Automatic Common Exchange
Security Trust II
Annual Report
December 31, 1997
Administrator, Custodian, Transfer Agent
Trustees and Paying Agent
Donald J. Puglisi, Managing Trustee The Bank of New York
William R. Latham III 101 Barclay Street
James B. O'Neill New York, New York 10286
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Automatic Common Exchange Security Trust II
Financial Statements as of December 31, 1997 and
for the period June 4, 1997 (commencement of operations)
to December 31, 1997, Financial Highlights, and
Report of Independent Accountants
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
TABLE OF CONTENTS
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Report of Independent Accountants 1
Financial Statements:
Statement of Assets and Liabilities as of December 31, 1997 2
Schedule of Investments as of December 31, 1997 3
Statement of Operations for the Period June 4, 1997 (Commencement
of Operations) to December 31, 1997 4
Statement of Changes in Net Assets for the Period June 4, 1997
(Commencement of Operations) to December 31, 1997 5
Notes to Financial Statements 6-8
Financial Highlights for the Period June 4, 1997 (Commencement of
Operations) to December 31, 1997 9
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Report of Independent Accountants
To the Trustees and Shareholders of Automatic Common Exchange Security Trust II
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Automatic Common Exchange Security Trust II (the
"Trust") as of December 31, 1997, and the related statements of operations,
changes in net assets and the financial highlights for the period June 4, 1997
(commencement of operations) to December 31, 1997. These financial statements
and financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and 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 the 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Automatic Common Exchange Security Trust II as of December 31, 1997, the results
of its operations, the changes in its net assets, and its financial highlights
for the period referred to above, in conformity with generally accepted
accounting principles.
PRICEWATERHOUSECOOPERS L.L.P.
New York, New York
July 1, 1998
1
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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost $224,278,749) $ 244,021,565
Cash 72,747
Prepaid expenses 190,088
Deferred organization costs, net of accumulated amortization of $1,959 8,041
----------------
Total Assets 244,292,441
LIABILITIES
Accrued expenses 8,000
Unearned expense reimbursement 262,129
Total Liabilities 270,129
Net Assets $ 244,022,312
================
COMPOSITION OF NET ASSETS
$1.55 Trust Automatic Common Exchange Securities ("TRACES"),
no par value; 9,934,235 shares issued and outstanding 224,279,496
Unrealized appreciation of investments 19,742,816
Net Assets $ 244,022,312
================
Net Asset Value per TRACES ($244,022,312 / 9,934,235 shares) $ 24.56
================
</TABLE>
See accompanying notes to financial statements.
2
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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
SCHEDULE OF INVESTMENTS
December 31, 1997
Par Maturity Market
Securities Description Value Date Cost Value
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UNITED STATES GOVERNMENT
SECURITIES:
<S> <C> <C> <C> <C>
United States Treasury Strips $ 3,855,000 02/15/98 $ 3,827,234 $ 3,828,979
United States Treasury Strips 3,855,000 05/15/98 3,773,146 3,779,172
United States Treasury Strips 3,855,000 08/15/98 3,715,099 3,725,549
United States Treasury Strips 3,855,000 11/15/98 3,657,181 3,674,509
United States Treasury Strips 3,855,000 02/15/99 3,599,414 3,622,081
United States Treasury Strips 3,855,000 05/15/99 3,542,075 3,571,503
United States Treasury Strips 3,855,000 08/15/99 3,485,516 3,521,542
United States Treasury Strips 3,855,000 11/15/99 3,430,368 3,472,507
United States Treasury Strips 3,855,000 02/15/2000 3,371,126 3,424,204
United States Treasury Strips 3,855,000 05/15/2000 3,320,561 3,378,638
---------------- -----------------------------------
$ 38,550,000 35,721,720 35,998,684
================ -----------------------------------
FORWARD PURCHASE
CONTRACT:
Republic Industries, Inc. Common
Stock Forward Purchase Agreements 05/15/2000 188,557,029 208,022,881
-----------------------------------
Total $ 224,278,749 $ 244,021,565
===================================
</TABLE>
See accompanying notes to financial statements.
3
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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
STATEMENT OF OPERATIONS
For the period June 4, 1997 (commencement of operations) to December 31, 1997
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<S> <C> <C>
INTEREST INCOME $ 1,352,210
EXPENSES:
Administrative fees and expenses $ 19,591
Accounting fees 26,005
Insurance expense 18,620
Trustees fees 7,053
Amortization of deferred organization costs 1,959
Other expenses 588
---------------
Total fees and expenses 73,816
EXPENSE REIMBURSEMENT (73,816)
Total expenses - net 0
----------------
Net Investment Income 1,352,210
Increase in unrealized appreciation of investments 19,742,816
----------------
Net increase in net assets resulting from operations $ 21,095,026
================
</TABLE>
See accompanying notes to financial statements.
4
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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
STATEMENT OF CHANGES IN NET ASSETS
For the period June 4, 1997 (commencement of operations) to December 31, 1997
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<S> <C>
OPERATIONS
Net investment income $ 1,352,210
Unrealized appreciation of investments 19,742,816
-----------------
Net increase in net assets
from operations 21,095,026
DISTRIBUTIONS
Net investment income (1,352,210)
Return of capital (5,543,143)
Net decrease in net assets from distributions (6,895,353)
-----------------
INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS
Gross proceeds from the sale of 9,934,231 TRACES 237,179,765
Less:
Selling commissions and offering expenses 7,357,226
Net increase in net assets from capital
share transactions 229,822,539
Total increase in net assets for the period 244,022,212
Net assets, beginning of period 100
Net assets, end of period $ 244,022,312
=================
</TABLE>
See accompanying notes to financial statements.
5
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
NOTES TO FINANCIAL STATEMENTS
For the period June 4, 1997 (commencement of operations) to December 31, 1997
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Note 1. Organization
Automatic Common Exchange Security Trust II ("Trust") was established on
February 21, 1997 and is registered as a non-diversified closed-end management
investment company under the Investment Company Act of 1940 (the "Act"). In June
1997, the Trust sold $1.55 Trust Automatic Common Exchange Securities ("TRACES")
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 Republic Industries, Inc. ("Republic"), a
New York corporation, with certain existing shareholders of Republic
("Sellers"). Each TRACES represents between 0.8333 shares and 1 share of
Republic common stock. The Republic common stock or its cash equivalent is
deliverable pursuant to the contract on May 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 prices
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 on the basis of the bid price received by the Trust at the end
of each period from an independent broker-dealer firm unaffiliated with
the Trust who is 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
6
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
NOTES TO FINANCIAL STATEMENTS
For the period June 4, 1997 (commencement of operations) to December 31, 1997
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the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Organization Expenses
Organization expenses of $10,000 are being amortized on a straight-line
basis over the life of the Trust beginning at the commencement of
operations of the Trust.
Note 3. Distributions
TRACES holders are entitled to receive distributions from the maturity of U.S.
Treasury Strips of $1.5519 per annum or $0.388 per quarter (except for the first
distribution on August 15, 1997 which was $0.3061), payable quarterly commencing
August 15, 1997.
Note 4. Purchases and Sales of Investments
Purchases and maturities of U.S. Treasury Strips for the period ended December
31, 1997 totaled $41,265,510 and $6,896,000, respectively. There were no sales
of such investments during the period. Purchase of the forward purchase contract
during the period totaled $188,761,609.
Note 5. Trustees Fees
Each of the three Trustees were paid a one-time, up-front fee of $10,800 for
their 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 December 31, 1997, the Trust had expensed $7,053 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 December 31, 1997, unrealized appreciation of investments, based on cost
for Federal income tax purposes, aggregated $19,742,816. The cost of investment
securities for Federal income tax purposes was $224,278,749 at December 31,
1997.
Note 7. Expenses
The estimated expenses to be incurred by the Trust in connection with its
ongoing operations is $100,000 annually. Of this amount, $325,945 was paid to
the Administrator by Goldman, Sachs & Co. ("Goldman Sachs"). At December 31,
1997, $253,945 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. Expenses incurred in excess of these
estimated amounts will be paid by Goldman Sachs.
7
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
NOTES TO FINANCIAL STATEMENTS
For the period June 4, 1997 (commencement of operations) to December 31, 1997
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Note 8. Forward Purchase Contract
On June 4, 1997, the Trust entered into a forward purchase contract with certain
existing stockholders of Republic (the "Sellers") and paid to the Sellers
$188,761,609 in connection therewith. Pursuant to such contract, the Sellers are
obligated to deliver to the Trust a specified number of shares of Republic
common stock on May 15, 2000 (the "Exchange Date") so as to permit the holders
of the TRACES to exchange on the Exchange Date each of their TRACES for between
0.8333 and 1.00 shares of Republic common stock. See the Trust's original
prospectus dated May 29, 1997 for the formula upon which such exchange will be
determined.
Offering expenses related to the Trust of $204,580 were paid by the Sellers.
This amount has been recorded as a reduction in the cost of the forward
contract.
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>
Republic Industries, Inc.
Common Stock Forward
Purchase Agreements 05/15/00 $ 188,557,029 $ 208,022,881 $ 19,465,852
=============== =============== ==============
</TABLE>
The Sellers' obligations under the forward purchase contracts are collateralized
by shares of Republic 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 9,934,235 shares with an aggregate market value of $231,591,853.
Note 9. Capital Share Transactions
On May 27, 1997, one TRACES was sold to one of the underwriters of the Trust for
$100. As a result of a stock split effected immediately prior to the public
offering of the TRACES, this TRACES was converted into four TRACES. During the
offering period, the Trust sold 9,934,231 TRACES to the public and received net
proceeds of $229,822,539 ($237,179,765 net of sales commission and offering
expenses of $7,357,226). As of December 31, 1997, there were 9,934,235 TRACES
issued and outstanding.
8
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
Financial Highlights
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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 investment 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
investment return for a period of less than one year is not annualized.
<TABLE>
<CAPTION>
June 4, 1997
(Commencement
of Operations) to
December 31, 1997
<S> <C>
Per Share Operating Performance (for a TRACES outstanding throughout
the period)
Investment income $ 0.14
Expenses 0
----------------
Investment income - net 0.14
----------------
Less distribution from:
Distributions from income (0.14)
Return of capital (0.56)
Total distributions (0.70)
Adjustment to capital (offering expenses) (0.02)
Unrealized gain on investments 1.99
----------------
Net increase in net asset value 1.41
Beginning net asset value 23.15 *
-----------------
Ending net asset value $ 24.56
================
Ending market value $ 23.50 **
=================
Total investment return based on market value 1.17 %
Ratios/Supplemental data Ratio of expenses to average net assets:
Before reimbursement 0.03 %
After reimbursement 0.00 %
Ratio of net investment income to average net assets:
Before reimbursement 0.54 %
After reimbursement 0.57 %
Net assets, end of period (in thousands) $ 244,022
* Net proceeds less selling commissions ($0.72 per share).
** Closing price on New York Stock Exchange at December 31, 1997.
</TABLE>
9
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