DECS TRUST III
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 III
Summary Information
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Each of the DECS issued by the DECS Trust III represents the right to receive an
annual distribution of $2.0125, and will be exchanged on February 15, 2001 (the
"Exchange Date") for between 0.8288 and 1.0 share of the Class B Common Stock,
par value $0.01 per share (the "Class B Stock"), of Herbalife International,
Inc. (the "Company"), or an equivalent value in cash or Class B Stock and cash.
The DECS are designed to provide investors with a higher yield than the dividend
yield paid on the Class B Stock, while also providing the opportunity for
investors to share in the appreciation, if any, of the Class B Stock above a
threshold appreciation price. The DECS 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 February 15, 2001, and
one or more 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 $0.503125 per DECS, payable
quarterly on each February 15, May 15, August 15 and November 15, through the
Exchange Date, and, on the Exchange Date, a number of shares of Class B Stock
per DECS (or, if some or all of the Sellers exercise their cash settlement
option in the forward purchase contracts, the cash equivalent of all or part
thereof or a combination of Class B Stock and cash) at the Exchange Rate
(determined as described below). If the Exchange Price (as defined below) on the
Exchange Date is greater than $27.75 per share, the Exchange Rate is equal to
0.8288 of a share of Class B Stock per DECS; if the Exchange Price is less than
or equal to $27.75 per share but is greater than $23.00 per share, the Exchange
Rate is equal to a number (or fractional number) of shares of Class B Stock per
DECS having a value (determined at the Exchange Price) equal to $23.00; and if
the Exchange Price is less than or equal to $23.00 per share, the Exchange Rate
is equal to one share of Class B Stock per DECS. The Exchange Rate is subject in
each case to adjustment in certain events. The "Exchange 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 Class B Stock as reported by The
Nasdaq Stock Market for the 20 trading days immediately prior to, but not
including, the Exchange Date. In lieu of delivery of the Class B Stock, each of
the Sellers may elect to pay cash on the Exchange Date in an amount equal to the
Exchange Price times the number of shares of the Class B Stock otherwise
deliverable by such Seller, determined under the above formula. If some or all
of the Sellers elect this option, holders of DECS will receive cash, or cash and
shares of Class B Stock, on the Exchange Date. If shares of Class B Stock are
distributed on the Exchange Date, holders will receive cash in lieu of any
fractional share of Class B Stock to which their aggregate holdings of DECS
otherwise would entitle them.
<PAGE>
DECS TRUST III
FINANCIAL REPORT
JUNE 30, 1998
(Unaudited)
<PAGE>
CONTENTS
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FINANCIAL STATEMENTS
Statement of net assets 1
Schedule of investments 2
Statement of operations 3
Statement of changes in net assets 4
Notes to financial statements 5-7
Financial highlights 8
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST III
STATEMENT OF NET ASSETS
June 30, 1998
(Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (amortized cost $110,645,504) (Notes 2, 4, and 8) $ 108,688,546
Cash 350
---------------
Total Assets $ 108,688,896
===============
Net Assets $ 108,688,896
===============
COMPOSITION OF NET ASSETS
DECS, no par value;
5,000,000 shares issued and outstanding (Note 9) $ 110,300,501
Unrealized depreciation of investments (1,956,958)
Undistributed net investment income 345,353
---------------
Net Assets $ 108,688,896
===============
Net Asset Value per DECS $ 21.74
===============
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST III
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 $ 2,516,000 08/15/98 $ 2,500,124 $ 2,499,017
United States Treasury Strips 2,516,000 11/15/98 2,467,542 2,465,832
United States Treasury Strips 2,516,000 02/15/99 2,433,450 2,431,298
United States Treasury Strips 2,516,000 05/15/99 2,400,415 2,398,855
United States Treasury Strips 2,516,000 08/15/99 2,367,506 2,365,917
United States Treasury Strips 2,516,000 11/15/99 2,335,930 2,334,288
United States Treasury Strips 2,516,000 02/15/00 2,303,574 2,302,222
United States Treasury Strips 2,516,000 05/15/00 2,274,011 2,271,559
United States Treasury Strips 2,516,000 08/15/00 2,242,335 2,240,346
United States Treasury Strips 2,516,000 11/15/00 2,212,394 2,210,968
United States Treasury Strips 2,516,000 02/15/01 2,182,932 2,180,645
-------------- ------------- -------------
$ 27,676,000 25,720,213 25,700,947
==============
FORWARD PURCHASE CONTRACTS:
Herbalife International, Inc. Class B
Common Stock
Forward Purchase Agreements 02/15/01 82,968,333 84,944,557
------------- -------------
Total $ 108,688,546 $ 110,645,504
============= =============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST III
STATEMENT OF OPERATIONS
For the period from March 31, 1998 (commencement of operations) to June 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 353,593
EXPENSES:
Administrative fees and expenses $ 10,047
Legal fees 3,932
Accounting fees 4,194
Printing & mailing expense 3,932
Trustees' fees (Note 5) 3,145
Other expenses 655
------------
Total fees and expenses 25,905
EXPENSE REIMBURSEMENT (Note 7) (25,905)
------------
Total expenses - net -
--------------
Net Investment Income 353,593
Unrealized depreciation
of investments (1,956,958)
--------------
Net decrease in net assets resulting from operations $ (1,603,365)
==============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
DECS TRUST III
STATEMENT OF CHANGES IN NET ASSETS
For the period from March 31, 1998 (commencement of operations) to June 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C>
OPERATIONS
Net investment income $ 353,593
Unrealized depreciation of investments (1,956,958)
--------------
Net decrease in net assets
from operations (1,603,365)
--------------
DISTRIBUTIONS
Net investment income (8,240)
Return of capital (1,249,510)
--------------
Net decrease in net assets from distributions (1,257,750)
--------------
INCREASE IN NET ASSETS FROM CAPITAL
SHARES TRANSACTION (Note 9)
Gross proceeds from the sale of 4,999,996 DECS shares 114,999,908
Less:
Selling commissions (3,449,997)
--------------
Net increase in net assets from capital
shares transactions 111,549,911
--------------
Total increase in net assets for
the period 108,688,796
Net assets, beginning of period 100
--------------
Net assets, end of period $ 108,688,896
==============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
DECS TRUST III
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1. ORGANIZATION
DECS Trust III (the "Trust") was established on January 22, 1998 and is
registered as a non-diversified, closed-end management investment company under
the Investment Company Act of 1940 (the "Act"). In March 1998, 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 shares of Class B Common Stock of Herbalife
International, Inc. (the "Company") from certain shareholders of the Company
(the "Sellers"). The stock, or its cash equivalent, is deliverable pursuant to
the contracts on February 15, 2001 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 contracts are valued at the mean of
the bid prices received by the Trust at the end of each period from three
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, or if such bid quotations are not
available, as determined in good faith by the Trustees.
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 III
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 3. DISTRIBUTIONS
DECS holders are entitled to receive distributions from the maturity of U.S.
Treasury Strips of $2.0125 per annum or $.503125 per quarter (except for the
first distribution on May 15, 1998 which was $.25155).
NOTE 4. PURCHASES AND SALES ON INVESTMENT
Purchases and maturities of U.S. Treasury Strips for the period ended June 30,
1998 totaled $26,605,354 and $1,258,000, respectively. There were no sales of
such investments during the period. Purchases of forward purchase contracts
during the period totaled $84,944,557.
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 $3,145 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, based on cost
for Federal income tax purposes, aggregated $1,956,958, consisting of gross
unrealized appreciation and depreciation of investments of $19,266, and
$1,976,224, respectively. The amortized cost of investment securities for
Federal income tax purposes was $110,645,504 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 $443,300. Of this amount,
$146,800 represents offering expenses ($136,000) and organizational expenses
($10,800) incurred by the Trust. All of these expenses are being paid directly
by the Sponsor of the Trust. The remaining amount of $296,500 represents a
prepayment of estimated administrative and other operating expenses. Such amount
was paid to the Administrator by the Sponsor of the Trust. 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 $296,500 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, $86,005 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 III
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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NOTE 8. FORWARD PURCHASE CONTRACTS
On March 31, 1998, the Trust entered into forward purchase contracts with
certain shareholders of the Company (the "Sellers") and paid to the Sellers
$84,944,557 in connection therewith. Pursuant to such contracts, the Sellers are
obligated to deliver to the Trust a specified number of shares of Herbalife
International Class B Common Stock on February 15, 2001 (the "Exchange Date") so
as to permit the holders of the DECS to exchange on the Exchange Date each of
their DECS for between 0.8288 and 1.0 shares. See the Trust's original
prospectus dated March 25, 1998 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 Contract Value Depreciation
---- -------- ----- ------------
<S> <C> <C> <C> <C>
Herbalife International, Inc.
Class B Common Stock Forward
Purchase Agreements 02/15/01 $ 84,944,557 $ 82,968,333 $ 1,976,224
============= ============= =============
</TABLE>
The Sellers' obligations under the forward purchase contracts are collateralized
by shares of Herbalife International, Inc. Class B 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 5,750,000 shares with an aggregate value of
$118,593,750.
NOTE 9. CAPITAL SHARE TRANSACTIONS
On March 31, 1998, one DECS was sold to the underwriter of the DECS for $100. As
a result of a stock split effected immediately prior to the public offering of
the DECS, this DECS was converted into four DECS. During the offering period,
the Trust sold 4,999,996 DECS to the public and received net proceeds of
$111,549,911 ($114,999,908 less sales commissions of $3,449,997). As of June 30,
1998, there were 5,000,000 DECS issued and outstanding with an aggregate cost,
net of return of capital and sales commissions, of $110,300,501.
7
<PAGE>
DECS TRUST III
FINANCIAL HIGHLIGHTS
(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 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 a period of
less than one year is not annualized.
<TABLE>
<CAPTION>
March 31,
1998
(Commencement
of Operations) to
June 30,
1998
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE FOR A DECS
OUTSTANDING THROUGHOUT THE PERIOD
Investment income $ .07
Expenses .00
------------
Investment income - net .07
Adjustment to capital (sales commissions) (.69)
Distribution from income (.00)
Return of capital (.25)
Unrealized loss on investments (.39)
------------
Net decrease in net asset value (1.26)
Beginning net asset value 23.00
------------
Ending net asset value $ 21.74
============
Ending market value $ 20.63
============
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE (9.37) %
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets:
Before reimbursement (1) .09 %
After reimbursement (1) .00 %
Ratio of net investment income to average net assets:
Before reimbursement (1) 1.18 %
After reimbursement (1) 1.27 %
Net assets, end of period (in thousands) $ 108,689
- ----------
(1) Annualized
</TABLE>
8
