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UNITED STATES
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, 2003
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
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-7075398
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
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 check CK whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _CK_ No __
Indicate by check CK whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes __ No _CK
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<Table>
<Caption>
September 30, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash in commodity trading accounts $ 7,643,026 $8,527,359
Net unrealized gain on open futures contracts 120,291 56,102
Other receivable 2,871 1,335
------------- ------------
Total assets $ 7,766,188 $8,584,796
------------- ------------
------------- ------------
LIABILITIES AND TRUST CAPITAL
Liabilities
Net unrealized loss on open forward contracts $ 6,501 $ --
Redemptions payable 85,869 40,817
Accounts payable 306 --
Management fees payable 9,453 9,132
Incentive fees 1,787 --
------------- ------------
Total liabilities 103,916 49,949
------------- ------------
Commitments
Trust capital
Limited interests (82,615.534 and 96,797.855 interests
outstanding) 7,589,298 8,449,304
General interests (794.373 and 980 interests outstanding) 72,974 85,543
------------- ------------
Total trust capital 7,662,272 8,534,847
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Total liabilities and trust capital $ 7,766,188 $8,584,796
------------- ------------
------------- ------------
Net asset value per limited and general interest ('Interests') $ 91.86 $ 87.29
------------- ------------
------------- ------------
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The accompanying notes are an integral part of these statements.
</Table>
2
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PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
Condensed Schedules of Investments
(Unaudited)
<Table>
<Caption>
September 30, 2003 December 31, 2002
-------------------------------- --------------------------------
Net Unrealized Net Unrealized
Gain (Loss) Gain (Loss)
as a % of Net Unrealized as a % of Net Unrealized
Futures Contracts Trust Capital Gain (Loss) Trust Capital Gain (Loss)
- -------------------------------------------------------------------------------------------------------------
Futures contracts purchased:
Stock indices $ (73,461) $ (36,059)
Interest rates 211,275 261,040
Currencies 283,174 90,669
Commodities 66,676 (36,719)
-------------- --------------
Net unrealized gain on futures
contracts purchased 6.36% 487,664 3.27% 278,931
-------------- --------------
Futures contracts sold:
Stock indices 7,257 1,004
Interest rates (311,725) (175,554)
Currencies (22,460) (48,279)
Commodities (40,444)
-------------- --------------
Net unrealized loss on futures
contracts sold (4.79)% (367,372) (2.61) (222,829)
------ -------------- ------ --------------
Net unrealized gain on futures
contracts 1.57% $ 120,292 0.66% $ 56,102
------ -------------- ------ --------------
------ -------------- ------ --------------
Forward currency contracts purchased: 0.05% $ 3,646 (0.04)% $ (3,158)
Forward currency contracts sold: (0.13) (10,147) 0.04 3,158
------ -------------- ------ --------------
Net unrealized loss on forward
contracts (0.08)% $ (6,501) 0% $ 0
------ -------------- ------ --------------
------ -------------- ------ --------------
Settlement Currency--Futures Contracts
British pound (0.59)% $ (45,304) (1.03)% $ (87,605)
Canadian dollar 0.51 39,214 (0.42) (36,264)
Euro 1.06 81,310 1.58 134,838
Japanese yen (0.31) (24,028) (0.21) (17,576)
Australian dollar (0.23) (17,931) 0.03 2,770
Swiss franc 0.07 5,605 0.20 16,844
Swedish krona 0.01 955 0.00 (164)
U.S. dollar 1.04 80,471 0.51 43,259
------ -------------- ------ --------------
Total 1.57% $ 120,292 0.66% $ 56,102
------ -------------- ------ --------------
------ -------------- ------ --------------
Settlement Currency--Forward Contracts
Swiss franc (0.08)% $ (6,237) --% $ --
Canadian dollar (0.07)% (5,323) -- --
U.S. dollar 0.07 5,059 0.00 0
------ -------------- ------ --------------
Total (0.08)% $ (6,501) 0.00% $ 0
------ -------------- ------ --------------
------ -------------- ------ --------------
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The accompanying notes are an integral part of these statements.
</Table>
3
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PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Nine months ended Three months ended
September 30, September 30,
---------------------- -----------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------
REVENUES
Net realized gain (loss) on commodity
transactions $855,718 $ 791,988 $(239,733) $ (94,496)
Change in net unrealized gain/loss on open
commodity positions 57,689 (165,594) 277,595 (698,792)
Interest income 78,376 133,269 23,326 41,938
-------- --------- --------- ---------
991,783 759,663 61,188 (751,350)
-------- --------- --------- ---------
EXPENSES
Commissions 454,837 517,316 148,796 174,265
Management fees 84,657 91,800 28,885 29,283
Incentive fees 1,787 -- -- --
-------- --------- --------- ---------
541,281 609,116 177,681 203,548
-------- --------- --------- ---------
Net income (loss) $450,502 $ 150,547 $(116,493) $(954,898)
-------- --------- --------- ---------
-------- --------- --------- ---------
ALLOCATION OF NET INCOME (LOSS)
Limited interests $445,986 $ 149,043 $(115,328) $(945,341)
-------- --------- --------- ---------
-------- --------- --------- ---------
General interests $ 4,516 $ 1,504 $ (1,165) $ (9,557)
-------- --------- --------- ---------
-------- --------- --------- ---------
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED
AND GENERAL INTERESTS
Net income (loss) per weighted average limited
and general interests $ 5.11 $ 1.38 $ (1.38) $ (9.21)
-------- --------- --------- ---------
-------- --------- --------- ---------
Weighted average number of limited and general
interests outstanding 88,134 108,751 84,320 103,700
-------- --------- --------- ---------
-------- --------- --------- ---------
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</Table>
STATEMENT OF CHANGES IN TRUST CAPITAL
(Unaudited)
<Table>
<Caption>
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
- -------------------------------------------------------------------------------------------------------
Trust capital--December 31, 2002 97,777.855 $ 8,449,304 $ 85,543 $ 8,534,847
Net income 445,986 4,516 450,502
Redemptions (14,367.948) (1,305,992) (17,085 ) (1,323,077)
------------ ----------- --------- -----------
Trust capital--September 30, 2003 83,409.907 $ 7,589,298 $ 72,974 $ 7,662,272
------------ ----------- --------- -----------
------------ ----------- --------- -----------
<Caption>
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</Table>
4
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PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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 state fairly the financial position of
Prudential Securities Strategic Trust (the 'Trust') as of September 30, 2003 and
December 31, 2002 and the results of its operations for the nine and three
months ended September 30, 2003 and 2002. 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 accounting principles generally
accepted in the United States of America 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, 2002.
In February 2003, Prudential Financial, Inc. ('Prudential') and Wachovia
Corp. ('Wachovia') announced an agreement to combine their separate retail
securities brokerage and clearing businesses under a new holding company named
Wachovia/Prudential Financial Advisors, LLC ('WPFA'), to be owned 62% by
Wachovia and 38% by Prudential. The transaction closed July 1, 2003. As a
result, the retail brokerage operations of Prudential Securities Incorporated
('PSI') were contributed to Wachovia Securities, LLC ('Wachovia Securities').
Wachovia Securities is wholly-owned by WPFA and is a registered broker-dealer
and a member of the National Association of Securities Dealers, Inc. ('NASD')
and all major securities exchanges. Effective July 1, 2003, PSI changed its name
to Prudential Equity Group, Inc. ('PEG'). PEG remains an indirectly wholly-owned
subsidiary of Prudential and is a registered broker-dealer and a member of the
NASD and all major securities exchanges. PEG continues to conduct the equity
research, domestic and international equity sales and trading operations, and
commodity brokerage and derivative operations it previously conducted as PSI.
The Managing Owner also remains an indirectly wholly-owned subsidiary of
Prudential.
As of January 31, 2003 Gamma was terminated as a trading manager to the
Trust. On February 11, 2003 the Managing Owner and the Trust entered into an
advisory agreement with Graham Capital Management, L.P. ('Graham') to manage a
portion of the Trust's assets. Pursuant to the advisory agreement, Graham is to
be paid a monthly management fee equal to 1/6 of 1% (approximately 2% annually)
and an incentive fee of 20% of the 'New High Net Trading Profits' on the portion
of Trust assets allocated to Graham, the same as was paid to Gamma. Graham does
not have to recoup Gamma's cumulative trading losses before earning any
incentive fees. The Trust did not incur commissions and management fees from the
period February 1, 2003 to February 13, 2003 on the portion of assets
unallocated to trading (i.e. the portion of assets previously managed by Gamma).
The advisory agreement may be terminated for a variety of reasons, including at
the discretion of the Managing Owner.
B. Related Parties
The Managing Owner is a wholly-owned subsidiary of PEG, which, in turn, is an
indirect wholly-owned subsidiary of Prudential. 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, PEG or
its affiliates bear the costs of these services, as well as the Trust's routine
operational, administrative, legal and auditing costs, and 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, 2003 and 2002 were $454,837 and $517,316, respectively, and
for the three months ended September 30, 2003 and 2002 were $148,796 and
$174,265, respectively.
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The Trust's assets are maintained either in trading or cash accounts at PEG
or, for margin purposes, with the various exchanges on which the Trust is
permitted to trade. PEG 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 PEG. PEG 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
PEG and the Trust pursuant to a line of credit. PEG may require that collateral
be posted against the marked-to-market position of the Trust.
As of September 30, 2003, a non-U.S. affiliate of the Managing Owner owned
116.497 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 contracts (including foreign exchange)
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 or settle in cash. Since the repurchase
price to which a commodity can rise is unlimited, entering into commitments to
sell commodities exposes the Trust to unlimited risk.
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 and forward contracts, the Trust is exposed to
credit risk that the counterparty to the contract will not meet its obligations.
The counterparty for futures contracts traded on United States and most foreign
futures exchanges is the clearinghouse associated with the particular exchange.
In general, clearinghouses are backed by their corporate members who are
required to share any financial burden resulting from the non-performance by one
of their 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, if the Trust enters into forward
transactions, the sole counterparty is PEG, the Trust's commodity broker. The
Trust has entered into a master netting agreement with PEG and, as a result,
when applicable, 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 included in the statements of financial condition;
however, counterparty nonperformance on only certain of the Trust's contracts
may result in greater loss than nonperformance on all of the Trust's contracts.
There can be no assurance that any counterparty, clearing member or
clearinghouse will meet its obligations to the Trust.
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
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clearing all trades with creditworthy counterparties; 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. 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 trading limitations and
policies) upon the trading activities of the trading managers as it, in good
faith, deems to be in the best interest of the Trust.
PEG, when acting as the Trust's futures commission merchant in accepting
orders for the purchase or sale of domestic futures 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 trading and is not allowed to commingle such assets with other
assets of PEG. At September 30, 2003, such segregated assets totalled
$2,406,005. Part 30.7 of the CFTC regulations also requires PEG to secure assets
of the Trust related to foreign futures trading, which totalled $5,357,312 at
September 30, 2003. There are no segregation requirements for assets related to
forward trading.
As of September 30, 2003, substantially all of the Trust's open futures
contracts and forward contracts mature within one year.
D. Financial Highlights
<Table>
<Caption>
For the Nine Months For the Three Months
ended September 30, ended September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- ------ --------- ------
Performance per Interest
Net asset value, beginning of period $ 87.29 $82.31 $ 93.24 $92.63
--------- ------ --------- ------
Net realized gain (loss) and change in net
unrealized gain/loss on commodity
transactions 9.74 5.44 .43 (7.70)
Interest income .87 1.23 .27 .41
Expenses (6.04) (5.61) (2.08) (1.97)
--------- ------ --------- ------
Increase (decrease) for the period 4.57 1.06 (1.38) (9.26)
--------- ------ --------- ------
Net asset value, end of period $ 91.86 $83.37 $ 91.86 $83.37
--------- ------ --------- ------
--------- ------ --------- ------
Total return 5.24% 1.29% (1.48)% (10.00)%
Ratio to average net assets (annualized)
Interest income 1.28% 1.92% 1.19% 1.82%
Expenses, including 0.03% of Incentive fees
for the nine months ended September 30,
2003 8.85% 8.79% 9.03% 8.85%
</Table>
These financial highlights represent the overall results of the Trust for
the nine and three months ended September 30, 2003 and 2002. An individual
limited owner's actual results may differ depending on the timing of
redemptions.
7
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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, 2003 were $1,305,992 and $238,502, respectively. Redemptions of
general interests for the nine and three months ended September 30, 2003 were
$17,085 and $6,142, respectively. Redemptions of limited and general interests
from May 1, 1996 (commencement of operations) to September 30, 2003 were
$54,631,699 and $444,098, respectively. Future redemptions will impact the
amount of funds available for investment in commodity contracts in subsequent
periods.
At September 30, 2003, 100% of the Trust's net assets were allocated to
commodities trading. A significant portion of the net assets of the Trust was
held in cash, which was 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. PEG 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 and forward 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 permitting the use of 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, 2003 was $91.86, an
increase of 5.24% from the December 31, 2002 net asset value per Interest of
$87.29, and a decrease of 1.48% from the June 30, 2003 net asset value per
Interest of $93.24. Past performance is not necessarily indicative of future
results.
The Trust's gross trading gains before commissions and related fees were
$913,000 and $38,000 during the nine and three months ended September 30, 2003,
compared to trading gains (losses) of $626,000 and $(793,000) for the
corresponding period in the prior year. Due to the nature of the Trust's trading
activities, a
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period to period comparison of its trading results is not meaningful. However, a
detailed discussion of the Trust's current quarter trading results is presented
below.
Quarterly Market Overview
In the U.S., the third quarter of 2003 was marked by an economic growth rate
of 7.2 percent--the fastest rate since 1984--which was boosted by strong
consumer and business spending. Leading indicators rose throughout July and
August, but fell 0.2 percent in September, the first decline in four months.
Manufacturing and industrial production grew throughout the quarter, although at
a slower pace, as new orders and production gradually strengthened. Child tax
credit checks arrived in July and August in time for the crucial back-to-school
retail sales period boosting disposable income to its biggest gain in a year.
Consumer spending, which makes up two-thirds of the economy, rose throughout
most of the quarter as retail sales increased 1.4 percent in July--the largest
increase in four months--and 0.6 percent in August, but cooled in September.
Housing, automobile and durable goods markets aided by incentives and
low-interest rates continued at a high clip. However, consumer confidence was
mixed in July and declined in September to the lowest level since the war in
Iraq as a result of higher gas prices and continued job losses. Despite a
slowdown in layoffs, hiring has not picked up as companies continued to focus on
becoming more efficient. The U.S. economy lost 49,000 jobs in July and a record
93,000 jobs in August. The majority of job losses occurred in the manufacturing
sector, which experienced its 38th consecutive monthly drop in employment in
September. Non-farm payrolls, mostly in the private sector, rose for the first
time in eight months in September. Watching over the weak labor market, the U.S.
Federal Reserve maintained the target for the federal funds rate at one percent,
a 45-year low, at both its August and September meetings.
The global economy experienced mixed growth in the third quarter. Widening
deficits, rising unemployment, declining business and consumer confidence and
sluggish economic growth continued to affect the 12-nation euro zone. The
European Central Bank left rates untouched at the end of September. The outlook
was rosier in Japan as capital spending spurred a recovery from its third
recession in a decade. Unemployment reached its lowest level since mid-2001, and
although Japanese consumer spending remained flat, business investments have
gradually grown.
Indices: The three major U.S. market gauges (Dow Jones Industrial Average,
S&P 500 and NASDAQ) boasted a second quarter of gains after three years of
declines, even though they finished lower in September. Stronger corporate
earnings, growth in capital and consumer spending and a third consecutive month
of manufacturing growth boosted stock prices. Toward the end of September, the
Dow Jones Industrial Average, S&P 500 and NASDAQ declined based on weak economic
data and a rush by investors to lock in third quarter gains. Japanese stocks
experienced their biggest sell-off in two years as a result of the pullback in
U.S. equities and the U.S. dollar's 33-month low against the yen. Investors were
concerned about poor consumer confidence figures, weak third-quarter earnings
results, high stock valuations, sketchy corporate governance, persistent job
market weakness, escalating conflict in the Middle East, and a production cut by
OPEC. Nonetheless, the Japanese Nikkei reached a 15-month high in mid-September
with an overall gain of 12.5 percent. Most Asian markets reported robust returns
with European markets edging upwards throughout the quarter resulting in two
consecutive quarters of gains for global stock markets.
Interest Rates: Volatility marked the performance of U.S. Treasuries, as
prices fell 1.9 percent with yields rising to 3.9 percent in the third quarter.
The majority of damage occurred in July as U.S. Treasuries posted their worst
monthly return in more than two decades when investors shifted their allocations
from bonds to stocks on the basis of stronger economic data. Prices rebounded in
August, but dipped again in mid-September as a result of profit taking ahead of
economic data reports. U.S. Treasury prices jumped at the end of September on
the back of soft consumer confidence figures, depressed job market reports,
slower manufacturing activity reports, and a weaker dollar. As a result of
improved world growth, global bond yields began low at the beginning of the
quarter and rose in every major developed bond market with Japanese bonds
experiencing the greatest rise in yields.
Currencies: In the foreign exchange markets, the U.S. dollar remained weak
and fell at the end of September when the Group of 7 and the U.S. Treasury
Secretary John Snow called for more exchange rate flexibility and further
supported a weak dollar policy. The dollar declined to a 33-month low against
the Japanese yen reversing only after intervention by the Bank of Japan. News of
the intervention forced European currencies lower. However, the Euro ended the
quarter at its highest level against the dollar since mid-June.
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Energies: To hedge against inflation, investors began buying oil in August.
Unexpected growth in U.S. inventories drove oil prices lower, reaching
four-month lows. Oil prices spiked in September as OPEC announced an output
reduction of 3.5 percent ahead of peak winter demand to stem the decline in
prices. Prices stabilized slightly when investors realized supplies appeared to
be sufficient but ended the quarter at the highest level in three weeks.
Quarterly Trust Performance
The following is a summary of performance for the major sectors in which the
Trust traded:
Interest Rates (-): As a result of improved world growth, global bond prices
declined in every major developed bond market. Long European and U.S. Treasury
bond positions resulted in net losses.
Energies (-): OPEC's announcement to cut production caused a significant
rally in energy prices. Short light crude and gas oil positions led to net
losses. An increase in storage in June as well as a relatively cool summer led
to a decline in natural gas prices and net losses for long positions.
Grains (-): Short corn and wheat positions resulted in net losses as drought
conditions drove prices upward.
Softs (-): High volatility in the softs markets led to net losses in sugar
positions.
Currencies (+): The strengthening of the Japanese yen due to the growing
Japanese economy led to net gains for long yen positions.
Metals (+): Investors looking to hedge against inflation drove the price of
gold to a seven-year high. Long gold positions resulted in net gains.
Indices (+): Long Japanese Topix, Japanese Nikkei Dow and NASDAQ index
positions resulted in net gains as U.S. and major global stock markets rose for
the second consecutive quarter.
Decreases in the overall average net asset levels of the Trust have led to
corresponding decreases in interest earned, as well as commissions and
management fees incurred by the Trust, which are largely based on the level of
net assets. The Trust's average net asset levels were lower during the nine and
three months ended September 30, 2003 as compared to the corresponding periods
in the prior year, primarily due to redemptions offset in part by favorable
trading performance during the nine months in 2003.
Interest income is earned on the equity balances held at PEG and, therefore,
varies monthly according to interest rates, trading performance and redemptions.
Interest income decreased by $54,000 and $19,000 for the nine and three months
ended September 30, 2003 as compared to the corresponding periods in 2002. This
decrease was primarily due to lower interest rates during 2003 as compared to
2002, as well as the decline in average net asset levels as discussed above.
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 $62,000 and $25,000 for the nine and three
months ended September 30, 2003 as compared to the corresponding periods in
2002. This decrease was due to the decline in average net asset levels as
discussed above and, to a lesser extent, the change in trading advisors as
discussed further in Note A.
Prior to January 31, 2003 all trading decisions were made by Bridgewater
Associates, Inc. and Gamma Capital Management, LLC ('Gamma'). Gamma was
terminated as a trading advisor to the Trust on January 31, 2003 and replaced
with Graham Capital Management, L.P. on February 11, 2003. 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 $7,000 and less than $500 for the nine
and three months ended September 30, 2003 as compared to the corresponding
periods in 2002. This decrease was due to the decline in average net asset
levels as discussed above and, to a lesser extent, the change in trading
advisors as discussed further in Note A.
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 $2,000 were incurred
during the nine months ended September 30, 2003. No incentive fees were incurred
during the three months ended September 30, 2003 and the nine and three months
ended June 30, 2002.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Managing Owner
carried out an evaluation, under the supervision and with the participation of
the officers of the Managing Owner, including the Managing Owner's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Trust's disclosure controls and procedures. Based
upon that evaluation, the Managing Owner's Chief Executive Officer and Chief
Financial Officer concluded that the Trust's disclosure controls and procedures
are effective.
There have not been any changes in our internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings--There are no material legal proceedings pending by or
against the Trust 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--None
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 Trust dated as of December 14, 1995
(incorporated by reference to Exhibit 3.1 to 4.1 to the Trust's
Registration Statement on Form S-1, File No. 33-80443)
4.2--Subscription Agreement (incorporated by reference to
Exhibit 4.2 to the Trust'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 Trust's Registration Statement on
Form S-1, File No. 33-80443)
31.1--Certification pursuant to Exchange Act Rules 13a-14 and
15d-14 (filed herewith)
31.2--Certification pursuant to Exchange Act Rules 13a-14
and 15d-14 (filed herewith)
32.1--Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the SARBANES-OXLEY
Act of 2002 (furnished herewith)
32.2--Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the SARBANES-OXLEY
Act of 2002 (furnished 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
Trust 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/ Ronald J. Ivans Date: November 14, 2003
----------------------------------------
Ronald J. Ivans
Chief Financial Officer
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