AJL PEPS 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>
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
TABLE OF CONTENTS
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Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Statement of Net Assets as of December 31, 1998 2
Schedule of Investments as of December 31, 1998 3
Statement of Operations for the Year Ended December 31, 1998 4
Statements of Changes in Net Assets for the
Years Ended December 31, 1998 and 1997 5
Notes to Financial Statements 6-8
Financial Highlights 9
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DELOITTE &
TOUCHE
------------------------------------------------------
Deloitte & Touche LLP Telephone: (312) 946-3000
Two Prudential Plaza Facsimile: (312) 946-2600
180 North Stetson Avenue
Chicago, Illinois 60601-6778
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, 1998, 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 three 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, 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 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, 1998, 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 three years in the period ended
December 31, 1998 and for the period from November 9, 1995 (commencement of
operations) to December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 10, the Trust is in the process of termination.
/s/ Deloitte & Touche LLP
February 19, 1999
- ---------------
Deloitte Touche
Tohmatsu
- ---------------
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENT OF NET ASSETS
DECEMBER 31,1998
- ---------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at fair value (amortized cost $229,559,539)
(Notes 2, 4 and 8) $ 103,789,749
Cash 256,888
Deferred organizational costs, net of accumulated amortization of
$11,534 (Note 2) 466
-------------
Total assets 104,047,103
LIABILITIES - Accounts payable and accrued expenses 253,346
-------------
NET ASSETS $ 103,793,757
=============
COMPOSITION OF NET ASSETS:
Premium Exchangeable Participating Shares ("PEPS"), no par value;
15,663,002 shares issued and outstanding (Note 9) $228,687,236
Net unrealized depreciation of investments (125,769,790)
Undistributed net investment income 876,311
------------
NET ASSETS $103,793,757
============
NET ASSET VALUE PER PEPS $ 6.63
============
</TABLE>
See notes to financial statements.
2
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<TABLE>
<CAPTION>
AJL PEPS TRUST
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 (principal only) $5,639,000 2/15/99 $ 5,608,831 $ 5,600,131
---------- ------------- -------------
Total United States government securities $5,639,000 5,608,831 5,600,131
========== ------------- -------------
FORWARD PURCHASE CONTRACTS:
GRIT/AJL PEPS Trust Purchase Agreement 2/15/99 49,090,459 111,979,704
JVA/AJL PEPS Trust Purchase Agreement 2/15/99 49,090,459 111,979,704
------------- -------------
Total forward purchase contracts 98,180,918 223,959,408
------------- -------------
TOTAL $ 103,789,749 $ 229,559,539
============= =============
</TABLE>
See notes to financial statements.
3
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,1998
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<S> <C>
ACCRETION OF ORIGINAL ISSUE DISCOUNT $ 897,130
EXPENSES:
Administrative fees and expenses 12,474
Legal fees 17,413
Accounting fees 26,478
Insurance expense 47,056
Trustees fees 11,064
Amortization of deferred organizational costs 3,543
Other expenses 9,323
-------------
Total fees and expenses 127,351
EXPENSE REIMBURSEMENT (Note 7) (123,808)
-------------
TOTAL EXPENSES - Net 3,543
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NET INVESTMENT INCOME 893,587
NET INCREASE IN UNREALIZED DEPRECIATION
OF INVESTMENTS (43,292,827)
-------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (42,399,240)
=============
</TABLE>
See notes to financial statements.
4
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<TABLE>
<CAPTION>
AJL PEPS TRUST
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATIONS:
Net investment income $ 893,587 $ 1,968,029
Unrealized depreciation of investments (43,292,827) (68,562,120)
------------- -------------
Net decrease in net assets from operations (42,399,240) (66,594,091)
DISTRIBUTIONS:
Net investment income (3,000,399) (1,870,119)
Return of capital (19,554,324) (20,683,646)
------------- -------------
Net decrease in net assets from distributions (22,554,723) (22,553,765)
------------- -------------
TOTAL DECREASE IN NET ASSETS
FOR THE YEAR (64,953,963) (89,147,856)
NET ASSETS, BEGINNING OF YEAR 168,747,720 257,895,576
------------- -------------
NET ASSETS, END OF YEAR $ 103,793,757 $ 168,747,720
============= =============
</TABLE>
See notes to financial statements.
5
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AJL PEPS TRUST
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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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. See Note 10.
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. The PEPS are valued at the last exchange price at the end of the
period.
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.
6
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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 $22,556,000 for
the years ended December 31, 1998 and 1997, respectively; there were no
purchases or sales of U.S. Treasury Strips investments or forward purchase
contracts during 1998.
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, 1998, the Trust
had amortized $11,534 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, unrealized depreciation of investments, based on
amortized cost for federal income tax purposes, aggregated $125,769,790,
consisting of gross unrealized appreciation of $8,700 and gross unrealized
depreciation of $125,778,490. The amortized cost of investment securities
for federal income tax purposes was $229,559,539 at December 31, 1998.
7. EXPENSES
At inception of the Trust, expenses to be incurred by the Trust in
connection with the offering of the PEPS and its ongoing operations were
estimated to be $1,261,471. Of this amount, $667,000 represented offering
expenses ($655,000) and organizational expenses ($12,000) to be incurred by
the Trust and are being paid from the proceeds received from the offering
of the PEPS. At December 31, 1998, the Trust had paid $413,654 relating to
such expenses.
The remaining estimated expenses of $594,471 represented prepayment of
estimated administrative and other operating expenses. Such amount was
deposited with the Administrator by the sponsor of the Trust, but has not
been included in the Trust's financial statements since the amount does not
represent Trust property. At December 31, 1998, $487,342 had been paid by
the Administrator for administrative and related operating expenses and had
been reimbursed to the Trust from the funds deposited by the sponsor.
Expenses incurred in excess of this amount will be paid by the sponsor or,
if not, by the Trust.
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. As discussed in Note 10
below, pursuant to such contracts, the Sellers were 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 a number of ADSs as determined by formula set
forth in the Trust's original prospectus dated November 15, 1995.
7
<PAGE>
The forward purchase contracts held by the Trust at December 31, 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 2/15/99 $111,979,704 $49,099,459 $ (62,889,245)
HDV GRIT Holdings, Inc. 2/15/99 111,979,704 49,099,459 (62,889,245)
------------ ----------- -------------
Total $223,959,408 $98,180,918 $(125,778,490)
============ =========== =============
</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, 1998, the custodian held
19,578,756 ADSs with an aggregate value of $104,012,141.
9. CAPITAL SHARE TRANSACTIONS
There were no redemptions or sales of PEPS in 1998 and 1997. As of December
31, 1998 and 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 $228,687,236 and $248,241,560, respectively. See Note 10 for a
description of the exchange of the PEPS in 1999.
10. SUBSEQUENT EVENTS
Trust Termination - In accordance with the Trust provisions, the PEPS were
mandatorily exchangeable for the ADSs on February 15, 1999. Holders of
record as of February 16, 1999 were entitled to exchange each of their PEPS
for 1.25 ADSs having a market value of $4.875 per ADS at the close of
business on February 16, 1999. On February 16, 1999, the ADSs were delisted
from the New York Stock Exchange.
Distribution - On February 16, 1999, U.S. Treasury Strips having a par
value of $5,639,000 matured. PEPS holders of record at that date were
entitled to a distribution of $0.36 per PEPS. Additionally, upon
termination of the Trust, each holder of the PEPS will receive any
remaining net assets of the Trust.
******
8
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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 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 1998 and 1997 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, 1996) and the
net assets as of December 31, 1996.
<TABLE>
<CAPTION>
9-Nov-95
(Commencement
Year Ended of Operations) to
December 31 December 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Investment income $ .06 $ .13 $ .21 $ .02
Expenses
-------- -------- -------- --------
Investment income - net , 06 .13 .21 .02
Distribution from income (.19) (.12) (.05) (.04)
Return of capital (1.25) (1.32) (1.37)
Unrealized gain (loss) on investments (2.76) (4.39) (1.82) .94
-------- -------- -------- --------
Net increase (decrease) in net asset value (4.14) (5.70) (3.03) .92
Beginning net asset value 10.77 16.47 19.50 18.58
-------- -------- -------- --------
Ending net asset value $ 6.63 $ 10.77 $ 16.47 $ 19.50
======== ======== ======== ========
Ending market value $ 6.63 $ 11.00 $ 16.38 $ 19.50
======== ======== ======== ========
Total investment return based on market value (27.61)% (26.32)% (9.95)% 4.95%
Ratio of expenses to average net assets:
Before waiver .10 % .06 % .05 % .10%
After waiver % % % %
Ratio of net investment income to average
net assets:
Before waiver .63 % .76 % 1.01 % .09%
After waiver .73 % .82 % 1.06 % .19%
Net assets, end of period (in thousands) $103,794 $168,748 $257,896 $305,451
</TABLE>
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