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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 June 30, 2002
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
2929 Allen Parkway, Suite 2500
Houston, Texas 77019-2120
----------------------------------------- ------------------------------------
(Address of principal 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, 2002, 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, 2002 was $119.43. There is no established market for
such Units.
Documents incorporated by reference: None.
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, 2002 and December 31, 2001 .................................. 1
Statements of Operations
- For the three months ended June 30, 2002 and 2001 .................... 2
- For the six months ended June 30, 2002 and 2001 ...................... 3
Statements of Changes in Partners' Capital
- For the six months ended June 30, 2002 ............................... 4
- For the six months ended June 30, 2001 ............................... 5
Statements of Cash Flows
- For the six months ended June 30, 2002 and 2001 ...................... 6
Selected Per Unit Data and Ratios
- For the six months ended June 30, 2002 and 2001 ...................... 8
Schedule of Enhanced Yield Investments
- June 30, 2002 ........................................................ 9
Notes to Financial Statements .......................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 15
Item 3. Quantitative and Qualitative Disclosure about Market Risk .............. 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form ........................................... 18
SIGNATURE ........................................................................ 19
ii
Part I. Financial Information
Item 1. Financial Statements
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
JUNE 30, 2002 AND DECEMBER 31, 2001
(Unaudited)
2002 2001
---- ----
Assets
- ------
Enhanced yield investments, at fair value
(cost of $970,378) $1,100,000 $1,100,000
Temporary cash investments, at cost which
approximates fair value 407,431 459,877
Cash 919 1,306
Accrued interest receivable - 53,648
---------- ----------
Total assets $1,508,350 $1,614,831
========== ==========
Liabilities and Partners' Capital
- ---------------------------------
Liabilities:
Accounts payable $ - $ 42,800
---------- ----------
Total liabilities - 42,800
---------- ----------
Commitments and contingencies
Partners' capital:
Managing partner 37,633 38,270
Independent general partners 582 601
Limited partners (12,310 Units issued and outstanding) 1,470,135 1,533,160
---------- ----------
Total partners' capital 1,508,350 1,572,031
---------- ----------
Total liabilities and partners' capital $1,508,350 $1,614,831
========== ==========
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 JUNE 30, 2002 AND 2001
(Unaudited)
2002 2001
---- ----
Investment income:
Income from enhanced yield investments $ - $ 1,375,604
Interest from temporary cash investments 1,628 5,497
----------- -----------
Total investment income 1,628 1,381,101
----------- -----------
Expenses:
Management fee - (17,030)
Independent general partner fees 1,500 9,750
Mailing and printing expenses (3,582) 619
Administrative fees 5,074 4,984
Professional fees 2,700 2,112
----------- -----------
Total expenses 5,692 435
----------- -----------
Net investment income (loss) (4,064) 1,380,666
----------- -----------
Unrealized appreciation of enhanced yield investments:
End of period 129,622 2,809,169
Beginning of period 129,622 3,484,169
----------- -----------
Increase in unrealized appreciation - (675,000)
----------- -----------
Net increase (decrease) in partners' capital
from operations $ (4,064) $ 705,666
=========== ===========
The accompanying notes are an
integral part of these financial statements.
2
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2000
---- ----
Investment income:
Income from enhanced yield investments $ (53,648) $ 1,393,097
Interest from temporary cash investments 3,554 8,502
----------- -----------
Total investment income (50,094) 1,401,599
----------- -----------
Expenses:
Management fee - 1,586
Independent general partner fees 3,000 18,000
Mailing and printing expenses (2,909) 1,997
Administrative fees 10,058 9,968
Professional fees 3,438 6,254
----------- -----------
Total expenses 13,587 37,805
----------- -----------
Net investment income (loss) (63,681) 1,363,794
----------- -----------
Realized loss on sale of enhanced yield investments - (1,131,624)
----------- -----------
Unrealized appreciation of enhanced yield investments:
End of period 129,622 2,809,169
Beginning of period 129,622 1,509,860
----------- -----------
Increase in unrealized appreciation - 1,299,309
----------- -----------
Net increase (decrease) in partners' capital
from operations $ (63,681) $ 1,531,479
=========== ===========
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 SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS PARTNERS
----- ------- -------- --------
Partners' capital,
December 31, 2001 $ 1,572,031 $ 38,270 $ 601 $ 1,533,160
----------- ----------- ----------- -----------
Investment activities:
Investment income (50,094) (501) (14) (49,579)
Expenses 13,587 136 5 13,446
----------- ----------- ----------- -----------
Net investment loss (63,681) (637) (19) (63,025)
----------- ----------- ----------- -----------
Net decrease in partners' capital (63,681) (637) (19) (63,025)
----------- ----------- ----------- -----------
Partners' capital,
June 30, 2002 $ 1,508,350 $ 37,633 $ 582 $ 1,470,135
=========== =========== =========== ===========
The accompanying notes are an
integral part of these financial statements.
4
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(Unaudited)
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS PARTNERS
----- ------- -------- --------
Partners' capital,
December 31, 2000 $ 5,334,305 $ 75,892 $ 1,651 $ 5,256,762
----------- --------- -------- -----------
Investment activities:
Investment income 1,401,599 14,017 397 1,387,185
Expenses 37,805 378 11 37,416
----------- --------- -------- -----------
Net investment loss 1,363,794 13,639 386 1,349,769
Realized loss on sale of enhanced
yield investments (1,131,624) (11,317) (321) (1,119,986)
Increase in unrealized appreciation
of enhanced yield investments 1,299,309 12,993 369 1,285,947
----------- --------- -------- -----------
Net increase in partners' capital 1,531,479 15,315 434 1,515,730
----------- --------- -------- -----------
Partners' capital,
June 30, 2001 $ 6,865,784 $ 91,207 $ 2,085 $ 6,772,492
=========== ========= ======== ===========
The accompanying notes are an
integral part of these financial statements.
5
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Investment income received $ 3,554 $ 1,366,414
Cash paid to management company, general partners
and suppliers (56,387) (88,249)
----------- -----------
Net cash provided (used) by operating activities (52,833) 1,278,165
----------- -----------
Cash flows from investing activities:
Proceeds of sale of enhanced yield investments - 49,500
----------- -----------
Net cash provided by investing activities - 49,500
----------- -----------
Net increase (decrease) in cash and cash equivalents (52,833) 1,327,665
Cash and cash equivalents at beginning of period 461,183 215,311
----------- -----------
Cash and cash equivalents at end of period $ 408,350 $ 1,542,976
=========== ===========
The accompanying notes are an
integral part of these financial statements.
6
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(Continued)
2002 2001
---- ----
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 $ (63,681) $ 1,531,479
Adjustments to reconcile net increase (decrease) in partners'
capital from operations to net cash used
by operating activities:
Realized loss on sales of enhanced yield investments, net - 1,131,624
Increase in unrealized appreciation of enhanced yield
investments - (1,299,309)
(Increase) decrease in accrued interest receivable 53,648 (9,660)
Decrease in accounts payable (42,800) (33,414)
Increase in due from management company - (17,030)
Income received in the form of enhanced yield investments - (25,525)
----------- -----------
Net cash provided (used) by operating activities $ (52,833) $ 1,278,165
=========== ===========
The accompanying notes are an
integral part of these financial statements.
7
EQUUS CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATE AND RATIOS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
2002 2001
---- ----
Investment income $ (4.03) $ 112.69
Expenses 1.09 3.04
-------- --------
Net investment income (loss) (5.12) 109.65
Realized loss on sale of enhanced yield investments - (90.98)
Increase in unrealized appreciation of enhanced yield investments - 104.46
-------- --------
Net increase (decrease) in partners' capital (5.12) 123.13
Partners' capital, beginning of period 124.55 427.03
-------- --------
Partners' capital, end of period $ 119.43 $ 550.16
======== ========
Ratio of expenses to average partners' capital 0.90% 0.62%
Ratio of net investment income (loss) to average partner's capital (4.20)% 22.44%
Ratio of net increase (decrease) in partners' capital from
operations to average partners' capital (4.20)% 25.20%
The accompanying notes are an
integral part of these financial statements.
8
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
JUNE 30, 2002
(Unaudited)
Date Of
Portfolio Company Initial Investment Cost Fair Value
- ----------------- ------------------ ---- ----------
Artegraft, Inc. January 1993
Manufacturer and distributor of specialty surgical products
- 9% demand promissory note $ 252,047 $ -
- 7% demand promissory note 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 -
MaxTech Holdings, Inc. March 1991
Assets held for sale
- 59,875 shares of common stock 15,781 1,100,000
---------- -----------
Total $ 970,378 $ 1,100,000
========== ===========
The accompanying notes are an
integral part of these financial statements.
9
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
JUNE 30, 2002
(Unaudited)
(Continued)
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. 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, 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
EQUUS CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
(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 was scheduled to
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. The agreement has been extended through December 31, 2002. The
Partnership has only two remaining investments, and is planning to dispose of
such investments and distribute the proceeds from such dispositions before the
end of 2002. The Partnership will be dissolved after the disposition of the two
remaining investments. The Managing Partner is wholly owned by Equus Capital
Management Corporation.
(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 a fee of $750 for each meeting of the
Independent General Partners attended and reimbursement of all out-of-pocket
expenses relating to attendance at such meetings. Until the year 2002, each
Independent General Partner received an annual fee of $13,500. This fee was
discontinued in 2002. 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.
Since Available Capital, as calculated, was depleted in the third quarter of
2001, no additional management fees are payable. 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 $3,269,069 in cumulative accrued priority returns owed to limited
partners at June 30, 2002 (See Note 4). It is highly unlikely that any incentive
fees will be paid. The Management Company also receives compensation for
providing certain administrative services to the
11
Partnership on terms determined by the Independent General Partners as being no
less favorable to the Partnership than those obtainable from competent
unaffiliated parties. The Management Company also has management agreements with
Equus II Incorporated ("EQS"), a Delaware corporation, and with Equus Equity
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 partner's capital. Valuations of enhanced yield
investments are performed in accordance with generally accepted accounting
principles and the financial reporting policies of the Securities and Exchange
Commission ("SEC"). The applicable methods prescribed by such principles and
policies are described below:
Publicly-traded Enhanced Yield Investments - Investments in companies
whose securities are publicly traded are valued at their quoted market price at
the close of business on the valuation date, less a discount to reflect the
estimated effects of restrictions on the sale of such securities ("Valuation
Discount"), if applicable.
Privately-held Enhanced Yield Investments - The fair value of
investments for which no market exists (including most investments made by the
Partnership) is determined on the basis of procedures established in good faith
by the Managing Partner and approved by the Independent General Partners of the
Partnership. As a general principle, the current "fair value" of an investment
would be the amount the Partnership might reasonably expect to receive for it
upon its current sale. Appraisal valuations are necessarily subjective and the
Managing Partner's estimate of values may differ materially from amounts
actually received upon the disposition of enhanced yield investments.
Generally, cost is the primary factor used to determine fair value
until significant developments affecting the Portfolio Company (such as results
of operations or changes in general market conditions) provide a basis for use
of an appraisal valuation. 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. Appraisal valuations are based
upon such factors as a Portfolio Company's earnings, cash flow and net worth,
the market prices for similar securities of comparable companies, an assessment
of the company's current and future financial prospects and various other
factors and assumptions. In the case of unsuccessful operations, the appraisal
may be based upon liquidation value.
Most of the Partnership's common equity investments may be appraised at
a multiple of free cash flow generated by the Portfolio Company in its most
recent fiscal year, less outstanding funded indebtedness and other senior
securities such as preferred stock. Projections of current year free cash flow
may be utilized and adjustments for non-recurring items are considered.
Multiples utilized are estimated based on the Management Company's experience in
the private company marketplace, and are necessarily subjective in nature. Most
of the Portfolio Companies utilize a high degree of leverage. From time to time,
Portfolio Companies are in default of certain covenants in their loan
agreements. In the event a Portfolio Company cannot generate adequate cash flow
to meet the principal and interest payments on such indebtness or is not
successful in refinancing the debt upon its maturity, the Partnership's
investment could be reduced or eliminated through foreclosure on the Portfolio
Company's assets or the Portfolio Company's reorganization or bankruptcy. When
the Managing Partner has a reasonable belief that the Portfolio Company will be
able to restructure the loan agreements to adjust for any defaults, the
Portfolio
12
Company's securities continue to be valued assuming that the company is a going
concern. The Partnership may also use, when available, third-party transactions
in a Portfolio Company's securities as the basis of valuation (the "private
market method"). The private market method will be used only with respect to
completed transactions or firm offers made by sophisticated, independent
investors.
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 conditions of the issuer. Certificates of deposit purchased by the
Partnership generally will be valued at their face value, plus interest accrued
to the date of valuation.
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. Profits and Losses for tax purposes are determined and
allocated as of the end of each calendar quarter. Profits and Losses are
allocated first to reflect such cash distributions made or scheduled to be made
(other than as to distributions of capital), and thereafter in a manner designed
to reflect cash distributions projected to be made.
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.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires the use of
certain estimates and assumptions by management in determining the reported
amounts of assets and liabilities, disclosure of contingent liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Because uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial
statements, actual results could differ from these estimates.
(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 $3,269,069 at June 30, 2002 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. 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.
Income from any source other than Enhanced Yield Investments is
generally allocated to the partners in proportion to the partners' capital
contributions. Indirect expenses of the Partnership are allocated between
Enhanced Yield Investments and Temporary Cash Investments on a pro-rata basis
based on the average assets from each type of investment.
Subject to certain provisions in the Partnership agreement, net
investment income and gains and
13
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 from a range of 0.75% to1.48%, at June 30, 2002.
(6) Enhanced Yield Investments
The Partnership made no new investments during the six months ended
June 30, 2002 and 2001, respectively. During the six months ended June 30, 2001,
the Partnership received note payments in the amount of $26,800 and management
fees in the amount of $25,000 from Artegraft, Inc. in the form of a 9% demand
note.
During the six months ended June 30, 2001, the Partnership realized a
net capital loss of $1,131,624. In 1993, the Partnership wrote off its
investment in Tennis Cards, Inc. and foreclosed on its collateral which
consisted of an inventory of tennis trading cards. On February 22, 2001, the
Partnership sold the entire inventory of tennis trading cards for net proceeds
of $49,500. In addition, the Partnership wrote off its entire investment in
Paracelsus Healthcare Corporation ("Paracelsus"), which went through bankruptcy,
realizing a capital loss of $1,181,124.
(7) Unrealized Appreciation on Enhanced Yield Investments
There was no change in unrealized appreciation during the six months
ended June 30, 2002.
Unrealized appreciation of Enhanced Yield Investments increased by
$1,299,309 during the six months ended June 30, 2001. Such increase resulted
from the increase in the estimated fair value of one Enhanced Yield Investments
in the amount of $125,000 and the transfer of net unrealized appreciation to net
realized loss from the write-off of one Enhanced Yield Investments in the amount
of $1,174,309.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 partner's capital. Valuations of enhanced yield
investments are performed in accordance with generally accepted accounting
principles and the financial reporting policies of the Securities and Exchange
Commission ("SEC"). The applicable methods prescribed by such principles and
policies are described below:
Publicly-traded Enhanced Yield Investments - Investments in companies
whose securities are publicly traded are valued at their quoted market price at
the close of business on the valuation date, less a discount to reflect the
estimated effects of restrictions on the sale of such securities ("Valuation
Discount"), if applicable.
Privately-held Enhanced Yield Investments - The fair value of
investments for which no market exists (including most investments made by the
Partnership) is determined by the Managing Partner on the basis of procedures
established in good faith by the Managing Partner and approved by the
Independent General Partners of the Partnership. As a general principle, the
current "fair value" of an investment would be the amount the Partnership might
reasonably expect to receive for it upon its current sale. Appraisal valuations
are necessarily subjective and the Managing Partner's estimate of values may
differ materially from amounts actually received upon the disposition of
enhanced yield investments.
Generally, cost is the primary factor used to determine fair value
until significant developments affecting the Portfolio Company (such as results
of operations or changes in general market conditions) provide a basis for use
of an appraisal valuation. 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. Appraisal valuations are based
upon such factors as a Portfolio Company's earnings, cash flow and net worth,
the market prices for similar securities of comparable companies, an assessment
of the company's current and future financial prospects and various other
factors and assumptions. In the case of unsuccessful operations, the appraisal
may be based upon liquidation value.
Most of the Partnership's common equity investments may be appraised at
a multiple of free cash flow generated by the Portfolio Company in its most
recent fiscal year, less outstanding funded indebtedness and other senior
securities such as preferred stock. Projections of current year free cash flow
may be utilized and adjustments for non-recurring items are considered.
Multiples utilized are estimated based on the Management Company's experience in
the private company marketplace, and are necessarily subjective in nature. Most
of the Portfolio Companies utilize a high degree of leverage. From time to time,
Portfolio Companies are in default of certain covenants in their loan
agreements. In the event a Portfolio Company cannot generate adequate cash flow
to meet the principal and interest payments on such indebtness or is not
successful in refinancing the debt upon its maturity, the Partnership's
investment could be reduced or eliminated through foreclosure on the Portfolio
Company's assets or the Portfolio Company's reorganization or bankruptcy. When
the Managing Partner has a reasonable belief that the Portfolio Company will be
able to restructure the loan agreements to adjust for any defaults, the
Portfolio Company's securities continue to be valued assuming that the company
is a going concern. The Partnership may also use, when available, third-party
transactions in a Portfolio Company's securities as the basis of valuation (the
"private market method"). The private market method will be used only with
respect to completed transactions or firm offers made by sophisticated,
independent investors.
The fair values of debt securities, which are generally held to
maturity, are determined on the basis
15
of the terms of the debt securities and the financial conditions of the issuer.
Certificates of deposit purchased by the Fund generally will be valued at their
face value, plus interest accrued to the date of valuation.
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. Profits and Losses for tax purposes are determined and
allocated as of the end of each calendar quarter. Profits and Losses are
allocated first to reflect such cash distributions made or scheduled to be made
(other than as to distributions of capital), and thereafter in a manner designed
to reflect cash distributions projected to be made.
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.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires the use of
certain estimates and assumptions by management in determining the reported
amounts of assets and liabilities, disclosure of contingent liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Because uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial
statements, actual results could differ from these estimates.
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.
At June 30, 2002, the Partnership had $970,378 (at cost) invested in
Enhanced Yield Investments of two companies, which have an estimated fair value
of $1,100,000 at such date.
At June 30, 2002, the Partnership had $408,350 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. 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 $(63,681)
and $1,363,794 for the six
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months ended June 30, 2002 and 2001, respectively. No income was earned from
Enhanced Yield Investments during the six months ended June 30, 2002. The
Partnership earned $1,393,097 in income from Enhanced Yield Investments during
the six months ended June 30, 2001. The decrease in income from Enhanced Yield
Investments in 2002 is primarily due to no additional management fees or
interest being received or accrued for Artegraft, Inc. and dividends paid in
arrears in 2001 by MaxTech Holdings, Inc.
The Management Company receives a management fee equal to 2.5% of the
Available Capital. Available Capital is the amount of net offering proceeds from
the sale of Units reduced by capital distributed to its holders of the Units and
realized losses from the Partnership's investments. Such fee amounted to $1,586
for the six months ended June 30, 2001. Due to the depletion of Available
Capital in the third quarter of 2001, no management fee was received for the six
months ended June 30, 2002. Based on the level of Available Capital at June 30,
2002, the Management Company will receive no additional management fees from the
Partnership. 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 $3,269,069 at June 30, 2002. 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.
Realized Gain or Loss on Enhanced Yield Investments
During the six months ended June 30, 2002, there were no realized gains
or losses on Enhanced Yield Investments.
During the six months ended June 30, 2001, the Partnership realized a
net capital loss of $1,131,624. In 1993, the Partnership wrote off its
investment in Tennis Cards, Inc. and foreclosed on its collateral which
consisted of an inventory of tennis trading cards. On February 22, 2001, the
Partnership sold the entire inventory of tennis trading cards for net proceeds
of $49,500. In addition, the Partnership wrote off its entire investment in
Paracelsus Healthcare Corporation, which went through bankruptcy, realizing a
capital loss of $1,181,124.
Unrealized Gains and Losses on Enhanced Yield Investments
There was no change to unrealized appreciation during the six months
ended June 30, 2002.
Unrealized appreciation of Enhanced Yield Investments increased by
$1,299,309 during the six months ended June 30, 2001. Such increase resulted
from the increase in the estimated fair value of Enhanced Yield Investments in
one company and the transfer of net unrealized depreciation to net realized
losses from the write-off of one Enhanced Yield Investment.
Distributions
During the six months ended June 30, 2002 and 2001, the Partnership
made no cash distributions. Cumulative cash distributions to limited partners
from inception to June 30, 2002, were $12,567,797 or $1,025.53 per weighted
average number of Units outstanding.
Enhanced Yield Investments
The Partnership made no new investments during the six months ended
June 30, 2002 and 2001,
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respectively.
During the six months ended June 30, 2001, the Partnership received
note payments in the amount of $26,800 and management fees in the amount of
$25,000 from Artegraft, Inc. in the form of a 9% demand note.
Both of the companies in which the Partnership has investments at June
30, 2002 are privately held. They 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 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. In addition, there were no
significant changes to the factors that affect market risk from 2001 to the
second quarter of 2002.
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.
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.
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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 13, 2002 EQUUS CAPITAL PARTNERS, L.P.
By: Equus Capital Corporation
Managing General Partner
/s/ Nolan Lehmann
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Nolan Lehmann
President and Principal Financial
and Accounting Officer
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