DECS TRUST II
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>
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
FINANCIAL REPORT
JUNE 30, 1998
(Unaudited)
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Statement of net assets 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
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
STATEMENT OF NET ASSETS
June 30, 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (amortized cost $78,065,462) (Notes 2, 4, and 8) $ 91,016,912
Cash 759
-------------
Total Assets $ 91,017,671
=============
Net Assets $ 91,017,671
=============
COMPOSITION OF NET ASSETS
DECS, no par value;
3,150,000 shares issued and outstanding (Note 9) $ 77,591,111
Net unrealized appreciation of investments 12,951,450
Undistributed net investment income 475,110
-------------
Net Assets $ 91,017,671
=============
Net Asset Value Per DECS $ 28.89
=============
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
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 $ 1,428,000 08/15/98 $ 1,418,832 $ 1,418,194
United States Treasury Strips 1,428,000 11/15/98 1,400,197 1,398,602
United States Treasury Strips 1,428,000 02/15/99 1,381,147 1,379,329
United States Treasury Strips 1,428,000 05/15/99 1,362,341 1,360,308
United States Treasury Strips 1,428,000 08/15/99 1,343,420 1,341,227
United States Treasury Strips 1,428,000 11/15/99 1,325,798 1,322,298
United States Treasury Strips 1,428,000 02/15/00 1,307,434 1,302,899
United States Treasury Strips 1,428,000 05/15/00 1,289,940 1,284,992
United States Treasury Strips 1,428,000 08/15/00 1,272,020 1,266,497
United States Treasury Strips 1,428,000 11/15/00 1,255,683 1,248,166
-------------- -------------- --------------
$ 14,280,000 13,356,812 13,322,512
==============
FORWARD PURCHASE CONTRACTS:
Royal Group Technologies Limited
Subordinate Voting Shares
Forward Purchase Agreements 11/15/00 77,660,100 64,742,950
-------------- --------------
Total $ 91,016,912 $ 78,065,462
============== ==============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
STATEMENT OF OPERATIONS
For the six months ended June 30, 1998
(Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 402,125
EXPENSES:
Administrative fees and expenses $ 18,786
Legal fees 7,351
Accounting fees 7,841
Mailing expense 7,351
Trustees' fees (Note 5) 5,881
-------------
Total fees and expenses 47,210
EXPENSE REIMBURSEMENT (Note 7) (47,210)
-------------
Total expenses - net ---
-------------
Net Investment Income 402,125
Net change in unrealized appreciation
of investments 15,531,448
-------------
Net increase in net assets resulting from
operations $ 15,933,573
=============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST II
STATEMENTS OF CHANGES IN NET ASSETs
For the six months ended June 30, 1998 and the period from November 4, 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 $ 402,125 $ 137,512
Unrealized appreciation (depreciation) of
investments 15,531,448 (2,579,998)
-------------- --------------
Net increase (decrease) in net assets
from operations 15,933,573 (2,442,486)
-------------- --------------
DISTRIBUTIONS
Net investment income (64,527)
Return of capital (2,997,714)
-------------- --------------
Net decrease in net assets from distributions (3,062,241) 0
-------------- --------------
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 0 80,488,825
-------------- --------------
Total increase in net assets for
the period 12,871,332 78,046,339
Net assets, beginning of period 78,146,339 100,000
-------------- --------------
Net assets, end of period $ 91,017,671 $ 78,146,339
============== ==============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
DECS TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
DECS Trust II (the "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 September 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.
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. 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
<PAGE>
DECS TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 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 which was $.519).
NOTE 4. PURCHASES AND SALES OF INVESTMENT
Maturities of U.S. Treasury Strips for the periods ended June 30, 1998 and
December 31,1997 totaled $3,063,000 and $0, respectively. Purchases of U.S.
Treasury Strips and the forward purchase contract for the period ended December
31, 1997 totaled $15,845,875 and $64,742,950 respectively. There were no sales
of such investments during either period.
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 $7,765 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 aggregated
$12,951,450, consisting of gross unrealized appreciation and depreciation of
$12,951,450 and $0, respectively. The amortized cost of investment securities
for Federal income tax purposes was $78,065,462 at June 30, 1998.
NOTE 7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the DECS and its ongoing operations is $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 Sellers.
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 June 30, 1998, $88,142 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>
DECS TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 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 contracts, 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 1.0 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 June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Exchange Cost of Contract Unrealized
Date Contracts Value Appreciation
---- --------- ----- ------------
<S> <C> <C> <C> <C>
Royal Group Technologies
Limited Subordinated
Voting Shares Forward
Purchase Agreements 11/15/00 $ 64,742,950 $ 77,660,100 $ 12,917,150
============== ============== =============
</TABLE>
The Sellers' obligations under the forward purchase contracts 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 June 30, 1998, the Custodian held
1,450,000 shares with an aggregate value of $42,050,000.
NOTE 9. CAPITAL SHARE TRANSACTIONS
On October 8, 1997 one DECS was sold to the underwriters of the DECS for
$100,000. As a result of a stock split effected 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 commission of $2,492,437). As of
June 30,1998 there were 3,150,000 DECS issued and outstanding with an aggregate
cost, net of sales commission and return of capital, of $77,591,111.
7
<PAGE>
DECS TRUST II
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
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 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
Six Months of Operations) to
Ended June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A DECS
OUTSTANDING THROUGHOUT THE PERIOD
Investment income $ 0.12 $ 0.04
Expenses 0.00 0.00
-------------- --------------
Investment income - net 0.12 0.04
Distributions from income (0.02) 0.00
Return of capital (0.95) 0.00
Adjustments to capital (sales commissions) 0.00 (0.79)
Unrealized gain (loss) on investments 4.93 (0.82)
-------------- --------------
Net increase (decrease) in net asset value 4.08 (1.57)
Beginning net asset value 24.81 26.38
-------------- --------------
Ending net asset value $ 28.89 $ 24.81
============== ==============
Ending market value $ 28.25 $ 23.63
============== ==============
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE 23.68 % (10.43) %
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets:
Before reimbursements (1) 0.11 % 0.11 %
After reimbursements (1) 0.00 % 0.00 %
Ratio of net investments income to average net assets:
Before reimbursements (1) 0.85 % 1.04 %
After reimbursements (1) 0.96 % 1.15 %
Net assets, end of period (in thousands) $ 91,018 $ 78,146
- ----------
(1) Annualized
</TABLE>
8
