DECS TRUST III
Annual Report
December 31, 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.
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DECS TRUST III
TABLE OF CONTENTS
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Page
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INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1998:
Statement of Net Assets 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
<PAGE>
DELOITTE &
TOUCHE
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Deloitte & Touche LLP Telephone: (212) 436-2000
Two World Financial Center Facsimile: (212) 436-5000
New York, New York 10281-1414
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
DECS Trust III:
We have audited the accompanying statement of net assets, including the schedule
of investments, of DECS Trust III as of December 31, 1998, the related
statements of operations, changes in net assets, and the financial highlights
for the period March 31, 1998 (commencement of operations) to December 31, 1998.
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, 1998 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 III as of
December 31, 1998, the results of its operations, the changes in its net assets,
and the financial highlights for the period March 31, 1998 to December 31, 1998
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
July 8, 1999
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Deloitte Touche
Tohmatsu
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<PAGE>
<TABLE>
<CAPTION>
DECS TRUST III
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
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ASSETS:
<S> <C>
Investments, at value (amortized cost $106,257,645) (Notes 2, 4 and 8) $ 62,534,545
Cash 1,096
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Total assets $ 62,535,641
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NET ASSETS $ 62,535,641
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COMPOSITION OF NET ASSETS:
DECS, no par value; 5,000,000 shares issued and outstanding (Note 9) $ 105,402,192
Unrealized depreciation of investments (43,723,100)
Undistributed net investment income 856,549
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Net assets $ 62,535,641
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NET ASSET VALUE PER DECS $ 12.51
=============
</TABLE>
See notes to financial statements.
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<PAGE>
<TABLE>
<CAPTION>
DECS TRUST III
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
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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 02/15/99 $ 2,502,539 $ 2,498,827
United States Treasury Strips 2,516,000 05/15/99 2,474,461 2,465,742
United States Treasury Strips 2,516,000 08/15/99 2,446,986 2,431,968
United States Treasury Strips 2,516,000 11/15/99 2,419,688 2,399,185
United States Treasury Strips 2,516,000 02/15/00 2,391,961 2,366,316
United States Treasury Strips 2,516,000 05/15/00 2,364,411 2,334,785
United States Treasury Strips 2,516,000 08/15/00 2,337,918 2,302,762
United States Treasury Strips 2,516,000 11/15/00 2,311,927 2,272,306
United States Treasury Strips 2,516,000 02/15/01 2,284,654 2,241,197
------------ ------------ ------------
$ 22,644,000 21,534,545 21,313,088
============
FORWARD PURCHASE
CONTRACTS:
Herbalife International, Inc.
Class B Common Stock
Forward purchase agreements 02/15/01 41,000,000 84,944,557
------------ ------------
Total $ 62,534,545 $106,257,645
============ ============
</TABLE>
See notes to financial statements.
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<TABLE>
<CAPTION>
DECS TRUST III
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 31, 1998 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
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<S> <C> <C>
INTEREST INCOME: $ 997,734
EXPENSES:
Administrative fees and expenses $ 30,142
Legal fees 11,795
Accounting fees 12,581
Printing and mailing expense 11,795
Trustees' fees (Note 5) 9,436
Other expenses 1,966
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Total fees and expenses 77,715
EXPENSE REIMBURSEMENT (Note 7) (77,715)
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TOTAL EXPENSES - Net -
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-
NET INVESTMENT INCOME 997,734
UNREALIZED DEPRECIATION OF INVESTMENTS (43,723,100)
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NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (42,725,366)
=============
</TABLE>
See notes to financial statements.
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<PAGE>
<TABLE>
<CAPTION>
DECS TRUST III
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MARCH 31, 1998 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
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<S> <C>
OPERATIONS:
Net investment income $ 997,734
Unrealized depreciation of investments (43,723,100)
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Net decrease in net assets from operations (42,725,366)
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DISTRIBUTIONS:
Net investment income (141,185)
Return of capital (6,147,819)
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Net decrease in net assets from distributions (6,289,004)
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INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (Note 9):
Gross proceeds from the sale of 4,999,996 DECS 114,999,908
Less selling commissions (3,449,997)
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Net increase in net assets from capital share transactions 111,549,911
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TOTAL INCREASE IN NET ASSETS FOR THE PERIOD 62,535,541
NET ASSETS, BEGINNING OF PERIOD 100
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NET ASSETS, END OF PERIOD $ 62,535,641
=============
</TABLE>
See notes to financial statements.
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<PAGE>
DECS TRUST III
NOTES TO FINANCIAL STATEMENTS
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1. ORGANIZATION
DECS Trust III ("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. ("Company"), from certain
stockholders 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.
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 on a basis which approximates 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 an independent
broker-dealer firm unaffiliated with the Trust who is 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.
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<PAGE>
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).
4. PURCHASES AND SALES OF INVESTMENTS
Purchases and maturities of U.S. Treasury Strips for the period ended
December 31, 1998 totaled $26,605,354 and $6,290,000, respectively. There
were no sales of such investments during the period. Purchase of the
forward purchase contracts during the period totaled $84,944,557.
5. TRUSTEES' FEES
Each of the three Trustees was paid a one-time, upfront fee of $10,800 for
his services during the life of the Trust. In addition, the Managing
Trustee was paid an additional one-time, upfront fee of $3,600 for serving
in such capacity. The total fees paid to the Trustees of $36,000 are being
expensed on a straight-line basis over the life of the Trust. As of
December 31, 1998, the Trust had expensed $9,436 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, 1998, net unrealized depreciation of investments, based
on cost for Federal income tax purposes, aggregated $43,723,100, consisting
of gross unrealized appreciation and depreciation of investments of
$221,457 and $43,944,557, respectively. The amortized cost of investment
securities for Federal income tax purposes was $106,257,645 at December 31,
1998.
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 December 31, 1998,
$93,089 has 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.
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<PAGE>
8. FORWARD PURCHASE CONTRACTS
On March 31, 1998, the Trust entered into forward purchase contracts with
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 Common Stock of the Company 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 .8288
and 1.00 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 December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Exchange Cost of Contract Unrealized
Date Contracts Value Depreciation
---- --------- ----- ------------
<S> <C> <C> <C> <C>
Herbalife International, Inc.
Class B Common Stock
Forward Purchase Agreement 02/15/01 $84,944,557 $41,000,000 $43,944,557
----------- ----------- -----------
$84,944,557 $41,000,000 $43,944,557
=========== =========== ===========
</TABLE>
The Sellers' obligations under the forward purchase contracts are
collateralized by the Class B Common Stock of the Company which is being
held in the custody of the Trust's Custodian, The Bank of New York. At
December 31, 1998, the Custodian held 5,750,000 shares with an aggregate
value of $65,765,625.
9. CAPITAL SHARE TRANSACTIONS
On March 3, 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 December 31, 1998, there were 5,000,000 DECS issued and
outstanding with an aggregate cost, net of return of capital and sales
commissions, of $105,402,192.
******
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<PAGE>
DECS TRUST III
FINANCIAL HIGHLIGHTS
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The Trust's financial highlights are presented below. The per share operating
performances 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
December 31,
1998
----
<S> <C>
PER SHARE OPERATING PERFORMANCE FOR A DECS
OUTSTANDING THROUGHOUT THE PERIOD:
Investment income $ 0.20
Expenses - before reimbursement 0.00 *
Expenses - after reimbursement 0.00
---------
Investment income - net 0.20
Adjustments to capital (sales commissions) (0.69)
Distribution from income (0.03)
Return of capital (1.23)
Unrealized loss on investments (8.74)
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Net decrease in net asset value (10.49)
Beginning net asset value 23.00
---------
Ending net asset value $ 12.51
=========
Ending market value $ 12.50
=========
Total investment return based on market value (40.34)%
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) 1.29
After reimbursement (1) 1.40
Net assets, end of period (in thousands) $ 62,536
</TABLE>
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(1) Annualized
* Amount is less than $.01 per share.
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