Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (a Delaware Corporation and Business Development Company)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2011
Overview: The Company seeks total return through capital appreciation and current income by investing in equity and equity-oriented securities of privately-owned companies. It operates as an internally managed fund and a Regulated Investment Company (RIC).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Net Assets | $41.4 million | $37.9 million (End of period) |
| Net Asset Value (NAV) per Share | $3.92 | $4.28 |
| Market Price per Share | $2.40 | $2.68 |
| Total Investment Income | $0.8 million | $1.7 million |
| Total Expenses | $2.7 million | $2.4 million |
| Net Investment Loss | $(1.9) million | $(0.7) million |
| Net Realized Loss | $(10.9) million | $(0.005) million |
| Net Change in Unrealized Depreciation | $11.6 million (Improvement) | $(12.3) million (Deterioration) |
| Net Increase/(Decrease) in Net Assets from Operations | $(1.2) million | $(13.0) million |
| Cash and Cash Equivalents | $17.3 million | $8.2 million |
| Borrowings (Margin Account) | $15.0 million | $15.0 million |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments in portfolio securities decreased from $27.7 million to $21.7 million. This was driven by significant realized losses and the monetization of several distressed assets.
- Realized Losses: The Company recorded a net realized loss of $10.9 million, primarily due to the sale of assets in Riptide Entertainment LLC ($10.1 million loss) and London Bridge Entertainment Partners Ltd ($0.9 million loss). In contrast, the prior year period had negligible realized losses.
- Unrealized Depreciation: Net unrealized depreciation improved significantly by $11.6 million (reducing the total unrealized loss balance), compared to a $12.3 million increase in depreciation in the prior year. This improvement was largely due to the transfer of unrealized losses to realized losses upon asset sales.
- Liquidity: Cash and cash equivalents increased from $7.4 million to $17.3 million, reflecting proceeds from asset dispositions ($9.7 million net proceeds) and a shift in strategy toward liquidity preservation.
- Expenses: Total expenses increased by $0.3 million year-over-year, primarily due to the write-off of $0.3 million in deferred offering costs and increased compensation/settlement expenses.
Outlook, Risks, and Management Commentary
- Strategy Shift: Management has shifted focus from originating new debt/equity investments to preserving liquidity and seeking liquidity events for mature investments. The Company is pursuing an equity rights offering and has suspended dividends since March 2009.
- Leadership Changes: On June 7, 2011, Alessandro Benedetti was appointed Executive Chairman and John Hardy was appointed CEO.
- Investment Activity: The Company acquired bonds from Orco Germany S.A. using newly issued shares as consideration. It also received $1.6 million in cash collateral from a failed bond delivery transaction.
- Risks and Contingencies:
- Legal Proceedings: The Company is involved in a lawsuit filed by RNR Production, Land and Cattle Company, Inc., alleging breach of fiduciary duty. A potential settlement amount has been accrued. Additionally, the Company settled a lease dispute with American General Life Insurance Company for $120,000.
- SEC Inquiry: The Company received a "Wells" notice in 2009 regarding potential violations of securities laws related to administrative fees and officer compensation; the SEC has not made a formal decision.
- Market Discount: Shares trade at a significant discount to NAV (38.8% as of June 30, 2011), limiting the ability to raise equity capital.
- RIC Status: The Company relies on margin borrowings to maintain qualifying investments for RIC tax status. Failure to maintain this status would subject the Company to corporate income tax.
Investor Verification Checklist
- Valuation Methodology: Verify the assumptions used for Level 3 fair value measurements, as $21.7 million of the portfolio consists of privately held securities with no active market.
- Legal Exposure: Monitor the status of the RNR Production lawsuit and the potential impact of the accrued settlement amount on future cash flows.
- RIC Compliance: Confirm the Company's ability to maintain its Regulated Investment Company status through the use of margin accounts and qualifying investments.
- Offering Status: Track the progress of the equity rights offering and the effectiveness of the Form N-2 registration statement, which was previously delayed.
- Portfolio Concentration: Assess the risk associated with the "Business products and services" sector, which represents 21.4% of the portfolio's fair value.