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. 2 [X]
POST-EFFECTIVE AMENDMENT NO. ___ [ ]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 2 [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 Cincinnati, Ohio 45202
Executive Offices) (Name and Address of Agent for Service)
(513) 629-2000
(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].
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
==========================================================================================================================
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> <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 28
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 26, 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" BEGINNING ON PAGE 8 OF
THIS PROSPECTUS.
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 28 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.
===========================================================================
Price to Public(a) Sales Load(a) Proceeds to
Fund(a)(b)
- ---------------------------------------------------------------------------
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
===========================================================================
(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% nonallocated 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
<PAGE>
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)(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
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
An investor would pay the
following cumulative expenses
on a $1,000 investment, assuming
a 5% annual return ............... $99 $140 $182 $300
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. The Fund's investment objective
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 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."
3
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). See "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 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
4
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 The Shares have been approved for listing on the
EXCHANGE SYMBOL 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."
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
5
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 Star Bank, N.A. will act as custodian for the Fund's
DIVIDEND PAYING AGENT assets and may employ sub- custodians as provided in
AND REGISTRAR 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
Market
9
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
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
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
10
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 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 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
11
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,
an investment in the equity securities of a particular Southwest Small Cap
Company will be so considered as "equal" if the market value of the investment
in the equity securities of the particular Southwest Small Cap Company being
considered does not differ from the average of the market values of the
investments in the equity securities of all Southwest Small Cap Companies held
in the Southwest Market Portfolio (the "Average Investment Amount") by more than
the greater of (i) 10% of the Average Investment Amount or (ii) the market value
of one round lot of the equity securities of the particular Southwest Small Cap
Company being considered. 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. Because rebalancing
transactions in the Southwest Market Portfolio are intended to maintain equal
dollar amounts of each security in the Southwest Market Portfolio, rather than
being motivated by the Investment Manager's expectations of potential capital
appreciation of a given security, rebalancings may sacrifice some potential
capital appreciation of securities that are sold pursuant to such rebalancings
prior to realizing their full potential for appreciation.
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 shares of such 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 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
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 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 attractive
demographic patterns, 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.
14
POPULATION GROWTH(a)
--------------------
1994
POPULATION
ESTIMATE GROWTH GROWTH
(IN THOUSANDS) 1970-1994 1993-1994
-------------- --------- ---------
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%
- ------------
(a) Source: Population Distribution Branch, U.S. Bureau of the Census.
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.
COMPENSATION(a)
---------------
1991 1992 GROWTH
---- ---- ------
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%
(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.
15
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.
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%
------- ------- ---- ------
$114.24 100.0% 670 100.0%
- ------------
(a) Information for this table was derived by the Investment Manager from
Standard & Poor's Compustat PC Plus, company filings with the Securities and
Exchange Commission and other public data sources.
16
The Southwest's economy is diversified. As of September 30, 1995, the
industry diversification of Southwest Small Cap Companies was as follows:
INDUSTRY DISTRIBUTION OF SOUTHWEST SMALL CAP COMPANIES(a)
INDUSTRY MARKET VALUE PERCENTAGE NUMBER OF PERCENTAGE
SECTOR ($ IN BILLIONS) DISTRIBUTION COMPANIES DISTRIBUTION
- ------ --------------- ------------ --------- ------------
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%
- ------------
(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.
17
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.
18
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
Biggs & Company Director
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
Cincinnati, Ohio 45205
- ------------
(*) Director who is 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).
19
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
or of the Investment Manager 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.
20
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 Articles 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.
21
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 noninterested 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 Manger, 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
22
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.
23
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).
24
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
25
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.
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. The Plan Agent's fees for the reinvestment of
dividends and capital gains distributions 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
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.
26
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 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
<TABLE>
<CAPTION>
PRICE SELLING DEALER MANAGERS' TOTAL SALES
SHARES PURCHASED PER SHARE CONCESSION FEE LOAD
<S> <C> <C> <C> <C>
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
</TABLE>
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
27
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-2
Investment Objectives and Policies ............................... SAI-2
Management ....................................................... SAI-6
Control Persons and Principal Holders of Securities .............. SAI-6
Brokerage Allocation and Other Practices ......................... SAI-7
Tax Status ....................................................... SAI-8
Financial Statements ............................................. SAI-10
28
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 during the Offering Period, 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
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:
TOTAL
PRICE SUBSCRIPTION
RANGE OF SHARES SHARES PURCHASED PER SHARE 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.as escrow agent for
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. escrow
account.
(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 #:
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 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 during the Offering Period, 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
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:
TOTAL
PRICE SUBSCRIPTION
RANGE OF SHARES SHARES PURCHASED PER SHARE 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.as escrow agent for
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. escrow
account.
(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 #:
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...................................... 19
Capital Stock............................................... 23
Dividends................................................... 25
Taxes....................................................... 26
Marketing Arrangements...................................... 26
Experts..................................................... 28
Legal Matters............................................... 28
Available Information....................................... 28
Reports to Stockholders..................................... 28
SAI Table of Contents....................................... 28
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 DECEMBER 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...... 5 Management
Brokerage Allocation and *
Other Practices........................... 7
Tax Status................................ 8 Taxes
Financial Statements...................... 10 *
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
<PAGE>
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 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."
5
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 lead
Dealer Manager of this offering) and McKenna Management Company (the Investment
Manager). Thus, prior to the completion of this offering, the Fund may be
characterized as being under common control with McKenna & Company I, L.P.,
McKenna Securities 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 following table describes all compensation paid to directors of the
Fund. No other individual has received any compensation from the Fund, nor does
the Fund intend to pay any other such compensation during 1995.
Compensation Table
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS AND FUND
COMPENSATION ACCRUED AS ESTIMATED ANNUAL FUND COMPLEX
FROM PART OF FUND BENEFITS UPON PAID TO
NAME OF PERSON, POSITION FUND(1) EXPENSES RETIREMENT DIRECTORS(1)
<S> <C> <C> <C> <C>
John J. McKenna,
Director and President ........................... $ 0 $ 0 $ 0 $ 0
Robert D. Harrell,
Director ......................................... $ 0 $ 0 $ 0 $ 0
Thomas D. Barrow,
Director ......................................... $1,000 $ 0 $ 0 $1,000
E. Glenn Biggs,
Director ......................................... $1,000 $ 0 $ 0 $1,000
Norman T. Reynolds,
Director ......................................... $1,000 $ 0 $ 0 $1,000
</TABLE>
(1) The Fund has not been in operation for a full fiscal year. Directors
who are not officers of the Fund or of the Investment Manager will
receive annual compensation of $10,000, plus $1,000 for each meeting of
Board of Directors attended and expenses related to attendance at such
meetings. The amount shown is the expected compensation from the Fund
for the current fiscal year ending December 31, 1995 since the Fund's
incorporation on October 10, 1995.
6
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.
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
7
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 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
8
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.
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.
9
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 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
<PAGE>
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.
12
<PAGE>
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. as Administrator. 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 & Company I,
L.P.
(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 & Company I, L.P. Upon commencement of
the public offering of shares of the Fund, the Fund will reimburse
McKenna & Company I, L.P. for its shares 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 & Company I, L.P., 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 & Company I, L.P. 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.
13
<PAGE>
PART C
OTHER INFORMATION
EXHIBIT INDEX
EXHIBIT DESCRIPTION
(a) Certificate 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 Revised Selling Agreement between the Fund
and McKenna Securities Company, as Lead Co-Manager
(h)(B) Master Selected Dealer Agreement +
(i) Not applicable
(j)(A) Form of Escrow 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) +
- ----------------------------------
+ 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.
14
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 .................. $ 13,793
Blue Sky fees and expenses ............................... 15,000
Cost of stock certificates ............................... 7,000
Printing ................................................. 30,000
Legal fees and expenses .................................. 125,000
Independent auditor's fees and expenses .................. 3,000
Miscellaneous including marketing expenses ............... 143,675
-----------------------
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
15
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.
16
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.
17
<PAGE>
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. 2 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 22nd day of December, 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. 2 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;
John J. McKenna President; Director December 22, 1995
* Director December 22, 1995
Thomas D. Barrow
* Director December 22, 1995
Norman T. Reynolds
* Director December 22, 1995
E. Glenn Biggs
* Director December 22, 1995
Robert D. Harrell
* Treasurer; Secretary December 22, 1995
Lynne P. Hohlfeld
*/S/ JOHN J. MCKENNA December 22, 1995
John J. McKenna, Attorney-in-fact
18
Exhibit h(a)
2
SOUTHWEST SMALL CAP EQUITY FUND, INC.
SELLING AGREEMENT
SHARES OF COMMON STOCK
_____, 1995
`
McKENNA SECURITIES COMPANY, as Lead Co-Manager
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 ("McKenna") and Capital West Securities, Inc. ("Capital West") as
Co-Managers (collectively, except as provided in Section 19, 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. Each of McKennan and Capital West,
severally, 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 McKenna or Capital West, respectively,
or any Broker/Dealer through the Dealer Manager (whether McKenna or
Capital West) expressly for use therein. This indemnity will be in
addition to any liability which the 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, as Lead Co-Manager
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.
19. RELATIONSHIP BETWEEN CO-MANAGERS. Notwithstanding anything
contained herein to the contrary, the parties acknowledge that, as between
McKenna and Capital West, McKenna is designated as the Lead Co-Manager and shall
have the exclusive right to excercise all powers of the "Dealer Manager"
conferred hereunder, on behalf of both itself and Capital West; provided,
however, that the rights, powers and liabilities of McKenna and Capital West
under Sections 7, 11 and 12 shall be deemed individual and several, not joint.
Accordingly McKenna is not responsible for the representations and obligations
of Capital West and vice versa.
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 "Lead Dealer Manager")
By: ________________
Print Name: ________
Title: _____________
CAPITAL WEST SECURITES, INC.
(together with the Lead Dealer Manager,
the "Dealer Manager")
By: ________________
Name: ______________
Title: _____________
COMMON STOCK COMMON STOCK
NUMBER SHARES
CUSIP. NO.
SOUTHWEST SMALL CAP EQUITY FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE
OF SOUTHWEST SMALL CAP EQUITY FUND, INC.
[THE WORDS "CERTIFICATE OF STOCK" ARE SUPERIMPOSED ON PARAGRAPH BELOW]
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon the surrender of this certificate properly
endorsed. This certificate and the shares represented hereby are subject to the
laws of the State of Delaware and to the Certificate of Incorporation and
By-laws of the Corporation as now or hereafter amended. This certificate is not
valid unless countersigned by the Transfer Agent and registered by the
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signature of
its duly authorized officers.
[CORPORATE SEAL DELAWARE]
DATED:
COUNTERSIGNED AND REGISTERED
TRANSFER AGENT AND PRESIDENT
BY
AUTHORIZED SIGNER SECRETARY/TREASURER
<PAGE>
[BACK]
SOUTHWEST SMALL CAP EQUITY FUND, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF MIN ACT Custodian UNIF TRFR MIN ACT Custodian
(Cust) (Minor) (Cust) (Minor)
under Uniform Gifts to Minors under Uniform Transfers to Minors
Act Act
(State) (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
OF THE SHARES
REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE
AND APPOINT __________________________ ATTORNEY TO TRANSFER THE SHARES ON
THE BOOKS OF THE CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED: 19
X
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
Signature(s) must be guaranteed by a commercial bank or trust company or by a
brokerage firm having a membership in one of the major stock exchanges.
[LETTERHEAD MAYOR, DAY, CALDWELL & KEETON, L.L.P]
December 22, 1995
Southwest Small Cap Equity Fund, Inc.
c/o MGF Service Corp.
312 Walnut Street
Cincinnati, Ohio 45202
Ladies and Gentlemen:
We have acted as counsel for Southwest Small Cap Equity Fund, Inc. (the
"Fund") in connection with the registration and proposed sale of an aggregate of
4,000,000 shares (the "Shares") of Common Stock, par value $.001 per share, of
the Fund ("Common Stock"), all as described in the Fund's Registration Statement
on Form N-2 filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended ("Registration Statement"). In such capacity,
we have familiarized ourselves with the Certificate of Incorporation and Bylaws
of the Fund and have examined all statutes and other records, instruments and
documents pertaining to the Fund that we have deemed necessary to examine for
the purposes of this opinion.
Based upon our examination as aforesaid, we are of the opinion that:
1. The Fund is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware;
and
2. The Shares are duly authorized and, when issued in accordance
with the terms of the offering, as described in the
Registration Statement will be validly issued, fully paid
and nonassessable shares of Common Stock of the Fund.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name in the Registration Statement under the caption "Legal Opinions."
Very truly yours,
MAYOR, DAY, CALDWELL & KEETON, L.L.P.
AGREEMENT RELATING TO INITIAL CAPITAL
November 15, 1995
SOUTHWEST SMALL CAP EQUITY FUND, INC.
312 Walnut Street, 21st Floor
Cincinnati, OH 45202
Ladies and Gentlemen:
McKenna & Company I, L.P. (the "Purchaser") hereby agrees to purchase
from Southwest Small Cap Equity Fund, Inc. (the "Fund"), and the Fund hereby
agrees to sell to the Purchaser, 10,000 shares of Common Stock, par value $.001
per share, of the Fund (the "Shares"), at an aggregate price of $100,000, or
$10.00 per share.
In conjunction with the purchase by the Purchaser of the Shares, the
Purchaser hereby represents that it is acquiring the Shares for investment with
no intention of reselling or otherwise distributing the Shares. The Purchaser
hereby further agrees that any transfer of any of the Shares or any interest
therein shall be subject to the following conditions:
1. The Purchaser shall furnish you and counsel satisfactory to
you prior to the time of transfer, a written description of
the proposed transfer specifying its nature and consequence
and giving the name of the proposed transferee.
2. You shall have obtained from your counsel a written opinion
stating whether in the opinion of such counsel the proposed
transfer may be effected without registration under the
Securities Act of 1933. If such opinion states that such
transfer may be so effected, the Purchaser shall then be
entitled to transfer the Shares in accordance with the terms
specified in its description of the transaction to you. If
such opinion states that the proposed transfer may not be so
effected, the Purchaser will not be entitled to transfer the
Shares unless the Shares are registered.
The Purchaser hereby authorizes you to take such action as you shall
reasonably deem appropriate to prevent any violation of the Securities Act of
1933 in connection with the transfer of the Shares, including the imposition of
a requirement that any transferee of the Shares sign a letter agreement similar
to this one. The Purchaser agrees that in the event the Shares are sold by the
Purchaser or its successors or any current holder prior to the complete
amortization of organization expenses by the Fund the proceeds payable in
respect of the Shares shall be reduced by the pro-rata share (based on the
proportionate share of the Shares sold to the total number of the Shares
outstanding at the time of sale) of the then unamortized deferred organization
expenses as of the date of such redemption.
Very truly yours,
McKENNA & COMPANY I, L.L.P.
Agreed to and accepted by:
SOUTHWEST SMALL CAP EQUITY By:
FUND, INC. John J. McKenna, Chairman of the Board
John J. McKenna, President
