Item 1. Business
Formation
Equitable Capital Partners, L.P. (the "Fund" or the "Registrant") was formed along with Equitable Capital Partners (Retirement Fund), L.P. (the "Retirement Fund," and collectively with the Fund referred to as the "Funds"). The Certificates of Limited Partnership were filed under the Delaware Revised Uniform Limited Partnership Act on February 2, 1988 and the Funds' operations commenced on October 13, 1988. The Fund seeks current income and capital appreciation potential by investing in privately structured, friendly leveraged acquisitions and leverage recapitalizations. The Fund pursues this objective by investing primarily in subordinated debt and related equity securities ("Mezzanine Investments") issued in conjunction with the "mezzanine financing" of leveraged acquisitions and leveraged recapitalizations. Mezzanine Investments, follow-on investments, bridge investments and certain other investments which the Fund is permitted to invest in are referred to herein as "Enhanced Yield Investments."
On July 22, 1993, Equitable Capital Management Corporation ("Equitable Capital"), formerly the Managing General Partner and investment adviser of the Funds, transferred substantially all of the assets comprising Equitable Capital's business to Alliance Capital Management L.P. ("Alliance Capital") and its wholly-owned subsidiary, Alliance Corporate Finance Group Incorporated ("Alliance Corporate"). In connection with such transaction, the limited partners of the Funds voted to approve a new investment advisory agreement between the Funds and Alliance Corporate and also voted to admit Alliance Corporate as Managing General Partner of the Funds (the "Managing General Partner") to succeed Equitable Capital. Accordingly, on July 22, 1993, the closing date of the transaction described above, Alliance Corporate was admitted as the successor Managing General Partner of the Funds. Equitable Capital assigned all of its interest as General Partner to Alliance Corporate. Robert F. Shapiro, Robert W. Lear, Alton G. Marshall and William G. Sharwell, who are not affiliated with Alliance Corporate or "interested persons" of the Funds for purposes of the Investment Company Act of 1940 as amended (the "Investment Company Act"), serve as the Funds' independent general partners (the "Independent General Partners"). Messrs. Shapiro and Lear have served since June 1988, and Mr. Marshall and Dr. Sharwell since 1989. The Managing General Partner is an indirect partially-owned subsidiary of The Equitable Life Assurance Society of the United States ("Equitable Life") and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. In addition, Alliance Corporate was admitted as the successor investment adviser to the Funds (the "Investment Adviser") pursuant to a new investment advisory agreement executed as of July 22, 1993 and since such date, has been responsible, subject to the supervision of the Independent General Partners, for the management of the Funds' investments.
The Fund elected to operate as a business development company under the Investment Company Act of 1940, as amended. As such, it is subject to certain provisions of the Investment Company Act. The description of the Fund's investment objective and policies, its management arrangements and certain provisions of the Investment Company Act applicable to the Fund are set forth in the information contained in the Prospectus of the Fund, dated July 15, 1988 (the "Prospectus"), filed with the Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act"), on July 19, 1988 under the following captions: "Investment Objective and Policies," "Management Arrangements" and "Regulation." Such information is incorporated by reference into this Item 1.
The Funds jointly offered an aggregate of 1,000,000 units of limited partnership interest ("Units") to investors in a public offering registered under the Securities Act pursuant to a Registration Statement on Form N-2 (File No. 33-20093), which was declared effective under the Securities Act by the Commission on July 15, 1988. Merrill Lynch, Pierce, Fenner & Smith (the "Agent"), an affiliate of ML Fund Administrators, Inc. (the "Fund Administrator"), acted as selling agent for the Units offered by the Fund.
On October 13, 1988, the Fund issued 284,611 Units to investors, and Equitable Capital, as Managing General Partner, admitted 18,288 investors as limited partners of the Fund (the "Limited Partners"). The net proceeds of the offering of such Units to the Fund was $264,688,230 after giving effect to volume discounts of $737,600 and the payment of $19,185,170 in sales commissions to the Agent. Equitable Capital, in its capacity as Managing General Partner, contributed a demand promissory note in the principal amount of $2,641,836 as required by the Amended and Restated Agreement of Limited Partnership, dated as of October 13, 1988 (the "Partnership Agreement"), pursuant to which the Fund had been organized . Equitable Capital reduced this note by $367 resulting from actual syndication expenses paid in excess of original estimates. The public offering has been concluded.
In connection with its organization and offering, the Fund incurred $554,631 in organizational expenses and $2,633,942 in offering, sales and marketing expenses. The organizational expenses were amortized on a straight-line basis over a sixty month period that commenced on October 13, 1988. Such expenses were fully amortized as of October 31, 1993. The offering, sales and marketing expenses incurred by the Fund have been paid and accounted for as a charge to the capital account of the Fund's partners. The net proceeds available for investment by the Fund after such offering less the return of capital distributed to the Limited Partners of $45,247,457 equaled $216,252,200.
Investments
As set forth in the Partnership Agreement, the Fund's investment period ended on October 12, 1991, three years after the Fund's operations commenced. Thereafter, the Fund is not permitted to acquire new Enhanced Yield Investments, but can make follow-on investments in existing portfolio companies. During the year ended December 31, 1996, the Fund made a follow-on investment in one Managed Company (as defined in the Prospectus) at a total cost of $4,532.
During the year ended December 31, 1995, the Fund made a follow-on investment in one Managed Company at a total cost of $1,869 and paid $457 in additional consideration to exercise warrants. During the year ended December 31, 1994, the Fund made a follow-on investment in one Managed Company at a total cost of $461.
As of December 31, 1996, the Fund had a total of 9 Enhanced Yield Investments at a net cost of $74,398,957 (inclusive of the receipt of securities having a capitalized cost of $854,000 received as payment-in-kind interest on certain Enhanced Yield Investments). During 1996, 1995 and 1994, the Fund received $28,181,211, $21,907,154, and $54,858,990, respectively, in principal payments and prepayments relating to certain Enhanced Yield Investments.
Pending investments in Enhanced Yield Investments, the net proceeds of the public offering were invested in certain temporary investments, consisting principally of commercial paper with maturities of less than sixty days. Currently, proceeds that are not invested in Enhanced Yield Investments or returned to Limited Partners are held in such temporary investments.
New Investments in 1996
The Fund's investment period ended on October 12, 1991. Accordingly, the Fund made no new investments in 1996.
Follow-on Investments in 1996
In 1996, the Fund made a single follow-on investment as described below:
RI Holdings, Inc. ("Rowe")
Rowe is engaged in the design, engineering and manufacturing of jukeboxes, bill acceptors and currency changers.
Under the terms of Rowe's senior subordinated notes, the Fund receives common stock at a nominal cost of one cent per share for each interest payment date on which Rowe delivers payment-in-kind securities in lieu of making a cash payment. On May 1, 1996, the Fund acquired 453,189.90 shares of Common Stock of RI Holdings, Inc. for a total cost of $4,532.
As of December 31, 1996, the Fund's investment in Rowe totaled $14,882,644 which includes senior subordinated PIK notes.
Competition
The Fund competes with other entities having a similar investment objective. In addition, since Enhanced Yield Investments are selected and managed exclusively by Alliance Corporate on behalf of the Fund, other entities which compete with Alliance Corporate with respect to such investments therefore compete with the Fund. Competitors include other private and public mezzanine funds, other business development companies, investment partnerships and corporations, small business investment companies and large industrial and financial companies investing directly or through affiliates and individuals.
Employees
The Fund has no employees. The Managing General Partner, subject to the supervision of the Independent General Partners, manages and controls the Fund's investments. Certain officers of Alliance Corporate have been designated as agents of the Fund with titles corresponding to the titles of the offices held by such persons with Alliance Corporate. The Fund Administrator performs administrative services for the Fund on behalf of the Managing General Partner.
Item 2.
Item 2. Properties
The Fund does not own or lease any physical properties.
Item 3.
Item 3. Legal Proceedings
The Fund is not party to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Units are illiquid securities and are subject to significant restrictions on transfer. The information in the Prospectus under the caption "Transferability of Units" is incorporated in this Item 5 by reference. There is no established trading market for the Units. The Partnership Agreement contains restrictions that are intended to prevent the development of a public market.
The number of holders of Units as of December 31, 1996 was 17,505. The Managing General Partner holds a general partner interest in the Fund and does not hold any Units. Pursuant to the terms of the Partnership Agreement, the Fund generally makes distributions within 45 days after the end of each calendar quarter of cash income received from investments in excess of expenses of operation, reserves for expenses and certain investments and liabilities. Net cash receipts representing cumulative income and gains are distributed as soon as practicable after the related disposition. Such distributions are allocated among the Managing General Partner, and the Limited Partners, in general, first 99% to the Limited Partners and 1% to the Managing General Partner until the Limited Partners have received a cumulative priority return of 10% noncompounded on an annual basis on their investments in Enhanced Yield Investments, second, 70% to the Limited Partners and 30% to the Managing General Partner until the Managing General Partner has received 20% of all current and prior distributions on such investments and, thereafter, 80% to the Limited Partners and 20% to the Managing General Partner. The Fund's distribution procedures are described in detail in the Prospectus under the caption "Distributions and Allocations"; the information under such caption is incorporated by reference in this Item 5.
On February 5, 1997, the Independent General Partners approved an aggregate cash distribution of $21,719,699 for the three months ended December 31, 1996, which was paid on February 14, 1997. The amount distributed to Limited Partners was $21,710,127, or $76.28 per Unit (of which $6,651,359 is capital returned from investments during the fourth quarter of 1996), to Limited Partners of record at December 31, 1996. On a per Unit basis, this distribution to Limited Partners includes $49.58 of realized gains, $3.33 of income from operations and $23.37 of return of capital. The Managing General Partner's one percent allocation of $219,294 was reduced by its one percent allocation of realized gains and capital returned from investments during the fourth quarter of 1996, of $209,722 (which is being held as a Deferred Distribution Amount pursuant to the Partnership Agreement), resulting in a net distribution of $9,572.
Item 6.
Item 6. Selection Financial Data
For the Years Ended
(a) Includes Return of Capital of $8,128,490 or $28.56 per LP Unit. (b) Includes Return of Capital of $276.52 per LP Unit. (c) Includes Return of Capital of $25,324,686 or $88.98 per LP Unit.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Net Proceeds of Offering
On October 13, 1988, the Fund completed the initial public offering of Units, admitting 18,288 Limited Partners who purchased 284,611 Units. The net proceeds available for investment by the Fund after such offering were $261,499,657 after volume discounts, sales commissions and organizational, offering, sales and marketing expenses.
Investments
During the year ended December 31, 1996, the Fund made a follow-on investment in one Managed Company at a total cost of $4,532.
As of December 31, 1996, the Fund had a total of 9 Enhanced Yield Investments at a net cost of $74,398,957 (inclusive of the receipt of securities having a capitalized cost of $854,000 received as payment-in-kind interest on certain Enhanced Yield Investments).
Proceeds from Investments
During the year ended December 31, 1996, the Fund received the following proceeds:
During the year ended December 31, 1996, the Fund received a total of $709,500 and $187,444 from Western Pioneer, Inc. and U.S. Leather Holdings, Inc., respectively, as principal paydowns of the senior notes held by the Fund. No gain or loss has been recorded on the transactions.
During the year ended December 31, 1996, the Fund received additional proceeds of $266,713 from Polaris Pool Systems, Inc. The money represents proceeds from the sale of the investment from prior years that have been held in escrow for future adjustments and expenses not paid on the sale dates. These proceeds were recorded and distributed as gains.
During March 1996, the Fund sold its remaining ASR Acquisition Corp. common stock for $2,045,112 and recognized a gain of $2,010,551 on the sale.
On April 9, 1996, the Equitable investors foreclosed on the common stock of United States Leather Holdings, Inc. All securities held by the Fund have been surrendered and cancelled in exchange for 795 shares of common stock in Leather U.S., Inc. The shares will have a cost basis of 50% of the original par value of the 15% Senior Debentures surrendered.
On May 8, 1996, the Fund received dividend income of $3,760,524 from Bank United Corp.
On August 6, 1996, a comprehensive restructuring closed for MTI Holdings, Inc. The Fund recognized a loss of $1,449,097 on this transaction.
On August 14, 1996, the Fund sold 207,492 shares of Bank United Corp. (formerly USAT Holdings Inc.) common stock for $3,911,224 and recognized a gain of $2,572,585.
On September 12, 1996, the Fund sold its Tulip Holding Corp. 14.5% Subordinated Notes for $5,687 and recognized a loss of $8,508,727 on the sale. The 16.5% Subordinated Notes, Series A Exchangeable Preferred Stock and Class A Common Stock were deemed worthless resulting in a total realized loss of $5,320,733 to the Fund.
On September 30, 1996, the Fund sold 22,977 shares of Ampex Recording Media Corp. Class A Common Stock for $182,953 which resulted in a loss of $1,552 to the Fund. The Fund sold its remaining 22,690 shares of Ampex Recording Media Corp. Class A Common Stock on November 29, 1996,for $182,946 and recognized a gain of $586 on the sale.
During the fourth quarter of 1996, the Fund sold 775,858 shares of Lexmark International Group, Inc. common stock for $18,057,338 resulting in a gain of $12,884,925 to the Fund.
On November 6, 1996, the Apollo Radio Holding Co., Inc. common stock and warrants held by the Fund were redeemed. The Fund received proceeds of $1,587,133 which resulted in a realized gain of $1,364,383 to the Fund.
On December 17, 1996, the Fund sold its American Paper Group, Ltd. 5% Subordinated Notes and common stock for $1,108,132 resulting in no gain or loss to the Fund.
During the year ended December 31, 1996, the Fund received a total of $131,558 from Pergament Home Centers, Inc., as principal paydowns of the Floating Rate Demand Note held by the Fund. No gain or loss has been recorded on the transactions.
For additional information, refer to the Supplemental Schedule of Realized Gains and Losses and Note 10 to the Financial Statements.
The Fund's Enhanced Yield Investments are typically issued in private placement transactions and are subject to certain restrictions on transfer, and are thus relatively illiquid. The balance of the Fund's assets at the end of the period covered by this report was invested in Temporary Investments, comprised of commercial paper with maturities of less than sixty days.
All cash dividends, interest and other income received by the Fund in excess of expenses of operation and reserves for expenses and certain investments and liabilities are distributed to the Limited Partners of the Fund and to Alliance Corporate, as the Managing General Partner, within 45 days after the end of each calendar quarter. Before each quarterly cash distribution, the Fund will analyze the then current cash projections and determine the amount of any additional reserves it deems necessary.
Participation in Enhanced Yield Investments
The Fund is invested primarily in Enhanced Yield Investments, also known in the securities industry as "high yield securities". The securities in which the Fund has invested were issued in conjunction with the mezzanine financing of privately structured, friendly leveraged acquisitions, recapitalizations and other leveraged financings, and are generally linked with an equity participation. Enhanced Yield Investments are debt and preferred equity securities that are below investment grade, i.e., unrated or rated by Standard & Poor's Corporation as BB or lower or by Moody's Investor Services, Inc. as Ba or lower. Risk of loss upon default by the issuer is significantly greater with Enhanced Yield Investments than with investment grade securities because Enhanced Yield Investments are generally unsecured and are often subordinated to other creditors of the issuer. Also, these issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as a recession or increasing interest rates, than investment grade issuers. Most of these securities are subject to resale restrictions and generally there is no quoted market for such securities.
Although the Fund cannot eliminate its risks associated with participation in Enhanced Yield Investments, it has established risk management policies. The Fund subjects each prospective investment to rigorous analysis, and makes only those investments that have been recommended by the Managing General Partner and that meet the Fund's investment guidelines or that have otherwise been approved by the Independent General Partners.
Fund investments are measured against specified Fund investment and performance guidelines. To limit the exposure of the Fund's capital in any single issuer, the Fund limits the amount of its investment in a particular issuer. The Fund also continually monitors portfolio companies in order to minimize the risks associated with participation in Enhanced Yield Investments.
Results of Operations
For the year ended December 31, 1996, the Fund had net investment income of $5,918,157, an increase of $702,946 from the net investment income of $5,215,211 for the year ended December 31, 1995. The Fund had net investment income of $6,924,128 for the same period in 1994. Net investment income is comprised of investment income (primarily interest and dividend income) offset by expenses. The increase in the 1996 net investment income versus the comparative period in 1995 reflects the increase in dividend income partially offset by the decrease in Investment Advisory Fees and Fund Administration Fees and Expenses.
For the year ended December 31, 1996, the Fund had investment income of $8,279,977, as compared to $7,984,889 for the same period in 1995 and $10,501,426 for the same period in 1994. The increase in 1996 investment income of 3.7% versus 1995 was primarily due to an increase in dividend income partially offset by a decrease in the amount of accrual status debt securities held by the Fund due to the sales and repayments of Enhanced Yield Investments during 1996. (See Note 12 to the Financial Statements). The decrease in the 1995 investment income of 24% versus the comparative period in 1994 was primarily due to a decrease in the amount of accrual status debt securities held by the Fund due to the sales and repayments of Enhanced Yield investments during 1995.
The Fund incurred expenses of $2,361,820 for the year ended December 31, 1996, as compared to $2,769,678 for the same period in 1995 and $3,577,298 for the same period in 1994. The decrease in the 1996 expenses versus 1995 expenses of $407,858 was primarily due to the decrease in the Investment Advisory Fee and Fund Administration Fees and Expenses. The decrease in the 1995 expenses versus 1994 expenses of $807,620 was primarily due to the decrease in the Investment Advisory Fee and Fund Administration Fees and Expenses.
The Fund experienced an increase in net assets resulting from operations for the year ended December 31, 1996 in the amount of $25,784,478 as compared to a decrease of $4,146,289 for the same period in 1995. The increase in net assets resulting from operations in 1996 versus 1995 is attributable to an increase in net investment income of $702,946, an increase in unrealized appreciation of $29,250,056 offset by an increase in net realized losses of $22,235 (see Statement of Operations in the Financial Statements). The decrease in net assets resulting from operations in 1995 of $4,146,289 as compared to a decrease in 1994 of $7,171,518 was attributable to a decrease in net investment income of $1,708,917, a decrease in net realized gains of $13,746,712 offset by a change in unrealized appreciation of $18,480,858.
For the year ended December 31, 1996, the Fund incurred an Investment Advisory Fee of $1,037,447 (as described in Note 6 to the Financial Statements). For the years ended December 31, 1995 and 1994, the Fund incurred Investment Advisory Fees of $1,442,458 and $1,855,152, respectively. The decrease in Investment Advisory Fees is due to a decrease in the Fund's Available Capital on which the Investment Advisory Fee is based, resulting primarily from redemptions of debt obligations held by the Fund (which is a component of Available Capital).
The Fund Administration Fees and Expenses (as described in Note 7 to the Financial Statements) for the years ended December 31, 1996, 1995 and 1994, were $916,209, $1,077,666, and $1,459,516, respectively. The decrease of $161,457 from 1995 to 1996 is due primarily to a decrease in the Fund's Available Capital on which the Fund Administration Fee is based, resulting primarily from redemptions of debt obligations held by the Fund (which is a component of Available Capital). During the years ended December 31, 1996, 1995 and 1994, the Fund incurred a total of $192,068, $173,962 and $473,142, respectively, of administrative expenses consisting primarily of printing, audit and tax return preparation and custodian fees paid for by the Fund Administrator.
In accordance with the Partnership Agreement, beginning October 13, 1996, the Fund Administration Fee was changed to an annual fee of $300,000 plus 100% of all direct out-of-pocket expenses incurred by the Fund Administrator on behalf of the Fund.
For the years ended December 31, 1996, 1995 and 1994, the Fund did not incur any interest or loan fees.
Independent General Partners' Fees and Expenses incurred for the years ended December 31, 1996, 1995 and 1994 were $192,279, $167,152, and $164,518, respectively. The changes are attributable to fluctuations in legal fees incurred by the Independent General Partners. (See Note 9 to the Financial Statements).
The Fund incurred professional fees of $183,323, $69,167 and $62,601 for the years ended December 31, 1996, 1995 and 1994, respectively, which were primarily comprised of legal fees reimbursed to Debevoise & Plimpton and Equitable Life for legal services (See Note 9 to the Financial Statements).
Unrealized Appreciation/Depreciation and Non-Accrual of Investments
The General Partners of the Fund determine, on a quarterly basis, the fair value of the Fund's portfolio securities that do not have a readily ascertainable market value. They are assisted in connection with such determination by the Managing General Partner, which has established a valuation committee comprised of senior executives to assess the Fund's portfolio and make recommendations regarding the value of its portfolio securities. This valuation committee uses available market information and appropriate valuation methodologies. In addition, the Managing General Partner has retained Arthur D. Little, Inc., a nationally recognized independent valuation consultant, to review such valuations.
For privately issued securities in which the Fund typically invests, the fair value of an investment is its initial cost, adjusted for amortization of discount or premium and as subsequently adjusted to reflect the occurrence of significant developments. "Significant developments" are business, economic or market events that may affect a company in which an investment has been made or the securities comprising such investment. For example, significant developments that could result in a writedown in value include, among other things, events of default with respect to payment obligations or other developments indicating that a portfolio company's performance may fall short of acceptable levels. A write-up in value of an investment could take place when a significant favorable development occurs, such as a transaction representing the partial sale of an investment that would result in a capital gain or company performance exceeding expected levels on a sustained basis.
Although the General Partners use their best judgment in determining the fair value of these investments, there are inherent limitations in any valuation technique involving securities of the type in which the Fund invests. Therefore, the fair values presented herein are not necessarily indicative of the amount which the Fund could realize in a current transaction.
For the years ended December 31, 1996 and 1995, the Fund recorded net unrealized appreciation on Enhanced Yield Investments of $31,877,152 and $2,627,096, respectively. For the year ended December 31, 1994, the Fund recorded net unrealized depreciation on Enhanced Yield Investments of $15,853,762. The change of $29,381,614 from 1995 to 1996, in unrealized appreciation was primarily the result of unrealized appreciation in Bank United Corp., Lexmark International Group, Inc. and Western Pioneer, Inc. and the reversal of unrealized depreciation in Leather U.S., Inc., Tulip Holding Corp., MTI Holdings, Inc. and WB Bottling Corporation, offset by writedowns in RI Holdings, Inc., Pergament Home Centers, Inc., U.S. Leather Holdings, Inc. and Tulip Holding Corp. and the reversal of unrealized appreciation in Lexmark International Group, Inc., American Safety Razor Company and Apollo Radio Holding Co., Inc. (See Note 12 to the Financial Statements).
Alliance Corporate continues to monitor the Fund's portfolio closely. As a matter of standard procedure, Alliance Corporate reviews each portfolio company's financial statements at least quarterly, and often monthly. Investment managers routinely review and discuss financial and operating results with the companies' management and equity sponsors, and attend periodic board of directors meetings, as appropriate. In some cases, Alliance Corporate officers, acting on behalf of the Funds, serve as directors on the boards of portfolio companies. When problems arise, communication with management and sponsors often occurs on a daily basis.
The following investments have been on non-accrual status as of the respective dates:
Pergament Home Centers, Inc. Floating Rate Demand note July 1, 1996 Western Pioneer, Inc. 10% Senior Subordinated Note November 30, 1994 RI Holdings, Inc. 16% Senior Subordinated Notes April 25, 1994
Realized Gains and Losses on Investments
For the year ended December 31, 1996, the Fund recorded net realized losses of $12,010,831 on transactions involving 10 Enhanced Yield Investments. (See Note 10 to the Financial Statements and the Supplemental Schedule of Realized Gains and Losses). For the years ended December 31, 1995 and 1994, the Fund realized a net loss on investments of $11,988,596 and a net gain of $1,758,116, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data
EQUITABLE CAPITAL PARTNERS, L.P.
Independent Auditors' Report
Statements of Assets, Liabilities and Partners' Capital as of December 31, 1996 and 1995
Statements of Operations For the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Net Assets For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital For the Years Ended December 31, 1996, 1995 and 1994
Schedule of Portfolio Investments - December 31, 1996
Supplemental Schedule of Realized Gains and Losses For the Year Ended December 31, 1996
Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
Equitable Capital Partners, L.P.
We have audited the accompanying statements of assets, liabilities and partners' capital of Equitable Capital Partners, L.P. (the "Fund") as of December 31, 1996 and 1995, including the schedule of portfolio investments, as of December 31, 1996, and the related statements of operations, cash flows, changes in net assets and changes in partners' capital for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Fund's General Partners. Our responsibility is to express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures include confirmation of securities owned as of December 31, 1996, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 1996 and 1995, the results of operations, its cash flows and the changes in its net assets and partners' capital for the respective stated periods, in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements of the Fund include securities valued at $44,569,548 and $46,116,681, as of December 31, 1996 and 1995 respectively, representing 40.2 and 41.0 percent of total assets, respectively, whose values have been estimated by the General Partners of the Fund in the absence of readily ascertainable market values. We have reviewed the procedures used by the General Partners in arriving at their estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of realized gains and losses for the year ended December 31, 1996 is presented for the purposes of additional analysis and is not a required part of the basic financial statements. This schedule is the responsibility of the Fund's General Partners. Such schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.
Deloitte & Touche LLP New York, New York February 21, 1997
EQUITABLE CAPITAL PARTNERS, L.P. STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
See the Accompanying Notes to Financial Statements.
EQUITABLE CAPITAL PARTNERS, L.P. STATEMENTS OF OPERATIONS
See the Accompanying Notes to Financial Statements
EQUITABLE CAPITAL PARTNERS, L.P. STATEMENTS OF CASH FLOW
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
EQUITABLE CAPITAL PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
1. Organization and Purpose
Equitable Capital Partners, L.P. (the "Fund") was formed along with Equitable Capital Partners (Retirement Fund), L.P. (the "Retirement Fund," and collectively with the Fund referred to as the "Funds") and the Certificates of Limited Partnership were filed under the Delaware Revised Uniform Limited Partnership Act on February 2, 1988. The Funds' operations commenced on October 13, 1988.
On July 22, 1993, Equitable Capital Management Corporation ("Equitable Capital"), formerly the Managing General Partner and investment adviser of the Fund, transferred substantially all of the assets comprising Equitable Capital's business to Alliance Capital Management L.P. ("Alliance Capital") and its wholly-owned subsidiary, Alliance Corporate Finance Group Incorporated ("Alliance Corporate"). In connection with such transaction, the limited partners (the "Limited Partners") of the Funds voted to approve a new investment advisory agreement between the Funds and Alliance Corporate and also voted to admit Alliance Corporate as Managing General Partner of the Funds to succeed Equitable Capital. Accordingly, on July 22, 1993, the closing date of the transaction described above, (i) Alliance Corporate was admitted as the successor Managing General Partner of the Funds, (ii) Equitable Capital withdrew from the Funds as Managing General Partner and assigned all of its interest as General Partner to Alliance Corporate and (iii) Alliance Corporate succeeded Equitable Capital as the investment adviser to the Fund pursuant to a new investment advisory agreement. Alliance Corporate (the "Investment Adviser") is a registered investment adviser under the Investment Advisers Act of 1940.
Prior to July 22, 1993, Equitable Capital was responsible, subject to the supervision of the independent general partners of the Funds (the "Independent General Partners"), for the management of the Funds' investments. As of July 22, 1993, Alliance Corporate assumed such responsibilities in its capacity as Managing General Partner and Investment Adviser of the Funds.
The Funds have elected to operate as business development companies under the Investment Company Act of 1940, as amended. The Funds seek current income and capital appreciation potential through investments in privately-structured, friendly leveraged acquisitions and other leveraged transactions. The Funds have pursued this objective by investing primarily in subordinated debt and related equity securities ("Enhanced Yield Investments") issued in conjunction with the "mezzanine financing" of friendly leveraged acquisitions and leveraged recapitalizations.
As stated in the Partnership Agreement, the Fund will terminate on October 13, 1998, subject to the right of the Independent General Partners to extend the term of the Fund for up to two additional one year periods, after which the Fund will liquidate any remaining investments within five years.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the Fund's records are maintained using the accrual method of accounting.
Valuation of Investments
Securities are valued at market or fair value. Market value is used for securities for which market quotations are readily available. For securities without a readily ascertainable market value, fair value is determined, on a quarterly basis, in good faith by the General Partners of the Fund. The total value of securities without a readily ascertainable market value is $44,569,548 and $46,116,681, as of December 31, 1996 and 1995, respectively, representing 40.2% and 41.0% of total assets, respectively. In connection with such determination, the Managing General Partner has established a valuation committee comprised of senior executives to assess the Fund's portfolio and make recommendations regarding the value of the Fund's portfolio securities. This valuation committee uses available market information and appropriate valuation methodologies. In addition, the Managing General Partner has retained Arthur D. Little, Inc., a nationally recognized independent valuation consultant, to review such valuations.
For privately issued securities in which the Fund typically invests, the fair value of an investment is its initial cost, adjusted for amortization of discount or premium and as subsequently adjusted to reflect the occurrence of significant developments. "Significant developments" are business, economic or market events that may affect a company in which an investment has been made or the securities comprising such investment. For example, significant developments that could result in a write down in value include, among other things, events of default with respect to payment obligations or other developments indicating that a portfolio company's performance may fall short of acceptable levels. A write up in value of an investment could take place when a significant favorable development occurs, such as a transaction representing the partial sale of an investment that would result in a capital gain, or company performance exceeding expected levels on a sustained basis. Although the General Partners use their best judgment in determining the fair value of these investments, there are inherent limitations in any valuation technique involving securities of the type in which the Fund invests. Therefore, the fair values presented herein are not necessarily indicative of the amount which the Fund could realize in a current transaction.
Temporary Investments with maturities of 60 days or less are valued at amortized cost, which approximates market value. Temporary Investments which mature in more than 60 days, for which market quotations are readily available, are valued at the most recent bid price or the equivalent quoted yield obtained from one or more of the market makers.
Interest Receivable on Investments
Investments will generally be placed on non-accrual status in the event of a default (after applicable grace period expires) or if the Managing General Partner determines that there is no reasonable expectation of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments from the Fund's portfolio companies are recorded at face value, unless the Managing General Partner determines that there is no reasonable expectation of collecting the full principal amounts of such securities.
Income Taxes
As discussed in Note 13, no provision for income taxes has been made since all income and losses are allocated to the Fund's partners ("Partners") for inclusion in their respective tax returns.
Investment Transactions
Enhanced Yield Investments - The Fund records transactions on the date on which it obtains an enforceable right to demand the securities or payment thereof.
Temporary Investments - The Fund records transactions on the trade date.
Realized gains and losses on investments are determined on the basis of specific identification for accounting and tax purposes.
Sales, Marketing and Offering Expenses and Sales Commissions
Sales commissions and selling discounts are allocated to the specific Partners' accounts to which they are applicable. Sales, marketing and offering expenses are allocated between the Funds in proportion to the number of units issued by each Fund and to the Partners in proportion to their capital contributions.
3. Note Receivable
On July 22, 1993, pursuant to the terms of the Fund's Amended and Restated Agreement of Limited Partnership, Alliance Corporate, as the successor Managing General Partner of the Fund, has contributed a non-interest bearing promissory note (the "Note") to the Fund in an aggregate amount equal to 1.01% of the aggregate Net Capital Contributions of all Limited Partners (less distributions representing returns of capital). Net Capital Contributions are comprised of gross offering proceeds, after giving effect to volume discounts (and after netting of sales commissions, organization, offering and sales and marketing expenses), less returns of capital distributed to Limited Partners. The principal amount of the Note is reduced proportionally as such Limited Partners receive distributions representing additional returns of capital. Such distributions received for the year ended December 31, 1996 resulted in a $82,097 reduction of the principal amount of the Note. The promissory note of Equitable Capital was canceled upon the contribution of Alliance Corporate's Note.
4. Capital Contributions
On October 13, 1988, the Fund closed the initial public offering of its units of Limited Partner interests ("Units"). Equitable Capital, the Fund's Managing General Partner at that time, accepted subscriptions for 284,611 Units and admitted 18,288 Limited Partners.
The Limited Partners' total capital contributions were $283,873,400, after giving effect to volume discounts allowed of $737,600. Equitable Capital's aggregate capital contribution was in the form of a promissory note in the principal amount of $2,641,469. On July 22, 1993, Equitable Capital's note was canceled and Alliance Corporate made a capital contribution in the form of a promissory note on such date, as described in Note 3. Sales, marketing and offering expenses and selling commissions have been charged against proceeds resulting in net capital contributed by Limited Partners of $261,531,542.
Allocation of income, loss and distributions of cash are made in accordance with the Partnership Agreement as further discussed in Note 11.
5. Sales, Marketing and Offering Expenses and Sales Commissions
The Fund expended a total of $535,631 for the reimbursement of sales and marketing expenses. Aggregate sales and marketing expenses of the Funds may not exceed $2,528,415 or 0.5% of the aggregate capital contributions and were allocated proportionately to the number of Units issued by each Fund. Aggregate sales and marketing expenses for the Funds totaled $951,683.
The Fund also paid $2,098,311 for the reimbursement of offering expenses. These expenses, along with the offering expenses of the Retirement Fund and the organizational expenses of the Funds, may not exceed $6,000,000. Aggregate offering and organizational expenses for the Funds totaled $4,711,806.
For their services as selling agent, the Fund paid sales commissions to Merrill Lynch, Pierce, Fenner & Smith Incorporated in the amount of $19,185,170, of which Equico Securities Corporation, an affiliate of Equitable Capital, a related party, received $317,150 as a selected dealer.
6. Investment Advisory Fee
As of July 22, 1993, Alliance Corporate has been receiving a quarterly Investment Advisory Fee, at the annual rate of 1.0% of the Fund's Available Capital, with a minimum annual payment of $2,000,000 collectively for the Funds, less 80% of commitment, transaction, investment banking and "break-up" or other fees related to the Fund's investments ("Deductible Fees"). Available Capital is defined as the sum of the aggregate Net Capital Contributions of the Partners less the cumulative amount of returns of Capital distributed to Partners and realized losses from investments. Since becoming the successor Managing General Partner of the Fund, Alliance Corporate has not received any Deductible Fees. Alliance Corporate is a related party of the Fund.
The Investment Advisory Fee is calculated and paid quarterly in advance. The Investment Advisory Fees paid by the Fund for the years ended December 31, 1996, 1995 and 1994 were $1,037,447, $1,442,458, and $1,855,152, respectively. The decrease from 1995 to 1996 in the Investment Advisory Fee is due primarily to the return of capital distributed to Limited Partners, which reduced the Fund's Available Capital, on which the Investment Advisory Fee is based.
7. Fund Administration Fees and Expenses
As compensation for its services during the fourth through seventh year of operation of the Funds, ML Fund Administrators, Inc. ("MLFAI"), as the Fund administrator, is entitled to receive from the Funds an annual amount equal to the greater of the (i) Minimum Fee and (ii) the Funds' prorated proportion (based on the number of Units issued by the Funds) of 0.45% of the excess of the aggregate net offering proceeds of the Units issued by the Funds over 50% of the aggregate amount of capital reductions of the Funds (subject to an annual maximum of $3.2 million). The Minimum Fee is 1% of the gross offering price of Units in the Funds, but not greater than $500,000. The Fund Administration Fee is calculated and paid quarterly in advance. The Fund Administration Fees paid by the Fund for the years ended December 31, 1996, 1995 and 1994, were $724,141, $903,704, and $986,374, respectively.
In addition to the Fund Administration Fee, MLFAI is entitled to receive reimbursement for a portion of direct out-of-pocket expenses incurred in connection with the administration of the Retirement Fund, commencing on October 13, 1992. For the years ended December 31, 1996 and 1995, the Fund incurred Administrative Expenses of $192,068 and $173,962 respectively, which consisted primarily of printing, audit and tax return preparation and custodian fees paid for by MLFAI on behalf of the Retirement Fund.
8. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner is entitled to a $30,000 annual fee (payable quarterly) from the Fund in addition to $500 for each meeting attended plus reimbursement for any out-of-pocket expenses. In accordance with the Fund's Partnership Agreement, the amount of such fee is reviewed annually by the Independent General Partners.
For the years ended December 31, 1996, 1995 and 1994, the Fund incurred $192,279, $167,152, and $164,518, respectively, of Independent General Partners' Fees and Expenses.
9. Related Party Transactions
For the years ended December 31, 1996, 1995 and 1994, the Fund paid expenses of $76,426, $44,530, and $87,221, respectively, as reimbursement for amounts paid for legal services provided by Equitable Life in connection with the Fund's Enhanced Yield Investments. The Fund is paying Alliance Corporate an Investment Advisory Fee for its services as described in Note 6. Additionally, the Fund paid sales commissions to Equico Securities, a related party, as described in Note 5.
10. Investment Transactions
The Fund is invested primarily in Enhanced Yield Investments, also known in the securities industry as "high yield securities". The securities in which the Fund has invested were issued in conjunction with the mezzanine financing of privately structured, friendly leveraged acquisitions, recapitalizations and other leveraged financings, and are generally linked with an equity participation. Enhanced Yield Investments are debt and preferred equity securities that are unrated or are rated by Standard & Poor's Corporation as BB or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss upon default by the issuer is significantly greater with Enhanced Yield Investments than with investment grade securities because Enhanced Yield Investments are generally unsecured and are often subordinated to other creditors of the issuer. Also, these issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as a recession or increasing interest rates, than investment grade issuers. Most of these securities are subject to resale restrictions and generally there is no quoted market for such securities.
Although the Fund cannot eliminate its risks associated with participation in Enhanced Yield Investments, it has established risk management policies. The Fund subjected each prospective investment to rigorous analysis and will make only those investments that have been recommended by the Managing General Partner and that meet the Fund's investment guidelines or that have otherwise been approved by the Independent General Partners. Fund investments are measured against specified Fund investment and performance guidelines. To limit the exposure of the Fund's capital in any single issuer, the Fund limits the amount of its investment in a particular issuer. The Fund also continually monitors portfolio companies in order to minimize the risks associated with participation in Enhanced Yield Investments.
During the year ended December 31, 1996, the Fund received a total of $709,500 and $187,444 from Western Pioneer, Inc. and U.S. Leather Holdings, Inc., respectively, as principal pay downs of the senior notes held by the Fund. No gain or loss has been recorded on the transactions.
During the year ended December 31, 1996, the Fund received additional proceeds of $266,713 from Polaris Pool Systems, Inc. The money represents proceeds from the sale of the investment from prior years that have been held in escrow for future adjustments and expenses not paid on the sale dates. These proceeds were recorded and distributed as gains.
During March 1996, the Fund sold its remaining ASR Acquisition Corp. common stock for $2,045,112 and recognized a gain of $2,010,551 on the sale.
On April 9, 1996, the Equitable investors foreclosed on the common stock of United States Leather Holdings, Inc. All securities held by the Fund have been surrendered and cancelled in exchange for 795 shares of common stock in Leather U.S., Inc. The shares will have a cost basis of 50% of the original par value of the 15% Senior Debentures surrendered.
On May 8, 1996, the Fund received dividend income of $3,760,524 from Bank United Corp.
On August 6, 1996, a comprehensive restructuring closed for MTI Holdings, Inc. The Fund recognized a loss of $1,449,097 on this transaction.
On August 14, 1996, the Fund sold 207,492 shares of Bank United Corp. (formerly USAT Holdings Inc.) common stock for $3,911,224 and recognized a gain of $2,572,585.
On September 12, 1996, the Fund sold its Tulip Holding Corp. 14.5% Subordinated Notes for $5,687 and recognized a loss of $8,508,727 on the sale. The 16.5% Subordinated Notes, Series A Exchangeable Preferred Stock and Class A Common Stock were deemed worthless resulting in a total realized loss of $5,320,733 to the Fund.
On September 30, 1996, the Fund sold 22,977 shares of Ampex Recording Media Corp. Class A Common Stock for $182,953 which resulted in a loss of $1,552 to the Fund. The Fund sold its remaining 22,690 shares of Ampex Recording Media Corp. Class A Common Stock on November 29, 1996, for $182,946 and recognized a gain of $586 on the sale.
During the fourth quarter of 1996, the Fund sold 775,858 shares of Lexmark International Group, Inc. common stock for $18,057,338 resulting in a gain of $12,884,925 to the Fund.
On November 6, 1996, the Apollo Radio Holding Co., Inc. common stock and warrants held by the Fund were redeemed. The Fund received proceeds of $1,587,133 which resulted in a realized gain of $1,364,383 to the Fund.
On December 17, 1996, the Fund sold its American Paper Group, Ltd. 5% Subordinated Notes and common stock for $1,108,132 resulting in no gain or loss to the Fund.
During the year ended December 31, 1996, the Fund received a total of $131,558 from Pergament Home Centers, Inc., as principal pay downs of the Floating Rate Demand Note held by the Fund. No gain or loss has been recorded on the transactions.
As of December 31, 1996, the Fund had investments in 5 Managed Companies (a Managed Company is one to which the Fund, the Managing General Partner or other persons in the Fund's investor group makes significant managerial assistance available) and 4 Non-Managed Companies (a Non-Managed Company is one to which such assistance is not provided) totaling $74,398,957 (including $854,000 capitalized cost of payment-in-kind securities), consisting of $40,161,470 in senior notes and subordinated notes and $34,237,487 in common stock and purchase warrants.
11. Allocation of Profits and Losses
Pursuant to the terms of the Partnership Agreement, net investment income and gains and losses on investments are generally allocated between the Managing General Partner and the Limited Partners based upon cash distributions as follows:
first, 99% to the Limited Partners and 1% to the Managing General Partner until the Limited Partners have received a cumulative priority return of 10% non-compounded on an annual basis on their investments in Enhanced Yield Investments,
second, 70% to the Limited Partners and 30% to the Managing General Partner until the Managing General Partner has received 20% of all current and prior distributions on such investments,
and thereafter, 80% to the Limited Partners and 20% to the Managing General Partner.
For the year ended December 31, 1996, earnings were allocated 99% to the Limited Partners, as a class, and 1% to the Managing General Partner.
12. Unrealized Appreciation/Depreciation and Non-Accrual of Investments
For the year ended December 31, 1996, the Fund recorded net unrealized appreciation on Enhanced Yield Investments of $31,877,152. Such appreciation was the result of adjustments in value made with respect to the following investments during 1996:
The amount includes the reversal of $12,626,984, $2,576,000 and $238,247 of unrealized depreciation of U.S. Leather Holdings, Inc. senior subordinated notes, senior subordinated preferred stock and non-voting common stock purchase warrants, respectively, due to a restructuring on April 9, 1996. On March 31, 1996, U.S. Leather Holdings, Inc. 15% Senior Subordinated Notes were written down from 60% to 50% of par, resulting in unrealized depreciation of $1,840,387 to the Fund.
On March 31, 1996, Pergament Home Centers, Inc. Class B Common Stock was written down from 25% of cost to zero, resulting in unrealized depreciation of $2,142,000. On June 30, 1996, Pergament Home Centers, Inc. Floating Rate Demand Note was written down from 100% to 75% of par, resulting in unrealized depreciation of $809,200 to the Fund.
On March 31, 1996, RI Holdings, Inc. senior subordinated notes were written down to 30% of par, resulting in unrealized depreciation of $2,145,567 to the Fund. On May 1, 1996, the Fund received additional shares of Class B Common Stock from RI Holdings. The Fund exchanged outstanding debt for the new common stock issued, resulting in unrealized depreciation of $1,360 to the Fund. On June 30, 1996, RI Holdings, Inc. senior subordinated notes were written down from 30% to 15% of par, resulting in unrealized depreciation of $3,658,076 to the Fund. On September 30, 1996, RI Holdings, Inc. senior subordinated notes were written down from 15% to 2% or par, resulting in unrealized depreciation of $3,170,333 to the Fund.
Due to the sale of 775,858 shares of Lexmark International Group, Inc. common stock during the fourth quarter 1996, the Fund reversed $6,636,463 of unrealized appreciation. Due to an increase in the quoted market price of Lexmark International Group, Inc. common stock, the Fund recorded total unrealized appreciation of $2,571,985 at September 30, 1996. The equity was valued at 100% of the closing market price at September 30, 1996 as compared to 90% at March 31, 1996, resulting in unrealized appreciation of $2,671,546 to the Fund.
On November 29, 1996, the Fund reversed a total of $39,413 of unrealized depreciation due to the sale of the remaining 22,690 shares of Ampex Recording Media Corp. Class A Common Stock. Due to a decrease in the quoted market price of the Ampex Recording Media Corp. Class A Common Stock, the Fund recorded total unrealized depreciation of $22,690 at September 30, 1996. Also, due to the sale of common stock on September 30, 1996, $16,773 of unrealized depreciation was reversed. Due to an increase in the quoted market price of the Ampex Recording Media Corp. Class A Common Stock Warrants, the Fund recorded total unrealized appreciation of $150,701 at June 30, 1996. The equity was valued at 80% of the closing market price at September 30, 1996, due to contractual restrictions on resale.
On November 6, 1996, the Fund reversed a total of $1,439,717 of unrealized appreciation in Apollo Radio Holding Co., Inc. due to the redemption of the common stock and warrants held by the Fund. On March 31, 1996, Apollo Radio common stock was written up, pending a cash distribution expected in the second half of 1996, resulting in unrealized appreciation of $449,717 to the Fund.
Due to the sale of the Class B Common Stock investment in ASR Acquisition Corp. in March 1996, the Fund reversed the unrealized appreciation recorded of $1,695,930.
On August 6, 1996, the Fund reversed a total of $1,447,889 of unrealized depreciation in MTI Holdings, Inc. due to a restructuring.
Due to the sale of the Tulip Holding Corporation 14.5% Subordinated Notes on September 12, 1996, the Fund reversed the unrealized depreciation recorded of $8,516,679. The Fund also reversed $5,320,733 of unrealized depreciation for the 16.5% Subordinated Notes, 15% Exchangeable Preferred Stock and Class A Common Stock which were deemed worthless as of September 30, 1996. On June 30, 1996, Tulip Holding Corporation subordinated notes were written down from 5% of par to zero, resulting in unrealized depreciation of $426,504 to the Fund.
On September 30, 1996, the Western Pioneer, Inc. senior subordinated note was written up to 50% of the original par value, resulting in unrealized appreciation of $3,510,540 to the Fund.
Due to an increase in the quoted market price of Bank United Corp. common stock, the Fund recorded total unrealized appreciation of $1,481,470 at December 31, 1996. Due to an increase in the quoted market price of Bank United Corp. common stock, the Fund recorded total unrealized appreciation of $13,763,746 at September 30, 1996. The equity was valued at 90% of the closing market price at December 31, 1996, due to contractual restrictions on resale.
On December 31, 1996, the Fund's preferred stock and common stock investments in WB Bottling Corporation were rendered worthless. As a result, the Fund reversed a total of $482,956 of unrealized depreciation.
For the years ended December 31, 1995 and 1994, the Fund recorded net unrealized appreciation of $2,627,096 and net unrealized depreciation of $15,853,762, respectively.
The following investments have been on non-accrual status as of the respective dates:
Pergament Home Centers, Inc. Floating Rate Demand Note July 1, 1996 Western Pioneer, Inc. 10% Senior Subordinated Note November 30, 1994 RI Holdings, Inc. 16% Senior Subordinated Notes April 25, 1994
Alliance Corporate continues to monitor the Fund's portfolio closely. As a matter of standard procedure, Alliance Corporate reviews each portfolio company's financial statements at least quarterly, and often monthly. Investment managers routinely review and discuss financial and operating results with the companies' management and equity sponsors, and attend periodic board of directors meetings, as appropriate. In some cases, Alliance Corporate officers, acting on behalf of the Funds, serve as directors on the boards of portfolio companies. When problems arise, communication with management and sponsors often occurs on a daily basis.
13. Income Taxes
No provision for income taxes has been made since all income and losses are allocated to the Fund's partners for inclusion in their respective tax returns.
Pursuant to Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes, the Fund is required to disclose any difference between the tax basis of the Fund's assets and liabilities versus the amounts reported in the Financial Statements. Generally, the tax basis of the Fund's assets approximate the amortized cost amounts reported in the Financial Statements. This amount is computed annually and as of December 31, 1996, the tax basis of the Fund's assets was greater than the amounts reported in the Financial Statements by $30,331,565. This difference is primarily attributable to unrealized depreciation on investments which has not been recognized for tax purposes. Additionally, certain realized gains and losses due to restructuring were treated differently for tax purposes, but not for financial reporting purposes.
14. Subsequent Distributions
On February 5, 1997, the Independent General Partners approved an aggregate cash distribution of $21,719,699 for the three months ended December 31, 1996, which was paid on February 14, 1997. The amount distributed to Limited Partners was $21,710,127, or $76.28 per Unit (of which $6,651,359 is capital returned from investments during the fourth quarter of 1996), to Limited Partners of record at December 31, 1996. On a per Unit basis, this distribution to Limited Partners includes $49.58 of realized gains, $3.33 of income from operations and $23.37 of return of capital. The Managing General Partner's one percent allocation of $219,294 was reduced by its one percent allocation of realized gains and capital returned from investments during the fourth quarter of 1996, of $209,722 (which is being held as a Deferred Distribution Amount pursuant to the Partnership Agreement), resulting in a net distribution of $9,572.
15. Subsequent Events
In January 1997, the Fund sold 30,002 shares of Lexmark International Group, Inc. at an average price of $25.74 per share and generated $772,125 of net proceeds, which includes realized gains of $572,111.
Certain shareholders of Bank United Corp. participated in a secondary offering of approximately 4.1 million shares of its common stock (which includes the underwriters' over-allotment option) in February 1997. The Fund sold an aggregate of 779,543 shares at a net price of $27.98 per share. The Fund received total net proceeds of $21,811,613.14 and realized gains of $16,581,184.92. The Fund still holds 98,365 shares of Bank United Corp., representing approximately 11% of its original shareholdings. The shares of Bank United Corp. are traded on the NASDAQ under the ticker symbol "BNKU".
On February 21, 1997, the Fund received a prepayment notice from Lexmark International Inc. stating that it will prepay its outstanding $19,667,348 of Senior Subordinated Notes held by the Fund, together with accrued interest and a contractual prepayment premium, on March 24, 1997. The amount of the prepayment premium will be a function of interest rate levels just prior to the time of prepayment.
Total proceeds received by the Fund from these transactions are expected to be distributed to the Limited Partners as part of the regular quarterly cash distribution to be made in May 1997.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Fund
The Fund's general partners (the "General Partners") are responsible for the management and administration of the Fund. The General Partners consist of Alliance Corporate succeeding Equitable Capital, as the Managing General Partner, and four individuals serving as Independent General Partners. Each Independent General Partner is not an "interested person" of the Fund as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act").
Independent General Partners
The Independent General Partners provide overall guidance and supervision with respect to the operations of the Fund and perform the various duties imposed on the directors of business development companies by the Investment Company Act of 1940. The Independent General Partners supervise the Managing General Partner and must, with respect to any Enhanced Yield Investment, either certify that it meets the Fund's investment guidelines or specifically approve it. The Independent General Partners are also responsible for approving certain transactions pursuant to the conditions of an exemptive order issued by the Securities and Exchange Commission (the "Commission") under which the Fund operates. In addition, if a portfolio company is in material default with respect to its payment obligations under any lending agreement to which it is a party or has a ratio of earnings before interest, taxes and depreciation to cash fixed charges of 1.1 to 1 or less for the latest fiscal year for which financial statements are available, the Independent General Partners are required to approve any changes in the terms of the Fund's investment in such portfolio company.
Messrs. Robert W. Lear and Robert F. Shapiro have served as Independent General Partners of the Fund and the Retirement Fund since June 1988. On April 12, 1989, Mr. Alton G. Marshall and Dr. William G. Sharwell were admitted to the Fund and the Retirement Fund, increasing the total number of Independent General Partners to four. Each Independent General Partner shall hold office until his removal or withdrawal pursuant to the provisions of the Partnership Agreement.
Mr. Lear, age 79, has been an Executive-in-Residence and Visiting Professor at the Columbia University Graduate School of Business since 1977. He is also a director of Cambrex Corp. and the Korea Fund (a closed-end investment fund). Mr. Lear is a trustee of the Scudder Institutional Funds (mutual funds) and a member of the advisory board of the Welsh, Carson, Anderson, Stowe Venture Capital Funds.
Mr. Shapiro, age 62, is the President of RFS & Associates, Inc. (consultants and investments). From 1986 to 1987 he was the Co-Chairman of Wertheim Schroeder & Co. Inc. (investment bankers) and from 1974 to 1986 he was the President of its predecessor, Wertheim & Co. Inc. Mr. Shapiro is a director of TJX Companies, Inc. (specialty retailing), a director of American Building Companies and the Burnham Fund Inc. (mutual fund). Mr. Shapiro was Chairman of the Securities Industry Association in 1985.
Mr. Marshall, age 75, is Senior Fellow of the Nelson A. Rockefeller Institute of Government. He is also President of Alton G. Marshall Associates, Inc. (real estate consultants). He was Chairman and Chief Executive Officer of Lincoln Savings Bank from 1984 to 1991. He is also a Director of New York State Electric and Gas Corporation. He is a Trustee of EQK Realty Investors I and EQK Green Acres (real estate investors), and a Trustee of The Hudson River Trust, which is a mutual fund receiving investment advice from Alliance Capital.
Dr. Sharwell, age 76, served as the President of Pace University from 1984 to 1990, after retiring in 1984 as Senior Vice President of AT&T. He is also a director of USLife Corporation, American Biogenetic Sciences, Inc. and United States Life Insurance Company.
Managing General Partner
The Managing General Partner is responsible for purchasing investments for the Fund which the Independent General Partners have reviewed for compliance with the investment guidelines or otherwise approved, for providing administrative services to the Fund and for the admission of assignee Limited Partners to the Fund.
Management of Alliance Corporate and the Fund
The senior officers of Alliance Corporate responsible for overseeing the management of the Fund are:
Position with Alliance Corporate Finance Group Incorporated ----------------------------------------
James R. Wilson President
William Gobbo, Jr. Senior Vice President
James D. Neidhart Senior Vice President
Laura Mah Vice President and Chief Accounting Officer
James R. Wilson, age 50, is the President of Alliance Corporate and is in charge of Alliance Corporate's Finance Department. He has specialized in private placement investment management for over 20 years. He joined Equitable Life in 1970. From 1975 to 1978, he was in charge of the Private Placement Department's Atlanta regional office, responsible for making direct placement loans to middle market companies. He then returned to the home office to supervise the credit review and approval procedures of all six regional offices. In 1980, Mr. Wilson joined the Investment Recovery Division of Equitable Capital Management Corporation and subsequently became its head. During his tenure in investment recovery, he was instrumental in a number of major restructurings and recapitalizations of troubled companies and served as chairman of several creditors' committees. Mr. Wilson was elected senior vice president and deputy head of Equitable Capital's Corporate Finance Department in 1985, and in 1991 he became executive vice president and head of the Corporate Finance Department. He was named President of Alliance Corporate Finance Group in 1993 in connection with the Alliance Capital/Equitable Capital merger. Mr. Wilson has served on several corporate Boards and presently is a director of US Leather, Inc. He is active in private placement industry events, has been a speaker at many industry conferences on leveraged buyouts and mezzanine finance and served as Chairman of the annual Private Placement Conference in 1994. Mr. Wilson is a graduate of Denison University and holds an MBA from the University of Pittsburgh.
Mr. William Gobbo, Jr., age 52, is a Senior Vice President of Alliance Corporate. Mr. Gobbo joined Alliance Corporate through the combination with Equitable Capital. Mr. Gobbo joined Equitable Life in 1967 as an economist in the office of Equitable's Chief Economist. He joined the Private Placement Department in 1976 and in 1984 became head of an investment group that was responsible for the Department's lending activities involving financial institutions and heavy industrial companies.
Mr. James D. Neidhart, age 52, is a Senior Vice President of Alliance Corporate. He is head of the Investment Recovery Division of Alliance Corporate responsible for the management of public and private investments in companies that have encountered troubled financial situations. He has been actively involved in over 20-25 restructurings, playing in most a leadership role including chairmanship of committees critical to the restructuring process. Mr. Neidhart, who joined Alliance Corporate through the combination with Equitable Capital, had been employed by Equitable Capital in its workout group since 1986. Prior to that, he had nine years of experience in private placement investments and workout transactions with the Prudential Insurance Company of America, three years of commercial lending experience with Harris Trust and Savings Bank and served six years as an Officer in the U.S. Air Force.
Mrs. Laura Mah, age 41, is a Vice President of Alliance Capital and co-manages the Insurance Services Group. She is responsible for accounting and reporting for assets managed by Alliance Capital for insurance clients, including mutual funds, partnerships, general, separate and advisory accounts. Mrs. Mah joined Alliance Capital through the combination with Equitable Capital. Prior to that, she was an Assistant Vice President with Shearson Lehman Hutton for five years. She is a Certified Public Accountant.
The Investment Adviser
As a result of the combination of the businesses of Equitable Capital and Alliance Capital, Equitable Capital's investment advisory agreement with the Fund terminated in accordance with its terms on July 22, 1993. On that date, Alliance Corporate succeeded Equitable Capital as the Fund's investment adviser. As investment adviser to the Fund, Alliance Corporate is responsible for the identification, management and liquidation of all investments for the Fund.
The Administrator
The Administrator performs certain operating and administrative services for the Fund on behalf of the Managing General Partner pursuant to an administrative services agreement, dated October 13, 1988, among the Fund, Equitable Capital and the Administrator.
The information contained in the Prospectus under the caption "Management Arrangements" is incorporated by reference into this Item 10.
Item 11.
Item 11. Executive Compensation
The information with respect to compensation of the Independent General Partners set forth under the caption "Management Arrangements -- The Independent General Partners" in the Prospectus is incorporated by reference into this Item 11. The Fund paid Mr. Lear $36,890, Mr. Shapiro $36,250, Mr. Marshall $36,935 and Dr. Sharwell $35,500 in fees with respect to their services as Independent General Partners in 1996.
The information with respect to the "Fund Administration Fee and Expenses" payable to the Managing General Partner and the Administrator set forth under the caption "Management Arrangements -- The Managing General Partner" in the Prospectus is incorporated by reference into this Item 11. The Fund paid $893,841 to the Administrator, through the Managing General Partner in 1996.
The information with respect to the "Investment Advisory Fee" payable to Alliance Corporate (and distributions from the Managing General Partner) set forth under the caption "Management Arrangements -- Description of Investment Advisory Agreements" in the Prospectus is incorporated by reference into this Item 11. The Fund paid Alliance Corporate $1,037,447 with respect to the Investment Advisory Fees for 1996. The Managing General Partner's 1% allocation of net investment income from Temporary Investments, which in 1996 amounted to $280, is credited against the Investment Advisory Fees, as required by the Partnership Agreement.
Alliance Corporate, as Managing General Partner, received $73,812 representing distributions of net investment income in 1996.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of the date of this report, no person or entity is known by the Fund to be the beneficial owner of more than 5% of the total number of outstanding Units.
The Independent General Partners and directors and officers of Alliance Corporate own as a group 777 Units, or less than 1% of the total Units outstanding.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Fund co-invests in Enhanced Yield Investments with the Retirement Fund and certain affiliates of Equitable Capital pursuant to the terms of an exemptive order granted by the Commission on August 11, 1988 permitting coinvestments on certain terms and conditions, Equitable Capital Partners, L.P., et al. (812-6983) IC-16522, August 11, 1988 (the "Order"). On December 31, 1990, the Commission granted a request to amend such Order to: (I) permit any person serving as an officer, director or employee of Equitable Life or any of its subsidiaries to serve as a director of Equitable Capital; (ii) permit Equitable Life and its subsidiaries (other than Equitable Capital) and certain other affiliates of Equitable Capital to invest as limited partners in sponsor limited partnerships which invest in transactions in which the Funds also invest; and (iii) amend and restate all of the conditions and undertakings contained in the August 11, 1988 Order to conform them to those contained in the application filed with the Commission on behalf of Equitable Capital Partners II, L.P. and Equitable Capital Partners (Retirement Fund) II, L.P. Equitable Capital Partners, L.P., et al. (812-7328) IC - 17925, December 31, 1990.
Pursuant to such arrangements, the Fund co-invested in the Enhanced Yield Investments listed above in Item 1 (with the exception of Color Your World, Inc.) with the Retirement Fund and one or more of the following: Equitable Deal Flow Fund, L.P., Equitable Capital Private Income and Equity Partnership II, L.P., Equitable Life, Equitable Variable Life Insurance Company, Tandem Insurance Group, Inc. and Royal Tandem Insurance Company.
In connection with the transaction that resulted in the succession of Alliance Corporate as Managing General Partner of, and Investment Adviser to, the Fund and Equitable Capital Partners (Retirement Fund), L.P. (the "Retirement Fund"), Equitable Capital and Alliance Corporate received two exemptive orders from the Securities and Exchange Commission permitting the Fund, the Retirement Fund and Alliance to rely on the exemptive orders previously issued to Equitable Capital and the Funds, subject to the same conditions and undertakings under such orders as applied to Equitable Capital.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
See Item 8. Financial Statements and Supplementary Data "Table of Contents."
Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 18th day of March, 1997.
EQUITABLE CAPITAL PARTNERS, L.P.
By: Alliance Corporate Finance Group Incorporated, as Managing General Partner,
Dated: March 18, 1997 ------------------------------- James R. Wilson Title: President
Dated: March 18, 1997 -------------------------------- Laura Mah Title: Vice President and Chief Accounting Officer
Pursuant to the Requirements of the Securities and Exchange Act of 1934 this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 18th day of March, 1997.
Signature Title
________________________ Independent General Partner of Robert W. Lear Equitable Capital Partners, L.P.
________________________ Independent General Partner of Robert F. Shapiro Equitable Capital Partners, L.P.
________________________ Independent General Partner of Alton G. Marshall Equitable Capital Partners, L.P.
________________________ Independent General Partner of William G. Sharwell Equitable Capital Partners, L.P.
________________________ President and Director of James R. Wilson Alliance Corporate
________________________ Dave H. Williams Director of Alliance Corporate
________________________ Bruce W. Calvert Director of Alliance Corporate
________________________ John D. Carifa Director of Alliance Corporate
________________________ Frank Savage Director of Alliance Corporate
________________________ Co-Chairman, Co-Chief Executive Officer Mark Arnold and Director of Alliance Corporate
________________________ Co-Chairman, Co-Chief Executive Officer Alastair Tedford and Director of Alliance Corporate
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 18th day of March, 1997.
EQUITABLE CAPITAL PARTNERS, L.P.
By: Alliance Corporate Finance Group Incorporated, as Managing General Partner,
Dated: March 18, 1997 /s/ James R. Wilson ----------------------------- James R. Wilson Title: President
Dated: March 18, 1997 /s/ Laura Mah ---------------------------- Laura Mah Title: Vice President and Chief Accounting Officer
Pursuant to the Requirements of the Securities and Exchange Act of 1934 this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 18th day of March, 1997.
Signature Title
/s/ Robert W. Lear Independent General Partner of Robert W. Lear Equitable Capital Partners, L.P.
/s/ Robert F. Shapiro Independent General Partner of Robert F. Shapiro Equitable Capital Partners, L.P.
/s/ Alton G. Marshall Independent General Partner of Alton G. Marshall Equitable Capital Partners, L.P.
/s/ William G. Sharwell Independent General Partner of William G. Sharwell Equitable Capital Partners, L.P.
/s/ James R. Wilson President and Director of James R. Wilson Alliance Corporate
/s/ Dave H. Williams Dave H. Williams Director of Alliance Corporate
/s/ Bruce W. Calvert Bruce W. Calvert Director of Alliance Corporate
/s/ John D. Carifa John D. Carifa Director of Alliance Corporate
/s/ Frank Savage Frank Savage Director of Alliance Corporate
/s/ Mark Arnold Co-Chairman, Co-Chief Executive Officer Mark Arnold and Director of Alliance Corporate
/s/ Alastair Tedford Co-Chairman, Co-Chief Executive Officer Alastair Tedford and Director of Alliance Corporate