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 quarterly period ended September 30, 1999
[ ] 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:
Name of each exchange
Title of each class 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 September 30, 1999, 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 September 30, 1999 was $398.38. 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
-September 30, 1999 and December 31, 1998 ..................... 1
Statements of Operations
- For the three months ended September 30, 1999 and 1998 ...... 2
- For the nine months ended September 30, 1999 and 1998 ....... 3
Statements of Changes in Partners' Capital
- For the nine months ended September 30, 1999 ................ 4
- For the nine months ended September 30, 1998 ................ 5
Statements of Cash Flows
- For the nine months ended September 30, 1999 and 1998 ....... 6
Selected Per Unit Data and Ratios
- For the nine months ended September 30, 1999 and 1998 ....... 8
Schedule of Enhanced Yield Investments
- September 30, 1999 .......................................... 9
Notes to Financial Statements ................................. 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk ..... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................... 16
SIGNATURE ................................................................. 16
ii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Enhanced yield investments, at fair value
(cost of $5,494,736 and $4,848,036, respectively) ............. $4,944,522 $4,871,402
Temporary cash investments, at cost which
approximates fair value ....................................... 18,583 336,672
Cash ............................................................ 2,941 2,936
Accounts receivable ............................................. -- 434,566
Accrued interest receivable ..................................... 35,234 --
---------- ----------
Total assets ............................................ $5,001,280 $5,645,576
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable .............................................. $ 3,300 $ 50,400
Notes payable to bank ......................................... 20,000 --
---------- ----------
Total liabilities ....................................... 23,300 50,400
---------- ----------
Commitments and contingencies
Partners' capital:
Managing partner .............................................. 72,329 78,501
Independent general partners .................................. 1,547 1,722
Limited partners (12,310 Units issued and outstanding) ........ 4,904,104 5,514,953
---------- ----------
Total partners' capital ................................. 4,977,980 5,595,176
---------- ----------
Total liabilities and partners' capital ................. $5,001,280 $5,645,576
========== ==========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
1
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Investment income:
Income from enhanced yield investments ................................... $ 20,290 $ 7,279
Interest from temporary cash investments ................................. 1,700 6,526
----------- -----------
Total investment income ............................................ 21,990 13,805
----------- -----------
Expenses:
Management fees .......................................................... 21,329 22,139
Independent general partner fees ......................................... 9,750 14,625
Mailing and printing expenses ............................................ 1,436 (271)
Administrative fees ...................................................... 3,352 5,115
Professional fees ........................................................ 2,400 2,032
----------- -----------
Total expenses ..................................................... 38,267 43,640
----------- -----------
Net investment loss ........................................................ (16,277) (29,835)
----------- -----------
Realized gain on sale of enhanced yield investments ........................ -- 2,696,846
----------- -----------
Unrealized appreciation (depreciation) of enhanced yield investments:
End of period ............................................................ (550,214) 73,957
Beginning of period ...................................................... (401,453) 2,281,311
----------- -----------
Decrease in unrealized appreciation ................................ (148,761) (2,207,354)
----------- -----------
Net increase (decrease) in partners' capital
from operations ................................................. $ (165,038) $ 459,657
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
2
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Investment income:
Income from enhanced yield investments .................................. $ 74,068 $ 24,033
Interest from temporary cash investments ................................ 8,186 12,653
----------- -----------
Total investment income ............................................ 82,254 36,686
----------- -----------
Expenses:
Management fees ......................................................... 64,201 86,259
Independent general partner fees ........................................ 34,125 42,375
Mailing and printing expenses ........................................... 6,273 7,172
Administrative fees ..................................................... 15,086 15,345
Professional fees ....................................................... 6,185 4,437
----------- -----------
Total expenses ..................................................... 125,870 155,588
----------- -----------
Net investment loss ........................................................ (43,616) (118,902)
----------- -----------
Realized gain on sale of enhanced yield investments ........................ -- 2,696,846
----------- -----------
Unrealized appreciation (depreciation) of enhanced yield investments:
End of period ........................................................... (550,214) 73,957
Beginning of period ..................................................... 23,366 2,480,991
----------- -----------
Decrease in unrealized appreciation ................................ (573,580) (2,407,034)
----------- -----------
Net increase (decrease) in partners' capital
from operations ................................................. $ (617,196) $ 170,910
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
3
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS PARTNERS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Partners' capital,
December 31, 1998 ......................... $ 5,595,176 $ 78,501 $ 1,722 $ 5,514,953
----------- ----------- ----------- -----------
Investment activities:
Investment income ......................... 82,254 823 23 81,408
Expenses .................................. 125,870 1,259 35 124,576
----------- ----------- ----------- -----------
Net investment loss .................... (43,616) (436) (12) (43,168)
Decrease in unrealized appreciation
of enhanced yield investments ............. (573,580) (5,736) (163) (567,681)
----------- ----------- ----------- -----------
Net decrease in partners' capital ............ (617,196) (6,172) (175) (610,849)
----------- ----------- ----------- -----------
Partners' capital,
September 30, 1999 ........................ $ 4,977,980 $ 72,329 $ 1,547 $ 4,904,104
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
4
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS 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 ............................ 36,686 367 10 36,309
Expenses ..................................... 155,588 1,556 44 153,988
----------- ----------- ----------- -----------
Net investment loss ....................... (118,902) (1,189) (34) (117,679)
Realized gain on sale of
enhanced yield investment ..................... 2,696,846 26,969 765 2,669,112
Decrease in unrealized appreciation
of enhanced yield investments ................ (2,407,034) (24,070) (683) (2,382,281)
Distribution to partners ........................ (3,731,359) (37,314) (1,045) (3,693,000)
----------- ----------- ----------- -----------
Net decrease in partners' capital ............... (3,560,449) (35,604) (998) (3,523,847)
----------- ----------- ----------- -----------
Partners' capital,
September 30, 1998 ........................... $ 5,673,466 $ 79,284 $ 1,744 $ 5,592,439
=========== =========== =========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Investment income received ............................... $ 47,020 $ 85,238
Cash paid to management company, general partners
and suppliers ......................................... (172,970) (199,022)
----------- -----------
Net cash used by operating activities ................. (125,950) (113,784)
----------- -----------
Cash flows from investing activities:
Purchase of enhanced yield investments ................... (312,500) --
Sale of enhanced yield investments ....................... 44,566 4,249,920
Repayments of enhanced yield investments ................. 55,800 74,700
Advance to portfolio company ............................. -- (240,000)
----------- -----------
Net cash provided (used) by investing activities ...... (212,134) 4,084,620
----------- -----------
Cash flows from financing activities:
Advances from bank ....................................... 20,000 --
Distributions to partners ................................ -- (3,731,359)
----------- -----------
Net cash provided (used) by financing activities ......... 20,000 (3,731,359)
----------- -----------
Net increase (decrease) in cash and cash equivalents .......... (318,084) 239,477
Cash and cash equivalents at beginning of period .............. 339,608 244,445
----------- -----------
Cash and cash equivalents at end of period .................... $ 21,524 $ 483,922
=========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Reconciliation of net increase (decrease) in partners' capital from operations
to net cash used by operating activities:
Net increase (decrease) in partners' capital from operations ................ $ (617,196) $ 170,910
Adjustments to reconcile net increase (decrease) in
partners' capital from operations to net cash used
by operating activities:
Realized gain on sale
of enhanced yield investments ........................................... -- (2,696,846)
Decrease in unrealized appreciation
of enhanced yield investments ........................................... 573,580 2,407,034
Decrease (increase) in accrued interest receivable .......................... (35,234) 48,552
Decrease in accounts payable ................................................ (47,100) (43,434)
----------- -----------
Net cash used by operating activities ............................................ $ (125,950) $ (113,784)
=========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Investment income .................................................. $ 6.61 $ 2.95
Expenses ........................................................... 10.12 12.51
------- -------
Net investment loss ................................................ (3.51) (9.56)
Realized gain on sale of
enhanced yield investments ..................................... -- 216.82
Decrease in unrealized appreciation of
enhanced yield investments .................................... (46.12) (193.52)
------- -------
Net increase (decrease) in partners' capital from operations ....... (49.63) 13.74
Distribution to partners ........................................... -- (300.00)
------- -------
Net decrease in partners' captial .................................. (49.63) (286.26)
Partners' capital, beginning of period ............................. 448.01 740.56
------- -------
Partners' capital, end of period ................................... $398.38 $454.30
======= =======
Ratio of expenses to average partners' capital ..................... 2.39% 2.09%
Ratio of net investment loss to average partners' capital .......... (0.83)% (1.60)%
Ratio of net increase (decrease) in partners' capital from
operations to average partners' capital ....................... (11.73)% 2.29%
</TABLE>
The accompanying notes are an
integral part of these financial statements.
8
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
- ----------------- -------------------- ------------ -----------
<S> <C> <C>
Artegraft, Inc. January 1993
- 12% junior term promissory note $ 194,200 $ 194,200
- 7% demand promissory note 702,500 702,500
- Warrant to buy up to 1,000 shares of
common stock at $.01 per share
through December 31, 2002 10 -
- Warrant to buy up to 4,000 shares
of common stock at $17.50 per share
through December 31, 2002 40 -
Drypers Corporation (NASDAQ - DYPR) July 1991
- 226,590 shares of common stock 1,314,413 652,563
E-B Holdings, Inc. December 1995
- 12% promissory notes 580,293 300,000
Garden Ridge Corporation (NASDAQ - GRDG) July 1992
- 57,376 shares of common stock 6,375 403,497
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
- 540,481 shares of common stock 1,181,124 491,762
----------- -----------
Total $ 5,494,736 $ 4,944,522
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
9
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
SEPTEMBER 30, 1999
(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. 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 includes discounts from the closing market price of $20,182, $12,479
and $15,209 to reflect the estimated effects of restrictions on the sale of such
securities at September 30, 1999. Such discounts total $47,870 or $3.85 per
unit. For the nine months ended September 30, 1999 and 1998, respectively, there
was no income earned on the 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 Garden Ridge Corporation, comprising 92% of the total value
of the Enhanced Yield Investments.
The accompanying notes are an
integral part of these financial statements.
10
<PAGE>
EQUUS CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(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
by December 31, 1999, subject to the right of the Independent General Partners
(as defined below) to extend the term for up to four additional years if they
determine that such extension is in the best interest of the Partnership. At a
meeting in November 1999, the Independent General Partners extended the
termination date to December 2000.
(2) MANAGEMENT
The Partnership has three general partners, consisting of the Managing
Partner and two 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 and
reimbursement of all out-of-pocket expenses relating to attendance at such
meetings. 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 the incentive
fees is subject to the payment of $3,482,701 in cumulative accrued priority
returns owed to limited partners at September 30, 1999 (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
Management Company 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
11
<PAGE>
Appreciation Fund L.P. ("EEAF"), a Delaware limited partnership.
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
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 of other
investments 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. (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 $3,482,701 at September 30, 1999 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.
The partnership made cash distributions of $3,731,359 including $300 per
Unit to limited partners, during the nine months ended September 30, 1998.
(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 from a range of 3.68% to 3.94%, at September 30, 1999.
(6) ENHANCED YIELD INVESTMENTS
The Partnership made a Follow-on Investment of $702,500 in an Enhanced
Yield Investment of one Portfolio Company during the nine months ended September
30, 1999, which included $390,000 converted from an accounts receivable. The
Partnership made no investments during the nine months ended September 30, 1998.
(7) ACCOUNTS RECEIVABLE
The balance in "Accounts receivable" at December 31, 1998 included $44,566
in escrow payments related to the sale of the Partnership's investment in
Industrial Equipment Rentals, Inc., which were received in January 1999 and a
$390,000 cash advance to Artegraft, Inc. which was reclassified to the
Partnership's investment in the form of a 7% promissory note due on demand by
Artegraft, Inc. as of March 31, 1999.
(8) NOTE PAYABLE TO BANK
The Partnership has a $250,000 line of credit promissory note with Bank of
America, N.A., with interest payable at prime (prime at September 30, 1999 was
8.25%) that expires on March 21, 2000. The Partnership had $20,000 outstanding
on such line of credit at September 30, 1999, which is secured by the
Partnership's investments in Drypers Corporation and Garden Ridge Corporation.
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 (net of $2,625 in selling commission discounts on sales to
affiliates) for 12,310 units of limited partners' interests ("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. The
Partnership will terminate by 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. At a meeting in November 1999, the Independent General Partners
extended the termination date to December 2000.
At September 30, 1999, the Partnership had $5,494,736 (at cost) invested
in Enhanced Yield Investments of six companies.
At September 30, 1999, the Partnership had $21,524 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 may borrow on its $250,000 line of
credit at a bank. 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 LOSS AND EXPENSES
Net investment loss after all expenses amounted to $43,616 and $118,902
for the nine months ended September 30, 1999 and 1998, respectively. The
Partnership earned $74,068 and $24,033 in income from Enhanced Yield Investments
during the nine months ended September 30, 1999 and 1998, respectively. The
higher income in 1999 was due primarily to the higher balance of an Enhanced
Yield Investment in one Portfolio Company earning current income in 1999 as
compared to 1998.
The Management Company receives a management fee equal to 2.5% of the
Available Capital, as defined. Such fee amounted to $64,201 and $86,259 for the
nine months ended September 30, 1999 and 1998, respectively. The steady decrease
in management fees is due to the decrease in Available Capital for each
respective year. 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 $3,482,701 at September 30, 1999. Based on
current valuations of Enhanced Yield Investments, the Management Company would
not receive any incentive fee upon the sale of the Partnership's investments.
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
$573,580 during the nine months ended September 30, 1999. Such decrease resulted
from the decrease in the estimated fair value of
14
<PAGE>
Enhanced Yield Investments of five companies.
Unrealized appreciation of Enhanced Yield Investments decreased by
$2,407,034 during the nine months ended September 30, 1998 due to the decrease
in the estimated fair value of Enhanced Yield Investments of four companies.
DISTRIBUTIONS
The Partnership made no cash distributions during the nine months ended
September 30, 1999. The Partnership made cash distributions of $3,731,359
including $300 per Unit to limited partners, during the nine months ended
September 30, 1998. Cumulative cash distributions to limited partners from
inception to September 30, 1999, were $7,336,047, or $600.53 per weighted
average number of Units outstanding.
ENHANCED YIELD INVESTMENTS
The Partnership made a Follow-on Investment of $702,500 in an Enhanced
Yield Investment of one Portfolio Company during the nine months ended September
30, 1999, which included $390,000 converted from an accounts receivable. The
Partnership made no investments during the nine months ended September 30, 1998.
During the third quarter 1999, the Fund received an additional 202,232
shares of Paracelsus Healthcare Corporation ("PLS") common stock pursuant to a
purchase price adjustment from the Champion / PLS Healthcare merger.
Of the companies in which the Partnership has investments at September 30,
1999, 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
Partnership's limited partners.
The Management Company had identified its computer systems to be replaced
and modified for Year 2000 compliance and installation was completed on
September 30, 1999. In addition, the Partnership has completed its inquiry of
its major service providers as well as its Portfolio Companies to determine if
they are in the process of reviewing their systems with the same goals. The
Partnership has received assurances from all of its major service providers and
its Portfolio Companies regarding Year 2000 compliance. However, although the
Partnership has received assurances, there can be no guarantee that Year 2000
problems originating from these third parties, whose systems affect the
Partnership, will not occur. The Partnership does not expect to incur any
expenses related to Year 2000 issues. The Partnership will develop a contingency
plan if significant risks related to Year 2000 are identified.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Partnership is subject to financial market risks, including changes in
interest rates with respect to its investments in debt securities, as well as
changes in marketable equity security prices. The Partnership does not use
derivative financial instruments to mitigate any of these risks. The return on
the Partnership's investments is generally not affected by foreign currency
fluctuations.
The Partnership's investment in portfolio securities consists of some
fixed rate debt securities. Since the debt securities are generally priced at a
fixed rate, changes in interest rates do not directly impact interest income. In
addition, changes in market interest rates are not typically a significant
factor in the Partnership's determination of fair value of these debt
securities. The Partnership's debt securities are generally held to maturity and
their fair values are determined on the basis of the terms of the debt security
and the financial condition of the issuer.
A portion of the Partnership's investment portfolio consists of debt and
equity investments in private companies. The Partnership would anticipate no
impact on these investments from modest changes in public market equity prices.
However, should significant changes in market equity prices occur, there could
be a longer-term effect on valuations of private companies, which could affect
the carrying value and the amount and timing of gains realized on these
investments. A portion of the Partnership's investment portfolio also consists
of common stocks in publicly traded companies. These investments are directly
exposed to equity price risk, in that a hypothetical ten percent change in these
equity prices would result in a similar percentage change in the fair value of
these securities.
PART II - OTHER INFORMATION
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.
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: November 11, 1999 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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<PERIOD-END> SEP-30-1999
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