SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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Equus II Incorporated
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EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
713-529-0900
Notice of Annual Meeting of Stockholders
TIME 9:00 a.m. Houston time on Thursday, May 3, 2001
PLACE Meeting Room No. 1, Ground Level,
Wortham Tower
2727 Allen Parkway
Houston, Texas 77019
ITEMS OF BUSINESS (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,
2001.
(3) To approve the amendment of the 1997 Stock
Incentive Plan.
(4 & 5) To consider the shareholder proposals
described in the accompanying Proxy Statement if
presented to the meeting.
(6) To transact such other business as may properly
come before the meeting.
RECORD DATE You are entitled to vote if you were a stockholder
at the close of business on March 19, 2001.
VOTING BY PROXY Please submit a proxy as soon as possible so
that your shares can be voted at the meeting in
accordance with your instructions. You may submit your
proxy (1) by telephone, (2) by internet, or (3) by
mail. For specific instructions, please refer to the
Questions and Answers, beginning on page 1 of this
proxy statement and the instructions on the proxy card.
By order of the Board of Directors,
TRACY H. COHEN
Secretary
This proxy statement and accompanying proxy card are being distributed on or
about April 3, 2001
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
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PROXY STATEMENT
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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 of proxies to be voted at the 2001 Annual Meeting of Stockholders to
be held on Thursday, May 3, 2001, at 9:00 a.m., local time, at Meeting Room No.
1, Ground Level, Wortham Tower, 2727 Allen Parkway, Houston, Texas 77019, and at
any adjournment thereof.
ABOUT THE MEETING
What is the purpose of the annual meeting?
At the annual meeting, stockholders will act upon the matters outlined in
the accompanying notice of meeting, including the election of directors,
ratification of the Fund's independent auditors, an amendment to the 1997 Stock
Incentive Plan and two shareholder proposals. In addition, the Fund's management
will report on the performance of the Fund during 2000 and respond to questions
from stockholders.
Who is entitled to vote?
Stockholders of record at the close of business on the record date, March
19, 2001, are entitled to receive notice of the annual meeting and to vote the
shares of common stock that they held on that date at the meeting, or any
postponement or adjournment of the meeting. Each outstanding share entitles its
holder to cast one vote on each matter to be voted upon. A list of stockholders
on the record date will be available for inspection at the Fund's office at 2929
Allen Parkway, Suite 2500, Houston, Texas for 10 days before the meeting.
Who can attend the meeting?
All stockholders as of the record date, or their duly appointed proxies,
may attend the meeting. Each stockholder may be asked to present valid picture
identification, such as a driver's license or passport. Cameras, recording
devices, and other electronic devices will not be permitted at the meeting.
Please note that if you hold your shares in "street name" (that is,
through a broker, bank, or other nominee), you will need to bring a copy of a
brokerage statement reflecting your stock ownership as of the record date and
check in at the registration desk at the meeting.
Parking is available at local garages; the fee for parking is $0.75 per
hour.
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of a
majority of the shares of common stock outstanding on the record date will
constitute a quorum, permitting the meeting to conduct its business. As of the
record date, 6,674,577 shares of common stock of the Fund were outstanding.
Proxies received but marked as abstentions and broker non-votes that are voted
on any matter will be included in the calculation of the number of shares
considered to be present at the meeting.
How do I vote?
If you complete and properly sign the accompanying proxy card and return it to
the Fund, it will be voted as you direct. If you are a registered stockholder
and attend the meeting, you may deliver your completed proxy card in person.
"Street name" stockholders who wish to vote at the meeting will need to obtain a
proxy form from the institution that holds their shares.
1
Can I vote by telephone or electronically?
If you are a registered stockholder (that is, if you hold your stock in
your own name), you may vote by telephone, via the internet, or by following the
instructions included with your proxy card. If your shares are held in "street
name," you will need to contact your broker or other nominee to determine
whether you will be able to vote by telephone or electronically.
The instructions for registered stockholders voting by telephone or the
internet are as follows:
Telephonic Voting
Stockholders who vote telephonically will dial 1-800-PROXIES. After
entering the control number you will hear the name of the company and will be
offered the option to vote for all of Management's recommendations or to vote on
each proposal individually.
Proposals are referred to by proposal number (as shown on the proxy card)
and the proposal for Election of Directors will be Proposal #1. After voting for
each proposal, you will be asked to confirm your vote.
Internet Voting
Stockholders who vote via the internet will access www.voteproxy.com. The
number of accesses per control number per day is limited to 5.
After entering the control number you will be offered the option to vote
for all of Management's recommendations or to vote on each proposal
individually. The text of each proposal and the name of each nominee are
displayed exactly as they appear on the proxy card.
After the voting process is completed, you will be shown how you voted and
will be given the opportunity to change your vote. You are also given the option
of receiving confirmation of the vote via e-mail and are asked to supply your
e-mail address.
Can I change my vote after I return my proxy card?
Yes. Even after you have submitted your proxy, you may change your vote at
any time before the proxy is exercised by filing with the Secretary of the Fund
either a notice of revocation or a duly executed proxy bearing a later date. The
powers of the proxy holders will be suspended if you attend the meeting in
person and so request, although attendance at the meeting will not by itself
revoke a previously granted proxy.
What are the Board's recommendations?
The Board's recommendation is set forth together with the description of
each item in this proxy statement. In summary, the Board recommends a vote:
o FOR election of the nominated slate of directors (see page 3);
o FOR ratification of the appointment of Arthur Andersen LLP as the
Fund's independent auditors (see page 13);
o FOR approval of the amendment of the 1997 Stock Incentive Plan (see
page 13);
o AGAINST shareholder proposal No. 1 (see page 17); and
o AGAINST shareholder proposal No. 2 (see page 21).
With respect to any other matter that properly comes before the meeting,
the proxy holders will vote as recommended by the Board of Directors or, if no
recommendation is given, in their own discretion.
How are votes counted?
In the election of directors, you may vote "FOR" all of the nominees or
your vote may be "WITHHELD" with respect to one or more of the nominees. For the
other proposals, you may vote
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"FOR," "AGAINST," or "ABSTAIN." If you sign your proxy card or broker voting
instruction card with no further instructions, your shares will be voted in
accordance with the recommendations of the Board.
What vote is required to approve each item?
Election of Directors. The affirmative vote of a plurality of the votes
cast at the meeting is required for the election of directors. A properly
executed proxy marked "WITHHELD" with respect to the election of one or more
directors will not be voted with respect to the director or directors indicated,
although it will be counted for purposes of determining whether there is a
quorum.
Other Items. For each other item, the affirmative vote of the holders of a
majority of the shares represented in person or by proxy and entitled to vote on
the item will be required for approval. A properly executed proxy marked
"ABSTAIN" with respect to any such matter will not be voted in favor of or
against such matter, although it will be counted as voted for purposes of
determining whether there is a quorum.
If you hold shares in "street name" through a broker, bank, or other
nominee, your broker, bank, or nominee may not be permitted to exercise voting
discretion with respect to some of the matters to be acted upon. Thus, if you do
not give your broker or nominee specific instructions, your shares may not be
voted on those matters and will not be counted in determining the number of
shares necessary for approval. Shares represented by such "broker non-votes"
will, however, be counted in determining whether there is a quorum.
What does it mean if I receive more than one proxy or voting instruction card?
It means your shares are registered differently or are in more than one
account. Please provide voting instructions for all proxy and voting instruction
cards you receive.
Who will bear the cost of soliciting votes for the meeting?
The cost of soliciting proxies by the Fund 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 Equus
Capital Management Company, the Fund's investment advisor (the "Management
Company") without special compensation therefor.
Who are the largest owners of the Fund's stock?
Other than Sam P. Douglass, Chairman of the Board and Chief Executive
Officer of the Fund, and Nolan Lehmann, President of the Fund, the Fund knows of
no single person or group that is the beneficial owner of more than 5% of the
outstanding shares of EQS Common Stock. The directors and officers of EQS, as a
group, beneficially own (including currently exercisable stock options)
approximately 25.7% of the shares of EQS Common Stock. The table on page 11
shows the number of shares beneficially owned by the Fund's directors and the
executive officers of the Fund as a group.
ITEM 1 - ELECTION OF DIRECTORS
Article III, Section 3.2 of the By-laws of the Fund 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
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.
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.
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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.
The Board unanimously recommends that each stockholder vote "FOR" the
election of the Board's Nominees for Director.
Nominees for Director
Sam P. Douglass* Mr. Douglass has been Chairman of the Board and Chief
Age 68 Executive Officer of the Fund since August 1991. 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. Mr. Douglass is a
director of Advanced Technical Products, Inc. He is also
a director of GCS RE, Inc., which is a privately-owned
company in which the Fund has an investment. Mr.
Douglass is a licensed attorney.
Gregory J. Flanagan Mr. Flanagan has been a director of the Fund since
Age 55 October 1992. He has been an Area President of Arthur J.
Gallagher & Co. and Managing Director of Healthcare
First, a division of Arthur J. Gallagher & Co. since
December 15, 2000. From January 1997 to December 15,
2000, he was a Vice President of Arthur J. Gallagher &
Co. 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 Mr. Knauss has been a director of the Fund since
Age 70 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 and he also
serves as a director of Philip Services Corp, where he
has served as Chairman of the Board since May 1998. He
is also a director of The Mexico Fund, Inc. He was Dean
and Distinguished University Professor of Law at the
University of Houston Law Center from 1981 to 1993.
Nolan Lehmann* Mr. Lehmann has been President and a director of the
Age 56 Fund since August 1991. Mr. Lehmann has been President
and a director of the Management Company since 1983. Mr.
Lehmann is a director of Allied Waste Industries, Inc.
and Paracelsus Healthcare Corporation. In addition, he
serves as a director of eight of the privately-owned
companies in which the Fund has an investment. Mr.
Lehmann is a certified public accountant.
Gary R. Petersen Mr. Petersen has been a director of the Fund since
Age 54 November 1994. He has been a Managing Director of EnCap
Investments, L.L.C. since 1989. EnCap Investments has
been a wholly-owned subsidiary of El Paso Corp. since
March 1999. Mr. Petersen 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
Nuevo Energy Company and Energy Capital Investment
Company.
John W. Storms Mr. Storms has been a director of the Fund since October
Age 56 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,
4
Certified Public Accountants since May of 1988. Mr.
Storms is a certified public accountant.
Dr. Francis D. Tuggle Dr. Tuggle has been a director of the Fund since October
Age 58 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* Dr. Williams has been a director of the Fund since
Age 55 October 1992 and was a director of Equus Capital
Corporation, a Delaware corporation and wholly owned
subsidiary of the Management Company ("ECC"), 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 Management at Rice University. Dr. Williams is
also a director of Service Corporation International and
serves on its investment committee.
* "Interested Person" as defined in the Investment Company Act.
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.
BOARD COMMITTEE MEMBERSHIP
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Committee to Study
Committee of Methods for the
Audit Independent Compensation Nominating Enhancement of
Name Committee Directors Committee Committee Shareholder Value
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Gregory J. Flanagan * * * **
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Robert L. Knauss ** * * *
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Gary R. Petersen * * ** *
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John W. Storms * * * *
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Dr. Francis D. Tuggle * * *
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Dr. Edward E. Williams * *
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* Member
** Chairman
What are the duties of the Board of Directors?
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.
5
What committees has the Board established?
The Board has five committees: an Audit Committee, a Committee of
Independent Directors, a Compensation Committee, a Nominating Committee, and a
Committee to Study Methods for the Enhancement of Shareholder Value. The Board
has no other standing committees.
Audit Committee
The functions of the Audit Committee are to:
o make recommendations to the full Board regarding the engagement or
discharge of independent accountants;
o direct and supervise investigations of matters within the scope of
the independent accountants' duties;
o review with the independent accountants the audit plan and results
of the audit; approve each professional service provided by the
independent accountants prior to the performance of such service;
o consider the range of audit and nonaudit fees; and
o review the adequacy of the Fund's system of internal accounting
controls.
Committee of Independent Directors
The functions of the Committee of Independent Directors are to:
o recommend to the full Board approval of any management, advisory, or
administration agreements;
o recommend to the full Board any underwriting or distribution
agreements; review the fidelity bond and premium allocation;
o review any joint insurance policies and premium allocation;
o review and monitor the Fund's compliance with procedures adopted
pursuant to certain rules promulgated under the Investment Company
Act; and
o 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.
Compensation Committee
The function of the Compensation Committee is to determine and issue stock
options for officers of the Fund under the 1997 Stock Incentive Plan (the
"Plan").
Nominating Committee
The function of the Nominating Committee is to select individuals for
nomination to the Board of Directors of the Fund.
Committee to Study Methods for the Enhancement of Shareholder Value
The function of the Committee to Study Methods for the Enhancement of
Shareholder Value is to recommend to the Board plans and actions which might
increase the value at which the EQS Common Stock trades on the New York Stock
Exchange.
How often did the Board and its committees meet during 2000?
During 2000, the Board met in person four times, the Audit Committee held
four meetings, the Compensation Committee held one meeting, and the Committee to
Study Methods for the Enhancement of Shareholder Value held one meeting. The
Committee of Independent Directors and the Nominating Committee met as needed at
regularly scheduled Board Meetings. 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.
6
Report of the Audit Committee
The Audit Committee of the Board reviews the financial reporting process,
the system of internal controls, the audit process, and the process of
monitoring compliance with laws and regulations. Each of the Audit Committee
members satisfies the definition of independent director as established in the
New York Stock Exchange Listing Requirements. The Board adopted an initial
written charter for the Audit Committee on October 26, 1999. A revised charter
was adopted on February 6, 2001, which is attached to this proxy statement as
Appendix A. The Fund operates on a January 1 to December 31 fiscal and tax year.
However, the Fund uses a November 1 to October 31 tax year for determining its
capital gains. The Audit Committee met four times during 2000.
The Audit Committee has reviewed the Fund's audited financial statements
for the year ended December 31, 2000, and discussed such statements with
management. The Audit Committee has discussed with Arthur Andersen LLP, the
Fund's independent accountants during 2000, the matters required to be discussed
by Statement of Auditing Standards No. 61 (Communication with Audit and Finance
Committees, as amended).
The Audit Committee received from Arthur Andersen LLP the written
disclosure required by Independent Standards Board Standard No. 1 (Independence
Discussions with Audit Committee, as amended), and discussed with them their
independence. The Audit Committee has considered whether the auditor's provision
of non-audit services is compatible with auditor independence.
Based on the review and discussions noted above, the Audit Committee
recommended to the Board that the Fund's audited financial statements for the
year ended December 31, 2000, be included in the Fund's Annual Report on Form
10-K for the year ended December 31, 2000, and be filed with the Securities and
Exchange Commission.
This report of the Audit Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, or the Investment Company Act of
1940, as amended, except to the extent that the Fund specifically incorporates
this information by reference, and shall not otherwise by deemed filed under
such Acts.
Submitted by:
Audit Committee
Robert L. Knauss, Chairman
Gregory J. Flanagan
Gary R. Petersen
John W. Storms
Dr. Francis D. Tuggle
7
Compensation of Directors and Executive Officers of the Fund
Each director who is not an officer of the Fund receives an annual fee of
$25,000, $3,000 for each meeting of the directors attended, $1,500 for
participation in each meeting conducted by telephonic conference, and $1,500 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 do
not receive any additional compensation from the Fund or 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. Officers of the Fund do not receive cash
compensation directly from the Fund, but are employed by and receive a salary
from the Management Company. The Fund established a stock incentive plan in 1997
to provide incentive compensation to its directors, officers, and employees.
The directors who were not officers of the Fund were paid an aggregate of
$233,500 and $267,250 as compensation for the years ended December 31, 2000 and
1999, respectively.
Under the 1997 Stock Incentive Plan (the "Plan"), each non-officer
director was granted an option to purchase 5,000 shares of EQS common stock on
November 4, 1997. In addition, each individual elected as a non-officer director
is, on the first business day following the annual stockholders meeting, granted
a stock option to purchase 2,000 shares of EQS common stock at the closing sales
price for shares of EQS common stock on that date. The Fund currently has no
bonus, profit-sharing, pension or retirement plan. Any new director will
automatically be granted an option to purchase 5,000 shares of EQS common stock
on the first business day following such director's first board meeting.
Under the Plan the Fund may grant stock options to eligible directors and
officers for up to the number of shares of EQS common stock equal to 20% of the
outstanding shares. At December 31, 2000, the Fund had outstanding stock options
covering an aggregate of 306,773 shares. The Compensation Committee is
responsible for granting awards of stock options under the Plan.
Cash Compensation
The following table sets forth all cash compensation paid to the directors
during or with respect to 2000, for services rendered in all capacities to the
Fund.
Pension Long-term
Aggregate or Retirement Compensation Awards
Compensation Benefits Accrued as Number of Securities
Name of Director from the Fund part of Fund Expenses Underlying Options
- ---------------- ------------- --------------------- ------------------
Sam P. Douglass* $0 (1) $0 0
Gregory J. Flanagan $39,500 $0 2,000
Robert L. Knauss $39,500 $0 2,000
Nolan Lehmann* $ 0(1) $0 0
Gary R. Petersen $38,000 $0 2,000
John W. Storms $39,500 $0 2,000
Francis D. Tuggle $39,000 $0 2,000
Edward E. Williams* $38,000 $0 2,000
- ----------
* Designates an "interested person."
(1) Mr. Douglass and Mr. Lehmann do not receive a salary from the Fund.
8
Options Granted During 2000
The following table contains information concerning the grant of stock
options under the Fund's incentive stock plan to directors and executive
officers during 2000.
% of Total
Options
Granted to
Directors Potential Realizable Value at
Number of and Assumed Annual Rates of Stock
Securities Officers Price Appreciation for Option
Underlying in Fiscal Exercise Term(1)
Options Year Price Expiration ------------------------------
Name Granted (#) 2000 ($/Sh) Date 5%($) 10%($)
---- ----------- ---- ------ ---- ----- ------
Sam P. Douglass 0 -- -- -- -- --
Gregory J. Flanagan 2,000 16.7% 9.938 05/09/10 32,374 51,551
Robert L. Knauss 2,000 16.7% 9.938 05/09/10 32,374 51,551
Nolan Lehmann 0 -- -- -- -- --
Gary R. Petersen 2,000 16.7% 9.938 05/09/10 32,374 51,551
John W. Storms 2,000 16.7% 9.938 05/09/10 32,374 51,551
Francis D. Tuggle 2,000 16.7% 9.938 05/09/10 32,374 51,551
Edward E. Williams 2,000 16.7% 9.938 05/09/10 32,374 51,551
- -----------
(1) The amounts shown under these columns are the result of calculations at
the 5% and 10% rates required by the rules adopted by the Securities and
Exchange Commission and are not intended to forecast future appreciation
of the Fund's stock price. The potential realizable values are based on an
assumption that the stock price of the shares of EQS Common Stock
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of the option term. The values do not take into
account amounts required to be paid as income taxes or option provisions
providing for termination of an option following termination of
employment, nontransferability, or vesting over periods of up to four
years.
Stock Option Exercises and Fiscal Year-End Values
The following table sets forth certain information concerning the value of
unexercised options held by each of the directors of the Fund at December 31,
2000.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 2000 December 31, 2000(1)
Acquired On Value -------------------------- --------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------- -------- ----------- ------------- ----------- -------------
Sam P. Douglass (2) 0 0 60,533 5,882 $0 $0
Gregory J. Flanagan 0 0 8,999 2,001 $0 $0
Robert L. Knauss 0 0 8,999 2,001 $0 $0
Nolan Lehmann (3) 0 0 54,372 5,882 $0 $0
Gary R. Petersen 0 0 8,999 2,001 $0 $0
John W. Storms 0 0 7,999 2,001 $0 $0
Francis D. Tuggle 0 0 7,999 2,001 $0 $0
Edward E. Williams 0 0 8,999 2,001 $0 $0
- ----------
(1) The value is based on a closing sale price of $8.8125 per share on December
31, 2000.
(2) On September 30, 1999, Mr. Douglass exercised options to purchase 193,753
shares of common stock at $17.00 per share. The exercise price of $3,293,801,
was paid in the form of a promissory note from Mr. Douglass to the Fund. The
balance of such note was $2,680,527 as of December 31, 2000. The note bears
interest at 5.42% per annum, has limited recourse, and is due on or before
September 30, 2008. The note when issued was secured by the 193,753 shares,
including any proceeds or dividends paid thereon. There are currently 206,959
shares of the Fund's common stock securing the note.
(3) On September 30, 1999, Mr. Lehmann exercised options to purchase 173,000
shares of common stock at $17.00 per share. The exercise price of $2,941,000,
was paid in the form of a promissory note from Mr. Lehmann to the Fund. The note
bears interest at 5.42% per annum, has limited recourse, and is due on or before
September 30, 2008. The note when issued was secured by the 173,000 shares,
including any proceeds or dividends paid thereon. There are currently 258,226
shares of the Fund's common stock securing the note.
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 cash compensation from the Fund, but participate in the 1997
Stock Incentive Plan. See "Investment Management Agreement" and "Management
Company" below.
9
For a description of the business background of each of Messrs. Douglass and
Lehmann see "Nominees for Director" above.
Patrick M. Cahill Mr. Cahill has been Treasurer of the Fund since March
Age 41 1996 and a Vice President of the Fund since May 1994.
He has been a Vice President of the Management Company
since April 1999. 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 director of Champion Window, Inc. and The
Drilltec Corporation, which are privately owned
companies in which the Fund has an investment. Mr.
Cahill is a certified public accountant
Tracy H. Cohen Ms. Cohen has been Secretary of the Fund since March
Age 34 1996 and a Vice President of the Fund since May 1995.
She has been Secretary of the Management Company since
April 1999. She has also been Investor Relations
Manager of the Management Company since April 1995.
From September 1990 to April 1995, she was employed by
Arthur Andersen LLP. Ms. Cohen is a director of
Equicom, Inc. and Petrocon Engineering, Inc., which are
privately-owned companies in which the Fund has an
investment. Ms. Cohen is a certified public accountant.
Gary L. Forbes Mr. Forbes has been a Vice President of the Fund since
Age 57 December 1991. Mr. Forbes has been a Vice President of
the Management Company since November 1991. He is a
director of Advanced Technical Products, Inc. and has
served as Chairman of the Board since July 2000. He is
also a director of Consolidated Graphics, Inc. and NCI
Building Systems, Inc. He is also a director of eight
of the privately-owned companies in which the Fund has
an investment. Mr. Forbes is a certified public
accountant.
Randall B. Hale Mr. Hale has been a Vice President of the Fund and the
Age 38 Management Company since November 1992. He has been a
director of the Management Company since February 1996.
From June 1985 to October 1992, he was employed by
Arthur Andersen LLP. Mr. Hale is a director of seven of
the 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 Securities and Exchange Commission
(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 2000. All of these filings were satisfied by
the Fund's directors, officers, and ten percent holders.
As of April 1, 2001, 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
Other than Messrs. Douglass and Lehmann, 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, 2001, 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
10
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.
Amount and Nature of
Beneficial Ownership
--------------------
Sole Voting Options
and Exercisable Other
Investment Within Beneficial Percent
Title of Class Name Power 60 days Ownership Total of Class
- -------------- ---- --------- ------- --------- ----- --------
Common Stock Sam P. Douglass(1) 15,144 66,415 555,943(2) 637,502 9.1%
Gregory J. Flanagan 7,300 9,999 0 17,299 *
Robert L. Knauss 614 9,999 399(3) 11,102 *
Nolan Lehmann(4) 362,693 60,284 37,923(5) 460,870 6.6 %
Gary R. Petersen 4,355 9,999 0 14,354 *
John W. Storms 7,161 8,999 0 16,169 *
Francis D. Tuggle 3,000 8,999 0 11,999 *
Edward E. Williams 37,654 9,999 0 47,653 *
All directors and 895,469 300,767 594,265 1,790,501 25.7%
officers as a group
(twelve persons)
* Indicates less than one percent.
(1) Mr. Douglass' address is 2929 Allen Parkway, Suite 2500, Houston, Texas
77019.
(2) Includes (a) 24,102 shares held directly and in retirement accounts by
Paula T. Douglass, Mr. Douglass' spouse, (b) 345,208 shares held by trusts
for the benefit of members of Mr. Douglass' family of which Mr. Douglass
is the trustee and a lifetime beneficiary, a trust of which Mr. Douglass
is the beneficiary, and a trust of which Mrs. Douglass is the beneficiary,
and (c) 186,633 shares held by Equus Corporation International, a Delaware
corporation of which Mr. Douglass is the Chairman of the Board and Chief
Executive Officer. Mr. Douglass disclaims beneficial ownership of all
shares not directly owned by him.
(3) Includes 399 shares held by the Robert L. Knauss Defined Plan (the "Knauss
Plan") of which Mr. Knauss is a control person. Mr. Knauss disclaims
beneficial ownership of the shares held by the Knauss Plan.
(4) Mr. Lehmann's address is 2929 Allen Parkway, Suite 2500, Houston, Texas
77019.
(5) Includes (a) 5,253 shares held by Jeannie Lehmann, Mr. Lehmann's spouse
and (b) 32,670 shares held by Lehmann Investments, L.P., of which Mr.
Lehmann is the general partner. Mr. Lehmann disclaims beneficial ownership
of all shares not owned directly by him.
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 stockholders of the Fund at a special meeting held on
April 9, 1997.
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 $1,911,274 for the year
ended December 31, 2000. The total net assets of the Fund as of December 31,
2000, were approximately $90.9 million.
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
11
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.
The Management Company also receives compensation for providing certain
investor communication services of which $50,000 is included in the Statements
of Operations for the year ended December 31, 2000.
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 and non-employee director stock options from such
Portfolio Companies. During 2000, the officers and directors of the Fund
received $281,753 of director fees from Portfolio Companies.
The Management Agreement will continue in effect until June 30, 2001, 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 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 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 and director; Paula T. Douglass,
director; S. Preston Douglass, Jr., director, Patrick M. Cahill, Vice President;
Gary L. Forbes, Vice President; and Tracy H. Cohen, Secretary. For a description
of the business background of each of Messrs. Sam P. Douglass, Lehmann, Hale,
Cahill, and Forbes and Ms. Cohen 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 2626 South Padre Island Drive, Corpus Christi, Texas 78413.
Paula T. Douglass, age 49, has been a director of ECI since December 1978
and the Management Company since July 1993. Since February 1998, Ms. Douglass
has been Chairman and Chief Executive Officer of Cinema Film Systems, Inc. She
served as Chairman and Chief Executive Officer of CFS/Rentec, Inc. from February
1998 through December 2000. She also served as Chairman of Iwerks Entertainment,
Inc. from January 1995 to March 1997. From September 1988 to September 1990 she
was employed as an attorney by Fulbright & Jaworski, LLP. Ms. Douglass is a
licensed attorney.
S. Preston Douglass, Jr. age 39, has been a director of the Management
Company since July 1993. He has been Chairman, CEO, and President of Corpus
Christi Harley Davidson since March 2000. He was a partner in the law firm of
Wallace, Machann, Jackson, Williams & Douglass, in Kerrville, Texas from January
1989 until March 2000. Mr. Douglass was a prosecutor in the 216th Judicial
District in Kerrville, Texas 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.
12
ITEM 2 - RATIFICATION OF THE SELECTION OF INDEPENDENT
AUDITORS FOR THE FUND
The Board, including a majority of the Fund's Independent 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, 2001. 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.
Arthur Andersen LLP has served as the independent accountants for the Fund
since its organization in 1991. 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 or she so desires, and to respond to appropriate questions of
the stockholders.
During 2000, the Fund retained its principal auditor, Arthur Andersen LLP,
to provide services in the following categories and amounts:
Audit Fees $78,750
All Other Fees $32,210
During 2000, Arthur Andersen LLP provided audit and tax services to the
Management Company and Equus Capital Corporation and was paid an aggregate
amount of $31,000.
The Audit Committee has considered whether the provision of non-audit
services by the Fund's principal auditor is compatible with maintaining auditor
independence.
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 independent auditors
of the Fund.
ITEM 3 - AMENDMENT OF THE 1997 STOCK INCENTIVE PLAN
The Board of Directors recommends that stockholders approve an amendment
to the Fund's 1997 Stock Incentive Plan to provide for the grant of dividend
equivalent rights in conjunction with the grant of stock options and incentive
stock options.
The plan plays an integral role in retaining the services of experienced
personnel, in encouraging such personnel to have a greater personal financial
investment in the Fund, and to align the interests of personnel with those of
the stockholders through increased employee ownership of the Fund. The Fund
originally authorized the issuance of 836,953 shares, which increased to
1,334,915 shares as of December 31, 2000, pursuant to the terms of the plan. To
date the Fund has granted options covering a total of 963,131 shares.
The exercise price of options granted under the plan is set at the fair
market value of the common stock on the date an option is granted. This pricing
formula does not take into account any income or capital gain distributions made
by the Fund. As a general rule, the market price of the Fund's common stock
declines by the amount of any distribution made by the Fund, since the
distribution reduces the net asset value per share. As the Fund is required to
distribute its realized capital gains annually in order to maintain its status
as a regulated investment company under the Internal Revenue Code of 1986, it
has become apparent that the options granted under the Plan do not fulfill the
purpose that was intended, which was to provide long-term incentive compensation
to management. Because of dividends made by the Fund, the market price of the
Fund's common stock has dropped below the exercise price of the options.
13
To address this problem the Board of Directors proposes to amend the plan
to provide for the grant of dividend equivalent rights. Generally, a dividend
equivalent right will provide each holder of an option with the right to receive
amounts on shares of common stock subject to an option equal to the dividend
distributions paid on all outstanding shares of common stock. These rights may
be paid currently or deferred and settled at the time an option is exercised.
A copy of the amendment is included as Appendix B.
The amendment to the plan must be approved by the holders of at least a
majority of the outstanding shares of EQS common stock present, or represented,
and entitled to vote at the Annual Meeting. In the event that such stockholder
vote is not obtained, the Fund will not issue any options with dividend
equivalent rights, but awards may continue to be made under the terms of the
plan as currently in effect.
The following is a summary of the principal features of the plan:
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 aggregate number of shares that may
be purchased under the plan for all participants and for all types of awards is
currently 1,334,915 shares (which represents 20% of the number of shares of
common stock outstanding as of December 31, 2000). These numbers include shares
previously issued or subject to prior plan awards. 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 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.
Administration. The plan is administered by a 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 are not eligible
to receive discretionary options or awards under the Plan. Dr. Edward E.
Williams, Gary R. Petersen, and Robert L. Knauss are the members of the
committee.
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, (ii) incentive stock options under Section 422A of
the Internal Revenue Code, (iii) alternate appreciation rights, (iv) limited
rights, and (v) dividend equivalent 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 Internal Revenue 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. Payment of the exercise price of an option
may be made in cash, and in the discretion of the committee, with such other
consideration as the committee may specify and as is permitted under the
Investment Company Act. Consistent with Section 422A of the Internal Revenue
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.
14
Unless otherwise provided in the award agreement, options 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 does not otherwise
accelerate the termination date of his or her options.
Alternate Appreciation Rights. Concurrently with or subsequent to the
award of a stock 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, permitting the option holder to be paid the appreciation on
the option in lieu of exercising the option. Alternate appreciation rights are
exercisable subject to the same terms and conditions as the related options;
provided, however, that alternate appreciation rights may be exercised only if
and to the extent that any payment on the alternate appreciation rights would
not result in a greater dilution of the interests of the Fund's stockholders
than would result, if instead of the alternate appreciation rights, the stock
options to which they relate were exercised. The amount to be paid on an
alternate appreciation 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 appreciation 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 appreciation
right will cancel an equal number of options related to the alternate
appreciation right. Unless otherwise provided in the award agreement, alternate
appreciation rights 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 appreciation rights during the
six-month period following his or her termination.
Limited Rights. Concurrently with or subsequent to the award of a stock
option, 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 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, the acquisition of 51% or
more of the shares of common stock by an unaffiliated person, entity, or group,
or the termination of the Management Company as investment adviser to the Fund.
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 New York Stock
Exchange during the 60-day period prior to the change in control; provided,
however, that limited rights may be exercised only if and to the extent that any
payment on the limited rights would not result in a greater dilution of the
interests of the Fund's stockholders than would result, if instead of the
limited rights, the stock options to which they relate were exercised. Payment
of the limited right will be made in cash.
Unless otherwise provided in the award agreement, limited rights 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.
Dividend Equivalent Rights. Concurrently with or subsequent to the award
of an option, the committee may award to the holder of an option a related
dividend equivalent right granting the holder the right to receive, for a period
of time to be determined by the committee, an amount for each share of common
stock subject to the option equal to each cash payment, stock dividend, or other
distribution declared and paid on each share of outstanding common stock. The
period may not extend beyond the expiration date of the option. Payment of a
dividend equivalent right may be immediate or deferred and in the form of cash
or common stock, or a combination of cash and common stock. If immediate, the
Fund will pay such amount within 90 days after the Fund has paid a dividend to
holders of common stock. If deferred, the payments will accumulate (with
interest computed in a manner to be determined by the committee) or may be
deemed to be reinvested in additional shares of common stock, which may
15
thereafter accrue additional equivalents, until a date or event specified by the
committee and then shall be made within 30 days after the occurrence of the
specified date or event, unless the right is forfeited under the terms of the
plan. Any reinvestment will be at fair market value on the date of reinvestment.
A dividend equivalent right may provide that it may be settled upon exercise of
the option to which it relates. To the extent permitted by the Investment
Company Act, the committee may provide that in lieu of paying the amount of a
deferred dividend equivalent right to an option holder in cash upon settlement
of the right, the exercise price of the option to which the dividend equivalent
right relates shall be reduced by the amount of the deferred dividend equivalent
right. Each dividend equivalent right terminates upon termination of the option
to which it relates.
Automatic Option Awards. Each non-officer director serving on the Board on
April 1, 1997, was granted a nonqualified stock option to purchase 5,000 shares
of common stock of the Fund that vested 50% immediately and 16-2/3% on the
first, second, and third anniversaries of the date of grant. Each new
non-officer 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 is granted, on the first business day following the annual meeting of
stockholders, a nonqualified stock option to purchase 2,000 shares of common
stock. The exercise price of the options will be the closing price of the common
stock on the New York Stock Exchange 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 stockholders, amend the plan to increase the
number of shares reserved for grant under the plan, change the employees
eligible to participate, or otherwise if a stockholder 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 excess of the
fair market value of the shares received at the time of exercise over the option
price. 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.
16
Alternate Appreciation Rights and Limited Rights. The grant of an
alternate appreciation right or limited right would not result in income for the
grantee or in a deduction for the Fund. Upon exercise of an alternate
appreciation 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.
Dividend Equivalent Rights. The IRS has not provided formal guidance on
the income tax consequences of the receipt of dividend equivalent rights.
However, under the principles of Section 83 of the Internal Revenue Code, the
holder of a dividend equivalent right should not recognize ordinary income until
the dividend is received by the holder. When the dividend is received, the
holder should recognize ordinary income equal to the amount of cash received
plus the fair market value of any common stock or other property received.
The deductions available to the Fund upon the exercise of stock options
are subject to certain limitations contained in Section 162(m) of the Internal
Revenue 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" 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 is
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.
The Board unanimously recommends that each stockholder vote "FOR" the
approval of the amendment to the 1997 Stock Incentive Plan, and your proxy will
be so voted if the proposal is presented unless you specify otherwise. If the
stockholders do not approve the amendment of the 1997 Stock Incentive Plan, the
amendment will not go into effect and the Board of Directors will consider
whether to adopt some alternative arrangement based on its assessment of the
Fund's needs.
ITEM 4 - SHAREHOLDER PROPOSAL NO. 1
The Fund has been notified that Mr. Ronald Mass intends to present the
proposal set forth below for consideration at the annual meeting. The address
and stock ownership of the proponent will be furnished by the Secretary of the
Company to any person, orally or in writing as requested, promptly upon receipt
of any oral or written request therefor.
"Resolved: That shareholders of Equus II Incorporated (the "Fund"),
recommend the Board of Directors take action to ensure that the Fund shares
trade at less than a 5% discount to net asset value (NAV). Suggested
alternatives include (1) conversion to an open-end investment company; (2)
liquidation of the fund; or (3) a commitment to conduct tender offers annually
for at least 40% of the shares outstanding at NAV whenever the discount exceeds
an annualized average of 5% over the previous calendar year."
17
Supporting Statement:
Many other closed-end funds have taken significant steps to narrow or
eliminate the discount to NAV. Examples of these funds include the Latin America
Smaller Companies Fund (LLF), the Fidelity Advisor Emerging Asia Fund (FAE), the
TCW/DW Emerging Markets Opportunities Trust (EMO), the Latin America Investment
Fund (LAM), the Emerging Markets Infrastructure Fund (EMG), the Jardine Fleming
China Fund (JFC), the Jardine Fleming India Fund (JFI), the India Growth Fund
(IGF), the United Kingdom Fund, the Taiwan Equity Fund (TYW), and the Worldwide
Dollarvest Fund (WDV). These steps include converting to an open-end investment
company, liquidating the fund, and conducting sizeable tender offers on an
annual basis. Meanwhile our Board of Directors refuses to take meaningful
action. It appears that our Fund Manager is more interested in collecting its
annual management fee than reclaiming value for shareholders.
A vote FOR this proposal is a vote FOR our right to recoup the losses we
suffer as our shares sink further from Net Asset Value.
Vote Required and Board Recommendation
The affirmative vote of a majority of the shares of common stock cast in
person or by proxy at the meeting is required for approval of the proposal.
Under New York Stock Exchange Rules, brokers who hold shares for the accounts of
their clients do not have the discretionary authority to vote such shares with
respect to this proposal.
The Board of Directors, including all of the Independent Directors,
strongly and unanimously opposes the stockholder proposal described above and
urges all stockholders to vote "Against" the proposal for the following reasons:
The Board and management are keenly aware of the performance of the stock
of the Fund, particularly with respect to the market discount from net asset
value. We have continuously challenged ourselves and our advisors for
constructive ideas and methods to reduce this discount.
In 1995, the Board of Directors established the Committee to Study Methods
for the Enhancement of Shareholder Value, which has continually focused on this
issue. The Board of Directors and management have taken significant actions to
enhance the Fund's share value and reduce the discount from net asset value,
including:
o Announcing the Fund's net asset value weekly through various
publications and daily on our Internet site (www.equuscap.com).
o Adopted a fixed dividend policy in 1995 to distribute at least $0.50
per share annually, which we increased to $0.60 per share in 2000.
In addition, the Fund has distributed all capital gains in excess of
the minimum dividend amount, which in 1999 resulted in a dividend of
$4.25 per share, approximately 25% of the Fund's market price prior
to such dividend.
o Transferred the listing of the Fund's common stock from the American
Stock Exchange to the New York Stock Exchange for greater exposure
and recognition.
o Restructured the advisory agreement with Equus Capital Management
Corporation in 1997 to provide incentive compensation to management
through stock and stock options. This major event extinguished
approximately $13.5 million in accrued liabilities at a significant
discount. Management now owns in excess of 22% of the outstanding
common stock of the Fund.
o Adopted open-market stock repurchase programs on four different
occasions since 1994, repurchasing a total of 733,500 shares
(approximately 10% of the outstanding shares) and adding
approximately $1.04 in net asset value per share to the remaining
shares. At its February 2001 meeting the Board authorized another
program to repurchase up to 5% of the outstanding shares of the Fund
on the open market over the next six months.
Advantages of the Closed-End Structure
The Fund's investment objective is to seek long-term capital appreciation
by making investments in equity and equity-oriented securities issued by
privately owned companies in negotiated transactions. As a business development
company, the Fund must maintain 70% of its total assets in certain types of
securities, purchased in private transactions from eligible portfolio companies
that at the time of investment do not have any class of marginable securities
listed on a national stock exchange. The closed-
18
end structure of the Fund was specifically chosen to enable it to acquire and
hold a portfolio of private and small capitalization, emerging growth stocks,
including unlisted and restricted securities. The SEC has stated that the usual
maximum aggregate holdings of illiquid assets by an open-end company is 15% of
the value of its net assets. Currently, investments in illiquid assets comprise
approximately 96% of the Fund's net assets. Accordingly, open-ending would
effectively require that the Fund withdraw its election to be a business
development company.
The closed-end structure also allows the Fund to put more of your
investment to work for you. Because an open-end fund must redeem shares upon
demand, such a fund has to maintain significant cash reserves, and may be forced
to sell its portfolio securities to meet redemption needs, even if such sales
are disadvantageous to the fund's other stockholders. Many of the securities
held by the Fund are subject to legal and contractual restrictions on resale,
and could not be sold at efficient prices on short notice. The relatively stable
asset base of a closed-end fund allows a portfolio manager to invest with the
longer-term outlook necessary for small companies to fully mature and realize
maximum capital appreciation potential. It is the Fund's emphasis on small
capitalization issuers and restricted securities that provides a unique
opportunity to stockholders.
Adverse Consequences of Converting to an Open-End Fund
Your Board believes that conversion to an open-end fund may have adverse
consequences for our long-term stockholders. First, conversion would raise the
possibility of the Fund suffering substantial redemptions of shares,
particularly in the period immediately following conversion. For example, the
TCW/DW Emerging Markets Opportunities Trust cited by Mr. Mass had its net asset
value reduced by 45% within five days following conversion and by 82% within one
year. Converting would also have the effect of significantly increasing
stockholder expenses on a per share basis. The potential capital outflow that
may occur upon conversion would reduce the Fund's economies of scale and result
in higher relative per share expenses. The conversion itself would create
significant one-time expenses associated with the conversion and a number of new
ongoing expenses in order to operate as an open-end company, including sales,
marketing, advertising and distribution expenses and additional compliance,
legal, custodial and transfer agency fees. Your Board believes that many
stockholders who would otherwise choose to remain stockholders of the Fund in
closed-end form may nonetheless choose to redeem if the Fund were to convert to
an open-end fund. As an open-end fund, the Fund could retain its current size in
the face of redemptions only if it can sell additional shares. Since it is not
part of a fund series, it would be difficult for the Fund to generate any
significant market interest in its shares.
Second, if redemptions upon conversion were significant, the Fund would
have to liquidate a substantial portion of its holdings to generate cash. The
liquidation of portfolio securities could trigger a significant tax liability
for the Fund and all remaining stockholders as the Fund sells portfolio
securities and realizes capital gains. The stockholders that forced the sale of
the portfolio securities in order to meet redemptions would not bear a portion
of this liability.
A study conducted by CDA/Wiesenberger in 1998 (1), an independent mutual
fund tracking service, on the impact open-ending has on a fund's long-term
stockholders provides empirical evidence that long-term stockholders can be
harmed by a conversion. The study reviewed the conversion of 10 closed-end funds
and found that:
o Within six months after conversion, the converted funds experienced
an average decrease in net assets of 28.18%.
o The converted funds' average expense ratio increased from 1.33% to
1.89%.
o The amount of cash held by the converted fund rose from an average
of 2.44% of assets as a closed-end fund to 7.75% of assets as an
open-end fund.
o Stockholders experienced significant tax liability as they received
post-conversion capital gains distributions averaging $6.21 per
share versus an average distribution during the five years prior to
conversion of $1.20 per share.
- ----------
(1) Copyright(C) 1998 Wiesenberger, A Thomson Financial Company, Reprinted by
permission. (The study can be found at
http://www.wiesenberger.com/resources/studies/pr-openending.shtml, or a
hard copy may be obtained by contacting us directly by telephone or with a
written request addressed to Equus II Incorporated at 2929 Allen Parkway,
Suite 2500, Houston, Texas 77019, telephone number 713-529-0900.)
19
Advantages of an Open Market Repurchase Program and Disadvantages of Conducting
a Tender Offer
As stated above, the Board has regularly reviewed the amount of discount
and has carefully evaluated possible options to narrow the discount, including
conducting a tender offer for Fund shares. Based upon these deliberations, the
Board has adopted several open market share repurchase programs instead of a
tender offer because it believes that an open market share repurchase program
will create more value for the Fund's long-term stockholders. When the Fund
purchases shares on the open market at the discounted market price, the Fund's
remaining stockholders experience an increase in their net asset value per
share. This increase comes from the Fund's "capturing" the discount on the
shares repurchased. If alternatively the Fund conducts a tender offer for its
shares at net asset value, it would be only the stockholders who tender their
shares who realize the benefit of "capturing" the discount, not the Fund's
long-term stockholders.
In order to conduct a tender offer, the Fund would have to comply with a
burdensome series of rules under the federal securities laws governing tender
offers. The costs associated with preparing and filing the tender offer
statement and conducting the tender offer would be significantly higher than the
costs associated with the open market share repurchase program. These additional
costs would be borne by all stockholders. Furthermore, a tender offer for 40% of
the outstanding shares of the Fund as requested by Mr. Mass would require the
Fund to raise over $35 million in cash, through borrowings or the liquidation of
portfolio securities, which would certainly interfere with the management of the
Fund.
For these reasons, your Board has determined that adopting an open market
share repurchase program, not conducting a tender offer, is in the best
interests of the Fund's long-term stockholders.
Adverse Consequences of Liquidation
The securities acquired by the Fund generally require four to seven years
to reach maturity. The average holding period for investments in the Fund's
current portfolio is almost four years, and several have been held for more than
ten years. Contractual or practical limitations may restrict the Fund's ability
to liquidate its securities in portfolio companies since in most cases such
companies are privately held and the Fund may own a relatively large percentage
of the issuer's outstanding securities. Currently, approximately 96% of the
Fund's portfolio is in securities that are not registered. The number of
potential purchasers for the Fund's private investments is a finite group of
institutional and sophisticated investors. Sales are generally negotiated on an
individual security and purchaser basis. Under circumstances where the Fund
seeks to liquidate these investments other than in an orderly manner, it is
unlikely that the Fund will realize the value at which these investments are
currently carried. Consequently, the Board does not believe that a forced
liquidation of the Fund is in the best interest of the Fund's long-term
stockholders.
Your Board has Addressed the Existence of a Discount
Your Board believes the discount needs to be considered in context. Most
closed-end funds characteristically trade at a discount. In fact, of the 41
general and specialized equity closed-end funds included in the Wall Street
Journal listing for December 29, 2000, thirty-four funds (83% of the total)
traded at a discount, including 29 funds (71% of the total) whose market
discount was greater than 5 %.
Although the Board of Directors believes that (i) the advantages of
remaining a closed-end fund outweigh the one-time benefit from open-ending, (ii)
the advantages of an open market repurchase program outweigh the benefits of a
tender offer, and (iii) liquidation of the Fund is inappropriate at this time,
your Board does recognize that the existence of a market discount to our net
asset value is a significant matter for our shareholders. Your Board has
diligently examined this issue and has been active in seeking to address it in a
manner that is consistent with the interests of all of the Fund's stockholders.
When appropriate, the Board and Management of the Fund have consulted with
investment bankers and other experts about strategies to improve the performance
of the Fund's stock. In evaluating each option, the Board has carefully
considered whether the implementation of the option would be in the best
interest of the Fund's long-term stockholders and whether there is sufficient
evidence to suggest the implementation of the option could have a measurable
effect on the discount. The Board has also considered the experiences of other
funds and the actions they have taken to reduce the discount. These
deliberations have led the Board to take significant actions in an effort to
reduce the discount. Your Board will continue to evaluate any options that it
believes will help reduce the discount.
20
The Board believes that the Fund's stockholders will realize greater
returns on their investments if the Fund maintains its present course of selling
its portfolio securities in a systematic manner over time, and reinvesting the
capital from such sales in new portfolio companies, while distributing all net
capital gains to the Fund's stockholders. However, the proposal, if adopted by
shareholders and The Board of Directors, would put the Fund into play, and could
thereby impede the Board's ability to pursue alternative strategies that could
result in greater long-term value for stockholders.
Therefore, the Board of Directors, including the Independent Directors,
unanimously recommends that the stockholders of the Fund vote "Against" Item 4 -
Shareholder Proposal No. 1.
ITEM 5 - SHAREHOLDER PROPOSAL NO. 2
The Fund has been notified that Mr. James McRitchie and Ms. Myra Young
intend to present the proposal set forth below for consideration at the annual
meeting. The address and stock ownership of the proponents will be furnished by
the Secretary of the Company to any person, orally, or in writing as requested,
promptly upon receipt of any oral or written request therefore.
"Whereas: Equus II Incorporated currently trades at a relatively deep
discount to net asset value;
Whereas: some shareholders lack the time and expertise to make intelligent
voting decisions, yet recognize management's recommendations may sometimes be
affected by conflicts of interest;
Whereas: proxy advisory firms have established reputations for sound
independent advice, with their recommendations sometimes dramatically increasing
institutional votes in opposition to management;
Whereas: shareholders have a common interest in obtaining sound
independent advice, but often insufficient private interest to justify paying
for it individually (the "free-rider" problem);
Therefore be it resolved: that Equus II Incorporated shareholders request
the Board of Directors to hire a proxy advisory firm, chosen by shareholder
vote. Shareholders request the Board to enact this resolution in time to hold
the vote at the year-2002 shareholder meeting, with the following features:
o To insulate selection from Fund management influence, any proxy
advisory firm could put itself on the proxy by:
* paying an entry fee,
* declaring the price ($5000 limit) for advisory services for
the coming year, and
* providing the address of a website describing their proposed
services and qualifications.
o The winning advisor would be paid its declared price by the Fund,
and would make advice freely available to all Fund shareholders for
the subsequent year on all matters put to shareholder vote, except
director elections (excluded to satisfy SEC rule 14a-8(i)(8).
o Advice could relate to such matters as open-ending or liquidation,
mergers, stock option plans, and shareholder proposals.
o Summary advice could be included in the Fund proxy, with references
to a website and/or a toll-free phone number for more detail.
o Performance of the advisory firm would not be policed by Fund
management, but rather by gain or loss of the advisor's reputation
with shareholders.
o The decision of whether to hire proxy advisory firms in later years
would be decided by future shareholder votes."
Supporting Statement:
Like the Fund's external auditor, the proxy advisor should be paid with
Fund funds, giving shareholders an independent professional opinion.
Independence is further enhanced when shareholders choose the advisor.
The conflicts of interest between managers and shareholders are described
in Robert Monks and Nell Minow's 1996 book Watching the Watchers, along with
shareholders' "free rider" and "rational ignorance" problems.
21
Proxy advisory firms such as Proxy Monitor (http://proxymonitor.com),
Institutional Shareholder Services (http://iss.cda.com), and Investor
Responsibility Research Center (http://www.irrc.org) are frequently cited in the
financial press. Examples are "Venator Holders Are Urged to Support Dissent
Slate" (The Wall Street Journal 07/06/1999) and "ISS's influence Grows In Proxy,
Option Matters" (The Wall Street Journal 11/10/1997).
Articles discussing the company-pay system for proxy advice and
developments that may follow are on the Corporate Monitoring website
(http://www.corpmon.com/publications.htm). General background materials on
corporate governance can be found at Corporate Governance
(http://www.corpgov.net) and The Corporate Library
(http://www.thecorporatelibrary.com).
Vote Required and Board Recommendation
The affirmative vote of a majority of the shares of common stock cast in
person or by proxy at the meeting is required for approval of the proposal.
Under New York Stock Exchange Rules, brokers who hold shares for the accounts of
their clients do not have discretionary authority to vote such shares with
respect to the proposal.
The Board of Directors, including all of the Independent Directors,
strongly and unanimously opposes the stockholder proposal described above and
urges all stockholders to vote "Against" the proposal for the following reasons:
o The proposal involves additional cost to the proxy process.
o There is a significant volume of published research and other
literature regarding the Fund and issues of importance to the Fund's
stockholders (made even more accessible by the Internet), and a
proxy advisory firm would offer little marginal benefit in
communicating with stockholders.
o Five of the Fund's eight directors are deemed disinterested
directors under the Investment Company Act and six of the Fund's
eight directors are deemed to be independent under the rules of the
New York Stock Exchange. Consequently, the influence of management
over the Board of Directors is limited.
o The Fund's experience has been that proxy advisory firms,
particularly those acting for a small fee, can only spend a short
period of time studying any particular company and tend to analyze
proposals solely by comparing them to industry norms that may not be
relevant to the Fund. Moreover, since each advisory firm has its own
set of criteria by which proposals are evaluated, different advisory
firms have arrived at different conclusions with respect to the same
proposal.
o The proposal precludes the Board from screening applicants to
determine their qualifications and from limiting the number of firms
that may take advantage of the proposal.
o The proposal does not require that proxy advisory firms disclose any
information about themselves, their expertise, prior experience,
quality of work, reliability, reputation, or the type of work that
they perform. In addition, there is no procedure by which the Fund
or its stockholders may inquire about these factors in order to make
a fully informed decision.
o The proposal precludes the Board from evaluating the advisory firm's
recommendations or the process by which the evaluations are made.
The absence of such checks is not in the best interests of our
stockholders.
Therefore, the Board of Directors, including the Independent Directors,
unanimously recommends the stockholders of the Fund vote "Against" Item 5 -
Shareholder Proposal No. 2.
OTHER MATTERS
The Board knows of no matters other than those listed in the Notice of
Annual Meeting that are likely to come before the Annual Meeting. However, if
any other matter properly comes before the Annual Meeting, the individuals named
as proxies will vote 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 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
22
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 2000 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, and (713) 529-0900.
STOCKHOLDER PROPOSALS FOR 2002
ANNUAL MEETING
Under the regulations of the SEC, an EQS stockholder may submit a proposal
on proper subject for action at the 2002 Annual Meeting of Stockholders. All
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 December 1, 2001, in order to
be considered for inclusion in the Fund's proxy statement and form of proxy for
the 2002 Annual Meeting. Submission of a stockholder proposal does not guarantee
inclusion in the Fund's proxy statement or form of proxy because certain SEC
rules must be met.
Under the Fund's Bylaws, if a stockholder 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 certain information specified in the Fund's Bylaws.
The Bylaws also provide that no business may be brought before an annual
meeting unless it has been properly brought before the meeting. To be properly
brought before the meeting a stockholder must deliver a written notice to the
Fund at the address set forth in the preceding paragraph of the stockholder's
intention to present a proposal (containing certain information specified in the
Bylaws) within the time limits described above for delivering of notice of a
nomination for the election of a director. These requirements apply to any
matter that a stockholder wishes to raise at an annual meeting other than
pursuant to the procedures in SEC Rule 14a-8.
The proxy solicited by the Board of Directors for the 2002 Annual Meeting
of Stockholders will confer discretionary authority to vote on any shareholder
proposal presented at that meeting, unless the Fund is provided with notice of
such proposal no later than February 15, 2002.
A copy of the full text of the Bylaw provisions discussed above may be
obtained by writing to the Corporate Secretary, 2929 Allen Parkway, Suite 2500,
Houston, Texas 77019.
23
Appendix A
EQUUS II INCORPORATED
AUDIT COMMITTEE CHARTER
Definitions
The following terms used in this Audit Committee Charter shall have the
following meanings:
"Accounting or related financial management expertise" means past
employment experience in finance or accounting, requisite professional
certification in accounting or comparable experience, or background that results
in the director's financial sophistication, including having been a Chief
Executive Officer, Chief Financial Officer, or other senior officer with
financial oversight responsibilities.
"Affiliate" includes a subsidiary, sibling company, predecessor, parent
company, or former parent company.
"Auditors" means the outside independent public accounting firm engaged by
the Fund to review the Fund's interim financial statements included in Quarterly
Reports on Form 10-Q and to audit the Fund's annual financial statements
included in Annual Reports on Form 10-K.
"Board" means the Board of Directors of the Fund.
"Business relationships" include commercial, industrial, banking,
consulting, legal, accounting, and other relationships.
"Committee" means the audit committee appointed by the Board of the Fund.
"Financially literate" means that the director must be able to read and
understand financial statements, including the Fund's balance sheet and
statements of operations, changes in net assets, and cash flows or become so
able within three months after joining the committee.
"Immediate family" includes a person's spouse, parents, children,
siblings, mothers-in-law and fathers-in-law, sons and daughters-in-law, brothers
and sisters-in-law, and anyone (other than employees) who shares such person's
income.
"Independent" means that the director is not:
o Currently, and has not been at any time within the past three years,
employed by the Fund, Equus Capital Management Corporation, Equus
Capital Corporation, or Equus Corporation International, or any
portfolio company of the Fund over which the Fund exercises a
controlling influence over management or policies or of which the
Fund owns beneficially, directly or indirectly, more than 25% of the
voting securities.
o Currently, and has not been within the past three years, a member of
the immediate family of a current executive officer of the Fund or
an affiliate of the Fund.
o An executive of another business organization where any of the
Fund's executives serve on the organization's compensation
committee.
o A partner, controlling shareholder, or executive officer of a
business organization that has a business relationship with the
Fund.
o An individual who has a direct business relationship with the Fund.
"NYSE" means the New York Stock Exchange.
"SEC" means the Securities and Exchange Commission.
Organization and Membership Requirements
The audit committee of the Board shall be comprised of at least three directors,
all of whom are independent of the management of the Fund and are free of any
relationship that, in the opinion of the Board, would interfere with their
exercise of independent judgment as a Committee member, and each of whom shall
be financially literate. In addition, at least one member of the Committee shall
have accounting or related financial management expertise.
24
Authority
The Committee's creation and authority is derived directly from the Board to
ensure that the Board is fulfilling its oversight responsibilities relating to
accounting, reporting practices, financial controls, and the quality and
integrity of the financial reports of the Fund. In so doing, it is the
responsibility of the Committee to maintain free and open means of communication
between the Directors, Auditors, internal auditors and the financial management
of the Fund. The Board and the Committee shall have the authority and
responsibility to select, evaluate and, where appropriate, replace the Auditors
of the Fund (or to nominate the Auditors to be proposed for shareholder approval
in any proxy statement). As such, the Auditors are ultimately accountable to the
Committee and the Board.
Responsibilities
In carrying out its responsibilities, the Committee believes its policies and
procedures should remain flexible, in order to best react to changing
conditions. The primary responsibilities of the Committee are to (1) ensure that
generally accepted accounting principles are being followed; (2) ensure that
internal controls and safeguards are adequate, effective, and efficient; (3)
oversee and improve the financial reporting and business risk management process
of the Fund, and, in connection therewith, identify, source, measure, and
prioritize the business and financial reporting risks of the Fund; (4) ensure
that the regulatory and legal requirements applicable to the Fund are being
complied with; and (5) ensure the independence of the Fund's Auditors in order
to provide an independent evaluation of ongoing operations.
In carrying out these responsibilities, the Committee will:
o Provide an open avenue of communication between the Auditors, the
Board, and financial management.
o Review and recommend to the Board the Auditors to be selected to
review and audit the financial statements of the Fund.
o Ensure that the Auditors submit, on a periodic basis (but at least
annually), a formal written statement delineating all relationships
between the Auditors and the Fund that in the Auditors' professional
judgment may reasonably be thought to bear on independence,
including confirmation in writing by the Auditors that, in their
professional judgment they are independent; review such statement
and actively discuss with the Auditors any disclosed relationships
or services that may impact the objectivity and independence of the
Auditors; and recommend that the full Board take appropriate action
in response to the Auditors' report to satisfy itself of the
independence of the Auditors.
o Meet with the Auditors and financial management of the Fund to
review the scope of the proposed audit for the current year, the
audit procedures to be utilized, and the results of such audit,
including any comments or recommendations of the Auditors.
o Review the adequacy and effectiveness of the accounting and
financial controls of the Fund with the Auditors and elicit any
recommendations for the improvement of such internal control
procedures or particular areas where new or more detailed controls
or procedures are desirable.
o Review with management and the Auditors the effect of business and
financial reporting risks of the Fund, and the related controls and
risk management processes established to manage those risks, on the
quality of the Fund's financial reporting.
o Review and discuss with management and the Auditors as soon as
practicable after the completion of the annual examination of the
Fund:
o The Fund's audited financial statements and related footnotes.
o The Auditors' audit of the financial statements and its report
thereon.
o Any significant changes required in the Auditors' audit plan.
o Any serious difficulties or disputes with management
encountered during the course of the audit.
o Other matters related to the conduct of the audit that are to
be communicated to the Committee under generally accepted
accounting principles, including Statement on Auditing
Standards No. 61, as modified or supplemented from time to
time.
o The written disclosures and letter from the Auditors required
by Independence Standards Board Standard No. 1, as modified or
supplemented from time to time, and the Auditors'
independence.
25
o Review with management and the Auditors the quality, not just the
acceptability, of the disclosure and content of such financial
statements.
o Consider the implications of recent SEC Staff Accounting Bulletins
(SABs) in the discussion of the quality, not just the acceptability,
of the Fund's accounting principles with management and the
Auditors.
o Review all unrecorded adjustments to the Fund's financial statements
that have been identified by either management or the Auditors and
all adjustments recorded by management that were proposed by the
Auditors.
o Provide a report for inclusion in the Fund's proxy statement that
(1) states whether the Committee has (a) reviewed and discussed the
audited financial statements with management, (b) discussed with the
Auditors the matters required to be discussed by Statement on
Auditing Standards No. 61, Communication with Audit Committees (as
modified or supplemented), (c) received from the Auditors the
written disclosures and letter regarding the Auditors' independence
required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees (as modified or
supplemented), and (d) discussed with the Auditors the Auditors'
independence; (2) includes a statement by the Committee whether
(based upon the review and discussions set forth in clause (1)
above), the Committee recommended to the Board that the audited
financial statements be included in the Annual Report on Form 10-K
for filing with the SEC; (3) states whether the Board has adopted a
written charter for the Committee; and (4) discloses whether the
Committee members are "independent" as defined in the NYSE listing
standards and provides required information concerning any member
who is not independent.
o Review with management and the Auditors each quarterly interim
financial report before it is filed or as soon thereafter as
practicable if it is not possible to do such review before filing
with the SEC or other regulators and, in connection therewith,
discuss with the Auditors any significant events, transactions and
changes in accounting estimates that were considered by the Auditors
in performing their quarterly review and that have affected the
quality of the Fund's financial reporting.
o Provide sufficient opportunity for the independent auditors to meet
with the members of the Committee without members of management
present. Among the items to be discussed in these meetings are the
Auditors' evaluation of the Fund's financial and accounting
personnel, and the cooperation that the Auditors receive during the
course of the audit.
o Discuss and review the adequacy and effectiveness of financial and
accounting personnel for the Fund and the personnel utilized by the
Auditors with the Auditors. Discuss and review succession and
emergency plans for all key positions.
o Periodically self-assess the financial literacy and other skills of
the members of the Committee against those skills that are needed to
fulfill the Committee's roles and responsibilities.
o Periodically solicit feedback on the skill requirements and skill
gaps of the Committee members from the Board, management, and
Auditors.
o Periodically access, including soliciting feedback from the Board,
management and Auditors, the contribution and performance of the
individual Committee members.
o Review filings by the Fund with the SEC and other published
documents containing the Fund's financial statements and consider
whether the information contained therein is consistent with the
information contained in the financial statements.
o Review and approve the required NYSE annual written confirmations
and proxy statement disclosures related to the Committee.
o Report any significant Committee findings and actions to the Board,
with such recommendations, as the Committee deems appropriate.
o Conduct or authorize investigations into any matter brought to the
Committee's attention within the scope of its duties, with the power
to retain outside counsel and other professionals to assist in the
conduct of any investigation.
o Review Fund policy statements, including the Code of Ethics, to
determine their appropriateness, and review procedures in place to
assure adherence to such policies.
o Submit a draft of the minutes of the Committee's quarterly meetings,
together with any related written materials, to the Auditors and
management for review and approval.
o Perform such other functions as assigned by law, the Fund's bylaws,
or the Board.
o Review and discuss with Management and the Auditors any
correspondence with the SEC or other regulatory agencies regarding
the Fund's financial reporting.
26
Meetings
The Committee shall meet at least four times a year on a quarterly basis.
Meetings shall be scheduled in cooperation with management of the Fund and the
Auditors. Regular meetings shall be held at the place and on the dates of
regular meetings of the Board either prior to or after regularly scheduled Board
meetings. The chairman of the Committee may call special meetings at any time.
Personal written, personal telephonic, telegraphic, or facsimile transmission
(confirmed by telephone) notice of any special meeting of the Committee shall be
given to each member at least 24 hours prior to the time of the meeting. Any
member may waive notice of a meeting.
Procedure; Quorum
The Committee shall choose a chairman, shall keep regular minutes of its
proceedings and report the same to the Board when requested, shall fix its own
rules or procedures, and shall meet at such times and at such place or places as
may be provided by this charter or such rules, or by resolution of the
Committee, or resolution of the Board. At every meeting of the Committee, the
presence of a majority of all the members shall constitute a quorum and the
affirmative vote of a majority of the members present shall be necessary for the
adoption by the Committee of any resolution. Members of the Committee may
participate in a meeting of the Committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other and such participation shall constitute presence
in person and attendance at such meeting, except where a person participates in
the meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened. If a
quorum shall not be present at any meeting of the Committee, the members present
thereat may adjourn the meeting from time to time, without notice other than the
announcement at the meeting, until a quorum shall be present.
Action Without Meeting
Unless otherwise restricted by the Amended and Restated Certificate of
Incorporation or Amended and Restated Bylaws of the Fund, any action required or
permitted to be taken at any meeting of the Committee may be taken without a
meeting if a written consent thereto is signed by all members of the Committee
and such written consent is filed with the minutes of proceedings of the
Committee. Such consent shall have the same force and effect as a unanimous vote
at a meeting.
Compensation
Members of the Committee shall be paid such compensation for attending Committee
meetings as shall be set by the Board from time to time.
Annual Review
At least once each year the Board shall:
o Review and reassess the adequacy of this charter;
o Confirm the independence of the members of the Committee;
o Confirm the financial literacy of the members of the Committee; and
o Confirm that at least one member of the Committee has accounting or
related financial management expertise.
27
Appendix B
ARTICLE VIII. DIVIDEND EQUIVALENT RIGHTS
Section 8.1. Award of Dividend Equivalent Rights. Concurrently with or
subsequent to the award of any Stock Option or Incentive Stock Option the
Committee may, subject to the provisions of the Plan and such other terms and
conditions as the Committee may prescribe, award to the Optionee with respect to
each share of Common Stock covered by an Option, a related dividend equivalent
right ("Dividend Equivalent Right") granting the Optionee the right to receive,
for a period of time to be determined by the Committee, an amount equal to each
cash payment, stock dividend, or other distribution declared and paid on each
share of Common Stock subject to a Stock Option or Incentive Stock Option. The
period shall not extend beyond the expiration date set forth in the Stock Option
or Incentive Stock Option. The terms and conditions of each Dividend Equivalent
Right shall be specified in a dividend equivalent right agreement that evidences
the Award.
Section 8.2. Payments. The Committee shall determine at the time of grant
whether payment pursuant to a Dividend Equivalent Right shall be immediate or
deferred and whether it shall be in the form of cash or Common Stock, or a
combination of cash and Common Stock. If immediate, the Company shall make
payments pursuant to each right within 90 days after the Company has paid a
dividend to holders of Common Stock. If deferred, the payments shall accumulate
(with interest computed in a manner to be determined by the Committee) or may be
deemed to be reinvested in additional shares of Common Stock, which may
thereafter accrue additional equivalents, until a date or event specified by the
Committee and then shall be made within 30 days after the occurrence of the
specified date or event, unless the right is forfeited under the terms of the
Plan. Any reinvestment shall be at fair market value on the date of
reinvestment. A Dividend Equivalent Right may provide that it shall be settled
upon exercise of the Stock Option or Incentive Stock Option to which it relates.
To the extent permitted by the Investment Company Act of 1940, as amended, the
Committee may provide that in lieu of paying the amount of a deferred Dividend
Equivalent Right to an Optionee in cash upon settlement of the right, the option
price of the Stock Option or Incentive Stock Option to which the Dividend
Equivalent Right relates shall be reduced by the amount of the deferred Dividend
Equivalent Right.
Section 8.3. Termination. Each Dividend Equivalent Right shall terminate
upon termination of the Stock Option or Stock Incentive Option to which it
relates.
28
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
This Proxy is solicited on behalf of the Board of Directors of Equus II
Incorporated (the "Fund") for the Annual Meeting of Stockholders on May 3, 2001.
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 3, 2001, at 9:00 a.m.
local time, at Meeting Room No. 1, Ground Level, Wortham Tower, 2727 Allen
Parkway, Houston, Texas 77019, or any adjournment thereof (the "Annual Meeting")
and to vote the shares of Common Stock, $.001 par value per share, of the Fund
("Shares"), standing in the name of the undersigned on the books of the Fund on
March 19, 2001, the record date for the Annual Meeting, with all powers the
undersigned would possess if personally present at the Annual Meeting, upon the
matters listed on the reverse side hereof and, in their discretion, upon such
other matters as may properly come before the 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.
You are encouraged to specify your choices by marking the appropriate
boxes, SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in
accordance with the Board of Directors' recommendations. The proxies cannot vote
your shares unless you sign and return this card.
SEE REVERSE
SIDE
|X| Please mark your votes as in this example
This proxy when properly executed will be voted in the manner directed herein.
If no direction is made, the proxy will be voted FOR election of directors, FOR
proposals 2 and 3, and AGAINST proposals 4 and 5.
The Board of Directors recommends a vote FOR the election of the nominees for
director and FOR proposals 2 and 3.
1. Election of Directors. The eight nominees for a one-year term or until
their successors are elected and shall qualify are: 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:
FOR WITHHELD
|_| |_|
FOR ALL NOMINEES EXCEPT AS NOTED
________________________________
2. Ratification of the appointment of FOR AGAINST ABSTAIN
Arthur Andersen LLP as the independent |_| |_| |_|
auditors of the Fund for the fiscal
year ending December 31, 2001
3. Approval of the amendment of the 1997 FOR AGAINST ABSTAIN
Stock Incentive Plan. |_| |_| |_|
The Board of Directors recommends a vote AGAINST proposals 4 and 5
4. Shareholder proposal requesting the FOR AGAINST ABSTAIN
Board of Directors take specific |_| |_| |_|
actions to ensure that the Fund's
shares trade at less than a 5% discount
to net asset value.
5. Shareholder proposal requesting the FOR AGAINST ABSTAIN
Board of Directors take action to |_| |_| |_|
appoint a proxy advisory firm for the
Fund's stockholders.
The Board of Directors knows of no other matter to come before the meeting. If
any other matters are properly brought before the meeting, the proxies will vote
this proxy on such matters in accordance with their best judgment.
Please sign exactly as name appears hereon.
When shares are held by joint tenants both
should sign. When signing as attorney,
executor, administrator, trustee, or
guardian, please give full title as such. If
a corporation, please sign in full corporate
name by President or other authorized
officer. If a partnership, please sign in
partnership name by authorized persons.
Date________________________________________
Signature __________________________________
Signature __________________________________
2