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 01-16532
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), L.P.
(Exact name of registrant as specified in its governing instruments)
Delaware 13-3486106
(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 (RETIREMENT FUND), 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 (RETIREMENT FUND), L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C> <C>
September 30, 1997
ASSETS: Notes Unaudited December 31, 1996
-------- ------------------ -----------------
Investments 2,10,12
Enhanced Yield Investments at Value-
Managed Companies
(amortized cost of $12,155,290 at
September 30, 1997 and $46,361,524
at December 31, 1996) $ 4,847,290 $ 47,988,305
Non-Managed Companies
(amortized cost of $10,729,275 at
September 30, 1997 and $12,961,638
at December 31, 1996) 6,114,440 14,814,796
Temporary Investments
(at amortized cost) 8,872,305 20,550,637
Cash 79,717 62,948
Interest Receivable 2,12 95,608 876,677
Note Receivable 3,4 846,890 1,178,728
Receivable for Investment Sold 498,474 77,712
Prepaid Expenses - 2,511
--------------- ----------------
TOTAL ASSETS $ 21,354,724 $ 85,552,314
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Professional Fees Payable 9 $ 60,905 $ 52,641
Independent General Partners' Fees Payable 8 9,117 20,846
Fund Administrative Expenses Payable 7 54,729 43,085
Other Accrued Liabilities 3,249 6,101
--------------- ----------------
Total Liabilities 128,000 122,673
Partners' Capital
Managing General Partner 3,4 730,946 1,099,814
Limited Partners (221,072 Units) 4 20,495,778 84,329,827
--------------- ----------------
Total Partners' Capital 21,226,724 85,429,641
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 21,354,724 $ 85,552,314
=============== ================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), 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 $ 231,192 $ 1,171,274 $ 1,856,007 $ 3,500,251
Discount -- 4,950 -- 16,511
Dividend -- -- 67,331 1,852,195
----------- ------------- ------------- -------------
TOTAL INVESTMENT INCOME 231,192 1,176,224 1,923,338 5,368,957
EXPENSES:
Investment Advisory Fee- Note 6 218,587 211,996 687,608 660,839
Fund Administration Fees and Expenses - Note 7 101,196 175,810 330,334 593,088
Independent General Partners'
Fees and Expenses - Note 8 36,844 47,262 106,885 141,382
Professional Fees - Note 9 6,212 101,931 110,730 109,233
Insurance Fees -- -- 5,126 4,410
Valuation Expenses 1,700 -- 4,400 9,446
----------- ------------- ------------- -------------
TOTAL EXPENSES 364,539 536,999 1,245,083 1,518,398
----------- ------------- ------------- -------------
NET INVESTMENT INCOME (133,347) 639,225 678,255 3,850,559
NET CHANGE IN UNREALIZED DEPRECIATION
ON INVESTMENTS- Note 12 3,394,533 15,051,391 (15,402,772) 23,522,984
NET REALIZED GAINS (LOSSES) ON INVESTMENTS - Note 10 (4,303,311) (6,605,542) 12,855,950 (17,501,651)
----------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(1,042,125) $ 9,085,074 $ (1,868,567) $ 9,871,892
=========== ============= ============= =============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), 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 Increase (Decrease) in Net Assets
Resulting from Operations $ (1,868,567) $ 9,871,892
Cash Distributions to Partners (62,002,512) (15,020,637)
Reduction in Managing General Partners'
Contribution (331,838) (40,458)
----------------- -----------------
Total Decrease (64,202,917) (5,189,203)
NET ASSETS:
Beginning of Period 85,429,641 88,842,112
End of Period $ 21,226,724 $ 83,652,909
================= =================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
----------------------------------------------
INCREASE (DECREASE) IN CASH September 30, 1997 September 30, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and Discount Income $ 1,894,684 $ 2,905,311
Fund Administration Fees & Expenses (318,690) (605,681)
Investment Advisory Fee (687,608) (660,839)
Independent General Partners' Fees and Expenses (118,614) (131,146)
Valuation Expenses (7,251) (7,586)
Sale (Purchase) of Temporary Investments, Net 12,488,055 8,250,397
Proceeds from Sales and Principal Payments of
Enhanced Yield Investments 48,873,786 5,419,496
Professional Fees (102,090) (103,199)
Insurance Fees (2,991) (375)
----------------- -----------------
Net Cash Provided by Operating Activities 62,019,281 15,066,378
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (62,002,512) (15,020,637)
Net Cash Used in Financing Activities (62,002,512) (15,020,637)
----------------- -----------------
Net Increase in Cash 16,769 45,741
----------------- -----------------
Cash at the Beginning of the Period 62,948 39,181
Cash at the End of the Period $ 79,717 $ 84,922
================= =================
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 $ (1,868,567) $ 9,871,892
Adjustments to Reconcile Net (Decrease) Increase in Net Assets
Resulting from Operations to Net Cash Provided by Operating
Activities:
Decrease in Investments 48,505,893 31,171,546
Decrease (Increase) in Accrued Interest and Investment
Income (28,655) (2,463,649)
Decrease in Prepaid Expenses 2,511 4,412
(Decrease) Increase in Other Accrued Liabilities (2,852) 1,859
Increase (Decrease) in Fund Administration Expenses Payable 11,644 (12,593)
Net Change in Unrealized (Appreciation)
Depreciation on Investments 15,402,772 (23,522,984)
(Decrease) Increase in Independent General
Partners' Fees Payable (11,729) 10,236
Increase in Professional Fees Payable 8,264 5,659
----------------- -----------------
Total Adjustments 63,887,848 5,194,486
----------------- -----------------
Net Cash Provided by Operating Activities $ 62,019,281 $ 15,066,378
================= =================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), L.P.
STATEMENT 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 $ 1,099,814 $ 84,329,827 $ 85,429,641
Cash Distributions to Partners (18,345) (61,984,167) (62,002,512)
Reduction in Managing General Partners' Contribution 3 (331,838) - (331,838)
Allocation of Net Investment Income 11 6,783 671,472 678,255
Allocation of Net Unrealized Depreciation
on Investments 12 (154,028) (15,248,744) (15,402,772)
Allocation of Net Realized Gains on Investments 128,560 12,727,390 12,855,950
----------- ------------ --------------
Partners' Capital at September 30, 1997 $ 730,946 $ 20,495,778 $ 21,226,724
=========== ============ ==============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
<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)
123.50 Shares Quantegy Acquisition Corp., Common Stock 11/13/95 $ 2,722,290 $ 2,722,290 $ 2,722,290
------------ ----------- ------------
2,722,290 2,722,290 2,722,290 13.73%
------------ ----------- ------------------------
LEATHER AND LEATHER PRODUCTS
LEATHER U.S., INC. - NOTE 12
(FORMERLY UNITED STATES LEATHER HOLDINGS, INC.)
621.90 Shares Leather U.S., Inc., Common Stock 04/09/96 7,308,000 7,308,000 0
----------- ------------ ----------
7,308,000 7,308,000 0 0.00
----------- ------------ ----------------------
MISCELLANEOUS RETAIL
R&S/STRAUSS, INC.
(FORMERLY WSR ACQUISITION CORP.)
$ 935,000 R&S/Strauss, Inc.,
Sr. Sub. Nt. 15% due 05/31/00* 06/13/90 935,000 935,000 935,000
$ 1,190,000 R&S/Strauss, Inc.,
Sr. Sub. Nt. 15% due 05/31/00* 06/13/90 1,190,000 1,190,000 1,190,000
----------- ----------- -----------
2,125,000 2,125,000 2,125,000 10.71
----------- ----------- ------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $12,155,290 $12,155,290 $ 4,847,290 24.44%
--------------------------------------- ----------- ----------- -------------------------
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), 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
115,883 Shares Lexmark International Group, Inc.,
Class B Common Stock (c) 03/27/91 $ 772,525 $ 772,525 $ 3,824,139
----------- ------------ ------------
772,525 772,525 3,824,139 19.28%
----------- ------------ -----------------------
DISTRIBUTION SERVICES
WESTERN PIONEER, INC. - NOTE 12
$ 4,730,800 Western Pioneer, Inc.,
Sr. Sub. Nts. 10% due 11/30/07*(b) 11/30/94 653,289 653,289 1,419,240
81,081 Warrants Western Pioneer, Inc.,
Common Stock Purchase Warrants ** 11/30/94 0 0 0
--------- ----------- -----------
653,289 653,289 1,419,240 7.16
--------- ----------- ----------------------
HEALTH SERVICES
MTI HOLDINGS, INC.
$ 113,386 MTI Holdings, Inc.,
Sr. Sec. Nt. 12% due 07/01/03* 08/06/96 113,386 113,386 113,386
8,125 Shares MTI Holdings, Inc., Common Stock** 08/06/96 121,875 121,875 121,875
2,264 Warrants MTI Holdings, Inc., Common Stock
Purchase Warrants 08/06/96 0 0 0
---------- ---------- -----------
235,261 235,261 235,261 1.19
---------- ---------- -----------------------
MISCELLANEOUS RETAIL
PERGAMENT HOME CENTERS, INC.- NOTES 10,12
$ 2,543,200 Pergament Acq. Corp., Home Centers, Inc.
Floating Rate Demand Note due 07/31/00*(b) 10/18/91 2,336,200 2,336,200 635,800
299.2 Shares Pergament Holdings, Corp.,
Common Stock Class B ** 02/28/89 6,732,000 6,732,000 0
109.2571 Shares Pergament Holdings, Corp.,
Common Stock Class C ** 02/28/89 0 0 0
----------- ----------- -----------
9,068,200 9,068,200 635,800 3.21
----------- ----------- -----------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $10,729,275 $10,729,275 $ 6,114,440 30.84%
------------------------------------------ ---------- ----------- ------------------------
TOTAL INVESTMENT IN ENHANCED YIELD INVESTMENTS $22,884,565 $22,884,565 $10,961,730 55.28%
---------------------------------------------- ----------- ----------- ------------------------
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), 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 7/15/97 $ 3,453,395 $ 3,495,178 $ 3,495,178
$ 2,500,000 AAFC, 5.53% due 11/19/97 7/15/97 2,451,228 2,481,183 2,481,183
$ 1,300,000 ALAMO FUNDING, 5.54% due 11/15/97 9/05/97 1,291,998 1,297,199 1,297,199
$ 1,600,000 WINDMILL FUNDING CORP, 5.65% due 10/06/97 9/30/97 1,598,493 1,598,745 1,598,745
------------ -------------- ------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 8,795,114 $ 8,872,305 $ 8,872,305 44.73%
------------------------------------ ------------ -------------- --------------------
TOTAL TEMPORARY INVESTMENTS $ 8,795,114 $ 8,872,305 $ 8,872,305 44.73%
--------------------------- ------------ -------------- --------------------
TOTAL INVESTMENT PORTFOLIO $ 31,679,679 $ 31,756,870 $ 19,834,035 100.00%
-------------------------- ============ ============== ====================
SUMMARY OF INVESTMENTS
Subordinated Notes $ 5,227,875 $ 5,227,875 $ 4,293,426 21.65%
Common Stock and Warrants 17,656,690 17,656,690 6,668,304 33.62
Temporary Investments 8,795,114 8,872,305 8,872,305 44.73
------------ -------------- --------------------
TOTAL INVESTMENT IN ENHANCED YIELD INVESTMENTS $ 31,679,679 $ 31,756,870 $ 19,834,035 100.00%
---------------------------------------------- ============ ============== ====================
* Restricted Security
** Restricted Non-income Producing Security
(a) Includes receipt of payment-in-kind securities.
(b) Non-accrual investment status.
(c) Pubicly traded class of securities.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), 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
DATE OF OR NUMBER AMORTIZED NET REALIZED
SECURITY TRANSACTION OF SHARES COST PROCEEDS GAIN (LOSS)
Polaris Pool Systems, Inc.
Common Stock 1/15/97 -- $ -- $ 542 (A) $ 542
Lexmark International Group, Inc.
Common Stock various 22,641 150,941 582,684 431,743
Bank United Corp.
Common Stock various 383,872 2,575,631 10,740,739 8,165,108
Lexmark International Inc.
14.25% Sr. Sub. Note 3/24/97 $24,103,269 24,103,269 28,162,757 4,059,488
Total Net Realized Gains for the
Three Months Ended March 31, 1997 $26,829,841 $39,486,722 $12,656,881
=========== =========== ===========
Polaris Pool Systems, Inc.
Common Stock 5/15/97 -- $ -- $ 796 (A) $ 796
Lexmark International Group, Inc.
Common Stock various 171,037 1,140,252 4,443,681 3,303,429
Bank United Corp.
Common Stock various 48,531 325,624 1,523,779 1,198,155
Total Net Realized Gains for the
Three Months Ended June 30, 1997 $ 1,465,876 $ 5,968,256 $ 4,502,380
=========== =========== ===========
RI Holdings, Inc.
16% Sr. Sub. Note 7/02/97 $12,972,582 $ 5,823,918 $ 202,165 $(5,621,753)
RI Holdings, Inc.
Common Stock 7/02/97 592,348 1,506,333 - (1,506,333)
Haddon Craftsman
Common Stock 9/19/97 -- -- 4,546 (A) 4,546
Lexmark International Group, Inc.
Common Stock various 106,349 708,997 3,529,226 2,820,229
Total Net Realized Losses for the
Three Months Ended September 30, 1997 $ 8,039,248 $ 3,735,937 $(4,303,311)
=========== =========== ===========
Total Net Realized Gain for the
Nine Months Ended September 30, 1997 $36,334,965 $49,190,915 $12,855,950
=========== =========== ===========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
EQUITABLE CAPITAL PARTNERS (RETIREMENT FUND), 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 Funds' 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 Retirement Fund will terminate
on October 13, 1998, subject to the right of the Independent General Partners to
extend the term of the Retirement Fund for up to two additional one year
periods, after which the Retirement Fund will liquidate any remaining
investments within five years.
<PAGE>
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 Retirement Fund.
The total value of securities without a readily ascertainable market value is
$7,137,591 and $40,903,485 as of September 30, 1997 and December 31, 1996,
respectively, representing 33.4% and 47.8% 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 Retirement
Fund's portfolio and make recommendations regarding the value of the Retirement
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.
For privately issued securities in which the Retirement 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 values of these
investments, there are inherent limitations in any valuation technique involving
securities of the type in which the Retirement Fund invests. Therefore, the fair
values presented herein are not necessarily indicative of the amount which the
Retirement 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.
<PAGE>
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
from the Retirement 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 discussed in Note 13, no provision for income taxes has been made since
all income and losses are allocated to the Retirement Fund's partners
("Partners") for inclusion in their respective tax returns.
Investment Transactions
Enhanced Yield Investments - The Retirement Fund records transactions on the
date on which it obtains an enforceable right to demand the securities or
payment thereof.
Temporary Investments - The Retirement 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.
3. Note Receivable
On July 22, 1993, pursuant to the terms of the Retirement Fund's Amended
and Restated Agreement of Limited Partnership, Alliance Corporate, as the
successor Managing General Partner of the Retirement Fund, has contributed a
non-interest bearing promissory note (the "Note") to the Retirement 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 $331,838 reduction of the
principal amount of the Note. The promissory note of Equitable Capital was
canceled upon the contribution of Alliance Corporate's Note.
4. Capital Contributions
On October 13, 1988, the Retirement Fund closed the initial public offering
of its units of Limited Partner interests ("Units"). Equitable Capital, the
Retirement Fund's Managing General Partner at that time, accepted subscriptions
for 221,072 Units and admitted 26,304 Limited Partners.
The Limited Partners' total capital contributions were $220,848,730, after
giving effect to volume discounts allowed of $223,270. Equitable Capital's
aggregate capital contribution was in the form of a promissory note in the
principal amount of $2,052,050. On July 22, 1993, Equitable Capital's note was
canceled 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 $203,146,793.
Allocation of income, loss and distributions of cash are made in accordance
with the Partnership Agreement as further discussed in Note 11.
<PAGE>
5. Sales, Marketing and Offering Expenses and Sales Commissions
The Retirement Fund expended a total of $416,052 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 totaled $951,683.
The Retirement Fund also paid $1,627,385 for the reimbursement of offering
expenses. These expenses, along with the offering expenses of Equitable Capital
Partners, L.P. and the organizational expenses of the Funds, may not exceed
$6,000,000. Aggregate offering and organizational expenses for the Funds totaled
$4,711,806.
For their services as selling agent, the Retirement Fund paid sales
commissions to Merrill Lynch, Pierce, Fenner & Smith Incorporated in the amount
of $15,251,770, of which Equico Securities Corporation, an affiliate of
Equitable Capital, a related party, received $168,150 as a selected dealer.
6. Investment Advisory Fee
As of July 22, 1993, Alliance Corporate has been receiving a quarterly
Investment Advisory Fee, at the annual rate of 1.0% of the Retirement 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 Retirement 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 Retirement Fund's allocable
share of the Minimum Amount is $874,350 or $218,588 per quarter. Investment
Advisory Fee 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 Retirement Fund for the nine months
ended September 30, 1997 and 1996 were $687,608 and $660,839, 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
Retirement 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
Retirement 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 $100,000 plus 100% of all direct
out-of-pocket expenses incurred by the Fund Administrator on behalf of the Fund.
The Retirement Fund Administration Fees paid by the Retirement Fund for the
nine months ended September 30, 1997 and 1996 were $75,000 and $489,705,
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 Retirement Fund, commencing on October 13, 1992. For the nine months
ended September 30, 1997 and 1996, the Retirement Fund incurred Administrative
expenses of $255,334 and $103,383, respectively, which consisted primarily of
printing, audit and tax return preparation and custodian fees paid for by MLFAI
on behalf of the Retirement Fund.
<PAGE>
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 Retirement Fund in
addition to $500 for each meeting attended and reimbursement for any
out-of-pocket expenses. In accordance with the Retirement 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 Retirement Fund
incurred $106,885 and $141,382, respectively, of Independent General Partners'
Fees and Expenses.
9. Related Party Transactions
For the nine months ended September 30, 1997 and 1996, the Retirement Fund
paid expenses of $9,108 and $99,751, respectively, as reimbursement for amounts
paid for legal services provided by Equitable Life in connection with the
Retirement Fund's Enhanced Yield Investments. The Retirement Fund is paying
Alliance Corporate an Investment Advisory Fee for its services as described in
Note 6. Additionally, the Retirement Fund paid sales commissions to Equico
Securities, a related party, as described in Note 5.
10. Investment Transactions
The Retirement Fund invested primarily in Enhanced Yield Investments, also
known in the securities industry as "high yield securities". The securities in
which the Retirement 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 Retirement Fund cannot eliminate its risks associated with
participation in Enhanced Yield Investments, it has established risk management
policies. The Retirement Fund subjects each prospective investment to rigorous
analysis, and made only those investments that were recommended by the Managing
General Partner and that met the Retirement Fund's investment guidelines or that
were otherwise approved by the Independent General Partners. The Retirement Fund
investments are measured against specified Retirement Fund investment and
performance guidelines. To limit the exposure of the Retirement Fund's capital
in any single issuer, the Retirement Fund limited the amount of its investment
in a particular issuer. The Retirement 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 Retirement Fund received
$51,224, $50,878 and $52,755, respectively, from Pergament Home Centers, Inc. as
a principal paydown of the Floating Rate Demand Note held by the Retirement
Fund. No gain, loss or income has been recorded on this transaction.
On January 15 and May 15, 1997, the Retirement Fund received additional
proceeds of $542 and $796, 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 Retirement Fund received a prepayment of Lexmark
International, Inc.'s 14.25% Senior Subordinated Notes outstanding, in the
principal amount of $24,103,269 together with a prepayment penalty of $4,059,488
and $791,892 of accrued interest. The transaction resulted in a gain of
$4,059,488 to the Retirement Fund.
On April 8, 1997, the Retirement Fund received a dividend of $6,794 from
Bank United Corp.
During the nine months ended September 30, 1997, the Retirement Fund sold
432,403 shares of Bank United Corp. Class A Common Stock for $12,264,518 and
realized a gain of $9,363,263.
On July 2, 1997, the Retirement Fund sold its RI Holdings Inc., 16% Senior
Subordinated Notes for $202,165 and realized a loss of $5,261,753 on the sale.
The write-off of the common stocks resulted in a realized loss of $1,506,333.
<PAGE>
On September 19, 1997, the Retirement Fund received additional proceeds of
$4,546 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 Retirement Fund sold
300,027 shares of Lexmark International Group, Inc. Class B Common Stock for
$8,555,591 resulting in a gain of $6,555,401.
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 Retirement Fund had remaining investments in
3 Managed Companies (a Managed Company is one to which the Retirement Fund, the
Managing General Partner or other persons in the Retirement 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 $22,884,565 (including $422,439 capitalized cost of
payment-in-kind securities), consisting of $5,227,875 in senior notes and
subordinated notes and $17,656,690 in common stock and purchase warrants.
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 Retirement Fund recorded
net unrealized depreciation on Enhanced Yield Investments of $15,402,772 as
compared to $23,522,984 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 $6,545,973, and $1,106,041 of
unrealized appreciation of Bank United Corp. Class A Common Stock due to the
sale of 383,872 shares in February 1997 and the remaining 48,531 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 Retirement Fund recorded unrealized
appreciation of $143,167 at March 31, 1997.
Due to the sale of 22,641 shares of Lexmark International Group, Inc. Class
B Common Stock in January 1997, 171,037 shares in May and June 1997 and 106,349
shares in July through September 1997 the the Retirement Fund reversed
$1,801,801, $1,646,224 and $2,217,161 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 $7,308,000 to the Retirement
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
$532,433 to the Retirement 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
$532,167.
<PAGE>
Due to the sale of the 16% Senior Subordinated Notes and the write-off of
the common stocks of RI Holdings, Inc., in July the Retirement Fund reversed
depreciation of $5,583,688 and $1,506,333, 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 $946,160.
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, 1996
Western Pioneer, Inc. 10%
Senior Subordinated Note November 30, 1994
Alliance Corporate continues to monitor the Retirement 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.
13. Income Taxes
No provision for income taxes has been made since all income and losses are
allocated to the Retirement Fund's partners for inclusion in their respective
tax returns.
Pursuant to Statement of Financial Accounting Standards No. 109 - Accounting
for Income Taxes, the Retirement Fund is required to disclose any difference
between the tax bases of the Retirement Fund's assets and liabilities versus the
amounts reported in the Financial Statements. Generally, the tax bases of the
Retirement 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 Retirement Fund's assets was greater than the amounts
reported in the Financial Statements by $21,205,814. 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 $3,853,285, 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 $1,421,493 of return of capital. On a per Unit basis, the distribution
of $17.43 includes $11.00 of net realized gains and $6.43 of return of capital.
The Managing General Partner's one percent allocation of $38,922 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 Retirement Fund sold 40,986 shares of
common stock at a net price of $29.90 per share. The Fund received $1,225,481 of
net proceeds and realized a gain of $952,240. The Fund continues to hold 74,897
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 Retirement Fund completed the initial public
offering of Units, admitting 26,304 Limited Partners who purchased 221,072
Units. The net proceeds available for investment by the Retirement Fund after
such offering less return of capital to Limited Partners were $181,514,467 after
volume discounts, sales commissions and organizational, offering, sales and
marketing expenses.
Investments
As of September 30, 1997, the Retirement Fund had a total of 7 Enhanced
Yield Investments at a net cost of $22,844,565 (inclusive of the receipt of
securities having a capitalized cost of $422,439 received as payment-in-kind
interest on certain Enhanced Yield Investments).
Proceeds from Investments
During the nine months ended September 30, 1997, the Retirement Fund
received proceeds from the following investments:
On January 2, April 2, and July 1, 1997, the Retirement Fund received
$51,224 and $50,878 and $52,755, respectively, from Pergament Home Centers, Inc.
as a principal paydown of the Floating Rate Demand Note held by the Retirement
Fund. No gain, loss or income has been recorded on this transaction.
On January 15 and May 15, 1997, the Retirement Fund received additional
proceeds of $542, and $796, 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 Retirement Fund received a prepayment of Lexmark
International, Inc.'s 14.25% Senior Subordinated Notes outstanding, in the
principal amount of $24,103,269 together with a prepayment penalty of $4,059,488
and $791,892 of accrued interest. The transaction resulted in a gain of
$4,059,488 to the Retirement Fund.
On April 8, 1997, the Retirement Fund received a dividend of $6,794 from
Bank United Corp.
On July 2, 1997, the Retirement Fund sold its RI Holdings Inc., 16% Senior
Subordinated Notes for $202,165 and realized a loss of $5,261,753 on the sale.
The write-off the common stock resulted in a realized loss of $1,506,333
On September 19, 1997, the Retirement Fund received additional proceeds of
$4,546 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 Retirement Fund sold
432,403 shares of Bank United Corp. Class A Common Stock for $12,264,518 and
realized a gain of $9,363,263.
For the three months ended September 30, 1997, the Retirement Fund sold
106,349 shares of Lexmark International Group, Inc. Class B Common Stock for
$3,529,226 resulting in a gain $2,820,229.
During the nine months ended September 30, 1997, the Retirement Fund sold
300,027 shares of Lexmark International Group, Inc. Class B Common Stock for
$8,555,591 resulting in a gain of $6,555,401.
All 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 Retirement 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 Retirement 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.
The Retirement Fund, which is designed for tax-exempt investors, is not
permitted to borrow to finance investments. The Partnership Agreement imposes
certain limits on the use of proceeds from the disposition of investments for
reinvestments.
<PAGE>
All cash dividends, interest and other income received by the Retirement
Fund in excess of expenses of operation and reserves for expenses and certain
investments and liabilities are distributed to the Limited Partners of the
Retirement 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 Retirement Fund will analyze the then current cash
projections and determine the amount of any additional reserves it deems
necessary.
Participation in Enhanced Yield Investments
The Retirement Fund is invested primarily in Enhanced Yield Investments,
also known in the securities industry as "high yield securities". The securities
in which the Retirement 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 Retirement Fund cannot eliminate its risks associated with
participation in Enhanced Yield Investments, it has established risk management
policies. The Retirement 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 Retirement Fund's investment
guidelines or that have otherwise been approved by the Independent General
Partners.
The Retirement Fund investments are measured against specified Retirement
Fund investment and performance guidelines. To limit the exposure of the
Retirement Fund's capital in any single issuer, the Retirement Fund limits the
amount of its investment in a particular issuer. The Retirement 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 $772,572 and $3,172,304, respectively, as compared to the
same periods 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 periods 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 Retirement Fund
had investment income of $231,192 and $1,923,338, respectively, as compared to
$1,176,224 and $5,368,957, respectively, for the same periods in 1996. The
decrease in 1997 investment income of 64% was primarily due to a decrease in
interest and dividend income.
<PAGE>
The Retirement Fund incurred expenses of $364,539 and $1,245,083 for the
three and nine months ended September 30, 1997, as compared to $536,999 and
$1,518,398, respectively, for the same periods in 1996. The decrease in the 1997
expenses of $273,315 was primarily due to a decrease in Fund Administration Fees
and Expenses and Independent General Parner's Fees and Expenses paid by the
Retirement Fund. The Retirement Fund's major expenses consist of the Investment
Advisory Fee, the Fund Administration Fees and Expenses and Independent General
Partners' Fees and Expenses.
The Retirement Fund experienced an decrease in net assets resulting from
operations for the nine months ended September 30, 1997 in the amount of
$1,868,567, as compared to an increase of $9,871,892 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 $678,255, net realized gains of
$12,855,950 offset by a net change in unrealized depreciation of $15,402,772.
For the comparable period in 1996, the increase in net assets was comprised of
net investment income of $3,850,559, net realized losses of $17,501,651 offset
by a net change in unrealized appreciation of $23,522,984 (see Statements of
Operations in the Financial Statements).
For the three months ended September 30, 1997 and 1996, the Retirement Fund
incurred Investment Advisory Fees of $218,587 and $211,996, respectively. For
the nine months ended September 30, 1997 and 1996, the Retirement Fund incurred
Investment Advisory Fees of $687,608 and $660,839, respectively, (as described
in Note 6 to the Financial Statements).
The Retirement 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 $101,196 and $175,810, respectively and for the nine months ended
September 30, 1997 and 1996 were $330,334 and $593,088, respectively. The
decrease from 1997 to 1996 of $262,754 is primarily the result of the Fund
Administration Fee changing to an annual fee of $100,000 plus 100% of all direct
out-of-pocket expenses incurred by the Retirement Fund Administrator on behalf
of the Retirement Fund.
Independent General Partners' Fees and Expenses incurred for the three and
nine months ended September 30, 1997 and 1996, were $36,844 and $106,885,
respectively, and $47,262 and $141,382, respectively.
The Retirement Fund incurred Professional Fees of $6,212 and $110,730 for
the three and nine months ended September 30, 1997, respectively. Professional
Fees incurred for the same periods in 1996 were $101,931 and $109,233,
respectively. (See Note 9 to the Financial Statements).
Unrealized Appreciation/Depreciation and Non-Accrual of Investments
The General Partners of the Retirement Fund determine, on a quarterly
basis, the fair value of the Retirement 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 Retirement
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.
<PAGE>
For privately issued securities in which the Retirement 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 write-down 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 write-up 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 Retirement Fund invests.
Therefore, the fair values presented herein are not necessarily indicative of
the amount which the Retirement Fund could realize in a current transaction.
For the nine months ended September 30, 1997, the Retirement Fund recorded
net unrealized depreciation on Enhanced Yield Investments of $15,402,772 as
compared to $23,522,984 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., Inc., Pergament Home Centers,
Inc. and Western Pioneer, Inc. the reversal of depreciation on RI Holdings, Inc.
and the reversal of unrealized appreciation on Lexmark International Group, Inc.
and Bank United Corp.
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, 1996
Western Pioneer, Inc. 10%
Senior Subordinated Note November 30, 1994
Alliance Corporate continues to monitor the Retirement 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
For the three months ended September 30, 1997, the Retirement Fund recorded
net realized losses of $4,303,311. For the nine months ended September 30, 1997,
the Retirement Fund recorded net realized gains of $12,855,950. on transactions
involving five Enhanced Yield Investments. For the three and nine months ended
September 30, 1996, the Retirement Fund recorded net realized losses on
investments of $6,605,542 and $17,501,651, 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 though 5 are herewith omitted as the response to all 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.**
* Incorporated by reference to the Retirement 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 Retirement 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 Retirement 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
(RETIREMENT FUND), 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
(RETIREMENT FUND), 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> 31,679,679
<INVESTMENTS-AT-VALUE> 19,834,035
<RECEIVABLES> 1,440,972
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,354,724
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 128,000
<TOTAL-LIABILITIES> 128,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 221,072
<SHARES-COMMON-PRIOR> 221,072
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13,429,167)
<NET-ASSETS> 21,226,724
<DIVIDEND-INCOME> 67,331
<INTEREST-INCOME> 1,856,007
<OTHER-INCOME> 0
<EXPENSES-NET> 1,245,083
<NET-INVESTMENT-INCOME> 678,255
<REALIZED-GAINS-CURRENT> 12,855,950
<APPREC-INCREASE-CURRENT> (15,402,772)
<NET-CHANGE-FROM-OPS> (1,868,567)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,760,501
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 1,501,079
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (64,202,917)
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 687,608
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<GROSS-EXPENSE> 1,245,083
<AVERAGE-NET-ASSETS> 53,328,183
<PER-SHARE-NAV-BEGIN> 381.46
<PER-SHARE-NII> 3.04
<PER-SHARE-GAIN-APPREC> (68.98)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 280.38
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<PER-SHARE-NAV-END> 92.71
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
