AJL PEPS Trust
Annual Report
December 31, 1997
Administrator, Custodian, Transfer Agent
Trustees and Paying Agent
Donald J. Puglisi, Managing The Bank of New York
Trustee Corporate Trust Administration
William R. Latham III 101 Barclay Street
James B. O'Neill New York, New York 10286
<PAGE>
AJL PEPS TRUST
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Statements of Net Assets as of December 31, 1997 2
Schedule of Investments as of December 31, 1997 3
Statement of Operations for the Year Ended December 31, 1997 4
Statements of Changes in Net Assets for the
Years Ended December 31, 1997 and 1996 5
Notes to Financial Statements 6-8
Financial Highlights 9
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DELOITTE &
TOUCHE LLP
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Two Prudential Plaza Telephone: (312) 946-3000
180 North Stetson Avenue Facsimile: (312) 946-2600
Chicago, Illinois 60601-6779
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of
AJL PEPS Trust:
We have audited the accompanying statement of net assets of AJL PEPS Trust (the
"Trust"), including the schedule of investments as of December 31, 1997, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the two years in the period then ended and
for the period from 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, 1997 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, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for each of the two years in the period ended
December 31, 1997 and for the period from November 9, 1995 (commencement of
operations) to December 31, 1995, in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
February 20, 1998
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Deloitte Touche
Tohmatsu
International
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
1997
<S> <C>
ASSETS:
Investments, at value (amortized cost$251,218,410)
(Notes 2, 4 and 8) $168,741,447
Cash 255,610
Deferred organizational costs,
net of accumulated amortization of $7,991 (Note 2) 4,009
------------
Total assets 169,001,006
LIABILITIES - Accounts payable and accrued expenses 253,346
------------
NET ASSETS $168,747,720
============
COMPOSITION OF NET ASSETS:
Premium Exchangeable Participating Shares ("PEPS"),
no par value; 15,663,002 shares issued and
outstanding (Note 9) $248,241,560
Net unrealized depreciation of investments (82,476,963)
Undistributed net investment income 2,983,123
------------
NET ASSETS $168,747,720
============
NET ASSET VALUE PER PEPS $ 10.77
============
</TABLE>
See notes to financial statements.
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<TABLE>
<CAPTION>
AJL PEPS TRUST
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
Par Maturity Market Amortized
Securities Description Value Date Value Cost
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT SECURITIES:
United States Treasury Strips (Principal only) $ 5,639,000 2/15/98 $ 5,600,937 $ 5,601,057
United States Treasury Strips (Principal only) 5,639,000 5/15/98 5,528,081 5,527,748
United States Treasury Strips (Principal only) 5,639,000 8/15/98 5,449,135 5,452,136
United States Treasury Strips (Principal only) 5,639,000 11/15/98 5,375,884 5,376,997
United States Treasury Strips (Principal only) 5,639,000 2/15/99 5,298,292 5,301,064
----------- ------------ ------------
$28,195,000 27,252,329 27,259,002
===========
FORWARD PURCHASE CONTRACTS:
GRIT/AJL PEPS Trust Purchase Agreement 2/15/99 70,744,559 111,979,704
JVA/AJL PEPS Trust Purchase Agreement 2/15/99 70,744,559 111,979,704
------------ ------------
141,489,118 223,959,408
------------ ------------
TOTAL $168,741,447 $251,218,410
============ ============
</TABLE>
See notes to financial statements.
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 1,971,763
EXPENSES:
Administrative fees and expenses 8,305
Legal fees 29,910
Accounting fees 36,485
Insurance expense 47,115
Trustees fees 11,076
Amortization of deferred organizational costs 3,734
Other expenses 12,596
------------
Total fees and expenses 149,221
EXPENSE REIMBURSEMENT (Note 7) (145,487)
------------
TOTAL EXPENSES - Net 3,734
------------
NET INVESTMENT INCOME 1,968,029
NET INCREASE IN UNREALIZED DEPRECIATION
OF INVESTMENTS (68,562,120)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $(66,594,091)
============
</TABLE>
See notes to financial statements.
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND1996
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,968,029 $ 3,314,858
Unrealized depreciation of investments (68,562,120) (28,627,444)
------------ ------------
Net decrease in net assets from operations (66,594,091) (25,312,586)
DISTRIBUTIONS:
Net investment income (1,870,119) (726,337)
Return of capital (20,683,646) (21,516,663)
------------ ------------
Net decrease in net assets from distributions (22,553,765) (22,243,000)
------------ ------------
TOTAL DECREASE IN NET ASSETS
FOR THE YEAR (89,147,856) (47,555,586)
NET ASSETS, BEGINNING OF YEAR 257,895,576 305,451,162
----------- ------------
NET ASSETS, END OF YEAR $168,747,720 $257,895,576
============ ============
</TABLE>
See notes to financial statements.
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AJL PEPS TRUST
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. ORGANIZATION
AJL PEPS Trust ("Trust") was established on August 17, 1995 and is
registered as a nondiversified, 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 accretion 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 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.
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.
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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 OF INVESTMENTS
Maturities of U.S. Treasury Strips totaled $22,556,000 and $22,243,000 for
the years ended December 31, 1997 and 1996, respectively; there were no
purchases or sales of U.S. Treasury Strips investments or forward purchase
contracts during the year.
5. TRUSTEES FEES
Each of the three Trustees was paid a one-time, upfront fee of $10,800 for
their 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 amortized
over the life of the Trust. As of December 31, 1997, the Trust had amortized
$23,537 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, 1997, unrealized depreciation of investments, based on
amortized cost for federal income tax purposes, aggregated $82,476,963,
consisting of gross unrealized appreciation of $333 and gross unrealized
depreciation of $82,477,296. The amortized cost of investment securities for
federal income tax purposes was $251,218,410 at December 31, 1997.
7. EXPENSES
The estimated expenses to be incurred by the Trust in connection with the
offering of the PEPS and its ongoing operations are $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, 1997, the Trust had paid $413,654 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, 1997, $424,621 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.
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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, 1997 are as
follows:
<TABLE>
<CAPTION>
Exchange Cost of Contract Unrealized
Forward Contracts Date Contract Value Depreciation
<S> <C> <C> <C> <C>
Jay Van Andel Trust 2/15/99 $111,979,704 $ 70,744,559 $41,235,145
HDV GRIT Holdings, Inc. 2/15/99 111,979,704 70,744,559 41,235,145
------------ ------------ -----------
Total $223,959,408 $141,489,118 $82,470,290
============ =========== ===========
</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, 1997, the custodian held
19,578,756 ADSs with an aggregate value of $181,103,493.
9. CAPITAL SHARE TRANSACTIONS
There were no redemptions or sales of PEPS in 1997 and 1996. As of December
31, 1997 and 1996, there were 15,663,002 PEPS issued and outstanding with an
aggregate cost, net of sales commission, offering costs and return of capital,
of $248,241,560 and $268,925,206, respectively.
******
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AJL PEPS TRUST
FINANCIAL HIGHLIGHTS
The Trust's financial highlights are presented below. The per-share operating
performance data are 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 the
period November 9, 1995 to December 31, 1995 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 1997 and 1996 are calculated using the average of the
quarter-end net assets for the year. Average net assets for 1995 were
calculated using the average of the net assets on the seed date (November 8,
1995) and the net assets as of December 31, 1995.
<TABLE>
<CAPTION>
November 9, 1995
(Commencement
Year Ended of Operations) to
December 31 December 31,
1997 1996 1995
<S> <C> <C> <C>
Investment income $ .13 $ .21 $ .02
Expenses --------- --------- ---------
Investment income - net .13 .21 .02
Distribution from income (.12) (.05) (.04)
Return of capital (1.32) (1.37)
Unrealized gain (loss) on investments (4.39) (1.82) .94
--------- --------- ---------
Net increase (decrease) in net asset value (5.70) (3.03) .92
Beginning net asset value 16.47 19.50 18.58
--------- --------- ---------
Ending net asset value $ 10.77 $ 16.47 $ 19.50
========= ========= =========
Ending market value $ 11.00 $ 16.38 $ 19.50
========= ========= =========
Total investment return based on market value (26 32)% (9.95)% 4.95%
Ratio of expenses to average net assets:
Before waiver .06% .05% .10%
After waiver % % %
Ratio of net investment income to average net assets:
Before waiver .76% 1.01% .09%
After waiver .82% 1.06% .19%
Net assets, end of period (in thousands) $ 168,748 $ 257,896 $ 305,451
</TABLE>
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