<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
June 30, 1998
For Quarterly Period Ended ..................................
2-83192
Commission file number ......................................
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 3-10 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 June 30, 1998 and the related
statements of operations and of changes in net assets for the three-month and
six-month periods ended June 30, 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 9, 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.
August 7, 1998
- 3 -
<PAGE> 4
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
June 30, 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 - $288,179,788 ............................. $1,952,704,146
Dividends receivable ................................... 3,181,182 3,286,297
Cash ................................................... 2,682,570 2,564,043
-------------- --------------
Total ........................................ 1,958,567,898 1,738,627,054
-------------- --------------
LESS LIABILITIES:
Distribution payable (Note 3) .......................... 3,365,617 3,387,399
Accrued expenses ....................................... 34,303 5,561
-------------- --------------
Total ........................................ 3,399,920 3,392,960
-------------- --------------
TOTAL TRUST PROPERTY ..................................... $1,955,167,978 $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 - 14,041,318 (Note 6) ........................... $1,952,644,671
Undistributed net investment income .................... 2,523,307 2,500,668
-------------- --------------
NET ASSETS ............................................... $1,955,167,978 $1,735,234,094
============== ==============
UNIT VALUE:
1997 - $1,735,234,094 / 14,505,395 units ............... $119.63
=======
1998 - $1,955,167,978 / 14,041,318 units ............... $139.24
=======
</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 June 30,
1998 1997
<S> <C> <C>
INVESTMENT INCOME:
Dividend income ..................................... $ 10,323,665 $ 8,859,157
Trustee's fees and expenses ......................... (131,824) (82,552)
Sponsors' fees ...................................... (7,693) 42,095
------------ ------------
Net investment income ............................... 10,184,148 8,818,700
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on securities sold .................... 25,322,762 22,321,115
Unrealized appreciation (depreciation) of investments (79,461,488) 163,285,907
------------ ------------
Realized and unrealized gain (loss) on investments .. (54,138,726) 185,607,022
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS .......................................... $(43,954,578) $194,425,722
============ ============
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
INVESTMENT INCOME:
Dividend income ..................................... $ 20,727,289 $ 21,206,260
Trustee's fees and expenses ......................... (281,067) (195,662)
Sponsors' fees ...................................... (28,149) (26,324)
------------ ------------
Net investment income ............................... 20,418,073 20,984,274
------------ ------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on securities sold .................... 50,083,274 41,188,153
Unrealized appreciation of
investments ....................................... 230,091,545 125,001,022
------------ ------------
Realized and unrealized gain on investments 280,174,819 166,189,175
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ..................................... $300,592,892 $187,173,449
============ ============
</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
June 30,
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income .............................. $ 10,184,148 $ 8,818,700
Realized gain on securities sold ................... 25,322,762 22,321,115
Unrealized appreciation (depreciation) of
investments ...................................... (79,461,488) 163,285,907
-------------- ---------------
Net increase (decrease) in net assets resulting from
operations ....................................... (43,954,578) 194,425,722
INCOME DISTRIBUTIONS TO HOLDERS (Note 3) ............. (10,088,526) (10,699,621)
CAPITAL SHARE TRANSACTIONS:
Redemptions of 217,841 and 340,403 units,
respectively (Note 5) ............................ (29,897,422) (29,997,759)
-------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS ................ (83,940,526) 153,728,342
NET ASSETS AT BEGINNING OF PERIOD .................... 2,039,108,504 1,263,103,772
-------------- ---------------
NET ASSETS AT END OF PERIOD .......................... $1,955,167,978 $1,416,832,114
============== ==============
PER UNIT:
Income distributions during period ................. $.71 $.70
==== ====
Net asset value at end of period ................... $139.24 $93.91
======= ======
UNITS OUTSTANDING AT END OF PERIOD ................... 14,041,318 15,087,610
========== ==========
</TABLE>
See Independent Accountants' Review Report and
Notes to Financial Statements.
- 6 -
<PAGE> 7
THE EQUITY INCOME FUND,
FIRST EXCHANGE SERIES - AT&T SHARES
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income .............................. $ 20,418,073 $ 20,984,274
Realized gain on securities sold ................... 50,083,274 41,188,153
Unrealized appreciation of
investments ...................................... 230,091,545 125,001,022
-------------- --------------
Net increase in net assets resulting
from operations .................................. 300,592,892 187,173,449
INCOME DISTRIBUTIONS TO HOLDERS (Note 3) ............. (20,252,616) (21,507,333)
CAPITAL SHARE TRANSACTIONS:
Redemptions of 464,077 and 638,443 units,
respectively (Note 5) ............................ (60,406,392) (55,628,297)
-------------- --------------
NET INCREASE IN NET ASSETS ........................... 219,933,884 110,037,819
NET ASSETS AT BEGINNING OF PERIOD .................... 1,735,234,094 1,306,794,295
-------------- --------------
NET ASSETS AT END OF PERIOD .......................... $1,955,167,978 $1,416,832,114
============== ==============
PER UNIT:
Income distributions during period ................. $1.41 $1.39
===== =====
Net asset value at end of period ................... $139.24 $93.91
======= ======
UNITS OUTSTANDING AT END OF PERIOD ................... 14,041,318 15,087,610
========== ==========
</TABLE>
See Independent Accountants' Review Report and
Notes to Financial Statements.
- 7 -
<PAGE> 8
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 JUNE 30, 1998 (UNAUDITED):
<TABLE>
<CAPTION>
Total Market
Name of Issuer Shares Cost Value
<S> <C> <C> <C>
AT&T 4,610,392 $ 56,946,734 $ 263,368,643
Airtouch Communications 1,844,194 10,395,786 107,770,087
Ameritech Corp. 5,532,508 30,068,713 248,271,296
Bell Atlantic Corporation 6,521,012 59,966,092 297,521,172
BellSouth Corporation 4,149,352 32,603,655 278,525,253
Lucent Technologies 2,988,379 24,987,110 248,595,778
NCR Corporation 288,205 3,127,907 9,366,663
SBC Communications Inc. 8,230,294 43,762,401 329,211,760
U.S. West Inc. (formerly
U.S. West Communications) 1,894,557 16,139,955 89,044,220
Mediaone Group Inc.(formerly
U.S. West Media Group) 1,844,194 10,181,435 81,029,274
------------ --------------
$288,179,788 $1,952,704,146
============ ==============
</TABLE>
See Independent Accountants' Review Report.
- 8 -
<PAGE> 9
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 Corporation 297,713 3,179,421 8,280,143
SBC Communications Inc. 4,251,128 45,168,484 311,395,126
U.S. West Inc. 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.
- 9 -
<PAGE> 10
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.
- 10 -
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the second quarter ended June 30, 1998, the Equity Income Fund,
First Exchange Series - AT&T Shares (the "Fund") continued to hold securities
of AT&T and each of the nine regional holding companies.
The Fund had net investment income of approximately $10.2 million and
net realized and unrealized loss on investments of approximately $54.1 million
for the quarter ended June 30, 1998, causing a net decrease in net assets
resulting from operations of approximately $44.0 million. In contrast, net
investment income of approximately $8.8 million and net realized and unrealized
gain on investments of approximately $185.6 million for the quarter ended June
30, 1997, resulted in a net increase in net assets resulting from operations of
approximately $194.4 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 second quarter of 1998 totalled $0.71
per Unit, compared with income distributions of $0.70 per Unit during the
second quarter of 1997.
As of the end of the second quarter of 1998, the per Unit net asset
value of the fund had increased to $139.24 from its $93.91 level at the end of
the second quarter of 1997, and decreased from its $143.00 level at the end of
the first quarter of 1998. There was a decrease of 217,841 Units outstanding
during the second quarter of 1998 due to redemptions, and there were 14,041,318
Units outstanding at the end of that quarter.
- 11 -
<PAGE> 12
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.
- 12 -
<PAGE> 13
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: August 13, 1998 By /s/ Jeffrey Cohen
------------------------------
Name: Jeffrey Cohen
Title: Vice President
- 13 -
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AT&T- FIRST
EXCHANGE SERIES IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 288,179,788
<INVESTMENTS-AT-VALUE> 1,952,704,146
<RECEIVABLES> 3,101,102
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,682,370
<TOTAL-ASSETS> 1,958,567,898
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,399,920
<TOTAL-LIABILITIES> 3,399,920
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,722,553,126
<SHARES-COMMON-STOCK> 14,041,318
<SHARES-COMMON-PRIOR> 14,505,395
<ACCUMULATED-NII-CURRENT> 2,523,307
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 230,091,545
<NET-ASSETS> 1,955,167,978
<DIVIDEND-INCOME> 20,727,289
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (309,216)
<NET-INVESTMENT-INCOME> 20,418,073
<REALIZED-GAINS-CURRENT> 50,083,274
<APPREC-INCREASE-CURRENT> 230,091,545
<NET-CHANGE-FROM-OPS> 300,592,092
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 20,252,616
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 464,077
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 219,933,884
<ACCUMULATED-NII-PRIOR> 2,523,307
<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>
