Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (a Delaware Corporation and Business Development Company)
Reporting Period: Quarterly report (Form 10-Q) for the period ended September 30, 2010.
Business Overview: The Fund invests in equity and equity-oriented securities of privately-owned companies with a total return objective (capital appreciation and current income). Effective July 1, 2009, the Fund terminated its external investment advisory agreement and transitioned to internal management. The Fund elected to be treated as a Regulated Investment Company (RIC) for tax purposes.
Key Financial Metrics
| Metric | Sept 30, 2010 | Dec 31, 2009 |
|---|---|---|
| Total Assets | $47.8 million | $81.0 million |
| Portfolio Investments (Fair Value) | $21.4 million | $42.4 million |
| Cash and Temporary Investments | $7.4 million | $6.0 million |
| Total Liabilities | $16.3 million | $30.1 million |
| Borrowings (Margin Account) | $16.0 million | $30.0 million |
| Net Assets | $31.5 million | $50.9 million |
| Net Asset Value (NAV) per Share | $3.55 | $5.74 |
| Market Value per Share | $2.38 | $3.22 |
Results of Operations (Nine Months Ended Sept 30, 2010)
- Total Investment Income: $2.3 million (down from $2.9 million in 2009).
- Total Expenses: $2.9 million (up from $2.9 million in 2009, driven by professional fees related to a proxy contest).
- Net Investment Loss: $(0.6) million (compared to $0.02 million income in 2009).
- Net Unrealized Depreciation: $(18.8) million increase in depreciation.
- Net Decrease in Net Assets from Operations: $(19.4) million.
- Net Decrease in Net Assets per Share: $(2.19).
Material Changes vs. Prior Period
- Portfolio Valuation: Total portfolio fair value declined 49.7% from $42.4 million to $21.4 million. This was driven by significant write-downs in several portfolio companies, including 1848 Capital Partners ($3.5M), Riptide Entertainment ($3.1M), London Bridge Entertainment ($2.6M), and Spectrum Management ($2.6M).
- Liquidity and Debt: Borrowings under the margin account decreased from $30.0 million to $16.0 million. The Fund utilized these borrowings to maintain RIC status by investing in U.S. Treasury Bills, which were sold and the loan repaid on October 1, 2010.
- Expense Structure: Professional fees increased significantly due to legal and solicitation costs associated with a proxy contest for the May 2010 Annual Shareholder Meeting. Management fees were eliminated following the internalization of management in 2009.
- Dividends: The Fund suspended its managed distribution policy in March 2009. No dividends were declared or paid during the nine months ended September 30, 2010.
Outlook, Risks, and Contingencies
- Portfolio Defaults: Several portfolio companies are in payment default.
- Big Apple Entertainment Partners LLC: Failed to repay a matured note. The Fund demanded payment from guarantors in October 2010.
- London Bridge Entertainment Partners Ltd: Remains in default on an April 2009 note despite partial payments on a July 2010 note. The Fund is in discussions with guarantors.
- 1848 Capital Partners LLC: Management indicated a need to raise outside capital to repay a note due in January 2011; the Fund impaired the value of this note.
- Legal Proceedings:
- SEC Inquiry: The Fund received a "Wells" notice in June 2009 regarding potential violations of securities laws related to a 2005 administrative fee and officer compensation. No formal enforcement decision has been made.
- Lease Dispute: American General Life Insurance Company filed a complaint seeking over $375,000 in unpaid rent and fees related to a former administrator's lease. The Fund intends to defend vigorously.
- Capital Raising: On November 1, 2010, the Board approved a non-transferable rights offering to shareholders to purchase new shares (1 new share for every 5 held) to raise capital.
- Market Discount: As of September 30, 2010, the Fund's stock traded at a 33.1% discount to its NAV.
Investor Verification Checklist
- Default Resolution: Verify the status of collections and legal actions regarding the defaulted notes from Big Apple Entertainment and London Bridge Entertainment.
- Valuation Methodology: Review the specific assumptions used for the $18.8 million unrealized depreciation, particularly for Level 3 assets where fair value is subjective.
- Capital Raise Success: Monitor the uptake of the rights offering announced in November 2010 to assess liquidity improvement.
- Legal Exposure: Track the outcome of the SEC Wells notice and the American General lease lawsuit.
- Follow-on Commitments: Assess the Fund's ability to meet remaining investment commitments (e.g., $0.8 million to Spectrum Management) without further dilution or debt.