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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 0-19070
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 13-3544867
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(State or other jurisdiction (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 November 27, 1989,
included as part of the Registration Statement on Form S-1 (File No. 33-32355)
filed with the Securities and Exchange Commission on November 30, 1989 pursuant
to Rule 424(b) of the Securities Act of 1933, as amended as of January 30, 1990,
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 to 10.
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PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
TABLE OF CONTENTS
<TABLE>
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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.......................................................... 4
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 3, L.P. (the ``Registrant''), a
Delaware limited partnership, was formed on November 27, 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. On May 30, 1990, the Registrant completed its offering and
raised $65,520,000 from the sale of 648,625 units of limited partnership
interest and 6,575 units of general partnership interest (collectively,
``Units'') which resulted in net proceeds to the Registrant of $64,222,750. 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 June 30, 1995 (the ``Capital Return
Date''). On the Capital Return Date, the letter of credit expired and the
Reserve Assets were allocated for commodities trading to Willowbridge Associates
Inc. (``Willowbridge''), an independent commodities trading manager.
Since July 1995, all trading decisions have been made by Sjo, Inc. (``Sjo'')
and Willowbridge (the ``Trading Managers''). All trading decisions for the
Registrant from August 1992 through June 1995 were made by Sjo. 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 Seaport Futures Management, Inc.
(the ``General Partner'') which is an affiliate of Prudential Securities
Incorporated (``PSI''), the Registrant's commodity broker. Both the General
Partner and PSI are wholly-owned subsidiaries of Prudential Securities Group
Inc. (``PSGI''). The General Partner is required to maintain at least a 1%
interest in the 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 Citibank, N.A. (the ``Bank'') on May 30, 1990. The Letter of
Credit was intended to provide protection to the limited partners against loss
of their initial investment as of the Capital Return Date when the limited
partners had the option to redeem their units and receive the greater of the
then current net asset value per Unit or 100% of their initial investment. As
described above, the Letter of Credit expired on June 30, 1995 (with no payment
required by the Bank) and does not provide protection thereafter.
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 Registrant and the other accounts which they manage,
the Registrant may compete with those accounts for the execution of the same or
similar trades.
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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 1,412 holders of record owning 116,211 Units,
including 1,163 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 does, however, provide 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 reduced by each Unit's pro rata portion of
unamortized organizational costs. 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.
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.
4
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<TABLE>
<CAPTION>
Year ended December 31,
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Net realized gain on commodity
transactions $ 6,497,225 $ 3,827,887 $ 6,529,871 $ 2,228,827 $ 6,012,112
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----------- ----------- ----------- ----------- -----------
Change in net unrealized gain on
open commodity positions $(1,002,361) $ 1,180,234 $(1,703,856) $ 1,607,453 $(1,968,777)
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Commissions $ 1,518,807 $ 1,225,644 $ 937,130 $ 1,075,292 $ 1,511,400
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Management fees $ 600,463 $ 503,036 $ 412,191 $ 451,733 $ 605,713
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Incentive fees $ 597,331 $ 206,647 $ 684,373 $ 3,445 $ 262,118
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Net income $ 3,180,481 $ 3,800,144 $ 2,847,113 $ 2,695,520 $ 3,797,528
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Allocation of net income:
Limited partners $ 3,157,728 $ 3,721,494 $ 2,802,550 $ 2,651,320 $ 3,729,018
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General partner $ 22,753 $ 78,650 $ 44,563 $ 44,200 $ 68,510
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Net income per weighted average
Unit $ 24.90 $ 23.30 $ 13.42 $ 9.78 $ 10.25
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Total assets $22,700,791 $22,270,965 $26,446,594 $29,950,177 $35,946,284
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----------- ----------- ----------- ----------- -----------
Redemptions $ 3,046,093 $ 7,969,201 $ 5,808,038 $ 8,430,289 $14,524,006
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net asset value per Unit $ 182.93 $ 156.63 $ 134.29 $ 121.63 $ 111.75
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</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.
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 Partnership
with copies of all Forms 3, 4 and 5 they file. All of these filing
5
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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 Seaport 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 Seaport Futures
Management, Inc. He is a Senior Vice President of Futures Administration of PSI.
He is also the President and a Director of Prudential Securities 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
Seaport Futures Management, Inc. She is a Senior Vice President of PSI. She is
also the Treasurer and Chief Financial Officer of Prudential Securities 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 Seaport Futures Management,
Inc. He is a First Vice President of PSI. He is also a Vice President of
Prudential Securities 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 Seaport Futures Management,
Inc. He is an Executive Vice President of PSI and head of its Futures Division.
He is also a Director of Prudential Securities Futures Management Inc. Most
recently, he held the position of Executive Director of Retail Development and
Retail Strategies at PSI. 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 Seaport Futures Management, Inc. He
is a First Vice President of the Futures Division of PSI. He is also a Director
of Prudential Securities 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
<TABLE>
<CAPTION>
Page in
Annual Report
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(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 Indpendent 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
and Agreement of Limited Partnership of the Registrant, dated as of
4.1 November 27, 1989 as amended and restated as of January 30, 1990
(incorporated by reference to Exhibits 3.1 and 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1990)
4.2 Subscription Agreement (incorporated by reference to Exhibit 4.2 to
the Registrant's Registration Statement on Form S-1, File No.
33-32355)
4.3 Request for Redemption (incorporated by reference to Exhibit 4.3 to
the Registrant's Registration Statement on Form S-1, File No.
33-32355)
10.1 Escrow Agreement, dated February 1, 1990 among the Registrant, Seaport
Futures Management, Inc., Prudential-Bache Securities Inc., and
Bankers Trust Company (incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1990)
10.2 Brokerage Agreement dated May 30, 1990 between the Registrant and
Prudential-Bache Securities Inc. (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1990)
10.3 Advisory Agreement dated February 1, 1990 among the Registrant,
Seaport Futures Management, Inc., and Elm Financial, Inc.
(incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1990)
</TABLE>
8
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<TABLE>
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10.4 Representation Agreement Concerning the Registration Statement and the
Prospectus, dated as of February 1, 1990 among the Registrant, Seaport
Futures Management, Inc., Prudential-Bache Securities Inc., and Elm
Financial, Inc. (incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the period ended June
30, 1990)
10.5 Net Worth Agreement, dated as of February 1, 1990 between Seaport
Futures Management, Inc. and Prudential Securities Group Inc.
(incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1990)
10.6 Promissory Note issued by Prudential Securities Group Inc. to Seaport
Futures Management, Inc., dated May 30, 1990 (incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1990)
10.7 Letter of Credit and Reimbursement Agreement among the Registrant,
Seaport Futures Management, Inc., Prudential Securities Group Inc. and
Citibank, N.A. dated February 1, 1990 (incorporated by reference to
Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1990)
10.8 Secured Demand Note Collateral Agreement dated February 15, 1991 be-
tween Seaport Futures Management, Inc. and Prudential Securities Group
Inc. (incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1991)
10.9 Advisory Agreement dated June 3, 1991 among the Registrant, Seaport
Futures Management, Inc., and Sjo, Inc. (incorporated by reference to
Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1991)
10.10 Amendment No. 1 to Letter of Credit and Reimbursement Agreement dated
February 15, 1991 between Citibank, N.A., Seaport Futures Management,
Inc. and Prudential Securities Group Inc. (incorporated by reference
to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1991)
10.11 Amendment No. 2 to Letter of Credit and Reimbursement Agreement dated
March 28, 1991 between Citibank, N.A., Seaport Futures Management,
Inc. and Prudential Securities Group Inc. (incorporated by reference
to Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1991)
10.12 Amendment to Advisory Agreement dated November 5, 1991 among the
Registrant, Seaport Futures Management, Inc., and Sjo, Inc.
(incorporated by reference to Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991)
10.13 Advisory Agreement dated November 18, 1991 among the Registrant, Sea-
port Futures Management, Inc., and A.O. Management Corporation
(incorporated by reference to Exhibit 10.13 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991)
10.14 Advisory Agreement dated August 1, 1992 among Seaport Futures Manage-
ment, Inc., Kenneth M. Jakubzak and the Registrant (incorporated by
reference to Exhibit 10.14 to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1992)
</TABLE>
9
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<TABLE>
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10.15 Addendum to Advisory Agreement dated October 1, 1992 among the Regis-
trant, Seaport Futures Management, Inc., and Sjo, Inc. (incorporated
by reference to Exhibit 10.15 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992)
10.16 Amendment No. 3 to Letter of Credit and Reimbursement Agreement dated
April 15, 1993 between Citibank, N.A., Seaport Futures Management,
Inc. and Prudential Securities Group Inc. (incorporated by reference
to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1993)
10.17 Addendum to Brokerage Agreement dated July 1, 1995 among the Regis-
trant, Seaport 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)
10.18 Advisory Agreement dated July 10, 1995 among the Registrant, Seaport
Futures Management, Inc. and Willowbridge Associates Inc.
(incorporated by reference to Exhibit 10.14 to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1995)
10.19 Form of Foreign Currency Addendum to Brokerage Agreement between the
Registrant and Prudential Securities Incorporated (incorporated by
reference to Exhibit 10.15 of 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 in 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 3, L.P.
By: Seaport 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
Partnership and in the capacities (with respect to the General Partner) and on
the dates indicated.
By: Seaport 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 3, L.P.
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, 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 3, 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 3, 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 3, L.P.
We have audited the accompanying statement of financial condition of
Prudential-Bache Capital Return Futures Fund 3, 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
3, 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 3, 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 $22,358,921 $20,889,009
Net unrealized gain on open commodity positions 341,870 1,340,794
Options, at market -- 41,162
------------ ------------
Total assets $22,700,791 $22,270,965
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 991,115 $ 877,911
Incentive fees payable 256,496 74,959
Due to affiliates 77,638 77,692
Accrued expenses 62,974 63,404
Management fees payable 54,531 53,350
------------ ------------
Total liabilities 1,442,754 1,147,316
------------ ------------
Commitments
Partners' capital
Limited partners (115,048 and 131,345 units outstanding) 21,045,294 20,572,015
General partner (1,163 and 3,522 units outstanding) 212,743 551,634
------------ ------------
Total partners' capital 21,258,037 21,123,649
------------ ------------
Total liabilities and partners' capital $22,700,791 $22,270,965
------------ ------------
------------ ------------
Net asset value per limited and general partnership unit (``Units'') $ 182.93 $ 156.63
------------ ------------
------------ ------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
3
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, 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 on commodity transactions $6,497,225 $ 3,827,887 $ 6,529,871
Change in net unrealized gain on open commodity
positions (1,002,361) 1,180,234 (1,703,856)
Interest from U.S. Treasury bills 753,904 804,638 437,090
Realized gain on reserve assets -- 7,370 116,228
Change in net unrealized gain on reserve assets -- (91,359) (780,823)
Interest from reserve assets -- 506,191 1,108,315
------------ ----------- ---------------
6,248,768 6,234,961 5,706,825
------------ ----------- ---------------
EXPENSES
Commissions 1,518,807 1,225,644 937,130
Other transaction fees 191,327 202,922 392,303
Letter of credit fees -- 103,003 238,647
Management fees 600,463 503,036 412,191
Incentive fees 597,331 206,647 684,373
General and administrative 160,359 187,320 178,048
Amortization of organizational costs -- 6,245 17,020
------------ ----------- ---------------
3,068,287 2,434,817 2,859,712
------------ ----------- ---------------
Net income $3,180,481 $ 3,800,144 $ 2,847,113
------------ ----------- ---------------
------------ ----------- ---------------
ALLOCATION OF NET INCOME
Limited partners $3,157,728 $ 3,721,494 $ 2,802,550
------------ ----------- ---------------
------------ ----------- ---------------
General partner $ 22,753 $ 78,650 $ 44,563
------------ ----------- ---------------
------------ ----------- ---------------
NET INCOME PER WEIGHTED AVERAGE LIMITED AND GENERAL
PARTNERSHIP UNIT
Net income per weighted average limited and general
partnership unit $ 24.90 $ 23.30 $ 13.42
------------ ----------- ---------------
------------ ----------- ---------------
Weighted average number of limited and general
partnership units outstanding 127,714 163,100 212,138
------------ ----------- ---------------
------------ ----------- ---------------
- --------------------------------------------------------------------------------------------------------
</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 232,289 $27,825,210 $428,421 $28,253,631
Net income -- 2,802,550 44,563 2,847,113
Redemptions (43,951) (5,808,038) -- (5,808,038)
------- ----------- -------- -----------
Partners' capital--December 31, 1994 188,338 24,819,722 472,984 25,292,706
Net income -- 3,721,494 78,650 3,800,144
Redemptions (53,471) (7,969,201) -- (7,969,201)
------- ----------- -------- -----------
Partners' capital--December 31, 1995 134,867 20,572,015 551,634 21,123,649
Net income -- 3,157,728 22,753 3,180,481
Redemptions (18,656) (2,684,449) (361,644) (3,046,093)
------- ----------- -------- -----------
Partners' capital--December 31, 1996 116,211 $21,045,294 $212,743 $21,258,037
------- ----------- -------- -----------
------- ----------- -------- -----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
4
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential-Bache Capital Return Futures Fund 3, L.P. (the ``Partnership'') is
a Delaware limited partnership formed on November 27, 1989 which will terminate
on December 31, 2009 unless terminated sooner under the provisions of its
Amended and Restated Agreement of Limited Partnership (the ``Partnership
Agreement''). On May 30, 1990, the Partnership completed its offering having
raised $65,520,000 from the sale of 648,625 units of limited partnership
interest and 6,575 units of general partnership interest and commenced
operations. The Partnership was formed to engage in the speculative trading of
commodity futures, forward and options contracts. The general partner of the
Partnership is Seaport Futures Management, Inc. (the ``General Partner'') which
is an affiliate of Prudential Securities Incorporated (``PSI''), the
Partnership's commodity broker. Both the General Partner and PSI are
wholly-owned subsidiaries of Prudential Securities Group Inc. (``PSGI''). The
General Partner is required to maintain at least a 1% interest in the
Partnership as long as it is acting as the Partnership's general partner.
Initially, 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 June 30, 1995 (the ``Capital Return
Date''). On the Capital Return Date, the letter of credit expired and the
Reserve Assets were allocated for commodities trading to Willowbridge Associates
Inc. (``Willowbridge''), an independent commodities trading manager.
Since July 1995, all trading decisions have been made by Sjo, Inc. (``Sjo'')
and Willowbridge (the ``Trading Managers''). All trading decisions for the
Partnership from August 1992 through June 1995 were made by Sjo. The General
Partner retains the authority to override trading instructions that violate the
Partnership's trading policies.
An irrevocable letter of credit (``Letter of Credit'') was issued in favor of
the Partnership by Citibank, N.A. (the ``Bank'') on May 30, 1990. The Letter of
Credit was intended to provide protection to the limited partners against loss
of their initial investment as of the Capital Return Date when the limited
partners had the option to redeem their units and receive the greater of the
then current net asset value per Unit or 100% of their initial investment. As
described above, the Letter of Credit expired on June 30, 1995 (with no payment
required by the Bank) and does not provide protection thereafter.
B. Summary of Significant Accounting Policies
Basis of accounting
The books and records of the Partnership are maintained on the accrual basis
of accounting in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the General Partner to make estimates and
assumptions that affect the reported amounts of liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
Commodity futures transactions are reflected in the accompanying statements
of financial condition on trade date. The difference between the original
contract amount and market value of futures and forward contracts is reflected
as net unrealized gain or loss. Option transactions are reflected in the
statements of financial condition at market value which is inclusive of the net
unrealized gain or loss. The market value of each contract is based upon the
closing quotation on the exchange, clearing firm or bank on, or through, which
the contract is traded.
5
<PAGE>
To the extent practicable, the Partnership invests a significant portion of
its Traded Assets in U.S. Treasury bills to fulfill original margin
requirements. Reserve Assets were invested in U.S. Treasury strips and a
guaranteed investment contract (``GIC''). U.S. Treasury bills are carried at
amortized cost, which approximates market value, while the U.S. Treasury strips
and the GIC were carried at their market values. Interest on these obligations
accrues for the benefit of the Partnership.
The weighted average number of limited and general partnership units
outstanding was computed for purposes of disclosing net income per weighted
average limited and general partnership unit. The weighted average limited and
general partnership units are equal to the number of Units outstanding at year
end, adjusted proportionately for the Units redeemed based on their respective
time outstanding during such year.
The Partnership has elected not to provide a Statement of Cash Flows as
permitted by Statement of Financial Accounting Standard No. 102, ``Statement of
Cash Flows--Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale.''
The Partnership considers U.S. Treasury bills to be cash equivalents.
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 realized profits or losses remaining after these allocations are
allocated to each partner in proportion to such partner's capital account at
year-end. Net income or loss for financial reporting purposes is allocated based
on the weighted average number of Units outstanding during the period.
Distributions (other than on redemptions of Units) are made at the sole
discretion of the General Partner on a pro rata basis in accordance with the
respective capital accounts of the partners. No distributions have been made
since inception.
The Partnership Agreement provides that a partner may redeem its Units as of
the last business day of any full calendar quarter at the then current net asset
value per Unit reduced by each Unit's pro rata portion of unamortized
organizational costs.
C. Costs, Fees and Expenses
Organizational costs
Costs incurred to organize the Partnership, including but not limited to
legal, accounting, registration fees and certain printing costs, are considered
deferred organizational costs. These costs were capitalized and amortized over a
60-month period ending in 1995.
Commissions and Letter of Credit fees
The General Partner, on behalf of the Partnership, entered into an agreement
with PSI to act as commodity broker for the Partnership. The Partnership paid
PSI fees comprised of brokerage and Letter of Credit fees at an initial rate of
5/6 of 1% (a 10% annual rate) of the Partnership's Traded Assets as of the first
day of each month. Such rate declined 1/2% per year until it reached an annual
rate of 7.5% effective July 1, 1995 in accordance with the scheduled rate
adjustment outlined in the Partnership's prospectus.
Through June 30, 1995, the portion of the monthly fee paid to PSI
representing Letter of Credit fees was calculated as follows: (i) .0007291 (an
.875% annual rate) of the outstanding Letter of Credit amount as of the first
day of each month was due to the Bank for issuing and maintaining the Letter of
Credit and (ii) .0002083 (a .25% annual rate) of the outstanding Letter of
Credit amount as of the first day of each month was due to PSGI for being
obligated to make payment of a portion of the General Partner's repayment
6
<PAGE>
obligation in the event the General Partner was unable to do so. Following the
expiration of the Letter of Credit on June 30, 1995 (see Note A), the
Partnership was no longer obligated to pay these fees.
Management and incentive fees
The Partnership pays each Trading Manager monthly management fees ranging
from 1/6 of 1% (a 2% annual rate) to 1/4 of 1% (a 3% annual rate) of the portion
of the Partnership's Traded Assets allocated to that Trading Manager as of the
end of each month.
In addition, the Partnership also pays the Trading Managers quarterly
incentive fees ranging from 15% to 20% 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 fees
In addition to the costs, fees and expenses previously discussed, the
Partnership reimburses the General Partner and its affiliates for actual
Partnership operating expenses payable by, or allocable to, the Partnership. The
amount of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. The Partnership also pays amounts directly to unrelated
parties for certain operating expenses.
D. Related Parties
The General Partner and its affiliates perform services for the Partnership
which include, but are not limited to: brokerage services, accounting and
financial management, registrar, transfer and assignment functions, investor
communications, printing services and other administrative services.
The costs incurred for these services for the years ended December 31, 1996,
1995 and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
----------------------------------------
Commissions $1,518,807 $1,225,644 $ 937,130
Letter of Credit fees -- 22,887 53,026
General and administrative 104,370 110,599 92,318
---------- ---------- ----------
$1,623,177 $1,359,130 $1,082,474
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Partnership maintains its trading and cash accounts with PSI.
Approximately seventy-five percent (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 a 9.16% GIC which matured on June
30, 1995 with The Prudential Asset Management Company Inc., an affiliate of the
General Partner. Interest earned on the GIC for the years ended December 31,
1995 and 1994 was $502,511 and $1,099,787, respectively. The realized gain on
the GIC was $7,370 and $116,228 and the change in unrealized gain on the GIC was
$(91,070) and $(776,608) for the years ended December 31, 1995 and 1994,
respectively.
7
<PAGE>
E. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for tax reporting purposes for the years ended December
31, 1996, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
----------------------------------------
Net income per financial statements $3,180,481 $3,800,144 $2,847,113
Change in net unrealized gain on
Reserve Assets -- 91,359 780,823
Change in unrealized gain/loss on
nonregulated commodity positions (304,542) 78,309 109
Original issue discount adjustments to
interest income -- 214 1,417
Treasury strip gain -- (6,720) --
---------- ---------- ----------
Tax basis net income $2,875,939 $3,963,306 $3,629,462
---------- ---------- ----------
---------- ---------- ----------
</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 in the statements
of financial condition. The Partnership's exposure to market risk is influenced
by a number of factors including the relationships among the contracts held by
the Partnership as well as the liquidity of the markets in which the contracts
are traded.
Futures and options contracts are traded on organized exchanges and are thus
distinguished from forward contracts which are entered into privately by the
parties. The credit risks associated with futures and options contracts are
typically perceived to be less than those associated with forward contracts,
because exchanges typically provide clearinghouse arrangements in which the
collective credit (subject to certain limitations) of the members of the
exchanges is pledged to support the financial integrity of the exchange. On the
other hand, the Partnership must rely solely on the credit of its broker (PSI)
with respect to forward transactions.
The 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 $20,318,217 and
$20,592,976, 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 $2,382,574 and $1,677,989 at December 31, 1996 and 1995,
respectively. There are no segregation requirements for assets related to
forward trading.
8
<PAGE>
As of December 31, 1996 and 1995, the Partnership's open futures and options
contracts mature within one year.
At December 31, 1996 and 1995, gross contract amounts of open futures and
options contracts are:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Financial Futures Contracts:
Commitments to purchase $229,278,898 $211,622,618
Commitments to sell 41,744,989 109,152,492
Other Futures and Options Contracts:
Commitments to purchase 6,484 19,550,940
Commitments to sell 227,403 1,851,942
</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 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
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 and options
contracts was:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------ --------------------------
Fair Value Fair Value
------------------------ --------------------------
Assets Liabilities Assets Liabilities
-------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ -- $ -- $ 247,938 $210,938
Other -- -- 831,073 169,415
Foreign exchanges
Financial 333,578 212,627 701,932 3,725
Other 227,403 6,484 20,892 76,963
Options Contracts:
Domestic exchanges
Other -- -- 41,162 --
-------- ------------ ---------- ------------
$560,981 $219,111 $1,842,997 $461,041
-------- ------------ ---------- ------------
-------- ------------ ---------- ------------
</TABLE>
9
<PAGE>
The following table presents the average fair value of futures and options
contracts during the year ended December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
-------------------------- ------------------------
Average Fair Value Average Fair Value
-------------------------- ------------------------
Assets Liabilities Assets Liabilities
---------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 56,153 $ 29,059 $ 26,831 $ 18,053
Currencies 123,647 32,513 13,890 6,770
Other 514,655 121,392 189,189 44,660
Foreign exchanges
Financial 745,771 36,408 708,851 43,821
Other 69,393 54,244 15,509 65,339
Forward Contracts:
Other 1,264 8,915 -- --
Options Contracts:
Domestic exchanges
Financial 8,786 -- -- --
Currencies 33,821 -- -- --
Other 26,675 -- 8,433 --
Foreign exchanges
Financial 3,179 -- -- --
Other -- -- 12,257 43,321
---------- ------------ -------- ------------
$1,583,344 $282,531 $974,960 $221,964
---------- ------------ -------- ------------
---------- ------------ -------- ------------
</TABLE>
The following table presents the net realized gains (losses) and the change
in net unrealized gains/losses of futures 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
-------------------------------------------- --------------------------------------------
Change in Change in
Net Realized Net Unrealized Net Realized Net Unrealized
Gains (Losses) Gains/Losses Total Gains (Losses) Gains/Losses Total
-------------- -------------- ---------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 838,008 $ (37,000) $ 801,008 $ 28,300 $ 37,000 $ 65,300
Currencies 758,643 -- 758,643 (98,113) -- (98,113)
Other 1,346,103 (661,658) 684,445 446,193 661,658 1,107,851
Foreign exchanges
Financial 4,374,602 (577,256) 3,797,346 3,783,409 534,209 4,317,618
Currencies -- -- -- 87,125 -- 87,125
Other (184,111) 276,990 92,879 (295,522) (56,070) (351,592)
Forward Contracts:
Other 10,020 -- 10,020 -- -- --
Options Contracts:
Domestic exchanges
Financial (134,985) -- (134,985) (4,047) -- (4,047)
Currencies (148,763) -- (148,763) 134,400 -- 134,400
Other (265,902) (23,125) (289,027) (241,113) 3,437 (237,676)
Foreign exchanges
Financial (76,702) -- (76,702) -- -- --
Other (19,688) 19,688 -- (12,745) -- (12,745)
-------------- -------------- ---------- -------------- -------------- ----------
$6,497,225 $ (1,002,361) $5,494,864 $3,827,887 $1,180,234 $5,008,121
-------------- -------------- ---------- -------------- -------------- ----------
-------------- -------------- ---------- -------------- -------------- ----------
</TABLE>
10
<PAGE>
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 3, L.P.
(a limited partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on May 30, 1990 with gross proceeds of
$65,520,000. After accounting for organizational and offering costs, the
Partnership's net proceeds were $64,222,750. At the inception of the
Partnership, sixty percent of the net proceeds was allocated to trading activity
(``Traded Assets'') and forty percent was placed in reserve and invested in
investment grade interest-bearing obligations (``Reserve Assets'').
On June 30, 1995, the letter of credit expired and the Reserve Assets became
available for commodities trading. During July 1995, these assets were allocated
for commodities trading to Willowbridge Associates Inc. (``Willowbridge''), an
independent commodity trading manager. As such, at December 31, 1996, 100% of
the Partnership's net assets were allocated to commodities trading. At December
31, 1996, a significant portion of the Traded Assets was held in U.S. Treasury
bills and cash, which are used as margin for the Partnership's trading in
commodities. Inasmuch as the sole business of the Partnership is to trade in
commodities, the Partnership continues to own such liquid assets to be used as
margin.
The percentage that U.S. Treasury bills bears to the total net assets varies
each day, and from month to month, as the market values of commodity interests
change. The balance of the total net assets is held in cash. All interest earned
on the Partnership's interest-bearing funds is paid to the Partnership.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in commodity futures contract prices
during a single day by regulations referred to as ``daily limits.'' During a
single day, no trades may be executed at prices beyond the daily limit. Once the
price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its commodity
futures positions.
Since the Partnership's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk). The General Partner attempts to minimize these
risks by requiring the Partnership's Trading Managers to abide by various
trading limitations and policies. See Note F to the financial statements for a
further discussion on the credit and market risks associated with the
Partnership's futures and options contracts.
The Partnership does not have, nor does it expect to have, any capital
assets.
Redemptions by limited partners recorded for the years ended December 31,
1996, 1995 and 1994 were $2,684,449, $7,969,201 and $5,808,038, respectively.
Additionally, redemptions by the general partner recorded for the year ended
December 31, 1996 were $361,644. Redemptions by limited partners and the general
partner recorded from commencement of operations, May 30, 1990, through December
31, 1996 totalled $59,981,640 and $712,189, respectively. Future redemptions
will impact the amount of funds available for investment in commodity contracts
in subsequent periods.
Results of Operations
The net asset value per Unit as of December 31, 1996 was $182.93, an increase
of 16.79% from the December 31, 1995 net asset value per Unit of $156.63, which
was an increase of 16.64% from the December 31, 1994 net asset value per Unit of
$134.29. The Partnership outperformed the 1996 MAR (Managed Account Reports)
Fund/Pool Index return of 11.89%. The MAR tracked the performance of 420 futures
funds in 1996. Past performance is not necessarily indicative of future results.
The global interest rate, stock index and energy markets were the solid
performers in 1996. In the financial sector, international bond prices rose as
the financial markets adjusted to slower rates of growth in the second half of
the year. U.S. stock index futures posted gains as U.S. stock prices moved
higher on
11
<PAGE>
expectations that moderate U.S. economic growth would be accompanied by
continuing low rates of inflation. In the energy sector, tight supplies of
natural gas drove prices higher as well as in crude oil and heating oil.
As discussed in Liquidity and Capital Resources above, the letter of credit
expired on June 30, 1995 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 an increase in interest rates in 1995
versus 1994, resulted in an increase in interest income from U.S. Treasury bills
of $367,548 for the year ended December 31, 1995 as compared to 1994. However,
poor trading performance during the first half of 1996 as well as redemptions
reduced the amount of funds available for investment in U.S. Treasury bills
during 1996. These factors, as well as a decrease in interest rates in 1996
versus 1995, resulted in a decrease in interest income from U.S. Treasury bills
of $50,734 for the year ended December 31, 1996 as compared to 1995.
Additionally, interest income from Reserve Assets was eliminated following the
allocation of Reserve Assets to commodities trading. The interest earned on
Reserve Assets was $506,191 during the year ended December 31, 1995, which was a
decrease of $602,124 as compared to 1994 as a result of the liquidation of
Reserve Assets for payment of redemptions.
Commissions are calculated on the 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 1/2 of 1% from 8% (inclusive of letter of credit
fees) to 7.5% effective July 1, 1995. The combination of these factors caused
commissions plus letter of credit fees to increase by $190,160 for the year
ended December 31, 1996 as compared to 1995 and $152,870 for the year ended
December 31, 1995 as compared to 1994.
Other transaction fees consist of National Futures Association, exchange,
floor brokerage and clearing fees which are based on the number of trades the
Trading Managers execute. Other transaction fees decreased by $11,595 for the
year ended December 31, 1996 as compared to 1995 and $189,381 for the year ended
December 31, 1995 as compared to 1994 due to decreased trading volume.
All trading decisions are currently being made by Sjo, Inc. and Willowbridge.
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 increased by $97,427 for the year ended December 31,
1996 as compared to 1995 and $90,845 for the year ended December 31, 1995 as
compared to 1994.
Incentive fees are based on New High Net Trading Profits generated by each
Trading Manager, as defined in the Advisory Agreements between the Partnership,
the General Partner and each Trading Manager. Incentive fees increased by
$390,684 for the year ended December 31, 1996 as compared to 1995 but decreased
by $477,720 for the year ended December 31, 1995 as compared to 1994.
General and administrative expenses decreased by $26,961 for the year ended
December 31, 1996 as compared to 1995 but increased by $9,272 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. These variances were primarily due
to costs associated with the appointment of Willowbridge as a new trading
advisor to the Partnership and other costs relating to the expiration of the
letter of credit during 1995.
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 3, L.P. is accurate and complete.
SEAPORT 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 $43.
The Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
Prudential-Bache Capital Return Futures Fund 3, L.P.
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
14
<PAGE>
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PBCR3/171879
<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 3 and is qualified in its entirety
by reference to such financial statements
</LEGEND>
<RESTATED>
<CIK> 0000857850
<NAME> Prudential-Bache Capital Return Futures Fund 3
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Dec-31-1996
<PERIOD-TYPE> 12-Mos
<CASH> 12,964,695
<SECURITIES> 9,736,096
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,700,791
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,700,791
<CURRENT-LIABILITIES> 1,442,754
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 21,258,037
<TOTAL-LIABILITY-AND-EQUITY> 22,700,791
<SALES> 0
<TOTAL-REVENUES> 6,248,768
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,068,287
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,180,481
<EPS-PRIMARY> 24.90
<EPS-DILUTED> 0
</TABLE>
