[Federal Register Volume 62, Number 202 (Monday, October 20, 1997)]
[Notices]
[Pages 54484-54485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27656]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22853; 812-10574]


Equus II Incorporated; Notice of Application

October 10, 1997.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order under section 61(a)(3)(B) of 
the Investment Company Act of 1940 (the ``Act'').

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SUMMARY OF APPLICATION: Applicant Equus II Incorporated seeks an order 
approving its 1997 Stock Incentive Plan (the ``Plan'') for certain of 
its directors, and the grant of certain stock options under the Plan.

FILING DATES: The application was filed on March 11, 1997. Applicant 
has agreed to file an amendment, the substance of which is incorporated 
in this notice, during the notice period.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on November 3, 
1997, and should be accompanied by proof of service on applicant, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicant, 2929 Allen Parkway, Suite 2500, Houston, Texas 77019.

FOR FURTHER INFORMATION CONTACT:
Lawrence W. Pisto, Senior Counsel, at (202) 942-0527, or Christine Y. 
Greenlees, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 5th Street, N.W., Washington, D.C. 
20549 (tel. (202) 942-8090).

Applicant's Representations

    1. Applicant is a business development company (``BDC'') within the 
meaning of section 2(a)(48) of the Act.1 Applicant requests 
an order pursuant to section 61(a)(3)(B) of the Act approving the Plan 
as it applies to each director of the applicant who is neither an 
officer nor an employee of the applicant (``Non-employee Director'') 
and to each new Non-employee Director who may be elected in the future 
to applicant's board of directors. The order also would approve the 
automatic grant of options, pursuant to the Plan, to purchase shares of 
applicant's common stock to each current and future Non-employee 
Director.
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    \1\ Section 2(a)(48) defines a BDC to be any closed-end 
investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) of the Act and makes available significant managerial 
assistance with respect to the issuers of such securities.
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    2. Applicant's board of directors (the ``Board'') consists of eight 
members. Five members of the Board are persons who are not ``interested 
persons'' (as defined in section 2(a)(19) of the Act) of the applicant. 
The Plan was approved by the Board on February 7, 1997, and by the 
applicant's shareholders on April 9, 1997, at a special meeting of 
shareholders. Officers, employees, and directors of the applicant are 
eligible to participate in the Plan. Applicant seeks approval of the 
Plan as it applies to Non-employee Directors. On May 15, 1997, the 
Board implemented part of the Plan. The portion of the Plan applicable 
to Non-employee Directors will not be implemented until an order is 
received from the Commission approving that portion of the Plan.
    3. Each Non-employee Director of the applicant receives an annual 
director's fee of $20,000, a fee of $2,000 for each meeting of the 
Board attended in person, a fee of $1,000 for participation in each 
telephonic meeting and for each committee meeting attended, and 
reimbursement of all out-of-pocket expenses relating to attendance at 
meetings.
    4. Equus Capital Management Corporation (``ECMC'') is an investment 
adviser registered under the Investment Advisers Act of 1940 (the 
``Advisers Act'') and serves as the applicant's management company. 
ECMC receives no compensation from the applicant under section 205(1) 
of the Advisers Act. Other than stock options issued to officers of the 
applicant under the Plan, the applicant does not currently have 
outstanding any warrants, options or rights to purchase its voting 
securities.
    5. The Plan provides that each Non-employee Director serving on the 
Board as of the later of the date of approval of

[[Page 54485]]

the Plan by: (a) The applicant's shareholders, or (b) an order of the 
Commission, will be granted a nonqualified stock option to purchase 
5,000 shares of common stock, $.01 par value (the ``Common Stock''), of 
applicant that will vest 50% immediately and 16\2/3\% on the first, 
second, and third anniversaries of the date of the grant. Each new Non-
employee Director will be granted upon his or her election a 
nonqualified stock option for a similar number of shares. In addition, 
beginning with the 1998 annual meeting of shareholders of applicant, 
each Non-employee Director elected will, on the first business day 
following the annual meeting, be granted 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 American 
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 
the Common Stock. Each option will be exercisable during the period 
beginning six months after the date of the grant and ending ten years 
after the date of the grant.
    6. In the event that a Non-employee Director's services are 
terminated because of death, permanent disability, or retirement, any 
invested options will vest, and the Non-employee Director or, if the 
Non-employee Director is not living, the Non-employee 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 Non-employee 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.

Applicant's Legal Analysis

    1. Section 63(3) of the Act permits a BDC to sell its common stock 
at a price below current net asset value upon the exercise of any 
option issued in accordance with section 61(a)(3) of the Act.
    2. Section 61(a)(3)(B) of the Act provides, in pertinent part, that 
a BDC may issue to its Non-employee Directors options to purchase its 
voting securities pursuant to an executive compensation plan, provided 
that: (a) The options expire by their terms within ten years; (b) the 
exercise price of the options is not less than the current market value 
of the underlying securities at the date of the issuance of the 
options, or if no market exists, the current net asset value of the 
voting securities; (c) the proposal to issue the options is authorized 
by the BDC's shareholders, and is approved by order of the SEC upon 
application; (d) the options are not transferable except for 
disposition by gift, will or intestacy; (e) no investment adviser of 
the BDC receives any compensation described in paragraph (1) of section 
205 of the Advisers Act, except to the extent permitted by clause (A) 
or (B) of that section; and (f) the BDC does not have a profit-sharing 
plan as described in section 57(n) of the Act.
    3. In addition, section 61(a)(3)(B) of the Act provides that the 
amount of the BDC's voting securities that would result from the 
exercise of all outstanding warrants, options, and rights at the time 
of issuance may not exceed 25% of the BDC's outstanding voting 
securities, except that if the amount of voting securities that would 
result from the exercise of all outstanding warrants, options, and 
rights issued to the BDC's directors, officers, and employees pursuant 
to an executive compensation plan would exceed 15% of the BDC's 
outstanding voting securities, then the total amount of voting 
securities that would result from the exercise of all outstanding 
warrants, options, and rights at the time of issuance will not exceed 
20% of the outstanding voting securities of the BDC.
    4. Applicant represents that the Plan and the options that would be 
granted automatically to current and future Non-employee Directors 
would comply with the requirements of section 61(a)(3)(B) of the Act. 
In addition, in support of its application, applicant states that its 
directors devote substantial time and attention to matters relating to 
applicant's portfolio companies, thus functioning more like the board 
of an operating company than the board of a traditional investment 
company. Applicant relies extensively on the judgment and experience of 
its directors, and believes that these factors are critical to its 
success. Further, applicant states that the Plan would provide 
incentives to the Non-employee Directors to remain on the Board and 
devote their best efforts to the success of applicant's business.
    5. Applicant submits that the terms of the Plan are fair and 
reasonable and do not involve overreaching of applicant or its 
shareholders. Under the Plan, the amount of stock options that would be 
granted to the six current Non-employee Directors would be 30,000 
shares in 1997 and 12,000 shares each year commencing in 1998, or 
approximately 1% of the 4,300,682 shares of Common Stock outstanding. 
Applicant submits that, given the relatively small number of options 
that may be granted and exercised by Non-employee Directors under the 
Plan, the exercise of stock options pursuant to the Plan will not have 
a substantial dilutive effect on the net asset value of applicant's 
Common Stock. In addition, the total amount of voting securities that 
would result from the exercise of all outstanding warrants, options, 
and rights at the time of issuance would not exceed 20% of the 
outstanding voting securities of the applicant. Further, because the 
options may not be exercised until six months after the date of grant 
and 50% of the stock options granted to Non-employee Directors vest on 
a ratable basis over the three years following the date of grant, the 
plan provides Non-employee Directors with an incentive to remain with 
the applicant.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27656 Filed 10-17-97; 8:45 am]
BILLING CODE 8010-01-M