DECS TRUST
Annual Report
December 31, 1997
Trustees
Donald J. Puglisi, Managing Trustee
William R. Latham III
James B. O'Neill
Administrator, Custodian, Transfer Agent
and Paying Agent
The Bank of New York
101 Barclay Street
New York, New York 10286
<PAGE>
DECS TRUST
Summary Information
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Each of the DECS issued by the DECS Trust represents the right to receive an
annual distribution of $2.008, and will be exchanged on August 15, 2000 (the
"Exchange Date") for between 0.8333 and 1.0 shares of common stock, without par
value ("Common Stock"), of DIMON Incorporated, a Virginia corporation (the
"Company"), or an equivalent value in cash or cash and Common Stock. The DECS
are designed to provide investors with a higher yield than the dividend yield
paid on the Common Stock, while also providing the opportunity for investors to
share in the appreciation, if any, of the Common Stock above a threshold
appreciation price. The DECS are not subject to redemption prior to the Exchange
Date.
The Trust was established to purchase and hold a portfolio of stripped U.S.
Treasury securities maturing on a quarterly basis through August 15, 2000, and
forward purchase contracts with certain shareholders of the Company (the
"Sellers"). The trustees of the Trust do not have the power to vary the
investments held by the Trust. The Trust's investment objective is to provide
each holder of DECS with a quarterly distribution of $0.502 per DECS, payable on
each February 15, May 15, August 15 and November 15, through August 15, 2000,
and, on August 15, 2000, a number of shares of Common Stock of the Company per
DECS (or, if some or all of the Sellers exercise their cash settlement option in
the forward purchase contracts, the cash equivalent of such shares or a
combination of Common Stock and cash) computed as follows: if the Exchange Price
(as defined below) is equal to or greater than $28.35, holders of DECS will
receive 0.8333 shares of Common Stock per DECS; if the Exchange Price is less
than $28.35 but equal to or greater than $23.625, holders of DECS will receive a
fraction of a share of Common Stock per DECS having a value (determined at the
Exchange Price) equal to $23.625; and if the Exchange Price is less than
$23.625, holders of DECS will receive one share of Common Stock per DECS,
subject in each case to adjustment in certain events. Upon any distribution of
Common Stock of the Company, holders of DECS will receive the number of whole
shares of Common Stock of the Company to which their DECS entitle them and cash
in lieu of any remaining fractional share. The "Exchange Price" is the average
closing price per share of Common Stock the Company on the New York Stock
Exchange (or if the Common Stock is not then listed on the NYSE, on its
principal trading market) for the 20 trading days immediately prior to, but not
including, August 15, 2000.
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DECS TRUST
TABLE OF CONTENTS
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Page
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INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997:
Statement of Assets and Liabilities 2
Schedule of Investments 3
Statement of Operations 4
Statement of Changes in Net Assets 5
Notes to Financial Statements 6-8
Financial Highlights 9-10
<PAGE>
Deloitte &
Touche
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Deloitte & Touche LLP Telephone: (212) 436-2000
Two World Financial Center Facsimile: (212) 436-5000
New York, New York 10281-1414
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders,
DECS Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of DECS Trust as of December 31, 1997, the related
statements of operations, changes in net assets and the financial highlights for
the period October 1, 1997 (commencement of operations) to December 31, 1997.
These financial statements and the financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at December 31, 1997 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DECS Trust as of
December 31, 1997, the results of its operations, the changes in its net assets,
and the financial highlights for the period October 1, 1997 to December 31, 1997
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 5, 1999
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Deloitte Touche
Tohmatsu
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<PAGE>
<TABLE>
<CAPTION>
DECS TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
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<S> <C>
ASSETS:
Investments, at value (amortized cost $79,275,661)
(Notes 2, 4 and 8) $ 94,746,088
Cash 2,040
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Total assets 94,748,128
LIABILITIES -
Account payable 1,039
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NET ASSETS $ 94,747,089
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COMPOSITION OF NET ASSETS:
DECS, no par value; 3,484,104 shares issued and outstanding (Note 9) 79,026,559
Unrealized net appreciation of investments 15,470,427
Undistributed net investment income 250,103
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NET ASSETS $ 94,747,089
============
NET ASSETS VALUE PER DECS $ 27.19
============
</TABLE>
See notes to financial statements.
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<PAGE>
<TABLE>
<CAPTION>
DECS TRUST
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
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Par Maturity Market Amortized
Securities Description Value Date Value Cost
- ---------------------- ----- ---- ----- ----
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT SECURITIES:
United States Treasury Strips $ 1,750,000 02/15/98 $ 1,738,187 $ 1,738,123
United States Treasury Strips 1,750,000 05/15/98 1,715,577 1,714,924
United States Treasury Strips 1,750,000 08/15/98 1,691,078 1,690,360
United States Treasury Strips 1,750,000 11/15/98 1,668,065 1,665,777
United States Treasury Strips 1,750,000 02/15/99 1,644,265 1,641,777
United States Treasury Strips 1,750,000 05/15/99 1,621,305 1,617,753
United States Treasury Strips 1,750,000 08/15/99 1,598,625 1,594,080
United States Treasury Strips 1,750,000 11/15/99 1,576,614 1,570,361
United States Treasury Strips 1,750,000 02/15/00 1,554,282 1,547,027
United States Treasury Strips 1,750,000 05/15/00 1,533,426 1,524,964
United States Treasury Strips 1,750,000 08/15/00 1,510,489 1,501,241
------------ ------------ ------------
$ 19,250,000 17,851,913 17,806,387
FORWARD PURCHASE CONTRACTS:
DIMON Incorporated Common Stock
Forward purchase agreement 08/15/00 76,894,175 61,469,274
------------ ------------
TOTAL $ 94,746,088 $ 79,275,661
============ ============
</TABLE>
See notes to financial statements.
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<PAGE>
<TABLE>
<CAPTION>
DECS TRUST
STATEMENT OF OPERATIONS
PERIOD FROM OCTOBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1997
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<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 255,618
EXPENSES:
Administrative fees and expenses 10,076
Legal fees 3,943
Accounting fees 4,469
Printing and mailing expense 3,943
Trustees fees (Note 5) 3,154
Other expenses 84
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Total fees and expenses 25,669
EXPENSE REIMBURSEMENT (Note 7) (25,669)
-------
Total expenses - net -
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NET INVESTMENT INCOME 255,618
NET CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS 15,470,427
=============
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 15,726,045
=============
</TABLE>
See notes to financial statements.
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<PAGE>
DECS TRUST
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM OCTOBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1997
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<S> <C>
OPERATIONS:
Net investment income $ 255,618
Net change in unrealized appreciation of investments 15,470,427
------------
Net increase in net assets from operations 15,726,045
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DISTRIBUTIONS:
Net investment income (5,515)
Return of capital (849,484)
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Net decrease in net assets from distributions (854,999)
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INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (Note 9):
Gross proceeds from the sale of 3,479,871 DECS 82,211,952
Less selling commisions (2,435,909)
------------
Net increase in net assets from capital share transactions 79,776,043
------------
TOTAL INCREASE IN NET ASSETS FOR THE PERIOD 94,647,089
NET ASSETS, BEGINNING OF PERIOD 100,000
------------
NET ASSETS, END OF PERIOD $ 94,747,089
============
</TABLE>
See notes to financial statements.
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<PAGE>
DECS TRUST
NOTES TO FINANCIAL STATEMENTS
FISCAL YEAR ENDED DECEMBER 31,1997
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1. ORGANIZATION
DECS Trust ("Trust") was established on November 21, 1995 and is registered
as a non-diversified, closed-end management investment company under the
Investment Company Act of 1940 (the "Act). In September 1997, the Trust
sold DECS (each, a "DECS") to the public pursuant to a Registration
Statement on form N-2 under the Securities Act of 1933 and the Act. The
Trust used the proceeds to purchase a portfolio comprised of stripped U.S.
Treasury securities, and forward purchase contracts for shares of common
stock of DIMON Incorporated ("DIMON"), with certain shareholders of DIMON
(the "Sellers"). The stock is deliverable pursuant to the contracts on
August 15, 2000 and the Trust will thereafter terminate.
Pursuant to the Administration Agreement between the Trust and the Bank of
New York (the "Administrator"), the Trustees have delegated to the
Administrator the administrative duties with respect to the Trust.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
by the Trust, which are in conformity with the generally accepted
accounting principles.
Valuation of Investments - The U.S. Treasury Strips are valued at the mean
of the bid and ask price at the close of the period. Amortized cost is
calculated on a basis which approximates the effective interest method. The
forward purchase contract is valued at the mean of the bid prices received
by the Trust at the end of each period from two independent broker-dealer
firms unaffiliated with the Trust who are in the business of making bids on
financial instruments similar to the contracts and with terms comparable
thereto.
Investment Transactions - Securities transactions are accounted for as of
the date the securities are purchased and sold (trade date). Interest
income is recorded as earned and consists of accrual of discount. Realized
gains and losses are accounted for on the specific identification method.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
3. DISTRIBUTIONS
DECS holders are entitled to receive distributions from the maturity of
U.S. Treasury Strips of $2.008 per annum or $.502 per quarter (except for
the first distribution on November 15, 1997 which was $.2454).
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<PAGE>
4. PURCHASES AND SALES OF INVESTMENTS
Purchases and maturities of U.S. Treasury Strips for the period ended
December 31, 1997 totaled $18,406,769 and $856,000, respectively. There
were no sales of such investments during the period. Purchases of the
forward purchase contracts during the period totaled $61,469,274.
5. TRUSTEES FEES
Each of the three Trustees were paid a one-time, up-front fee of $10,800
for the services during the life of the Trust. In addition, the Managing
Trustee was paid an additional one-time, up-front fee of $3,600 for serving
in such capacity. The total fees paid to the Trustees of $36,000 are being
expensed over the life of the Trust. As of December 31, 1997, the Trust had
expensed $3,154 of such fees.
6. INCOME TAXES
The Trust is not an association taxable as a corporation for Federal income
tax purposes; accordingly, no provision is required for such taxes.
As of December 31, 1997, net unrealized appreciation of investments
aggregated $15,470,427. The amortized cost of investment securities for
Federal income tax purposes was $79,275,661 at December 31, 1997.
7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the DECS and its ongoing operations are $373,958. Of this
amount, $81,000 represents offering expenses ($71,000) and organizational
expenses ($10,000) incurred by the Trust. All of these expenses are being
paid directly by the Sponsor of the Trust and the Sellers. The remaining
amount of $292,958 represents a prepayment of estimated administrative and
other operating expenses. Such amount was paid to the Administrator by the
Sponsor. Expenses incurred in excess of this amount will be paid by the
Sellers.
Cash received by the Administrator from the Sponsor of $292,958 for the
payment of administrative and related operating expenses of the Trust has
not been included in the Trust's financial statements since the amount does
not represent Trust property. At December 31, 1997, $81,000 had been paid
by the Administrator for current and prepaid administrative and related
operating expenses. All administrative and related operating expenses
incurred by the Trust are reflected in the Trust's financial statements net
of amounts reimbursed.
8. FORWARD PURCHASE CONTRACTS
On October 1, 1997, the Trust entered into forward purchase contracts with
certain shareholders of DIMON (the "Sellers") and paid to the Sellers
$61,469,274 in connection therewith. Pursuant to such contracts, the
Sellers are obligated to deliver to the Trust a specified number of shares
of common stock on August 15, 2000 (the"Exchange Date") so as to permit the
holders of the DECS to exchange on the Exchange Date each of their DECS for
between 0.8333 and 1.00 shares of common stock. See the Trust's original
prospectus dated September 25, 1997 for the formula upon which such
exchange will be determined.
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<PAGE>
The forward purchase contracts held by the Trust at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
Exchange Cost of Contract Unrealized
Date Contract Value Appreciation
<S> <C> <C> <C> <C>
DIMON Incorporated
Common Stock Forward
Purchase Agreement 8/15/00 $61,469,274 $76,894,175 $15,424,901
</TABLE>
The Sellers' obligations under the forward purchase contract are
collateralized by shares of Dimon common stock which are being held in the
custody of the Trust's Custodian, The Bank of New York. At December 31,
1997, the Custodian held 3,484,104 shares with an aggregate value of
$91,457,730.
9. CAPITAL SHARE TRANSACTIONS
On September 9, 1997, one DECS was sold to the Sponsor of the trust for
$100,000. As a result of a stock split effective immediately prior to the
public offering of the DECS, this DECS was converted into 4,233 DECS.
During the offering period, the Trust sold 3,479,871 DECS to the public and
received net proceeds of $79,776,043 ($82,211,952 less sales commissions of
$2,435,909). As of December 31, 1997, there were 3,484,104 DECS issued and
outstanding with an aggregate cost, net of return of capital and sales
commissions of $79,026,559.
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<PAGE>
DECS TRUST
FINANCIAL HIGHLIGHTS
PERIOD FROM OCTOBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1997
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The Trust's financial highlights are presented below. The per share operating
performance date is designed to allow investors to trace the operating
performance, on a per share basis, from the Trust's beginning net asset value to
the ending net asset value so that they can understand what effect the
individual items have on their investment assuming it was held throughout the
period. Generally, the per share amounts are derived by converting the actual
dollar amounts incurred for each item as disclosed in the financial statements
to their equivalent per share amounts.
The total return based on market value measures the Trust's performance assuming
investors purchased shares at market value as of the beginning of the period,
reinvested dividends and other distributions at market value, and then sold
their shares at the market value per share on the last day of the period. The
total return computations do not reflect any sales charges investors may incur
in purchasing or selling shares of the Trust. The total return for period of
less than one year is not annualized.
<TABLE>
<CAPTION>
October 1,
1997
(Commencement
of Operations to)
December 31,
<S> <C>
PER SHARE OPERATING PERFORMANCE FOR A DECS
OUTSTANDING THROUGHOUT THE PERIOD:
Investment income $ 0.07
Expenses - before reimbursement 0.00 +
Expenses - net of reimbursement 0.00
--------
Investment income - net 0.07
Adjustments to capital (sales commissions) (0.70)
Distribution from income 0.00 +
Return of capital (0.24)
Unrealized gain on investments 4.44
--------
Net increase in net asset value 3.57
BEGINNING NET ASSET VALUE 23.62
--------
ENDING NET ASSET VALUE $ 27.19
========
ENDING MARKET VALUE $ 25.75
========
</TABLE>
(continued)
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<PAGE>
DECS TRUST
FINANCIAL HIGHLIGHTS
PERIOD FROM OCTOBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1997 (concluded)
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<TABLE>
<S> <C>
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE 10.06%
RATIOS/SUPPLEMTAL DATA
Ratio of expenses to average net assets:
Before reimbursement (1) 0.12%
After reimbursement (1) 0.00%
Ratio of net investment income to average net assets:
Before reimbursement (1) 1.05%
After reimbursement (1) 1.17%
Net assets, end of period (in thousands) $ 94,747
</TABLE>
(1) Annualized
+ Amount is less than $0.01 per share
* * * * * *
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