SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.__ )
Filed by the Registrant [X]
Filed by Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary proxy statement
[_] Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)
(2)
[X] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting materials pursuant to Rule 14a-11(c) or Rule 14a-12
EQUUS II INCORPORATED
-------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Dana Hiller, 2929 Allen Parkway, Suite 2500, Houston, TX 77019
--------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
______________________________________________________________________
(2) Aggregate number of securities to which transaction applies: _________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
______________________________________________________________________
(4) Proposed maximum aggregate value of transaction: _____________________
(5) Total fee paid: ________________________________________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing fee for which the offsetting fee was
paid previously. Identify the previous filing by registration number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid: __________________________________________
(2) Form, Schedule, or Registration Statement No.: _______________________
(3) Filing Party: ____________________________________________
(4) Date Filed: ____________________________________________
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
(713) 529-0900
Notice of Annual Meeting of Stockholders
TIME 9:00 a.m. Houston time on Friday, May 9, 2003
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
PricewaterhouseCoopers LLP as the Fund's independent
auditors for the fiscal year ending December 31, 2003.
(3) To approve and ratify an amendment to the Fund's
1997 Stock Incentive Plan as it applies to directors
of the Fund who are neither officers nor employees of
the Fund and to authorize the cancellation and
reissuance of certain options granted to non-employee
directors of the Fund under the Fund's 1997 Stock
Incentive Plan.
(4) 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 21, 2003.
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 by mail.
For specific instructions, please refer to the
Questions and Answers, beginning on page 2 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 11, 2003
EQUUS II INCORPORATED
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
--------------------
PROXY STATEMENT
--------------------
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 2003 Annual Meeting of
Stockholders to be held on Friday, May 9, 2003, 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, the
ratification of the Fund's independent auditors, the approval of an amendment to
the 1997 Stock Incentive Plan and the cancellation and reissuance of certain
options previously granted to the non-employee directors under the 1997 Stock
Incentive Plan. In addition, the Fund's management will report on the
performance of the Fund during 2002 and respond to questions from stockholders.
Who is entitled to vote?
Stockholders of record at the close of business on the record date, March
21, 2003, 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 ten 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
half 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, 6,233,021 shares of common stock of the Fund were outstanding.
1
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.
Can I vote by telephone or electronically?
Because of cost increases, we are not offering registered stockholders
(that is, if you hold your stock in your own name) the ability to vote by
telephone or via the Internet. 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.
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:
. for election of the nominated slate of directors (see page 4);
. for ratification of the appointment of PricewaterhouseCoopers LLP as the
Fund's independent auditors (see page 16); and
. for approval and ratification of the proposed amendment to the Fund's
1997 Stock Incentive Plan and to authorize the cancellation and
reissuance of certain options granted to non-employment directors of the
Fund under the Fund's 1997 Stock Incentive Plan (see page 18).
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 "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.
2
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 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 "Management Company"), the Fund's investment advisor,
without special compensation therefor.
3
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 six
independent directors (i.e. directors who are not "interested persons" as
defined in the Investment Company Act). 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, six of whom
are independent directors (Messrs. Flanagan, Knauss, Petersen, Storms, Dr.
Tuggle, and Dr. Williams). 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.
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.
4
Nominees for Director
Number of
Portfolios in
Fund Complex Other
Overseen by Directorships
Position(s) Term of Office Director or Held by Director
Name Held with and Length of Principal Occupation(s) Nominee for or Nominee for
and Age Fund Time Served During Past 5 Years Director Director
------- ---- ----------- ------------------- -------- --------
Gregory J. Flanagan; Director One year; Area President of Arthur J. One
Age 57 director Gallagher & Co. and Managing
since 1992 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
Robert L. Knauss; Director One year; Chairman and Principal One The Mexico Fund,
Age 72 director Executive Officer of Philip Inc., Philip
since 1991 Services Corp. since April Services Corp.,
2002; Chairman and Chief Seitel Inc., and
Executive Officer of Baltic Baltic
International USA, Inc. since International
January 1994. USA, Inc.
Gary R. Petersen; Director One year; Managing Director of EnCap One Nuevo Energy
Age 56 director Investments, L.L.C. since 1989 Company and
since 1994 Plains All
American
Pipeline, L.P.
John W. Storms; Director One year; Managing General Partner of Two
Age 58 director Storms & Critz, Certified
since 1991 Public Accountants since May of
1988
Dr. Francis D. Tuggle; Director One year; Dean and Professor at the One
Age 60 director George L. Argyros School of
since 1991 Business and Economics at
Chapman University since July
2002; Professor at the Kogod
College of Business Administration
at American University from July
1990 to June 2002 where he was Dean
from July 1990 to June 1996
Dr. Edward E. Willams; Director One year; Henry Gardiner Symonds One Service
Age 57 director Professor and the Director of Corporation
since 1992 the Entrepreneurship Program International
of the Jesse H. Jones Graduate
School of Management at Rice
University since 1982
The following directors, who are officers of the Fund, are "interested persons"
as defined in the Investment Company Act.
Sam P. Douglass; Chairman of One year; Chairman of the Board and Chief Two
Age 70 the Board Chairman and Executive Officer of the
and Chief CEO since Management Company since 1983.
Executive 1991 Since December 1978, he has
Officer served as Chairman and
Chief Executive Officer of Equus
Corporation International ("ECI"),
a privately owned corporation
engaged in a variety of
investment activities
Nolan Lehmann; President One year; President and a director of the Two Allied Waste
Age 58 and a President Management Company since 1983 Industries, Inc.
director and a
director
since 1991
5
What committees has the Board established?
The Board has five committees: an Audit Committee, a Committee of the
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:
. recommend, for shareholder approval, the appointment of the Fund's
independent auditors, and oversee the compensation, retention, and
other matters relating to the engagement or discharge of the
independent auditors;
. oversee the Fund's financial controls and reporting processes;
. direct and supervise investigations of matters within the scope of
the independent auditor's duties;
. review with the independent auditors the audit plan and results of
the audit;
. review and oversee the Fund's annual and interim financial
statements;
. approve each professional service provided by the independent
auditors prior to the performance of such service, including any
non-audit services (including the fees and term thereof);
. review the performance of the independent auditor;
. review the Fund's legal, regulatory and ethical compliance programs;
and
. establish procedures for handling complaints involving accounting,
internal accounting controls and auditing matters.
The members of the Audit Committee are independent (as defined in Section
303.01(B)(2) and (3) of the New York Stock Exchange listing standards). The
Fund's Audit Committee charter is attached hereto as Appendix A.
Committee of the Independent Directors
The functions of the Committee of the Independent Directors are to:
. recommend to the full Board approval of any management, advisory, or
administration agreements;
. recommend to the full Board any underwriting or distribution
agreements;
. review the fidelity bond and premium allocation;
. review any joint insurance policies and premium allocation;
. review and monitor the Fund's compliance with procedures adopted
pursuant to certain rules promulgated under the Investment Company
Act; and
. carry out such other duties as the independent directors shall, from
time to time, conclude are necessary in the performance of their
duties under the Investment Company Act.
Compensation Committee
The function of the Compensation Committee is to determine and issue stock
options for officers of the Fund under the Equus II Incorporated 1997 Stock
Incentive Plan (the "Plan"), which is the only form of compensation paid by the
Fund to its officers for serving as such.
6
Nominating Committee
The function of the Nominating Committee is to select individuals for
nomination to the Board of Directors of the Fund. The Nominating Committee will
consider nominees recommended by stockholders. The procedures to be followed by
stockholders in submitting such recommendations are set forth under "Stockholder
Proposals for 2004 Annual Meeting."
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 that 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 2002?
During 2002, the Board met in person four times, the Audit Committee held
six meetings, and the Compensation Committee, the Nominating Committee, and the
Committee to Study Methods for the Enhancement of Shareholder Value each held
one meeting. The Committee of Independent Directors 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.
BOARD COMMITTEE MEMBERSHIP
------------------------------------------------------------------------------------------------------------------
Committee to Study
Committee of Methods for the
Audit Compensation Independent Enhancement of Nominating
Name Committee Committee Directors Shareholder Value Committee
------------------------------------------------------------------------------------------------------------------
Gregory J. Flanagan X X X*
------------------------------------------------------------------------------------------------------------------
Robert L. Knauss X* X X
------------------------------------------------------------------------------------------------------------------
Gary R. Petersen X* X X
------------------------------------------------------------------------------------------------------------------
John W. Storms X X X*
------------------------------------------------------------------------------------------------------------------
Dr. Francis D. Tuggle X X X
------------------------------------------------------------------------------------------------------------------
Dr. Edward E. Williams X X X
------------------------------------------------------------------------------------------------------------------
X = Member
* = Chairman
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.
7
Dollar Range of Equity Securities Beneficially Owned by Directors
Aggregate Dollar Range of Equity
Securities in All Funds Overseen
or to be Overseen by Director
Name of Director Dollar Range of Equity or Nominee in Family of
or Nominee Securities in the Fund(1) Investment Companies
----------- ---------------------- --------------------
Sam P. Douglass Over $100,000 Over $100,000
Gregory J. Flanagan $50,001-$100,000(3) $50,001-$100,000(2)(3)
Robert L. Knauss $1-$10,000(3) $1-$10,000(2)(3)
Nolan Lehmann Over $100,000 Over $100,000
Gary R. Peterson $10,001-$50,000(3) $10,001-$50,000(2)(3)
John W. Storms $50,001-$100,000(3) $50,001-$100,000(2)(3)
Dr. Francis D. Tuggle $10,001-$50,000(3) $10,001-$100,000(2)(3)
Dr. Edward E. Williams Over $100,000(3) Over $100,000(2)(3)
(1) Based on closing price of EQS common stock on April 4, 2003.
(2) Includes only shares of the Fund. No independent director or nominee for
director of the Fund is a director of another fund in the Equus family of
investment companies except John W. Storms who is an independent general
partner of Equus Capital Partners, L.P., a Delaware limited partnership
managed by the Management Company.
(3) Excludes options exercisable within 60 days that are not in-the-money.
Other Indirect Interests
Dr. Williams may be paid additional sums by Equus Capital Corporation, a
wholly owned subsidiary of the Management Company ("ECC"), in connection with
ECC's redemption of its Series C preferred stock. ECC has liquidated
substantially all of its assets, but is retaining some cash for taxes, operating
expenses, and contingencies. At December 31, 2002, the aggregate value of the
assets held by ECC was $1,903,488, of which Dr. Williams had a 5.3% interest.
8
Compensation of Directors and Executive Officers of the Fund
During 2002, each director who was not an officer of the Fund received 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. For 2003, the
Board has voted to reduce the annual fee to $20,000, the meeting fee to $2,000,
and the committee fee to $1,000 per meeting. 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
$238,500 and $246,000 as compensation for the years ended December 31, 2002 and
2001, respectively.
Under the 1997 Stock Incentive Plan (the "Plan"), each non-officer director
was granted an option to purchase 5,500 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 2,200 shares of EQS common stock at the closing sales
price for shares of EQS common stock on that date. One of the items of business
to be voted on at the Annual Meeting of the Stockholders will be to authorize
the cancellation of certain outstanding options to purchase shares of EQS common
stock held by non-employee directors, which were granted prior to 2002, and to
authorize the Fund to make a one-time grant of options to purchase the same
number of EQS shares to each non-employee director at current market value of
the EQS shares at the date of the Annual Meeting. The Fund currently has no
bonus, profit-sharing, pension or retirement plan. Any new director will
automatically be granted an option to purchase 5,500 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, 2002, the Fund had outstanding stock options
covering an aggregate of 1,086,800 shares. The Compensation Committee is
responsible for granting awards of stock options under the Plan.
9
Compensation
The following table sets forth all compensation paid to the directors, and
for each of the three highest paid officers who have aggregate compensation from
the Fund in 2002 in excess of $60,000:
Long-term
Pension Compensation Awards
Aggregate or Retirement -------------------
Compensation Benefits Accrued as Number of Securities
Name of Director from the Fund Part of Fund Expenses Underlying Options
------------------ ------------- --------------------- ---------------------
Sam P. Douglass* .............. $ 0(1) $0 0
Gregory J. Flanagan ........... 38,500 0 2,200
Robert L. Knauss .............. 41,750 0 2,200
Nolan Lehmann* ................ 0(1) 0 0
Gary R. Petersen .............. 37,500 0 2,200
John W. Storms ................ 41,750 0 2,200
Francis D. Tuggle ............. 40,500 0 2,200
Edward E. Williams ............ 38,500 0 2,200
______________
* Designates an "interested person."
(1) Mr. Douglass and Mr. Lehmann do not receive a salary from the Fund.
Options Granted During 2002
The following table contains information concerning the grant of stock
options under the Fund's incentive stock plan to directors and executive
officers during 2002:
% of Total
Options
Granted to
Number of Directors Potential Realizable Value at Assumed
Securities and Annual Rates of Stock Price
Underlying Officers in Exercise Appreciation for Option Term(1)
Options Fiscal Year Price Expiration -------------------------------
Name Granted (#) 2002 ($/Sh) Date 5% 10%
---- ----------- ---- ------ ---- -- ---
Sam P. Douglass ........ 0 0% $ -- -- $ 0 $ 0
Gregory J. Flanagan .... 2,200 16.7% 7.80 05/07/12 27,952 44,509
Robert L. Knauss ....... 2,200 16.7% 7.80 05/07/12 27,952 44,509
Nolan Lehmann .......... 0 0% -- -- 0 0
Gary R. Petersen ....... 2,200 16.7% 7.80 05/07/12 27,952 44,509
John W. Storms ......... 2,200 16.7% 7.80 05/07/12 27,952 44,509
Francis D. Tuggle ...... 2,200 16.7% 7.80 05/07/12 27,952 44,509
Edward E. Williams .... 2,200 16.7% 7.80 05/07/12 27,952 44,509
-----------
(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
options exercised during the last fiscal year and unexercised options held by
the Fund's Chief Executive Officer and the Fund's four most highly compensated
executive officers other than the CEO at December 31, 2002:
10
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 2002 December 31, 2002(1)
Acquired On Value ----------------- --------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------- -------- ----------- ------------- ----------- -------------
Sam P. Douglass ............... 0 $0 158,400 79,200 $0 $0
Nolan Lehmann ................. 0 0 151,800 75,900 0 0
Gary L. Forbes ................ 0 0 132,000 66,000 0 0
Randall B. Hale ............... 0 0 132,000 66,000 0 0
Tracy H. Cohen ................ 0 0 66,000 33,000 0 0
__________
(1) The value is based on a closing price of $6.64 per share on December 31,
2002.
Executive Officers of the Fund
The executive officers of the Fund as of December 31, 2002 were:
Sam P. Douglass Chairman of the Board and Chief Executive Officer
Nolan Lehmann President
Tracy H. Cohen Vice President and Secretary
Gary L. Forbes Vice President
Randall B. Hale Vice President
Dana K. Hiller 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. For a description of the business background of each
of Messrs. Douglass and Lehmann see "Nominees for Director" above.
Tracy H. Cohen Ms. Cohen has been Secretary of the Fund since March 1996
Age 36 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. Ms. Cohen is a director
of three of the 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 59 December 1991 and a Vice President of the Management Company
since November 1991. He is a director of Consolidated
Graphics, Inc. and NCI Building Systems, Inc. He is also a
director of six 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 40 Management Company since November 1992. He has been a
director of the Management Company since February 1996. Mr.
Hale is a director of ENGlobal Corporation and four of the
privately owned companies in which the Fund has an
investment. Mr. Hale is a certified public accountant.
Effective February 15, 2003, Mr. Hale resigned his positions
as a vice president of the Fund and as a director and
officer of the Management Company to become Chief Executive
Officer of Container Acquisition, Inc., a portfolio company
of the Fund.
11
Dana K. Hiller Ms. Hiller has been a Vice President of the Fund since May
Age 35 2001. She joined the Management Company as Controller in
September 1999. From May 1997 to September 1999 she was
practice controller of Integrated Orthopedics, Inc. From
August 1994 to May 1997 she was a financial analyst with
American General Land Development. She 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 2002. The Fund's directors, officers, and
ten-percent holders satisfied all of these filing requirements.
As of April 4, 2003, 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.
12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth at April 4, 2003, the number and percentage
of outstanding shares of EQS Common Stock beneficially held by (1) any person
known to the Fund to be the beneficial owner of more than five percent of the
EQS common stock, (2) each director and nominee for director of the Fund, and
(3) all officers and directors as a group. Under the rules of the SEC, a person
is deemed to own beneficially all securities as to which that person owns or
shares voting or investment power, as well as all securities which such person
may acquire within 60 days through the exercise of currently available
conversion rights, warrants or options. Except as otherwise indicated, the
stockholders listed in the table below have sole voting and investment power
with respect to the shares indicated.
Amount and Nature of
Beneficial Ownership
--------------------
Sole Voting Options
and Exercisable Other
Name of Investment Within Beneficial Percent
Title of Class Beneficial Owner Power 60 days Ownership Total of Class
-------------- ----------------- ----- ------- --------- ----- --------
Common Stock Karpus Management, Inc.(1) 584,838 0 0 584,838 9.4%
Sam P. Douglass(2) 19,657 158,400 388,474(3) 566,531 8.9
Nolan Lehmann(4) 144,781 151,800 41,375(5) 337,956 5.3
Gregory J. Flanagan 7,700 15,398 1,100(6) 24,198 *
Robert L. Knauss 675 15,398 438(7) 16,511 *
Gary R. Petersen 2,155 15,398 0 17,553 *
John W. Storms 7,876 14,298 0 22,174 *
Francis D. Tuggle 3,400 14,298 0 17,698 *
Edward E. Williams 42,418 15,398 0 57,816 *
All directors and 253,068 618,188 431,387 1,302,643 19.0%
officers as a group
(eleven persons)
* Indicates less than one percent.
(1) The address of Karpus Management, Inc. is 14 Tobey Village Office Park,
Pittsford, New York 14534. The address of and number of shares beneficially
owned by Karpus Management, Inc. is based on the Schedule 13D/A filed by
Karpus Management, Inc. with the SEC on March 7, 2003.
(2) Mr. Douglass' address is 2929 Allen Parkway, Suite 2500, Houston, Texas
77019.
(3) Includes (a) 28,260 shares held directly and in retirement accounts by
Paula T. Douglass, Mr. Douglass' wife, (b) 154,918 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) 205,296 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.
(4) Mr. Lehmann's address is 2929 Allen Parkway, Suite 2500, Houston, Texas
77019.
(5) Includes (a) 5,778 shares held by Jeanne Lehmann, Mr. Lehmann's spouse and
(b) 35,597 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.
(6) Includes 1,100 shares held by his spouse.
(7) Includes 438 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.
13
INVESTMENT MANAGEMENT AGREEMENT
The investments and business of the Fund are managed by the Management
Company pursuant to a Management Agreement (the "Management Agreement") dated
May 9, 1997. The date that the Management Agreement was last submitted to a vote
of the stockholders of the Fund was May 9, 1997, when it was initially approved.
On May 7, 2002, the Board of Directors of the Fund approved the continuation of
the Management Agreement until June 30, 2003.
Under the Management Agreement the Management Company provides, or arranges
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 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 that 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 $1,532,152 for the year ended December 31, 2002. The total net assets
of the Fund as of December 31, 2002, were approximately $77.0 million.
Under the Management Agreement, the Fund bears all costs and expenses
directly allocable and identifiable to the Fund or its business or investments,
including all expenses with respect to investments or the acquisition or
disposition thereof, expenses of registering the shares under federal and state
securities laws, costs of printing proxies and other expenses related to
meetings of stockholders, litigation expenses, costs of third party evaluations
or appraisals of the Fund (or its assets) or its actual investments, fees of
transfer agents and custodians, legal fees, fees of independent public
accountants, expenses of printing and distributing reports to stockholders,
securities holders and regulatory bodies, federal, state and local taxes, and
other costs and expenses directly allocable and identifiable to the Fund or its
business or investments.
The Management Company also received additional compensation of $50,000 for
providing certain investor communication services to the Fund for the year ended
December 31, 2002.
Officers of the Management Company also serve as directors of portfolio
companies in which the Fund has investments. In consideration for such service,
such officers may receive and retain fees and non-employee director stock
options from such portfolio companies. During 2002, the officers of the Fund
received $256,750 of director fees from portfolio companies.
The Management Agreement will continue in effect until June 30, 2003, 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).
14
MANAGEMENT COMPANY
The Management Company was formed in 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 a director
Paula T. Douglass Director
S. Preston Douglass, Jr. Director
Gary L. Forbes Vice President
Tracy H. Cohen Secretary
For a description of the business background of each of Messrs. Sam P. Douglass,
Lehmann, 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 51, has been a director of Equus Corporation
International ("ECI") since December 1978 and a director of the Management
Company since July 1993. From February 1998 through November 2000, Ms. Douglass
was Chairman and Chief Executive Officer of Cinema Film Systems, Inc.
S. Preston Douglass, Jr. age 41, has been a director of the Management
Company since July, 1993. He is Chairman, Chief Executive Officer and President
of Corpus Christi Harley Davidson.
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.
15
ITEM 2 -- RATIFICATION OF THE SELECTION OF INDEPENDENT
AUDITORS FOR THE FUND
The Audit Committee has selected the accounting firm of
PricewaterhouseCoopers 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, 2003. The Fund's appointment of PricewaterhouseCoopers
LLP is conditioned on the Fund's right to terminate such employment at any time
without any penalty. In accordance with the Audit Committee's resolution, the
selection of PricewaterhouseCoopers LLP for the current fiscal year is submitted
to stockholders for ratification. The Fund knows of no direct or indirect
financial interest of PricewaterhouseCoopers LLP in the Fund.
PricewaterhouseCoopers LLP was retained as the independent accountants for
the Fund on July 5, 2002, following the resignation of Arthur Andersen LLP
("Andersen") as the independent accountants for the Fund. Prior to their
resignation, Andersen served as the independent accountants for the Fund since
the organization of the Fund in 1991. A representative of PricewaterhouseCoopers
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.
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 member of the committee
satisfies the definition of independent director as established in the New York
Stock Exchange listing standards currently in effect. In addition, the Board has
determined that Robert L. Knauss, as defined by SEC rules, is both independent
and an audit committee financial expert. In February 2003, we revised our
independent charter, which was then approved by the Fund's Board of Directors.
The revised Audit Committee charter is attached hereto as Appendix A.
The Audit Committee met six times during 2002. The Audit Committee has
reviewed and discussed the Fund's audited financial statements for the year
ended December 31, 2002, with management, which has primary responsibility for
the financial statements, and with PricewaterhouseCoopers LLP. The Audit
Committee has discussed with PricewaterhouseCoopers LLP, the Fund's independent
accountants during 2002, 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 PricewaterhouseCoopers LLP the written
disclosure required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committee, as amended) and discussed with
PricewaterhouseCoopers LLP their 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, 2002, be included in the Fund's Annual Report on Form
10-K for the year ended December 31, 2002, and be filed with the Securities and
Exchange Commission. The Audit Committee also recommended to the Board of
Directors, and the Board has approved, subject to shareholder ratification, the
selection of PricewaterhouseCoopers LLP as the Fund's independent accounts for
2003.
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 be deemed filed under
such Acts.
16
Submitted by:
Audit Committee
Robert L. Knauss, Chairman
John W. Storms
Dr. Francis D. Tuggle
Audit and Non-Audit Fees
During 2002, the Fund retained its principal auditor, PwC, to provide
services in the following categories and amounts:
Audit Fees $75,870
Financial Information Systems Design
and Implementation Fees $ 0
All Other Fees $ 0
During 2002, PwC provided audit services to the Management Company and
Equus Capital Corporation, a subsidiary of the Management Company. The fee for
such services was $25,000.
The proposal to ratify the appointment of PwC 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 PricewaterhouseCoopers LLP as independent
auditors of the Fund.
17
ITEM 3 -- APPROVAL AND RATIFICATION OF AN AMENDMENT TO THE FUND'S
1997 STOCK INCENTIVE PLAN AND CANCELLATION AND REISSUANCE OF
CERTAIN OPTIONS GRANTED TO NON-EMPLOYEE DIRECTORS OF
THE FUND UNDER THE FUND'S 1997 STOCK INCENTIVE PLAN
On May 15, 1997, the Board of Directors of the Fund implemented an
executive compensation plan in the form of a stock option plan meeting the
requirements of Section 61(a)(3)(B) of the Investment Company Act to provide
incentive compensation to the individuals who manage the Fund. Officers,
employees, and directors of the Fund are eligible to participate in the 1997
Stock Incentive Plan (the "Plan"). The Plan was approved by the Board on
February 7, 1997, and by the Fund's stockholders on April 9, 1997. The portion
of the Plan applicable to non-employee directors was implemented following
receipt of an order from the Securities Exchange Commission ("SEC") dated
November 4, 1997, approving that portion of the Plan.
At the 2001 annual meeting, stockholders approved an amendment to the Plan
to permit the Fund to grant dividend equivalent rights with option awards. The
Fund proposes to make certain technical amendments to the Plan to permit the
award of dividend equivalent rights to non-employee directors and to permit the
Fund to make a one-time grant of options to its non-employee directors to
replace certain outstanding options that will be cancelled.
The Board believes that 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
management with the Fund's stockholders through increased employee ownership of
the Fund.
The Fund does not have a profit-sharing plan as described in Section 57(n)
of the Act and does not pay incentive compensation to its management under
Section 205 of the Investment Adviser Act. Other than stock options issued to
officers and directors of the Fund under the Plan, the Fund does not currently
have outstanding any warrants, options, or rights to purchase its voting
securities.
In addition to providing for the grant of stock options to officers and
employees of the Fund, each non-employee director serving on the Board on
November 4, 1997, was granted a nonqualified stock option to purchase 5,500
shares of common stock, $.001 par value, 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-employee director is 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 of the Fund, each non-employee
director elected was, and will be, on the first business day following the
annual meeting, granted a nonqualified stock option to purchase 2,200 shares of
common stock. The exercise price of the options is the closing price of the
common stock on the New York Stock Exchange on the date the option is granted or
if no market for the common stock exists, the current net asset value of the
shares of common stock. Each option is 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 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. Options may not
be assigned or transferred other than by will or the laws of descent and
distribution.
As originally adopted, the exercise price of options granted under the Plan
is set at the closing market price of the common stock on the date an option is
granted. This pricing formula did not take into account any income or capital
gain distributions made by the Fund. Historically, the market price of the
Fund's shares has declined by an amount approximating any distribution made by
the Fund. The Fund has
18
made a number of decisions that require periodic distributions. First, the Fund
has attempted to qualify as a regulated investment company ("RIC") under the
Internal Revenue Code in order to be exempt from taxation at the Fund level. To
qualify as RIC, the Fund is required to distribute at least 90% of its
investment company taxable income each year. Second, the Fund has elected to
distribute its realized capital gains rather than to retain such gains and pay
capital gains tax at the Fund level. Third, from 1995 to 2000, the Fund had a
policy of paying a minimum annual distribution of at least $0.50 per share. Each
of these policies and distributions resulted in a decline in the Fund's net
asset value and a corresponding decline in the market price of the Fund's common
stock. Since 1997, the Fund has distributed approximately $5.45 per share in
long-term capital gains, ordinary income, and capital.
To address this problem, in 2001 the Board of Directors proposed an
amendment to the Plan to provide for the grant of dividend equivalent rights.
Generally, a dividend equivalent right provides each holder of an option with
the right to receive an amount equal to the dividend distributions paid on a
share of common stock subject to an option. The Fund's stockholders approved
this amendment in May 2001.
The establishment and amendment of stock option plans pursuant to which
options are granted to non-employee directors of a business development company
must be approved by the SEC. The Fund received an order from the SEC approving
the Plan in 1997. The Fund has filed an application with the SEC to permit the
award of dividend equivalent rights to non-employee directors and to permit a
special one-time grant of options to replace certain outstanding options that
will be cancelled. Implementation of the following amendments to the Plan and
the cancellation and reissuance of options to the non-employee directors is
subject to receipt of an order from the SEC approving such amendments and
options.
The Board's intention in adopting dividend equivalent rights was that
non-employee directors would be entitled to be granted dividend equivalent
rights with their Automatic Option Awards under the Plan.
Each of the six non-employee directors has been granted and currently holds
the following options to purchase shares under the Plan:
Date of Grant Number of Options(1) Exercise Price
------------- -------------------- --------------
11/4/1997 5,500 $ 21.82
5/14/1998 2,200 24.95
5/6/1999 2,200(2) 14.15
5/10/2000 2,200 9.04
5/4/2001 2,200 8.45
5/7/2002 2,200 7.80
-------
Total 16,500
=======
The six non-employee directors hold options to purchase a total of 96,800
shares. These options represent less than 9% of the total options outstanding
and less than 1.6% of the issued and outstanding shares of the Fund. The average
exercise price of outstanding options issued to the non-employee directors prior
to 2003 is approximately $18.08 per share.
The Board proposes to amend or modify the Plan, subject to stockholder
approval, to permit (1) the cancellation of outstanding options to purchase
96,800 shares held by non-employee directors (outstanding options granted prior
to 2003) and (2) a one-time grant of options to purchase 16,500 shares
_______________
(1) Includes a 10% stock dividend paid in December 2001.
(2) Mr. Storms and Dr. Tuggle each exercised options to purchase 1,100 shares in
1999 and hold options to purchase 15,400 shares.
19
(15,400 shares in the case of Mr. Storms and Dr. Tuggle) to each non-employee
director at the closing price of the EQS shares on the date of the 2003 Annual
Meeting.
As originally adopted, the Plan does not permit members of the Compensation
Committee to receive awards under the Plan other than Automatic Awards, as
defined in the Plan. This provision was included in the Plan at the time of its
original drafting to permit options granted under the Plan to qualify for the
exemption from Section 16(b) of the Securities Exchange Act of 1934 (short-swing
profits) provided by Rule 16b-3. Subsequent to the Plan's adoption, the
Securities Exchange Commission amended Rule 16b-3 to broaden the types of exempt
transactions. Under Rule 16b-3, as amended, the grant of options to directors
are exempt from Section 16(b) if (1) the grant is approved by the board of
directors of the issuer, a committee of the board of directors that is comprised
solely of two or more Non-Employee Directors (as defined in Rule 16b-3), (2) the
grant is approved by the stockholders of the issuer, or (3) the equity
securities so acquired are held for a period of six months following
acquisition.
The Board proposes the following amendments to the Plan:
1. Paragraph 1.2(a) of the Plan will be amended to read as follows:
(a) The Plan shall be administered by a Committee of disinterested
persons appointed by the Board of Directors of the Company (the
"Committee"), as constituted from time to time. The Committee shall consist
of at least two members of the Board of Directors. Each member of the
Committee shall be a "Non-Employee Director" as such term is defined in
Rule 16b-3 promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
2. Section 1.4 of the Plan will be amended to add the following new
clause (vi):
(vi) Dividend Equivalent Rights, as described in Article VIII.
3. Article VIII of the Plan will be amended to read as follows:
Section 8.1. Award of Dividend Equivalent Rights. Concurrently with or
subsequent to the award of any Stock Option, Incentive Stock Option, or
Automatic Award 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 a related dividend equivalent right ("Dividend Equivalent
Right"). The Dividend Equivalent Right will grant the Optionee the right to
receive, with respect to each share of Common Stock subject to a Stock
Option, Incentive Stock Option, or Automatic Award, 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 by the Fund on its
outstanding shares of common stock. The period shall not extend beyond the
expiration date set forth in the Stock Option, Incentive Stock Option, or
Automatic Award. 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. Payment pursuant to a Dividend Equivalent Right
shall be deferred and 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
20
reinvestment. A Dividend Equivalent Right shall be settled only upon
exercise of the Stock Option, Incentive Stock Option, or Automatic Award 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, Incentive
Stock Option, or Automatic Award 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, Stock Incentive Option, or
Automatic Award to which it relates.
Other than the proposed cancellation of the 96,800 outstanding options and
the grant of 96,800 in replacement options, the Board does not propose to grant
non-employee directors any additional awards under the Plan (other than
Automatic Awards) without stockholder or SEC approval.
The Board unanimously recommends that each stockholder vote "FOR" the
ratification and approval of the proposed amendments to the 1997 Stock Incentive
Plan, the cancellation of the outstanding Automatic Awards granted to
non-employment directors of the Fund under the 1997 Stock Incentive Plan, and
the reissuance of an equivalent number of Automatic Awards at the closing price
of a share of common stock on the date of the 2003 Annual Meeting.
Implementation of the foregoing transactions will be subject to the
issuance by the SEC of an exemptive order permitting such transactions.
21
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 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 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 meeting to permit further solicitation of proxies. Any
adjournment will require the affirmative vote of a majority of the shares
present at the meeting.
ANNUAL REPORT
The financial statements of the Fund are contained in the 2002 Annual
Report to Stockholders, which has been provided to the stockholders concurrently
herewith. Such report and the financial statements contained therein are not to
be considered as a part of this soliciting material. A copy of the Fund's Annual
Report to Stockholders is available without charge upon request. Please direct
your request to Equus II Incorporated, Attention: Investor Relations, P. O. Box
130197, Houston, Texas 77219-0197, (713) 529-0900.
STOCKHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Under the regulations of the SEC, an EQS stockholder may submit a proposal
on a proper subject for action at the 2004 annual meeting. 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, 2003, in order to be
considered for inclusion in the Fund's proxy statement and form of proxy for the
2004 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 our By-laws, if you are a stockholder and wish to make a director
nomination at a stockholders' meeting, written notice of your 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, your notice 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 By-laws.
The By-laws 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
By-laws) 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.
22
The proxy solicited by the Board of Directors for the 2004 Annual Meeting
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, 2004.
A copy of the full text of the By-law 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
The audit committee of the board of directors of Equus II Incorporated shall
consist of a minimum of three directors. Members of the committee shall be
appointed by the board of directors upon the recommendation of the nominating
and corporate governance committee and may be removed by the board of directors
in its discretion. All members of the committee shall be independent directors
under the standard proposed by the New York Stock Exchange, and shall also
satisfy the more rigorous independence requirement for members of audit
committees established by the New York Stock Exchange and Rule 10A-3 of the
Securities and Exchange Commission. All members shall have sufficient financial
experience and at least one member shall be an audit committee financial expert,
as such term is defined in Rule 401 of Regulation S-K of the Securities and
Exchange Commission and/or Section 303A of the New York Stock Exchange's Listed
Company Manual.
The purpose of the committee shall be to assist the board in its oversight of
the integrity of (1) the financial statements of the fund, (2) the fund's
compliance with legal and regulatory requirements, (3) the independence and
qualifications of the independent auditor, and (4) the performance of the fund's
internal audit function and independent auditor.
In furtherance of this purpose, the committee shall have the following authority
and responsibilities:
1. To discuss with management and the independent auditor the annual
audited financial statements and quarterly financial statements,
including matters required to be reviewed under applicable legal,
regulatory or New York Stock Exchange requirements.
2. To discuss with management and the independent auditor, as
appropriate, earnings press releases and financial information.
3. To recommend, for shareholder approval, the independent auditor to
examine the fund's accounts, controls and financial statements. The
committee shall have the sole authority and responsibility for the
appointment, compensation, retention, and oversight of the work of the
independent auditor engaged by the fund (including resolution of
disagreements between management and the auditor regarding financial
reporting). The committee shall have the sole authority to approve all
audit engagement fees and terms and the committee, or a member of the
committee, must pre-approve any non-audit service (including the fees
and term thereof) provided to the fund by the fund's independent
auditor. The independent auditor will report directly to the
committee.
4. To discuss with management and the independent auditor as appropriate,
any audit problems or difficulties and management's response thereto,
and the fund's risk assessment and risk management policies, including
the fund's major financial risk exposure and steps taken by management
to monitor and mitigate such exposure.
5. To review the fund's financial reporting and accounting standards and
principles, significant changes in such standards or principles or in
their application and the key accounting decisions affecting the
fund's financial statements, including alternatives to, and the
rationale for, the decisions made.
A-1
6. To review and approve an appropriate control process for the fund's
internal transactions and accounting and to meet separately,
periodically, with personnel responsible for the internal audit
function.
7. To obtain and review at least annually a formal written report from
the independent auditor delineating: the auditing firm's internal
quality-control procedures; any material issues raised within the
preceding five years by the auditing firm's internal quality-control
reviews, by peer reviews of the firm, or by any governmental or other
inquiry or investigation relating to any audit conducted by the firm.
The committee will also review steps taken by the auditing firm to
address any findings in any of the foregoing reviews. Also, in order
to assess auditor independence, the committee will review at least
annually all relationships between the independent auditor and the
fund.
8. To prepare and publish an annual committee report in the fund's proxy
statement.
9. To set policies for the hiring of employees or former employees of the
fund's independent auditor.
10. To review and investigate any matters pertaining to the integrity of
management, including conflicts of interest, or adherence to standards
of business conduct. In connection with these reviews, the committee
will meet, as deemed appropriate, with fund officers and employees.
11. To establish procedures for (1) the receipt, retention, and treatment
of complaints received by the fund regarding accounting, internal
accounting controls, or auditing matters; and (2) the confidential,
anonymous submission of employees of the fund of concerns regarding
questionable accounting or auditing matters.
The committee shall meet separately at least quarterly with management and
also with the fund's independent auditor.
The committee shall have authority to retain such outside counsel, experts
and other advisors, as the committee may deem necessary to carry out its
duties in its sole discretion. The committee shall have sole authority to
approve related fees and retention terms.
While the committee has the responsibilities and powers set forth in this
charter, it is not the duty of the committee to plan or conduct audits or
to determine that the fund's financial statements and disclosures are
complete and accurate and are in accordance with generally accepted
accounting principles and applicable rules and regulations. These are the
responsibilities of management and the independent auditor.
The committee shall report to the board after each committee meeting and
shall conduct and present to the board an annual performance evaluation of
the committee. The committee will review with the full board any issues
that arise with respect to the quality or integrity of the fund's financial
statements, the fund's compliance with legal or regulatory requirements,
and the performance of the fund's independent auditor. The committee shall
review at least annually the adequacy of this charter and recommend any
proposed changes to the board for approval.
A-2
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 9, 2003.
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 9, 2003, at 9:00 a.m.
local time, at Meeting Room No. 1, Ground Level, Wortham Tower, 2727 Allen
Parkway, Houston, Texas 77019, or any adjournments thereof (the "Annual
Meeting") and to vote the shares of Common Stock, $.001 par value per share, of
the Fund ("Shares"), standing in the name of the undersigned on the books of the
Fund on March 21, 2003, the record date for the Annual Meeting, with all powers
the undersigned would possess if personally present at the Annual Meeting.
The undersigned hereby acknowledges previous receipt of the Notice of
Annual Meeting of Stockholders and the Proxy Statement and hereby revokes any
proxy or proxies heretofore given by the undersigned.
(Continued and to be signed on the reverse side)
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 and
FOR proposals 2 and 3.
Please sign, date and return promptly in the enclosed envelope. Please mark your
vote in blue or black ink as shown here [X]
1. Election of the eight nominees listed below to the Board of Directors.
Nominees:
FOR ALL NOMINEES_______ [_] Sam P. Douglass
[_] Gregory J. Flanagan
[_] Robert L. Knauss
WITHHOLD AUTHORITY FOR ALL NOMINEES _____ [_] Nolan Lehmann
[_] Gary R. Petersen
FOR ALL EXCEPT (see instructions below) _____ [_] John W. Storms
[_] Dr. Francis D. Tuggle
[_] Dr. Edward E. Williams
INSTRUCTION: To withhold authority to vote for any individual nominee(s),
mark "FOR ALL EXCEPT" and fill in the circle next to each nominee you wish
to withhold, as shown here.
[_]
The Board of Directors recommends a vote "FOR" the following Proposals
2. Ratification of the appointment of PricewaterhouseCoopers, LLP as the
independent auditors for the Fund for the fiscal year ending December 31,
2003:
FOR __________ AGAINST ___________ ABSTAIN ___________
3. Approve and ratify an amendment to the Fund's 1997 Stock Incentive Plan
and to authorize the cancellation and reissuance of certain options
granted as it relates to non-employee directors, as set forth in the proxy
statement.
FOR __________ AGAINST ___________ ABSTAIN ___________
The Board of Directors knows of no other matter to come before the meeting. If
any other matter is properly brought before the meeting with respect to which
the Fund was not provided notice on or before February 15, 2003, the proxies
will have discretion to vote this proxy on such matter in accordance with their
best judgment.
Date__________________________________________
Signature ____________________________________
Signature ____________________________________
Please sign exactly as name appears on this Proxy. When shares are held jointly,
each holder should sign. When signing as executor, administrator, attorney,
trustee, or guardian, please give full title as such. If the signer is a
corporation, please sign full corporate name by duly authorized officer, giving
full title as such. If signer is a partnership, please sign in partnership name
by authorized person.