UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended: September 30, 1997
Commission File Number 0-16531
EQUITABLE CAPITAL PARTNERS, L.P.
(Exact name of registrant as specified in its governing instruments)
Delaware 13-3486115
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1345 Avenue of the Americas
New York, New York 10105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:(212) 969-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Units of Limited Partnership Interest
(Title of class)
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 .
Selected information from the Prospectus, dated July 15, 1988, and filed with
the Securities and Exchange Commission on July 19, 1988 (File No. 33-20093), is
incorporated by reference into Parts I, II and III of this Quarterly Report on
Form 10-Q.
<PAGE>
EQUITABLE CAPITAL PARTNERS, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners'
Capital as of September 30, 1997 and December 31, 1996 5
Statements of Operations - For the Three and Nine
Months Ended September 30, 1997 and 1996 6
Statements of Changes in Net Assets - For the Nine
Months Ended September 30, 1997 and 1996 7
Statements of Cash Flows - For the Nine Months Ended
September 30, 1997 and 1996 8
Statement of Changes in Partners' Capital -
For the Nine Months Ended September 30, 1997 9
Schedule of Portfolio Investments - September 30, 1997 10
Supplemental Schedule of Realized Gains and Losses
For the Nine Months Ended September 30, 1997 13
Notes to Financial Statements 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
PART II - OTHER INFORMATION
Item 6. Exhibits 25
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS,L.P.
STATEMENTS OF ASSETS
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C> <C>
September 30, 1997
ASSETS: Notes (Unaudited) December 31, 1996
Investments
Enhanced Yield Investments at Value- Managed Companies
(amortized cost of $16,931,732 at
September 30, 1997 and $55,159,154
at December 31, 1996) 2,10,12 $ 7,589,732 $ 52,325,273
Non-Managed Companies
(amortized cost of $14,244,478 at
September 30, 1997 and $19,239,803
at December 31, 1996) 9,187,664 28,618,359
Temporary Investments
(at amortized cost ) 10,867,490 27,105,414
Cash 45,078 91,206
Interest Receivable 2,12 212,851 753,608
Note Receivable 3,4 1,505,445 1,846,593
Receivable for Investment Sold 660,530 100,282
Prepaid Expenses -- 2,650
----------------- ----------------
TOTAL ASSETS $ 30,068,790 $ 110,843,385
================= ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Professional Fees Payable 9 $ 44,250 $ 40,107
Independent General Partners' Fees Payable 8 12,400 24,456
Fund Administrative Expenses Payable 7 73,974 58,985
Other Accrued Liabilities 5,715 11,663
----------------- ----------------
Total Liabilities 136,339 135,211
Partners' Capital
Managing General Partner 3,4 1,154,302 1,550,892
Limited Partners (284,611 Units) 4 28,778,149 109,157,282
----------------- ----------------
Total Partners' Capital 29,932,451 110,708,174
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 30,068,790 $ 110,843,385
================= ================
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
---------------------------------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
INVESTMENT INCOME- Notes 2,12:
Interest $ 350,243 $ 1,141,590 $ 2,187,617 $ 3,411,384
Discount -- 10,172 -- 33,645
Dividend -- -- 136,678 3,760,524
------------ ------------ ------------ ------------
TOTAL INVESTMENT INCOME 350,243 1,151,762 2,324,295 7,205,553
EXPENSES:
Investment Advisory Fee- Note 6 281,413 249,764 932,442 824,674
Fund Administration Fees and Expenses- Note 7 173,086 229,860 553,687 767,058
Independent General Partners'
Fees and Expenses- Note 8 39,556 49,636 109,609 147,971
Professional Fees - Note 9 31,000 123,906 62,050 141,179
Insurance Fees -- -- 6,017 5,256
Valuation Expenses 2,500 -- 6,000 19,021
------------ ------------ ------------ ------------
TOTAL EXPENSES 527,555 653,166 1,669,805 1,905,159
------------ ------------ ------------ ------------
NET INVESTMENT INCOME (177,312) 498,596 654,490 5,300,394
NET CHANGE IN UNREALIZED DEPRECIATION
ON INVESTMENTS- Note 12 8,888,987 29,715,206 (20,943,490) 37,949,493
NET REALIZED GAINS (LOSSES)ON INVESTMENTS- Note 10 (10,727,598) (12,705,316) 16,546,648 (25,779,920)
------------ ------------ ------------ ------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (2,015,923) $ 17,508,486 $ (3,742,352) $ 17,469,967
============ ============ ============ ============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
--------------------------------------------
September 30, 1997 September 30, 1996
------------------ ------------------
FROM OPERATIONS:
Net (Decrease) Increase in Net Assets
Resulting from Operations $ (3,742,352) $ 17,469,967
Cash Distributions to Partners (76,692,223) (22,326,249)
Reduction in Managing General Partners' Contribution (341,148) (61,285)
------------- -------------
Total Decrease (80,775,723) (4,917,567)
NET ASSETS:
Beginning of Period 110,708,174 112,353,878
End of Period $ 29,932,451 $ 107,436,311
============= =============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
--------------------------------
September 30, September 30,
1997 1996
-------------- --------------
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and Discount Income $ 1,822,856 $ 6,398,571
Fund Administration Fees & Expenses (538,697) (779,746)
Investment Advisory Fee (932,442) (824,674)
Independent General Partners' Fees and Expenses (121,665) (140,449)
Valuation Expenses (11,948) (13,216)
Sale (Purchase)of Temporary Investments, Net 17,280,120 10,823,692
Proceeds from Sales and Principal Payments of
Enhanced Yield Investments 59,209,146 7,121,320
Professional Fees (57,533) (80,625)
Insurance Fees (3,742) (375)
-------------- --------------
Net Cash Provided by Operating Activities 76,646,095 22,504,498
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (76,692,223) (22,326,249)
Net Cash Used in Financing Activities (76,692,223) (22,326,249)
-------------- --------------
Net (Decrease) Increase in Cash (46,128) 178,249
-------------- --------------
Cash at the Beginning of the Period 91,206 74,501
Cash at the End of the Period $ 45,078 $ 252,750
============== ==============
RECONCILIATION OF NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net (Decrease) Increase In Net Assets
Resulting From Operations $ (3,742,352) $ 17,469,967
Adjustments to Reconcile Net (Decrease) Increase in Net Assets
Resulting from Operations to Net Cash Provided by Operating
Activities:
Decrease in Investments 59,942,618 43,724,932
Decrease (Increase) in Accrued Interest and Investment Income (501,439) (806,981)
Decrease in Prepaid Expenses 2,650 5,256
Net Change in Unrealized Depreciation (Appreciation) on Investments 20,943,490 (37,949,493)
Increase (Decrease) in Fund Administration Expenses Payable 14,989 (12,688)
(Decrease) Increase in Other Accrued Liabilities (5,948) 5,805
(Decrease) Increase in Independent General
Partners' Fees Payable (12,056) 7,522
Increase in Professional Fees Payable 4,143 60,178
-------------- --------------
Total Adjustments 80,388,447 5,034,531
-------------- --------------
Net Cash Provided by Operating Activities $ 76,646,095 $ 22,504,498
============== ==============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
<S> <C> <C> <C> <C>
Managing Limited
Notes General Partner Partners Total
------- ----------------- --------------- -----------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Partners' Capital at January 1, 1997 $ 1,550,892 $ 109,157,282 $ 110,708,174
Cash Distributions to Partners (18,019) (76,674,204) (76,692,223)
Reduction in Managing General Partners' Contribution 3 (341,148) - (341,148)
Allocation of Net Investment Income 11 6,545 647,945 654,490
Allocation of Net Unrealized Depreciation
on Investments 12 (209,435) (20,734,056) (20,943,491)
Allocation of Net Realized Gains on Investments 165,467 16,381,182 16,546,649
----------- -------------- --------------
Partners' Capital at September 30, 1997 $ 1,154,302 $ 28,778,149 $ 29,932,451
=========== ============== ==============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PRINCIPAL INVESTMENT INVESTMENT AMORTIZED VALUE % OF TOTAL
AMOUNT/SHARES INVESTMENT DATE COST COST (NOTE 2) INVESTMENTS
- --------------- -------------------------------------------- ----------- ---------- ---------- --------- -----------
ENHANCED YIELD INVESTMENTS
MANAGED COMPANIES
MISCELLANEOUS MANUFACTURING
QUANTEGY ACQUISITION CORP.
(FORMERLY AMPEX RECORDING MEDIA CORP.)
162 Shares Quantegy Acquisition Corp., Common Stock 11/13/95 $ 3,464,732 $3,464,732 $ 3,464,732
------------ ---------- -----------
3,464,732 3,464,732 3,464,732 12.53%
------------ ---------- -----------------------
LEATHER AND LEATHER PRODUCTS
LEATHER U.S., INC. - NOTE 12
(FORMERLY UNITED STATES LEATHER HOLDINGS, INC.)
795.00 Shares Leather U.S., Inc., Common Stock 04/09/96 9,342,000 9,342,000 0
------------ ----------- -----------
9,342,000 9,342,000 0 0.00
------------ ----------- -----------------------
MISCELLANEOUS RETAIL
R&S/STRAUSS, INC.
(FORMERLY WSR ACQUISITION CORPORATION)
$ 1,815,000 R&S/Strauss, Inc., Sr. Sub. Nt. 15% due 05/31/00* 06/13/90 1,815,000 1,815,000 1,815,000
$ 2,310,000 R&S/Strauss, Inc., Sr. Sub. Nt. 15% due 05/31/00* 06/13/90 2,310,000 2,310,000 2,310,000
----------- ------------ -----------
4,125,000 4,125,000 4,125,000 14.92
----------- ------------ -----------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 16,931,732 $ 16,931,732 $ 7,589,732 27.45%
--------------------------------------- ------------ ------------ -----------------------
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PRINCIPAL INVESTMENT INVESTMENT AMORTIZED VALUE % OF TOTAL
AMOUNT/SHARES INVESTMENT DATE COST COST (NOTE 2) INVESTMENTS
- --------------- ---------------------------------------------------- ------------ --------------- ----------- --------- -----------
NON-MANAGED COMPANIES
CONSUMER PRODUCTS MANUFACTURING
LEXMARK INTERNATIONAL GROUP, INC. - NOTES 10,12
154,054 Shares Lexmark International Group, Inc.,
Class B Common Stock (c) 03/27/91 $ 1,026,990 $ 1,026,990 $ 5,083,782
----------- ------------ -------------
1,026,990 1,026,990 5,083,782 18.39%
----------- ------------ -----------------------
DISTRIBUTION SERVICES
WESTERN PIONEER, INC. - NOTE 12
$ 9,460,000 Western Pioneer, Inc.,
Sr. Sub. Nts. 10% due 11/30/07*(b) 11/30/94 1,219,460 1,219,460 2,838,000
162,161 Warrants Western Pioneer, Inc.,
Common Stock Purchase Warrants ** 11/30/94 0 0 0
----------- ------------ ------------
1,219,460 1,219,460 2,838,000 10.27
----------- ------------ ----------------------
HEALTH SERVICES
MTI HOLDINGS, INC.
$ 220,102 MTI Holdings, Inc.,
Sr. Sec. Nt. 12% due 07/01/03* 08/06/96 220,102 220,102 220,102
15,772 Shares MTI Holdings, Inc., Common Stock** 08/06/96 236,580 236,580 236,580
4,397 Warrants MTI Holdings, Inc., Common Stock
Purchase Warrants 08/06/96 0 0 0
--------- ---------- ----------
456,682 456,682 456,682 1.65
--------- ---------- --------------------
MISCELLANEOUS RETAIL
PERGAMENT HOME CENTERS, INC.- NOTES 10, 12
$ 3,236,800 Pergament Acq. Corp., Home Centers, Inc.
Floating Rate Demand Note due 07/31/00* (b) 10/18/91 2,973,346 2,973,346 809,200
380.80 Shares Pergament Holding, Corp., Common Stock Class B ** 02/28/89 8,568,000 8,568,000 0
139.0545 Shares Pergament Holding, Corp., Common Stock Class C ** 02/28/89 0 0 0
----------- ----------- -----------
11,541,346 11,541,346 809,200 2.93
----------- ----------- ---------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $14,244,478 $14,244,478 $ 9,187,664 33.24%
------------------------------------------ ----------- ----------- ---------------------
TOTAL INVESTMENT IN ENHANCED YIELD INVESTMENTS $31,176,210 $31,176,210 $16,777,396 60.69%
---------------------------------------------- ----------- ----------- ---------------------
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(CONCLUDED)(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PRINCIPAL INVESTMENT INVESTMENT AMORTIZED VALUE % OF TOTAL
AMOUNT/SHARES INVESTMENT DATE COST COST (NOTE 2) INVESTMENTS
- -------------- -------------------------------------------------- ------------ --------------- ---------- ---------- --------------
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 3,500,000 UNIFUNDING, 5.51% due 10/10/97 07/15/97 $ 3,453,395 $ 3,495,178 $ 3,495,178
$ 2,900,000 AAFC, 5.53% due 11/19/97 07/15/97 2,843,425 2,878,172 2,878,172
$ 1,700,000 ALAMO FUNDING 5.54% due 10/15/97 09/05/97 1,689,536 1,696,337 1,696,337
$ 2,800,000 WINDMILL FUNDING CORP 5.65% due 10/06/97 09/30/97 2,797,263 2,797,803 2,797,803
------------- ------------ ------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 10,783,619 $ 10,867,490 $ 10,867,490 39.31%
------------- ------------ ---------------------
TOTAL TEMPORARY INVESTMENTS $ 10,783,619 $ 10,867,490 $ 10,867,490 39.31%
------------- ------------ ---------------------
TOTAL INVESTMENT PORTFOLIO $ 41,959,829 $ 42,043,700 $ 27,644,886 100.00%
============= ============ =====================
SUMMARY OF INVESTMENTS
Subordinated Notes $ 8,537,908 $ 8,537,908 $ 7,992,302 28.91%
Common Stock and Warrants 22,638,302 22,638,302 8,785,094 31.78
Temporary Investments 10,783,619 10,867,490 10,867,490 39.31
------------- ------------ ---------------------
$ 41,959,829 $ 42,043,700 $ 27,644,886 100.00%
============= ============ =====================
* Restricted Security
** Restricted Non-income Producing Security
(a) Includes receipt of payment-in-kind securities.
(b) Non-accrual investment status.
(c) Publicly traded class of securities.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PAR VALUE OR
DATE OF NUMBER OF AMORTIZED NET REALIZED
SECURITY TRANSACTION SHARES COST PROCEEDS GAIN (LOSS)
Polaris Pool Systems, Inc.
Common Stock 1/15/97 -- $ -- $ 1,100(A) $ 1,100
Lexmark International Group, Inc.
Common Stock various 30,002 200,014 772,125 572,111
Bank United Corp.
Common Stock various 779,543 5,230,428 21,811,613 16,581,185
Lexmark International, Inc.
14.25% Sr. Sub. Note 3/24/97 $ 19,667,348 19,667,348 22,979,735 3,312,387
Total Net Realized Gains for the ------------ ------------ ------------
Three Months Ended March 31, 1997 $ 25,097,790 $ 45,564,573 $ 20,466,783
============ ============ ============
Polaris Pool Systems, Inc. 5/15/97 -- $ -- $ 1,616(A) $ 1,616
Lexmark International Group, Inc.
Common Stock various 226,641 1,510,948 5,888,318 4,377,370
Bank United Corp.
Common Stock various 98,365 659,990 3,088,467 2,428,477
Total Net Realized Gains for the ------------ ------------ ------------
Three Months Ended June 30, 1997 $ 2,170,938 $ 8,978,401 $ 6,807,463
============ ============ ============
RI Holdings, Inc.
16% Sr. Sub. Nts. 7/02/97 $ 26,338,272 $ 11,824,318 $ 409,189 $(11,415,129)
RI Holdings, Inc.
Common Stock 7/02/97 1,203,474 3,058,326 - (3,058,326)
Lexmark International Group, Inc.
Common Stock various 140,921 939,478 4,676,509 3,737,031
Haddon Craftsman
Common Stock 9/19/97 -- -- 8,826(A) 8,826
Total Net Realized Loss for the ------------ ------------ -----------
Three Months Ended September 30, 1997 $ 15,822,122 $ 5,094,524 $(10,727,598)
============ ============ ============
Total Net Realized Gains for the
Nine Months Ended September 30, 1997 $ 43,090,850 $ 59,637,498 $ 16,546,648
============ ============ ============
(A) Proceeds represent a distribution to the Fund from the escrow account.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
EQUITABLE CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. Organization and Purpose
Equitable Capital Partners, L.P. (the "Fund") was formed along with
Equitable Capital Partners (Retirement Fund), L.P. (the "Retirement Fund," and
collectively with the Fund referred to as the "Funds") and the Certificates of
Limited Partnership were filed under the Delaware Revised Uniform Limited
Partnership Act on February 2, 1988. The Funds' operations commenced on October
13, 1988.
On July 22, 1993, Equitable Capital Management Corporation ("Equitable
Capital"), formerly the Managing General Partner and investment adviser of the
Funds, transferred substantially all of the assets comprising Equitable
Capital's business to Alliance Capital Management L.P. ("Alliance Capital") and
its wholly-owned subsidiary, Alliance Corporate Finance Group Incorporated
("Alliance Corporate"). In connection with such transaction, the limited
partners, (the "Limited Partners") of the Funds voted to approve a new
investment advisory agreement between the Funds and Alliance Corporate and also
voted to admit Alliance Corporate as Managing General Partner of the Funds to
succeed Equitable Capital. Accordingly, on July 22, 1993, the closing date of
the transaction described above, (i) Alliance Corporate was admitted as the
successor Managing General Partner of the Funds (ii) Equitable Capital withdrew
from the Funds as Managing General Partner and assigned all of its interest as
General Partner to Alliance Corporate and (iii) Alliance Corporate succeeded
Equitable Capital as the investment adviser to the Funds pursuant to a new
investment advisory agreement. Alliance Corporate (the "Investment Adviser") is
a registered investment adviser under the Investment Advisers Act of 1940.
Prior to July 22, 1993, Equitable Capital was responsible, subject to the
supervision of the independent general partners of the Funds (the "Independent
General Partners"), for the management of the Fund's investments. As of July 22,
1993, Alliance Corporate assumed such responsibilities in its capacity as
Managing General Partner and Investment Adviser of the Funds.
The Funds have elected to operate as business development companies under
the Investment Company Act of 1940, as amended. The Funds seek current income
and capital appreciation potential through investments in privately-structured,
friendly leveraged acquisitions and other leveraged transactions. The Funds have
pursued this objective by investing primarily in subordinated debt and related
equity securities ("Enhanced Yield Investments") issued in conjunction with the
"mezzanine financing" of friendly leveraged acquisitions and leveraged
recapitalizations.
As stated in the Partnership Agreement, the Fund will terminate on October
13, 1998, subject to the right of the Independent General Partners to extend the
term of the Fund for up to two additional one year periods, after which the Fund
will liquidate any remaining investments within five years.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the Fund's records are maintained using
the accrual method of accounting.
Valuation of Investments
Securities are valued at market or fair value. Market value is used for
securities for which market quotations are readily available. For securities
without a readily ascertainable market value, fair value is determined, on a
quarterly basis, in good faith by the General Partners of the Fund. The total
value of securities without a readily ascertainable market value is $11,693,614
and $44,569,548 as of September 30, 1997 and December 31, 1996, respectively,
representing 38.9% and 40.2% of total assets, respectively. In connection with
such determination, the Managing General Partner has established a valuation
committee comprised of senior executives to assess the Fund's portfolio and make
recommendations regarding the value of the Fund's portfolio securities. This
valuation committee uses available market information and appropriate valuation
methodologies. In addition, the Managing General Partner has retained Arthur D.
Little, Inc., a nationally recognized independent valuation consultant, to
review such valuations.
<PAGE>
For privately issued securities in which the Fund typically invested, the
fair value of an investment is its initial cost, adjusted for amortization of
discount or premium and as subsequently adjusted to reflect the occurrence of
significant developments. "Significant developments" are business, economic or
market events that may affect a company in which an investment has been made or
the securities comprising such investment. For example, significant developments
that could result in a writedown in value include, among other things, events of
default with respect to payment obligations or other developments indicating
that a portfolio company's performance may fall short of acceptable levels. A
writeup in value of an investment could take place when a significant favorable
development occurs, such as a transaction representing the partial sale of an
investment that would result in a capital gain, or company performance exceeding
expected levels on a sustained basis. Although the General Partners use their
best judgment in determining the fair value of these investments, there are
inherent limitations in any valuation technique involving securities of the type
in which the Fund invests. Therefore, the fair values presented herein are not
necessarily indicative of the amount which the Fund could realize in a current
transaction.
Temporary Investments with maturities of 60 days or less are valued at
amortized cost, which approximates market value. Temporary Investments which
mature in more than 60 days, for which market quotations are readily available,
are valued at the most recent bid price or the equivalent quoted yield obtained
from one or more of the market makers.
Interest Receivable on Investments
Investments will generally be placed on non-accrual status in the event of a
default (after applicable grace period expires) or if the Managing General
Partner determines that there is no reasonable expectation of collecting
interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
from the Fund's portfolio companies are recorded at face value, unless the
Managing General Partner determines that there is no reasonable expectation of
collecting the full principal, amounts of such securities.
Income Taxes
As discusssed in Note 13, no provision for income taxes has been made since
all income and losses are allocated to the Fund's partners ("Partners") for
inclusion in their respective tax returns.
Investment Transactions
Enhanced Yield Investments - The Fund records transactions on the date on
which it obtains an enforceable right to demand the securities or payment
thereof.
Temporary Investments - The Fund records transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Sales, Marketing and Offering Expenses and Sales Commissions
Sales commissions and selling discounts have been allocated to the specific
Partners' accounts to which they are applicable. Sales, marketing and offering
expenses are allocated between the Funds in proportion to the number of units
issued by each Fund and to the Partners in proportion to their capital
contributions.
<PAGE>
3. Note Receivable
On July 22, 1993, pursuant to the terms of the Fund's Amended and Restated
Agreement of Limited Partnership, Alliance Corporate, as the successor Managing
General Partner of the Fund, has contributed a non-interest bearing promissory
note (the "Note") to the Fund in an aggregate amount equal to 1.01% of the
aggregate Net Capital Contributions of all Limited Partners (less distributions
representing returns of capital). Net Capital Contributions are comprised of
gross offering proceeds, after giving effect to volume discounts (and after
netting of sales commissions, organization, offering and sales and marketing
expenses), less returns of capital distributed to Limited Partners. The
principal amount of the Note is reduced proportionally as such Limited Partners
receive distributions representing additional returns of capital. Such
distributions received for the nine months ended September 30, 1997 resulted in
a $341,148 reduction of the principal amount of the Note. The promissory note of
Equitable Capital was cancelled upon the contribution of Alliance Corporate's
note.
4. Capital Contributions
On October 13, 1988, the Fund closed the initial public offering of its
units of Limited Partner interests ("Units"). Equitable Capital, the Fund's
Managing General Partner at that time, accepted subscriptions for 284,611 Units
and admitted 18,288 Limited Partners.
The Limited Partners' total capital contributions were $283,873,400, after
giving effect to volume discounts allowed of $737,600. Equitable Capital's
aggregate capital contribution was in the form of a promissory note in the
principal amount of $2,641,469. On July 22, 1993, Equitable Capital's note was
cancelled and Alliance Corporate, as successor Managing General Partner, made a
capital contribution in the form of a promissory note on such date, as described
in Note 3. Sales, marketing and offering expenses and selling commissions have
been charged against proceeds resulting in net capital contributed by Limited
Partners of $261,531,542.
Allocation of income, loss and distributions of cash are made in accordance
with the Partnership Agreement as further discussed in Note 11.
5. Sales, Marketing and Offering Expenses and Sales Commissions
The Fund expended a total of $535,631 for the reimbursement of sales and
marketing expenses. Aggregate sales and marketing expenses of the Funds may not
exceed $2,528,415 or 0.5% of the aggregate capital contributions and were
allocated proportionately to the number of Units issued by each Fund. Aggregate
sales and marketing expenses for the Funds totalled $951,683.
The Fund also paid $2,098,311 for the reimbursement of offering expenses.
These expenses, along with the offering expenses of the Retirement Fund and the
organizational expenses of the Funds, may not exceed $6,000,000. Aggregate
offering and organizational expenses for the Funds totalled $4,711,806.
For their services as selling agent, the Fund paid sales commissions to
Merrill Lynch, Pierce, Fenner & Smith Incorporated in the amount of $19,185,170,
of which Equico Securities Corporation, an affiliate of Equitable Capital, a
related party, received $317,150 as a selected dealer.
<PAGE>
6. Investment Advisory Fee
Alliance Corporate has been receiving a quarterly Investment Advisory Fee,
at the annual rate of 1.0% of the Fund's Available Capital, with a minimum
annual payment of $2,000,000 collectively for the Funds, less 80% of commitment,
transaction, investment banking and "break-up" or other fees related to the
Fund's investments ("Deductible Fees"). Available Capital is defined as the sum
of the aggregate Net Capital Contributions of the Partners less the cumulative
amount of returns of capital distributed to Partners and realized losses from
investments.
As stated in the Partnership Agreement, the Fund's allocable share of the
Minimum Amount is $1,125,650 or $281,413 per quarter. Investment Advisory Fees
for the nine months ended September 30, 1997, reflect and adjustment for the
difference between the Minimum Amount due to the Investment Advisor and what was
paid for the quarters ending December 31, 1996 and March 31, 1997.
The Investment Advisory Fee is calculated and paid quarterly in advance.
The Investment Advisory Fees paid by the Fund for the nine months ended
September 30, 1997 and 1996 were $932,442 and $824,674, respectively.
7. Fund Administration Fee and Expenses
As compensation for its services during the fourth through seventh year of
operation of the Funds, ML Fund Administrators, Inc. ("MLFAI"), as the Fund
administrator, is entitled to receive from the Funds an annual amount equal to
the greater of the (i) Minimum Fee and (ii) the Funds' prorated proportion
(based on the number of Units issued by the Funds) of 0.45% of the excess of the
aggregate net offering proceeds of the Units issued by the Funds over 50% of the
aggregate amount of capital reductions of the Funds (subject to an annual
maximum of $3.2 million). The Minimum Fee is 1.0% of the gross offering price of
Units in the Funds, but not greater than $500,000. The Fund Administration Fee
is calculated and paid quarterly in advance.
In accordance with the Partnership Agreement, beginning October 13, 1996,
the Fund Administration Fee is an annual fee of $300,000 plus 100% of all direct
out-of-pocket expenses incurred by the Fund Administrator on behalf of the Fund.
The Fund Administration Fees paid by the Fund for the nine months ended
September 30, 1997 and 1996 were $225,000 and $630,453, respectively.
Beginning October 13, 1996, MLFAI is entitled to receive reimbursement for
all direct-out-of-pocket expenses incurred in connection with the administration
of the Fund, commencing October 13, 1992. For the nine months ended September
30, 1997 and 1996, the Fund incurred administrative expenses of $328,687 and
$136,605, respectively, which consisted primarily of printing, audit and tax
return preparation and custodian fees paid for by MLFAI on behalf of the Fund.
8. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner is
entitled to a $30,000 annual fee (payable quarterly) from the Fund in addition
to $500 for each meeting attended and reimbursement for any out-of-pocket
expenses. In accordance with the Fund's Partnership Agreement, the amount of the
annual fee is reviewed annually by the Independent General Partners.
For the nine months ended September 30, 1997 and 1996, the Fund incurred
$109,609 and $147,971, respectively, of Independent General Partners' Fees and
Expenses.
9. Related Party Transactions
For the nine months ended September 30, 1997 and 1996, the Fund paid
expenses of $15,384 and $73,550 respectively, as reimbursement for amounts paid
for legal services provided by Equitable Life in connection with the Fund's
Enhanced Yield Investments. The Fund is paying Alliance Corporate an Investment
Advisory Fee for its services as described in Note 6. Additionally, the Fund
paid sales commissions to Equico Securities, a related party, as described in
Note 5.
<PAGE>
10. Investment Transactions
The Fund invested primarily in Enhanced Yield Investments, also known in
the securities industry as "high yield securities". The securities in which the
Fund has invested were issued in conjunction with the mezzanine financing of
privately structured, friendly leveraged acquisitions, recapitalizations and
other leveraged financings, and are generally linked with an equity
participation. Enhanced Yield Investments are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with Enhanced Yield
Investments than with investment grade securities because Enhanced Yield
Investments are generally unsecured and are often subordinated to other
creditors of the issuer. Also, these issuers usually have high levels of
indebtedness and are more sensitive to adverse economic conditions, such as a
recession or increasing interest rates, than investment grade issuers. Most of
these securities are subject to resale restrictions and generally there is no
quoted market for such securities.
Although the Fund cannot eliminate its risks associated with participation
in Enhanced Yield Investments, it has established risk management policies. The
Fund subjected each prospective investment to rigorous analysis, and made only
those investments that were recommended by the Managing General Partner and that
met the Fund's investment guidelines or that were otherwise approved by the
Independent General Partners. Fund investments are measured against specified
Fund investment and performance guidelines. To limit the exposure of the Fund's
capital in any single issuer, the Fund limited the amount of its investment in a
particular issuer. The Fund also continually monitors portfolio companies in
order to minimize the risks associated with participation in Enhanced Yield
Investments.
On January 2, April 2, and July 1, 1997, the Fund received $65,194, $64,754
and $67,143, respectively, from Pergament Home Centers, Inc. as a principal
paydown of the Floating Rate Demand Note held by the Fund. No gain, loss or
income has been recorded on this transaction.
On January 15 and May 15, 1997, the Fund received additional proceeds of
$1,100 and $1,616, respectively, from Polaris Pool Systems, Inc. The money
represents proceeds from the sale of the investments from prior years that have
been held in escrow for future adjustments and expenses not paid on the sale
dates.
On March 24, 1997, the Fund received a prepayment of Lexmark International,
Inc.'s 14.25% Senior Subordinated Notes outstanding, in the principal amount of
$19,667,348 together with a prepayment penalty of $3,312,387 and $646,154 of
accrued interest. The transaction resulted in a gain of $3,312,387 to the Fund.
On April 8, 1997, the Fund received a dividend of $13,771 from Bank United
Corp.
On July 2, 1997, the Fund sold its RI Holdings Inc., 16% Senior
Subordinated Notes for $409,189 and realized a loss of $11,415,129 on the sale.
The write-off of the common stocks resulted in a realized loss of $3,058,326.
On September 19, 1997, the Fund received additional procees of $8,826 from
Haddon Craftsman. This represents proceeds from the sale of the investment from
prior years that have been held in escrow.
During the nine months ended September 30, 1997, the Fund sold the
remaining 877,908 shares of Bank United Corp. Class A Common Stock for
$24,900,079 and realized a gain of $19,009,662.
During the nine months ended September 30, 1997, the Fund sold 397,564
shares of Lexmark International Group, Inc. Class B Common Stock for $11,336,952
resulting in a gain of $8,686,512.
All of the proceeds received during the third quarter of 1997 are expected
to be distributed to Limited Partners on record as of September 30, 1997, on
November 14, 1997.
As of September 30, 1997, the Fund had remaining investments in 3 Managed
Companies (a Managed Company is one to which the Fund, the Managing General
Partner or other persons in the Fund's investor group make significant
managerial assistance available) and 4 Non-Managed Companies (a Non-Managed
Company is one to which such assistance is not provided) totaling $31,176,210
(including $854,000 capitalized cost of payment-in-kind securities), consisting
of $8,537,908 in senior notes and subordinated notes and $22,638,302 in common
stock and purchase warrants.
<PAGE>
11. Allocation of Profits and Losses
Pursuant to the terms of the Partnership Agreement, net investment income
and gains and losses on investments are generally allocated between the Managing
General Partner and the Limited Partners based upon cash distributions as
follows:
first, 99% to the Limited Partners and 1% to the Managing General Partner
until the Limited Partners have received a cumulative priority return of 10%
non-compounded on an annual basis on their investments in Enhanced Yield
Investments;
second, 70% to the Limited Partners and 30% to the Managing General Partner
until the Managing General Partner has received 20% of all current and prior
distributions on such investments;
and thereafter, 80% to the Limited Partners and 20% to the Managing
General Partner.
For the nine months ended September 30, 1997, earnings were allocated 99%
to the Limited Partners, as a class, and 1% to the Managing General Partner.
12. Unrealized Appreciation/Depreciation and Non-Accrual of Investments
For the nine months ended September 30, 1997, the Fund recorded net
unrealized depreciation on Enhanced Yield Investments of $20,943,490 compared to
$37,949,493 of unrealized appreciation for the nine months ended September 30,
1996. Such depreciation was the result of adjustments in value made with respect
to the following investments during the nine months ended September 30, 1997:
The amount includes the reversal of $13,293,616, and $2,241,777 of
unrealized appreciation of Bank United Corp. Class A Common Stock due to the
sale of 779,543 shares in February 1997 and the remaining 98,365 shares in May
1997. Due to an increase in the quoted market price of Bank United Corp. Class A
Common Stock and the equity being valued at 100% of the closing market price as
compared to 90% at December 31, 1996, the Fund recorded unrealized appreciation
of $290,177 at March 31, 1997.
Due to the sale of 30,002 shares of Lexmark International Group, Inc. Class
B Common Stock in January, 226,641 shares in May and June and 140,921 shares in
July through September 1997 the Fund reversed $2,389,245, $2,178,374 and
$2,936,608 of unrealized appreciation, respectively.
During the first quarter Leather U.S., Inc. common stock was written down
from 100% to 15% of the par. In the second quarter ended June 30, 1997 Leather
U.S., Inc. common stock was written down from 15% to 0% of the par. The
writedowns resulted in unrealized depreciation of $9,342,000 to the Fund.
On March 31, 1997, Pergament Home Center, Inc. Floating Rate Demand Note
was written down from 75% to 50% of par, resulting in unrealized depreciation of
$677,642 to the Fund. In the third quarter ended September 30, 1997, Pergament
Home Centers, Inc., Floating Rate Demand Note was written down from 50% of par
to 25% of par. This writedown resulted in unrealized depreciation of $677,305.
Due to the sale of the 16% Senior Subordinated Notes and the write-off of
the common stocks of RI Holdings Inc., in July 1997 the Fund reversed
depreciation of $11,336,574 and $3,058,326, respectively.
During the three months ended September 30, 1997, Western Pioneer, Inc.,
10% Senior Subordinated Notes were written down from 50% of par to 30% of par
This writedown resulted in unrealized depreciation of $1,892,000.
<PAGE>
The following investments have been on non-accrual status as of the
respective dates:
Pergament Home Centers, Inc.
Floating Rate Demand Note July 1, 1996
MTI Holdings, Inc. 12%
Senior Secured Note October 1, 1995
Western Pioneer, Inc. 10%
Senior Subordinated Note November 30, 1994
Alliance Corporate continues to monitor the Fund's portfolio closely. As a
matter of standard procedure, Alliance Corporate reviews each portfolio
company's financial statements at least quarterly, and often monthly. Investment
managers routinely review and discuss financial and operating results with the
companies' management and equity sponsors, and attend periodic board of
directors meetings, as appropriate. In some cases, Alliance Corporate officers,
acting on behalf of the Fund, serve as directors on the boards of portfolio
companies. When problems arise, communication with management and sponsors often
occurs on a daily basis.
13. Income Taxes
No provision for income taxes has been made since all income and losses are
allocated to the Fund's partners for inclusion in their respective tax returns.
Pursuant to Statement of Financial Accounting Standards No. 109 - Accounting
for Income Taxes, the Fund is required to disclose any difference between the
tax bases of the Fund's assets and liabilities versus the amounts reported in
the Financial Statements. Generally, the tax bases of the Fund's assets
approximate the amortized cost amounts reported in the Financial Statements.
This amount is computed annually and as of December 31, 1996, the tax basis of
the Fund's assets was greater than the amounts reported in the Financial
Statements by $30,331,565. This difference is primarily attributable to
unrealized depreciation on investments which has not been recognized for tax
purposes. Additionally, certain realized gains and losses due to restructurings
were treated differently for tax purposes than for financial reporting purposes.
14. Subsequent Events
On November 6, 1997, the Independent General Partners approved an aggregate
cash distribution of $5,259,611 for the three months ended September 30, 1997,
which will be paid on November 14, 1997 to the Limited Partners. The amount that
will be distributed to Limited Partners on record as of September 30, 1997
includes $2,049,199 of return of capital. On a per Unit basis, the distribution
of $18.48 includes $11.28 of net realized gains and $7.20 of return of capital.
The Managing General Partner's one percent allocation of $53,127 is being held
as a Deferred Distribution Amount resulting in no distribution to the Managing
General Partner.
In November 1997, pursuant to a Secondary Offering of shares of Lexmark
International Group, Inc common stock the Fund sold 54,486 shares of common
stock at a net price of $29.90 per share. The Fund received $1,629,131 of net
proceeds and realized a gain of $1,265,890. The Fund continues to hold 99,568
shares of Lexmark common stock.
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
Net Proceeds of Offering
On October 13, 1988, the Fund completed the initial public offering of
Units, admitting 18,288 Limited Partners who purchased 284,611 Units. The net
proceeds available for investment by the Fund after such offering were
$261,499,657 after volume discounts, sales commissions and organizational,
offering, sales and marketing expenses.
Investments
As of September 30, 1997, the Fund had a total of 7 Enhanced Yield
Investments at a net cost of $31,176,210 (inclusive of the receipt of securities
having a capitalized cost of $854,000 received as payment-in-kind interest on
certain Enhanced Yield Investments).
Proceeds from Investments
During the nine months ended September 30, 1997, the Fund received proceeds
from the following investments:
On January 2, April 2, and July 1, 1997, the Fund received $65,194, $64,754
and $67,143, respectively, from Pergament Home Centers, Inc. as a principal
paydown of the Floating Rate Demand Note held by the Fund. No gain, loss or
income has been recorded on this transaction.
On January 15 and May 15, 1997, the Fund received additional proceeds of
$1,100 and $1,616, respectively, from Polaris Pool Systems, Inc. The money
represents proceeds from the sale of the investments from prior years that have
been held in escrow for future adjustments and expenses not paid on the sale
dates.
On March 24, 1997, the Fund received a prepayment of Lexmark International,
Inc.'s 14.25% Senior Subordinated Notes outstanding, in the principal amount of
$19,667,348 together with a prepayment penalty of $3,312,387 and $646,154 of
accrued interest. The transaction resulted in a gain of $3,312,387 to the Fund.
On April 8, 1997, the Fund received a dividend of $13,771 from Bank United
Corp.
On July 2, 1997, the Fund sold its RI Holdings Inc., 16% Senior
Subordinated Notes for $409,189 and realized a loss of $11,415,129 on the sale.
The write-off of the common stocks resulted in a realized loss of $3,058,326.
During the nine months ended September 30, 1997, the Fund sold the
remaining 877,908 shares of Bank United Corp. Class A Common Stock for
$24,900,079 and realized a gain of $19,009,662.
On September 19, 1997, the Fund received additional proceeds of $8,826 from
Haddon Craftsman. This represents proceeds from the sale of the investment from
prior years that have been held in escrow.
During the nine months ended September 30, 1997, the Fund sold 397,564
shares of Lexmark International Group, Inc. Class B Common Stock for $11,336,952
resulting in a gain of $8,686,512.
All of the proceeds received during the third quarter of 1997 are expected
to be distributed to Limited Partners on record as of September 30, 1997, on
November 14, 1997.
For additional information, refer to the Supplemental Schedule of Realized
Gains and Losses and Note 10 to the Financial Statements.
The Fund's Enhanced Yield Investments are typically issued in private
placement transactions and are subject to certain restrictions on transfer, and
are thus relatively illiquid. The balance of the Fund's assets at the end of the
period covered by this report was invested in Temporary Investments, comprised
of commercial paper with maturities of less than sixty days.
All cash dividends, interest and other income received by the Fund in excess
of expenses of operation and reserves for expenses and certain investments and
liabilities are distributed to the Limited Partners of the Fund and to Alliance
Corporate, as the Managing General Partner, within 45 days after the end of each
calendar quarter. Before each quarterly cash distribution, the Fund will analyze
the then current cash projections and determine the amount of any additional
reserves it deems necessary.
<PAGE>
Participation in Enhanced Yield Investments
The Fund is invested primarily in Enhanced Yield Investments, also known in
the securities industry as "high yield securities". The securities in which the
Fund has invested were issued in conjunction with the mezzanine financing of
privately structured, friendly leveraged acquisitions, recapitalizations and
other leveraged financings, and are generally linked with an equity
participation. Enhanced Yield Investments are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with Enhanced Yield
Investments than with investment grade securities because Enhanced Yield
Investments are generally unsecured and are often subordinated to other
creditors of the issuer. Also, these issuers usually have high levels of
indebtedness and are more sensitive to adverse economic conditions, such as a
recession or increasing interest rates, than investment grade issuers. Most of
these securities are subject to resale restrictions and generally there is no
quoted market for such securities.
Although the Fund cannot eliminate its risks associated with participation
in Enhanced Yield Investments, it has established risk management policies. The
Fund subjects each prospective investment to rigorous analysis, and makes only
those investments that have been recommended by the Managing General Partner and
that meet the Fund's investment guidelines or that have otherwise been approved
by the Independent General Partners.
Fund investments are measured against specified Fund investment and
performance guidelines. To limit the exposure of the Fund's capital in any
single issuer, the Fund limits the amount of its investment in a particular
issuer. The Fund also continually monitors portfolio companies in order to
minimize the risks associated with participation in Enhanced Yield Investments.
Results of Operations
For the three and nine months ended September 30, 1997, net investment
income decreased by $675,908 and $4,645,904 respectively, as compared to the
same period in 1996. Net investment income is comprised of investment income
(primarily interest and dividend income) offset by expenses. The decrease in the
1997 net investment income versus the comparative period in 1996, reflects the
decrease in interest and dividend income partially offset by the decrease in
Fund Administration Fees and Expenses.
For the three and nine months ended September 30, 1997, the Fund had
investment income of $350,243 and $2,324,295, respectively, as compared to
$1,151,762 and $7,205,553 , respectively, for the same periods in 1996. The
decrease in 1997 investment income of 68% was primarily due to an decrease in
interest and dividend income.
The Fund incurred expenses of $527,555 and $1,669,805 for the three and
nine months ended September 30, 1997, as compared to $653,166 and $1,905,159 for
the same periods in 1996. The decrease in the 1997 expenses of $235,354 was
primarily due to a decrease in Professional Fees, Fund Administration Fees and
Expenses and Independent General Partner's Fees and Expenses paid by the Fund.
The Fund's major expenses consist of the Investment Advisory Fee, the Fund
Administration Fees and Expenses and Independent General Partners' Fees and
Expenses.
The Fund experienced an decrease in net assets resulting from operations
for the nine months ended September 30, 1997 in the amount of $3,742,352 as
compared to an increase of $17,469,967 for the comparative period in 1996. The
decrease in net assets for the nine months ended September 30, 1997 is comprised
of net investment income of $654,490, net realized gains of $16,546,648 offset
by a net change in unrealized depreciation of $20,943,490. For the comparable
period in 1996, the increase in net assets was comprised of net investment
income of $5,300,394, net realized losses of $25,779,920 offset by a net change
in unrealized appreciation of $37,949,493 (see Statements of Operations in the
Financial Statements).
For the three months ended September 30, 1997 and 1996, the Fund incurred
Investment Advisory Fees of $281,413 and $249,764, respectively. For the nine
months ended September 30, 1997 and 1996, the Fund incurred Investment Advisory
Fees of $932,442 and $824,674, respectively (as described in Note 6 to the
Financial Statements).
<PAGE>
The Fund Administration Fees and Expenses (as described in Note 7 to the
Financial Statements) for the three months ended September 30, 1997 and 1996
were $173,086 and $229,860 respectively, and for the nine months ended September
30, 1997 and 1996 were $553,687 and $767,058, respectively. The decrease from
1996 to 1997 of $213,371 is primarily due to the Fund Administration Fee
changing to an annual fee of $300,000 plus 100% of all direct out-of-pocket
expenses incurred by the Fund Administrator on behalf of the Fund.
Independent General Partners' Fees and Expenses incurred for the three and
nine months ended September 30, 1997 and 1996 were $39,556 and $49,636,
respectively and $109,609 and $147,971, respectively.
The Fund incurred Professional Fees of $31,000 and $62,050 for the three
and nine months ended September 30, 1997, respectively. Professional Fees
incurred for the same periods in 1996 were $123,906 and $141,179, respectively.
(See Note 9 to the Financial Statements.)
Unrealized Appreciation/Depreciation and Non-Accrual of Investments
The General Partners of the Fund determine, on a quarterly basis, the fair
value of the Fund's portfolio securities that do not have a readily
ascertainable market value. They are assisted in connection with such
determination by the Managing General Partner, which has established a valuation
committee comprised of senior executives to assess the Fund's portfolio and make
recommendations regarding the value of its portfolio securities. This valuation
committee uses available market information and appropriate valuation
methodologies. In addition, the Managing General Partner has retained Arthur D.
Little, Inc., a nationally recognized independent valuation consultant, to
review such valuations.
For privately issued securities in which the Fund typically invests, the
fair value of an investment is its initial cost, adjusted for amortization of
discount or premium and as subsequently adjusted to reflect the occurrence of
significant developments. "Significant developments" are business, economic or
market events that may affect a company in which an investment has been made or
the securities comprising such investment. For example, significant developments
that could result in a writedown in value include, among other things, events of
default with respect to payment obligations or other developments indicating
that a portfolio company's performance may fall short of acceptable levels. A
writeup in value of an investment could take place when a significant favorable
development occurs, such as a transaction representing the partial sale of an
investment that would result in a capital gain or company performance exceeding
expected levels on a sustained basis.
Although the General Partners use their best judgment in determining the
fair value of these investments, there are inherent limitations in any valuation
technique involving securities of the type in which the Fund invests. Therefore,
the fair values presented herein are not necessarily indicative of the amount
which the Fund could realize in a current transaction.
For the nine months ended September 30, 1997, the Fund recorded net
unrealized depreciation on Enhanced Yield Investments of $20,943,490 as compared
to $37,949,493 of unrealized appreciation for the nine months ended September
30, 1996. The change in unrealized depreciation was primarily the result of
unrealized depreciation in Leather U.S., Pergament Home Centers, Inc. and
Western Pioneer, Inc., the reversal of depreciation on RI Holdings, Inc. and the
reversal of unrealized appreciation in Bank United Corp. and Lexmark
International Group, Inc.
<PAGE>
The following investments have been on non-accrual status as of the
respective dates:
Pergament Home Centers, Inc.
Floating Rate Demand Note July 1, 1996
MTI Holdings, Inc. 12%
Senior Secured Note October 1, 1995
Western Pioneer, Inc. 10%
Senior Subordinated Note November 30, 1994
Alliance Corporate continues to monitor the Fund's portfolio closely. As a
matter of standard procedure, Alliance Corporate reviews each portfolio
company's financial statements at least quarterly, and often monthly. Investment
managers routinely review and discuss financial and operating results with the
companies' management and equity sponsors, and attend periodic board of
directors meetings, as appropriate. In some cases, Alliance Corporate officers,
acting on behalf of the Funds, serve as directors on the boards of portfolio
companies. When problems arise, communication with management and sponsors often
occurs on a daily basis.
Realized Gains and Losses on Investments
During the three months ended September 30, 1997, the Fund recorded a net
realized loss of $10,727,598 and for the nine months ended September 30, 1997
the Fund recorded net realized gains of $16,546,648 on transactions involving
five Enhanced Yield Investments. For the three and nine months ended September
30, 1996, the Fund recorded net realized losses on investments of $12,705,316
and $25,779,920, respectively, on transactions involving four Enhanced Yield
Investments (see Note 10 to the Financial Statements and the Supplemental
Schedule of Realized Gains and Losses).
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 4 are herewith omitted as the response to items is either
none or not applicable for the September 30, 1997, Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27 - Financial Data Schedule for the quarter ending
September 30, 1997.
3.1 Amended and Restated Certificate of Limited Partnership, dated as
of April 12, 1989*
4.1 Amended and Restated Agreement of Limited Partnership, dated as
of October 13, 1988**
10.1 Investment Advisory Agreement, dated July 22, 1993, between
Registrant and Alliance Corporate Finance Group Incorporated****
10.2 Administrative Services Agreement, dated October 13, 1988, among
the Registrant, Equitable Capital Management Corporation and ML
Fund Administrators, Inc.**
10.3 Credit Agreement dated as of June 27, 1989, between Equitable
Capital Partners, L.P. and Wells Fargo Bank, N.A.***
* Incorporated by reference to the Fund's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989, filed with the Securities and
Exchange Commission on March 29, 1990.
** Incorporated by reference to the Fund's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988, filed with the Securities and
Exchange Commission on March 29, 1989.
*** Incorporated by reference to the Fund's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1989, filed with the Securities and
Exchange Commission on August 14, 1989.
**** Incorporated by reference to the Fund's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, filed with the Securities and
Exchange Commission on March 28, 1994.
(b) Reports on Form 8-K - None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 14th day of
November, 1997.
EQUITABLE CAPITAL PARTNERS, L.P.
By: Alliance Corporate Finance Group Incorporated,
as Managing General Partner,
Dated: November 14, 1997 /s/ James R. Wilson
-----------------------------
James R. Wilson
Title: President
Dated: November 14, 1997 /s/ Andy Pitsillos
---------------------------
Andy Pitsillos
Title: Vice President and Chief
Accounting Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 14th day of
November, 1997.
EQUITABLE CAPITAL PARTNERS, L.P.
By: Alliance Corporate Finance Group Incorporated,
as Managing General Partner,
Dated: November 14, 1997
James R. Wilson
Title: President
Dated: November 14, 1997
Andy Pitsillos
Title: Vice President and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary information extracted from the third quarter of
1997 Form 10-Q Balance Sheets and Statements of Operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 31,176,210
<INVESTMENTS-AT-VALUE> 16,777,396
<RECEIVABLES> 2,378,826
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,068,790
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 136,339
<TOTAL-LIABILITIES> 136,339
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 284,611
<SHARES-COMMON-PRIOR> 284,611
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (14,398,817)
<NET-ASSETS> 29,932,451
<DIVIDEND-INCOME> 136,678
<INTEREST-INCOME> 2,187,617
<OTHER-INCOME> 0
<EXPENSES-NET> 1,669,805
<NET-INVESTMENT-INCOME> 654,490
<REALIZED-GAINS-CURRENT> 16,546,648
<APPREC-INCREASE-CURRENT> 20,943,490
<NET-CHANGE-FROM-OPS> (3,742,352)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,130,570
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 2,214,274
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (80,775,723)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 932,442
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,669,805
<AVERAGE-NET-ASSETS> 70,320,313
<PER-SHARE-NAV-BEGIN> 383.53
<PER-SHARE-NII> 2.28
<PER-SHARE-GAIN-APPREC> (72.85)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 269.40
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 101.11
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
