Business Context and Reporting Period
Company: Equus II Incorporated (a Delaware corporation and Business Development Company)
Reporting Period: Quarterly period ended March 31, 1999
Business Overview: The Fund seeks capital appreciation by investing in equity and equity-oriented securities of privately-owned companies, often in leveraged buyouts or recapitalizations. It provides significant managerial assistance to 93% of its portfolio value.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Total Assets | $204,947,547 | $215,603,144 |
| Total Net Assets | $107,268,931 | $152,707,968 |
| Net Assets Per Share | $21.65 | $31.63 |
| Total Investment Income | $1,175,837 | $1,194,853 |
| Total Expenses | $1,416,722 | $1,278,314 |
| Net Investment Loss | $(240,885) | $(83,461) |
| Realized Gain on Sales | $2,932,804 | $265,743 |
| Unrealized Appreciation (Change) | $(11,578,016) | $8,054,934 |
| Total Change in Net Assets | $(8,886,097) | $8,237,216 |
| Cash and Cash Equivalents | $57,242,183 | $75,170,083 |
| Notes Payable to Bank | $96,900,000 | $98,500,000 |
Material Changes vs. Prior Period
- Net Asset Decline: Net assets decreased by approximately $45.4 million (29.7%) compared to the prior year quarter, driven primarily by a $11.6 million decrease in unrealized appreciation of portfolio securities.
- Increased Interest Expense: Interest expense more than doubled from $317,631 in Q1 1998 to $718,170 in Q1 1999. This was due to a significant increase in the average daily balance of outstanding notes payable ($40.2 million in 1999 vs. $13.4 million in 1998).
- Realized Gains: Realized gains on sales of portfolio securities increased significantly to $2.93 million in Q1 1999, compared to $265,743 in Q1 1998, largely due to sales of United Rentals, Inc. and United States Filter Corporation.
- Management Fees: Management fees decreased to $536,345 from $763,540, reflecting the reduction in total net assets.
Outlook, Risks, and Unusual Items
- Subsequent Sales: Following the quarter-end, the Fund sold investments in American Residential Services, Inc., United States Filter Corporation, and Allied Waste Industries, Inc., realizing combined capital gains of approximately $5.96 million.
- Debt Repayment: Subsequent to March 31, 1999, the Fund repaid a net $55,000,000 of notes payable to the bank.
- Dividend Policy: No dividends were declared for the quarter. The Fund maintains a policy to distribute at least $0.50 per share annually if taxable income permits.
- Year 2000 Risk: The Fund identified potential risks regarding Year 2000 compliance for its management company, service providers, and portfolio companies. While assurances were received from major providers and 87% of portfolio value, no guarantee of compliance exists.
- Valuation Uncertainty: A significant portion of the portfolio ($137 million) lacks readily ascertainable market values and is carried at appraised values, which may differ significantly from actual sale prices.
Investor Verification Checklist
- Verify the impact of the $11.6 million unrealized depreciation on specific portfolio holdings, particularly the seven companies cited as decreasing in value.
- Confirm the sustainability of the Fund's liquidity given the high level of debt ($96.9 million) relative to net assets ($107.3 million), despite the subsequent repayment of $55 million.
- Review the valuation discounts applied to publicly traded securities ($2.6 million total discount) to understand the gap between market price and reported fair value.
- Monitor the status of commitments to invest an additional $11.1 million in existing and new portfolio companies.
- Assess the Fund's ability to meet its annual dividend policy given the net investment loss for the quarter and the reliance on realized gains for distributions.