FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-17526
EQUUS CAPITAL PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0264305
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
2929 ALLEN PARKWAY, SUITE 2500
HOUSTON, TEXAS 77019-2120
(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
(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 [ ]
As of March 31, 1996, 12,278 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 March 31, 1996 was $1,032.77. There is no established market
for such Units.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
EQUUS CAPITAL PARTNERS, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
- MARCH 31, 1996 AND DECEMBER 31, 1995......................................................1
STATEMENTS OF OPERATIONS
- FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995........................................2
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
- FOR THE THREE MONTHS ENDED MARCH 31, 1996.................................................3
- FOR THE THREE MONTHS ENDED MARCH 31, 1995.................................................4
STATEMENTS OF CASH FLOWS
- FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995........................................5
SELECTED PER UNIT DATA AND RATIOS
- FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995........................................7
SCHEDULE OF ENHANCED YIELD INVESTMENTS
- MARCH 31, 1996...........................................................................8
NOTES TO FINANCIAL STATEMENTS...........................................................11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................................14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................15
SIGNATURE........................................................................................................16
</TABLE>
-ii-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
MARCH 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
1996 1995
---- ----
ASSETS
ENHANCED YIELD INVESTMENTS, AT FAIR
VALUE (COST OF $9,148,057 AND $9,152,957,
RESPECTIVELY) ................................ $13,316,331 $13,486,398
TEMPORARY CASH INVESTMENTS, AT COST
WHICH APPROXIMATES FAIR VALUE ................ 12,415 --
CASH ........................................... 4,072 19,407
ACCOUNTS RECEIVABLE ............................ -- 100
ACCRUED INTEREST RECEIVABLE .................... 66,614 67,045
----------- -----------
TOTAL ASSETS ......................... $13,339,432 $13,572,950
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
ACCOUNTS PAYABLE ............................. $ 16,036 $ 36,300
DUE TO MANAGEMENT COMPANY .................... -- 49,833
NOTE PAYABLE ................................. 515,000 400,000
----------- -----------
TOTAL LIABILITIES .................... 531,036 486,133
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
MANAGING PARTNER ............................. 151,233 153,417
INDEPENDENT GENERAL PARTNERS ................. 3,762 3,824
LIMITED PARTNERS (12,310 UNITS
ISSUED AND OUTSTANDING) .................... 12,713,401 12,929,576
----------- -----------
TOTAL PARTNERS' CAPITAL .............. 12,868,396 13,086,817
----------- -----------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL .................... $13,399,432 $13,572,950
=========== ===========
The accompanying notes are an
integral part of these financial statements.
-1-
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
---- ----
INVESTMENT INCOME:
INCOME FROM ENHANCED YIELD INVESTMENTS ....... $ 35,550 $ 51,139
INTEREST FROM TEMPORARY CASH INVESTMENTS ..... 261 315
----------- -----------
TOTAL INVESTMENT INCOME .................... 35,811 51,454
----------- -----------
EXPENSES:
MANAGEMENT FEE ............................... 49,640 59,113
INTEREST EXPENSE ............................. 9,274 29,657
INDEPENDENT GENERAL PARTNER FEES ............. 15,750 15,750
MAILING AND PRINTING EXPENSES ................ 6,560 11,525
ADMINISTRATIVE FEES .......................... 5,262 5,280
PROFESSIONAL FEES ............................ 2,579 3,486
----------- -----------
TOTAL EXPENSES ............................. 89,065 124,811
----------- -----------
NET INVESTMENT LOSS ............................ (53,254) (73,357)
----------- -----------
UNREALIZED APPRECIATION OF ENHANCED
YIELD INVESTMENTS:
END OF PERIOD ................................ 4,168,274 691,587
BEGINNING OF PERIOD .......................... 4,333,441 1,160,290
----------- -----------
DECREASE IN UNREALIZED APPRECIATION ........ (165,167) (468,703)
----------- -----------
TOTAL DECREASE IN PARTNERS'
CAPITAL FROM OPERATIONS .................. $ (218,421) $ (542,060)
=========== ===========
The accompanying notes are an
integral part of these financial statements.
-2-
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS PARTNERS
----- -------- ----------- --------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1995 ............................ $ 13,086,817 $ 153,417 $ 3,824 $ 12,929,576
------------ ------------ ------------ ------------
INVESTMENT ACTIVITIES:
INVESTMENT INCOME ............................ 35,811 358 10 35,443
EXPENSES ..................................... 89,065 891 25 88,149
------------ ------------ ------------ ------------
NET INVESTMENT LOSS ........................ (53,254) (533) (15) (52,706)
DECREASE IN UNREALIZED APPRE-
CIATION OF ENHANCED
YIELD INVESTMENTS ............................ (165,167) (1,651) (47) (163,469)
------------ ------------ ------------ ------------
NET DECREASE IN PARTNERS'
CAPITAL ...................................... (218,421) (2,184) (62) (216,175)
------------ ------------ ------------ ------------
PARTNERS' CAPITAL,
MARCH 31, 1996 ............................... $ 12,868,396 $ 151,233 $ 3,762 $ 12,713,401
============ ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-3-
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS PARTNERS
----- -------- ----------- --------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 ........................ $ 10,632,072 $ 128,870 $ 3,127 $ 10,500,075
------------ ------------ ------------ ------------
INVESTMENT ACTIVITIES:
INVESTMENT INCOME ........................ 51,454 514 14 50,926
EXPENSES ................................. 124,811 1,248 35 123,528
------------ ------------ ------------ ------------
NET INVESTMENT LOSS ................... (73,357) (734) (21) (72,602)
DECREASE IN UNREALIZED
APPRECIATION OF
ENHANCED YIELD
INVESTMENTS .............................. (468,703) (4,687) (133) (463,883)
------------ ------------ ------------ ------------
NET DECREASE IN
PARTNERS' CAPITAL ........................ (542,060) (5,421) (154) (536,485)
------------ ------------ ------------ ------------
PARTNERS' CAPITAL,
MARCH 31, 1995 ........................... $ 10,090,012 $ 123,449 $ 2,973 $ 9,963,590
============ ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-4-
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
INTEREST AND DIVIDENDS RECEIVED .................... $ 36,242 $ 56,348
CASH PAID TO MANAGEMENT COMPANY,
GENERAL PARTNERS AND SUPPLIERS ................... (159,162) (130,977)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES ............ (122,920) (74,629)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF ENHANCED YIELD INVESTMENTS ............ (20,000) (275,000)
REPAYMENTS OF ENHANCED YIELD INVESTMENTS ........... 25,000 120,536
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES . 5,000 (154,464)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
ADVANCES FROM BANK ................................. 115,000 331,500
REPAYMENTS TO BANK ................................. -- (31,500)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 115,000 300,000
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . (2,920) 70,907
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ................................ 19,407 19,407
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD .......................................... $ 16,487 $ 90,172
========= =========
The accompanying notes are an
integral part of these financial statements.
-5-
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(CONTINUED)
1996 1995
---- ----
RECONCILIATION OF DECREASE IN PARTNERS'
CAPITAL FROM OPERATIONS TO NET CASH
USED BY OPERATING ACTIVITIES:
DECREASE IN PARTNERS' CAPITAL FROM OPERATIONS ........ $(218,421) $(542,060)
ADJUSTMENTS TO RECONCILE DECREASE IN PARTNERS'
CAPITAL FROM OPERATIONS TO NET CASH
USED BY OPERATING ACTIVITIES:
DECREASE IN UNREALIZED APPRECIATION
OF ENHANCED YIELD INVESTMENTS ................. 165,167 468,703
DECREASE IN ACCRUED INTEREST RECEIVABLE ......... 431 4,894
DECREASE IN ACCOUNTS PAYABLE .................... (20,264) (7,926)
INCREASE (DECREASE) IN DUE TO MANAGEMENT COMPANY (49,833) 1,760
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES ................ $(122,920) $ (74,629)
========= =========
The accompanying notes are an
integral part of these financial statements.
-6-
EQUUS CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
---- ----
INVESTMENT INCOME $ ................................ 2.88 $ 4.14
EXPENSES ........................................... 7.16 10.04
--------- -------
NET INVESTMENT LOSS ................................ (4.28) (5.90)
DECREASE IN UNREALIZED APPRECIATION
OF ENHANCED YIELD INVESTMENTS ................... (13.28) (37.68)
--------- -------
NET DECREASE IN PARTNERS' CAPITAL FROM
OPERATIONS ...................................... (17.56) (43.58)
PARTNERS' CAPITAL, BEGINNING OF PERIOD ............. 1,050.33 852.97
--------- -------
PARTNERS' CAPITAL, END OF PERIOD ................... $ 1,032.77 $ 809.39
========= =======
RATIO OF EXPENSES TO AVERAGE PARTNERS' CAPITAL ..... 0.69% 1.21%
RATIO OF NET INVESTMENT LOSS TO AVERAGE
PARTNERS' CAPITAL ............................... (0.41)% (0.71)%
RATIO OF TOTAL DECREASE IN PARTNERS' CAPITAL
FROM OPERATIONS TO AVERAGE PARTNERS' CAPITAL .... (1.69)% (5.24)%
The accompanying notes are an
integral part of these financial statements.
-7-
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---- ----------
<S> <C> <C>
ARTEGRAFT, INC. JANUARY 1993
- 12% SENIOR TERM PROMISSORY NOTE $ 234,400 $ 234,400
- 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 2,891,956
- 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 - 829
DRYPERS CORPORATION (NASDAQ - DYPR) JULY 1991
- 224,344 SHARES OF COMMON STOCK 1,309,000 740,996
- 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 110,000 110,000
GARDEN RIDGE CORPORATION (NASDAQ - GRDG) JULY 1992
- 52,688 SHARES OF COMMON STOCK 144,705 2,226,473
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-8-
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
MARCH 31, 1996
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---- ----------
<S> <C> <C> <C>
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 1,800,000
- 2,200,000 SHARES OF 10% CUMULA-
TIVE CONVERTIBLE PREFERRED STOCK 1,500,000 2,200,000
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 $9,148,057 $13,316,331
========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
-9-
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
MARCH 31, 1996
(UNAUDITED)
(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
At 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 $360,450, $143,182 and $184,003 to reflect the effects of
restrictions on the sale of such securities at March 31, 1996. Such discounts
total $687,635 or $55.30 per unit. Income was earned in the amount of $20,017
and $20,178 for the three months ended March 31, 1996 and 1995, 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.
-10-
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
(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. Payment of incentive fees
is subject to the payment of $4,521,230 in cumulative accrued priority returns
owed to limited partners at March 31, 1996 (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 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.
-11-
The Managing Partner is a wholly-owned subsidiary of 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 $4,521,230 and $4,241,362 at March 31, 1996 and December
31, 1995, 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.
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.
-12-
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 March 31, 1996.
(6) ENHANCED YIELD INVESTMENTS
The Partnership made follow-on investments of $20,000 in Enhanced Yield
Investments of one Portfolio Company during the three months ended March 31,
1996.
The Partnership made follow-on investments of $275,000 in Enhanced
Yield Investments of one Portfolio Company during the three months ended March
31, 1995.
(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 8.75% at March 31, 1996. On March 31, 1996 and
December 31, 1995, the Partnership had $515,000 and $400,000, 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 of credit during the three months ended March 31, 1996 and 1995, was
$441,154 and $1,314,017, respectively.
(8) COMMITMENTS AND CONTINGENCIES
The Partnership has committed to invest, under certain circumstances,
up to an additional $40,000 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 April 1996, the Partnership sold 24,000 shares of Garden Ridge
Corporation for $1,179,840, realizing a capital gain of $1,041,510. In addition,
the Partnership paid off the $515,000 balance outstanding on the note payable.
-13-
ITEM 2. 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 March 31, 1996, the Partnership had $9,148,057 (at cost) invested in
Enhanced Yield Investments of nine companies, and had committed to invest up to
an additional $40,000 in the Enhanced Yield Investments of one existing
Portfolio Company under certain conditions.
At March 31, 1996, the Partnership had $16,487 in cash and temporary
cash investments. 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 $515,000 outstanding under such line
of credit at March 31, 1996, 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. During April 1996, the Partnership sold 24,000
shares of Garden Ridge Corporation for $1,179,840, realizing a capital gain of
$1,041,510. In addition, the Partnership paid off the $515,000 balance
outstanding on the note payable.
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 $53,254 and $73,357
for the three months ended March 31, 1996 and 1995, respectively. The
Partnership earned $35,550 and $51,139 in income from Enhanced Yield Investments
during the three months ended March 31, 1996 and 1995, respectively. The
decrease in 1996 was due to a decrease in the amounts invested in Enhanced Yield
Investments bearing current yields.
The Management Company receives a management fee at an annual rate
equal to 2.5% of the Available Capital, as defined, and is paid quarterly in
arrears. Such fee amounted to $49,640 and $59,113 for the three months ended
March 31, 1996 and 1995, 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 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 $4,521,230 and $4,241,362 at
March 31, 1996 and December 31, 1995, respectively. Management fees and other
expenses incurred directly by the Partnership are paid with funds provided from
operations.
-14-
UNREALIZED GAINS ON ENHANCED YIELD INVESTMENTS
Unrealized appreciation of Enhanced Yield Investments decreased by
$165,167 during the three months ended March 31, 1996. Such net decrease
resulted from the increase of $1,834,833 in the estimated fair value of Enhanced
Yield Investments of three companies and the decrease of $2,000,000 in the
estimated fair value of Enhanced Yield Investments of one company.
Unrealized appreciation of Enhanced Yield Investments decreased by
$468,703 during the three months ended March 31, 1995. Such net decrease
resulted from the increase of $140,690 in the estimated fair value of Enhanced
Yield Investments of one company and the decrease of $609,393 in the estimated
fair value of Enhanced Yield Investments of one company.
DISTRIBUTIONS
The Partnership made no cash distributions during the three months
ended March 31, 1996 and 1995. Cumulative cash distributions to limited partners
from inception to March 31, 1996, were $873,297, or $75.53 per weighted average
number of Units outstanding.
ENHANCED YIELD INVESTMENTS
The Partnership made follow-on investments of $20,000 in Enhanced Yield
Investments of one company during the three months ended March 31, 1996. In
January 1996, the Partnership advanced $20,000 to E-B Holdings, Inc. in exchange
for an 8% promissory note.
During the three months ended March 31, 1995, the Partnership made
follow-on investments of $275,000 in CMC Holdings, Inc.
Of the companies in which the Partnership has investments at March 31,
1995, only Champion Healthcare Corporation, Drypers Corporation and Garden Ridge
Corporation 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) 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.
-15-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date May 14, 1996 EQUUS CAPITAL PARTNERS, L.P.
By: Equus Capital Corporation
Managing General Partner
/s/ NOLAN LEHMANN
Nolan Lehmann
President and Principal Financial
and Accounting Officer
-16-
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