PAGE ___ OF ___ PAGES. 1933 ACT FILE NO. 33-98050
THE INDEX TO EXHIBITS APPEARS ON PAGE ___ 1940 ACT FILE NO. 811-9110
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. ___ [ ]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 1 [X]
----------------
SOUTHWEST SMALL CAP EQUITY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
----------------
C/O MGF Service Corp. John F. Splain, Assistant Secretary
312 Walnut Street c/o MGF Service Corp.
Cincinnati, Ohio 45202 312 Walnut Street
(Address of Principal Executive Offices) Cincinnati, Ohio 45202
(513) 629-2000 (Name and Address of Agent for Service)
(Registrant's Telephone Number,
Including Area Code)
----------------
With copies to:
GEOFFREY K. WALKER, ESQ. JOHN J. MCKENNA, CHAIRMAN & CEO
JEFF C. DODD, ESQ. MCKENNA MANAGEMENT COMPANY
MAYOR, DAY, CALDWELL & KEETON, L.L.P. 909 FANNIN, SUITE 1600
700 LOUISIANA STREET, SUITE 1900 HOUSTON, TEXAS 77010
HOUSTON, TEXAS 77002-2778
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a
dividend reinvestment plan, check the following box [X].
----------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Being Offering Price Aggregate Registration
Title of Securities Being Registered Registered Per Unit Offering Price Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share............... 4,000,000 $10.00 $40,000,000 $13,793*
================================================================================================================
</TABLE>
* As calculated pursuant to Rule 457(a) under the Securities Act of 1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SOUTHWEST SMALL CAP EQUITY FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM N-2 ITEM NUMBER AND HEADING PROSPECTUS CAPTION OR PAGE
-------------------------------- --------------------------
<S> <C>
1. Outside Front Cover Page of Prospectus................ Registration Statement Cover; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Additional Information
3. Fee Table and Synopsis................................ Fee Table
4. Financial Highlights.................................. Prospectus Summary; Risk Factors; Investment
Objective and Policies
5. Plan of Distribution.................................. Prospectus Summary; Marketing Arrangements
6. Selling Shareholders.................................. Not Applicable
7. Use of Proceeds....................................... Prospectus Summary; Use of Proceeds
8. General Description of the Registrant................. Outside Front Cover Page of Prospectus; Prospectus
Summary; The Fund; Risk Factors; Investment
Objective and Policies; Management of the Fund
9. Management............................................ Prospectus Summary; Management of the Fund
10. Capital Stock, Long-Term Debt, and Other
Securities......................................... Prospectus Summary; Capital Stock; Dividends
11. Defaults and Arrears on Securities ................... Not Applicable
12. Legal Proceedings..................................... Not Applicable
13. Table of Contents of the Statement of Additional
Information........................................ Page 30
</TABLE>
SUBJECT TO COMPLETION, DATED NOVEMBER 22, 1995
PROSPECTUS
$40,000,000
SOUTHWEST SMALL CAP EQUITY FUND, INC.
4,000,000 SHARES OF COMMON STOCK
Southwest Small Cap Equity Fund, Inc. (the "Fund") is a newly organized,
diversified, closed-end management investment company. The Fund's investment
objective is to seek capital appreciation for long-term investors by investing
in common equity securities of publicly traded, small capitalization companies
headquartered in Texas, Colorado, Oklahoma, Louisiana, Arkansas or New Mexico
(the "Southwest").
The shares of common stock of the Fund (the "Shares") have been approved for
listing on the Chicago Stock Exchange under the symbol "SWS". The Shares are
being offered by McKenna Securities Company and Capital West Securities, Inc.
(the "Dealer Managers") and certain broker/dealers ("Broker/Dealers"), on a
"best efforts" basis. The offering will terminate on [thirty days from the date
of this Prospectus], subject to extension for up to 30 days. Subscriptions will
be placed in escrow with Star Bank, N.A., Cincinnati, Ohio. If subscriptions for
a minimum of 2,000,000 Shares have not been deposited by the date this offering
terminates, then all proceeds will be promptly returned to investors with all
interest earned thereon while in escrow. The minimum permitted subscription by
an investor is 100 Shares. See "Marketing Arrangements."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE SHARES.
EQUITY SECURITIES OF CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST FREQUENTLY
TRADED AT DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL OFFERING PRICES.
THIS RISK MAY BE GREATER FOR INITIAL INVESTORS EXPECTING TO SELL SHARES OF A
CLOSED-END INVESTMENT COMPANY SOON AFTER THE COMPLETION OF AN INITIAL PUBLIC
OFFERING OF SUCH SHARES. FOR A DISCUSSION OF OTHER RISKS THAT SHOULD BE
CONSIDERED BY POTENTIAL INVESTORS, SEE "RISK FACTORS."
This Prospectus concisely sets forth information about the Fund that an
investor should know before investing, and it should be retained for future
reference. A Statement of Additional Information ("SAI") dated the date hereof
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The table of contents of the SAI is located on page 30 of
this Prospectus. A copy of this information may be obtained free of charge upon
request made to McKenna Securities Company by writing to 909 Fannin, Suite 1600,
Houston, Texas 77010, calling (713) 951- 9191, telefaxing (713) 951-0550 or
sending e-mail to [email protected].
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================================
Price to Public(a) Sales Load(a) Proceeds to
Fund(a)(b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................................... $10.00 $.80 $9.20
Total Minimum....................................... $20,000,000 $1,600,000 $18,400,000
Total Maximum....................................... $40,000,000 $3,200,000 $36,800,000
====================================================================================================================================
</TABLE>
(a) Based on a Price to Public of $10.00 per share, the "Sales Load" includes
sales commissions of 6% paid to the Dealer Managers and other selling
Broker/Dealers and a 1% origination fee and a 1% nonaccountable expense
allowance paid to the Dealer Managers as more fully described in
"Marketing Arrangements". Price to Public and Sales Load will be subject
to reductions at various levels of single transactions, as more fully
described in "Marketing Arrangements." See "Marketing Arrangements" for
information concerning indemnification of the Dealer Managers and other
information concerning the distribution of Shares in this offering.
(b) Before deducting organizational and offering expenses payable by the Fund
and not included as "Sales Load," estimated at $350,000. The Fund has
agreed, upon McKenna Securities Company's request, to amend the
registration statement of which this Prospectus is a part to permit an
increase in the offering on the same terms herein of up to 6,000,000
additional Shares. If this offering is increased by 6,000,000 additional
Shares, the total "Price to Public" will be a maximum of $100,000,000, the
total "Sales Load" will be a maximum of $8,000,000 and the total "Proceeds
to Fund" will be a maximum of $92,000,000.
The Shares are offered on behalf of the Fund by the Dealer Managers and
certain Broker/Dealers, subject to acceptance and the right of the Fund to
withdraw, cancel or modify the offering and to reject any order in whole or in
part. Share certificates will be delivered promptly after the release of escrow
funds. See "Marketing Arrangements."
MCKENNA SECURITIES COMPANY
CAPITAL WEST SECURITIES, INC.
The date of this Prospectus is ______________, 1995
FEE TABLE
STOCKHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price) 8.00%
Dividend Reinvestment Plan Fees None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO THE SHARES)(a)
Management Fee 1.00%
Other Expenses 1.00%
Administrative Fee .50%
Estimated Additional Expenses .50%
Total Annual Expenses (estimated) 2.00%
(a) For the years ending December 31, 1995, 1996 and 1997, subject to certain
conditions, to the extent certain fees and expenses otherwise payable by the
Fund exceed 2% of the Fund's net assets, the Investment Manager and
Administrator will reduce or waive the fees otherwise payable to them or
reimburse the Fund for such fees. See "Management of the Fund-Investment
Manager."
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following cumulative expenses
on a $1,000 investment, assuming a 5% annual return $99 $140 $182 $300
</TABLE>
The purpose of this table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The annual return reflected in the example above is hypothetical,
and does not represent a prediction as to the Fund's performance. The example
assumes reinvestment of all dividends and distributions at net asset value.
Other Expenses are annualized based upon estimated amounts for the current
fiscal year. For a description of Management Fees, Administration Fees and
certain other expenses, see "Management of the Fund--Investment Manager" and
"--Administration." The example should not be considered as a representation of
future expenses; actual expenses may be greater than those shown. The actual
number of Shares sold in this offering, which may range from 2,000,000 (minimum)
to 4,000,000 (maximum), will not affect the rate at which Stockholder
Transaction Expenses, annual Management Fee or annual Administration Fee will be
calculated and is not expected to have any material effect upon other expenses
estimated above.
IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGERS MAY EFFECT TRANSACTIONS ON
THE CHICAGO STOCK EXCHANGE WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. INVESTORS
SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION "RISK
FACTORS."
THE FUND
The Fund is a newly organized, diversified, closed-end management investment
company. The Fund's investment objective is to seek capital appreciation for
long- term investors through investments in common equity securities of publicly
traded Southwest Small Cap Companies. In general, "Southwest Small Cap
Companies" are defined as publicly traded companies that (i) are headquartered
in Texas, Colorado, Oklahoma, Louisiana, Arkansas or New Mexico (the
"Southwest") and (ii) have or had, as of the end of any calendar quarter ending
on or after December 31, 1987, a common equity market value of between $10
million and $250 million. A company continues to qualify as a "Southwest Small
Cap Company" even if the market value of its common equity securities
subsequently rises above $250 million or falls below $10 million, but ceases to
qualify when it relocates its headquarters outside the Southwest or when its
common equity ceases to be publicly traded. As of September 30, 1995, the
Investment Manager had identified 670 Southwest Small Cap Companies, of which
the common equity market values of 118 were $250 million or more, 471 were
between $10 million and $250 million and 81 were $10 million or less. The
aggregate common equity market value of the 670 Southwest Small Cap Companies at
September 30, 1995 was approximately $114 billion and the average equity market
capitalization was approximately $170 million.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek capital appreciation for long-term
investors by investing in common equity securities of publicly traded Southwest
Small Cap Companies. This reflects, in part, the Investment Manager's opinion
based on its analysis of the performance of the Southwest Index(TM)that, during
the period from December 31, 1987 through September 30, 1995, a strategy of
investing in such securities on a broad and diversified basis could have
realized greater investment returns than a strategy designed to track the
performance of certain broad market indexes, most particularly the S&P 500 and
Russell 2000. The Southwest Index(TM)was developed by the Investment Manager to
measure the market performance after December 31, 1987 of publicly traded common
equity securities issued by Southwest Small Cap Companies. See "Investment
Objective and Policies -- The Southwest Index(TM)." The Fund's investment
objective also reflects the Investment Manager's belief that the Southwest, as a
region, has offered and will continue to offer a more favorable business climate
than other regions of the United States because of a greater population growth
rate, regulatory environments, taxation levels and general business costs (such
as lower labor costs), among other factors. In addition, the investment
objective of the Fund reflects the Investment Manager's opinion that investments
in small capitalization companies can offer the potential to achieve returns
that may be greater than investments in companies with larger market
capitalizations. However, no assurance can be given that the Fund's investment
objective will be realized.
INVESTMENT POLICY
In pursuing its investment objective, the Fund's investment policy will be,
generally, (i) to have not less than one-half of its assets invested,
predominantly on an equal dollar weighted basis, in publicly traded common
equity securities of substantially all of the Southwest Small Cap Companies (the
"Southwest Market Portfolio") and (ii) to have the remainder of its assets
invested in publicly traded common equity securities of particular Southwest
Small Cap Companies selected by the Investment Manager (the "Southwest Value
Portfolio"). In making investments for the Southwest Value Portfolio, the
Investment Manager will seek to invest in equity
3
securities of Southwest Small Cap Companies that are, in the Investment
Manager's estimation, undervalued. The Investment Manager believes that this
investment policy will allow the Fund to benefit from a broad-based, diversified
investment across the range of publicly traded Southwest Small Cap Companies,
while also permitting the Fund to target investments in the common equity
securities of particular companies that the Investment Manager determines to be
especially attractive. For more detailed information regarding policies and
restrictions applicable to the Fund's investments, see "Investment Objective and
Policies."
SOUTHWEST MARKET PORTFOLIO
The Southwest Market Portfolio's performance will be intended generally to
correspond to the performance of the common equity securities of the entire
group of companies that are included in the Southwest Index(TM). As with the
Southwest Index(TM), the investment strategy with respect to the Southwest
Market Portfolio incorporates the following critical design parameters:
o Identical criteria and procedures are used to identify Southwest Small
Cap Companies and publicly traded common equity securities of Southwest
Small Cap Companies for purposes of the Fund's investments and the
Southwest Index(TM).
o Each Southwest Small Cap Company will continue to qualify for Fund
investment unless the issuer relocates its headquarters outside the
Southwest or its common equity securities cease to be publicly traded.
Accordingly, a change in the market value of common equity securities
of a particular Southwest Small Cap Company (even if its market
capitalization decreases below $10 million or increases above $250
million) does not result in removal of such securities from the
Southwest Market Portfolio or the Southwest Index(TM).
Moreover, the assumed quarterly rebalancing of the hypothetical portfolio used
to compute the Southwest Index(TM) will be approximated by quarterly purchases
and sales of investments in the Southwest Market Portfolio, subject to
transaction cost constraints, to achieve a roughly equal dollar investment in
each portfolio security.
Nevertheless, the Investment Manager does not expect or intend to seek an exact
correlation between performance of the Southwest Market Portfolio and the
Southwest Index(TM) for a variety of reasons, including the exercise of
discretion that will be allowed the Investment Manager in determining the
precise composition, size, weighing and timing of investments, the Fund's
portfolio transaction costs, the potential impact of the Fund's diversification
requirements and the Fund's expenses. Contrary to the assumptions used in the
Southwest Index(TM), the Investment Manager will have the ability (without the
obligation) (i) to liquidate or reduce a particular investment included in the
Southwest Market Portfolio if, in its judgment, the market value of such
investment has been or will be adversely affected by material events or
conditions and (ii) to exercise or convert rights associated with particular
securities and to tender securities in connection with tender or exchange
offers, regardless of whether such securities continue to be publicly traded.
See "Investment Objectives and Policies -- Southwest Market Portfolio."
SOUTHWEST VALUE PORTFOLIO
The assets allocated to the Southwest Value Portfolio also will be invested in
publicly traded common equity securities of Southwest Small Cap Companies.
However, such investments will be made selectively in securities of particular
Southwest Small Cap Companies that, in the Investment Manager's estimation, are
undervalued. In making such investments, the Investment Manager will analyze not
only traditional indicators (including book values, dividend yields,
price/earnings ratios and revenues), but also the level and direction of
earnings. Particular attention
4
will be given to cash flow, sales trends, debt and the relationship between the
levels of inventories and receivables.
RISK FACTORS
Prior to this offering, there has been no public market for the Shares. Equity
securities of closed-end investment companies have in the past frequently traded
at discounts from their net asset values and initial offering prices. This risk
may be greater for initial investors expecting to sell shares of a closed-end
investment company soon after the completion of an initial public offering of
such shares. The equity securities in which the Fund will invest will be issued
by publicly traded, small capitalization companies, which may have limited
financial, managerial or other resources and will be subject to numerous risks
not normally associated with securities issued by publicly traded companies with
larger market capitalizations. Moreover, because the Fund will invest in equity
securities of companies headquartered in the Southwest, the market value of such
securities may be especially affected by economic conditions in the Southwest
(most particularly Texas) and conditions affecting the energy industry and other
industries that are prevalent in the Southwest. There can be no assurance that
the investment objective of the Fund will be achieved. See "Risk Factors."
THE OFFERING
The Fund is offering from 2,000,000 Shares (minimum) to 4,000,000 Shares
(maximum) at $10.00 per Share subject to reductions at various levels of single
transactions, as more fully described in "Marketing Arrangements." The minimum
permitted investment by an investor in this offering is 100 Shares. The Fund has
agreed, upon McKenna Securities Company's request, to amend the registration
statement of which this Prospectus is a part to permit an increase of the
offering of up to 6,000,000 additional Shares on the same terms herein.
The offering is being made on a "best efforts" basis and will terminate no later
than [thirty days from the date of this Prospectus], subject to the right of the
Fund to extend the offering up to 30 days without notice.
Subscriptions will be placed in escrow with Star Bank, N.A., Cincinnati, Ohio.
Investors must complete, execute and deliver a Subscription Form, included in
the Subscription Agreement which is Appendix A to this Prospectus (the
"Subscription Agreement"). If subscriptions for a minimum of 2,000,000 Shares
have not been received by the date this offering terminates, then all
subscriptions will be promptly returned to investors with interest earned while
in escrow. See "Marketing Arrangements."
PROPOSED CHICAGO STOCK
EXCHANGE SYMBOL
The Shares have been approved for listing on the Chicago Stock Exchange under
the symbol "SWS".
DIVIDENDS
The Fund intends to distribute annually substantially all of its net investment
income, and to distribute at least annually any net realized capital gains to or
to the accounts of holders of Shares. Under the Fund's Dividend Reinvestment
Plan (the "Plan"), all dividends and distributions will be automatically
reinvested by Star Bank, N.A., as agent (the "Plan Agent"), to purchase
additional Shares from the Fund or in the open market unless a stockholder
affirmatively elects to receive cash. All dividends and distributions will be
taxable, whether reinvested pursuant to the Plan or distributed in cash. See
"Dividends."
5
INVESTMENT MANAGER
The Investment Manager is McKenna Management Company, which is a registered
investment adviser under the Investment Advisers Act of 1940 and an affiliate of
McKenna Securities Company. The Investment Manager will manage the Fund's
investments in accordance with the Fund's investment objective and policies.
Prior to the organization of the Fund, the Investment Manager had not served as
investment adviser to any other investment company.
The principal investment officer of the Investment Manager is Robert D. Harrell.
Mr. Harrell, who has more than 26 years of investment management experience as
an institutional portfolio manager and chief investment officer, joined the
Investment Manager in 1995 as its Chief Investment Officer. For two years prior
to joining the Investment Manager, Mr. Harrell was Director of Research and
Investment Advisory Services for Arneson Kercheville Ehrenberg & Associates, a
regional brokerage firm located in San Antonio. Previously, Mr. Harrell was a
principal of Benchmark Asset Management, Inc. ("Benchmark") in Houston, which he
founded in 1986 and which had $150 million under management when it was sold to
an unrelated investment management company in 1992. Prior to founding Benchmark,
Mr. Harrell was Senior Vice President, Chief Operating Officer, and Chief
Investment Officer of American Capital Advisors, Inc., a private fund management
company in the American Capital Group, where he worked from 1982 to 1986. Before
that, he was Executive Vice President of Investment Advisors, Inc., where he
worked from 1972 to 1982.
ADMINISTRATOR
McKenna & Company I, L.P., an affiliate of the Investment Manager and of McKenna
Securities Company, will serve as the Fund's administrator (the "Administrator")
pursuant to the terms of an Administration Agreement. The Administrator will
subcontract many of the administrative services of the Fund to MGF Service
Corp., a mutual fund services company located in Cincinnati, Ohio. See
"Management of the Fund -- Administration.
CUSTODIAN, TRANSFER AGENT
DIVIDEND PAYING AGENT
AND REGISTRAR
Star Bank, N.A. will act as custodian for the Fund's assets and may employ sub-
custodians as provided in the Custodian Agreement. Star Bank, N.A. will also act
as transfer agent, dividend paying agent and registrar for the Fund's Common
Stock.
FEES AND EXPENSES
For its services, the Investment Manager will be paid a monthly fee at an annual
rate of 1.00% of the Fund's Average Net Assets as determined for the month. See
"Management of the Fund -- Investment Manager." This fee is higher than the fee
paid by a number of other investment companies to other investment advisers. The
Administrator will be paid a monthly fee at an annual rate of .50% of Average
Net Assets as determined for the month, out of which it will pay the charges of
MGF Service Corp., as sub-administrator, and certain other administrative
expenses. The Fund will also pay the costs of the custodian, the transfer agent,
dividend paying agent and Plan Agent, and certain other third party costs, which
the Investment Manager anticipates will generally approximate .50% of the Fund's
Average Net Assets annually. See "Management of the Fund."
If, with respect to any of the years ending December 31, 1995, 1996 or 1997, the
total expenses of the Fund incurred by, or allocated to, the Fund with respect
to any such year (excluding the expenses incurred or paid in connection with
this offering, brokerage commissions and other portfolio transaction expenses,
taxes, interest, expenditures that are capitalized in accordance with generally
accepted accounting principles and extraordinary expenses) exceed 2% of net
assets as of the end of such year, the Investment Manager and the Administrator
will, to the extent of such excess and on a pro rata basis, waive their
Management Fees and their Administration Fees, respectively, payable for such
year or reimburse the Fund.
6
THE FUND
The Fund, incorporated in Delaware on October 10, 1995, is a
diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The address of the
Fund is c/o MGF Service Corp., 312 Walnut Street, Cincinnati, Ohio 45202.
The Fund's investment objective is to seek capital appreciation for
long-term investors by investing in common equity securities of Southwest Small
Cap Companies. To further this investment objective the Fund's investment policy
will be, generally, (i) to have not less than one-half of its assets invested,
predominantly on an equal dollar weighted basis, in common equity securities of
substantially all Southwest Small Cap Companies (the "Southwest Market
Portfolio") and (ii) to have the remainder of its assets invested in common
equity securities of a selected group of Southwest Small Cap Companies
identified by the Investment Manager (the "Southwest Value Portfolio"). This
investment policy is intended to provide the Fund with a broad-based,
diversified common equity investment across the range of publicly traded
Southwest Small Cap Companies, while also allowing targeted investment in the
securities of selected Southwest Small Cap Companies that the Investment Manager
determines to be particularly attractive.
The Fund will enable an investor to invest in a portfolio of common
equity securities of hundreds of publicly traded Southwest Small Cap Companies,
and thereby to participate on a broadly diversified basis in the Southwest
regional economy, without incurring the administrative burdens that would be
encountered by an individual investor seeking to pursue the Fund's investment
program. Such burdens would include arranging purchases and sales of securities,
obtaining current information about companies located in the Southwest,
assembling a portfolio of such companies, assuring the safekeeping of investment
securities and purchasing and selling such securities.
The Investment Manager is McKenna Management Company, which is a
registered investment adviser under the Investment Advisers Act of 1940 and an
affiliate of McKenna Securities Company. The principal investment officer of the
Investment Manager is Robert D. Harrell. Mr. Harrell, who has more than 26 years
of investment management experience as an institutional portfolio manager and
chief investment officer, joined the Investment Manager in 1995 as its Chief
Investment Officer. For the two years prior to joining the Investment Manager,
Mr. Harrell was Director of Research and Investment Advisory Services for
Arneson Kercheville Ehrenberg & Associates, a regional brokerage firm located in
San Antonio. Previously, Mr. Harrell was a principal in Benchmark Asset
Management, Inc. ("Benchmark") in Houston, which he founded in 1986 and which
had $150 million under management in August 1992 when it was sold to an
unrelated investment management company. Prior to founding Benchmark, Mr.
Harrell was Senior Vice President, Chief Operating Officer and Chief Investment
Officer of American Capital Advisors, Inc., a private fund management company in
the American Capital Group, where he worked from 1982 to 1986. Before that, he
was Executive Vice President of Investment Advisors, Inc., where he worked from
1972 to 1982.
USE OF PROCEEDS
The net proceeds of this offering, estimated to be between $18,050,000
(minimum) and $36,450,000 (maximum) after deducting the sales load and offering
and organizational expenses, will be invested in accordance with the Fund's
investment objective and policies set forth under "Investment Objective and
Policies." The Fund anticipates that, under normal market conditions, the net
proceeds of this offering will be so invested promptly after consummation of the
sale of the Shares pursuant to this Prospectus. The Fund anticipates that it
will have invested the portion of the proceeds to be allocated to the Southwest
Market Portfolio within 30 days of the receipt of the proceeds from this
offering and will have invested the remainder of the proceeds of the offering
within 60 days of the receipt by the Fund of such net proceeds. Not less than
one-half of the net proceeds will be allocated to the Southwest Market Portfolio
and the remainder of the net proceeds will be allocated to the Southwest Value
Portfolio. To the extent that any assets are not invested in equity securities
of Southwest Small Cap Companies, they will be invested in Temporary
Investments. See "Investment Objective and Policies -- Temporary Investments."
7
RISK FACTORS
INVESTORS SHOULD RECOGNIZE THAT AN INVESTMENT IN THE SHARES IS SUBJECT
TO NUMEROUS RISKS. THE RISKS THAT INVESTORS SHOULD TAKE INTO ACCOUNT INCLUDE THE
FOLLOWING:
NO PRIOR HISTORY; DISCOUNT FROM NET ASSET VALUE
The Fund is a newly organized company with no prior operating history.
Prior to this offering, there has been no public market for the Shares. Shares
of closed-end investment companies have in the past frequently traded at a
discount from their net asset values and initial offering price. This
characteristic of shares of a closed-end fund is a risk separate and distinct
from the risk that a fund's net asset value will decrease. The risk of loss
associated with purchasing shares of a closed-end investment company may be more
pronounced for investors who purchase in the initial public offering and who
expect to sell their shares in a relatively short period of time.
LONG-TERM INVESTMENT; NOT COMPLETE INVESTMENT PROGRAM
The Fund is designed for long-term investors and not as a trading
vehicle. An investment in shares of the Fund should not be considered a complete
investment program.
INVESTMENTS IN SMALL CAPITALIZATION COMPANIES
The equity securities in which the Fund will invest will be issued by
publicly traded small capitalization companies, which may have limited
financial, managerial or other resources and will be subject to numerous risks
not normally associated with securities issued by publicly traded companies with
larger market capitalizations. Typically, smaller publicly traded companies
depend for their success on the management talents and efforts of one person or
a small group of persons, and the death, disability or resignation of one or
more of these persons could have a material adverse impact on their company.
Moreover, they frequently have smaller product lines and market shares than
larger publicly traded companies. They also may be more vulnerable to economic
downturns and often need substantial capital to expand or compete. Small
capitalization companies typically pay small dividends, if any. Such companies
may also experience substantial variations in operating results. In addition,
many small capitalization public companies may not be well-known to the
investing public, may not have significant institutional ownership and may be
followed by relatively few securities analysts, if any, which could result in a
limited availability of information and chronic undervaluation. To the extent
securities of small capitalization publicly traded companies are traded in the
over-the-counter markets, their securities may have fewer market makers, wider
spread between quoted bid and asked prices and lower trading volumes, resulting
in comparatively greater price volatility and less liquidity than the securities
of public companies that have larger market capitalizations and/or that are
traded on the national stock exchanges. For these and other reasons, investments
in publicly traded small capitalization companies involve a high degree of risk.
INVESTMENTS IN SOUTHWEST COMPANIES
The Fund's assets, other than Temporary Investments, will be invested
in common equity securities of publicly traded companies headquartered in the
Southwest. Accordingly, the value of the Fund's assets may be adversely affected
by political and economic factors affecting the Southwest including matters
affecting U.S. relations with, or the economy of, Mexico. In addition, the
economy of the Southwest may differ favorably or unfavorably from the U.S.
economy in general. For example, characteristics such as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment and resource
self-sufficiency may differ. The energy industry and related industry sectors
occupy a more prominent position in the Southwest economy than in the United
States economy in general, and the Southwest economy therefore is more
susceptible to adverse changes in the prices, and the worldwide availability, of
crude oil and natural gas. In addition, since over one-half (62.8% as of
September 30, 1995) of all Southwest Small Cap Companies are headquartered in
Texas, factors especially affecting the Texas economy or companies located in
Texas may have a direct impact on the value of the Fund's investments.
8
INVESTMENTS IN EQUITY SECURITIES
The Fund's investments will be in common equity securities, except for
Temporary Investments. All equity securities are subject to price volatility,
potential bankruptcy of the issuer, general movements in markets, overall
economic conditions and perceptions of potential growth. The securities of small
capitalization, publicly traded companies are particularly susceptible to these
characteristics. Moreover, general market conditions may depress the value of
the Fund's investments, irrespective of economic conditions in the Southwest or
the fundamental operating characteristics of small capitalization, publicly
traded companies in which it invests.
DEPENDENCE ON MANAGEMENT
The Fund is dependent on the management of the Investment Manager,
particularly of John J. McKenna, its chief executive officer, and Robert D.
Harrell, its chief investment officer. The loss of the services of either of
these persons could, at least in the short term, have a material adverse effect
on the operations of the Fund. See "Management of the Fund."
NO PRIOR INVESTMENT RECORD AT MCKENNA MANAGEMENT COMPANY
Although the Chief Investment Officer of the Investment Manager, Robert
D. Harrell, has more than 26 years of prior investment management experience as
an institutional portfolio manager and chief investment officer, Mr. Harrell has
no prior investment record with the Investment Manager. The Investment Manager
was formed in 1990 but has in the past limited its business to investment
research and has not previously managed an investment fund.
ANTI-TAKEOVER PROVISIONS
The Fund's Certificate of Incorporation contains certain anti-takeover
provisions that may have the effect of inhibiting the Fund's possible conversion
to open-end status and limiting the ability of other persons to acquire control
of the Fund. In certain circumstances, these provisions might also inhibit a
sale of Shares at a premium over prevailing market prices, if such a premium
develops. The Fund's Board of Directors has determined that these provisions are
in the best interests of the stockholders generally. See "Capital
Stock -- Anti-takeover Provisions."
INVESTMENT OBJECTIVE AND POLICIES
INTRODUCTION
The investment objective of the Fund is to seek capital appreciation
for long-term investors by investing in the common equity securities of publicly
traded Southwest Small Cap Companies. This investment objective is fundamental
and may not be changed without the approval of a "majority of the Fund's
outstanding voting securities." See "Investment Restrictions." The investment
policy of the Fund will be, in general and except for Temporary Investments as
discussed below, (i) to have not less than one-half of its assets invested,
predominantly on an equal dollar weighted basis, in publicly traded common
equity securities of substantially all of the Southwest Small Cap Companies (the
"Southwest Market Portfolio") and (ii) to have the remainder of its assets
invested in publicly traded common equity securities of particular Southwest
Small Cap Companies selected by the Investment Manager (the "Southwest Value
Portfolio"). The investment policy set forth in the preceding sentence, as well
as certain other policies set forth below under "Investment Restrictions," are
fundamental and may not be changed without the approval of a "majority of the
Fund's outstanding voting securities." See "Investment Restrictions." The Fund
will be diversified in that it will not invest more than 5% of its total assets
in securities of any one Southwest Small Cap Company and will not, at the time
of investment, own more than 10% of the outstanding voting securities of any one
Southwest Small Cap Company. As used herein, the term "Portfolio" refers only to
a given segment of the Fund's assets invested according to a specified
investment strategy and not to a separate series of securities of the Fund. It
is not possible for an investor to make an investment in either the Southwest
9
Market Portfolio or the Southwest Value Portfolio; rather each investor will
invest in the Fund, and the Fund will divide its investments between the
Southwest Market Portfolio and the Southwest Value Portfolio.
The Fund's investment objective reflects the Investment Manager's
opinion that during the period from December 31, 1987 through September 30, 1995
a strategy of investing in common equity securities of Southwest Small Cap
Companies on a broad and diversified basis could have realized greater
investment returns than a strategy designed to track the performance of certain
broad market indexes, most particularly the S&P 500 and Russell 2000. This
opinion is based, in part, upon the Investment Manager's analysis of the
performance of the Southwest Index(TM).
See "The Southwest Index(TM)."
The Fund's investment objective also reflects the Investment Manager's
belief that the Southwest, as a region, has offered and will continue to offer a
more favorable business climate than other regions of the United States because
of a greater population growth rate, regulatory environments, taxation levels
and general business costs (such as lower labor costs), among other factors. See
" -- Selected Demographic and Other Characteristics of the Southwest Region and
Southwest Small Cap Companies."
Moreover, the investment objective of the Fund reflects the Investment
Manager's opinion that investments in companies with small capitalizations can
offer the potential to achieve returns that may be greater than investments in
securities of companies with large market capitalizations. According to STOCKS,
BONDS, BILLS AND INFLATION -- 1995 YEARBOOK, published by Ibbotson Associates,
the historical returns (i.e., 1926-1994) associated with "small company" stocks
exceeded those of "large company" stocks. For the purposes of that report "small
companies" were companies in the bottom 20% of market capitalization listed on
the New York Stock Exchange. As of September 30, 1994, New York Stock Exchange
listed companies in the bottom 20% of market capitalization had market
capitalizations of $144.3 million or less. The Investment Manager believes that,
while Ibbotson Associates' report does not necessarily represent the returns
associated with Southwest Small Cap Companies, it does suggest that investments
in the equities of smaller capitalization companies may provide greater returns
than investment in equities of larger capitalization companies.
SOUTHWEST SMALL CAP COMPANIES
Except for Temporary Investments, both the Southwest Market Portfolio
and the Southwest Value Portfolio will consist of common equity securities of
publicly traded Southwest Small Cap Companies. The criteria and process for
identifying a "Southwest Small Cap Company" for purposes of the Fund are
identical to those employed for compiling the Southwest Index(TM). See "The
Southwest Index(TM)."
The determination of whether a company is a "Southwest Small Cap
Company" is made by the Investment Manager as of the end of each calendar
quarter. Specifically, a "Southwest Small Cap Company" is defined as a publicly
traded company that the Investment Manager determines (i) was headquartered in
Texas, Colorado, Oklahoma, Louisiana, Arkansas or New Mexico as of the end of
the calendar quarter as to which such determination is made, and (ii) has or had
a common equity market value of between $10 million and $250 million as of the
end of any quarter ending on or after the later of the quarter ending December
31, 1987 or the quarter when such company became headquartered in the Southwest.
As of September 30, 1995, the common equity market capitalization of all 670
Southwest Small Cap Companies identified by the Investment Manager was
approximately $114 billion and the average common equity market capitalization
was approximately $170 million.
Once qualified as such, a company continues to be a Southwest Small Cap
Company as long as its headquarters remain in the Southwest and its common
equity securities continue to be publicly traded, even if the company's common
equity market value subsequently falls below $10 million or rises above $250
million. As of September 30, 1995, the Investment Manager had identified 670
Southwest Small Cap Companies, of which 118 had a common equity market value of
$250 million or more, 471 had a common equity market value between $10 million
and $250 million, and 81 had a common equity market value of $10 million or
less.
For these purposes, "common equity securities" includes shares of
common stock and, where applicable, other publicly traded common equity
securities such as units of master limited partnerships and royalty trusts that
10
are considered by the Investment Manager to be operating entities, and other
publicly traded units that, at the time of investment, include shares of common
stock as well as other securities such as warrants or rights. However, the term
"common equity securities" does not include securities of real estate investment
trusts, royalty trusts, investment companies, or other entities that the
Investment Manager considers not to be operating entities and does not include
convertible securities or warrants (unless they were included, at the time of
investment, in units with shares of common stock). If a company has more than
one class of publicly traded equity securities, the class of publicly traded
common equity securities that has the largest number of shares outstanding is
considered to be the common equity security for the purposes of identifying
Southwest Small Cap Companies.
An equity security is deemed "publicly traded" if it has a closing
price quoted by Standard & Poor's Compustat PC Plus (or such similar alternative
publicly available source or sources as the Investment Manager may choose to
use) as of the end of a quarter. "Market capitalization" or "market value" is
calculated for a company's publicly traded common equity securities, as of the
date of determination, by multiplying the number of shares or units outstanding
by that date's quoted closing price, in each case as indicated by such publicly
available source or sources chosen by the Investment Manager.
The Investment Manager determines whether the headquarters of a company
are located in the "Southwest" based on publicly available sources that the
Investment Manager deems reliable. Such determinations are made as of the end of
each calendar quarter.
If the Investment Manager determines that a company previously
designated as a Southwest Small Cap Company is no longer headquartered in the
Southwest as of the end of a calendar quarter, it will promptly liquidate,
subject to market conditions, the Fund's investments in the securities of that
company. Similarly, the common equity securities of a company become eligible
for purchase immediately after the end of any calendar quarter as of which the
Investment Manager determines that such company has become a Southwest Small Cap
Company (whether by relocation, initial public offering or otherwise).
SOUTHWEST MARKET PORTFOLIO
The Fund's investment objective and policies with respect to the
Southwest Market Portfolio reflect, in part, the Investment Manager's opinion
that, during the period from December 31, 1987 through September 30, 1995, a
strategy of investing in a broadly diversified portfolio of publicly traded
common equity securities issued by Southwest Small Cap Companies could have
achieved greater returns than a strategy designed to track certain broad market
indexes, most particularly the S&P 500 and the Russell 2000. This opinion of the
Investment Manager is based upon its analysis of the historical performance of
the Southwest Index(TM), which was developed by the Investment Manager to
measure the market performance of the publicly traded common equity securities
of the entire group of Southwest Small Cap Companies beginning December 31,
1987. See "The Southwest Index(TM)."
The Southwest Market Portfolio's performance is intended generally to
correspond to the performance of the common equity securities of the entire
group of publicly traded Southwest Small Cap Companies. Accordingly, the
investment strategy with respect to the Southwest Market Portfolio incorporates
design parameters of the Southwest Index(TM). Thus, the criteria and procedures
used to designate a company as a Southwest Small Cap Company for the purposes of
the Southwest Market Portfolio, and the Southwest Value Portfolio are identical
to those used to designate a Southwest Small Cap Company for the purposes of the
Southwest Index(TM). See "The Southwest Index(TM)."
The Fund's Southwest Market Portfolio investments will be made
predominately on an equal dollar weighted basis, in a manner similar to the
Southwest Index(TM). This means that investments will be made so that roughly
equal amounts of the Fund's Southwest Market Portfolio assets will be invested
initially in securities of each Southwest Small Cap Company and such investments
will be rebalanced on a quarterly basis to restore roughly equal dollar values
to the amounts invested in each company whose securities are held in the
portfolio. In rebalancing the Southwest Market Portfolio, the Investment Manager
will sell a portion of the securities included in the Southwest Market Portfolio
that have experienced relatively more favorable changes in market value during
the prior quarter and will purchase securities that have experienced relatively
less favorable changes in market value, so as
11
to maintain a roughly equal dollar amount invested in the equity securities of
each Southwest Small Cap Company. In addition, to offset capital gains
recognized for tax purposes because of such sales, the Investment Manager will
endeavor to sell equity securities, selected in its discretion, that have
experienced relatively less favorable changes in market value in order to
recognize losses. Such sales may be made in anticipation of the end of a year or
a quarter in order to recognize losses before the end of a tax year, even though
corresponding reallocation transactions might not occur until after the end of a
year or a quarter. The effect of the recognition of losses would be to reduce
taxable net income and taxable net realized capital gain that would be available
for distribution to holders of the Shares. However, the Investment Manager
believes that to the extent the Fund recognizes losses to offset gains in the
Southwest Market Portfolio, the Fund will more closely approximate actual
investment performance of the total Southwest Market Portfolio.
In making and liquidating investments for the Southwest Market
Portfolio, the Investment Manager may take into account market conditions and
other considerations in timing purchases and sales and allocating assets
realized from sales or used to make purchases. Purchases and sales will be made
at such times and in such quantities as the Investment Manager considers prudent
and in a manner that the Investment Manager determines to be calculated to
effect efficient execution in light of securities transaction costs; accordingly
purchases and sales may occur significantly after the end of a quarter. In order
to contain the Fund's securities transaction costs, the Investment Manager does
not currently expect to purchase or sell equity securities for the Southwest
Market Portfolio in less than round lots (multiples of 100 shares or units) and
intends to employ procedures to reduce the number (and related costs) of
quarterly transactions to the extent practicable. The Investment Manager
currently intends to structure its rebalancing transactions so that the dollar
investments in at least 90% of the companies whose securities are held as
Southwest Market Portfolio investments will be roughly equal. For this purpose,
the market values of investments in securities of different companies will be
considered "equal" if they are within 10% of the average market value of all
such investments or within the market value of one round lot of such securities,
whichever is greater. Rebalancing transactions will be based on market prices of
the respective securities as of the end of the preceding calendar quarter.
Quarterly rebalancings of the assets allocated to the Southwest Market
Portfolio will reflect not only changes in the market values of existing
investments, but also changes in the composition of the group of Southwest Small
Cap Companies (including additions or deletions because of initial public
offerings, cessations of public trading or movements of headquarters into or out
of the Southwest). These rebalancing transactions will also occur at such times
and in such quantities as the Investment Manager deems prudent. Quarterly
rebalancings of the Fund's Southwest Market Portfolio may result in increased
transaction costs to the Fund associated with the need for significant numbers
of securities transactions being conducted on a quarterly basis. In addition,
additional income tax liability may arise from gains recognized in the sale of
securities associated with such rebalancings. The Fund is permitted, but not
required, to sell securities and realize losses, to offset or partially offset
such gain and reduce such consequent tax liability.
In addition, the Investment Manager has the power (without the
obligation) to liquidate or reduce a particular investment included in the
Southwest Market Portfolio if, in its judgment, the market value, liquidity or
other relevant characteristics of such investment has been or will be adversely
affected by material events or conditions. Such material events or conditions
include, but are not limited to, the inability of the Investment Manager to
purchase common equity securities of any given Southwest Small Cap Company in
normal trading activities because the volume of trading or other factors
adversely affect the liquidity of the market for such securities, the bankruptcy
or insolvency of such company, or the Investment Manager's belief that the
integrity or competence of management of such company has been compromised. In
addition, the Investment Manager will have the discretion to exercise or convert
rights associated with particular securities and to tender such securities in
connection with tender or exchange offers regardless of whether such securities
continue to be publicly traded.
The Southwest Market Portfolio and Southwest Value Portfolio will be
rebalanced as between each other, as of the end of each quarter, so that
immediately after such rebalancing, not less than one-half of the Fund's net
asset value is allocated to the Southwest Market Portfolio. Consequently,
investment gains or losses in one portfolio may be expected to affect the
amounts available to be invested in the other portfolio. The Investment Manager
will have complete discretion as to the Southwest Value Portfolio equity
securities liquidated or acquired in connection
12
with any such rebalancings. See "Southwest Value Portfolio." Immediately after
any rebalancing, at least 50% of the Fund's assets will be invested in the
Southwest Market Portfolio.
Moreover, McKenna Securities Company, the Administrator or their
affiliates may act as underwriters or investment brokers on behalf of companies
that are, or will become, Southwest Small Cap Companies. If the 1940 Act would
prevent an investment or a sale by the Fund in connection with any quarterly
rebalancing by reason of such activities, the Investment Manager would endeavor
to make the investment and sale as soon as legally permitted to do so.
As a result of the exercise of any or all of the foregoing powers, the
actual performance of the Southwest Market Portfolio may be expected to differ
to some degree from the performance of the Southwest Index(TM). In any event,
however, the Investment Manager would not expect a perfect correlation between
the performance of the Southwest Market Portfolio and the Southwest Index(TM)
because of other factors, including the Fund's portfolio transaction costs, the
potential impact of the Fund's diversification requirements and the Fund's
expenses.
SOUTHWEST VALUE PORTFOLIO
In selecting investments for the Southwest Value Portfolio, the
Investment Manager will employ a value approach. Specifically, the Investment
Manager will seek to invest in equity securities of Southwest Small Cap
Companies that are, in its estimation, undervalued. The Investment Manager will
analyze fundamental worth by reference to a number of factors, including book
value, dividend yield, price/earnings ratios, revenues, and the level, direction
and quality of earnings. Attention will also be given to cash flows, sales
trends, debt levels, and the relationship between inventory and receivable
levels. The Investment Manager will have complete discretion in making decisions
to reduce or liquidate investments in the Southwest Value Portfolio, which
decisions may be based upon its opinions concerning trends affecting
characteristics of fundamental value, as well as market trends.
Under normal market conditions, the Investment Manager intends to
invest all of the assets allocated to the Southwest Value Portfolio in equity
securities of Southwest Small Cap Companies, subject to a reserve of a portion
(generally not exceeding 10% of the Fund's total assets under normal market
conditions) of such assets for investment in Temporary Investments. Under
certain adverse market or economic conditions, the Fund may invest a larger
percentage of its assets in Temporary Investments. See " -- Temporary
Investments". The Investment Manager will, however, have wide latitude to
increase the percentage of Southwest Value Portfolio assets allocated to
Temporary Investments when, in its judgment, market or other trends indicate
that it would be prudent to do so.
To the extent that the Fund's overall investment in a particular
company or industry must be limited or reduced to maintain the Fund's status as
a diversified investment company or to prevent industry concentration, the
Investment Manager will endeavor to reduce investments in equity securities
included in the Southwest Value Portfolio before doing so with respect to the
Southwest Market Portfolio.
THE SOUTHWEST INDEX(TM)
The Investment Manager developed the Southwest Index(TM) to measure the
performance of a presumed investment in the publicly traded common equity
securities of all Southwest Small Cap Companies, on an equal dollar weighted
basis, commencing December 31, 1987. The following is a summary of the design
parameters and performance of the Southwest Index(TM) and its performance in
comparison to the S&P 500 Index and the Russell 2000 Index through September 30,
1995.
The Southwest Index(TM) tracks the performance of "publicly traded"
"common equity securities" of "Southwest Small Cap Companies." Each of these
terms has been defined identically for purposes of creating both the Southwest
Index(TM) and the Fund's investment objective and policies. See "Investment
Objective and Policies -- Southwest Small Cap Companies" above.
13
At the beginning of each quarter, the total market value of the
Southwest Index(TM) as of the end of the preceding calendar quarter is assumed
to be reallocated into equal dollar amount investments in the publicly traded
common equity securities of all companies that are then Southwest Small Cap
Companies. As with other market indexes, investments are presumed to be made
without transaction costs. All dividends and distributions are presumed to be
reinvested.
The comparative performance of the S&P 500 Index, the Russell 2000
Index and the Southwest Index(TM) for the period December 31, 1987 through
September 30, 1995 is illustrated below:
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
<TABLE>
<CAPTION>
CUMULATIVE WEALTH RELATIVES 4Q87 1Q88 2Q88 3Q88 4Q88 1Q89 2Q89 3Q89
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500 $10,000 $10,569 $11,267 $11,303 $11,647 $12,486 $13,585 $15,039
RUSSELL 2000 $10,000 $11,805 $12,564 $12,381 $12,237 $13,112 $13,904 $14,799
SOUTHWEST INDEX $10,000 $11,913 $12,441 $12,025 $11,549 $13,193 $15,261 $16,351
<CAPTION>
CUMULATIVE WEALTH RELATIVES 4Q89 1Q90 2Q90 3Q90 4Q90 1Q91 2Q91 3Q91
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500 $15,343 $14,897 $15,821 $13,657 $14,875 $17,027 $16,990 $17,898
RUSSELL 2000 $13,977 $13,589 $14,044 $10,525 $10,978 $14,201 $13,919 $14,961
SOUTHWEST INDEX $15,862 $15,783 $15,856 $13,577 $12,394 $16,483 $16,907 $22,028
<CAPTION>
CUMULATIVE WEALTH RELATIVES 4Q91 1Q92 2Q92 3Q92 4Q92 1Q93 2Q93 3Q93
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500 $19,387 $18,899 $19,259 $19,866 $20,862 $21,770 $21,873 $22,436
RUSSELL 2000 $15,773 $16,915 $15,665 $16,021 $18,353 $19,034 $19,378 $21,006
SOUTHWEST INDEX $22,620 $27,687 $26,209 $27,882 $30,670 $34,237 $38,911 $42,976
<CAPTION>
CUMULATIVE WEALTH RELATIVES 4Q93 1Q94 2Q94 3Q94 4Q94 1Q95 2Q95 3Q95
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500 $22,956 $22,092 $22,135 $23,158 $22,986 $25,217 $27,565 $29,690
RUSSELL 2000 $21,474 $20,849 $19,954 $21,269 $20,791 $21,655 $23,553 $25,775
SOUTHWEST INDEX $42,687 $43,011 $40,716 $41,548 $38,184 $41,895 $47,114 $50,796
</TABLE>
- -------------------
(a) Indexes assume no transaction costs or other expenses. Past
performance is no guarantee of future results. Performance
shown is not a representation of Fund performance. For more
detailed information regarding these indexes, see "Investment
Objective and Policies" in the SAI.
The Investment Manager also compared measures of the volatility,
- -- i.e., the extent to which returns fluctuate from period to period, of the
assumed portfolio returns of the Southwest Index(TM) against those associated
with each of the S&P 500 and Russell 2000 Indexes. "Volatility" was computed by
determining the annualized standard deviation of quarterly returns for each of
the three indexes. The standard deviation of returns is one measure for
determining the volatility of a portfolio. It reflects, over a specified period,
the degree to which each quarter's returns vary from the portfolio's average
return.
In addition, the Investment Manager measured market risk of the indexes
by computing their "beta" factors. Beta is a measure of the sensitivity of a
portfolio's returns to broad movements in the market. For this purpose, the S&P
500 Index was used as a benchmark for the market. The market benchmark's beta
is, by definition, equal
14
to 1.0. Portfolios with betas exceeding 1.0 are more volatile than the assumed
market and those with betas less than 1.0 are less volatile than the assumed
market.
In measuring the movement of these indexes, the Investment Manager also
calculated the coefficient of correlation between the S&P 500 Index and each of
the Southwest Index(TM) and the Russell 2000 Index. The S&P 500 Index serves as
benchmark for the market in this calculation. When an index moves identically to
the S&P 500 Index, it has a correlation of 1.0; when it moves differently from
the S&P 500 Index, it has a correlation of less than 1.0. The S&P 500 Index, by
definition, has a correlation coefficient of 1.0. The Investment Manager
considers a lower correlation to the S&P 500 Index to be a desirable
characteristic for an investor who seeks to offset exposure to general market
fluctuations.
While, taken alone, none of these quantitative measures of risk can
serve as a substitute for complete analysis, they can provide additional
information about certain forms of risk in a portfolio when considered in
combination and with the portfolio's returns. However, risk measures change over
time and do not necessarily predict the portfolio's risk or returns.
The results of these measurements of such risks for the period from
December 31, 1987 to September 30, 1995 are set forth in the following table:
<TABLE>
<CAPTION>
INVESTMENT PERFORMANCE
DECEMBER 31, 1987 - SEPTEMBER 30, 1995(a)
SOUTHWEST INDEX(TM) RUSSELL 2000 S&P 500
------------------- ------------ -------
<S> <C> <C> <C>
Annualized Rate of Return 21.5% 12.4% 14.3%
Annualized Standard Deviation
of Quarterly Returns 22.1% 18.1% 10.8%
Beta 1.03 1.31 1.00
Coefficient of Correlation 0.51 0.78 1.00
</TABLE>
--------------------
(a) Indexes assume no transaction costs or other expenses. Past
performance is no guarantee of future results. Performance
shown is not a representation of Fund performance. For more
detailed information regarding these indexes, see "Investment
Objective and Policies" in the SAI.
As shown by the table above, the Southwest Index(TM) has an annualized
rate of return and a standard deviation higher than the S&P 500 Index and the
Russell 2000 Index. The higher standard deviation indicates that the Southwest
Index(TM) has a higher level of volatility than the S&P 500 Index and the
Russell 2000 Index. However, the Southwest Index(TM) has a beta that is 1.03,
which is approximately equal to average market risk, while the Russell 2000
Index has a beta of 1.31 relative to the S&P 500 Index. The comparatively low
level of market risk reflected in the Southwest Index(TM) is considered by the
Investment Manager to be a desirable characteristic for a portfolio of
investments in small capitalization companies. The Investment Manager considers
the low correlation coefficient of the Southwest Index(TM) to indicate that an
investment in the Southwest Index(TM), in combination with other portfolios,
would be effective in offsetting exposure to general market fluctuations. The
Investment Manager also believes that the superior return of the Southwest
Index(TM) may be attributable to (i) the equal dollar weighted basis for
portfolio allocation, (ii) the assumed quarterly rebalancing, (iii) the
historical premium return of small capitalization companies, and (iv) the
attributes of the six-state Southwest region.
The performance results depicted above are designed only to illustrate
the performance of the Southwest Index(TM) compared to the S&P 500 Index and the
Russell 2000 Index during the indicated period. Although there are other equity
market indexes, including the Wilshire 5000 Equity Index, the Russell Midcap
Index, and the S&P Midcap 400 Index, among others, the Investment Manager has
elected to compare the Southwest Index(TM) to the S&P 500 Index because it is
widely regarded as a measure of the total equity market performance in the
United States
15
and to the Russell 2000 Index because it is widely regarded as a measure of
performance of the equities of small capitalization U.S. companies. Any or all
of these market indexes may have outperformed and may outperform the Southwest
Index(TM) over a given period of time.
Each index has different design characteristics which may affect
reported or reflected performance. For example, in contrast with the S&P 500
Index and the Russell 2000 Index, which are market capitalization based indexes,
the Southwest Index(TM) is an equal dollar weighted index. In other words, while
a hypothetical investment based on the S&P 500 Index or the Russell 2000 Index
would be made according to the relative market capitalization of the companies
included within such indexes, the Southwest Index(TM) assumes an equal dollar
investment in the common equity securities of each Southwest Small Cap Company.
For a description of certain other differences in the methods used to compute
the S&P 500 Index, the Russell 2000 Index and the Southwest Index(TM), see
"Investment Policy and Objectives" in the SAI.
Neither Standard & Poor's Corporation, publisher of the S&P 500 Index,
nor Frank Russell Company ("Russell"), publisher of the Russell 2000 Index,
guarantees the accuracy and/or the completeness of the S&P 500 Index or the
Russell 2000 Index, respectively, or any data included therein, and neither of
them has any obligation to take the needs of the Fund or the holders of the
Shares into consideration in determining, composing or calculating the S&P 500
Index or the Russell 2000 Index, respectively. Neither Standard & Poor's
Corporation nor Russell have made any warranty, express or implied, as to
results to be obtained by the Fund, and neither Standard & Poor's Corporation
nor Russell shall have any other liability for the use of the S&P 500 Index or
the Russell 2000 Index or any data included therein.
TEMPORARY INVESTMENTS
Fund assets not invested in common equity securities of Southwest Small
Cap Companies in accordance with the Fund's investment objective and policies
will be invested in Temporary Investments (as defined below).
Temporary Investments are defined as cash, demand deposits and debt
securities denominated in U.S. dollars and similar or equivalent securities
including: (i) short-term (less than 12 months to maturity) obligations issued
or guaranteed by the U.S. government, state governments of the six Southwest
states, or their respective agencies or instrumentalities; (ii) finance company
obligations, corporate commercial paper and other short-term commercial
obligations, in each case rated, or issued by companies with similar securities
outstanding that are rated, Prime-1 or A or better by Moody's Investors Service,
Inc., or A-1 or A or better by S&P or, if unrated, of comparable quality as
determined by the Investment Manager; (iii) obligations and securities
(including certificates of deposit, time deposits and bankers' acceptances) of
banks, subject to the restriction that the Fund may not invest more than 25% of
its total assets in obligations and securities of banks (exclusive of demand
deposits); (iv) repurchase agreements with respect to obligations and securities
in which the Fund may invest; and (v) money market funds to the extent such
investments are permitted by the 1940 Act.
The banks in which deposits by the Fund may be made, as to which
obligations and securities may be purchased by the Fund and with which the Fund
may enter into repurchase agreements include any U.S. bank that is a member of
the Federal Reserve System and any foreign bank that has been determined by the
Investment Manager to be creditworthy. Repurchase agreements are contracts
pursuant to which the seller of a security agrees at the time of sale to
repurchase the security at an agreed upon price and date. When the Fund enters
into a repurchase agreement, the seller will be required to maintain the value
of the securities subject to the repurchase agreement, marked to market daily,
at not less than their repurchase price. Repurchase agreements may involve risks
in the event of insolvency or other default by the seller, including possible
delays or restrictions upon the Fund's ability to dispose of the underlying
securities.
When certain adverse market, economic, political or other circumstances
require immediate action to avoid losses, the Fund may adopt a "temporary
defensive position", which may require the Fund to deviate temporarily from its
investment policies, which may involve investing a larger portion of the Fund's
assets in Temporary Investments, without a stockholder vote and without prior or
contemporaneous notification to stockholders during exigent situations. The Fund
will deviate from its investment policies in adopting such a temporary defensive
16
position only under abnormal market or economic situations and, while in such a
temporary defensive position, will invest in securities that the Fund and
Investment Manager believe appropriate under such circumstances. Such a
temporary defensive position may require investment in such Temporary
Investments of up to 100% of the Fund's assets.
SELECTED DEMOGRAPHIC AND OTHER CHARACTERISTICS OF THE
SOUTHWEST REGION AND SOUTHWEST SMALL CAP COMPANIES
The Fund's investment objective reflects, in part, the Investment
Manager's belief that the Southwest, as a region, offers a more favorable
business climate than other regions of the United States because of a greater
population growth rate, regulatory environments and general business costs
(e.g., lower labor costs), among other factors. Because of these and other
factors, the Investment Manager believes that the economy of the Southwest
should grow over the next ten years at a greater rate than the overall U.S.
economy. In addition, the Investment Manager believes that investments in common
equity securities of small capitalization companies will offer the potential to
achieve returns that may be greater than investments in companies with large
market capitalizations. However, no assurance can be given that the Fund's
investment objective will be realized.
SOUTHWEST REGION. The Investment Manager believes that moderate
climate, geographic location, generally lower state and local income taxes and
modern infrastructure have generally led to positive population growth in the
Southwest compared to the United States as a whole. The following table shows
the growth in regional population for the periods 1970-1994 and 1993-1994 and
reflects that the population of the Southwest has been growing at about twice
the rate for the rest of the United States during both periods.
<TABLE>
<CAPTION>
POPULATION GROWTH(a)
1994
POPULATION
ESTIMATE GROWTH GROWTH
(IN THOUSANDS) 1970-1994 1993-1994
-------------- --------- ---------
<S> <C> <C> <C>
Arkansas 2,453 27.6% 1.1%
Colorado 3,656 65.4% 2.6%
Louisiana 4,315 18.4% 0.6%
New Mexico 1,654 62.6% 2.4%
Oklahoma 3,258 27.3% 0.8%
Texas 18,378 64.1% 2.0%
Southwest 33,714 49.5% 1.7%
Balance U.S. 226,627 25.4% 0.8%
Total U.S. 260,341 28.1% 0.9%
</TABLE>
--------------------
(a) Source: Population Distribution Branch, U.S. Bureau of the
Census.
17
As reflected in the following table, the average annual labor costs in
the Southwest during 1991 and 1992 was 6.62% and 7.24%, respectively, lower than
average annual compensation in the entire United States and the rate of growth
for such two years was 13.46% lower than the total rate for the rest of the
United States.
<TABLE>
<CAPTION>
COMPENSATION(a)
1991 1992 GROWTH
---- ---- ------
<S> <C> <C> <C>
Arkansas $19,008 $20,108 5.8%
Colorado $23,981 $25,040 4.4%
Louisiana $21,503 $22,340 3.9%
New Mexico $20,272 $21,051 3.8%
Oklahoma $20,968 $21,699 3.5%
Texas $23,760 $25,080 5.6%
Southwest $21,582 $22,553 4.5%
Balance U.S. $23,317 $24,548 5.3%
Total U.S. $23,113 $24,314 5.2%
</TABLE>
--------------------
(a) Source: U.S. Bureau of Labor Statistics. Cited in STATISTICAL
ABSTRACT OF THE UNITED STATES, 1994. Table No. 663.
Compensation is "average annual pay" including bonuses, cash
value of meals and lodging and tips and other gratuities. The
data excludes most agricultural workers on small farms,
members of the armed forces, elected officials in most states,
railroad employees, most domestic workers, employees of
certain non-profit entities, and most self-employed
individuals.
The following table compares the average stated corporate income tax
rates in the Southwest states versus the remainder of the United States. It
reflects that the average rate for the six state region is approximately 8.7%
below the national average while only two of the states have higher rates.
CORPORATE TAX RATES 1995(a)
Arkansas 6.5%
Colorado 5.0%
Louisiana 8.0%
New Mexico 6.0%
Oklahoma 7.6%
Texas (Franchise Tax) 4.5%
Southwest 6.3%
Balance of U.S. 7.0%
Total U.S. 6.9%
--------------------
(a) Source: ALL STATES TAX GUIDE, New York: Research Institute of
America, as of July 1995.
In 1994, the Southwest accounted for approximately 80% of the U.S.
domestic supply of natural gas, 50% of domestic crude oil production and 76% of
domestic drilling activity, according to data published by OIL & GAS JOURNAL.
The Investment Manager believes that, as the United States becomes more
dependent on foreign energy sources, the Southwest may experience a competitive
advantage in the production and distribution of energy versus other regions in
the United States.
The Investment Manager believes that the combination of population
growth, lower labor costs, lower corporate tax rates and energy self-sufficiency
in the Southwest region, together with other factors, creates a more attractive
business climate in the Southwest than other regions in the United States.
18
<PAGE>
SOUTHWEST SMALL CAP COMPANIES. The following table shows, as of
September 30, 1995, the distribution of the headquarters of Southwest Small Cap
Companies by state and reflects that Texas, in addition to having a majority of
the population in the Southwest, is headquarters for a majority of Southwest
Small Cap Companies.
DISTRIBUTION OF SOUTHWEST SMALL CAP COMPANIES BY STATE(a)
COMMON EQUITY PERCENTAGE OF PERCENTAGE OF
MARKET VALUE MARKET VALUE NUMBER OF NUMERICAL
($ BILLIONS) DISTRIBUTION COMPANIES DISTRIBUTION
------------- ------------- --------- -------------
Texas ....... $ 79.46 69.6% 421 62.8%
Colorado .... 11.80 10.3% 135 20.1%
Louisiana ... 8.85 7.7% 40 6.0%
Oklahoma .... 5.71 5.0% 44 6.6%
New Mexico .. 4.40 3.9% 11 1.6%
Arkansas .... 4.01 3.5% 19 2.8%
------- ------ --- ------
$ 114.24 100.0% 670 100.0%
- --------------------
(a) Information for this table was derived by the Investment Manager
from Standard & Poor's Compustat PC Plus, company filings with the
Securities and Exchange Commission and other public data sources.
The Southwest's economy is diversified. As of September 30, 1995, the
industry diversification of Southwest Small Cap Companies was as follows:
INDUSTRY DISTRIBUTION OF SOUTHWEST SMALL CAP COMPANIES(a)
<TABLE>
<CAPTION>
INDUSTRY MARKET VALUE PERCENTAGE NUMBER OF PERCENTAGE
SECTOR ($ IN BILLIONS) DISTRIBUTION COMPANIES DISTRIBUTION
- ------ --------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Engineering & Technology ............................ $ 16.81 14.7% 62 9.3%
Oil & Gas ........................................... 16.34 14.3% 99 14.8%
Machinery & Equipment ............................... 14.61 12.8% 59 8.8%
Financial Services .................................. 11.23 9.8% 67 10.0%
Services ............................................ 9.14 8.0% 60 9.0%
Energy Services ..................................... 8.50 7.4% 30 4.5%
Transportation ...................................... 5.80 5.1% 23 3.4%
Retail Trade ........................................ 5.50 4.8% 54 8.1%
Misc. Manufacturing ................................. 5.16 4.5% 37 5.5%
Natural Gas Transmission ............................ 4.45 3.9% 11 1.6%
Wholesale Trade ..................................... 3.50 3.1% 41 6.1%
Chemical & Mining ................................... 3.33 2.9% 28 4.2%
Medical/Health Services ............................. 3.28 2.9% 42 6.3%
Other ............................................... 3.15 2.8% 36 5.4%
Communications ...................................... 2.42 2.1% 9 1.3%
Construction ........................................ 0.79 0.7% 10 1.5%
Utilities ........................................... 0.22 0.2% 2 0.3%
----- ---- -- ---
$ 114.24 100.00% 670 100.0%
</TABLE>
- --------------------
(a) All data derived from Standard & Poor's Compustat PC Plus. Industry
classifications have been assigned on the basis of Standard Industrial
Classification Codes (SICs). See "Investment Objectives and Policies"
in the SAI for additional data.
19
INVESTMENT RESTRICTIONS
The investment objective of the Fund and the investment policies of the
Fund (to the extent set forth in "Investment Objective and
Policies -- Introduction"), as well as the restrictions set forth below, are
fundamental and may not be changed without approval of the holders of a
"majority of the Fund's outstanding voting securities" (as defined below). The
Fund may not:
i. issue any senior securities except preferred stock authorized
to be issued by the Fund;
ii. purchase securities on margin (but the Fund may obtain such
short term credit as may be necessary for the clearance of
transactions);
iii. sell securities short;
iv. borrow money, except for commercial loans for temporary
purposes in amounts not exceeding 10% of the Fund's total
assets;
v. underwrite the securities of other issuers;
vi. invest in any securities other than common equity securities
of Southwest Small Cap Companies and Temporary Investments;
vii. acquire common equity securities of any one Southwest Small
Cap Company if, at the time of and after giving effect to such
acquisition, (i) the Fund would own more than 10% of the
voting securities of such issuer or (ii) more than 5% of the
Fund's total assets would be invested in the securities of
such issuer;
viii. invest more than 25% of the Fund's total assets in the common
equity securities of Southwest Small Cap Companies that are
engaged in any one industry;
ix. purchase or sell real estate;
x. purchase or sell commodities, commodity contracts, futures
contracts or related options;
xi. invest in companies for the purpose of exercising control of
management;
xii. invest in the securities of any other registered investment
company except money market funds to the extent permitted by
the 1940 Act;
xiii. invest in securities that are "restricted securities" within
the meaning of Rule 144 as promulgated by the Securities and
Exchange Commission under the Securities Act of 1933; or
xiv. lend money or purchase or sell loans (including real estate
mortgage loans).
No policies or restrictions other than those described or referred to
in the preceding paragraph are fundamental, and any or all such other policies
and restrictions may be adopted, repealed or changed at any time and from time
to time by the Board of Directors of the Fund without stockholder approval or
prior notice to stockholders.
As used in this Prospectus, a "majority of the Fund's outstanding
voting securities" means the lesser of (i) 67% or more of the shares of the Fund
entitled to vote are present or represented at a stockholders meeting at which
the holders of more than 50% of the shares entitled to vote are present or
represented or (ii) more than 50% of the outstanding shares of the Fund.
20
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The names of the principal officers and directors of the Fund are set
forth below, together with their positions and their principal occupations
during the past five years and, in the case of the directors, their positions
with certain other organizations and publicly held companies.
NAME AND ADDRESS AGE POSITION
---------------------------- --- ------------------------------------
John J. McKenna (*) 46 Chairman of the Board and President
McKenna & Company
909 Fannin, Suite 1600
Houston, Texas 77010
Robert D. Harrell(*)(**) 63 Director
McKenna & Company
909 Fannin, Suite 1600
Houston, Texas 77010
Thomas D. Barrow, Ph.D.(+) 71 Director
5847 San Felipe, Suite 3830
Houston, Texas 77057
E. Glenn Biggs(*) 62 Director
Biggs & Company
300 Convent, Suite 1350
San Antonio, Texas 78205
Norman T. Reynolds(+) 55 Director
1021 Main, Suite 1100
Houston, Texas 77002
Lynne P. Hohlfeld 35 Secretary and Treasurer
McKenna & Company
909 Fannin, Suite 1600
Houston, Texas 77010
John F. Splain 39 Assistant Secretary
MGF Service Corp.
312 Walnut Street
Cincinatti, Ohio 45205
(*) Director who0is an "interested person" of the Fund within the meaning
of the 1940 Act.
(**) Mr. Harrell is the Chief Investment Officer of the Investment Manager.
(+) Director who is not an "interested person" of the Fund within the
meaning of the 1940 Act.
JOHN J. MCKENNA is Chairman of the Board and President of the Fund. Mr.
McKenna has been Chairman of the Board and Chief Executive Officer of McKenna &
Company since its formation in October 1989. He also serves as Chairman of the
Board and Chief Executive Officer of the Fund, the Investment Manager and
McKenna Securities Company. From June 1986 until September 1989, Mr. McKenna was
Managing Director and head of the Houston Investment Banking Office of Shearson
Lehman Brothers. From November 1981 until June 1986, Mr. McKenna was with Dean
Witter Reynolds Inc. as head of their independent oil and gas business in the
Southwest Region. From 1971 to 1981 Mr. McKenna was with Citibank, N.A. in New
York, New York. Mr. McKenna is a member of the Board of Directors of Proler
International Corp. (NYSE: PS).
21
ROBERT D. HARRELL is a director of the Fund. Mr. Harrell is currently a
Managing Director of McKenna & Company and is Chief Investment Officer of
McKenna Management Company. From September 1993 until August 1995, Mr. Harrell
was Director of Investment Advisory Services for Arneson Kercheville Ehrenberg &
Associates, a regional brokerage firm located in San Antonio. In January 1986,
Mr. Harrell founded Benchmark Asset Management, Inc. ("Benchmark") in Houston.
Benchmark had $150 million in funds under management in August 1992 when it was
sold to Acorn Asset Management, Inc., where Mr. Harrell was employed until
August 1993. Prior to founding Benchmark, Mr. Harrell was Senior Vice President,
Chief Operating Officer and Chief Investment Officer of American Capital
Advisors from 1982 to 1986. Before that, he was Executive Vice President of
Investment Advisors, Inc., where he worked from 1972 to 1982, and was portfolio
manager of Industries Trend Fund at Funds, Inc. from 1969 to 1972.
THOMAS D. BARROW, PH.D. is a director of the Fund. Dr. Barrow joined
Humble Oil and Refining in 1951 as a geologist and became a Director of the
company in 1965 and its President in 1970. In 1972, he was elected Senior Vice
President of Exxon Corporation and a member of its board of directors. In this
role, he was responsible for Exxon Research and Engineering Company, Esso
Production Research Company and the worldwide exploration and production
activities, among other responsibilities. He retired from Exxon Corporation in
1978. In 1978 he was elected Chairman and CEO of Kennecott Copper Corporation.
At the time of Kennecott's acquisition by Standard Oil Company (Ohio) ("Sohio")
in 1981, he was elected Vice Chairman of Sohio. Dr. Barrow currently serves as
Director of McDermott International, Inc. (NYSE: MDL), Chairman of GX
Technology, Senior Chairman of Geoquest International Holdings, as well as Vice
Chairman of Baylor College of Medicine and Director and member of the Executive
Committee of the Texas Medical Center and Houston Grand Opera. Previously he has
served as a member of the Board of Directors of Texas Commerce Bancshares,
American General Insurance Company, Cameron Iron Works and the Houston Chamber
of Commerce.
E. GLENN BIGGS is a director of the Fund. Mr. Biggs is currently
President of Biggs & Company, a San Antonio-based consulting firm. From December
1990 to January 1994, he was Chairman and CEO of Texas TGV Corporation which was
the project company formed to develop a high speed rail system in Texas. Mr.
Biggs is currently a Director of Diamond Shamrock Inc. (NYSE: DRM); Director of
Central and Southwest Corporation (NYSE: CSR); Director of Southwestern Bancorp,
Inc.; Former Chairman of the Board of Regents, Baylor University; Former
Trustee, Baylor Medical Center and an Advisory Director of Beacon Group, Inc.
Mr. Biggs may be deemed to be an "interested person" of the Fund by reason of
his ownership of units of limited partner interest in McKenna & Company I, L.P.,
which is the parent of McKenna Management Company and of McKenna Securities
Company.
NORMAN T. REYNOLDS is a director of the Fund. Mr. Reynolds is an
attorney in Houston specializing in securities and corporate law. His clients
include a number of small and medium sized companies. Mr. Reynolds has
maintained a private practice since 1971. Prior to 1971 he was with the firm of
Philip Masquelette and with Butler & Binion.
LYNNE P. HOHLFELD is the Secretary and Treasurer of the Fund. Since
1990, she has been Controller of McKenna & Company. She will be responsible for
investor reports, administration and accounting functions of the Fund. From 1982
to 1984, she was with Arthur Andersen & Co. and from 1984 to 1990, with Dixie
Chemical Company, Inc. She is a certified public accountant.
JOHN F. SPLAIN is Assistant Secretary of the Fund. Mr. Splain is also
Secretary and General Counsel of MGF Service Corp., Midwest Group Financial
Services, Inc. and Leshner Financial, Inc. He is also Secretary of Midwest
Income Trust; Midwest Group Tax Free Trust; Midwest Strategic Trust; Brundage,
Story and Rose Investment Trust; Leeb Personal Finance Investment Trust; The
Tuscarora Investment Trust and Williamsburg Investment Trust; and Assistant
Secretary of Schwartz Investment Trust and Fremont Mutual Funds, Inc. (all of
which are registered investment companies).
All Directors other than directors who are also officers of the Fund
will be paid a fee of $10,000 per year, plus up to $1,000 for every meeting of
the Board attended. All Directors will be reimbursed for travel and
out-of-pocket expenses incurred in connection with meetings of the Board of
Directors.
22
The officers of the Fund conduct and supervise the daily business
operations of the Fund, while the Directors, in addition to their functions set
forth elsewhere under "Management of the Fund," review such actions, decide on
general policy and review potential conflicts of interest.
The Fund's Board of Directors has an Executive Committee, which may
exercise the powers of the Board to conduct the current and ordinary business of
the Fund while the Board is not in session. The Fund also has an Audit
Committee, composed of Mr. Reynolds (Chairman) and Dr. Barrow, and an Investment
Committee, composed of Mr. Harrell (Chairman), Mr. McKenna and Mr. Biggs.
The Board of Directors has been divided into three classes, having
initial terms of one, two and three years, respectively. Commencing with the
first annual meeting of stockholders in 1996, at each annual meeting of
stockholders the term of one class will expire and directors will be elected to
serve in that class for terms of three years. The expirations of the initial
terms of office of the Fund's directors are as follows: at the 1996 annual
meeting, Mr. Harrell and Dr. Barrow; at the 1997 annual meeting, Mr. Biggs and
Mr. Reynolds; at the 1998 annual meeting, Mr. McKenna. In the event that the
number of directors were to be increased or decreased, the number of directors
subject to election at each annual meeting would be subject to adjustment by the
Board of Directors in accordance with applicable law.
The Certificate of Incorporation and By-Laws of the Fund provide that
the Fund will indemnify its directors and officers and may indemnify employees
or agents of the Fund against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Fund to the fullest extent permitted by law. In addition, the Fund's Certificate
of Incorporation provides that the Fund's directors and officers will not be
liable to stockholders for money damages, except in limited instances. However
nothing in the Certificate of Incorporation or By-laws of the Fund protects or
indemnifies a director, officer, employee or agent against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
INVESTMENT MANAGER
The Investment Manager is McKenna Management Company, which is a
registered investment adviser under the Investment Advisers Act of 1940.
Pursuant to a management agreement (the "Management Agreement") between the Fund
and the Investment Manager, the Investment Manager will provide investment
management services to the Fund. Pursuant to the Management Agreement, the
Investment Manager will be responsible on a day-to-day basis for investing the
Fund's portfolio in accordance with its investment objective and policies and
subject to any directions that it may receive from the Board of Directors of the
Fund, which will periodically review investments included in the Southwest
Market Portfolio and Southwest Value Portfolio. The Investment Manager will have
discretion over investment decisions for the Fund and, in that connection, will
initiate purchase and sale orders for the Fund's portfolio securities. The
Investment Manager will also provide investment advisory research and
statistical services to the Fund. The Investment Manager will pay the reasonable
salaries and expenses of such of the Fund's officers and employees and any fees
and expenses of such of the Fund's directors who are directors, officers or
employees of the Investment Manager, except that the Fund will bear travel
expenses or an appropriate portion thereof of directors and officers of the Fund
who are directors, officers or employees of the Investment Manager to the extent
that such expenses relate to attendance at meetings of the Board of Directors or
any committees thereof.
Management of the Fund's assets by the Investment Manager will be under
the supervision of the Investment Manager's senior officers, most particularly
John J. McKenna and Robert D. Harrell, both of whom are officers and directors
of the Fund. See "Management of the Fund -- Officers and Directors."
As compensation for its services, the Investment Manager will receive
from the Fund monthly fees at an annual rate of 1.00% of the Fund's Average Net
Assets as determined for such calendar month. The Investment Manager will
determine the "Average Net Assets" of the Fund for each calendar month by
computing the arithmetic average of the Fund's net assets as of each of the
dates during such month that such net assets are computed. See "Net Asset Value"
in the SAI.
23
The Fund will pay or cause to be paid all of its expenses, except for the
expenses borne by the Investment Manager pursuant to the Management Agreement.
Expenses to be paid by the Fund include, among others, organizational and
offering expenses (which will include out-of-pocket expenses, but not overhead
or employee costs, of the Investment Manager); expenses for legal, accounting
and auditing services; federal, state and local taxes and governmental fees;
dues and expenses incurred in connection with membership in investment company
organizations; fees and expenses incurred in connection with listing the Fund's
shares on any stock exchange; costs of printing and distributing stockholder
reports, proxy materials, prospectuses, stock certificates and distributions of
dividends; charges of the Fund's custodians, sub-custodians, registrars,
transfer agents, dividend disbursing agents and dividend reinvestment plan
agents; payment for portfolio pricing services to a pricing agent, if any;
registration and filing fees of the SEC; expenses of registering or qualifying
securities of the Fund for sale in the various states; freight and other charges
in connection with the shipment of the Fund's portfolio securities; fees and
expenses of non-interested directors; costs associated with stockholder
relations functions; costs of stockholders meetings; insurance including officer
and director insurance; interest; brokerage costs; and litigation and other
extraordinary or nonrecurring expenses. The Fund anticipates that, in connection
with the execution of portfolio transactions on the Fund's behalf, certain
affiliated persons of the Investment Manager, may from time to time be selected
to perform brokerage services for the Fund and that such persons will receive
brokerage fees and commissions for performing such services.
Unless earlier terminated as described below, the Management Agreement
will remain in effect for two years after its execution, and from year to year
thereafter if approved annually (i) by a majority of the non-interested
directors of the Fund and (ii) by the Board of Directors of the Fund or by a
majority of the outstanding voting securities of the Fund. The Management
Agreement may be terminated without penalty by the Fund's Board of Directors or
by vote of a majority of the outstanding voting securities of the Fund or upon
60 days' written notice by the Investment Manager and will terminate in the
event it is "assigned" (as defined in the 1940 Act).
The services of the Investment Manager are not deemed to be exclusive,
and nothing in the relevant service agreements will prevent it or its affiliates
from providing similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those of
the Fund) or from engaging in other activities.
If, with respect to any of the years ending December 31, 1995, 1996 or
1997, the total expenses of the Fund incurred by, or allocated to, the Fund with
respect to any such year (excluding the expenses incurred or paid in connection
with this offering, brokerage commissions and other portfolio transaction
expenses, taxes, interest, expenditures that are capitalized in accordance with
generally accepted accounting principles and extraordinary expenses) exceed 2%
of net assets as of the end of such year, the Investment Manager and the
Administrator will, to the extent of such excess and on a pro rata basis, waive
their Management Fees and their Administration Fees, respectively, payable for
such year or reimburse the Fund (but any reimbursement will not exceed fees
paid).
ADMINISTRATION
McKenna & Company I, L.P. (the "Administrator") will serve as the
Fund's administrator pursuant to an Administration Agreement with the Fund (the
"Administration Agreement"). McKenna & Company I, L.P. is an affiliate of the
Investment Manager. As compensation for its services, the Administrator will
receive from the Fund monthly fees at an annual rate of .50% of the Fund's
Average Net Assets for such calendar month, subject to the limitation on fees
for 1995, 1996 and 1997 described in the last paragraph of " -- Investment
Manager". The Administrator may be contacted c/o MGF Service Corp., 312 Walnut
Street, Cincinnati, Ohio 45202.
The Administrator will perform various administrative services for the
Fund, including providing the Fund with the services of persons to perform
administrative and clerical functions, maintenance of the Fund's books and
records, preparation of various filings, reports, statements and returns filed
with government authorities, and preparation of financial information for the
Fund's proxy statements and semiannual and annual reports to stockholders. The
Administrator will subcontract certain of these services to MGF Service Corp.,
an experienced mutual fund service company. In connection with its services as
sub-administrator, MGF Service Corp. will be paid an administrative fee by the
Investment Manager (not the Fund) equal to the annual rate of .25% of the
average weekly value of the Fund's assets up to a value of $100 million, and at
the annual rate of .2% of such assets in
24
excess of $100 million; provided however, that the minimum monthly fee shall be
$6,000. MGF Service Corp., 312 Walnut Street, Cincinnati, Ohio 45202, is a
subsidiary of Leshner Financial, Inc., of which Robert H. Leshner is the
controlling stockholder.
CUSTODIAN/TRANSFER AGENT
Star Bank, N.A. will act as custodian for the Fund's assets and may
employ sub-custodians approved by the Board of Directors of the Fund in
accordance with the 1940 Act. Star Bank, N.A. will act as the transfer agent,
dividend paying agent and registrar for the Fund's Common Stock and as Plan
Agent under the Fund's Dividend Reinvestment Plan. Star Bank, N.A. is located at
425 Walnut Street, Cincinnati, Ohio 45201. It is a subsidiary of Star Banc
Corporation.
CAPITAL STOCK
CAPITALIZATION
The authorized capital stock of the Fund is 15,000,000 shares of Common
Stock ($.001 par value per share) and 1,000,000 shares of Preferred Stock ($.01
par value per share).
The shares of Common Stock outstanding prior to the date of this
Prospectus are, and the Shares, when issued, will be, fully paid and
nonassessable. All shares of Common Stock have equal dividends, distributions
and voting privileges. There are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of Common Stock is entitled to
its proportion of the Fund's assets after debts and expenses. There are no
cumulative voting rights for the election of directors. Prior to the offering,
McKenna & Company I, L.P., will own all of the outstanding shares of Common
Stock of the Fund and, consequently, will be the controlling person of the Fund
until the shares offered hereby are issued and sold.
The Fund has no present intention of offering additional shares of its
Common Stock other than as provided in the Dividend Reinvestment Plan. Other
offerings of its Common Stock, if made, will require approval of the Fund's
Board of Directors. Any additional offering will be subject to the requirements
of the 1940 Act that shares of Common Stock may not be sold at a price below the
then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing stockholders or
with the consent of a majority of the Fund's outstanding Common Stock. The Board
of Directors has authorized the officers of the Fund in their discretion,
subject to compliance with the 1940 Act and other applicable law, to purchase in
the open market up to 5% of the outstanding Common Stock in the event that the
Common Stock trades at a discount to net asset value. There is no assurance that
any such open market purchases will be made and such authorization may be
terminated at any time.
The Fund's Certificate of Incorporation authorizes the issuance of
Preferred Stock and provides that the Board of Directors may issue any unissued
shares of Preferred Stock in one or more classes or series, with rights and
preferences as determined by the Board of Directors, by action by the Board of
Directors without the approval of the holders of Common Stock. Holders of Common
Stock have no preemptive right to purchase any shares of Preferred Stock that
might be issued. The terms of any Preferred Stock, including its dividend rate,
liquidation preference and redemption provisions will be determined by the Board
of Directors (subject to applicable law and the Fund's Certificate of
Incorporation). The Fund has no present intention of offering or issuing shares
of Preferred Stock.
ANTI-TAKEOVER PROVISIONS
The Fund presently has provisions in its Certificate of Incorporation
and By-Laws (commonly referred to as "anti-takeover" provisions) that may have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions or to modify
its structure. The affirmative vote of at least 75% of the Shares will be
required to amend the Charter or By-Laws to change any of the provisions in the
succeeding three paragraphs.
25
First, a director may be removed from office only for cause by vote of
at least 75% of the Shares entitled to be voted on the matter.
Second, the affirmative vote of 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. The conversion also requires the affirmative vote
of holders of at least 75% of the Common Stock unless it is approved by a vote
of 75% of the Continuing Directors (as defined below), in which event such
conversion requires the approval of the holders of a majority of the Common
Stock. A "Continuing Director" is any member of the Board of Directors of the
Fund who (i) is not a person or affiliate of a person who enters or proposed to
enter into a Business Combination (as defined below) with the Fund (an
"Interested Party") and (ii) who has been a member of the Board of Directors for
a period of at least 12 months, or has been a member of the Board of Directors
since October 31, 1995, or is a successor of a Continuing Director who is
unaffiliated with an Interested Party and is recommended to succeed a Continuing
Director by a majority of the Continuing Directors then on the Board of
Directors of the Fund.
Third, the Fund's Board of Directors has been classified into three
classes, each with a term of three years, with only one class of directors
standing for election in any year. Such classification may prevent replacement
of a majority of the directors for up to a two-year period.
Additionally, the affirmative vote of 75% of the entire Board of
Directors and the holders of at least (i) 80% of the Common Stock and (ii) in
the case of a Business Combination, 66-2/3% of the Common Stock other than
Common Stock held by an Interested Party who is (or whose affiliate is) a party
to a Business Combination or an affiliate or associate of the Interested Party,
are required to authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the
Fund with or into any other person (any transactions within this clause
(i) or clauses (ii) or (iii) below being a "Business Combination");
(ii) issuance or transfer by the Fund (in one or a series of
transactions in any 12-month period) of any securities of the Fund to
any person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value greater than
or equal to ten percent (10%) of the fair market value of the Fund's
assets, excluding issuances or transfers of debt securities of the
Fund, sales of securities of the Fund in connection with a public
offering, issuances of securities of the Fund pursuant to a dividend
reinvestment plan adopted by the Fund, issuances of securities of the
Fund upon the exercise of any stock subscription rights distributed by
the Fund and portfolio transactions effected by the Fund in the
ordinary course of its business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or
other disposition by the Fund (in one or a series of transactions in
any 12-month period) to or with any person or entity of any assets of
the Fund having an aggregate fair market value greater than or equal to
ten percent (10%) of the fair market value of the Fund's assets except
for portfolio transactions (including pledges of portfolio securities
in connection with borrowings) effected by the Fund in the ordinary
course of its business;
(iv) the voluntary liquidation or dissolution of the Fund, or
an amendment to the Fund's Certificate of Incorporation to terminate
the Fund's existence; or
(v) unless the 1940 Act or federal law requires a lesser vote,
any stockholder proposal as to specific investment decisions made or to
be made with respect to the Fund's assets as to which stockholder
approval is required under federal or Delaware law.
However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of 75% of the Continuing Directors. In that case,
if Delaware law requires stockholder approval, the affirmative vote of a
majority of the votes entitled to be cast thereon shall be required. The Fund's
By-Laws contain provisions the effect of which is to prevent matters, including
nominations of directors, from being considered at a stockholders' meeting where
the Fund has not received notice of the matters at least 60 days prior to the
meeting (or 10 days following the date notice of such meeting is given by the
Fund if less than 70 days' notice of such meeting is given by the Fund).
26
Reference is made to the Certificate of Incorporation and By-Laws of
the Fund, on file with the Securities and Exchange Commission, for the full text
of these provisions. See "Available Information." The percentage of votes
required under these provisions, which are greater than the minimum requirements
under Delaware law absent the elections described above or in the 1940 Act, will
make a change in the Fund's business or management more difficult and may have
the effect of depriving stockholders of an opportunity to sell shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction.
In addition, in the opinion of the Investment Manager, these provisions
offer several advantages. They may require persons seeking control of the Fund
to negotiate with its management regarding the price to be paid for the shares
required to obtain such control, they promote continuity and stability and they
enhance the Fund's ability to pursue long-term strategies that are consistent
with its investment objective.
DIVIDENDS
DIVIDENDS AND DISTRIBUTIONS
The Fund will declare annually dividends equal to substantially all of
any net investment income and will distribute at least annually any net realized
capital gains. Net investment income for this purpose is income other than net
realized capital gains less expenses.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Dividend Reinvestment Plan (the "Plan"), stockholders
whose shares of Common Stock are registered in their own names will be deemed to
have elected to have all distributions automatically reinvested by Star Bank,
N.A., as agent (the "Plan Agent"), in Fund shares pursuant to the Plan, unless
in a specific instance a stockholder elects to receive distributions in cash.
Stockholders who elect to receive distributions in cash will receive all
distributions in cash paid by check in dollars mailed directly to the
stockholders by Star Bank, N.A. as dividend paying agent. In the case of
stockholders, such as banks, brokers or nominees, that hold shares for others
who are beneficial owners, the Plan Agent will administer the Plan on the basis
of the number of shares certified from time to time by the stockholders as
representing the total amount registered in such stockholders' names and held
for the account of beneficial owners that have not elected to receive
distributions in cash. Investors that own shares registered in the name of a
bank, broker or other nominee should consult with such nominee as to
participation in the Plan through such nominee, and may be required to have
their shares registered in their own names in order to participate in the Plan.
The Plan Agent serves as agent for the stockholders in administering
the Plan. If the Directors of the Fund declare an income dividend or a capital
gains distribution payable either in the Fund's Common Stock or in cash,
nonparticipants in the Plan will receive cash and participants in the Plan will
receive Common Stock, to be issued by the Fund or purchased by the Plan Agent in
the open market, as provided below. If the market price per share on the
valuation date equals or exceeds net asset value per share on that date, the
Fund will issue new shares to participants at net asset value; provided,
however, if the net asset value is less than 95% of the market price on the
valuation date, then such shares will be issued at 95% of the market price. The
valuation date will be the dividend or distribution payment date or, if that
date is not a Chicago Stock Exchange trading day, the next preceding trading
day. If net asset value exceeds the market price of Fund on the valuation date,
or if the Fund should declare an income dividend or capital gains distribution
payable only in cash, the Plan Agent will, as agent for the participants, buy
Fund shares in the open market, on the Chicago Stock Exchange or elsewhere, for
the participants' accounts on, or shortly after, the payment date. If, before
the Plan Agent has completed its purchases, the market price exceeds the net
asset value of a Fund share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the distribution had been paid in shares
issued by the Fund on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if the
Plan Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period or if the market discount shifts to a market premium
during the purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend amount in newly
issued shares at the close of business on the last purchase date.
27
The Plan Agent maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in an account, including
information needed by stockholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in the name of
the participant, and each stockholder's proxy will include those purchased
pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments will be paid by the Fund. There will be no brokerage charges with
respect to shares issued directly by the Fund as a result of dividends or
capital gains distributions payable either in stock or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and capital gains distributions and voluntary cash
payments made by the participant. Brokerage charges for purchasing small amounts
of stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions, because the Plan Agent will
be purchasing stock for all participants in larger blocks and prorating the
lower commission attributable to such purchases.
The receipt and reinvestment by the Plan of a participant's dividends
and distributions will not relieve the participant of any income tax which may
be payable on such dividends or distributions. See "Tax Status -- U.S.
Stockholders" in the SAI.
Experience under the Plan may indicate that changes in the Plan are
desirable. Accordingly, the Fund and the Plan Agent reserve the right to
terminate the Plan as applied to any dividend or distribution paid subsequent to
notice of the termination sent to members of the Plan at least 30 days before
the date for such dividend or distribution. The Plan also may be amended by the
Fund and the Plan Agent, but (except when necessary or appropriate to comply
with applicable law, rules or policies of a regulatory authority) only by at
least 30 days' written notice to participants in the Plan. All correspondence
concerning the Plan should be directed to Star Bank, N.A., as Plan Agent, at 425
Walnut Street, P.O. Box 1118, Cincinnati, Ohio 45201-1118.
TAXES
The Fund intends to qualify for the special tax treatment afforded a
"regulated investment company" under Subchapter M of the Internal Revenue Code
so that it does not pay federal taxes on income and capital gains distributed to
stockholders. The Fund intends to distribute substantially all of its net
investment income and any net realized capital gains to its stockholders.
Distributions of net investment income as well as from net realized short-term
capital gains, if any, are taxable as ordinary income. Dividends distributed by
the Fund from net investment income may be eligible, in whole or in part, for
the dividends received deduction available to corporations. Distributions of net
realized long-term capital gains are taxable as long-term capital gains
regardless of how long a stockholder has held Shares of the Fund.
The Fund will mail to its stockholders a statement indicating the
amount and federal income tax status of all distributions made during the year.
In addition to federal taxes, stockholders of the Fund may be subject to state
and local taxes on distributions. Stockholders should consult their tax advisers
about the tax effect of distributions and withdrawals from the Fund and the use
of the Dividend Reinvestment Plan. The tax consequences described in this
section apply whether distributions are taken in cash or reinvested in
additional Shares pursuant to the Plan.
MARKETING ARRANGEMENTS
The Shares are being offered on a best efforts basis by the Dealer
Managers, which are McKenna Securities Company, 909 Fannin, Suite 1600, Houston,
Texas 77010, and Capital West Securities, Inc., #1 Leadership Square, Suite 1600
North, 211 North Robinson, Oklahoma City, Oklahoma 73102. Under Section 2(11) of
the Securities Act of 1933, as amended, McKenna Securities Company and Capital
West Securities, Inc. may be considered to be "underwriters" in connection with
the offering of the Shares.
McKenna Securities Company is an affiliate of the Investment Manager.
The Dealer Managers have agreed, subject to the terms and conditions contained
in the Selling Agreement, to use their best efforts to offer on
28
<PAGE>
behalf of the Fund up to 4,000,000 Shares to the public at the offering price
set forth below. The purchase price for the Shares must be paid upon
subscription. All payments shall be forwarded to and held by the Escrow Agent
pending attainment of the minimum offering and thereafter until acceptance by
the Fund. If the minimum offering amount of 2,000,000 Shares is not attained by
[thirty days from the date of this Prospectus] (subject to extension by the Fund
for up to 30 days, without notice), all escrowed funds will be returned to
investors with interest earned while in escrow. McKenna Securities Company, as
lead Dealer Manager, has entered into, and may in the future enter into, selling
agreements with certain Broker/Dealers who are members of the National
Association of Securities Dealers, Inc. for sale of the Shares, and McKenna
Securities Company, as lead Dealer Manager, will receive and pay to the
applicable Broker/Dealers a sales commission according to the following
schedule:
PER SHARE PURCHASE SCHEDULE
PRICE SELLING DEALER MANAGERS' TOTAL SALES
SHARES PURCHASED PER SHARE CONCESSION FEE LOAD
------------------ --------- ---------- ---------------- -----------
100 to 24,999 $ 10.00 $ .60 $ .20 $ .80
25,000 to 49,999 $ 9.90 $ .50 $ .20 $ .70
50,000 to 74,999 $ 9.80 $ .40 $ .20 $ .60
75,000 to 99,999 $ 9.70 $ .30 $ .20 $ .50
100,000 to 499,999 $ 9.60 $ .20 $ .20 $ .40
500,000 or more $ 9.20 $ .00 $ .00 $ .00
During the offering period, the Fund may sell common shares at the
offering price less the sales load to directors, officers, employees and the
relatives of directors, officers and employees of the Fund and of McKenna &
Company and Capital West Securities, Inc. and their affiliates.
Except as indicated in the preceding table, the Fund has agreed to pay
to the Dealer Managers an origination fee equal to $0.10 per Share sold in this
offering and a nonaccountable expense allowance equal to $0.10 per Share sold in
this offering. The total amount is referred to in the above table as the Dealer
Managers' Fee. As between the Dealer Managers, Capital West Securities, Inc.
will be allocated the $0.10 per share origination fee and the lesser of $0.10
per share or $50,000 of nonaccountable expense allowance with respect to Shares
that are sold through it and through the Broker/Dealers as to which it has
coordinating responsibility. The Fund has also agreed to pay all filing fees,
legal costs and other expenses in connection with qualifying the Shares offered
hereby for sale under the laws of such states as the Dealer Managers may
designate. The Dealer Managers' Fee will not be paid to the Dealer Managers with
respect to any single transaction of 500,000 shares or more. McKenna Securities
Company, as lead Dealer Manager, may terminate the best efforts obligations in
respect of the offering in the event of a material adverse development affecting
the Fund and certain other circumstances.
The Fund has agreed, upon McKenna Securities Company's request, to
amend the registration statement of which this Prospectus is a part, to permit
an increase of the offering of up to 6,000,000 additional Shares on the same
terms as set forth herein.
The Fund anticipates that the Dealer Managers and selling
Broker/Dealers or their affiliates may, from time to time, subject to the
regulations set forth in the 1940 Act, act as brokers or dealers in connection
with the execution of the Fund's investments after the Dealer Managers and such
Broker/Dealers cease to be underwriters in connection with this offering.
The Fund has agreed to indemnify the Dealer Managers and selling
Broker/Dealers against certain civil liabilities, including liabilities under
the federal securities laws. However, such indemnification is subject to the
provisions of Section 17(1) of the 1940 Act, which provides, in part, that no
agreement shall contain a provision which protects or purports to protect an
underwriter of an investment company or business development company against any
liability to such company or its security holders to which it would otherwise be
subject due to its
29
<PAGE>
misfeasance, bad faith, or gross negligence in the performance of its duties, or
reckless disregard of its obligations and duties under such agreement.
EXPERTS
The financial statement of the Fund included in the SAI has been
audited by Arthur Andersen LLP independent public accountants, as indicated in
their report thereon and has been so included in reliance on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the issuance of the shares offered hereby will be
passed upon for the Fund and the Dealer Managers by Mayor, Day, Caldwell &
Keeton, L.L.P., Houston, Texas.
AVAILABLE INFORMATION
As of the effective date of this Prospectus, the Fund will be subject
to the informational requirements of the Securities Exchange Act of 1934, as
amended, (the "Exchange Act"), and the 1940 Act and in accordance therewith will
file reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). The reports, proxy statements and annual
reports and other information filed by the Fund can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at certain of its Regional
Offices located at 7 World Trade Center, New York, New York 10048 and Northwest
Atrium Center, 500 Madison Street, Room 1400, Chicago, Illinois 60661- 2511.
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
REPORTS TO STOCKHOLDERS
The Fund will furnish to its stockholders annual reports containing
audited financial statements, periodic unaudited reports containing financial
statements and such other periodic reports as it may determine to furnish or as
may be required by law.
THE FOLLOWING IS THE TABLE OF CONTENTS CONTAINED IN THE
STATEMENT OF ADDITIONAL INFORMATION FILED AS PART OF THE
FUND'S REGISTRATION STATEMENT.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
OF THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
------
General Information and History......................................... SAI-3
Investment Objectives and Policies...................................... SAI-3
Management.............................................................. SAI-4
Control Persons and Principal Holders of Securities..................... SAI-5
Investment Advisory and Other Services.................................. SAI-5
Brokerage Allocation and Other Practices................................ SAI-6
Tax Status.............................................................. SAI-7
Financial Statements................................................... SAI-11
================================================================================
30
SUBSCRIPTION AGREEMENT APPENDIX A
(TO BE RETAINED FOR YOUR RECORDS)
McKenna Securities Company,
as Lead Dealer Manager
909 Fannin, Suite 1600
Houston, Texas 77010
Telephone: (713) 951-9191
Telefax: (713) 951-0550
Gentlemen:
1. PROSPECTUS. The undersigned ("Subscriber") hereby acknowledges
receipt of that certain prospectus (the "Prospectus") dated _____, 1995,
offering up to 4,000,000 shares, subject to increase to up to 10,000,000 shares
as set forth in the Prospectus, (the "Shares") of Common Stock, par value $.001
per share ("Common Stock") of Southwest Small Cap Equity Fund, Inc., a Delaware
corporation (the "Fund"), at a subscription price per share in accordance with
the schedule set forth below in Paragraph 6, from which commissions and fees
will be paid to McKenna Securities Company and Capital West Securities, Inc.
(the "Dealer Managers") and to certain selected broker/dealers. All capitalized
terms used herein and not defined herein shall have the meanings assigned to
such terms in the Prospectus.
2. SUBSCRIPTION TENDER. The undersigned, by executing this Subscription
Agreement, hereby tenders this subscription, together with a check, account
debit or wire transfer (the "Subscription Payment") payable to, or for the
account of, Star Bank, N.A., as Escrow Agent (the "Escrow Agent"), in the amount
of the Total Subscription Amount set forth below in Paragraph 6 for the number
of Shares set forth below in Paragraph 6. The offering of the Shares is made
pursuant to the Prospectus.
3. ESCROW. Upon receipt of the Subscription Payment, the Escrow Agent
shall deposit such funds into an escrow account (the "Escrow Account") in
accordance with the terms of that certain Escrow Agreement by and among the
Fund, McKenna Securities Company, as lead Dealer Manager, and the Escrow Agent.
In the event McKenna Securities Company receives completed and executed
Subscription Agreements and the Escrow Agent receives Subscription Payments
before the termination of this offering for at least 2,000,000 Shares, the
Escrow Agent shall disburse to the Fund the Subscription Payment and the Fund
shall cause to be delivered to the undersigned the number of shares set forth
below. In the event that McKenna Securities Company does not receive completed
and executed Subscription Agreements and Subscription Payments for at least
2,000,000 Shares prior to the termination of this offering, the Escrow Agent
shall return to the undersigned the undersigned's Subscription Payment, with
interest, in each case as more fully set forth in the Escrow Agreement.
4. ACCEPTANCE. Execution and delivery of this Subscription Agreement
and tender of the Subscription Payment shall constitute an irrevocable offer to
purchase the Shares indicated below, which offer may be accepted or rejected by
an officer of McKenna Securities Company. The irrevocable offer made by
execution and delivery of this Subscription Agreement and tender of the
Subscription Payment shall not be subject to withdrawal or revocation
notwithstanding any extension of the offering period or any increase in the
number of Shares being offered or sold, in each case as contemplated by the
Prospectus. Acceptance by McKenna Securities Company shall be indicated by (a)
an authorized officer's execution hereof, and (b) the deposit of the
undersigned's payment into the Escrow Account; provided that the acceptance
shall not be effective until such time as the Escrow Account is credited with
funds in the Subscription Payment amount, without any restrictions on the use of
such funds. In either case, such acceptance shall be subject to the terms of the
Escrow Agreement, including such terms relating to the minimum subscription
requirement discussed above in Paragraph 3.
5. TAXPAYER INFORMATION. United States citizens, legal entities or
residents must provide their Taxpayer Identification Number. For most individual
taxpayers, the Taxpayer Identification Number is the individual's social
security number. For individual, joint, custodian and sole proprietorship
subscriptions, social security numbers are to be used.
A-1
<PAGE>
6. HOW TO BUY SHARES: Please complete and sign this agreement. Send it
with payment or payment instructions to your broker or to: McKenna
Securities Company, 909 Fannin, Suite 1600, Houston, Texas 77010, Fax #
713-951-0550.
(a) Please multiply the number of shares purchased by the price per
share indicated below:
Range of Shares Shares Purchased Price Per Share Total Subscription Amount
- ------------------ ---------------- --------------- -------------------------
100 to 24,999 ____________ X $ 10.00 $ _____________________
25,000 to 49,999 ____________ X $ 9.90 $ _____________________
50,000 to 74,999 ____________ X $ 9.80 $ _____________________
75,000 to 99,999 ____________ X $ 9.70 $ _____________________
100,000 to 499,999 ____________ X $ 9.60 $ _____________________
500,000 or more ____________ X $ 9.20 $ _____________________
(b) Method of Payment:
[ ] Check enclosed (payable to Star Bank, N.A. for the account of
Southwest Small Cap Equity Fund, Inc.).
[ ] Debit my brokerage account. Account #_____
Title of Account _____ Firm Name _____
[ ] I hereby instruct my bank, _____ to wire transfer from
Account #_____ the amount indicated in paragraph 6(a) above to
Star Bank, N.A., CINTI/TRUST, ABA #0420-0001-3 for credit to
Account 990 1877, attn: Thomas F. Lewis, III ref: Southwest
Small Cap Equity Fund, Inc.
(c) Type of Ownership (CHECK ONE):
[ ] Husband and Wife as community property
[ ] Joint Tenants
[ ] Tenants in common
[ ] Separate property
[ ] Other; e.g., corporation, partnership, custodian, trustee,
etc.
(d) [ ] Please check this box if you are NOT subject to backup
withholding under the provisions of section 3406(a)(l)(C) of the
Internal Revenue Code.
IN WITNESS WHEREOF, the undersigned subscriber has executed this
Subscription Agreement this _____ day of _____,_____. Under the penalties of
perjury, the undersigned Subscriber further certifies that the information
provided on this form is true, correct and complete.
Signature(s) of Subscriber(s) Subscriber's Address and Telephone #:
_________SAMPLE______________ ________________________________________________
_____________________________ ________________________________________________
Typed or Printed Name(s) of Subscriber(s) ______________________________________
_____________________________ Telephone Home: _____________ Office: ________
_____________________________ Subscriber Taxpayer ID# or
Social Security #_______________________________
================================================================================
TO BE COMPLETED BY ACCOUNT EXECUTIVE
Broker/Dealer Firm ________________________ Branch Office ____________________
Account Executive Name ____________________ Signature ________________________
Office Address ____________________________ City _______ State ___ Zip ___
Office Telephone __________________________ Fax ______________________________
================================================================================
ACCEPTED BY: ______________________________________ Date: ____________________
MCKENNA SECURITIES COMPANY, lead Dealer Manager
A-2
SUBSCRIPTION AGREEMENT APPENDIX A
(TO BE FORWARDED TO DEALER MANAGER)
McKenna Securities Company,
as Lead Dealer Manager
909 Fannin, Suite 1600
Houston, Texas 77010
Telephone: (713) 951-9191
Telefax: (713) 951-0550
Gentlemen:
1. PROSPECTUS. The undersigned ("Subscriber") hereby acknowledges
receipt of that certain prospectus (the "Prospectus") dated _____, 1995,
offering up to 4,000,000 shares, subject to increase to up to 10,000,000 shares
as set forth in the Prospectus, (the "Shares") of Common Stock, par value $.001
per share ("Common Stock") of Southwest Small Cap Equity Fund, Inc., a Delaware
corporation (the "Fund"), at a subscription price per share in accordance with
the schedule set forth below in Paragraph 6, from which commissions and fees
will be paid to McKenna Securities Company and Capital West Securities, Inc.
(the "Dealer Managers") and to certain selected broker/dealers. All capitalized
terms used herein and not defined herein shall have the meanings assigned to
such terms in the Prospectus.
2. SUBSCRIPTION TENDER. The undersigned, by executing this Subscription
Agreement, hereby tenders this subscription, together with a check, account
debit or wire transfer (the "Subscription Payment") payable to, or for the
account of, Star Bank, N.A., as Escrow Agent (the "Escrow Agent"), in the amount
of the Total Subscription Amount set forth below in Paragraph 6 for the number
of Shares set forth below in Paragraph 6. The offering of the Shares is made
pursuant to the Prospectus.
3. ESCROW. Upon receipt of the Subscription Payment, the Escrow Agent
shall deposit such funds into an escrow account (the "Escrow Account") in
accordance with the terms of that certain Escrow Agreement by and among the
Fund, McKenna Securities Company, as lead Dealer Manager, and the Escrow Agent.
In the event McKenna Securities Company receives completed and executed
Subscription Agreements and the Escrow Agent receives Subscription Payments
before the termination of this offering for at least 2,000,000 Shares, the
Escrow Agent shall disburse to the Fund the Subscription Payment and the Fund
shall cause to be delivered to the undersigned the number of shares set forth
below. In the event that McKenna Securities Company does not receive completed
and executed Subscription Agreements and Subscription Payments for at least
2,000,000 Shares prior to the termination of this offering, the Escrow Agent
shall return to the undersigned the undersigned's Subscription Payment, with
interest, in each case as more fully set forth in the Escrow Agreement.
4. ACCEPTANCE. Execution and delivery of this Subscription Agreement
and tender of the Subscription Payment shall constitute an irrevocable offer to
purchase the Shares indicated below, which offer may be accepted or rejected by
an officer of McKenna Securities Company. The irrevocable offer made by
execution and delivery of this Subscription Agreement and tender of the
Subscription Payment shall not be subject to withdrawal or revocation
notwithstanding any extension of the offering period or any increase in the
number of Shares being offered or sold, in each case as contemplated by the
Prospectus. Acceptance by McKenna Securities Company shall be indicated by (a)
an authorized officer's execution hereof, and (b) the deposit of the
undersigned's payment into the Escrow Account; provided that the acceptance
shall not be effective until such time as the Escrow Account is credited with
funds in the Subscription Payment amount, without any restrictions on the use of
such funds. In either case, such acceptance shall be subject to the terms of the
Escrow Agreement, including such terms relating to the minimum subscription
requirement discussed above in Paragraph 3.
5. TAXPAYER INFORMATION. United States citizens, legal entities or
residents must provide their Taxpayer Identification Number. For most individual
taxpayers, the Taxpayer Identification Number is the individual's social
security number. For individual, joint, custodian and sole proprietorship
subscriptions, social security numbers are to be used.
A-3
<PAGE>
6. HOW TO BUY SHARES: Please complete and sign this agreement. Send it
with payment or payment instructions to your broker or to: McKenna
Securities Company, 909 Fannin, Suite 1600, Houston, Texas 77010, Fax #
713-951-0550.
(a) Please multiply the number of shares purchased by the price per
share indicated below:
Range of Shares Shares Purchased Price Per Share Total Subscription Amount
- ------------------ ---------------- --------------- -------------------------
100 to 24,999 ____________ X $ 10.00 $ _____________________
25,000 to 49,999 ____________ X $ 9.90 $ _____________________
50,000 to 74,999 ____________ X $ 9.80 $ _____________________
75,000 to 99,999 ____________ X $ 9.70 $ _____________________
100,000 to 499,999 ____________ X $ 9.60 $ _____________________
500,000 or more ____________ X $ 9.20 $ _____________________
(b) Method of Payment:
[ ] Check enclosed (payable to Star Bank, N.A. for the account of
Southwest Small Cap Equity Fund, Inc.).
[ ] Debit my brokerage account. Account #_____
Title of Account _____ Firm Name _____
[ ] I hereby instruct my bank, _____ to wire transfer from
Account #_____ the amount indicated in paragraph 6(a) above to
Star Bank, N.A., CINTI/TRUST, ABA #0420-0001-3 for credit to
Account 990 1877, attn: Thomas F. Lewis, III ref: Southwest
Small Cap Equity Fund, Inc.
(c) Type of Ownership (CHECK ONE):
[ ] Husband and Wife as community property
[ ] Joint Tenants
[ ] Tenants in common
[ ] Separate property
[ ] Other; e.g., corporation, partnership, custodian, trustee,
etc.
(d) [ ] Please check this box if you are NOT subject to backup
withholding under the provisions of section 3406(a)(l)(C) of the
Internal Revenue Code.
IN WITNESS WHEREOF, the undersigned subscriber has executed this
Subscription Agreement this _____ day of _____,_____. Under the penalties of
perjury, the undersigned Subscriber further certifies that the information
provided on this form is true, correct and complete.
Signature(s) of Subscriber(s) Subscriber's Address and Telephone #:
_________SAMPLE______________ ________________________________________________
_____________________________ ________________________________________________
Typed or Printed Name(s) of Subscriber(s) ______________________________________
_____________________________ Telephone Home: _____________ Office: ________
_____________________________ Subscriber Taxpayer ID# or
Social Security #_______________________________
================================================================================
TO BE COMPLETED BY ACCOUNT EXECUTIVE
Broker/Dealer Firm ________________________ Branch Office ____________________
Account Executive Name ____________________ Signature ________________________
Office Address ____________________________ City _______ State ___ Zip ___
Office Telephone __________________________ Fax ______________________________
================================================================================
ACCEPTED BY: ______________________________________ Date: ____________________
MCKENNA SECURITIES COMPANY, lead Dealer Manager
A-4
<PAGE>
- -----------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE FUND'S INVESTMENT MANAGER, OR EITHER DEALER MANAGER. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................3
The Fund.................................7
Use of Proceeds..........................7
Risk Factors.............................8
Investment Objective and Policies........9
Management of the Fund..................21
Capital Stock...........................25
Dividends...............................27
Taxes...................................28
Marketing Arrangements..................28
Experts.................................30
Legal Matters...........................30
Available Information...................30
Reports to Stockholders.................30
SAI Table of Contents...................30
Appendix A: Subscription Agreement....A-1
------------------
UNTIL _____, 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
4,000,000 SHARES
SOUTHWEST SMALL CAP
EQUITY FUND, INC.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MCKENNA SECURITIES
COMPANY
CAPITAL WEST
SECURITIES, INC.
_____, 1995
<PAGE>
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER 22, 1995
SUBJECT TO COMPLETION
SOUTHWEST SMALL CAP EQUITY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
WITH THE RELATED PROSPECTUS OF SOUTHWEST SMALL CAP EQUITY FUND, INC. PLEASE
RETAIN THIS DOCUMENT FOR YOUR REFERENCE. A COPY OF THE PROSPECTUS MAY BE
OBTAINED, FREE OF CHARGE, UPON REQUEST MADE TO MCKENNA SECURITIES COMPANY, BY
WRITING TO 909 FANNIN, SUITE 1600, HOUSTON, TEXAS 77010, CALLING AT (713)
951-9191, OR SENDING E-MAIL TO [email protected].
------------------------------
TABLE OF CONTENTS
SAI RELATED INFORMATION
CAPTION PAGE IN PROSPECTUS
- ------- ---- -------------------
Investment Objective and Policies .......... 2 Investment Objective and
Policies
Management and Principal Stockholder ....... 6 Management
Brokerage Allocation and ................... *
Other Practices ............................ 6
Tax Status ................................. 7 Taxes
Financial Statements ....................... 11 *
------------------------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.
THE DATE OF THIS STATEMENT OF ADDITIONAL
INFORMATION AND OF THE PROSPECTUS IS ____________, 1995
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION
SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS. ALL INITIAL CAPITALIZED TERMS
IN THIS STATEMENT OF ADDITIONAL INFORMATION HAVE THE MEANINGS ASSIGNED TO THEM
IN THE PROSPECTUS.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
Southwest Small Cap Equity Fund, Inc. (the "Fund") is a newly
organized, diversified, closed-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act").
INVESTMENT OBJECTIVE AND POLICIES THAT ARE DEEMED FUNDAMENTAL. The only
objective and policies that are deemed fundamental are set forth below, and may
not be changed without the approval of a "majority of the Fund's outstanding
voting securities." See "--Investment Restrictions." A "majority of the Fund's
outstanding voting securities" means the lesser of (1) 67% or more of the shares
of the Fund entitled to vote that are present or represented at a stockholders
meeting at which the holders of more than 50% of the shares entitled to vote
that are present or represented or (2) more than 50% of the outstanding shares
of the Fund. Except as specifically set forth in (a) below, the policies,
practices and other matters relating thereto described in the Prospectus or this
Statement of Additional Information are operating policies that may be changed
by the Board of Directors of the Fund without stockholder approval and without
notice to the stockholders of the Fund.
(a) Only the following are fundamental:
(i) The investment objective of the Fund, which is to seek
capital appreciation for long-term investors by investing in
the common equity securities of publicly traded Southwest
Small Cap Companies.
(ii) The investment policy of the Fund, which in general,
under normal market conditions and except for Temporary
Investments, is (i) to have not less than one-half of its
assets invested, predominantly on an equal dollar weighted
basis, in publicly traded common equity securities of
substantially all of the Southwest Small Cap Companies (the
"Southwest Market Portfolio") and (ii) to have the remainder
of its assets invested in publicly traded common equity
securities of particular Southwest Small Cap Companies
selected by the Investment Manager (the "Southwest Value
Portfolio").
(iii) The investment restrictions described in the Prospectus
under the caption "Investment Objective and
Policies--Investment Restrictions."
(b) Unless otherwise noted, whenever an investment policy or
restriction states a maximum or approximate percentage of the Fund's assets that
may be invested in any security or other asset or sets forth a policy regarding
quality standards, that percentage or that quality standard will be determined
immediately after giving effect to the Fund's acquisition of a security or other
asset to which such percentage or quality standard relates. Accordingly, any
subsequent change in values, net assets or other circumstances will not affect
the determination of whether the investment complies with the Fund's investment
policies and restrictions.
(c) One of the restrictions set forth in the Prospectus under the
caption "Investment Objective and Policies--Investment Restrictions" is that the
Fund may not invest more than 25% of its total assets in common equity
securities of Southwest Small Cap Companies that are engaged in any one
industry. The Investment Manager will have wide latitude in determining the
primary industry classification of each Southwest Small Cap Company for the
purposes of computing the industry concentration restriction. However, in
determining an "industry"
2
classification the Investment Manager intends generally to follow the same
method of compilation as it employed in preparing the table under the caption
"Industry Distribution of Small Cap Companies" set forth in the Prospectus in
"Investment Objective and Policies--Selected Demographic and Other
Characteristics of the Southwest Region and Southwest Small Cap Companies." Set
forth below are the SIC codes that were grouped under each classification set
forth in such table:
CHEMICAL & MINING (SIC Codes: 1040 (Gold and Silver Ores); 1400
(Mining, Quarry Nonmetal Minerals); 2810 (Industrial Inorganic Chemicals); 2821
(Plastics, Resins, Elastomers); 2833 (Medicinal Chemicals, Botanical Products);
2842 (Special Clean, Polish Preps); 2860 (Industrial Organic Chemicals); 2870
(Agricultural Chemicals); 2890 (Miscellaneous Chemical Products)).
COMMUNICATIONS (SIC Codes: 4812 (Radiotelephone Communication); 4813
(Phone Communication Ex Radiotelephone); 4832 (Radio Broadcasting Stations)).
CONSTRUCTION (SIC Codes: 1531 (Operative Builders); 1540 (General
Building Contractors-Nonresidential); 1623 (Water, Sewer, Pipeline
Construction); 1700 (Construction-Special Trade)).
ENERGY SERVICES (SIC Codes: 1381 (Drilling Oil and Gas Wells); 1382
(Oil and Gas Field Expl Services); 1389 (Oil & Gas Field Services, Nec)).
ENGINEERING & TECHNOLOGY (SIC Codes: 3571 (Electronic Computers); 3572
(Computer Storage Devices); 3576 (Computer Communication Equip); 3577 (Computer
Peripheral Eq, Nec); 3578 (Calculators, Accounting Machines, Ex Computers); 3672
(Printed Circuit Boards); 3674 (Semiconductor, Related Device); 3679 (Electronic
Components, Nec); 3812 (Srch, Det, Nav, Guid, Aero Sys); 3823 (Industrial
Measurement Instruments); 3824 (Totalizing Fluid Meters); 3825 (Electrical Meas
& Test Instruments); 3826 (Lab Analytical Instruments); 3829 (Meas & Controlling
Dev, Nec); 7372 (Prepackaged Software); 7373 (Comp Integrated Sys Design); 8700
(Engr, Acc, Resh, Mgmt, Rel Svcs); 8711 (Engineering Services)).
FINANCIAL SERVICES (SIC Codes: 6021 (National Commercial Banks); 6022
(State Commercial Banks); 6035 (Savings Instn, Fed Chartered); 6036 (Savings
Instn, Not Fed Chart); 6099 (Functions Rel To Dep Bkg, Nec); 6153 (Short-Term
Bus Credit, Ex Ag); 6099 (Functions Rel To Dep Bkg, Nec); 6153 (Short-Term Bus
Credit, Ex Ag); 6162 (Mortgage Bankers); 6199 (Finance Services); 6211 (Security
Brokers & Dealers); 6282 Investment Advice; 6311 (Life Insurance); 6321
(Accident & Health Insurance); 6331 (Fire, Marine, Casualty Insurance); 6351
(Surety Insurance); 6399 (Insurance Carriers); 6361 (Title Insurance); 6799
(Investors, Nec)).
MACHINERY & EQUIPMENT (SIC Codes: 3310 (Steel Works, Roll & Finish
Mill); 3312 (Steel Works & Blast Furnaces); 3317 (Steel Pipe and Tubes); 3320
(Iron and Steel Foundries); 3330 (Prim Smelt, Refin Nonferrous Metal); 3334
(Prim Production of Aluminum); 3341 (Sec Smelt, Refine Nonferrous Metal); 3350
(Rolling & Draw Nonferrous Metal); 3390 (Misc Primary Metal Products); 3430
(Heating Eq, Plumbing Fixture); 3433 (Heating Eq, Ex Electrical, Air Furnace);
3448 (Prefab Metal Buildings and Comp); 3470 (Coating, Engraving, Allied Svc);
3490 (Misc Fabricated Metal Prods); 3510 (Engines and Turbines); 3523 (Farm
Machinery and Equipment); 3530 (Construction, Mining, Matl Handle Eq); 3531
(Construction Machinery & Eq); 3533 (Oil & Gas Field Machinery, Equipment); 3555
(Printing Trades Machinery, Equipment); 3559 (Special Industry Machinery, Nec);
3560 (General Industrial Machinery and Equipment); 3569 (General Ind Mach & Eq,
Nec); 3580 (Refrigerators & Service Industry Machine); 3585 (Air-Cond, Heating,
Refrigeration Equipment); 3590 (Misc. Indl. Coml); 3613 (Switchgear &
Switchboard Application); 3621 (Motors and Generators); 3634 (Electric
Housewares and Fans); 3640 (Electric Lighting, Wiring Equipment); 3661
(Telephone & Telegraph Apparatus); 3663 (Radio, TV Broadcast, Communications
Equip); 3669 (Communications Equip, Nec); 3690 (Misc Elec Machinery, Equipment,
Supplies); 3713 (Truck and Bus Bodies); 3714 (Motor Vehicle Part, Accessory);
3721 (Aircraft); 3730 (Ship & Boat Building & Repairing); 3861 (Photograph
Equipment & Supply)).
3
MEDICAL/HEALTH SERVICES (SIC Codes: 2834 (Pharmaceutical Preparations);
2835 (In Vitro, In Vivo Diagnostics); 2836 (Biological Pds, Ex Diagnostics);
3841 (Surgical, Med Instr, Apparatus); 3842 (Ortho, Prosth, Surg Appl, Suply);
3843 (Dental Equipment & Supplies); 3844 (X-Ray & Related Apparatus); 3845
(Electromedical Apparatus); 8000 (Health Services); 8051 (Skilled Nursing Care
Fac); 8060 (Hospitals); 8082 (Home Health Care Services); 8093 (Spec Outpatient
Facility, Nec)).
MISC MANUFACTURING (SIC Codes: 2221 (Brdwovn Fabric Man Made, Silk);
2300 (Apparel & Other Finished Pds); 2320 (Mens, Boys Frnsh, Work Clthng); 2390
(Misc Fabricated Textile Pds); 2400 (Lumber and Wood Pds, Ex Furn); 2451 (Mobile
Homes); 2452 (Prefab Wood Bldgs, Components); 2590 (Misc Furniture and
Fixtures); 2621 (Paper Mills); 2670 (Convrt Papr, Paprbrd, Ex Boxes); 2673
(Plastic, Foil, Coatd Papr Bags); 2711 (Newspaper: Pubg, Pubg & Print); 2731
(Books: Pubg, Pubg & Print); 2741 (Miscellaneous Publishing); 2750 (Commercial
Printing); 2761 (Manifold Business Forms); 2950 (Asphalt Paving, Roofing Matls);
3060 (Fabricated Rubber Pds, Nec); 3081 (Unsupp Plastics Film & Sheet); 3089
(Plastics Products, Nec); 3140 Footwear, Except Rubber); 3241 (Cement,
Hydraulic); 3290 (Abrasive, Asbestos, Misc Minrl); 3873 (Watches, Clocks and
Parts); 3949 (Sporting & Athletic Goods, Nec); 3950 (Pens, Pencil, Oth Artist
Matl)).
NATURAL GAS TRANSMISSION (SIC Codes: 4922 (Natural Gas Transmission);
4923 (Natural Gas Transmission & Distr); 4924 (Natural Gas Distribution)).
OIL & GAS (SIC Codes: 1311 (Crude Petroleum & Natural Gas); 2911
(Petroleum Refining); 4610 (Pipe Lines, Ex Natural Gas)).
OTHER (SIC Codes: 200 (Agricultural Products-Livestock, Animal Spec);
2013 (Sausage, Other Prepared Meat Products); 2015 (Poultry Slaughter &
Process); 2020 (Dairy Products); 2024 (Ice Cream & Frozen Desserts); 2033 (Can
Fruit, Vegetables, Preserves, Jam, Jelly); 2040 (Grain Mill Products); 2052
(Cookies and Crackers); 2060 (Sugar & Confectionery Products); 2070 (Fats &
Oils); 2086 (Bottled & Can Soft Drinks, water); 2090 (Misc Food Preps, Kindred
Pds); 2844 (Perfume, Cosmetic, Toilet Prep); 6500 (Real Estate); 6512
(Operators-Nonres Bldgs); 6552 (Subdivide, Dev, Ex Cemetery); 6794 (Patent
Owners and Lessors); 6795 (Mineral Royalty Traders); 7812 (Motion Picture,
Videotape Production); 7822 (Motion Picture, Videotape Distribution); 8731 (Coml
Physical, Biological Resh); 8734 (Testing Laboratories); 9995 (Non-Operating
Establishments)).
RETAIL TRADE (SIC Codes: 5200 (Building Materials, Hardware,
Garden-Retail); 5211 (Lumber & Other Building Material-Retail); 5331 (Variety
Stores); 5411 (Grocery Stores); 5412 (Convenience Stores); 5500 (Auto Dealers,
Gas Stations); 5531 (Auto and Home Supply Stores); 5651 (Family Clothing
Stores); 5700 (Home Furniture & Equip Store); 5731 (Radio, TV, Consumer
Electronics Stores); 5734 (Computer and Computer Software Stores); 5810 (Eating
and Drinking Places); 5812 (Eating Places); 5900 (Miscellaneous Retail); 5940
(Misc Shopping Goods Stores); 5944 (Jewelry Stores); 5945 (Hobby, Toy, and Game
Shops); 5960 (Nonstore Retailers); 5961 (Catalog, Mail-Order Houses)).
SERVICES (SIC Codes: 4581 (Airports & Terminal Services); 4841 (Cable
and Other Pay TV Services); 4899 (Communications Services, Nec); 4950 (Sanitary
Services); 4953 (Refuse Systems); 4955 (Hazardous Waste Management); 7011
(Hotels and Motels); 7200 (Personal Services); 7310 (Advertising); 7359 (Equip
Rental & Leasing, Nec); 7361 (Employment Agencies); 7363 (Help Supply Services);
7370 (Cmp Programming, Data Process); 7371 (Computer Programming Service); 7374
(Cmp Processing, Data Prep Svc); 7380 (Misc Business Services); 7389 (Business
Services, Nec); 7500 (Auto Repair, Services, Parking); 7600 (Misc Repair
Services); 7819 (Service to Motion Picture Production); 7900 (Amusement &
Recreation Services); 7990 (Misc Amusement & Rec Service); 8741 (Management
Services); 8742 (Management Consulting Services)).
TRANSPORTATION (SIC Codes: 4011 (Railroads, Line-Haul Operating); 4100
(Transit & Passenger Trans); 4210 (Trucking, Courier Service, Ex Air); 4213
(Trucking, Except Local); 4400 (Water Transportation); 4412
4
(Deep Sea Frn Trans-Freight); 4512 (Air Transport, Scheduled); 4522 (Air
Transport, Nonscheduled); 4731 (Arrange Trans-Freight, Cargo)).
UTILITIES (SIC Codes: 4911 (Electric Services)).
WHOLESALE TRADE (SIC Codes: 5010 (Motor Vehicle Parts,
Supply-Wholesale); 5030 (Lumber and Constr Matl-Whsl); 5045 (Computers &
Software-Wholesale); 5047 (Medical, Dental, Hospital Equipment-Wholesale); 5050
(Metals, Minerals, Ex Pete-Whsl); 5063 (Elec Apparatus & Equip-Whsl); 5064 (Elec
Appliance, TV, Radio-Whsl); 5065 (Electronic Parts, Eq-Whsl, Nec); 5080
(Machinery and Equipment-Whsl); 5082 (Construction, Mining (Ex Pete) Equipment -
Wholesale); 5084 (Industrial Mach & Eq-Whsl); 5090 (Misc Durable Good-Whsl);
5099 (Durable Goods-Wholesale, Nec); 5122 (Drugs and Proprietary-Whsl); 5130
(Apparel, Piece Gds, Notns-Whsl); 5140 (Groceries & Related Pds-Whsl); 5171
(Petroleum Bulk Stations-Whsl); 5172 (Petroleum, Ex Bulk Stations-Whsl); 5190
(Misc Nondurable Goods-Whsl)).
The Investment Manager intends to determine the appropriate SIC code
for each Southwest Small Cap Company by reference to information contained in
Standard & Poor's Compustat PC Plus, and other information and sources that it
deems relevant. The Investment Manager may, in its discretion, rearrange the
group of SIC codes within industry classifications set forth above, create or
combine industry categories described above, or redesignate the SIC code
classification of a Southwest Small Cap Company, if it determines that changed
or other circumstances warrant such adjustments.
THE SOUTHWEST INDEX(TM)
The Fund's investment objective and policies with respect to the
Southwest Market Portfolio reflect, in part, the Investment Manager's opinion
that, during the period from December 31, 1987 through September 30, 1995, a
strategy of investing in a broadly diversified portfolio of publicly traded
common equity securities issued by Southwest Small Cap Companies could have
achieved greater returns than a strategy designed to track certain broad market
indices, most particularly the S&P 500 and the Russell 2000. This opinion of the
Investment Manager is based in part upon its analysis of the historical
performance of the Southwest Index(TM), which was developed by the Investment
Manager to measure the market performance of the publicly traded common equity
securities of the entire group of Southwest Small Cap Companies beginning
December 31, 1987. The "Southwest Index(TM)" is a measurement of the market
performance of a presumed investment in the common equity securities, on an
equal dollar basis, of all Southwest Small Cap Companies during the period
commencing on December 31, 1987. The Southwest Index(TM) tracks the performance
of "publicly traded" "common equity securities" of "Southwest Small Cap
Companies." Each of these terms has been defined identically for purposes of
creating both the Southwest Index(TM) and the Fund's investment objective and
policies. See the information contained in the Prospectus under the caption
"Investment Objective and Policies-Southwest Small Cap Companies."
The Prospectus generally describes the essential features of the
Southwest Index(TM), and sets forth a comparison of the performance of the
Southwest Index(TM) as against the S&P 500 Index and the Russell 2000 Index, as
well as volatility and market risk characteristics for each index.
Each index has different design characteristics which may affect
reported or reflected performance. For example, in contrast with the S&P 500
Index and the Russell 2000 Index, which are market capitalization based indexes,
the Southwest Index(TM) is an equal dollar weighted index. In other words, while
a hypothetical investment based on the S&P 500 Index or the Russell 2000 Index
would be made according to the relative market capitalization of the companies
included within such indexes, the Southwest Index(TM) assumes an equal
investment in the common equity securities of each Southwest Small Cap Company.
In addition, the S&P 500 Index and the Russell 2000 Index may be
constructed according to different rules as between themselves and the Southwest
Index(TM). For example, the Russell 2000 Index includes real estate
5
investment trusts; may in certain circumstances include two classes of stock of
a covered company; excludes securities that do not trade above $1.00 between two
"reconstitutions" and shares traded in the OTC Bulletin Board or on the pink
sheets; determines available shares for the purposes of the market
capitalization test by excluding certain cross ownership holdings and large
holdings; reconstitutes the index annually; and does not replace securities that
leave the index between reconstitution dates. The S&P 500 Index covers larger
market capitalization companies, primarily drawn from the New York Stock
Exchange (the index represents over 65% of the market value of all common stocks
listed on the New York Stock Exchange) and it consists of a statistically
selected group of 400 industrial companies, 60 transportation and utility
companies, and 40 financial companies.
MANAGEMENT AND PRINCIPAL STOCKHOLDER
Prior to the completion of this offering, all of the outstanding shares
of the Fund's common stock were owned by McKenna & Company I, L.P., which also
owns all of the outstanding shares of McKenna Securities Company (the Dealer
Manager of this offering) and McKenna Management Company (the Investment
Manager). Thus, prior to the lead completion of this offering, the Fund may be
characterized as being under common control with McKenna & Company I, L.P.,
McKenna Securies Company and the Investment Manager. After this offering McKenna
& Company I, L.P. will own approximately .25% of the outstanding shares of
common stock if a maximum number of Shares are sold and approximately .50% if a
minimum number of Shares are sold.
The address of McKenna & Company I, L.P. is 909 Fannin, Suite 1600,
Houston, Texas 77010.
The Fund will pay each director of the Fund who is not also an officer
of the Fund a fee of $10,000 per year plus $1,000 for every meeting of the Board
attended. The Fund has not completed a full fiscal year as of the date of this
filing. Messrs. Thomas Barrow, Glen Biggs, and Norman Reynolds are currently
the only directors who are not also officers of the Fund. Based on existing
agreements or understandings, the Fund does not anticipate paying remuneration
in excess of $60,000 during any 12-month period to any director, officer,
employee or other individual. The only fees payable by the Fund other than the
directors who are not also officers are to the Investment Manager and
Administrator, as more fully described in the Prospectus.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Fund has no obligation to deal with any brokers or dealers in the
execution of transactions in portfolio securities. Subject to the policy
established by the Fund's Board of Directors, the Investment Manager is
primarily responsible for the Fund's portfolio decisions and the initiation of
the Fund's portfolio transactions.
In placing orders, it is the policy of the Fund to obtain the best
results taking into account the general execution and operational facilities of
the broker or dealer, the type of transaction involved and other factors such as
the risk of the broker or dealer in positioning the securities involved. While
generally the best price is sought in placing orders, the Fund may not
necessarily be paying the lowest price available. Securities firms which provide
supplemental research to the Investment Manager may receive orders for
transactions by the Fund. In these circumstances, as contemplated by Section
28(e) of the Securities Exchange Act of 1934, the commissions paid may be higher
than those which the Fund might otherwise have paid to another broker if those
services had not been provided. Information so received will be in addition to,
and not in lieu of, the services required to be performed by the Investment
Manager under the Management Agreement, and the expenses of the Investment
Manager will not necessarily be reduced as a result of the receipt of such
supplemental information. Research services furnished to the Investment Manager
by brokers who effect securities transactions for the Fund may be used by the
Investment Manager in providing services to other investment companies and
accounts which it may manage. Similarly, research services furnished to the
Investment Manager by brokers who effect securities transactions for other
investment companies and accounts which the Investment Manager manages now or in
the future may be used by the Investment Manager in servicing the Fund. Not all
of these research services are used by the Investment Manager in managing any
particular account, including the Fund.
6
The Fund anticipates that certain broker/dealers that are parties to
selling agreements with respect to the distribution of shares in connection with
this offering may from time to time act as brokers or dealers, in connection
with the execution of portfolio transactions on the Fund's behalf. In addition,
affiliated persons (as such term is defined in the 1940 Act) of the Fund, or
affiliated persons of such persons, may from time to time be selected to perform
brokerage services for the Fund, subject to the considerations discussed above,
but are prohibited by the 1940 Act from dealing with the Fund as principal in
the purchase or sale of securities. In order for such an affiliated person to be
permitted to effect any portfolio transactions for the Fund, the commissions,
fees or other remuneration received by such affiliated person must be reasonable
and fair compared to the commissions, fees or other remuneration received by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. This standard would allow such an affiliated person to receive
no more than the remuneration which would be expected to be received by an
unaffiliated broker in a commensurate arm's-length transaction. The Fund is
prohibited by the 1940 Act from purchasing securities in offerings in which
McKenna Securities Company or any of its affiliates acts as an underwriter
unless certain conditions established under the 1940 Act are satisfied.
Investment decisions or recommendations for the Fund are made
independently from those for other funds and accounts that may be advised or
managed by the Investment Manager now or in the future. Such other funds and
accounts may also invest in the same securities as the Fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as the Fund, however, transactions in such securities will be
made, insofar as feasible, for the respective funds and accounts in a manner
deemed equitable to all. In some cases, this procedure may adversely affect the
size of the position obtained for or disposed of by the Fund or the price paid
or received by the Fund. In addition, because of different investment
objectives, a particular security may be purchased for one or more funds or
accounts when one or more funds or accounts are selling the same security.
Although the Management Agreement does not contain any restrictions on
portfolio turnover, it is not the Fund's policy to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Fund will not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities. For purposes of this calculation, portfolio securities
exclude all securities having a maturity when purchased of one year or less.
TAX STATUS
The following is a general summary of certain United States federal
income tax considerations affecting the Fund and U.S. stockholders. No attempt
is made to present a detailed explanation of all federal, state, local and
foreign income or other tax considerations, and this discussion is not intended
as a substitute for careful tax planning. ACCORDINGLY, POTENTIAL INVESTORS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING AN INVESTMENT IN THE FUND.
THE FUND
The Fund intends to qualify and elect to be treated as a "regulated
investment company" for U.S. federal income tax purposes under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). In order to so
qualify, the Fund must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
certain loans of securities, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities or currencies (including, but
not limited to, gains from options, futures or forward contracts); (b) derive in
each taxable year less than 30% of its gross income from the sale or other
disposition of any of the following that are held for less than three months
(the "30% limitation"): (i) stock or securities, (ii) options, futures or
forward contracts, or (iii) foreign currencies (or foreign currency options,
futures or forward contracts) that are
7
not directly related to its principal business of investing in stock or
securities (or options and futures with respect to stocks or securities) and (c)
diversify its holdings so that, at the end of each quarter of each taxable year,
(i) at least 50% of the value of the Fund's assets is represented by cash, cash
items, U.S. Government securities, securities of other regulated investment
companies, and other securities which, with respect to any one issuer, do not
represent more than 5% of the value of the Fund's assets nor more than 10% of
the outstanding voting securities of such issuer, and (ii) nor more than 25% of
the value of the Fund is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies).
If the Fund qualifies as a regulated investment company and distributes
to its stockholders at least 90% of its investment company taxable income
(including any short-term capital gain but not net capital gain, which is the
excess of net long-term capital gains over net short-term capital losses), then
the Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax at a rate of 35% on
any undistributed income. If in any year the Fund should fail to qualify as a
regulated investment company, the Fund would be subject to federal tax in the
same manner as an ordinary corporation, and distributions to stockholders would
be taxable to such holders as ordinary income to the extent of the earnings and
profits of the Fund. Distributions in excess of earnings and profits will be
treated as a tax-free return of capital, to the extent of a holder's basis in
its shares, and any excess, as a long- or short-term capital gain. In addition,
the Fund will be subject to a nondeductible 4% excise tax on the amount by which
the aggregate income it distributes in any calendar year is less than the sum of
(a) 98% of the Fund's ordinary income for such calendar year, plus (b) 98% of
the excess of capital gains over capital losses for the one-year period ending
on October 31 of each year, plus (c) 100% of the undistributed ordinary income
and capital gains over capital losses from prior years.
The Fund intends to distribute sufficient income so as to avoid both
U.S. federal income tax and the excise tax.
The tax treatment of certain investments of the Fund is not free from
doubt and it is possible that an Internal Revenue Service (the "IRS")
examination of the issuers of such securities or of the Fund could result in
adjustments to the income of the Fund. An upward adjustment by the IRS to the
income of the Fund may result in the failure of the Fund to satisfy the 90%
distribution requirement described in the Prospectus necessary for the Fund to
maintain its status as a regulated investment company under the Code. In such
event, the Fund may be able to make a "deficiency dividend" distribution to its
stockholders with respect to the year under examination to satisfy this
requirement. Such distribution will be taxable as a dividend to the stockholders
receiving the distribution (whether or not the Fund has sufficient current or
accumulated earnings and profits for the year in which such distribution is
made) in the taxable year in which such dividends are received. A downward
adjustment by the IRS to the income of the Fund may cause a portion of the
previously made distribution with respect to the year under examination not to
be treated as a dividend. In such event, the portion of distributions to each
holder not treated as a dividend would be recharacterized as a return of capital
and reduce the stockholder's basis in the shares held at the time of the
previously made distributions. Accordingly, this reduction in basis could cause
a stockholder to recognize additional gain upon the sale of such stockholder's
shares of the Fund.
U.S. STOCKHOLDERS
DISTRIBUTIONS. Distributions to stockholders of net investment income
will be taxable as ordinary income whether paid in cash or reinvested in
additional shares. It is not anticipated that a significant portion of such
dividends, if any, will qualify for the dividends-received deduction for
corporate stockholders under the Code. Stockholders receiving distributions from
the Fund in the form of additional shares pursuant to the dividend reinvestment
plan will be treated for federal income tax purposes as receiving a distribution
in an amount equal to the fair market value of the additional shares on the date
of such a distribution. Consequently, if the number of Shares distributed
reflects a market premium, the amount distributed to stockholders participating
in the plan would exceed the amount of the cash distributed to nonparticipating
stockholders.
8
Distributions to stockholders of net capital gain that are designated
by the Fund as "capital gains dividends" will be taxable as long-term capital
gains, whether paid in cash or additional shares, regardless of how long the
shares of the Fund have been held by such stockholders. Capital gains dividends
will not be eligible for the dividends received deduction. The current maximum
federal income tax rate imposed on individuals with respect to long-term capital
gains is limited to 28%, whereas the current maximum federal income tax rate
imposed on individuals with respect to ordinary income (and short-term capital
gains, which are taxed at the same rates as ordinary income) is 39.6%. With
respect to corporate taxpayers, long-term capital gains are currently taxed at
the same federal income tax rates as ordinary income and short-term capital
gains.
Dividends and distributions by the Fund are generally taxable to the
stockholders at the time the dividend or distribution is made (even if paid or
reinvested in additional shares). Any dividend declared by the Fund in October,
November or December of any calendar year, however, which is payable to
stockholders of record on a specified date in such a month and which is not paid
on or before December 31 of such year will be treated as received by the
stockholders as of December 31 of such year, provided that the dividend is paid
during January of the following year.
A notice detailing the tax status of dividends and distributions paid
by the Fund will be mailed annually to the stockholders of the Fund.
DISPOSITIONS AND REPURCHASES. Gain or loss, if any, recognized on the
sale or other disposition of shares of the Fund will be taxed as capital gain or
loss if the shares are capital assets in the stockholder's hands. Generally, a
stockholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. If a stockholder sells or otherwise disposes
of a share of the Fund before holding it for more than six months, any loss on
the sale or other disposition of such share shall be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
stockholder with respect to such share. A loss realized on a sale or exchange of
shares may be disallowed if other shares are acquired (whether under the Plan or
otherwise) within a 61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of.
A repurchase by the Fund of shares generally will be treated as a sale
of the shares by a stockholder provided that after the repurchase the
stockholder does not own, either directly or by attribution under Section 318 of
the Code, any shares. If, after a repurchase a stockholder continues to own,
directly or by attribution, any shares, it is possible that any amounts received
in the repurchase by such stockholder will be taxable as a dividend to such
stockholder, and there is a risk that stockholders who do not have any of their
shares repurchased would be treated as having received a dividend distribution
as a result of their proportionate increase in the ownership of the Fund.
FOREIGN STOCKHOLDERS
U.S. taxation of a stockholder who, as to the United States, is a
non-resident alien individual, a foreign trust or estate, a foreign corporation,
or a foreign partnership ("foreign stockholder"), depends on whether the income
from the Fund is "effectively connected" with a U.S. trade or business carried
on by such stockholder. Ordinarily, income from the Fund will not be treated as
so "effectively connected."
INCOME NOT EFFECTIVELY CONNECTED. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the foreign
stockholder, distributions of investment company taxable income will be subject
to a U.S. tax at a rate of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends to a non-resident alien who is
present in the United States for fewer than one hundred eighty-three days during
the taxable year will not be subject to the 30% U.S. withholding tax. An alien
individual who is physically present in the United States for more than one
hundred eighty-two days during
9
the taxable year generally is treated as a resident for U.S. federal
income tax purposes, in which case he or she will be subject to U.S. federal
income tax on his or her worldwide income including ordinary income and capital
gain dividends at the graduated rates applicable to U.S. citizens, rather than
the 30% U.S. withholding tax. In the case of a foreign stockholder who is a
non-resident alien individual, the Fund may be required to withhold U.S. federal
income tax at a rate of 31% of distributions of capital gain dividends under the
backup withholding system unless the foreign stockholder makes required
certifications to the Fund on a properly completed U.S. Internal Revenue Service
Form W-8. The amount so withheld could be applied as a credit against any U.S.
tax due from the stockholder or, if no tax is due, refunded pursuant to a claim
therefor properly filed on an income tax return.
INCOME EFFECTIVELY CONNECTED. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a foreign
stockholder, then distributions of investment company taxable income and net
capital gains, and any gains realized upon the sale of shares of the Fund, will
be subject to U.S. federal income tax at the graduated rates applicable to U.S.
citizens, residents and domestic corporations. Such stockholders may also be
subject to the 30% branch profits tax.
THE TAX CONSEQUENCES TO A FOREIGN STOCKHOLDER ENTITLED TO CLAIM THE
BENEFITS OF AN APPLICABLE TAX TREATY MAY BE DIFFERENT FROM THOSE DESCRIBED
HEREIN. FOREIGN STOCKHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS
REGARDING THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE FUND.
10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders of
Southwest Small Cap Equity Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
the Southwest Small Cap Equity Fund, Inc. as of November 15, 1995. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above present fairly, in all material respects, the financial position of the
Southwest Small Cap Equity Fund, Inc. as of November 15, 1995 in conformity with
generally accepted accounting principles.
_/s/_ARTHUR_ANDERSEN_LLP_
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
November 17, 1995
11
<PAGE>
SOUTHWEST SMALL CAP EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
AS OF NOVEMBER 15, 1995
ASSETS
Cash $100,000
Deferred organizational expenses (Note 2) 49,000
Deferred offering costs (Note 2) 142,000
- -------
Total assets 291,000
-------
LIABILITIES
Accrued expenses (Note 2) 191,000
-------
Total liabilities 191,000
-------
CAPITAL
Preferred stock ($.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding)
Common stock ($.001 par value; 15,000,000 shares
authorized, 10,000 shares issued and outstanding) 10
Paid-in-capital 99,990
------
Net assets for shares of stock outstanding $100,000
========
Shares outstanding 10,000
========
Offering price per share $ 10.00
========
The accompanying notes are an integral
part of this financial statement.
13
Southwest Small Cap Equity Fund, Inc.
Notes to the Statement of Assets and Liabilities
November 15, 1995
(1) The Southwest Small Cap Equity Fund, Inc. (the "Fund") is a
diversified, closed-end management investment company registered under
the Investment Company Act of 1940. The Fund retains McKenna & Company
I, L.P. ("McKenna"), as Administrator of the Fund. The Fund has had no
operations except for the initial issuance of shares. On November 15,
1995, 10,000 shares of the Fund were issued for cash at $10.00 per
share to McKenna.
(2) Expenses incurred in connection with the organization of the Fund and
the initial offering of shares are estimated to be $49,000 and
$142,000, respectively. These organizational and offering expenses have
been or will be paid by McKenna. Upon commencement of the public
offering of shares of the Fund, the Fund will reimburse McKenna for its
share of such expenses, with the organizational costs being capitalized
and amortized on a straight-line basis over five years and the offering
costs being charged to paid-in-capital immediately. As of November 15,
1995, all outstanding shares of the Fund were held by McKenna, who
purchased these initial shares in order to provide the Fund with its
required capital. In the event any of the initial shares of the Fund
are sold by McKenna or by any subsequent owner at any time prior to the
complete amortization of organizational expenses, the proceeds payable
with respect to such shares will be reduced by the pro rata shares of
the unamortized deferred organizational expenses as of the date of such
sale.
(3) Reference is made to the Prospectus and this Statement of Additional
Information for a description of the Management Agreement, the
Administration Services Agreement, the Custody and Stock Transfer
Agreement, the Dealer Manager Agreement, and tax aspects of the Fund.
14
<PAGE>
PART C
OTHER INFORMATION
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
(a) Articles of Incorporation +
(b) By-Laws +
(c) Not applicable
(d) Form of specimen stock certificate *
(e) Form of Dividend Reinvestment Plan
(f) Not applicable
(g)(A) Form of Management Agreement between
the Fund and McKenna Management
Company
(g)(B) Form of Administration Agreement
between the Fund and McKenna & Company
I, L.P. and MGF Service Corp.
(g)(C) Form of Sub-Administration Agreement
among the Fund and McKenna & Company I,
L.P. and MGF Service Corp.
(h)(A) Form of Selling Agreement between
the Fund and McKenna Securities Company
(h)(B) Master Selected Dealer Agreement
(i) Not applicable
(j)(A) Form of Custody Agreement between the Fund and
Star Bank, N.A.
(k) Form of Transfer Agency Agreement
between the Fund and Star Bank,
N.A.
(l)(A) Opinion and Consent of Mayor, Day, *
Caldwell & Keeton, L.L.P.
(m) Not applicable
(n) Consent of Arthur Andersen LLP
(o) Not applicable
(p) Form of Share Purchase Agreement
between the Fund and McKenna
& Company I, L.P. *
(q) Not applicable
(r) Not applicable
(s) Power of Attorney (included +
on signature page)
- ----------------------------------
* To be filed by amendment
+ Previously filed with the Commission
MARKETING ARRANGEMENTS
In connection with this offering, the Dealer Managers may effect
transactions on the Chicago Stock Exchange which stabilize or maintain the
market price of the Common Stock at a level above that which might otherwise
prevail in the open market. Such stabilizing, if commenced, may be discontinued
at any time.
15
<PAGE>
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities covered by this
Registration Statement.
Securities and Exchange Commission Fees *
Blue Sky fees and expenses *
Cost of stock certificates *
Printing *
Legal fees and expenses *
Independent auditor's fees and expenses *
Miscellaneous including marketing expenses *
-----------------------
* To be filed by amendment
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
The Fund does not control any person. The Fund, the Dealer Manager and
the Investment Manager are under common control.
John J. McKenna, Chairman of the Board and President of the Fund is
Chairman and Chief Executive Officer of McKenna & Company which is the general
partner of McKenna & Company I, L.P. which is the Administrator of the Fund. He
is also Chairman and CEO of McKenna Management Company which is the Investment
Manager of the Fund.
Robert D. Harrell, Director of the Fund, is a Managing Director of
McKenna & Company I, L.P. and is Chief Investment Officer of McKenna Management
Company.
Lynne P. Hohlfeld, Treasurer and Secretary of the Fund is Controller of
McKenna & Company I, L.P.
E. Glenn Biggs, Director of the Fund, is a limited partner of McKenna &
Company I, L.P.
NUMBER OF HOLDERS OF SECURITIES
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Common Stock 1
par value $.001 per share
INDEMNIFICATION
Section 145 of the DGCL, INTER ALIA, authorizes a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the corporation) because the person is or was a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
the suit or proceeding if the person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reason to believe his conduct was unlawful. Similar indemnity is authorized
against expenses (including attorneys' fees) actually and reasonably incurred in
defense or settlement of any pending, completed or threatened action or suit if
such person acted in good
16
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and provided further that (unless a court of
competent jurisdiction otherwise provides) the person shall not have been
adjudged liable to the corporation. The indemnification may be made only as
authorized in each specific case upon a determination by the stockholders or
disinterested directors that indemnification is proper because the indemnitee
has met the applicable standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any capacity,
or arising out of his status as such, whether or not the corporation would
otherwise have the power to indemnify him.
Article VI of the Fund's Articles of Incorporation and Article 8 of the
Fund's By-Laws provide, in substance, that directors, officers, employees and
agents of the Fund shall be indemnified to the extent permitted by Section 145
of the DGCL. Additionally, Article VI of the Fund's Charter eliminates in
certain circumstances the monetary liability of directors of the Fund for a
breach of their fiduciary duty as directors. These provisions do not eliminate
the liability of a director (i) for a breach of a director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions by a director
not in good faith; (iii) for acts or omissions by a director involving
intentional misconduct or a knowing violation of the law; (iv) under Section 174
of the DGCL (relating to the declaration of dividends and purchase or redemption
of shares in violation of the DGCL); and (v) for transactions from which the
director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted for directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The Fund has agreed to indemnify the Dealer Managers and selling
Broker/Dealers against certain civil liabilities, including liabilities under
the federal securities laws. However, such indemnification is subject to the
provisions of Section 17(1) of the Investment Act which provides, in part, that
no agreement shall contain a provision which protects or purports to protect an
underwriter of an investment company or business development company against any
liability to such company or its security holders to which it would otherwise be
subject due to its misfeasance, bad faith, or gross negligence in the
performance of its duties, or reckless disregard of its obligations and duties
under such agreement.
BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT MANAGER
For information as to the business, professional, vocation or
employment of a substantial nature of each of the officers and directors of the
Fund, see the information set forth in the Prospectus under the caption,
"Management".
LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Fund will be maintained at the offices
of MGF Services Corp., 312 Walnut Street, Cincinnati, Ohio 45202.
17
MANAGEMENT SERVICES
Except as described in the Prospectus under the captions "Management of
the Fund," "Dividends" and "Marketing Arrangements," the Fund is not party to
any management or other service related contract.
UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(1) To suspend the offering of shares until the Prospectus is amended if (a)
subsequent to the effective date of the Registration Statement, the net asset
value of the Fund declines more than ten percent from its net asset value as of
the effective date of the Registration Statement or (b) the net asset value of
the Fund increases to an amount greater than the net proceeds of the offering as
stated in the Prospectus.
(2) (a) To file, during any period in which offers or sales are being made,
a post-effective amendment to the Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the 1933 Act;
(ii) to reflect in the Prospectus any facts or events after
the effective date of the Registration Statement (or the most
recent post-effective amendment) which, individually or in the
aggregate, represent a fundamental change in the information
set forth in the Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
(b) That, for the purpose of determining any liability under the 1933
Act, each such post effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of those securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered by the Registration Statement
which remain unsold at the termination of this offering.
(3) (a) For the purpose of determining any liability under the 1933 Act,
the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant under Rule 497(h) under
the 1933 Act [17 CFR 230.497(h)] shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(b) For the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.
(4) The registrant hereby further undertakes to send by first class mail or
other means designed to ensure equally prompt delivery, within two business days
of receipt of a written or oral request, any Statement of Additional
Information.
18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
No. 1 to Registration Statement No. 33-98050 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Houston, State of Texas on
the 22 day of November, 1995.
SOUTHWEST SMALL CAP EQUITY FUND, INC.
By:_/s/_JOHN_J._MCKENNA_
John J. McKenna, Chairman of the
Board and President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement No. 33-98050 has been signed below by
the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/_JOHN_J._MCKENNA_ Chairman of the Board; November 22, 1995
John J. McKenna President; Director
_________*___________ Director November 22, 1995
Thomas D. Barrow
_________*___________ Director November 22, 1995
Norman T. Reynolds
_________*___________ Director November 22, 1995
E. Glenn Biggs
_________*___________ Director November 22, 1995
Robert D. Harrell
_________*___________ Treasurer; Secretary November 22, 1995
Lynne P. Hohlfeld
*/s/_JOHN_J._MCKENNA_ November 22, 1995
John J. McKenna, Attorney-in-fact
0266149.03
119521/2022
20
Exhibit (e)
TERMS AND CONDITIONS OF
DIVIDEND REINVESTMENT PLAN
1. Each shareholder ("Shareholder") holding shares of common stock
("Shares") of the Southwest Small Cap Equity Fund, Inc. (the "Fund") will be
deemed to have elected to be a participant in the Dividend Reinvestment Plan
(the "Plan"), unless the Shareholder specifically elects in writing (addressed
to the Agent at the address below or to any nominee who holds Shares for the
Shareholder in its name) to receive all dividends and distributions of capital
gains in cash, paid by check mailed directly to the record holder by or under
the direction of Star Bank, N.A., as the Fund's dividend-paying agent. Star
Bank, N.A., will act as Agent (the "Agent") for each Shareholder, and will open
accounts for each Shareholder under the Plan in the same name as their Shares
are registered.
2. Whenever the Board of Directors of the Fund declares a distribution
from capital gains or an income dividend payable in either Shares or cash,
participating Shareholders will receive such distribution or dividend in the
manner described in paragraph 3 below.
3. If the Board of Directors of the Fund declares an income dividend or
a capital gains distribution payable in either Shares or in cash, Plan
participants will receive Shares, to be issued by the Fund or purchased by the
Agent in the open market, as provided below. If the market price per share on
the valuation date equals or exceeds net asset value per share on that date, the
Fund will issue new shares to participants at net asset value; provided,
however, that if the net asset value is less than 95% of the market price on the
valuation date, then such shares will be issued at 95% of the market price. The
valuation date will be the dividend or distribution payment date or, if that
date is not a Chicago Stock Exchange regular trading day, the next preceding
regular trading day. If net asset value exceeds the market price of the Shares
at such time, or if the Fund should declare an income dividend or capital gains
distribution payable only in cash, the Agent will purchase Shares in the
open-market as provided below. If the Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period provided for
below or if the market discount shifts to a market premium during the purchase
period, the Agent will cease making open-market purchases and will invest the
uninvested portion of the dividend amount in newly issued Shares at the close of
business on the last purchase date.
4. The open-market purchases provided for above may be made on any
securities exchange on which the Shares of the Fund are traded, in the
over-the-counter market or in negotiated transactions, and may be on such terms
as to price, delivery and otherwise as the Agent shall determine. Such purchases
will be made as soon as practicable on or shortly after the payable date for the
applicable dividend or distribution, and in no event more than 30 days after
such date except where temporary curtailment or suspension of purchase is
necessary to comply with applicable provisions of federal securities law. Funds
held by the Agent uninvested will not bear interest, and it is understood that,
in any event, the Agent shall have no liability in connection with any inability
to purchase Shares within the time periods herein provided, or with the timing
of any purchases effected. The Agent shall have no responsibility as to the
value of the Shares acquired for the Shareholder's account. The Agent may
commingle amounts of all Plan Shareholders to be used for open-market purchases
of Shares and the price per Share allocable to each participant in connection
with such purchases shall be the average price (including brokerage commissions)
of all Shares purchased by the Agent.
5. The Agent will maintain all Shareholder accounts in the Plan and
will furnish written confirmations of all transactions in each account,
including information needed by Shareholders for personal and tax records. The
Agent will hold Shares acquired pursuant to the Plan in noncertificated form in
the Shareholder's name or that of its nominee, and each Shareholder's proxy will
include those Shares purchased pursuant to the Plan. The Agent will forward to
Shareholders any proxy solicitation material and will vote any Shares so held
for Shareholders in accordance with the proxy returned by Shareholders to the
Fund. Upon written request, the Agent will deliver to Shareholders, without
charge, a certificate or certificates for the full Shares so held by it,
provided, however, that no certificates for fractional shares will be issued.
6. The Agent will confirm to Shareholders each acquisition made for
their respective accounts as soon as practicable but not later than 70 days
after the date thereof. Although Shareholders may from time to time have an
undivided fractional interest (computed to three decimal places) in a Share of
the Fund, no certificates for fractional shares will be issued. Dividends and
distributions on fractional shares will be credited to each Shareholder's
account. In the event of termination of a Shareholder's account under the Plan,
the Agent will adjust for any such undivided fractional interest in cash at the
market value of the Fund's Shares at the time of termination less the pro rata
expense of any sale required to make such an adjustment.
7. Any share dividends or split shares distributed by the Fund on
Shares held by the Agent for Shareholders will be credited to their respective
accounts. In the event that the Fund makes available to Shareholders rights to
purchase additional Shares or other securities, the Shares held for Shareholders
under the plan will be added to other Shares held by the Shareholders in
calculating the number of rights to be issued to Shareholders.
8. The Agent's service fee for handling capital gains distributions or
income dividends will be paid by the Fund. Shareholders will be charged a pro
rata share of brokerage commissions on all open market purchases.
9. Shareholders may terminate their accounts under the Plan by
notifying the Agent in writing. Such termination will be effective immediately
if notice is received by the Agent not less than ten days prior to any dividend
of distribution record date; otherwise such termination will be effective on the
first trading day after that payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be amended or
terminated by the Fund as applied to any dividend or capital gains distribution
paid subsequent to written notice of the change or termination sent to Plan
participants at least 30 days prior to the records date for the dividend or
capital gains distribution. The Plan may be amended or terminated by the Agent,
with the Fund's prior written consent, on at least 30 days' written notice to
plan participants. Notwithstanding the preceding two sentences, the Agent or the
Fund may amend or supplement the Plan at any time or times when necessary or
appropriate to comply with applicable law or rules or policies of the Securities
and Exchange Commission or any other regulatory authority. Upon any termination
the Agent will cause a certificate or certificates for the full Shares held by
each Shareholder under the Plan and cash adjustment for any fraction to be
delivered to each Shareholder without charge.
10. Any amendment or supplement shall be deemed to be accepted by each
Shareholder unless, prior to the effective date thereof, the Agent receives
written notice of the termination of the Shareholder's account under the Plan.
Any such amendment may include an appointment by the Agent in its place and
stead of a successor Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Agent under
these terms and conditions. Upon any such appointment of an Agent for the
purpose of receiving dividends and distributions, the Fund will be authorized to
pay to such successor Agent, for each
2
Shareholder's account, all dividends and distributions payable on Shares of the
Fund held in each Shareholder's name or under the Plan for retention or
applications by such successor Agent as provided in these terms and conditions.
11. In the case of participants, such as banks, broker-dealers or other
nominees, which hold Shares for others who are beneficial owners ("Nominee
Holders"), the Agent will administer the Plan on the basis of the number of
Shares certified from time to time by each Nominee Holder as representing the
total amount registered in the Nominee Holder's name and held for the account of
beneficial owners who are to participate in the Plan.
12. The Agent shall at all times act in good faith and use its best
efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by its negligence, bad faith, or willful misconduct or that
of its employees.
13. All correspondence concerning the Plan should be directed to Star
Bank, N.A., as Plan Agent, at 425 Walnut Street, P.O. Box 1118, Cincinnati,
Ohio, 45201-1118.
14. These terms and conditions shall be governed by the laws of the
State of Ohio.
Dated:
ACKNOWLEDGED AND ACCEPTED:
By: ___________________
Name: _______
Title: _______
0265380.02
119520/2126
3
Exhibit g(a)
MANAGEMENT AGREEMENT
McKenna Management Company
Two Houston Center
909 Fannin, Suite 1600
Houston, TX 77010
Ladies and Gentlemen:
Southwest Small Cap Equity Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company registered under the Investment Company
Act of 1940, as amended (the "Act"), and subject to the rules and regulations
promulgated thereunder.
1. APPOINTMENT AS MANAGER. The Fund being duly authorized hereby
appoints and employs McKenna Management Company ("the Manager") as the
discretionary portfolio manager of the Fund, on the terms and conditions set
forth herein.
2. ACCEPTANCE OF APPOINTMENT; STANDARD OF PERFORMANCE. The Manager
accepts the appointment as the discretionary portfolio manager and agrees to use
its best professional judgment to make timely investment decisions for the Fund
in accordance with the provisions of this Agreement.
3. PORTFOLIO MANAGEMENT SERVICES OF MANAGER. The Manager is hereby
employed and authorized to select portfolio securities for investment by the
Fund, to purchase and sell securities of the Fund, and upon making any purchase
or sale decision, to place orders for the execution of such portfolio
transactions in accordance with paragraphs 5 and 6 hereof. In providing
portfolio management services to the Fund, the Manager shall be
<PAGE>
subject to such investment restrictions as are set forth in the Act and the
rules thereunder, the Internal Revenue Code, applicable state securities laws,
the supervision and control of the Board of Directors of the Fund, such specific
instructions as the Board of Directors may adopt and communicate to the Manager,
the investment objectives, policies and restrictions of the Fund furnished
pursuant to paragraph 4, and the provisions of Schedule A hereto. The Manager is
not authorized by the Fund to take any action, including the purchase or sale of
securities for the Fund, in contravention of any restriction, limitation,
objective, policy or instruction described in the previous sentence. The Manager
shall maintain on behalf of the Fund the records listed in Schedule A hereto (as
amended from time to time).
4. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. The Fund
will provide the Manager with the statement of investment objectives, policies
and restrictions applicable to the Fund as contained in the Fund's registration
statements under the Act and the Securities Act of 1933, and any instructions
adopted by the Board of Directors supplemental thereto. The Fund will provide
the Manager with such further information concerning the investment objectives,
policies and restrictions applicable thereto as the Manager may from time to
time reasonably request. The Fund retains the right, on written notice to the
Manager, to modify any such objectives, policies or restrictions in any manner
at any time.
- 2 -
5. TRANSACTION PROCEDURES. All transactions will be consummated
by payment to or delivery by Star Bank, N.A. or any successor custodian (the
"Custodian"), or such depositories or agents as may be designated by the
Custodian in writing, as custodian for the Fund, of all cash and/or securities
due to or from the Fund, and the Manager shall not have possession or custody
thereof. The Manager shall advise the Custodian and confirm in writing to the
Fund all investment orders for the Fund placed by it with brokers and dealers.
The Manager shall issue to the Custodian such instructions as may be appropriate
in connection with the settlement of any transaction initiated by the Manager.
It shall be the responsibility of the Manager to take appropriate action if the
Custodian fails to confirm in writing proper execution of the instructions.
6. ALLOCATION OF BROKERAGE. The Manager shall have the authority and
discretion to select brokers and dealers to execute portfolio transactions
initiated by the Manager, and for the selection of the markets on or in which
the transactions will be executed.
A. In doing so, the Manager will attempt to obtain the best
results taking into account the execution and operational facilities of the
broker or dealer, the type of transaction involved and other factors such as the
risk of the broker or dealer in positioning the securities involved. Consistent
with this policy, the Manager may select a broker or dealer that also provides
brokerage and research services (as
- 3 -
those terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
to any other accounts over which it exercises investment discretion. It is
understood that neither the Fund nor the Manager has adopted a formula for the
allocation of the Fund's investment transaction business. It is also understood
that it is desirable for the Fund that the Manager have access to supplemental
investment and market research and security and economic analyses provided by
certain brokers who may execute transactions for the Fund and that the
commissions paid to such brokers may be higher than those which the Fund might
otherwise have paid to another broker if those services had not been provided.
Therefore, the Manager is authorized to place orders for the purchase and sale
of securities for the Fund with such certain brokers, subject to review by the
Fund's Board of Directors from time to time with respect to the extent and
continuation of this practice, and provided the Manager determines in good faith
that the amount of the commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker or dealer. The
determination may be viewed in terms of either a particular transaction or the
Manager's overall responsibilities with respect to the Fund and to any other
accounts over which it exercises investment discretion. Information so received
will be in addition to, and not in lieu of, the services required to be
performed by the Investment Manager under the Management Agreement, and the
expenses of the Investment Manager will not
- 4 -
necessarily be reduced as a result of the receipt of such supplemental
information. Research services furnished to the Investment Manager by brokers
who effect securities transactions for the Fund may be used by the Investment
Manager in providing services to other investment companies and accounts which
it may manage. Similarly, research services furnished to the Investment Manager
by brokers who effect securities transactions for other investment companies and
accounts which the Investment Manager manages now or in the future may be used
by the Investment Manager in servicing the Fund. Not all of these research
services are used by the Investment Manager in managing any particular account,
including the Fund. It is understood that although the information may be useful
to the Fund and the Manager, it is not possible to place a dollar value on such
information. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., and subject to seeking best qualitative
execution, the Manager may give consideration to sales of shares of the Fund as
a factor in the selection of brokers and dealers to execute portfolio
transactions of the Fund.
On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Fund as well as any other clients, the
Manager, to the extent permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the securities to be sold or
purchased in order to obtain the most favorable price or lower brokerage
commissions
- 5 -
and efficient execution. In such event, allocation of the securities so
purchased or sold, as well as expenses incurred in the transaction, will be made
by the Manager, insofar as feasible, in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Fund and to such
other clients. For each fiscal quarter of the Fund, the Manager shall prepare
and render reports to the Fund's Board of Directors of the total brokerage
business placed and the manner in which the allocation has been accomplished.
Such reports shall set forth at a minimum the information required to be
maintained by Rule 31a-1(b)(9) under the Act.
B. The Manager may execute any portfolio transactions
for the Fund's account with a broker or dealer which is an "affiliated person"
(as defined in the Act) of the Fund, the Manager or any portfolio manager of the
Fund subject to Paragraph 6(A) above and provisions adopted by the Board of
Directors pursuant to Rule 17e-1 under the Investment Company Act of 1940. In
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by such affiliated person must be reasonable and fair compared to the
commissions, fees or other remuneration received by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time. This standard
would allow such an affiliated
- 6 -
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length transaction.
The Fund agrees that it will provide the Manager with a list of brokers and
dealers which are "affiliated persons" of the Fund or the Manager.
7. PROXIES. The Fund will vote all proxies solicited by or with respect
to the issuers of securities in which assets of the Fund may be invested from
time to time. At the Fund's request, the Manager shall provide the Fund with its
recommendations as to the voting of such proxies.
8. REPORTS TO THE MANAGER. The Fund will provide the Manager with such
periodic reports concerning the status of the Fund as the Manager may reasonably
request.
9. FEES FOR SERVICES. For the services provided to the Fund, the Fund
shall pay the Manager, on the first business day following the end of each
month, a fee equal to one twelfth (1/12) of the annual rate of 1.00% of the
Fund's Average Net Assets during such month. The Manager will determine the
"Average Net Assets" of the Fund for each calendar month by computing the
arithmetic average of the Fund's net assets as of each of the dates during such
month that such net assets are computed.
10. EXPENSES. During the term of this Agreement, the Manager will pay
all expenses incurred by it in connection with its portfolio management services
pertaining to the Fund. Notwithstanding the foregoing, the Fund shall pay all of
its own expenses, including the following:
(a) Organizational and offering expenses of the Fund;
(b) Brokerage fees and commissions with regard to portfolio
transactions of the Fund;
(c) Fees and expenses of the custodian of the Fund's
- 7 -
portfolio securities;
(d) Fees and expenses of the Fund's administrative agent, the
Fund's stock transfer and dividend paying agent, the Fund's
accounting agent and the Plan Agent for the Fund's Dividend
Reinvestment Plan or, if the Fund performs any such services
without an agent, the costs of the same;
(e) Auditing and legal expenses;
(f) Insurance expenses, including the expense of officer and
director insurance;
(g) Cost of maintenance of the Fund's existence as a legal entity;
(h) Compensation and expenses of directors who are not interested
persons of the Manager as that term is defined by law;
(i) Costs of stockholders' meetings and other stockholder
relations functions;
(j) Federal and State registration or qualification fees and
expenses;
(k) Dues and expenses incurred in connection with listing the
Fund's shares on any stock exchange;
(l) Dues and expenses incurred in connection with membership in
investment company organizations;
(m) Costs of setting in type, printing and mailing Prospectuses,
reports and notices to existing shareholders;
(n) Taxes, interest charges and extraordinary expenses;
(o) The portfolio management fee payable to the Manager, as
provided in paragraph 9 herein; and
(p) other extraordinary or nonrecurring expenses.
If, with respect to any of the years ending December 31, 1995, 1996, or
1997, the total expenses of the Fund incurred by, or allocated to, the Fund with
respect to any such year (excluding the expenses incurred or paid in connection
with an offering of securities, brokerage commissions and other portfolio
transaction expenses, taxes, interest, expenditures that are capitalized in
accordance with generally accepted accounting principles and extraordinary
- 8 -
expenses) exceed 2% of net assets as of the end of such year, the Manager will,
to the extent of such excess (and on a pro rata basis with the Administrator for
the Fund as to its Administration Fees) waive its Management Fees payable for
such year or reimburse the Fund. The Manager shall in no event be required to
reimburse an amount greater than the total cumulative amount of fees received
from the Fund pursuant to paragraph 9, above.
11. OTHER INVESTMENT ACTIVITIES OF THE MANAGER. The Fund acknowledges
that the Manager or one or more of its affiliates may have investment
responsibilities or render investment advice to or perform other portfolio
management services for other individuals or entities and that the Manager, its
affiliates or any of its or their directors, officers, agents or employees may
buy, sell or trade in any securities for its or their respective accounts
("Affiliated Accounts"). Subject to the provisions of paragraph 2 hereof, the
Fund agrees that the Manager or its affiliates may give advice or exercise
investment responsibility and take such other action with respect to other
Affiliated Accounts which may differ from the advice given or the timing or
nature of action taken with respect to the Fund, provided that the Manager acts
in good faith, and provided further, that it is the Manager's policy to
allocate, within its reasonable discretion, investment opportunities to the Fund
over a period of time on a fair and equitable basis relative to the Affiliated
Accounts, taking into account the investment objectives and
- 9 -
policies of the Fund and any specific investment restrictions applicable
thereto, each as described in the Fund's Prospectus under the heading
"Investment Objective and Policies." If any Affiliated Account or Accounts are
prepared to invest in, or desire to dispose of, the same security at the same
time as the Fund, transactions in such securities will be made, insofar as
feasible, for the Fund and the Affiliated Accounts in a manner deemed equitable
to all. In some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by the Fund or the price paid or received
by the Fund. In addition, because of different investment objectives, a
particular security may be purchased for one or more funds or accounts when one
or more funds or accounts are selling the same security. The Fund acknowledges
that one or more of the Affiliated Accounts may at any time hold, acquire,
increase, decrease, dispose of or otherwise deal with positions in investments
in which the Fund may have an interest from time to time, whether in
transactions which involve the Fund or otherwise. The Manager shall have no
obligation to acquire for the Fund a position in any investment which any
Affiliated Account may acquire, and the Fund shall have no first refusal,
co-investment or other rights in respect of any such investment, either for the
Fund or otherwise.
12. CERTIFICATES OF AUTHORITY. The Fund and the Manager shall furnish
to each other from time to time certified copies of
- 10 -
the resolutions of their Board of Directors or executive committees, as the case
may be, evidencing the authority of officers and employees who are authorized to
act on behalf of the Fund and/or the Manager.
13. LIMITATION OF LIABILITY. The Manager shall not be liable for any
action taken, omitted or suffered to be taken by it in its reasonable judgment,
in good faith and believed by it to be authorized or within the discretion or
rights or powers conferred upon it by this Agreement, or in accordance with (or
in the absence of) specific directions or instructions from the Fund; PROVIDED,
HOWEVER, that such acts or omissions shall not have resulted from the Manager's
willful misfeasance, bad faith or gross negligence, a violation of the standard
of care established by and applicable to the Manager in its actions under this
Agreement or breach of its duty or of its obligations hereunder. Nothing in this
paragraph 13 shall be construed in a manner inconsistent with Sections 17(h) and
(i) of the Act. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION
OBLIGATIONS SET FORTH IN THIS AGREEMENT, THE PARTIES HERETO SHALL BE ENTITLED TO
INDEMNIFICATION IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE
LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF
THE STRICT LIABILITY OR NEGLIGENCE OF THE PARTY INDEMNIFIED. THE PARTIES AGREE
THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND.
- 11 -
14. CONFIDENTIALITY. Subject to the duty of the Manager and the Fund to
comply with applicable law, including any demand of any regulatory or taxing
authority having jurisdiction, the parties hereto shall treat as confidential
all information pertaining to the Fund and the actions of the Manager and the
Fund in respect thereof.
15. ASSIGNMENT. No assignment of this Agreement shall be made by the
Manager, and this Agreement shall terminate automatically in the event of such
assignment. The Manager shall notify the Fund in writing sufficiently in advance
of any proposed change of control, as defined in Section 2(a) (9) of the Act, as
will enable the Fund to consider whether an assignment will occur, and to take
the steps necessary to enter into a new contract with the Manager.
16. REPRESENTATIONS. WARRANTIES AND AGREEMENTS OF THE FUND. The Fund
represents, warrants and agrees that:
A. The Manager has been duly appointed by the Board of
Directors of the Fund to provide portfolio management services to the Fund as
contemplated hereby.
B. The Fund will deliver to the Manager a true and
complete copy of its then current prospectus and statement of additional
information as effective from time to time and such
- 12 -
other documents or instruments governing the investments of the Fund and such
other information as is necessary for the Manager to carry out its obligations
under this Agreement.
C. The Fund is currently in compliance and shall at all times
comply with the requirements imposed upon the Fund by applicable laws and
regulations.
17. REPRESENTATIONS. WARRANTIES AND AGREEMENTS OF THE MANAGER. The
Manager represents, warrants and agrees that:
A. The Manager is registered as an "investment adviser" under
the Investment Advisers Act of 1940.
B. The Manager will maintain, keep current and preserve
on behalf of the Fund, in the manner and for the time periods required or
permitted by the Act, the records identified in Schedule A. The Manager agrees
that such records (unless otherwise indicated on Schedule A) are the property of
the Fund, and will be surrendered to the Fund promptly upon request.
C. The Manager will complete such reports concerning purchases
or sales of securities on behalf of the Fund as the Fund may from time to time
require to ensure compliance with the Act, the Internal Revenue Code and
applicable state securities laws.
- 13 -
D. The Manager will adopt a written code of ethics complying
with the requirements of Rule 17j-1 under the Act and will provide the Fund with
a copy of the code of ethics and evidence of its adoption. Within forty-five
(45) days of the end of each calendar quarter of each year while this Agreement
is in effect, the Manager shall certify to the Fund that the Manager has
complied with the requirements of Rule 17j-l during the previous quarter and
that there has been no violation of the Manager's code of ethics or, if such a
violation has occurred, that appropriate action was taken in response to such
violation. Upon the written request of the Fund, the Manager shall submit to the
Fund the reports required to be made by Rule l7j-l(c) (1).
E. The Manager will, promptly after filing with the Securities
and Exchange Commission an amendment to its Form ADV, furnish a copy of such
amendment to the Fund.
F. Upon request of the Fund, the Manager will provide
assistance to the Custodian in the collection of income due or payable to the
Fund.
G. The Manager will immediately notify the Fund of the
occurrence of any event which would disqualify the Manager from serving as an
investment adviser of an investment company pursuant to Section 9(a) of the Act
or otherwise.
- 14 -
18. AMENDMENT. This Agreement may be amended at any time, but only by
written agreement between the Manager and the Fund, which amendment, other than
amendments to Schedule A, is subject to the approval of the Board of Directors
and the shareholders of the Fund in the manner required by the Act and the rules
thereunder, subject to any applicable exemptive order of the Securities and
Exchange Commission modifying the provisions of the Act with respect to approval
of amendments to this Agreement.
19. EFFECTIVE DATE; TERM. This Agreement shall become effective on the
date of its execution and shall remain in force for two years from the date
thereof, and from year to year thereafter but only so long as such continuance
is specifically approved at least annually by the vote of a majority of the
Directors who are not interested persons of the Fund or the Manager, cast in
person at a meeting called for the purpose of voting on such approval, and by a
vote of the Board of Directors or of a majority of the outstanding voting
securities of the Fund. The aforesaid requirement that this Agreement may be
continued "annually" shall be construed in a manner consistent with the Act and
the rules and regulations thereunder.
20. TERMINATION. This Agreement may be terminated by either party
hereto, without the payment of any penalty, immediately upon written notice to
the other in the event of a
- 15 -
breach of any provision thereof by the party so
notified, or otherwise upon sixty (60) days' written notice to the other, but
any such termination shall not affect the status, obligations or liabilities of
any party hereto to the other.
21. DEFINITIONS. As used in paragraphs 15 and 19 of this Agreement, the
terms "assignment," interested person" and "vote of a majority of the
outstanding voting securities" shall have the meanings set forth in the Act and
the rules and regulations thereunder.
22. APPLICABLE LAW. To the extent that state law is not preempted by
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of Ohio.
McKENNA MANAGEMENT COMPANY SOUTHWEST SMALL CAP
EQUITY FUND, INC.
By:_______________________ _______________________
Title: President Title: President
Date: ____, 1995 Date: ____, 1995
- 16 -
SCHEDULE A
RECORDS TO BE MAINTAINED BY THE MANAGER
1. (Rule 31a-l(b)(5) and (6)) A record of each brokerage order, and all
other portfolio purchases or sales, given by the Manager on behalf of
the Fund for, or in connection with, the purchase or sale of
securities, whether executed or unexecuted. Such records shall include:
A. The name of the broker;
B. The terms and conditions of the order and of any modification
or cancellation thereof;
C. The time of entry or cancellation;
D. The price at which executed;
E. The time of receipt of a report of execution; and
F. The name of the person who placed the order on behalf of the
Fund.
2. (Rule 31a-l(b)(9)) A record for each fiscal quarter, completed within
ten (10) days after the end of the quarter, showing specifically the
basis or bases upon which the allocation of orders for the purchase and
sale of portfolio securities to named brokers or dealers was effected,
and the division of brokerage commissions or other compensation on such
purchase and sale orders. Such record:
A. Shall include the consideration given to:
(i) The sale of shares of the Fund by brokers or dealers.
(ii) The supplying of services or benefits by brokers or
dealers to:
(a) the Fund;
(b) the Manager;
(c) any other portfolio manager of the Fund; and
(d) any person affiliated with the foregoing
persons.
(iii) Any other consideration other than the technical
qualifications of the brokers and dealers
- 17 -
as such.
B. Shall show the nature of the services or benefits made
available.
C. Shall describe in detail the application of any general or
specific formula or other determinant used in arriving at such
allocation of purchase and sale orders and such division of
brokerage commissions or other compensation.
D. The name of the person responsible for making the
determination of such allocation and such division of
brokerage commissions or other compensation.
3. (Rule 31a-l(b)(10)) A record in the form of an appropriate
memorandum identifying the person or persons, committees or groups
authorizing the purchase or sale of portfolio securities. Where an
authorization is made by a committee or group, a record shall be kept
of the names of its members who participate in the authorization. There
shall be retained as part of this record: any memorandum,
recommendation or instruction supporting or authorizing the purchase or
sale of portfolio securities and such other information as is
appropriate to support the authorization, including such information as
is appropriate to support the determination that such security is the
"Equity Security of a Southwest Small Cap Company," as defined in the
Prospectus, or is otherwise a permitted investment for the Fund.*
4. (Rule 31a-1(f)) Such accounts, books and other documents as are
required to be maintained by registered investment advisers by rules
adopted under Section 204 of the Investment Advisers Act of 1940, to
the extent such records are necessary or appropriate to record the
Manager's transactions with respect to the Fund.
* Such information might include: the current Form 10-K, annual and
quarterly reports, press releases, reports by analysts and from brokerage firms
(including their recommendation; i.e., buy, sell, hold) or any internal reports
or portfolio manager reviews.
0265107.01
119520/2128
- 18 -
Exhibit g(b)
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT dated as of ____, 1995 between Southwest Small Cap Equity
Fund, Inc. (the "Fund"), a Delaware corporation, and McKenna & Company I, L.P.
("McKenna"), a limited partnership.
WHEREAS, the Fund has been organized to operate as a diversified,
closed-end management investment company registered under the Investment Company
Act of 1940; and
WHEREAS, the Fund wishes to avail itself of the information, advice,
assistance and facilities of McKenna to perform on behalf of the Fund the
services as hereinafter described; and
WHEREAS, McKenna wishes to provide such services to the Fund under the
conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the Fund and McKenna agree as follows:
1. EMPLOYMENT. The Fund, being duly authorized, hereby employs McKenna
to perform those services described in this Agreement. McKenna shall perform the
obligations thereof upon the terms and conditions hereinafter set forth.
2. FUND ADMINISTRATION. Subject to the direction and control of the
Fund, McKenna shall supervise the Fund's business affairs not otherwise
supervised by other agents of the Fund. To the extent not otherwise the primary
responsibility of, or provided by, other agents of the Fund, McKenna shall (1)
prepare all reports required to be filed by the Fund with the Securities and
Exchange Commission ("SEC") on Form N-SAR, or such other form as the SEC may
substitute for Form N-SAR; (2) provide to the Fund's independent accountants
such information as is necessary for such accountants to prepare and file the
Fund's federal, state and local tax returns, and review such returns after they
are prepared; (3) respond to certain inquiries from the Fund's stockholders in
connection with proxies, rights offerings and other such events; (4) assist in
the preparation and dissemination to stockholders of the Fund proxy and rights
offering materials and oversee the tabulation of proxies by the Fund's transfer
agent, (5) negotiate contractual arrangements with the Fund's agents, including
custodians, transfer agents, dividend paying agents, independent accountants and
printing companies, monitor the performance of such agents pursuant to such
arrangements, and make such reports and recommendations to the Board of
Directors concerning the provision of such services as the Fund reasonably
requests or McKenna deems appropriate; (6)
<PAGE>
assist in preparing financial information relating to the Fund for the Fund's
periodic reports to stockholders, prospectuses, proxy materials and earnings
releases; (7) assist in monitoring compliance of the Fund's operations with the
Investment Company Act of 1940 and with its investment policies and limitations;
(8) assist in the calculation of the Fund's net asset value in accordance with
the Fund's registration statement under the Investment Company Act of 1940 and
the Securities Act of 1933 and make the Fund's net asset value available for
public dissemination; (9) assist in establishing the accounting policies of the
Fund; (10) assist the Fund in determining the amount of dividends or other
distributions available to be paid by the Fund to its stockholders; (11) arrange
for the printing (at the Fund's expense) of financial reports, prospectuses,
proxy materials and dividend notices to stockholders; (12) provide the Fund's
transfer agent, dividend paying agent and custodian with such information as is
required for such parties to effect the payment of dividends and other
distributions and implementing the Fund's Dividend Reinvestment Plan; and (13)
assist in the preparation and dissemination of press releases regarding such
dividends and other distributions. Although this Agreement does not specify the
level of assistance to be provided by McKenna, it does obligate McKenna to
render such services when, as and to the extent that the Fund deems appropriate
in order for the Fund to obtain the benefits of the Agreement. McKenna shall
provide personnel to serve as officers of the Fund if so elected by the Board of
Directors; provided, however, that the Fund shall reimburse McKenna for the
expenses incurred by such personnel in attending Board of Directors' meetings
and shareholders' meetings of the Fund.
Notwithstanding the foregoing, McKenna may utilize the services of one
or more sub-administrators of its choice subject to the approval of the Board of
Directors of the Fund. The cost of employing each such sub-administrator will be
paid by McKenna and not by the Fund.
3. RECORD KEEPING AND OTHER INFORMATION. McKenna or its agent shall
create and maintain all necessary records in accordance with all applicable
laws, rules and regulations, including but not limited to records required by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder, as
the same may be amended from time to time, pertaining to the various functions
performed by it and not otherwise created and maintained by another party
pursuant to contract with the Fund. Where applicable, such records shall be
maintained by McKenna or its agent for the periods and in the places required by
Rule 31a-2 under the Investment Company Act of 1940.
4. AUDIT, INSPECTION AND VISITATION. McKenna shall make available to
the Fund during regular business hours all records and other data created and
maintained pursuant to the foregoing provisions of this Agreement for reasonable
audit and inspection
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by the Fund or any regulatory agency having authority over the Fund.
5. COMPENSATION. For the performance of McKenna's obligations under
this Agreement, the Fund shall pay McKenna, on the first business day following
the end of each month, a fee equal to one twelfth (1/12) of the annual rate of
.50% of the Fund's average weekly net assets during such month. McKenna shall
not be required to reimburse the Fund or the Fund's investment adviser for (or
have deducted from its fees) any expenses in excess of expense limitations
imposed by certain state securities commissions having jurisdiction over the
Fund.
6. INDEMNIFICATION OF MCKENNA. McKenna may rely on information
reasonably believed by it to be accurate and reliable. Except as may otherwise
be required by the Investment Company Act of 1940 and the rules thereunder,
neither McKenna nor its shareholders, officers, directors, employees, agents,
control persons or affiliates of any thereof shall be subject to any liability
for, or any damages, expenses or losses incurred by the Fund in connection with,
any error of judgment, mistake of law, any act or omission connected with or
arising out of any services rendered under or payments made pursuant to this
Agreement or any other matter to which this Agreement relates, except by reason
of willful misfeasance, bad faith or gross negligence on the part of any such
persons in the performance of the duties of McKenna under this Agreement or by
reason of reckless disregard by any of such persons of the obligations and
duties of McKenna under this Agreement.
Any person, even though also a director, officer, employee, shareholder
or agent of McKenna, or any of its affiliates, who may be or become an officer,
director, employee or agent of the Fund, shall be deemed, when rendering
services to the Fund or acting on any business of the Fund, to be rendering such
services to or acting solely as an officer, director, employee or agent of the
Fund and not as a director, officer, employee, shareholder or agent of or one
under the control or direction of McKenna or any of its affiliates, even though
paid by one of those entities.
Notwithstanding any other provision of this Agreement, the Fund shall
indemnify and hold harmless McKenna, its directors, officers, employees,
shareholders, agents, control persons and affiliates, from and against any and
all claims, demands, expenses and liabilities (whether with or without basis in
fact or law) of any and every nature which McKenna may sustain or incur or which
may be asserted against McKenna by any person, by reason of, or as a result of:
(i) any action taken or omitted to be taken by McKenna in good faith in reliance
upon any certificate, instrument, order or stock certificate believed by it to
be genuine and to be signed, countersigned or executed by any duly authorized
person, upon the oral instructions or written
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instructions of an authorized person of the Fund or upon the opinion of legal
counsel for the Fund or its own counsel; or (ii) any action taken or omitted to
be taken by McKenna in connection with its appointment in good faith in reliance
upon any law, act, regulation or interpretation of the same even though the same
may thereafter have been altered, changed, amended or repealed. However,
indemnification under this subparagraph shall not apply to actions or omissions
of McKenna or its directors, officers, employees, shareholders or agents in
cases of its or their own gross negligence, willful misconduct, bad faith, or
reckless disregard of its or their own duties hereunder. WITHOUT LIMITING OR
ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS
AGREEMENT, THE PARTIES HERETO SHALL BE ENTITLED TO INDEMNIFICATION IN ACCORDANCE
WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO
SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE STRICT LIABILITY OR
NEGLIGENCE OF THE PARTY INDEMNIFIED. THE PARTIES AGREE THAT THIS PARAGRAPH
CONSTITUTES A CONSPICUOUS LEGEND.
7. SERVICES FOR OTHERS. Nothing in this Agreement shall prevent McKenna
or any affiliated person of McKenna from providing services for any other
person, firm or corporation, including other investment companies; provided,
however, that McKenna expressly represents that it will undertake no activities
which, in its judgment, will adversely affect the performance of its obligations
to the Fund under this Agreement.
8. COMPLIANCE WITH THE INVESTMENT COMPANY ACT OF 1940. The parties
hereto acknowledge and agree that nothing contained herein shall be construed to
require McKenna to perform any services for the Fund which services could cause
McKenna to be deemed an "investment adviser" of the Fund within the meaning of
Section 2(a)(20) of the Investment Company Act of 1940 or to supersede or
contravene the Prospectus or Statement of Additional Information of the Fund or
any provisions of the Investment Company Act of 1940 and the rules thereunder.
9. RENEWAL AND TERMINATION. This Agreement shall become effective on
the date first above written and shall remain in force for a period of two (2)
years from such date, and from year to year thereafter, but only so long as such
continuance is specifically approved at least annually by the vote of a majority
of the Directors who are not interested persons of the Fund or McKenna, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Board of Directors or of a majority of the Fund's outstanding voting
securities. This Agreement may be terminated without the payment of any penalty
by either party upon sixty (60) days' written notice to the other party. This
Agreement shall terminate automatically in the event of its assignment. Upon the
termination of this Agreement, the Fund shall pay McKenna such compensation as
may be payable for the period prior to the effective date of such
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termination.
10. MISCELLANEOUS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Texas. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
SOUTHWEST SMALL CAP EQUITY FUND, INC.
By: ________________________________
Its: President
McKENNA & COMPANY I, L.P.
By: ________________________________
Its: General Partner
0264914.01
119520/2129
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Exhibit g(c)
SUB-ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT dated as of , 1995 between Southwest Small Cap Equity
Fund, Inc. (the "Fund"), a Delaware corporation, McKenna & Company I, L.P.
("McKenna"), a limited partnership, and MGF Service Corp. ("MGF"), an Ohio
corporation.
WHEREAS, the Fund is a diversified, closed-end management investment
company under the Investment Company Act of 1940; and
WHEREAS, McKenna acts as the administrator to the Fund pursuant to the
terms of an Administrative Services Agreement; and
WHEREAS, McKenna wishes to avail itself of the information, advice,
assistance and facilities of MGF to perform on behalf of the Fund the services
as hereinafter described; and
WHEREAS, MGF wishes to provide such services to the Fund under the
conditions set forth below; and
WHEREAS, the Board of Directors of the Fund has authorized McKenna to
retain MGF to provide such services and to execute this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the Fund, McKenna and MGF agree as follows:
1. EMPLOYMENT. McKenna, being duly authorized, hereby employs MGF to
perform those services described in this Agreement. MGF shall perform the
obligations thereof upon the terms and conditions hereinafter set forth and
subject to the direction and control of the Fund.
2. FUND ADMINISTRATION. Subject to the direction and control of the
Fund, MGF shall (1) prepare all reports required to be filed by the Fund with
the Securities and Exchange Commission ("SEC") on Form N-SAR, or such other form
as the SEC may substitute for Form N-SAR; (2) provide to the Fund's independent
accountants such information as is necessary for such accountants to prepare and
file the Fund's federal, state and local tax returns, and review such returns
after they are prepared; (3) respond to certain inquiries from the Fund's
stockholders in connection with proxies, rights offerings and other such events;
(4) assist in the preparation and dissemination to stockholders of the Fund
proxy and rights offering materials and oversee the tabulation of proxies by
-1-
the Fund's transfer agent, (5) negotiate contractual arrangements with the
Fund's agents, including custodians, transfer agents, dividend paying agents,
independent accountants and printing companies, monitor the performance of such
agents pursuant to such arrangements, and make such reports and recommendations
to the Fund concerning the provision of such services as the Fund reasonably
requests or as MGF deems appropriate; (6) assist in preparing financial
information relating to the Fund for the Fund's periodic reports to
stockholders, prospectuses, proxy materials and press releases; (7) assist in
monitoring compliance of the Fund's operations with the Investment Company Act
of 1940 and with its investment policies and limitations; (8) assist in the
calculation of the Fund's net asset value in accordance with the Fund's
registration statement under the Investment Company Act of 1940 and the
Securities Act of 1933 and make the Fund's net asset value available for public
dissemination; (9) assist in establishing the accounting policies of the Fund;
(10) assist the Fund in determining the amount of dividends or other
distributions available to be paid by the Fund to its stockholders; (11) arrange
for the printing (at the Fund's expense) of financial reports, prospectuses,
proxy materials and dividend notices to stockholders; (12) provide the Fund's
transfer agent, dividend paying agent and custodian with such information as is
required for such parties to effect the payment of dividends and other
distributions and implementing the Fund's Dividend Reinvestment Plan; and (13)
assist in the preparation and dissemination of press releases regarding such
dividends and other distributions. The Fund shall reimburse MGF for expenses
incurred by MGF personnel in attending Board of Directors' meetings and
shareholders' meetings of the Fund.
3. RECORD KEEPING AND OTHER INFORMATION. MGF shall create and maintain
all necessary records in accordance with all applicable laws, rules and
regulations, including but not limited to records required by Section 31(a) of
the Investment Company Act of 1940 and the rules thereunder, as the same may be
amended from time to time, pertaining to the various functions performed by it
and not otherwise created and maintained by another party pursuant to contract
with the Fund. Where applicable, such records shall be maintained by MGF for the
periods and in the places required by Rule 31a-2 under the Investment Company
Act of 1940.
4. AUDIT, INSPECTION AND VISITATION. MGF shall make available to
McKenna and the Fund during regular business hours all records and other data
created and maintained pursuant to the foregoing provisions of this Agreement
for reasonable audit and inspection by the Fund, McKenna or any regulatory
agency having authority over the Fund or McKenna.
5. COMPENSATION. For the performance of MGF's obligations under this
Agreement, McKenna shall pay MGF, on the first business day following the end of
each month, a fee equal to one-
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twelfth (1/12) of the annual rate of .25% of the average value of the Fund's
weekly net assets during such month up to $100,000,000, and .20% of the average
value of such assets in excess of $100,000,000; provided, however, that the
minimum fee shall be $6,000 per month. MGF shall not be required to reimburse
the Fund or the Fund's investment adviser for (or have deducted from its fees)
any expenses in excess of expense limitations imposed by certain state
securities commissions having jurisdiction over the Fund.
6. INDEMNIFICATION OF MGF. MGF may rely on information reasonably
believed by it to be accurate and reliable. Except as may otherwise be required
by the Investment Company Act of 1940 and the rules thereunder, neither MGF nor
its shareholders, officers, directors, employees, agents, control persons or
affiliates of any thereof shall be subject to any liability for, or any damages,
expenses or losses incurred by the Fund or Mckenna in connection with, any error
of judgment, mistake of law, any act or omission connected with or arising out
of any services rendered under or payments made pursuant to this Agreement or
any other matter to which this Agreement relates, except by reason of willful
misfeasance, bad faith or gross negligence on the part of any such persons in
the performance of the duties of MGF under this Agreement or by reason of
reckless disregard by any of such persons of the obligations and duties of MGF
under this Agreement.
Notwithstanding any other provision of this Agreement, McKenna shall
indemnify and hold harmless MGF, its directors, officers, employees,
shareholders, agents, control persons and affiliates, from and against any and
all claims, demands, expenses and liabilities (whether with or without basis in
fact or law) of any and every nature which MGF may sustain or incur or which may
be asserted against MGF by any person, by reason of, or as a result of: (i) any
action taken or omitted to be taken by MGF in good faith in reliance upon any
certificate, instrument, order or stock certificate believed by it to be genuine
and to be signed, countersigned or executed by any duly authorized person, upon
the oral instructions or written instructions of an authorized person of McKenna
or the Fund or upon the opinion of legal counsel for McKenna or the Fund or its
own counsel; or (ii) any action taken or omitted to be taken by MGF in
connection with its appointment in good faith in reliance upon any law, act,
regulation or interpretation of the same even though the same may thereafter
have been altered, changed, amended or repealed. However, indemnification under
this subparagraph shall not apply to actions or omissions of MGF or its
directors, officers, employees, shareholders or agents in cases of its or their
own gross negligence, willful misconduct, bad faith, or reckless disregard of
its or their own duties hereunder.
7. SERVICES FOR OTHERS. Nothing in this Agreement shall prevent MGF or
any affiliated person of MGF from providing
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services for any other person, firm or corporation, including other investment
companies; provided, however, that MGF expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations under this Agreement.
8. COMPLIANCE WITH THE INVESTMENT COMPANY ACT OF 1940. The parties
hereto acknowledge and agree that nothing contained herein shall be construed to
require MGF to perform any services which services could cause MGF to be deemed
an "investment adviser" of the Fund within the meaning of Section 2(a)(20) of
the Investment Company Act of 1940 or to supersede or contravene the Prospectus
or Statement of Additional Information of the Fund or any provisions of the
Investment Company Act of 1940 and the rules thereunder.
9. RENEWAL AND TERMINATION. This Agreement shall become effective on
the date first above written and shall remain in force for a period of two (2)
years from such date, and from year to year thereafter, but only so long as such
continuance is specifically approved at least annually by the vote of a majority
of the Directors who are not interested persons of the Fund, McKenna or MGF,
cast in person at a meeting called for the purpose of voting on such approval
and by a vote of the Board of Directors or of a majority of the Fund's
outstanding voting securities. This Agreement may be terminated without the
payment of any penalty by any party upon sixty (60) days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment. Upon the termination of this Agreement, McKenna shall pay MGF such
compensation as may be payable for the period prior to the effective date of
such termination.
10. MISCELLANEOUS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
SOUTHWEST SMALL CAP EQUITY FUND, INC.
By: ________________________________
Its: President
McKENNA & COMPANY I, L.P.
By: ________________________________
Its: President
MGF SERVICE CORP.
By: ________________________________
Its: President
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Exhibit h(a)
2
SOUTHWEST SMALL CAP EQUITY FUND, INC.
SELLING AGREEMENT
SHARES OF COMMON STOCK
_____, 1995
`
McKENNA SECURITIES COMPANY
909 Fannin, Suite 1600
Houston, Texas 77010
Ladies and Gentlemen:
Southwest Small Cap Equity Fund, Inc., a Delaware corporation (the
"FUND"), is a newly organized, diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"COMPANY ACT"). The Fund proposes to issue and offer through McKenna Securities
Company (the "DEALER MANAGER"), acting as agent for the Fund, up to 4,000,000
shares (subject to increase as provided herein) of common stock, par value $.001
per share, of the Fund (the "COMMON STOCK") at a price of $10.00 per share
(subject to decrease as provided herein) on the terms set forth herein (the
shares of Common Stock so offered being referred to herein as the "SHARES"). The
Fund's offering of the Shares through the Dealer Manager is referred to herein
as the "OFFERING". The Shares are more fully described in the Registration
Statement referred to below.
The Fund and its investment manager, McKenna Management Company (the
"INVESTMENT MANAGER"), hereby confirm their agreement with the Dealer Manager
with regard to the sale of the Shares by the Dealer Manager, on the basis of the
representations, warranties, covenants and agreements herein contained and
subject to the terms and conditions herein set forth.
1. EMPLOYMENT OF THE DEALER MANAGER.
(a) DEALER MANAGER AS AGENT. The Fund employs the Dealer Manager as its
exclusive agent to sell the Shares for the Fund's account, and the Dealer
Manager agrees to use its best efforts as agent for the Fund to sell the Shares
upon and subject to the terms and conditions set forth in this agreement. The
Dealer Manager's agency shall continue until terminated as provided herein.
(b) PUBLIC OFFERING AND PRICE. It is understood that, commencing on the
date when the Registration Statement becomes effective (the "EFFECTIVE DATE"),
the Dealer Manager proposes to offer the Shares for sale to the public on a cash
basis only, at the prices set forth in the Prospectus and in the following
table.
(c) SELLING GROUP. The Dealer Manager shall have the right to associate
with other broker/dealers ("BROKER/DEALERS") as it may determine and shall have
the right to grant to such
<PAGE>
persons such concessions out of the commissions to be received by the Dealer
Manager as the Dealer Manager may determine, under and pursuant to a Selected
Dealer Agreement in the form filed as an exhibit to the Registration Statement.
All sales of Shares shall be made as an agent for the Fund.
(d) MINIMUM OFFERING. The Fund and the Dealer Manager agree that unless
at least 2,000,000 of the Shares (the "MINIMUM OFFERING") to be offered
hereunder are sold within 30 days after the Effective Date (which period may be
extended for an additional period not to exceed 30 days by mutual agreement
between the Fund and the Dealer Manager) (such period, whether or not so
extended, being herein referred to as the "OFFERING PERIOD"), the agency between
the Fund and the Dealer Manager will terminate, the full proceeds which have
been paid for the Shares will be returned to the proposed purchasers, and this
Agreement will terminate without further obligation to any of the parties hereto
except as set forth in SECTION 14.
(e) ESCROW OF FUNDS PENDING CLOSING. Prior to consummation of the sale
of Shares offered hereunder, all proceeds received from proposed purchasers of
the Shares will be deposited in an escrow account maintained with Star Bank,
N.A., as Escrow Agent pursuant to an Escrow Agreement among the Fund, the Dealer
Manager and Star Bank, N.A. (the "ESCROW AGENT"), in form satisfactory to the
parties (the "ESCROW AGREEMENT"). The parties mutually agree to faithfully
perform their obligations under the Escrow Agreement. The Dealer Manager will
promptly deliver the funds into the escrow account in accordance with Rule
15(c)2-4 of the Exchange Act (as hereinafter defined), but in any event not to
exceed five business days after receipt of such funds.
2. DELIVERY OF AND PAYMENT FOR SHARES.
(a) TIME OF DELIVERY AND PAYMENT. Delivery of certificates and payment
of the purchase price for the Shares shall be made at the offices of the Fund or
another mutually acceptable location on the third full business day following
the last day of the Offering Period, or at such other time as shall be agreed
upon by the Dealer Manager and the Fund (such date and time referred to herein
as the "CLOSING DATE"), subject to the satisfaction or waiver by the Dealer
Manager of the conditions set forth in Section 10 hereof.
(b) DELIVERY AGAINST PAYMENT; FORM OF CERTIFICATES; EXAMINATION.
Delivery of certificates for the Shares, with any transfer taxes thereon duly
paid by the Fund, shall be made for the benefit of the Purchasers in a manner
mutually agreed upon by the Dealer Manager and the Fund against payment of the
purchase price for the Shares in certified or official bank checks payable to
the order of the Fund in immediately available funds. Certificates for the
Shares shall be registered in such name or names and in such authorized
denominations as the Dealer Manager may request in writing at least two full
business days prior to the Closing Date. The Fund will permit the Dealer Manager
to examine and package such certificates for delivery at least one full business
day prior to the Closing Date.
3. COMPENSATION OF DEALER MANAGER.
(a) COMMISSION. At the Closing, the Fund agrees to pay to the Dealer
Manager for the benefit of the Broker/Dealers a sales commission based upon per
share public offering price
2
for each of the Shares sold by the Dealer Manager as representative of the
Broker/Dealers as indicated in the table below. The commission shall be payable
in certified funds upon the release of the funds deposited in the escrow account
by one or more certified or official bank checks issued by the Escrow Agent for
the account of the Fund, and shall be payable as directed by the Dealer Manager.
SHARES PURCHASED PRICE PER SHARE DEALER SALES COMMISSION
---------------- --------------- -----------------------
100 to 29,999 $10.00 .60
25,000 to 49,000 9.90 .50
50,000 to 74,999 9.80 .40
75,000 to 99,000 9.70 .30
100,000 to 499,999 9.60 .20
500,000 or more 9.20 .00
(b) ORIGINATION FEE. At the Closing, the Fund agrees to pay to the
Dealer Manager an origination fee in the amount of $0.10 per share; PROVIDED,
HOWEVER, that no origination fee shall be payable for any shares purchased from
the fund pursuant to a single Subscription Agreement for more than 499,999
shares.
(c) REIMBURSEMENT FOR EXPENSES. At the Closing, the Fund agrees
(without prejudice to the provisions of PARAGRAPH 14(D) hereof) that the Fund
shall reimburse the Dealer Manager for its expenses on a nonaccountable basis in
the amount of $0.10 per share; PROVIDED, HOWEVER, that no such reimbrusement
shall be payable for any shares purchased from the fund pursuant to a single
Subscription Agreement for more than 499,999 shares.
(d) APPLICATION OF EXPENSE ALLOWANCE. The Dealer Manager agrees that it
will pay all costs incurred or to be incurred by the Dealer Manager or by its
personnel in connection with the offering of the Shares out of its
nonaccountable expense allowance, except those to be paid by the Fund as
described in SECTION 14 hereof.
4. REGISTRATION STATEMENT AND PROSPECTUS. The Fund has filed with the
Securities and Exchange Commission (the "COMMISSION") a Notification of
Registration on Form N-8A (the "NOTIFICATION") relating to the registration of
the Fund as an investment company under the Company Act. In addition, the Fund
has prepared and filed with the Commission (i) in accordance with the provisions
of the Securities Act of 1933, as amended, and the published rules and
regulations promulgated thereunder (collectively, the "ACT", with all references
herein to "Rules" and "Regulations", unless otherwise specified, being to the
rules and regulations promulgated by the Commission pursuant to the Act) and
(ii) in accordance with the provisions of the Company Act, a registration
statement on Form N-2 (No. 33-98050), including a prospectus subject to
completion (each prospectus and amendment thereto included in the registration
statement before the registration statement becomes effective under the Act, the
form of prospectus omitting Rule 430A Information included in the Registration
Statement when it becomes effective, if applicable (the "RULE 430A PROSPECTUS"),
any prospectus filed by the Fund with the Dealer Manager's consent pursuant to
Rule 424(a), and such amendments thereof as may have been required prior to the
Effective Date being referred to as a "PRELIMINARY PROSPECTUS").
3
The registration statement, as amended, at the time and on the date it
becomes effective (and in the event of any post-effective amendment thereto,
then as amended at the time and on the date such post-effective amendment
becomes effective), including all exhibits, financial statements and schedules
forming a part thereof, and information, if any, contained in a prospectus
subsequently filed with the Commission pursuant to Rule 497(h) and deemed to be
a part of the registration statement pursuant to Rule 430A, is called the
"REGISTRATION Statement." As used herein, the term "PROSPECTUS" means the final
prospectus included as part of the Registration Statement, except that if a
prospectus filed on behalf of the Fund with the Commission pursuant to Rule
424(b) shall differ from such final prospectus, the term "Prospectus" shall mean
the prospectus as filed pursuant to Rule 424(b) from and after the date on which
it shall have first been used.
5. REPRESENTATIONS AND WARRANTIES OF THE FUND. The Fund represents and
warrants to the Dealer Manager that:
(a) ACCURACY OF REGISTRATION STATEMENT, NOTIFICATION AND
PROSPECTUS. When the Registration Statement and any post-effective
amendment thereto shall become effective, at the Closing Date and
during such longer period as the Prospectus may be required to be
delivered pursuant to any Rule by the Dealer Manager or a dealer, the
Registration Statement (and any post-effective amendment thereto), the
Notification, and the Prospectus (and any amendments thereof and
supplement thereto) will comply in all material respects with the
applicable provisions of the Act and the Company Act, will not contain
an untrue statement of a material fact, and will not omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; PROVIDED that the Fund
makes no representation or warranty with respect to information
included in the Registration Statement, Notification or Prospectus
provided to the Fund by the Dealer Manager specifically for inclusion
therein. If a Rule 430A prospectus is included in the Registration
Statement at the time it becomes effective, the prospectus filed
pursuant to Rules 430A and 424 will contain all information and all
statements required to be stated therein in accordance with the Act and
Regulations.
When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement, any
amendment thereto, or pursuant to Rule 424(a)), and when any amendment
thereof or supplement thereto was first filed with the Commission, such
Preliminary Prospectus and any amendments and supplements thereto
complied in all material respects with the Act and the Company Act and
did not contain an untrue statement of a material fact and did not omit
to state any material fact required to be stated therein or necessary
in order to make the statements therein not misleading; PROVIDED that
the Fund makes no representation or warranty with respect to
information included in the Preliminary Prospectus provided to the Fund
by the Dealer Manager specifically for inclusion therein.
Without limiting the foregoing, (i) any contract, agreement,
instrument, lease, license, certification or permit required to be
described in the Registration Statement or the Prospectus has been
properly described therein in all material respects, (ii) any contract,
agreement, instrument, lease, license, certification or permit required
to be filed as an exhibit to the Registration Statement has been filed
with the Commission as an exhibit to the Registration Statement, (iii)
there is no litigation, arbitration, claim,
4
governmental or other proceeding (formal or informal), or investigation
pending or, to the Fund's knowledge, threatened (or any basis therefor
known to the Fund) with respect to the Fund or its operations,
businesses, properties or assets, except as properly described in the
Prospectus or except as, individually or in the aggregate, would not
have a material adverse effect upon the operations, business,
properties or assets of the Fund, (iv) the Fund is not in violation of,
or default with respect to, its Certificate of Incorporation or Bylaws,
or any law, rule, regulation, order, judgment or decree of any court,
Federal or state regulatory body, self-regulatory organization, stock
exchange or securities association having jurisdiction over it or its
properties or operations, except as may be properly described in the
Prospectus or except as such violations, individually or in the
aggregate, would not have a material adverse effect upon the
operations, business, properties or assets of the Fund, and (v) the
Fund is not in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan, agreement, note, lease or other instrument
to which it is a party of by which it or its properties may be bound.
(b) ACCURACY OF FINANCIAL INFORMATION. The statement of assets
and liabilities (including all notes thereto) included in the
Registration Statement and the Prospectus present fairly the financial
position of the Fund as at the date thereof and said statement has been
prepared in conformity with U.S. generally accepted accounting
principles, consistently applied throughout the periods involved, are
correct and complete, and are in accordance with the books and records
of the Fund. Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as set forth in the Registration Statement and the Prospectus, there
has not been any material adverse change in the business, prospects,
properties, operations, condition (financial or other) or results of
operations of the Fund, and since such dates the Fund has not incurred
or undertaken any liabilities or obligations, direct or contingent,
which are material to the Fund, except for liabilities or obligations
which were incurred or undertaken in the ordinary course of business or
an reflected in the Registration Statement and the Prospectus.
(c) INDEPENDENT PUBLIC ACCOUNTANTS. Arthur Andersen LLP, whose
report is filed with the Commission as a part of the Registration
Statement, are independent public accountants with regard to the Fund
as required by the Act and the Company Act.
(d) ORGANIZATION AND QUALIFICATION. The Fund has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware. The Fund has no subsidiaries
and does not control, directly or indirectly, any corporation,
partnership, joint venture, association or other business organization.
The Fund is duly qualified to do business as a foreign corporation and
is a corporation in good standing in each jurisdiction in which the
nature of its activities or its ownership or leasing of property
requires such qualification, except where the failure to so qualify
would not have a material adverse effect on its business, operations,
or properties. The Fund owns or possesses all material governmental
licenses, permits, consents, orders, approvals or other authorizations
as necessary to own, lease and operate its properties and carry on its
business as contemplated in the Prospectus (except for an order of
effectiveness of the Registration Statement issued by the Commission),
and no such
5
governmental licenses, permits, consents, orders, approvals or other
authorization contains any materially burdensome restrictions.
(e) COMPLIANCE OF FUND WITH SECURITIES LAWS. The Fund is
registered with the Commission under the Company Act as a diversified,
closed-end management investment company. The Fund is, and at all times
through the Closing Date will be, in compliance with the terms and
provisions of the Act and the Company Act in all material respects. No
person is acting or serving as an officer or director of, or investment
adviser to, the Fund except in accordance with the provisions of the
Company Act and the rules and regulations of the Commission thereunder,
and the Investment Advisers Act, as amended, and the respective rules
and regulations of the Commission thereunder (the "ADVISERS ACT").
(f) CORPORATE AUTHORITY. The Fund has all requisite corporate
power and authority to conduct its business as described in the
Registration Statement and the Prospectus, and to execute, deliver and
perform this Agreement and each of the Management Agreement dated as of
_____, 1995 (the "MANAGEMENT AGREEMENT") between the Fund and McKenna
Management Company (the "INVESTMENT MANAGER"), the Administration
Agreement dated as of _____, 1995 (the "ADMINISTRATION AGREEMENT")
between the Fund and McKenna & Company I, L.P. (the "FUND
ADMINISTRATOR"), the Custodian Agreement dated as of _____, 1995 (the
"CUSTODIAN AGREEMENT") between the Fund and _____ (the "CUSTODIAN"),
the Dividend Reinvestment Plan and Agreement dated as of _____, 1995,
between the Fund and Star Bank, N.A., (the "Plan Agent"), the Stock
Transfer Agreement dated as of _____, 1995 between the Fund and Star
Bank, N.A., (the "Transfer Agent") and the Escrow Agreement (all of the
foregoing, together with this Agreement, collectively referred to
herein as the "FUND AGREEMENTS"), all of which Fund Agreements have
been filed with the Commission as exhibits to the Registration
Statement.
(g) AUTHORIZATION AND ENFORCEABILITY. The execution, delivery
and performance of each of the Fund Agreements and the consummation of
the transactions contemplated therein are within the corporate power of
the Fund and have been duly and validly authorized by all necessary
corporate action, and each Fund Agreement represents a valid and
binding obligation of the Fund enforceable against the Fund in
accordance with its terms, except to the extent that rights to
indemnity hereunder may be limited by federal or state securities laws
or the public policy underlying such laws.
(h) NO VIOLATION. The execution, delivery and performance of
the Fund Agreements will not violate or conflict with the Fund's
Certificate of Incorporation or Bylaws, or any law, rule, regulation,
order, judgment or decree of any court, Federal or state regulatory
body, self-regulatory organization, stock exchange or securities
association having jurisdiction over it or its properties or
operations, or violate, conflict with, result in the breach of, require
any consent under or result in the creation of any liens on any assets
or properties of the Fund pursuant to, any contract, indenture,
mortgage, loan, agreement, note, lease or other instrument, license or
permit to which it is a party or by which it or its properties may be
bound.
6
(i) NO CONSENTS REQUIRED. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or
with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Fund or any of its properties or assets or
of or with any other person, entity or group is required for the
execution, delivery and performance of the Fund Agreements and the
consummation of the transactions contemplated thereby, including the
issuance, sale and delivery of the Shares to be issued, sold and
delivered by the Fund hereunder, except the registration under the Act
and the Company Act of the offering and sale of the Shares and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under the Act,
the Company Act, the Securities Exchange Act of 1934 (the "EXCHANGE
ACT"), state securities or blue sky laws, or the rules and regulations
of the National Association of Securities Dealers (the "NASD") or The
Chicago Stock Exchange in connection with the issuance, registration,
listing and sale of the Shares.
(j) VALIDITY OF AND TITLE TO SHARES; CAPITALIZATION. All of
the outstanding shares of Common Stock of the Fund are duly and validly
authorized and issued, are fully paid and nonassessable and were not
issued in violation of or subject to any preemptive rights. The Fund
had at _____, 1995 an authorized and outstanding capitalization as set
forth in the Registration Statement. The Shares, when delivered and
sold in accordance with this Agreement, will be duly and validly issued
and outstanding, fully paid and nonassessable, and will not have been
issued in violation of or subject to any preemptive rights. The
purchasers of the Shares will receive good, valid and marketable title
to the Shares purchased by them free and clear of any liens,
agreements, and encumbrances. The Shares conform to the descriptions
thereof contained in the Registration Statement and the Prospectus.
There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance of,
any share of capital stock of the Fund nor is there outstanding any
security or other instrument which by its terms is convertible into,
exercisable for or exchangeable for capital stock of the Fund, except
as may be properly described in the Registration Statement.
(k) DISCLOSURE OF FUND DOCUMENTS. The Fund Agreements comply
in all material respects with the descriptions thereof in the
Prospectus, and there are no other documents or agreements to which the
Fund is a party which are required under the Act, the Company Act, the
Advisers Act or the Exchange Act to be described in the Prospectus.
(l) COMPLIANCE OF ORGANIZATIONAL DOCUMENTS AND FUND AGREEMENTS
WITH SECURITIES LAWS. The Certificate of Incorporation and the Bylaws
of the Fund and each of the Fund Agreements comply in all material
respects with all applicable provisions of the Company Act, the
Advisers Act and the Exchange Act.
(m) EFFECTIVENESS OF FUND AGREEMENTS; NO DEFAULT. Each of the
Fund Agreements is in full force and effect and neither the Fund, nor
to the Fund's knowledge any other party to any such Fund Agreement, is
in default or breach thereunder, and no event has occurred which with
the passage of time would constitute a default thereunder.
7
(n) MATERIAL TRANSACTIONS DISCLOSED. Subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has been no transaction entered
into by the Fund which is material to the Fund other than those
described in or contemplated by the Prospectus and those in the
ordinary course of business, and there has been no dividend or
distribution of any kind declared, paid or made by the Fund on any
class of its capital stock.
(o) LISTING. The Shares have been approved for listing on The
Chicago Stock Exchange, subject to official notice of issuance.
(p) NO ORDERS. Neither the Commission nor the "blue sky" or
securities authority of any jurisdiction has issued any order (a "STOP
ORDER") suspending the effectiveness of the Registration Statement,
preventing or suspending the use of any Preliminary Prospectus, the
Prospectus, the Registration Statement or any amendment or supplement
thereto, refusing to permit the effectiveness of the Registration
Statement or suspending the registration or qualification of the Shares
or the offering and sale of the Shares, nor have any of such
authorities instituted or threatened to institute any proceedings with
respect to a Stop Order.
(q) NO STABILIZATION. Except as described in the Prospectus,
neither the Fund nor any affiliated purchaser (as defined in the
Regulations) has taken or will take, directly or indirectly, prior to
the termination of this Agreement, any action designed to stabilize or
stipulate the price of any security of the Fund, or which has caused or
resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any
security of the Fund, to facilitate the sale or resale of any of the
Shares.
(r) COMPLIANCE WITH INTERNAL REVENUE CODE. The Fund intends
to, and will, direct the investment of the proceeds of the Offering in
such a manner as to comply with the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "CODE").
(s) NO FINDERS. Except as may be set forth in the Registration
Statement and as contemplated hereby, the Fund has not incurred any
liability for a fee, commission or other compensation on account of the
employment of a broker or finder in connection with the sale of Shares
contemplated by this Agreement.
(t) NO MATERIAL ADVERSE CHANGE. Subsequent to the date as of
which information is given in the Registration Statement and the
Prospectus and since the date of the statement of assets and
liabilities set forth therein, except as otherwise stated therein,
there has been no material adverse change in the condition (financial
or otherwise) or net assets of the Fund, or in the management, capital
stock, investment objectives, investment policies, earnings,
liabilities, business affairs or business prospects of the Fund,
whether or not arising from transactions arising in the ordinary course
of business.
(u) NO LITIGATION. There is no litigation or governmental or
other proceeding or investigation before any court or before or by any
public body or board pending, or to
8
the Fund's best knowledge, threatened against, the Fund which is
reasonably likely to result in any material adverse change in the
condition, financial or otherwise, business affairs or business
prospects of the Fund, or is reasonably likely to materially and
adversely affect the properties or assets of the Fund.
6. REPRESENTATIONS AND WARRANTIES OF THE INVESTMENT MANAGER. The
Investment Manager represents and warrants to the Dealer Manager that:
(a) ORGANIZATION AND QUALIFICATION. The Investment Manager has
been duly organized and is validly existing as a corporation in good
standing under the laws of the State of Delaware. The Investment
Manager is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which the nature of its
activities and the ownership or leasing of property requires such
qualification, except where the failure to so qualify would not have a
material adverse effect on its business, operations, or properties. The
Investment Manager owns or possesses all material governmental
licenses, permits, consents, orders, approvals or other authorizations
as necessary to own, lease and operate its properties and carry on its
business as now being conducted.
(b) REGISTRATION AS INVESTMENT ADVISER. The Investment Manager
is duly registered as an investment adviser under the Advisers Act, and
it is not prohibited by the Advisers Act or the Company Act from acting
under the Management Agreement as an investment adviser to the Fund.
(c) CORPORATE AUTHORITY. The Investment Manager has all
requisite corporate power and authority to conduct its business as
described in the Registration Statement and the Prospectus, and to
execute, deliver and perform this Agreement and the Fund Agreements to
which the Investment Manager is a party.
(d) AUTHORIZATION AND ENFORCEABILITY. The execution, delivery
and performance of the Fund Agreements to which the Investment Manager
is a party and the consummation of the transactions contemplated
therein are within the corporate power of the Investment Manager and
have been duly and validly authorized by all necessary corporate
action, and each of the Fund Agreements to which the Investment Manager
is a party represents a valid and binding obligation of the Investment
Manager enforceable against the Investment Manager in accordance its
terms, except to the extent that rights to indemnity hereunder may be
limited by federal or state securities laws or the public policy
underlying such laws.
(e) NO VIOLATION. The execution, delivery and performance of
the Fund Agreements to which the Investment Manager is a party will not
violate or conflict with the Investment Manager's Certificate of
Incorporation or Bylaws, or any law, rule, regulation, order, judgment
or decree of any court, Federal or state regulatory body,
self-regulatory organization, stock exchange or securities association
having jurisdiction over it or its properties or operations, or
violate, conflict with, result in the breach of, require any consent
under, or result in the creation of any liens on any assets or
properties of the Investment Manager pursuant to, any contract,
indenture, mortgage, loan, agreement, note, lease or other instrument,
license or permit to which it is a party of by which it or
9
its properties may be bound.
(f) NO CONSENTS REQUIRED. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or
with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Investment Manager or any of its
properties or assets or of or with any other person, entity or group is
required for the execution, delivery and performance of the Fund
Agreements to which the Investment Manager is a party, and the
consummation of the transactions contemplated hereby and thereby,
except such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits as may be required under
the Act, the Company Act, the Exchange Act, state securities or blue
sky laws, or the rules and regulations of the NASD or The Chicago Stock
Exchange in connection with the transactions contemplated hereby and
thereby.
(g) EFFECTIVENESS OF FUND AGREEMENTS; NO DEFAULT. Each of the
Fund Agreements to which the Investment Manager is a party is in full
force and effect and neither the Investment Manager, nor to the
Investment Manager's knowledge any other party to any such Fund
Agreement, is in default or breach thereunder, and no event has
occurred which with the passage of time would constitute a default
thereunder.
(h) NO MATERIAL ADVERSE CHANGE. Subsequent to the date as of
which information is given in the Registration Statement and the
Prospectus, except as otherwise stated therein, there has been no
material adverse change in the condition (financial or otherwise) or
net assets of the Investment Manager, or in the management, capital
stock, investment objective, investment policies, earnings,
liabilities, business affairs or business prospects of the Investment
Manager, whether or not arising from transactions arising in the
ordinary course of business.
(i) NO LITIGATION. There is no litigation or governmental or
other proceeding or investigation before any court or before or by any
public body or board pending, or to the Investment Manager's best
knowledge, threatened against, the Investment Manager which is
reasonably likely to result in any material adverse change in the
condition, financial or otherwise, business affairs or business
prospects of the fund, or is reasonably likely to materially and
adversely affect the properties or assets of the Investment Manager.
7. REPRESENTATIONS AND WARRANTIES OF DEALER MANAGER. The Dealer Manager
represents and warrants to the Fund and to the Investment Manager that:
(a) ORGANIZATION AND QUALIFICATION. The Dealer Manager has
been duly organized and is validly existing as a corporation in good
standing under the laws of the State of Delaware. The Dealer Manager is
duly qualified to do business as a foreign corporation in each
jurisdiction in which the nature of its activities and the ownership or
leasing of property requires such qualification, except where the
failure to so qualify would not have a material adverse effect on its
business, operations, or properties.
(b) REGISTRATION AND COMPLIANCE. The Dealer Manager is duly
registered as a
10
broker-dealer under the Securities Exchange Act of 1934, is a member in
good standing of the National Association of Securities Dealers, Inc.,
is in compliance with all rules and regulations under the Securities
and Exchange Act of 1934 and the NASD Rules of Fair Practice, the
violation of which would have a material adverse effect on the Dealer
Manager, and is either registered or exempt from registration under any
state securities laws applicable to any offer and sale of the Shares.
(c) CORPORATE AUTHORITY. The Dealer Manager has all requisite
corporate power and authority to conduct its business as described in
the Registration Statement and the Prospectus, and to execute, deliver
and perform this Agreement and the Fund Agreements to which the Dealer
Manager is a party.
(d) AUTHORIZATION AND ENFORCEABILITY. The execution, delivery
and performance of the Fund Agreements to which the Dealer Manager is a
party and the consummation of the transactions contemplated therein are
within the corporate power of the Dealer Manager and have been duly and
validly authorized by all necessary corporate action, and each of the
Fund Agreements to which the Dealer Manager is a party represents a
valid and binding obligation of the Dealer Manager enforceable against
the Dealer Manager in accordance its terms, except to the extent that
rights to indemnity hereunder may be limited by federal or state
securities laws or the public policy underlying such laws.
(e) NO VIOLATION. The execution, delivery and performance of
the Fund Agreements to which the Dealer Manager is a party will not
violate or conflict with the Dealer Manager's Certificate of
Incorporation or Bylaws, or any law, rule, regulation, order, judgment
or decree of any court, Federal or state regulatory body,
self-regulatory organization, stock exchange or securities association
having jurisdiction over it or its properties or operations, or
violate, conflict with, result in the breach of, require any consent
under, or result in the creation of any liens on any assets or
properties of the fund pursuant to, any contract, indenture, mortgage,
loan, agreement, note, lease or other instrument, license or permit to
which it is a party of by which it or its properties may be bound.
(f) NO CONSENTS REQUIRED. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or
with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Dealer Manager or any of its properties or
assets or of or with any other person, entity or group is required for
the execution, delivery and performance of the Fund Agreements to which
the Dealer Manager is a party, and the consummation of the transactions
contemplated thereby, except such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as
may be required under the Act, the Company Act, the Exchange Act, state
securities or blue sky laws, or the rules and regulations of the NASD
or The Chicago Stock Exchange in connection with the offer and sale of
the Shares.
8. COVENANTS OF THE FUND AND THE INVESTMENT MANAGER. The Fund and the
Investment Manager covenant and agree with the Dealer Manager that:
11
(a) MATTERS REGARDING REGISTRATION STATEMENT, NOTIFICATION,
AND PROSPECTUS. The Fund will use its best efforts to cause the
Registration Statement and any amendment thereof to become effective as
promptly as possible. If the Registration Statement has become or
becomes effective with a form of prospectus omitting Rule 430A
information, or filing of the Prospectus is otherwise required under
Rule 424(b), the Fund will file the Prospectus, properly completed,
pursuant to Rule 424(b) within the time period prescribed and will
provide evidence satisfactory to the Dealer Manager of such timely
filing. The Fund will notify the Dealer Manager immediately (i) when
the Registration Statement and any amendments thereto become effective,
(ii) of any request by the Commission or any "blue sky" authority for
any amendment of or supplement to the Registration Statement or the
Prospectus or for any additional information, (iii) of the issuance of
any Stop Order or of the initiation, or the threatening, of any
proceedings therefor, (iv) of the receipt of any comments from the
Commission or any "blue sky" authority, (v) of the receipt by the Fund
of any notification with respect to the suspension of the qualification
of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for that purpose, (vi) of the institution
of any procedures pursuant to Section 8(e) of the Company Act and (vii)
of the happening of any event during the period described in SECTION 14
which in the judgment of the Fund makes any statement in the
Registration Statement, the Notification or the Prospectus untrue in
any material respect or which requires amendments or changes to the
Registration Statement, Notification or Prospectus in order the make
the statements therein not misleading in any material respect. If any
governmental authority shall propose or enter a Stop Order at any time,
the Fund will make every reasonable effort to prevent the issuance of
any such Stop Order, and if issued, to obtain the lifting of such order
as soon as possible. The Fund will not file any amendment to the
Registration Statement or any amendment of or supplement to the
Prospectus (including any Prospectus required to be filed pursuant to
Rule 424(b)) or any documents filed under the Exchange Act if such
document would be deemed to be incorporated by reference into the
Prospectus, whether before or after the effective date of the
Registration Statement, to which the Dealer Manager shall reasonably
object in writing after being timely furnished in advance a copy
thereof (which the Fund hereby undertakes to do).
(b) REQUIRED AMENDMENTS. If at any time when a prospectus
relating to the Shares is required to be delivered under the Act any
event shall have occurred as a result of which the Prospectus as then
amended or supplemented includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it
shall be necessary at any time to amend or supplement the Prospectus,
Registration Statement or Notification to comply with the Act or the
Company Act, the Fund will notify the Dealer Manager promptly and
prepare and file with the Commission an appropriate amendment or
supplement (in form and substance satisfactory to the Dealer Manager)
which will correct such statement or omission or which will effect such
compliance and will use its best efforts to have any such amendment to
the Registration Statement declared effective as soon as possible.
(c) FURNISHING DOCUMENTS. The Fund will promptly deliver to
the Dealer
12
Manager two signed copies of each of the Notification and the
Registration Statement including exhibits, and such number of copies of
any Preliminary Prospectus, the Prospectus, the Notification and the
Registration Statement, and all amendments of and supplements to such
documents, if any, as the Dealer Manager may reasonably request.
(d) BLUE SKY QUALIFICATIONS. The Fund will, in cooperation
with the Dealer Manager, at or prior to the time the Registration
Statement becomes effective, endeavor in good faith to qualify the
Shares for offering and sale under the securities laws relating to the
offering or sale of the Shares in such jurisdictions as the Dealer
Manager may designate and to maintain such qualification in effect for
so long as required for the distribution thereof.
(e) NO SECURITIES TRANSACTIONS. Without the prior written
consent of the Dealer Manager, the Fund will not issue, sell, offer or
agree to sell, or otherwise dispose of, directly or indirectly, any
Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock), and the Fund will obtain the
undertaking of each of its officers and directors and such of its
shareholders as have been heretofore designated by the Dealer Manager
not to engage in any of the aforementioned transactions on their own
behalf, other than the Fund's sale of Shares hereunder.
(f) FURNISHING OF FINANCIAL STATEMENTS. The Fund will make
generally available (within the meaning of Section 11(a) of the Act) to
its security holders and to the Dealer Manager as soon as practicable,
but not later than forty-five (45) days after the end of its fiscal
quarter in which the first anniversary date of the Closing occurs, an
earnings statement (which need not be audited but which shall satisfy
the provisions of Section 11(a) of the Act) covering a period of at
least twelve consecutive months beginning on or after the Closing.
(g) FURNISHING OF REPORTS. During a period of three (3) years
from the effective date of the Registration Statement, the Fund will
furnish to the Dealer Manager copies of (i) all reports to its
shareholders; (ii) all reports, financial statements and proxy or
information statements filed by the Fund with the Commission and The
Chicago Stock Exchange, and (iii) all press releases, articles and
material news items released by the Fund.
(h) USE OF PROCEEDS. The Fund will apply the proceeds from the
sale of the Shares as set forth under "Use of Proceeds" in the
Prospectus, and will comply with all provisions of all undertakings
contained in the Registration Statement.
(i) NO PUBLICITY. The Fund will prior to the Closing Date
issue no press release or other communication directly or indirectly
and hold no press conference with respect to the Fund, its financial
condition, results of operations, business, properties, assets, or
liabilities, or this offering, without the Dealer Manager's prior
written consent, unless such press release or communication is required
by applicable law or the rules of The Chicago Stock Exchange.
(j) INVESTMENT MANAGER ACTIONS. The Investment Manager
covenants and
13
agrees with the Dealer Manager to use its best efforts to cause the
Fund to comply with each of the Fund's covenants and agreements
contained in this SECTION 8.
(k) PAYMENT OF COSTS AND EXPENSES. Whether or not the
transactions contemplated in this Agreement are consummated or this
Agreement is terminated, the Fund and the Investment Manager agree to
pay all costs and expenses incident to the performance of the
obligations of the Fund hereunder, including those in connection with
(i) preparing, printing, duplicating, filing and distributing the
Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any Preliminary Prospectus, the
Prospectus and any amendments thereof or supplements thereto, the
underwriting documents (including this Agreement, the Selected Dealer
Agreement, and all other documents related to the public offering of
the Shares (including those supplied to the Dealer Manager in
quantities as hereinabove stated), (ii) the issuance, transfer and
delivery of the Shares to the Dealer Manager, including any transfer or
other taxes payable thereon, (iii) the qualification of the Shares
under state or foreign securities or Blue Sky laws, including the costs
of printing and mailing a preliminary and final "Blue Sky Survey" and
the fees of counsel for the Dealer Manager ("Dealer Managers' Counsel")
and such counsel's disbursements in relation thereto, (iv) listing the
Shares on The Chicago Stock Exchange, (v) the review of the terms of
the public offering of the Shares by the NASD, and the fees of the
Dealer Manager's Counsel and such counsel's disbursements relating
thereto, and (vi) the filing fees payable to the Commission and the
NASD.
9. COVENANTS OF DEALER MANAGER. The Dealer Manager covenants and agrees
as follows:
(a) CONDUCT OF OFFERING. Neither the Dealer Manager nor any
person acting on its behalf will offer any of the Shares for sale, or
solicit offers to subscribe for or buy any Shares, or otherwise
negotiate with any person with respect to the Shares, on the basis of
any communications or documents except the Prospectus, information of a
factual nature provided by the Fund or the Investment Manager, or any
other documents and communications reasonably satisfactory in form and
substance to the Fund and the Investment Manager.
(b) COMPLIANCE WITH LAWS. In making or soliciting offers, or
negotiating offers and sales, the Dealer Manager will comply with the
provisions of the Securities Act, the Exchange Act, the Company Act,
and the "blue sky" laws of the jurisdictions in which the Dealer
Manager or any person acting on its behalf makes or solicits such
offers or so negotiates.
10. CONDITIONS OF DEALER MANAGER'S OBLIGATIONS. The obligations of the
Dealer Manager to use its best efforts as agent for the Fund to sell the Shares
as provided herein shall be subject to the each of the following conditions:
(a) EFFECTIVE REGISTRATION STATEMENT. The Registration
Statement shall have become effective not later than 6:00 p.m.,
Washington, D.C. time, on the date of this Agreement or at such later
time and date as shall have been consented to in writing by the
14
Dealer Manager, and no Stop Order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof shall
have been issued and no proceedings therefor shall have been initiated
or threatened. Each post-effective amendment to the Registration
Statement, if any, shall have become effective. If the Fund shall have
elected to rely upon Rule 430A under the Act, the 430A information
previously omitted from the effective Registration Statement pursuant
to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) within the prescribed time period, and
the Fund shall have provided evidence reasonably satisfactory to the
Dealer Manager of such timely filing, or a post-effective amendment
providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A.
(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of each of the Fund and the Investment
Manager herein contained, and each of the representations, warranties,
statements and opinions in any certificates, opinions, written
statements or letters furnished to the Dealer Manager, shall be true
and correct in all material respects as of the date hereof and as of
the Closing Date.
(c) PERFORMANCE OF COVENANTS AND AGREEMENTS. Each of the Fund
and the Investment Manager shall have performed all covenants and
agreements and satisfied all conditions contained herein required to be
performed or satisfied by them on or before the Closing Date.
(d) OPINION OF COUNSEL TO THE FUND. As of the Closing Date,
the Dealer Manager shall have received a letter from Mayor, Day,
Caldwell & Keeton, L.L.P., counsel for the Fund, dated the Closing
Date, addressed to the Dealer Manager and in form and substance
reasonably satisfactory to the Dealer Manager, confirming its legal
opinions to the effect that:
(i) The Fund has been duly organized and is validly
existing as a corporation in good standing under the State of
Delaware.
(ii) The Fund has authorized and outstanding capital
stock as described in the Registration Statement and
Prospectus, and the Shares to be delivered on the Closing Date
have been duly and validly authorized and, when delivered in
accordance with this Agreement, will be duly and validly
issued, fully paid and nonassessable and will not have been
issued in violation of or subject to any preemptive rights.
The purchasers of the Shares will receive good, valid and
marketable title to the Shares being sold by the Fund in
accordance with this Agreement, free and clear of all liens,
agreements and encumbrances. The Common Stock and the Shares
conform to the descriptions thereof contained in the
Registration Statement and the Prospectus. To the knowledge of
such counsel, there is no commitment, plan or arrangement to
issue, and there is outstanding no option, warrant or other
right calling for the issuance of, any share of capital stock
of the Fund or any security or other instrument which by its
terms is convertible into, exercisable for or exchangeable for
capital stock of the Fund, except as may be properly described
in the Registration Statement.
15
(iii) The Shares are duly authorized for listing on
The Chicago Stock Exchange.
(iv) Each of the Fund Agreements has been duly and
validly authorized, executed and delivered by the Fund and is
a valid and binding obligation of the Fund, enforceable
against the Fund in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting
creditors' rights generally, or by general equitable
principles, and except to the extent that rights to indemnity
hereunder may be limited by federal or state securities laws
or the public policy underlying such laws.
(v) The Certificate of Incorporation and the Bylaws
of the Fund and each of the Fund Agreements complies in all
material respects with all applicable provisions of the Act,
the Company Act, the Advisers Act and the Exchange Act.
(vi) The execution, delivery and performance of the
Fund Agreements will not violate or conflict with the Fund's
Certificate of Incorporation or Bylaws, or, to the knowledge
of such counsel, any law, rule, regulation, order, judgment or
decree of any court, Federal or state regulatory body,
self-regulatory organization, stock exchange or securities
association having jurisdiction over it or its properties or
operations, or, to the knowledge of such counsel, violate,
conflict with, result in the breach of, require any consent
under, or result in the creation of any liens on any assets or
properties of the Fund pursuant to, any contract, indenture,
mortgage, loan, agreement, note, lease or other instrument to
which it is a party or by which it or its properties may be
bound. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or
with any court or any public, governmental or regulatory
agency or body having jurisdiction over the Fund or any of its
properties or assets or of or with any other person, entity or
group is, to the knowledge of such counsel, required for the
execution, delivery and performance of the Fund Agreements,
and the consummation of the transactions contemplated thereby,
including the issuance, sale and delivery of the Shares to be
issued, sold and delivered by the Fund hereunder, except the
registration under the Act and the Company Act of the Shares
and such consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits
as may be required under the Act, the Company Act, the
Exchange Act, state securities or blue sky laws, or the rules
and regulations of the NASD or The Chicago Stock Exchange, in
connection with the purchase and distribution of the Shares by
the Dealer Manager.
(vii) The Registration Statement, the Notification,
and the Prospectus and any amendments thereof or supplements
thereto (other than the financial statements and schedules and
other financial and statistical data included or incorporated
by reference therein, as to which no opinion need be rendered)
comply as to form in all material respects with the
requirements of the Act and the Company Act.
16
(viii) The Registration Statement is effective under
the Act, and, to the knowledge of such counsel, no Stop Order
suspending the effectiveness of the Registration Statement or
any post-effective amendment thereof has been issued and no
proceedings therefor have been initiated or threatened by the
Commission. Any filing of a Prospectus known by such counsel
to be required pursuant to Rule 424(b) under the Act has been
made in accordance with Rule 424(b) and 430A under the Act.
(ix) To such counsel's knowledge, (A) there is no
litigation, arbitration, claim, governmental or other
proceeding (formal or informal) or investigation pending or,
to the Fund's knowledge, threatened (or any basis therefor
known to the Fund) with respect to the Fund or its operations,
businesses, properties or assets, except as may be properly
described in the Prospectus or such as individually or in the
aggregate would not have a material adverse effect upon the
operations, business, properties or assets of the Fund, (B)
the Fund is not, to the knowledge of such counsel, in
violation of, or default with respect to, its Certificate of
Incorporation or Bylaws, or any law, rule, regulation, order,
judgment or decree of any court, Federal or state regulatory
body, self-regulatory organization, stock exchange or
securities association having jurisdiction over it or its
properties or operations, except as may be properly described
in the Prospectus or as such violation in the aggregate would
not have a material adverse effect upon the operations,
business, properties assets of the Fund, (C) the Fund is not,
to the knowledge of such counsel, in default in the
performance or observance of any material obligation,
agreement, covenant or condition contained in any contract,
indenture, mortgage, loan, agreement, note, lease or other
instrument to which it is a party of by which it or its
properties may be bound, and (D) to the knowledge of such
counsel, any contract, agreement, instrument, lease or license
required to be described in the Registration Statement,
Notification, or the Prospectus has been properly described
therein and any contract, agreement, instrument, lease or
license required to be filed as an exhibit to the Registration
Statement has been filed with the Commission as an exhibit to
the Registration Statement.
(x) The Fund is registered with the Commission under
the Company Act as a diversified, closed-end management
investment company.
(xi) The statements in the Prospectus under the
captions "Management of the Fund, "Capital Stock", "Dividends"
and "Taxes", and the statements in the Statement of Additional
Information included in the Registration Statement under the
captions "Management and Principal Shareholder", "Tax Status",
and "Persons Controlled by or Under Common Control", insofar
as such statements constitute a summary of legal matters,
documents referred to therein or matters of law, are fair and
accurate summaries of the material provisions thereof in all
material respects.
(xii) On the basis of their examination of the
Registration Statement and the Prospectus, their investigation
made in connection with the preparation of the Registration
Statement and the Prospectus, and their participation in
conferences with the officers and authorized agents of the
Fund and the Investment Manager,
17
they are of the opinion that the Registration Statement, as of
its effective date, and the Prospectus, as of its date,
complied (other than the financial statements or other
financial, economic or statistical data contained therein, as
to which they need not express an opinion) as to form in all
material respects with the requirements of the Act and the
Company Act, and they have no reason to believe that the
Registration Statement, as of its effective date, and the
Prospectus, as of the date thereof (other than the financial
statements or other financial, economic or statistical data
contained therein, as to which they need not express an
opinion) contained any untrue statement of a material fact or
omitted to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading.
In addition, the letter from such counsel shall state that no
facts have come to the attention of such counsel that lead such counsel
to believe that either the Registration Statement at the time it became
effective (or any amendment thereof made prior to the Closing Date, as
of the date of such amendment or any document incorporated by
reference) contained an untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus as
of the date thereof (or any amendment thereof or supplement thereto
made prior to the Closing Date, as of the date of such amendment or
supplement) contained an untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such
counsel need make no statement with respect to the financial statements
and schedules and other financial and statistical data included or
incorporated by reference therein).
In connection with such letter, such counsel may rely (A) as
to matters involving the application of laws other than the laws of the
United States, Texas and the Delaware General Corporation Law, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to the Dealer Manager) of other counsel
reasonably acceptable to the Dealer Manager, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Fund and
certificates or other written statements of officers of departments of
various jurisdictions having custody or documents respecting the
corporate existence or good standing of the Fund, provided that copies
of any such statements or certificates shall be delivered to the Dealer
Manager. The opinion of such counsel for the Fund shall state that the
opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, the Dealer Manager and they are
justified in relying thereon. Any opinion qualified by "knowledge"
shall be to the actual knowledge of such counsel after conducting such
review as is described in such letter. Further, such counsel may state
that they have not independently verified the accuracy, completeness or
fairness of the statements made or included in the Registration
Statement, Notification and Prospectus, and take no responsibility
therefore except and to the extent stated in paragraph (xi) above.
(e) OFFICER'S CERTIFICATE. At the Closing Date, the Dealer
Manager shall have received a certificate of the Chairman of the Board
of the Fund, dated the Closing Date,
18
to the effect that the condition set forth in subsection (a) of this
SECTION 9 has been satisfied, that as of the date hereof and as of the
Closing Date, the representations and warranties of the Fund set forth
in SECTION 5 hereof are accurate, and that as of the Closing Date, the
obligations of the Fund to be performed hereunder on or prior thereto
have been duly performed.
(f) OPINION OF COUNSEL TO INVESTMENT MANAGER. At the Closing
Date, the Dealer Manager shall have received the opinion of Mayor, Day,
Caldwell & Keeton, L.L.P., counsel for the Investment Manager, dated
the Closing Date, addressed to the Dealer Manager and in form and
substance reasonably satisfactory to the Dealer Manager, to the effect
that:
(i) The Investment Manager has been duly organized
and is validly existing as a corporation in good standing
under the State of Delaware.
(ii) The Investment Manager is duly registered as an
investment adviser under the Advisers Act, and is not
prohibited by the Advisers Act or the Company Act from acting
under the Management Agreement as investment adviser to the
Fund as contemplated by the Prospectus.
(iii) Each of the Fund Agreements to which the
Investment Manager is a party has been duly and validly
authorized, executed and delivered by the Investment Manager,
and is a valid and binding obligation of the Investment
Manager, enforceable against the Investment Manager in
accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium
or other similar law affecting creditors' rights generally, or
by general equitable principles except to the extent that
rights to indemnity hereunder may be limited by federal or
state securities laws or the public policy underlying such
laws .
(iv) The execution, delivery and performance of the
Fund Agreements to which the Investment Manager is a party
will not violate or conflict with the Investment Manager's
Certificate of Incorporation or Bylaws, or, to the knowledge
of such counsel, any law, rule, regulation, order, judgment or
decree of any court, Federal or state regulatory body,
self-regulatory organization, stock exchange or securities
association having jurisdiction over it or its properties or
operations, or violate, conflict with, result in the breach
of, require any consent under, or result in the creation of
any liens on any assets or properties of the Investment
Manager pursuant to, any contract, indenture, mortgage, loan,
agreement, note, lease or other instrument to which it is a
party of by which it or its properties may be bound. No
consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any
public, governmental or regulatory agency or body having
jurisdiction over the Investment Manager or any of its
properties or assets or of or with any other person, entity or
group is, to the knowledge of such counsel, required for the
execution, delivery and performance of the Fund Agreements to
which the Investment Manager is a party, and the consummation
of the transactions contemplated thereby.
19
In connection with such letter, such counsel may rely (A) as
to matters involving the application of laws other than the laws of the
United States, Texas and the Delaware General Corporation Law, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to the Dealer Manager) of other counsel
reasonably acceptable to the Dealer Manager, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Fund and
certificates or other written statements of officers of departments of
various jurisdictions having custody or documents respecting the
corporate existence or good standing of the Fund, provided that copies
of any such statements or certificates shall be delivered to the Dealer
Manager. The opinion of such counsel for the Fund shall state that the
opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, the Dealer Manager and they are
justified in relying thereon. Any opinion qualified by "knowledge"
shall be to the actual knowledge of such counsel after conducting such
review as is described in such letter. Further, such counsel may state
that they have not independently verified the accuracy, completeness or
fairness of the statements made or included in the Registration
Statement, Notification and Prospectus, and take no responsibility
therefore except and to the extent stated in paragraph (xi) above.
(g) ACCOUNTANTS' LETTER. At the time this Agreement is
executed and at the Closing Date, the Dealer Manager shall have
received a letter from Arthur Andersen LLP, independent public
accountants for the Fund, dated as of the date of this Agreement and as
of the Closing Date, addressed to the Dealer Manager and in form and
substance satisfactory to the Dealer Manager, to the effect that: (i)
they are, and during the periods covered by their reports included in
the Registration Statement and Prospectus they were, independent
certified public accountants with respect to the Fund within the
meaning of the Act; (ii) in their opinion, the statement of assets and
liabilities examined by them and included in the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Company Act; (iii) on the
basis of procedures (but not an examination made in accordance with
generally accepted auditing standards) consisting of a reading of the
latest available statement of assets and liabilities of the Fund (with
an indication of the date of the latest available statement of assets
and liabilities), a reading of the minutes of meetings and consents of
the shareholders and board of directors of the Fund and the committees
thereof subsequent to _____, inquiries of officers and other employees
of the Fund who have responsibility for financial and accounting
matters of the Fund and its subsidiaries with respect to transactions
and events subsequent to _____, and other specified procedures and
inquiries to a date not more than five days prior to the date of such
letter, nothing has come to their attention that would cause them to
believe that: (A) the statement of assets and liabilities of the Fund
does not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Company Act or that such
statement of assets and liabilities is not fairly presented in
conformity with generally accepted accounting principles (except to the
extent certain footnote disclosures have been omitted in accordance
with applicable rules of the Commission); and (B) with respect to the
period subsequent to _____ there were, as of the date of the most
recent available statement of assets and liabilities of the Fund and as
of a specified date not more than five days prior to the date of such
letter, any
20
changes in the capital stock or long-term indebtedness of the Fund or
decrease in the net assets or stockholders' equity of the Fund or that
the Fund has incurred any long-term liabilities, in each case as
compared with the amounts shown in the most recent statement of assets
and liabilities included in the Registration Statement and the
Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter. The letter from Arthur Andersen LLP
shall cover such additional matters as the Dealer Manager may
reasonably request.
(h) CERTAIN EVENTS. At the Closing Date (i) no Stop Order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding therefor shall have
been initiated or threatened; (ii) all requests for additional
information on the part of the Commission shall have been complied with
or such requests shall have been otherwise satisfied; (iii) since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein or
contemplated thereby, there shall not have been any material adverse
change in the condition (financial or otherwise), results of
operations, businesses or properties of the Fund, whether or not
arising in the ordinary course of business, other than as set forth in
or contemplated by the Prospectus, the effect of which is in the Dealer
Manager's reasonable judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares on the terms and in the manner contemplated in
the Prospectus; and (iv) the total number of Shares to be issued and
outstanding upon consummation of the Closing shall be not less than
2,000,000.
(i) NASD REVIEW. The NASD, upon review of the terms of the
public offering of the Shares, shall not have objected to the Dealer
Manager's participation in such offering under such terms.
(j) ADDITIONAL INFORMATION. Prior to the Closing Date, the
Fund and its counsel shall have furnished to the Dealer Manager such
further information, opinions, certificates and documents as the Dealer
Manager may reasonably request.
If any of the conditions specified in this SECTION 10 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the Dealer
Manager or to Dealer Manager's counsel pursuant to this SECTION 10 shall not be
in all material respects reasonably satisfactory in form and substance to the
Dealer Manager and to Dealer Manager's counsel, all obligations of the Dealer
Manager hereunder may be canceled by the Dealer Manager at, or at any time prior
to, the Closing Date. Notice of such cancellation shall be given to the Fund in
writing, or by telephone, telex or telegraph, confirmed in writing.
11. INDEMNIFICATION.
(a) BY FUND. The Fund agrees to indemnify and hold harmless
the Dealer Manager and each Broker/Dealer and each person, if any, who
controls the Dealer Manager or any Broker/Dealer within the meaning of
Section 15 of the Act or Section
21
20(a) of the Exchange Act, against any and all losses, liabilities,
claims, damages and expenses whatsoever (including but not limited to
attorneys' fees and any and all expense whatsoever incurred in
investigating, preparing or defending against any litigation, commenced
or threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they
or any of them may become subject under the Act, the Exchange Act, or
other Federal or state law or regulation, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect
thereof) (i) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in or
incorporated by reference in the Registration Statement or Notification
for the registration of the Shares, as originally filed or any
amendment thereof, or any related Preliminary Prospectus or the
Prospectus, or any supplement thereto or amendment thereof, or any
application document executed by the Fund filed or delivered in
connection with the qualifications of the Shares for sale under any
"blue sky law" or the listing of the Shares on any securities exchange,
or (ii) arise out of or are based upon the omission or alleged omission
to state in any of the foregoing a material fact required to be stated
therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that the Fund will not be liable in any such case to
the extent but only to the extent that any such loss, liability, claim,
damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written
information furnished to the Fund by or on behalf of the Dealer Manager
or such Broker/Dealer through the Dealer Manager expressly for use
therein as set forth in SECTION 5. This indemnity agreement will be in
addition to any liability which the Fund may otherwise have including
under this Agreement.
(b) BY DEALER MANAGER. The Dealer Manager agrees to indemnify
and hold harmless the Fund, and each of its directors, each of the
officers of the Fund who shall have signed the Registration Statement,
and each other person, if any, who controls the Fund within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation),
joint or several, to which they or any of them may become subject under
the Act, the Exchange Act, or other Federal or state securities law,
insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement or Notification for the registration of the
Shares, as originally filed or any amendment thereof, or any related
Preliminary Prospectus or the Prospectus, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not
misleading, in each case to the extent, but only to the extent, that
any such loss, liability, claim, damage or expense arises out of or is
based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Fund by or on
behalf of the Dealer Manager or any Broker/Dealer through the Dealer
Manager expressly for use therein. This indemnity will be in addition
to any liability which any Dealer Manager may otherwise have
22
including under this Agreement.
(c) NOTIFICATION; OPPORTUNITY TO DEFEND. Promptly after
receipt by an indemnified party under subsection (a) or (b) above of
notice of the commencement of any action, such indemnified party shall,
if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof
(but the failure so to notify an indemnifying party shall not relieve
it from any liability which it may have under this SECTION 11 except to
the extent that it has been prejudiced in any material respect by such
failure or from any liability which it may have otherwise). In case any
such action is brought against any indemnified party, and it notifies
an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein, and to the extent it may
elect by written notice delivered to the indemnified party promptly
after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party
or parties shall have the right to employ its or their own counsel in
any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by one
of the indemnifying parties in connection with the defense of such
action, (ii) the indemnifying parties shall not have employed counsel
to have charge of the defense of such action within a reasonable time
after notice of commencement of the action, or (iii) such indemnified
party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional
to those available to one or all of the indemnifying parties (in which
case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties),
in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, any indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
PROVIDED, HOWEVER, that such consent was not unreasonably withheld.
12. CONTRIBUTION. In order to provide for contribution in circumstances
in which the indemnification provided for in SECTIONS 11(A) or (B) hereof is for
any reason held to be unavailable from the Fund or Dealer Manager or is
insufficient to hold harmless a party indemnified thereunder, the Fund and the
Dealer Manager shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provisions (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Fund or Dealer
Manager, any contribution received by the Fund or Dealer Manager from other
persons who may also be liable for contribution, including persons who control
the Fund within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Fund who signed the Registration Statement and
directors of the Fund) to which the Fund and the Dealer Manager may be subject,
in such proportions as are appropriate to reflect the relative benefits received
by the Fund and the Dealer Manager from the offering of the Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party "not having received notice" as
provided in SECTION 11 hereof, in such proportion as is appropriate to reflect
not only the relative benefits
23
referred to above but also the relative fault of the Fund and the Dealer Manager
in connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Fund and the
Dealer Manager shall be deemed to be in the same proportion as (x) the total
proceeds from the offering (net of underwriting discounts and commissions but
before deducting organization and offering expenses and fees and nonaccountable
expense reimbursements paid to the Dealer Manager) received by the Fund and (y)
the fees and nonaccountable expense reimbursements received by the Dealer
Manager, respectively, in each case as set forth in the table on the cover page
of or elsewhere in the Prospectus. The relative fault of the Fund and of the
Dealer Manager shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Fund or the Dealer Manager and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Fund and the Dealer Manager agree that it would not be just and equitable if
contribution pursuant to this SECTION 12 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above. The Fund shall be liable for the
amounts to be contributed by it pursuant to the provisions of this SECTION 12.
Notwithstanding the provisions of this SECTION 12, (i) in no case shall the
Dealer Manager be liable or responsible for any amount in excess of the fees and
nonaccountable expense reimbursements actually paid to the Dealer Manager
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11 of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this SECTION 12, each person, if any, who controls the Dealer Manager within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, shall
have the same rights to contribution as the Dealer Manager, and each person, if
any, who controls the Fund within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Fund who shall have
signed the Registration Statement and each director of the Fund shall have the
same rights to contribution as the Fund, subject in each case to clauses (i) and
(ii) of the preceding sentence. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this SECTION 12, notify such
party or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
SECTION 12 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its consent; PROVIDED, HOWEVER, that such
consent was not unreasonably withheld.
13. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Dealer Manager, the Investment
Manager and the Fund contained in this Agreement, including the agreements
contained in SECTION 8, the indemnity agreements contained in SECTION 11 and the
contribution agreements contained in SECTION 12, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
the Dealer Manager or any controlling person thereof, or by or on behalf of the
Fund or the Investment Manager or any of their respective officers and
directors, or any controlling person thereof, and shall survive delivery of any
payment for the Shares to and by the Dealer Manager.
14. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
24
(a) EFFECTIVE DATE. This Agreement shall become effective at
10:30 A.M., Washington, D.C. time, on the first full business day
following the day on which the Registration Statement becomes effective
or at the time of the public offering by the Dealer Manager of the
Shares, whichever is earlier. As used herein, the "time of the public
offering" shall mean the time, after the Registration Statement becomes
effective, of the release by the Dealer Manager for publication of the
first newspaper advertisement which is subsequently published relating
to the Shares or the time, after the Registration Statement becomes
effective, when the Shares are first released for offering by the
Dealer Manager, whichever shall first occur. Until this Agreement
becomes effective as aforesaid, it may be terminated by the Fund by
notifying the Dealer Manager. Notwithstanding the foregoing, the
provisions of this SECTION 14 and of SECTIONS 1, 5, 11 and 12 hereof
shall at all times be in full force and effect.
(b) TERMINATION UPON CERTAIN EVENTS. The Dealer Manager shall
have the right to terminate this Agreement at any time prior to the
Closing Date if any domestic or international event or act or
occurrence has materially disrupted, or in the Dealer Manager's opinion
will in the immediate future materially disrupt, securities markets; or
if trading on the New York or Chicago Stock Exchanges shall have been
suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been
required, on the New York or Chicago Stock Exchanges by the New York or
Chicago Stock Exchanges or by order of the Commission or any other
governmental authority having jurisdiction; or if the United States
shall have become involved in a war or major hostilities; or if a
banking moratorium has been declared by a state or federal authority,
or if a moratorium in foreign exchange trading by major international
banks or persons has been declared; or if any new restriction
materially adversely affecting the distribution of the Shares shall
have become effective; or if there shall have been such change in the
market for the Fund's securities or securities in general or in
political, financial or economic conditions as in the Dealer Manager's
judgment makes it inadvisable to proceed with the offering, sale and
delivery of the Shares on the terms contemplated by the Prospectus.
(c) NOTICE. Any notice of termination pursuant to this SECTION
14 shall be by telephone, telex, or telegraph, confirmed in writing by
letter.
(d) REIMBURSEMENT OF DEALER MANAGER. If this Agreement shall
be terminated pursuant to any of the provisions hereof (otherwise than
pursuant to notification by the Dealer Manager as provided in SECTION
14(B) hereof), or if the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Dealer
Manager set forth herein is not satisfied or because of any refusal,
inability or failure on the part of the Fund or Investment Manager to
perform any agreement herein or comply with any provision hereof, the
Fund and the Investment Manager agree, subject to demand by the Dealer
Manager, to reimburse the Dealer Manager for all out-of-pocket expenses
(including the fees and expenses of its counsel), incurred by the
Dealer Manager in connection herewith.
15. NOTICE. All communications hereunder, except as may be otherwise
specifically
25
provided herein, shall be in writing and, if sent to any Dealer Manager, shall
be mailed, delivered, or telexed or telegraphed and confirmed in writing, to
such Dealer Manager as follows:
If sent to the Fund, shall be mailed, delivered, or
telegraphed and confirmed in writing, to the Fund (with a copy
to the Investment Manager) as follows:
Southwest Small Cap Equity Fund, Inc.
c/o MGF Service Corp.
312 Walnut Street
Cincinnati, Ohio 45202
Attn: John F. Splain,
Assistant Secretary
If sent to the Investment Manager, shall be mailed, delivered,
or telegraphed and confirmed in writing, to the Investment
Manager as follows:
McKenna Management Company
909 Fannin, Suite 1600
Houston, Texas 77010
If sent to the Dealer Manager, shall be mailed, delivered, or
telegraphed and confirmed in writing, to the Dealer Manager as
follows:
McKenna Securities Company
909 Fannin, Suite 1600
Houston, Texas 77010
All notices hereunder shall be effective upon receipt by the party to which it
is addressed.
16. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Dealer Manager, the Fund, and the Investment Manager
and the controlling persons, directors, officers, employees and agents referred
to herein, and their respective successors and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision herein
contained. The term "successors and assigns" shall not include a purchaser, in
its capacity as such, of Shares.
17. CONSTRUCTION. This Agreement shall be construed in accordance with
the internal laws of the State of Texas, without giving effect to the rules
governing conflicts of laws. Time is of the essence in this agreement.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall be deemed one instrument.
26
If the foregoing correctly sets forth the understanding between the
Dealer Manager, the Fund, and the Investment Manager please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
SOUTHWEST SMALL CAP EQUITY FUND, INC.
(the "Fund")
By: ________________
Print Name: ________
Title: _____________
McKENNA MANAGEMENT COMPANY
(the "Investment Manager")
By: ________________
Print Name: ________
Title: _____________
Accepted as of the date first above written.
McKENNA SECURITIES COMPANY
(the "Dealer Manager")
By: ________________
Print Name: ________
Title: _____________
Exhibit h(b)
SELECTED DEALER AGREEMENT
_____, 1995
McKENNA SECURITIES COMPANY, As
Lead Dealer Manager
909 Fannin, Suite 1600
Houston, Texas 77010
Gentlemen:
In connection with a public offering (the "OFFERING") of Common Stock,
$.001 par value per share (the "SHARES"), of Southwest Small Cap Equity Fund,
Inc. (the "FUND") to be conducted after the date hereof, for which Offering
McKenna Securities Company and Capital West Securities, Inc. (the "DEALER
MANAGERS") have been employed to use their best efforts to sell the Shares for
the Fund's account, the undersigned broker/dealer (the "DEALER") has been
offered the right to sell, as agent for the Fund, the Shares being distributed
to the public. This will confirm the Dealer Managers' and Dealer's mutual
agreements as to the terms and conditions applicable to the Dealer's
participation in the selected dealer group being organized by the Dealer
Managers as set forth in this Agreement. Capitalized but undefined terms shall
have the meaning given such terms in that certain Selling Agreement among the
Dealer Managers, the Fund and the Investment Manager dated as of _____, 1995
(the "SELLING AGREEMENT"), a copy of which has been furnished or made available
to the Dealer.
1. _____ CONDITIONS OF OFFERING. The Offering will be subject to
issuance and delivery of the Shares by the Fund in compliance with the Selling
Agreement and the Escrow Agreement, and will be subject to the issuance of the
approving opinion of counsel for the Fund and to satisfaction or waiver of other
conditions set forth in the Selling Agreement. McKenna Securities Company as
lead Dealer Manager ("McKenna") will advise the Dealer by telefax, telegram,
telex or other form of written communication (a "DEALER NOTICE") of the
particular method of consummation of the Offering and any supplementary terms
and conditions of the Offering which, to the extent such supplementary terms and
conditions are inconsistent with any provision herein, shall supersede any such
provision. Unless otherwise indicated in any such Dealer Notice, communications
by the Dealer with respect to any Offering should be sent to the McKenna at its
address given herein. McKenna reserves the right to reject any subscription in
whole or in part. <PAGE> The Public Offering price of the Shares shall be as
indicated in the following table, and McKenna will disburse the sales commission
indicated in the following table to the Dealer:
SHARES PURCHASED PRICE PER SHARE DEALER SALES COMMISSION
100 to 29,999 $10.00 .60
25,000 to 49,999 9.90 .50
50,000 to 74,999 9.80 .40
75,000 to 99,999 9.70 .30
100,000 to 499,999 9.60 .20
500,000 or more 9.20 .00
In connection with any sales of shares hereunder, the Dealer shall
tender a Subscription Agreement completed by the Purchaser of such shares, in
the Form of Appendix A to the Prospectus and shall tender payment for shares
subscribed for thereby, in each case in accordance with the Prospectus and the
Escrow Agreement, a copy of which has been furnished or made available to the
Dealer.
Payment of sales commissions for Shares sold by a Dealer is to be made
at the offices of McKenna by certified or official bank checks issued
by the Escrow Agent for the account of the Fund in immediately available funds
payable as instructed by McKenna in accordance with the terms of this
agreement, as amended or supplemented, for the benefit of the Dealers
individually with respect to the amount sold by each Dealer.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) PROSPECTUSES. McKenna shall provide the Dealer with such
number of copies of each preliminary prospectus, the Prospectus and any
amendment or supplement to any thereof relating to the Offering as the Dealer
may reasonably request for the purposes contemplated by the Securities Act of
1933 (the "SECURITIES ACT") and the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), and the applicable rules and regulations of the Securities
and Exchange Commission thereunder. The Dealer represents that the Dealer is
familiar with Rule 15c2-8 under the Exchange Act relating to the distribution of
preliminary and final prospectuses and agrees that the Dealer will comply
therewith. The Dealer agrees to keep an accurate record of its distribution
(including dates, number of copies and persons to whom sent) of copies of the
Prospectus or any preliminary prospectus (or any amendment or supplement to any
thereof), and, promptly upon request by McKenna, to bring all subsequent changes
to the attention of anyone to whom such material shall have been furnished. The
Dealer agrees to furnish to persons who submit a Subscription Agreement and
tender payment for the proposed purchase of Shares a copy of the Prospectus
filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act. The
Dealer agrees that in connection with any offers, sales or purchases of Shares
in an Offering the Dealer will rely upon no statements whatsoever, written or
oral, other than the statements in the Prospectus delivered to the Dealer by
McKenna. The Dealer will not be authorized by the Fund or by the Dealer Managers
to give any information or to make any representation not contained in the
Prospectus in connection with the offering or sale of the Shares.
(b) OPEN MARKET TRANSACTIONS. Until such time as the terms of
this
2
Agreement shall no longer apply to the Offering or until McKenna notifies the
Dealer that the Dealer is released from this restriction, the Dealer agrees not
to deal, trade, bid for, purchase, attempt to purchase, or sell, directly or
indirectly, any Shares except as broker pursuant to unsolicited orders and as
otherwise provided in this Agreement.
(c) NASD. The Dealer represents that the Dealer is actually
engaged in the investment banking or securities business and the Dealer is
either a member in good standing of the NASD or, if not such a member, a foreign
dealer, bank or institution not eligible for membership. If the Dealer is such a
member, the Dealer agrees that in making sales of the Shares the Dealer will
comply with all applicable rules of the NASD, including without limitation, the
NASD's Interpretation with Respect to Free-Riding and Withholding and Section 24
of Article III of the NASD's Rules of Fair Practice. If the Dealer is such a
foreign dealer, bank or institution, the Dealer agrees not to offer or sell any
Shares in the United States of America except through McKenna and in making
sales of Shares outside the United States of America the Dealer agrees to comply
as though the Dealer were a member with such Interpretation and Sections 8, 24
and 36 of Article III of the NASD's Rules of Fair Practice and to comply with
Section 25 of such Article III as it applies to nonmember brokers or dealers in
a foreign country.
(d) RELATIONSHIP AMONG DEALER MANAGERS AND SELECTED DEALERS.
Nothing contained herein shall constitute the Dealer as being a partner with the
Dealer Managers or with any other Dealer entering into a Selected Dealer
Agreement (a "Selected Dealer"). The Dealer Managers shall not be under any
obligation to the Dealer except for obligations assumed herein or in any Dealer
Notice in connection with any Offering. The Dealer agrees to pay its
proportionate share of any claim, demand or liability asserted against the
Dealer and the other Selected Dealers or any of them, or against the Dealer
Managers, based on any claim that the Dealer and such Selected Dealers or any of
them constitute an association, unincorporated business or other separate
entity, including, in each case, the Dealer's proportionate share of any expense
incurred in defending against any such claim, demand or liability.
(e) BLUE SKY LAWS. McKenna will inform the Dealer as to the
jurisdictions in which the Shares have been qualified for sale under the
respective securities or "blue sky" laws of such jurisdictions. The Dealer
understands and agrees that compliance with the securities or "blue sky" laws in
each jurisdiction in which the Dealer shall offer or sell any of the Shares
shall be the Dealer's sole responsibility and that the McKenna assumes no
responsibility or obligation as to the eligibility of the Shares for sale or the
Dealer's right to sell the Shares in any jurisdiction.
(f) COMPLIANCE WITH LAW. The Dealer agrees that in selling
Shares (which agreement shall also be for the benefit of the Fund or other
seller of such Shares) the Dealer will comply with the applicable provisions of
the Securities Act and the Exchange Act, the applicable rules and regulations of
the Securities and Exchange Commission thereunder, the applicable rules and
regulations of the NASD and the applicable rules and regulations of The Chicago
Stock Exchange. McKenna shall have full authority to take such action as McKenna
and the other Dealer Managers may deem advisable in respect of all matters
pertaining to any Offering. The Dealer Manager shall not have any liability to
the Dealer, except for lack of good faith and for obligations expressly assumed
by the Dealer Manager in this Agreement; PROVIDED, HOWEVER, that
3
nothing in this sentence shall be deemed to relieve the Dealer Managers from any
liability imposed by the Securities Act.
3. TERMINATION; SUPPLEMENTS AND AMENDMENTS. This Agreement may be
terminated by either party hereto upon five business days' written notice to the
other party; PROVIDED, HOWEVER, that if a Dealer Notice was sent prior to such
notice, this Agreement shall remain in full force and effect and shall terminate
in accordance with the last sentence of this Section. This Agreement may be
supplemented or amended by McKenna by written notice thereof to the Dealer, and
any such supplement or amendment to this Agreement shall be effective with
respect to any Offering to which this Agreement applies after the date of such
supplement or amendment. Each reference to "this Agreement" herein shall, as
appropriate, be to this Agreement as so amended or supplemented.
4. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on, and
inure to the benefit of the parties hereto and the respective successors and
assigns of each of them.
5. ESCROW AGREEMENT. The Dealer agrees that it is bound by, and will
cause all offers to purchase Shares in respect of which it is acting hereunder
to be made in accordance with, the terms of the Escrow Agreement executed by
McKenna, on behalf of the Dealer Managers, and the Fund.
6. GOVERNING LAW. This Agreement, together with such supplementary
terms and conditions with respect to such Offering as may be contained in any
Dealer Notice from McKenna to the Dealer in connection therewith, shall be
governed by, and construed in accordance with, the laws of the State of Texas.
4
By signing this Agreement the Dealer confirms the Dealer's acceptance
of and agreement to the terms and conditions of this Agreement (as supplemented
or amended pursuant to SECTION 3), together with and subject to any
supplementary terms and conditions contained in any Dealer Notice from McKenna,
all of which shall constitute (i) a binding agreement between the Dealer and the
Dealer Managers, (ii) confirmation that the Dealer's representations and
warranties set forth in SECTION 2 are true and correct at that time and (iii)
confirmation that the Dealer's agreements set forth herein have been and will be
fully performed by the Dealer to the extent and at the times required thereby.
Very truly yours,
__________________
(Name of Firm)
By: ______________
Name: ____________
Title: ___________
Confirmed as of the date first above written:
McKENNA SECURITIES COMPANY,
as lead Dealer Manager
By: ______________
Name: ____________
Title: ___________
0248688.05
119520/2132
5
Exhibit j(a)
CUSTODY AGREEMENT
This AGREEMENT, dated as of , 1995, by and between Southwest Small Cap
Equity Fund, Inc. (the "Fund"), a diversified closed-end management investment
company organized under the laws of the Delaware, and STAR BANK, N.A., a
national banking association (the "Custodian").
W I T N E S S E T H:
WHEREAS, the Fund desires that the Fund's Securities and cash be held
and administered by the Custodian pursuant to this Agreement; and
WHEREAS, the Fund is a diversified closed-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Custodian represents that it is a bank having the
qualifications prescribed in Section 26(a)(i) of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Fund and the Custodian hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1.1 "AUTHORIZED PERSON" means any Officer or other person duly
authorized by resolution of the Board of Directors to give Oral Instructions and
Written Instructions on behalf of the Fund and named in Exhibit A hereto or in
such resolutions of the Board of Directors, certified by an Officer, as may be
received by the Custodian from time to time.
1
1.2 "BOARD OF DIRECTORS" shall mean the Directors from time to time
serving under the Fund's Agreement and Articles of Incorporation, as from time
to time amended.
1.3 "BOOK-ENTRY SYSTEM" shall mean a federal book-entry system as
provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, in Subpart B of
31 CFR Part 350, or in such book-entry regulations of federal agencies as are
substantially in the form of such Subpart O.
1.4 "BUSINESS DAY" shall mean any day recognized as a settlement day by
The New York Stock Exchange, Inc. and any other day for which the Fund computes
the net asset value of Shares of the Fund.
1.5 "NASD" shall mean The National Association of Securities Dealers,
Inc.
1.6 "OFFICER" shall mean the President, any Vice President, the
Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer of
the Fund.
1.7 "ORAL INSTRUCTIONS" shall mean instructions orally transmitted to
and accepted by the Custodian because such instructions are: (i) reasonably
believed by the Custodian to have been given by an Authorized Person, (ii)
recorded and kept among the records of the Custodian made in the ordinary course
of business and (iii) orally confirmed by the Custodian. The Fund shall cause
all Oral Instructions to be confirmed by Written Instructions prior to the end
of the next Business Day. If such Written Instructions confirming Oral
Instructions are not received by the Custodian prior to a transaction, it shall
in no way affect the validity of the transaction or the authorization thereof by
the Fund. If Oral Instructions vary from the Written Instructions which purport
to confirm them, the
2
Custodian shall notify the Fund of such variance but such Oral Instructions will
govern unless the Custodian has not yet acted.
1.8 "FUND CUSTODY ACCOUNT" shall mean the account in the name of the
Fund, which is provided for in Section 3.2 below.
1.9 "PROPER INSTRUCTIONS" shall mean Oral Instructions or Written
Instructions. Proper Instructions may be continuing Written Instructions when
deemed appropriate by both parties.
1.10 "SECURITIES DEPOSITORY" shall mean The Depository Trust Company
and (provided that Custodian shall have received a copy of a resolution of the
Board of Directors, certified by an Officer, specifically approving the use of
such clearing agency as a depository for the Fund) any other clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities and Exchange Act of 1934 as amended (the "1934 Act"), which acts as a
system for the central handling of Securities where all Securities of any
particular class or series of an issuer deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of the Securities.
1.11 "SECURITIES" shall include, without limitation, common and
preferred stocks, bonds, call options, put options, debentures, notes, bank
certificates of deposit, bankers' acceptances, mortgage-backed securities or
other obligations, and any certificates, receipts, warrants or other instruments
or documents representing rights to receive, purchase or subscribe for the same,
or evidencing or representing any other rights or interests therein, or any
similar property or assets that the Custodian has the facilities to clear and to
service.
3
1.12 "SHARES" shall mean the units of beneficial interest issued by the
Fund.
1.13 "SUB-CUSTODIAN" shall mean and include (i) any branch of a
"qualified U.S. bank," as that term is defined in Rule 17f-5 under the 1940 Act,
(ii) any "eligible foreign custodian," as that term is defined in Rule 17f-5
under the 1940 Act, approved by the Board of Directors and having a contract
with the Custodian which contract has been approved by the Board of Directors,
and (iii) any securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United States, which
operates the central system for handling of securities or equivalent
book-entries in that country or a transnational system for the central handling
of securities or equivalent book-entries, which securities depository or
clearing agency has been approved by the Board of Directors; provided, that the
Custodian, or a Sub-Custodian has entered into an agreement with such securities
depository or clearing agency.
1.14 "WRITTEN INSTRUCTIONS" shall mean (i) written communications
actually received by the Custodian and signed by an Authorized Person, or (ii)
communications by telex or any other such system from one or more persons
reasonably believed by the Custodian to be Authorized Persons, or (iii)
communications between electro-mechanical or electronic devices provided that
the use of such devices and the procedures for the use thereof shall have been
approved by resolutions of the Board of Directors, a copy of which, certified by
an Officer, shall have been delivered to the Custodian.
4
ARTICLE II
APPOINTMENT OF CUSTODIAN
2.1 APPOINTMENT. The Fund hereby constitutes and appoints the Custodian
as custodian of all Securities and cash owned by or in the possession of the
Fund at any time during the period of this Agreement.
2.2 ACCEPTANCE. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as hereinafter set forth.
2.3 DOCUMENTS TO BE FURNISHED. The following documents, including any
amendments thereto, will be provided contemporaneously with the execution of the
Agreement to the Custodian by the Fund:
a. A copy of the Articles of Incorporation of the Fund
certified by the Secretary;
b. A copy of the Bylaws of the Fund certified by the
Secretary;
c. A copy of the resolution of the Board of Directors of the
Fund appointing the Custodian, certified by the Secretary;
d. A copy of the then current Prospectus of the
Fund; and
e. A certification of the President and Secretary of the Fund
setting forth the names and signatures of the current Officers of the Fund and
other Authorized Persons.
5
2.4 NOTICE OF APPOINTMENT OF DIVIDEND AND TRANSFER AGENT. The Fund
agrees to notify the Custodian in writing of the appointment, termination or
change in appointment of any Dividend and Transfer Agent of the Fund.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
3.1 SEGREGATION. All Securities and non-cash property held by the
Custodian for the account of the Fund (other than Securities maintained in a
Securities Depository or Book-Entry System) shall be physically segregated from
other Securities and non-cash property in the possession of the Custodian and
shall be identified as subject to this Agreement.
3.2 FUND CUSTODY ACCOUNT. The Custodian shall open and maintain in its
Trust Department a custody account in the name of the Fund coupled with the name
of the Fund, subject only to draft or order of the Custodian, in which the
Custodian shall enter and carry all Securities, cash and other assets of the
Fund which are delivered to it.
3.3 APPOINTMENT OF AGENTS. (a) In its discretion, the Custodian may
appoint one or more Sub-Custodians to act as Securities Depositories or as
sub-custodians to hold Securities and cash of the Fund and to carry out such
other provisions of this Agreement as it may determine, provided, however, that
the appointment of any such agents and maintenance of any Securities and cash of
the Fund shall be at the Custodian's expense and shall not relieve the Custodian
of any of its obligations or liabilities under this Agreement.
(b) If, after the initial approval of Sub-Custodians by the Board of
Directors in connection with this Agreement, the Custodian wishes to appoint
other Sub-Custodians to
6
hold property of the Fund, it will so notify the Fund and provide it with
information reasonably necessary to determine any such new Sub-Custodian's
eligibility under Rule 17f-5 under the 1940 Act, including a copy of the
proposed agreement with such Sub-Custodian. The Fund shall at the meeting of the
Board Of Directors next following receipt of such notice and information give a
written approval or disapproval of the proposed action.
(c) The Agreement between the Custodian and each Sub-Custodian acting
hereunder shall contain the required provisions set forth in Rule
17f-5(a)(1)(iii).
(d) If the Custodian intends to remove any Sub-Custodian previously
approved by the Board Of Directors, it shall so notify the Fund and move the
Securities and cash of the Fund deposited with such Sub-Custodian to another
Sub-Custodian previously approved by the Board Of Directors. The Custodian shall
promptly take such steps as may be required to remove any Sub-Custodian that has
ceased to meet the requirements of Rule 17f-5 under the 1940 Act.
(e) The Custodian hereby warrants to the Fund that in its opinion,
after due inquiry, the established procedures to be followed by each
Sub-Custodian in connection with the safekeeping of property of the Fund
pursuant to this Agreement afford protection for such property not materially
different from that afforded by the Custodian's established safekeeping
procedures with respect to similar property held by it (and its securities
depositories) in Cincinnati, Ohio.
(f) The Custodian shall oversee the maintenance of any Securities held
for the Fund by any Sub-Custodian. Any Securities held by a Sub-Custodian will
be subject only to the instructions of the Custodian or its agents; and any
Securities held in an eligible foreign
7
securities depository for the account of a Sub-Custodian will be subject only to
the instructions of such Sub-Custodian. In the event that a Sub-Custodian
permits any of the Securities placed in its care to be held in an eligible
foreign securities depository, such Sub-Custodian will be required by its
agreement with the Custodian to identify on its books such Securities as being
held for the account of the Custodian as a custodian for its customers.
3.4 DELIVERY OF ASSETS TO CUSTODIAN. The Fund shall deliver, or cause
to be delivered, to the Custodian all of the Fund's Securities, cash and other
assets, including (a) all payments of income, payments of principal and capital
distributions received by the Fund with respect to such Securities, cash or
other assets owned by the Fund at any time during the period of this Agreement,
and (b) all cash received by the Fund for the issuance, at any time during such
period, of Shares. The Custodian shall not be responsible for such Securities,
cash or other assets until actually received by it.
3.5 SECURITIES DEPOSITORIES AND BOOK-ENTRY SYSTEMS. The Custodian may
deposit and/or maintain Securities of the Fund in a Securities Depository or in
a Book-Entry System, subject to the following provisions:
(a) Prior to a deposit of Securities of the Fund in any Securities
Depository or Book-Entry System, the Fund shall deliver to the Custodian a
resolution of the Board Of Directors, certified by an Officer, authorizing and
instructing the Custodian on an on-going basis to deposit in such Securities
Depository or Book-Entry System all Securities eligible for deposit therein and
to make use of such Securities Depository or Book-Entry System to the extent
8
possible and practical in connection with its performance hereunder, including,
without limitation, in connection with settlements of purchases and sales of
Securities, loans of Securities, and deliveries and returns of collateral
consisting of Securities.
(b) Securities of the Fund kept in a Book-Entry System or Securities
Depository shall be kept in an account ("Depository Account") of the Custodian
in such Book-Entry System or Securities Depository which includes only assets
held by the Custodian as a fiduciary, custodian or otherwise for customers.
(c) The records of the Custodian with respect to Securities of the Fund
maintained in a Book-Entry System or Securities Depository shall, by book-entry,
identify such Securities as belonging to the Fund.
(d) If Securities purchased by the Fund are to be held in a Book-Entry
System or Securities Depository, the Custodian shall pay for such Securities
upon (i) receipt of advice from the Book-Entry System or Securities Depository
that such Securities have been transferred to the Depository Account, and (ii)
the making of an entry on the records of the Custodian to reflect such payment
and transfer for the account of the Fund. If Securities sold by the Fund are
held in a Book-Entry System or Securities Depository, the Custodian shall
transfer such Securities upon (i) receipt of advice from the Book-Entry System
or Securities Depository that payment for such Securities has been transferred
to the Depository Account, and (ii) the making of an
9
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund.
(e) The Custodian shall provide the Fund with copies of any report
(obtained by the Custodian from a Book-Entry System or Securities Depository in
which Securities of the Fund are kept) on the internal accounting controls and
procedures for safeguarding Securities deposited in such Book-Entry System or
Securities Depository.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the Fund
resulting (i) from the use of a Book-Entry System or Securities Depository by
reason of any negligence or willful misconduct on the part of Custodian or any
Sub-Custodian appointed pursuant to Section 3.3 above or any of its or their
employees, or (ii) from failure of Custodian or any such Sub-Custodian to
enforce effectively such rights as it may have against a Book-Entry System or
Securities Depository. At its election, the Fund shall be subrogated to the
rights of the Custodian with respect to any claim against a Book-Entry System or
Securities Depository or any other person from any loss or damage to the Fund
arising from the use of such Book-Entry System or Securities Depository, if and
to the extent that the Fund has not been made whole for any such loss or damage.
10
3.6 DISBURSEMENT OF MONEYS FROM FUND CUSTODY ACCOUNT. Upon receipt of
Proper Instructions, the Custodian shall disburse moneys from the Fund Custody
Account but only in the following cases:
(a) For the purchase of Securities for the Fund but only in accordance
with Section 4.1 of this Agreement and only (i) in the case of Securities (other
than options on Securities, futures contracts and options on futures contracts),
against the delivery to the Custodian (or any Sub-Custodian appointed pursuant
to Section 3.3 above) of such Securities registered as provided in Section 3.9
below or in proper form for transfer, or if the purchase of such Securities is
effected through a Book-Entry System or Securities Depository, in accordance
with the conditions set forth in Section 3.5 above; (ii) in the case of options
on Securities, against delivery to the Custodian (or such Sub-Custodian) of such
receipts as are required by the customs prevailing among dealers in such
options; (iii) in the case of futures contracts and options on futures
contracts, against delivery to the Custodian (or such Sub-Custodian) of evidence
of title thereto in favor of the Fund or any nominee referred to in Section 3.9
below; and (iv) in the case of repurchase or reverse repurchase agreements
entered into between the Fund and a bank which is a member of the Federal
Reserve System or between the Fund and a primary dealer in U.S. Government
securities, against delivery of the purchased Securities either in certificate
form or through an entry crediting the
11
Custodian's account at a Book-Entry System or Securities Depository with
such Securities;
(b) In connection with the conversion, exchange or surrender, as set
forth in Section 3.7(f) below, of Securities owned by the Fund;
(c) For the payment of any dividends or capital gain distributions
declared by the Fund;
(d) In payment of the redemption price of Shares as provided in Section
5.1 below;
(e) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account of the Fund:
interest; taxes; administration, investment advisory, accounting, auditing,
transfer agent, custodian, trustee and legal fees; and other operating expenses
of the Fund; in all cases, whether or not such expenses are to be in whole or in
part capitalized or treated as deferred expenses;
(f) For transfer in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under the 1934 Act
and a member of the NASD, relating to compliance with rules of The Options
Clearing Corporation and of any registered national securities exchange (or of
any similar organization or organizations) regarding escrow or other
arrangements in connection with transactions by the Fund;
(g) For transfer in accordance with the provision of any agreement
among the Fund, the Custodian, and a futures commission merchant registered
12
under the Commodity Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market (or any similar
organization or organizations) regarding account deposits in connection with
transactions by the Fund;
(h) For the funding of any uncertificated time deposit or other
interest-bearing account with any banking institution (including the Custodian),
which deposit or account has a term of one year or less; and
(i) For any other proper purpose, but only upon receipt, in addition to
Proper Instructions, of a copy of a resolution of the Board Of Directors,
certified by an Officer, specifying the amount and purpose of such payment,
declaring such purpose to be a proper corporate purpose, and naming the person
or persons to whom such payment is to be made.
3.7 DELIVERY OF SECURITIES FROM FUND CUSTODY ACCOUNT. Upon receipt of
Proper Instructions, the Custodian shall release and deliver Securities from the
Fund Custody Account but only in the following cases:
(a) Upon the sale of Securities for the account of the Fund but only
against receipt of payment therefor in cash, by certified or cashiers check or
bank credit;
(b) In the case of a sale effected through a Book-Entry System or
Securities Depository, in accordance with the provisions of Section 3.5 above;
13
(c) To an offeror's depository agent in connection with tender or other
similar offers for Securities of the Fund; provided that, in any such case, the
cash or other consideration is to be delivered to the Custodian;
(d) To the issuer thereof or its agent (i) for transfer into the name
of the Fund, the Custodian or any Sub-Custodian appointed pursuant to Section
3.3 above, or of any nominee or nominees of any of the foregoing, or (ii) for
exchange for a different number of certificates or other evidence representing
the same aggregate face amount or number of units; provided that, in any such
case, the new Securities are to be delivered to the Custodian;
(e) To the broker selling Securities, for examination in accordance
with the "street delivery" custom;
(f) For exchange or conversion pursuant to any plan or merger,
consolidation, recapitalization, reorganization or readjustment of the issuer of
such Securities, or pursuant to provisions for conversion contained in such
Securities, or pursuant to any deposit agreement, including surrender or receipt
of underlying Securities in connection with the issuance or cancellation of
depository receipts; provided that, in any such case, the new Securities and
cash, if any, are to be delivered to the Custodian;
(g) Upon receipt of payment therefor pursuant to any repurchase or
reverse repurchase agreement entered into by the Fund;
14
(h) In the case of warrants, rights or similar Securities, upon the
exercise thereof, provided that, in any such case, the new Securities and cash,
if any, are to be delivered to the Custodian;
(i) For delivery in connection with any loans of Securities of the
Fund, but only against receipt of such collateral as the Fund shall have
specified to the Custodian in Proper Instructions;
(j) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against receipt by the
Custodian of the amounts borrowed;
(k) Pursuant to any authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Fund;
(l) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under the 1934 Act
and a member of the NASD, relating to compliance with the rules of The Options
Clearing Fund and of any registered national securities exchange (or of any
similar organization or organizations) regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a futures commission merchant registered
under the Commodity Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market (or
15
any similar organization or organizations) regarding account deposits in
connection with transactions by the Fund; or
(n) For any other proper corporate purpose, but only upon receipt, in
addition to Proper Instructions, of a copy of a resolution of the Board Of
Directors, certified by an Officer, specifying the Securities to be delivered,
setting forth the purpose for which such delivery is to be made, declaring such
purpose to be a proper corporate purpose, and naming the person or persons to
whom delivery of such Securities shall be made.
3.8 ACTIONS NOT REQUIRING PROPER INSTRUCTIONS. Unless otherwise
instructed by the Fund, the Custodian shall with respect to all Securities held
for the Fund:
(a) Subject to Section 7.4 below, collect on a timely basis all income
and other payments to which the Fund is entitled either by law or pursuant to
custom in the securities business;
(b) Present for payment and, subject to Section 7.4 below, collect on a
timely basis the amount payable upon all Securities which may mature or be
called, redeemed, or retired, or otherwise become payable;
(c) Endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments;
(d) Surrender interim receipts or Securities in temporary form for
Securities in definitive form;
(e) Execute, as custodian, any necessary declarations or certificates
of ownership under the federal income tax laws or the laws or regulations of
16
any other taxing authority now or hereafter in effect, and prepare and submit
reports to the Internal Revenue Service ("IRS") and to the Fund at such time, in
such manner and containing such information as is prescribed by the IRS;
(f) Hold for the Fund, either directly or, with respect to Securities
held therein, through a Book-Entry System or Securities Depository, all rights
and similar securities issued with respect to Securities of the Fund; and
(g) In general, and except as otherwise directed in Proper
Instructions, attend to all non-discretionary details in connection with the
sale, exchange, substitution, purchase, transfer and other dealings with
Securities and assets of the Fund.
3.9 REGISTRATION AND TRANSFER OF SECURITIES. All Securities held for
the Fund that are issued or issuable only in bearer form shall be held by the
Custodian in that form, provided that any such Securities shall be held in a
Book-Entry System if eligible therefor. All other Securities held for the Fund
may be registered in the name of the Fund, the Custodian, or any Sub-Custodian
appointed pursuant to Section 3.3 above, or in the name of any nominee of any of
them, or in the name of a Book-Entry System, Securities Depository or any
nominee of either thereof. The Fund shall furnish to the Custodian appropriate
instruments to enable the Custodian to hold or deliver in proper form for
transfer, or to register in the name of any of the nominees hereinabove referred
to or in the name of a Book-Entry System or Securities Depository, any
Securities registered in the name of the Fund.
3.10 RECORDS. (a) The Custodian shall maintain, by Fund, complete and
accurate records with respect to Securities, cash or other property held for the
Fund, including (i)
17
journals or other records of original entry containing an itemized daily record
in detail of all receipts and deliveries of Securities and all receipts and
disbursements of cash; (ii) ledgers (or other records) reflecting (A) Securities
in transfer, (B) Securities in physical possession, (C) monies and Securities
borrowed and monies and Securities loaned (together with a record of the
collateral therefor and substitutions of such collateral), (D) dividends and
interest received, and (E) dividends receivable and interest receivable; and
(iii) canceled checks and bank records related thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request,
or as may be required by the 1940 Act, including, but not limited to, Section 31
of the 1940 Act and Rule 31a-2 promulgated thereunder.
(b) All such books and records maintained by the Custodian shall (i) be
maintained in a form acceptable to the Fund and in compliance with rules and
regulations of the Securities and Exchange Commission, (ii) be the property of
the Fund and at all times during the regular business hours of the Custodian be
made available upon request for inspection by duly authorized officers,
employees or agents of the Fund and employees or agents of the Securities and
Exchange Commission, and (iii) if required to be maintained by Rule 31a-1 under
the 1940 Act, be preserved for the periods prescribed in Rule 31a-2 under the
1940 Act.
3.11 FUND REPORTS BY CUSTODIAN. The Custodian shall furnish the Fund
with a daily activity statement and a summary of all transfers to or from the
Fund Custody Account on the day following such transfers. At least monthly and
from time to time, the Custodian
18
shall furnish the Fund with a detailed statement of the Securities and moneys
held by the Custodian and the Sub-Custodians for the Fund under this Agreement.
3.12 OTHER REPORTS BY CUSTODIAN. The Custodian shall provide the Fund
with such reports, as the Fund may reasonably request from time to time, on the
internal accounting controls and procedures for safeguarding Securities, which
are employed by the Custodian or any Sub-Custodian appointed pursuant to Section
3.3 above.
3.13 PROXIES AND OTHER MATERIALS. The Custodian shall cause all proxies
relating to Securities which are not registered in the name of the Fund, to be
promptly executed by the registered holder of such Securities, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Fund such proxies, all proxy soliciting materials and
all notices relating to such Securities.
3.14 INFORMATION ON CORPORATE ACTIONS. The Custodian shall promptly
deliver to the Fund all information received by the Custodian and pertaining to
Securities being held by the Fund with respect to optional tender or exchange
offers, calls for redemption or purchase, or expiration of rights as described
in the Standards of Service Guide attached as Exhibit B. If the Fund desires to
take action with respect to any tender offer, exchange offer or other similar
transaction, the Fund shall notify the Custodian at least five Business Days
prior to the date on which the Custodian is to take such action. The Fund will
provide or cause to be provided to the Custodian all relevant information for
any Security which has unique put/option provisions at least five Business Days
prior to the beginning date of the tender period.
19
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
4.1 PURCHASE OF SECURITIES. Promptly upon each purchase of Securities
for the Fund, Written Instructions shall be delivered to the Custodian,
specifying (a) the name of the issuer or writer of such Securities, and the
title or other description thereof, (b) the number of shares, principal amount
(and accrued interest, if any) or other units purchased, (c) the date of
purchase and settlement, (d) the purchase price per unit, (e) the total amount
payable upon such purchase, and (f) the name of the person to whom such amount
is payable. The Custodian shall upon receipt of such Securities purchased by the
Fund pay out of the moneys held for the account of the Fund the total amount
specified in such Written Instructions to the person named therein. The
Custodian shall not be under any obligation to pay out moneys to cover the cost
of a purchase of Securities for the Fund, if in the Fund Custody Account there
is insufficient cash available to the Fund for which such purchase was made.
4.2 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES
PURCHASED. In any and every case where payment for the purchase of Securities
for the Fund is made by the Custodian in advance of receipt of the Securities
purchased but in the absence of specified Written Instructions to so pay in
advance, the Custodian shall be liable to the Fund for such Securities to the
same extent as if the Securities had been received by the Custodian.
4.3 SALE OF SECURITIES. Promptly upon each sale of Securities by the
Fund, Written Instructions shall be delivered to the Custodian, specifying (a)
the name of the issuer or writer of such Securities, and the title or other
description thereof, (b) the number of shares, principal amount (and accrued
interest, if any), or other units sold, (c) the date of sale and
20
settlement, (d) the sale price per unit, (e) the total amount payable upon such
sale, and (f) the person to whom such Securities are to be delivered. Upon
receipt of the total amount payable to the Fund as specified in such Written
Instructions, the Custodian shall deliver such Securities to the person
specified in such Written Instructions. Subject to the foregoing, the Custodian
may accept payment in such form as shall be satisfactory to it, and may deliver
Securities and arrange for payment in accordance with the customs prevailing
among dealers in Securities.
4.4 DELIVERY OF SECURITIES SOLD. Notwithstanding Section 4.3 above or
any other provision of this Agreement, the Custodian, when instructed to deliver
Securities against payment, shall be entitled, if in accordance with generally
accepted market practice, to deliver such Securities prior to actual receipt of
final payment therefor. In any such case, the Fund shall bear the risk that
final payment for such Securities may not be made or that such Securities may be
returned or otherwise held or disposed of by or through the person to whom they
were delivered, and the Custodian shall have no liability for any for the
foregoing.
4.5 PAYMENT FOR SECURITIES SOLD, ETC. In its sole discretion and from
time to time, the Custodian may credit the Fund Custody Account, prior to actual
receipt of final payment thereof, with (i) proceeds from the sale of Securities
which it has been instructed to deliver against payment, (ii) proceeds from the
redemption of Securities or other assets of the Fund, and (iii) income from
cash, Securities or other assets of the Fund. Any such credit shall be
conditional upon actual receipt by Custodian of final payment and may be
reversed if final payment is not actually received in full. The Custodian may,
in its sole discretion and from
21
time to time, permit the Fund to use funds so credited to the Fund Custody
Account in anticipation of actual receipt of final payment. Any such funds shall
be repayable immediately upon demand made by the Custodian at any time prior to
the actual receipt of all final payments in anticipation of which funds were
credited to the Fund Custody Account.
4.6 ADVANCES BY CUSTODIAN FOR SETTLEMENT. The Custodian may, in its
sole discretion and from time to time, advance funds to the Fund to facilitate
the settlement of the Fund's transactions in the Fund Custody Account. Any such
advance shall be repayable immediately upon demand made by Custodian.
ARTICLE V
REDEMPTION OF FUND SHARES
5.1 TRANSFER OF FUNDS. From such funds as may be available for the
purpose in the Fund Custody Account, and upon receipt of Proper Instructions
specifying that the funds are required to redeem Shares of the Fund, the
Custodian shall wire each amount specified in such Proper Instructions to or
through such bank as the Fund may designate with respect to such amount in such
Proper Instructions.
5.2 NO DUTY REGARDING PAYING BANKS. The Custodian shall not be under
any obligation to effect payment or distribution by any bank designated in
Proper Instructions given pursuant to Section 5.1 above of any amount paid by
the Custodian to such bank in accordance with such Proper Instructions.
22
ARTICLE VI
SEGREGATED ACCOUNTS
Upon receipt of Proper Instructions, the Custodian shall establish and
maintain a segregated account or accounts for and on behalf of the Fund, into
which account or accounts may be transferred cash and/or Securities, including
Securities maintained in a Depository Account,
(a) in accordance with the provisions of any agreement among the Fund,
the Custodian and a broker-dealer registered under the 1934 Act and a member of
the NASD (or any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund,
(b) for purposes of segregating cash or Securities in connection with
securities options purchased or written by the Fund or in connection with
financial futures contracts (or options thereon) purchased or sold by the Fund,
(c) which constitute collateral for loans of Securities made by the
Fund,
(d) for purposes of compliance by the Fund with requirements under the
1940 Act
for the maintenance of segregated accounts by registered investment companies in
connection with reverse repurchase agreements and when-issued, delayed delivery
and firm commitment transactions, and
23
(e) for other proper corporate purposes, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the Board
Of Directors, certified by an Officer, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
ARTICLE VII
CONCERNING THE CUSTODIAN
7.1 STANDARD OF CARE. The Custodian shall be held to the exercise of
reasonable care in carrying out its obligations under this Agreement, and shall
be without liability to the Fund or the Fund for any loss, damage, cost, expense
(including attorneys' fees and disbursements), liability or claim unless such
loss, damage, cost, expense, liability or claim arises from negligence, bad
faith or willful misconduct on its part or on the part of any Sub-Custodian
appointed pursuant to Section 3.3 above. The Custodian shall be entitled to rely
on and may act upon advice of counsel on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall promptly notify the Fund of any action taken or omitted by
the Custodian pursuant to advice of counsel. The Custodian shall not be under
any obligation at any time to ascertain whether the Fund is in compliance with
the 1940 Act, the regulations thereunder, the provisions of the Fund's charter
documents or by-laws, or its investment objectives and policies as then in
effect.
7.2 ACTUAL COLLECTION REQUIRED. The Custodian shall not be liable for,
or considered to be the custodian of, any cash belonging to the Fund or any
money represented
24
by a check, draft or other instrument for the payment of money, until the
Custodian or its agents actually receive such cash or collect on such
instrument.
7.3 NO RESPONSIBILITY FOR TITLE, ETC. So long as and to the extent that
it is in the exercise of reasonable care, the Custodian shall not be responsible
for the title, validity or genuineness of any property or evidence of title
thereto received or delivered by it pursuant to this Agreement.
7.4 LIMITATION ON DUTY TO COLLECT. Custodian shall not be required to
enforce collection, by legal means or otherwise, of any money or property due
and payable with respect to Securities held for the Fund if such Securities are
in default or payment is not made after due demand or presentation.
7.5 RELIANCE UPON DOCUMENTS AND INSTRUCTIONS. The Custodian shall be
entitled to rely upon any certificate, notice or other instrument in writing
received by it and reasonably believed by it to be genuine. The Custodian shall
be entitled to rely upon any Oral Instructions and any Written Instructions
actually received by it pursuant to this Agreement.
7.6 EXPRESS DUTIES ONLY. The Custodian shall have no duties or
obligations whatsoever except such duties and obligations as are specifically
set forth in this Agreement, and no covenant or obligation shall be implied in
this Agreement against the Custodian.
7.7 CO-OPERATION. The Custodian shall cooperate with and supply
necessary information to the entity or entities appointed by the Fund to keep
the books of account of the Fund and/or compute the value of the assets of the
Fund. The Custodian shall take all such reasonable actions as the Fund may from
time to time request to enable the Fund to
25
obtain, from year to year, favorable opinions from the Fund's independent
accountants with respect to the Custodian's activities hereunder in connection
with (a) the preparation of the Fund's reports on Form N-1A and Form N-SAR and
any other reports required by the Securities and Exchange Commission, and (b)
the fulfillment by the Fund of any other requirements of the Securities and
Exchange Commission.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY FUND. The Fund shall indemnify and hold harmless
the Custodian and any Sub-Custodian appointed pursuant to Section 3.3 above, and
any nominee of the Custodian or of such Sub-Custodian, from and against any
loss, damage, cost, expense (including attorneys' fees and disbursements),
liability (including, without limitation, liability arising under the Securities
Act of 1933, the 1934 Act, the 1940 Act, and any state or foreign securities
and/or banking laws) or claim arising directly or indirectly (a) from the fact
that Securities are registered in the name of any such nominee, or (b) from any
action or inaction by the Custodian or such Sub-Custodian (i) at the request or
direction of or in reliance on the advice of the Fund, or (ii) upon Proper
Instructions, or (c) generally, from the performance of its obligations under
this Agreement or any sub-custody agreement with a Sub-Custodian appointed
pursuant to Section 3.3 above, provided that neither the Custodian nor any such
Sub-Custodian shall be indemnified and held harmless from and against any such
loss, damage, cost, expense, liability or claim arising from the Custodian's or
such Sub-Custodian's negligence, bad faith or willful misconduct.
26
8.2 INDEMNIFICATION BY CUSTODIAN. The Custodian shall indemnify and
hold harmless the Fund from and against any loss, damage, cost, expense
(including attorneys' fees and disbursements), liability (including without
limitation, liability arising under the Securities Act of 1933, the 1934 Act,
the 1940 Act, and any state or foreign securities and/or banking laws) or claim
arising from the negligence, bad faith or willful misconduct of the Custodian or
any Sub-Custodian appointed pursuant to Section 3.3 above, or any nominee of the
Custodian or of such Sub-Custodian.
8.3 INDEMNITY TO BE PROVIDED. If the Fund requests the Custodian to
take any action with respect to Securities, which may, in the opinion of the
Custodian, result in the Custodian or its nominee becoming liable for the
payment of money or incurring liability of some other form, the Custodian shall
not be required to take such action until the Fund shall have provided indemnity
therefor to the Custodian in an amount and form satisfactory to the Custodian.
8.4 SECURITY. If the Custodian advances cash or Securities to the Fund
for any purpose, either at the Fund's request or as otherwise contemplated in
this Agreement, or in the event that the Custodian or its nominee incurs, in
connection with its performance under this Agreement, any loss, damage, cost,
expense (including attorneys' fees and disbursements), liability or claim
(except such as may arise from its or its nominee's negligence, bad faith or
willful misconduct), then, in any such event, any property at any time held for
the account of the Fund shall be security therefor, and should the Fund fail
promptly to repay or indemnify the Custodian, the Custodian shall be entitled to
utilize
27
available cash of such Fund and to dispose of other assets of such Fund to the
extent necessary to obtain reimbursement or indemnification.
ARTICLE IX
FORCE MAJEURE
Neither the Custodian nor the Fund shall be liable for any failure or
delay in performance of its obligations under this Agreement arising out of or
caused, directly or indirectly, by circumstances beyond its reasonable control,
including, without limitation, acts of God; earthquakes; fires; floods; wars;
civil or military disturbances; sabotage; strikes; epidemics; riots; power
failures; computer failure and any such circumstances beyond its reasonable
control as may cause interruption, loss or malfunction of utility,
transportation, computer (hardware or software) or telephone communication
service; accidents; labor disputes; acts of civil or military authority;
governmental actions; or inability to obtain labor, material, equipment or
transportation; provided, however, that the Custodian in the event of a failure
or delay (i) shall not discriminate against the Fund in favor of any other
customer of the Custodian in making computer time and personnel available to
input or process the transactions contemplated by this Agreement and (ii) shall
use its best efforts to ameliorate the effects of any such failure or delay.
ARTICLE X
EFFECTIVE PERIOD; TERMINATION
10.1 EFFECTIVE PERIOD. This Agreement shall become effective as of its
execution and shall continue in full force and effect until terminated as
hereinafter provided.
28
10.2 TERMINATION. Either party hereto may terminate this Agreement by
giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than sixty (60) days after the date of the
giving of such notice. If a successor custodian shall have been appointed by the
Board of Directors, the Custodian shall, upon receipt of a notice of acceptance
by the successor custodian, on such specified date of termination (a) deliver
directly to the successor custodian all Securities (other than Securities held
in a Book-Entry System or Securities Depository) and cash then owned by the Fund
and held by the Custodian as custodian, and (b) transfer any Securities held in
a Book-Entry System or Securities Depository to an account of or for the benefit
of the Fund at the successor custodian, provided that the Fund shall have paid
to the Custodian all fees, expenses and other amounts to the payment or
reimbursement of which it shall then be entitled. Upon such delivery and
transfer, the Custodian shall be relieved of all obligations under this
Agreement. The Fund may at any time immediately terminate this Agreement in the
event of the appointment of a conservator or receiver for the Custodian by
regulatory authorities or upon the happening of a like event at the direction of
an appropriate regulatory agency or court of competent jurisdiction.
10.3 FAILURE TO APPOINT SUCCESSOR CUSTODIAN. If a successor custodian
is not designated by the Fund on or before the date of termination specified
pursuant to Section 10.1 above, then the Custodian shall have the right to
deliver to a bank or corporation company of its own selection, which (a) is a
"bank" as defined in the 1940 Act and (b) has aggregate capital, surplus and
undivided profits as shown on its then most recent published report of not less
than $25 million, all Securities, cash and other property held by Custodian
29
under this Agreement and to transfer to an account of or for the Fund at such
bank or trust company all Securities of the Fund held in a Book-Entry System or
Securities Depository. Upon such delivery and transfer, such bank or trust
company shall be the successor custodian under this Agreement and the Custodian
shall be relieved of all obligations under this Agreement.
ARTICLE XI
COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to compensation as agreed upon from
time to time by the Fund and the Custodian. The fees and other charges in effect
on the date hereof and applicable to the Fund are set forth in Exhibit C
attached hereto.
ARTICLE XII
LIMITATION OF LIABILITY
It is expressly agreed that the obligations of the Fund hereunder shall
not be binding upon any of the Directors, shareholders, nominees, officers,
agents or employees of the Fund personally, but shall bind only the property of
the Fund as provided in the Fund's Agreement and Articles of Incorporation, as
from time to time amended. The execution and delivery of this Agreement have
been authorized by the Trustees, and this Agreement has been signed and
delivered by an authorized officer of the Fund, acting as such, and neither such
authorization by the Directors nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the corporation
property of the Fund as provided in the above-mentioned Agreement and Articles
of Incorporation.
30
ARTICLE XIII
NOTICES
Unless otherwise specified herein, all demands, notices, instructions,
and other communications to be given hereunder shall be in writing and shall be
sent or delivered to the recipient at the address set forth after its name
hereinbelow:
TO THE FUND:
Southwest Small Cap Equity Fund, Inc.
C/O MGF Service Corp.
Attn; Mr. John Splain
312 Walnut Street
Cincinnati, Ohio 45202
Telephone: (513) 629-2000
Facsimile: (513) 629-2041
TO CUSTODIAN:
Star Bank, N.A.
425 Walnut Street, M.L. 6118
Cincinnati, Ohio 45202
Attention: Mutual Fund Custody Services
Telephone: (513) 632-
Facsimile: (513) 632-4448
or at such other address as either party shall have provided to the other by
notice given in accordance with this Article XIII. Writing shall include
transmissions by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
31
ARTICLE XIV
MISCELLANEOUS
14.1 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Ohio.
14.2 REFERENCES TO CUSTODIAN. The Fund shall not circulate any printed
matter which contains any reference to Custodian without the prior written
approval of Custodian, excepting printed matter contained in the prospectus or
statement of additional information for the Fund and such other printed matter
as merely identifies Custodian as custodian for the Fund. The Fund shall submit
printed matter requiring approval to Custodian in draft form, allowing
sufficient time for review by Custodian and its counsel prior to any deadline
for printing.
14.3 NO WAIVER. No failure by either party hereto to exercise, and no
delay by such party in exercising, any right hereunder shall operate as a waiver
thereof. The exercise by either party hereto of any right hereunder shall not
preclude the exercise of any other right, and the remedies provided herein are
cumulative and not exclusive of any remedies provided at law or in equity.
14.4 AMENDMENTS. This Agreement cannot be changed orally and no
amendment to this Agreement shall be effective unless evidenced by an instrument
in writing executed by the parties hereto.
14.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts, each of which
shall be deemed an original but all of which together shall constitute but one
and the same instrument.
32
14.6 SEVERABILITY. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired thereby.
14.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; PROVIDED, HOWEVER, that this Agreement shall not be assignable by
either party hereto without the written consent of the other party hereto.
14.8 HEADINGS. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or construction
of any provision of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered in its name and on its behalf by its
representatives thereunto duly authorized, all as of the day and year first
above written.
ATTEST: SOUTHWEST SMALL
CAP EQUITY FUND, INC.
_________________________ By:_________________________________
ATTEST: STAR BANK, N.A.
_________________________ By:_________________________________
33
EXHIBIT A
AUTHORIZED PERSONS
Set forth below are the names and specimen signatures of the persons
authorized by the Fund to administer the Fund Custody Account.
NAME SIGNATURE
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
34
Exhibit k
SERVICE AGREEMENT FOR STOCK TRANSFER SERVICES
between SOUTHWEST SMALL CAP EQUITY FUND, INC..
and STAR BANK, N.A.
This Agreement, dated as of ____________, 1995 is by and between SOUTHWEST SMALL
CAP EQUITY FUND, INC. (the "Fund") and Star Bank, N.A. (the "Company") for the
purpose of the Company to act as Stock Transfer Agent, Registrar and Dividend
Disbursing Agent for the Fund. The Company agrees to provide all necessary
administrative and managerial services of a Stock Transfer Agent, Registrar, and
Dividend/Capital Gain Disbursing Agent as outlined in this agreement to the
Fund.
TRANSFER AGENT SERVICES
The Company agrees to transfer the registration of the Fund's Common stock
certificates of ownership within the Rules and Regulations established by the
Securities Transfer Association and other applicable industry guidelines.
Routine transfers, as defined by Securities and Exchange Commission (SEC) Rule
17, will be transferred within the Rule's 72 hour turnaround standard. The
Company will process all other transfer of registration transactions promptly
and maintain complete and accurate records of such transactions pursuant to SEC
record keeping requirements.
REGISTRAR SERVICES
The Company will monitor and maintain the issued and outstanding share balances
of the Fund's Common Stock to insure issuance within the authorized limit of
each equity class. The Company will provide to the Fund's internal or external
audit group certification as to the issued and outstanding shares of each equity
class upon request.
DIVIDEND AND CAPITAL GAIN DISBURSEMENT SERVICES
The Company will annually disburse checks and maintain applicable records
representing dividend and/or capital gain payments to the shareholders of record
of the Fund's Common stock. On the business day following the Fund's Board of
Directors approval of a cash dividend or capital gain distribution the Fund will
deliver in writing to the Company the Payment Declaration which outlines the
rate per share, record date, and payable date of the payment. The Company will
release to the United States Post Office all payment checks for mailing no later
than one business day prior to the payable date. The Fund agrees to provide the
Company, in available funds, the total of the cash disbursement by 10:00 a.m. on
the payable date. Payment may be made in the form of a wire transfer, check, or
charge to a Star Bank, N.A. checking account.
DIVIDEND REINVESTMENT SERVICES
The Company will perform and maintain applicable records for Dividend
Reinvestment Services on behalf of the shareholders of the Fund pursuant to the
terms and conditions of the Fund's Dividend Reinvestment Plan ("the Plan"). The
Company must receive, in writing, any alteration to the terms nad conditions of
the Plan at least 60 calendar days prior to implementation of the alteration.
STOCK OPTIONS
Upon written request of the Fund, the Company will issue from authorized but
unissued shares certificates of ownership of the Fund pursuant to any Stock
Option Plan which has been approved by the Fund's Board of Directors.
Certificates will be issued in accordance with routine transfer turnaround
requirements.
SPECIAL MAILING SERVICES
The Company will perform special mailing for quarterly reports or other
correspondence to shareholders for $75.00 for each 1,000 registered holders per
mailing plus out of pocket expenses.
PROXY SERVICES
The Company will perform Proxy Solicitation and Tabulation Services for the Fund
annually or at any other Special Meeting if requested by the shareholders or the
Fund's Board of Directors. The Fund will provide written notice of Annual and
Special Meetings to the Company on the business day following the announcement
of such meeting. Any Special Meeting Proxy Solicitation and Tabulation in
addition to the Annual Meeting will be billed at the rate noted in the FEES,
CHARGES, AND EXPENSES section of this agreement.
TAX REPORTING SERVICES
The Company agrees to make the required annual reporting of income and capital
gain disbursements and brokerage transactions to shareholders and the Internal
Revenue Service according to government guidelines.
REORGANIZATION SERVICES
The Company will provide reorganization Services for events (e.g. stock splits
and stock dividends) approved by the Fund's Board of Directors. The Fund will
deliver in writing to the Company the terms and conditions of the reorganization
on the business day following Board approval.
CONVERSION EXPENSE
The Fund agrees to pay the Company a one time charge for the conversion of
shareholder data including but not limited to name, address, social security or
taxpayer identification number, certificate number, share amount, and
disbursement address. This charge of $3,000.00 will be billed with the first
quarterly invoice issued to the Fund.
FEES, CHARGES, AND EXPENSES
In exchange for the services enumerated in this agreement the Fund agrees to pay
the Company the following outline of fees, charges, and expenses:
Service Fee Annual Cost Number of Shareholders
- ----------- ----------- ----------------------
$4.00 per shareholder first 1,000 registered holders
$3.00 per shareholder next 4,000 registered holders
$2.00 per shareholder all remaining registered holders
The Service Fee is an annual fee inclusive of the provision by the Company of
the Transfer Agent, Registrar, Dividend and Capital Gain Disbursement, Dividend
Reinvestment, Stock Option, and Proxy Services (Annual Meeting only) outlined
above in this agreement.
Reorganization Services 1.00 per certificate issuance
Special Meeting Services 1.00 per proxy card issued
This fee is for additional meetings requiring Proxy Solicitation and Tabulation
Services over and above the Annual Meeting.
Out of Pocket Expenses at prevailing market costs
- - including but not limited to: postage and insurance
mail supplies (envelopes)
check inventory
certificate inventory
An invoice for fees, charges, and expenses will be issued to the Fund quarterly
every January, April, July and October. The number of shareholders will be the
number of active and inactive accounts maintained by the Company as of the end
of the months of December, March, June, and September. Out of Pocket expenses
will be included on the quarterly billing after occurrence of the expense by the
Company. The Company reserves the right to invoice the Fund for the advancement
of out of pocket expenses.
LENGTH OF AGREEMENT
This agreement will be in effect for a period of 2 years from the date the
Company begins Stock Transfer Services. The Agreement will be automatically
extended for successive 1 year periods unless either party notifies the other of
intent to terminate, in writing, 6 months prior to the end of the agreement
period. The Fund may terminate the Agreement with 90 calendar days prior written
notice within 30 calendar days following receipt by the Fund of the Company's
intention to increase fees at the end of any Agreement period.
AMENDMENTS
Any amendments to the terms and conditions of this agreement must be agreed to
in writing by the Fund and the Company and will attain effect 30 calendar days
subsequent to the written acceptance by both parties.
LIABILITIES
The Company will not be held liable for its actions performed with due care and
in good faith during the normal course of business which are absent of
negligence. The Company makes no claims as to the validity of the shareholder
information provided by the prior Transfer Agent and will perform its duties on
a best efforts basis when the integrity of this information is in question.
PERFORMANCE
The Fund and the Company agree to provide the documentation and service as
outlined in this Agreement. The Company will comply with all applicable rules
and regulations of the SEC and any Stock Exchange trading the shares of the Fund
with respect to maintenance and retention of data and documentation.
ENTIRETY
The Fund and the Company agree that this Agreement is the only document which
enumerates the terms and conditions of the Stock Transfer Services provided by
the Company. Neither party may rely on arrangements outside of the Agreement,
implied, oral, or otherwise.
AUTHORIZATIONS
By their signature below the following authorized representatives of the Fund
and the Company agree to the terms and conditions of this Service Agreement as
of the _____th day of _______________, 1995.
SOUTHWEST SMALL CAP EQUITY STAR BANK, N.A.
FUND, INC.
- ------------------------- ----------------------------------
Signature Signature
- ------------------------- ----------------------------------
Title Title
- ------------- ----------------
Date Date
0269807.01
11/21/95 7:53 PM
Exhibit n
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of
this Form N-2 Registration Statement, Pre-Effective Amendment No. 1.
_/S/_ARTHUR_ANDERSEN_LLP_
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
November 17, 1995
0269837.01
11/21/95 7:58 PM
