-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DQ5cqEZ+xYo3aD6dMRP+QKDZxOZpDZJYq95F6EyKeZ03+XXJXjvTswXFlh1dR3cd PW3KoUl95WRCyhh0l2Wnlg== 0000890566-96-001906.txt : 19961118 0000890566-96-001906.hdr.sgml : 19961118 ACCESSION NUMBER: 0000890566-96-001906 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUUS II INC ET AL CENTRAL INDEX KEY: 0000878932 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 760345915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00098 FILM NUMBER: 96664830 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY STE 2500 CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135290900 MAIL ADDRESS: STREET 1: 2929 ALLEN PARKWAY STREET 2: STE 2500 CITY: HOUSTON STATE: TX ZIP: 77019 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 or - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19509 EQUUS II INCORPORATED (Exact name of registrant as specified in its charter) Delaware 76-0345915 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2929 Allen Parkway, Suite 2500 Houston, Texas 77019-2120 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (713) 529-0900 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- --------------------- COMMON STOCK AMERICAN STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Approximate aggregate market value of common stock held by non-affiliates of the registrant: $65,663,376 computed on the basis of $16 per share, closing price of the common stock on the American Stock Exchange, Inc. on November 12, 1996. There were 4,184,766 shares of the registrant's common stock, $.001 par value, outstanding as of November 12, 1996. The net asset value of a share at September 30, 1996 was $24.63. Documents incorporated by reference: None EQUUS II INCORPORATED (A Delaware Corporation) INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Balance Sheets - September 30, 1996 and December 31, 1995...................1 Statements of Operations - For the three months ended September 30, 1996 and 1995.....2 - For the nine months ended September 30, 1996 and 1995 .....3 Statements of Changes in Net Assets - For the nine months ended September 30, 1996 and 1995......4 Statements of Cash Flows - For the nine months ended September 30, 1996 and 1995......5 Selected Per Share Data and Ratios - For the nine months ended September 30, 1996 and 1995......7 Schedule of Portfolio Securities - September 30, 1996.........................................8 Notes to Financial Statements...............................13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...........................23 SIGNATURE.....................................................................23 -ii- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EQUUS II INCORPORATED BALANCE SHEETS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Unaudited)
1996 1995 ------------ ------------ ASSETS Investments in portfolio securities at fair value (cost $69,326,901 and $63,635,092, respectively) ... $109,478,726 $ 71,610,360 Temporary cash investments, at cost which approximates fair value ............................ 68,871,073 60,232,594 Cash .................................................... 1,183 7,267 Accounts receivable ..................................... 1,326 1,326 Accrued interest receivable ............................. 896,929 525,939 Commitment fees, net .................................... 35,000 37,500 Deferred reorganization costs, net ...................... 17,595 35,190 ------------ ------------ Total assets ................................... 179,301,832 132,450,176 ------------ ------------ LIABILITIES AND NET ASSETS Liabilities: Accounts payable ................................... 44,554 242,286 Dividends payable .................................. 183,123 -- Due to management company .......................... 591,289 309,266 Deferred management incentive fee .................. 10,221,636 4,295,335 Notes payable to bank .............................. 65,200,000 65,750,000 ------------ ------------ Total liabilities .............................. 76,240,602 70,596,887 ------------ ------------ Commitments and contingencies Net assets: Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares outstanding ................ -- -- Common stock, $.001 par value, 10,000,000 shares authorized, 4,184,766 and 3,138,575 shares outstanding, respectively ........................ 4,185 3,139 Additional paid-in capital ......................... 56,961,329 51,291,676 Undistributed net investment income ................ -- -- Undistributed net capital gains .................... 5,943,891 2,583,206 Unrealized appreciation of portfolio securities, net 40,151,825 7,975,268 ------------ ------------ Total net assets ............................... $103,061,230 $ 61,853,289 ============ ============ Net assets per share ........................... $ 24.63 $ 19.71 ============ ============
The accompanying notes are an integral part of these financial statements. -1- EQUUS II INCORPORATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited)
1996 1995 ------------ ------------ Investment income: Income from portfolio securities ................. $ 873,262 $ 525,458 Interest from temporary cash investments ......... 17,538 82,197 ------------ ------------ Total investment income ....................... 890,800 607,655 ------------ ------------ Expenses: Management fee ................................... 515,307 310,074 Management incentive fee ......................... 75,983 -- Deferred management incentive fee ................ 3,147,385 423,913 Director fees and expenses ....................... 45,007 48,030 Professional fees ................................ 84,962 56,433 Administrative fees .............................. 12,500 12,500 Mailing, printing and other expenses ............. 44,508 61,746 Interest expense ................................. 87,553 75,069 Franchise taxes .................................. 9,760 4,520 Amortization ..................................... 5,865 5,865 ------------ ------------ Total expenses ................................ 4,028,830 998,150 ------------ ------------ Net investment loss ................................. (3,138,030) (390,495) ------------ ------------ Realized gain (loss) on sales of portfolio securities, net ........................ (2,258,526) 3,802,362 ------------ ------------ Unrealized appreciation of portfolio securities, net: End of period .................................... 40,151,825 9,442,784 Beginning of period .............................. 21,776,460 11,125,581 ------------ ------------ Increase (decrease) in unrealized appreciation, net ........................... 18,375,365 (1,682,797) ------------ ------------ Total increase in net assets from operations ....................................... $ 12,978,809 $ 1,729,070 ============ ============
The accompanying notes are an integral part of these financial statements. -2- EQUUS II INCORPORATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited)
1996 1995 ------------ ----------- Investment income: Income from portfolio securities ................. $ 2,175,097 $ 1,818,249 Interest from temporary cash investments ......... 57,867 173,440 ------------ ----------- Total investment income ....................... 2,232,964 1,991,689 ------------ ----------- Expenses: Management fee ................................... 1,332,137 928,508 Management incentive fee ......................... 1,183,146 -- Deferred management incentive fee ................ 5,926,301 1,410,873 Director fees and expenses ....................... 147,825 155,513 Professional fees ................................ 174,042 154,531 Administrative fees .............................. 37,500 37,500 Mailing, printing and other expenses ............. 101,657 226,833 Interest expense ................................. 526,722 192,734 Franchise taxes .................................. 55,166 35,622 Amortization ..................................... 17,595 17,595 ------------ ----------- Total expenses ................................ 9,502,091 3,159,709 ------------ ----------- Net investment loss ................................. (7,269,127) (1,168,020) ------------ ----------- Realized gain on sales of portfolio securities, net .................................. 3,370,681 6,867,395 ------------ ----------- Unrealized appreciation of portfolio securities, net: End of period .................................... 40,151,825 9,442,784 Beginning of period .............................. 7,975,268 9,255,817 ------------ ----------- Increase in unrealized appreciation, net ........................... 32,176,557 186,967 ------------ ----------- Total increase in net assets from operations ................................ $ 28,278,111 $ 5,886,342 ============ ===========
The accompanying notes are an integral part of these financial statements. -3- EQUUS II INCORPORATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) 1996 1995 ------------- ------------ Operations: Net investment loss ...................... $ (7,269,127) $ (1,168,020) Realized gain on sales of portfolio securities, net ............. 3,370,681 6,867,395 Increase in unrealized appreciation of portfolio securities, net .......... 32,176,557 186,967 ------------- ------------ Increase in net assets from operations ..................... 28,278,111 5,886,342 ------------- ------------ Capital transactions: Proceeds from rights offering ............ 13,338,935 -- Rights offering expenses ................. (225,982) -- Dividends ................................ (183,123) Redemption of fractional shares .......... -- (115) Stock repurchased and retired under common stock repurchase plan .... -- (1,993,642) ------------- ------------ Increase (decrease) in net assets from capital share transactions ..... 12,929,830 (1,993,757) ------------- ------------ Net increase in net assets .................. 41,207,941 3,892,585 Net assets at beginning of period ........... 61,853,289 60,880,364 ------------- ------------ Net assets at end of period ................. $ 103,061,230 $ 64,772,949 ============= ============ The accompanying notes are an integral part of these financial statements. -4- EQUUS II INCORPORATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited)
1996 1995 ------------- ------------- Cash flows from operating activities: Interest and dividends received ................... $ 1,426,295 $ 1,622,476 Cash paid to management company, directors, bank and suppliers .............................. (3,471,404) (1,850,205) ------------- ------------- Net cash used by operating activities ........... (2,045,109) (227,729) ------------- ------------- Cash flows from investing activities: Purchase of portfolio securities .................. (18,021,986) (8,616,480) Proceeds from sales of portfolio securities ....... 7,736,537 8,941,229 Principal payments from portfolio companies ....... 8,400,000 3,603,328 Maturity of temporary cash investment with original maturities of greater than three months ......... -- 300,000 ------------- ------------- Net cash provided (used) by investing activities (1,885,449) 4,228,077 ------------- ------------- Cash flows from financing activities: Advances from bank ................................ 195,950,000 208,100,000 Repayments to bank ................................ (196,500,000) (194,700,000) Proceeds from rights offering ..................... 13,338,935 -- Rights offering expenses .......................... (225,982) -- Repurchase of common stock ........................ -- (1,993,642) Redemption of fractional shares ................... -- (115) ------------- ------------- Net cash provided by financing activities ....... 12,562,953 11,406,243 ------------- ------------- Net increase in cash and cash equivalents ....... 8,632,395 15,406,591 Cash and cash equivalents at beginning of period ........ 60,239,861 45,175,967 ------------- ------------- Cash and cash equivalents at end of period .............. $ 68,872,256 $ 60,582,558 ============= =============
The accompanying notes are an integral part of these financial statements. -5- EQUUS II INCORPORATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (Continued)
1996 1995 ------------ ----------- Reconciliation of increase in net assets from operations to net cash used by operating activities: Increase in net assets from operations ......................................... $ 28,278,111 $ 5,886,342 Adjustments to reconcile increase in net assets from operations to net cash used by operating activities: Realized gain on sale of portfolio securities, net ...................................................... (3,370,681) (6,867,395) Increase in unrealized appreciation, net ............................... (32,176,557) (186,967) Increase in accounts receivable ........................................ -- (44,886) Accrued interest and dividends exchanged for portfolio securities ................................................. (435,679) (272,244) Increase (decrease) in accrued interest receivable ..................... (370,990) 52,083 Amortization of commitment fee ......................................... 72,500 46,875 Commitment fees paid ................................................... (70,000) (75,000) Amortization of reorganization costs ................................... 17,595 17,595 Decrease in accounts payable ........................................... (197,732) (94,981) Increase in due to management company .................................. 6,208,324 1,415,015 ------------ ----------- Net cash used by operating activities .......................................... $ (2,045,109) $ (227,729) ============ ===========
The accompanying notes are an integral part of these financial statements. -6- EQUUS II INCORPORATED SUPPLEMENTAL INFORMATION - SELECTED PER SHARE DATA AND RATIOS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited)
1996 1995 ------------- ------------- Investment income .......................... $ 0.60 $ 0.67 Expenses ................................... 2.57 1.06 ------------- ------------- Net investment loss ........................ (1.97) (0.39) Realized gain on sale of portfolio securities, net ............. 0.91 2.30 Increase in unrealized appreciation of portfolio securities, net .......... 8.71 0.06 ------------- ------------- Increase in net assets from operations ............................ 7.65 1.97 ------------- ------------- Capital transactions: Effect of rights offering ................ (2.69) -- Dividends ................................ (0.04) -- Effect of common stock repurchases ....... -- 0.37 ------------- ------------- Net increase in net assets from capital transactions .......................... (2.73) 0.37 ------------- ------------- Net increase in net assets ................. 4.92 2.34 Net assets at beginning of period .......... 19.71 19.94 ------------- ------------- Net assets at end of period ................ $ 24.63 $ 22.28 ============= ============= Ratio of expenses to average net assets ................................ 11.52% 5.03% Ratio of net investment loss to average net assets ................ (8.82)% (1.86)% Ratio of increase in net assets from operations to average net assets ............................ 34.29% 9.37% Average shares outstanding during period ... 3,696,034 2,985,009
The accompanying notes are an integral part of these financial statements. -7- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES SEPTEMBER 30, 1996 (Unaudited)
Date Of Portfolio Company Initial Investment Cost Fair Value A.C. Liquidating Corporation February 1985 -4,885 shares of 10% Series C cumulative preferred stock $ 488,500 $ - -10% secured promissory notes 188,014 - Allied Waste Industries, Inc. (NASDAQ - AWIN) March 1989 -1,351,449 shares of common stock 5,109,808 11,893,580 -Warrants to buy up to 125,000 and 15,000 shares of common stock at $5.00 and $13.50 per share, through August 1999 and February 1997, respectively - 126,563 American Residential Services, Inc. (NYSE - ARS) December 1995 -1,221,035 shares of common stock 3,057,100 16,479,868 -Warrants to buy up to 100,000 shares of common stock at $15 per share through September 2001 - - BSI Holdings, Inc. February 1989 -230,965 shares of common stock 1,330,647 5,269,743 -1,200,000 shares of Series A preferred stock 1,200,000 1,200,000 -3,528,500 shares of 8% Series B preferred stock 3,528,500 3,528,500 -Warrants to buy up to 22,018, 31,926 and 3,991 shares of common stock at $0.01, $0.01 and $35 per share, through June 2006, August 2006 and August 2006, respectively. - 1,230,257 -1,000 shares of common stock of GCS RE, Inc. 132,910 132,910 Cardiovascular Ventures, Inc. November 1991 -150,000 shares of Series A convertible preferred stock 375,000 375,000 -214,286 shares of Series B convertible preferred stock 750,001 750,001 -56,717 shares of Series C convertible preferred stock 248,137 248,137
The accompanying notes are an integral part of these financial statements. -8- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES SEPTEMBER 30, 1996 (Unaudited) (Continued)
Date Of Portfolio Company Initial Investment Cost Fair Value Carruth-Doggett Industries, Inc. December 1995 -10% senior subordinated promissory note $ 2,250,000 $ 2,250,000 -Warrant to buy up to 33,333 shares of common stock at $0.01 per share through December 14, 2005 - - -Warrant to buy up to 333 shares of common stock of CDE Corp at $0.01 per share through December 2005 - - Coach USA, INC. (NASDAQ - TOUR) December 1985 -143,112 shares of common stock 1,863,357 3,108,154 David's Supermarkets, Inc. February 1990 -735,000 shares of common stock 735,000 450,000 -333,445 shares of 3.5% junior preferred stock 3,334,450 3,334,450 -Warrants to buy up to 538,462 shares of common stock at $1 per share through April 2000 - - Drypers Corporation (NASDAQ - DYPR) July 1991 -1,096,892 shares of common stock 6,400,132 3,151,143 -25,000 shares of 7.5% convertible preferred stock 2,500,000 6,500,001 -Warrants to buy up to 6,634 shares of common stock at $4 per share through June 1998 - - Garden Ridge Corporation (NASDAQ - GRDG) July 1992 -474,942 shares of common stock 685,030 7,841,318 Hot & Cool Holdings, Inc. March 1996 -12% subordinated promissory note 1,300,000 1,300,000 -Warrants to buy up to 14,942 shares of common stock at $.01 per share through March 2006 - -
The accompanying notes are an integral part of these financial statements. -9- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES SEPTEMBER 30, 1996 (Unaudited) (Continued)
Date Of Portfolio Company Initial Investment Cost Fair Value Industrial Equipment Rentals, Inc. June 1993 -182,230 shares of common stock $ 1,822 $ 500,000 -5,371 shares of junior preferred stock 537,100 537,100 -67,500 shares of Series B senior convertible preferred stock 250,050 250,050 -12% subordinated debenture 1,077,778 1,077,778 -9% senior subordinated debenture 499,950 499,950 Midway Airlines Corporation August 1993 -452,392 shares of Class C common stock 1,195,616 - -274,761 shares of junior preferred stock 2,747,610 - -12% subordinated note 271,000 271,000 -Warrants to buy up to 203,250 shares of Class C common stock at $.01 per share through April 2002 - - NCI Building Systems, Inc. (NASDAQ - BLDG) April 1989 -100,000 shares of common stock 159,784 3,250,000 Paracelsus Healthcare Corporation (NYSE - PLS) December 1990 -1,263,058 shares of common stock 5,278,748 11,100,401 Restaurant Development Group, Inc. June 1987 -610,909 shares of Class A common stock 2,891,156 700,000 -14% promissory note, face amount $350,000 275,000 350,000 -Prime +2% promissory note 639,122 639,122 -Warrants to buy up to 150,000 and 62,500 shares of common stock at $2.80 and $3 per share through November 1996 and April 1998, respectively - -
The accompanying notes are an integral part of these financial statements. -10- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES SEPTEMBER 30, 1996 (Unaudited) (Continued)
Date Of Portfolio Company Initial Investment Cost Fair Value Sovereign Business Forms, Inc. August 1996 -6,500 shares of preferred stock $ 650,000 $ 650,000 -15% promissory note 550,000 550,000 -Warrant to buy 551,894 shares of common stock at $1 per share through August 2006 - - Strategic Holdings, Inc. September 1995 -2,986,408 shares of common stock 2,986,408 2,986,408 -3,705,900 shares of Series B preferred stock 3,705,900 3,705,900 -1,000 shares of SMIP, Inc. common stock 150,000 150,000 -15% promissory note of SMIP, Inc. 175,000 175,000 Summit/DPC Partners, L.P. October 1995 -36.11% limited partnership interest 2,600,000 2,600,000 Travis International, Inc. December 1986 -66,784 shares of common stock 534,589 1,502,640 -104,500 shares of Class A common stock 25,701 2,351,250 Video Rental of Pennsylvania, Inc. January 1988 -125,000 shares of common stock 125,000 500,000 -125,000 shares of 9% redeemable preferred stock 125,000 125,000 -10% secured promissory note 2,672,349 2,672,349 -12% secured promissory note 900,000 900,000 -10,000 shares of common stock of Equus Video Corporation 25,000 25,000 WMW Industries, Inc. (formerly Williams & Mettle Co.) October 1989 -530,035 shares of common stock 1,024,309 463,830 -12% subordinated promissory note 763,747 763,747 -Junior participation in prime + 1.75% note 1,012,576 1,012,576 -Warrant to buy 72,672 shares of common stock at $0.01 per share through December 1999 - - ---------------- -------------- Total $69,326,901 $109,478,726 =========== ============
The accompanying notes are an integral part of these financial statements. -11- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES SEPTEMBER 30, 1996 (Unaudited) (Continued) All of the Fund's portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933. The Fund negotiates certain aspects of the method and timing of the disposition of the Fund's investment in each portfolio company, including registration rights and related costs. In connection with the investments in Allied Waste Industries, Inc., American Residential Services, Inc., BSI Holdings, Inc., Cardiovascular Ventures, Inc., Coach USA, INC., Drypers Corporation, Hot & Cool Holdings, Inc., Industrial Equipment Rentals, Inc., Paracelsus Healthcare Corporation, Sovereign Business Forms, Inc. and Strategic Holdings, Inc., rights have been obtained to demand the registration of such securities under the Securities Act of 1933, providing certain conditions are met. The Fund does not expect to incur significant costs, including costs of any such registration, in connection with the future disposition of its portfolio securities. As defined in the Investment Company Act of 1940, the Fund is considered to have a controlling interest in A.C. Liquidating Corporation, BSI Holdings, Inc., Industrial Equipment Rentals, Inc., Restaurant Development Group, Inc., Strategic Holdings, Inc., Video Rental of Pennsylvania, Inc. and WMW Industries, Inc. In addition, American Residential Services, Inc., Cardiovascular Ventures, Inc., David's Supermarkets, Inc., Drypers Corporation and Travis International, Inc. are considered to be affiliated entities of the Fund. The fair value of the Fund's investments in publicly traded securities include discounts from the closing market prices to reflect the effects of restrictions on the sale of such securities at September 30, 1996. Such discounts, as detailed below, total $15,990,453 or $3.82 per share as of September 30, 1996. Allied Waste Industries, Inc. ..... $ 1,012,011 American Residential Services, Inc. 7,541,801 Coach USA, Inc. ................... 720,092 Drypers Corporation ............... 4,736,424 Garden Ridge Corporation .......... 292,064 Paracelsus Healthcare Corporation . 1,688,061 ----------- Total discount .............. $15,990,453 Income was earned in the amount of $1,408,950 and $1,050,156 for the nine months ended September 30, 1996 and 1995, respectively, on portfolio securities of companies in which the Fund has a controlling interest. As defined in the Investment Company Act of 1940, all of the Fund's investments are in eligible portfolio companies. The Fund provides significant managerial assistance to all of the portfolio companies in which it has invested except Cardiovascular Ventures, Inc., Coach USA, Inc., Midway Airlines Corporation, Paracelsus Healthcare Corporation and Summit/DPC Partners, L.P. The Fund provides significant managerial assistance to portfolio companies that comprise 83% of the total value of the investments in portfolio companies at September 30, 1996. The accompanying notes are an integral part of these financial statements. -12- EQUUS II INCORPORATED NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995 (Unaudited) (1) ORGANIZATION AND BUSINESS PURPOSE Equus II Incorporated (the "Fund"), a Delaware corporation, was formed by Equus Investments II, L.P. (the "Partnership") on August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of common stock of the Fund. The shares of the Fund trade on the American Stock Exchange under the symbol EQS. The Fund seeks to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned companies in transactions negotiated directly with such companies. The Fund seeks to invest primarily in companies which intend to acquire other businesses, including leveraged buyouts. The Fund may also invest in recapitalizations of existing businesses or special situations from time to time. The Fund has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. (2) MANAGEMENT The Fund has entered into a management agreement with Equus Capital Management Corporation, a Delaware corporation (the "Management Company"). Pursuant to such agreement, the Management Company performs certain services, including certain management and administrative services necessary for the operation of the Fund. The Management Company entered into a Sub-Adviser Agreement with Equus Capital Corporation, a Delaware corporation (the "Sub-Adviser"), pursuant to which the Sub- Adviser provides certain investment advisory services for the Fund, including preparing the Fund's quarterly net asset valuations. The Management Company receives a management fee at an annual rate of 2% of the net assets of the Fund, paid quarterly in arrears. Included in "Due to management company" in the accompanying Balance Sheet at September 30, 1996 and 1995, are $515,306 and $309,266, respectively of such management fees. The Management Company also receives compensation for providing certain investor communication services, of which $37,500 is included in the accompanying Statements of Operations for the nine months ended September 30, 1996 and 1995. The Management Company also receives or must reimburse a management incentive fee equal to 20% of net realized capital gains less unrealized capital depreciation, computed on a cumulative basis over the life of the Fund. The Sub-Adviser receives a fee from the Management Company equal to 50% of the Management Company's net management incentive fee. The management incentive fee is paid or reimbursed quarterly in arrears. Included in "Due to management company" in the accompanying Balance Sheet at September 30, 1996, is $75,983 of such management incentive fees. Current management incentive fee expense of $1,183,146 is included in the accompanying Statement of Operations for the nine months ended September 30, 1996. Included in "Deferred management incentive fees" in the accompanying Balance Sheets are $10,221,636 and $4,295,335 of accrued management incentive fees at September 30, 1996 and December 31, 1995, respectively. Such fees are calculated on the net unrealized appreciation of investments in portfolio securities and will not be paid until such appreciation is realized. Deferred management incentive fee expense for the nine months ended September 30, 1996 and 1995 totaled $5,926,301 and $1,410,873, respectively. The deferred management incentive fee is reflected as an expense of the Fund when there is an increase in the Fund's net unrealized appreciation of portfolio securities and is reflected -13- as a reduction in expense to the Fund when there is a decrease in the Fund's net appreciation of portfolio securities. The Sub-Adviser is a wholly-owned subsidiary of the Management Company and the Management Company is controlled by a privately-owned corporation. As compensation for services rendered to the Fund, each director who is not an officer of the Fund receives an annual fee of $20,000 paid quarterly in arrears, a fee of $2,000 for each meeting of the Board of Directors attended in person, a fee of $1,000 for participation in each telephonic meeting of the Board of Directors and for each committee meeting attended ($500 for each committee meeting if attended on the same day as a Board Meeting), and reimbursement of all out-of-pocket expenses relating to attendance at such meetings. Certain officers and directors of the Fund serve as directors of Portfolio Companies, and receive and retain fees in consideration for such service. (3) SIGNIFICANT ACCOUNTING POLICIES Interim Financial Statements - The financial statements included herein have been prepared without audit and include all adjustments which management considers necessary for a fair presentation. Valuation of Investments - Portfolio investments are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination of net assets. Investments in companies whose securities are publicly traded are valued at their quoted market price as of the respective balance sheet dates, less a discount to reflect the estimated effects of restrictions on the sale of such securities ("Valuation Discount"), if applicable. Cost is used to approximate fair value of other investments until significant developments affecting an investment provide a basis for use of an appraisal valuation. Thereafter, portfolio investments are carried at appraised values as determined quarterly by the Sub- Adviser, subject to the approval of the Board of Directors. The fair market values of debt securities, which are generally held to maturity, are determined on the basis of the terms of the debt securities and the financial condition of the issuer. Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, $106,228,726 (including $60,074,466 in publicly-traded securities, net of a $15,990,453 Valuation Discount) and $68,098,481 (including $26,862,806 in publicly-traded securities, net of a $5,642,282 Valuation Discount) at September 30, 1996 and December 31, 1995, respectively, the Sub-Adviser's estimate of fair value may significantly differ from the fair value that would have been used had a ready market existed for the securities. Appraised values do not reflect brokers' fees or other normal selling costs or management incentive fees which might become payable on disposition of such investments. See Note 2 above regarding the accrual of management incentive fees. On a weekly basis, the Fund adjusts its net asset value for changes in the value of its publicly held securities and material changes in the value of its private securities and reports those amounts to Lipper Analytical Services, Inc. Such weekly net asset values appear in various publications, including BARRON'S and THE WALL STREET JOURNAL. Subsequent to September 30, 1996 and through November 12, 1996, the Fund's net asset value declined approximately 5.4% due to decreases in the market value of its publicly held securities. Investment Transactions - Investment transactions are recorded on the accrual method. Realized gains and losses on investments sold are computed on a specific identification basis. Cash Flows - For purposes of the Statements of Cash Flows, the Fund considers all highly liquid temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. Income Taxes - No provision for Federal income taxes has been made in the accompanying -14- financial statements as the Fund has qualified for pass-through treatment as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986. As such, all net income is allocable to the stockholders for inclusion in their respective tax returns. Net capital losses are not allocable to the shareholders but can be carried over to offset future earnings of the Fund. (4) BOOK TO TAX RECONCILIATION The Fund accounts for dividends in accordance with Statement of Position 93-2 which relates to the amounts distributed by the Fund as net investment income or net capital gains, which are often not equal to the corresponding income or gains shown in the Fund's financial statements. The Fund had undistributed net investment income and capital gains during 1995 of $173,128 and $9,995, respectively, for tax purposes. A dividend of such undistributed income was declared and will be distributed during 1996 (see note 5). The Fund had a net investment loss for tax purposes for the nine months ended September 30, 1996, and therefore has no net investment income to distribute for 1996. The Fund, for book purposes, has undistributed net capital gains of $5,943,891 in the accompanying Balance Sheet at September 30, 1996. However, for tax purposes, the Fund has distributed all of its net realized capital gains except for $2,197,530. The $2,197,530 is comprised of $2,187,535 of net realized capital gains for the nine months ended September 30, 1996 and $9,995 in net realized capital gains from 1995 which have not yet been distributed. The following is a reconciliation of the difference in the Fund's net realized capital gain on the sale of portfolio securities for book and tax purposes for the nine months ended September 30, 1996 and 1995, respectively. 1996 1995 ----------- ----------- Net realized gain on the sales of portfolio securities, book ........................ $ 3,370,681 $ 6,867,395 Management incentive fee .................. (1,183,146) -- Reversal of amounts previously written off ............................. -- 48,838 Utilization of capital loss carryforwards . -- (1,892,377) ----------- ----------- Net realized gain on the sales of portfolio securities, tax ............... $ 2,187,535 $ 5,023,856 =========== =========== (5) DIVIDENDS The Fund declared dividends of $183,123 during the nine months ended September 30, 1996, to be paid prior to year-end. The $183,123 represents $173,128 of ordinary income and $9,995 of capital gains. The Fund adopted a policy effective in 1995 to make dividend distributions of at least $0.50 per share on an annual basis. In the event that taxable income, including realized capital gains, exceeds $0.50 per share in any year, additional dividends may be declared to distribute such excess. Distributions can be made payable by the Fund either in the form of a cash distribution or a stock dividend. If the Fund does not have available cash to pay the minimum dividends, it may borrow the required funds or sell some of its portfolio investments. (6) TEMPORARY CASH INVESTMENTS Temporary cash investments, which represent the short-term utilization of cash prior to investment in securities of portfolio companies, distributions to the shareholders or payment of expenses, consist of money market accounts earning interest at rates ranging from 3.50% to 4.84% at September 30, 1996. The following is a list of temporary cash investments at September 30, 1996 and December 31, 1995: -15- 1996 1995 ----------- ----------- Broadcort Money Plus ................ $ -- $ 1,338 Dreyfus Cash Management Fund ........ -- 58,141 Dreyfus Treasury Cash Management Fund -- 60,026,074 First Interstate Bank of Texas, N.A . -- 85,353 Great Hall Money Market ............. 11 8,211 NationsBank of Texas, N.A ........... 68,871,062 -- Pitkin County Bank .................. -- 53,477 ----------- ----------- Total money market accounts ..... $68,871,073 $60,232,594 =========== =========== (7) PORTFOLIO SECURITIES During the nine months ended September 30, 1996, the Fund invested $9,800,000 in three new companies and made follow-on investments of $9,407,665 in nine portfolio companies, including $435,679 in dividends and accrued interest received in the form of additional portfolio securities and $750,000 of common stock received through the net exercise of common stock warrants. In addition, the Fund realized net capital gains of $3,370,681 during the nine months ended September 30, 1996. During the nine months ended September 30, 1995, the Fund invested $7,017,308 in a new company and made follow-on investments of $1,871,416 in six portfolio companies, and realized net capital gains of $6,867,395. (8) DEFERRED REORGANIZATION COSTS The Fund paid $117,300 in expenses related to the formation of the Fund and is amortizing such amount over 5 years. Accumulated amortization of such expenses totaled $99,705 and $82,110 at September 30, 1996 and December 31, 1995, respectively. (9) NOTES PAYABLE TO BANK The Fund had a $60,000,000 line of credit promissory note with a bank, with interest payable at the prime rate, at December 31, 1995. The prime rate was 8.5% at December 31, 1995. The Fund had $60,000,000 outstanding on such note at December 31, 1995, that was secured by $60,000,000 of the Fund's temporary cash investments. The Fund paid a $75,000 commitment fee on such note in 1995, which was deferred and amortized over the commitment period. Amortization expense related to such fees is included in "Interest expense" in the accompanying Statements of Operations for the nine months ended September 30, 1995. In March 1996, the Fund entered into a new $65,000,000 line of credit promissory note with a bank, with interest payable at 1% over the rate earned in its money market account. The Fund had $65,000,000 outstanding on such note at September 30, 1996, that was secured by $65,000,000 of the Fund's temporary cash investments. The Fund paid a $50,000 commitment fee in 1996, which was deferred and is being amortized over the commitment period. The note matures on April 4, 1997. The Fund also had a $13,000,000 revolving line of credit from a bank, with interest payable at prime, of which $5,750,000 was outstanding at December 31, 1995. The Fund paid a facility fee of $3,125 to the bank for such revolving line of credit during 1995, which is included in interest expense for the year ended December 31, 1995. The line of credit was secured by a portion of the Fund's investment in Allied Waste Industries, Inc., Champion Healthcare Corporation, Drypers Corporation, Garden Ridge Corporation and NCI Building Systems, Inc. -16- On March 18, 1996, the Fund entered into a new $20,000,000 revolving line of credit with another bank which replaced its $13,000,000 line of credit. The Fund had $200,000 outstanding under such line of credit at September 30, 1996. The line is secured by the Fund's investments in portfolio securities. The Fund paid a $20,000 commitment fee in connection with such loan which was deferred and will be amortized over the commitment period which ends April 4, 1997. The outstanding balance on the loan bears interest at prime + 1/4% to 3/4%. The fund also pays 1/4% interest on the unused portion of the line of credit. The average daily balances outstanding on the Fund's notes payable during the nine months ended September 30, 1996 and 1995, were $7,215,345 and $2,450,915, respectively. (10) STOCK REPURCHASE PLAN During 1995, the Board of Directors of the Fund authorized the repurchase of additional shares of the Fund's common stock, and during the nine months ended September 30, 1995, the Fund repurchased and cancelled 145,500 shares of its stock for $1,993,642. The stock repurchased in 1995 was repurchased at an average discount of 33.61% from its net asset value. (11) RIGHTS OFFERING On March 5, 1996, the Fund filed a registration statement with the Securities and Exchange Commission for a rights offering. Under the rights offering, the Fund issued each shareholder of record as of April 10, 1996, one right for each share owned. One share of common stock could be acquired for every three rights. The exercise price for shares in the rights offering was $12.75 per share, a 19.7% discount from the market price on April 10, 1996. On May 8, 1996, the Fund completed its rights offering, which was over-subscribed. The Fund issued a total of 1,046,191 shares at $12.75 per share and raised $13,112,953, net of $225,982 in expenses. The proceeds from the rights offering were used to repay debt and to fund the commitments the Fund had made for new and follow-on investments. (12) COMMITMENTS AND CONTINGENCIES The Fund has made commitments to invest, under certain circumstances, up to an additional $2,000,000 in BSI Holdings, Inc., $565,500 in GCS RE, Inc., $450,000 in Sovereign Business Forms, Inc., $300,000 in Video Rental of Pennsylvania, Inc. and $500,000 in a new company. In connection with its commitment to GCS RE, Inc., the Fund has committed to a bank to maintain at least $380,000 in temporary cash investments to fund such commitment. On April 1, 1996, an action was filed in federal district court in Houston, Texas by two stockholders of the Fund against the directors of the Fund, the Management Company, and the Fund, as nominal defendant, asserting that by approving the rights offering the Management Company and the directors of the Fund violated their fiduciary duties to the Fund's stockholders under the Investment Company Act of 1940 and Delaware common law, that the Fund and the Management Company aided and abetted the breaches of fiduciary duties. The plaintiffs seek to have the action certified as a class action on behalf of all of the stockholders of the Fund but do not specify the amount of any damages that have been suffered. The Fund, its directors and the Management Company intend to vigorously defend against this action, and management of the Fund believes that ultimate resolution of such complaint will not have a material adverse effect on the Fund's financial position or results of operations. Certain of the portfolio companies are involved in asserted claims and have the possibility for unasserted claims which may ultimately affect the fair value of the Fund's portfolio investments. In the opinion of Management, the financial position or operating results of the Fund will not be materially affected by these claims. -17- (13) SUBSEQUENT EVENTS In October 1996, in connection with its commitment discussed above, the Fund advanced an additional $100,000 to Sovereign Business Forms, Inc. under a 15% promissory note. In addition, during October 1996, the Fund advanced $216,705 to Strategic Materials, Inc. in exchange for 216,705 shares of common stock. In connection with such purchase, the Fund received warrants to buy up to 100,000 and 225,000 shares of Strategic Materials Inc. common stock for $1.50 and $.004643 per share, respectively. Subsequent to September 30, 1996, the Fund repaid $65,200,000 of notes payable to the bank. -18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES Equus II Incorporated (the "Fund"), a Delaware corporation and business development company, was formed as a successor to Equus Investments II, L.P. (the "Partnership" or "Predecessor Entity") pursuant to a reorganization in which all of the assets and liabilities of the Partnership were transferred to the Fund on July 1, 1992, in exchange for 1,866,132 shares of common stock of the Fund (the "Exchange"). Such shares were then distributed on a pro rata basis to the partners of the Partnership, effectively liquidating the Partnership. Each Limited Partner received one share of common stock of the Fund for each unit of partnership interest owned. The Fund has qualified for pass-through tax treatment as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986 each year since its organization. On September 11, 1992, the Fund's shares of common stock were listed for trading on the American Stock Exchange, under the symbol "EQS". At September 30, 1996, the Fund had $109,478,726 of its assets invested in portfolio securities of 22 companies, and has committed to invest up to an additional $3,315,500 in three of such companies and $500,000 in a new company under certain conditions. Current temporary cash investments, anticipated future investment income, proceeds from borrowings and proceeds from the sale of existing portfolio securities are believed to be sufficient to finance these commitments. At September 30, 1996, the Fund had $200,000 outstanding on its $20,000,000 revolving line of credit loan from a bank. On March 5, 1996, the Fund filed a registration statement with the Securities and Exchange Commission for a rights offering. Under the rights offering, the Fund issued each shareholder of record as of April 10, 1996, one right for each share owned. One share of common stock could be acquired for every three rights. The exercise price for shares in the rights offering was $12.75 per share, a 19.7% discount from the market price on April 10, 1996. On May 8, 1996, the Fund completed its rights offering, which was over-subscribed. The Fund issued a total of 1,046,191 shares at $12.75 per share and raised $13,112,953, net of $225,982 in expenses. The proceeds from the rights offering were used to repay debt and to fund the commitments the Fund had made for new and follow-on investments. Net cash used by operating activities was $2,045,109 and $227,729 for the nine months ended September 30, 1996 and 1995. A decrease in cash interest and dividends received from portfolio companies in 1996 and increased interest expenses and management incentive fees paid during 1996 accounted for the majority of the increase in cash used by operating activities. At September 30, 1996, the Fund had $68,871,073 of its total assets of $179,301,832 invested in temporary cash investments consisting of money market securities. This amount includes proceeds from a $65,000,000 revolving line of credit to a bank that is utilized to enable the Fund to achieve adequate diversification to maintain its pass-through tax status as a regulated investment company. Such amount was repaid to the bank on October 2, 1996. The Fund has the ability to borrow funds and issue forms of indebtedness, subject to certain restrictions. Net investment income and net realized gains from the sales of portfolio investments are intended to be distributed at least annually, to the extent such amounts are not reserved for payment of contingencies or to make follow-on or new investments. The Fund reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Fund as long-term capital gains and shareholders will be able to claim their proportionate share of the federal income taxes paid by the Fund on such gains as a credit against their own federal income tax liabilities. Stockholders will also be entitled to increase the adjusted tax basis of their Fund shares by the difference between their undistributed capital gains and their tax credit. -19- RESULTS OF OPERATIONS INVESTMENT INCOME AND EXPENSE Net investment loss after all expenses amounted to $7,269,127 and $1,168,020 for the nine months ended September 30, 1996 and 1995, respectively. The net investment loss in 1996 was primarily attributable to the accrual of $1,183,146 in management incentive fees and $5,926,301 in deferred management incentive fees related to the realized gains from the sales of portfolio securities of $3,370,681 and the increase in the net unrealized appreciation of portfolio securities of $32,176,557, respectively. Income from portfolio securities increased to $2,175,097 in 1996 as compared to $1,818,249 in 1995, due to the increase in amounts invested in dividend-bearing portfolio securities during 1996 as compared to 1995. Interest expense increased to $526,722 in 1996 as compared to $192,734 in 1995, due to the increase of the average daily balances outstanding on the lines of credit to $7,215,345 during the nine months ended September 30, 1996, from $2,450,915 in 1995. The Management Company receives management fee compensation at an annual rate of 2% of the net assets of the Fund. Such fees amounted to $1,332,137 and $928,508 for nine months ended September 30, 1996 and 1995, respectively. The increase in 1996 is due to the $28,278,111 increase in net assets from operations during the nine months ended September 30, 1996 and the $13,112,953 in net equity raised in the Fund's rights offering. The Management Company also receives or must reimburse a management incentive fee equal to 20% of net realized capital gains less unrealized capital depreciation, computed on a cumulative basis over the life of the Fund. Management incentive fees of $1,183,146 were accrued during the nine months ended September 30, 1996. Deferred management incentive fee expense (income) for the nine months ended September 30, 1996 and 1995 totaled $5,926,301 and $1,410,873, respectively. The deferred management incentive fee is reflected as an expense of the Fund when there is an increase in the Fund's net unrealized appreciation of portfolio securities and is reflected as a reduction in expense to the Fund when there is a decrease in the Fund's net appreciation of the portfolio securities. The deferred management incentive fees are not paid until such appreciation is realized. REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES During the nine months ended September 30, 1996, the Fund realized net capital gains of $3,370,681 from the sale or disposition of securities of six portfolio companies. The Fund sold 233,044 shares of Allied Waste Industries, Inc. ("AWIN") common stock for $1,563,678, realizing a capital gain of $461,919, exchanged 25,571 shares of Enterprises Holding Company preferred stock for $1,173,598 in cash and 238,933 shares of American Residential Services, Inc. common stock, realizing a capital gain of $1,173,598, sold 96,000 shares of Garden Ridge Corporation common stock for $4,719,360 realizing a capital gain of $4,343,372, sold 32,789 shares of Tech-Sym Corporation for $1,029,901, realizing a capital gain of $911,656 and exchanged $5,083,083 of notes receivable from Yellow Cab Service Corporation and $63,601 in cash for 71,440 shares of Coach USA, Inc common stock, valued at $1,714,560, realizing a capital loss of $3,432,124. In addition, the Fund realized a capital loss of $87,740 on its investment in Sports & Leisure, Inc., which filed for Chapter 11 bankruptcy during February 1996. During the nine months ended September 30, 1995, the Fund realized capital gains of $6,867,395 from the sale of securities in five portfolio companies. -20- UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES Net unrealized appreciation on investments increased $32,176,557 during the nine months ended September 30, 1996, from $7,975,268 to $40,151,825. Such net increase resulted from increases in the estimated fair value of securities of ten of the Fund's Portfolio Companies aggregating $35,323,661, the decrease in the estimated fair value of the securities of three of the Fund's portfolio companies aggregating $3,433,992, and the transfer of $286,888 in net unrealized depreciation to net realized gains from the sale of investments in three companies. Net unrealized appreciation on investments increased $186,967 during the nine months ended September 30, 1995, from $9,255,817 to $9,442,784. Such net increase resulted from increases in the estimated fair value of securities of six of the Fund's portfolio companies aggregating $13,403,478, a decrease in the estimated fair value of securities of five portfolio company of $9,675,231 and the transfer of $3,541,280 in net unrealized appreciation to net realized gains. DIVIDENDS The Fund declared dividends of $183,123 during the nine months ended September 30, 1996 and no dividends during the nine months ended September 30, 1995. PORTFOLIO INVESTMENTS During the nine months ended September 30, 1996, the Fund invested $9,800,000 in three new Portfolio Companies and made follow-on investments in nine Portfolio Companies of $9,407,665, including $435,679 in accrued interest and dividends received in the form of additional portfolio securities and $750,000 of common stock received through the net exercise of common stock warrants. On January 2, 1996, the Fund exercised its warrants to acquire 163,044 shares of AWIN on a net exercise basis. This resulted in the Fund receiving 56,054 shares of AWIN valued at $750,000, which were paid for by tendering the remaining 106,990 shares to AWIN. In May 1995, the Fund received 23,751 shares of common stock of AWIN valued at $144,733, as payment for dividends and inducement for the conversion of preferred stock to common stock. In February 1996, the Fund acquired 25,000 shares of 7.5% convertible preferred stock of Drypers Corporation for $2,500,000. The preferred stock is convertible into 2,500,000 shares of common stock of Drypers Corporation. In March 1996, the Fund acquired 24,810 shares of Series A preferred stock and 190 shares of Series B preferred stock of Enterprises Holding Company ("EHC"), for $2,481,000 and $19,000, respectively. On June 30, 1996, the Fund received an additional 571 shares of Series A preferred stock of EHC as payment for $57,100 in dividends. In addition, the Fund invested $4,800,000 in a 12% promissory note of EHC. EHC was formed to acquire Crown Services, Inc., a company which provides plumbing, heating and air conditioning and electrical services in Houston, Texas. During 1996 the Fund advanced an additional $2,550,000 on a $2,600,000 prime + 1/4% convertible promissory note to American Residential Services, Inc. ("ARS"), a company formed to acquire existing businesses which provide plumbing, heating and air conditioning and electrical services to the residential community. On September 25, 1996, ARS completed an initial public offering of its common stock. In connection with such offering, ARS acquired EHC and the Fund received $1,173,598 in cash and 238,933 shares of ARS common stock in exchange for 5,000 shares of its EHC preferred stock. In addition, the Fund received 137,140 shares of ARS common stock in exchange for its remaining 20,571 shares of EHC preferred stock. The $4,8000,000 promissory note due from EHC was also repaid in full. The Fund was repaid $2,100,000 of the $2,600,000 promissory note. The remaining -21- $500,000 was converted into 844,962 shares of ARS common stock. During March 1996, the Fund invested $1,300,000 in Hot & Cool Holdings, Inc. ("Hot & Cool"), in exchange for a 12% subordinated promissory note. In addition, the Fund received warrants to buy 14,942 shares of common stock of Hot & Cool for $.01 per share through March 8, 2006. Hot & Cool manufactures automotive radiators and other heat transfer products in South Texas and Mexico. In March 1996, the Fund committed to invest up to an additional $1,200,000 in Video Rental of Pennsylvania ("VRP") in exchange for a 12% promissory note. The Fund had advanced $900,000 on such note through September 30, 1996. In April 1996, the Fund rolled $147,349 of accrued interest into a new $2,672,349, 10% promissory note due from VRP. In January 1996, in connection with the guaranty of $5,000,000 of BSI Holdings, Inc. ("BSI") debt, the Fund received warrants to acquire up to 22,018 shares of BSI Holdings, Inc. common stock for $0.01 per share. In May 1996, the Fund exercised warrants to buy 64,715 shares of common stock of BSI Holdings, Inc. for $647. On August 9, 1996, the Fund acquired 1,200,000 shares of Series A preferred stock of BSI for $1,200,000. In connection with such investment, the Fund received warrants to buy up to 31,926 and 3,991 shares of BSI common stock for $0.01 and $35 per share, respectively, through August 2006. In addition, on August 9, 1996 , the Fund converted its $3,350,000 senior subordinated debenture and $178,500 subordinated promissory note into 3,528,500 shares of 8%, Series B preferred stock of BSI. In May 1996, the Fund converted $342,541 of its note receivable from Champion Healthcare Corporation ("CHC") and exercised warrants to buy 45,000 and 5,246 shares of common stock of (CHC") for $315,000 and $27,541, respectively. In August 1996, CHC was merged into Paracelsus Healthcare Corporation ("PLS") and received one share of Paracelsus common stock for each share of common stock of CHC and two shares of PLS common stock for each share of CHC preferred stock. In January 1996, the Fund rolled $86,497 of accrued interest along with $677,250 from an existing note receivable from WMW Industries, Inc. ("WMW") into a new $763,747, 12% subordinated promissory note. In addition, in May 1996, the Fund purchased 40,617 shares of Series B convertible preferred stock of WMW for $67,830. In June 1996, the Fund converted its Series A and Series B convertible preferred stock of WMW into 4,642,452 shares of WMW common stock. WMW then effected a 10 for 1 reverse stock split leaving the Fund with 530,035 shares of WMW common stock. On August 22, 1996, the Fund acquired 6,500 shares of common stock for $650,000, invested $550,000 in a 15% promissory note and obtained warrants to buy up to 551,894 shares of common stock of Sovereign Business Forms, Inc. for $1 per share through August 2006. Sovereign Business Forms, Inc, located in Houston, Texas, is a business forms manufacturer. On August 29, 1996, Coach USA, Inc. acquired Yellow Cab Services Corporation. The Fund received 143,112 shares of Coach USA, Inc. common stock for its investment in Yellow Cab Service Corporation. During the nine months ended September 30, 1995, the Fund made follow-on investments of $749,172 in three portfolio companies. Of the companies in which the Fund has investments at September 30, 1996, Allied Waste Industries, Inc., American Residential Services, Inc., Coach USA, Inc., Drypers Corporation, Garden Ridge Corporation, NCI Building Systems, Inc. and Paracelsus Healthcare Corporation are publicly held. The others each have a small number of shareholders and do not generally make financial information available to the public. However, each company's operations and financial information are reviewed by Management to determine the proper valuation of the Fund's investment. -22- SUBSEQUENT EVENTS In October 1996, in connection with its commitment, the Fund advanced an additional $100,000 to Sovereign Business Forms, Inc. under a 15% promissory note. In addition, during October 1996, the Fund advanced $216,705 to Strategic Materials, Inc. in exchange for 216,705 shares of common stock. In connection with such purchase, the Fund received warrants to buy up to 100,000 and 225,000 shares of Strategic Materials Inc. common stock for $1.50 and $.004643 per share, respectively. Subsequent to September 30, 1996, the Fund repaid $65,200,000 of notes payable to the bank. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits None (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Fund during the period for which this report is filed. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned, thereunto duly authorized. EQUUS II INCORPORATED By:/s/NOLAN LEHMANN Nolan Lehmann, President, Principal Financial and Accounting Officer Date: November 13, 1996 -23- EX-27 2
6 9-MOS DEC-31-1996 SEP-30-1996 138,197,974 178,349,799 898,255 53,778 0 179,301,832 0 0 76,240,602 76,240,602 4,185 56,961,329 4,184,766 3,138,575 0 0 5,943,891 0 40,151,825 103,061,230 364,921 1,836,293 31,750 9,502,091 (7,269,127) 3,370,681 32,176,557 28,278,111 0 0 0 0 1,046,191 0 0 41,207,941 0 2,583,206 0 0 8,441,584 526,722 9,502,091 82,457,259 19.71 (1.97) 9.62 0.04 0 0 24.63 11.52 7,215,345 1.72
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