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 June 30, 1999
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 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 __
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
1999 1998
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ASSETS
Equity in commodity trading accounts:
Cash $38,187,531 $47,615,180
Net unrealized gain on open commodity positions 3,471,615 981,485
Options, at market 219,275 --
----------- ------------
Net equity 41,878,421 48,596,665
Other receivable 19,377 9,104
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Total assets $41,897,798 $48,605,769
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LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 1,071,948 $ 1,735,717
Management fees payable 75,826 88,932
Incentive fee payable 45,161 1,766,804
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Total liabilities 1,192,935 3,591,453
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Commitments
Trust capital
Limited interests (321,616.163 and 359,949.431 interests
outstanding) 40,297,771 44,564,154
General interests (3,249 and 3,636 interests outstanding) 407,092 450,162
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Total trust capital 40,704,863 45,014,316
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Total liabilities and trust capital $41,897,798 $48,605,769
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Net asset value per limited and general interest ('Interests') $ 125.30 $ 123.81
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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)
Six months ended Three months ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
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REVENUES
Net realized loss on commodity
transactions $ (117,733) $(6,123,327) $(2,833,962) $(6,631,692)
Change in net unrealized gain on open
commodity positions 2,303,805 (1,966,009) 2,393,986 (1,742,279)
Interest income 786,067 1,048,944 390,941 468,260
----------- ----------- ----------- -----------
2,972,139 (7,040,392) (49,035) (7,905,711)
----------- ----------- ----------- -----------
EXPENSES
Commissions 1,627,625 1,846,314 780,929 826,747
Management fees 478,518 692,486 222,723 298,198
Incentive fees 357,011 -- 45,161 --
----------- ----------- ----------- -----------
2,463,154 2,538,800 1,048,813 1,124,945
----------- ----------- ----------- -----------
Net income (loss) $ 508,985 $(9,579,192) $(1,097,848) $(9,030,656)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
ALLOCATION OF NET INCOME (LOSS)
Limited interests $ 503,902 $(9,483,151) $(1,086,870) $(8,940,335)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
General interests $ 5,083 $ (96,041) $ (10,978) $ (90,321)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER WEIGHTED AVERAGE
LIMITED AND GENERAL INTEREST
Net income (loss) per weighted average
limited and general interest $ 1.46 $ (19.86) $ (3.23) $ (19.23)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of limited and
general interests outstanding 348,084 482,328 339,842 469,520
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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STATEMENT OF CHANGES IN TRUST CAPITAL
(Unaudited)
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
- -----------------------------------------------------------------------------------------------------
Trust capital--December 31, 1998 363,585.431 $44,564,154 $450,162 $45,014,316
Net income -- 503,902 5,083 508,985
Redemptions (38,720.268) (4,770,285) (48,153 ) (4,818,438)
------------ ----------- --------- -----------
Trust capital--June 30, 1999 324,865.163 $40,297,771 $407,092 $40,704,863
------------ ----------- --------- -----------
------------ ----------- --------- -----------
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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
JUNE 30, 1999
(Unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of management, 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 June 30,
1999 and the results of its operations for the six and three months ended June
30, 1999 and 1998. 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, 1998 (the 'Annual Report').
New Accounting Guidance
In June 1999, the Financial Accounting Standards Board ('FASB') issued
Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133, which delayed the effective date of FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
('SFAS 133'). The Trust does not believe the effect of adoption of SFAS 133, now
required effective January 1, 2001, will be material.
B. Related Parties
The managing owner of the Trust is Prudential Securities Futures Management
Inc. (the 'Managing Owner'), a wholly owned subsidiary of Prudential Securities
Incorporated ('PSI'). 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 its routine operational, administrative, legal and
auditing fees as well as costs paid to organize the Trust and offer its
Interests. As described in the Annual Report, all commissions for brokerage
services are paid to PSI.
The Trust's assets are maintained either in trading or cash accounts at PSI,
the Trust's commodity broker, 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 positions of the Trust.
As of June 30, 1999, a non-U.S. affiliate of the Managing Owner owns 293.003
limited interests of the Trust.
C. 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
4
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 Trust presents unrealized gains and losses
on open forward positions as a net amount in the statements of financial
condition because it has a master netting agreement with PSI.
The 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, 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 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 June 30, 1999, such segregated assets
totalled $34,950,402. 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 $6,981,037 at June 30, 1999. There are no segregation requirements for
assets related to forward trading.
As of June 30, 1999, all open futures, forward and options contracts
mature within one year.
As of June 30, 1999 and December 31, 1998, gross contract amounts of open
futures, forward and options contracts were:
1999 1998
------------ ------------
Financial Futures Contracts:
Commitments to purchase $ 93,379,846 $ 97,619,028
Commitments to sell 234,386,891 181,380,377
Currency Futures and Options Contracts:
Commitments to purchase 7,050,698 50,575,452
Commitments to sell 71,847,512 45,606,627
Other Futures and Options Contracts:
Commitments to purchase 28,282,993 --
Commitments to sell 874,354 1,413,262
Currency Forward Contracts:
Commitments to purchase -- 171,615
Commitments to sell 1,929,538 103,545
Other Forward Contracts:
Commitments to purchase 52,364 --
The 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). The gross contract amounts
significantly exceed the future cash requirements as the Trust intends to close
out
5
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. 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.
At June 30, 1999 and December 31, 1998, the fair values of open futures,
forward and options contracts were:
1999 1998
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Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 950,992 $ 61,737 $ 33,297 $ 7,775
Currencies 495,082 146,617 988,150 166,778
Other 395,757 783,250 11,713 --
Foreign exchanges
Financial 2,434,262 285,699 509,091 215,661
Other 692,605 166,762 3,550 --
Forward Contracts:
Currencies 29,564 30,218 -- 174,102
Other -- 52,364 -- --
Options Contracts:
Domestic exchanges
Currencies 24,400 -- -- --
Other 194,875 -- -- --
----------- ----------- ----------- -----------
$ 5,217,537 $ 1,526,647 $ 1,545,801 $ 564,316
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The following table presents the average fair value of futures, forward and
options contracts during the six months ended June 30, 1999 and 1998,
respectively.
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 660,629 $ 42,341 $ 478,766 $ 159,260
Currencies 852,682 304,899 800,884 207,134
Other 216,958 302,960 435,905 588,997
Foreign exchanges
Financial 990,613 200,336 1,658,368 84,994
Other 275,029 125,753 -- 446
Forward Contracts:
Currencies 8,086 145,169 -- --
Other -- 15,451 171,952 246,969
Options Contracts:
Domestic exchanges
Financial 50,358 -- 94,429 --
Currencies 40,159 10,105 58,043 --
Other 27,839 5,509 -- --
Foreign exchanges
Financial -- -- 10,287 --
Other 19,921 5,581 21,620 --
---------- ----------- ---------- -----------
$3,142,274 $ 1,158,104 $3,730,254 $ 1,287,800
---------- ----------- ---------- -----------
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6
The following table presents the average fair value of futures, forward and
options contracts during the three months ended June 30, 1999 and 1998,
respectively.
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 687,623 $ 50,342 $ 264,438 $ 170,600
Currencies 376,343 262,825 1,101,831 307,706
Other 360,646 529,906 275,898 552,576
Foreign exchanges
Financial 1,165,843 183,148 686,863 101,271
Other 452,473 220,067 -- --
Forward Contracts:
Currencies 14,006 119,690 -- --
Other -- 27,040 128,810 430,580
Options Contracts:
Domestic exchanges
Financial -- -- 148,251 --
Currencies 24,803 17,684 27,975 --
Other 48,719 9,641 -- --
Foreign exchanges
Financial -- -- 18,003 --
Other 34,862 9,767 37,836 --
---------- ----------- ---------- -----------
$3,165,318 $ 1,430,110 $2,689,905 $ 1,562,733
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
The following tables present the Trust's trading revenues from futures,
forward and options contracts during the six and three months ended June 30,
1999 and 1998, respectively.
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Futures Contracts:
Domestic exchanges
Financial $ 1,723,748 $(1,839,083 ) $ 124,150 $ (340,018 )
Currencies (1,206,779 ) (4,613,684 ) (1,543,537 ) (3,058,986 )
Other (818,200 ) (4,030,247 ) (772,444 ) (2,318,100 )
Foreign exchanges
Financial 3,136,210 5,129,006 1,644,163 233,490
Other 655,845 -- 586,533 --
Forward Contracts:
Currencies (1,934 ) -- 19,972 --
Other (50,156 ) (1,099,926 ) (52,364 ) (1,682,472 )
Options Contracts:
Domestic exchanges
Financial (678,813 ) (890,181 ) -- (746,521 )
Currencies (422,199 ) (656,525 ) (294,799 ) (387,587 )
Other (139,904 ) (4,940 ) (139,904 ) (4,940 )
Foreign exchanges
Financial -- (65,754 ) -- (65,754 )
Other (11,746 ) (18,002 ) (11,746 ) (3,083 )
------------ ------------ ------------ ------------
$ 2,186,072 $(8,089,336 ) $ (439,976 ) $(8,373,971 )
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
7
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.
At June 30, 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 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, forward and options contracts.
Redemptions of limited interests for the six and three months ended June 30,
1999 were $4,770,285 and $2,414,449, respectively. Redemptions by the Managing
Owner recorded for the six and three months ended June 30, 1999 were $48,153 and
$24,358, respectively. Redemptions of limited interests and general interests
recorded from the commencement of operations, May 1, 1996, through June 30, 1999
were $30,987,910 and $201,548, respectively. Future redemptions will impact the
amount of funds available for investment in commodity contracts in subsequent
periods.
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 June 30, 1999 was $125.30, an increase
of 1.20% from the December 31, 1998 net asset value per Interest of $123.81.
Quarterly Market Overview
In the United States, as economic indicators strengthened and the Federal
Reserve Bank announced they would raise interest rates, the U.S. dollar rose
against most major currencies, especially European which were spurred by
deteriorating confidence in the Euro. Throughout the second quarter, several
issues weighed on world markets including significant price declines in global
long-term interest bonds, the U.S.
8
Federal Reserve's tightening of monetary policy and an increased supply of
corporate debt. Furthermore, as the U.S. economy generated strength, investors
feared possible inflation. U.S. bond prices fell, followed by European bonds
which were depressed by rumors regarding Italy's retreat from the European
Economic Union. Global stock markets recorded gains over the quarter, supported
by solid corporate earnings and improved economies (especially Asian). In the
commodity markets, the energy sector rallied as OPEC announced production cuts
and lower inventories in oil and gasoline. A consistent tone prevailed in the
agricultural and soft commodity markets as favorable seasonal growing conditions
continued to weigh on prices.
Quarterly Trust Performance
The Trust captured gains in the financial sector driven by U.S. Treasury and
Japanese government bonds positions. Global bond markets followed the U.S. bond
market lead to higher interest rates and lower prices. By mid-June, the U.S.
30-year Treasury bond yield was back above 6.0% in anticipation of tightening by
the U.S. Federal Reserve (the 'FED'). Subsequently, on June 30, the FED raised
its federal funds rate by 25 basis points. In Japan, the possibility of an
improving economy triggered a bond market rally.
In the energy sector, trading in light crude oil provided profits. Crude oil
products rallied as extremely hot U.S. weather drove utility demand during June.
The rally continued following statements by oil ministers from Saudi Arabia and
Mexico regarding the high degree of compliance with current OPEC production
cuts.
Losses were incurred in the metal sector led by silver, copper, and aluminum.
Base metals rallied sharply following announcements that two major companies
would significantly cut copper output. If carried out, the estimated production
cuts would almost eliminate the estimated global copper supply surplus. Silver
experienced extreme volatility throughout the second quarter, and failed to
recognize a trend. Additionally, aluminum rallied through April, until the
market backed off almost 50% of the bullish move in March. As of May 24, the
market corrected, and has since been trending higher.
Currency sector positions incurred losses, particularly in the Japanese yen,
Australian dollar, and Euro. As the Japanese economy showed signs of recovery,
the Bank of Japan intervened by selling yen, fearing a premature strengthening
of that currency might dampen growth. The Australian dollar increased in value
partly based on indications that Asia's economy may be recovering. However, as
gold prices fell to a 20-year low, the commodity-based currencies (i.e.
Australian dollar) tumbled as well. Weakness in the Euro continued due to
deteriorating confidence in that currency and Italy's possible retraction from
the European Economic Union. Consequently, the European Central Bank has been
rumored to be considering an interest rate increase.
Losses were incurred in the grain sector from soybean, corn and wheat
positions. Prices began to trend lower in the grain markets as large corn and
soybean crops in South America, coupled with near record plantings in the U.S.,
kept grain prices under pressure.
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 $263,000 and $77,000 for the six and three months
ended June 30, 1999 as compared to the same periods in 1998 primarily due to the
effects of declining interest rates and redemptions.
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 $219,000 and $46,000 for the six and three
months ended June 30, 1999 as compared to the same periods in 1998 primarily due
to redemptions. 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 June 30, 1999, all trading decisions were made by Willowbridge Associates,
Inc. ('Willowbridge') and Bridgewater Associates, Inc. ('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 and redemptions. Management fees decreased
$214,000 and $75,000 for the six and three months ended June 30, 1999 as
compared to the same periods in 1998. These decreases are primarily due to
redemptions as well as a reduction in the management fee rate during July 1998
on the portion of net assets traded by Bridgewater. This reduction from a 3%
annual rate to .9756% became effective when approximately 50% of the net assets
traded by Willowbridge were reallocated to Bridgewater during July 1998.
9
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 $357,000 and $45,000
were earned during the six and three months ended June 30, 1999. No incentive
fees were earned during the six and three months ended June 30, 1998.
New Accounting Guidance
In June 1999, the Financial Accounting Standards Board ('FASB') issued
Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133, which delayed the effective date of FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
('SFAS 133'). The Trust does not believe the effect of adoption of SFAS 133, now
required effective January 1, 2001, will be material.
Year 2000 Risk
A discussion of Year 2000 risk and its effect on the operations of the Trust
is included in the Trust's Annual Report.
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 Exchange Commission for the year ended December 31,
1998.
The following table presents the trading Value at Risk of the Trust's open
positions by market sector as of June 30, 1999 and December 31, 1998. As of June
30, 1999 and December 31, 1998, the Trust's total capitalization was
approximately $40.7 million and $45.0 million, respectively.
June 30, 1999 December 31, 1998
--------------------------------- ---------------------------------
% of Total % of Total
Market Sector Value at Risk Capitalization Value at Risk Capitalization
- ------------------------------------- ------------- --------------- ------------- ---------------
Commodities $ 2,359,970 5.80% $ 89,400 0.20%
Interest Rates 2,195,027 5.39 1,069,880 2.38
Stock Indicies 2,071,739 5.09 323,431 0.72
Currencies 1,802,396 4.43 1,857,167 4.12
------------- ------- ------------- -----
Total $ 8,429,132 20.71% $ 3,339,878 7.42%
------------- ------- ------------- -----
------------- ------- ------------- -----
The following table presents the average trading Value at Risk of the Trust's
open positions by market sector for the three months ended June 30, 1999.
Three months ended
June 30, 1999
---------------------------------
% of Total
Market Sector Value at Risk Capitalization
- ------------------------------------- ------------- ---------------
Commodities $ 1,683,403 4.06%
Interest Rates 2,066,543 4.99
Stock Indicies 2,611,622 6.31
Currencies 1,729,517 4.18
------------- -------
Total $ 8,091,085 19.54%
------------- -------
------------- -------
The primary trading risk exposures of the Trust at June 30, 1999 and during
the three months then ended, by market sector, were:
Commodities. The trading managers of the Trust trade a variety of
agricultural, metal and energy-related futures contracts which together
represent the overall principal market exposure of the Trust as of June 30,
1999. Positions in light crude oil, soybeans and base metals account for the
majority of this commodities trading risk exposure at June 30, 1999 and during
the three months then ended.
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Interests 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 June
30, 1999 and during the three months then ended, positions in U.S. Treasury
bonds accounted for the majority of interest rate trading risk for the Trust.
Stock Indices. Although the trading managers trade various indices, the
Trust's primary equity index exposure at June 30, 1999 and during the three
months then ended resulted from positions in the OSE Nikkei Dow Index (Japan).
The stock index futures traded by the Trust are, by law, limited to futures on
broadly based indices.
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 June 30,
1999 and during the three months then ended resulted from positions in the local
currencies of G-7 countries.
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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--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 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: August 16, 1999
----------------------------------------
Steven Carlino
Vice President and Treasurer
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