SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to Rule 14a-11(c) or Rule 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)
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:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] 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 fee for which the offsetting fee was paid
previously. Identify the previous filing by registration number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule, or Registration Statement No.:
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4) Date Filed:
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EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD _______________ ___, 1997
A Special Meeting of Stockholders of EQUUS II INCORPORATED, (the "Fund"),
will be held on ___________, ___________ __, 1997, at 9:30 a.m., local time, at
Meeting Room No. 1, Plaza Level, Liberty Tower, 2919 Allen Parkway, Houston,
Texas 77019, for the following purposes, all as more fully described in the
accompanying proxy statement:
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, which eliminates the
management incentive fee payable in the form of cash to the Management Company
under the current Management Agreement with respect to any future capital
appreciation of the Fund. The new Management Agreement also authorizes the
payment to the Management Company of the deferred incentive compensation accrued
as a liability on the balance sheet of the Fund at December 31, 1996, in shares
of the Fund's common stock, $.01 par value (the "Common Stock"), valued at
market value on December 31, 1996, on the basis of cumulative realized and
unrealized capital gains net of realized and unrealized capital losses upon the
Fund's portfolio securities.
2. To approve and adopt the Equus II Incorporated 1997 Stock Incentive
Plan.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The implementation of Proposal Nos. 1 and 2 are conditioned on the
approval of both proposals.
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.
Stockholders of record as of the close of business on January ___, 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
___________, 1997
Houston, Texas
IMPORTANT
YOU CAN HELP THE FUND AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP
LETTERS TO ENSURE A QUORUM BY PROMPTLY SIGNING, DATING AND RETURNING THE
ENCLOSED PROXY CARD. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED
IN THE UNITED STATES.
<PAGE>
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
PROXY STATEMENT
Special Meeting of Stockholders
January __, 1997
This 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") to be held on ________________, ________
___, 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.
The first mailing of this Proxy Statement is expected to be made on or about
January ___, 1997.
The shares represented by the accompanying proxy and entitled to vote will
be voted if the proxy card is properly signed and received before the Special
Meeting. Where a choice is specified on any proxy card as to the vote on any
matter to come before the Special Meeting, the proxy will be voted in accordance
with such specification. Where no choice is specified, the proxy will be voted
for all of the proposals and in such manner as the persons named on the enclosed
proxy card in their discretion determine on such other business as may properly
come before the Special Meeting. A stockholder may revoke a proxy 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.
Only holders of record as of the close of business on January ___, 1997
(the "Record Date"), of the Fund's Common Stock are entitled to vote at the
Special Meeting. Each share of Common Stock is entitled to one vote on each
matter to be voted on at the Special Meeting. EQS had 4,184,766 shares of Common
Stock outstanding on the Record Date. No shareholder was known to own more than
5% of the outstanding shares of Common Stock on that date. The directors and
officers of EQS, as a group, beneficially owned approximately 1.9% of the
outstanding shares of Common Stock on that date.
A majority of the voting power of the outstanding shares of the Fund,
represented in person or by proxy, constitutes a quorum for the transaction of
business at the Special Meeting. Abstentions and shares held of record by a
broker or its nominee ("Broker Shares") that are voted on any matter are
included in determining the number of votes present for purposes of determining
the existence of a quorum for the Special Meeting. Broker Shares that are not
voted on any matter will not be included in determining whether a quorum is
present. With respect to a single proposal, abstentions and broker non-votes
(i.e., Broker Shares that are not voted on the proposal) will not be counted as
votes in favor of or against the proposal.
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The affirmative vote of a majority of the outstanding shares of Common
Stock represented and entitled to vote at the Special Meeting will be required
to approve each of the three proposals. Under the Investment Company Act of
1940, as amended (the "Investment Company Act") the vote of a majority of the
outstanding voting securities of a company means the vote, at a special meeting
of the security holders of such company duly called (A) of 67% or more of the
voting securities present at such meeting if the holders of more than 50% of the
outstanding voting securities of such company are present or represented by
proxy or (B) of more than 50% of the outstanding voting securities of such
company, whichever is less.
EQS is a non-diversified, closed-end company as defined under the
Investment Company Act and has elected to be treated as a business development
company under the Investment Company Act. The Fund's investment advisers are
Equus Capital Management Corporation, a Delaware corporation (the "Management
Company") and Equus Capital Corporation (the "Sub- Adviser"). The Fund's
principal executive office is located at 2929 Allen Parkway, Suite 2500 Houston.
Texas 77019. The telephone number is 713-529-0900.
The cost of soliciting proxies will be paid by the Fund. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries and
custodians to forward to beneficial owners of stock held in the name of such
nominees. The solicitation of proxies will be by mail, telephone, or otherwise
through the officers and regular employees of the Fund or the Management Company
without special compensation therefor. In addition, the Fund has engaged
MacKenzie Partners, Inc., 156 Fifth Avenue, New York, New York 10010 to assist
in the solicitation of proxies. MacKenzie Partners, Inc. will receive a fee
estimated to be $6,500 and reimbursement of all out-of-pocket expenses.
PROPOSAL 1. TO APPROVE AND ADOPT A NEW MANAGEMENT AGREEMENT
BETWEEN THE FUND AND EQUUS CAPITAL MANAGEMENT CORPORATION
CURRENT MANAGEMENT AGREEMENT
The Management Company has served as investment adviser of the Fund since
commencement of its operations on July 1, 1992. The Management Company
previously served as investment adviser to Equus Investments II, L.P., a
Delaware partnership and predecessor of the Fund (the "Equus II Partnership"),
Equus Investments Incorporated, a Delaware corporation that merged with the Fund
on July 1, 1993 ("Equus I"), and Equus Investments, L.P., a Delaware partnership
and predecessor of Equus I (the "Equus I Partnership").
The investments and business of the Fund are managed by the Management
Company, pursuant to a Management Agreement (the "Current Management Agreement")
initially approved by the Board on March 24, 1992, and by the stockholders of
the Fund on March 24, 1992. The Current Management Agreement was amended by the
stockholders of the Fund at a meeting held on June 25, 1993. Continuation of the
Current Management Agreement for an additional period ending June 30, 1997, was
most recently approved by the Board, including a majority of the
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Independent Directors, at their meeting held on May 9, 1996. The Current
Management Agreement will continue in effect thereafter from year-to-year
provided such continuance is approved at least annually by (i) a vote of a
majority of the outstanding shares of the Fund or (ii) a majority of the
independent directors, at a meeting called for the purpose of voting on such
approval.
The Current Management Agreement will continue in effect until June 30,
1997, and from year-to-year thereafter provided such continuance is approved at
least annually by (i) a vote of a majority of the outstanding shares of the Fund
or (ii) a majority of the directors who are not "interested persons" of the
Fund, at a meeting called for the purpose of voting on such approval. The
Current Management Agreement may be terminated at any time, without the payment
of any penalty, by a vote of the Board of the Fund or the holders of a majority
of the Fund's shares on 60 days' written notice to the Management Company, and
would automatically terminate in the event of its "assignment" (as defined in
the Investment Company Act).
The Current Management Agreement provides that 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 include, without limitation, providing the Fund with office space,
equipment, facilities and supplies and clerical services; keeping and
maintaining the books and records of the Fund, and handling communications and
correspondence with stockholders; preparing accounting, management and other
reports; and providing such other managerial and administrative services as may
be reasonably requested by the Fund to identify, evaluate, structure, monitor
and dispose of the Fund's investments. In return for the services and the
expenses that the Management Company assumes under the Current Management
Agreement, the Fund pays the Management Company, on a quarterly basis, a
management fee equal to 0.5% of the net assets of the Fund on the last day of
each calendar quarter (2% per annum). The management fee is payable quarterly in
arrears. The Management Company's management fees from the Fund were $1,237,775,
$1,212,457 and $1,243,559 for the years ended December 31, 1995, 1994 and 1993,
respectively, and were $1,332,137 for the nine months ended September 30, 1996.
The total net assets of the Fund as of September 30, 1996, were approximately
$103.1 million.
The Management Company also receives compensation for providing certain
investor communication services of which $50,000, $50,000 and $72,370 was
received for the years ended December 31. 1995, 1994 and 1993, respectively.
Certain officers and directors of the Fund serve as directors of portfolio
companies. In consideration for such service, such officers or directors may
receive and retain directors fees and may participate in such companies' stock
option plans. During 1995 the officers and directors of the Fund received
$73,848 of director fees from portfolio companies.
Under the Current Management Agreement, the Fund is obligated to bear all
costs and expenses directly allocable and identifiable to the Fund or its
business or investments, including,
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but not limited to, all expenses with respect to investments or the acquisition
or disposition thereof, expenses of registering the shares under federal and
state securities laws, costs of printing proxies and other expenses related to
meetings of stockholders, litigation expenses, costs of third party evaluations
or appraisals of the Fund (or its assets) or its actual investments, fees of
transfer agents and custodians, legal fees, fees of independent public
accountants, expenses of printing and distributing reports to stockholders,
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.
Pursuant to Section 7(e) of the Current Management Agreement, the Fund is
currently obligated to pay the Management Company quarterly and at the final
dissolution of the Fund, as compensation for the services provided under the
Current Management Agreement, an incentive fee (the "Management Incentive Fee")
in an amount (the "Payment Amount") equal to (i) 20% of the net realized capital
gains less unrealized capital depreciation of the Fund and its predecessors on a
cumulative basis calculated from October 23, 1987, through the end of the
calendar quarter (but not less than zero), less (ii) the aggregate amount of the
Management Incentive Fee payments and allocations to the Management Company or
to the Sub-Adviser in prior periods; provided that if the Payment Amount is a
negative number, the Management Company is required to pay the Payment Amount to
the Fund, and, provided, further, that for purposes of calculating the
Management Incentive Fee with respect to all assets acquired from Equus I on
June 30, 1993 (the "Equus I Investments"), (a) the Fund shall treat such Equus I
Investments whose fair market value on June 30, 1993, was less than the amount
Equus I paid for such Equus I Investments as if they had been purchased by the
Fund for their fair market value on June 30, 1993 and (b) the Fund shall treat
such Equus I Investments whose fair market value on June 30, 1993, was more than
the amount Equus I paid for such Equus I Investments as if they had been
purchased by the Fund for the amount Equus I paid for them. The Investment
Advisers Act of 1940 (the "Advisers Act") restricts the amount of the Management
Incentive Fee to 20% of the Fund's net realized capital gains less unrealized
capital depreciation. Pursuant to Section 6(a) of the Current Management
Agreement (the "Sub-Adviser Agreement") between the Management Company and the
Sub- Adviser, the Management Company is obligated to pay the Sub-Adviser
quarterly and at final dissolution or liquidation of the Fund, as compensation
for services provided under the Sub- Adviser Agreement, an incentive fee equal
to one-half of the Payment Amount.
Since 1984, the Management Company and the Sub-Adviser have been paid
cumulative cash Management Incentive Fees of $5,722,328 by the Fund and its
predecessors, of which $1,183,146 was paid in 1996. The Incentive Fee is paid
only upon the realization of capital gains. However, in accordance with
generally accepted accounting principles, the Fund records an expense and a
corresponding liability for the Management Incentive Fee attributable to the net
unrealized capital appreciation of investments in portfolio securities which
would be paid if such investments were sold at their current value (the
"Deferred Management Incentive Fee").
Deferred Management Incentive Fee expense (income) for the years ended
December 31, 1995, 1994 and 1993 totaled $1,277,595, $(582,622) and $1,947,330,
respectively, and for the nine months ended September 30, 1996 totaled
$5,926,301. The Deferred Management Incentive
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<PAGE>
Fee expense (income) relates to the increase (decrease) in unrealized
appreciation of investments in portfolio securities and is not paid until such
appreciation is realized. A Deferred Management Incentive Fee payable of
$4,295,335 and $3,017,740 had accrued at December 31, 1995 and 1994,
respectively, on the net unrealized appreciation of portfolio securities. The
accrued Deferred Management Incentive Fee payable at September 30, 1996, was
$10,221,636.
Since their organization, the Fund and its predecessors have invested an
aggregate of $138,932,095 in portfolio investments and have disposed of
portfolio investments for an aggregate consideration of $109,173,188 of which
$69,605,194 represented a return of capital and $39,567,994 represented capital
gain. At September 30, 1996, the Fund had net assets of $103,061,230 and net
unrealized capital gains of $40,151,825.
The Current Management Agreement also provides for indemnification by the
Fund of the Management Company and its officers and directors from any
threatened, pending or completed action to the extent that the activities giving
rise to such action were performed in good faith either on behalf of the Fund or
in furtherance of the interests of the Fund and in a manner reasonably believed
by such person to be within the scope of the authority conferred by the Current
Management Agreement or by law, so long as such person's conduct did not
constitute bad faith, negligence, misconduct or any breach of fiduciary duty
owed to the Fund. In the absence of a determination by a court that the person
seeking indemnification is not liable by reason of disabling conduct, such
indemnification may be authorized by a reasonable determination, based upon a
review of the facts, by the disinterested directors or by independent counsel in
a written opinion. Indemnification is limited by Section 17(i) of the Investment
Company Act.
PROPOSED NEW MANAGEMENT AGREEMENT
Since the listing of the Common Stock on the American Stock Exchange (the
"AMEX"), the shares of Common Stock of the Fund have traded at a discount to the
Fund's net asset value. At September 30, 1996, the closing sale price of the
Fund's shares was $16.375 and the net asset value of the Fund was $24.63 per
share, or a discount of approximately 33%. Since mid-1994, the Board and
management of the Fund have implemented a number of actions in an attempt to
reduce this discount.
On June 22, 1994, the Board approved a stock repurchase program. From such
date to December 31, 1994, the Fund repurchased 46,200 shares of its stock for
$640,159. In March 1995, the Board authorized the repurchase of up to an
additional $1,500,000 of the Fund's shares. The Fund repurchased an additional
111,400 shares for $1,498,722, completing the program in June 1995. After
completion of the repurchase program announced in March, the Board in June 1995
authorized the repurchase of up to an additional $1,500,000 of its shares. The
Fund repurchased an additional 34,100 shares for $494,920 under the June 1995
repurchase program. These actions increased the Fund's net asset value by $1.47
per share.
In addition, at its February 1995 meeting, the Board established a
committee to review ways for the Fund to enhance shareholder value (the
"Committee"). The Committee has reviewed
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a number of proposals, one of which is a change in the management incentive
compensation structure of the Fund.
The Committee has reviewed a proposal to end the payment of incentive
compensation to the Management Company and the Sub-Adviser and to substitute in
its place a stock option plan for the directors, officers and employees of the
Fund. The Committee and the Board of the Fund believe that a stock option plan
better aligns management's compensation with the Fund's shareholders' objective
of increasing the market value of the Fund's shares. The Board believes that
giving the Fund's directors, officers and employees a proprietary interest in
the Fund will motivate such directors, officers and employees to benefit the
Funds' shareholders by causing the Fund's shares to appreciate.
Under the Investment Company Act, the Fund, as a business development
company, may have either an investment adviser that is paid incentive
compensation based on the capital gains of the Fund or a stock option plan for
its officers and directors. Consequently, in order to implement a stock option
plan, the incentive compensation provisions of the Management Agreement must be
terminated.
However, the Board does not wish to penalize the Management Company and
the Sub- Adviser by terminating the incentive compensation provisions of the
Current Management Agreement prematurely. At September 30, 1996, the Fund had
accrued a Deferred Management Incentive Fee payable to the Management Company of
$10,221,636. This amount represents the unpaid Management Incentive Fee computed
on the excess of net realized and unrealized appreciation of the Fund's
investments over unrealized depreciation at September 30, 1996, and would be
payable to the Management Company upon sale of the Fund's investments at their
current values as of such date.
The Board proposes that upon termination of the incentive compensation
provisions of the Management Agreement with the Management Company, the
Management Company be vested with the amount of the Deferred Management
Incentive Fee as of December 31, 1996. For purposes of determining the Deferred
Management Incentive Fee, 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 at that
time. The Management Company will be paid the Deferred Management Incentive Fee
in shares of the Fund's Common Stock valued at the average of the high and low
sale prices of such shares on the AMEX on December 31, 1996. Based on the high
and low sales prices for shares of Common Stock on the AMEX at September 30,
1996, and the amount of the Deferred Management Incentive Fee at September 30,
1996, the Fund would issue approximately 619,500 shares of Common Stock to the
Management Company in payment of the Deferred Management Incentive Fee. Based on
the high and low sales prices of such shares on January 17, 1997, the Fund would
issue approximately 603,350 shares. Payment of the Deferred Management Incentive
Fee in shares of the Fund's Common Stock will permit the Fund to retain cash
otherwise required to pay the Deferred Management Incentive Fee and assist in
aligning the Management Company's goal with the Fund's
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shareholders' goal of increasing the market value of the Fund's shares by
converting a liability of the Fund to the Management Company into a substantial
equity interest in the Fund. The shares issued to the Management Company would
not be registered under the Securities Act of 1933, as amended (the "Securities
Act"), and would, therefore, be restricted from future sale unless registered or
sold pursuant to an exemption from such registration such as Rule 144 under the
Securities Act.
The payment of Management Incentive Fees and the accrual of Deferred
Management Incentive Fees increased the recorded investment 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 $2,465,753 for 1995 and from $9,502,091 to $2,392,644 for the nine months
ended September 30, 1996, and the expense ratio of the Fund would have been
reduced from 6.1% to 3.9% for 1995 and from 11.5% to 2.7% for the nine months
ended September 30, 1996.
The following unaudited pro forma financial data is presented to show the
pro forma effect of the adoption of the New Management Agreement. The Unaudited
Pro Forma Condensed Balance Sheets as of September 30, 1996 and December 31,
1995, assume that the New Management Agreement was adopted on September 30, 1996
and December 31, 1995, respectively. The Unaudited Pro Forma Condensed
Statements of Expenses reflect the expenses of the Fund for the nine months
ended September 30, 1996, and the year ended December 31, 1995, as if the New
Management Agreement was adopted on January 1, 1996 and 1995, respectively. The
unaudited pro forma financial data 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.
Pro Forma Condensed Balance Sheet
December 31, 1995 and September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Actual Pro forma Pro forma Actual Pro forma Pro forma
12/31/95 Adjustments 12/31/95 9/30/96 Adjustments 9/30/96
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets ....... $132,450,176 -- $132,450,176 $179,301,832 -- $179,301,832
------------ ----------- ------------ ------------ ------------ ------------
Deferred Compen-
sation Payable ..... 4,295,335 (4,295,335) -- 10,221,636 (10,221,636) --
Other Liabilities .. 66,301,552 -- 66,301,552 66,018,966 -- 66,018,966
------------ ----------- ------------ ------------ ------------ ------------
Total Liabilities .. 70,596,887 (4,295,335) 66,301,552 76,240,602 (10,221,636) 66,018,966
------------ ----------- ------------ ------------ ------------ ------------
Net Assets ......... $ 61,853,289 $ 4,295,335 $ 66,148,624 $103,061,230 $ 10,221,636 $113,282,866
============ =========== ============ ============ ============ ============
Shares Outstanding . 3,138,575 322,654 3,461,229 4,184,766 619,493 4,804,259
============ =========== ============ ============ ============ ============
Net Asset Value .... $ 19.71 $ 13.25 $ 19.11 $ 24.63 $ 16.38 $ 23.58
============ =========== ============ ============ ============ ============
Percentage Net Asset
Value Dilution ..... 3.0% 4.3%
============ ============
</TABLE>
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Pro Forma Condensed Statement of Expenses
Year Ended December 31, 1995 and Nine Months Ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Actual Pro forma Pro forma Actual Pro forma Pro forma
12/31/95 Adjustments 12/31/95 9/30/96 Adjustments 9/30/96
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Incentive Compensation $1,277,595 ($1,277,595) $ -- $7,109,447 ($7,109,447) $ --
Other Expenses ....... 2,465,753 -- 2,465,753 2,392,644 -- 2,392,644
---------- ----------- ---------- ---------- ----------- ----------
Total Expenses ....... $3,743,348 ($1,277,595) $2,465,753 $9,502,091 ($7,109,447) $2,392,644
========== =========== ========== ========== =========== ==========
Expense Ratio ........ 6.1% 3.9% 11.5% 2.7%
========== ========== ========== ==========
</TABLE>
The Directors have made a determination that the immediate dilution in net
asset value of the Fund because of the issuance of shares in payment of the
Deferred Management Incentive Fee is more than offset by the elimination of
future incentive fees.
The Directors, including all of the Independent Directors, have 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
approval of the 1997 Stock Incentive Plan. Accordingly, the Board authorized for
submission to the stockholders of the Fund for their approval a proposal,
contingent upon adoption and approval of the 1997 Stock Incentive Plan, to
approve and adopt the New Management Agreement. If the New Management Agreement
is approved, the Board anticipates that the Sub-Adviser Agreement will be
terminated.
In addition to the elimination of the incentive compensation provisions of
the Current Management Agreement, the New Management Agreement contains certain
revisions to Section 9 of the Current Management Agreement dealing with
indemnification of the Management Company to clarify the circumstances under
which indemnification will be provided by the Fund and the requirements for
indemnification of the Management Company by the Fund. The Board believes that
the amendments to Section 9 will avoid confusion in interpreting Section 9 and
will not subject the Fund to any greater claims for indemnification.
The adoption of the New Management Agreement 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 as of December 31, 1996, in shares of Common Stock under Sections
61(a)(3)(B) and 23(a) of the Investment Company Act and 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. A formal response
has not
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been received as of the date of this Proxy Statement. There is no assurance that
the Commission will grant an exemptive order.
THE MANAGEMENT COMPANY
The Management Company was organized as a Delaware corporation on
September 27, 1983, and maintains its offices at 2929 Allen Parkway, Suite 2500,
Houston, Texas 77019. The Management Company's sole activity is to perform
management, administrative and investment advisory services for the Fund, Equus
Capital Partners, L.P. and Equus Equity Appreciation Fund, L.P. The Management
Company is a registered investment adviser under the Investment Advisers Act of
1940 (the "Advisers Act").
The officers and directors of the Management Company and their principal
occupations are as follows:
Sam P. Douglass, age 64, has been Chairman of the Board and Chief
Executive Officer of the Management Company since 1983. He has been Chairman of
the Board and Chief Executive Officer of the Fund since August 1991. Mr.
Douglass has also been Chairman of the Board of the Sub-Adviser since its
formation in September 1983 and became Chief Executive Officer on December
4,1989. Since December 1978, he has served as Chairman and Chief Executive
Officer of Equus Corporation International ("ECI"), a privately owned
corporation engaged in a variety of investment activities. He is also a director
of David's Supermarkets, Inc., GCS RE, Inc., Restaurant Development Group, Inc.
and Video Rental of Pennsylvania, Inc., which are privately-owned companies in
which the Fund has an investment. Mr. Douglass is a licensed attorney.
Nolan Lehmann, age 52, has been President and a director of the Management
Company since 1983. Mr. Lehmann has also been President and a director of the
Fund since August 1991. He is also the President and a director of the
Sub-Adviser. Mr. Lehmann is also a director of Allied Waste Industries, Inc.,
American Residential Services, Inc., Drypers Corporation and Garden Ridge
Corporation. In addition, he serves as a director of nine of the privately-owned
companies in which the Fund has an investment. Mr. Lehmann is a certified public
accountant.
Gary L. Forbes, age 52, has been a Vice President of the Management
Company and the Sub-Adviser since November 1991. Mr. Forbes has been a Vice
President of the Fund since December 1991. He is a director of Consolidated
Graphics, Inc., Drypers Corporation, and NCI Building Systems, Inc. He is also a
director of Carruth-Doggett Industries, Inc., David's Supermarkets, Inc.,
Sovereign Business Forms, Inc., and WMW Industries, Inc., which are
privately-owned companies in which the Fund has an investment. Mr. Forbes is a
certified public accountant.
Randall B. Hale, age 34, has been a Vice President of the Management
Company, the Fund, and the Sub-Adviser since November 1992. He has been a
director of the Management Company and the Sub-Adviser since February 1996. He
has been Secretary of the Management Company since March 1996. From June 1985 to
October 1992, he was employed by Arthur
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Andersen LLP. Mr. Hale is a director of American Residential Services, Inc.. Mr.
Hale is also a director of BSI Holdings, Inc., Industrial Equipment Rentals,
Inc., Strategic Holdings, Inc. and SMIP, Inc., which are privately-owned
companies in which the Fund has an investment. Mr. Hale is a certified public
accountant.
Paula T. Douglass, age 44, has been a director of the Management Company
since July 1993. She was elected a director of the Sub-Adviser in February 1996.
Since July 1991, she has been Chairman and CEO of DOVA Production and
Entertainment Company. From September 1989 to September 1990 she was employed as
an attorney by Fulbright & Jaworski, LLP. Since December 1978, she has been a
director of ECI and is Chairman of Iwerks Entertainment, Inc.
Ms. Douglass is a licensed attorney.
S. Preston Douglass, Jr. age 34, has been a director of the Management
Company since July 1993. He was elected a director of the Sub-Adviser in
February 1996. He is a partner in the law firm of Wallace, Mosty, Machann,
Jackson & Williams, Kerrville, Texas where he began in January 1989. He was a
prosecutor in the 216th Judicial District in Kerrville, Texas from December 1987
to December 1988. He is a licensed attorney.
The business address of the Management Company's officers and directors is
2929 Allen Parkway, Suite 2500, Houston, Texas 77019, except for S. Preston
Douglass, Jr. whose address is 820 Main Street, Suite 100, Kerrville, Texas
78028.
There is no family relationship between any independent director of the
Fund and any director or officer of the Management Company. Paula T. Douglass is
the wife of Sam P. Douglass and S. Preston Douglass, Jr. is the son of Sam P.
Douglass.
As a result of its stock ownership in the Management Company, ECI has 80%
voting control of the Management Company.
THE SUB-ADVISER AGREEMENT
The Management Company entered into a Sub-Adviser Agreement (the
"Sub-Adviser Agreement) with the Sub-Adviser pursuant to which the Sub-Adviser
provides certain investment advisory services for the Fund. The Sub-Adviser
Agreement provides that the Sub-Adviser shall be responsible for preparing the
Fund's quarterly net asset valuations and providing certain investment advice to
the Fund. In return for its services, the Management Company has agreed to pay
the Sub-Adviser quarterly and at the final dissolution or liquidation of the
Fund, if the Fund is dissolved on a date other than the end of a fiscal quarter,
an incentive fee in an amount equal to 50% of the Management Incentive Fee that
the Management Company receives from the Fund. If the amount of the incentive
fee in any period is a negative number, or cumulative net realized capital gains
less unrealized capital depreciation at the end of any fiscal quarter is less
than such amount calculated at the end of the previous fiscal quarter, the
Sub-Adviser is required to repay to the Management Company all or a portion of
the incentive fee previously paid.
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The Sub-Adviser Agreement also provides for indemnification by the Fund of
the Sub- Adviser and its officers and directors from any threatened, pending or
completed action to the extent that the activities giving rise to such action
were performed in good faith either on behalf of the Fund or in furtherance of
the interests of the Fund and in a manner reasonably believed by such person to
be within the scope of the authority conferred by the Sub-Adviser Agreement or
By-Laws, so long as such person's conduct did not constitute bad faith,
negligence, misconduct or any breach of fiduciary duty owed to the Sub-Adviser.
In the absence of a determination by a court that the person seeking
indemnification is not liable by reason of disabling conduct, such
indemnification may be authorized by a reasonable determination, based upon a
review of the facts, by the disinterested directors or by independent counsel in
a written opinion. Indemnification is limited by Section 17(i) of the Investment
Company Act.
The Sub-Adviser Agreement will continue in effect until July 1, 1997 and
from year-to-year thereafter provided such continuance is approved at least
annually by (i) a vote of a majority of the outstanding shares of the Fund or
(ii) a majority of the directors who are not "interested persons" of the Fund,
at a meeting called for the purpose of voting on such approval. The Sub- Adviser
Agreement may be terminated at any time, without the payment of any penalty, by
a vote of the Board of Directors of the Fund or the holders of a majority of the
Fund's Shares on 60 days' written notice to the Sub-Adviser, and would
automatically terminate in the event of its "assignment" (as defined in the
Investment Company Act).
THE SUB-ADVISER
The Sub-Adviser is a corporation organized under the laws of the State of
Delaware in September 1983. The Sub-Adviser was organized to serve as managing
general partner of the Equus I Partnership and other similar partnerships. The
Sub-Adviser is a registered investment adviser under the Advisers Act.
The officers and directors of the Sub-Adviser are: Sam P. Douglass,
Chairman of the Board and Chief Executive Officer; Nolan Lehmann, President and
director; Randall B. Hale, Vice President and director; Paula T. Douglass,
director; S. Preston Douglass, Jr., director; Patrick M. Cahill, Vice President
and Treasurer; Tracy H. Cohen, Vice President and Secretary and Gary L. Forbes,
Vice President. The business address of the Sub-Adviser's officers and directors
(other than S. Preston Douglass, Jr.) is 2929 Allen Parkway, Suite 2500,
Houston, Texas 77019. The business address of S. Preston Douglass, Jr. is 820
Main Street, Suite 100, Kerrville, Texas 78028.
For a description of the business background of each of Messrs. Douglass,
Lehmann, Hale, and Forbes, Ms. Douglass and S. Preston Douglass, Jr. see "The
Management Company" above.
Patrick M. Cahill, age 36, has been Treasurer and a Vice President of the
Sub-Adviser since March 1996 and Controller of the Sub-Adviser Since May 1987.
Mr. Cahill has been a Vice President of the Fund since May 1994 and Treasurer of
the Fund since March 1996. He has also
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been the Controller of the Management Company since May 1987. From June 1982 to
May 1987, he was employed by Ernst & Young. Mr. Cahill is a certified public
accountant.
Tracy H. Cohen, age 29, has been a Vice President of the Sub-Adviser since
April 1995 and Secretary since March 1996. She also has served as a Vice
President of the Fund since May 1995 and Secretary of the Fund since March 1996.
She is also Investor Relations Manager of the Management Company where she has
been employed since April 1995. From September 1990 to April 1995, she was
employed by Arthur Andersen LLP. Ms. Cohen is a certified public accountant.
There is no family relationship between any Independent Director of the
Fund and any director or officer of the Sub-Adviser. Paula T. Douglass is the
wife of Sam P. Douglass and S.
Preston Douglass, Jr. is the son of Sam P. Douglass.
The Sub-Adviser became a wholly-owned subsidiary of the Management Company
on June 30, 1995. As a result of its stock ownership in the Management Company,
ECI has 80% voting control of the Management Company. ECI has its principal
offices at 2929 Allen Parkway, 25th Floor, Houston, Texas 77019.
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.
PROPOSAL 2. APPROVAL AND ADOPTION OF THE EQUUS II INCORPORATED
1997 STOCK INCENTIVE PLAN
There will be presented at the meeting a proposal to adopt the Equus II
Incorporated 1997 Stock Incentive Plan (the "Plan"). The Board believes that
stock options and stock-based incentives play an important role in retaining the
services of experienced personnel and in encouraging such personnel to have a
greater personal financial investment in the Fund (although the Plan does not
necessarily require them to hold for investment stock received under the Plan).
The proposed Plan is set forth in Appendix B. The primary aspects of the
proposed Plan are as follows.
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<PAGE>
GENERAL INFORMATION
ELIGIBILITY. Directors and officers of the Fund who are responsible for or
contribute to the management, growth, success, and profitability of the Fund and
who are designated by the administrators of the Plan.
AUTHORIZED SHARES AND ADJUSTMENTS. The Company has reserved 836,953 shares
of Common Stock for issuance under the Plan (which represents 20% of the number
of shares of Common Stock outstanding as of September 30, 1996). Commencing
December 31, 1996, and continuing each calendar quarter thereafter, the number
of shares available for issuance under the Plan will be the greater of 836,953
or 20% of the number of shares of Common Stock outstanding on the last day of
the preceding calendar quarter. If an option or award lapses or is terminated or
canceled without issuance of shares, the unissued shares subject to such option
or award will again be available for grant under the Plan. If there is a stock
split, stock dividend, reclassification of shares, or other similar corporate
event affecting the Fund's shares, appropriate adjustments will be made in the
number and kind of shares that can be issued under the Plan and the number and
kind of shares and exercise prices of options or awards outstanding at the date
of such event. No officer shall be granted in any fiscal year of the Fund
options or rights to acquire in the aggregate more than 500,000 shares of Common
Stock.
ADMINISTRATION. The Plan will be administered by a committee (the
"Compensation Committee") appointed by the Board that, to the extent required to
qualify for the exemption contained in Rule 16b-3 under the Securities Exchange
Act of 1934, as amended, must include at least two directors. Members of the
Compensation Committee will not be eligible to receive discretionary options or
awards under the Plan. Dr. Edward E. Williams, Gary R. Petersen, and Robert L.
Knauss will be the initial Board members on the Committee. The Committee
anticipates that effective January 2, 1996, each of the six current officers of
the Fund will receive grants under the Plan and that grants covering
approximately 800,000 shares of Common Stock will be made to such officers.
However, the Committee has made no determination as to the allocation of the
800,000 shares among the six officers.
TYPES OF AWARDS
The Plan authorizes the grant, either alone or in combination, of (i)
"nonqualified" stock options that do not qualify for beneficial treatment under
the Internal Revenue Code of 1986, as amended (the "Code"), (ii) incentive stock
options under Section 422A of the Code, (iii) reload options, (iv) alternate
appreciation rights, and (v) limited rights. Any award granted under the Plan
must be evidenced by a written award agreement.
STOCK OPTIONS. The Committee may grant options qualifying as incentive
stock options under the Code and nonqualified stock options. Subject to certain
terms and conditions provided in the Plan, options granted under the Plan are
exercisable at the price and on the terms determined by the Committee. The
exercise price of options may not be less than the fair market value of the
Common Stock at the date of grant. Options are exercisable at such times as
provided in the award agreement although options may not be exercised prior to
six months after the date they are granted and the option period for any award
may not exceed ten years. Subject to the terms of the
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<PAGE>
award agreement, payment of the exercise price of an option may be made in cash,
shares of Common Stock, and in the discretion of the Committee, with other
awards under the Plan, by the withholding of shares issuable upon exercise of
the option, or with such other consideration as the Committee may specify, or
any combination thereof. Consistent with Section 422A of the Code and the
regulations thereunder, the Plan contains certain limits on the value of
incentive stock options that may be exercised during a year and restrictions on
the exercise price and period of incentive stock options granted to employees
who own more than 10% of the Fund's Common Stock.
Unless otherwise provided in the award agreement, options will terminate
three months after an option holder's termination of employment for any reason
other than death, retirement, disability, or termination by the Fund without
cause. In the event of the termination of employment because of death, the
option holder's estate may exercise his or her options during the one-year
period following death. In the event of termination of employment because of
disability or retirement, the option holder may exercise his or her options
during the 36-month period following his or her termination. In the event of
termination of employment by the Fund without cause, all options shall vest and
the option holder may exercise his or her options during the 60-month period
following his or her termination. The termination of an officer's services will
not otherwise accelerate the termination date of his or her options.
RELOAD OPTIONS. Concurrently with or subsequent to the award of a stock
option, the Committee may authorize the grant of reload options ("Reload
Options") to the option holder. The number of Reload Options will equal the
number of shares of Common Stock used to pay, or withheld by the Fund in payment
of, the exercise price of the underlying stock option. The grant of the Reload
Option will become effective upon the exercise of the stock option through the
use or withholding of shares of Common Stock. Reload Options will be
nonqualified stock options under the Code. The Reload Options will be subject to
the same terms and conditions on payment and termination as other stock options.
ALTERNATE APPRECIATION RIGHTS. Concurrently with or subsequent to the
award of a stock option or Reload Option, the Committee may award to the option
holder with respect to each share of Common Stock covered by an option, a
related alternate appreciation right ("Alternate Rights"), permitting the option
holder to be paid the appreciation on the option in lieu of exercising the
option. Alternate Rights are exercisable subject to the same terms and
conditions as the related options. The amount to be paid on an Alternate Right
is the difference between the fair market value of a share of Common Stock and
the option price per share on the exercise date. Payment of Alternate Rights
will be made in shares of Common Stock determined by dividing the payment amount
by the current market value of a share of Common Stock on the exercise date.
Exercise of an Alternate Right will cancel an equal number of options related to
the Alternate Right. Unless otherwise provided in the award agreement, Alternate
Rights will terminate three months after an option holder's termination of
employment for any reason other than retirement or disability. In the event of
termination of employment because of disability or retirement, the option holder
may exercise his or her Alternate Rights during the six-month period following
his or her termination.
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<PAGE>
LIMITED RIGHTS. Concurrently with or subsequent to the award of a stock
option, Reload Option, or Alternate Right, the Committee may grant with respect
to each share of Common Stock covered by an option, a related limited right
permitting the option holder, during a specified time period, to be paid the
appreciation on the option in lieu of exercising the option ("Limited Right").
Limited Rights are exercisable in full for a period of seven months following
the date of a "Change in Control" of the Fund. A Change in Control of the Fund
is defined as a change in a majority of the directors of the Fund within one
year following certain designated transactions, including a tender offer,
merger, or proxy contest, or the acquisition of 51% or more of the shares of
Common Stock by an unaffiliated person, entity, or group. The amount to be paid
on a Limited Right is the difference between the option price per share of
Common Stock covered by the related option and the greater of (i) the highest
price per share paid in connection with the Change in Control or (ii) the
highest price per share of the Common Stock on the AMEX during the 60-day period
prior to the Change in Control. Payment of the Limited Right will be made in
cash.
Unless otherwise provided in the award agreement, Limited Rights will
terminate upon an option holder's termination of employment for any reason other
than retirement or disability. In the event of termination of employment because
of disability or retirement, the option holder may exercise his or her Limited
Rights during the six-month period following his or her termination.
Terminations following a Change in Control (except for "just cause") do not
terminate a Limited Right.
AUTOMATIC OPTION AWARDS. Each non-officer director serving on the Board of
Directors as of February 28, 1997, will be granted a nonqualified stock option
to purchase 5,000 shares of Common Stock of the Fund that will vest 50%
immediately and 16-2/3% on the first, second, and third anniversaries of the
date of grant. Each new non-employee director will be granted upon his or her
election a nonqualified stock option for a similar number of shares. In
addition, beginning with the 1998 annual meeting of stockholders, each
individual elected as a non-officer director shall, on the first business day
following the annual meeting of stockholders, be granted a stock option to
purchase 2,000 shares of Common Stock. The exercise price of the options will be
the closing price of the Fund's Common Stock on the AMEX on the date the option
is granted. Each option will be exercisable during the period beginning six
months after the date of grant and ending ten years after the date of grant. In
the event of the termination of a director's services because of death,
permanent disability, or retirement, any unvested options shall vest and the
director or, if the director is not living, the director's estate, may exercise
his or her options during the one-year period following the date of death,
permanent disability, or retirement . The termination of a director's services
will not otherwise accelerate the termination date of his or her options.
AMENDMENT AND TERMINATION
The Board may amend, alter, or discontinue the Plan at any time, provided
that no amendment, alteration, or discontinuance may be made that would impair
the rights of an award holder without his or her consent. The Board may not,
without the prior approval of shareholders, amend the Plan to increase the
number of shares reserved for grant under the Plan, change the
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<PAGE>
employees eligible to participate, or otherwise if a shareholder vote is
required to comply with any tax or regulatory requirement.
TAX CONSEQUENCES
Set forth below is a summary of the federal income tax consequences
relating to awards granted under the Plan.
STOCK OPTIONS. The grant of a nonqualified stock option or an incentive
stock option will not result in income for the grantee or in a deduction for the
Fund.
The exercise of a nonqualified stock option will result in ordinary income
for the option holder and a deduction for the Fund measured by the difference
between the option price and the fair market value of the shares received at the
time of exercise. Income tax withholding would be required.
The exercise of an incentive stock option would not result in income for
the option holder if the option holder (i) does not dispose of the shares within
two years after the date of grant or one year after the transfer of shares upon
exercise and (ii) is an employee of the Fund or a subsidiary of the Fund from
the date of grant until three months after the exercise date. If these
requirements are met, the basis of the shares upon later disposition would be
the option price. Any gain will be taxed to the employee as long-term capital
gain and the Fund would not be entitled to a deduction. The excess of the fair
market value on the exercise date over the option price is an item of tax
preference, potentially subject to the alternative minimum tax. Officers of the
Fund are considered to be employees of the Fund under applicable federal income
tax regulations.
If the holder of an incentive stock option disposes of the shares prior to
the expiration of the holding periods, the option holder would recognize
ordinary income and the Fund would be entitled to a deduction equal to the
lesser of the fair market value of the shares on the exercise date minus the
option price or the amount realized on disposition minus the option price. Any
gain in excess of the ordinary income portion would be taxable as long-term or
short-term capital gain.
ALTERNATE RIGHTS AND LIMITED RIGHTS. The grant of an Alternate Right or
Limited Right would not result in income for the grantee or in a deduction for
the Fund. Upon exercise of an Alternate Right or Limited Right, the grantee
would recognize ordinary income and the Fund would be entitled to a deduction
measured by the fair market value of the shares or cash received.
Income tax withholding would be required.
The deductions available to the Fund upon the exercise of stock options
are subject to certain limitations contained in Section 162(m) of the Code.
Section 162(m) of the Code places a $1 million cap on the deductible
compensation that can be paid to certain executives of publicly traded
corporations. Under the Plan, no officer may be granted in any fiscal year of
the Fund options or rights to acquire in the aggregate more than 500,000 shares
of Common Stock. This annual limit is intended to provide that grants under the
Plan qualify as "performance based"
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<PAGE>
compensation under Section 162(m)(4)(C) of the Code and will therefore be exempt
from the cap and do not count toward the $1 million limit.
Special rules apply in the case of individuals subject to Section 16(b) of
the Securities Exchange Act of 1934. In particular, under current law shares
received pursuant to the exercise of a stock option or other purchase right are
treated as restricted as to transferability and subject to a substantial risk of
forfeiture for a period of six months after the date of exercise. Accordingly,
the amount of ordinary income recognized, and the amount of the Fund's deduction
are determined as of such date unless the option holder makes an election under
Section 83(b) of the Code to make such determination as of the exercise date.
The Fund believes that the Plan is not subject to any of the provisions of
the Employee Retirement Income Security Act of 1974.
THE FOREGOING DOES NOT CONSTITUTE A DEFINITIVE STATEMENT OF THE FEDERAL
INCOME TAX EFFECTS OF OPTIONS UNDER THE PLAN, AND EACH PARTICIPANT IN THE PLAN
SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
EFFECTS OF THE PROVISIONS DISCUSSED HEREIN.
VOTE REQUIRED FOR APPROVAL
Approval of the Plan requires the affirmative vote of the holders of a
majority of the shares of Common Stock represented at the meeting. 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 UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
PLAN.
OTHER MATTERS
The Board knows of no matters other than those listed in the attached
Notice of Special Meeting which are likely to come before the Special Meeting.
However, if any other matter properly comes before the Special Meeting, the
persons named on the enclosed proxy card will vote the proxy in accordance with
their best judgment on such matters.
In the event that sufficient votes in favor of the proposals set forth in
the Notice of the Special Meeting of Stockholders and Proxy Statement are not
received by the time scheduled for the Special Meeting, the individuals named as
proxies may move for one or more recesses of the Special Meeting to permit
further solicitation of proxies with respect to any such proposals. Any such
adjournment will require the affirmative vote of a majority of the shares
present at an Special Meeting.
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ANNUAL REPORT
The financial statements of the Fund are contained in the 1995 Annual
Report to Stockholders, which previously has been provided to the stockholders.
Such report and the financial statements contained therein are not to be
considered as a part of this soliciting material. A copy of the Fund's Annual
Report to Stockholders is available without charge upon request. Please direct
your request to Equus II Incorporated, Attention: Investor Relations, P.O. Box
130197, Houston, Texas 77219-0197, (713) 529-0900 or (800) 856-0901.
NOTICE TO BANKS, BROKER/DEALERS, VOTING TRUSTEES AND NOMINEES
Please advise the Fund whether other persons are the beneficial owners of
the Shares for which proxies are being solicited from you, and, if so, the
number of copies of the Proxy Statement and other soliciting material you wish
to receive in order to supply copies to the beneficial owners of shares of
Common Stock.
It is important that proxies be returned promptly. Therefore, stockholders
who do not expect to attend in person are urged to date, sign, and return the
proxy card in the enclosed stamped envelope.
By order of the Board of Directors,
Tracy H. Cohen
SECRETARY
________________, 1997
Houston, Texas
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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
The undersigned hereby constitutes and appoints Sam P. Douglass, and Nolan
Lehmann, or either of them, with full power of substitution and revocation to
each, the true and lawful attorneys and proxies of the undersigned at the
Special Meeting of Shareholders of Equus II Incorporated to be held on
_______________, 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, $.01 par value per share, of the Fund ("Shares"), the undersigned is
entitled to vote at the Special meeting, upon the matters listed on the reverse
side hereof and upon such other matters as may properly come before the 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.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING
PROPOSALS AND, IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR SUCH
PROPOSALS.
1. Approval and adoption of a new Management Agreement.
FOR __________ AGAINST ___________ ABSTAIN ___________
2. Approval and adoption of the Equus II Incorporated 1997 Stock
Incentive Plan.
FOR __________ AGAINST ___________ ABSTAIN ___________
Signature should agree with name printed herein. If
Shares are held in the name of more than one person,
EACH joint owner should sign. Officers, executors,
administrators trustees, guardians, and attorneys should
indicate the capacity in which they sign. Attorneys
should submit powers of attorney.
Signature _______________________________ Date ____
Signature _______________________________ Date ____
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY IN THE STAMPED,
PRE-ADDRESSED ENVELOPE ENCLOSED.
<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
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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;
(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.
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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.
(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 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,
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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
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
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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.
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
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<PAGE>
"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 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
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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 December 31, 1996, shall be appraised by an independent appraiser selected by
the independent members of the Board of Directors. 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 December 31, 1996.
If such appraisal reflects a net capital gain as of December 31, 1996, the Fund
shall deliver to the Management Company the number of shares of Common Stock,
$.01 par value ("Common Stock"), of the Fund equal to the amount of the
Incentive Fee (as defined in the Prior Agreement) consequently owed to the
Management Company on December 31, 1996, divided by the average of the high and
low sale prices of a share of Common Stock on the American Stock Exchange on
December 31, 1996.
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.
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:
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If to the Fund: Equus II Incorporated
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Attention: President
If to the Management Company: Equus Capital Management Corporation
P.O. Box 13197
Houston, Texas 77219
Attention: President
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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