UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
811-10565
(Investment Company Act File Number)
EQUITY SECURITIES TRUST II
(Exact Name of Registrant as Specified in Charter)
C/O THE BANK OF NEW YORK
100 CHURCH STREET
NEW YORK, NEW YORK 10007
(Address of Principal Executive Offices) (Zip Code)
212-437-4079
(Registrant's Telephone Number, Including Area Code)
MS. BETTY COCOZZA
THE BANK OF NEW YORK
100 CHURCH STREET
NEW YORK, NEW YORK 10007
(Name and Address of Agent for Service)
DECEMBER 31, 2003
(Date of Fiscal Year End)
JUNE 30, 2003
(Date of Reporting Period)
ITEM 1. REPORT TO STOCKHOLDERS.
EQUITY SECURITIES TRUST II
SEMIANNUAL REPORT
JUNE 30, 2003
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EQUITY SECURITIES TRUST II
Semiannual Report
June 30, 2003
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
100 Church Street
New York, New York 10007
2
SUMMARY INFORMATION
- --------------------------------------------------------------------------------
Equity Securities Trust II (the "Trust") is a Delaware business trust. It was
created to issue Equity Trust Securities and to carry out the transactions
described in this summary. The Equity Trust Securities are securities that
represent all of the beneficial interest in the Trust. On December 18, 2001, the
Trust sold 9,791,336 Equity Trust Securities to the public at a price of $22.50
each. With part of the net proceeds received from the sale of the Equity Trust
Securities, the Trust purchased a portfolio of U.S. Treasury securities and,
with the remainder of the proceeds, it purchased prepaid forward contracts for
the purchase of Rainbow Media Group Class A Tracking Stock (the "Tracking
Stock") issued by Cablevision Systems Corporation ("Cablevision") from certain
subsidiaries of AT&T Corp. These subsidiaries are referred to in this summary as
the "Sellers." In August 2002 each share of the Tracking Stock was exchanged for
1.1909 shares of Cablevision NY Group Class A Common Stock (the "Class A
Stock").
The terms of the Equity Trust Securities are designed to give the holders a
higher current yield than they would receive by owning the Class A Stock, while
also giving them the chance to share in the increased value of Class A Stock if
its price goes up. Cablevision does not currently pay dividends on its common
stock and has stated that it does not intend to do so, but in the future
Cablevision might pay dividends that are higher than the distributions holders
will receive from the Trust. Holders of the Equity Trust Securities will receive
less than they paid for their securities if the price of 1.1909 shares of Class
A Stock is below that price when the Trust terminates on or shortly after
February 15, 2005 (the "Exchange Date"), but they will receive only part of the
increased value if the price of the Class A Stock goes up, and then only if the
price is above $23.05 per share shortly before the Exchange Date.
Each Equity Trust Security entitles the holder to a cash distribution of $0.3516
on each February 15, May 15, August 15 and November 15, ending on February 15,
2005. Those payments are made from maturing U.S. Treasury securities that the
Trust acquired when it issued the Equity Trust Securities.
Holders of the Equity Trust Securities originally were entitled to receive
between 0.8197 and 1.0 share of Tracking Stock for each Equity Trust Security
owned on the Exchange Date. However, as a result of the exchange of Class A
Stock for Tracking Stock, on the Exchange Date holders of the Equity Trust
Securities will receive between 0.9762 and 1.1909 shares of Class A Stock for
each Equity Trust Security owned. If, shortly before the Exchange Date, the
price of the Class A Stock is more than $23.05 per share, holders will receive
0.9762 of a share of Class A Stock, or the cash equivalent, for each Equity
Trust Security owned. If the price of the Class A Stock is more than $18.89 per
share but less than or equal to $23.05 per share, holders will receive Class A
Stock worth $22.50, or the cash equivalent, for each Equity Trust Security.
Finally, if the price of Class A Stock is $18.89 per share or less, holders will
receive 1.1909 shares of Class A Stock, or the cash equivalent, for each Equity
Trust Security owned. Those amounts will be adjusted if Cablevision splits its
stock, pays a stock dividend, issues warrants or distributes certain types of
assets or if certain other events occur.
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Under their prepaid forward contracts with the Trust, the Sellers have the
option to deliver cash to the Trust instead of shares of Class A Stock. If the
Sellers decide to deliver cash, holders will receive the cash value of the Class
A Stock they would have received under the Sellers' contracts instead of the
shares themselves. If Cablevision merges into another company or liquidates,
holders may receive shares of the other company or cash instead of Class A Stock
on the Exchange Date. If a Seller defaults under its prepaid forward contract
with the Trust, the obligations of the Sellers under their contracts will be
accelerated and the Trust will immediately distribute to holders the Class A
Stock or cash received by the Trust under the prepaid forward contracts plus the
amount of the U.S. Treasury securities then held by the Trust.
The Sellers may elect to deliver cash instead of the Class A Stock subject to
their contracts by completing an offering of securities to refinance the Equity
Trust Securities (a "rollover offering"). The Sellers may extend the Exchange
Date under their prepaid forward contracts to May 15, 2005, but only in
connection with a rollover offering. If the Sellers extend the Exchange Date,
they must deliver cash to be distributed as an additional partial distribution
at the rate of $0.3516 per quarter for the period beginning on February 15, 2005
and ending on the extended Exchange Date. If the Sellers complete a rollover
offering and have extended the Exchange Date, the Sellers will deliver the cash
due under their prepaid forward contracts by the fifth business day after the
extended Exchange Date. If the Sellers have elected to extend the Exchange Date
to May 15, 2005, the Sellers will also have the option, in connection with the
consummation of the rollover offering, of later accelerating the Exchange Date
to between February 15, 2005 and May 15, 2005, in which case the Sellers will
deliver the cash due under their prepaid forward contracts by the fifth business
day after the accelerated Exchange Date.
This is only a summary of certain provisions and features of the Equity Trust
Securities and is not a complete statement of their terms. For a more complete
description of the terms of these securities, you should refer to the Trust's
prospectus dated December 12, 2001. A copy of this prospectus may be found in
the Securities and Exchange Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system at http://www.sec.gov.
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EQUITY SECURITIES TRUST II
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2003
(Unaudited)
- -------------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $195,380,147) $ 234,437,596
Cash 1,829
Prepaid expenses 125,668
---------------
TOTAL ASSETS $ 234,565,093
---------------
LIABILITIES
Unearned expense reimbursement 125,668
---------------
TOTAL LIABILITIES 125,668
---------------
NET ASSETS $ 234,439,425
===============
COMPOSITION OF NET ASSETS
Equity Trust Securities
9,791,337 shares issued and outstanding (Note 9) $ 195,381,976
Unrealized appreciation of investments 39,057,449
---------------
NET ASSETS $ 234,439,425
===============
NET ASSET VALUE PER SHARE
($234,439,425 /9,791,337 shares outstanding) $ 23.94
===============
The accompanying notes are an integral part of these financial statements.
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EQUITY SECURITIES TRUST II
SCHEDULE OF INVESTMENTS
June 30, 2003
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Par Maturity Market
Securities Description Value Date Cost Value
- ---------------------- ----- ---- ---- -----
UNITED STATES GOVERNMENT SECURITIES:
United States Treasury STRIPS $ 3,443,000 08/15/03 $ 3,432,618 $ 3,437,973
United States Treasury STRIPS 3,443,000 11/15/03 3,407,093 3,430,467
United States Treasury STRIPS 3,443,000 02/15/04 3,381,002 3,420,861
United States Treasury STRIPS 3,443,000 05/15/04 3,351,176 3,413,184
United States Treasury STRIPS 3,443,000 08/15/04 3,323,173 3,402,407
United States Treasury STRIPS 3,443,000 11/15/04 3,274,879 3,388,773
United States Treasury STRIPS 3,443,000 02/15/05 3,245,106 3,381,164
-------------- -------------- --------------
$ 24,101,000 23,415,047 23,874,829
==============
FORWARD PURCHASE CONTRACTS:
Cablevision NY Group Class A
Common Stock (see Note 8) 171,965,100 210,562,767
-------------- --------------
Total $ 195,380,147 $ 234,437,596
============== ==============
The accompanying notes are an integral part of these financial statements.
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EQUITY SECURITIES TRUST II
STATEMENT OF OPERATIONS
For the six months ended June 30, 2003
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
INTEREST INCOME $ 392,874
EXPENSES:
Administrative fees and expenses $ 18,006
Legal fees 4,697
Audit fees 12,500
Trustees' fees 5,636
Other expenses 6,029
----------
TOTAL FEES AND EXPENSES 46,868
EXPENSE REIMBURSEMENT (Note 7) (46,868)
----------
TOTAL EXPENSES - NET -
--------------
NET INVESTMENT INCOME 392,874
NET CHANGE IN UNREALIZED APPRECIATION
OF INVESTMENTS 47,264,491
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 47,657,365
==============
The accompanying notes are an integral part of these financial statements.
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EQUITY SECURITIES TRUST II
STATEMENTS OF CHANGES IN NET ASSETS
For the six months and year ended June 30, 2003 and December 31, 2002
(Unaudited)
Six Months
Ended Year Ended
June 30, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 392,874 $ 951,472
Net change in unrealized appreciation of investments 47,264,491 (30,386,972)
--------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS 47,657,365 (29,435,500)
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (392,874) (986,365)
Return of capital (6,492,394) (11,507,638)
--------------- ---------------
TOTAL DISTRIBUTIONS (6,885,268) (12,494,003)
--------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS FOR
THE PERIOD 40,772,097 (41,929,503)
NET ASSETS, BEGINNING OF PERIOD 193,667,328 235,596,831
--------------- ---------------
NET ASSETS, END OF PERIOD $ 234,439,425 $ 193,667,328
=============== ===============
The accompanying notes are an integral part of these financial statements.
8
EQUITY SECURITIES TRUST II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
Equity Securities Trust II ("Trust") was established on October 30, 2001 and is
registered as a non-diversified, closed-end management investment company under
the Investment Company Act of 1940 (the "Act"). In December 2001, the Trust sold
Equity Trust Securities 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 pay the purchase price for prepaid forward purchase contracts for shares
of Rainbow Media Group Class A Tracking Stock (the "Tracking Stock") from
certain holders of the Tracking Stock (the "Sellers"). Each Equity Trust
Security originally represented between 0.8197 and 1.00 share of the Tracking
Stock or its cash equivalent. Effective August 20, 2002, each share of the
Tracking Stock was exchanged for 1.1909 shares of Cablevision NY Group Class A
Common Stock ("Class A Stock"). As a result, each Equity Trust Security
represents between 0.9762 and 1.1909 shares of Class A Stock or its cash
equivalent. The number of shares, or amount of cash, will vary, depending on the
average market price of the Class A Stock over the twenty business days before
the Exchange Date. Class A Stock, or its cash equivalent, is deliverable
pursuant to the forward purchase contracts on February 15, 2005 (the "Exchange
Date") but the Exchange Date may be extended by the Sellers to any date through
May 15, 2005. The Trust will terminate upon the distribution of the Class A
Stock or cash to the holders of the Equity Trust Securities.
Pursuant to an 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 accounting principles generally accepted
in the United States of America.
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 fair valued, in
accordance with procedures approved by the Trustees of the Trust, at the
mean of the bid prices received by the Trust at the end of each period from
two 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 estimated value may differ
significantly from the value that would have been used had a ready market
for the contracts existed, and the difference could be material.
INVESTMENT TRANSACTIONS
Securities transactions are accounted for on a trade date basis. Interest
income is recorded as earned and consists of amortization of discount.
Realized gains and losses are accounted for on the specific identification
method.
9
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
NOTE 3. DISTRIBUTIONS
The face amounts and maturities of U.S. Treasury STRIPS held by the Trust
correspond to the amounts and payment dates of scheduled distributions to
shareholders. Equity Trust Security holders are entitled to receive
distributions from the maturity of U.S. Treasury STRIPS of $1.4064 per annum or
$.3516 per quarter. Pursuant to the Trust Agreement, the U.S. Treasury STRIPS
must be held to maturity unless termination of the Trust is accelerated in which
case the U.S. Treasury STRIPS would be sold and the proceeds distributed pro
rata to the shareholders. For the six months ended June 30, 2003, the total
distribution to shareholders was $6,885,268. The distribution included net
investment income and return of capital of $392,874 and $6,492,394,
respectively.
NOTE 4. PURCHASES, SALES AND MATURITIES ON INVESTMENTS
Maturities of U.S. Treasury STRIPS for the six months ended June 30, 2003
totaled $6,886,000. There were no purchases or sales of the U.S. Treasury STRIPS
or forward purchase contracts during the period.
NOTE 5. TRUSTEES' FEES
Each of the three Trustees has been paid a one-time up-front fee of $10,800 for
his services during the life of the Trust. The Managing Trustee has been paid an
additional one-time up-front fee of $3,600 for serving in such capacity. The
total prepaid fees of $36,000 have been paid by the Trust's sponsor.
NOTE 6. INCOME TAXES
The Trust is treated as a grantor trust for Federal income tax purposes;
accordingly, no provision is required for such taxes.
As of June 30, 2003, net unrealized appreciation of investments, based on cost
for Federal income tax purposes of $195,380,147, aggregated $39,057,449,
consisting of gross unrealized appreciation and depreciation of investments of
$39,057,449 and $0, respectively.
NOTE 7. EXPENSES
At the closing of the offering of the Equity Trust Securities, the Trust's
sponsor paid the Trust's Administrator, its Custodian and its Paying Agent and
each Trustee a one-time, up-front fee and, in the case of the Administrator,
anticipated expenses of the Trust over the term of the Trust. The Trust's
sponsor has agreed to pay any on-going expenses of the Trust in excess of these
estimated amounts and to reimburse the Trust for any amounts it may be required
to pay as indemnification to any Trustee, the Administrator, the Custodian or
the Paying Agent.
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NOTE 8. FORWARD PURCHASE CONTRACTS
The Trust holds forward purchase contracts with the Sellers, for which it paid
them a total of $171,965,100. Pursuant to such contracts, the Sellers are
obligated to deliver to the Trust on February 15, 2005 (the "Exchange Date"), or
a date not later than May 15, 2005 if the Sellers elect to extend the Exchange
Date, a number of shares of Class A Stock or, at the Sellers' option, its cash
equivalent equal to the product of the Exchange Rate times the initial number of
shares subject to the Sellers' contracts. The Exchange Rate will vary depending
on the average market price of the Class A Stock over the twenty business days
before the Exchange Date (the "Average Market Price"). The Exchange Rate will be
1.1909 if the Average Market Price is $18.89 or less, will be 0.9762 if the
Average Market Price is more than $23.05, and will be the rate that would result
in the number of shares of Class A Stock that would be equal in value to $22.50
if the Average Market Price is more than $18.89 but less than or equal to
$23.05. The forward purchase contracts are illiquid and cannot be sold by the
Trust.
Offering expenses of $314,000 were paid by the Sellers. This amount has been
recorded as a reduction in the cost of the forward purchase contracts.
The Sellers' obligations under the forward purchase contracts are collateralized
by shares of Class A Stock which are being held in the custody of The Bank of
New York, the Trust's Custodian. At June 30, 2003, the Custodian held 9,791,336
shares with an aggregate value of $203,268,135.
NOTE 9. CAPITAL SHARE TRANSACTIONS
In December 2001, the Trust sold 9,791,336 Equity Trust Securities to the public
and received net proceeds of $213,381,908 ($220,305,060 less sales commissions
and offering expenses of $6,923,152). As of June 30, 2003, there were 9,791,337
Equity Trust Securities issued and outstanding.
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EQUITY SECURITIES TRUST II
FINANCIAL HIGHLIGHTS
(Unaudited)
- --------------------------------------------------------------------------------
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.
For the period from
December 18, 2001
For the For the (Commencement of
Six Months Year Ended of Operations) to
Ended December 31, December 31,
June 30, 2003 2002 2001
------------- ---- ----
Net asset value, beginning of period $ 19.78 $ 24.06 $ 21.82 *
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .04 .10 -
Unrealized gain (loss) on investments 4.82 (3.10) 2.27
----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSET VALUE 4.86 (3.00) 2.27
LESS: DISTRIBUTIONS
Net investment income (.04) (1.18) -
Return of capital (.66) (.10) -
----------- ----------- -----------
TOTAL DISTRIBUTIONS (.70) (1.28) -
CAPITAL SHARE TRANSACTIONS:
Offering costs - - (0.03)
------------ ----------- -----------
Ending net asset value $ 23.94 $ 19.78 $ 24.06
============ =========== ===========
Ending market value ** $ 23.60 $ 20.09 $ 23.52
============ =========== ===========
Total investment return (2) 21.25 % (7.53)% 4.53 %
Ratios/supplemental data
Ratio of expenses to average net assets:
Before reimbursement (1) .04 % .05 % .32 %
After reimbursement (1) .00 % .00 % .00 %
Ratio of net investment income to average net assets:
Before reimbursement (1) .33 % .48 % .08 %
After reimbursement (1) .37 % .53 % .41 %
Net assets, end of period (in thousands) $ 234,439 $ 193,667 $ 235,597
- ----------
(1) Annualized
(2) 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.
* Net proceeds less selling commissions and offering expenses ($1.18 per
share)
** Closing price on NYSE at end of period.
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ITEM 2. CODE OF ETHICS.
Not required in this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not required in this report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not required in this report.
ITEMS 5-6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable. The registrant invests exclusively in non-voting
securities.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's managing trustee has concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-2(c) under the
Investment Company Act of 1940, as amended (the "1940 Act"), are effective, as
of a date within 90 days of the filing date of the report that includes the
disclosure required by this paragraph, based on his evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act.
(b) There were no changes in the registrant's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
13
ITEM 10. EXHIBITS
(a) Code of Ethics. Not required in this filing.
(b) Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002.
14
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 6, 2003
EQUITY SECURITIES TRUST II
By: /s/ Donald J. Puglisi
-----------------------------
Name: Donald J. Puglisi
Title: Managing Trustee
Pursuant to the requirements of the Investment Company Act of 1940, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: November 6, 2003
By: /s/ Donald J. Puglisi
-----------------------------
Name: Donald J. Puglisi
Title: Managing Trustee
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