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, 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
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-7075398
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
N/A
- --------------------------------------------------------------------------------
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)
September 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash $30,937,971 $47,615,180
Net unrealized gain on open commodity positions 5,348,708 981,485
Net option premiums 281,361 --
------------- ------------
Net equity 36,568,040 48,596,665
Other receivable 10,658 9,104
------------- ------------
Total assets $36,578,698 $48,605,769
------------- ------------
------------- ------------
LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 1,011,614 $ 1,735,717
Management fees payable 65,938 88,932
Incentive fee payable -- 1,766,804
------------- ------------
Total liabilities 1,077,552 3,591,453
------------- ------------
Commitments
Trust capital
Limited interests (290,064.890 and 359,949.431 interests
outstanding) 35,146,128 44,564,154
General interests (2,930 and 3,636 interests outstanding) 355,018 450,162
------------- ------------
Total trust capital 35,501,146 45,014,316
------------- ------------
Total liabilities and trust capital $36,578,698 $48,605,769
------------- ------------
------------- ------------
Net asset value per limited and general interest ('Interests') $ 121.17 $ 123.81
------------- ------------
------------- ------------
- ----------------------------------------------------------------------------------------------------
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,
-------------------------- ---------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
REVENUES
Net realized gain (loss) on commodity
transactions $(3,181,210) $1,017,473 $(3,063,477) $ 7,140,800
Change in net unrealized gain on open
commodity positions 4,367,223 1,085,121 2,063,418 3,051,130
Interest income 1,144,704 1,473,020 358,637 424,076
----------- ---------- ----------- -----------
2,330,717 3,575,614 (641,422) 10,616,006
----------- ---------- ----------- -----------
EXPENSES
Commissions 2,320,247 2,417,893 692,622 571,579
Management fees 671,131 880,518 192,613 188,032
Incentive fees 357,011 646,724 -- 646,724
----------- ---------- ----------- -----------
3,348,389 3,945,135 885,235 1,406,335
----------- ---------- ----------- -----------
Net income (loss) $(1,017,672) $ (369,521) $(1,526,657) $ 9,209,671
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
ALLOCATION OF NET INCOME (LOSS)
Limited interests $(1,007,489) $ (365,588) $(1,511,391) $ 9,117,563
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
General interests $ (10,183) $ (3,933) $ (15,266) $ 92,108
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
NET INCOME (LOSS) PER WEIGHTED AVERAGE
LIMITED AND GENERAL INTEREST
Net income (loss) per weighted average
limited and general interest $ (3.02) $ (.80) $ (4.85) $ 21.63
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average number of limited and
general interests outstanding 336,965 463,449 314,726 425,690
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
- ------------------------------------------------------------------------------------------------------
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 loss -- (1,007,489) (10,183 ) (1,017,672)
Redemptions (70,590.541) (8,410,537) (84,961 ) (8,495,498)
------------ ----------- --------- -----------
Trust capital--September 30, 1999 292,994.890 $35,146,128 $355,018 $35,501,146
------------ ----------- --------- -----------
------------ ----------- --------- -----------
- -----------------------------------------------------------------------------------------------------
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, 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 September
30, 1999 and the results of its operations for the nine and three months ended
September 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').
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 September 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 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
4
transactions. The Trust presents unrealized gains and losses on open forward
positions, if any, 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 September 30, 1999, such segregated assets
totalled $26,954,139. 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 $6,829,715 at September 30, 1999. There are no segregation requirements
for assets related to forward trading.
As of September 30, 1999, all open futures, forward and options contracts
mature within one year.
As of September 30, 1999 and December 31, 1998, gross contract amounts of
open futures, forward and options contracts were:
1999 1998
------------ ------------
Financial Futures and Options Contracts:
Commitments to purchase $266,389,082 $ 97,619,028
Commitments to sell 251,189,246 181,380,377
Currency Futures Contracts:
Commitments to purchase 32,118,063 50,575,452
Commitments to sell 10,872,935 45,606,627
Other Futures and Options Contracts:
Commitments to purchase 31,230,482 --
Commitments to sell 343,149 1,413,262
Currency Forward Contracts:
Commitments to purchase 27,748 171,615
Commitments to sell -- 103,545
Other Forward Contracts:
Commitments to purchase 16,757,661 --
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 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.
5
At September 30, 1999 and December 31, 1998, the fair values of open futures,
forward and options contracts were:
1999 1998
--------------------------- ---------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 719,031 $ 31,487 $ 33,297 $ 7,775
Currencies 298,163 152,825 988,150 166,778
Other 321,250 138,353 11,713 --
Foreign exchanges
Financial 424,468 279,032 509,091 215,661
Other 673,243 58,562 3,550 --
Forward Contracts:
Currencies -- 39,325 -- 174,102
Other 2,823,511 -- -- --
Options Contracts:
Domestic exchanges
Financial 1,013 -- -- --
Other 882,900 -- -- --
Foreign exchange
Other 186,074 -- -- --
----------- ----------- ----------- -----------
$ 6,329,653 $ 699,584 $ 1,545,801 $ 564,316
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The following table presents the average fair value of futures, forward and
options contracts during the nine months ended September 30, 1999 and 1998,
respectively.
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 614,338 $ 32,907 $ 787,562 $ 134,009
Currencies 712,448 272,829 814,093 315,517
Other 187,994 232,548 322,124 431,621
Foreign exchanges
Financial 998,083 239,515 1,904,090 204,298
Other 367,607 118,898 3,751 28,544
Forward Contracts:
Currencies 13,906 112,218 1,465 90
Other 284,730 10,816 120,443 190,690
Options Contracts:
Domestic exchanges
Financial 35,352 -- 66,101 --
Currencies 53,349 7,074 40,630 --
Other 119,083 3,857 4,900 --
Foreign exchanges
Financial -- -- 7,201 --
Other 34,141 3,907 15,134 --
---------- ----------- ---------- -----------
$3,421,031 $ 1,034,569 $4,087,494 $ 1,304,769
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
6
The following table presents the average fair value of futures, forward and
options contracts during the three months ended September 30, 1999 and 1998,
respectively.
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 617,494 $ 23,606 $1,389,901 $ 60,775
Currencies 412,696 185,153 696,090 492,384
Other 189,248 247,001 132,465 226,164
Foreign exchanges
Financial 1,370,200 319,625 2,118,801 414,203
Other 610,868 118,869 9,377 70,578
Forward Contracts:
Currencies 28,006 34,055 3,663 226
Other 711,824 13,091 191 258,552
Options Contracts:
Domestic exchanges
Financial 253 -- -- --
Currencies 69,194 -- -- --
Other 297,707 -- 12,250 --
Foreign exchanges
Other 50,490 -- 9,868 --
---------- ----------- ---------- -----------
$4,357,980 $ 941,400 $4,372,606 $ 1,522,882
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
The following tables present the Trust's trading revenues from futures,
forward and options contracts during the nine and three months ended September
30, 1999 and 1998, respectively.
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Futures Contracts:
Domestic exchanges
Financial $ 887,418 $ 1,850,457 $ (836,330 ) $ 3,689,540
Currencies (3,565,710 ) (3,540,488 ) (2,358,930 ) 1,073,196
Other (1,962,079 ) (5,631,904 ) (1,143,880 ) (1,601,657)
Foreign exchanges
Financial 2,315,629 12,604,230 (820,581 ) 7,475,224
Other 1,754,641 3,303 1,098,796 3,303
Forward Contracts:
Currencies 7,814 (116,004 ) 9,748 (116,004)
Other 2,773,355 (1,277,277 ) 2,823,511 (177,351)
Options Contracts:
Domestic exchanges
Financial (898,213 ) (890,181 ) (219,400 ) --
Currencies (566,174 ) (722,951 ) (143,975 ) (66,426)
Other 484,966 (4,940 ) 624,870 --
Foreign exchanges
Financial -- (65,754 ) -- --
Currencies -- (48,425 ) -- (48,425)
Other (45,634 ) (57,472 ) (33,888 ) (39,470)
------------ ------------ ------------ ------------
$ 1,186,013 $ 2,102,594 $(1,000,059 ) $ 10,191,930
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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 September 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 nine and three months ended
September 30, 1999 were $8,410,537 and $3,640,252, respectively. Redemptions by
the Managing Owner recorded for the nine and three months ended September 30,
1999 were $84,961 and $36,808, respectively. Redemptions of limited interests
and general interests recorded from the commencement of operations, May 1, 1996,
through September 30, 1999 were $34,628,162 and $238,356, 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 September 30, 1999 was $121.17, a
decrease of 2.13% from the December 31, 1998 net asset value per Interest of
$123.81, and a decrease of 3.30% from the June 30, 1999 net asset value per
Interest of $125.30.
Quarterly Market Overview
During the quarter, global financial markets experienced heavy volatility. In
July, U.S. Federal Reserve policy gave markets a boost. However, record trade
deficits, higher employment costs, fears of inflation and higher interest rates
in the U.S. quickly caused a reversal in U.S. stock and bond markets. Global
stock and
8
bond markets followed U.S. markets demonstrating increased volatility. The U.S.
dollar also experienced fluctuations throughout the quarter as signs of a
stronger U.S. economy versus the European community supported the dollar's rise
to new highs against most major currencies. However, later in the quarter as a
record trade gap and stronger than expected European economic data were
reported, the U.S. dollar came under pressure and continued to fall against most
major currencies and to record lows against the Japanese yen. In the commodities
markets, energy prices rose as OPEC members agreed to maintain cuts in oil
output. The metal sector experienced extreme movement as gold prices rose to a
two-year high following reports that 15 European central banks would limit sales
and retain higher gold reserves.
Quarterly Trust Performance
The Trust incurred losses in the currency sector due to positions in the
Japanese yen and British pound sterling. The Japanese yen rallied against the
U.S. dollar and European currencies following a stronger than expected second
quarter GDP report. The rally was sustained by an optimistic outlook for the
Japanese economy and the absence of meaningful intervention by the Bank of
Japan. British pound sterling hit an eight-month high against the U.S. dollar.
The pound's increase was supported by low inflation, low unemployment and an
unexpected interest rate increase by the Bank of England.
In the financial sector, trading in Euro Bund (formerly German bond), U.S.
Treasury bonds, and Japanese government bonds resulted in losses. Except for
Japan, global interest rate markets followed the lead of the U.S. bond market as
rates moved higher. On August 24th, the Federal Open Market Committee decided to
increase the U.S. federal funds rate by 25 basis points. European bond prices
were weaker than U.S. bond prices due to fear of a tightening bias and rate hike
by the European Central Bank (ECB). Consequently, ECB President Duisenberg made
a public statement about tightening monetary policy in response to inflationary
pressures within the euro-zone. In Japan, long-term interest rates rose during
the first half of the quarter on concerns that more government bonds may be
issued to finance the bailout of the weaker Japanese banks.
Trading in the grain sector resulted in losses for the Trust led by long
positions in soybeans and corn. Soybean prices fell as drought-related supply
concerns were alleviated and the market began to focus on weak domestic demand.
Corn reached an eleven-year low as ideal weather conditions prevailed early in
the quarter improving the outlook for a large crop.
Profits were derived in the metal sector from long positions in gold. Gold
prices rose following an auction by the Bank of England which yielded
higher-than-expected prices. The market later surged following a joint
announcement by 15 European central banks that they would not sell or lease any
reserves, other than those previously designated for sale, for a five year
period. This announcement removed a tremendous amount of supply uncertainty from
the market, and allowed producer demand to send prices higher.
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 $328,000 and $65,000 for the nine and three months
ended September 30, 1999 as compared to the same periods in 1998 primarily due
to the effects of lower 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 $98,000 for the nine months ended September
30, 1999 as compared to the same period in 1998 primarily due to redemptions.
Commissions increased $121,000 for the three months ended September 30, 1999 as
compared to the same period in 1998 primarily due to strong trading performance
during the second half of 1998 as well as the reallocation of trading assets
during the third quarter of 1998. During July 1998, Willowbridge Associates,
Inc. ('Willowbridge') ceased to serve as a trading manager to the Trust with
regard to all trading programs with the exception of its XLIM program, which
represented approximately 50% of the Trust's assets. These assets were assigned
to Bridgewater Associates, Inc. ('Bridgewater'), who began trading Trust assets
on August 26, 1998. As a result, the Trust did not incur commissions or
management fees during the period these assets were not allocated for
commodities trading. The three month increase was partially offset by
redemptions and a reduction in the annual rate of commissions charged to the
Trust from 7.75% to 7.5% of the net asset value of the Trust during September
1998.
At September 30, 1999, all trading decisions were made by Willowbridge and
Bridgewater (the 'Trading Managers'). Management fees are calculated on the net
asset value allocated to each Trading Manager at the end of each month and,
therefore, are affected by trading performance and redemptions. Management
9
fees decreased $209,000 for the nine months ended September 30, 1999 but
increased $5,000 for the three months ended September 30, 1999 as compared to
the same periods in 1998 primarily due to the same reasons commissions
fluctuated as discussed above. Additionally, the Trust experienced a reduction
in the management fee rate during the third quarter of 1998 on the portion of
net assets traded by Bridgewater. This reduction from a 3% annual rate to .9756%
became effective when the portion of the net assets traded by Willowbridge were
reallocated to Bridgewater 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 $357,000 were earned
during the six months ended June 30, 1999. Incentive fees of $647,000 were
earned during the three months ended September 30, 1998.
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 September 30, 1999 and December 31, 1998. As of
September 30, 1999 and December 31, 1998, the Trust's total capitalization was
approximately $35.5 million and $45.0 million, respectively.
September 30, 1999 December 31, 1998
--------------------------------- ---------------------------------
% of Total % of Total
Market Sector Value at Risk Capitalization Value at Risk Capitalization
- ------------------------------------- ------------- --------------- ------------- ---------------
Commodities $ 4,069,140 11.46% $ 89,400 0.20%
Stock Indices 2,242,366 6.32 323,431 0.72
Interest Rates 1,166,863 3.29 1,069,880 2.38
Currencies 579,905 1.63 1,857,167 4.12
------------- ------- ------------- -----
Total $ 8,058,274 22.70% $ 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 September 30, 1999.
Three months ended
September 30, 1999
---------------------------------
% of Total
Market Sector Value at Risk Capitalization
- ------------------------------------- ------------- ---------------
Commodities $ 2,395,878 6.55%
Stock Indices 1,979,582 5.41
Interest Rates 1,436,069 3.93
Currencies 1,149,468 3.14
------------- -------
Total $ 6,960,997 19.03%
------------- -------
------------- -------
The primary trading risk exposures of the Trust at September 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 September 30,
1999. Positions in metals (particularly gold and copper), light crude oil and
natural gas account for the majority of this commodities trading risk exposure
at September 30, 1999 and during the three months then ended.
10
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
September 30, 1999 and during the three months then ended, positions in Euro
Bunds, LIFFE gilts and U.S. Treasury bonds account 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 September 30, 1999 and during the three
months then ended resulted from positions in the S&P 500 Index, DAX (Germany)
and the OSE Nikkei Dow (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 September
30, 1999 and during the three months then ended resulted from positions in the
local currencies of G-7 countries.
11
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
12
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 12, 1999
----------------------------------------
Steven Carlino
Vice President and Treasurer
13