MANDATORY COMMON EXCHANGE TRUST
Annual Report
December 31, 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>
MANDATORY COMMON EXCHANGE TRUST
Summary Information
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Each of the Trust Issued Mandatory Exchange Securities ("TIMES") issued by the
Mandatory Common Exchange Trust represents the right to receive an annual
distribution of $3.543, and will be exchanged on August 15, 2000 (the "Exchange
Date") for between 0.8475 and 1.0 shares of common stock, $0.01 par value
("Common Stock"), of FIRSTPLUS Financial Group, Inc. (the "Company"), or an
equivalent value in cash. The TIMES 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 TIMES are not subject
to early redemption.
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 a
forward purchase contract with a shareholder of the Company (the "Seller"). 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 TIMES with
a quarterly distribution of $0.886 per TIMES, payable quarterly 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 per TIMES equal to the Exchange
Rate (determined as described below) or the cash equivalent. If the Reference
Market Price (as defined below) on the Exchange Date is less than $57.67 but
equal to or greater than $48.875, the Exchange Rate is equal to a number (or
fractional number) of shares of Common Stock per TIMES having a value
(determined at the Reference Market Price) equal to $48.875; if the Reference
Market Price on the Exchange Date is equal to or greater than $57.67, the
Exchange Rate is 0.8475 shares of Common Stock per TIMES; and if the Reference
market Price on the Exchange Date is less than $48.875, the Exchange Rate is 1.0
share of Common Stock per TIMES. The Exchange Rate is subject in each case to
adjustment in certain events. The "Reference Market Price" means the average of
the daily closing sale price (or, if no closing sale price is reported, the last
reported sale price) of the Common Stock as reported by NASDAQ for the 20
trading days immediately prior to, but not including, the Exchange Date. In lieu
of delivery of the Common Stock, the Seller may elect to pay cash on the
Exchange Date in an amount equal to the Reference Market Price times the number
of shares of the Common Stock determined under the above formula. If the Seller
elects this option, holders of TIMES will receive cash instead of shares of
Common Stock on the Exchange Date. If shares of Common Stock are distributed on
the Exchange Date, holders will receive cash in lieu of any fractional share to
which their aggregate holdings of TIMES otherwise would entitle them.
<PAGE>
MANDATORY COMMON EXCHANGE TRUST
FINANCIAL STATEMENTS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998 AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
MANDATORY COMMON EXCHANGE 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, 1998:
Statement of Assets and Liabilities 2
Schedule of Investments 3
Statement of Operations 4
Statements of Changes in Net Assets 5
Notes to Financial Statements 6-8
Financial Highlights 9-10
<PAGE>
DELOITTE &
TOUCHE
- ---------- ----------------------------------------------------------
Deloitte & Touche LLP Telephone: (212) 436-2000
Two World Trade Center Facsimile: (212) 436-5000
New York, New York 10281-1414
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders,
Mandatory Common Exchange Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Mandatory Common Exchange Trust (the "Trust") as
of December 31, 1998, the related statements of operations for the year then
ended and changes in net assets and the financial highlights for the year ended
December 31, 1998 and for the period September 17, 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 audits.
We conducted our audits 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, 1998 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 audits provide 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 Mandatory Common
Exchange Trust as of December 31, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
December 27, 1999
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Deloitte Touche
Tohmatsu
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<PAGE>
<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
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<S> <C>
ASSETS:
Investments, at value (amortized cost $96,568,231) (Notes 2, 4, and 8) $16,025,467
Cash 4,224
-----------
Total assets 16,029,691
LIABILITIES:
Accounts payable and accrued expenses 1,148
-----------
NET ASSETS $16,028,543
COMPOSITION OF NET ASSETS:
Trust Issued Mandatory Exchange Securities ("TIMES"), no par value;
2,207,046 shares issued and outstanding (Note 9) $95,619,204
Unrealized depreciation of investments (80,542,764)
Undistributed net investment income 952,103
-----------
NET ASSETS $16,028,543
===========
NET ASSET VALUE PER TIMES $ 7.26
===========
</TABLE>
See notes to financial statements.
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<PAGE>
<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE TRUST
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
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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 $ 1,956,000 02/15/99 $ 1,945,536 $ 1,941,769
United States Treasury Strips 1,956,000 05/15/99 1,923,491 1,913,994
United States Treasury Strips 1,956,000 08/15/99 1,901,897 1,885,629
United States Treasury Strips 1,956,000 11/15/99 1,881,124 1,857,144
United States Treasury Strips 1,956,000 02/15/00 1,859,569 1,829,092
United States Treasury Strips 1,956,000 05/15/00 1,838,151 1,802,455
United States Treasury Strips 1,956,000 08/15/00 1,817,574 1,774,066
----------- ----------- -----------
$13,692,000 13,167,342 13,004,149
===========
FORWARD PURCHASE CONTRACT:
FIRSTPLUS Financial Group, Inc.
common stock forward purchase agreement 08/15/00 2,858,125 83,564,082
----------- -----------
TOTAL $16,025,467 $96,568,231
=========== ===========
</TABLE>
See notes to financial statements.
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<PAGE>
<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 963,569
EXPENSES (Note 7):
Administrative fees $ 37,735
Insurance 17,152
Trustees fees (Note 5) 12,350
Legal fees 10,291
Accounting fees 8,233
Other 8,576
--------
Total fees and expenses 94,337
EXPENSE REIMBURSEMENT (Note 7) (94,337)
--------
Total expenses - net -
------------
NET INVESTMENT INCOME 963,569
NET CHANGE IN UNREALIZED DEPRECIATION OF INVESTMENTS (68,741,409)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(67,777,840)
============
</TABLE>
See notes to financial statements.
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<PAGE>
<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD SEPTEMBER 17, 1997 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
September 17,
1997
(Commencement
of Operations)
Year Ended to
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
OPERATIONS:
Net investment income $ 963,569 $ 337,286
Net change in unrealized depreciation of investments (68,741,409) (11,801,355)
------------ -------------
Net decrease in net assets from operations (67,777,840) (11,464,069)
------------ -------------
DISTRIBUTIONS:
Net investment income (338,336) (10,416)
Return of capital (7,483,435) (1,227,737)
------------ ------------
Net decrease in net assets from distributions (7,821,771) (1,238,153)
------------ ------------
INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (Note 9):
Gross proceeds from the sale of 2,205,000 TIMES - 107,769,375
Less: Selling commissions - (3,233,081)
Less: Offering costs - (305,918)
------------ ------------
Net increase in net assets from capital share transactions - 104,230,376
------------ ------------
TOTAL (DECREASE) INCREASE IN NET ASSETS FOR
THE PERIOD (75,599,611) 91,528,154
NET ASSETS, BEGINNING OF PERIOD 91,628,154 100,000
------------ ------------
NET ASSETS, END OF PERIOD $ 16,028,543 $ 91,628,154
============ ============
</TABLE>
See notes to financial statements.
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<PAGE>
MANDATORY COMMON EXCHANGE TRUST
NOTES TO FINANCIAL STATEMENTS
FISCAL YEAR ENDED DECEMBER 31, 1998
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1. ORGANIZATION
Mandatory Common Exchange Trust (the "Trust") was established on October 4,
1996 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 Trust Issued Mandatory Exchange Securities
("TIMES") 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
a forward purchase contract for shares of common stock of FIRSTPLUS
Financial Group, Inc. ("FIRSTPLUS") with an existing shareholder of
FIRSTPLUS (the "Seller"). The shares are deliverable pursuant to the
contract 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 contract 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
TIMES holders are entitled to receive distributions from the maturity of
U.S. Treasury Strips of $3.543 per annum or $0.88575 per quarter (except
for the first distribution on November 15, 1997 which was $0.561).
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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 $20,766,294 and $1,239,000, respectively.
Maturities for the year ended December 31, 1998 totaled $7,824,000. There
were no sales of such investments during the periods ended December 31,
1997 and 1998. Purchase of the forward purchase contract during the period
ended December 31, 1997 totaled $83,564,082.
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, 1998, the Trust had
expensed $15,936 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, 1998, net unrealized depreciation of investments
aggregated $80,542,764, which consists of gross unrealized appreciation of
$163,193 and gross unrealized depreciation of $80,705,957. The amortized
cost of investment securities for Federal income tax purposes was
$96,568,231 at December 31, 1998.
7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the TIMES and its ongoing operations are $605,918. Of this
amount, $330,918 represents offering expenses ($305,918) and organizational
expenses ($25,000) incurred by the Trust. All of these expenses are being
paid directly by the Seller and the Sponsors of the Trust. The remaining
amount of $275,000 represents a prepayment of estimated administrative and
other operating expenses. Such amount was paid to the Administrator by the
Sponsors of the Trust. Expenses incurred in excess of this amount will be
paid by the Seller.
Cash received by the Administrator from the sponsor of the Trust of
$275,000 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, 1998,
$109,720 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 CONTRACT
On September 17, 1997, the Trust entered into a forward purchase contract
with an existing shareholder of FIRSTPLUS (the "Seller") and paid to the
Seller $83,564,082 in connection therewith. Pursuant to such contract, the
Seller is 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 TIMES to exchange, on the Exchange Date, each of their TIMES
for between 0.8475 and 1.00 shares of common stock (see
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<PAGE>
the Trust's original prospectus dated September 12, 1997 for the formula
upon which such exchange will be determined).
The forward purchase contract held by the Trust at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Exchange Cost of Contract Unrealized
Date Contract Value Depreciation
---- -------- ----- ------------
<S> <C> <C> <C> <C>
FIRSTPLUS Financial Group, Inc.
common stock forward
purchase agreement 8/15/00 $ 83,564,082 $ 2,858,125 $(80,705,957)
============ =========== ============
</TABLE>
The Seller's obligation under the forward purchase contract is
collateralized by shares of FIRSTPLUS common stock and U.S. Government
Obligations, with an aggregate value at December 31, 1998 of $13,349,853,
which are being held in custody of the Trust's Custodian, The Bank of New
York.
9. CAPITAL SHARE TRANSACTIONS
On September 10, 1997, two TIMES were sold to the underwriters of the TIMES
for $100,000 ($50,000 per TIMES). As a result of a stock split effected
immediately prior to the public offering of the TIMES, these two TIMES were
converted into 2,046 TIMES. During the offering period, the Trust sold
2,205,000 TIMES to the public and received net proceeds of $104,230,376
($107,769,375 less sales commission of $3,233,081 and offering costs of
$305,918). As of December 31, 1998, there were 2,207,046 TIMES issued and
outstanding with an aggregate cost, net of sales commissions, offering
cost, and return of capital, of $95,619,204.
10. SUBSEQUENT EVENT
In March 1999, FIRSTPLUS Financial Group, Inc. filed for bankruptcy
protection under Chapter 11. Such event may impact the ability of the
Seller to perform under the terms of the existing forward purchase
contract.
******
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<PAGE>
MANDATORY COMMON EXCHANGE TRUST
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE
PERIOD SEPTEMBER 17, 1997 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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>
September 17,
1997
Year (Commencement
Ended of Operations) to
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A TIMES
OUTSTANDING THROUGHOUT THE PERIOD:
Investment income $ .44 $ .15
Expenses - before reimbursement .00 + .00 +
Expenses - net of reimbursement .00 .00
--------- --------
Investment income - net .44 .15
Adjustments to capital (sales commissions and offering costs) - (1.61)
Distribution from income (.15) (.01)
Return of capital (3.40) (.55)
Unrealized loss on investments (31.15) (5.34)
--------- --------
Net decrease in net asset value (34.26) (7.36)
BEGINNING NET ASSET VALUE 41.52 48.88
--------- --------
ENDING NET ASSET VALUE $ 7.26 $ 41.52
========= ========
ENDING MARKET VALUE $ 7.25 $ 40.50
========= ========
</TABLE>
(Continued)
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<PAGE>
MANDATORY COMMON EXCHANGE TRUST
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE
PERIOD SEPTEMBER 17, 1997 (COMMENCEMENTS OF OPERATIONS)
TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE (78.48)% (16.10)%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets:
Before reimbursement 0.15 0.10 (1)
After reimbursement 0.00 0.00 (1)
Ratio of net investment income to average net assets:
Before reimbursement 1.33 1.08 (1)
After reimbursement 1.48 1.18 (1)
NET ASSETS, End of period (in thousands) $16,029 $91,628
======= =======
</TABLE>
(1) Annualized
+ Amount is less than $.01 per share
(Concluded)
******
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