PEAK TrENDS TRUST
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>
Peak TrENDS Trust
Summary Information
Each of the Trust Enhanced Dividend Securities ("TrENDS") of the Peak TrENDS
Trust represents the right to receive an annual distribution of $1.418, and will
be exchanged on May 15, 2001 for between 0.8696 and 1.0 ordinary share, $0.01
par value per share ("Common Stock") of Peak International Limited (the
"Company"). The annual distribution of $1.418 per TrENDS is payable quarterly on
each February 15, May 15, August 15 and November 15, commencing August 15, 1998
and ending May 15, 2001. The TrENDS are not subject to redemption.
The Trust was established to purchase and hold a portfolio of stripped U.S.
Treasury securities maturing on a quarterly basis through May 15, 2001, and a
forward purchase contract for Common Stock of the Company (the "Contract") with
Luckygold 18A Limited, a company incorporated in the British Virgin Islands,
which is a shareholder of the Company (the "Seller"). Mr. T. L. Li, the sole
shareholder of the Seller has guaranteed the delivery of the shares of Common
Stock covered by the Contract and the maintenance of collateral for the Seller's
obligations under the Contract. 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 TrENDS with a
quarterly distribution of $0.354 per TrENDS and, on May 15, 2001 (the "Exchange
Date"), a number of shares of Common Stock per TrENDS computed as follows: (1)
if the average daily closing or last sale price of the Common Stock in the
Nasdaq National Market for the 20 trading days immediately preceding the
Exchange Date (the "Reference Market Price") is less than $18.1125 but equal to
or greater than $15.75, the holder will be entitled to receive a number of
shares of Common Stock per TrENDS the value of which, when multiplied by the
Reference Market Price, is equal to $15.75; (2) if the Reference Market Price
per TrENDS on the Exchange Date is equal to or greater than $18.1125, the holder
will be entitled to receive 0.8696 shares of Common Stock per TrENDS; and (3) if
the Reference Market Price per TrENDS on the Exchange Date is less than $15.75,
the holder will be entitled to receive 1.0 share of Common Stock per TrENDS. The
exchange ratios are subject in each case to adjustment upon the occurrence of
certain events. Holders will receive a cash adjustment in lieu of any fractional
share of Common Stock distributable in respect of their aggregate holdings of
TrENDS. Under the Contract, instead of delivering shares of Common Stock, the
Seller may elect, not later than 20 trading days prior to the Exchange Date, to
pay cash in an amount per TrENDS equal to the Reference Market Price multiplied
by the number of shares of Common Stock determined under the above formula. If
the Seller should make that election, holders of TrENDS will receive cash
instead of shares of Common Stock on the Exchange Date.
<PAGE>
PEAK TrENDS TRUST
TABLE OF CONTENTS
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Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS AS OF AND 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
- ---------- -------------------------------------------------------
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,
PEAK TrENDS TRUST:
We have audited the accompanying statement of net assets, including the schedule
of investments, of PEAK TrENDS TRUST as of December 31, 1998, the related
statements of operations, changes in net assets, and the financial highlights
for the period June 3, 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 include 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 PEAK TrENDS TRUST as
of December 31, 1998, the results of its operations, the changes in its net
assets, and the financial highlights for the period June 3, 1998 to December 31,
1998 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
July 8, 1999
- ---------------
Deloitte Touche
Tohmatsu
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1
<PAGE>
<TABLE>
<CAPTION>
PEAK TrENDS TRUST
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------
<S> <C>
ASSETS
INVESTMENT, AT VALUE (amortized cost $77,757,788)
(Notes 2, 4 and 8) $ 51,040,919
------------
Total assets 51,040,919
LIABILITIES:
Accounts payable 300
------------
NET ASSETS $ 51,040,619
============
COMPOSITION OF NET ASSETS
TRUST ENHANCED DIVIDEND SECURITIES ("TrENDS") - No
par value - 5,300,000 shares issued and outstanding (Note 9) $ 77,216,398
NET UNREALIZED DEPRECIATION OF INVESTMENTS (26,716,869)
UNDISTRIBUTED NET INVESTMENT INCOME 541,090
------------
NET ASSETS $ 51,040,619
============
NET ASSET VALUE PER TrENDS $ 9.63
============
</TABLE>
See notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
PEAK TrENDS TRUST
SCHEDULE OF INVESTMENTS
DECEMBER 31,1998
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Maturity Market Amortized
Securities Description Par Value Date Value Cost
- ---------------------- --------- ---- ----- ----
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT SECURITIES:
United States Treasury Strips $ 1,878,000 02/15/99 $ 1,867,971 $ 1,865,383
United States Treasury Strips 1,879,000 05/15/99 1,847,771 1,841,716
United States Treasury Strips 1,878,000 08/15/99 1,826,055 1,815,711
United States Treasury Strips 1,878,000 11/15/99 1,804,589 1,791,388
United States Treasury Strips 1,878,000 02/15/00 1,784,044 1,766,857
United States Treasury Strips 1,878,000 05/15/00 1,765,095 1,743,370
United States Treasury Strips 1,879,000 08/15/00 1,746,023 1,720,528
United States Treasury Strips 1,878,000 11/15/00 1,725,525 1,696,633
United States Treasury Strips 1,878,000 02/15/01 1,705,130 1,673,178
United States Treasury Strips 1,878,000 05/15/01 1,684,716 1,650,562
------------ ------------ ------------
$ 18,782,000 17,756,919 17,565,326
============
FORWARD PURCHASE
CONTRACT:
Peak International Limited:
Common Stock
Forward Purchase Agreement 33,284,000 60,192,462
------------- ------------
TOTAL $ 51,040,919 $ 77,757,788
============= ============
</TABLE>
See notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
PEAK TrENDS TRUST
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 3,1998 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 601,132
EXPENSES:
Administrative fees and expenses $ 22,124
Legal fees 2,950
Accounting fees 11,800
Printing and mailing expense 8,456
Trustees' fees (Note 5) 7,080
Other expense 2,950
--------
Total fees and expenses 55,360
EXPENSE REIMBURSEMENT (Note 7) (55,360)
--------
Total expenses - net --
-------------
Net investment income 601,132
Net change in unrealized depreciation of
investments (26,716,869)
-------------
Net decrease in net assets resulting from
operations $ (26,115,737)
=============
</TABLE>
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
PEAK TrENDS TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 3,1998 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment income $ 601,132
Unrealized depreciation of investments (26,716,869)
------------
Net decrease in net assets from operations (26,115,737
------------
DISTRIBUTIONS:
Net investment income (60,042)
Return of capital (3,321,358)
-----------
Net decrease in net assets from distributions (3,381,400)
-----------
INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (Note 9):
Gross proceeds from the sale of 5,299,994 TrENDS 83,474,906
Less selling commissions (2,504,250)
Offering expenses (433,000)
------------
Net increase in net assets from capital
share transactions 80,537,656
------------
TOTAL INCREASE IN NET ASSETS FOR THE PERIOD 51,040,519
NET ASSETS, BEGINNING OF PERIOD 100
------------
NET ASSETS, END OF PERIOD $ 51,040,619
============
</TABLE>
See notes to financial statements.
5
<PAGE>
PEAK TrENDS TRUST
NOTES TO FINANCIAL STATEMENTS
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1. ORGANIZATION
Peak TrENDS Trust ("Trust") was established on March 24, 1998 and is
registered as a nondiversified, closed-end management investment company
under the Investment Company Act of 1940 (the "Act"). In June 1998, the
Trust sold Trust Enhanced Dividend Securities ("TrENDS") 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 common stock of Peak International Limited ("PEAK"), a Bermuda
corporation, from a shareholder of PEAK (the "Seller"). The stock is
deliverable pursuant to the contract on May 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 arc 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 using. the effective interest method. The forward
purchase contract is valued at a bid price 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 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 (including amortization of discount) is recognized on the accrual
basis. 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
TrENDS holders are entitled to receive distributions from the maturity of
U.S. Treasury Strips of $1,418 per annum or $3.54 per quarter (except for
the first distribution on August 15, 1998 which was $.284.) Distributions
are payable quarterly and commence on August 15, 1998.
6
<PAGE>
4. PURCHASES AND SALES OF INVESTMENT
Purchases of U.S. Treasury Strips for the period ended December 31, 1998
totaled $20,345,194. There was no sale of such investments during the
period. Purchase of the forward purchase contract during the period totaled
$60,192,462.
5. TRUSTEE 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 3 1, 1998, the Trust
had expensed $7,080 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
amortized cost for Federal income tax purposes, aggregated $26,716,869
which consists of gross unrealized appreciation of $191,593 and gross
unrealized depreciation of $26,908,462. The amortized cost of investment
securities for Federal income tax purposes was $77,757,788 at December 31,
1998.
7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the TrENDS and its ongoing operations is $734,500. Of this
amount, $453,000 represents offering expenses ($433,000) and organizational
expenses ($20,000) incurred by the Trust. The organizational expenses are
being paid directly by the sponsor of the Trust and the offering expenses
are being paid directly by the Seller. The remaining amount of $281,500
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
Seller.
Cash received by the Administrator from the sponsor of the Trust of
$281,500 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,
$45,293 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.
8. FORWARD PURCHASE CONTRACT
On June 3, 1998, the Trust entered into a forward purchase contract with a
shareholder of PEAK (the "Seller") and paid to the Seller $60,192,462 in
connection therewith. Pursuant to such contract, the Seller is obligated to
deliver to the Trust a specified number of common stock on May 15, 2001
(the "Exchange Date") so as to permit the holders of the TrENDS to exchange
on the Exchange Date each of their TrENDS for between .8696 and 1.00 common
stock. See the Trust's original prospectus dated May 29, 1998 for the
formula upon which such exchange will be determined.
7
<PAGE>
The forward purchase contract held by the Trust at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Exchange Cost of Contract Unrealized
Date Contract Value Depreciation
---- -------- ----- ------------
<S> <C> <C> <C> <C>
Peak International Limited:
Common Stock
Forward Purchase Agreement 05/15/01 $60,192,462 $33,284,000 $26,908,462
----------- ----------- -----------
$60,192,462 $33,284,000 $26,908,462
=========== =========== ===========
</TABLE>
The Seller's obligations under the forward purchase contract are
collateralized by PEAK common stock which are being held in the custody of
the Trust's custodian, The Bank of New York. At December 3 1, 1998, the
custodian held 5,300,000 shares with an aggregate value of $44,387,500.
9. CAPITAL SHARE TRANSACTIONS
On May 21, 1998 one TrENDS was sold to the underwriters of the TrENDS for
$100. As a result of a stock split effected immediately prior to the public
offering of the TrENDS, this TrENDS was converted into 6 TrENDS. During the
offering period, the Trust sold 5,299,994 TrENDS to the public and received
net proceeds of $80,537,656 ($83,474,906 less sales commission of
$2,504,250 and offering expenses of $433,000). As of December 31, 1998,
there were 5,300,000 TrENDS issued and outstanding with an aggregate cost,
net of sales commission and offering expenses of $77,216,398.
* * * * * *
8
<PAGE>
PEAK TrENDS TRUST
FINANCIAL HIGHLIGHTS FOR THE PERIOD JUNE 3,1998 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31,1998
- --------------------------------------------------------------------------------
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>
June 3,
1998
(Commencement
of Operations) to
December 31,
1998
----
<S> <C>
Per share operating performance for a TrENDS
outstanding throughout the period:
Investment income 0.11
Expenses - prior to reimbursement 0.00 *
Expenses - after reimbursement 0.00
--------
Investment income - net 0.11
Adjustments to capital (sales commissions) (0.47)
Adjustments to capital (offering expenses) (0.08)
Distribution of income (0.01)
Return of capital (0.63)
Unrealized loss on investments (5.04)
--------
Net decrease in net asset value (6.12)
Beginning net asset value 15.75
--------
Ending net asset value $ 9.63
========
Ending market value $ 9.63
========
Total investment return based on market value (35.12)%
Ratios/Supplemental data
Ratio of expenses to average net assets:
Before waiver 0.13 (1)
After waiver 0.00 (1)
Ratio of net investments income to average net assets:
Before waiver 1.28 (1)
After waiver 1.41 (1)
Net assets, end of period (in thousands) $ 51,041
</TABLE>
(1) Annualized
* Amount is less than $.01
9
