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
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(Exact name of registrant as specified in charter)
c/o The Bank of New York
101 Barclay Street
New York, New York 10286
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(Address of principal executive offices) (Zip code)
Ms. Betty Cocozza
The Bank of New York
101 Barclay Street
New York, New York 10286
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(Name and address of agent for service)
212-815-2909
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(Registrant's telephone number, including area code)
December 31, 2004
-------------------------
(Date of fiscal year end)
June 30, 2004
--------------------------
(Date of reporting period)
ITEM 1. REPORT TO STOCKHOLDERS
EQUITY SECURITIES TRUST II
SEMIANNUAL REPORT
June 30, 2004
EQUITY SECURITIES TRUST II
SEMIANNUAL REPORT
JUNE 30, 2004
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
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 Class A
Stock is below that price when the trust terminates on or shortly after February
15, 2005 (which is referred to below as 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 shares 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 shares 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.
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
3
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 proceeds from the sale 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.
4
EQUITY SECURITIES TRUST II
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2004
(UNAUDITED)
ASSETS
Investments, at value (cost $182,155,877) $ 216,718,670
Cash 3,293
Prepaid expenses 43,673
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TOTAL ASSETS $ 216,765,636
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LIABILITIES
Unearned expense reimbursement 43,673
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TOTAL LIABILITIES 43,673
------------------
NET ASSETS $ 216,721,963
==================
COMPOSITION OF NET ASSETS
Equity Trust Securities
9,791,337 shares issued and outstanding (Note 9) $ 182,159,170
Unrealized appreciation of investments 34,562,793
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NET ASSETS $ 216,721,963
==================
NET ASSET VALUE PER SHARE ($216,721,963/9,791,337 shares outstanding) $ 22.13
==================
The accompanying notes are an integral part of these financial statements.
5
EQUITY SECURITIES TRUST II
SCHEDULE OF INVESTMENTS
JUNE 30, 2004
(UNAUDITED)
PAR MATURITY COST MARKET
SECURITIES DESCRIPTION VALUE DATE VALUE
UNITED STATES GOVERNMENT SECURITIES
United States Treasury STRIPS $ 3,443,000 08/15/04 $ 3,429,410 $ 3,438,387
United States Treasury STRIPS 3,443,000 11/15/04 3,396,127 3,423,375
United States Treasury STRIPS 3,443,000 02/15/05 3,365,240 3,406,504
------------- -------------- --------------
$ 10,329,000 10,190,777 10,268,266
=============
FORWARD PURCHASE CONTRACTS:
Cablevision NY Group Class A
Common Stock (see Note 8) 171,965,100 206,450,404
-------------- --------------
Total $ 182,155,877 $ 216,718,670
============== ==============
The accompanying notes are an integral part of these financial statements.
6
EQUITY SECURITIES TRUST II
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
INTEREST INCOME $ 226,193
EXPENSES:
Administrative fees and expenses $ 18,105
Legal fees 4,723
Trustees' fees 5,667
Other expenses 6,061
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TOTAL FEES AND EXPENSES 34,556
Expense Reimbursement (Note 7)
(34,556)
-------------
TOTAL EXPENSES - NET -
---------------
NET INVESTMENT INCOME 226,193
NET CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS (30,516,572)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (30,290,379)
===============
The accompanying notes are an integral part of these financial statements.
7
EQUITY SECURITIES TRUST II
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND
YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
SIX MONTHS
ENDED Year ended
JUNE 30, December 31,
2004 2003
------------- -------------
OPERATIONS:
Net investment income $ 226,193 $ 714,411
Net change in unrealized appreciation of investments (30,516,572) 73,286,408
------------- -------------
NET (DECREASE) INCREASE IN NET ASSETS
FROM OPERATIONS (30,290,379) 74,000,819
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (226,193) (714,411)
Return of capital (6,659,075) (13,056,126)
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TOTAL DISTRIBUTIONS (6,885,268) (13,770,537)
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NET (DECREASE) INCREASE IN NET ASSETS FOR
THE PERIOD (37,175,647) 60,230,282
NET ASSETS, BEGINNING OF PERIOD 253,897,610 193,667,328
------------- -------------
NET ASSETS, END OF PERIOD $ 216,721,963 $ 253,897,610
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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
existing stockholders (the "Sellers") of the Tracking Stock. Each Equity Trust
Security originally represented between 0.8197 and 1.00 share of the Tracking
Stock or cash equal to the value of those shares. Effective August 20, 2002,
each share of the Tracking Stock was exchanged for 1.1909 shares of Cablevision
NY Group Common Stock ("Cablevision"). As a result, each Equity Trust Security
represents between .9762 and 1.1909 shares of Cablevision or its cash
equivalent. The number of shares, or amount of cash, will vary, depending on the
average market price of Cablevision over the twenty business days before the
Exchange Date. Cablevision, or its cash equivalent, is deliverable pursuant to
the contract on February 15, 2005 (the "Exchange Date") but may be extended by
the Sellers to any date through May 15, 2005 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 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 contract is 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.
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.
9
EQUITY SECURITIES TRUST II
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 (except for the first distribution on February 15, 2002 which
was $.2212). 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, 2004, the total distribution
to shareholders is $6,885,268. The distribution includes net investment income
and return of capital of $226,193 and $6,659,075, respectively.
NOTE 4. PURCHASES, SALES AND MATURITIES ON INVESTMENTS
Maturities of U.S. Treasury Strips for the six months ended June 30, 2004
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
their services during the life of the Trust. The Managing Trustee has been paid
an additional one-time, upfront 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, 2004, net unrealized appreciation of investments, based on cost
for Federal income tax purposes, of $182,155,877 aggregated $34,562,793,
consisting of gross unrealized appreciation and depreciation of investments of
$34,562,793, and $0, respectively.
NOTE 7. EXPENSES
The Trust's Sponsor has paid each of the Administrator, the Custodian and the
Paying Agent, and each Trustee, at the closing of the offering of the Equity
Trust Securities a one-time, up-front amount, 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.
NOTE 8. FORWARD PURCHASE CONTRACT
The Trust has acquired and holds forward purchase contracts with existing
shareholders of Cablevision (the "Sellers") and paid them $171,965,100 in
connection therewith. Pursuant to such contracts on the Exchange Date the
Sellers are obligated to deliver to the Trust a number of shares of Cablevision
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
10
EQUITY SECURITIES TRUST II
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
price of Cablevision 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 .6883 if the Average Market Price is more than
$23.05, and will be the rate that would result in the number of shares of
Cablevision 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 contract.
The Sellers obligations under the forward purchase contracts are collateralized
by shares of Cablevision NY Group Class A Common Stock which are being held in
the custody of the Trust's Custodian, The Bank of New York. At June 30, 2004,
the Custodian held 11,660,795 shares with an aggregate value of $229,134,622.
NOTE 9. CAPITAL SHARE TRANSACTIONS
During the offering period, 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, 2004, there
were 9,791,337 Equity Trust Securities issued and outstanding.
11
EQUITY SECURITIES TRUST I
FINANCIAL HIGHLIGHTS
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 SIX For the For the period from
MONTHS Year Ended For the December 18,2001
ENDED December Year Ended (Commencement
JUNE 30 31, December 31, of Operations)to
2004 2003 2002 December 31,2001
----------- ----------- ------------ -------------------
Net asset value, beginning of period $ 25.93 $ 19.78 $ 24.06 $ 21.82*
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .02 .07 .10 -
Unrealized (loss) gain on investments (3.12) 7.48 (3.10) 2.27
---------- ----------- ----------- ------------
NET (DECREASE) INCREASE IN NET ASSET VALUE (3.10) 7.55 (3.00) 2.27
LESS: DISTRIBUTIONS
Net investment income (.02) (.07) (1.18) -
Return of capital (.68) (1.33) (.10) -
---------- ----------- ----------- ------------
TOTAL DISTRIBUTIONS (.70) (1.40) (1.28) -
CAPITAL SHARE TRANSACTIONS:
Offering costs - - (0.03)
Ending net asset value $ 22.13 $ 25.93 $ 19.78 $ 24.06
---------- =========== =========== ============
Ending market value ** $ 21.99 $ 25.75 $ 20.09 $ 23.52
---------- =========== =========== ============
Total investment return (2) (12.17)% 36.48% (7.53)% 4.53%
Ratios/supplemental data
Ratio of expenses to average net assets:
Before reimbursement (1) .03% .04% .05% .32%
After reimbursement (1) .00% .00% .00% .00%
Ratio of net investment income to average net assets:
Before reimbursement (1) .16% .31% .48% .08%
After reimbursement (1) .19% .35% .53% .41%
Net assets, end of period (in thousands) $ 216,722 $ 253,897 $ 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.
12
ITEM 2. CODE OF ETHICS
Not applicable to this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable to this report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable to this report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to this report.
ITEM 6. SCHEDULE OF INVESTMENTS
See "SCHEDULE OF INVESTMENTS" in the Semiannual Report filed under Item 1.
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. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable. Neither the registrant nor any "affiliated purchaser" has
purchased any equity security of the registrant registered pursuant to section
12 of the Securities Exchange Act of 1934.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable to this report.
ITEM 10. 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 1940
Act (17 CFR 270.30a-2(c))) 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 (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934 (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal controls over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal half-year that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
13
ITEM 11. EXHIBITS
(a)(2) Certification required by Rule 30a-2(a) under the 1940 Act.
(b) Certification required by Rule 30a-2(b) under the 1940 Act.
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: September 9, 2004
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: September 9, 2004
By: /s/ Donald J. Puglisi
---------------------------
Name: Donald J. Puglisi
Title: Managing Trustee
15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
99.CERT Certification required by Rule 30a-2(a) under the 1940 Act.
99.CERT906 Certification required by Rule 30a-2(b) under the 1940 Act.