Business Context and Reporting Period
Company: Equus II Incorporated (a Delaware corporation, Business Development Company)
Reporting Period: Quarterly period ended September 30, 1999 (Nine months ended September 30, 1999)
Business Overview: The Fund seeks capital appreciation by investing in equity and equity-oriented securities of privately-owned companies, primarily those involved in leveraged buyouts or recapitalizations. It holds controlling interests in many portfolio companies and provides significant managerial assistance.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 1999 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Total Investment Income | $3,704,102 | $2,847,029 |
| Total Expenses | $4,046,387 | $4,252,428 |
| Net Investment Loss | $(342,285) | $(1,405,399) |
| Realized Gain on Sales | $30,405,864 | $4,995,079 |
| Unrealized Appreciation (Decrease) | $(34,433,420) | $(27,759,534) |
| Total Decrease in Net Assets from Operations | $(4,369,841) | $(24,169,854) |
| Net Assets (End of Period) | $111,785,187 | $120,168,221 |
| Net Assets Per Share | $22.56 | $24.89 |
| Cash and Cash Equivalents | $35,049,509 | $80,058,868 |
| Notes Payable to Bank | $45,850,000 | $98,500,000 |
Material Changes vs. Prior Period
- Realized Gains Surge: Realized gains increased significantly to $30.4 million in 1999 from $5.0 million in 1998, driven by the sale of seven portfolio companies, including a major transaction involving CRC Holdings (sold to LG&E Energy Corp) and Travis International.
- Unrealized Depreciation: Net unrealized appreciation decreased by $34.4 million in 1999 compared to a $27.8 million decrease in 1998. This was due to valuation decreases in six portfolio companies offset by increases in seven others, alongside the transfer of unrealized gains to realized gains upon sale.
- Debt Reduction: Total notes payable to banks decreased from $98.5 million at year-end 1998 to $45.85 million at September 30, 1999. The Fund repaid significant borrowings, including a $35 million note utilized for tax diversification purposes.
- Expense Management: Total expenses decreased slightly, primarily due to a reduction in professional fees (transfer agent and safekeeping) and management fees (due to lower net assets), partially offset by higher interest expense resulting from higher average daily loan balances.
Guidance, Outlook, and Risks
- Dividend Declaration: In October 1999, the Fund declared a dividend of $4.25 per share from net realized capital gains for the taxable year ended October 31, 1999. Payment is scheduled for December 1999, with shareholders able to elect cash or stock.
- Share Repurchase: In October 1999, the Fund announced a plan to purchase up to 300,000 shares of its common stock in open market transactions over the next six months.
- Investment Activity: The Fund invested $14.6 million in four new companies and $7.3 million in follow-on investments during the nine-month period. It has committed to invest up to $6.95 million in existing and new portfolio companies.
- Year 2000 Compliance: The Fund and its major service providers have completed or are in the process of completing Year 2000 compliance. The Fund received assurances from portfolio companies representing 87% of its total value.
- Valuation Risks: A significant portion of the portfolio ($114.6 million) consists of securities without readily ascertainable market values, relying on appraisals by the Management Company. Fair values for publicly traded securities include discounts for restrictions on sale.
- Contingencies: The Fund is involved in asserted and unasserted claims with portfolio companies, though management does not believe these will materially affect financial position.
Investor Verification Checklist
- Dividend Payment: Verify the receipt of the $4.25 per share dividend declared in October 1999 and the election method (cash vs. stock).
- Share Repurchase Execution: Monitor the execution of the announced 300,000 share buyback program and its impact on share count and NAV.
- CRC Holdings Earn-Out: Track the performance of the CRC business sold to LG&E Energy Corp to determine if the potential $11.7 million earn-out will be realized.
- Portfolio Valuations: Review quarterly updates on the fair value of private portfolio securities, particularly those with significant unrealized depreciation.
- Debt Covenants: Confirm the Fund's compliance with its revolving lines of credit and the status of the $100 million line of credit extended to June 2000.