by reference to the Registrant's 1996 Annual
Report which is filed as an exhibit hereto
Reports of Independent Accountants:
Report of Independent Accountants as of December 31, 1996 and for the
year then ended 2
Independent Auditors' Report as of December 31, 1995 and for the years
ended December 31, 1995 and 1994 2A
Financial Statements:
Statements of Financial Condition--December 31, 1996 and 1995 3
Statements of Operations--Three years ended December 31, 1996 4
Statements of Changes in Partners' Capital--Three years ended December
31, 1996 4
Notes to Financial Statements 5
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
3. Exhibits
Description:
3.1 Agreement of Limited Partnership of the Registrant, dated as of June 8,
and 1989 as amended and restated as of July 21, 1989 (incorporated by
4.1 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 Registration Statement on Form S-1, File No. 33-29039)
4.3 Request for Redemption (incorporated by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1, File No. 33-29039)
10.1 Escrow Agreement, dated July 21, 1989 among the Registrant, P-B Futures
Management, Inc., Prudential-Bache Securities Inc. and Bankers Trust
Company (incorporated by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K for the period ended December 31, 1989)
10.2 Brokerage Agreement dated October 6, 1989 between the Registrant and
Prudential-Bache Securities Inc. (incorporated by reference to Exhibit
10.2 to the Registrant's Annual Report on Form 10-K for the period ended
December 31, 1989)
</TABLE>
8
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<TABLE>
<S> <C> <C> <C>
10.3 Advisory Agreement dated July 21, 1989 among the Registrant, P-B Futures
Management, Inc., Eclipse Capital Management, Inc., C.M. Wilson &
Associates, Inc. and John W. Henry & Co., Inc. (incorporated by
reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K
for the period ended December 31, 1989)
10.4 Representation Agreement Concerning the Registration Statement and the
Prospectus, dated as of July 21, 1989 among the Registrant, P-B Futures
Management, Inc., Prudential-Bache Securities Inc., Eclipse Capital
Management, Inc., C.M. Wilson & Associates, Inc. and John W. Henry &
Co., Inc. (incorporated by reference to Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the period ended December 31, 1989)
10.5 Net Worth Agreement, dated as of July 21, 1989 between P-B Futures
Management, Inc. and Prudential Securities Group Inc. (incorporated by
reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the period ended December 31, 1989)
10.6 Promissory Note issued by Prudential Securities Group Inc. to P-B
Futures Management, Inc., dated October 6, 1989 (incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
for the period ended December 31, 1989)
10.7 Letter of Credit and Reimbursement Agreement among the Registrant, P-B
Futures Management, Inc., Prudential Securities Group Inc. and Barclays
Bank plc dated July 21, 1989 (incorporated by reference to Exhibit 10.7
to the Registrant's Annual Report on Form 10-K for the period ended
December 31, 1989)
10.8 Amendment to Letter of Credit and Reimbursement Agreement dated March
27, 1991 between Barclays Bank plc, New York Branch, P-B Futures
Management, Inc. and Prudential Securities Group Inc. (incorporated by
reference to Exhibit 10.8 to Registrant's Quarterly Report on Form 10-Q
for the period ended March 31, 1991)
10.9 Advisory Agreement dated April 25, 1990 among the Registrant, P-B
Futures Management Inc. and Reynwood Trading Corporation (incorporated
by reference to Exhibit 10.9 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991)
10.10 Addendum to Advisory Agreement dated October 1, 1990 among the
Registrant, P-B Futures Management, Inc., Eclipse Capital Management,
Inc. and John W. Henry & Co., Inc. (incorporated by reference to Exhibit
10.10 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991)
10.11 Advisory Agreement dated May 1, 1994 among the Registrant, Prudential
Securities Futures Management, Inc. and Welton Investment Services
Corporation (incorporated by reference to Exhibit 10.11 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994)
10.12 Advisory Agreement dated January 1, 1995 among the Registrant,
Prudential Securities Futures Management Inc. and TSA Capital Management
(incorporated by reference to Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994)
10.13 Addendum to Brokerage Agreement dated January 1, 1995 among the Regis-
trant, Prudential Securities Futures Management Inc. and Prudential
Securities Incorporated (incorporated by reference to Exhibit 10.13 to
the Registrant's Quarterly Report on Form 10-Q for the period ended June
30, 1995)
</TABLE>
9
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<TABLE>
<S> <C> <C> <C>
10.14 Form of Foreign Currency Addendum to Brokerage Agreement between the
Registrant and Prudential Securities Incorporated (incorporated by
reference to Exhibit 10.13 to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1996)
13.1 Registrant's 1996 Annual Report (with the exception of the information
and data incorporated by reference in Items 7 and 8 of this Annual
Report on Form 10-K, no other information or data appearing in the
Registrant's 1996 Annual Report is to be deemed filed as part of this
report) (filed herewith)
16.1 Letter dated May 15, 1996 from Deloitte & Touche LLP to the Securities
and Exchange Commission regarding change in certifying accountant
(incorporated by reference to Exhibit 16.1 to the Registrant's Current
Report on Form 8-K dated May 14, 1996)
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report
</TABLE>
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 2, L.P.
By: Prudential Securities Futures Management Inc.
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: March 27, 1997
----------------------------------------
Steven Carlino
Vice President and Chief Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities (with respect to the General Partner) and on
the dates indicated.
By: Prudential Securities Futures Management Inc.
A Delaware corporation, General Partner
By: /s/ James M. Kelso Date: March 27, 1997
-----------------------------------------
James M. Kelso
President and Director
By: /s/ Barbara J. Brooks Date: March 27, 1997
-----------------------------------------
Barbara J. Brooks
Treasurer and Chief Financial Officer
By: /s/ Steven Carlino Date: March 27, 1997
-----------------------------------------
Steven Carlino
Vice President
By: /s/ A. Laurence Norton, Jr. Date: March 27, 1997
-----------------------------------------
A. Laurence Norton, Jr.
Director
By: /s/ Guy S. Scarpaci Date: March 27, 1997
-----------------------------------------
Guy S. Scarpaci
Director
11
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1996
- -----------------------------------------------------------------------
Prudential-Bache Annual
Capital Return Futures Report
Fund 2, L.P.
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
LETTER TO THE LIMITED PARTNERS FOR THE YEAR ENDED DECEMBER 31, 1996
1
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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 29, 1997
To the General Partner and
Limited Partners of
Prudential-Bache Capital Return Futures Fund 2, L.P.
In our opinion, the accompanying statement of financial condition and the
related statements of operations and of changes in partners' capital present
fairly, in all material respects, the financial position of Prudential-Bache
Capital Return Futures Fund 2, L.P. (the ``Partnership'') at December 31, 1996,
and the results of its operations and the changes in its partners' capital for
the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
2
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Deloitte &
Touche LLP
--------------------------------------------------------
Two World Financial Center Telephone: (212) 436-2000
New York, New York 10281-1414 Facsimile: (212) 436-5000
INDEPENDENT AUDITORS' REPORT
To the Partners of
Prudential-Bache Capital Return Futures Fund 2, L.P.
We have audited the accompanying statement of financial condition of
Prudential-Bache Capital Return Futures Fund 2, L.P. as of December 31, 1995,
and the related statements of operations and changes in partners' capital for
the years ended December 31, 1995 and 1994. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Prudential-Bache Capital Return Futures Fund
2, L.P. as of December 31, 1995, and the results of its operations for the years
ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
January 29, 1996
- -----------------
Deloitte Touche
Tohmatsu
International
- -----------------
2A
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash and cash equivalents $32,963,259 $32,150,048
Net unrealized gain on open commodity positions 658,774 872,394
----------- -----------
Total assets $33,622,033 $33,022,442
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 1,692,233 $ 1,143,534
Incentive fees 657,105 --
Management fees payable 117,811 97,931
Due to affiliates 54,587 63,134
Accrued expenses 49,264 45,374
Options, at market 44,006 3,000
----------- -----------
Total liabilities 2,615,006 1,352,973
----------- -----------
Commitments
Partners' capital
Limited partners (131,697 and 151,718 units outstanding) 30,696,788 29,692,794
General partner (1,331 and 10,100 units outstanding) 310,239 1,976,675
----------- -----------
Total partners' capital 31,007,027 31,669,469
----------- -----------
Total liabilities and partners' capital $33,622,033 $33,022,442
----------- -----------
----------- -----------
Net asset value per limited and general partnership unit (``Units'') $ 233.09 $ 195.71
----------- -----------
----------- -----------
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
3
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
REVENUES
Net realized gain (loss) on commodity
transactions $ 8,858,731 $12,172,603 $ (567,322)
Change in net unrealized gain on open commodity
positions (212,725) (955,977) 193,155
Interest from U.S. Treasury bills 1,114,103 1,393,208 752,198
Interest from reserve assets -- 6,737 1,279,240
Realized gain on reserve assets -- -- 297,342
Change in net unrealized gain on reserve assets -- -- (876,623)
--------------- --------------- ---------------
9,760,109 12,616,571 1,077,990
--------------- --------------- ---------------
EXPENSES
Commissions 2,566,587 2,795,106 2,453,619
Management fees 1,101,928 1,200,458 1,077,040
Incentive fees 704,792 365,699 269,470
Letter of credit fees -- -- 260,167
General and administrative 139,510 168,794 191,783
Amortization of organizational costs -- -- 21,987
--------------- --------------- ---------------
4,512,817 4,530,057 4,274,066
--------------- --------------- ---------------
Net income (loss) $ 5,247,292 $ 8,086,514 $(3,196,076)
--------------- --------------- ---------------
--------------- --------------- ---------------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $ 5,203,383 $ 7,663,099 $(3,059,652)
--------------- --------------- ---------------
--------------- --------------- ---------------
General partner $ 43,909 $ 423,415 $ (136,424)
--------------- --------------- ---------------
--------------- --------------- ---------------
NET INCOME (LOSS) PER WEIGHTED AVERAGE
LIMITED AND GENERAL PARTNERSHIP UNIT
Net income (loss) per weighted average
limited and general partnership unit $ 35.04 $ 44.84 $ (12.31)
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average number of limited and
general partnership units outstanding 149,733 180,338 259,669
--------------- --------------- ---------------
--------------- --------------- ---------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1993 279,080 $ 44,999,346 $ 1,689,684 $ 46,689,030
Net loss (3,059,652) (136,424) (3,196,076)
Redemptions (82,140) (13,205,896) -- (13,205,896)
------- ------------ ----------- ------------
Partners' capital--December 31, 1994 196,940 28,733,798 1,553,260 30,287,058
Net income 7,663,099 423,415 8,086,514
Redemptions (35,122) (6,704,103) -- (6,704,103)
------- ------------ ----------- ------------
Partners' capital--December 31, 1995 161,818 29,692,794 1,976,675 31,669,469
Net income 5,203,383 43,909 5,247,292
Redemptions (28,790) (4,199,389) (1,710,345) (5,909,734)
------- ------------ ----------- ------------
Partners' capital--December 31, 1996 133,028 $ 30,696,788 $ 310,239 $ 31,007,027
------- ------------ ----------- ------------
------- ------------ ----------- ------------
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
4
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential-Bache Capital Return Futures Fund 2, L.P. (the ``Partnership'') is
a Delaware limited partnership formed on June 8, 1989 which will terminate on
December 31, 2009 unless terminated sooner under the provisions of its Amended
and Restated Agreement of Limited Partnership (the ``Partnership Agreement'').
On October 6, 1989, the Partnership completed its offering having raised
$101,010,000 from the sale of 1,000,000 units of limited partnership interest
and 10,100 units of general partnership interest and commenced operations. The
Partnership was formed to engage in the speculative trading of commodity
futures, forward and options contracts. Physical commodities may also be traded
from time to time. The general partner of the Partnership is Prudential
Securities Futures Management Inc. (the ``General Partner''), a wholly-owned
subsidiary of Prudential Securities Group Inc. (``PSGI''). Prudential Securities
Incorporated (``PSI''), a wholly-owned subsidiary of PSGI, was the principal
underwriter of the Units and is the commodity broker. The General Partner is
required to maintain at least a 1% interest in the Partnership as long as it is
acting as the Partnership's general partner.
Initially, sixty percent (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 seventy-five percent (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 twenty-five percent
(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 forty percent (40%) of the
net proceeds was placed in reserve (the ``Reserve Assets'') and was not
committed to commodities trading until December 31, 1994 (the ``Capital Return
Date''). On the Capital Return Date, the letter of credit expired. Additionally,
on January 3, 1995 the Reserve Assets matured and the resulting proceeds were
allocated for commodities trading to Analytic/TSA Investors Inc. (formerly known
as TSA Capital Management), an independent commodities trading manager.
All trading decisions for the Partnership are made by Welton Investment
Services Corporation,
Analytic/TSA Investors Inc. and John W. Henry & Co., Inc., independent commodity
trading managers, since January 1, 1995. During the period May 1, 1994 through
December 31, 1994, John W. Henry & Co., Inc. and Welton Investment Services
Corporation shared responsibilities for the Partnership's trading decisions.
During the period January 1, 1992 through April 30, 1994, John W. Henry & Co.,
Inc. and another independent commodity trading manager shared responsibilities
for the Partnership's trading decisions. (The independent commodity trading
managers are each a ``Trading Manager''). The General Partner retains the
authority to override trading instructions that violate the Partnership's
trading policies.
On October 6, 1989, an irrevocable letter of credit (``Letter of Credit'')
was issued in favor of the Partnership by Barclays Bank plc (the ``Bank''). The
Letter of Credit was intended to provide protection to the limited partners
against loss of their initial investment through 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 December 31,
1994 (with no payment required of the Bank) and does not provide protection
thereafter.
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
<PAGE>
Commodity futures and forward transactions are reflected in the accompanying
statements of financial condition on trade date. The difference between the
original contract amount and market value of futures and forward contracts is
reflected as net unrealized gain or loss. Options transactions are reflected in
the statements of financial condition at market value which is inclusive of the
net unrealized gain or loss. The market value of each contract is based upon the
closing quotation on the exchange, clearing firm or bank on, or through, which
the contract is traded.
To the extent practicable, the Partnership invests a significant portion of
its 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, while the U.S. Treasury strips and
the GIC were carried at their market values. Interest on these obligations
accrued 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 Units redeemed based on
their respective time outstanding during such year.
The Partnership has elected not to provide a Statement of Cash Flows as
permitted by Statement of Financial Accounting Standards No. 102, ``Statement of
Cash Flows--Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale.''
The Partnership considers U.S. Treasury bills to be cash equivalents.
Certain balances from prior years have been reclassified to conform with the
current financial statement presentation.
Income taxes
The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from the Partnership's operations
are passed directly to the individual partners. The Partnership may be subject
to other state and local taxes in jurisdictions in which it operates.
Profit and loss allocations, distributions and redemptions
Net realized profits or losses for tax purposes are allocated first to
partners who redeem Units to the extent the amounts received on redemption are
greater than or are less than the amounts paid for the redeemed Units by the
partners. Net income or loss for financial reporting purposes is allocated
quarterly to all partners on a pro rata basis based on each partner's number of
Units outstanding during the quarter.
Distributions (other than on redemptions of Units) are made at the sole
discretion of the General Partner on a pro rata basis in accordance with the
respective capital accounts of the partners. No distributions have been made
since inception.
The Partnership Agreement provides that a limited partner may redeem its
units as of the last business day of any full calendar quarter at the then
current net asset value per Unit.
C. Costs, Fees and Expenses
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 1994.
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% per month (a 10% annual rate) of the Partnership's Traded Assets as of
the first day of each month. A decrease to the rate of .7083% per month (an 8.5%
annual rate) for brokerage fees was implemented on January 1, 1995.
6
<PAGE>
Through December 31, 1994, the portion of the monthly fee paid to PSI
representing Letter of Credit fees was calculated as follows: (i) .000625 (a
.75% 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 (see Note A), the Partnership is no longer
obligated to pay these fees.
Management and incentive fees
The Partnership pays John W. Henry & Co., Inc. and Welton Investment Services
Corporation monthly management fees equal to 1/3 of 1% (a 4% annual rate) and
TSA Capital Management monthly management fees equal to 1/6 of 1% (a 2% 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 each Trading Manager a quarterly
incentive fee equal to 15% of the ``New High Net Trading Profits'' generated by
each Trading Manager (as defined in the Advisory Agreement between the
Partnership, the General Partner and each Trading Manager).
General and administrative expenses
In addition to the costs, fees and expenses previously discussed, the
Partnership reimburses the General Partner and its affiliates for actual
Partnership operating expenses payable by, or allocable to, the Partnership. The
amount of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. The Partnership also pays amounts directly to unrelated
parties for certain operating expenses.
D. Related Parties
The General Partner and its affiliates perform services for the Partnership
which include, but are not limited to: brokerage services, accounting and
financial management, registrar, transfer and assignment functions, investor
communications, printing and other administrative services.
The costs incurred for the years ended December 31, 1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Commissions $2,566,587 $2,795,106 $2,453,619
Letter of Credit fees -- -- 64,906
General and administrative 87,997 109,661 92,412
---------- ---------- ----------
$2,654,584 $2,904,767 $2,610,937
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Partnership maintains its trading and cash accounts at PSI. Approximately
75% of the Traded Assets is generally invested in interest-bearing U.S.
Government obligations (primarily U.S. Treasury bills), a significant portion of
which is utilized for margin purposes for the Partnership's commodity trading
activities.
In connection with the Partnership's interbank transactions, PSI engages in
foreign currency forward transactions with the Partnership and an affiliate of
PSI who, as principal, attempts to earn a profit on the bid-ask spreads (which
must be competitive) on any foreign currency forward transactions entered into
between the Partnership and PSI, on the one hand, and PSI and such affiliate on
the other. In connection with its trading of foreign currencies in the interbank
market, PSI may arrange bank lines of credit at major international banks. To
the extent such lines of credit are arranged, PSI does not charge the
Partnership for maintaining such lines of credit, but requires margin deposits
with respect to forward contract transactions.
Additionally, the Partnership maintained an 8.60% GIC which matured on
December 31, 1994 with The Prudential Asset Management Company, Inc., an
affiliate of the General Partner. Interest earned on the GIC for the years ended
December 31, 1995 and 1994 was $6,737 and $1,275,435, respectively. Realized
gain on the GIC for the year ended December 31, 1994 was $297,342 and the change
in unrealized gain on the GIC for the year ended December 31, 1994 was
$(876,153).
7
<PAGE>
E. Income Taxes
The following is a reconciliation of net income (loss) for financial
reporting purposes to net income (loss) for tax reporting purposes for the years
ended December 31, 1996, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Net income (loss) per financial
statements $5,247,292 $8,086,514 $(3,196,076)
Change in net unrealized gain on Reserve
Assets -- -- 876,623
Change in unrealized gain/loss on
nonregulated commodity positions (216,909) (38,758) (13,371)
Other -- 178 862
---------- ---------- -----------
Tax basis net income (loss) $5,030,383 $8,047,934 $(2,331,962)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
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 on 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, 1996 and 1995, such segregated assets totalled $24,078,572 and
$26,171,977, respectively. Part 30.7 of the CFTC regulations also requires PSI
to secure assets of the Partnership related to foreign futures and options
trading which totalled $9,271,094 and $7,008,411. There are no segregation
requirements for assets related to forward trading.
8
<PAGE>
As of December 31, 1996, the Partnership's open futures, forward and options
contracts mature within one year. As of December 31, 1995, the Partnership's
open forward contracts mature within three months, but open futures and options
contracts mature within one year.
At December 31, 1996 and 1995, gross contract amounts of open futures,
forward and options contracts are:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Currency Forward Contracts:
Commitments to purchase $ 27,427,116 $ 372,619
Commitments to sell $ 19,223,534 $ 17,163,772
Currency Futures and Options Contracts:
Commitments to purchase $ 7,651,893 $ 14,350,975
Commitments to sell $ 15,877,256 $ 28,217,838
Financial Futures and Options Contracts:
Commitments to purchase $110,757,098 $359,544,988
Commitments to sell $ 38,688,741 $ 25,500,889
Other Futures and Options Contracts:
Commitments to sell $ 320,262 $ 3,593,525
</TABLE>
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.
At December 31, 1996 and 1995, the fair value of open futures, forward and
options contracts was:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------- -------------------------
<S> <C> <C> <C> <C>
Fair Value Fair Value
------------------------- -------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ -- $ (55,900) $ 461,831 $ --
Currencies 194,561 (96,820) 133,670 (338,563)
Other 313,497 (6,743) 795 (100)
Foreign exchanges
Financial 316,218 (238,492) 785,691 (9,984)
Other 4,092 -- -- --
Forward Contracts:
Currencies 535,753 (307,392) 244,587 (405,533)
Options Contracts:
Domestic exchanges
Financial -- (10,000) -- --
Currencies -- -- -- (3,000)
Other -- (23,168) -- --
Foreign exchanges
Financial -- (10,838) -- --
---------- ----------- ---------- -----------
$1,364,121 $ (749,353) $1,626,574 $(757,180)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
9
<PAGE>
The following table presents the average fair value of futures, forward and
options contracts during the years ended December 31, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Average Fair Value Average Fair Value
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 308,869 $ (56,271) $ 422,804 $ (46,089)
Currencies 282,498 (167,813) 232,377 (157,762)
Other 184,711 (33,855) 140,375 (39,356)
Foreign exchanges
Financial 1,378,782 (59,216) 772,337 (48,982)
Other 2,004 (3,411) 8,862 --
Forward Contracts:
Currencies 938,567 (344,856) 2,130,850 (1,173,482)
Options Contracts:
Domestic exchanges
Financial -- (1,379) -- --
Currencies 20,116 (12,341) 59,492 (56,366)
Other -- (3,283) -- --
Foreign Exchanges
Financial -- (1,174) -- --
---------- ----------- ---------- -----------
$3,115,547 $(683,599) $3,767,097 $(1,522,037)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The following table presents the net realized gains (losses) and the change
in net unrealized gains/losses of futures, forward and options contracts during
the years ended December 31, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
-------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in Change in
Net Realized Net Unrealized Net Realized Net Unrealized
Gains (Losses) Gains/Losses Total Gains (Losses) Gains/Losses Total
-------------- -------------- ---------- -------------- -------------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 740,444 $ (517,731) $ 222,713 $ 2,534,630 $ (324,394) $ 2,210,236
Currencies 529,206 302,634 831,840 1,799,236 (176,768) 1,622,468
Other 939,370 306,059 1,245,429 (462,065) (479,765) (941,830)
Foreign exchanges
Financial 4,727,696 (697,981) 4,029,715 3,767,439 (258,008) 3,509,431
Other (20,406) 4,092 (16,314) 122,152 -- 122,152
Forward Contracts:
Currencies 1,816,646 389,307 2,205,953 5,430,254 274,708 5,704,962
Options Contracts:
Domestic exchanges
Financial 37,225 (10,000) 27,225 -- -- --
Currencies 97,225 3,000 100,225 (1,019,043) 8,250 (1,010,793)
Other (7,984) 18,733 10,749 -- -- --
Foreign Exchanges
Financial (691) (10,838) (11,529) -- -- --
-------------- -------------- ---------- -------------- -------------- -----------
$8,858,731 $ (212,725) $8,646,006 $ 12,172,603 $ (955,977) $11,216,626
-------------- -------------- ---------- -------------- -------------- -----------
-------------- -------------- ---------- -------------- -------------- -----------
</TABLE>
10
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on October 6, 1989 with gross proceeds
of $101,010,000. After accounting for organizational and offering costs, the
Partnership's net proceeds were $99,010,000. At the inception of the
Partnership, sixty percent of the net proceeds was allocated to commodities
trading activity (``Traded Assets'') and forty percent was placed in reserve and
invested in investment grade interest-bearing obligations (``Reserve Assets'').
On December 31, 1994, the letter of credit expired and on January 3, 1995 the
Reserve Assets matured and the resulting proceeds became available for
commodities trading. These assets were allocated for trading to Analytic/TSA
Investors Inc., an independent commodity trading manager to the Partnership. As
such, at December 31, 1996, 100% of the Partnership's assets are allocated to
commodities trading. At December 31, 1996, a significant portion of the Traded
Assets was held in U.S. Treasury bills (which represented approximately 77% of
the net asset value prior to redemptions payable) and cash, which are used as
margin for the Partnership's trading in commodities. Inasmuch as the sole
business of the Partnership is to trade in commodities, the Partnership
continues to own such liquid assets to be used as margin.
The percentage that U.S. Treasury bills bears to the total net assets varies
each day, and from month to month, as the market values of commodity interests
change. The balance of the total net assets is held in cash. All interest earned
on the Partnership's interest-bearing funds is paid to the Partnership.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in certain commodity futures contract
prices during a single day by regulations referred to as ``daily limits.''
During a single day, no trades may be executed at prices beyond the daily limit.
Once the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its commodity
futures positions.
Since the Partnership's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk). The General Partner attempts to minimize these
risks by requiring the Partnership's Trading Managers to abide by various
trading limitations and policies. See Note F to the financial statements for a
further discussion on the credit and market risks associated with the
Partnership's futures, forwards and options contracts.
Redemptions by limited partners recorded for the years ended December 31,
1996, 1995 and 1994 were $4,199,389, $6,704,103 and $13,205,896, respectively.
Additionally, redemptions by the General Partner recorded during the year ended
December 31, 1996 were $1,710,345. Redemptions by limited partners and the
General Partner recorded from the commencement of operations, October 6, 1989,
through December 31, 1996 totalled $115,279,982 and $1,710,345, 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.
Results of Operations
The net asset value per Unit as of December 31, 1996 was $233.09, an increase
of 19.10% from the December 31, 1995 net asset value per Unit of $195.71 which
was an increase of 27.26% from the December 31, 1994 net asset value per Unit of
$153.79. The Partnership outperformed the MAR (Managed Account Reports)
Fund/Pool Index, which tracked the performance of 420 futures funds for the year
ended December 31, 1996 and had a return of 11.89%. Past performance is not
necessarily indicative of future results.
11
<PAGE>
The global interest rate, currency and metal sectors were solid performers
for 1996. Trends in world currency markets reflected economic fundamentals as
well as political developments, particularly the progress of the planned
European Monetary Union. Global bond markets gained momentum in the second half
of the year due to the low interest rate policies set by the U.S. Federal
Reserve Bank and the central banks of Europe. After reaching a five-year high in
February, gold prices began a relentless decline throughout the year.
As discussed in Liquidity and Capital Resources above, the Letter of Credit
expired on December 31, 1994 and as a result, there were no Letter of Credit
fees charged since that date. With the expiration of the Letter of Credit,
Reserve Assets were allocated to commodities trading thus increasing the
Partnership's Traded Assets, including its investments in U.S. Treasury bills.
This increase in U.S. Treasury bills, coupled with higher interest rates in 1995
versus 1994, resulted in an increase of approximately $641,000 in interest
income from U.S. Treasury bills for the year ended December 31, 1995 compared to
1994. However, interest income from U.S. Treasury bills decreased by
approximately $279,000 for the year ended December 31, 1996 compared to 1995
primarily due to lower interest rates in 1996 and less funds available for
investment in U.S. Treasury bills as a result of redemptions and lackluster
trading performance in the first three quarters of 1996. Additionally, interest
income from Reserve Assets was eliminated following the allocation of Reserve
Assets to commodities trading on January 3, 1995. The interest earned on Reserve
Assets for the years ended December 31, 1995 and 1994 was approximately $7,000
and $1,279,000, respectively.
Commissions are calculated on Traded Assets on the first day of each month
and, therefore, vary based on monthly trading performance and redemptions. The
Traded Assets increased when the Letter of Credit expired and Reserve Assets
were allocated to commodities trading as discussed above. However, the
commission rate decreased by 1.5% from 10% (inclusive of letter of credit fees)
to 8.5% effective January 1, 1995. The combination of these factors caused
commissions plus letter of credit fees to decrease by approximately $229,000 for
the year ended December 31, 1996 as compared to 1995 but to increase by
approximately $81,000 for the year ended December 31, 1995 as compared to 1994.
All trading decisions are currently being made by John W. Henry & Co., Inc.,
Welton Investment System Corp. and Analytic/TSA Investors Inc. 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. Additionally, the Traded Assets increased when Reserve Assets were
allocated to commodities trading as discussed above. As a result, management
fees decreased by approximately $99,000 for the year ended December 31, 1996 as
compared to 1995 but increased by approximately $123,000 for the year ended
December 31, 1995 as compared to 1994.
Incentive fees are based on the New High Net Trading Profits generated by
each Trading Manager, as defined in the Advisory Agreement between the
Partnership, the General Partner and each Trading Manager. Although the
Partnership experienced an overall loss for 1994, John W. Henry & Co., Inc.
earned sufficient trading profits to earn incentive fees in that year as well as
in 1995 and 1996. Accordingly, incentive fees of approximately $657,000,
$366,000 and $269,000 were paid to John W. Henry & Co., Inc. for the years ended
December 31, 1996, 1995 and 1994, respectively. Additionally, Analytic/TSA
Investors Inc. earned incentive fees of approximately $48,000 during the year
ended December 31, 1996.
General and administrative expenses decreased by approximately $29,000 for
the year ended December 31, 1996 as compared to 1995 and decreased by
approximately $23,000 for the year ended December 31, 1995 as compared to 1994.
These expenses include reimbursements of costs incurred by the General Partner
on behalf of the Partnership, in addition to accounting, audit, tax and legal
fees as well as printing and postage costs related to reports sent to limited
partners.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Partnership from inception through December 31, 1996.
12
<PAGE>
- --------------------------------------------------------------------------------
I hereby affirm that, to the best of my knowledge and belief, the information
contained herein relating to Prudential-Bache Capital Return Futures Fund 2,
L.P. is accurate and complete.
PRUDENTIAL SECURITIES FUTURES
MANAGEMENT INC.
(General Partner)
by: Barbara J. Brooks
Treasurer and Chief Financial Officer
- --------------------------------------------------------------------------------
13
<PAGE>
OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 1996 was $102.
The Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
Prudential-Bache Capital Return
Futures Fund 2, L.P.
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
14
<PAGE>
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PBCR2/171781
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial
information extracted from the financial
statements for Prudential-Bache Capital Return
Futures Fund 2 and is qualified in its entirety
by reference to such financial statements
</LEGEND>
<RESTATED>
<CIK> 0000851786
<NAME> Prudential-Bache Capital Return Futures Fund 2
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Dec-31-1996
<PERIOD-TYPE> 12-Mos
<CASH> 32,963,259
<SECURITIES> 658,774
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,622,033
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,622,033
<CURRENT-LIABILITIES> 2,615,006
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 31,007,027
<TOTAL-LIABILITY-AND-EQUITY> 33,622,033
<SALES> 0
<TOTAL-REVENUES> 9,760,109
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,512,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,247,292
<EPS-PRIMARY> 35.04
<EPS-DILUTED> 0
</TABLE>
