SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
EQUUS II INCORPORATED
(Name of Registrant as Specified in its Charter)
John T. Unger, Snell & Smith, P.C., 1000 Louisiana, Suite 3650,
Houston, TX 77002
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
2. Form, Schedule or Registration Statement No.:
3. Filing Party:
4. Date Filed:
<PAGE>
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
March 20, 1997
Dear Equus Stockholder,
In the proxy materials we recently mailed to you outlining the change in
management compensation, we stated that certain aspects of the proposals were
subject to receiving approval of an exemptive order from the SEC. On March 7,
1997, the staff of the SEC responded to our filing and, based on our
discussions, the Board of Directors of the Fund has elected to modify certain
aspects of the proposals as outlined in the attached Supplement to the Proxy
Statement. The most significant change relates to the form of payment of the
deferred incentive compensation payable. The initial Proxy Statement
contemplated the payment of such amount in shares of Common Stock, valued at the
market price. The Supplement proposes the payment of such amount in shares of
Common Stock, VALUED AT NET ASSET VALUE. THIS POSITIVE CHANGE RESULTS IN FEWER
SHARES BEING ISSUED TO MANAGEMENT AND NO IMMEDIATE DILUTION TO THE EXISTING
SHAREHOLDERS OF THE FUND. THE CHANGE ALSO DEMONSTRATES A STRONG VOTE OF
CONFIDENCE BY MANAGEMENT IN THE UNDERLYING NET ASSET VALUE OF THE FUND AND ITS
PROSPECTS FOR THE FUTURE.
When evaluating Equus II, it is important to understand that the Fund is a
unique investment vehicle. It is one of the few investments where an ordinary
investor can participate in the private equity market, a market that is
primarily dominated by large, private institutional investors. Equus II is not a
mutual fund and should not be compared to typical mutual funds. In fact,
management of the Fund serves on the board of 17 of the Fund's 21 current
portfolio companies. THE FUND'S OBJECTIVE IS TO GENERATE LONG TERM CAPITAL GAINS
BY MAKING EQUITY INVESTMENTS IN SMALL TO MEDIUM SIZED PRIVATE COMPANIES. We
believe that we have been successful in achieving our objective. The Fund's
stock price increased by a record 32.6% during 1996, after including the effect
of the $0.76 per share dividend and the rights offering. Over the last four
years, the market value of Equus II has appreciated by an average of 21.4% per
year, assuming the reinvestment of all dividends. This performance exceeded
returns of the S&P 500, the Russell 2000 and the Herzfeld Closed-End Average.
A major concern for stockholders and management alike has been Equus II's
large trading discount to its net asset value. Management and the Board of
Directors have dedicated a significant amount of time towards this issue. In
1994 and 1995 the Fund implemented a stock repurchase plan. While this did
increase the net asset value per share somewhat, the discount did not erode. In
addition, in 1995, the Board established a committee to review ways to enhance
shareholder value, with an emphasis on ways to erode the trading discount. The
committee believes that the cash incentive fee and the related impact it has on
the Fund's expense ratio are contributing factors to the trading discount. In
addition, the Board and the committee concluded that the current incentive fee
structure incentivizes management to generate realized gains, but does not place
adequate emphasis on increasing the Fund's stock price. Accordingly, the Board
has proposed a change in the form of management incentive compensation.
<PAGE>
The Board's intention with the proposed changes is to modify the method of
payment of the incentive compensation and to more closely align management's
interests with the stockholders'. Essentially, it is proposed that all of
management's incentive compensation, which is currently a cash based
compensation based on realized gains, be tied directly to the stock price
performance. Therefore, a Stock Option Plan is proposed to serve as incentive
compensation for management and directors. Incentive Options will be issued at
the market price on the date of grant for up to 20% of the outstanding shares.
The Compensation Committee, which consists of non-officer directors, is charged
with granting the options as they see fit. As a result, management's incentive
compensation in the future is determined by stock appreciation, which is not
necessarily the case under the current incentive fee structure.
To permit additional time for stockholders to consider the information
contained in the Supplement, the Board will adjourn the meeting on March 27,
1997, and will reconvene the meeting on APRIL 9, 1997, at the same time and
location as previously scheduled. IF YOU HAVE PREVIOUSLY VOTED AND DO NOT WISH
TO CHANGE YOUR VOTE ON ANY OF THE PROPOSALS, YOU DO NOT NEED TO VOTE AGAIN.
Otherwise, please fill out and promptly return the enclosed proxy card to assure
that your shares are properly represented and voted at the meeting.
We hope that this letter has clarified the changes to the proposals, the
reasons that the Board decided to propose to change the incentive compensation
structure of the Fund and why they believe that it is in the best interest of
the stockholders to approve this change. In summary, the proposed change in the
incentive fee structure benefits the shareholders in the following ways:
o It results in no immediate dilutive effect to the existing shareholders.
o It will significantly reduce the Fund's expense ratio.
o The payment of the deferred incentive compensation payable, previously due
in cash, in shares of common stock, represents a significant buy-in to the
Fund by management. Management is effectively buying over 400,000 shares
at net asset value, while the stock trades at a significant discount to
its net asset value.
o The combination of the issuance of shares and options more closely aligns
management's interest with the stockholders'.
Thank you for your support of Equus II and your consideration of these matters.
We look forward to being an equity partner in the Fund with you and in the
continued success of the Fund.
Sincerely,
SAM P. DOUGLASS
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
<PAGE>
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
AMENDED NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
AND CHANGE IN PROPOSALS TO BE CONSIDERED
A Special Meeting of Stockholders of EQUUS II INCORPORATED, (the "Fund"),
is scheduled to be held on Thursday, March 27, 1997, at 9:30 a.m., local time,
at Meeting Room No. 1, Plaza Level, Liberty Tower, 2919 Allen Parkway, Houston,
Texas 77019. The meeting has been called for the following purposes, all as more
fully described in the Proxy Statement dated February 24, 1997, as supplemented
by the accompanying Supplement to Proxy Statement (the "Supplement"):
1. To approve and adopt a new Management Agreement (the "New Management
Agreement") between the Fund and Equus Capital Management Corporation (the
"Management Company") in the form attached as Exhibit A to the Supplement.
2. To authorize the payment by the Fund to the Management Company of the
deferred incentive compensation payable on the balance sheet of the Fund in
shares of the Fund's common stock, $.001 par value (the "Common Stock"), valued
at net asset value. Such deferred compensation shall be determined on the basis
of cumulative realized and unrealized capital gains net of realized and
unrealized capital losses upon the Fund's portfolio securities.
3. To approve and adopt the Equus II Incorporated 1997 Stock Incentive
Plan.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The implementation of Proposals 1,2 and 3 are conditioned on the approval
of all three proposals. Implementation of the proposals is subject to the
approval of the Securities and Exchange Commission.
The meeting may be recessed from time to time, and actions with respect to
the matters specified in the notice may be taken at any reconvened meeting
without further notice to stockholders unless required by the Bylaws of the
Fund. To permit additional time for stockholders to consider the information
contained in the Supplement, the Board of Directors will adjourn the meeting on
March 27, 1997, and will reconvene the meeting on Wednesday, April 9, 1997, at
the same time and location as previously scheduled.
Stockholders of record as of the close of business on February 18, 1997,
are entitled to notice of, and to vote at, the Special Meeting. Whether or not
you currently plan to attend the Special Meeting, you are urged to sign, date
and return the proxy card in the envelope provided.
By order of the Board of Directors,
TRACY H. COHEN
CORPORATE SECRETARY
Houston, Texas
March 20, 1997
IMPORTANT
A STOCKHOLDER MAY REVOKE OR CHANGE A PROXY DELIVERED TO THE FUND
PRIOR TO RECEIPT OF THIS AMENDED NOTICE AT ANY TIME BEFORE IT IS
VOTED BY: (I) PROVIDING WRITTEN NOTICE OF REVOCATION TO EQS, (II)
EXECUTING AND DELIVERING A PROXY OF A LATER DATE, OR (III) ATTENDING
AND VOTING IN PERSON. PROXIES DELIVERED TO EQS PRIOR TO RECEIPT OF
THE AMENDED NOTICE AND SUPPLEMENT THAT ARE NOT REVOKED OR CHANGED
PRIOR TO THE SPECIAL MEETING WILL BE VOTED ON PROPOSALS 1, 2, AND 3
AS AMENDED. AN ADDITIONAL PROXY CARD IS INCLUDED WITH THIS AMENDED
NOTICE. A STOCKHOLDER WHO HAS PREVIOUSLY DELIVERED A PROXY AND DOES
NOT WISH TO REVOKE OR AMEND THE PROXY NEED NOT SEND A NEW PROXY.
<PAGE>
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
SUPPLEMENT DATED MARCH 20, 1997 TO PROXY STATEMENT
DATED FEBRUARY 24, 1997
Special Meeting of Stockholders
This Supplement to Proxy Statement is furnished to the stockholders of
Equus II Incorporated ("EQS" or the "Fund"), in connection with the solicitation
by its Board of Directors (the "Board") of proxies to be voted at the Special
Meeting of Stockholders (the "Special Meeting") scheduled to be held on
Thursday, March 27, 1997, at 9:30 a.m., local time, at Meeting Room No. 1, Plaza
Level, Liberty Tower, 2919 Allen Parkway, Houston, Texas 77019, and at any
adjournment thereof. To permit additional time for stockholders to consider the
information contained in the Supplement, the Board of Directors has determined
to adjourn the Special Meeting on March 27, 1997 without any action on the
proposals and to reconvene the Special Meeting on Wednesday, April 9, 1997, at
the same time and location as previously announced. The first mailing of this
Supplement to Proxy Statement is expected to be made on or about March 20, 1997.
Capitalized terms used herein shall have the meaning assigned to such terms in
the Proxy Statement of the Fund dated February 24, 1997 (the "Proxy Statement").
Subsequent to the date of mailing of the Proxy Statement to stockholders
of the Fund, the Fund has been in communication with the staff of the Securities
and Exchange Commission (the "Commission") with respect to the application for
exemptive order filed by the Fund with the Commission to permit the proposed
payment of the accrued Deferred Management Incentive Fee in shares of Common
Stock. Based on such communications, the Board of Directors has elected to amend
Section 12 of the proposed New Management Agreement to provide that the accrued
Deferred Management Incentive Fee payable as of March 31, 1997, or such later
date as may be required by the Commission (the "New Valuation Date") will be
paid in shares of the Fund's Common Stock valued at net asset value per share on
the New Valuation Date. The impact of this change is that the stockholders of
the Fund will not incur any dilution in net asset value per share from the
issuance of shares of Common Stock in payment of the accrued Deferred Management
Incentive Fee and that the Management Company will be paid the Deferred
Management Incentive Fee at a discount equal to the market discount of the
Fund's Common Stock on the New Valuation Date.
A STOCKHOLDER MAY REVOKE A PROXY DELIVERED TO THE FUND PRIOR TO RECEIPT OF
THIS SUPPLEMENT AT ANY TIME BEFORE IT IS VOTED BY: (I) PROVIDING WRITTEN NOTICE
OF REVOCATION TO EQS, (II) EXECUTING AND DELIVERING A PROXY OF A LATER DATE TO
EQS, OR (III) ATTENDING AND VOTING IN PERSON AT THE SPECIAL MEETING. PROXIES
DELIVERED TO THE FUND PRIOR TO RECEIPT OF THIS SUPPLEMENT THAT ARE NOT REVOKED
PRIOR TO THE SPECIAL MEETING WILL BE VOTED ON PROPOSAL NOS. 1 AND 2 AS AMENDED
IN THE AMENDED NOTICE OF SPECIAL MEETING. AN ADDITIONAL PROXY CARD IS INCLUDED
WITH THIS SUPPLEMENT FOR USE BY A STOCKHOLDER IF DESIRED. A STOCKHOLDER WHO HAS
PREVIOUSLY DELIVERED A PROXY AND DOES NOT WISH TO REVOKE OR AMEND THE PROXY NEED
NOT SEND A NEW PROXY.
The cost of soliciting proxies and of holding the Special Meeting will be
paid one-half by the Management Company and one-half by the Fund.
2
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION SET FORTH IN THE
PROXY STATEMENT AND SHOULD BE READ TOGETHER WITH THE PROXY STATEMENT.
PROPOSAL 1. TO APPROVE AND ADOPT A NEW MANAGEMENT AGREEMENT
BETWEEN THE FUND AND EQUUS CAPITAL MANAGEMENT CORPORATION
The Board proposes that upon termination of the incentive compensation
provisions of the Current Management Agreement with the Management Company and
approval of the New Management Agreement, the Management Company become vested
in the amount of the Deferred Management Incentive Fee as of the New Valuation
Date, and that the amount of the Deferred Management Incentive Fee be paid, if
Proposal 2 is approved, in shares of Common Stock of the Fund valued at net
asset value. For purposes of determining the Deferred Management Incentive Fee
payable upon termination of the Current Management Agreement, the investments of
the Fund will be appraised by an independent appraiser selected by the
Independent Directors. (See "Proposal 2. Authorization to Pay the Deferred
Management Incentive Fee payable in Shares of Common Stock of the Fund" in the
Proxy Statement).
The New Management Agreement will be in the form of Exhibit A attached
hereto, which is identical to the form of Management Agreement attached as
Exhibit A to the Proxy Statement except for revisions to Section 12 thereof to
reflect the payment of the accrued Deferred Management Incentive Fee in shares
of Common Stock valued at net asset value discussed herein.
The Management Incentive Fee increased the recorded expenses of the Fund
in 1995 and 1993 and reduced such expenses in 1994. Excluding Management
Incentive Fees, the expenses of the Fund would have been reduced from $3,743,348
to $2,543,466 for 1995 and from $9,502,091 to $2,519,735 for the nine months
ended September 30, 1996, and the expense ratio of the Fund would have been
reduced from 6.1% to 4.0% for 1995 and from 11.5% to 2.8% for the nine months
ended September 30, 1996.
The following unaudited pro forma financial data is presented to show the
effect on the Fund's net asset value and relative per share and ratio data from
the adoption of the New Management Agreement, which includes : (1) the payment
of the Deferred Management Incentive Fee payable by the issuance of shares of
Common Stock valued at the net asset value of such shares as of the end of the
period and (2) the elimination of the cash Deferred Management Incentive Fee.
The unaudited pro forma condensed balance sheets give effect to the approval of
the New Management Agreement and the issuance of the shares of Common Stock as
of September 30, 1996 and December 31, 1995, respectively. The unaudited pro
forma condensed statements of expenses give effect to the adoption of the New
Management Agreement and the issuance of the shares of Common Stock as of
January 1, 1996, and January 1, 1995, respectively. The unaudited pro forma
financial statements are not necessarily indicative of the results that would
have been achieved had the New Management Agreement been in place during such
periods, or that might be attained in the future.
3
<PAGE>
Pro Forma Condensed Balance Sheets
September 30, 1996 and December 31, 1995
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro forma Pro forma Historical Pro forma Pro forma
9/30/96 Adjustments 9/30/96 12/31/95 Adjustments 12/31/95
---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets ...................... $ 179,302 $ -- $ 179,302 $ 132,450 $ -- $ 132,450
---------- ---------- ---------- ---------- --------- ----------
Deferred Management
Incentive Fee ..................... 10,222 (10,222)(A) -- 4,295 (4,295)(A) --
Other Liabilities ................. 66,019 -- 66,019 66,302 -- 66,302
---------- ---------- ---------- ---------- --------- ----------
Total Liabilities ................. 76,241 (10,222) 66,109 70,597 (4,295) 66,302
========== ========== ========== ========== ========= ==========
Net Assets ........................ $ 103,061 $ 10,222(A) $ 113,283 $ 61,853 $ 4,295(A) $ 66,148
========== ========== ========== ========== ========= ==========
Shares Outstanding (B) ............ 4,184,766 415,008(C) 4,599,774 3,138,575 217,927(D) 3,356,502
========== ========== ========== ========== ========= ==========
Net Asset Value Per Share ......... $ 24.63 -- $ 24.63 $ 19.71 -- $ 19.71
========== ========== ========== ========== ========= ==========
Net Asset Dilution Per Share ...... -- -- $ 0.00 -- -- $ 0.00
========== ========== ========== ========== ========= ==========
</TABLE>
See notes to pro forma condensed financial statements.
Pro Forma Condensed Statements of Expenses
For the Nine Months Ended September 30, 1996
and the Year Ended December 31, 1995
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Historical Pro forma Pro forma Historical Pro forma Pro forma
9/30/96 Adjustments 9/30/96 12/31/95 Adjustments 12/31/95
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Incentive Fees $ 7,109 ($ 7,109)(E) $ -- $ 1,278 ($ 1,278)(E) $ --
Management Fees ......... 1,332 127(F) 1,459 1,237 78(F) 1,315
Other Expenses .......... 1,061 -- 1,061 1,228 -- 1,228
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses .......... $ 9.502 ($ 6,982) $ 2,520 $ 3,743 ($ 1,200) $ 2,543
========== ========== ========== ========== ========== ==========
Expense Ratio (G) ....... 11.5% -- 2.8% 6.1% -- 4.0%
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to pro forma condensed financial statements.
Notes to Pro Forma Condensed Financial Statements
Pro Forma Adjustments
(A) Reflects payment of the Deferred Management Incentive Fee by the
issuance of 415,008 and 217,927 shares of Common Stock at September 30, 1996,
and December 31, 1995, respectively.
(B) Does not include any shares that may become issuable upon the exercise
of stock options that may be granted under the 1997 Stock Incentive Plan.
(C) The number of shares issued was calculated based on a price of $ 24.63
per share, the net asset value of a share of Common Stock on September 30, 1996.
4
<PAGE>
(D) The number of shares issued was calculated based on a price of $ 19.71
per share, the net asset value of a share of Common Stock on December 31, 1995.
(E) Reflects the elimination of the Management Incentive Fee expense
incurred during the period.
(F) Reflects the increase in management fees resulting from the increase
in the net assets outstanding during the period due to the conversion of the
Deferred Management Incentive Fee payable into shares of Common Stock.
(G) The expense ratio was calculated based on the average net assets of
the Fund at the beginning and the end of the period.
Since the accrued Deferred Management Incentive Fee is paid in shares of
Common Stock valued at their net asset value, the outstanding shares of the Fund
do not suffer any dilution in net asset value from the issuance of shares of
Common Stock as payment of the accrued Deferred Management Incentive Fee.
The Board, including all of the Independent Directors, has considered this
matter and deemed it appropriate and in the best interest of the Fund and the
stockholders of the Fund to recommend adoption of the New Management Agreement
in the form attached as Exhibit A contingent on the stockholders authorizing the
payment of the Deferred Management Incentive Fee in shares of Common Stock of
the Fund valued at net asset value and the approval of the 1997 Stock Incentive
Plan.
The adoption of the New Management Agreement also will be contingent upon
receipt by the Fund and the Management Company of an exemptive order from the
Commission that permits the proposed payment of the accrued Deferred Management
Incentive Fee payable as of the New Valuation Date under Sections 23(a) and 63
of the Investment Company Act and under Section 205(a)(1) of the Investment
Advisers Act. The Fund and the Management Company filed an application for such
an exemptive order on October 10, 1996. The Fund received comments to the
application on March 7, 1997, requesting additional information. Subsequent to
receipt of such request, the Fund has been in communication with the staff of
the Commission. Based on such communications, the Board of Directors has elected
to amend Section 12 of the proposed New Management Agreement to provide that the
accrued Deferred Management Incentive Fee payable as of the New Valuation Date
will be paid in shares of the Fund's Common Stock valued at net asset value per
share on the New Valuation Date. Contemporaneously with the mailing of this
Supplement, the Fund intends to file an amended application for an exemptive
order. However, there is no assurance that the Commission will grant an
exemptive order.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the outstanding
shares of the Fund is required to approve and adopt the New Management
Agreement. Such a majority is defined in the Investment Company Act as the
lesser of (a) 67% or more of the shares present at the meeting, if holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy, or (b) more than 50% of the outstanding shares of the Fund.
THE BOARD OF DIRECTORS OF THE FUND UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL AND ADOPTION OF THE NEW MANAGEMENT AGREEMENT.
5
<PAGE>
PROPOSAL 2. AUTHORIZATION TO PAY THE DEFERRED
MANAGEMENT INCENTIVE FEE PAYABLE IN
SHARES OF COMMON STOCK OF THE FUND
There will be presented at the meeting a proposal to authorize, upon
termination of the Current Management Agreement and approval of the New
Management Agreement, the payment to the Management Company by the Fund of the
Deferred Management Incentive Fee accrued as a payable on the balance sheet of
the Fund on the New Valuation Date in shares of Common Stock valued at net asset
value on the New Valuation Date. The Deferred Management Incentive Fee will be
determined on the basis of cumulative realized and unrealized capital gains net
of realized and unrealized capital losses upon the Fund's portfolio securities
on the New Valuation Date.
For purposes of determining the Deferred Management Incentive Fee payable
upon termination of the Current Management Agreement, the investments of the
Fund will be appraised by an independent appraiser selected by the Independent
Directors, the cost of which will be borne one-half by the Management Company
and one-half by the Fund. All unrealized capital gains and losses of the Fund
will be deemed realized on the New Valuation Date. The Management Company will
be paid the Deferred Management Incentive Fee in shares of the Fund's Common
Stock valued at their net asset value on the New Valuation Date. Based on the
net asset value per share of Common Stock on September 30, 1996, and the amount
of the Deferred Management Incentive Fee at September 30, 1996, the Fund would
have issued 415,008 shares of Common Stock to the Management Company in payment
of the Deferred Management Incentive Fee payable. Based on the accrued Deferred
Management Incentive Fee and the net asset value per share on March 14, 1997,
the Fund would have issued 483,027 shares.
The Board, including all of the Independent Directors, has considered this
matter and deemed it appropriate and in the best interest of the Fund and the
stockholders of the Fund to recommend the issuance of shares of the Fund's
Common Stock valued at net asset value on the New Valuation Date in payment of
the Deferred Management Incentive Fee payable at the New Valuation Date,
contingent on the stockholders approval and adoption of the New Management
Agreement in the form attached as Exhibit A and the approval of the 1997 Stock
Incentive Plan.
The payment of the Deferred Management Incentive Fee payable at the New
Valuation Date in shares of the Fund's Common Stock also will be contingent upon
receipt by the Fund and the Management Company of an exemptive order from the
Commission that permits the proposed payment of the accrued Deferred Management
Incentive Fee in shares of Common Stock under Section 23(a) of the Investment
Company Act. There is no assurance that the Commission will grant an exemptive
order.
VOTE REQUIRED FOR APPROVAL
Although the approval of the Fund's stockholders is not required under the
Investment Company Act to authorize the payment of the Deferred Management
Incentive Fee in shares of the Fund's Common Stock at a price equal to the
current net asset value of such shares, the Board of Directors of the Fund has
decided to present such proposal to the stockholders for their consideration.
The affirmative vote of a majority of the shares present at the meeting, if a
quorum is present, will be required to approve Proposal 2.
THE BOARD OF DIRECTORS OF THE FUND UNANIMOUSLY RECOMMENDS A VOTE "FOR"
AUTHORIZATION TO PAY THE DEFERRED MANAGEMENT INCENTIVE FEE IN SHARES OF THE
FUND'S COMMON STOCK VALUED AT NET ASSET VALUE PER SHARE.
6
<PAGE>
PROPOSAL 3. APPROVAL AND ADOPTION OF THE EQUUS II INCORPORATED
1997 STOCK INCENTIVE PLAN
There is no change in Proposal 3 or the information set forth in the Proxy
Statement with respect to Proposal 3.
By order of the Board of Directors,
Tracy H. Cohen
SECRETARY
Houston, Texas
March 20, 1997
7
<PAGE>
Exhibit A
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT ("Agreement") dated as of ______________, 1997,
by and between EQUUS II INCORPORATED, a Delaware corporation (the "Fund"), and
EQUUS CAPITAL MANAGEMENT CORPORATION, a Delaware corporation (the "Management
Company").
WITNESSETH
WHEREAS, the Fund is engaged in business as a business development company
under the Investment Company Act of 1940, as amended (the "Act"), and in the
business of making investments in equity and equity-oriented securities issued
in private placements, primarily in connection with leveraged buyouts and
leveraged recapitalizations, and making short-term investments for its own
account; and
WHEREAS, the Management Company is engaged in the business of rendering
management, administrative and investment advisory services with respect to
companies participating in equity and equity-oriented securities in private
placements and making short-term investments; and
WHEREAS, the Fund deems it advisable to retain the Management Company to
render certain management, administrative and investment advisory services to
the Fund, and the Management Company desires to provide such services to the
Fund, on the terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein, the Fund and the Management Company hereby agree as follows;
1. ENGAGEMENT. Commencing on the date hereof, the Fund engages and retains
the Management Company to provide, or to make arrangements with suitable third
parties to provide, the management, administrative and investment advisory
services described below, subject to the supervision of the Board of Directors
of the Fund, for the period and on the terms and conditions set forth in this
Agreement. The Management Company hereby accepts such engagement and agrees
during the terms of this Agreement, at its own expense, to provide, or to make
satisfactory arrangements for the provision of, such services and to assume the
obligations herein set forth for the compensation provided herein.
2. TERM. Subject to the provisions of Section 11, the initial term of this
Agreement will be for the period commencing on the date of this Agreement and
expiring on June 30, 1998. Thereafter, this Agreement shall automatically be
extended, subject to the provisions of Section 11, for successive one year
terms, until terminated by either party hereto in accordance with the provisions
of Section 11.
3. PROVISION OF MANAGEMENT AND ADMINISTRATIVE SERVICES. The Management
Company shall provide, or arrange for suitable third parties to provide, any and
all management and administrative services reasonably necessary for the
operation of the Fund and the conduct of its business. Such management and
administrative services shall include, but not be limited to, the following:
(i) providing the Fund with such office space, equipment, facilities
and supplies, and the services of such clerical and other personnel of the
Management Company, as may be necessary or required for the reasonable
conduct of the business of the Fund;
A-1
<PAGE>
(ii) keeping and maintaining the books and records of the Fund and
handling communications and correspondence with stockholders of the Fund;
(iii) preparing such accounting, management and other reports and
documents as may be necessary or appropriate for the reasonable conduct of
the business of the Fund;
(iv) making such arrangements and handling such communications with
accountants, attorneys, banks, transfer agents, custodians, underwriters,
insurance companies, depositories and other persons as may from time to
time be requested by the Fund or may be reasonably necessary to perform
any of the other services to be rendered by the Management Company under
this Agreement;
(v) providing such other managerial and administrative services as
may be reasonably requested by the Fund to identify, evaluate, structure,
monitor and dispose of Fund investments; and
(vi) providing such other advice and recommendations with respect to
the business and affairs of the Fund as the Management Company shall deem
to be desirable or appropriate.
4. PROVISION OF INVESTMENT ADVISORY SERVICES. The Management Company
shall, within a reasonable period of time after any request by the Fund,
provide, or arrange for suitable third parties to provide, the Fund with such
investment research and advice as the Fund may request with respect to any
existing or proposed investments. The Management Company agrees to comply with
all provisions of the Act and all rules and regulations promulgated thereunder
in providing the services to the Fund described herein. The Management Company's
investment services shall include identifying, evaluating, structuring,
acquiring, monitoring, holding, managing and arranging for the disposition of
investments for the Fund.
5. SUPERVISION. The performance by the Management Company of its duties
and obligations hereunder shall be subject to the control and supervision of the
Board of Directors of the Fund and the Management Company's determination of
what services are necessary or required for the operation or to reasonably
conduct the business of the Fund shall be subject to review by such Board of
Directors. The Management Company shall provide periodic reports to the Board of
Directors of its performance of its obligations hereunder as may be requested by
the Board of Directors.
The Management Company and its Affiliates shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
6. ALLOCATION OF COSTS AND EXPENSES.
(a) COSTS AND EXPENSES OF THE MANAGEMENT COMPANY. The Management
Company shall bear all costs and expenses incurred or paid by the
Management Company in providing any services to the Fund under Sections 3
and 4, including, but not limited to, the cost of office space, equipment
and supplies utilized by the Fund's personnel, all wages, salaries and
benefits of the Management Company staff and other Management Company
personnel; and all additional costs and expenses incurred or paid by the
Management Company in connection with this Agreement and the Management
Company's performance hereunder not directly allocable and identifiable to
the Fund or its business or investments.
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(b) EXPENSES OF THE FUND. Except as provided in Section 6(a), the
Fund shall bear (and shall reimburse the Management Company for) all costs
and expenses directly allocable and identifiable to the Fund or its
business or investments, including, but not limited to, all expenses with
respect to investments or dispositions thereof, acquisitions of portfolio
securities, dispositions of portfolio securities, expenses of registering
shares of stock under federal and state securities laws, costs of printing
proxies and other expenses related to meetings of shareholders, litigation
expenses, costs of third party evaluations or appraisals of the Fund (or
its assets) or its investments, legal fees, fees of independent public
accountants, expenses of printing or distributing reports to securities
holders and regulatory bodies, federal, state and local taxes, and other
costs and expenses directly allocable and identifiable to the Fund or its
business or investments.
(c) REGISTRATION EXPENSES. Organizational and offering expenses,
including accounting, legal and printing expenses and registration fees
incurred by the Management Company in connection with the public offering
of shares of common stock or senior securities in the Fund will be
reimbursed to the Management Company by the Fund.
7. MANAGEMENT FEES.
(a) DESCRIPTION OF THE MANAGEMENT FEE. In consideration of the
services to be provided by the Management Company to the Fund under this
Agreement, the Fund agrees to pay to the Management Company a fee (the
"Management Fee") equal to one-half of one percent (.5%) of the Net Assets
(as hereinafter defined) of the Fund, on the last day of each calendar
quarter during the term of this Agreement payable in arrears on the day
after filings with the Securities and Exchange Commission (the
"Commission") are made for such calendar quarter (the "Payment Date").
(b) DEFINITION OF NET ASSETS. For purposes of this Agreement, "Net
Assets" means the total assets (determined in accordance with paragraph
7(c)), less total liabilities, of the Fund, determined in accordance with
generally accepted accounting principles consistently applied.
(c) DETERMINATION OF TOTAL ASSETS. For purposes of determining the
total assets of the Fund, the following shall be applicable with respect
to assets other than short-term investments if the following would result
in the total assets of the Fund being less than would otherwise be the
case:
(i) an investment for which no market exists will be valued
based upon its original cost to the Fund until significant
developments affecting the entity in which the investment is made
justify, in the opinion of the Board of Directors of the Fund, use
of another valuation method; and
(ii) without limiting the discretion of the Board of
Directors, other valuation methods which may be appropriate if
approved by the Board of Directors include (x) appraisal valuation,
(y) third party transaction valuation with respect to completed
transactions or firm offers made by sophisticated, independent
investors and (z) liquidation valuation.
(d) EXPENSE LIMITATIONS. In the event the operating expenses of the
Fund, including amounts payable to the Management Company pursuant to
subsection (a) hereof, for any fiscal year ending on a date during which
this Agreement is in effect exceed any expense limitations
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applicable to the Fund imposed by applicable state securities laws or
regulations promulgated thereunder, as such limitations may be raised or
lowered from time to time, the Management Company shall reduce the
Management Fee by the extent of such excess and, if required pursuant to
any such laws or regulations, will reimburse the Fund in the amount of
such excess; provided, however, to the extent permitted by law, there
shall be excluded from such expenses the amount of any interest, taxes,
portfolio transaction costs and extraordinary expenses (including but not
limited to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Fund. Whenever the
expenses of the Fund exceed a pro rata portion of the applicable annual
expense limitations, if any, the estimated amount of reimbursement under
such limitations shall be applicable as an offset against the quarterly
payment of the Management Fee due to the Management Company. Should two or
more such expense limitations be applicable as at the end of the last
business day of the quarter, the expense limitation which results in the
largest reduction in the Management Fee shall be applicable.
(e) COMPUTATION OF MANAGEMENT FEE. On or prior to a Payment Date,
the Management Company shall prepare a computation showing the Management
Fee due for the preceding quarter. Such computation shall be submitted to
the Board of Directors who shall promptly review it. If the Board of
Directors approves such computation, the fee reflected thereon shall be
paid to the Management Company by the Fund. If the Board of Directors does
not approve such computation, the fund shall pay the Management Company
the Management Fee computed by the Board of Directors or if they shall not
have computed a Management Fee, then the Management Fee originally
submitted by the Management Company. Thereafter, the Net Assets of the
Fund as of the end of such quarter shall be determined by such independent
public accountants as the Management Company and the Fund shall agree
upon, or the Management Company and the Board of Directors shall agree
upon an alternative method of resolving the dispute such as an independent
appraisal of one or more assets. If the dispute is submitted to such
accountants, their determination shall be determinative of the Management
Fee payable for such quarter, and, upon such determination or upon
completion of such alternative manner of resolving the dispute, the
Management Company shall be paid or shall refund to the Fund any portion
of the Management Fee determined to be underpaid or overpaid, as the case
may be. The cost of such determination of the Management Fee by such
independent public accountants or otherwise shall be paid by the Fund,
unless the Management Fee determination of the Management Company exceeds
by ten percent or more the Management Fee determination finally made, in
which case the Management Company shall pay the cost of such
determination.
(f) EFFECT OF TERMINATION. If this Agreement is terminated as of any
date not the last day of a calendar quarter, the Management Fee shall be
calculated as of the effective date of termination and shall be paid as
soon as possible after such date of termination.
8. LIABILITY OF THE MANAGEMENT COMPANY. The Management Company, its
officers, directors, employees, agents and affiliates (collectively,
"Affiliates") shall not be liable to the Fund, or any stockholder of the Fund,
for any error of judgment or mistake of law or any loss or damage with respect
to any investment of the Fund or arising from any act or omission of the
Management Company or any of the Affiliates in the performance of its
obligations hereunder, unless such loss or damage is the result of bad faith,
negligence, misconduct or any breach of fiduciary duty, or disregard of any
duties or obligations owed to the Fund by the Management Company or such
Affiliates by reason of this Agreement or any relation created hereby.
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9. INDEMNIFICATION OF THE MANAGEMENT COMPANY AND AFFILIATES. The Fund
shall indemnify and hold harmless, to the extent permitted by law, the
Management Company and any of its Affiliates, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative
(including any action by or in the right of the Fund), by reason of any acts or
omissions or alleged acts or omissions arising out of the activities of such
person, if such activities were performed in good faith either on behalf of the
Fund or in furtherance of the interest of the Fund, and in a manner reasonably
believed by such person to be within the scope of the authority conferred by
this Agreement or by law against losses, damages or expenses for which such
person has not otherwise been reimbursed (including, but not limited to,
accountants' and attorneys' fees, judgments, fines and amounts paid in
settlement) actually and reasonably incurred by such person in connection with
such action, suit or proceeding, so long as such conduct did not constitute bad
faith, negligence, misconduct or any other breach of fiduciary duty with respect
to such acts or omissions and, with respect to any criminal action or
proceedings, and no reasonable cause to believe his conduct was unlawful. The
satisfaction of any indemnification and any holding harmless hereunder shall be
from and limited to Fund assets. Notwithstanding the foregoing, absent a court
determination that the person seeking indemnification was not liable by reason
of "disabling conduct" within the meaning of Section 17(h) of the Act, the
decision by the Fund to indemnify such person shall be based upon the reasonable
determination, based upon a review of the facts, that such person was not liable
by reason of such disabling conduct, by (1) the vote of a majority of a quorum
of directors of the Fund who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Act nor parties to such action, suit, or
proceeding or (2) an independent legal counsel in a written opinion.
Expenses incurred by the Management Company in defending a civil or
criminal action, suit or proceeding shall be paid by the Fund in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
of Directors of the Fund in the specific case upon receipt of an undertaking by
or on behalf of the Management Company to repay such amount unless it shall
ultimately be determined that the Management Company is entitled to be
indemnified by the Fund as authorized in this Section 9, provided that at least
one of the following conditions precedent has occurred in the specific case: (1)
the Management Company has provided security for its undertaking; (2) the Fund
is insured against losses arising by reason of any lawful advances; or (3) a
majority of a quorum of the disinterested non-party directors of the Fund or an
independent legal counsel in a written opinion, shall determine, based upon a
review of the readily available facts, that there is reason to believe that the
Management Company ultimately will be found entitled to indemnification. The
advancement and indemnification provisions in this Section 9 shall apply to all
threatened, pending, and completed actions, suits, or proceedings in which the
Management Company is a party or is threatened to be made a party during the
term of this Agreement, including those actions, suits or proceedings that were
threatened, filed, or otherwise initiated prior to the effective date of this
provision.
For purposes of this Section 9, any provision hereof applicable to the
Management Company shall also be applicable to any person serving as a director,
officer, employee, agent, or affiliate of the Management Company if such person
is made a party or is threatened to be made a party to a threatened, pending, or
completed action, suit, or proceeding in such capacity. The indemnification and
advancement provisions of this Section shall be independent of and in addition
to any indemnification and advancement provisions that may apply to any
director, officer, employee, agent, or affiliate of the Management Company
because of any other position that such person may hold with the Fund.
10. OBLIGATIONS OF THE MANAGEMENT COMPANY NOT EXCLUSIVE. The obligations
of the Management Company to the Fund are not exclusive. The Management company
may, in its discretion, render the same or similar services to any person or
persons whose business may be in direct or indirect competition with
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the business of the Fund and may be in direct competition with the Fund for
particular investments. Additionally, it is contemplated that from time to time
one or more of Affiliates of the Management Company may serve as directors,
officers or employees of the Fund or otherwise have an interest or affiliation
with the Fund or have the same or similar relationships with competitors of the
Fund. Neither the Management Company nor any of its Affiliates shall in any
manner be liable to the Fund by reason of the aforedescribed activities of the
Management Company or such Affiliate. Within 60 days after the end of each
calendar quarter of the Fund, the Management Company will furnish the Board of
Directors of the Fund with information on a confidential basis, as to any
investment within the investment objective of the Fund made during such fiscal
year by the Management Company, any sub-adviser or any of their Affiliates for
their own account or for the account of others.
11. APPROVAL, TERMINATION AND CONTINUATION. The Fund shall use its best
efforts to cause this Agreement to be approved by a majority of the outstanding
voting securities of the Fund. This Agreement may be terminated at any time,
without the payment of any penalty, by the Board of Directors of the Fund or by
vote of a majority of the outstanding voting securities of the Fund, or by the
Management Company, on 60 days' written notice to the other party. This
Agreement shall automatically terminate in the event of its assignment.
This Agreement shall continue in effect for a period of more than two
years from the date of its execution only so long as such continuance is
specifically approved at least annually by (i) the disinterested Directors of
the Fund, and (ii) the Board of Directors of the Fund or a vote of a majority of
the outstanding voting securities of the Fund.
12. TERMINATION OF PRIOR MANAGEMENT AGREEMENT. The Fund and the Management
Company are parties to a Management Agreement dated as of July 1, 1993 (the
"Prior Agreement"), which has been terminated on the effective date of this
Agreement. In connection with such termination, the investments of the Fund on
March 31, 1997, or such later date as may be required by the Commission (the
"Valuation Date"), shall be appraised by an independent appraiser selected by
the independent members of the Board of Directors of the Fund. The cost of such
appraisal shall be borne equally by the Fund and the Management Company. All
unrealized gains and losses of the Fund shall be deemed realized as of the
Valuation Date. If such appraisal reflects a net capital gain as of the
Valuation Date, the Fund shall deliver to the Management Company, if approved by
the stockholders of the Fund, the number of shares of Common Stock, $.01 par
value ("Common Stock"), of the Fund equal to the amount of the Incentive Fee
consequently owed to the Management Company as of the Valuation Date divided by
the net asset value of a share of Common Stock on the Valuation Date; provided,
however, if the payment of the Incentive Fee in shares of Common Stock as
provided above is not approved by the Commission, the Incentive Fee shall, upon
the agreement of the Management Company and the Fund, be calculated, discounted,
and paid in shares of Common Stock or pursuant to a promissory note on such
terms and conditions as the Commission and the independent members of the Board
of Directors of the Fund shall approve.
13. USE OF NAME. The Management Company reserves the right to grant the
use of the name "Equus Investments" or a similar name to another investment
company, business development company or business enterprise. The Management
Company also reserves the right to withdraw from the Fund the right to use the
name "Equus" upon termination of this Agreement or at any other time, provided
that, if the right to withdraw the name "Equus" is exercised by the Management
Company, the Management Company will submit the question of continuing this
Agreement to a vote of the security holders and the Board of Directors of the
Fund.
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14. NOTICES. All notices, requests, consents and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered, as evidenced by an executed receipt,
or on the date mailed, postage prepaid, by certified mail, return receipt
requested, or telegraphed and confirmed, if addressed to the respective parties
as follows:
If to the Fund: Equus II Incorporated
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Attention:President or Chairman of the Board
If to the Management Company: Equus Capital Management Corporation
P.O. Box 13197
Houston, Texas 77219
Attention:President or Chairman of the Board
15. DEFINITIONS. The terms "assignment" and "majority of the outstanding
voting securities" shall have the meanings given to them by Sections 2(a)(4) and
2(a)(42), respectively, of the Act.
16. ASSIGNMENT. This Agreement may not be assigned by either party hereto.
17. AMENDMENT. This Agreement may be amended only by an instrument in
writing executed by both parties thereto; provided, however, that this Agreement
may be amended by the parties only if such amendment is specifically approved by
(i) the Board of Directors of the Fund, and (ii) the vote of a majority of
outstanding voting securities of the Fund.
18. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas and the
applicable provisions of the Act.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
EQUUS II INCORPORATED
By:__________________________________
Nolan Lehmann, President
EQUUS CAPITAL MANAGEMENT
CORPORATION
By:__________________________________
Sam P. Douglass, Chairman of the Board
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EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
This Proxy is solicited on behalf of the Board of Directors of Equus II
Incorporated (the "Fund") for the Special Meeting of Stockholders on march 27,
1997.
The undersigned hereby constitutes and appoints Sam P. Douglass, or Nolan
Lehmann, with full power of substitution and revocation to each, the true and
lawful attorneys and proxies of the undersigned at the Special Meeting of
Stockholders of Equus II Incorporated to be held on March 27, 1997, at 9:30 a.m.
local time, at Meeting Room No. 1, Plaza Level, Liberty Tower, 2919 Allen
Parkway, Houston, Texas 77019, or any adjournment thereof (the "Special
Meeting") and to vote the shares of Common Stock, $.001 par value per share, of
the Fund ("Shares"), standing in the mane of the undersigned on the books of the
Fund on February 18, 1997, the record date for the Special Meeting, with all
powers the undersigned would possess if personally present at the Special
Meeting.
The undersigned hereby acknowledges previous receipt of the
Notice of Special Meeting of Stockholders and the Proxy Statement
and hereby revokes any proxy or proxies heretofore given by the
undersigned.
- --------------------------------------------------------------------------------
Fold and Detach Here
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, AND 3 AND IF
NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR SUCH PROPOSALS.
PROPOSALS
1. To approve and adopt of a new Management Agreement between the Fund and
Equus Capital Management Corporation, as set forth in the Proxy Statement
and the Supplement to the Proxy Statement (the "Supplement").
FOR __________ AGAINST ___________ ABSTAIN ___________
2. To authorize payment by the Fund to the Management Company of
the deferred incentive compensation payable on the balance
sheet of the Fund in shares of common stock, $.001 par value,
valued at net asset value. Such deferred incentive
compensation shall be determined on the basis of cumulative
realized and unrealized capital gains net of realized and
unrealized capital losses upon the Fund's portfolio
securities, as set forth in the Proxy Statement and the
Supplement.
FOR __________ AGAINST ___________ ABSTAIN ___________
3. To approve and adopt the Equus II Incorporated 1997 Stock Incentive Plan,
as set forth in the Proxy Statement.
FOR __________ AGAINST ___________ ABSTAIN ___________1
4. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.
FOR __________ AGAINST ___________ ABSTAIN ___________
The implementation of Proposal Nos. 1, 2, and 3 are conditioned on
the approval of all three proposals.
Please sign exactly as name appears hereon. When shares
are held by joint tenants both should sign. When signing
as attorney, executor, administrator, trustee, or
guardian, please give full title as such. If a
corporation, please sign in full corporate name by
President or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
<PAGE>
Date________________________________________
Signature _______________________________
Signature _______________________________
