DECS TRUST II
Annual Report
December 31, 1997
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 II
Summary Information
- --------------------------------------------------------------------------------
Each of the DECS issued by the DECS Trust II represents the right to receive an
annual distribution of $1.81328, and will be exchanged on November 15, 2000 (the
"Exchange Date") for between 0.8130 and 1.0 subordinate voting shares, without
par value ("Subordinate Voting Shares"), of Royal Group Technologies Limited
(the "Company"), or an equivalent value in cash or cash and Subordinate Voting
Shares. The DECS are designed to provide investors with a higher yield than the
dividend yield paid on the Subordinate Voting Shares, while also providing the
opportunity for investors to share in the appreciation, if any, of the
Subordinate Voting Shares 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 November 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 $0.45332 per DECS, payable
on each February 15, May 15, August 15 and November 15, through November 15,
2000, and, on November 15, 2000, a number of Subordinate Voting Shares 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 Subordinate Voting Shares and cash) computed as
follows: if the Exchange Price (as defined below) is equal to or greater than
$32.44, holders of DECS will receive 0.8130 Subordinate Voting Shares per DECS;
if the Exchange Price is less than $32.44 but equal to or greater than $26.375,
holders of DECS will receive a fraction of a Subordinate Voting Shares per DECS
having a value (determined at the Exchange Price) equal to $26.375; and if the
Exchange Price is less than $26.375, holders of DECS will receive one
Subordinate Voting Shares per DECS, subject in each case to adjustment in
certain events. Upon any distribution of Subordinate Voting Shares of the
Company, holders of DECS will receive the number of whole Subordinate Voting
Shares 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
Subordinate Voting Shares the Company on the New York Stock Exchange (or if the
Subordinate Voting Shares are not then listed on the NYSE, on the principal
Canadian securities exchange on which the Subordinate Voting Shares are listed)
for the 20 trading days immediately prior to, but not including, November 15,
2000.
<PAGE>
DECS TRUST II
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997:
Statement of Assets and Liabilities 2
Schedule of Investments 3
Statement of Operations 4
Statement 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 Financial Center Facsimile: (212) 436-5000
New York, New York 10281-1414
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders,
DECS Trust II:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of DECS Trust II as of December 31, 1997, the
related statements of operations, changes in net assets and the financial
highlights for the period November 4, 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 audit.
We conducted our audit 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, 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DECS Trust II as of
December 31, 1997, the results of its operations, the changes in its net assets,
and the financial highlights for the period November 4, 1997 to December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 5, 1999
- ---------------
Deloitte Touche
Tohmatsu
- ---------------
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31,1997
- -------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (amortized cost $80,726,337) (Notes 2, 4, and 8) $78,146,339
-----------
Total assets 78,146,339
-----------
NET ASSETS $78,146,339
===========
COMPOSITION OF NET ASSETS:
DECS, no par value; 3,150,000 shares issued and outstanding (Note 9) $80,588,825
Net unrealized depreciation of investments (2,579,998)
Undistributed net investment income 137,512
-----------
NET ASSETS $78,146,339
===========
NET ASSETS VALUE PER DECS $ 24.81
===========
</TABLE>
See notes to financial statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Par Maturity Market Amortized
Securities Description Value Date Value Cost
- ---------------------- ----- ---- ----- ----
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT SECURITIES:
United States Treasury Strips $ 1,635,000 02/15/98 $ 1,623,899 $ 1,623,987
United States Treasury Strips 1,428,000 05/15/98 1,399,911 1,399,778
United States Treasury Strips 1,428,000 08/15/98 1,379,919 1,380,259
United States Treasury Strips 1,428,000 11/15/98 1,361,141 1,360,960
United States Treasury Strips 1,428,000 02/15/99 1,341,720 1,342,196
United States Treasury Strips 1,428,000 05/15/99 1,322,985 1,323,337
United States Treasury Strips 1,428,000 08/15/99 1,304,478 1,304,705
United States Treasury Strips 1,428,000 11/15/99 1,286,314 1,286,207
United States Treasury Strips 1,428,000 02/15/99 1,268,278 1,267,063
United States Treasury Strips 1,428,000 05/15/99 1,251,542 1,249,658
United States Treasury Strips 1,428,000 08/15/99 1,232,978 1,231,579
United States Treasury Strips 1,428,000 11/15/99 1,215,799 1,213,658
----------- ----------- -----------
$17,343,000 15,988,964 15,983,387
===========
FORWARD PURCHASE CONTRACTS:
Royal Group Technologies Limited
Subordinate voting shares
Forward purchase agreement 11/15/00 62,157,375 64,742,950
----------- -----------
TOTAL $78,146,339 $80,726,337
=========== ===========
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
STATEMENT OF OPERATIONS
PERIOD FROM NOVEMBER 4,1997 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 137,512
EXPENSES:
Administrative fees and expenses $ 6,020
Legal fees 2,356
Accounting fees 2,513
Printing and mailing expense 2,356
Trustees fees (Note 5) 1,884
---------
Total fees and expenses 15,129
EXPENSE REIMBURSEMENT (Note 7) (15,129)
---------
Total expenses - net -
------------
NET INVESTMENT INCOME 137,512
NET CHANGE IN UNREALIZED DEPRECIATION OF INVESTMENTS (2,579,998)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (2,442,486)
============
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM NOVEMBER 4,1997 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1997
- ---------------------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment income $ 137,512
Change in net unrealized depreciation of investments (2,579,998)
------------
Net decrease in net assets for operations (2,442,486)
------------
INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (Note 9):
Gross proceeds from the sale of 3,146,209 DECS 82,981,262
Less: selling commissions (2,492,437)
------------
NET INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 80,488,825
------------
TOTAL INCREASE IN NET ASSETS FOR THE PERIOD 78,046,339
NET ASSETS, BEGINNING OF PERIOD 100,000
------------
NET ASSETS, END OF PERIOD $ 78,146,339
============
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
DECS TRUST II
NOTES TO FINANCIAL STATEMENTS
FISCAL YEAR ENDED DECEMBER 31,1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
DECS Trust II ("Trust") was established on September 2, 1997 and is
registered as a non-diversified, closed-end management investment company
under the Investment Company Act of 1940 (the "Act). In November 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 Subordinate Voting
Shares of Royal Group Technologies Limited ("ROYAL") with certain
shareholders of ROYAL (the "Sellers"). The stock is deliverable pursuant to
the contracts on November 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 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.
3. DISTRIBUTIONS
DECS holders are entitled to receive distributions from the maturity of
U.S. Treasury Strips of $1.81328 per annum or $.45332 per quarter (except
for the first distribution on February 15, 1998 of $0.519).
- 6 -
<PAGE>
4. PURCHASES AND SALES OF INVESTMENTS
Purchases of U.S. Treasury Strips for the period ended December 31, 1997
totaled $15,845,875. There were no sales of such investments during the
period. Purchases of the forward purchase contracts during the period
totaled $64,742,950.
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, 1997, the Trust had
expensed $1,884 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, 1997, net unrealized depreciation of investments
aggregated $2,579,998, which consists of gross unrealized appreciation of
$5,577 and gross unrealized depreciation of $2,585,575. The amortized cost
of investment securities for Federal income tax purposes was $80,726,337 at
December 31, 1997.
7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the DECS and its ongoing operations are $459,000. Of this
amount, $170,000 represents offering expenses ($160,000) and organizational
expenses ($10,000) incurred by the Trust. All of these expenses are being
paid directly by the Sponsor of the Trust and the Sellers. The remaining
amount of $289,000 represents a prepayment of estimated administrative and
other operating expenses. Such amount was paid to the Administrator by the
Sponsor. 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
$289,000 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, 1997,
$36,000 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.
- 7 -
<PAGE>
8. FORWARD PURCHASE CONTRACTS
On November 4, 1997,the Trust entered into forward purchase contracts with
certain shareholders of ROYAL (the "Sellers") and paid to the Sellers
$64,742,950 in connection therewith. Pursuant to such contract, the Sellers
are obligated to deliver to the Trust a specified number of Subordinate
Voting Shares on November 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 0.813 and 1.00 Subordinate Voting Shares. See the Trust's
original prospectus dated October 29, 1997 for the formula upon which such
exchange will be determined.
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 Depreciation
---- -------- ----- ------------
<S> <C> <C> <C> <C>
Royal Group Technologies Limited
Subordinate voting shares
Forward purchase agreement 11/15/00 $ 64,742,950 $ 62,157,375 $ (2,585,575)
</TABLE>
The Sellers' obligations under the forward purchase contract are
collateralized by ROYAL Subordinate Voting Shares which are being held in
the custody of the Trust's Custodian, The Bank of New York. At December 31,
1997, the Custodian held 1,450,000 shares with an aggregate value of
$33,621,875.
9. CAPITAL SHARE TRANSACTIONS
On October 8, 1997, one DECS was sold to the Sponsor of the DECS for
$100,000. As a result of a stock split effective immediately prior to the
public offering of the DECS, this DECS was converted into 3,791 DECS.
During the offering period, the Trust sold 3,146,209 DECS to the public and
received net proceeds of $80,488,825 ($82,981,262 less sales commissions of
$2,492,437). As of December 31, 1997, there were 3,150,000 DECS issued and
outstanding with an aggregate cost, net of sales commissions of
$80,588,825.
- 8 -
<PAGE>
DECS TRUST II
FINANCIAL HIGHLIGHTS
PERIOD FROM NOVEMBER 4, 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>
November 4,
1997
(Commencement
of Operations) to
December 31,
1997
----
<S> <C>
PER SHARE OPERATING PERFORMANCE FOR A DECS
OUTSTANDING THROUGHOUT THE PERIOD:
Investment income $ .04
Expenses - before reimbursement .00 +
Expenses - net of reimbursement .00
--------
Investment income - net .04
Adjustments to capital (sales commissions) (.79)
Unrealized loss on investments (.82)
--------
Net decrease in net asset value (1.57)
BEGINNING NET ASSET VALUE 26.38
--------
ENDING NET ASSETS VALUE $ 24.81
========
ENDING MARKET VALUE $ 23.63
========
</TABLE>
(continued)
- 9 -
<PAGE>
DECS TRUST II
FINANCIAL HIGHLIGHTS
PERIOD FROM NOVEMBER 4, 1997 (COMMENCEMENTS OF OPERATIONS) TO
DECEMBER 31, 1997 (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE 10.43 %
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets:
Before reimbursement (1) 0.11 %
After reimbursement (1) 0.00 %
Ratio of net investment income to average net assets:
Before reimbursement (1) 1.15 %
After reimbursement (1) 1.04 %
NET ASSETS, End of period (in thousands) $78,146
</TABLE>
(1) Annualized
+ Amount is less than $.01 per share
* * * * * *
- 10 -
