1999
- --------------------------------------------------------------------------------
Prudential Securities Annual
Strategic Trust Report
LETTER TO LIMITED OWNERS FOR
PRUDENTIAL SECURITIES STRATEGIC TRUST
1
PricewaterhouseCoopers (LOGO)
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Telephone (212) 596 8000
Facsimile (212) 596 8910
Report of Independent Accountants
To the Managing Owner and
Limited Owners of
Prudential Securities Strategic Trust
In our opinion, the accompanying statements of financial condition and the
related statements of operations and changes in trust capital present fairly, in
all material respects, the financial position of Prudential Securities Strategic
Trust at December 31, 1999 and 1998, and the results of its operations for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Managing Owner; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States 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
Managing Owner, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
January 28, 2000
2
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
December 31,
-----------------------------
1999 1998
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ASSETS
Cash $31,489,773 $47,615,180
Net unrealized gain on open futures contracts 3,686,345 1,155,587
Net option premium 152,364 --
------------- -----------
Net equity 35,328,482 48,770,767
Other receivable 2,203 9,104
------------- -----------
Total assets $35,330,685 $48,779,871
------------- -----------
------------- -----------
LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 1,219,087 $ 1,735,717
Unrealized loss on open forward contracts 205,135 174,102
Management fees payable 65,935 88,932
Incentive fees payable 37,416 1,766,804
------------- -----------
Total liabilities 1,527,573 3,765,555
------------- -----------
Commitments
Trust capital
Limited interests (261,529.58 and 359,949.43 interests
outstanding) 33,465,044 44,564,154
General interests (2,642 and 3,636 interests outstanding) 338,068 450,162
------------- -----------
Total trust capital 33,803,112 45,014,316
------------- -----------
Total liabilities and trust capital $35,330,685 $48,779,871
------------- -----------
------------- -----------
Net asset value per limited and general interest ('Interests') $ 127.96 $ 123.81
------------- -----------
------------- -----------
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The accompanying notes are an integral part of these statements.
3
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
REVENUES
Net realized gain on commodity transactions $1,076,676 $13,284,951 $ 70,832
Change in net unrealized gain/loss on open commodity
positions 2,499,725 (1,597,171) 2,224,441
Interest income 1,497,863 2,022,918 2,179,775
---------- ----------- -----------
5,074,264 13,710,698 4,475,048
---------- ----------- -----------
EXPENSES
Commissions 2,966,784 3,265,316 3,628,875
Management fees 865,933 1,155,091 1,409,961
Incentive fees 394,427 2,339,362 1,220,889
---------- ----------- -----------
4,227,144 6,759,769 6,259,725
---------- ----------- -----------
Net income (loss) $ 847,120 $ 6,950,929 $(1,784,677)
---------- ----------- -----------
---------- ----------- -----------
ALLOCATION OF NET INCOME (LOSS)
Limited interests $ 838,655 $ 6,882,295 $(1,771,590)
---------- ----------- -----------
---------- ----------- -----------
General interests $ 8,465 $ 68,634 $ (13,087)
---------- ----------- -----------
---------- ----------- -----------
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED AND
GENERAL INTEREST
Net income (loss) per weighted average limited and
general interest $ 2.62 $ 15.76 $ (4.15)
---------- ----------- -----------
---------- ----------- -----------
Weighted average number of limited and general
interests outstanding 323,719 441,066 430,048
---------- ----------- -----------
---------- ----------- -----------
- ----------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN TRUST CAPITAL
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
- ------------------------------------------------------------------------------------------------------
Trust capital--December 31, 1996 260,763.31 $ 26,700,158 $ 280,010 $ 26,980,168
Contributions 286,839.40 31,319,600 241,000 31,560,600
Net loss -- (1,771,590) (13,087) (1,784,677)
Redemptions (84,055.63) (9,031,056) -- (9,031,056)
------------ ------------ --------- ------------
Trust capital--December 31, 1997 463,547.08 47,217,112 507,923 47,725,035
Contributions 49,726.31 5,359,300 27,000 5,386,300
Net income -- 6,882,295 68,634 6,950,929
Redemptions (149,687.96) (14,894,553) (153,395) (15,047,948)
------------ ------------ --------- ------------
Trust capital--December 31, 1998 363,585.43 44,564,154 450,162 45,014,316
Net income -- 838,655 8,465 847,120
Redemptions (99,413.85) (11,937,765) (120,559) (12,058,324)
------------ ------------ --------- ------------
Trust capital--December 31, 1999 264,171.58 $ 33,465,044 $ 338,068 $ 33,803,112
------------ ------------ --------- ------------
------------ ------------ --------- ------------
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The accompanying notes are an integral part of these statements.
4
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential Securities Strategic Trust, formerly known as Willowbridge
Strategic Trust, (the 'Trust') was organized under the Delaware Business Trust
Statute on October 16, 1995 and commenced trading operations on May 1, 1996. The
Trust will terminate on December 31, 2015 unless terminated sooner as provided
in the Second Amended and Restated Declaration of Trust and Trust Agreement (the
'Trust Agreement'). The Trust was formed to engage in the speculative trading of
commodity futures, forward and options contracts. The Trustee of the Trust is
Wilmington Trust Company. The managing owner is Prudential Securities Futures
Management Inc. (the 'Managing Owner'), a wholly owned subsidiary of Prudential
Securities Incorporated ('PSI'), which, in turn, is a wholly owned subsidiary of
Prudential Securities Group Inc. PSI is the principal underwriter and selling
agent for the Trust's interests (the 'Interests') as well as the commodity
broker ('Commodity Broker') of the Trust. The Managing Owner is required to
maintain at least a 1% interest in the Trust so long as it is acting as the
Managing Owner.
On May 1, 1996, the Trust completed its initial offering with gross proceeds
of $12,686,200 from the sale of 125,352 limited interests and 1,510 general
interests. Additional Interests were offered monthly at the then current net
asset value per Interest until the continuous offering period expired on January
31, 1998. Additional contributions raised during the continuous offering period
resulted in additional proceeds to the Trust of $51,242,700.
At inception, the Managing Owner, on behalf of the Trust, entered into an
agreement with Willowbridge Associates, Inc. ('Willowbridge'), an independent
commodity trading manager, to make the Trust's commodities trading decisions.
During July 1998, Willowbridge ceased to serve as a trading manager to the Trust
with regard to assets in all trading programs with the exception of its XLIM
program, which represented approximately 50% of the Trust's assets. These assets
were reallocated to a new trading manager to the Trust, Bridgewater Associates,
Inc. ('Bridgewater'), who began trading Trust assets on August 26, 1998. The
monthly management fee paid to Bridgewater equals .0813% (a .9756% annual rate)
of its traded assets as compared to 1/4 of 1% (a 3% annual rate) paid to
Willowbridge. The quarterly incentive fees paid to Bridgewater and Willowbridge
equal 20% of the New High Net Trading Profits as defined in the Advisory
Agreements among the Trust, the Managing Owner and each trading manager. In
conjunction with this change, the Trust was renamed Prudential Securities
Strategic Trust. As further discussed in Note G to the financial statements, the
Managing Owner terminated Willowbridge as a trading manager of the Trust on
February 15, 2000.
B. Summary of Significant Accounting Policies
Basis of accounting
The financial statements of the Trust are prepared in accordance with
generally accepted accounting principles.
Commodity futures, forward and options transactions are reflected in the
accompanying statements of financial condition on trade date. The difference
between the original contract amount and market value is reflected as 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.
The weighted average number of limited and general interests outstanding was
computed for purposes of disclosing net income (loss) per weighted average
limited and general interest. The weighted average limited and general interests
are equal to the number of Interests outstanding at year end, adjusted
proportionately for Interests subscribed and redeemed based on their respective
time outstanding during such year.
The Trust 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.'
5
Certain balances from the prior year have been reclassified to conform with
the current financial statement presentation.
Income taxes
The Trust is treated as a partnership for Federal income tax purposes. As
such, the Trust is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual Interest holders. The Trust may be subject to other
state and local taxes in jurisdictions in which it operates.
Profit and loss allocation, distributions and redemptions
Net realized profits or losses for tax purposes are allocated first to
Interest holders who redeem Interests to the extent the amounts received on
redemption are greater than or are less than the amounts paid for the redeemed
Interests by the Interest holders. Net realized profits or losses remaining
after these allocations are allocated monthly to each Interest holder in
proportion to such Interest holder's capital account at month-end. Net income or
loss for financial reporting purposes is allocated monthly to all Interest
holders on a pro rata basis based on each Interest holder's number of Interests
outstanding during the month.
Distributions (other than redemptions of Interests) are made at the sole
discretion of the Managing Owner on a pro rata basis in accordance with the
respective capital accounts of the Interest holders. No distributions have been
made since inception.
Additional Interests were offered monthly at their month-end net asset value
per Interest until the continuous offering period expired as discussed in Note
A.
Redemptions are permitted as of the last business day of each month, on at
least 10 days' prior written notice. Redemptions are at the then current net
asset value per Interest; however, Interests redeemed on or prior to the end of
the first and second successive six-month periods after their effective date of
purchase were subject to redemption charges of 4% and 3%, respectively, of the
net asset value at which they were redeemed. These redemption charges were paid
to the Managing Owner. Partial redemptions are permitted.
Accounting for Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ('SFAS') No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Trust adopted effective October 1,
1999. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and requires that an entity recognize all
derivatives as assets or liabilities measured at fair value. SFAS No. 133
supersedes SFAS No. 119, Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments and SFAS No. 105, Disclosure of Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk which required the disclosure of
average aggregate fair values and contract/notional values, respectively, of
derivative financial instruments for an entity like the Trust which carries its
assets at fair value. The Managing Owner does not believe the adoption of SFAS
No. 133 has a material effect on the carrying value of assets and liabilities
within the financial statements.
C. Fees
Organizational, offering and general and administrative costs
PSI or its affiliates paid the costs of organizing the Trust and offering its
Interests and also pay administrative costs incurred by the Managing Owner or
its affiliates for services it performs for the Trust. These costs include, but
are not limited to, those discussed in Note D below. Routine legal, audit,
postage and other third party costs are also paid by PSI or its affiliates.
Management and incentive fees
The Trust pays each trading manager a monthly management fee ranging from
.0813% (a .9756% annual rate) to 1/4 of 1% (a 3% annual rate) of the portion of
the Trust's net assets allocated to each trading manager as of the last day of
each month. In addition, the Trust pays each trading manager a quarterly
incentive fee of 20% of 'New High Net Trading Profits' (as defined in the
Advisory Agreements among the Trust, the Managing Owner and each trading
manager).
6
Commissions
The Managing Owner, on behalf of the Trust, entered into an agreement with
PSI to act as Commodity Broker whereby the Trust pays a fixed monthly fee for
brokerage and other services rendered. Effective September 1, 1998, the Trust
pays PSI commissions at a flat rate of 5/8 of 1% (7.5% per annum) of the Trust's
net asset value as of the first day of each month. Prior to September 1, 1998,
the Trust paid commissions at a flat rate of .64583 of 1% (7.75% per annum.)
From this fee, PSI pays all of the Trust's execution (including floor brokerage
expenses, give-up charges and NFA, clearing and exchange fees) and account
maintenance costs, as well as compensation to employees who sold Interests in
the Trust.
D. Related Parties
The Managing Owner or its affiliates perform services for the Trust 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. Except for costs
related to brokerage services as further discussed below, PSI or its affiliates
pay the costs of these services in addition to costs of organizing the Trust and
offering its Interests as well as the routine operational, administrative, legal
and auditing costs.
The Trust's assets are maintained either in trading or cash accounts at PSI
or, for margin purposes, with the various exchanges on which the Trust is
permitted to trade. PSI credits the Trust monthly with 80% of the interest it
earns on the average net assets in the Trust's accounts and retains the
remaining 20%.
The Trust, acting through its trading managers, executes over-the-counter,
spot, forward and/or option foreign exchange transactions with PSI. PSI then
engages in back-to-back trading with an affiliate, Prudential-Bache Global
Markets Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions. PBGM
keeps its prices on foreign currency competitive with other interbank currency
trading desks. All over-the-counter currency transactions are conducted between
PSI and the Trust pursuant to a line of credit. PSI may require that collateral
be posted against the marked-to-market position of the Trust.
As of December 31, 1999, a non-U.S. affiliate of the Managing Owner owns
293.003 limited interests of the Trust.
The costs charged to the Trust for brokerage services for the years ended
December 31, 1999, 1998 and 1997 were $2,966,784, $3,265,316, and $3,628,875,
respectively.
E. Income Taxes
There have been no differences between the tax basis and book basis of
Interest holders' capital since inception of the Trust.
F. Credit and Market Risk
Since the Trust's business is to trade futures, forward (including foreign
exchange transactions) and options contracts, its capital is at risk due to
changes in the value of these contracts (market risk) or the inability of
counterparties to perform under the terms of the contracts (credit risk).
Futures, forward and options contracts involve varying degrees of off-balance
sheet risk; and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the contracts (or commodities
underlying the contracts) frequently result in changes in the Trust's unrealized
gain (loss) on open commodity positions reflected in the statements of financial
condition. The Trust's exposure to market risk is influenced by a number of
factors including the relationships among the contracts held by the Trust 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 Trust must rely solely on the credit of its broker (PSI) with
respect to forward transactions.
The Managing Owner attempts to minimize both credit and market risks by
requiring the Trust's trading managers to abide by various trading limitations
and policies. The Managing Owner monitors compliance
7
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. Additionally, pursuant
to the Advisory Agreement among the Trust, the Managing Owner and each trading
manager, a trading manager will automatically be terminated if the net asset
value allocated to that trading manager declines by 33 1/3% in any year or since
the initial allocation of assets to that trading manager. Furthermore, the
Second Amended and Restated Declaration of Trust and Trust Agreement (the 'Trust
Agreement') provides that the Trust will liquidate its positions, and eventually
dissolve, if the Trust experiences a decline in the net asset value of 50% in
any year or since the commencement of trading activities. In each case, the
decline in the net asset value is after giving effect for distributions and
redemptions. The Managing Owner 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 Trust.
PSI, when acting as the Trust'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 Trust all assets of the
Trust relating to domestic futures and options trading and not to commingle such
assets with other assets of PSI. At December 31, 1999, such segregated assets
totalled $24,728,236. Part 30.7 of the CFTC regulations also requires PSI to
secure assets of the Trust related to foreign futures and options trading which
totalled $10,600,246 at December 31, 1999. There are no segregation requirements
for assets related to forward trading.
As of December 31, 1999, all open futures and forward contracts mature within
one year.
Gross contract amounts represent the Trust'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). Gross contract amounts
significantly exceed future cash requirements as the Trust 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
Trust 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 Trust's commitments to
purchase commodities is limited to the gross contract amounts involved, while
the market risk associated with its commitments to sell is unlimited since the
Trust'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.
As of December 31, 1998, the gross contract amounts of open futures and
forward contracts were:
1998
------------
Interest Rate Futures:
Commitments to purchase $ 92,177,040
Commitments to sell 181,380,377
Stock Index Futures:
Commitments to purchase 5,441,988
Currency Futures:
Commitments to purchase 50,575,452
Commitments to sell 45,606,627
Commodity Futures:
Commitments to sell 1,413,262
Currency Forwards:
Commitments to purchase 171,615
Commitments to sell 103,545
8
At December 31, 1999 and December 31, 1998, the fair values of futures,
forward and options contracts were:
1999 1998
--------------------------- ---------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 5,455 $ 13,650 $ 33,297 $ 7,775
Stock indices 2,022,713 3,606 -- --
Currencies 142,955 185,257 988,150 166,778
Commodities 206,761 119,006 11,713 --
Foreign exchanges
Interest rates 167,112 181,994 329,643 194,044
Stock indices -- 11,538 179,448 21,617
Commodities 1,670,554 256,879 3,550 --
Forward Contracts:
Currencies -- 8,656 -- 174,102
Commodities -- 196,479 -- --
Options Contracts:
Foreign exchanges
Commodities 395,089 -- -- --
----------- ----------- ----------- -----------
$ 4,610,639 $ 977,065 $ 1,545,801 $ 564,316
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The following table presents the average fair value of futures, forward and
options contracts during the year ended December 31, 1998.
1998
--------------------------
Assets Liabilities
---------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 624,219 $ 101,716
Stock indices 16,546 5,215
Currencies 835,289 395,244
Commodities 248,688 332,016
Foreign exchanges
Interest rates 1,531,709 139,631
Stock indices 62,458 70,770
Commodities 5,348 26,790
Forward Contracts:
Currencies 1,127 27,512
Commodities 92,648 160,820
Options Contracts:
Domestic exchanges
Interest rates 50,847 --
Currencies 31,254 --
Commodities 3,769 --
Foreign exchanges
Interest rates 5,539 --
Commodities 11,642 --
---------- -----------
$3,521,083 $ 1,259,714
---------- -----------
---------- -----------
9
The following table presents trading revenues from futures, forward and
options contracts for the years ended December 31, 1998 and 1997.
1998 1997
----------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 4,758,105 $(1,163,675)
Stock indices (884,350) (2,431,450)
Currencies 2,400,023 6,682,118
Commodities (5,689,561) 200,123
Foreign exchanges
Interest rates 15,079,412 (557,736)
Stock indices (736,748) (213,251)
Commodities (35,584) 972,431
Forward Contracts:
Currencies (299,241) --
Commodities (1,114,551) (146,888)
Options Contracts:
Domestic exchanges
Interest rates (890,181) (317,560)
Currencies (771,376) (294,634)
Commodities (4,940) (205,597)
Foreign exchanges
Interest rates (65,754) --
Commodities (57,474) (228,608)
----------- -----------
$11,687,780 $ 2,295,273
----------- -----------
----------- -----------
G. Subsequent Event
As of February 15, 2000, Willowbridge ceased to serve as a trading manager to
the Trust. The advisory agreement among the Trust, the Managing Owner and
Willowbridge was automatically terminated when the assets allocated to
Willowbridge declined by greater than 33 1/3% from their balance at December 31,
1999. The portion of Trust assets which were traded by Willowbridge are not
currently allocated to commodities trading and, as such, have not been subject
to management fees or commissions since February 15, 2000. The Managing Owner is
currently considering other independent commodity trading managers to trade
these assets on behalf of the Trust.
10
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I hereby affirm that, to the best of my knowledge and belief, the
information contained herein relating to Prudential Securities Strategic Trust
is accurate and complete.
PRUDENTIAL SECURITIES
FUTURES MANAGEMENT INC.
(Managing Owner)
By: Barbara J. Brooks
Chief Financial Officer
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11
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Trust commenced operations on May 1, 1996 with gross proceeds of
$12,686,200 allocated to commodities trading. Additional Interests were offered
monthly at the then current net asset value per Interest until the continuous
offering period expired on January 31, 1998. Additional contributions made
during the continuous offering period totalled $51,242,700, including $375,000
of contributions from the Managing Owner.
The Trust Agreement provides that an Interest holder may redeem its Interests
as of the last business day of any month at the then current net asset value per
Interest. Redemptions of limited interests recorded for the years ended December
31, 1999, 1998 and 1997 were $11,937,765, $14,894,553 and $9,031,056,
respectively. Redemptions by the Managing Owner for the years ended December 31,
1999 and 1998 were $120,559 and $153,395, respectively. Redemptions of limited
interests and general interests from the commencement of operations, May 1, 1996
through December 31, 1999 totalled $38,155,390 and $273,954, respectively.
Future redemptions will impact the amount of funds available for investment in
commodity contracts in subsequent periods.
At December 31, 1999, 100% of the Trust's net assets were allocated to
commodities trading. A significant portion of the net assets are held in cash
which is used as margin for the Trust's trading in commodities. Inasmuch as the
sole business of the Trust is to trade in commodities, the Trust continues to
own such liquid assets to be used as margin. PSI credits the Trust monthly with
80% of the interest it earns on the average net assets in these accounts and
retains the remaining 20%.
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 Trust from promptly liquidating its commodity
futures positions.
Since the Trust'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 Trust's exposure to market risk is influenced
by a number of factors including the volatility of interest rates and foreign
currency exchange rates, the liquidity of the markets in which the contracts are
traded and the relationships among the contracts held. The inherent uncertainty
of the Trust's speculative trading as well as the development of drastic market
occurrences could result in monthly losses considerably beyond the Trust's
experience to date and could ultimately lead to a loss of all or substantially
all of investors' capital. The Managing Owner attempts to minimize these risks
by requiring the Trust's trading managers to abide by various trading
limitations and policies, which include limiting margin amounts, trading only in
liquid markets and utilizing stop loss provisions. See Note F to the financial
statements for a further discussion of the credit and market risks associated
with the Trust's futures, forward and options contracts.
The Trust does not have, nor does it expect to have, any capital assets.
Results of Operations
The net asset value per Interest as of December 31, 1999 was $127.96, an
increase of 3.35% from the December 31, 1998 net asset value per Interest of
$123.81, which was an increase of 20.25% from the December 31, 1997 net asset
value per Interest of $102.96. The MAR (Managed Account Reports) Fund/Pool
Index, which tracked the performance of 317 and 281 futures funds during 1999
and 1998, returned gains of 1.48% and 6.81%, respectively. Past performance is
not necessarily indicative of future results.
12
In 1999, profits in the metal, financial, index, and energy sectors outpaced
losses in the currency and grain sectors.
The metal sector recorded substantial gains in the third quarter from long
positions in gold. Gold prices rose following the Bank of England's auction
which yielded higher-than-expected prices. The market later surged following a
joint announcement by 15 European central banks that they would not sell or
lease any reserves other than those previously designated for sale, for a
five-year period. This announcement removed a tremendous amount of supply
uncertainty from the market, allowing producer demand to send prices higher.
Financial sector profits earned in the first and second quarters exceeded
losses in the third and fourth quarters. During the first quarter, significant
gains resulted from short U.S. Treasury bond positions which profited from
falling prices as the U.S. economy continued to grow at a rapid pace. Gains were
also experienced from short European bond positions which declined in price as
political pressures within Europe delayed central bank interest rate reductions.
Second quarter gains were driven by positions in U.S. Treasury and Japanese
government bonds. Global bond markets followed the U.S. bond market's lead to
higher interest rates and lower prices. By mid-June, the U.S. 30-year Treasury
bond yield was back above 6% in anticipation of tightening by the U.S. Federal
Reserve (FED). Subsequently, on June 30, the FED raised the federal funds rate
by 25 basis points. In Japan, the possibility of an improving economy triggered
a bond market rally.
Long positions in the energy sector, specifically crude oil and derivative
products, provided gains in the second and third quarters. In the first quarter,
energy markets surged as OPEC announced substantial cuts in crude oil exports.
Crude oil prices continued to rally into the second quarter as extremely hot
U.S. weather drove increased utility demand during June and following statements
by Saudi Arabian and Mexican oil ministers reporting a high degree of compliance
with OPEC production cuts. These production cuts continued to prove beneficial
for the Trust's long positions into the third quarter.
Currency sector positions recorded net losses from the second to the fourth
quarters. The Trust suffered primarily from losses in the Japanese yen and Swiss
franc. In Japan, the economy showed signs of a recovery during the second
quarter, but Japanese officials feared a premature strengthening of the yen
might dampen growth. The Bank of Japan intervened at various points throughout
the year by selling yen. During November, the Japanese yen surged to a 4-year
high against the U.S. dollar. Consequently, from the second through the fourth
quarters, short yen positions added to losses. The Trust experienced losses in
the Swiss franc in the second and fourth quarters. The Swiss franc fell further
against the U.S. dollar during the second quarter as it lost its safe haven
attraction when the Kosovo war ended and the Federal Reserve Bank increased
interest rates. In the fourth quarter, the Swiss franc lost value when the Swiss
National Bank added liquidity to their domestic money market in an attempt to
keep interest rates from rising due to millennium-related liquidity concerns. As
a result, long Swiss franc positions contributed to losses.
During July 1998, Willowbridge ceased to serve as a trading manager to the
Trust with regard to all trading programs with the exception of its XLIM
program, which represented approximately 50% of the Trust's assets. These assets
were reallocated to Bridgewater, a new trading manager to the Trust, who began
trading Trust assets on August 26, 1998. As a result, the Trust did not incur
commissions or management fees during the period these assets were not allocated
for commodities trading. The monthly management fee paid to Bridgewater equals
.0813% (a .9756% annual rate) of its traded assets as compared to 1/4 of 1% (a
3% annual rate) paid to Willowbridge. The quarterly incentive fees paid to
Bridgewater and Willowbridge equal 20% of the New High Net Trading Profits as
defined in the Advisory Agreements among the Trust, the Managing Owner and each
trading manager. As further discussed in Note G to the financial statements, as
of February 15, 2000, Willowbridge was terminated as a trading manager to the
Trust.
Interest income is earned on the equity balances held at PSI and, therefore,
varies monthly according to interest rates, trading performance, contributions
and redemptions. Interest income decreased by $525,000 for the year ended
December 31, 1999 as compared to 1998 primarily due to redemptions and, to a
lesser extent, declining interest rates. Interest income decreased by $157,000
for the year ended December 31, 1998 as compared to 1997 primarily due to
declining interest rates during 1998, poor trading performance during 1998
through the second quarter and redemptions.
13
Commissions are calculated on the Trust's net asset value at the beginning of
each month and, therefore, vary according to trading performance, contributions
and redemptions. Commissions decreased by $299,000 for the year ended December
31, 1999 as compared to 1998 primarily due to redemptions. Commissions decreased
by $364,000 for the year ended December 31, 1998 as compared to 1997 primarily
due to poor trading performance during 1998 through the second quarter and
redemptions. The effect of the reallocation of assets from Willowbridge to
Bridgewater during 1998 as discussed above partially offset the decrease in the
1999 commissions versus 1998 and added to the decrease in the 1998 commissions
versus 1997. Additionally, effective September 1, 1998, the annual rate of
commissions charged to the Trust was reduced from 7.75% to 7.5% of the net asset
value of the Trust.
At December 31, 1999, all trading decisions were made by Willowbridge and
Bridgewater (the 'Trading Managers'). Management fees are calculated on the net
asset value allocated to each Trading Manager at the end of each month and,
therefore, are affected by trading performance, contributions and redemptions.
Management fees decreased by $289,000 and $255,000 for the years ended December
31, 1999 and 1998, respectively, as compared to the prior years, primarily for
the same reasons commissions decreased as discussed above.
Incentive fees are based on the New High Net Trading Profits generated by
each Trading Manager, as defined in the Advisory Agreements among the Trust, the
Managing Owner and each Trading Manager. Incentive fees of $394,000, $2,339,000,
and $1,221,000 were earned for the years ended December 31, 1999, 1998 and 1997,
respectively. Although the Trust ended 1997 with an overall loss, incentive fees
were generated by strong trading performance during the first three months of
1997. The payment of these fees is not contingent upon future trading and,
therefore, is unaffected by the Trust's poor trading performance during the
remainder of the 1997 year.
Accounting for Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ('SFAS') No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Trust adopted effective October 1,
1999. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and requires that an entity recognize all
derivatives as assets or liabilities measured at fair value. SFAS No. 133
supersedes SFAS No. 119, Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments and SFAS No. 105, Disclosure of Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk which required the disclosure of
average aggregate fair values and contract/notional values, respectively, of
derivative financial instruments for an entity like the Trust which carries its
assets at fair value. The Managing Owner does not believe the adoption of SFAS
No. 133 has a material effect on the carrying value of assets and liabilities
within the financial statements.
Year 2000 Risk
The arrival of year 2000 was much anticipated and raised serious concerns
about whether or not computer systems around the world would continue to
function properly and the degree of 'Year 2000 Problems' that would have to be
resolved.
The Trust engages third parties to perform primarily all of the services it
needs and also relies on other third parties such as governments, exchanges,
clearinghouses, vendors and banks. The Trust has not experienced any material
adverse impact on operations related to Year 2000 Problems. While the Trust
believes it has mitigated its Year 2000 risk, the Trust cannot guarantee that an
as yet unknown Year 2000 failure will not have a material adverse effect on the
Trust's operations.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Trust from inception through December 31, 1999.
14
OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 1999 was $52.
The Trust's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited owners without charge upon written
request to:
Prudential Securities Strategic Trust
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
15
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
WILLO/17225