<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 1998
-------------------------------------------
Commission file number 2-83192
-------------------------------------------------
The Equity Income Fund, First Exchange Series - AT&T Shares
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-6824382
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employee
of incorporation) Identification No.)
Merrill Lynch, Pierce, Fenner Prudential Securities
& Smith Incorporated Incorporated
P.O. Box 9051 One Seaport Plaza
Princeton, New Jersey 08543-9051 199 Water Street
New York, New York 10292
Morgan Stanley Dean Witter Smith Barney Inc.
Two World Trade Center-69th Floor 388 Greenwich Street
New York, New York 10048 New York, New York 10013
- --------------------------------------------------------------------------------
(Addresses of principal executive office of Sponsors)
The Bank of New York, 101 Barclay Street, New York, N.Y. 10286
- --------------------------------------------------------------------------------
(Addresses of principal executive office of Trustee)
(212) 815-2887
- --------------------------------------------------------------------------------
(Trustee's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 Days. Yes |X|. No |_|.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
(See pages 3-9 below.)
- 2 -
<PAGE> 3
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Sponsors, Trustee and Holders
of The Equity Income Fund,
First Exchange Series - AT&T Shares:
We have reviewed the accompanying statement of condition of The Equity Income
Fund, First Exchange Series - AT&T Shares as of March 31, 1998 and the related
statements of operations and of changes in net assets for the three-month
periods ended March 31, 1998 and 1997. These financial statements are the
responsibility of the Trustee.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of condition of The Equity Income Fund, First Exchange
Series - AT&T Shares as of December 31, 1997, and the related statements of
operations and of changes in net assets for the year then ended (not presented
herein) and in our report dated March 13, 1998; we expressed an unqualified
opinion on those financial statements. In our opinion, the information set
forth in the accompanying statement of condition as of December 31, 1997 is
fairly stated, in all material respects, in relation to the statement of
condition from which it has been derived.
May 1, 1998
-3-
<PAGE> 4
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
<S> <C> <C>
TRUST PROPERTY:
Investment in marketable securities - at market value
(Notes 1 and 2):
1997 cost-$298,343,900 $1,732,776,714
1998 cost-$292,643,659 $2,036,629,505
Dividends receivable 3,230,460 3,286,297
Cash 2,644,469 2,564,043
-------------- --------------
Total 2,042,504,434 1,738,627,054
-------------- --------------
LESS LIABILITIES:
Distribution payable (Note 3) 3,383,642 3,387,399
Accrued expenses 12,288 5,561
-------------- --------------
Total 3,395,930 3,392,960
-------------- --------------
TOTAL TRUST PROPERTY $2,039,108,504 $1,735,234,094
============== ==============
NET ASSETS, REPRESENTED BY:
Units of fractional undivided interest outstanding:
1997 - 14,505,395 (Note 6) $1,732,733,426
1998 - 14,259,159 (Note 6) $2,036,614,666
Undistributed net investment income 2,493,838 2,500,668
-------------- --------------
NET ASSETS $2,039,108,504 $1,735,234,094
============== ==============
UNIT VALUE:
1997 - $1,735,234,094 / 14,505,395 units $119.63
==============
1998 - $2,039,108,504 / 14,259,159 units $143.00
==============
</TABLE>
See Independent Accountants' Review Report and
Notes to Financial Statements.
-4-
<PAGE> 5
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31,
1998 1997
<S> <C> <C>
INVESTMENT INCOME:
Dividend income $ 10,403,624 12,347,104
Trustee's fees and expenses (149,243) (113,110)
Sponsors' fees (20,456) (68,419)
------------ ----------
Net investment income 10,233,925 12,165,575
------------ ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain on securities sold 24,760,512 18,867,038
Unrealized appreciation (depreciation) of investments 309,553,033 (38,284,885)
------------ ----------
Net realized and unrealized gain (loss) on
investments 334,313,545 (19,417,847)
------------ ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $344,547,470 (7,252,272)
============ ==========
</TABLE>
See Independent Accountants' Review Report and
Notes to Financial Statements.
-5-
<PAGE> 6
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31,
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,233,925 $ 12,165,575
Realized gain on securities sold 24,760,512 18,867,038
Unrealized appreciation (depreciation) of
investments 309,553,033 (38,284,885)
-------------- --------------
Net increase (decrease) in net assets resulting
from operations 344,547,470 (7,252,272)
INCOME DISTRIBUTIONS TO HOLDERS (Note 3) (10,164,090) (10,807,712)
CAPITAL SHARE TRANSACTIONS:
Redemptions of 246,236 and 298,040 units,
respectively (Note 5) (30,508,970) (25,630,539)
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS 303,874,410 (43,690,523)
NET ASSETS AT BEGINNING OF PERIOD 1,735,234,094 1,306,794,295
-------------- --------------
NET ASSETS AT END OF PERIOD $2,039,108,504 $1,263,103,772
============== ==============
PER UNIT:
Income distributions during period $.707 $.693
============== ==============
Net asset value at end of period $143.00 $81.87
============== ==============
UNITS OUTSTANDING AT END OF PERIOD 14,259,159 15,428,013
============== ==============
</TABLE>
See Independent Accountants' Review Report and
Notes to Financial Statements.
-6-
<PAGE> 7
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a Unit
Investment Trust. A summary of the significant accounting policies, which are in
conformity with generally accepted accounting principles, followed by the Fund
in the preparation of its financial statements since July 7, 1983, its initial
date of deposit, is as follows:
(a) Securities are stated at market value based on the last sales price reported
at the close of business on the New York Stock Exchange. Substantially all of
the aggregate cost of securities represents the market value of the shares of
common stock of American Telephone and Telegraph Company (AT&T) on the days the
shares were exchanged for units of the Fund; such aggregate cost was
subsequently allocated among the portfolio holdings in shares of AT&T and the
seven regional holding companies following their divestiture by AT&T in
accordance with its Plan of Reorganization. Realized gains or losses on sales of
securities are determined using the average cost basis.
(b) The Fund is not subject to income taxes. Accordingly, no provision for such
taxes is required.
(c) Dividend income has been recognized on the ex-dividend date.
2. MARKETABLE SECURITIES, AT MARCH 31, 1998 (UNAUDITED):
<TABLE>
<CAPTION>
Total Market
Name of Issuer Shares Cost Value
<S> <C> <C> <C>
AT&T 4,681,808 $ 57,828,852 $ 307,243,650
Airtouch Communications 1,872,757 10,556,797 91,648,046
Ameritech Corp. 5,618,210 30,534,496 277,750,257
Bell Atlantic Corporation 3,311,011 60,894,962 339,378,627
BellSouth Corporation 4,213,628 33,108,706 284,683,242
Lucent Technologies 1,517,334 25,374,152 194,029,085
NCR Corp. 292,663 3,176,290 9,676,170
SBC Communications Inc. 8,357,792 44,440,338 364,608,676
U.S. West Communications 1,872,757 15,988,233 102,533,446
U.S. West Media Group 1,872,757 10,740,833 65,078,306
--------- ------------ --------------
$292,643,659 $2,036,629,505
============ ==============
</TABLE>
See Independent Accountants' Review Report.
-7-
<PAGE> 8
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
NOTES TO FINANCIAL STATEMENTS
MARKETABLE SECURITIES, AT DECEMBER 31, 1997:
<TABLE>
<CAPTION>
Total Market
Name of Issuer Shares Cost Value
<S> <C> <C> <C>
AT&T 4,762,732 $ 58,829,554 $ 291,717,335
Airtouch Communications 1,905,120 10,737,194 79,181,550
Ameritech Corp. 2,857,659 31,359,314 230,041,549
Bell Atlantic Corporation 3,368,236 61,851,410 306,509,476
BellSouth Corporation 4,286,460 34,504,478 241,381,279
Lucent Technologies 1,543,554 25,524,130 123,291,376
NCR Corp. 297,713 3,179,421 8,280,143
SBC Communications Inc. 4,251,128 45,168,484 311,395,126
U.S. West Incorporated 1,905,120 16,263,966 85,968,540
U.S. West Media Group 1,905,120 10,925,949 55,010,340
---------- ----------
$298,343,900 $1,732,776,714
============ ==============
</TABLE>
3. DISTRIBUTIONS
Any monthly distributions to Holders, who have not elected to participate
in the Fund's Reinvestment Plan, are made on or about the first day of each
month.
4. REINVESTMENT PLAN
Holders could reinvest any distributions in the Fund prior to April 1,
1984, or in certain subsequent series of The Equity Income Fund after March 31,
1984, by executing an appropriate notice of election to participate in the
Fund's Reinvestment Plan. The Sponsors (Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley Dean Witter, Prudential Securities Incorporated and
Smith Barney Inc.) may, in their sole discretion, cancel the Fund's Reinvestment
Plan at any time.
5. REDEMPTIONS
Holders may request redemptions of units by presentation thereof to the
Trustee, The Bank of New York. Redemptions of units are made in kind by the
Trustee; fractional undivided interests are redeemed in cash. Under certain
circumstances, Holders may request redemptions of units in cash. Units of the
Fund are listed and traded on the American and Pacific Stock Exchanges.
See Independent Accountants' Review Report.
-8-
<PAGE> 9
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES
All Fund items of income received, expenses paid, and realized gains and
losses on securities sold are attributable to the Holders, on a pro rata basis,
for Federal income tax purposes in accordance with the grantor trust rules of
the United States Internal Revenue Code.
See Independent Accountants' Review Report.
-9-
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first quarter ended March 31, 1998, the Equity Income Fund,
First Exchange Series - AT&T Shares (the "Fund") continued to hold securities of
AT&T and each of the seven regional holding companies.
The Fund had net investment income of approximately $10.2 million and net
realized and unrealized gain on investments of approximately $334.3 million for
the quarter ended March 31, 1998, causing a net increase in net assets resulting
from operations of approximately $344.5 million. In contrast, net investment
income of approximately $12.2 million and net realized and unrealized loss on
investments of approximately $19.4 million for the quarter ended March 31, 1997,
resulted in a net decrease in net assets resulting from operations of
approximately $7.3 million. For the year ended December 31, 1997, net investment
income of approximately $42.0 million and net realized and unrealized gain on
investments of approximately $542.8 million resulted in a net increase in net
assets resulting from operations of approximately $584.7 million.
Income distributions during the first quarter of 1998 totalled $0.71 per
Unit, compared with income distributions of $0.69 per Unit during the first
quarter of 1997.
As of the end of the first quarter of 1998, the per Unit net asset value
of the fund had increased to $143.00 from its $81.87 level at the end of the
first quarter of 1997, and increased from its $119.63 level at the end of the
fourth quarter of 1997. There was a decrease of 246,236 Units outstanding during
the first quarter of 1998 due to redemptions, and there were 14,259,159 Units
outstanding at the end of that quarter.
- 10 -
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on 8-K
a. 4.1 - Form of Trust Indenture (incorporated by reference to
Exhibit 1.1 to the Registration Statement of The Equity Income
Fund, First Exchange Series - AT&T Shares, 1933 Act File No.
2-83192).
4.1.1 - Form of Certificate of Amendment to Trust Indenture
dated August 8, 1983 (incorporated by reference to
Registration Statement on Form 8-A of the Equity Income Fund,
First Exchange Series - AT&T Shares, 1934 Act File No.
1-8642).
4.1.2 - Form of Standard Terms and Conditions of Trust
effective January 1, 1983 (incorporated by reference to
Exhibit 1.1.1 to the Registration Statement of The Equity
Income Fund, First Exchange Series - AT&T Shares,
1933 Act File No. 2-83192).
19 - Forms 10-Q and 10-K (incorporated by reference to such
forms filed under The Equity Income Fund, First Exchange
Series - AT&T Shares, No. 2-83192).
23 - Consents (incorporated by reference to Registration
Statement of The Equity Income Fund, First Exchange Series -
AT&T Shares, 1933 Act File No. 2-83192).
27 - Financial Data Schedule.
b. None.
- 11 -
<PAGE> 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Trustee of the trust has duly caused this report to be signed on behalf of the
trust by the undersigned thereto duly authorized.
THE EQUITY INCOME FUND, First
Exchange Series - AT&T Shares
THE BANK OF NEW YORK, Trustee
Dated: May 15, 1998 By /s/ Jeffrey Cohen
-----------------------------
Name: Jeffrey Cohen
Title: Vice President
- 12 -
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AT&T-FIRST
EXCHANGE SERIES IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 292,643,659
<INVESTMENTS-AT-VALUE> 2,036,629,505
<RECEIVABLES> 3,230,460
<ASSETS-OTHER> 2,644,469
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,042,504,434
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 3,395,930
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 292,628,820
<SHARES-COMMON-STOCK> 14,259,159
<SHARES-COMMON-PRIOR> 14,505,395
<ACCUMULATED-NII-CURRENT> 2,493,838
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,743,985,846
<NET-ASSETS> 2,039,108,504
<DIVIDEND-INCOME> 10,403,624
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (169,699)
<NET-INVESTMENT-INCOME> 10,233,925
<REALIZED-GAINS-CURRENT> 24,760,512
<APPREC-INCREASE-CURRENT> 309,553,033
<NET-CHANGE-FROM-OPS> 344,547,470
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,164,090)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 246,236
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 303,874,410
<ACCUMULATED-NII-PRIOR> 2,500,668
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
