AJL PEPS Trust
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>
AJL PEPS Trust
Summary Information
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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AJL PEPS TRUST
FINANCIAL REPORT
JUNE 30, 1998
(Unaudited)
2
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CONTENTS
================================================================================
FINANCIAL STATEMENTS:
Statement of Net Assets as of June 30, 1998 4
Schedule of Investments as of June 30, 1998 5
Statement of Operations for the Six Months Ended June 30, 1998 6
Statements of Changes in Net Assets for the Six Months Ended
June 30, 1998 and the Year Ended December 31, 1997 7
Notes to Financial Statements 8-10
Financial Highlights 11
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3
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENT OF NET ASSETS
June 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (amortized cost $240,531,473) (Notes 2, 4, and 8) $ 109,625,407
Cash 256,249
Deferred organizational costs, net of accumulated
amortization of $9,858 (Note 2) 2,142
--------------
Total Assets $ 109,883,798
==============
LIABILITIES
Accounts payable and accrued expenses $ 253,346
--------------
Net Assets $ 109,630,452
==============
COMPOSITION OF NET ASSETS
Premium Exchangeable Participating Shares ("PEPS"), no par value;
15,663,002 shares issued and outstanding (Note 9) $ 238,324,776
Net unrealized depreciation of investments (130,906,066)
Undistributed net investment income 2,211,742
--------------
Net Assets $ 109,630,452
==============
Net Asset Value per PEPS $ 7.00
==============
</TABLE>
See Notes to Financial Statements.
4
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<TABLE>
<CAPTION>
AJL PEPS TRUST
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 $ 5,639,000 08/15/98 $ 5,602,798 $ 5,600,623
United States Treasury Strips 5,639,000 11/15/98 5,530,393 5,524,125
United States Treasury Strips 5,639,000 02/15/99 5,453,984 5,447,317
------------ ------------- -------------
$ 16,917,000 $ 16,587,175 $ 16,572,065
============ ============== =============
FORWARD PURCHASE CONTRACTS
GRIT/AJL PEPS Trust Purchase
Agreement 02/15/99 $ 46,519,116 $ 111,979,704
JVA/AJL PEPS Trust Purchase
Agreement 02/15/99 46,519,116 111,979,704
------------- -------------
Total 93,038,232 223,959,408
------------- -------------
$ 109,625,407 $ 240,531,473
============= =============
</TABLE>
See Notes to Financial Statements.
5
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 591,064
EXPENSES:
Administrative fees and expenses $ 431
Legal fees 8,658
Accounting fees 16,000
Insurance expense 23,557
Trustees' fees 5,538
Amortization of deferred organizational costs 1,867
Other expenses 5,598
--------------
Total fees and expenses 61,649
EXPENSE REIMBURSEMENT (Note 7) 59,782
--------------
Total expenses - Net 1,867
--------------
Net Investment Income 589,197
Net increase in unrealized depreciation
of investments (48,429,103)
--------------
Net decrease in net assets resulting from operations $ (47,839,906)
==============
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1998
and the Year Ended December 31, 1997
(Unaudited)
Six months
Ended Year Ended
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 589,197 $ 1,968,029
Unrealized depreciation of investments (48,429,103) (68,562,120)
-------------- --------------
Net decrease in net assets from operations (47,839,906) (66,594,091)
-------------- --------------
DISTRIBUTIONS
Net investment income (1,360,578) (1,870,119)
Return of capital (9,916,784) (20,683,646)
-------------- --------------
Net decrease in net assets from distributions (11,277,362) (22,553,765)
-------------- --------------
Total decrease in net assets for the period (59,117,268) (89,147,856)
Net assets, beginning of period 168,747,720 257,895,576
-------------- --------------
Net assets, end of period $ 109,630,452 $ 168,747,720
============== ==============
</TABLE>
See Notes to Financial Statements.
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AJL PEPS TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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Note 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.
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.
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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AJL PEPS TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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Note 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.
Note 4. Purchases and Sales of Investments
Maturities of U.S. Treasury Strips totaled $11,278,000 and $22,556,000 for the
six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. There were no purchases or sales of U.S. Treasury Strips
investments or forward purchase contracts during the period.
Note 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 June 30, 1998, the Trust had amortized $29,075 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
amortized cost for federal income tax purposes, aggregated $130,906,066,
consisting of gross unrealized appreciation of $15,110 and gross unrealized
depreciation of $130,921,176. The amortized cost of investment securities for
federal income tax purposes was $240,531,473 at June 30, 1998.
Note 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 June 30,
1998, 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 June 30, 1998, $468,109 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.
9
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AJL PEPS TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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Note 8. Forward Purchase Contracts
On November 15, 1995, the Trust entered into two forward purchase contracts with
two existing 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 June 30, 1998 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 02/15/99 $ 111,979,704 $ 46,519,116 $ (65,460,588)
HDV GRIT Holdings, Inc. 02/15/99 111,979,704 46,519,116 (65,460,588)
------------- ------------ ---------------
$ 223,959,408 $ 93,038,232 $ (130,921,176)
============= ============ ===============
</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 June 30,1998, the custodian held 19,578,756 ADSs with an
aggregate value of $105,235,814.
Note 9. Capital Share Transactions
There were no redemptions or sales of PEPS during the period ended June 30, 1998
and the year ended December 31, 1997. As of June 30, 1998 and December 31, 1997,
there were 15,663,002 PEPS issued and outstanding with an aggregate cost, net of
sales commission, offering costs and return of capital, of $238,324,776 and
$248,241,560, respectively.
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AJL PEPS TRUST
FINANCIAL HIGHLIGHTS
(Unaudited)
- --------------------------------------------------------------------------------
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 periods
of less than one year are not annualized.
<TABLE>
<CAPTION>
November 9,
1995
Six Months (Commencement
Ended Year Ended Year Ended of Operations) to
June 30, December 31, December 31, December 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per share operating performance for a
PEPS outstanding throughout the period
Investment income $ 0.04 $ 0.13 $ 0.21 $ 0.02
Expenses 0.00 0.00 0.00 0.00
--------- --------- --------- ---------
Investment income - net 0.04 0.13 0.21 0.02
Adjustments to capital (offering expenses) 0.00 0.00 0.00 (0.04)
Distributions from income (0.09) (0.12) (0.05) 0.00
Return of capital (0.63) (1.32) (1.37) 0.00
Unrealized gain (loss) on investments (3.09) (4.39) (1.82) 0.94
--------- --------- --------- ---------
Net increase (decrease) in net asset value (3.77) (5.70) (3.03) 0.92
Beginning net asset value 10.77 16.47 19.50 18.58
--------- --------- --------- ---------
Ending net asset value $ 7.00 $ 10.77 $ 16.47 $ 19.50
========= ========= ========= =========
Ending market value $ 7.00 $ 11.00 $ 16.38 $ 19.50
========= ========= ========= =========
Total investment return based on
market value (31.81)% (26.34)% (9.95)% 4.95%
Ratios/Supplemental Data
Ratio of expenses to average net assets:
Before waiver 0.11 % 0.06 % 0.05 % 0.10%
After waiver 0.00 % 0.00 % 0.00 % 0.00%
Ratio of net investment income to average
net assets:
Before waiver 0.74 % 0.84 % 1.01 % 0.09%
After waiver 0.85 % 0.90 % 1.06 % 0.19%
Net assets, end of period (in thousands) $109,630 $168,748 $257,896 $305,451
</TABLE>
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