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 June 30, 1998
[ ] 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
(Address of principal 77019-2120
executive offices) (Zip Code)
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 June 30, 1998, 12,187 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 June 30, 1998 was $717.34. There is no established market for
such Units.
Documents incorporated by reference: None.
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
(A Delaware Limited Partnership)
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
- June 30, 1998 and December 31, 1997.......................... 1
Statements of Operations
- For the three months ended June 30, 1998 and 1997............ 2
- For the six months ended June 30, 1998 and 1997.............. 3
Statements of Changes in Partners' Capital
- For the six months ended June 30, 1998....................... 4
- For the six months ended June 30, 1997....................... 5
Statements of Cash Flows
- For the six months ended June 30, 1998 and 1997.............. 6
Selected Per Unit Data and Ratios
- For the six months ended June 30, 1998 and 1997.............. 8
Schedule of Enhanced Yield Investments
- June 30, 1998................................................ 9
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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
ASSETS
Enhanced yield investments, at fair value
(cost of $6,412,934 and $6,462,734, respectively) .... $8,694,245 $8,943,725
Temporary cash investments, at cost which
approximates fair value .............................. 216,678 243,365
Cash ...................................................... 5,415 1,080
Accounts receivable ....................................... 35,000 33,097
Accrued interest receivable ............................... 11,830 59,382
---------- ----------
Total assets .................................... $8,963,168 $9,280,649
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable ..................................... $ 18,000 $ 46,734
---------- ----------
Total liabilities ............................... 18,000 46,734
---------- ----------
Commitments and contingencies
Partners' capital:
Managing partner ..................................... 112,001 114,888
Independent general partners ......................... 2,659 2,741
Limited partners (12,310 Units issued and outstanding) 8,830,508 9,116,286
---------- ----------
Total partners' capital ......................... 8,945,168 9,233,915
---------- ----------
Total liabilities and partners' capital ......... $8,963,168 $9,280,649
========== ==========
The accompanying notes are an integral part of these financial statements.
1
</TABLE>
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Investment income:
Income from enhanced yield investments ............ $ 8,523 $ 36,612
Interest from temporary cash investments .......... 2,778 4,317
----------- -----------
Total investment income ...................... 11,301 40,929
----------- -----------
Expenses:
Management fee .................................... 31,926 48,938
Independent general partner fees .................. 13,125 14,625
Mailing and printing expenses ..................... 5,733 3,856
Administrative fees ............................... 5,115 5,179
Professional fees ................................. 1,500 7,663
----------- -----------
Total expenses ............................... 57,399 80,261
----------- -----------
Net investment loss .................................... (46,098) (39,332)
----------- -----------
Unrealized appreciation of enhanced yield investments:
End of period ..................................... 2,281,311 3,106,631
Beginning of period ............................... 3,002,032 718,997
----------- -----------
Increase (decrease) in unrealized appreciation (720,721) 2,387,634
----------- -----------
Net increase (decrease) in partners' capital
from operations ........................... $ (766,819) $ 2,348,302
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Investment income:
Income from enhanced yield investments ............ $ 16,754 $ 250,784
Interest from temporary cash investments .......... 6,127 8,321
----------- ----------
Total investment income ...................... 22,881 259,105
----------- ----------
Expenses:
Management fee .................................... 64,120 97,000
Independent general partner fees .................. 27,750 30,375
Mailing and printing expenses ..................... 7,443 8,088
Administrative fees ............................... 10,230 10,357
Professional fees ................................. 2,405 12,450
----------- ----------
Total expenses ............................... 111,948 158,270
----------- ----------
Net investment income (loss) ........................... (89,067) 100,835
----------- ----------
Unrealized appreciation of enhanced yield investments:
End of period ..................................... 2,281,311 3,106,631
Beginning of period ............................... 2,480,991 726,321
----------- ----------
Increase (decrease) in unrealized appreciation (199,680) 2,380,310
----------- ----------
Net increase (decrease) in partners' capital
from operations ........................... $ (288,747) $2,481,145
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNER PARTNERS
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Partners' capital,
December 31, 1997 .............. $ 9,233,915 $ 114,888 $ 2,741 $ 9,116,286
----------- --------- ------- -----------
Investment activities:
Investment income .............. 22,881 229 6 22,646
Expenses ....................... 111,948 1,119 31 110,798
----------- --------- ------- -----------
Net investment loss ......... (89,067) (890) (25) (88,152)
Decrease in unrealized appreciation
of enhanced yield investments .. (199,680) (1,997) (57) (197,626)
----------- --------- ------- -----------
Net decrease in partners' capital . (288,747) (2,887) (82) (285,778)
----------- --------- ------- -----------
Partners' capital,
June 30, 1998 .................. $ 8,945,168 $ 112,001 $ 2,659 $ 8,830,508
=========== ========= ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNER PARTNERS
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Partners' capital,
December 31, 1996 ................. $10,011,774 $122,667 $2,952 $ 9,886,155
----------- -------- ------ -----------
Investment activities:
Investment income ................. 259,105 2,591 74 256,440
Expenses .......................... 158,270 1,583 45 156,642
----------- -------- ------ -----------
Net investment income ................ 100,835 1,008 29 99,798
Increase in unrealized appreciation of
enhanced yield investments ........ 2,380,310 23,803 675 2,355,832
----------- -------- ------ -----------
Net increase in partners' capital .... 2,481,145 24,811 704 2,455,630
----------- -------- ------ -----------
Partners' capital,
June 30, 1997 ..................... $12,492,919 $147,478 $3,656 $12,341,785
=========== ======== ====== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest and dividends received ................... $ 70,433 $ 233,148
Cash paid to management company, general partners
and suppliers .................................. (140,682) (182,370)
--------- ---------
Net cash provided (used) by operating activities (70,249) 50,778
--------- ---------
Cash flows from investing activities:
Sale of enhanced yield investments ................ 33,097 --
Repayments of enhanced yield investments .......... 49,800 16,600
Advance to portfolio company ...................... (35,000) --
--------- ---------
Net cash provided by investing activities ...... 47,897 16,600
--------- ---------
Net increase (decrease) in cash and cash equivalents ... (22,352) 67,378
Cash and cash equivalents at beginning of period ....... 244,445 240,976
--------- ---------
Cash and cash equivalents at end of period ............. $ 222,093 $ 308,354
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Reconciliation of net increase (decrease) in partners' capital from
operations to net cash provided (used) by operating activities:
Net increase (decrease) in partners' capital from operations .. $(288,747) $ 2,481,145
Adjustments to reconcile net increase (decrease) in
partners' capital from operations to net cash provided
(used) by operating activities:
Decrease (increase) in unrealized appreciation of
enhanced yield investments ................................ 199,680 (2,380,310)
Decrease (increase) in accrued interest receivable ........... 47,552 (25,957)
Decrease in accounts payable .................................. (28,734) (24,100)
--------- -----------
Net cash provided (used) by operating activities ................... $ (70,249) $ 50,778
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Investment income ................................................ $ 1.84 $ 20.83
Expenses ......................................................... 9.00 12.72
---------- ----------
Net investment income (loss) ..................................... (7.16) 8.11
Increase (decrease) in unrealized appreciation of
enhanced yield investments .................................. (16.06) 191.37
---------- ----------
Net increase (decrease) in partners' capital from operations ..... (23.22) 199.48
Partners' capital, beginning of period ........................... 740.56 803.10
---------- ----------
Partners' capital, end of period ................................. $ 717.34 $ 1,002.58
========== ==========
Ratio of expenses to average partners' capital ................... 1.23% 1.41%
Ratio of net investment income (loss) to average partners' capital (0.98)% 0.90%
Ratio of net increase in partners' capital from
operations to average partners' capital ..................... (3.18)% 22.09%
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
JUNE 30, 1998
(UNAUDITED
<TABLE>
<CAPTION>
DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
- ----------------- ------------------ --------- ----------
<S> <C> <C> <C>
Artegraft, Inc. .................................. January 1993
- 12% senior term promissory note .............. $ 44,921 $ 44,921
- 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 $17.50 per share
through December 31, 2002 .................... 40 186,675
Drypers Corporation (NASDAQ - DYPR) .............. July 1991
- 226,590 shares of common stock ............... 1,314,413 1,405,874
E-B Holdings, Inc. ............................... December 1995
- 12% promissory notes ......................... 580,293 440,293
Garden Ridge Corporation (NASDAQ - GRDG) ......... July 1992
- 57,376 shares of common stock ................ 6,375 1,078,310
Independent Gas Company Holdings, Inc. ........... February 1991
- 16,267 shares of common stock ................ 20,447 500,000
- 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
MaxTech Holdings, Inc. ........................... March 1991
- 59,875 shares of common stock ................ 15,781 --
- 2,200,000 shares of 10% cumulative
convertible preferred stock .................. 1,500,000 2,200,000
Paracelsus Healthcare Corporation (NYSE - PLS) April 1991
- 338,249 shares of common stock ............... 1,181,124 1,025,317
---------- ----------
Total ...................................... $6,412,934 $8,694,245
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
JUNE 30, 1998
(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 E-B Holdings, Inc., Independent Gas Company
Holdings, Inc. and MaxTech Holdings, 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 a controlling interest in Drypers Corporation, E-B Holdings,
Inc. and MaxTech Holdings, Inc. The fair value of the Partnership's investments
in Drypers Corporation, Garden Ridge Corporation and Paracelsus Healthcare
Corporation include discounts from the closing market price of $66,961, $33,350
and $31,711 to reflect the estimated effects of restrictions on the sale of such
securities at June 30, 1998. Such discounts total $132,022 or $10.62 per unit.
Income was earned in the amount of $227,637 for the six months ended June 30,
1997, 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.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(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.
The Partnership seeks 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 ("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 $13,500 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 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
$4,837,549 in cumulative accrued priority returns owed to limited partners at
June 30, 1998 (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
<PAGE>
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.
(3) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements - The financial statements included herein
have been prepared without audit and include all adjustments which management
considers necessary for fair presentation.
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 $4,837,549 at June 30, 1998, 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
<PAGE>
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 June 30, 1998.
(6) ENHANCED YIELD INVESTMENTS
During the six months ended June 30, 1998 and 1997, the Partnership made
no investments.
(7) ACCOUNTS RECEIVABLE
The balance in "Accounts receivable" at June 30, 1998, is comprised of a
short-term advance to Artegraft, Inc., which is expected to be repaid before
year end. The balance in "Accounts receivable" at December 31, 1997, was
comprised of $33,097 in escrow payments, which were received in January 1998,
related to the sale of the Partnership's investment in Industrial Equipment
Rentals, Inc.
(8) SUBSEQUENT EVENTS
On August 10, 1998, the Partnership received $165,483 in escrow payments
related to the 1997 sale of the Partnership's investment in Industrial Equipment
Rentals, Inc. which will be recorded as a realized capital gain.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's total contributed capital was $12,435,691, consisting of
$12,307,375 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 and offering costs, were $10,591,816.
At June 30, 1998, the Partnership had $6,412,934 (at cost) invested in
Enhanced Yield Investments of nine companies, and total partners' capital of
$8,945,168.
At June 30, 1998, the Partnership had $222,093 in cash and temporary cash
investments. The Partnership intends to make no new 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. Management believes that temporary cash investments and
proceeds from existing Enhanced Yield Investments 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 income (loss) after all expenses amounted to $(89,067) and
$100,835 for the six months ended June 30, 1998 and 1997, respectively. The
Partnership earned $16,754 and $250,784 in income from Enhanced Yield
Investments during the six months ended June 30, 1998 and 1997, respectively.
The higher income in 1997 was due primarily to the receipt of $161,132 in
dividend income from an Enhanced Yield Investment in one company and the higher
balance of investments in Enhanced Yield Investments earning current income in
1997 as compared to 1998.
The Management Company receives a management fee at an annual rate equal
to 2.5% of the Available Capital, as defined, which is paid quarterly in
arrears. Such fee amounted to $64,120 and $97,000 for the six months ended June
30, 1998 and 1997, 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 $4,837,549 at June 30, 1998.
Management fees and other expenses incurred directly by the Partnership are paid
with funds provided from operations.
UNREALIZED GAINS ON ENHANCED YIELD INVESTMENTS
Unrealized appreciation of Enhanced Yield Investments decreased by
$199,680 during the six months ended June 30, 1998. Such net decrease resulted
from an increase of $882,346 in the estimated fair value of Enhanced Yield
Investments of three companies and a decrease of $1,082,026 in the estimated
fair value of Enhanced Yield Investments of two companies.
14
<PAGE>
Unrealized appreciation of Enhanced Yield Investments increased by
$2,380,310 during the six months ended June 30, 1997. Such net decrease resulted
from an increase in the estimated fair value of Enhanced Yield Investments of
four companies.
DISTRIBUTIONS
The Partnership made no cash distributions during the six months ended
June 30, 1998 and 1997. Cumulative cash distributions to limited partners from
inception to June 30, 1998, were $3,643,047, or $300.53 per weighted average
number of Units outstanding.
ENHANCED YIELD INVESTMENTS
The Partnership made no investments during the six months ended June 30,
1998 and 1997.
Of the companies in which the Partnership has investments at June 30,
1998, only Drypers Corporation, Garden Ridge Corporation and Paracelsus
Healthcare 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.
YEAR 2000
Many computer software systems in use today cannot properly process
date-related information from and after January 1, 2000. Should any of the
computer systems employed by the Management Company, any of the Partnership's
other major service providers, or companies in which the Partnership has an
investment, fail to process this type of information properly, that could have a
negative impact on the Partnership's operations and the services provided to the
limited partners of the Partnership. The Management Company is reviewing all of
their own computer systems with the goal of modifying or replacing such systems
to the extent necessary to prepare for the Year 2000. In addition, the
Partnership is in the process of inquiring of its major service providers as
well its portfolio companies to determine if they are in the process of
reviewing their systems with the same goals. Such assessment is expected to be
complete prior to the end of the year. It is anticipated that the Partnership
will incur no material expenses related to the Year 2000 issues.
SUBSEQUENT EVENTS
On August 10, 1998, the Partnership received $165,483 in escrow payments
related to the 1997 sale of the Partnership's investment in Industrial Equipment
Rentals, Inc. which will be recorded as a realized capital gain.
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
<PAGE>
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 August 12, 1998 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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