MANDATORY COMMON EXCHANGE 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>
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 REPORT
JUNE 30, 1998
(Unaudited)
<PAGE>
CONTENTS
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FINANCIAL STATEMENTS
Statement of assets and liabilities 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
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<PAGE>
<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE TRUST
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (amortized cost $100,042,450) (Notes 2, 4, and 8) $ 87,179,876
Cash 3,109
--------------
Total Assets $ 87,182,985
--------------
LIABILITIES
Accounts payable 1,148
--------------
Net Assets $ 87,181,837
==============
COMPOSITION OF NET ASSETS
Trust Issued Mandatory Exchange Securities ("TIMES"),
no par value; 2,207,046 shares issued and outstanding $ 99,306,333
Unrealized depreciation of investments (12,862,574)
Undistributed net investment income 738,078
--------------
Net Assets $ 87,181,837
==============
Net Asset Value per TIMES 39.50
==============
</TABLE>
See Notes to Financial Statements.
1
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<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE 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 $ 1,956,000 08/15/98 $ 1,943,442 $ 1,942,072
United States Treasury Strips 1,956,000 11/15/98 1,917,917 1,914,116
United States Treasury Strips 1,956,000 02/15/99 1,891,824 1,885,875
United States Treasury Strips 1,956,000 05/15/99 1,866,063 1,858,191
United States Treasury Strips 1,956,000 08/15/99 1,840,146 1,830,450
United States Treasury Strips 1,956,000 11/15/99 1,816,009 1,802,413
United States Treasury Strips 1,956,000 02/15/00 1,790,855 1,774,978
United States Treasury Strips 1,956,000 05/15/00 1,767,872 1,749,141
United States Treasury Strips 1,956,000 08/15/00 1,742,346 1,721,132
------------ ------------ -------------
$ 17,604,000 16,576,474 16,478,368
============
FORWARD PURCHASE CONTRACT:
FIRSTPLUS Financial Group, Inc. Common
Stock Forward Purchase Agreement 08/15/00 70,603,402 83,564,082
------------ -------------
Total $ 87,179,876 $ 100,042,450
============ =============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE TRUST
STATEMENT OF OPERATIONS
For the six months ended June 30, 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 525,788
EXPENSES (Note 7):
Administrative fees and expenses $ 18,712
Legal fees 5,103
Accounting fees 4,083
Insurance expense 8,506
Trustees fees (Note 5) 6,125
Other expenses 4,252
-------------
Total fees and expenses 46,781
EXPENSE REIMBURSEMENT (Note 7) (46,781)
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Total expenses - net ---
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Net Investment Income 525,788
Net change in unrealized depreciation of investments (1,061,219)
--------------
Net decrease in net assets resulting from operations $ (535,431)
==============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
MANDATORY COMMON EXCHANGE TRUST
STATEMENTS OF CHANGES IN NET ASSETS
For the six months ended June 30, 1998 and the period from September 17, 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 $ 525,788 $ 337,286
Unrealized depreciation of investments (1,061,219) (11,801,355)
--------------- ---------------
Net decrease in net assets from operations (535,431) (11,464,069)
--------------- ---------------
DISTRIBUTIONS
Net investment income (114,580) (10,416)
Return of capital (3,796,306) (1,227,737)
--------------- ---------------
Net decrease in net assets from distributions (3,910,886) (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)
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 (4,446,317) 91,528,154
Net assets, beginning of period 91,628,154 100,000
--------------- ---------------
Net assets, end of period $ 87,181,837 $ 91,628,154
=============== ===============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
MANDATORY COMMON EXCHANGE TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1. ORGANIZATION
Mandatory Common Exchange Trust ("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 ("Seller"). The shares, or their cash
equivalent, 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.
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 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. Unrealized 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>
MANDATORY COMMON EXCHANGE TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 3. DISTRIBUTIONS
TIMES holders are entitled to receive distributions from the maturity of U.S.
Treasury Strips of $3.543 per annum or $0.886 per quarter (except for the first
distribution on November 15, 1997 which was $0.561).
NOTE 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
six months ended June 30, 1998 totaled $3,912,000. There were no sales of such
investments during either period. Purchase of the forward purchase contract
during the period ended December 31, 1997 totaled $83,564,082.
NOTE 5. TRUSTEES FEES
Each of the three Trustees was paid a one-time, up front fee of $10,800 for his
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 ($36,000) are being expensed over
the life of the Trust. As of June 30, 1998, the Trust had expensed $9,711 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 aggregated
$12,862,574, which consists of gross unrealized appreciation of $98,106 and
gross unrealized depreciation of $12,960,680. The amortized cost of investment
securities for Federal income tax purposes was $100,042,450 at June 30, 1999.
NOTE 7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the TIMES and its ongoing operations is $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 sponsors 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 June 30, 1998, $96,059 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>
MANDATORY COMMON EXCHANGE TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 8. FORWARD PURCHASE CONTRACT
On September 17, 1997, the Trust entered into a forward purchase contract with
an existing stockholder 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 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 June 30, 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 $ 70,603,402 $ (12,960,680)
============= ============= =============
</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 June 30, 1998 of $133,683,433, which are being held in
custody of the Trust's Custodian, The Bank of New York.
NOTE 9. CAPITAL SHARE TRANSACTIONS
On September 10, 1997 two TIMES were sold to 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 June 30, 1998
there were 2,207,046 TIMES issued and outstanding with an aggregate cost, net of
sales commissions and offering costs. and return of capital, of $99,306,333.
7
<PAGE>
MANDATORY COMMON EXCHANGE TRUST
FINANCIAL HIGHLIGHTS
For the six months ended June 30, 1998 and the period from September 17, 1997
(commencement of operations) to December 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
The Trust's financial highlights are presented below. The per share operating
performance data is designed to allow investors to trace the operating
perfon-nance, 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
Six Months (Commencement
Ended of Operations) to
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A
TIME OUTSTANDING THROUGHOUT THE PERIOD
Investment income $ 0.24 $ 0.15
Expenses 0.00 0.00
---------- ----------
Investment income - net 0.24 0.15
Adjustment to capital (sales commissions and 0.00 (1.61)
offering expenses)
Distributions from income (0.05) (0.01)
Return of capital (1.72) (0.55)
Unrealized loss on investments (0.49) (5.34)
---------- ----------
Net decrease in net asset value (2.02) (7.36)
Beginning net asset value 41.52 48.88
---------- ----------
Ending net asset value $ 39.50 $ 41.52
========== ==========
Ending market value $ 39.50 $ 40.50
========== ==========
TOTAL INVESTMENT RETURN BASED ON MARKET 2.00 % (16.10) %
VALUE
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets:
Before reimbursement (1) 0.11 % 0.10 %
After reimbursement (1) 0.00 % 0.00 %
Ratio of net investments income to average net
assets:
Before reimbursement (1) 1.08 % 1.08 %
After reimbursement (1) 1.19 % 1.18 %
Net assets, end of period (in thousands) $ 87,182 $ 91,628
</TABLE>
(1) Annualized
8
