10-Q 1 a2048931z10-q.txt 10-Q 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, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-17526 EQUUS CAPITAL PARTNERS, L.P. ---------------------------- (Exact name of registrant as specified in its charter) DELAWARE 76-0264305 --------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2929 Allen Parkway, Suite 2500 HOUSTON, TEXAS 77019-2120 --------------------------------- ------------------------------------ (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (713) 529-0900 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE --------- ---------- Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERS' INTERESTS ------------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of March 31, 2001, 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, 2001 was $493.43. 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 - March 31, 2001 and December 31, 2000....................... 1 Statements of Operations - For the three months ended March 31, 2001 and 2000......... 2 Statements of Changes in Partners' Capital - For the three months ended March 31, 2001.................. 3 - For the three months ended March 31, 2000.................. 4 Statements of Cash Flows - For the three months ended March 31, 2001 and 2000......... 5 Selected Per Unit Data and Ratios - For the three months ended March 31, 2001 and 2000......... 7 Schedule of Enhanced Yield Investments - March 31, 2001............................................. 8 Notes to Financial Statements................................ 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 13 Item 3. Quantitative and Qualitative Disclosure about Market Risk.... 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................. 15 SIGNATURE ................................................................ 15 ii PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EQUUS CAPITAL PARTNERS, L.P. STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL MARCH 31, 2001 AND DECEMBER 31, 2000 (Unaudited)

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, 2001 AND 2000 (Unaudited)

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, 2001 (Unaudited)

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, 2000 (Unaudited)

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, 2001 AND 2000 (Unaudited)

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, 2001 AND 2000 (Unaudited) (Continued)

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, 2001 AND 2000 (Unaudited)

The accompanying notes are an integral part of these financial statements. 7 EQUUS CAPITAL PARTNERS, L.P. SCHEDULE OF ENHANCED YIELD INVESTMENTS MARCH 31, 2001 (Unaudited)

The accompanying notes are an integral part of these financial statements. 8 EQUUS CAPITAL PARTNERS, L.P. SCHEDULE OF ENHANCED YIELD INVESTMENTS MARCH 31, 2001 (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 investment in 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 MaxTech Holdings, Inc. For the three months ended March 31, 2001 and 2000, 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. The accompanying notes are an integral part of these financial statements. 9 EQUUS CAPITAL PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 (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. In 1999, the agreement was extended through December 31, 2000. At a meeting in November 2000, the Independent General Partners extended the termination date for an additional year to December 31, 2001. (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 $3,728,298 in cumulative accrued priority returns owed to limited partners at March 31, 2001 (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 10 retain fees in consideration for such service. The Management Company also has management agreements with the Managing Partner and Equus II Incorporated ("EQS"), a Delaware corporation, and with Equus Equity Appreciation Fund L.P. ("EEAF"), a Delaware limited partnership. 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. Profit and Losses for tax purposes are determined and allocated as of the end of each calendar quarter. Profit 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. (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 $3,728,298 at March 31, 2001 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 11 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. 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 from a range of 3.01% to 5.09%, at March 31, 2001. (6) ENHANCED YIELD INVESTMENTS The Partnership made no new investments during the three months ended March 31, 2001. During the three months ended March 31, 2001, the Partnership received note payments in the amount of $26,800 and management fees in the amount of $12,500 from Artegraft, Inc. in the form of a 9% demand note. During the three months ended March 31, 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"), realizing a capital loss of $1,181,124. Paracelsus, which is in bankruptcy, has announced that its equity holders will receive nothing when the company is reorganized. The Partnership made no new investments during the three months ended March 31, 2000. During the three months ended March 31, 2000, the Partnership received note payments in the amount of $37,200 and management fees in the amount of $16,667 from Artegraft, Inc. in the form of a 9% demand note. 12 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. At March 31, 2001, the Partnership had $2,445,378 (at cost) invested in Enhanced Yield Investments of two companies. At March 31, 2001, the Partnership had $196,401 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 $(16,872) and $2,125 for the three months ended March 31, 2001 and 2000, respectively. The Partnership earned $17,494 and $32,800 in income from Enhanced Yield Investments during the three months ended March 31, 2001 and 2000, respectively. The decrease in income from Enhanced Yield Investments in 2001 is primarily due to a decrease in interest income related to Artegraft, Inc. paying off its 12% promissory note during the first quarter of 2001. The Management Company receives a management fee equal to 2.5% of the Available Capital, as defined. Such fee amounted to $18,616 and $19,195 for the three months ended March 31, 2001 and 2000, 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 $3,728,298 at March 31, 2001. 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 three months ended March 31, 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 13 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, realizing a capital loss of $1,181,124. There were no realized gains or losses on Enhanced Yield Investments for the three months ended March 31, 2000. UNREALIZED GAINS AND LOSSES ON ENHANCED YIELD INVESTMENTS Unrealized appreciation of Enhanced Yield Investments increased by $1,974,309 during the three months ended March 31, 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. Unrealized appreciation of Enhanced Yield Investments decreased by $210,646 during the three months ended March 31, 2000. Such decrease resulted from the decrease in the estimated fair value of Enhanced Yield Investments of two companies. DISTRIBUTIONS During the three months ended March 31, 2001, the Partnership made no cash distributions. The Partnership made a cash distribution of $615,500 or $50 per Unit during the three months ended March 31, 2000. Cumulative cash distributions to limited partners from inception to March 31, 2001, were $7,951,547, or $650.53 per weighted average number of Units outstanding. ENHANCED YIELD INVESTMENTS During the three months ended March 31, 2001, the Partnership received note payments in the amount of $26,800 and management fees in the amount of $12,500 from Artegraft, Inc. in the form of a 9% demand note. During the three months ended March 31, 2000, the Partnership received note payments in the amount of $37,200 and management fees in the amount of $16,667 from Artegraft, Inc. in the form of a 9% demand note. All of the companies in which the Partnership has investments at March 31, 2001 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 14 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. 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. 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: May 11, 2001 EQUUS CAPITAL PARTNERS, L.P. By: Equus Capital Corporation Managing General Partner /s/ Nolan Lehmann ---------------------------------- Nolan Lehmann President and Principal Financial and Accounting Officer 15

EQUUS CAPITAL PARTNERS LP 10-Q