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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 March 31, 2003
[ ] 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:
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 March 31, 2003, 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 March 31, 2003 was $56.26. 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
- March 31, 2003 and December 31, 2002.........................1
Statements of Operations
- For the three months ended March 31, 2003 and 2002...........2
Statements of Changes in Partners' Capital
- For the three months ended March 31, 2003....................3
- For the three months ended March 31, 2002....................4
Statements of Cash Flows
- For the three months ended March 31, 2003 and 2002...........5
Selected Per Unit Data and Ratios
- For the three months ended March 31, 2003 and 2002...........7
Schedule of Enhanced Yield Investments
- March 31, 2002...............................................8
Notes to Financial Statements.....................................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................13
Item 3. Quantitative and Qualitative Disclosure about Market Risk........15
PART II. OTHER INFORMATION
Item 4. Controls and Procedures...........................................16
Item 6. Exhibits and Reports on Form 8-K..................................16
SIGNATURE.....................................................................17
Part I. Financial Information
Item 1. Financial Statements
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
MARCH 31, 2003 AND DECEMBER 31, 2002
(Unaudited)
2003 2002
-------- ----------
Assets
Enhanced yield investments, at fair value
(cost of $954,597 and $970,378, respectively) $ -- $ 550,000
Temporary cash investments, at cost which
approximates fair value 854,671 1,197,687
Cash 1,092 1,304
-------- ----------
Total assets $855,763 $1,748,991
======== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 14,000 $ 38,611
Distributions payable to limited partners 119,030 980,730
-------- ----------
Total liabilities 133,030 1,019,341
-------- ----------
Commitments and contingencies
Partners' capital:
Managing partner 29,777 29,846
Independent general partners 363 365
Limited partners (12,310 Units issued and outstanding) 692,593 699,439
-------- ----------
Total partners' capital 722,733 729,650
-------- ----------
Total liabilities and partners' capital $855,763 $1,748,991
======== ==========
The accompanying notes are an
integral part of these financial statements.
1
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
--------- --------
Investment income:
Income from enhanced yield investments $ -- $(53,648)
Interest from temporary cash investments 1,713 1,926
--------- --------
Total investment income 1,713 (51,722)
--------- --------
Expenses:
Independent general partner fees 1,500 1,500
Mailing and printing expenses 1,650 673
Administrative fees 5,029 4,984
Professional fees 451 738
--------- --------
Total expenses 8,630 7,895
--------- --------
Net investment loss (6,917) (59,617)
--------- --------
Realized gain on sale of enhanced yield investments 534,219 --
--------- --------
Unrealized appreciation (depreciation) of enhanced
yield investments:
End of period (954,597) 129,622
Beginning of period (420,378) 129,622
--------- --------
Increase in unrealized depreciation (534,219) --
--------- --------
Net decrease in partners' capital from operations $ (6,917) $(59,617)
========= ========
The accompanying notes are an
integral part of these financial statements.
2
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
INDEPENDENT
MANAGING GENERAL LIMITED
TOTAL PARTNER PARTNERS PARTNERS
--------- -------- ----------- ---------
Partners' capital,
December 31, 2002 $ 729,650 $29,846 $ 365 $ 699,439
--------- ------- ----- ---------
Investment activities:
Investment income 1,713 17 -- 1,696
Expenses 8,630 86 2 8,542
--------- ------- ----- ---------
Net investment loss (6,917) (69) (2) (6,846)
Realized gain on sale of enhanced
yield investments 534,219 5,342 152 528,725
Increase in unrealized depreciation
of enhanced yield investments (534,219) (5,342) (152) (528,725)
--------- ------- ----- ---------
Net decrease in partners' capital (6,917) (69) (2) (6,846)
--------- ------- ----- ---------
Partners' capital,
March 31, 2003 $ 722,733 $29,777 $ 363 $ 692,593
========= ======= ===== =========
The accompanying notes are an integral part of these financial statements.
3
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 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 (51,722) (517) (15) (51,190)
Expenses 7,895 79 3 7,813
---------- ------- ---- ----------
Net investment loss (59,617) (596) (18) (59,003)
---------- ------- ---- ----------
Net decrease in partners' capital (59,617) (596) (18) (59,003)
---------- ------- ---- ----------
Partners' capital,
March 31, 2002 $1,512,414 $37,674 $583 $1,474,157
========== ======= ==== ==========
The accompanying notes are an integral part of these financial statements.
4
EQUUS CAPITAL PARTNERS, L.P.,
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
---------- --------
Cash flows from operating activities:
Investment income received $ 1,713 $ 1,926
Cash paid to management company, general partners
and suppliers (33,241) (43,695)
---------- --------
Net cash used by operating activities (31,528) (41,769)
---------- --------
Cash flows from investing activities:
Proceeds of sale of enhanced yield investments 550,000 --
---------- --------
Net cash provided by investing activities 550,000 --
---------- --------
Cash flows from financing activities:
Distributions to partners (861,700) --
---------- --------
Net cash used by financing activities (861,700) --
---------- --------
Net decrease in cash and cash equivalents (343,228) (41,769)
Cash and cash equivalents at beginning of period 1,198,991 461,183
---------- --------
Cash and cash equivalents at end of period $ 855,763 $419,414
========== ========
The accompanying notes are an integral part of these financial statements.
5
EQUUS CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
(Continued)
2003 2002
--------- --------
Reconciliation of net decrease in partners' capital from
operations to net cash used by operating activities:
Net decrease in partners' capital from operations $ (6,917) $(59,617)
Adjustments to reconcile net decrease in partners' capital
from operations to net cash used by operating activities:
Realized gain on sales of enhanced yield investments, net (534,219) --
Increase in unrealized depreciation of enhanced yield
investments 534,219 --
Decrease in accrued interest receivable -- 53,648
Decrease in accounts payable (24,611) (35,800)
--------- --------
Net cash used by operating activities $ (31,528) $(41,769)
========= ========
The accompanying notes are an integral part of these financial statements.
6
EQUUS CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
------- -------
Investment income $ 0.13 $ (4.16)
Expenses 0.69 0.64
------- -------
Net investment loss (0.56) (4.80)
Realized gain on sale of enhanced yield investments 42.95 --
Increase in unrealized depreciation of
enhanced yield investments (42.95) --
------- -------
Net decrease in partners' capital from operations (0.56) (4.80)
------- -------
Net decrease in partners' capital (0.56) (4.80)
Partners' capital, beginning of period 56.82 124.55
------- -------
Partners' capital, end of period $ 56.26 $119.75
======= =======
Ratio of expenses to average partners' capital 1.23% 0.52
Ratio of net investment loss to average partner's capital (0.98)% (3.92)%
Ratio of net decrease in partners' capital from
operations to average partners' capital (0.98)% (3.92)%
The accompanying notes are an integral part of these financial statements.
7
EQUUS CAPITAL PARTNERS, L.P.
SCHEDULE OF ENHANCED YIELD INVESTMENTS
MARCH 31, 2003
(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 --
-------- ---
Total $954,547 $--
======== ===
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, the Partnership's
remaining investments are in eligible Enhanced Yield Investments. The
Partnership provides significant managerial assistance to the one Portfolio
Company in which it has a remaining investment.
The accompanying notes are an integral part of these financial statements.
8
EQUUS CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(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, 2003. The
Partnership has only one remaining investment, and in 2003 plans to dispose of
such investment, distribute the proceeds therefrom and any temporary cash
investments, and thereafter dissolve the Partnership. 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. 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 agreement provides that
the Management Company would 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. No incentive fees will be
paid. The Management Company also receives compensation for providing certain
administrative services to the Partnership on terms determined by the
Independent
9
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 the Managing Partner and Equus II Incorporated
("EQS"), a Delaware corporation, and with Equus Equity Appreciation Fund L.P.
("EEAF"), a Delaware limited partnership. The management fees paid by EQS
represent the Management Company's primary source of revenue and support.
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 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 value of the
Partnership's investment could be reduced or eliminated through foreclosure on
the Portfolio Company's assets or the
10
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 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.
Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, amounting to
zero and $550,000 at March 31, 2003 and December 31, 2002, respectively, the
Partnership's estimate of fair value may differ materially from the value that
would have been used had a ready market existed for the securities. Appraised
values do not reflect brokers' fees or other normal selling costs which might
become payable on disposition of such investments.
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 $3,358,010 at March 31, 2003 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
11
realized. Based on current valuations of Enhanced Yield Investments, the
Management Company will 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 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 ranging from 0.55% to 0.88% and 0.82% to 1.64%, at March 31, 2003 and
2002, respectively.
(6) Enhanced Yield Investments
The Partnership made no new investments during the three months ended March
31, 2003 and 2002, respectively.
(7) Unrealized Appreciation on Enhanced Yield Investments
Unrealized depreciation of Enhanced Yield Investments increased by $534,219
during the three months ended March 31, 2003. Such increase resulted in the
transfer of unrealized appreciation to realized gain from the receipt of
proceeds from a sale of the common stock investment in MaxTech Holdings, Inc.
There was no change in unrealized appreciation during the three months
ended March 31, 2002.
12
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 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 value of 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.
13
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
Fund generally will be valued at their face value, plus interest accrued to the
date of valuation.
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 March 31, 2003, the Partnership had $954,597 (at cost) invested in
Enhanced Yield Investments of one company, which has an estimated fair value of
zero at such date.
At March 31, 2003, the Partnership had $855,763 in cash and temporary cash
investments. However, $119,030 of such amount reflects prior distributions
declared but unclaimed by Partners entitled thereto. 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. Since the Partnership term will
expire during the year ended December 31, 2003, no Follow-on Investments are
expected to be made. The Partnership has only one remaining investment, and in
2003 plans to dispose of such investment, distribute the proceeds therefrom and
any temporary cash investments, and thereafter dissolve the Partnership.
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.
Results of Operations
Investment Income and Expenses
Net investment loss after all expenses amounted to $6,917 and $59,617 for
the three months ended March 31, 2003 and 2002, respectively. No income was
earned from Enhanced Yield Investments during the three months ended March 31,
2003 and 2002. However, during the three months ended March 31, 2002, accrued
interest of $53,648 from Artegraft Inc. was written off due to the
uncollectibility of the interest.
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. Due to the depletion of
Available Capital in the third quarter of 2001, no management fee was paid to
the Management Company for the three months ended March 31, 2003 and 2002. Based
on the level of Available Capital at March 31, 2003, the Management Company will
receive no additional management fees from the Partnership. The Management
Company was 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 Partnership will not pay any incentive fee
to the Management Company upon the sale of the Partnership's investments.
14
Realized Gain or Loss on Enhanced Yield Investments
During the three months ended March 31, 2003, the Partnership realized a
capital gain of $534,219. On January 10, 2003, the Partnership received proceeds
of $550,000 from a sale of the common stock investment in MaxTech Holdings, Inc.
During the three months ended March 31, 2002, there were no realized gains
or losses on Enhanced Yield Investments.
Unrealized Gains and Losses on Enhanced Yield Investments
Unrealized depreciation of Enhanced Yield Investments increased by $534,219
during the three months ended March 31, 2003. Such increase resulted in the
transfer of unrealized appreciation to realized gain from the receipt of
proceeds from a sale of the common stock investment in MaxTech Holdings, Inc.
There was no change to unrealized appreciation during the three months
ended March 31, 2002.
Distributions
During the three months ended March 31, 2003 and 2002, the Partnership made
no cash distributions. The cash distribution for the year ended December 31,
2002 of $861,700 was sent to the limited partners in January 2003 and is
therefore reflected in the cash flow statement for the three months ended March
31, 2003. Cumulative cash distributions to limited partners from inception to
March 31, 2003, were $13,492,497 or $1,095.53 per weighted average number of
Units outstanding.
Enhanced Yield Investments
The company in which the Partnership has an investment at March 31, 2003 is
privately held. It has a small number of shareholders and does not generally
make financial information available to the public. However, the company's
operations and financial information is 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 2002 to the
first quarter of 2003.
The Partnership's investment portfolio consists of debt investments in one
private company. 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
15
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 4. Controls and Procedures
The Partnership maintains disclosure controls and other procedures that are
designed to ensure that information required to be disclosed by the Partnership
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Managing Partner's management, including its Chairman and Chief Executive
Officer and President and Principal Financial and Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosure.
The Managing Partner's Chairman and Chief Executive Officer and President
and Principal Financial and Accounting Officer have reviewed and evaluated the
effectiveness of the Fund's disclosure controls and procedures within 90 days
prior to the date of this report. Based on their review and evaluation, the
Managing Partner's Chairman and Chief Executive Officer and President and
Principal Financial and Accounting Officer concluded that the Partnership's
disclosure controls and procedures were effective in ensuring that information
relating to the Partnership was made known to them by others within the
Partnership in a timely manner, particularly during the period in which this
Quarterly Report on Form 10-Q was being prepared, and that no changes are
required at this time.
There have been no significant changes in the Partnership's internal
controls or in other factors that could significantly affect the Partnership's
internal controls subsequent to the date the Partnership completed its
evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification by the Chief Executive Officer
99.2 Certification by the President and Principal Financial and
Accounting Officer
(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.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2003 EQUUS CAPITAL PARTNERS, L.P.
By: Equus Capital Corporation
Managing General Partner
/s/ Nolan Lehmann
---------------------------------
Nolan Lehmann
President and Principal Financial
and Accounting Officer
17
EXHIBIT A
Form of Quarterly Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Sam P. Douglass, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Equus Capital
Partners, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions and about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls, which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Sam P. Douglass
---------------------------------
Sam P. Douglass
Chairman
Chief Executive Officer
of Equus Capital Corporation
Managing General Partner
EXHIBIT A
Form of Quarterly Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Nolan Lehmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Equus Capital
Partners, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions and about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls, which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Nolan Lehmann
----------------------------------------
Nolan Lehmann
President
Principal Financial & Accounting Officer
of Equus Capital Corporation
Managing General Partner