SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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: 0-23885
PRUDENTIAL SECURITIES STRATEGIC TRUST
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(Exact name of Registrant as specified in its charter)
Delaware 13-7075398
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One New York Plaza, 13th Floor, New York, New York 10292
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
N/A
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Former name, former address and former fiscal year, if changed since last report
Indicate by CK whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _CK_ No __
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
2000 1999
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ASSETS
Cash $ 15,587,076 $31,489,773
Net unrealized gain on open futures and options contracts 44,489 3,686,345
Unrealized gain on open forward contracts 47,888 --
Premiums paid on options -- 152,364
Other receivable 4,658 2,203
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Total assets $ 15,684,111 $35,330,685
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LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 537,324 $ 1,219,087
Unrealized loss on open forward contracts -- 205,135
Management fees payable 17,864 65,935
Incentive fees payable -- 37,416
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Total liabilities 555,188 1,527,573
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Commitments
Trust capital
Limited interests (168,297.404 and 261,529.578 interests
outstanding) 14,977,631 33,465,044
General interests (1,700 and 2,642 interests outstanding) 151,292 338,068
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Total trust capital 15,128,923 33,803,112
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Total liabilities and trust capital $ 15,684,111 $35,330,685
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Net asset value per limited and general interest ('Interests') $ 89.00 $ 127.96
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The accompanying notes are an integral part of these statements.
2
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
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REVENUES
Net realized loss on commodity
transactions $(5,669,612) $(3,181,210) $(2,470,209) $(3,063,477)
Change in net unrealized gain/loss on
open commodity positions (3,388,833) 4,367,223 501,928 2,063,418
Interest income 819,863 1,144,704 243,691 358,637
----------- ----------- ----------- -----------
(8,238,582) 2,330,717 (1,724,590) (641,422)
----------- ----------- ----------- -----------
EXPENSES
Commissions 980,153 2,320,247 332,417 692,622
Management fees 178,808 671,131 57,151 192,613
Incentive fees -- 357,011 -- --
----------- ----------- ----------- -----------
1,158,961 3,348,389 389,568 885,235
----------- ----------- ----------- -----------
Net loss $(9,397,543) $(1,017,672) $(2,114,158) $(1,526,657)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
ALLOCATION OF NET LOSS
Limited interests $(9,303,550) $(1,007,489) $(2,093,011) $(1,511,391)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
General interests $ (93,993) $ (10,183) $ (21,147) $ (15,266)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER WEIGHTED AVERAGE LIMITED
AND GENERAL INTEREST
Net loss per weighted average limited
and general interest $ (43.40) $ (3.02) $ (11.47) $ (4.85)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of limited and
general interests outstanding 216,512 336,965 184,387 314,726
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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STATEMENT OF CHANGES IN TRUST CAPITAL
(Unaudited)
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
- -----------------------------------------------------------------------------------------------------
Trust capital--December 31, 1999 264,171.578 $33,465,044 $338,068 $33,803,112
Net loss (9,303,550) (93,993 ) (9,397,543)
Redemptions (94,174.174) (9,183,863) (92,783 ) (9,276,646)
------------ ----------- --------- -----------
Trust capital--September 30, 2000 169,997.404 $14,977,631 $151,292 $15,128,923
------------ ----------- --------- -----------
------------ ----------- --------- -----------
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The accompanying notes are an integral part of these statements.
3
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of Prudential Securities Futures Management Inc. (the 'Managing Owner'), the
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of
Prudential Securities Strategic Trust (the 'Trust') as of September 30, 2000 and
the results of its operations for the nine and three months ended September 30,
2000 and 1999. However, the operating results for the interim periods may not be
indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Trust's annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1999.
As of February 15, 2000, Willowbridge Associates Inc. ('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. On July 5, 2000, the Managing Owner reallocated
the portion of Trust assets previously traded by Willowbridge to Gamma Capital
Management, LLC ('Gamma'), an independent commodities trading manager. These
assets were not allocated to commodities trading from February 15, 2000 through
July 5, 2000 and, as such, were not subject to management fees or commissions.
The monthly management fee paid to Gamma equals 1/6 of 1% (a 2% 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 Gamma 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. Additionally,
Gamma must recoup the cumulative trading losses of Willowbridge before it is
paid an incentive fee.
New Accounting Guidance
In June 2000, the Financial Accounting Standards Board ('FASB') issued
Statement No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which
became effective for the Trust on July 1, 2000. SFAS 138 amends the accounting
and reporting standards of FASB Statement No. 133 for certain derivative
instruments and certain hedging activities. SFAS 138 has not had a material
effect on the carrying value of assets and liabilities within the financial
statements.
B. Related Parties
The Managing Owner is a wholly owned subsidiary of Prudential Securities
Incorporated ('PSI') which, in turn, is a wholly owned subsidiary of Prudential
Securities Group Inc. 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, PSI or its affiliates pay the costs of these
services in addition to the Trust's routine operational, administrative, legal
and auditing costs as well as costs paid to organize the Trust and offer its
Interests.
The costs charged to the Trust for brokerage services for the nine months
ended September 30, 2000 and 1999 were $980,153, and $2,320,247, respectively.
The costs charged to the Trust for brokerage services for the three months ended
September 30, 2000 and 1999 were $332,417 and $692,622, respectively.
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%.
4
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 positions of the Trust.
As of September 30, 2000, a non-U.S. affiliate of the Managing Owner owns
538.703 limited interests of the Trust.
C. Derivative Instruments and Associated Risks
The Trust is exposed to various types of risks associated with the derivative
instruments and related markets in which it invests. These risks include, but
are not limited to, risk of loss from fluctuations in the value of derivative
instruments held (market risk) and the inability of counterparties to perform
under the terms of the Trust's investment activities (credit risk).
Market risk
Trading in futures and forward (including foreign exchange transactions)
contracts involves entering into contractual commitments to purchase or sell a
particular commodity at a specified date and price. The gross or face amount of
the contracts, which is typically many times that of the Trust's net assets
being traded, significantly exceeds the Trust's future cash requirements since
the Trust intends to close out its open positions prior to settlement. As a
result, the Trust 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 and forwards to be the net unrealized gain or loss on the
contracts. The market risk associated with the Trust's commitments to purchase
commodities is limited to the gross or face amount of the contracts held.
However, when the Trust enters into a contractual commitment to sell
commodities, it must make delivery of the underlying commodity at the contract
price and then repurchase the contract at prevailing market prices. Since the
repurchase price to which a commodity can rise is unlimited, entering into
commitments to sell commodities exposes the Trust to unlimited risk.
Trading in options involves the payment or receipt of a premium and the
corresponding right or obligation, as the case may be, to either purchase or
sell the underlying commodity for a specified price during a limited period of
time. Purchasing options involves the risk that the underlying commodity does
not change price as expected, so that the option expires worthless and the
premium is lost. On the other hand, selling options involves unlimited risk
because the Trust is exposed to the potentially unlimited price movement in the
underlying commodity.
Market risk is influenced by a wide variety of factors including government
programs and policies, political and economic events, the level and volatility
of interest rates, foreign currency exchange rates, the diversification effects
among the derivative instruments the Trust holds and the liquidity and inherent
volatility of the markets in which the Trust trades.
Credit risk
When entering into futures, forward or options contracts, the Trust is
exposed to credit risk that the counterparty to the contract will not meet its
obligations. The counterparty for futures and options contracts traded in the
United States and on most foreign futures and options exchanges is the
clearinghouse associated with such exchanges. In general, clearinghouses are
backed by the corporate members of the clearinghouse who are required to share
any financial burden resulting from the non-performance by one of its members
and, as such, should significantly reduce this credit risk. In cases where the
clearinghouse is not backed by the clearing members (i.e., some foreign
exchanges), it is normally backed by a consortium of banks or other financial
institutions. On the other hand, the sole counterparty to the Trust's forward
transactions is PSI, the Trust's commodity broker. The Trust has entered into a
master netting agreement with PSI and, as a result, presents unrealized gains
and losses on open forward positions as a net amount in the statements of
financial condition. The amount at risk associated with counterparty
non-performance of all of the Trust's contracts is the net unrealized gain (plus
premiums paid on options) included in the statements of financial condition.
There can be no assurance that any counterparty, clearing member or
clearinghouse will meet its obligations to the Trust.
5
The Managing Owner attempts to minimize both credit and market risks by
requiring the Trust and its trading managers to abide by various trading
limitations and policies. The Managing Owner 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. Additionally, pursuant
to the Advisory Agreements among the Trust, the Managing Owner and each trading
manager, the Trust shall automatically terminate a trading manager if the net
asset value allocated to that trading manager declines by 33 1/3% from the value
at the beginning of any year or since the initial allocation of assets to that
trading manager. (See Note A for a discussion of the termination of Willowbridge
as a trading manager to the Trust.) Furthermore, the Second Amended and Restated
Declaration of Trust and 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% from the value at the beginning of any year or since
the commencement of trading activities. In each case, the decline in 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 is not to commingle
such assets with other assets of PSI. At September 30, 2000, such segregated
assets totalled $5,029,096. 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 $10,602,469 at September 30, 2000. There are no segregation
requirements for assets related to forward trading.
As of September 30, 2000, the Trust's open futures and forward contracts
generally mature within one year.
At September 30, 2000 and December 31, 1999, the fair values of futures,
forward and options contracts were:
2000 1999
------------------------ --------------------------
Assets Liabilities Assets Liabilities
-------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 46,050 $ 31,537 $ 5,455 $ 13,650
Stock indices 1,782 -- 2,022,713 3,606
Currencies 396,525 340,555 142,955 185,257
Commodities 20,525 -- 206,761 119,006
Foreign exchanges
Interest rates 36,231 108,294 167,112 181,994
Stock indices 31,899 9,734 -- 11,538
Commodities 11,470 9,873 1,670,554 256,879
Forward Contracts:
Currencies 47,888 -- -- 8,656
Commodities -- -- -- 196,479
Options Contracts:
Foreign exchanges
Commodities -- -- 395,089 --
-------- ----------- ---------- -----------
$592,370 $ 499,993 $4,610,639 $ 977,065
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6
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
ITEM 2. 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 day of any month at the then current net asset value per
Interest. Redemptions of limited interests for the nine and three months ended
September 30, 2000 were $9,183,863 and $1,959,366, respectively. Redemptions by
the Managing Owner recorded for the nine and three months ended September 30,
2000 were $92,783 and $19,802, respectively. Redemptions of limited interests
and general interests from commencement of operations, May 1, 1996, through
September 30, 2000 were $47,339,253 and $366,737, respectively. Future
redemptions will impact the amount of funds available for investment in
commodity contracts in subsequent periods.
A significant portion of the net assets of the Trust 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 and its 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 C to the financial
statements for a further discussion of the credit and market risks associated
with the Trust's futures and forward 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 September 30, 2000 was $89.00, a
decrease of 30.45% from the December 31, 1999 net asset value per Interest of
$127.96, and a decrease of 11.48% from the June 30, 2000 net asset value per
Interest of $100.54.
The Trust's gross trading gains/(losses) were $(9,058,000) and $(1,968,000)
during the nine and three months ended September 30, 2000 compared to $1,186,000
and $(1,000,000) for the corresponding periods in the prior year. Due to the
nature of the Trust's trading activities, a period to period comparison of
7
its trading results is not meaningful. However, a detailed discussion of the
Trust's current quarter trading results is presented below.
Quarterly Market Overview
U.S. economic activity expanded at a moderate pace at the beginning of the
third quarter and showed signs of slowing down near quarter-end. Growth in
consumer spending slowed from the outsized gains earlier in the year, and sales
of new homes dropped from earlier highs. However, business spending continued to
surge and industrial production trended upward. Even though expansion in
employment slowed considerably in recent months, labor markets remained tight by
historical standards and some measures of labor compensation continued to
accelerate. The recent decrease in consumer spending resulted from moderate
growth of real disposable income in recent months coupled with dips in stock
market valuation. Nevertheless, consumer sentiment continued to be buoyant.
Consumer prices, as measured by the CPI, increased in June in response to a
surge in energy prices, but climbed only modestly in July and August.
U.S. Treasury markets were choppy throughout the quarter but ended slightly
higher, while Japanese government bonds fell sharply on news of a 25 basis point
rate hike. The U.S. Federal Reserve Bank maintained interest rates at 6.50%
throughout the quarter due to increasing indications of a slow down in aggregate
demand and rising productivity. Conversely, there was a shift by other European
and Asian central banks toward tighter domestic monetary policy. At its monetary
policy meeting held in August, the Bank of Japan (BOJ) decided to raise rates
from 0% to 0.25%. In February 1999, the BOJ adopted a zero interest rate policy,
unprecedented both in and out of Japan, to counter the possibility of mounting
deflationary pressure and prevent further deterioration of Japan's economy. Over
the past year and a half, Japan's economy substantially improved; consequently,
the BOJ felt confident that Japan's economy had reached the stage where
deflation was no longer an immediate threat.
The BOJ's increase in short-term interest rates in August caused the yen to
rally sharply against the British pound and U.S. dollar. The U.S. dollar was
strong against most major currencies at the beginning of the quarter. The end of
September brought a sharp reversal to this trend following intervention by the
G-7 central banks to support the euro. This move drove the euro up 5% against
the U.S. dollar and the Japanese yen. The euro surged to a high of above $0.90
after the initial wave of euro buying before settling down more than $0.02 below
its intervention peaks.
Global equity markets experienced choppiness in July and August before
declining in September. This was due to growing concern over near record energy
costs and warnings of earning shortfalls, particularly from U.S. technology
companies.
Energy prices continued their upward trend throughout the quarter. In August,
the American Petroleum Institute reported that crude inventories were at a
24-year low and by month's end the price per barrel had moved to over $33. On
September 22, the U.S. announced that it would release 30 million barrels of oil
from the U.S. strategic petroleum reserve over the next month in an effort to
cap surging energy prices; crude oil prices fell by $2 a barrel.
Quarterly Trust Performance
The following is a summary of performance for the major sectors in which the
Trust traded:
Currencies (-): Long positions in the euro yielded losses despite a brief
rally after intervention by the European Central Bank and other G-7 central
banks to boost the failing euro. Increasing European productivity and growth
coupled with rising energy prices have been the contributing factors to
weakening foreign currencies.
Interest rates (-): Losses were realized in long domestic and European bond
positions as the slowing global economy and an interest rate hike by the
European Central Bank resulted in choppy bond markets.
Stock indices (-): The global economic slowdown negatively affected the major
stock indices. Long positions in the European DAX, Tokyo TOPIX and Sydney
Futures Exchange resulted in losses as markets fell in the wake of growing
concerns over near record energy costs and slowing global economies.
Metals (+): Long copper positions provided positive performance for the
quarter as strong demand and weakening foreign currencies drove prices higher.
8
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. On July 5, 2000, the Managing Owner reallocated the portion of Trust
assets previously traded by Willowbridge to Gamma, an independent commodities
trading manager. These assets were not allocated to commodities trading from
February 15, 2000 through July 5, 2000 and, as such, were not subject to
management fees or commissions. The monthly management fee paid to Gamma equals
1/6 of 1% (a 2% 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 Gamma
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. Additionally, Gamma must recoup the cumulative trading losses of
Willowbridge before it is paid an incentive fee.
Interest income is earned on the equity balances held at PSI and, therefore,
varies monthly according to interest rates, trading performance and redemptions.
Interest income decreased by $325,000 and $115,000 for the nine and three months
ended September 30, 2000 as compared to the same periods in 1999 primarily due
to redemptions during 1999 and 2000 as well as poor trading performance during
the first and third quarters of 2000.
Commissions are calculated on the Trust's net asset value at the beginning of
each month and, therefore, vary according to trading performance and
redemptions. Commissions decreased by $1,340,000 and $360,000 for the nine and
three months ended September 30, 2000 as compared to the same periods in 1999
due primarily to redemptions during 1999 and 2000 and poor trading performance
during the first and third quarters of 2000, as well as the postponement of
commissions charged to the Trust by PSI on the portion of net assets which were
unallocated to commodities trading as discussed above.
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 and redemptions. Management fees decreased by $492,000 and $135,000
for the nine and three months ended September 30, 2000 as compared to the same
periods in 1999 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 approximately
$357,000 were earned during the nine months ended September 30, 1999. No
incentive fees were earned during the nine months ended September 30, 2000.
New Accounting Guidance
In June 2000, the Financial Accounting Standards Board ('FASB') issued
Statement No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which
became effective for the Trust on July 1, 2000. SFAS 138 amends the accounting
and reporting standards of FASB Statement No. 133 for certain derivative
instruments and certain hedging activities. SFAS 138 has not had a material
effect on the carrying value of assets and liabilities within the financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 305(c) of Regulation S-K requires disclosure during each interim
reporting period of material changes in the quantitative and qualitative market
risk information provided as of the end of the immediately preceding year. The
following information should be read in conjunction with the Trust's Form 10-K
as filed with the Securities and Exchange Commission for the year ended December
31, 1999.
9
The following table presents the trading Value at Risk of the Trust's open
positions by market sector as of September 30, 2000 and December 31, 1999. As of
September 30, 2000 and December 31, 1999, the Trust's total capitalization was
approximately $15.1 million and $33.8 million, respectively.
September 30, 2000 December 31, 1999
--------------------------------- ---------------------------------
% of Total % of Total
Market Sector Value at Risk Capitalization Value at Risk Capitalization
- ------------------------------------- ------------- --------------- ------------- ---------------
Currencies $ 722,862 4.78% $ 365,279 1.08%
Interest Rates 430,128 2.84 399,718 1.18
Stock Indices 149,707 0.99 2,922,101 8.65
Commodities 47,800 0.32 2,632,700 7.79
------------- ------- ------------- -------
Total $ 1,350,497 8.93% $ 6,319,798 18.70%
------------- ------- ------------- -------
------------- ------- ------------- -------
The following table presents the average trading Value at Risk of the Trust's
open positions by market sector for the nine and three months ended September
30, 2000.
Nine months ended Three months ended
September 30, 2000 September 30, 2000
--------------------------------- ---------------------------------
% of Total % of Total
Market Sector Value at Risk Capitalization Value at Risk Capitalization
- ------------------------------------ ------------- --------------- ------------- ---------------
Currencies $ 736,188 3.37% $ 830,018 4.80%
Interest Rates 790,725 3.62 527,835 3.05
Stock Indices 757,327 3.47 227,755 1.32
Commodities 486,145 2.22 46,063 0.26
------------- ------- ------------- -------
Total $ 2,770,385 12.68% $ 1,631,671 9.43%
------------- ------- ------------- -------
------------- ------- ------------- -------
The overall decrease in the Trust's Value at Risk since December 31, 1999 is
primarily the result of the replacement of Willowbridge with Gamma as the
trading manager to the Trust as more fully described in Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations above.
The portfolio traded by Willowbridge at December 31, 1999, as well as from the
period from January 1, 2000 through February 15, 2000, included contracts which,
in aggregate, required higher exchange maintenance margins as compared to the
portfolio traded by Gamma.
The primary trading risk exposures of the Trust at September 30, 2000 and
during the nine and three months then ended, by market sector, were:
Currencies. Currency market risk arises from exchange rate fluctuations,
primarily fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. These fluctuations are
influenced by interest rate changes as well as political and general economic
conditions. Similar to prior periods, the Trust's major exposure as of September
30, 2000 and during the nine and three months then ended resulted from positions
in the local currencies of G-7 countries, particularly the euro and the Japanese
yen.
Interest Rates. Interest rate movements directly affect the price of
sovereign bond positions held by the Trust and indirectly affect the value of
its stock index and currency positions. The Trust's primary interest rate
exposure is to interest rate fluctuations in the U.S. and other G-7 countries,
particularly fluctuations in long-term, as opposed to short-term, rates. At
September 30, 2000 and during the nine and three months then ended, positions in
Montreal Bankers Acceptances, LIFFE 3 month Euribor, CBOT 10-year Treasury bonds
and SFE (Australia) Treasury bills account for the majority of interest rate
trading risk for the Trust. At December 31, 1999, the majority of interest rate
trading risk resulted from positions in Eurex bund and LIFFE long gilt.
Stock Indices. Although the trading managers trade various indices, the
Trust's primary equity index exposure at September 30, 2000 and during the nine
and three months then ended resulted from positions in the S&P 500 Index, DAX
(Germany), and the Tokyo Stock Price Index (TOPIX). The decrease of equity index
exposure at September 30, 2000 from December 31, 1999 resulted primarily from
fewer S&P 500
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Index contracts held by the Trust. The stock index futures traded by the Trust
are, by law, limited to futures on broadly based indices.
Commodities. Positions in copper and natural gas account for the majority of
the commodities trading risk exposure at September 30, 2000 and during the nine
and three months then ended. The decrease in commodities trading risk exposure
at September 30, 2000 from December 31, 1999 resulted primarily from fewer
copper, aluminum and coffee contracts held by the Trust.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings--There are no material legal proceedings pending by or
against the Registrant or the Managing Owner
Item 2. Changes in Securities--None
Item 3. Defaults Upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 5. Other information--Effective September 2000, Eleanor L. Thomas was
elected by the Board of Prudential Securities Futures Management Inc. as
President replacing Joseph A. Filicetti.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
3.1
and
4.1--Second Amended and Restated Declaration of Trust and Trust
Agreement of the Registrant dated as of December 14, 1995
(incorporated by reference to Exhibit 3.1 to 4.1 to the
Registrant's Registration Statement on Form S-1, File No.
33-80443)
4.2--Subscription Agreement (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration
Statement on Form S-1, File No. 33-80443)
4.3--Request for Redemption (incorporated by
reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form
S-1, File No. 33-80443)
27.1--Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRUDENTIAL SECURITIES STRATEGIC TRUST
By: Prudential Securities Futures Management Inc.
A Delaware corporation, Managing Owner
By: /s/ Steven Carlino Date: November 13, 2000
----------------------------------------
Steven Carlino
Vice President and Treasurer
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