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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19509
EQUUS II INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 76-0345915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
COMMON STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Approximate aggregate market value of common stock held by non-affiliates of the
registrant: $53,869,148 computed on the basis of $13.125 per share, closing
price of the common stock on the American Stock Exchange, Inc. on August 7,
1996. There were 4,184,766 shares of the registrant's common stock, $.001 par
value, outstanding as of August 7, 1996. The net asset value of a share at June
30, 1996 was $21.57.
Documents incorporated by reference: None
EQUUS II INCORPORATED
(A Delaware Corporation)
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets
- June 30, 1996 and December 31, 1995.............................1
Statements of Operations
- For the three months ended June 30, 1996 and 1995...............2
- For the six months ended June 30, 1996 and 1995 ................3
Statements of Changes in Net Assets
- For the six months ended June 30, 1996 and 1995.................4
Statements of Cash Flows
- For the six months ended June 30, 1996 and 1995.................5
Selected Per Share Data and Ratios
- For the six months ended June 30, 1996 and 1995.................7
Schedule of Portfolio Securities
- June 30, 1996...................................................8
Notes to Financial Statements....................................13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..............22
Item 6. Exhibits and Reports on Form 8-K.................................23
SIGNATURE.....................................................................23
-ii-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUUS II INCORPORATED
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
1996 1995
------------ ------------
ASSETS
Investments in portfolio securities at
fair value (cost $75,970,517 and
$63,635,092, respectively) ................... $ 97,746,977 $ 71,610,360
Temporary cash investments, at cost which
approximates fair value ...................... 55,327,447 60,232,594
Cash ............................................. 1,963 7,267
Accounts receivable .............................. 1,3261,326
Accrued interest receivable ...................... 777,616 525,939
Commitment fees .................................. 52,500 37,500
Deferred reorganization costs .................... 23,460 35,190
------------ ------------
Total assets ............................. 153,931,289 132,450,176
------------ ------------
LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable ............................. 132,160 242,286
Due to management company .................... 1,459,333 309,266
Deferred management incentive fee ............ 7,074,252 4,295,335
Notes payable to bank ........................ 55,000,000 65,750,000
------------ ------------
Total liabilities ........................ 63,665,745 70,596,887
------------ ------------
Commitments and contingencies
Net assets:
Preferred stock, $.001 par value, 5,000,000
shares authorized, no shares issued or
outstanding ................................ -- --
Common stock, $.001 par value, 10,000,000
shares authorized, 4,184,766 and 3,138,575
shares issued and outstanding, respectively 4,185 3,139
Additional paid-in capital ................... 60,272,486 51,291,676
Undistributed net investment income .......... -- --
Undistributed net capital gains .............. 8,212,413 2,583,206
Unrealized appreciation of portfolio
securities, net ............................ 21,776,460 7,975,268
------------ ------------
Total net assets ......................... $ 90,265,544 $ 61,853,289
============ ============
Net assets per share ..................... $ 21.57 $ 19.71
============ ============
The accompanying notes are an integral part of these financial statements.
-1-
EQUUS II INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
------------ ------------
Investment income:
Income from portfolio securities ............ $ 821,946 $ 796,546
Interest from temporary cash investments .... 10,858 59,615
------------ ------------
Total investment income .................. 832,804 856,161
------------ ------------
Expenses:
Management fee .............................. 451,328 315,655
Management incentive fee .................... 1,008,006 --
Deferred management incentive fee ........... 7,427 1,112,592
Director fees and expenses .................. 52,168 61,000
Professional fees ........................... 62,016 56,391
Administrative fees ......................... 12,500 12,500
Mailing, printing and other expenses ........ 20,936 100,213
Interest expense ............................ 198,614 51,912
Franchise taxes ............................. 39,066 22,988
Amortization ................................ 5,865 5,865
------------ ------------
Total expenses ........................... 1,857,926 1,739,116
------------ ------------
Net investment loss ............................ (1,025,122) (882,955)
------------ ------------
Realized gain on sales of portfolio
securities, net ............................. 4,343,372 1,588,853
------------ ------------
Unrealized appreciation of portfolio
securities, net:
End of period ............................... 21,776,460 11,125,581
Beginning of period ......................... 21,042,668 7,151,473
------------ ------------
Increase in unrealized
appreciation, net ...................... 733,792 3,974,108
------------ ------------
Total increase in net assets from
operations .................................. $ 4,052,042 $ 4,680,006
============ ============
The accompanying notes are an integral part of these financial statements.
-2-
EQUUS II INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
------------ ------------
Investment income:
Income from portfolio securities ............ $ 1,301,835 $ 1,292,790
Interest from temporary cash investments .... 40,329 91,243
------------ ------------
Total investment income .................. 1,342,164 1,384,033
------------ ------------
Expenses:
Management fee .............................. 816,830 618,435
Management incentive fee .................... 1,107,163 --
Deferred management incentive fee ........... 2,778,916 986,959
Director fees and expenses .................. 102,817 107,483
Professional fees ........................... 89,080 98,098
Administrative fees ......................... 25,000 25,000
Mailing, printing and other expenses ........ 57,149 165,087
Interest expense ............................ 439,170 117,664
Franchise taxes ............................. 45,406 31,102
Amortization ................................ 11,730 11,730
------------ ------------
Total expenses ........................... 5,473,261 2,161,558
------------ ------------
Net investment loss ............................ (4,131,097) (777,525)
------------ ------------
Realized gain on sales of portfolio
securities, net ............................. 5,629,207 3,065,033
------------ ------------
Unrealized appreciation of portfolio
securities, net:
End of period ............................... 21,776,460 11,125,581
Beginning of period ......................... 7,975,268 9,255,817
------------ ------------
Increase in unrealized
appreciation, net ...................... 13,801,192 1,869,764
------------ ------------
Total increase in net assets
from operations ........................... $ 15,299,302 $ 4,157,272
============ ============
The accompanying notes are an integral part of these financial statements.
-3-
EQUUS II INCORPORATED
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
------------ ------------
Operations:
Net investment loss ..................... $ (4,131,097) $ (777,525)
Realized gain on sales of
portfolio securities, net ............. 5,629,207 3,065,033
Increase in unrealized appreciation
of portfolio securities, net .......... 13,801,192 1,869,764
------------ ------------
Increase in net assets
from operations ..................... 15,299,302 4,157,272
------------ ------------
Capital transactions:
Proceeds from rights offering ........... 13,338,935 --
Rights offering expenses ................ (225,982) --
Redemption of fractional shares ......... -- (115)
Stock repurchased and retired
under common stock repurchase plan .... -- (1,603,672)
------------ ------------
Increase (decrease) in net assets
from capital share transactions ..... 13,112,953 (1,603,787)
------------ ------------
Net increase in net assets ................. 28,412,255 2,553,485
Net assets at beginning of period .......... 61,853,289 60,880,364
------------ ------------
Net assets at end of period ................ $ 90,265,544 $ 63,433,849
============ ============
The accompanying notes are an integral part of these financial statements.
-4-
EQUUS II INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
------------- -------------
Cash flows from operating activities:
Interest and dividends received ......................................................... $ 654,808 $ 1,139,544
Cash paid to management company, directors, bank and suppliers .......................... (1,657,673) (803,984)
------------- -------------
Net cash provided (used) by operating activities ...................................... (1,002,865) 335,560
------------- -------------
Cash flows from investing activities:
Purchase of portfolio securities ........................................................ (13,176,019) (749,172)
Proceeds from sales of portfolio securities ............................................. 6,905,480 3,730,965
Principal payments from portfolio companies ............................................. -- 4,234,156
Maturity of temporary cash investment with original maturities of greater
than three months ..................................................................... -- 100,000
------------- -------------
Net cash provided (used) by investing activities ...................................... (6,270,539) 7,315,949
------------- -------------
Cash flows from financing activities:
Advances from bank ...................................................................... 125,450,000 146,200,000
Repayments to bank ...................................................................... (136,200,000) (141,800,000)
Proceeds from rights offering ........................................................... 13,338,935 --
Rights offering expenses ................................................................ (225,982) --
Repurchase of common stock .............................................................. -- (1,603,672)
Redemption of fractional shares ......................................................... -- (115)
------------- -------------
Net cash provided by financing activities ............................................. 2,362,953 2,796,213
------------- -------------
Net increase (decrease) in cash and cash equivalents .................................. (4,910,451) 10,447,722
Cash and cash equivalents at beginning of period, excluding $300,000 of temporary
cash investments with original maturities of greater than three months at
December 31, 1994 ....................................................................... 60,239,861 45,175,967
------------- -------------
Cash and cash equivalents at end of period, excluding $200,000 of temporary cash
investments with original maturities of greater than three months at
June 30, 1995 ........................................................................... $ 55,329,410 $ 55,623,689
============= =============
The accompanying notes are an integral part of these financial statements.
-5-
EQUUS II INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
(Continued)
1996 1995
------------- -------------
Reconciliation of increase in net assets from operations to net cash provided
(used) by operating activities:
Increase in net assets from operations .................................................... $ 15,299,302 $ 4,157,272
Adjustments to reconcile increase in net assets from operations to net cash
(provided) used by operating activities:
Realized gain on sale of portfolio securities, net ................................. (5,629,207) (3,065,033)
Increase in unrealized appreciation, net ........................................... (13,801,192) (1,869,764)
Increase in accounts receivable .................................................... -- (47,386)
Accrued interest and dividends exchanged for portfolio securities .................. (435,679) --
Increase in accrued interest receivable ............................................ (251,677) (197,103)
Amortization of commitment fee ..................................................... 55,000 28,125
Commitment fees paid ............................................................... (70,000) --
Amortization of reorganization costs ............................................... 11,730 11,730
Increase (decrease) in accounts payable ............................................ (110,126) 18,258
Increase in due to management company .............................................. 3,928,984 1,299,461
------------ -----------
Net cash provided (used) by operating activities .......................................... $ (1,002,865) $ 335,560
============ ===========
The accompanying notes are an integral part of these financial statements.
-6-
EQUUS II INCORPORATED
SUPPLEMENTAL INFORMATION - SELECTED PER SHARE DATA AND RATIOS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
------------- -------------
Investment income .......................... $ 0.39 $ 0.46
Expenses ................................... 1.59 0.72
------------- -------------
Net investment loss ........................ (1.20) (0.26)
Realized gain on sale of
portfolio securities, net .............. 1.63 1.02
Increase in unrealized appreciation
of portfolio securities, net ........... 4.00 0.62
------------- -------------
Increase in net assets from
operations ............................. 4.43 1.38
------------- -------------
Capital transactions:
Effect of rights offering ................ (2.57) --
Effect of common stock repurchases ....... -- 0.30
------------- -------------
Net increase in net assets from capital
transactions ........................... (2.57) 0.30
------------- -------------
Net increase in net assets ................. 1.86 1.68
Net assets at beginning of period .......... 19.71 19.94
------------- -------------
Net assets at end of period ................ $ 21.57 $ 21.62
============= =============
Ratio of expenses to average net
assets ................................. 7.20% 3.48%
Ratio of net investment loss
to average net assets ................. (5.43)% (1.25)%
Ratio of increase in net
assets from operations to average
net assets ............................. 20.11% 6.69%
Average shares outstanding during period ... 3,448,983 3,021,198
The accompanying notes are an integral part of these financial statements.
-7-
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1996
(Unaudited)
Date Of
Portfolio Company Initial Investment Cost Fair Value
- ----------------- ------------------ -------- -----------
A.C. Liquidating Corporation ............................................................ February 1985
-4,885 shares of 10% Series C cumulative preferred stock .............................. $ 488,500 $ --
-10% secured promissory notes ......................................................... 188,014 --
Allied Waste Industries, Inc. (NASDAQ - AWIN) ........................................... March 1989
-1,351,449 shares of common stock ..................................................... 5,109,808 10,719,739
-Warrants to buy up to 125,000 and 15,000 shares of common stock at $5.00
and $13.50 per share, respectively through August 1999 and February 1997,
respectively ......................................................................... -- 96,094
American Residential Services, Inc. ..................................................... December 1995
-Prime+1/4% convertible promissory note ............................................... 1,200,000 1,200,000
-Warrants to buy up to 100,000 shares of common stock at a price to be determined ..... -- --
BSI Holdings, Inc. ...................................................................... February 1989
-230,965 shares of common stock ....................................................... 1,330,647 4,108,349
-12% senior subordinated debenture .................................................... 3,350,000 3,350,000
-10% subordinated promissory note ..................................................... 178,500 178,500
-1,000 shares of common stock of GCS RE, Inc. ......................................... 132,910 132,910
-Warrants to buy up to 22,018 shares of common stock at $0.01 per share ............... -- 391,651
Cardiovascular Ventures, Inc. ........................................................... November 1991
-150,000 shares of Series A convertible preferred stock ............................... 375,000 375,000
-214,286 shares of Series B convertible preferred stock ............................... 750,001 750,001
-56,717 shares of Series C convertible preferred stock ................................ 248,137 248,137
The accompanying notes are an integral part of these financial statements.
-8-
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1996
(Unaudited)
(Continued)
Date Of
Portfolio Company Initial Investment Cost Fair Value
- ----------------- ------------------ -------- -----------
Carruth-Doggett Industries, Inc. ..................................................... December 1995
-10% senior subordinated promissory note ........................................... $2,250,000 $ 2,250,000
-Warrant to buy up to 33,333 shares of common stock at $0.01 per share through
December 14, 2005 ................................................................. -- --
-Warrant to buy up to 333 shares of common stock of CDE Corp at $0.01 per
share through December 14, 2005 ................................................... -- --
Champion Healthcare Corporation
(AMEX - CHC) ........................................................................ December 1990
-1,089,190 shares of common stock .................................................. 3,713,936 9,571,957
-3,601 shares of Series C convertible preferred stock .............................. 64,818 64,818
-83,333 shares of Series D convertible preferred stock ............................. 1,499,994 1,499,994
-11% senior subordinated note ...................................................... 1,157,458 1,157,458
David's Supermarkets, Inc. ........................................................... February 1990
-735,000 shares of common stock .................................................... 735,000 450,000
-333,445 shares of 3.5% junior preferred stock ..................................... 3,334,450 3,334,450
-Warrants to buy up to 538,462 shares of common stock at $1 per share through
April 21, 2000 .................................................................... -- --
Drypers Corporation (NASDAQ - DYPR) .................................................. July 1991
-1,096,892 shares of common stock .................................................. 6,400,132 2,652,828
-25,000 shares of 7.5% convertible preferred stock ................................. 2,500,000 5,281,250
-Warrants to buy up to 6,634 shares of common stock at $4 per share through
June 30, 1998 ..................................................................... -- --
Enterprises Holding Company .......................................................... March 1996
-25,381 shares of Series A preferred stock ......................................... 2,538,100 2,538,100
-190 shares of Series B preferred stock ............................................ 19,000 19,000
-12% promissory note ............................................................... 4,800,000 4,800,000
Garden Ridge Corporation (NASDAQ - GRDG) ............................................. July 1992
-474,942 shares of common stock .................................................... 685,030 11,526,219
The accompanying notes are an integral part of these financial statements.
-9-
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1996
(Unaudited)
(Continued)
Date Of
Portfolio Company Initial Investment Cost Fair Value
- ----------------- ------------------ -------- -----------
Hot & Cool Holdings, Inc. ............................................................ March 1996
-12% subordinated promissory note .................................................. $1,300,000 $1,300,000
-Warrants to buy up to 14,942 shares of common stock at $.01 per share through
March 2006 ........................................................................ -- --
Industrial Equipment Rentals, Inc. ................................................... June 1993
-182,230 shares of common stock .................................................... 1,822 1,822
-5,371 shares of junior preferred stock ............................................ 537,100 537,100
-67,500 shares of Series B senior convertible preferred stock -- ................... 250,050 250,050
-12% subordinated debenture ........................................................ 1,077,778 1,077,778
-9% senior subordinated debenture .................................................. 499,950 499,950
Midway Airlines Corporation .......................................................... August 1993
-452,392 shares of Class C common stock ............................................ 1,195,616 --
-274,761 shares of junior preferred stock -- ....................................... 2,747,610 500,000
-12% subordinated note ............................................................. 271,000 271,000
-Warrants to buy up to 203,250 shares of Class C common stock at $.01 per
share through April 2002 .......................................................... -- --
NCI Building Systems, Inc. (NASDAQ - BLDG) ........................................... April 1989
-100,000 shares of common stock .................................................... 159,784 3,375,000
Restaurant Development Group, Inc. ................................................... June 1987
-610,909 shares of Class A common stock ............................................ 2,891,156 700,000
-14% promissory note, face amount $350,000 ......................................... 275,000 350,000
-Prime +2% promissory note ......................................................... 639,122 639,122
-Warrants to buy up to 150,000 and 62,500 shares of common stock at $2.80 and
$3 per share through November 1996 and April 1998, respectively ................... -- --
The accompanying notes are an integral part of these financial statements.
-10-
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1996
(Unaudited)
(Continued)
Date Of
Portfolio Company Initial Investment Cost Fair Value
- ----------------- ------------------ -------- -----------
Strategic Holdings, Inc. ........................................................ September 1995
-2,986,408 shares of common stock ............................................. $ 2,986,408 $ 2,986,408
-3,705,900 shares of Series B preferred stock ................................. 3,705,900 3,705,900
-1,000 shares of SMIP, Inc. common stock ...................................... 150,000 150,000
-15% promissory note of SMIP, Inc. ............................................ 175,000 175,000
Summit/DPC Partners, L.P. ....................................................... October 1995
-36.11% limited partnership interest .......................................... 2,600,000 2,600,000
Travis International, Inc. ...................................................... December 1986
-66,784 shares of common stock ................................................ 534,589 1,502,640
-104,500 shares of Class A common stock ....................................... 25,701 2,351,250
Video Rental of Pennsylvania, Inc. .............................................. January 1988
-125,000 shares of common stock ............................................... 125,000 500,000
-125,000 shares of 9% redeemable preferred stock .............................. 125,000 125,000
-10% secured promissory note .................................................. 2,672,349 2,672,349
-12% secured promissory note .................................................. 515,000 515,000
-10,000 shares of common stock of Equus Video Corporation ..................... 25,000 25,000
WMW Industries, Inc. ............................................................
(formerly Williams & Mettle Co.) ............................................... October 1989
-530,035 shares of common stock ............................................... 1,024,309 463,830
-12% subordinated promissory note ............................................. 763,747 763,747
-Junior participation in prime + 1.75% note ................................... 512,576 512,576
-Warrant to buy 72,672 shares of common stock at $0.01 per share through
December 21, 1999 ............................................................ -- --
Yellow Cab Service Corporation .................................................. December 1985
-1,006,701 shares of common stock ............................................. 51,432 --
-3% subordinated promissory note, face amount aggregating $1,655,014 .......... 1,566,000 --
-3% subordinated promissory note .............................................. 3,517,083 2,500,000
----------- -----------
Total ...................................................................... $75,970,517 $97,746,977
=========== ===========
The accompanying notes are an integral part of these financial statements.
-11-
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1996
(Unaudited)
(Continued)
All of the Fund's portfolio securities are restricted from public sale
without prior registration under the Securities Act of 1933. The Fund negotiates
certain aspects of the method and timing of the disposition of the Fund's
investment in each portfolio company, including registration rights and related
costs.
In connection with the investments in Allied Waste Industries, Inc.,
American Residential Services, Inc., BSI Holdings, Inc., Cardiovascular
Ventures, Inc., Champion Healthcare Corporation, Drypers Corporation,
Enterprises Holding Company, Hot & Cool Holdings, Inc., Industrial Equipment
Rentals, Inc. and Strategic Holdings, Inc. investment rights have been obtained
to demand the registration of such securities under the Securities Act of 1933,
providing certain conditions are met. The Fund 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 Fund is considered to
have a controlling interest in A.C. Liquidating Corporation, BSI Holdings, Inc.,
Industrial Equipment Rentals, Inc., Restaurant Development Group, Inc.,
Strategic Holdings, Inc., Video Rental of Pennsylvania, Inc. and WMW Industries,
Inc. In addition, Cardiovascular Ventures, Inc., David's Supermarkets, Inc.,
Drypers Corporation and Travis International, Inc. are considered to be
affiliated entities of the Fund. The fair value of the investments in Allied
Waste Industries, Inc., Champion Healthcare Corporation, Drypers Corporation and
Garden Ridge Corporation include discounts from closing market prices of
$1,662,653, $2,817,575, $3,755,821 and $466,037, respectively, to reflect the
effects of restrictions on the sale of such securities at June 30, 1996. Such
discounts total $8,702,086 or $2.08 per share as of June 30, 1996. Income was
earned in the amount of $855,465 and $722,178 for the six months ended June 30,
1996 and 1995, respectively, on portfolio securities of companies in which the
Fund has a controlling interest.
As defined in the Investment Company Act of 1940, all of the Fund's
investments are in eligible portfolio companies. The Fund provides significant
managerial assistance to all of the portfolio companies in which it has invested
except Cardiovascular Ventures, Inc., Midway Airlines Corporation, Summit/DPC
Partners, L.P. and Yellow Cab Service Corporation. The Fund provides significant
managerial assistance to portfolio companies that comprise 93% of the total
value of the investments in portfolio companies at June 30, 1996.
The accompanying notes are an integral part of these financial statements.
-12-
EQUUS II INCORPORATED
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(Unaudited)
(1) ORGANIZATION AND BUSINESS PURPOSE
Equus II Incorporated (the "Fund"), a Delaware corporation, was formed by
Equus Investments II, L.P. (the "Partnership") on August 16, 1991. On July 1,
1992, the Partnership was reorganized and all of the assets and liabilities of
the Partnership were transferred to the Fund in exchange for shares of common
stock of the Fund. The shares of the Fund trade on the American Stock Exchange
under the symbol EQS.
The Fund seeks to achieve capital appreciation by making investments in
equity and equity-oriented securities issued by privately-owned companies in
transactions negotiated directly with such companies. The Fund seeks to invest
primarily in companies which intend to acquire other businesses, including
leveraged buyouts. The Fund may also invest in recapitalizations of existing
businesses or special situations from time to time. The Fund has elected to be
treated as a business development company under the Investment Company Act of
1940, as amended.
(2) MANAGEMENT
The Fund 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 services,
including certain management and administrative services necessary for the
operation of the Fund. The Management Company entered into a Sub-Adviser
Agreement with Equus Capital Corporation, a Delaware corporation (the
"Sub-Adviser"), pursuant to which the Sub-Adviser provides certain investment
advisory services for the Fund, including preparing the Fund's quarterly net
asset valuations. The Management Company receives a management fee at an annual
rate of 2% of the net assets of the Fund, paid quarterly in arrears. Included in
"Due to management company" in the accompanying Balance Sheet at June 30, 1996
and 1995, are $451,327 and $309,266, respectively of such management fees. The
Management Company also receives compensation for providing certain investor
communication services, of which $25,000 is included in the accompanying
Statements of Operations for the six months ended June 30, 1996 and 1995.
The Management Company also receives or must reimburse a management
incentive fee equal to 20% of net realized capital gains less unrealized capital
depreciation, computed on a cumulative basis over the life of the Fund. The
Sub-Adviser receives a fee from the Management Company equal to 50% of the
Management Company's net management incentive fee. The management incentive fee
is paid or reimbursed quarterly in arrears. Included in "Due to management
company" in the accompanying Balance Sheet at June 30, 1996, is $1,008,006 of
such management incentive fees.
Included in "Deferred management incentive fees" in the accompanying
Balance Sheets are $7,074,252 and $4,295,335 of accrued management incentive
fees at June 30, 1996 and December 31, 1995, respectively. Such fees are
calculated on the net unrealized appreciation of investments in portfolio
securities and will not be paid until such appreciation is realized. Deferred
management incentive fee expense for the six months ended June 30, 1996 and 1995
totaled $2,778,916 and $986,959, respectively. The deferred management incentive
fee is reflected as an expense of the Fund when there is an increase in the
Fund's net unrealized appreciation of portfolio securities and is reflected as a
reduction in expense to the Fund when there is a decrease in the Fund's net
appreciation of portfolio securities. Current management incentive fee expense
of $1,107,163 is included in the accompanying Statement of Operations for the
six months ended June 30, 1996.
-13-
The Sub-Adviser is a wholly-owned subsidiary of the Management Company and
the Management Company is controlled by a privately-owned corporation.
As compensation for services rendered to the Fund, each director who is not
an officer of the Fund receives an annual fee of $20,000 paid quarterly in
arrears, a fee of $2,000 for each meeting of the Board of Directors attended in
person, a fee of $1,000 for participation in each telephonic meeting of the
Board of Directors and for each committee meeting attended ($500 for each
committee meeting if attended on the same day as a Board Meeting), and
reimbursement of all out-of-pocket expenses relating to attendance at such
meetings. Certain officers and directors of the Fund serve as directors of
Portfolio Companies, and receive and retain fees in consideration for such
service.
(3) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements - The financial statements included herein
have been prepared without audit and include all adjustments which management
considers necessary for a fair presentation.
Valuation of Investments - Portfolio investments are carried at fair value
with the net change in unrealized appreciation or depreciation included in the
determination of net assets. Investments in companies whose securities are
publicly traded are valued at their quoted market price as of the respective
balance sheet dates, less a discount to reflect the estimated effects of
restrictions on the sale of such securities ("Valuation Discount"), if
applicable. Cost is used to approximate fair value of other investments until
significant developments affecting an investment provide a basis for use of an
appraisal valuation. Thereafter, portfolio investments are carried at appraised
values as determined quarterly by the Sub-Adviser, subject to the approval of
the Board of Directors. The fair market 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 portfolio securities which do not have readily
ascertainable market values, $94,371,977 (including $39,848,087 in
publicly-traded securities, net of a $8,702,086 Valuation Discount) and
$68,098,481 (including $26,862,806 in publicly-traded securities, net of a
$5,642,282 Valuation Discount) at June 30, 1996 and December 31, 1995,
respectively, the Sub-Adviser's estimate of fair value may significantly differ
from the fair 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 or management incentive fees which might become payable on
disposition of such investments. See Note 2 above regarding the accrual of
management incentive fees.
On a weekly basis, the Fund adjusts its net asset value for changes in the
value of its publicly held securities and material changes in the value of its
private securities and reports those amounts to Lipper Analytical Services, Inc.
Such weekly net asset values appear in various publications, including BARRON'S
and THE WALL STREET JOURNAL. Through August 3, 1996, the Fund's net asset value
declined due to decreases in the market value of its publicly held securities.
Investment Transactions - Investment transactions are recorded on the
accrual me thod. Realized gains and losses on investments sold are computed on a
specific identification basis.
Cash Flows - For purposes of the Statements of Cash Flows, the Fund
considers all highly liquid temporary cash investments purchased with an
original maturity of three months or less to be cash equivalents.
Income Taxes - No provision for Federal income taxes has been made in the
accompanying financial statements as the Fund has qualified for pass-through
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986. As such, all net income is allocable to the stockholders
for inclusion in their respective tax returns. Net capital losses are not
allocable to the shareholders but can be carried over to offset future earnings
of the Fund.
-14-
(4) BOOK TO TAX RECONCILIATION
The Fund accounts for dividends in accordance with Statement of Position
93-2 which relates to the amounts distributed by the Fund as net investment
income or net capital gains, which are often not equal to the corresponding
income or gains shown in the Fund's financial statements. The Fund had
undistributed net investment income and capital gains during 1995 of $173,021
and $9,995, respectively, for tax purposes. A dividend of such undistributed
income will be declared and distributed during 1996. The Fund had a net
investment loss for tax purposes for the six months ended June 30, 1996, and
therefore has no net investment income to distribute for 1996. The Fund, for
book purposes, has undistributed net capital gains of $8,212,413 in the
accompanying Balance Sheet at June 30, 1996. However, for tax purposes, the Fund
has distributed all of its net realized capital gains except for $4,532,039. The
$4,532,039 is comprised of $4,522,044 of net realized capital gains for the six
months ended June 30, 1996 and $9,995 in net realized capital gains from 1995
which have not yet been distributed. The following is a reconciliation of the
difference in the Fund's net realized capital gain on the sale of portfolio
securities for book and tax purposes for the six months ended June 30, 1996 and
1995, respectively.
1996 1995
----------- -----------
Net realized gain on the sales of portfolio
securities, book ............................. $ 5,629,207 $ 3,065,033
Management incentive fee ....................... (1,107,163) --
Reversal of amounts previously
written off .................................. -- 48,838
Utilization of capital loss carryforwards ...... -- (1,892,374)
----------- -----------
Net realized gain on the sales of
portfolio securities, tax .................... $ 4,522,044 $ 1,221,497
=========== ===========
(5) DIVIDENDS
The Fund declared no dividends during the six months ended June 30, 1996
and 1995. The Fund adopted a policy effective in 1995 to make dividend
distributions of at least $0.50 per share on an annual basis. In the event that
taxable income, including realized capital gains, exceeds $0.50 per share in any
year, additional dividends may be declared to distribute such excess.
Distributions can be made payable by the Fund either in the form of a cash
distribution or a stock dividend. If the Fund does not have available cash to
pay the minimum dividends, it may borrow the required funds or sell some of its
portfolio investments.
(6) TEMPORARY CASH INVESTMENTS
Temporary cash investments, which represent the short-term utilization of
cash prior to investment in securities of portfolio companies, distributions to
the shareholders or payment of expenses, consist of money market accounts
earning interest at rates ranging from 3.50% to 4.84% at June 30, 1996. The
following is a list of temporary cash investments at June 30, 1996 and December
31, 1995:
1996 1995
----------- -----------
Broadcort Money Plus ........................... $ -- $ 1,338
Dreyfus Cash Management Fund ................... -- 58,141
Dreyfus Treasury Cash Management Fund .......... -- 60,026,074
First Interstate Bank of Texas, N.A ............ -- 85,353
Great Hall Money Market ........................ 11 8,211
-15-
NationsBank of Texas, N.A ...................... 55,327,436 --
Pitkin County Bank ............................. -- 53,477
----------- -----------
Total money market accounts ................ $55,327,447 $60,232,594
=========== ===========
(7) PORTFOLIO SECURITIES
During the six months ended June 30, 1996, the Fund invested $8,600,000 in
two new companies and made follow-on investments of $5,761,698 in eight
portfolio companies, including $435,679 in dividends and accrued interest
received in the form of additional portfolio securities and $750,000 of common
stock received through the net exercise of common stock warrants. In addition,
the Fund realized net capital gains of $5,629,207 during the six months ended
June 30, 1996.
During the six months ended June 30, 1995, the Fund made follow-on
investments of $749,172 in three portfolio companies, and realized net capital
gains of $3,065,033.
(8) DEFERRED REORGANIZATION COSTS
The Fund paid $117,300 in expenses related to the formation of the Fund and
is amortizing such amount over 5 years. Accumulated amortization of such
expenses totaled $93,840 and $82,110 at June 30, 1996 and December 31, 1995,
respectively.
(9) NOTES PAYABLE TO BANK
The Fund had a $60,000,000 line of credit promissory note with a bank, with
interest payable at the prime rate, at December 31, 1995. The prime rate was
8.5% at December 31, 1995. The Fund had $60,000,000 outstanding on such note at
December 31, 1995, that was secured by $60,000,000 of the Fund's temporary cash
investments. The Fund paid a $75,000 commitment fee on such note in 1995, which
was deferred and amortized over the commitment period. Amortization expense
related to such fees is included in "Interest expense" in the accompanying
Statements of Operations for the six months ended June 30, 1995.
In March 1996, the Fund entered into a new $65,000,000 line of credit
promissory note with a bank, with interest payable at 1% over the rate earned in
its money market account. The Fund had $55,000,000 outstanding on such note at
June 30, 1996, that was secured by $55,000,000 of the Fund's temporary cash
investments. The Fund paid a $50,000 commitment fee in 1996, which was deferred
and is being amortized over the commitment period. The note matures on April 4,
1997.
The Fund also had a $13,000,000 revolving line of credit from a bank, with
interest payable at prime, of which $5,750,000 was outstanding at December 31,
1995. The Fund paid a facility fee of $3,125 to the bank for such revolving line
of credit during 1995, which is included in interest expense for the year ended
December 31, 1995. The line of credit was secured by a portion of the Fund's
investment in Allied Waste Industries, Inc., Champion Healthcare Corporation,
Drypers Corporation, Garden Ridge Corporation and NCI Building Systems, Inc.
On March 18, 1996, the Fund entered into a new $20,000,000 revolving line
of credit with another bank which replaced its $13,000,000 line of credit. The
Fund had no balance outstanding under such line of credit at June 30, 1996. The
line is secured by the Fund's investments in portfolio securities. The Fund paid
a $20,000 commitment fee in connection with such loan which was deferred and
will be amortized over the commitment period which ends April 4, 1997. The
outstanding balance on the loan bears interest at prime + 1/4% to 3/4%. The fund
also pays 1/4% interest on the unused portion of the line of credit.
-16-
The average daily balances outstanding on the Fund's notes payable during
the six months ended June 30, 1996 and 1995, were $9,256,481 and $2,015,384,
respectively.
(10) STOCK REPURCHASE PLAN
During 1995, the Board of Directors of the Fund authorized the repurchase
of additional shares of the Fund's common stock, and during the six months ended
June 30, 1995, the Fund repurchased and cancelled 118,700 shares of its stock
for $1,603,672. The stock repurchased in 1995 was repurchased at an average
discount of 33.31% from its net asset value.
(11) RIGHTS OFFERING
On March 5, 1996, the Fund filed a registration statement with the
Securities and Exchange Commission for a rights offering. Under the rights
offering, the Fund issued each shareholder of record as of April 10, 1996, one
right for each share owned. One share of common stock could be acquired for
every three rights. The exercise price for shares in the rights offering was
$12.75 per share, a 19.7% discount from the market price on April 10, 1996. On
May 8, 1996, the Fund completed its rights offering, which was over-subscribed.
The Fund issued a total of 1,046,191 shares at $12.75 per share and raised
$13,112,953, net of $225,982 in expenses. The proceeds from the rights offering
were used to repay debt and to fund the commitments the Fund had made for new
and follow-on investments.
(12) COMMITMENTS AND CONTINGENCIES
The Fund has made commitments to invest, under certain circumstances, up to
an additional $1,300,000 in American Residential Services, Inc., $5,000,000 in
BSI Holdings, Inc., $565,500 in GCS RE, Inc. and $685,000 in Video Rental of
Pennsylvania, Inc. In connection with its commitment to GCS RE, Inc., the Fund
has committed to a bank to maintain at least $380,000 in temporary cash
investments to fund such commitment. In addition, the Fund has committed to
invest up to $1,650,000 in a new company.
On April 1, 1996, an action was filed in federal district court in Houston,
Texas by two stockholders of the Fund against the directors of the Fund, the
Management Company, and the Fund, as nominal defendant, asserting that by
approving the rights offering the Management Company and the directors of the
Fund violated their fiduciary duties to the Fund's stockholders under the
Investment Company Act of 1940 and Delaware common law, that the Fund and the
Management Company aided and abetted the breaches of fiduciary duties, and that
the directors' approval of the rights offering constitutes unratifiable ULTRA
VIRES and illegal conduct. The plaintiffs seek to have the action certified as a
class action on behalf of all of the stockholders of the Fund but do not specify
the amount of any damages that have been suffered. The Fund, its directors and
the Management Company intend to vigorously defend against this action, and
management of the Fund believes that ultimate resolution of such complaint will
not have a material adverse effect on the Fund's financial position or results
of operations.
Certain of the portfolio companies are involved in asserted claims and have
the possibility for unasserted claims which may ultimately affect the fair value
of the Fund's portfolio investments. In the opinion of Management, the financial
position or operating results of the Fund will not be materially affected by
these claims.
(13) SUBSEQUENT EVENTS
In July 1996, in connection with its commitment discussed above, the Fund
advanced an additional $400,000 to American Residential Services, Inc. under a
$1,600,000 prime + 1/4% convertible promissory note.
-17-
Subsequent to June 30, 1996, the Fund repaid $55,000,000 of notes payable
to the bank.
On August 1, 1996, the Fund declared dividends of $183,016 in net
investment income and capital gains which will be distributed by the end of the
year.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Equus II Incorporated (the "Fund"), a Delaware corporation and business
development company, was formed as a successor to Equus Investments II, L.P.
(the "Partnership" or "Predecessor Entity") pursuant to a reorganization in
which all of the assets and liabilities of the Partnership were transferred to
the Fund on July 1, 1992, in exchange for 1,866,132 shares of common stock of
the Fund (the "Exchange"). Such shares were then distributed on a pro rata basis
to the partners of the Partnership, effectively liquidating the Partnership.
Each Limited Partner received one share of common stock of the Fund for each
unit of partnership interest owned. The Fund has qualified for pass-through tax
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986 each year since its organization. On September 11, 1992,
the Fund's shares of common stock were listed for trading on the American Stock
Exchange, under the symbol "EQS".
At June 30, 1996, the Fund had $97,746,977 of its assets invested in
portfolio securities of 22 companies, and has committed to invest up to an
additional $7,550,500 in three of such companies and $1,650,000 in a new company
under certain conditions. Current temporary cash investments, anticipated future
investment income, proceeds from borrowings and proceeds from the sale of
existing portfolio securities are believed to be sufficient to finance these
commitments. At June 30, 1996, the Fund had no balance outstanding on its
$20,000,000 revolving line of credit loan from a bank.
On March 5, 1996, the Fund filed a registration statement with the
Securities and Exchange Commission for a rights offering. Under the rights
offering, the Fund issued each shareholder of record as of April 10, 1996, one
right for each share owned. One share of common stock could be acquired for
every three rights. The exercise price for shares in the rights offering was
$12.75 per share, a 19.7% discount from the market price on April 10, 1996. On
May 8, 1996, the Fund completed its rights offering, which was over-subscribed.
The Fund issued a total of 1,046,191 shares at $12.75 per share and raised
$13,112,953, net of $225,982 in expenses. The proceeds from the rights offering
were used to repay debt and to fund the commitments the Fund had made for new
and follow-on investments.
Net cash provided (used) by operating activities was $(1,002,865) and
$335,560 for the six months ended June 30, 1996 and 1995. A decrease in cash
interest and dividends received from portfolio companies in 1996 of $484,736 and
increased interest expenses of $400,269 paid during 1996 accounted for the
majority of the increase in cash used by operating activities.
At June 30, 1996, the Fund had $55,327,447 of its total assets of
$153,931,289 invested in temporary cash investments consisting of money market
securities. This amount includes proceeds from a $55,000,000 revolving line of
credit to a bank that is utilized to enable the Fund to achieve adequate
diversification to maintain its pass-through tax status as a regulated
investment company. Such amount was repaid to the bank on July 1, 1996.
The Fund has the ability to borrow funds and issue forms of indebtedness,
subject to certain restrictions. Net investment income and net realized gains
from the sales of portfolio investments are intended to be distributed at least
annually, to the extent such amounts are not reserved for payment of
contingencies or to make follow-on or new investments.
The Fund reserves the right to retain net long-term capital gains in excess
of net short-term capital losses for reinvestment or to pay contingencies and
expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains and shareholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income tax liabilities. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.
-19-
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSE
Net investment loss after all expenses amounted to $4,131,097 and $777,525
for the six months ended June 30, 1996 and 1995, respectively. The net
investment loss in 1996 was primarily attributable to the accrual of $1,107,163
in management incentive fees and $2,778,916 in deferred management incentive
fees related to the realized gains from the sales of portfolio securities of
$5,629,207 and the increase in the net unrealized appreciation of portfolio
securities of $13,801,192 in 1996, respectively. Income from portfolio
securities increased to $1,301,835 in 1996 as compared to $1,292,790 in 1995,
due to the increase in amounts invested in dividend-bearing portfolio securities
during 1996 as compared to 1995.
Interest expense increased to $439,170 in 1996 as compared to $117,664 in
1995, due to the increase of the average daily balances outstanding on the lines
of credit to $9,256,481 during the six months ended June 30, 1996, from
$2,015,384 in 1995.
The Management Company receives management fee compensation at an annual
rate of 2% of the net assets of the Fund. Such fees amounted to $816,830 and
$618,435 for six months ended June 30, 1996 and 1995, respectively. The increase
in 1996 is due to the $15,299,302 increase in net assets from operations during
the six months ended June 30, 1996 and the $13,112,953 in net equity raised in
the Fund's rights offering.
The Management Company also receives or must reimburse a management
incentive fee equal to 20% of net realized capital gains less unrealized capital
depreciation, computed on a cumulative basis over the life of the Fund.
Management incentive fees of $1,107,163 were accrued during the six months ended
June 30, 1996. Deferred management incentive fee expense (income) for the six
months ended June 30, 1996 and 1995 totaled $2,778,916 and $986,959,
respectively. The deferred management incentive fee is reflected as an expense
of the Fund when there is an increase in the Fund's net unrealized appreciation
of portfolio securities and is reflected as a reduction in expense to the Fund
when there is a decrease in the Fund's net appreciation of the portfolio
securities. The deferred management incentive fees are not paid until such
appreciation is realized.
REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES
During the six months ended June 30, 1996, the Fund realized net capital
gains of $5,629,207 from the sale or disposition of securities of four portfolio
companies. The Fund sold 233,044 shares of Allied Waste Industries, Inc. common
stock for $1,563,678, realizing a capital gain of $461,919, 96,000 shares of
Garden Ridge Corporation common stock for $4,719,360 realizing a capital gain of
$4,343,372 and 32,789 shares of Tech-Sym Corporation for $1,029,901, realizing a
capital gain of $911,656. In addition, the Fund realized a capital loss of
$87,740 on its investment in Sports & Leisure, Inc., which filed for Chapter 11
bankruptcy during February 1996.
During the six months ended June 30, 1995, the Fund realized capital gains
of $3,065,033 from the sale of securities in two portfolio companies.
UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES
Net unrealized appreciation on investments increased $13,801,192 during the
six months ended June 30, 1996, from $7,975,268 to $21,776,460. Such net
increase resulted from increases in the estimated fair value of securities of
eight of the Fund's Portfolio Companies aggregating $17,134,442, the decrease in
the estimated fair value of the securities of one of the Fund's portfolio
companies aggregating $188,014, and the transfer of $3,145,236 in net unrealized
appreciation to net realized gains
-20-
from the sale of investments in three companies.
Net unrealized appreciation on investments increased $1,869,765 during the
six months ended June 30, 1995, from $9,255,817 to $11,125,581. Such net
increase resulted from increases in the estimated fair value of securities of
six of the Fund's portfolio companies aggregating $9,922,443, a decrease in the
estimated fair value of securities of six portfolio company of $5,176,373 and
the transfer of $2,876,306 in net unrealized appreciation to net realized gains.
DIVIDENDS
The Fund declared no dividends during the six months ended June 30, 1996
and 1995.
PORTFOLIO INVESTMENTS
During the six months ended June 30, 1996, the Fund invested $8,600,000 in
two new Portfolio Companies and made follow-on investments in eight Portfolio
Companies of $5,761,698, including $435,679 in accrued interest and dividends
received in the form of additional portfolio securities and $750,000 of common
stock received through the net exercise of common stock warrants.
On January 2, 1996, the Fund exercised its warrants to acquire 163,044
shares of AWIN on a net exercise basis. This resulted in the Fund receiving
56,054 shares of AWIN valued at $750,000, which were paid for by tendering the
remaining 106,990 shares to AWIN. In May 1995, the Fund received 23,751 shares
of common stock of AWIN valued at $144,733, as payment for dividends and
inducement for the conversion of preferred stock to common stock.
In February 1996, the Fund acquired 25,000 shares of 7.5% convertible
preferred stock of Drypers Corporation for $2,500,000. The preferred stock is
convertible into 2,500,000 shares of common stock of Drypers Corporation.
In March 1996, the Fund acquired 24,810 shares of Series A preferred stock
and 190 shares of Series B preferred stock of Enterprises Holding Company
("EHC"), for $2,481,000 and $19,000, respectively. On June 30, 1996, the Fund
received an additional 571 shares of Series A preferred stock of EHC as payment
for $57,100 in dividends. In addition, the Fund invested $4,800,000 in a 12%
promissory note of EHC. EHC was formed to acquire Crown Services, Inc., a
company which provides plumbing, heating and air conditioning and electrical
services in Houston, Texas.
During March 1996, the Fund invested $1,300,000 in Hot & Cool Holdings,
Inc. ("Hot & Cool"), in exchange for a 12% subordinated promissory note. In
addition, the Fund received warrants to buy 14,942 shares of common stock of Hot
& Cool for $.01 per share through March 8, 2006. Hot & Cool manufactures
automotive radiators and other heat transfer products in South Texas and Mexico.
During 1996 the Fund advanced an additional $1,150,000 on a $1,600,000
prime + 1/4% convertible promissory note to American Residential Services, Inc.,
a company formed to acquire existing businesses which provide plumbing, heating
and air conditioning and electrical services to the residential community.
In March 1996, the Fund committed to invest up to an additional $1,200,000
in Video Rental of Pennsylvania ("VRP") in exchange for a 12% promissory note.
The Fund had advanced $515,000 on such note through June 30, 1996. In April
1996, the Fund rolled $147,349 of accrued interest into a new $2,672,349, 10%
promissory note due from VRP.
In January 1996, in connection with the guaranty of $5,000,000 of BSI
Holdings, Inc. debt, the Fund received warrants to acquire up to 22,018 shares
of BSI Holdings, Inc. common stock for $0.01
-21-
per share. In May 1996, the Fund exercised warrants to buy 64,715 shares of
common stock of BSI Holdings, Inc. for $647.
In May 1996, the Fund converted $342,541 of its note receivable from
Champion Healthcare Corporation and exercised warrants to buy 45,000 and 5,246
shares of common stock of Champion Healthcare Corporation for $315,000 and
$27,541, respectively.
In January 1996, the Fund rolled $86,497 of accrued interest along with
$677,250 from an existing note receivable from WMW Industries, Inc. ("WMW") into
a new $763,747, 12% subordinated promissory note. In addition, in May 1996, the
Fund purchased 40,617 shares of Series B convertible preferred stock of WMW for
$67,830. In June, 1996, the Fund converted its Series A and Series B convertible
preferred stock of WMW into 4,642,452 shares of WMW common stock. WMW then had a
10 for 1 reverse stock split leaving the Fund with 530,035 shares of WMW common
stock.
During the six months ended June 30, 1995, the Fund made follow-on
investments of $749,172 in three portfolio companies.
Of the companies in which the Fund has investments at June 30, 1996, only
Allied Waste Industries, Inc., Champion Healthcare Corporation, Drypers
Corporation, Garden Ridge Corporation and NCI Building Systems, Inc. are
publicly held. The others each have a small number of shareholders and do not
generally make financial information available to the public. However, each
company's operations and financial information are reviewed by Management to
determine the proper valuation of the Fund's investment.
SUBSEQUENT EVENTS
In July 1996, in connection with its commitment discussed above, the Fund
advanced an additional $400,000 to American Residential Services, Inc. under a
$1,600,000 prime + 1/4% convertible promissory note.
Subsequent to June 30, 1996, the Fund repaid $55,000,000 of notes payable
to the bank.
On August 1, 1996, the Fund declared dividends of $183,016 in net
investment income and capital gains which will be distributed by the end of the
year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Fund held its annual meeting of shareholders on May 10, 1996. At the
meeting, shareholders voted on the election of the persons named in the Proxy
Statement as Directors of the Fund for the terms described therein and the
ratification of the selection of Arthur Andersen LLP as the Fund's independent
auditors for the fiscal year ending December 31, 1996.
The table set forth below shows, with respect to each nominee, the number
of shares voted for such nominee and shares for which authority was withheld:
NAME OF NOMINEE FOR WITHHELD
- ---------------- --------- --------
Sam P. Douglass ........................... 2,055,262 94,863
Gregory J. Flanagan ....................... 2,057,010 93,115
Robert L. Knauss .......................... 2,054,240 95,885
Nolan Lehmann ............................. 2,053,947 96,178
Gary R. Petersen .......................... 2,057,827 92,298
-22-
NAME OF NOMINEE FOR WITHHELD
- ---------------- --------- --------
John W. Storms ............................ 2,058,227 91,898
Dr. Francis D. Tuggle ..................... 2,057,440 92,685
Dr. Edward E. Williams .................... 2,058,560 91,565
The table below sets forth, as to all other matters voted upon, the number
of shares voted for the proposal, against the proposal and shares that
abstained.
PROPOSAL FOR AGAINST ABSTAIN
- -------- --------- ------- -------
Ratification of auditors ............. 2,075,940 39,038 35,147
All nominees to the Registrant's Board of Directors were elected and the
Fund's selection of independent auditors was ratified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a)Exhibits
10. Material Contracts
None
(b)REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Fund during the period
for which this report is filed.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.
EQUUS II INCORPORATED
By:\s\ NOLAN LEHMANN
Nolan Lehmann, President,
Principal Financial and
Accounting Officer
Date: August 9, 1996
-23-