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AJL PEPS TRUST
ANNUAL REPORT
DECEMBER 31, 1996
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TABLE OF CONTENTS
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Summary Information........................................................................................ 1
Independent Auditors' Report............................................................................... 2
Financial Statements:
Statement of Assets and Liabilities as of December 31, 1996.............................................. 3
Schedule of Investments as of December 31, 1996.......................................................... 4
Statement of Operations for the Year Ended December 31, 1996............................................. 5
Statements of Changes in Net Assets for the Year Ended December 31, 1996 and the Period November 9, 1995
(Commencement of Operations) to December 31, 1995...................................................... 6
Notes to Financial Statements............................................................................ 7
Financial Highlights for the Year Ended December 31, 1996 and the Period November 9, 1995 (Commencement
of Operations) to December 31, 1995.................................................................... 10
</TABLE>
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SUMMARY INFORMATION
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Each of the $1.44 Premium Exchangeable Participating Shares, or "PEPS," of
the AJL PEPS Trust represents the right to receive an annual distribution of
$1.44, and will be exchanged on February 15, 1999 for between 0.8475 and 1.25
American Depositary Shares ("ADS") of Amway Japan Limited (the "Company"). Each
ADS represents one-half of one share of common stock of the Company. The annual
distribution of $1.44 per PEPS is payable quarterly on each February 15, May 15,
August 15 and November 15, through February 15, 1999. The PEPS 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 February 15, 1999, and
forward purchase contracts with two 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 PEPS
with a quarterly distribution of $0.36 per PEPS and, on February 15, 1999, a
number of ADS (or, at the option of the holder, the equivalent number of shares
of common stock of the Company) per PEPS computed as follows: if the Exchange
Price per ADS is equal to or greater than $22.61, 0.8475 ADS per PEPS; if the
Exchange Price per ADS is less than $22.61 but equal to or greater than $15.33,
a number (or fractional number) of ADS per PEPS having a value (determined at
the Exchange Price) equal to $19.16; and if the Exchange Price per ADS is less
than $15.33, 1.25 ADS per PEPS, subject in each case to adjustment in certain
events. Holders of PEPS will receive cash in lieu of fractional ADS or
fractional shares of common stock of the Company. The "Exchange Price" per ADS
means, with certain exceptions, the average of one-half the closing price of a
share of the Company on its principal trading market (currently the Japanese
over-the-counter market), divided by the noon buying rate in New York City for
cable transfers in Japanese yen, for the 20 trading days immediately prior to,
but not including, February 15, 1999.
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INDEPENDENT AUDITORS' REPORT
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To the Trustees and Shareholders
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of AJL PEPS Trust (the "Trust") as of
December 31, 1996, the related statements of operations for the year then ended,
and changes in net assets and the financial highlights for the year then ended
and for the period November 9, 1995 (commencement of operations) to December 31,
1995. These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits 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 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 the securities owned at
December 31, 1996 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 audits provide 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 AJL PEPS Trust at
December 31, 1996, the results of its operations, the changes in its net assets,
and its financial highlights for the above-stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 5, 1997
2
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AJL PEPS TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
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ASSETS:
Investments, at value (amortized cost $271,802,647)--Notes 2, 4 and 8....... $257,887,804
Cash........................................................................ 270,595
Deferred organizational costs, net of accumulated amortization of
$4,257--Note 2............................................................ 7,743
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Total Assets.............................................................. 258,166,142
LIABILITIES--Accounts payable and accrued expenses............................ 270,566
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NET ASSETS.................................................................... $257,895,576
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COMPOSITION OF NET ASSETS:
Premium Exchangeable Participating Shares, no par value; 15,663,002 shares
issued and outstanding--Note 9.............................................. $268,925,206
Unrealized depreciation of investments........................................ (13,914,843)
Undistributed net investment income........................................... 2,885,213
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NET ASSETS.................................................................... $257,895,576
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NET ASSET VALUE PER PEPS...................................................... $ 16.47
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</TABLE>
See accompanying notes to financial statements.
3
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AJL PEPS TRUST
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
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<CAPTION>
PAR MATURITY MARKET AMORTIZED
SECURITIES DESCRIPTION VALUE DATE VALUE COST
- ------------------------------------------------------ ------------- --------- -------------- --------------
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT SECURITIES:
United States Treasury Strips....................... $ 5,639,000 2/15/97 $ 5,603,982 $ 5,602,478
United States Treasury Strips....................... 5,639,000 5/15/97 5,530,393 5,530,917
United States Treasury Strips....................... 5,639,000 8/15/97 5,453,759 5,458,276
United States Treasury Strips....................... 5,639,000 11/15/97 5,373,629 5,386,369
United States Treasury Strips....................... 5,639,000 2/15/98 5,297,389 5,314,022
United States Treasury Strips....................... 5,639,000 5/15/98 5,219,064 5,244,643
United States Treasury Strips....................... 5,639,000 8/15/98 5,137,073 5,173,246
United States Treasury Strips....................... 5,639,000 11/15/98 5,064,273 5,102,689
United States Treasury Strips....................... 5,639,000 2/15/99 4,984,650 5,030,599
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$ 50,751,000 47,664,212 47,843,239
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FORWARD PURCHASE CONTRACTS:
GRIT/AJL PEPS Trust Purchase Agreement.............. 2/15/99 105,111,796 111,979,704
JVA/AJL PEPS Trust Purchase Agreement............... 2/15/99 105,111,796 111,979,704
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210,223,592 223,959,408
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Total............................................. $ 257,887,804 $ 271,802,647
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</TABLE>
See accompanying notes to financial statements.
4
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AJL PEPS TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
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ACCRETION OF ORIGINAL ISSUE DISCOUNT................................ $ 3,318,592
EXPENSES:
Administrative fees and expenses.................................. $ 8,790
Legal fees........................................................ 32,308
Accounting fees................................................... 42,753
Insurance expense................................................. 47,116
Trustees fees..................................................... 11,076
Amortization of deferred organizational costs..................... 3,734
Other expenses.................................................... 11,196
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Total fees and expenses......................................... 156,973
EXPENSE REIMBURSEMENT (Note 7)...................................... (153,239)
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TOTAL EXPENSES--Net................................................. 3,734
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NET INVESTMENT INCOME............................................... 3,314,858
NET CHANGE IN UNREALIZED DEPRECIATION OF INVESTMENTS................ (28,627,444)
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NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $(25,312,586)
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</TABLE>
See accompanying notes to financial statements.
5
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AJL PEPS TRUST
STATEMENTS OF CHANGES IN NET ASSETS
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PERIOD FROM
NOVEMBER 9,
1995
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
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OPERATIONS:
Net investment income......................................................... $ 3,314,858 $ 296,692
Unrealized appreciation (depreciation) of investments......................... (28,627,444) 14,712,601
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Net increase (decrease) in net assets from operations....................... (25,312,586) 15,009,293
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DISTRIBUTIONS:
Net investment income......................................................... (726,337) --
Return of capital............................................................. (21,516,663) --
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Net decrease in net assets from distributions............................... (22,243,000) --
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INCREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTION:
Gross proceeds from the sale of Premium Exchangeable Participating Shares..... -- 300,000,000
Less:
Selling commissions......................................................... -- (9,003,131)
Offering expenses........................................................... -- (655,000)
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Net increase in net assets from capital shares transactions............... -- 290,341,869
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TOTAL INCREASE (DECREASE) IN NET ASSETS FOR THE PERIOD.......................... (47,555,586) 305,351,162
NET ASSETS, BEGINNING OF PERIOD................................................. 305,451,162 100,000
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NET ASSETS, END OF PERIOD....................................................... $ 257,895,576 $ 305,451,162
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</TABLE>
See accompanying notes to financial statements.
6
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AJL PEPS TRUST
FINANCIAL HIGHLIGHTS
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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.
The ratio of expenses and net investment income to average net assets is
expressed with and without the application of the expense reimbursement waiver.
Average net assets for 1996 are calculated taking the average of the monthly net
assets for the year. Average net assets for 1995 were calculated taking the
average of the net assets on the seed audit date (November 9, 1995) and the net
assets as of December 31, 1995.
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NOVEMBER 9,
1995
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
1996 1995
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Investment income................................................................. $ .21 $ .02
Expenses.......................................................................... .00 .00
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Investment income--Net............................................................ .21 .02
Adjustments to capital (offering expenses)........................................ -- (.04)
Distribution from income.......................................................... (.05)
Return of capital................................................................. (1.37)
Unrealized gain on investments.................................................... (1.82) .94
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Net increase in net asset value................................................... (3.03) .92
Beginning net asset value......................................................... 19.50 18.58
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Ending net asset value............................................................ $ 16.47 $ 19.50
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Ending market value............................................................... $ 16.38 $ 19.50
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Total investment return based on market value..................................... (9.95)% 4.95%
Ratio of expenses to average net assets:
Before waiver................................................................... .05% .10%
After waiver.................................................................... .00% .00%
Ratio of net investments income to average net assets:
Before waiver................................................................... 1.01% .09%
After waiver.................................................................... 1.06% .19%
Net assets, end of period (in thousands)........................................ $ 257,896 $ 305,451
</TABLE>
10
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AJL PEPS TRUST
NOTES TO THE FINANCIAL STATEMENTS
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1. ORGANIZATION
AJL PEPS Trust ("Trust") was established on August 17, 1995 and is
registered as a non-diversified, closed-end management investment company
under the Investment Company Act of 1940 (the "Act"). In November 1995, the
Trust sold Premium Exchangeable Participating Shares ("PEPS") 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 to acquire two forward
purchase contracts for American Depository Shares ("ADS") representing shares
of common stock of Amway Japan Limited ("AJL"), a Japanese corporation, from
two existing shareholders of AJL. Each ADS represents one-half of one share of
common stock. The ADSs are deliverable pursuant to the contracts on February
15, 1999 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 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.
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. Unrealized 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 required 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.
ORGANIZATIONAL EXPENSES--Organizational expenses of $12,000 are being
amortized on a straight-line basis over the life of the Trust beginning at the
commencement of operations of the Trust.
7
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3. DISTRIBUTIONS
PEPS holders are entitled to receive distributions from the maturity of
U.S. Treasury Strips of $1.44 per annum or $0.36 per quarter (except for the
first distribution on February 15, 1996 which was $0.34). Distributions are
payable quarterly and commenced on February 15, 1996.
4. PURCHASES AND SALES ON INVESTMENTS
Maturities of U.S. Treasury Strips totaled $22,243,000 for the year ended
December 31, 1996; there were no purchases or sales of U.S. Treasury Strips
investments or forward purchase contracts during the period.
5. TRUSTEES FEES
Each of the three Trustees were paid a one-time, up front fee of $10,800
for their 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 accrued
over the life of the Trust. As of December 31, 1996, the Trust had accrued
$12,461 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, 1996, unrealized depreciation of investments, based on
amortized cost for Federal income tax purposes, aggregated $13,914,843,
consisting of gross unrealized appreciation of $1,504 and gross unrealized
depreciation of $13,916,347. The amortized cost of investment securities for
Federal income tax purposes was $271,802,647 at December 31, 1996.
7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the PEPS and its ongoing operations is $1,261,471. Of this amount,
$667,000 represents offering expenses ($655,000) and organizational expenses
($12,000) incurred by the Trust. The offering and organizational expenses are
being paid from the proceeds received from the offering of the PEPS. At
December 31, 1996, the Trust had paid $396,434 relating to such expenses. The
remaining amount of $594,471 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 sponsor or, if not, by the Trust.
Cash received by the Administrator from the sponsor of $594,471 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, 1996, $261,306 had been paid by the
Administrator for current and prepaid administrative 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
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8. FORWARD PURCHASE CONTRACTS
On November 15, 1995, the Trust entered into two forward purchase
contracts with two principal shareholders of AJL (the "Sellers") and paid to
the Sellers $223,959,408 in connection therewith. Pursuant to such contracts,
the Sellers are obligated to deliver to the Trust a specified number of ADSs
on February 15, 1999 (the "Exchange Date) so as to permit the holders of the
PEPS to exchange on the Exchange Date each of their PEPS for between 0.8475
and 1.25 ADSs. See the Trust's original prospectus dated November 15, 1995 for
the formula upon which such exchange will be determined.
The forward purchase contracts held by the Trust at December 31, 1996 are
as follows:
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EXCHANGE COST OF UNREALIZED
FORWARD CONTRACTS DATE CONTRACT CONTRACT VALUE DEPRECIATION
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<S> <C> <C> <C> <C>
Jay Van Andel Trust................................ 2/15/99 $ 11,979,704 $ 105,111,796 $ 6,867,908
HDV GRIT Holdings, Inc............................. 2/15/99 11,979,704 105,111,796 6,867,908
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$ 223,959,408 $ 210,223,592 $ 13,735,816
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</TABLE>
The Sellers' obligations under the forward purchase contracts are
collateralized by ADSs which are being held in the custody of the Trust's
custodian, The Bank of New York. At December 31, 1996, the custodian held
19,578,756 ADSs with an aggregate value of $325,496,819.
9. CAPITAL SHARE TRANSACTIONS
On November 8, 1995, two PEPS were sold to two of the underwriters of the
PEPS for $100,000 ($50,000 per PEPS). As a result of a stock split effected
immediately prior to the public offering of the PEPS, these two PEPS were
converted into 5,382 PEPS. During the period ended December 31, 1995, the
Trust sold 15,657,620 PEPS to the public and received net proceeds of
$290,996,869 ($300,000,000 net of sales commission of $9,003,131). There were
no sales of PEPS in 1996. As of December 31, 1996 and 1995, there were
15,663,002 PEPS issued and outstanding with an aggregate cost, net of sales
commission, offering costs and return of capital, of $268,925,206 and
$290,441,869, respectively.
9
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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
Corporate Trust Trustee Administration
101 Barclay Street
New York, New York 10286
