Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (EQS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: EQS is a non-diversified business development company (BDC) and regulated investment company (RIC) investing in equity and equity-oriented securities of privately-owned companies. The Fund employs a total return strategy seeking capital appreciation and current income.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Investment Income | $1.62 million | $2.08 million |
| Total Expenses | $2.04 million | $2.18 million |
| Net Investment Loss | $(0.42) million | $(0.09) million |
| Net Realized Gain (Loss) | $(0.03) million | $0.98 million |
| Net Change in Unrealized Appreciation (Depreciation) | $(4.99) million | $0.31 million |
| Net Decrease in Net Assets from Operations | $(5.44) million | $1.20 million |
| Net Assets (End of Period) | $73.0 million | $103.0 million |
| Net Asset Value (NAV) per Share | $8.24 | $12.00 |
| Market Value per Share | $3.23 | $7.01 |
| Debt (Borrowing under margin account) | $41.0 million | $45.0 million (Dec 31, 2008) |
| Cash and Temporary Investments | $6.7 million | $18.3 million |
Material Changes vs. Prior Period
- Portfolio Valuation: Net unrealized depreciation increased by $5.0 million during the six months ended June 30, 2009, compared to a $0.3 million increase in unrealized appreciation in the prior year period. This decline was driven by decreased estimated fair market values of key portfolio companies (Infinia Corporation, Spectrum Management, Sovereign Business Forms, and Metic Group plc) due to operational decreases.
- Realized Gains/Losses: The Fund realized a net capital loss of $0.03 million in 2009 (from Treasury Bill sales) versus a net capital gain of $0.98 million in 2008 (driven by sales of JL Madre Equipment and RP&C International Investments).
- Investment Activity: New and follow-on investments totaled $1.3 million in the first half of 2009, a significant decrease from $14.0 million in the same period in 2008. The Fund made no new investments other than follow-ons in 2009.
- Expense Structure: Management fees decreased to $0.71 million in 2009 from $1.02 million in 2008 due to the decline in net assets. Incentive fees were $0 in 2009 compared to $0.11 million in 2008 due to the absence of net realized capital gains.
- Market Discount: The Fund's stock traded at a 60% discount to NAV at June 30, 2009, compared to a smaller discount in the prior period. The market price declined approximately 53% year-over-year.
Guidance, Outlook, and Risks
- Management Internalization: On June 12, 2009, the Fund announced plans to "internalize" management. The investment advisory agreement with Moore Clayton Capital Advisors, Inc. terminated on June 30, 2009. The Fund now directly employs its management team to reduce operational costs and enhance liquidity.
- Dividend Suspension: On March 24, 2009, the Fund suspended its managed distribution policy and quarterly dividends indefinitely. It will continue to distribute net investment income and realized capital gains annually as required by the Investment Company Act of 1940.
- Liquidity and Financing: The Fund maintains a $7.5 million revolving line of credit with Amegy Bank (unused as of June 30, 2009). It utilized a margin account to borrow $41.0 million to maintain RIC tax status; this loan was repaid on July 1, 2009, following the sale of collateralized U.S. Treasury bills.
- SEC Inquiry: On June 30, 2009, the Fund received a "Wells" notice from the SEC regarding a potential civil action. The inquiry relates to a one-time administrative fee paid in 2005 and the compensation of a Fund officer during that period. The Fund is cooperating with the SEC.
- Market Risks: The Fund is exposed to significant market risk due to its concentration in private companies and the "Alternative Energy" sector (26.1% of NAV). Economic recession and credit market dislocations continue to constrain capital availability and impact portfolio valuations.
Investor Verification Checklist
- SEC Wells Notice Status: Verify the outcome of the SEC inquiry regarding 2005 administrative fees and officer compensation.
- Portfolio Valuation Methodology: Review the specific assumptions used to value privately-held securities, particularly for Infinia Corporation and Spectrum Management, which drove the $5.0 million unrealized loss.
- Dividend Policy: Confirm the timeline and criteria for resuming quarterly distributions, if any, given the indefinite suspension.
- Management Transition: Assess the impact of internalizing management on future expense ratios and operational efficiency.
- Liquidity Position: Monitor the Fund's ability to meet the $3.2 million remaining commitment to HealthSPAC, LLC, which has been postponed until 2010.