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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] 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)
PATRICK M. CAHILL, 2929 ALLEN PARKWAY, SUITE 2500, HOUSTON, TX 77019
(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:
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 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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 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:
2) Form, Schedule, or Registration Statement No.:
3) Filing Party:
4) Date Filed:
EQUUS II INCORPORATED
2929 ALLEN PARKWAY, SUITE 2500
HOUSTON, TEXAS 77019
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 20, 1997
The Annual Meeting of Stockholders of EQUUS II INCORPORATED, (the
"Fund"), will be held on Tuesday, May 20, 1997, at 9:00 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 elect eight members to the Board of Directors for the ensuing
year.
2. To ratify the Board of Directors' appointment of Arthur Andersen LLP
as the Fund's independent auditors for the fiscal year ending
December 31, 1997.
3. To transact such other business as may properly come before the
meeting, or any adjournment thereof.
Nominees for directors are set forth in the enclosed Proxy
Statement.
Stockholders of record as of the close of business on March 21, 1997,
are entitled to notice of, and to vote at, the Annual Meeting. WHETHER OR NOT
YOU CURRENTLY PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO SIGN, DATE AND
RETURN THE PROXY CARD IN THE ENVELOPE PROVIDED.
In the event that the necessary quorum to transact business is not
obtained at the Annual Meeting, the persons named as proxies may propose one or
more adjournments of the Annual Meeting to permit further solicitation of
proxies.
By order of the Board of Directors,
TRACY H. COHEN
SECRETARY
April 25, 1997
Houston, Texas
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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.
- --------------------------------------------------------------------------------
EQUUS II INCORPORATED
2929 ALLEN PARKWAY, SUITE 2500
HOUSTON, TEXAS 77019
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
MAY 20, 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 1997 Annual
Meeting of Stockholders (the "Annual Meeting") to be held on Tuesday, May 20,
1997, at 9:00 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
April 25, 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
Annual Meeting. Where a choice is specified on any proxy card as to the vote on
any matter to come before the Annual Meeting, the proxy will be voted in
accordance with such specification. Where no choice is specified, the proxy will
be voted for the election of the persons nominated to serve as directors of the
Fund named in this Proxy Statement, for the proposal to ratify the appointment
of Arthur Andersen LLP as independent auditors for the fiscal year ending
December 31, 1997, 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 Annual 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 Annual Meeting.
Only holders of record as of the close of business on March 21, 1997
(the "Record Date"), of the Fund's common stock, $.001 par value ("EQS Common
Stock") are entitled to vote at the Annual Meeting. Each share of EQS Common
Stock is entitled to one vote on each matter to be voted on at the Annual
Meeting. EQS had 4,300,682 shares of EQS Common Stock outstanding on the Record
Date. No group was known to own more than 5% of the outstanding shares of EQS
Common Stock on that date. The directors and officers of EQS, as a group,
beneficially owned approximately 2.0% of the outstanding shares of EQS Common
Stock on that date.
1
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 Annual 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 Annual 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.
Directors shall be elected by a plurality of the votes of the
outstanding shares of EQS Common Stock represented and entitled to vote at the
Annual Meeting. In connection with the election of directors, a stockholder may
withhold authority to vote for any or all nominees. The affirmative vote of a
majority of the outstanding shares of EQS Common Stock represented and entitled
to vote at the Annual Meeting will be required to ratify the selection of the
independent auditors.
EQS is a non-diversified, closed-end company as defined under the
Investment Company Act of 1940, as amended (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.
PROPOSAL 1. ELECTION OF DIRECTORS
Article III, Section 3.2 of the By-laws of the Fund currently provides
for a minimum of three and a maximum of fifteen directors (a majority of whom
must be independent directors). There are currently eight directors, including
five independent directors (i.e. directors who are not "interested persons" as
defined in the Investment Company Act)("Independent Directors"). The nominees
receiving an affirmative vote of a plurality of the shares entitled to vote and
present, either in person or by proxy, at the Annual Meeting, will be elected as
members of the Board. All of the elected directors will serve until their
respective successors have been duly elected and qualified or until they resign,
die or are removed from office.
2
In the event a stockholder entitled to vote for the election of
directors at a meeting wishes to make a director nomination at a stockholders
meeting, written notice of such stockholder's intent to make such nomination
must be given, either by personal delivery or by U.S. mail, postage prepaid, to
Tracy H. Cohen, Secretary, Equus II Incorporated, 2929 Allen Parkway, Suite
2500, Houston, Texas 77019, not less than 60 nor more than 90 days prior to the
meeting; provided, however, that in the event less than 70 days' notice or prior
public disclosure of the date of the meeting is given to stockholders, notice by
the stockholder to be timely must be received not later than the close of
business on the fifth day following the day on which such notice is mailed or
such public disclosure was made. Each such notice must set forth: (a) the name
and address of the stockholder who intends to make the nomination, (b) the name,
age, business address, home address and principal occupation of the person or
persons to be nominated; (c) a representation that the stockholder is a holder
of record of stock of the Company entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (d) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; (e) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the rules of the Securities and Exchange Commission,
had the nominee been nominated, or intended to be nominated, by the Board of
Directors; and (f) the consent of each nominee to serve as a director of the
Corporation if so elected. The chairman of the stockholder meeting shall
determine if a nomination complies with the foregoing requirements and may
disregard the nomination of any person not made in compliance with the foregoing
procedure.
The persons named as proxies in the enclosed form of proxy were selected
by the Board, and have advised the Board that, unless authority is withheld,
they intend to vote the shares represented by them at the Annual Meeting for the
election of Sam P. Douglass, Gregory J. Flanagan, Robert L. Knauss, Nolan
Lehmann, Gary R. Petersen, John W. Storms, Dr. Francis D. Tuggle and Dr. Edward
E. Williams. All of the nominees are current members of the Board, five of whom
are independent directors (Messrs. Flanagan, Knauss, Petersen, Storms and Dr.
Tuggle). All of the nominees have consented to their nomination and will serve
if elected to the Board.
The Board knows of no reason why any nominee for director would be
unable to serve as a director. If at the time of the Annual Meeting any of the
named nominees are unable or unwilling to serve as directors of the Fund, the
persons named as proxies intend to vote for such substitutes as may be nominated
by the Board.
3
THE BOARD UNANIMOUSLY RECOMMENDS THAT EACH STOCKHOLDER VOTE "FOR" THE ELECTION
OF THE BOARD'S NOMINEES FOR DIRECTOR.
NOMINEES FOR DIRECTOR
DIRECTOR
NAME AND OCCUPATION AGE SINCE
SAM P. DOUGLASS* ......................................... 64 1991
Chairman of the Board and
Chief Executive Officer
of the Fund, the Management
Company and the Sub-Adviser.
GREGORY J. FLANAGAN ...................................... 51 1992
Vice President
of Arthur J. Gallagher & Co.
ROBERT L. KNAUSS ......................................... 66 1991
Chairman and Chief Executive Officer of
Baltic International USA, Inc.
NOLAN LEHMANN* ........................................... 52 1991
President of the Fund, the Management
Company and the Sub-Adviser.
GARY R. PETERSEN ......................................... 50 1994
Partner of EnCap Investments, L. C.
JOHN W. STORMS ........................................... 52 1991
Managing General Partner of Storms & Critz,
Certified Public Accountants.
DR. FRANCIS D. TUGGLE .................................... 54 1991
Professor of the Kogod College of
Business Administration
at American University.
DR. EDWARD E. WILLIAMS* .................................. 51 1992
Henry Gardiner Symonds Professor
and Director of the Entrepreneurship
Program of the Jesse H. Jones Graduate
School of Administration at Rice University.
- ----------------
* "Interested Person" as defined in the Investment Company Act.
4
Sam P. Douglass has been Chairman of the Board and Chief Executive
Officer of the Fund since August 1991. He has been Chairman of the Board of the
Sub-Adviser since its formation in September 1983 and became Chief Executive
Officer on December 4, 1989. Mr. Douglass also has been Chairman of the Board
and Chief Executive Officer of the Management Company since 1983. 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 GCS RE, Inc., Restaurant
Development Group, Inc. and VRPI Spin Off, Inc., which are privately-owned
companies in which the Fund has an investment. Mr. Douglass is a licensed
attorney.
Gregory J. Flanagan has been a director of the Fund since October 1992.
He was a director of the Sub-Adviser from July 1984 to October 1992. He has been
a Vice President of Arthur J. Gallagher & Co. since January 1997. He was a Vice
President and Regional Director of Alexander & Alexander, Inc. from December
1993 to January 1997 and was Senior Vice President from March 1990 to December
1993. He was President of Bank of Oklahoma, N.A. from September 1986 to February
1990.
Robert L. Knauss has been a director of the Fund since October 1991 and
was an Independent General Partner of the Fund's predecessor from its inception
in 1987. He has been Chairman and Chief Executive Officer of Baltic
International USA, Inc. since January 1994. He was Distinguished University
Professor of Law at the University of Houston Law Center from 1981 to 1995. From
1981 to 1993, he was also Dean of the University of Houston Law Center. He also
serves as a director of Allwaste, Inc. and The Mexico Fund, Inc.
Nolan Lehmann has been President and a director of the Fund since August
1991. Mr. Lehmann has been President and a director of the Management Company
since 1983. 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., Brazos Sportswear, Inc., Drypers Corporation and
Garden Ridge Corporation. In addition, he serves as a director of eleven of the
privately-owned companies in which the Fund has an investment. Mr. Lehmann is a
certified public accountant.
Gary R. Petersen has been a director of the Fund since November 1994. He
has been a partner of EnCap Investments, L.C. since 1988. Mr. Petersen had
previously served as Senior Vice President and Manager of the Corporate Finance
Division of the Energy Banking Group for RepublicBank Corporation from 1985 to
1988. He is also a director of Belden & Blake Energy Company, Nuevo Energy, Inc.
and Energy Capital Investment Company.
John W. Storms has been a director of the Fund since October 1991 and
was an Independent General Partner of the Fund's predecessor from its inception
in 1987. He has been the Managing General Partner of Storms & Critz, Certified
Public Accountants since May of 1988. Mr. Storms is a certified public
accountant.
5
Dr. Francis D. Tuggle has been a director of the Fund since October 1991
and was an Independent General Partner of the Fund's predecessor from its
inception in 1987. He has been a Professor at the Kogod College of Business
Administration at American University since July 1990 where he was Dean from
July 1990 to June 1996. From 1981 to 1990, he was the Jesse H. Jones Professor
of Management at the Jesse H. Jones Graduate School of Administration of Rice
University.
Dr. Edward E. Williams has been a director of the Fund since October
1992 and was a director of the Sub-Adviser from March 1987 to June 1995. Since
1982, he has been the Henry Gardiner Symonds Professor and the Director of the
Entrepreneurship Program of the Jesse H. Jones Graduate School of Administration
at Rice University. Dr. Williams is Managing Partner of First Texas Venture
Capital, a limited liability company, which was a former stockholder of the
Sub-Adviser. Dr. Williams is also a director of Service Corporation
International and serves on its investment committee. Dr. Williams is also a
director of VRPI Spin Off, Inc., a privately-owned company in which the Fund has
an investment.
There is no family relationship between any director, executive officer
or person nominated or selected by the Board to become a director or executive
officer.
MEETINGS AND COMMITTEES OF THE BOARD
The Board provides overall guidance and supervision with respect to the
operations of the Fund and performs the various duties imposed on the directors
of business development companies by the Investment Company Act. Among other
things, the Board supervises the management arrangements of the Fund, the
custodial arrangements with respect to portfolio securities, the selection of
accountants, fidelity bonding and transactions with affiliates. All actions
taken by the Board are taken by majority vote unless a higher percentage is
required by law or unless the Investment Company Act, the Fund's Restated
Certificate of Incorporation or By-laws require that the actions be approved by
a majority of the independent directors. The Investment Company Act requires
that a majority of the directors be individuals who are not "interested persons"
(as defined under the Investment Company Act) of the Fund.
The Board has four committees: an Audit Committee, a Committee of the
Independent Directors, a Compensation Committee and a Committee to Study Methods
for the Enhancement of Shareholder Value. The Board has no nominating committee
or other standing committees.
The members of the Audit Committee are Messrs. Flanagan, Knauss,
Petersen, Storms and Dr. Tuggle, all of whom are independent directors. The
functions of the Audit Committee are: to make recommendations to the full Board
regarding the engagement or discharge of independent accountants; to direct and
supervise investigations of matters within the scope of the independent
accountant's duties; to review with the independent accountants the audit plan
and results of the audit; to approve each professional service provided by the
independent accountants prior to the performance of such service; to consider
the range of audit and nonaudit fees; and to review the adequacy of the Fund's
system of internal accounting controls.
6
The members of the Committee of the Independent Directors are Messrs.
Flanagan, Knauss, Petersen, Storms and Dr. Tuggle, all of the Fund's independent
directors. The functions of the Committee of the Independent Directors are to:
recommend to the full Board approval of any management, advisory, or
administration agreements; recommend to the full Board any underwriting or
distribution agreements; review the fidelity bond and premium allocation; review
any joint insurance policies and premium allocation; review and monitor the
Fund's compliance with procedures adopted pursuant to certain rules promulgated
under the Investment Company Act; and carry out such other duties as the
independent directors shall, from time to time, conclude are necessary in the
performance of their duties under the Investment Company Act.
The members of the Compensation Committee are Messrs. Knauss, Petersen
and Dr. Williams. The function of the Compensation Committee will be to
determine and issue stock option grants for officers of the Fund under the Equus
II Incorporated 1997 Stock Incentive Plan, which is the only form of
compensation paid by the Fund to its officers for serving as such.
The members of the Committee to Study Methods for the Enhancement of
Shareholder Value are Messrs. Flanagan, Storms and Dr. Williams. The function of
the Committee to Study Methods for the Enhancement of Shareholder Value is to
recommend to the full Board plans and actions which might increase the value at
which the EQS Common Stock trades on the American Stock Exchange.
Directors who are officers of the Fund receive no remuneration from the
Fund; each director who is not an officer of the Fund receives from the Fund an
annual fee of $20,000, $2,000 for each meeting of the directors attended, $1,000
for participation in each meeting of the directors conducted by telephonic
conference and for each committee meeting attended ($500 for each committee
meeting if attended on the same day as a Board meeting), and reimbursement for
all out-of-pocket expenses relating to attendance at such meetings. The
independent directors will not receive any additional cash compensation from the
Fund or its portfolio companies for any additional services rendered. Officers
and directors of the Fund who are affiliated with Management may serve as
directors of portfolio companies and in such capacities may receive and retain
directors' fees and other compensation directly from the portfolio companies.
The Fund currently has no bonus, profit-sharing, pension or retirement plan, but
is in the process of establishing a stock option plan. The directors who were
not officers of the Fund were paid an aggregate of $196,500 as compensation for
the year ended December 31, 1996.
The following table sets forth all cash compensation paid to the directors
during or with respect to 1996, for services rendered in all capacities to the
Fund.
POSITIONS IN WHICH AGGREGATE
NAME OF PERSON COMPENSATION RECEIVED COMPENSATION (1)
All directors as a Director $196,500
group (8 persons)
(1) The Fund did not have any pension, profit sharing, retirement or
long-term incentive compensation plans in effect at December 31, 1996.
7
During 1996, the Board met in person five times (including the Annual
Meeting) and by telephone conference twice, the Audit Committee of the Board
held three meetings and the Committee to Study Methods for the Enhancement of
Shareholder Value held one meeting. All directors attended more than 75% of the
meetings held by the Board or the committees of the Board on which they served.
The Restated Certificate of Incorporation and By-laws of the Fund provide for
the indemnification of the Fund's directors in connection with their activities
as directors.
EXECUTIVE OFFICERS OF THE FUND
The executive officers of the Fund are: Sam P. Douglass, Chairman of the
Board and Chief Executive Officer; Nolan Lehmann, President; Patrick M. Cahill,
Vice President and Treasurer; Tracy H. Cohen, Vice President and Secretary; Gary
L. Forbes, Vice President and Randall B. Hale, Vice President. Executive
officers receive no compensation from the Fund. See "Investment Management
Agreement" and "Management Company" below. For a description of the business
background of each of Messrs. Douglass and Lehmann see "Nominees for Director"
above.
Patrick M. Cahill, age 37, has been Treasurer of the Fund since March
1996 and a Vice President of the Fund since May 1994. He has been Treasurer and
a Vice President of the Sub-Adviser since March 1996 and Controller of the
Sub-Adviser Since May 1987. He has also 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 30, has been Secretary of the Fund since March 1996
and a Vice President of the Fund since May 1995. She has been Secretary of the
Sub-Adviser since March 1996 and a Vice President of the Sub-Adviser since April
1995. 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.
Gary L. Forbes, age 53, has been a Vice President of the Fund since
December 1991. Mr. Forbes has been a Vice President of the Management Company
and the Sub-Adviser since November 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., Container-Care International,
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.
8
Randall B. Hale, age 34, has been a Vice President of the Fund, the
Sub-Adviser, and the Management Company since November 1992. He has been a
director of the Sub-Adviser and the Management Company 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 Andersen LLP. Mr. Hale is a director of
American Residential Services, Inc. and Brazos Sportswear, Inc. Mr. Hale is also
a director of 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.
FILING OF REPORTS OF STOCK OWNERSHIP
Under the federal securities laws, the Fund's directors, executive (and
certain other) officers, and any persons holding more than ten percent of EQS
Common Stock are required to report their ownership of EQS Common Stock and any
changes in that ownership to the Fund and the SEC . Specific due dates for these
reports have been established by regulation and the Fund is required to report
in this proxy statement any failure to file by these dates in 1995. All of these
filings were satisfied by the Fund's directors, officers, and ten percent
holders.
As of March 31, 1997, the Fund believes that all directors, officers and
ten percent holders are current in their filings. In making these statements,
the Fund has relied on the written representations of its directors, officers
and ten percent holders and copies of reports that they have filed with the SEC.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDER
The Fund does not know of any person who is a beneficial owner of more
than 5% of the outstanding shares of EQS Common Stock.
OWNERSHIP OF MANAGEMENT
The following table sets forth at March 31, 1997, the number and
percentage of outstanding shares of EQS Common Stock beneficially held by (i)
each director and nominee for director of the Fund and (ii) all officers and
directors as a group. Under the rules of the SEC, a person is deemed to own
beneficially all securities as to which that person owns or shares voting or
investment power, as well as all securities which such person may acquire within
60 days through the exercise of currently available conversion rights, warrants
or options. Except as otherwise indicated, the stockholders listed in the table
below have sole voting and investment power with respect to the shares
indicated.
9
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
SOLE VOTING OTHER
NAME OF AND BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER INVESTMENT POWER OWNERSHIP TOTAL OF CLASS
- ------------ ------------------ ---------------- ----------- ----- --------
Common Stock Sam P. Douglass 7,982 13,848(1) 21,830 *
Gregory J. Flanagan 2,000 0 2,000 *
Robert L. Knauss 432 213(2) 645 *
Nolan Lehmann 18,554 3,319(3) 21,873 *
Gary R. Petersen 2,431 0 2,431 *
John W. Storms 2,610 0 2,610 *
Francis D. Tuggle 1,600 0 1,600 *
Edward E. Williams 7,470 14,305(4) 21,775 *
All directors and 55,406 31,685 87,091 2.0%
officers as a group
(twelve persons)
- ---------------
* Indicates less than one percent.
(1) Mr. Douglass may be deemed to beneficially own (a) 3,652 shares held by
Paula T. Douglass, his wife, (b) 1,738 shares held in an Individual
Retirement Account of Paula T. Douglass, and (c) 8,458 shares held in a
401K Plan for the benefit of Paula T. Douglass. Mr. Douglass disclaims
beneficial ownership of all shares not directly owned by him.
(2) Mr. Knauss may be deemed to beneficially own 213 shares held by the
Robert L. Knauss Defined Plan (the "Plan") of which Mr. Knauss is a
control person. Mr. Knauss disclaims beneficial ownership of the 213
shares held by the Plan.
(3) Mr. Lehmann may be deemed to beneficially own 3,319 shares held by
Jeanne Lehmann, his wife. Mr. Lehmann disclaims beneficial ownership of
all shares not owned directly by him.
(4) Dr. Williams may be deemed to beneficially own 14,305 shares held by
First Texas Venture Capital, a limited liability company, of which he is
the Managing Partner. Dr. Williams disclaims beneficial ownership of all
shares not owned directly by him.
10
INVESTMENT MANAGEMENT AGREEMENT
The investments and business of the Fund are managed by the Management
Company, pursuant to a Management Agreement (the "Management Agreement")
initially approved by the Board on March 24, 1992, and by the stockholders on
March 24, 1992. The Management Agreement was amended by the stockholders of the
Fund at a meeting held on June 25, 1993. Continuation of the Management
Agreement for an additional period ending June 30, 1997, was most recently
approved by the Board, including a majority of the Independent Directors, at
their meeting held on November 7, 1996. The 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 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 its services and the
expenses which the Management Company assumes under the 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 fee from the Fund was $1,848,253, for the year
ended December 31, 1996. The total net assets of the Fund as of December 31,
1996 were approximately $103.2 million. The management fee paid by the Fund is
higher than the fee paid by most investment companies.
Under the 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, 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.
11
In addition to the management fee, the Fund has agreed to pay the
Management Company 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 (i) 20% of the net realized capital gains
less unrealized capital depreciation of the Fund and its predecessor-in-interest
on a cumulative basis from October 23, 1987 (November 14, 1984, with respect to
certain investments previously held by Equus Investments Incorporated) through
the end of the fiscal quarter, less (ii) the aggregate amount of the incentive
fee payments and special allocation distributions to the Management Company or
the Sub-Adviser in prior periods. If the amount of the incentive fee in any
fiscal quarter is a negative number, or cumulative net realized capital gains
less unrealized capital depreciation at the end of any period is less than such
amount calculated at the end of the previous period, the Management Company will
be required to repay to the Fund all or a portion of the incentive fee
previously paid. A current incentive fee of $1,058,012 was incurred during the
year ended December 31, 1996. Deferred management incentive fee expense for the
year ended December 31, 1996 totaled $6,488,693. The deferred management
incentive fee expense relates to the increase in unrealized appreciation of
portfolio securities and will not be paid until such appreciation is realized,
unless the New Management Agreement (defined below) takes effect. Deferred
management incentive fee of $10,784,028 was accrued at December 31, 1996, on the
net unrealized appreciation of portfolio securities. The Investment Advisers Act
of 1940 (the "Advisers Act") restricts the amount of the Management Company's
incentive fee to 20% of the Fund's net realized capital gains less unrealized
capital depreciation.
At a Special Meeting of Stockholders (the "Special Meeting") held on
April 9, 1997, the stockholders of the Fund approved the terms of a new
Management Agreement between the Fund and the Management Company (the "New
Management Agreement"). The material changes between the current Management
Agreement and the New Management Agreement relate to changes made to management
incentive compensation and certain revisions to the provisions regarding
indemnification of the Management Company.
The New Management Agreement eliminates the management incentive
compensation provisions of the current Management Agreement discussed above and
provides that the accrued deferred management incentive fee, as of the
"Valuation Date" (defined as March 31, 1997 or a subsequent date approved by the
Securities and Exchange Commission (the "Commission") and the directors of the
Fund), be paid to the Management Company in shares of EQS Common Stock valued at
net asset value as of the Valuation Date. Implementation of the New Management
Agreement is contingent upon receipt by the Fund of an exemptive order from the
Commission. The Fund filed an application for an exemptive order in October 1996
and anticipates the issuance of an exemptive order by the Commission prior to
the date of the Annual Meeting, although there is no assurance that an exemptive
order will be issued.
If the New Management Agreement is implemented, in addition to the
normal valuation procedures that the Fund follows with respect to the valuation
of portfolio securities for purposes of determining the net asset value of the
Fund and the amount of the accrued deferred management incentive fee on the
Valuation Date, the Fund will engage an independent appraiser to provide an
appraisal of the investment portfolio of the Fund as of the Valuation Date.
12
At the Special Meeting in conjunction with the approval of the terms of
the New Management Agreement, the stockholders of the Fund also approved the
establishment of the Equus II Incorporated 1997 Stock Incentive Plan (the
"Plan") which provides for the issuance of stock options to officers and
directors of the Fund. The Plan will become effective when the New Management
Agreement is implemented. The Plan provides that the Fund may issue stock
options for up to 20% of the number of outstanding shares of EQS Common Stock.
Officers and directors of the Fund who are responsible for or contribute to the
growth, success, and profitability of the Fund and are designated by the
Compensation Committee are eligible to participate in the Plan. The Plan will be
administered by the Compensation Committee. The Plan also provides for the
automatic issuance of specific amounts of stock options to the non-officer
directors of the Fund. The issuance of such options is subject to receipt by the
Fund of an order from the Commission pursuant to section 61(a)(3)(B) of the
Investment Company Act approving the terms of the Plan as it applies to the
non-officer directors of the Fund. The Fund filed an application with the
Commission for such an order in March 1997. No stock options may be issued to
the non-officer directors until such an order is issued by the Commission.
The Management Company also receives compensation for providing certain
investor communication services of which $50,000 is included in the Statements
of Operations for each of the three years ended December 31, 1996.
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 fees. During 1996 and 1995 the officers and
directors of the Fund received $143,987 and $73,848, respectively in director
fees from portfolio companies.
The 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 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.
The Management Agreement will continue in effect until June 30, 1997
(unless the New Management Agreement is implemented), 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 Management 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
13
Management Company, and would automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act).
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 are: Sam P.
Douglass, Chairman of the Board and Chief Executive Officer; Nolan Lehmann,
President and director; Randall B. Hale, Vice President, director and Secretary;
Paula T. Douglass, director; S. Preston Douglass, Jr., director and Gary L.
Forbes, Vice President. For a description of the business background of each of
Messrs. Sam P. Douglass, Lehmann, Hale and Forbes see "Nominees for Director"
and "Executive Officers of the Fund" above. A description of the business
background of Paula T. Douglass and S. Preston Douglass, Jr., is set forth
below. 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.
Paula T. Douglass, age 45, 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 was Chairman of Iwerks Entertainment, Inc. from January 1995
to March 1997. She is a licensed attorney.
S. Preston Douglass, Jr. age 35, 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 from December 1987 to December 1988.
He is a licensed attorney and former President of the Kerr County Bar
Association.
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.
14
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 (i) ten percent of the net realized
capital gains less unrealized capital depreciation of the Fund and its
predecessor-in-interest on a cumulative basis from October 23, 1987 (November
14, 1984, with respect to certain investments previously held by Equus
Investments Incorporated) through the end of each fiscal quarter, less (ii) the
aggregate amount of the incentive fee payments and special incentive allocation
distributions to the Sub-Adviser in prior periods. 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 will be required to repay to the Management Company all
or a portion of the incentive fee previously paid.
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; provided,
however, if the New Management Agreement is implemented, the Sub-Adviser
Agreement will be terminated. 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).
15
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 Equus Investments I, L.P. 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, Cahill, Forbes and Ms. Cohen, see "Nominees for
Director" and "Executive Officers of the Fund" above. For a description of the
business background of each of Ms. Douglass and S. Preston Douglass, Jr., see
"Management Company".
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 is a wholly-owned subsidiary of the Management Company.
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.
PROPOSAL 2. RATIFICATION OF THE SELECTION OF
INDEPENDENT AUDITORS FOR THE FUND
The Board, including all of the Fund's disinterested directors, has
selected the accounting firm of Arthur Andersen LLP to audit the Fund's
financial statements for, and otherwise act as the Fund's independent
accountants with respect to the fiscal year ending December 31, 1997. The Fund's
engagement of Arthur Andersen LLP is conditioned on the Fund's right (exercised
by a vote of a majority of its outstanding securities at any meeting called for
such purpose) to terminate at any time, with or without cause and without
penalty, such employment. In accordance with the Board's resolution, the
selection of Arthur Andersen LLP for the current fiscal year is submitted to
stockholders for ratification. The Fund knows of no direct or indirect financial
interest of Arthur Andersen LLP in the Fund.
16
A representative of Arthur Andersen LLP is expected to be present at the
Annual Meeting and will be available to make a statement, if he so desires, and
to respond to appropriate questions of the stockholders.
The proposal to ratify the appointment of Arthur Andersen LLP as the
Fund's independent auditors requires the affirmative vote of a majority of the
outstanding shares of EQS Common Stock represented and entitled to vote at the
Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS THAT EACH STOCKHOLDER VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE INDEPENDENT
AUDITORS OF THE FUND.
OTHER MATTERS
The Board knows of no matters other than those listed in the attached
Notice of Annual Meeting which are likely to come before the Annual Meeting.
However, if any other matter properly comes before the Annual 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 Annual Meeting of Stockholders and Proxy Statement are not
received by the time scheduled for the Annual Meeting, the individuals named as
proxies may move for one or more adjournments of the Annual 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 Annual Meeting.
ANNUAL REPORT
THE FINANCIAL STATEMENTS OF THE FUND ARE CONTAINED IN THE 1996 ANNUAL
REPORT TO STOCKHOLDERS, WHICH HAS BEEN PROVIDED TO THE STOCKHOLDERS CONCURRENTLY
HEREWITH. 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.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Under the regulations of the SEC, a record or beneficial owner of shares
of EQS Common Stock may submit proposals on proper subjects for action at the
1998 Annual Meeting of Stockholders of the Fund. All such proposals must be
mailed to the Fund, c/o Equus Capital Management Corporation, 2929 Allen
Parkway, Suite 2500, Houston, Texas 77019, attention: Nolan Lehmann, and must be
received at that address no later that January 31, 1998, in order to be
considered for inclusion in the Fund's proxy statement and form of proxy
relating to the 1998 Annual Meeting. Submission of a shareholder proposal does
not guarantee inclusion in the Fund's proxy statement or form of proxy because
certain SEC rules must be met.
17
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, other soliciting material, and Annual
Reports you wish to receive in order to supply copies to the beneficial owners
of shares of EQS 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
April 25, 1997
Houston, Texas
18
EQUUS II INCORPORATED
2929 ALLEN PARKWAY, SUITE 2500, HOUSTON, TEXAS 77019
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF EQUUS II INCORPORATED (THE
"FUND") FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 20, 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 Annual Meeting of
Stockholders of EQUUS II INCORPORATED, to be held on May 20, 1997, at 9:00 a.m.,
local time, at Meeting Room No. 1, Plaza Level, Liberty Tower, 2919 Allen
Parkway, Houston Texas 77019, or any adjournments thereof (the "Annual Meeting")
and to vote the shares of Common Stock, $.001 par value per share, of the Fund
(the "Shares") standing in the name of the undersigned on the books of the Fund
on March 21, 1997, the record date for the Annual Meeting, with all powers the
undersigned would possess if personally present at the Annual Meeting.
The undersigned hereby acknowledges previous receipt of the Notice of Annual
Meeting of Stockholders and the Proxy Statement and hereby revokes any proxy or
proxies heretofore given by the undersigned.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES, AND
FOR PROPOSALS 2 AND 3, AND IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED
FOR SUCH NOMINEES, PROPOSALS 2 AND 3.
(Continued and to be dated and signed on the reverse side.)
1. Election of Directors
FOR all nominees listed below [ ]
WITHHOLD AUTHORITY to vote for all nominees listed below [ ]
*EXCEPTIONS [ ]
NOMINEES: Sam P. Douglass, Gregory J. Flanagan, Robert L. Knauss, Nolan Lehmann,
John W. Storms, Gary R. Petersen, Dr. Francis D. Tuggle, Dr. Edward E. Williams
(INSTRUCTIONS: To withhold authority to vote for any Individual nominee, mark
the "Exceptions" box and write that nominee's name in the space provided below.)
*Exceptions ___________________________________________________________________
2. RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP
as the independent auditors of the Fund for the fiscal year ending December
31, 1997.
FOR [ ]
AGAINST [ ]
ABSTAIN [ ]
3. In their description, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.
FOR [ ]
AGAINST [ ]
ABSTAIN [ ]
Change of Address or Comments Mark Here [ ]
Please sign exactly as name appears to the left. 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 person:
Dated: ____________________________________, 1997
_________________________________________________
Signature
_________________________________________________
Signature if held jointly
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK. [X]
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.