SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal period ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-17526
EQUUS CAPITAL PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
DELAWARE 76-0264305
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2929 Allen Parkway, Suite 2500
Houston, Texas 77019-2120
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (713) 529-0900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERS' INTERESTS
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(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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information statement
incorporated by reference in Part III of this 10-K. [ X ]
As of December 31, 1995, 12,273 units ("Units") of limited partners' interests
in the Partnership were held by non-affiliates of the registrant. The net asset
value of a Unit at December 31, 1995 was $1,050.33. There is no established
market for such Units.
Documents incorporated by reference: None.
TABLE OF CONTENTS
PART I PAGE
Item 1. Business ................................................ 1
Item 2. Properties .............................................. 11
Item 3. Legal Proceedings ....................................... 11
Item 4. Submission of Matters to a Vote of Security
Holders .............................................. 11
PART II
Item 5. Market for the Registrant's Units
and Related Unitholder Matters ....................... 11
Item 6. Selected Financial Data ................................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................................... 13
Item 8. Financial Statements and Supplementary
Data ................................................. 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 34
PART III
Item 10. Directors and Executive Officers of
the Registrant ....................................... 34
Item 11. Executive Compensation .................................. 38
Item 12. Security Ownership of Certain
Beneficial Owners and Management ..................... 42
Item 13. Certain Relationships and Related
Transactions ......................................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K .............................. 42
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ITEM 1. BUSINESS.
Equus Capital Partners, L.P. (the "Partnership") was organized as a
limited partnership under Delaware law on December 1, 1988, and has elected to
be a business development company under the Investment Company Act of 1940 (the
"Investment Company Act"). The Partnership's total contributed capital was
$12,435,691, consisting of $12,307,375 (net of $2,625 in selling commission
discounts on sales to affiliates) for 12,310 Units from 1,428 limited partners,
$125,316 from the Managing Partner (as defined below) and $3,000 from the
Independent General Partners (as defined below). The investment objective of the
Partnership is to achieve current income and capital appreciation principally by
making investments in "mezzanine" securities, consisting primarily of
subordinated debt or preferred stock combined with equity participations in
common stock or rights to acquire common stock, and subsequently disposing of
such investments. The Partnership Agreement provides for termination of the
Partnership on December 31, 1999, subject to the right of the Independent
General Partners to extend the term for four additional years if they determine
it is in the best interest of the Partnership.
Equus Capital Corporation, a Delaware corporation (the "Managing
Partner"), is the managing general partner of the Partnership and is responsible
for initially approving the Partnership's investments, arranging additional
financing for companies in which the Partnership invests ("Portfolio Companies")
and providing management assistance to Portfolio Companies.
Three independent individuals (the "Independent General Partners") also
serve as general partners of the Partnership. The Independent General Partners
are responsible for providing overall guidance and supervision of the
Partnership, approving the Partnership's investments and performing various
duties imposed on disinterested directors of a business development company by
the Investment Company Act. Among other things, the Independent General Partners
supervise the management arrangements for the Partnership, the custody
arrangements with respect to portfolio securities, the selection of independent
accountants, fidelity bonding and any transactions with affiliates.
The Partnership has engaged Equus Capital Management Corporation, a
Delaware corporation (the "Management Company"), to provide certain management
and administrative services to the Partnership. Subject to the supervision of
the Independent General Partners, the Management Company performs, or arranges
for third parties to perform, the management, certain investment advisory and
other services necessary for the operation of the Partnership. The Management
Company identifies, evaluates, structures, monitors and arranges for the
disposition of the Partnership's investments, and provides managerial assistance
to the Portfolio Companies. The Management Company manages the Partnership's
cash and short-term, interest-bearing investments. The Management Company also
provides the Partnership, at the Management Company's expense, with the office
space, facilities, equipment and personnel (whose salaries and benefits are paid
by the Management Company) necessary to enable the Partnership to conduct its
business.
The Managing Partner and the Management Company are sometimes referred
to herein collectively as "Management."
The Partnership's office is located at 2929 Allen Parkway, Suite 2500,
Houston, Texas 77019-2120, and its telephone number is (713) 529-0900.
The Partnership has no employees.
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GENERAL
The investment objective of the Partnership is to provide current
income and capital appreciation potential by investing primarily in subordinated
debt and related equity securities issued in conjunction with the mezzanine
financing of various corporate transactions ("Mezzanine Investments"). The
Partnership could also invest in debt and equity securities issued by
financially troubled companies ("Other Investments"). The Partnership may also
provide interim financing ("Bridge Investments") for certain Portfolio Companies
and, pending application of funds, will make Temporary Investments, as described
below. Mezzanine Investments, Other Investments, Bridge Investments and related
Follow-on Investments are collectively referred to herein as "Enhanced Yield
Investments." The Partnership completed its initial investment program in 1993,
and may only make Follow-on Investments in existing portfolio companies after
such date.
COINVESTMENTS
The Partnership has coinvested in certain Enhanced Yield Investments
with Equus II Incorporated, a Delaware corporation ("EQS"). The Partnership and
Management obtained an order from the Securities and Exchange Commission (the
"SEC") exempting the Partnership from certain prohibitions contained in the
Investment Company Act relating to coinvestments by the Partnership and EQS.
Under the terms of the order, Enhanced Yield Investments purchased by the
Partnership and EQS were required to meet certain guidelines or be approved in
advance by the Managing Partner and the Independent General Partners and were
required to satisfy certain conditions established by the SEC.
TEMPORARY INVESTMENTS
Pending investment in Enhanced Yield Investments, the Partnership
invests its available funds in interest-bearing bank accounts, money market
mutual funds, U.S. Treasury securities and/or certificates of deposit with
maturities of less than one year (collectively, "Temporary Investments").
Temporary Investments also include commercial paper (rated or unrated) and other
short-term securities. Temporary Investments constituting cash, cash items,
securities issued or guaranteed by the U.S. Treasury or U.S. Government agencies
and high quality debt securities (commercial paper rated in the two highest
rating categories by Moody's Investor Services, Inc. or Standard & Poor's
Corporation, or if not rated, issued by a company having an outstanding debt
issue so rated) with maturities of less than one year at the time of investment
will qualify for determining whether the Partnership has 70% of its total assets
invested in Managed Companies (as hereafter defined) or in qualified Temporary
Investments for purposes of the business development company provisions of the
Investment Company Act. See "Regulation" below.
The Partnership's Enhanced Yield Investments generally are unrated
securities. Such securities would, however, if rated, typically be classified as
speculative securities that generally would be of the type rated BB/Ba to
CCC/Caa.
CURRENT PORTFOLIO COMPANIES
The following is a description of the Partnership's investments as of
December 31, 1995:
ARTEGRAFT, INC.
Artegraft, Inc. ("Artegraft"), Morristown, New Jersey, manufactures and
distributes a specialty surgical product line consisting of bovine vascular
prostheses used in hemodialysis and other healthcare procedures. At December 31,
1995, the Partnership's investment in Artegraft, valued at $759,300, with
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a cost of $509,350, consisted of $259,300 in a 12% senior term promissory note,
$250,000 in a 12% junior term promissory note, and warrants to buy up to 1,000
and 4,000 shares of common stock for $0.01 and $25 per share, respectively. The
Partnership's investment represents a 25% fully-diluted equity interest in
Artegraft.
CHAMPION HEALTHCARE CORPORATION (AMEX: CHC)
Champion Healthcare Corporation ("CHC"), Houston, Texas, was organized
to acquire acute care hospitals in suburban markets, with primary emphasis given
to hospitals that have significant opportunity for improving market share and
cash flow. In December 1994, CHC merged into AmeriHealth Corporation, which was
renamed Champion Healthcare Corporation. CHC operates nine hospitals in seven
states. The December 31, 1995 closing price of CHC's common stock on the
American Stock Exchange was $5.3125 per share. At December 31, 1995, the
Partnership's investment in CHC, valued at $1,599,146 with a cost of $1,171,181,
consisted of 333,755 shares of restricted common stock, 1,300 shares of Series C
convertible preferred stock and warrants to buy 1,894 shares of common stock at
$5.90 per share. The Series C convertible preferred stock is convertible into
2,600 shares of common stock. The common stock and warrants of CHC were valued
on an as-exercised basis at an average price of $4.69 per share due to
restrictions on the Partnership's ability to sell such stock. The discount
results in an aggregate reduction in value from the actual market price on such
date of approximately $197,328. The Partnership's investment represents an
approximate 2% fully-diluted equity interest in CHC. Mr. Lehmann, the President
of the Managing Partner and Management Company, serves on CHC's Board of
Directors.
DRYPERS CORPORATION (NASDAQ: DYPR)
Drypers Corporation ("Drypers"), Houston, Texas, manufactures and
distributes disposable diapers and baby wipes sold under the trade name
Drypers(R). Drypers is believed to be the third leading branded diaper
manufacturer in the United States, and has manufacturing facilities in Marion,
Ohio; Vancouver, Washington; Buenos Aires, Argentina and Puerto Rico. The
December 31, 1995 closing price of Drypers' common stock on the NASDAQ National
Market was $3.125 per share. At December 31, 1995, the Partnership's investment
in Drypers, valued at $595,914 with a cost of $1,309,000, consisted of 224,344
shares of common stock and warrants to buy 1,357 shares of common stock at $4
per share. The stock was valued at an average price of $2.66 per share due to
restrictions on the Partnership's ability to sell such stock. This discount
results in an aggregate reduction in value from the market price on such date of
$105,161. The Partnership's investment represents an approximate 3%
fully-diluted equity interest in Drypers. Mr. Lehmann serves as a director of
Drypers.
E-B HOLDINGS, INC.
E-B Holdings, Inc. ("E-B"), Houston, Texas, was formed to foreclose on
certain assets of CMC Holdings, Inc., including two restaurants in the Houston
area. At December 31, 1995, the Partnership's investment in E-B, valued at
$350,000 with a cost of $1,174,500, consisted of 740 shares of common stock,
$400,000 in a 12% promissory note and $90,000 in 8% promissory notes. The
Partnership's investment represents a 74% fully-diluted equity interest in E-B.
Mr. Forbes, a Vice President of the Managing Partner and Management Company,
serves on E-B's Board of Directors.
GARDEN RIDGE CORPORATION (NASDAQ: GRDG)
Garden Ridge Corporation ("GRDG"), Houston, Texas, is a specialty
retailer of crafts and home decorative items. GRDG operates eleven megastores in
Kentucky, Oklahoma, Tennessee and Texas
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and is continuing its expansion into other areas of the United States. GRDG
completed an initial public offering of its common stock in May 1995. The
December 31, 1995 closing price of GRDG on the NASDAQ National Market was $38.75
per share. At December 31, 1995, the Partnership's investment in GRDG, valued at
$1,853,761 with a cost of $144,705, consisted of 52,688 shares of common stock.
The stock was valued at an average price of $35.18 per share due to restrictions
on the Partnership's ability to sell such stock. The discount results in an
aggregate reduction in value from the market price on such date of $187,899. The
Partnership's investment represents an approximate 1% fully-diluted equity
interest in GRDG. Mr. Lehmann serves on GRDG's Board of Directors.
INDEPENDENT GAS COMPANY HOLDINGS, INC.
Independent Gas Company Holdings, Inc. ("IGC"), Canute, Oklahoma,
acquires and manages established propane gas distributors, primarily serving
rural Texas and Oklahoma markets. At December 31, 1995, the Partnership's
investment in IGC was valued at the original cost of $1,519,977 and consisted of
16,267 shares of common stock, 1,281 shares of 9% Series A preferred stock and
215 shares of Series C preferred stock. The Partnership's investment represents
an approximate 10% fully-diluted equity interest in IGC.
INDUSTRIAL EQUIPMENT RENTALS, INC.
Industrial Equipment Rentals, Inc. ("IER"), Houma, Louisiana, rents
industrial equipment from locations in Texas, Louisiana, Alabama and
Mississippi, primarily to refineries, petrochemical plants and oil and gas
operations along the Gulf Coast corridor. At December 31, 1995, the
Partnership's investment in IER, valued at its original cost of $808,300,
consisted of 91,115 shares of common stock, 2,685 shares of 6% cumulative junior
preferred stock and $538,889 in a 12% subordinated debenture. The Partnership's
investment represents an approximate 7% fully-diluted equity interest in IER.
Mr. Lehmann and Mr. Hale, a vice president of the Managing Partner and
Management Company, serve on IER's Board of Directors.
MAXTECH HOLDINGS, INC. (FORMERLY MAXIM ENGINEERS, INC.)
MaxTech Holdings, Inc. ("Maxim"), Dallas, Texas, provides environmental
and engineering consulting services and has approximately 45 offices throughout
the United States. At December 31, 1995, the Partnership's investment in Maxim,
valued at $6,000,000 with a cost of $1,515,781, consisted of 59,875 shares of
common stock and 2,200,000 shares of 10% cumulative convertible preferred stock.
The Partnership's investment represents an approximate 30% fully-diluted equity
interest in Maxim. Mr. Forbes serves on the Board of Directors of Maxim.
MEDIFIT OF AMERICA, INC.
Medifit of America, Inc. ("Medifit"), Teaneck, New Jersey, provides
comprehensive outpatient rehabilitation services from over 15 facilities in six
states, mainly for employees covered by workers' compensation insurance and
corporate health and fitness programs. At December 31, 1995, the Partnership's
investment in Medifit, which was recorded at no value with a cost of $1,000,163,
consisted of 190,476 shares of Series D preferred stock and warrants to buy
9,054 and 76,379 shares of common stock for $3.75 and $0.01 per share,
respectively. The Partnership's investment represents a 3% fully-diluted equity
interest.
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PREVIOUSLY OWNED PORTFOLIO COMPANIES
AUTOCORP, INC. ("AUTOCORP")
In 1991, the Partnership advanced $1,650,000 to AutoCorp in exchange
for $1,050,000 in subordinated 12.5% term notes and a $600,000, 12.5%
subordinated convertible promissory note. AutoCorp, doing business as
Pettigrew-Smith Auto Supply, was a retail distributor of auto parts and supplies
in Houston, Texas. The Partnership's interest represented approximately 15% of
AutoCorp's total common equity on a fully diluted basis. During 1992, the
Partnership was repaid its principal and interest on its investment in AutoCorp.
CMC HOLDINGS, INC. ("CMC")
In November 1992, the Partnership made its initial investment in CMC
Holdings, Inc. which was formed to acquire Cliff's Restaurants, a chain of
upscale hamburger restaurants in Houston, Texas. Through December 31, 1995, the
Partnership had invested $2,488,000 in CMC. On December 22, 1995, the
Partnership contributed $1,174,500 of its notes receivable from CMC to E-B
Holdings, Inc. The balance of its investment was written off in December 1995,
resulting in a realized capital loss of $1,313,500.
TENNIS CARDS, INC. ("TCI")
During August 1992, the Partnership advanced $150,000 to TCI in
exchange for a 10% subordinated promissory note. In addition, the Partnership
received warrants to buy up to 63 shares of common stock of TCI for $1,000 per
share through August 24, 1997. Tennis Cards, Inc. had an exclusive license to
print and market trading cards featuring selected professional tennis players.
The Partnership's investment represented 20% of TCI's total common equity on a
fully diluted basis. On December 29, 1993, the Partnership foreclosed on certain
assets of TCI and realized a net capital loss of $150,000.
ONGOING MANAGEMENT SUPPORT
Successful Enhanced Yield Investments typically require active
monitoring of, and significant participation in, major business decisions of
Portfolio Companies. In many cases, representatives of Management serve as
members of the board of directors of Portfolio Companies. Such management
assistance is required of a business development company and is intended to
enable the Partnership to provide guidance and management assistance with
respect to such matters as capital structure, budgets, profit goals,
diversification strategy, financing requirements, management additions or
replacements and development of a public market for the securities of the
Portfolio Company. In connection with their service as directors of Portfolio
Companies, officers and directors of Management may receive and retain
directors' fees or reimbursement for expenses incurred. When necessary,
Management, on behalf of the Partnership, may also assign staff professionals
with financial or management expertise to assist Portfolio Company management on
specific problems.
FOLLOW-ON INVESTMENTS
Following its initial investment in a Portfolio Company, the
Partnership may be requested to make Follow-on Investments in the company.
Follow-on Investments may be made to take advantage of warrants or other
preferential rights granted to the Partnership or otherwise to increase the
Partnership's position in a successful or promising Portfolio Company. The
Partnership may also be called upon to
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provide additional equity or mezzanine financing needed by a Portfolio Company
to implement fully its business plans, to develop a new line of business or to
recover from unexpected business problems. The Partnership may borrow an amount
up to 20% of its partners' capital to make Follow-on Investments in Portfolio
Companies. In addition, the Partnership may reinvest cash receipts and proceeds
from the disposition of Enhanced Yield Investments in Follow-on Investments.
DISPOSITION OF INVESTMENTS
The Managing Partner is responsible (subject to the supervision of the
Independent General Partners) for the decision and, together with the Management
Company, the actions to dispose of an Enhanced Yield Investment.
The Managing Partner may engage brokers who acted as selling agents for
the Units (collectively, the "Selling Agents") or their affiliates, to assist in
the disposition of portfolio investments. The underwriters (including any
Selling Agents or their affiliates) of a public offering of a Portfolio
Company's securities and brokers assisting in the sale of a Portfolio Company's
securities or assets may be compensated for such services to the extent
permitted by law and the rules of the NASD. In addition, under certain
circumstances the Partnership may distribute marketable portfolio securities in
kind to limited partners. Sales of such securities by limited partners may be
subject to legal or practical restrictions and may also entail certain expenses.
In structuring investments, the Partnership endeavors to reach appropriate
agreements or understandings with a prospective Portfolio Company with respect
to the method and timing of the disposition of the Partnership's investment and,
if appropriate, will seek to obtain registration rights at the expense of the
Portfolio Company. The Partnership bears the costs of disposing of an investment
to the extent not paid by the Portfolio Company.
VALUATION
On a quarterly basis the Managing Partner performs a valuation of the
assets and portfolio investments held by the Partnership, subject to the
approval of the Independent General Partners. Valuations of portfolio securities
are done in accordance with generally accepted accounting principles and the
financial reporting policies of the SEC. The applicable methods prescribed by
such principles and policies are described below.
The fair value of investments for which no market exists (including
most Enhanced Yield Investments) are determined on the basis of procedures
established in good faith by the Independent General Partners. As a general
principle, the current fair value of an investment being valued by the General
Partners is the amount which the Partnership might reasonably expect to receive
for it upon its current sale. There is a range of values that are reasonable for
such investments at any particular time. Generally, cost is the primary factor
used to determine fair value until significant developments affecting the
Portfolio Company (such as results of operations or changes in general market
conditions) provide a basis for use of an appraisal valuation.
Appraisal valuations are based upon such factors as the Portfolio
Company's earnings, cash flow and net worth, the market prices for similar
securities of comparable companies and an assessment of the company's future
financial prospects. In the case of unsuccessful operations, the appraisal may
be based upon liquidation value.
Appraisal valuations are necessarily subjective.
The Partnership may also use, when available, third-party transactions
in a Portfolio Company's securities as the basis of valuation (the "private
market method"). The private market method will be used only with respect to
completed transactions or firm offers made by sophisticated, independent
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investors. Securities with legal, contractual or practical restrictions on
transfer may be valued at a discount from their value determined by the
foregoing methods to reflect such restrictions.
Partnership investments for which market quotations are readily
available and which are freely transferable will be valued as follows: (i)
securities traded on a securities exchange or the NASDAQ National Market System
are valued at the closing price on the date of valuation and (ii) securities
traded in the over-the-counter market are valued at the average of the closing
bid and asked prices on the date of valuation. For securities which are in a
class of public securities but are restricted from free trading (such as Rule
144 stock), valuation will be set by discounting the closing sales or bid price
to reflect the estimated illiquidity caused by such restrictions. The fair
values of debt securities, which are generally held to maturity, are determined
on the basis of the terms of the debt securities and the financial condition of
the issuer. Certificates of deposit purchased by the Partnership generally will
be valued at their face value, plus interest accrued to the date of valuation.
The Independent General Partners review the valuation policies on a
quarterly basis to determine their appropriateness and may also hire independent
firms to review the Managing Partner's methodology of valuation or to conduct an
independent valuation.
PARTNERSHIP BORROWINGS - RISKS OF LEVERAGE
On February 16, 1994, the General Partners approved an investment
policy allowing the Partnership to borrow an amount up to 20% of its partners'
capital for Follow-on Investments. The Partnership is permitted under the
Investment Company Act to borrow funds if, immediately after the borrowing, it
will have an asset coverage (as defined in the Investment Company Act) of at
least 200%. The amount and nature of any Partnership borrowing will depend upon
a number of factors over which neither the Independent General Partners, the
Management Company, nor the Managing Partner has control, including general
economic conditions, conditions in the financial markets and the impact of the
financing on the tax treatment of the limited partners.
As a result of borrowing money, the partnership is exposed to the risks
of leverage, which may be considered a speculative investment technique. The use
of leverage, even on a short-term basis, could have the effect of magnifying
increases or decreases in the Partnership's net asset value. While the "spread"
between the current yield on the Partnership's investments and the cost of any
loan would augment the partners' return from the Partnership, if the spread
narrows (because of an increase in the cost of debt or insufficient income on
the Partnership's investments), distributions to the partners would be adversely
affected. If the spread were reversed, the Partnership might be unable to meet
its obligations to its lenders, which might then seek to cause the Partnership
to liquidate some or all of its investments. There can be no assurance that the
Partnership would realize full value for its investments or recoup all of its
capital if its portfolio investments were involuntarily liquidated.
The costs of borrowing money may exceed the income from the portfolio
securities purchased by the Partnership with the borrowed money. The Partnership
will suffer a decline in net asset value if the investment performance of the
additional securities purchased with borrowed money fails to cover their cost to
the Partnership (including any interest paid on the money borrowed). A decline
in net asset value could affect the ability of the Partnership to make
distributions to partners. If the asset coverage for debt securities issued by
the Partnership declines to less than 200 percent (as a result of market
fluctuations or otherwise), the Partnership may be required to sell a portion of
its investments when it may be disadvantageous to do so.
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OPERATING EXPENSES
The Management Company, at its expense, provides the Partnership with
office space, facilities, equipment and personnel (whose salaries and benefits
are paid by the Management Company) necessary for the conduct of the
Partnership's business and pays all costs related to proposed acquisitions of
portfolio securities that are not completed, unless such proposed acquisitions
have been previously approved by the Independent General Partners.
The Partnership pays certain expenses relating to its operations,
including: the Management Fee; the Management Company Incentive Fee; and the
Fund Administration Fee (all as defined under "Management Agreement"); fees and
expenses of the Independent General Partners; finder's fees; direct costs of
proposed investments in Portfolio Companies, whether or not completed, if such
proposed investments have been approved for acquisition by the Independent
General Partners; fees of unaffiliated transfer agents, registrars and
disbursing agents; portfolio transaction expenses; interest, legal and
accounting expenses; costs of printing and mailing proxy materials and reports
to limited partners; custodian fees; taxes; litigation costs; costs of disposing
of investments including brokerage fees and commissions; and other extraordinary
or nonrecurring expenses properly payable by the Partnership.
CUSTODIAN
The Partnership acts as the custodian of its securities to the extent
permitted under the Investment Company Act and is subject to the restrictions
imposed on self-custodians by the Investment Company Act and the rules and
regulations thereunder. The Partnership has entered into an agreement with
Southwest Guaranty Trust Company, Houston, Texas, with respect to the
safekeeping of such securities. The principal business office of such trust
company is 2121 Sage Road, Suite 150, Houston, Texas 77056.
TRANSFER AND DISBURSING AGENT
The Management Company acts as the transfer agent and disbursing agent
for the Partnership. The Management Company is paid for such services on terms
approved by the Independent General Partners as being no less favorable to the
Partnership than those obtainable from unaffiliated parties.
RISK FACTORS
An investment in Units of limited partnership interest in the
Partnership involves a number of risks due to the nature of the Partnership's
investment portfolio. Investments in mezzanine securities involve a high degree
of business and financial risk and can result in substantial losses. In the
event that a Portfolio Company cannot generate adequate cash flow to meet its
debt service, the Partnership's investment could be reduced or eliminated
through foreclosure on the Portfolio Company's assets or the Portfolio Company's
reorganization or bankruptcy. The Enhanced Yield Investments acquired by the
Partnership may require four to seven years to reach maturity and generally are
illiquid. This lack of liquidity may preclude or delay any disposition of such
investments, or reduce proceeds that might otherwise be realized from any such
dispositions. After its initial investment in a Portfolio Company, the
Partnership may be called upon from time to time to provide additional funds to
such company. There can be no assurance that the Partnership will have
sufficient funds, or be willing, to make such investments. The Partnership's
inability or unwillingness to make a Follow-on Investment could adversely affect
an investment in a Portfolio Company. The Partnership is a "non-diversified"
company as defined in the Investment Company Act. The Partnership is not limited
in the proportion of its assets that may be invested in securities of a single
issuer, and, accordingly, an investment in the Partnership
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may, under certain circumstances, present greater risk to an investor than an
investment in a diversified company. Also see "Partnership Borrowings."
Valuation of Investments - Enhanced Yield Investments are carried at
fair value with the net change in unrealized appreciation or depreciation
included in the determination of partners' capital. Investments in companies
whose securities are publicly-traded are valued at their quoted market price,
less a discount to reflect the estimated effects of restrictions on the sale of
such securities, if applicable. Cost is used to approximate fair value until
significant developments affecting an Enhanced Yield Investment provide a basis
for use of an appraisal valuation. Thereafter, Enhanced Yield Investments are
carried at appraised values as determined quarterly by the Managing Partner,
subject to the approval of the Independent General Partners. The fair values of
debt securities, which are generally held to maturity, are determined on the
basis of the terms of the debt securities and the financial condition of the
issuer. Because of the inherent uncertainty of the valuation of Enhanced Yield
Investments which do not have readily ascertainable market values, the Managing
Partner's estimate of fair value may significantly differ from the fair value
that would have been used had a ready market existed for such investments.
REGULATION
The Investment Advisers Act of 1940 (the "Investment Advisers Act")
generally prohibits investment advisers from entering into investment advisory
contracts with an investment company that provide for compensation to the
investment adviser on the basis of a share of capital gains upon or capital
appreciation of the portfolio investments or any portion of the funds of the
investment company. The Investment Advisers Act, however, does permit the
payment of compensation based on capital gains in an investment advisory
contract between an investment adviser and a business development company. The
Partnership has elected to be treated as a business development company under
the Investment Company Act in order to provide for incentive compensation to the
Management Company and the Managing Partner based on the capital appreciation of
the Partnership's investments.
The Partnership may not withdraw its election to be treated as a
business development company without first obtaining the approval of a majority
in interest of its limited partners. The following brief description of the
Investment Company Act is qualified in its entirety by reference to the full
text of the Investment Company Act and the rules thereunder.
A business development company must be operated for the purpose of
investing in the securities of certain present and former "eligible portfolio
companies" or certain bankrupt or insolvent companies and must make available
significant managerial assistance to portfolio companies. An eligible portfolio
company generally is a company that (i) is organized under the laws of, and has
its principal place of business in, any state or states, (ii) is not an
investment company and (iii)(a) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list, (b) is actively controlled by the business development company
acting either alone or as part of a group acting together and an affiliate of
the business development company is a member of the portfolio company's board of
directors or (c) meets such other criteria as may be established by the SEC.
Control is presumed to exist where the business development company owns more
than 25% of the outstanding voting securities of a Portfolio Company.
"Making available significant managerial assistance" is defined under
the Investment Company Act to mean (i) any arrangement whereby a business
development company, through its directors, officers, employees or general
partners, offers to provide and, if accepted, does provide significant guidance
and counsel concerning the management, operations or business objectives or
policies of a portfolio company or (ii) the exercise of a controlling influence
over the management or policies of a
-9-
portfolio company by the business development company acting individually or as
part of a group of which the business development company is a member acting
together which controls such company. A business development company may satisfy
the requirements of clause (i) with respect to a portfolio company by purchasing
securities of such a company as part of a group of investors acting together if
one person in such group provides the type of assistance described in such
clause. However, the business development company will not satisfy the general
requirement of making available significant managerial assistance if it only
provides such assistance indirectly through an investor group. A business
development company need only extend significant managerial assistance with
respect to Portfolio Companies which are treated as Qualifying Assets (as
defined below) for the purpose of satisfying the 70% test discussed below.
The Investment Company Act prohibits or restricts the Partnership from
investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the
Investment Company Act limits the type of assets that the Partnership may
acquire to "Qualifying Assets" and certain assets necessary for its operations
(such as office furniture, equipment and facilities) if, at the time of the
acquisition, less than 70% of the value of the Partnership's total assets
consists of qualifying assets. Qualifying Assets include (i) securities of
companies that were eligible portfolio companies at the time that the
Partnership acquired their securities; (ii) securities of companies that are
actively controlled by the Partnership; (iii) securities of bankrupt or
insolvent companies that are not otherwise eligible Portfolio Companies; (iv)
securities acquired as Follow-on Investments in companies that were eligible
Portfolio Companies at the time of the Partnership's initial acquisition of
their securities but are no longer eligible Portfolio Companies, provided that
the Partnership has maintained a substantial portion of its initial investment
in such companies; (v) securities received in exchange for or distributed on or
with respect to any of the foregoing; and (vi) cash items, government securities
and high-quality, short-term debt. The Investment Company Act also places
restrictions on the nature of the transactions in which, and the persons from
whom, securities can be purchased in order for such securities to be considered
Qualifying Assets. As a general matter, Qualifying Assets may only be purchased
from the issuer or an affiliate in a transaction not constituting a public
offering. The Partnership may not purchase any security on margin, except such
short-term credits as are necessary for the clearance of portfolio transactions,
or engage in short sales of securities.
The Partnership is permitted by the Investment Company Act, under
specified conditions, to issue multiple classes of senior debt and a single
class of limited partners' interests senior to the Units if its asset coverage,
as defined in the Investment Company Act, is at least 200% after the issuance of
the debt or the senior limited partners' interests. In addition, provision must
be made to prohibit any distribution to limited partners for the repurchase of
any Unit unless the asset coverage ratio is at least 200% at the time of the
distribution or repurchase.
The Partnership may sell its securities at a price that is below the
prevailing net asset value per Unit only upon the approval of the policy by
limited partners holding a majority of the Units issued by the Partnership,
including a majority of Units held by nonaffiliated Limited Partners. In
addition, the Partnership may repurchase its Units, subject to the restrictions
of the Investment Company Act.
Many of the transactions involving the Partnership and its affiliates
(as well as affiliates of such affiliates) require the prior approval of a
majority of the Independent General Partners and a majority of the Independent
General Partners having no financial interest in the transactions. However,
certain transactions involving closely affiliated persons of the Partnership,
including its General Partners and the Management Company, require the prior
approval of the SEC. In general (a) any person who owns, controls or holds with
power to vote more than 5% of the outstanding Units, (b) any director, executive
officer or general partner of such person and (c) any person who directly or
indirectly controls, is
-10-
controlled by or is under common control with such person, must obtain the prior
approval of a majority of the Independent General Partners and, in some
situations, the prior approval of the SEC, before engaging in certain
transactions involving the Partnership or any company controlled by the
Partnership. In accordance with the Investment Company Act, a majority of the
General Partners must be persons who are not "interested persons" as defined in
such act. Except for certain transactions which must be approved by the
Independent General Partners, the Investment Company Act generally does not
restrict transactions between the Partnership and its Portfolio Companies.
ITEM 2. PROPERTIES.
The Partnership does not have an interest in any physical properties.
ITEM 3. LEGAL PROCEEDINGS.
The Partnership is not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.
There is no established public trading market for the Partnership's
Units. The Partnership had 1,413 limited partners at December 31, 1995, and made
cash distributions of $184,650 to limited partners during 1993. Amounts
distributed to limited partners from net investment income were $15.00 per Unit
outstanding in 1993. No distributions were made in 1995 or 1994.
-11-
Item 6. SELECTED FINANCIAL DATA.
Following is a summary of selected financial data of the Partnership
for the five years ended December 31, 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Investment income $ 340,077 $ 118,642 $ 441,432 $ 454,019 $ 760,647
Net investment
income (loss) $ (131,580) $ (100,715) $ (46,618) $ (164,949) $ 321,439
Realized loss on
sales of enhanced
yield investments, net $ (586,826) $ - $ (150,000) $ - $ -
Increase (decrease) in
unrealized appreciation
of enhanced yield
investments, net $ 3,173,151 $ (905,491) $ 604,287 $ 1,321,494 $ 140,000
Total increase (decrease) in
partners' capital from
operations $ 2,454,745 $ (1,006,206) $ 407,669 $ 1,156,545 $ 461,439
Distributions to partners $ - $ - $ 186,568 $ 189,377 $ 316,704
Total assets $ 13,572,950 $ 11,976,122 $ 11,919,896 $ 11,657,611 $ 10,498,649
Partners' capital, end of year $ 13,086,817 $ 10,632,072 $ 11,638,278 $ 11,417,177 $ 10,450,009
Cost of enhanced yield invest-
ments made during year $ 561,044 $ 2,012,183 $ 2,413,438 $ 3,951,774 $ 5,562,177
Net cash provided (used) by
operating activities $ (222,266) $ (256,155) $ (94,322) $ 22,404 $ 162,033
PER UNIT OF LIMITED PARTNERS' INTEREST:
Net investment
income (loss) $ (10.58) $ (8.10) $ (3.75) $ (13.26) $ 25.84
Realized loss on
sales of enhanced
yield investments, net $ (47.18) $ - $ (12.02) $ - $ -
Increase (decrease) in
unrealized appreciation
of enhanced yield
investments, net $ 255.12 $ (72.20) $ 57.36 $ 96.88 $ 11.26
Distributions to partners $ - $ - $ 15.00 $ 15.23 $ 25.46
Partners' capital, end of year $ 1,050.33 $ 852.97 $ 933.27 $ 906.68 $ 838.29
</TABLE>
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The initial closing of the sale of units of limited partners' interests
("Units") was completed on October 6, 1989, and additional quarterly closings
were held through December 31, 1990. The Partnership's total contributed capital
was $12,435,691, consisting of $12,307,375 (net of $2,625 in selling commission
discounts on sales to affiliates) for 12,310 Units from 1,428 limited partners,
$125,316 from the Managing Partner and $3,000 from the Independent General
Partners. Net proceeds to the Partnership, after payment of selling commissions
and wholesale marketing assistance fees of $1,228,375 and payment of $615,500 as
reimbursement of offering costs, were $10,591,816.
At December 31, 1995, the Partnership had $9,152,957 (at cost) invested
in Enhanced Yield Investments of nine companies, and had committed to invest up
to an additional $60,000 in the Enhanced Yield Investments of one existing
Portfolio Company under certain conditions of which $20,000 was invested in
January of 1996.
At December 31, 1995, the Partnership had $19,407 in cash. In order to
allow Follow-on Investments in Enhanced Yield Investments when such
opportunities arise, the Partnership may utilize proceeds from existing Enhanced
Yield Investments or borrowings. The Partnership has a $750,000, prime rate,
revolving line of credit with a bank, to be used for Follow-on Investments. The
Partnership had $400,000 outstanding under such line of credit at December 31,
1995, which is due on September 30, 1996. Management believes that temporary
cash investments, proceeds from existing Enhanced Yield Investments and the
revolving line of credit provide the Partnership with the liquidity necessary to
pay operating expenses of the Partnership as well as make certain Follow-on
Investments.
Net investment income and the proceeds from the sale of Enhanced Yield
Investments are distributed to the extent such amounts are not reserved for
payment of expenses and contingencies or used to make Follow-on Investments in
existing Enhanced Yield Investments.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES
Net investment loss after all expenses amounted to $131,580, $100,715
and $46,618 for the years ended December 31, 1995, 1994 and 1993, respectively.
Interest income from temporary cash investments was $2,818, $9,528 and $38,563
for the years ended December 31, 1995, 1994 and 1993, respectively. The
decreases in 1995 and 1994 were due to the decrease in the amounts available for
temporary cash investments as the Partnership invested in additional Enhanced
Yield Investments. The Partnership earned $337,259, $109,114 and $402,869 in
income from Enhanced Yield Investments during the years ended December 31, 1995,
1994 and 1993, respectively. The decrease in 1994 was due to a decrease in the
amounts invested in Enhanced Yield Investments bearing current yields and the
reversal of $96,212 in accrued interest receivable related to the Partnership's
investment in one company. In addition, two Portfolio Companies which paid
dividends of $167,962 and $128,595 on preferred stock held by the Partnership in
1995 and 1993, respectively, did not declare or pay dividends in 1994.
The Management Company receives a management fee equal to 2.5% of the
Available Capital, as defined. Such fee amounted to $226,180, $247,120 and
$263,858 for the years ended December 31, 1995, 1994 and 1993, respectively. The
Management Company is also allocated an incentive fee equal to 10% of the
Partnership's cumulative distributions from Enhanced Yield Investments
(excluding returns
-13-
of capital) over the life of the Partnership, subject to payment of a priority
return to the limited partners. The cumulative accrued priority return amounted
to $4,241,362 and $2,960,698 at December 31, 1995 and 1994, respectively.
Deferred incentive fees of $235,494 were accrued at December 31, 1993. During
1994, the Partnership reversed the accrual of all deferred incentive fees, due
to an increase in the accrued priority return and a decrease in net unrealized
appreciation on Enhanced Yield Investments in 1994. Deferred incentive fee
expense (income) of ($235,494) and $55,535 is included in the Statements of
Operations for the years ended December 31, 1994 and 1993, respectively.
Management fees and other expenses incurred directly by the Partnership are paid
with funds provided from operations.
REALIZED LOSS ON ENHANCED YIELD INVESTMENTS
During 1995, the Partnership realized a net capital loss of $586,826 on
the disposition of Enhanced Yield Investments in two companies. During September
1995, the Partnership sold 24,000 shares of Garden Ridge Corporation ("GRDG")
common stock for $732,000 and realized a net capital gain of $726,667. In
addition, in connection with a GRDG stock split in May 1995, the Partnership
received $7 for a fractional share which was recorded as a realized capital
gain. In December 1995, the Partnership realized a loss of $1,313,500 on its
investment in CMC Holdings, Inc.
In 1994, the Partnership sold 1,464 shares of GRDG to management of
GRDG, under a pre-existing incentive option to acquire such shares, for $1,464,
the original cost to the Partnership.
In December 1993, the Partnership foreclosed on certain assets of
Tennis Cards, Inc. and realized a net capital loss of $150,000.
UNREALIZED GAINS ON ENHANCED YIELD INVESTMENTS
Unrealized appreciation of Enhanced Yield Investments increased by
$3,173,151 during the year ended December 31, 1995. Such net increase resulted
from the increase of $5,517,158 in the estimated fair value of Enhanced Yield
Investments of two companies, the decrease of $3,196,340 in the estimated fair
value of Enhanced Yield Investments of four companies and the transfer of
$852,333 from net unrealized depreciation to realized capital losses due to the
sale of Enhanced Yield Investments in two companies.
Unrealized appreciation of Enhanced Yield Investments decreased by
$905,491 during the year ended December 31, 1994. Such net decrease resulted
from the increase of $750,312 in the estimated fair value of Enhanced Yield
Investments of three companies and the decrease of $1,655,803 in the estimated
fair value of Enhanced Yield Investments of three companies. The decrease in
value of Enhanced Yield Investments in two companies was exacerbated by the
need, pursuant to the Partnership's accounting policies, to record discounts
aggregating $1,041,080 from the actual public market price of such securities at
December 31, 1994.
Unrealized appreciation of Enhanced Yield Investments increased
$604,287 during the year ended December 31, 1993. Such increase resulted from
the increase of $1,354,449 in the estimated fair values of Enhanced Yield
Investments of four companies and the decrease of $750,162 in the estimated fair
values of Enhanced Yield Investments of one company.
DISTRIBUTIONS
The Partnership made no cash distributions during 1995 and 1994. During
1993, the Partnership made cash distributions of $186,568. The limited partners'
share of such distributions amounted to
-14-
$15.00 per Unit during 1993. Cumulative cash distributions to limited partners
from inception to December 31, 1995, were $873,297, or $75.53 per weighted
average number of Units outstanding.
ENHANCED YIELD INVESTMENTS
The Partnership made follow-on investments of $561,044 in Enhanced
Yield Investments of four companies during the year ended December 31, 1995. In
May 1995, the Partnership acquired 250 shares of MaxTech Holdings, Inc.,
formerly Maxim Technologies, Inc. ("Maxim"), common stock for $250. Maxim was
set up to be the holding company of HIHUSA, Inc. and Maxim Engineers, Inc.
("MEI"). The Partnership then exchanged its 15,531 shares of common stock and
1,500,000 shares of preferred stock of MEI for 59,625 shares of common stock and
2,200,000 shares of preferred stock of Maxim.
On December 31, 1995, the Partnership converted its Series A and Series
B preferred stock of Champion Healthcare Corporation ("CHC") into 217,708 and
21,077 shares of CHC common stock, respectively. In addition, the Partnership
received 42,218 shares of CHC common stock as a payment of $145,784 in preferred
stock dividends and as an inducement to enter into the transaction and to forego
any additional dividends on the Series C preferred stock of CHC.
In 1995, the Partnership advanced $275,000 and $90,000 to CMC Holdings,
Inc. in exchange for 12% and 8% promissory notes, respectively. On December 22,
1995, Equus exchanged $1,174,500 in subordinated debentures and promissory notes
due from CMC Holdings, Inc., for 740 shares of common stock, a $400,000, 12%
promissory note and a $90,000, 8% promissory note of E-B Holdings, Inc. The CMC
Holdings notes were secured by the assets of two restaurants which were
foreclosed on, and are now operated by E-B Holdings, Inc.
On May 9, 1995, GRDG effected a 4.5-for-1 stock split of its
outstanding common stock in connection with an initial public offering ("IPO")
of its common stock. The number of shares held by the Partnership has been
adjusted to reflect such stock split. In June 1995, the Partnership exercised
its warrants and acquired 7,501 shares of GRDG for $50,010. On December 31,
1995, the Partnership exchanged its $45,100 note receivable from Independent Gas
Company Holdings, Inc. for 1,305 shares of common stock, 45 shares of Series C
preferred stock and $100 in cash.
During the year ended December 31, 1994, the Partnership made follow-on
investments of $2,012,183 in five companies.
During the year ended December 31, 1993, the Partnership invested
$1,558,350 in two new companies. In addition, the Partnership made follow-on
investments of $855,088 in three existing companies.
Of the companies in which the Partnership has investments at December
31, 1995, only CHC, Drypers Corporation and GRDG are publicly-held. The others
each have a small number of shareholders and do not generally make financial
information available to the public. However, each company's operations and
financial information are reviewed by the General Partners to determine the
proper valuation of the Partnership's investment.
SUBSEQUENT EVENTS
During January 1996, the Partnership advanced an additional $20,000 to
E-B Holdings, Inc. under an 8% subordinated promissory note.
-15-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Public Accountants
To the Independent General Partners of
Equus Capital Partners, L.P.:
We have audited the accompanying statements of assets, liabilities and
partners' capital of Equus Capital Partners, L.P. (a Delaware limited
partnership), including the schedules of enhanced yield investments, as of
December 31, 1995 and 1994, and the related statements of operations, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 1995, and the selected per unit data and ratios for each of the
five years in the period ended December 31, 1995. These financial statements and
selected per unit data and ratios are the responsibility of Equus Capital
Corporation (the "Managing Partner"). Our responsibility is to express an
opinion on these financial statements and selected per unit data and ratios
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected per
unit data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included physical verification or
confirmation of securities owned as of December 31, 1995 and 1994. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected per unit data and
ratios referred to above present fairly, in all material respects, the financial
position of Equus Capital Partners, L.P. as of December 31, 1995 and 1994, and
the results of its operations, changes in its partners' capital and its cash
flows for each of the three years in the period ended December 31, 1995, and the
selected per unit data and ratios for each of the five years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 3, the financial statements include enhanced yield
investments valued at $13,486,398 (103% of partners' capital) and $11,876,797
(112% of partners' capital) as of December 31, 1995 and 1994, respectively,
whose values have been estimated by the Managing Partner and approved by the
Independent General Partners in the absence of readily ascertainable market
values. We have reviewed the procedures used by the Managing Partner in arriving
at its estimate of value of such investments and have inspected the underlying
documentation, and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate. However, because of the inherent
uncertainty of valuation, the Managing Partner's estimate of values may differ
significantly from the values that would have been used had a ready market
existed for the investments and the differences could be material.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
February 23, 1996
-16-
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
DECEMBER 31, 1995 AND 1994
1995 1994
----------- -----------
ASSETS
Enhanced yield investments, at fair
value (cost of $9,152,957 and $10,716,507,
respectively) ............................ $13,486,398 $11,876,797
Temporary cash investments, at cost
which approximates fair value ............ -- 13,589
Cash ....................................... 19,407 5,676
Accounts receivable ........................ 100 --
Accrued interest receivable ................ 67,045 80,060
----------- -----------
Total assets ..................... $13,572,950 $11,976,122
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable ......................... $ 36,300 $ 44,050
Note payable ............................. 400,000 1,300,000
Due to management company ................ 49,833 --
----------- -----------
Total liabilities ................ 486,133 1,344,050
----------- -----------
Commitments and contingencies
Partners' capital:
Managing partner ......................... 153,417 128,870
Independent general partners ............. 3,824 3,127
Limited partners (12,310 Units
issued and outstanding) ................ 12,929,576 10,500,075
----------- -----------
Total partners' capital .......... 13,086,817 10,632,072
----------- -----------
Total liabilities and
partners' capital ................ $13,572,950 $11,976,122
=========== ===========
-17-
The accompanying notes are an
integral part of these financial statements.
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
Investment income:
<S> <C> <C> <C>
Income from enhanced yield investments .................. $ 337,259 $ 109,114 $ 402,869
Interest from temporary cash investments ................ 2,818 9,528 38,563
----------- ----------- -----------
Total investment income ............................... 340,077 118,642 441,432
----------- ----------- -----------
Expenses:
Management fee .......................................... 226,180 247,120 263,858
Deferred incentive fees ................................. -- (235,494) 55,535
Independent general partner fees ........................ 61,515 61,500 64,658
Professional fees ....................................... 49,308 45,515 55,929
Mailing and printing expenses ........................... 22,878 42,198 26,890
Interest expense ........................................ 90,656 37,383 --
Administrative fees ..................................... 21,120 21,135 21,180
----------- ----------- -----------
Total expenses ........................................ 471,657 219,357 488,050
----------- ----------- -----------
Net investment loss ....................................... (131,580) (100,715) (46,618)
----------- ----------- -----------
Realized loss on sales of enhanced
yield investments, net .................................. (586,826) -- (150,000)
----------- ----------- -----------
Unrealized appreciation of enhanced yield investments, net:
End of year ............................................. 4,333,441 1,160,290 2,065,781
Beginning of year ....................................... 1,160,290 2,065,781 1,461,494
----------- ----------- -----------
Increase (decrease) in unrealized
appreciation, net ................................... 3,173,151 (905,491) 604,287
----------- ----------- -----------
Net increase (decrease) in partners'
capital from operations ............................. $ 2,454,745 $(1,006,206) $ 407,669
=========== =========== ===========
</TABLE>
-18-
The accompanying notes are an
integral part of these financial statements.
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS PARTNERS
Partners' capital,
<S> <C> <C> <C> <C>
December 31, 1992 $11,417,177 $252,644 $3,316 $11,161,217
------------ --------- -------- ------------
Investment activities:
Investment income 441,432 4,415 125 436,892
Expenses 488,050 4,881 136 483,033
------------ --------- -------- ------------
Net investment loss (46,618) (466) (11) (46,141)
Realized loss on enhanced
yield investment, net (150,000) (2,037) (43) (147,920)
Increase (decrease) in unrealized
appreciation of enhanced
yield investments, net 604,287 (101,944) 202 706,029
Distributions to partners (186,568) (1,865) (53) (184,650)
------------ --------- -------- ------------
Net increase (decrease) in
partners' capital 221,101 (106,312) 95 327,318
------------ --------- -------- ------------
Partners' capital,
December 31, 1993 $11,638,278 $146,332 $3,411 $11,488,535
------------ --------- -------- ------------
-19-
Investment activities:
Investment income $ 118,642 $ 1,186 $ 34 $ 117,422
Expenses 219,357 2,193 63 217,101
------------ --------- ------- ------------
Net investment loss (100,715) (1,007) (29) (99,679)
Decrease in unrealized appre-
ciation of enhanced
yield investments, net (905,491) (16,455) (255) (888,781)
------------ ------- ------ ----------
Net decrease in partners'
capital (1,006,206) (17,462) (284) (988,460)
------------ --------- -------- ------------
Partners' capital,
December 31, 1994 10,632,072 128,870 3,127 10,500,075
----------- -------- -------- ------------
Investment activities:
Investment income 340,077 3,400 97 336,580
Expenses 471,657 4,717 134 466,806
------------ --------- ------- ------------
Net investment loss (131,580) (1,317) (37) (130,226)
Realized loss on sales of
enhanced yield
investments, net (586,826) (5,868) (167) (580,791)
Increase in unrealized appre-
ciation of enhanced
yield investments, net 3,173,151 31,732 901 3,140,518
------------ --------- ------- ------------
Net increase in partners'
capital 2,454,745 24,547 697 2,429,501
------------ --------- ------- ------------
Partners' capital
December 31, 1995 $13,086,817 $153,417 $3,824 $12,929,576
=========== ======== ====== ===========
</TABLE>
-20-
The accompanying notes are an
integral part of these financial statements.
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Interest received ..................................................... $ 207,308 $ 200,770 $ 352,544
Cash paid to management company,
general partners, bank and suppliers ................................ (429,574) (456,925) (446,866)
----------- ----------- -----------
Net cash used by operating activities ............................... (222,266) (256,155) (94,322)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of enhanced yield investments ................................ (415,260) (2,012,183) (2,378,863)
Sale of enhanced yield investments .................................... 732,007 1,464 --
Repayment of enhanced yield investments ............................... 805,661 391,300 495,726
Purchase of temporary cash investments ................................ -- -- (100,000)
Maturities of temporary cash investments .............................. -- -- 399,000
----------- ----------- -----------
Net cash provided (used) by investing
activities ........................................................ 1,122,408 (1,619,419) (1,584,137)
----------- ----------- -----------
Cash flows from financing activities:
Advances on note payable from bank .................................... 556,500 1,400,000 --
Repayments on note payable to bank .................................... (1,456,500) (100,000) --
Distributions to partners ............................................. -- -- (186,568)
----------- ----------- -----------
Net cash provided (used) by financing
activities ........................................................ (900,000) 1,300,000 (186,568)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ...................................................... 142 (575,574) (1,865,027)
Cash and cash equivalents at
beginning of year ..................................................... 19,265 594,839 2,459,866
----------- ----------- -----------
Cash and cash equivalents at end
of year ............................................................... $ 19,407 $ 19,265 $ 594,839
=========== =========== ===========
-21-
Reconciliation of increase (decrease)
in partners' capital from operations to
net cash used by operating activities:
Increase (decrease) in partners' capital
from operations ....................................................... $ 2,454,745 $(1,006,206) $ 407,669
Adjustments to reconcile increase (decrease) in partners' capital from
operations to net cash used by operating activities: Realized loss on
sales of enhanced yield
investments, net .................................................. 586,826 -- 150,000
Decrease (increase) in unrealized appreciation
of enhanced yield investments, net ................................ (3,173,151) 905,491 (604,287)
Decrease (increase) in accounts receivable .......................... -- 938 (938)
Accrued interest or dividends exchanged for
enhanced yield investments ........................................ (145,784) -- --
Decrease (increase) in accrued
interest receivable ............................................... 13,015 81,190 (87,950)
Decrease in accounts payable ........................................ (7,750) (2,074) (14,351)
Increase in due to management company ............................... 49,833 -- --
Increase (decrease) in deferred incentive fees ...................... -- (235,494) 55,535
----------- ----------- -----------
Net cash used by operating activities ..................................... $ (222,266) $ (256,155) $ (94,322)
=========== =========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-22-
EQUUS CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS
FOR THE FIVE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Investment income $ 27.34 $ 9.54 $ 35.49 $ 36.50 $ 61.15
Expenses 37.92 17.64 39.24 49.76 35.31
---------- ---------- ---------- ----------- ----------
Net investment income (loss) $ (10.58) $ (8.10) $ (3.75) $ (13.26) $ 25.84
========== ========== ========== ========== =========
Realized loss on sales of enhanced
yield investments, net $ (47.18) $ - $ (12.02) $ - $ -
========== =========== ========== =========== =========
Increase (decrease) in unrealized
appreciation of enhanced
yield investments, net $ 255.12 $ (72.20) $ 57.36 $ 96.88 $ 11.26
========== ========= ========== ========== =========
Net increase (decrease) in partners'
capital from operations $ 197.36 $ (80.30) $ 41.59 $ 83.62 $ 37.10
========== ========= ========== ========== =========
Distributions to partners $ - $ - $ 15.00 $ 15.23 $ 25.46
========== ========= ========== ========== =========
Partners' capital, end of year $ 1,050.33 $ 852.97 $ 933.27 $ 906.68 $ 838.29
========== ========= ========== ========= =========
Ratio of expenses to average
partners' capital 3.98% 1.97% 4.27% 5.70% 4.24%
Ratio of net investment income
(loss) to average
partners' capital (1.11)% (0.91)% (0.41)% (1.52)% 3.10%
Ratio of total increase (decrease)
in partners' capital from
operations to average
partners' capital 20.74% (8.99)% 4.52% 9.58% 4.46%
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-23-
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---- ----------
<S> <C> <C> <C>
Artegraft, Inc. January 1993
- 12% senior term promissory note $ 259,300 $ 259,300
- 12% junior term promissory note 250,000 250,000
- Warrant to buy up to 1,000 shares of
common stock at $.01 per share
through December 31, 2002 10 63,325
- Warrant to buy up to 4,000 shares
of common stock at $25 per share
through December 31, 2002 40 186,675
Champion Healthcare Corporation (AMEX - CHC) April 1991
- 333,755 shares of common stock 1,147,781 1,575,746
- 1,300 shares of Series C convertible
preferred stock 23,400 23,400
- Warrants to buy up to 1,894 shares of
common stock at $5.90 per share through
June 1, 1999 - -
Drypers Corporation (NASDAQ - DYPR) July 1991
- 224,344 shares of common stock 1,309,000 595,914
- Warrants to buy up to 1,357
shares of common stock at $4
per share through June 30, 1998 - -
E-B Holdings, Inc. December 1995
- 740 shares of common stock 684,500 -
- 12% promissory note 400,000 260,000
- 8% promissory notes 90,000 90,000
Garden Ridge Corporation (NASDAQ - GRDG) July 1992
- 52,688 shares of common stock 144,705 1,853,761
-24-
Independent Gas Company Holdings, Inc. February 1991
- 16,267 shares of common stock $ 20,447 $ 20,447
- 1,281 shares of 9% Series A preferred stock 1,284,530 1,284,530
- 215 shares of Series C preferred stock 215,000 215,000
Industrial Equipment Rentals, Inc. June 1993
- 91,115 shares of common stock 911 911
- 2,685 shares of 6% cumulative junior
preferred stock 268,500 268,500
- 12% subordinated debenture 538,889 538,889
MaxTech Holdings, Inc. March 1991
(formerly Maxim Engineers, Inc.)
- 59,875 shares of common stock 15,781 2,986,000
- 2,200,000 shares of 10% cumula-
tive convertible preferred stock 1,500,000 3,014,000
Medifit of America, Inc. September 1992
- 190,476 shares of Series D preferred
stock 1,000,000 -
- Warrant to buy up to 9,054 shares
of common stock at $3.75 per share
through January 1, 1998 163 -
- Warrant to buy up to 76,379 shares
of common stock at $.01 per share
through January 1, 1998 - -
-------------- ------------
Total $9,152,957 $13,486,398
===============================
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-25-
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
DECEMBER 31, 1995
(CONTINUED)
Substantially all of the Partnership's Enhanced Yield Investments are restricted
from public sale without prior registration under the Securities Act of 1933.
The Partnership negotiates certain aspects of the method and timing of the
disposition of the Partnership's Enhanced Yield Investments in each Portfolio
Company, including registration rights and related costs. In connection with the
investments in Champion Healthcare Corporation, E-B Holdings, Inc., Independent
Gas Company Holdings, Inc., Industrial Equipment Rentals, Inc., MaxTech
Holdings, Inc. and Medifit of America, Inc., rights have been obtained to demand
the registration of such securities under the Securities Act of 1933, providing
certain conditions are met. The Partnership does not expect to incur significant
costs, including costs of any such registration, in connection with the future
disposition of its portfolio securities.
As defined in the Investment Company Act of 1940, the Partnership is considered
to have controlling interest in E-B Holdings, Inc., Industrial Equipment
Rentals, Inc. and MaxTech Holdings, Inc. The fair value of the Partnership's
investments in Champion Healthcare Corporation, Drypers Corporation and Garden
Ridge Corporation include discounts from the closing market price of $197,328,
$105,161 and $187,899 to reflect the effects of restrictions on the sale of such
securities at December 31, 1995. Such discounts total $490,388 or $39.44 per
unit. Income was earned in the amount of $81,115, $42,394 and $279,015 for the
years ended December 31, 1995, 1994 and 1993, respectively, on Enhanced Yield
Investments of companies in which the Partnership has a controlling interest.
As defined in the Investment Company Act of 1940, all of the Partnership's
investments are in eligible Enhanced Yield Investments. The Partnership provides
significant managerial assistance to all of the Portfolio Companies in which it
has invested except Artegraft, Inc. and Medifit of America, Inc. The Partnership
provides significant managerial assistance to Portfolio Companies that comprise
95% of the total value of the Enhanced Yield Investments.
The accompanying notes are an
integral part of these financial statements.
-26-
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---- ----------
<S> <C> <C> <C>
Artegraft, Inc. January 1993
- 12% senior term promissory note $ 358,900 $ 358,900
- 12% junior term promissory note 250,000 250,000
- Warrant to buy up to 1,000 shares of
common stock at $.01 per share
through December 31, 2002 10 63,325
- Warrant to buy up to 4,000 shares
of common stock at $25 per share
through December 31, 2002 40 186,675
Champion Healthcare Corporation (AMEX-CHC) April 1991
- 52,752 shares of common stock 46,463 342,888
- 831,177 shares of Series A convertible
preferred stock 831,177 1,415,109
- 10,538 shares of Series B convertible
preferred stock 124,356 137,000
- 1,300 shares of Series C convertible
preferred stock 23,400 23,400
- Warrants to buy up to 1,894 shares of
common stock at $5.90 through June 1999 - 1,136
CMC Holdings, Inc. November 1992
- 74,000 shares of common stock 74,000 -
- 148,000 shares of Series A cumulative
preferred stock 148,000 -
- 11% subordinated debentures 1,776,000 999,000
- 12% promissory note 125,000 125,000
Drypers Corporation (NASDAQ-DYPR) July 1991
- 224,344 shares of common stock 1,309,000 2,243,440
- Warrants to buy up to 1,357
shares of common stock at $4
per share through June 30, 1998 - 8,142
-27-
Garden Ridge Corporation (formerly
Garden Ridge Pottery Corp.) July 1992
- 15,375 shares of common stock $ 100,029 $ 422,813
- 14,802 shares of 8% cumulative
preferred stock 88,812 88,812
- Prime + 3%, minimum 9.5%
subordinated notes 363,233 363,233
- 12% senior subordinated note 166,680 166,680
- Warrants to buy up to 1,667 shares of
common stock at $30 per share through
December 15, 2003 - -
Independent Gas Company Holdings, Inc. February 1991
- 14,962 shares of common stock 20,447 20,447
- 1,281 shares of 9% Series A preferred stock 1,284,530 1,284,530
- 170 shares of Series C preferred stock 170,000 170,000
- 10% bridge loan 45,100 45,100
Industrial Equipment Rentals, Inc. June 1993
- 91,115 shares of common stock 911 911
- 2,685 shares of 6% cumulative junior
preferred stock 268,500 268,500
- 12% subordinated debenture 538,889 538,889
Maxim Engineers, Inc. March 1991
- 15,531 shares of common stock 15,531 65,531
- 1,500,000 shares of 10% cumulative,
convertible preferred stock 1,500,000 1,950,000
- Prime + 2%, $385,000 revolving line
of credit 45,241 45,241
-28-
Medifit of America, Inc. September 1992
- 190,476 shares of Series D preferred
stock $ 1,000,000 $ 250,000
- 10% demand note 42,095 42,095
- Warrant to buy up to 9,054 shares
of common stock at $3.75 per share
through January 1, 1998 163 -
- Warrant to buy up to 76,379 shares
of common stock at $.01 per share
through January 1, 1998
- -
----------- ------------
Total $10,716,507 $11,876,797
=========== ============
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-29-
EQUUS CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) ORGANIZATION AND BUSINESS PURPOSE
Equus Capital Partners, L.P. (the "Partnership"), a Delaware limited
partnership, completed the sale of 12,310 units of limited partners' interest
("Units") to 1,428 limited partners as of December 31, 1990. Each Unit required
a capital contribution to the Partnership of $1,000 less applicable selling
commission discounts and may not be sold, transferred or assigned without the
consent of Equus Capital Corporation, a Delaware corporation (the "Managing
Partner"), which consent may not be unreasonably withheld. Subscriptions for
Units were first accepted at the initial closing on October 6, 1989, and
subsequent quarterly closings were held through the final closing effective
December 31, 1990.
The Partnership seeks to achieve current income and capital
appreciation principally by making investments in securities consisting
primarily of subordinated debt and related equity securities issued by companies
to raise capital or in connection with leveraged acquisitions or
recapitalizations ("Enhanced Yield Investments"). The Partnership has elected to
be treated as a business development company under the Investment Company Act of
1940, as amended. The Partnership will terminate no later than December 31,
1999, subject to the right of the Independent General Partners to extend the
term for up to four additional years if they determine that such extension is in
the best interest of the Partnership.
(2) MANAGEMENT
The Partnership has four general partners, consisting of the Managing
Partner and three independent, individual general partners (the "Independent
General Partners"). As compensation for services rendered to the Partnership,
each Independent General Partner receives an annual fee of $15,000 and a fee of
$1,500 for each meeting of the Independent General Partners attended. Pursuant
to the Partnership agreement, the Managing Partner has made a general partner's
capital contribution to the Partnership of $125,316, or approximately one
percent of the Partnership's contributed capital, and each Independent General
Partner has made a capital contribution of $1,000.
The Partnership has entered into a management agreement with Equus
Capital Management Corporation, a Delaware corporation (the "Management
Company"). Pursuant to such agreement, the Management Company performs certain
management and administrative services necessary for the operation of the
Partnership. The Management Company receives a management fee at an annual rate
equal to 2.5% of the available capital and is payable quarterly in arrears. In
addition, the Management Company will receive an incentive fee equal to 10% of
the Partnership's cumulative distributions from Enhanced Yield Investments
(excluding returns of capital) over the life of the Partnership, subject to
payment of a priority return to the limited partners. During 1994, the
Partnership reversed the accrual of all deferred incentive fees, due to an
increase in the accrued priority return and a decrease in net unrealized
appreciation on Enhanced Yield Investments in 1994. Deferred incentive fee
expense (income) of ($235,494) and $55,535 is included in the Statements of
Operations for the years ended December 31, 1994 and 1993 respectively. Payment
of the incentive fees is subject to the payment of $4,241,362 and $2,960,698 in
cumulative accrued priority returns owed to limited partners at December 31,
1995 and 1994, respectively (See Note 4). The Management Company also receives
compensation for providing certain administrative services to the Partnership on
terms determined by the Independent General Partners as being no less favorable
to the Partnership than those obtainable from competent unaffiliated parties.
Certain officers of the Managing Partner serve as directors of Portfolio
Companies, and receive
-30-
and retain fees in consideration for such service. The Management Company also
has management agreements with the Managing Partner and Equus II Incorporated
("EQS"), a Delaware corporation, and with Equus Equity Appreciation Fund L.P.
("EEAF"), a Delaware limited partnership.
The Managing Partner is controlled by the Management Company which in
turn is controlled by a privately owned corporation. The Managing Partner is
also the managing general partner of EEAF and is a subordinated investment
advisor to EQS.
(3) SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments - Enhanced Yield Investments are carried at
fair value with the net change in unrealized appreciation or depreciation
included in the determination of partners' capital. Investments in companies
whose securities are publicly-traded are valued at their quoted market price,
less a discount to reflect the estimated effects of restrictions on the sale of
such securities, if applicable. Cost is used to approximate fair value until
significant developments affecting an Enhanced Yield Investment provide a basis
for use of an appraisal valuation. Thereafter, Enhanced Yield Investments are
carried at appraised values as determined quarterly by the Managing Partner,
subject to the approval of the Independent General Partners. The fair values of
debt securities, which are generally held to maturity, are determined on the
basis of the terms of the debt securities and the financial condition of the
issuer. Because of the inherent uncertainty of the valuation of Enhanced Yield
Investments which do not have readily ascertainable market values, the Managing
Partner's estimate of fair value may significantly differ from the fair value
that would have been used had a ready market existed for such investments.
Appraised values do not reflect brokers' fees, other normal selling costs or
management incentive fees which might become payable on disposition of such
investments. Such management incentive fees are recorded in total in the
Partnership's Financial Statements. (See Note 2).
Investment Transactions - Investment transactions are recorded on the
accrual method. Realized gains and losses on investments sold are computed on a
specific identification basis.
Income Taxes - No provision for income taxes has been made since all
income and losses are allocable to the partners for inclusion in their
respective tax returns.
Cash Flows - For purposes of the Statements of Cash Flows, the
Partnership considers all highly liquid temporary cash investments purchased
with an original maturity of three months or less to be cash equivalents.
(4) ALLOCATIONS AND DISTRIBUTIONS
The Partnership's cumulative net distributions from Enhanced Yield
Investments in excess of returns of capital will be shared in proportion to the
partners' capital contributions until the limited partners have received a
priority return, and thereafter are designed so that such distributions
generally will ultimately be shared 80% by the general and limited partners in
proportion to their capital contributions, 10% by the Managing Partner as an
incentive distribution and 10% by the Management Company as an incentive fee.
The priority return of $4,241,362 and $2,960,698 at December 31, 1995 and 1994,
respectively, is equal to the cumulative, non-compounded return on the average
daily amount of the gross capital contributions represented by Enhanced Yield
Investments ranging from 10 to 12% per annum, depending on the date of the
original contribution, less amounts previously distributed related to such
return. For financial reporting purposes, net unrealized appreciation or
depreciation is allocated to the partners' capital accounts as if it were
realized.
-31-
Income from any source other than Enhanced Yield Investments is
generally allocated to the partners in proportion to the partners' capital
contributions. Indirect expenses of the Partnership are allocated between
Enhanced Yield Investments and Temporary Cash Investments on a pro-rata basis
based on the average assets from each type of investment.
Subject to certain provisions in the Partnership agreement, net
investment income and gains and losses on investments are generally allocated
between the general partners and the limited partners on the same basis as cash
distributions.
(5) TEMPORARY CASH INVESTMENTS
Temporary cash investments, which represent the short-term utilization
of cash prior to investment in Enhanced Yield Investments, distributions to the
partners or payment of expenses, consisted of money market accounts earning
interest at 4.5% at December 31, 1995.
(6) ENHANCED YIELD INVESTMENTS
The Partnership made follow-on investments of $561,044 in Enhanced
Yield Investments of four Portfolio Companies during the year ended December 31,
1995, including $145,784 in dividends received in the form of common stock from
Champion Healthcare Corporation.
During 1995, the Partnership realized net capital losses on sales of
Enhanced Yield Investments of $586,826. On May 9, 1995, Garden Ridge Corporation
effected a 4.5-for-1 stock split of its outstanding common stock in connection
with an initial public offering ("IPO") of its common stock. The number of
shares held by the Partnership has been adjusted to reflect such stock split. In
connection with the stock split, the Partnership received $7 for a fractional
share which was recorded as a realized capital gain. Subsequent to the IPO,
Garden Ridge Corporation redeemed $88,812 in preferred stock and repaid the
$529,913 in subordinated debt held by the Partnership. In September 1995, the
Partnership sold 24,000 shares of Garden Ridge Corporation for $732,000
realizing a capital gain of $726,667. In December 1995, the Partnership realized
a capital loss of $1,313,500 on the disposition of its investment in CMC
Holdings, Inc.
The Partnership made follow-on investments of $2,012,183 in Enhanced
Yield Investments of five Portfolio Companies during the year ended December 31,
1994.
The Partnership invested $1,558,350 in Enhanced Yield Investments of
two new companies and made follow-on investments of $855,088 in three existing
companies during the year ended December 31, 1993. The Partnership was also
repaid its bridge loan investments in Independent Gas Company Holdings, Inc.
("IGC") and its notes from Champion Healthcare Corporation. On December 29,
1993, the Partnership realized a $150,000 capital loss on its investment in
Tennis Cards, Inc.
(7) NOTE PAYABLE
On March 31, 1994, the Partnership entered into a $1,500,000 revolving
line of credit note payable with a bank. The line of credit was increased to
$1,750,000 in March 1995, and then reduced to $750,000 in September 1995. This
prime rate line of credit is used to fund the Partnership's follow-on
investments. The prime rate was 8.5% at December 31, 1995. On December 31, 1995
and 1994, the Partnership had $400,000 and $1,300,000, respectively, outstanding
under such line of credit, which is due September 30, 1996. The line of credit
is secured by the Partnership's investment in Drypers Corporation and Champion
Healthcare Corporation. The average daily balance outstanding on such line
-32-
of credit during the years ended December 31, 1995 and 1994 was $891,801 and
$498,727, respectively.
(8) COMMITMENTS AND CONTINGENCIES
The Partnership has committed to invest, under certain circumstances,
up to an additional $60,000 in E-B Holdings, Inc. The temporary cash
investments, proceeds from existing Enhanced Yield Investments and revolving
line of credit provide the Partnership with the liquidity necessary to pay
operating expenses of the Partnership as well as make certain follow-on
Investments.
(9) SUBSEQUENT EVENTS
During January 1996, the Partnership advanced an additional $20,000 to
E-B Holdings, Inc. under an 8% subordinated promissory note.
-33-
ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Partnership has no directors or officers. On December 31, 1995, the
Partnership was managed by the Managing Partner and three Independent General
Partners.
Certain information regarding the Independent General Partners is set
forth below:
John M. Ivancevich, age 56, has been an Independent General Partner of
the Partnership since 1989. He has been Executive Vice President for Academic
Affairs and Provost at the University of Houston since July 1995 and was Dean of
the College of Business Administration at the University of Houston from 1988 to
July 1995. Dean Ivancevich has held the Hugh Roy and Lillie Cranz Cullen
Distinguished Professorship of Management since 1979. Since 1974, Dean
Ivancevich has occupied various positions in the College of Business
Administration, including Chairman of the Department of Organizational Behavior
and Management and Associate Dean for Research.
Salvatore E. Manzo, age 78, has been an Independent General Partner of
the Partnership since 1989. He was director of Business Development and
Financing of the Economic Development Division of the Greater Houston
Partnership from 1989 to 1992. From 1985 to 1989, he was Assistant Dean for
Executive Development of the Jesse H. Jones Graduate School of Administration of
Rice University, and from 1979 to 1985, Mr. Manzo was Director of Executive
Development at such school.
Williston B. Symonds, age 63, has been an Independent General Partner
of the Partnership since 1990. He has been an independent consultant since 1981
with temporary affiliations with companies in the energy and telecommunications
industries. From 1983 to 1985 he was with Advanced Telecommunications
Corporation, a provider of alternate long distance telephone services and
consulting engineering, as a director, Vice President-Finance, Secretary and
Treasurer and from 1984 as President and Treasurer. He is also a director of the
Houston National Bank of Houston, Texas.
The Independent General Partners make up the audit committee and do not
have separate nominating or compensation committees, but act on such matters as
a committee of the whole. The business address of Messrs. Ivancevich, Manzo and
Symonds is 2929 Allen Parkway, Suite 2500, Houston, Texas 77019.
FILING OF REPORTS OF UNIT OWNERSHIP
Under the federal securities laws, the Partnership's general partners
and any persons holding more than ten percent of the Partnership's Units are
required to report their ownership of the Partnership's Units and any changes in
that ownership to the Partnership and the SEC. Specific due dates for these
reports have been established by regulation and the Partnership is required to
report any failure to file by these dates in 1995. All of these filings were
satisfied by the Partnership's general partners and ten percent holders,
pursuant to Section 16(2) of the Securities Exchange Act of 1934.
As of March 1, 1996, the Partnership believes that all of the
Partnership's general partners and ten percent holders are current in their
filings. In making these statements, the Partnership has relied on the transfer
records of the Partnership and copies of reports that they have filed with the
SEC.
-34-
MANAGING PARTNER
The Managing Partner is a corporation organized under the laws of the
State of Delaware in September 1983. The Managing Partner was organized to serve
as managing general partner of Equus Investments I, L.P., Equus Investments II,
L.P., the Partnership and similar partnerships which may be formed. The Managing
Partner, subject to the supervision of the Independent General Partners, has
exclusive power and authority to manage and control the Partnership. The
Managing Partner is a registered investment adviser under the Investment
Advisers Act of 1940.
The following is a list of the directors and officers of the Managing
Partner:
NAME AGE POSITION
Sam P. Douglass 63 Chairman of the Board and
Chief Executive Officer
Nolan Lehmann 51 President and Director
Randall B. Hale 33 Vice President and Director
Paula T. Douglass 44 Director
S. Preston Douglass, Jr. 34 Director
Tom S. Tucker 53 Vice President, Secretary
and Treasurer
Gary L. Forbes 52 Vice President
Tracy H. Cohen 29 Vice President
Sam P. Douglass has been Chairman of the Board of the Managing Partner
since its formation in September 1983 and became Chief Executive Officer in
December 1989. Mr. Douglass is also Chairman of the Board and Chief Executive
Officer of the Management Company and Equus II Incorporated. Since December
1978, he has served as Chairman and Chief Executive Officer of Equus Corporation
International, a privately owned corporation engaged in a variety of investment
activities.
Nolan Lehmann has been the President of the Managing Partner since May
1990 and a director since December 1989. From its formation in September 1983 to
May 1990 he was Executive Vice President. Mr. Lehmann is also President and a
director of the Management Company and Equus II Incorporated. He is a director
of Allied Waste Industries, Inc., Champion Healthcare Corporation, Drypers
Corporation and Garden Ridge Corporation. Mr. Lehmann is a certified public
accountant.
Randall B. Hale, has been a Vice President of the Managing Partner,
Equus II Incorporated and the Management Company since November 1992. He was
elected a director of the Managing Partner and Management Company in February
1996. From June 1985 to October 1992, he was employed by Arthur Andersen LLP.
Mr. Hale is a certified public accountant.
Paula T. Douglass, has been a director of the Management Company since
July 1993. She was elected director of the Managing Partner in February 1996.
Since July 1991, she has been Chairman and CEO of DOVA Production and
Entertainment Company. From September 1989 to September 1990 she was employed as
an attorney by Fulbright & Jaworski. Since December 1978, she has been a
director of Equus Corporation International and she is also Chairman of the
Board of Iwerks Entertainment, Inc. She is also a licensed attorney.
S. Preston Douglass, Jr., has been a director of the Management Company
since July 1993. He was elected director of the Managing Partner in February
1996. He is a partner at Wallace, Mosty,
-35-
Machann, Jackson & Williams where he has been employed since January 1989. He
was a prosecutor in the 216th Judicial District in Kerrville, Texas from
December 1987 to December 1988. He is a licensed attorney.
Tom S. Tucker has been Treasurer of the Managing Partner since April
1984, Secretary of the Managing Partner since February 1987, a Vice President of
the Managing Partner since August 1988, Vice President and Treasurer of the
Management Company since its formation in September 1983 and Secretary of the
Management Company since October 1987. Since June 1980, Mr. Tucker has been
Financial Vice President of Equus Corporation International. He is also Vice
President, Secretary and Treasurer of Equus II Incorporated. He is a certified
public accountant.
Tracy H. Cohen, was elected a Vice President of the Managing Partner in
April 1995 and is the Manager of the Investor Relations Department for the
Management Company for which she has been employed since April 1995. She has
been a Vice President of Equus II Incorporated since May 1995. From September
1990 to April 1995, she was employed by Arthur Andersen LLP. Ms. Cohen is a
certified public accountant.
Gary L. Forbes was a director of the Managing Partner from January 1992
to November 1995 and has been a Vice President of the Managing Partner and the
Management Company since November 1991. He was a director of the Management
Company from July 1993 to November 1995. He has been a Vice President of Equus
II Incorporated since December 1991. He was President of Coal & Timber, Inc.
from January to November 1991. Mr. Forbes was Vice President and Chief Financial
Officer of Elders Resources North America, Inc. from 1988 to 1990. From 1983 to
1988 Mr. Forbes was President of WKG Corporation. He is also a director of
Consolidated Graphics, Inc. and NCI Building Systems, Inc. Mr. Forbes is a
certified public accountant.
There is no family relationship between any Independent General Partner
and any director or officer of the Managing Partner. Paula T. Douglass is the
wife of Sam P. Douglass, and S. Preston Douglass, Jr. is the son of Sam P.
Douglass.
The business address of Messrs. Douglass, Lehmann, Hale, Tucker, Forbes
and Ms. Douglass and Cohen is 2929 Allen Parkway, Suite 2500, Houston, Texas
77019. The business address of Mr. S. Preston Douglass, Jr. is 820 Main Street ,
Suite 100, Kerrville, Texas 78028.
The Managing Partner has contributed $125,316 to the Partnership,
representing approximately 1% of total capital contributions to the Partnership.
The Managing Partner is a wholly-owned subsidiary of the Management
Company. As a result of its stock ownership in the Management Company, Equus
Corporation International has 80% voting control of the Management Company.
Equus Corporation International has its principal offices at 2929 Allen Parkway,
Suite 2500, Houston, Texas 77019.
Under the securities laws of the United States, the Partnership's
General Partners and any persons holding more than ten percent of the
Partnership's Units are required to report their ownership of the Partnership's
Units and any changes in that ownership to the SEC. Specific due dates for these
reports have been established and the Partnership is required to report in this
annual report any failure to file by these dates during 1995. All of these
filing requirements were satisfied by its General Partners. In making these
statements, the Partnership has relied on the written representations of its
General Partners and its ten percent holders and copies of the reports that they
have filed with the Commission.
-36-
MANAGEMENT COMPANY
The Management Company was organized as a Delaware corporation in 1983
and maintains its offices at 2929 Allen Parkway, Suite 2500, Houston, Texas
77019. The Management Company's sole activity is to provide management,
administrative and investment advisory services for the Partnership, Equus II
Incorporated and Equus Equity Appreciation Fund, L.P. The Management Company is
a registered investment adviser under the Advisers Act.
The directors and officers of the Management Company are Sam P.
Douglass, Chairman of the Board and Chief Executive Officer, Nolan Lehmann,
President and a director, Randall B. Hale, Vice President and director, Paula T.
Douglass, director, S. Preston Douglass, Jr., director, Tom S. Tucker, Vice
President, Secretary and Treasurer and Gary L. Forbes, Vice President. See
"Managing Partner" above for information concerning Messrs. Sam P. Douglass,
Lehmann, Hale, S. Preston Douglass, Jr., Tucker, Forbes and Ms. Douglass.
As a result of its stock ownership in the Management Company, Equus
Corporation International has 80% voting control of the Management Company.
Equus Corporation International is a privately owned corporation engaged in a
variety of investment activities. The business address of Equus Corporation
International is 2929 Allen Parkway, Suite 2500, Houston, Texas 77019.
THE MANAGEMENT AGREEMENT
The Management Agreement provides that the Management Company receive
as compensation for its services a management fee (the "Management Fee") at an
annual rate of 2.5% of Available Capital of the Partnership, paid quarterly in
arrears. "Available Capital" is the amount of net offering proceeds from the
sale of Units reduced by capital distributed to the holders of the Units and
realized losses from the Partnership's investments. The Management Fee is
payable quarterly in arrears. Management fees of $226,180, $247,120 and $263,858
were paid during the years ended December 31, 1995, 1994 and 1993, respectively.
The Management Agreement also provides that the Management Company will
be paid as the Management Company Incentive Fee an amount equal to 10% of the
excess of distributions from Enhanced Yield Investments over distributions from
Enhanced Yield Investments representing returns of capital over the life of the
Partnership, subject to payment of the priority return to the Limited Partners.
The cumulative amount of the Management Company Incentive Fee will be determined
as of the end of each fiscal quarter and upon termination of the Partnership.
If, at the end of any such period or upon termination, net payments previously
made to the Management Company exceed 10% of the Partnership's cumulative
distributions, including the priority return, from Enhanced Yield Investments
less unrealized capital depreciation, the Management Company will be required to
repay all or a portion of the Management Company Incentive Fee previously
received. A deferred incentive fee of $235,494 was accrued as of December 31,
1993. Such deferred incentive fees are recorded to the extent unrealized
appreciation exceeds the priority return owed. During 1994, the Partnership
reversed the accrual of all deferred incentive fees, due to an increase in the
accrued priority return and a decrease in the net unrealized appreciation on
Enhanced Yield Investments in 1994. Deferred incentive fee expense (income) of
($235,494) and $55,535 is included in the Statements of Operations for the years
ended December 31, 1994 and 1993, respectively. At December 31, 1995, payment of
incentive fees is subject to the payment of $4,241,362 in cumulative accrued
priority returns owed to limited partners.
The Advisers Act restricts the aggregate amount of the Management
Company Incentive Fee and distributions with respect to the Managing Partner's
incentive distribution to 20% of the Partnership's net
-37-
realized capital gains less unrealized capital depreciation. This restriction
does not apply, however, to the Partnership's ordinary interest and dividend
income.
The Management Agreement provides for indemnification by the
Partnership of the Management Company and its officers and directors, to the
fullest extent allowed by law, against any threatened, pending or completed
action to the extent that the activities giving rise to such action were
performed in good faith either on behalf of the Partnership or in furtherance of
the interests of the Partnership and in a manner reasonably believed by the
indemnified person to be within the scope of the authority conferred by the
Management Agreement or by law, so long as such person was not guilty of bad
faith, negligence, misconduct or any breach of fiduciary duty owed to the
Partnership. Indemnification is limited by Section 17(d) of the Investment
Company Act.
The Management Agreement was approved by the Independent General
Partners and was submitted to the first annual meeting of Limited Partners for
their approval. Unless earlier terminated, the Management Agreement will remain
in effect from year to year if approved by (i) a majority of the General
Partners or a majority in interest of Limited Partners and (ii) a majority of
the Independent General Partners. The Management Agreement is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party or by a vote of a majority in interest of Limited Partners.
As compensation for the specified administrative services to be
rendered by the Management Company, the Management Company is paid a fee (the
"Fund Administration Fee") of $15 per Limited Partner account per year and will
be reimbursed for certain out-of-pocket expenses relating to such services. Such
terms and conditions must be approved by the Independent General Partners,
however, as being not less favorable to the Partnership than those obtainable
from competent unaffiliated third parties. The amount of compensation payable to
the Management Company is reviewed annually by the Independent General Partners
and, subject to the limitation contained in the previous sentence, may be
increased or decreased by the Independent General Partners to provide for such
compensation as the Independent General Partners may in good faith deem
reasonable. Administration fees were $21,120, $21,135 and $21,180 for the years
ended December 31, 1995, 1994 and 1993, respectively.
The Management Company is a registered investment adviser under the
Advisers Act.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all cash compensation paid to the
Independent General Partners during or with respect to 1995 for services
rendered in all capacities to the Partnership.
NUMBER OF CAPACITIES IN CASH
PERSONS IN GROUP WHICH SERVED COMPENSATION
3 Independent General $61,500
Partners
Each Independent General Partner receives from the Partnership an
annual fee of $15,000, a fee of $1,500 for each meeting of the Independent
General Partners attended and reimbursement for all out-of-pocket expenses
relating to attendance at such meetings. Independent General Partners do not
receive any additional compensation from the Partnership or its Portfolio
Companies for any additional services rendered.
-38-
The Partnership has no directors, executive officers or employees and
therefore paid no other compensation during 1995.
DISTRIBUTIONS AND ALLOCATIONS OF PROFITS AND LOSSES
DISTRIBUTIONS
Subject to the Priority Return, the Partnership's cumulative net
distributions from Enhanced Yield Investments in excess of returns of capital
generally are to be shared 80% by the Limited Partners and the General Partners
in proportion to their Capital Contributions, 10% by the Managing Partner as an
incentive distribution and 10% by the Management Company as an incentive fee.
Current Returns. All cash dividends, interest and other income received
by the Partnership in excess of expenses of operation and reserves for expenses
and Follow-on Investments are to be distributed to the Partners at least
annually as follows:
(a) From Enhanced Yield Investments,
first, 99% to the Limited Partners and the Independent General
Partners, as a class, and 1% to the Managing Partner, until the
Limited Partners, as a class, have received from cumulative
distributions from Enhanced Yield Investments made by the
Partnership (other than as a return of capital), an amount equal
to the sum of (i) an aggregate return (cumulative but not
compounded) ranging from 12% to 10% per annum (depending on when
the Limited Partner made his Capital Contribution) on the average
daily amount of Gross Capital Contributions represented by
Enhanced Yield Investments (the "Priority Return"), and (ii) any
outstanding Compensatory Payment (as defined below),
second, 79% to the Limited Partners and the Independent General
Partners, as a class, and 21% to the Managing Partner until the
Managing Partner has received from all distributions with respect
to Enhanced Yield Investments made by the Partnership (other than
as a return of capital), an amount equal to 11% of all such
distributions (10 percentage points being an incentive
distribution, the "MGP Incentive Distribution"), except that if
there are any outstanding Deferred Distribution Amounts (defined
below), such distribution will, to the extent permitted by the
Partnership Agreement, first be made solely to the Managing
Partner until such amount is distributed to it, and
third, thereafter, 89% to the Limited Partners and the Independent
General Partners, as a class, and 11% to the Managing Partner (10
percentage points being an MGP Incentive Distribution).
(b) From Temporary Investments, 99% to the Limited Partners and
the Independent General Partners, as a class, and 1% to the
Managing Partner.
The Priority Return is 12% for Capital Contributions made prior to June
30, 1989, 11% for Capital Contributions made between July 1 and September 30,
1989 and 10% for Capital Contributions made thereafter.
Capital Transactions. All proceeds from the disposition of Enhanced
Yield Investments and Temporary Investments, including distributions of returns
of capital from investments ("Capital Transactions"), that are not utilized or
reserved for Follow-on Investments or used to pay, or reserved
-39-
for the payment of, outstanding obligations or expenses of the Partnership
(including the Management Company Incentive Fee), will be distributed as soon as
practicable after such Capital Transactions as follows:
(a) From Enhanced Yield Investments,
first, 99% to the Limited Partners and the Independent General
Partners, as a class, and 1% to the Managing Partner, until the
Limited Partners, as a class, have received from cumulative
distributions from Enhanced Yield Investments, an amount equal to
the sum of (i) the Priority Return and (ii) any outstanding
Compensatory Payment,
second, to the Managing Partner, the Independent General Partners
and the Limited Partners, as a class, in proportion to their
respective "Net Capital Contributions" (Capital Contributions net
of selling commissions and organizational, offering and marketing
expenses) until the Limited Partners, as a class, have received
from cumulative distributions from Enhanced Yield Investments (a)
the portion of their Net Capital Contributions represented by
Enhanced Yield Investments then or theretofore liquidated and not
reinvested plus (b) an amount equal to the sum of (i) the Priority
Return and (ii) any outstanding Compensatory Payment, except that
if there are any outstanding Deferred Distribution Amounts, such
distribution will, to the extent permitted by the Partnership
Agreement, first be made solely to the Managing Partner until such
amount is distributed to it,
third, 79% to the Limited Partners and the Independent General
Partners, as a class, and 21% to the Managing Partner, until the
Managing Partner has received from all distributions made with
respect to Enhanced Yield Investments, 11% of all such
distributions (10 percentage points being an MGP Incentive
Distribution), other than as a return of capital, and
fourth, thereafter 89% to the Limited Partners and the Independent
General Partners, as a class, and 11% to the Managing Partner (10
percentage points being an MGP Incentive Distribution).
(b) From Temporary Investments,
first, to the Managing Partner, the Independent General Partners
and the Limited Partners, as a class, in proportion to their
respective Net Capital Contributions until the Limited Partners,
as a class, have received from cumulative distributions other than
distributions from Enhanced Yield Investments the portion of their
Net Capital Contributions represented by Temporary Investments
then or theretofore liquidated and not reinvested, and
second, 99% to the Limited Partners and the Independent General
Partners, as a class, and 1% to the Managing Partner.
For purposes of the distribution described above, "Gross Capital
Contributions represented by Enhanced Yield Investments" is the total cost of
Enhanced Yield Investments grossed up for the related selling commissions,
marketing and sales expenses and organization and offering expenses, without
regard to selling discounts or waivers of selling commissions or wholesale
marketing assistance fees.
The Managing Partner will make certain payments to the Partnership
("Compensatory Payments") in an amount equal to the cumulative amount by which
cumulative net proceeds received from the
-40-
disposition of Enhanced Yield Investments are less than the cost of such
investments, but only to the extent of cumulative MGP Incentive Distributions
previously received by the Managing Partner.
In addition, to the extent that making any distributions from the
proceeds of any Capital Transaction would result in the Managing Partner
receiving cumulative distributions relating to the disposition of Capital
Transactions in excess of 11% (10% as an MGP Incentive Distribution and 1% based
on contributed capital) of the cumulative capital gains realized (net of
realized capital losses and unrealized net capital depreciation), such
distributions will instead be deferred (the "Deferred Distribution Amount").
Distributions to Limited Partners will be allocated among such Limited
Partners in proportion to the respective number of Units held by such Limited
Partners and based on the Priority Return they are entitled to receive.
Net income earned by the Partnership subsequent to a closing and before
the next closing were allocated among the Partners as of the time such income
was earned or realized. Prior to the admission of any new Limited Partners to
the Partnership, to the extent cash was available for distribution, the
Partnership distributed to the existing Limited Partners all realized income and
gain. As soon as possible after the Partnership's termination, the Managing
Partner, or a liquidating trustee, will liquidate the Partnership and the
Partners will receive a liquidating distribution of the remaining assets based
upon their allocable share thereof.
ALLOCATIONS
Profits and Losses for tax purposes are determined and allocated as of
the end of each calendar quarter. Profits and Losses are allocated first to
reflect such cash distributions made or scheduled to be made (other than as to
distributions of capital), and thereafter in a manner designed to reflect cash
distributions projected to be made.
The Partnership and the Managing Partner intend to file an application
for an exemptive order of the SEC concerning proposed procedures in the event
that the Managing Partner is removed. Under such application, in the event of
the removal of the Managing Partner and the continuation of the Partnership, the
investments of the Partnership at the time of removal would be appraised. All
unrealized capital gains and losses of the Partnership would be deemed realized
at that time for purposes of making a final allocation to the Managing Partner.
With respect to the allocation of its MGP Incentive Distributions, the Managing
Partner would receive a final allocation of capital gains and losses as if such
allocation were being made at the end of a fiscal year. If the capital account
of the Managing Partner has a positive balance after such final allocation, to
the extent permissible under the Investment Advisers Act, the Partnership would
deliver a promissory note issued by it to the Managing Partner, the principal
amount of which shall be equal to the amount, if any, by which the positive
balance in the Managing Partner's capital account exceeds its Capital
Contribution, and which bears interest at a rate per annum equal to the prime
lending rate in effect at First Interstate Bank of Texas, N.A. at the time of
removal, with interest payable annually and principal payable, if at all, only
from any available cash before any distributions thereof are made to the
Partners. If the capital account of the Managing Partner has a negative balance
after such final allocation, the Managing Partner shall contribute cash to the
capital of the Partnership in an amount equal to the negative balance in its
capital account, which contribution of cash will be a Capital Contribution, thus
affecting the amounts allocated to it. The Managing Partner would become a
Limited Partner with respect to its remaining interest in Profits and Losses
allocated and related distributions.
-41-
No assurance can be given that such exemptive order will be granted. In
the event such order is not granted, the Managing Partner would not be entitled
to participate in unrealized gains of the Partnership upon the removal of the
Managing Partner and continuation of the Partnership.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
To the best knowledge of the Partnership, no person beneficially owns
more than five percent of the Units of limited partners' interests in the
Partnership. The Partnership has no other class of security currently
outstanding. No Independent General Partner of the Partnership owns any Units of
limited partners' interests in the Partnership.
Set forth below is information as of December 31, 1995, with respect to
the ownership of Units by the directors and officers of the Managing Partner.
UNITS
NAME BENEFICIALLY OWNED PERCENTAGE
Nolan Lehmann
(President and
Director of the
Managing Partner) 12 .10%
All directors and officers
of the Managing Partner
as a group (eight persons) 12 .10%
There exists no arrangement known to the Partnership, the operation of
which may at a subsequent date result in a change of control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made in Items 10 and 11 to the information set forth under
the captions "The Management Agreement" and "The Management Company" and to the
information set forth under the captions "Managing Partner" and "Distributions
and Allocation of Profits and Losses" for information concerning certain
relationships and transactions between the Managing Partner and the Management
Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS PAGES
Report of Independent Public Accountants....................... 16
Statements of Assets, Liabilities and Partners'
Capital at December 31, 1995 and 1994.......................... 17
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993............................... 18
-42-
Statements of Changes in Partners' Capital
for the years ended December 31, 1995, 1994
and 1993....................................................... 19
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993............................... 21
Selected Per Unit Data and Ratios for the
five years ended December 31, 1995............................. 23
Schedules of Enhanced Yield Investments
at December 31, 1995 and 1994.................................. 24
Notes to Financial Statements.................................. 30
All other information required in the financial statement schedules has
been incorporated in the financial statements or notes thereto or has been
omitted since the information is not applicable, not present or not present in
amounts sufficient to require submission of the schedule.
(a)(3) Exhibits
3. Articles of Incorporation and By-laws.
(a) Certificate of Limited Partnership of the Partnership dated
November 30, 1988. [Form N-2 Exhibit 1.1 to Registration
Statement, File No. 33-25985].
(b) Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of October 6, 1989. [Exhibit 3(e) to the
Partnership's Annual Report on Form 10-K, filed March 30,
1990.]
4. Instruments defining the rights of security holders, including debentures
(a) Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of October 6, 1989. [Exhibit 3(e) to the
Partnership's Annual Report on Form 10-K, filed March 30,
1990]
(b) Form of Subscription Agreement [Form N-2, Exhibit B to
Prospectus, File No. 33-25985].
10. Material Contracts
(a) Management Agreement between the Partnership and Equus Capital
Management Corporation dated October 6, 1989. [Exhibit 10(a)
to the Partnership's Annual Report on Form 10-K filed March
30, 1990.]
(b) Service Agreement between the Partnership and Equus Capital
Management Corporation dated October 6, 1989. [Exhibit 10(b)
to the Partnership's Annual Report on Form 10-K filed March
30, 1990.]
-43-
(c) Safekeeping Agreement between the Partnership and Southwest
Guaranty Trust Company dated January 2, 1991. [Exhibit 10(d)
to the Partnership's Annual Report on Form 10-K filed March
21, 1991.]
(d) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Partnership during the
period for which this report is filed.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.
EQUUS CAPITAL PARTNERS, L.P.
By: Equus Capital Corporation,
Managing Partner
By: /s/NOLAN LEHMANN
Nolan Lehmann, President
Date: March 11, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
EQUUS CAPITAL CORPORATION
Managing General Partner
By: /s/ NOLAN LEHMANN March 11, 1996
Nolan Lehmann, President
/s/ JOHN M. IVANCEVICH Independent March 11, 1996
John M. Ivancevich General Partner
/s/ SALVATORE E. MANZO Independent March 11, 1996
Salvatore E. Manzo General Partner
/s/ WILLISTON B. SYMONDS Independent March 11, 1996
Williston B. Symonds General Partner
-44-
/s/ NOLAN LEHMANN President and Director of the March 11, 1996
Nolan Lehmann Managing General Partner (principal
Financial and Executive Officer
of the Managing General Partner)
/s/ SAM P. DOUGLASS Chairman of the Board and Chief March 11, 1996
Sam P. Douglass Executive Officer of the Managing
General Partner
/s/ RANDALL B. HALE Director of the Managing March 11, 1996
Randall B. Hale General Partner
/s/ PAULA T. DOUGLASS Director of the Managing March 11, 1996
Paula T. Douglass General Partner
/s/ S. PRESTON DOUGLASS, JR. Director of the Managing March 11, 1996
S. Preston Douglass, Jr. General Partner
</TABLE>
-45-
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 9,152,957
<INVESTMENTS-AT-VALUE> 13,486,398
<RECEIVABLES> 67,145
<ASSETS-OTHER> 19,407
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,572,950
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 486,133
<TOTAL-LIABILITIES> 486,133
<SENIOR-EQUITY> 13,086,817
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 12,310
<SHARES-COMMON-PRIOR> 12,310
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 13,086,817
<DIVIDEND-INCOME> 184,072
<INTEREST-INCOME> 156,005
<OTHER-INCOME> 0
<EXPENSES-NET> 471,657
<NET-INVESTMENT-INCOME> (131,580)
<REALIZED-GAINS-CURRENT> (586,826)
<APPREC-INCREASE-CURRENT> 3,173,151
<NET-CHANGE-FROM-OPS> 2,454,745
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,454,745
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 226,180
<INTEREST-EXPENSE> 90,656
<GROSS-EXPENSE> 471,657
<AVERAGE-NET-ASSETS> 11,859,444
<PER-SHARE-NAV-BEGIN> 852.97
<PER-SHARE-NII> (10.58)
<PER-SHARE-GAIN-APPREC> 207.94
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1,050.33
<EXPENSE-RATIO> .04
<AVG-DEBT-OUTSTANDING> 891,801
<AVG-DEBT-PER-SHARE> 71.72
</TABLE>
