AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
Semiannual Report
June 30, 1998
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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CONTENTS
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FINANCIAL STATEMENTS (UNAUDITED)
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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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
Statement of Assets and Liabilities
June 30, 1998
(Unaudited)
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<S>
<C>
ASSETS
Investments, at value (amortized cost $217,550,061) (Notes 2, 4, and 8)
$ 245,013,598
Cash
65,781
Prepaid expenses
143,310
Deferred organization costs, net of accumuluated amortization of $3,640
6,360
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Total Assets
$ 245,229,049
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LIABILITIES
Unearned expense reimbursement
213,670
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Net Assets
$ 245,015,379
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COMPOSITION OF NET ASSETS
$1.55 Trust Automatic Common Exchange Securities ("TRACES TM/SM"),
no par value; 9,934,235 shares issued and outstanding (Note 9)
$ 217,551,842
Unrealized appreciation of investments
27,463,537
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Net Assets
$ 245,015,379
=============
Net Asset Value per TRACES
$ 24.66
=============
</TABLE>
See Notes to Financial Statements.
1
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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
Schedule of Investments
June 30, 1998
(Unaudited)
Par Maturity
Market Amortized
Securities Description Value Date
Value Cost
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- --------------------------------
<S> <C> <C>
<C> <C>
UNITED STATES GOVERNMENT
SECURITIES:
United States Treasury Strips $ 3,855,000 8/15/98 $
3,830,675 $ 3,826,230
United States Treasury Strips 3,855,000 11/15/98
3,779,943 3,768,143
United States Treasury Strips 3,855,000 02/15/99
3,727,515 3,709,814
United States Treasury Strips 3,855,000 05/15/99
3,677,747 3,652,307
United States Treasury Strips 3,855,000 08/15/99
3,626,668 3,594,558
United States Treasury Strips 3,855,000 11/15/99
3,579,098 3,537,957
United States Treasury Strips 3,855,000 02/15/00
3,528,135 3,478,256
United States Treasury Strips 3,855,000 05/15/00
3,482,299 3,425,767
=============
- ------------- -------------
$ 30,840,000
29,232,080 28,993,032
=============
FORWARD PURCHASE
CONTRACT:
Republic Industries, Inc. Common
Stock Forward Purchase Agreements 05/15/00
215,781,518 188,557,029
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Total $
245,013,598 $ 217,550,061
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</TABLE>
See Notes to Financial Statements.
2
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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
STATEMENT OF OPERATIONS
For the six months ended June 30, 1998
(Unaudited)
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<S>
<C> <C>
INTEREST INCOME
$ 981,313
EXPENSES:
Administrative fees and expenses $
16,806
Accounting fees
7,445
Insurance expense
15,973
Trustees' fees (Note 5)
6,050
Other expenses
504
Amortization of deferred organization costs
1,681
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Total fees and expenses
48,459
EXPENSE REIMBURSEMENT (Note 7)
(48,459)
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Total expenses - net
---
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Net Investment Income
981,313
Increase in unrealized appreciation of investments
7,720,721
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Net increase in net assets resulting from operations
$ 8,702,034
===========
</TABLE>
See Notes to Financial Statements.
3
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<TABLE>
<CAPTION>
AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1998 and the Period from June 4, 1997
(commencement of operations) to December 31, 1997 (Unaudited)
Six
Months Ended Period Ended
June
30, 1998 Dec. 31, 1997
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<S> <C>
<C>
OPERATIONS
Net investment income $
981,313 $ 1,352,210
Unrealized appreciation of investments
7,720,721 19,742,816
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Net increase in net assets
from operations
8,702,034 21,095,026
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DISTRIBUTIONS
Net investment income
(981,313) (1,352,210)
Return of capital
(6,727,654) (5,543,143)
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Net decrease in net assets from distributions
(7,708,967) (6,895,353)
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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)
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Net increase in net assets from capital
share transactions
0 229,822,539
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Total increase in net assets for the period
993,067 244,022,212
Net assets, beginning of period
244,022,312 100
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Net assets, end of period $
245,015,379 $ 244,022,312
=============== ===============
</TABLE>
See Notes to Financial Statements.
4
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
TM/SM") 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 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 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. 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
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 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
Maturities of U.S. Treasury Strips for the six months ended June 30, 1998 and
the period ended December 31, 1997 totaled $7,710,000 and $6,896,000,
respectively. There were no sales of investments during either period. Purchase
of the forward purchase contract and the U.S. Treasury Strips during the period
ended December 31,1997 totaled $188,761,609 and $41,265,510, 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 $13,103 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 appreciation of investments, based on
amortized cost for Federal income tax purposes, aggregated $27,463,537,
consisting of gross unrealized appreciation of $27,463,537 and gross unrealized
depreciation of $0. The amortized cost of investment securities for Federal
income tax purposes was $217,550,061 at June 30, 1998.
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 June 30, 1998,
$261,945 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.
6
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
purchase contract.
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 Appreciation
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<S> <C> <C> <C>
<C>
Republic Industries, Inc.
Common Stock Forward
Purchase Agreements 05/15/00 $ 188,557,029 $
215,781,518 $ 27,224,489
===============
=============== ===============
</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 June 30, 1998, the Custodian held
9,934,235 shares with an aggregate market value of $248,976,765.
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 June 30, 1998, there were 9,934,235 TRACES issued
and outstanding with an aggregate cost, net of sales commission, offering
expenses and return of capital, of $217,551,842.
7
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AUTOMATIC COMMON EXCHANGE SECURITY TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
Six Months
of Operations)
Ended
to December 31,
June 30,
1998 1997
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<S> <C>
<C>
PER SHARE OPERATING PERFORMANCE (FOR A TRACES
OUTSTANDING THROUGHOUT THE PERIOD)
Investment income $
0.10 $ 0.14
Expenses
0.00 0.00
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Investment income - net
0.10 0.14
Adjustments to capital (offering expenses)
0.00 (0.02)
Distributions from income
(0.10) (0.14)
Return of capital
(0.68) (0.56)
Unrealized gain on investments
0.78 1.99
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Net increase in net asset value
0.10 1.41
Beginning net asset value
24.56 23.15
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Ending net asset value $
24.66 $ 24.56
============= ===============
Ending market value $
24.00 $ 23.50
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TOTAL INVESTMENT RETURN BASED ON MARKET VALUE
5.43% 1.17%
RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets:
Before reimbursement (1)
0.04% 0.05%
After reimbursement (1)
0.00% 0.00%
Ratio of net investment income to average net assets:
Before reimbursement (1)
0.77% 0.92%
After reimbursement (1)
0.81% 0.97%
Net assets, end of period (in thousands) $
245,015 $ 244,022
(1) Annualized
</TABLE>
8
