DECS TRUST
Semiannual Report
June 30, 1998
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.
<PAGE>
DECS TRUST
FINANCIAL REPORT
JUNE 30, 1998
(Unaudited)
<PAGE>
CONTENTS
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FINANCIAL STATEMENTS
Statement of net assets 1
Schedule of investments 2
Statement of operations 3
Statements of changes in net assets 4
Notes to financial statements 5-7
Financial highlights 8
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST
STATEMENT OF NET ASSETS
June 30, 1998
(Unaudited)
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<S> <C>
ASSETS
Investments, at value (amortized cost $76,236,325) (Notes 2, 4, and 8) $ 49,654,003
Cash 2,961
---------------
Total Assets 49,656,964
===============
Net Assets $ 49,656,964
===============
COMPOSITION OF NET ASSETS
DECS, no par value;
3,484,104 shares issued and outstanding (Note 9) $ 75,621,975
Net unrealized depreciation of investments (26,582,322)
Undistributed net investment income 617,311
---------------
Net Assets $ 49,656,964
===============
Net Asset Value Per DECS $ 14.25
===============
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST
SCHEDULE OF INVESTMENTS
June 30, 1998
(Unaudited)
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 08/15/98 $ 1,738,765 $ 1,737,747
United States Treasury Strips 1,750,000 11/15/98 1,715,927 1,713,054
United States Treasury Strips 1,750,000 02/15/99 1,692,582 1,688,587
United States Treasury Strips 1,750,000 05/15/99 1,669,536 1,664,431
United States Treasury Strips 1,750,000 08/15/99 1,646,348 1,640,216
United States Treasury Strips 1,750,000 11/15/99 1,623,896 1,616,020
United States Treasury Strips 1,750,000 02/15/00 1,602,178 1,592,158
United States Treasury Strips 1,750,000 05/15/00 1,581,588 1,569,473
United States Treasury Strips 1,750,000 08/15/00 1,559,564 1,545,365
------------ ------------ ------------
$ 15,750,000 14,830,384 14,767,051
============
FORWARD PURCHASE CONTRACTS:
DIMON Incorporated Common Stock
Forward Purchase Agreements 08/15/00 34,823,619 61,469,274
------------ ------------
Total $ 49,654,003 $ 76,236,325
============ ============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST
STATEMENT OF OPERATIONS
For the six months ended June 30, 1998
(Unaudited)
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<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 460,664
EXPENSES:
Administrative fees and expenses $ 19,824
Legal fees 7,757
Accounting fees 8,791
Printing & mailing expense 7,757
Trustees' fees (Note 5) 6,206
Other expenses 165
-------------
Total fees and expenses 50,500
EXPENSE REIMBURSEMENT (Note 7) (50,500)
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Total expenses - net ---
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Net Investment Income 460,664
Net change in unrealized depreciation
of investments (42,052,749)
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Net decrease in net assets resulting from
operations $ (41,592,085)
=============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST
STATEMENTS OF CHANGES IN NET ASSETS
For the six months ended June 30, 1998 and the period from October 1, 1997
(commencement of operations) to December 31, 1997
(Unaudited)
Six Months Period Ended
Ended December 31,
June 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 460,664 $ 255,618
Unrealized (depreciation) appreciation of
investments (42,052,749) 15,470,427
--------------- ---------------
Net (decrease) increase in net assets
from operations (41,592,085) 15,726,045
--------------- ---------------
DISTRIBUTIONS
Net investment income (93,456) (5,515)
Return of capital (3,404,584) (849,484)
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Net decrease in net assets from distributions (3,498,040) (854,999)
--------------- ---------------
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 commissions (2,435,909)
--------------- ---------------
Net increase in net assets from capital share
transactions 0 79,776,043
--------------- ---------------
Total (decrease) increase in net assets for the period (45,090,125) 94,647,089
Net assets, beginning of period 94,747,089 100,000
--------------- ---------------
Net assets, end of period $ 49,656,964 $ 94,747,089
=============== ===============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
DECS TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1. ORGANIZATION
DECS Trust (the "Trust") was established on August 5, 1997 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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Trust, which are in conformity with 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 using 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 three
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.
5
<PAGE>
DECS TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 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).
NOTE 4. PURCHASES AND SALES OF INVESTMENT
Maturities of U.S. Treasury Strips for the six months ended June 30, 1998 and
the period ended December 31, 1997 totaled $3,500,000 and $856,000,
respectively. There were no sales of such investments during either period.
Purchases of the forward purchase contracts and the U.S. Treasury strips during
the period ended December 31,1997 totaled $61,469,274 and $18,406,769,
respectively.
NOTE 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 is being expensed over
the life of the Trust. As of June 30, 1998, the Trust had expensed $9,360 of
such fees.
NOTE 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 June 30, 1998, net unrealized depreciation of investments, based on
amortized cost for Federal income tax purposes, aggregated $26,582,322,
consisting of gross unrealized appreciation of $63,333 and gross unrealized
depreciation of $26,645,655. The amortized cost of investment securities for
Federal income tax purposes was $76,236,325 at June 30, 1998.
NOTE 7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the DECS and its ongoing operations is $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 from cash
received by the Administrator from 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 Sellers. Expenses
incurred in excess of this amount will be paid by the Sellers.
Cash received by the Administrator from the Sellers 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 June 30, 1998, $83,083 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.
6
<PAGE>
DECS TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 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 contract, 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 1.0
shares. See the Trust's original prospectus dated September 25, 1997 for the
formula upon which such exchange will be determined.
The forward purchase contracts held by the Trust at June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Exchange Cost of Contract Unrealized
Date Contracts Value Depreciation
---- --------- ----- ------------
<S> <C> <C> <C> <C>
DIMON Incorporated Common
Stock Forward Purchase
Agreements 08/15/00 $ 61,469,274 $ 34,823,619 $ 26,645,654
============= ============= =============
</TABLE>
The Sellers' obligations under the forward purchase contracts 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 June 30, 1998, the Custodian held
3,484,104 shares with an aggregate value of $39,196,170.
NOTE 9. CAPITAL SHARE TRANSACTIONS
On September 9, 1997, one DECS was sold to the underwriter of the DECS for
$100,000. As a result of a stock split effected 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 $79,773,080 ($82,211,952 less sales commissions of $2,438,872). As
of June 30, 1998, there were 3,484,104 DECS issued and outstanding with an
aggregate cost, net of return of capital and sales commissions, of $75,621,975.
7
<PAGE>
DECS TRUST
FINANCIAL HIGHLIGHTS
(unaudited)
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The Trust's financial highlights are presented below. The per share operating
performance data 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
Six Months (Commencement
Ended of Operations) to
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A DECS
OUTSTANDING THROUGHOUT THE PERIOD
Investment income $ 0.13 $ 0.07
Expenses 0.00 0.00
-------------- --------------
Investment income - net 0.13 0.07
Adjustments to capital (sales commissions) --- (0.70)
Distributions from income (0.03) (0.00)
Return of capital (0.97) (0.24)
Unrealized (loss) gain on investments (12.07) 4.44
-------------- --------------
Net (decrease) increase in net asset value (12.94) 3.57
Beginning net asset value 27.19 23.62
-------------- --------------
Ending net asset value $ 14.25 $ 27.19
============== ==============
Ending market value $ 13.75 $ 25.75
============== ==============
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE (43.40) % 10.06 %
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets:
Before reimbursement (1) 0.14 % 0.12 %
After reimbursement (1) 0.00 % 0.00 %
Ratio of net investment income to average net assets:
Before reimbursement (1) 1.15 % 1.05 %
After reimbursement (1) 1.29 % 1.17 %
Net assets, end of period (in thousands) $ 49,657 $ 94,747
- ----------
(1) Annualized
</TABLE>
8
