Securities Act File No. 33-96334
Investment Company Act File No. 811-09088
Securities And Exchange Commission
Washington, DC 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 3
TEXAS CAPITAL VALUE FUNDS, INC
(Exact Name of Registrant as Specified in Charter)
1600 West 38th Street, Suite 412
Austin, TX 78731
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code:
(512)458-8166
Thomas Roberts
The Company Corporation, Inc.
17521 Shenandoah Court
Ashton, Maryland 20861
(Name and Address of Agent for Service)
____________________________________
It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b) |x|
On ____ pursuant to paragraph (b)
|_|
75 Days after filing pursuant to paragraph (a)(1)
| |
On (date) pursuant to paraagraph (a) of rule 485
|_|
Pursuant to Rule 24f-2 under the Investment Company Act of
1940, Registrant has elected to register an indefinite number
of shares of beneficial interest, par value of $.0001 per share.
CROSS REFERENCE SHEET
(as required by Rule 495)
N-1A Item No. Location
Part A
Item 1. Cover Page
Item 2. Synopsis
Item 3. Condensed Financial Information
Item 4. General Description of the Registrant
Item 5. Management of the Fund
Item 6. Capital Stock and Other Securities
Item 7. Purchase of Securities Being Offered
Item 8. Redemption or Repurchase
Item 9. Pending Legal Proceedings
Part B Information Required in a Statement of Additional
Information
Item 10. Cover Page
Item 11. Table of Contents
Item 12. General Information and History
Item 13. Investment Objectives and Policies
Item 14. Management of the Fund
Item 15. Control Persons and Principal Holders of Securities
Item 16. Investment Advisory and Other Services
Item 17. Brokerage Allocation
Item 18. Capital Stock and Other Securities
Item 19. Purchase Redemption, Pricing
Item 20. Tax Status
Item 21. Underwriters
Item 22. Calculation of Performance Data
Item 23. Financial Statements
Part C
Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C to this
Registration Statement
TEXAS CAPITAL VALUE FUNDS, INC.
Post Office Box 141849
Austin, Texas 78714-1849
Existing Accounts: 800-628-4077
New Accounts & Information: 888-TEX-RICH
or 512-451-7905
Value & Growth Portfolio
Texas Opportunity Fund
Growth & Income Portfolio
Prospectus August 1, 1996
This prospectus sets forth concisely the information about the
Texas Opportunity Fund, the Value & Growth Portfolio, and
the Growth & Income Portfolio (each individually a "Fund",
or collectively, the "Funds") that a prospective investor should
know before investing. Each Fund is a non-diversified, open-
end investment series of the Texas Capital Value Funds, Inc.
(the "Company") commonly known as a "mutual fund." This
prospectus should be read and retained for future reference.
If you require more detailed information, a Statement of
Additional Information, dated August 1, 1996, which has
been filed with the Securities and Exchange Commission and
incorporated by reference into this Prospectus, may be
obtained without charge by writing the above address or
calling 1-888 TEX-RICH.
This Prospectus is not a solicitation by the Company or any
Fund for the sale of shares in any state in which the offering
is not authorized. No person is authorized by the Company to
give any information or make any representation other than
those contained herein or in other printed or written material
issued by the Company or the Company's distributor, and no
person is entitled to rely upon any other information or
representation.
Table of Contents
PROSPECTUS SUMMARY
TABLE OF FUND EXPENSES
FINANCIAL HIGHLIGHTS
GENERAL DESCRIPTION OF THE FUNDS
CHARITABLE GIVING
INVESTMENT OBJECTIVE
RISKS
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE FUNDS
HOW TO PURCHASE SHARES IN THE FUND
HOW TO REDEEM (SELL) SHARES
DISTRIBUTIONS AND TAXES
DISTRIBUTION PLAN
RETIREMENT PLANS
EXCHANGE PRIVILEGES
THE COMPANY
SHAREHOLDER REPORTS
AUDITORS & LITIGATION
DETERMINING NET ASSET VALUE
FUND PERFORMANCE
INFORMATION FOR SHAREHOLDERS
Shares in each Fund are not deposits or obligations of, or
guaranteed or endorsed by any bank, and the shares are not
federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency.
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.
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus.
Prospectus Summary
Investment Objective:
Texas Opportunity Fund: Capital appreciation by
investing in common stocks of which at least 65% will be
companies headquartered in the state of Texas, or which have
a majority of their operations in Texas (the "Texas
Companies").
Value & Growth Portfolio: Capital appreciation by
investing in equity securities of large and small domestic and
foreign corporations.
Growth & Income Portfolio: Capital appreciation and
income by investing in equity securities of large-cap domestic
and foreign corporations paying dividends. See "Investment
Objective" on page 4.
Investment Techniques:
The Value & Growth Portfolio and the Growth & Income
Portfolio use highly quantitative techniques in the selection of
stocks. The Value & Growth Portfolio seeks capital
appreciation by investing in large and small companies that
appear to be undervalued with the potential to substantially
increase their earnings. The Growth and Income portfolio
seeks capital appreciation by investing primarily in large-cap
companies that yield high dividends.
The Texas Opportunity Fund will invest in stocks
participating in the Texas economy. These securities will be
selected based on product or service potential, management,
and technical characteristics. The Texas Opportunity Fund
intends to fully invest in common stocks of primarily Texas
Companies at all times, but may, for defensive purposes,
periodically reduce its exposure to equities. See "Investment
Objective" and "Risks" on pages 4 and 5, respectively.
Risks:
There can be no assurance that any Fund will achieve its
investment objectives. Factors which should be considered by
an investor include, but are not limited to, higher than
average volatility, and the Funds' non-diversification policy.
In particular, the Texas Opportunity Fund may entail greater
than average risk. Texas has a greater concentration of
energy and technology companies than the rest of the United
States. Weakness in energy or technology could result in s
ignificant losses for the Fund. The Funds are not designed to
be a complete investment program for investors. See "Risks"
on page 5.
The Advisors: First Austin Capital Management, Inc.
manages the Value & Growth and the Growth & Income
Funds (the "Advisor" when such defined term is used in
connection with these Funds). Martin Capital Management
manages the Texas Opportunity Fund (the "Advisor" when
such defined term is used in connection with this Fund). See
"Management of the Funds" on page 6.
Distributions/Dividends: Paid annually from available capital
gains and income. Distributions may be reinvested
automatically without a sales charge. See "Distributions and
Taxes" on page 13.
Initial and Subsequent Purchases: Initially $1,000,
subsequently $100 minimums. For shareholders signed up
for the Autovest Plan, there is no initial minimum. See "How
to Purchase Shares in the Fund" and "Autovest Plan" on
pages 9 and 10.
Net Asset Value: The net asset value of the Fund will be
available daily by calling 1-888-TEX-RICH. See
"Determining Net Asset Value" on page 14.
Charitable Giving: For the Value & Growth Portfolio and the
Growth & Income Portfolio, the Advisor of these Funds will
donate up to 10% of the Advisor's earned net proceeds from
advisory fees from the Fund to various charities each year.
Shareholders with at least $15,000 in either Fund will have
the opportunity to designate a charity to which the Adviser
will donate. See "Charitable Giving" on page 4.
Transfers From Other Mutual Funds. Will occur at net asset
value (without sales charges). See "How to Purchase Shares
in the Fund", page 9.
Table of Fund Expenses
The following table illustrates expenses and fees that a
shareholder of the Funds will incur.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases 3.0%
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees (a)
Exchange Fees None
Annual Fund Operating Expenses
Management Fees 1.00%
12b-1 Fees (b) . 0.25%
Other expenses 0.70%
Total Fund Operating Expenses 1.95%
(a) Shareholders pay a $10 charge for redemptions by
fed wire and a $10 charge for redemptions by phone. There
are no other redemption charges.
(b) The level of distribution expenses is 0.25% per
annum of the Fund's average net assets, of which 0.15% of
the fee should be considered a service fee received by the
selling broker on an annual basis for providing the investor
with continuing service. The distribution expense may result
in long-term shareholders paying more than the maximum
sales charge that would have been permissible if imposed
entirely as an initial sales charge.
The purpose of this table is to assist investors in
understanding the various costs and expenses that they will
bear directly or indirectly as a shareholder in the Fund.
The following examples illustrate the expenses that an
investor would pay on a $1,000 investment over various time
periods assuming (1) a 5% annual rate of return, and (2)
redemption at the end of each period. As noted in the table
above the Funds charge no redemption fees.
1 Year: $49 3 Years: $89
These examples should not be considered a representation of
past or future expenses or performances. Actual expenses
may be greater or less than those shown.
The advisory fee is higher than that paid by most mutual
funds. Each advisor, at its option, may reduce its fee to the
extent required to limit total annual Fund operating expenses
to the maximum allowed by applicable state laws.
Financial Highlights
The following information for the fiscal period ended March
31, 1996, should be read in conjunction with the financial
statements and related notes that also appear in the Value &
Growth Portfolio's Semi-Annual Report dated March 31,
1996, which is incorporated by reference into the Prospectus.
VALUE & GROWTH PORTFOLIO
(For a Fund Share Outstanding Throughout the Period)
Financial Highlights (unaudited)
Period
Ended
3/31/96(a)
Net asset value, beginning of period
$10.00
Income from investment operations:
Net investment income (loss)
- -$0.01
Net Realized and unrealized gain
(loss) on investments
- -$.21
Total from investment income
- -$.22
Less Distributions from net
Investment income
- -$.01
NAV end of period
$9.77
Total Return (b)
- -2.2%
Ratios/ Supplemental Data
Net Assets - End of Period
$923,611
Ratios to average net assets
Expenses
.90%
Net investment income (loss)
- -.18%
Portfolio Turnover
21%
(a) The Value & Growth Portfolio commenced operations on
November 6, 1995
(b) Total return represents aggregate total return for the
period indicated.
General Description of the Funds
Charitable Giving
Each Fund is an open-ended, non-diversified series offered by
Texas Capital Value Funds, Inc., a Maryland corporation
incorporated on June 26, 1995, and registered as an open-end
management investment company under the Investment
Company Act of 1940 (the "1940 Act").
First Austin, the Advisor to the Value & Growth Portfolio
and the Growth & Income Portfolio, will donate up to 10% of
the Advisor's earned net proceeds from advisory fees from the
Funds to various charities each year. Shareholders who have
shares in either of these two Funds worth at least $15,000 will
have the opportunity to designate a charity for the Advisor to
donate to, although the amount of any such donation to such
designated charity shall be determined by the Advisor. Any
such charities must be non-profit groups as defined by Section
501 ( c )(3) of the Internal Revenue Code.
Investment Objective
Since the Advisor is writing the check, there will be no
impact on the shareholder's holdings in the Fund(s), nor will
there be any tax deductions to any such shareholder.
Each Fund has a unique investment objective although there
are some aspects common to all of the Funds.
Common Characteristics: For all the Funds, purchase of
issues will be primarily, but not exclusively, listed issues and
American Depository Receipts on the on the New York,
American and NASDAQ exchanges and may include up to
33% foreign based companies.
Neither Advisor uses techniques such as borrowing,
hedging, or short sales in the management of the Funds. The
Funds make no use of derivatives.
Under normal circumstances, each Fund will have
virtually all of its assets invested in equity securities.
However, for temporary defensive purposes, each Fund may
hold cash, money market instruments, notes or bonds, or
enter into repurchase agreements, all of which will be of
investment grade as determined by Moody's Investor's
Service, Inc. or Standard & Poor's Corporation rating
agencies.
Unique Characteristics: The Value & Growth Portfolio's
primary investment objective is capital appreciation through
the investment in common stocks and securities convertible
into common stocks. The Advisor attempts to invest in
companies which appear to be undervalued and possess an
ability to increase their earnings. No consideration is given
to income of the portfolio holdings. While the quantitative
strategy the Advisor plans to use does not specifically screen
for small companies, test results have shown a large
percentage of companies selected for the Value & Growth
Portfolio had market capitalizations of less than a billion
dollars. Smaller companies have historically performed
better than larger companies over long periods, but also have
historically shown higher volatility than larger companies.
For the Growth & Income Portfolio, the Advisor will
invest primarily in large-cap equity securities of sufficient
yield. The ratio of the price of a stock relative to its dividend
yield is considered. The portfolio will generally be comprised
of high-yield, large-cap domestic and foreign companies.
For both portfolios most of the securities selected are
likely to have much lower ratios in at least one of the
categories described in the next paragraph than the market in
general. Academic research and studies have shown that
portfolios with the characteristics of low price-to-earnings,
low price-to-cashflow and low price-to-book ratios may be
associated with higher investment rates of return over long
periods of time. Such an investment strategy may also be
subject to greater investment risk.
For both the Value & Growth and the Growth & Income
Portfolios, the Advisor will employ highly structured,
computer driven, quantitative strategies to endeavor to find
companies that are likely to perform well. Such strategies are
different than the strategies most advisors use to select stocks
in that the Advisor will give little or no weight to qualitative
factors of securities considered for purchase. For the Value &
Growth Portfolio, fundamental ratios such as the price of a
stocks relative to its earnings (price-to-earnings), the price of
a stock relative to its cashflow (price-to-cashflow) and the
price of a stock relative to its bookvalue or net worth (price-
to-book) weigh heavily in the selection process.
Texas Opportunity Fund. This Fund's investment
objective is capital appreciation by investing in common
stocks and securities convertible into common stocks of which
at least 65% will be Texas Companies. The Fund intends to
be fully invested in common stocks of primarily Texas
Companies, but for defensive purposes may hold cash or
equivalents from time to time. Since the Fund is structured
primarily for capital appreciation, any income should be
considered incidental to the investment decision.
Risks
The Advisor to the Texas Opportunity Fund will employ
both qualitative and quantitative strategies to endeavor to find
companies that are likely to perform well. This Fund will
differ from other funds in that stocks selected for inclusion in
the Fund will be primarily Texas Companies. Product or
service growth potential, management, technical, and
economic cycle considerations weigh heavily in the selection
process.
The security selection process for the Texas Opportunity
Fund will attempt to reflect the diversification of the Texas
economy; however the manager will have the discretion to
adjust sector representation based upon the sector's
performance outlook. An investment strategy focused on a
single, albeit large economy, may be subject to greater
investment risk than a more broadly diversified mutual fund.
Texas has a greater concentration of energy and technology
companies than the rest of the United States. Weakness in
energy or technology could result in significant losses for the
Fund. None of the Funds are designed to be a complete
investment program for investors.
Portfolio Turnover Policy. The Advisors may make changes
in the Funds consistent with each Fund's policies when each
Advisor believes doing so is in the best interest of the Fund it
manages. Fund turnover is expected to be less than 150% per
year, which is higher than average for most funds. High
turnover rates increase transaction costs and may increase
taxable capital gains. Each Advisor considers these effects
when evaluating the anticipated benefits of short-term
investing.
Non-diversification Policy. Each Fund is classified as being
non-diversified which means that each Fund may invest no
more than 25% of its total assets in any one issuer other than
U.S. government securities and at the close of each quarter of
the taxable year, at least 50% of the value of each Fund must
be represented by a) cash and cash items, including U.S.
government securities and b) other securities of different
issuers in which each Fund has invested no more than 5% of
its assets and with respect to which it owns no more than 10%
of the outstanding voting securities of the issuer. Each Fund,
therefore, may be more susceptible than a more widely
diversified fund to a single economic, political or regulatory
occurrence. Each Fund seeks only diversification for
adequate representation among what it considers to be the
best performing securities and to maintain its federal non-
taxable status under Sub-Chapter M of the Internal Revenue
Code.
Investment in any mutual fund has inherent risks. There can
be no assurance that the investment objectives of each Fund
will be realized or that the Fund will not decline in value.
Economic conditions change and stock markets are volatile.
Moreover, investors should be aware that certain investment
policies of the Funds, such as investing in smaller
capitalization companies, and the Funds' non-diversification
policy can entail greater than average risk. Prior to each
Fund's inception, the advisors had no experience managing
investment companies.
Additionally, the Texas Opportunity Fund will concentrate
its investments in Texas Companies which may entail
greater than average risk than more broadly diversified funds.
Texas has a greater concentration of energy and technology
companies than the rest of the nation. Weakness in energy or
technology could result in significant losses for the Fund.
Each Fund may invest up to 33% of its assets in foreign
based companies. Foreign Securities involve certain inherent
risks that are different from those of domestic issuers,
including political or economic instability of the issuer or the
country of issue, diplomatic developments which could affect
U.S. investments in those countries, changes in foreign
currency and exchange rates and the possibility of adverse
changes in investment or exchange control regulations. As a
result of these and other factors, foreign securities purchased
by each Fund may be subject to greater price fluctuation than
securities of U.S. companies.
Each Fund may also invest without limitation in fixed
income obligations including cash equivalents (such as
bankers' acceptances, certificates of deposit, commercial
paper, short-term government and corporate obligations and
repurchase agreements) for temporary defensive purposes
when the Fund's Advisor believes market conditions so
warrant and for liquidity. If the seller under a repurchase
agreement becomes insolvent, the Fund's right to dispose of
the securities may be restricted or delayed. Lending of
securities can result in a failure to deliver the original
securities by the borrower, and similar risks with respect to
disposition of collateral.
Investors should carefully consider such risks and the
Fund characteristics in light of their own financial
circumstances. A Fund is not designed to be a complete
investment program for investors. It must be realized, as is
true of almost all securities, there can be no assurance that a
Fund will obtain its ongoing objective of capital appreciation.
As with any investment strategy, there can be no
guarantee of success.
Investment Restrictions
The Funds have adopted and will follow certain investment
policies set forth below, which are fundamental and may not
be changed without shareholder approval.
Management of the Funds
(a) Each Fund may not invest more than 25% of its total
assets in the securities of issuers in any one industry. This
restriction does not apply to investments by a Fund in
securities of the U.S. Government or its agencies or
instrumentalities.
(b) Each Fund may not issue senior securities or borrow
money except for temporary purposes in amounts up to 10%
of its net assets (including the amount borrowed) less
liabilities (not including the amount borrowed) at the time of
such borrowing, provided that collateral arrangements with
respect to permitted instruments shall not be deemed to entail
the issuance of senior securities if appropriately covered.
Each Fund will not make any investments while outstanding
borrowings exceed 5% of the value of its total assets.
(c) Each Fund may not make loans, although it may invest
in debt securities, enter into repurchase agreements and lend
its Fund securities.
(d) Each Fund may not invest in securities or other assets
that the Board of Directors determines to be illiquid if more
than 15% of the Fund's net assets would be invested in such
securities.
(e) Each Fund may not (i) purchase or sell commodities or
commodities contracts (including financial futures and related
options), (ii) invest in oil, gas, or mineral exploration or
development programs or leases, or (iii) purchase securities
on margin, except for such short-term credit as may be
necessary for the clearance of transactions and except for
borrowings in amounts not exceeding 10% of its net assets.
(f) Each Fund may not purchase or sell real estate or make
real estate mortgage loans or invest in real estate limited
partnerships, except that each Fund may purchase or sell
securities issued by entities in the real estate industry or
instruments backed by real estate such as, but not limited to,
Real Estate Investment Trusts (R.E.I.T's).
(g) Each Fund may not act as an underwriter of securities
issued by others, except to the extent it may be deemed to be
an underwriter in connection with the disposition of Fund
securities of each Fund.
(h) The investment in warrants, valued at the lower of cost
or market, may not exceed 5.0% of the value of each Fund's
net assets. Included within that amount, but not to exceed
2.0% of the value of each Fund's net assets, may be warrants
which are not listed on the New York or American Stock
Exchange. Warrants acquired by each Fund in units or
attached to securities may be deemed to be without value.
(i) Each Fund shall not invest in other open ended
management investment companies.
The business and affairs of the Funds are managed under the
direction of the Board of Directors of the Company. The
Company's officers (the "Officers") conduct and supervise the
daily business operations of the Funds. Shareholders have
one vote for each share held on matters on which they are
entitled to vote. The Company is not required to and has no
intention of holding annual shareholder meetings, although
special meetings may be called for purposes such as electing
or removing individual members of the Company's Board of
Directors (each individually, a "Director", and collectively the
"Directors" or "Board of Directors") or changing fundamental
investment policies or for any other matter as required by law.
Day-to Day Management. Mark A. Coffelt, Director of the
Company and Chief Investment Officer of the Value &
Growth and the Growth & Income Portfolios, manages the
investment program of these two Funds and is primarily
responsible for their day-to-day management. Paul Martin,
Chief Investment Officer of the Texas Opportunity Fund,
manages Fund's investment program and is primarily
responsible for the Fund's day-to-day management.
Directors and Officers. The Directors and Officers are listed
below, together with their principal occupations during at
least the past five years.
Mark A. Coffelt, C.F.A., President of the Texas Capital Value
Funds, Inc. and (Interested) Director, Chief Investment
Officer of the Value & Growth Portfolio and Growth &
Income Portfolio and President of First Austin Capital
Management, Inc. Prior to founding First Austin Capital
Management, Inc., in 1987, Mr. Coffelt was Controller of
Racal-Milgo, a data communications company. He is a
graduate of Occidental College, B.A. in economics and a
graduate of the Wharton School, University of Pennsylvania,
M.B.A. Mr. Coffelt is a Chartered Financial Analyst of the
Association of Investment Management and Research.
Paul Martin, (Interested) Director, is Chief Investment
Officer of Martin Capital Management. Prior to founding
Martin Capital Management in November, 1988, Mr. Martin
worked four years as a stockbroker in New York City,
managing investment accounts at Merrill Lynch and
Oppenheimer & Company. Mr. Martin served seven years
active duty with the United States armed services, and
continues to serve as a U.S. Naval Reserve Officer. He has a
BA degree in liberal arts from St. John's College in Santa Fe,
New Mexico. Mr. Martin is the Chief Investment Officer for
the Texas Opportunity Fund.
Janis A. Claflin, Director, is President and owner of Claflin &
Associates, a firm providing business consulting and
counseling services to banks, medical groups, associations,
foundations and individuals. She also serves as Chairperson
of the Trustee Program Committee on the Board of Directors
of the Fetzer Institute, a multi-million dollar foundation
which sponsored the Public Broadcasting Series "Healing and
the Mind" with Bill Moyers. She is a licensed Marriage and
Family Therapist and holds a B.A. in English from the
George Peabody College for Teachers and a M.A. from Yale
Divinity School in Religion.
Edward K. Clark, Attorney, CPA, Director, is a practicing tax
attorney with Clark & Clark of Austin, Texas. He has been a
partner in the law firm of McGinnis, Lochridge & Kilgore,
L.L.P., and has also been associated with the firms of Scofield
& Clark, P.C., and Ford & Ferraro, L.L.P., all of Austin. In
addition, he has served as the general counsel and chief
financial officer of Jefferson Service Company, Inc., of
Shreveport, Louisiana. Mr. Clark is Board Certified in Tax
Law by the Texas Board of Legal Specialization and is
licensed as a Certified Public Accountant in Texas. He holds
a B.B.A. and a M.P.A. (Master in Professional Accounting)
degrees from the University of Texas at Austin, and a J.D.
from the University of Houston College of Law.
John Henry McDonald, CFP, Director, is President and
founder of Austin Asset Management, a financial planning
firm. He holds a CFP from the College for Financial
Planning and is a member of the CFP Board of Standards for
the CFP item writing committee. He currently serves as
President of the Austin Society of Institute of Certified
Financial Planners.
Eric Barden, is the Company's Secretary. He is currently an
investment advisor and Compliance Officer for First Austin
Capital Management, Inc., an Advisor to two of the Funds.
He is also a registered representative with Choice
Investments, Inc., the Company's Distributor. He graduated
from the University of Texas, B.A. in economics and
government.
Investment Advisors. There are two different investment
Advisors. First Austin Capital Management, Inc., ("First
Austin") is the advisor to the Value & Growth Portfolio and
the Growth & Income Portfolio. Martin Capital Management
("Martin Capital") is the Advisor to the Texas Opportunity
Fund. Both Advisors are registered investment advisors with
the Securities and Exchange Commission and the State of
Texas. First Austin is based in Austin, Texas at the address
of 1600 West 38th Street, Suite 412, Austin, Texas 78731.
Martin Capital is based in Austin, Texas at the address of 600
W. Tenth Street, #740, Austin, Texas 78701. First Austin is
owned by Mark A. Coffelt and Guy D. Coffelt. Mark Coffelt
is the Chief Investment Officer of First Austin, Chairman of
the Board of Directors and President of the Company, and the
Fund manager for the Value & Growth Portfolio and the
Growth & Income Portfolio. Martin Capital is owned by Paul
Martin. Paul Martin is the Chief Investment Officer for
Martin Capital and Fund manager to the Texas Opportunity
Fund. Martin Capital has no prior experience furnishing
investment advice to an investment company; however,
Martin Capital has been managing portfolios since 1989.
On October 24, 1995 the shareholders of the Company
approved an investment advisory and administrative contract
with First Austin which was unanimously approved by the
Board at their first meeting held on July 25, 1995 to manage
and administer the Value & Growth Portfolio.
On March 22, 1996, the Board authorized the creation of a
new series called the Texas Opportunity Fund to be managed
by Martin Capital. Under separate agreement, First Austin
will provide administrative services to the Company on behalf
of the Texas Opportunity Fund. On June 28, 1996, the Board
authorized the creation of a new series called the Growth &
Income Portfolio to be managed and administered by First
Austin.
All advisory agreements are for an original term of one
year. After the original term expires, each advisory
agreement will continue on a year to year basis provided that
approval is voted at least annually in advance by either the
Board of Directors or the holders of a majority of the
outstanding voting securities of the respective Fund, but in
either event, the extension of the term of an advisory
agreement must also be approved in advance by a majority of
the Directors who are neither parties to the agreement nor
interested persons as defined in the Investment Company Act
of 1940 (the "1940 Act") at a meeting called for such purpose.
First Austin will also act as the administrator to the
Funds. The administrator provides support services to each
Fund including establishing and maintaining shareholders'
accounts and records, processing purchase and redemption
transactions, answering routine client inquiries regarding the
Fund, preparing registration statements, prospectuses, tax
returns and proxy statements, providing daily valuation of
each Fund, calculating the daily net asset value per share, and
providing such other services to the Fund as the Company
may reasonably request. First Austin may assign
administrative services to other groups and providers without
automatic termination of the Agreement. By order of the
Board of Directors of the Company, out of the administrative
fee received by Martin Capital Management, Martin Capital
Management will pay First Austin 1/12 of 0.15% of the assets
of the Texas Opportunity Fund or $2,000 a month, whichever
is greater, to provide compliance services to the Texas
Opportunity Fund.
For such administrative services, the Company has agreed
to pay each Advisor additional fees of 0.70% per year of the
net assets of each Fund for the first $5 million of net assets,
declining to 0.20% per year of net assets in excess of $200
million, and a 12(b)-1 fee of 0.25% to the Distributor who
passes through 0.15% to the broker of record. All fees are
computed on the average daily closing net asset value of each
Fund and are payable monthly.
Advisory Agreements. Under the advisory agreements, each
Advisor will furnish investment advice to the Fund(s) it
manages on the basis of a continuous review of the portfolio
and recommend to the Company when and to what extent
securities should be purchased or disposed of. The advisory
agreements may be terminated at any time, without the
payment of any penalty, by the Board of Directors or by vote
of a majority of the outstanding voting securities of the
respective Fund on sixty (60) days' prior written notice to the
Advisor. In the event of an assignment by an Advisor of the
investment advisory services under an advisory agreement, as
defined in the 1940 Act, the advisory agreement will
terminate automatically. Ultimate decisions regarding
investment policy and individual purchases and sales of
securities are made not by the Advisor but by the Company's
Officers and Directors.
All Fund costs, with the exception of extraordinary legal
expenses as determined by the Board of Directors, brokerage
commissions, and custodial charges based upon transactions
in the Fund(s), will be borne by the Advisor to the Fund(s) as
part of fees charged. Marketing expenses will be primarily
borne by the "Distributor" (as defined below). For advisory
services, the Company has agreed to pay each Advisor a flat
fee of 1.00% per year. The advisory fee paid to each Advisor
is higher than that paid by most investment companies.
On-going legal and auditing expenses, federal and state
registration fees, printing expenses for shareholder statements
and prospectuses, and the cost of fidelity bond and other
insurance will be borne by each Advisor as part of its
Agreement with the Company for its respective Fund(s).
From time to time, each Advisor may voluntarily waive a
portion of its fee otherwise payable to it to meet Fund expense
limits prescribed by any state in which the Fund's shares are
offered for sale. Currently, the Company believes that limit is
2.5% of the first $30 million of the Fund's average net assets,
2.0% of the next $70 million, and 1.5% of average net assets
in excess of $100 million.
Organization Costs. Under the Agreement, each Advisor has
absorbed all of the organization costs for its respective
Fund(s).
Accounting and Transfer Agent Services. The Company has
contracted with Fund Services, Inc. (the "Transfer Agent") for
transfer agent services and with Commonwealth Fund
Accounting, Inc. for fund accounting services.
The address of the accounting and transfer agent is 1500
Forest Ave., Suite 111, Richmond, VA 23229. All shares are
held in non-certificated form registered on the books of the
Fund and the Transfer Agent for the account of the
shareholder.
How To Purchase Shares in the Fund
Company Distributor. Choice Investments, Inc. is the broker-
dealer and the Fund's underwriter and distributor (the
"Distributor"). The address of the Distributor is 5900
Balcones, Suite 100, Austin, Texas 78731. The phone
number of the Distributor is (512) 451-7905 or toll free (888)
TEX-RICH.
Custodian. Bank of Boston, N.A., is each Fund's custodian.
Brokerage. The Company requires all brokers to effect
transactions in Fund securities in such a manner as to get
prompt execution of the orders at the most favorable price.
Each Fund will place orders with brokers who provide
research services to the Advisor at commission rates
considered to be reasonable, although higher than the lowest
brokerage rates available, or to brokers who sell shares in the
Fund. No formula for such allocations exists; thus, the
respective Fund bears the cost of such services.
Each Advisor also places portfolio transactions for other
advisory accounts. Research services furnished by broker-
dealers which effect securities transactions for the Fund may
be used by the Advisor in servicing all of its advisory
accounts and not all such research services may be used by
the Advisor in the management of the Fund's portfolio.
Conversely, research services furnished by broker-dealers
which effect securities transactions for other advisory
accounts may be used by the Advisor in the management of a
Fund. In the opinion of the Advisors, it is not possible to
measure separately the benefits from research services to each
advisory account. Because the volume and nature of the
trading activities of the advisory accounts are not uniform, the
amount of commissions in excess of the lowest available rate
paid by each advisory account for brokerage and research
services will vary.
Each Advisor seeks to allocate Fund transactions equitably
whenever concurrent decisions are made to purchase or sell
securities for a Fund and other advisory accounts. In some
cases, this procedure could have an adverse effect on the price
or the amount of securities purchased or sold by the Fund. In
making such allocations, the main factors considered by the
Advisor are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of
the persons responsible for recommending the investment.
Investors may reduce or eliminate sales charges in various
ways as follows: a) through the aggregation of accounts as
single investors (reduced sales charge); b) by issuing a
statement of intention to purchase more than $50,000 over a
thirteen month period (reduced sales charge); or c) by being a
charity or member of a group exempt from the sales charge.
Qualifications for reduced or no sales charges are described in
detail below.
The table below shows the sales charges as a percentage
of assets invested.
SALES CHARGE AS A PERCENTAGE OF ASSETS
INVESTED
AMOUNT OF
DEALER DISCOUNT
AS A % OF
TRANSACTION PRICE VALUE
PRICE
Less than $50,000
3.0%
3.09%
2.5%
$50,000 but less than $100,000
2.5%
2.56%
2.0%
$100,00 but less than $250,000
2.0%
2.04%
1.5%
$250,000 but less than $1 million
1.5%
1.52%
1.0%
$1 Million +
1.0%
1.01%
0.5%
Aggregation of Accounts as Single Investors. Investors in the
following categories may combine their purchases into a
single transaction to qualify for a reduced sales charge:
1. an individual, his or her spouse and their children under 21
purchasing for his, her or their own account;
2. a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account (including a pension, profit-
sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue
Code);
3. employee benefit plans of a single employer or of affiliated
employers.
Statement of Intention (Letter of Intent). An investor may
also obtain the reduced sales charges shown above by
expressing in writing to the Fund an intent to invest $50,000
or more within a thirteen month period. A form for this
purpose can be obtained by writing or calling the Fund or an
investor can write their own letter of intent.
While an investor is not obligated to fulfill a letter of
intent, if the goal is not met, the investor is required to pay
the difference between the sales charge actually paid and the
one that would otherwise have been due had no letter of intent
been signed.
Rights of Accumulation. An investor may also obtain a
cumulative quantity discount (known as a right of
accumulation) by adding his or her current purchase to the
net asset value (at the close of business on the previous day)
of all shares previously purchased and still owned in the
Fund. The applicable sales charge is then based on this total.
To benefit from any right of accumulation ("ROA"), an
investor must identify any ROA links to other accounts and
communicate these links in writing to the Fund's shareholder
service staff.
Investors Exempt from Sales Charges. Certain categories of
people may invest in the Fund without paying a sales charge.
These categories include Charter Shareholders, shareholders
meeting the requirements of a Board approved investment
program, qualified pension or profit sharing plans with ten or
more employees, Directors, Officers and employees of the
Company, officers and employees and clients of each
Advisor, officers and employees of the Distributor (including
immediate family members of the above groups and their
retirement plans), representatives registered with the National
Association of Securities Dealers buying for their own
account, discretionary accounts of bank trust departments,
registered investment advisors and their clients where the
registered investment advisor is buying on behalf of the
client, and charities and religious organizations as defined by
Section 501(c)(3) of the Internal Revenue Code.
The Value & Growth Portfolio originally opened without
a sales charge for a period set by the Board of Directors.
Applications received in good order by the Transfer Agent or
Distributor through December 31, 1995 were exempt from the
front-end sales charge. Shareholders buying during that
period and buying at least $10,000 worth of the Value &
Growth Portfolio were deemed Charter shareholders. Charter
shareholders will never pay a sales load on any future
investments in the Value & Growth Portfolio, or any other
Funds of the Company.
Transfers From Other Mutual Funds. Transfers of assets
from any open-end investment company will occur at net
asset value.
Other Fees. Investors may be charged a transaction or other
fee by an investment adviser, a brokerage firm or other
financial institution in connection with purchases or
redemptions of Fund shares at net asset value (i.e., without a
sales charge).
Direct Purchase of Shares. To purchase shares in the Fund
an investor should complete an application form and send it
to the Distributor along with a check payable to:
Texas Capital Value Funds, Inc.
P. O. Box 141849
Austin, TX 78714-1849
Minimum Investments. A shareholder's initial investment
must be a minimum of $1,000, unless he/she is participating
in the Company's Autovest Plan (see below), where the initial
minimum is waived. The minimum for subsequent
investments is at least $100.
Subsequent Investments. With subsequent investments,
shareholders should write the name and number of the
account on their check. Checks do not need to be certified,
but are accepted subject to collection and must be drawn in
United States dollars on United States banks. The investment
will be processed at the public offering price next calculated
after receipt of purchase request in good order.
Autovest Plan. Under the Autovest Plan, there is no initial
minimum, but the shareholder must agree to contribute a
minimum of $1,200 the first year.
On a monthly or quarterly basis, the shareholder's money
will be automatically transferred from such shareholder's
bank account to the shareholder's Fund account on or about
the 15th day of each month. A shareholder can elect this
option by filling out the Autovest section on the new account
form. For further information, call the Transfer Agent at
800-628-4077.
Purchases Through a Broker-Dealer. Shareholders may
purchase shares through their broker-dealer if that broker-
dealer has a signed agreement with the Distributor. Broker-
dealers may place orders on behalf of shareholders by calling
the Distributor. Orders will be processed at the net asset
value of the Fund next calculated after receipt in good order.
The broker-dealer is responsible for placing purchase
orders promptly with the Distributor and for forwarding
payment within three (3) business days.
By Wire. Before wiring funds, an investor must call the
Transfer Agent at 1-800-628-4077 to advise the Transfer
Agent that such investor intends to make an initial
investment by wire and to receive an account number. The
investor must then proceed as follows: (i) provide the
Transfer Agent with such investor's name and the dollar
amount to be invested, (ii) complete the Fund's account
application (included with this Prospectus), being sure to
include the date of the order and the confirmation number,
(iii) mail or deliver the completed application to the
appropriate address shown at the top of the application, and
(iv) request his or her bank to transmit immediately to the
Transfer Agent available funds by wire for the purchase of
shares in the Fund.
How To Redeem (Sell) Shares
Subsequent Investments by Wire. An existing shareholder
may make a subsequent investment by instructing his or her
bank to wire funds as indicated above, commencing with
contacting the Transfer Agent to notify the Transfer Agent of
an incoming wire. It is essential that complete information
regarding the shareholder's account be included in all wire
instructions in order to facilitate prompt and accurate
handling of investments.
General. Investors will not be permitted to redeem any shares
purchased with an initial investment made by wire until one
(1) business day after the completed account application is
received by the Fund. All investments must be made in U.S.
dollars and drawn on U.S. banks. Third party checks are not
accepted. A charge may be imposed if any check used for
investment does not clear. The Fund reserves the right to
reject any purchase in whole or in part.
If an order, together with payment in proper form, is
received by the Transfer Agent by the close of public trading
on the New York Stock Exchange (currently 4:00 p.m., New
York City time), Fund shares will be purchased at the
offering price next determined after the close of such trading.
A shareholder has the right to have the Fund redeem all or
any portion of his outstanding shares at their current net asset
value on each day the New York Stock Exchange is open for
trading. The redemption price is the net asset value per share
next determined after the shares are validly tendered for
redemption. A shareholder may redeem their shares by
offering them for "repurchase" or "redemption" directly to the
Fund or through their dealer.
Direct Redemption. A written request for redemption must be
received by the Fund's Transfer Agent in order to constitute a
valid tender for redemption. For amounts in excess of
$5,000, the Fund requires that the signature(s) on the written
request be guaranteed as specified below. All owners of the
account must sign unless the account application form states
that only one signature is necessary for redemptions. All
redemption checks must be sent to the address-of-record on
the account. The Fund usually requires additional documents
when shares are registered in the name of a corporation,
agent or fiduciary if the shareholder is a surviving joint
owner. In the case of a corporation, a corporate resolution
signed by the secretary will be needed. In the case of an
agent or fiduciary, a copy of the death certificate is usually
required. The Fund's Transfer Agent can be contacted at
(800) 628-4077 with any questions about requirements for
redeeming shares.
Telephone Redemption. A shareholder may redeem shares by
telephone if such shareholder requested this service at the
time the initial account application was completed. If a
shareholder did not request this service at that time, such
shareholder must request approval of telephone redemption
privileges in writing (sent to the Fund's Transfer Agent) with
signature guarantee before shares can be redeemed by
telephone. There is no charge for establishing this service,
but the Transfer Agent will charge such shareholder's account
a $10.00 service fee each time a telephone redemption is
made. Once telephone authorization is in effect, the
shareholder may redeem shares by calling the Transfer Agent
at 1-800-628-4077. By establishing this service, the
shareholder authorizes the Transfer Agent to act upon any
telephone instructions it believes to be genuine to (1) redeem
shares from the shareholder's account and (2) mail or wire
redemption proceeds. If the shareholder requests that
redemption proceeds be wired to such shareholder, the
Transfer Agent will charge such shareholder's account with a
wire service charge, currently $10.00. This charge is in
addition to the $10.00 service fee for making a telephone
redemption. The amount of these service charges may be
changed at any time, without notice, by the Transfer Agent.
A shareholder cannot redeem shares by telephone if such
shareholder paid for his or her shares with a personal,
corporate, or government check and the payment has been on
the books of the Fund for less than fifteen (15) business days.
If it should become difficult to reach the Transfer Agent
by telephone during periods when market or economic
conditions lead to an unusually large volume of telephone
requests, a shareholder may send a redemption request to the
Transfer Agent by overnight mail.
The Fund employs reasonable procedures designed to
confirm the authenticity of the instructions communicated by
telephone for, if it does not, it may be liable for any losses due
to unauthorized or fraudulent transactions. As a result of this
policy, a shareholder authorizing telephone redemption bears
the risk of loss which may result from unauthorized or
fraudulent transactions which the Fund believes to be
genuine. When a shareholder requests a telephone
redemption or transfer, he or she will be asked to respond to
certain questions designed to confirm their identity as a
shareholder of record. Cooperation with these procedures
will protect the shareholder's account and the Fund from
unauthorized transactions.
Signature Guarantees. To protect each shareholder and the
Company from fraud, signature guarantees are required for:
(1) all redemptions ordered by mail if the shareholder
requires that the check be payable to another person or that
the check be mailed to an address other than the one
indicated on the account registration; (2) all requests to
transfer the registration of shares to another owner; and (3)
all authorizations to establish or change telephone redemption
service, other than through the shareholder's initial account
application.
In the case of redemption by mail, signature guarantees
must appear either: (1) on the written request for redemption;
or (2) on a separate instrument of assignment (usually
referred to as a "stock power") specifying the total number of
shares being redeemed. The Company may waive these
requirements in certain instances.
The following institutions are acceptable signature
guarantors: (a) participants in good standing of the Securities
Transfer Agents Medallion Program ("STAMP"); (b)
commercial banks which are members of the Federal Deposit
Insurance Corporation ("F.D.I.C."); (c) trust companies; (d)
firms which are members of a domestic stock exchange; (e)
eligible guarantor institutions qualifying under Rule 17Ad-15
of the Securities Exchange Act of 1934 that are authorized by
charter to provide signature guarantees; (f) foreign branches
of any of the above; (g) the Distributor for the Fund. The
Transfer Agent cannot honor guarantees from notaries public,
savings and loan associations, or savings banks.
General. Payment of the redemption proceeds will be
made promptly, but not later than the seventh (7th) day after
the receipt of all documents in proper form, including the
appropriate signature guarantee.
The Fund may suspend the right of redemption under
certain extraordinary circumstances in accordance with the
Rules of the Securities and Exchange Commission. In the
case of shares purchased by check and redeemed shortly after
purchase, the Fund will not mail redemption proceeds until it
has been notified that the check used for purchase has been
collected, which may take up to fifteen (15) business days
from the purchase date. To minimize or avoid such delay,
investors may purchase shares by certified check or federal
funds wire. A redemption may result in recognition of a gain
or loss to the shareholder for Federal income tax purposes.
Reinvestment Privileges. If a shareholder redeems some or
all of the shareholder's shares and then changes his or her
mind, such shareholder may re-invest them without sales
charges at the net asset value if such shareholder does so
within sixty (60) days of the date of redemption. This
privilege may be exercised only once by a shareholder.
However, a shareholder has not used up this one-time
privilege if the sole purpose of a prior redemption was to
invest the proceeds at net asset value in an Individual
Retirement Account or Simplified Employee Pension Plan. If
the shareholder realized a gain on the redemption, the
transaction is taxable and reinvestment will not alter any
capital gains tax payable. If there has been a loss on the
redemption, some or all of the loss may not be allowed as a
tax deduction depending on the amount reinvested and the
timing of reinvestment.
Redemption at the Option of the Fund. Due to the relatively
high cost of maintaining smaller accounts, the Fund reserves
the right to redeem shares in any account, other than
retirement plan or Uniform Gifts/Transfers to Minors Act
accounts, if at any time, due to redemptions by the
shareholder, the total value of a shareholder's account does
not equal at least $1000. Involuntary redemption will only
result when the shareholder account drops below the
minimum due to redemptions, rather than changes in the net
asset value of the Fund. If the Fund determines to make such
an involuntary redemption, the shareholder will first be
notified that the value of his or her account is less than $1000
and will be allowed 30 days to make an additional
investment to bring the value of his or her account to at least
$1000 before the Company takes any action. The Company
reserves the right to raise minimums at some future date,
although it currently has no plans to do so.
Distribution Plan
Under the provisions of Sub-Chapter M of the Internal
Revenue Code of 1986 as amended, each Fund, by paying out
substantially all of its investment income and realized capital
gains, intends to be relieved of federal income tax on the
amounts distributed to shareholders. In order to qualify as a
"regulated investment company" under Sub-Chapter M, at
least 90% of each Fund's must be derived from dividends,
interest and gains from security transactions, no more than
30% of each Fund's profits may be derived from sales of
securities held less than three months, and no more than 50%
of each Fund's assets may be in securities holdings that
exceed 5% of the total assets of the Fund at the time of
purchase.
Dividends & Distributions. Distribution of any net long term
capital gains realized by each Fund in the Fund's in the fiscal
year and owned by a shareholder will be taxable to the
shareholder as long term capital gains, regardless of the
length of time Fund shares have been held by the shareholder.
All income realized by each Fund owned by a shareholder
including short term capital gains, will be taxable to the
shareholder as ordinary income. Dividends from net income
will be distributed annually or more frequently at the
discretion of the Company's Board of Directors. Dividends
received shortly after purchase of shares by a shareholder will
have the effect of reducing the per share net asset value of
such shareholder's shares by the amount of such dividends or
distributions and, although in effect a return of capital, are
subject to federal income taxes.
Dividend Reinvestment. Since each Fund is structured for
long term shareholders, all fund distributions will be
reinvested back into the fund rather than paid out, unless a
shareholder requests otherwise. There is no sales charge for
reinvested dividends.
Distributions and Taxes
Backup Withholding. The Company is required by Federal
law to withhold 31% of reportable payments (which may
include dividends, capital gains, distributions and
redemptions) paid to shareholders who have not complied
with IRS regulations. In order to avoid this withholding
requirement, a shareholder must certify on a W-9 tax form or
other applicable documents supplied by the Company that
such shareholder's Social Security Number is correct and
either that such shareholder is not currently subject to back-
up withholding or that such shareholder is exempt from back-
up withholding.
Foreign Income Taxes. Investment income received by each
Fund from sources within foreign countries may be subject to
foreign income taxes withheld at the source. It is not
expected that any Fund will be able to "pass through" these
taxes to shareholders but such taxes generally will be
deductible by each Fund.
The Company has adopted a distribution plan pursuant to
Rule 12b-1 under the 1940 Act (the "Plan") under which the
Company contracts with registered broker-dealers and their
agents to distribute shares of each Fund.
Registered broker-dealers and their agents who have
previously signed service agreements with the Distributor will
be paid 0.15% of the average daily net assets for those
shareholders brought to a Fund for the period of time those
shareholders remain with the Fund. The Distributor will
retain 0.10% of the total 0.25% Rule 12b-1 fee for such
shareholders.
Retirement Plans
For accounts that come direct to a Fund without a broker-
dealer, the Distributor will, by default, be the shareholder's
broker-dealer. Amounts will be accrued daily and paid
monthly. The services provided by selected broker-dealers
pursuant to the Plan are primarily designed to promote the
sale of shares of each Fund and include the furnishing of
office space and equipment, telephone facilities, personnel
and assistance to the Fund in servicing such shareholders.
Individual Retirement Accounts. The Company's minimum
initial investment for IRA retirement plans is $1000 with
minimum subsequent investments of $100. The Company
offers an Internal Revenue Service prototype Individual
Retirement Account ("IRA") plan and information
is available from the Company or from securities dealers.
Investors should consult a tax advisor before establishing any
retirement plan. The Company's IRA trustee charges an
annual fee of $10 for IRA accounts.
Exchange Privileges
Simplified Employee Pension Plan (SEP/IRA). The
Company also offers a simplified employee pension ("SEP")
plan for employers, including self-employed individuals who
wish to purchase Fund shares with tax-deductible
contributions. Contributions to a SEP are generally allowed
to be much higher than an ordinary IRA.
Shareholders may generally exchange shares of one Fund for
another offered by the Company without sales charges. For
information on the availability of any Fund exchange, call the
Transfer Agent at 800-628-4077.
Once an exchange request is made, either by telephone or
in writing, it may not be modified or canceled. The Company
reserves the right to restrict frequent exchanges. Investors
will be notified at least 60 days in advance of any changes in
restrictions on the frequency of exchanges.
Exchanges will be made at the net asset value of the
shares to be redeemed, and the per share net asset value of the
shares purchased, in both cases as next determined after the
exchange request is received.
For federal income tax purposes, an exchange of Fund
shares is a taxable event (unless the shares are held in a tax-
deferred IRA type account) and accordingly, the investor may
realize a capital gain or loss. Before making an exchange
request, the investor should determine the tax consequences
of a particular exchange.
The Company
The Company is organized as a series fund which permits it
to issue its authorized capital stock in one or more series,
each series representing a separate investment Fund.
The Company's authorized capital stock consists of
100,000,000 (one hundred million) shares of common stock
of the par value of $.0001 each, of which there have been
initially allocated 25,000,000 (twenty five million) shares to
each Fund. The Board of Directors may, at its discretion,
classify and allocate shares to additional series within the
Company or classify and allocate additional shares to each
Fund without further action by the shareholders. Each share
outstanding entitles the holder to one vote on matters relating
to that Fund. There will normally be no meetings of the
shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors
holding office have been elected by shareholders.
The Value & Growth Portfolio's fiscal year end is
September 30th. The Texas Opportunity Fund's fiscal year
end is June 30th. The Growth & Income Portfolio's fiscal
year is not yet determined.
Shareholder Reports
Each Fund sends all shareholders annual reports containing
certified financial statements and semiannual reports
containing unaudited financial statements.
Auditors & Litigation
Tait, Weller & Baker, Certified Public Accountants of
Philadelphia, Pennsylvania have been selected as the
independent accountants and auditors of each Fund. Tait,
Weller & Baker certify a significant portion of the mutual
funds in America and the auditing firm has no direct or
indirect interest in any Fund or the Advisors. As of the date
of this Prospectus, there was no pending or threatened
litigation involving any Fund in any capacity whatsoever.
Determining Net Asset Value
Pricing of Shares. The net asset value ("NAV") of each
Fund's shares is determined as of the close of business of the
New York Stock Exchange on each business day of which
that Exchange is open (presently 4:00 p.m. New York time)
Monday through Friday exclusive of holidays. The price is
determined by dividing the value of its securities, plus any
cash and other assets less all liabilities, excluding capital and
surplus, by the number of shares outstanding.
NAV = (Value of Fund Assets)-(Fund Liabilities)
Number of Outstanding Shares
Fund securities are valued using current market values, if
available. Securities for which market quotations are not
readily available are valued at fair market values as
determined in good faith by or under the supervision of the
Officers in accordance with methods which are specifically
authorized by the Board of Directors.
Fund Performance
From time to time, each Fund may advertise its "average
annual total return" over various periods of time. This total
return figure shows the average percentage change in value of
an investment in each Fund from the beginning date of the
measurement period to the ending date of the measurement
period. The figure reflects changes in the price of the Fund's
shares including the payment of the maximum sales load and
assumes that any income dividends and/or capital gains
distributions made by the Fund during the period are
reinvested in shares of the Fund. Figures will be given for
recent one-, five- and ten-year periods (when applicable), and
may well be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year
basis). When considering "average" total return figures for
periods longer than one year, investors should note that each
Fund's annual total return for any one year in the period
might have been greater or less than the average for the entire
period. Each Fund also may use "aggregate" total return
figures for various periods, representing the cumulative
change in value of an investment in the Fund for the specific
period (again reflecting changes in the Fund's share price and
assuming reinvestment of dividends and distributions).
Aggregate total returns may be shown by schedules, charts or
graphs, and may be broken down to indicate subtotals of the
various components of total return (that is, the change in
value of initial investment, income dividends, and capital
gains distributions).
Each Fund may quote the Fund's average annual total
and/or aggregate total return for various time periods in
advertisements or communications to shareholders. The
Fund may also compare its performance to that of other
mutual funds with similar investment objectives and to stock
and other relevant indices or to rankings prepared by
independent services or industry publications. For example, a
Fund's total return may be compared to data prepared by
Lipper Analytical Services, Inc., Morningstar, Value Line
Mutual Fund Survey and CDA Investment Technologies, Inc.
Total return data as reported in such national financial
publications as The Wall Street Journal, The New York
Times, Investor's Business Daily, USA Today, Barron's,
Money, and Forbes as well as publications of a local or
regional nature, may be used in comparing Fund
performance.
A Fund's total return may also be compared to such
indices as the Dow Jones Industrial Average, the Standard &
Poor's 500 Composite Stock Price Index, the NASDAQ
Composite OTC Index or NASDAQ Industries Index, the
Consumer Price Index, the Russell 2000 Index, or other
indices as the Advisors deem appropriate.
Information for Shareholders
Further information on performance measurement may be
found in the Statement of Additional Information which may
be obtained from the Company as described above.
The Company will provide the following statements and
reports to keep the investor current regarding the status of his
or her investment account:
Confirmation Statements. Provided after each transaction
that affects the account balance or account registration of a
shareholder.
Account Statements. Provided quarterly.
Financial Reports. Provided at least semiannually. Annual
reports will include audited financial statements. To reduce
expenses, one copy of each report will be mailed to each
taxpayer identification number even though the investor may
have more than one account in a particular Fund.
TRANSFER AGENT
Fund Services, Inc.
1500 Forest Ave, Suite 111
Richmond, VA 23229
(800) 628-4077-Call to get a Prospectus/Application, IRA
package, or for questions regarding purchases, redemptions,
distributions and other services.
DISTRIBUTOR
Choice Investments, Inc.
5900 Balcones Drive, Suite 100
Austin, Texas 78731
(888) TEX-RICH OR (512) 451-7905
MAILING ADDRESS FOR EACH FUND
Texas Capital Value Funds, Inc.
P.O. Box 141849
Austin, Texas 78714-1849
INVESTMENT MANAGERS
Value & Growth Portfolio and Growth & Income Portfolio
First Austin Capital Management, Inc.
1600 West 38th Street, Suite 412
Austin, Texas 78731
Texas Opportunity Fund
Martin Capital Management
600 W. 10th Street, #740
Austin, Texas 78701
INDEPENDENT AUDITORS
Tait, Weller & Baker
2 Penn Center, Suite 700
Philadelphia, PA 19102-1707
COUNSEL
Law Offices of Susan Braun Rice
27 New Haven
Laguna Niguel, California 92677
CUSTODIAN
Bank of Boston, N.A.
FUND IDENTIFICATION
Value & Growth Fund CUSIP #882241102
Growth & Income Portfolio CUSIP # 882241300
Texas Opportunity Fund CUSIP # 882241201
Value & Growth
Portfolio
Texas Opportunity Fund
Growth & Income
Portfolio
Distributed by Choice Investments, Inc.
PART B
TEXAS CAPITAL VALUE FUNDS, INC.
Statement of Additional Information
dated August 1, 1996
1600 W 38th Avenue, Suite 412 Austin, TX 78731
(512) 458-8165
General Marketing: 888-839-7424
Shareholder Information: 800-628-4077
This Part B sets forth additional information about the Texas
Opportunity Fund, the Value & Growth Portfolio, and the
Growth & Income Portfolio (each individually a "Fund", or
collectively, the "Funds" or "Fund(s)"). Each Fund is a non-
diversified, open-end investment series of the Texas Capital
Value Funds, Inc.
This Statement of Additional Information is not a Prospectus,
but should be read in conjunction with the Prospectus dated
August 1, 1995. To obtain a Prospectus, please call the
Fund(s) at (800) 839-7924. Capitalized terms used herein but
not defined have the meanings assigned to them in the
Prospectus.
Table of Contents/Cross Reference Page in Prospectus
INVESTMENT OBJECTIVE AND POLICIES /7
BOARD OF DIRECTORS COMPENSATION TABLE /NA
CONTROL PERSONS /NA
INVESTMENT ADVISORS /13
PORTFOLIO TURNOVER /9
PORTFOLIO TRANSACTIONS AND BROKERAGE /16
DISTRIBUTION OF THE FUND(S) /16
PERFORMANCE INFORMATION /28
TAX STATUS /24
NET ASSET VALUE /28
CAPITAL STRUCTURE /27
HOW TO REDEEM SHARES /10
RATINGS OF INVESTMENT SECURITIES /NA
No dealer, salesman or other person has been authorized to
give any information or to make any representations, other
than those contained in this Statement of Additional
Information or in the Prospectus, and, if given or made, such
other information or representations must not be relied upon
as having been authorized by the Company, the Fund(s), the
Advisors, or the Distributor. This Statement of Additional
Information and the Prospectus do not constitute an offer to
sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction in which such an offer to
sell or solicitation of an offer to buy may not lawfully be
made.
INVESTMENT OBJECTIVE AND POLICIES
Each Fund has a unique investment objective although there
are some aspects common to all of the Fund(s).
Common Characteristics: For all the Fund(s), purchase of
issues will be primarily, but not exclusively, listed issues and
American Depository Receipts on the on the New York,
American and NASDAQ exchanges and may include up to
33% foreign based companies.
Neither Advisor uses techniques such as borrowing, hedging,
or short sales in the management of the Fund(s). The Fund(s)
make no use of derivatives.
Under normal circumstances, each Fund will have virtually
all of its assets invested in equity securities. However, for
temporary defensive purposes, each Fund may hold cash,
notes or bonds, or enter into repurchase agreements, all of
which will be of investment grade as determined by Moody's
Investor's Service, Inc. or Standard & Poor's Corporation
rating agencies.
The Value & Growth Portfolio's primary investment
objective is capital appreciation through investment in
common stocks and securities convertible into common
stocks. The Advisor attempts to invest in companies which
appear to be extremely undervalued and possess an ability to
increase their earnings. No consideration is given to income
of the Fund holdings. While the quantitative strategy the
Advisor plans to use does not specifically screen for small
companies, test results have shown a large percentage of
companies selected for the Value & Growth Portfolio had
market capitalizations of less than a billion dollars. Smaller
companies have historically performed better than larger
companies over long periods, but also have historically shown
higher volatility than larger companies.
For the Growth & Income Portfolio, the Advisor will
invest primarily in large-cap equity securities of sufficient
yield. The ratio of the prices of a stock relative to its dividend
yield is considered. The portfolio will generally be comprised
of high-yield, large-cap domestic and foreign companies.
Most of the securities selected for both funds are likely to
have much lower ratios in at least one of the categories
described in the paragraph below than the market in general.
Academic research and studies have shown that portfolios
with the characteristics of low price-to-earnings, low price-to-
cashflow and low price-to-book ratios may be associated with
higher investment rates of return over long periods of time.
Such an investment strategy may also be subject to greater
investment risk.
For the Value & Growth and the Growth & Income
portfolios, the Advisor will employ highly structured,
computer driven, quantitative strategies to endeavor to find
companies that are likely to perform well. Such strategies are
different than the strategies most advisors use to select stocks
in that the Advisor will give little or no weight to qualitative
factors of securities considered for purchase. For the Value &
Growth Portfolio, fundamental ratios such as the price of a
stocks relative to its earnings (price-to-earnings), the price of
a stock relative to its cashflow (price-to-cashflow) and the
price of a stock relative to its bookvalue or net worth (price-
to-book) weigh heavily in the selection process
Texas Opportunity Fund. This Fund's investment
objective is capital appreciation by investing in common
stocks and securities convertible into common stocks of which
at least 65% will be of companies headquartered in the state
of Texas, or which have a majority of their operations in
Texas (the "Texas Companies"). The Fund intends to be fully
invested in common stocks of primarily Texas companies, but
for defensive purposes may hold cash or equivalents from
time to time. Since the Fund is structured primarily for
capital appreciation, any income should be considered
incidental to the investment decision.
The Advisor to the Texas Opportunity Fund will employ
both qualitative and quantitative strategies to endeavor to find
companies that are likely to perform well. This Fund will
differ from other funds in that stocks selected for inclusion in
the Fund will be Texas Companies. Product or service
growth potential, management, technical, and economic cycle
considerations weigh heavily in the selection process.
The security selection process for the Texas Opportunity
Fund will attempt to reflect the diversification of the Texas
economy; however the manager will have the discretion to
adjust sector representation based upon the sector's
performance outlook. An investment strategy focused on a
single, albeit large economy, may be subject to greater
investment risk than a more broadly diversified mutual fund.
Texas has a greater concentration of energy and technology
companies than the rest of the United States. Weakness in
energy or technology could result in significant losses for the
Fund.
None of these Funds are designed to be a complete
investment program for investors.
Non-diversification Policy. Each Fund is classified as being
non-diversified which means that each Fund may invest no
more than 25% of its total assets in any one issuer other than
U.S. government securities and at the close of each quarter of
the taxable year, at least 50% of the value of each Fund must
be represented by a) cash and cash items, including U.S.
government securities and b) other securities of different
issuers in which each Fund has invested no more than 5% of
its assets and with respect to which it owns no more than 10%
of the outstanding voting securities of the issuer. Each Fund,
therefore, may be more susceptible than a more widely
diversified fund to a single economic, political or regulatory
occurrence. Each Fund seeks only diversification for
adequate representation among what it considers to be the
best performing securities and to maintain its federal non-
taxable status under Sub-Chapter M of the Internal Revenue
Code.
Investment Restrictions
The Fund(s) have adopted and will follow certain investment
policies set forth below, which are fundamental and may not
be changed without shareholder approval.
(a) Each Fund may not invest more than 25% of its total
assets in the securities of issuers in any one industry. This
restriction does not apply to investments by a Fund in
securities of the U.S. Government or its agencies or
instrumentalities.
(b) Each Fund may not issue senior securities or borrow
money except for temporary purposes in amounts up to 10%
of its net assets (including the amount borrowed) less
liabilities (not including the amount borrowed) at the time of
such borrowing, provided that collateral arrangements with
respect to permitted instruments shall not be deemed to entail
the issuance of senior securities if appropriately covered.
Each Fund will not make any investments while outstanding
borrowings exceed 5% of the value of its total assets.
(c) Each Fund may not make loans, although it may invest
in debt securities, enter into repurchase agreements and lend
its portfolio securities.
(d) Each Fund may not invest in securities or other assets
that the Board of Directors determines to be illiquid if more
than 15% of the Fund(s)'s net assets would be invested in
such securities.
(e) Each Fund may not (i) purchase or sell commodities or
commodities contracts (including financial futures and related
options), (ii) invest in oil, gas, or mineral exploration or
development programs or leases, or (iii) purchase securities
on margin, except for such short-term credit as may be
necessary for the clearance of transactions and except for
borrowings in amounts not exceeding 10% of its net assets.
(f) Each Fund may not purchase or sell real estate or make
real estate mortgage loans or invest in real estate limited
partnerships, except that each Fund may purchase or sell
securities issued by entities in the real estate industry or
instruments backed by real estate such as, but not limited to,
Real Estate Investment Trusts (R.E.I.T's).
(g) Each Fund may not act as an underwriter of securities
issued by others, except to the extent it may be deemed to be
an underwriter in connection with the disposition of Fund
securities of each Fund.
(h) The investment in warrants, valued at the lower of cost
or market, may not exceed 5.0% of the value of each Fund's
net assets. Included within that amount, but not to exceed
2.0% of the value of each Fund's net assets, may be warrants
which are not listed on the New York or American Stock
Exchange. Warrants acquired by each Fund in units or
attached to securities may be deemed to be without value.
(i) Each Fund shall not invest in other open ended
management investment companies.
The foregoing restrictions may not be changed for any Fund
without the approval of a majority of that Fund's outstanding
voting securities. As used in this Statement of Additional
Information, a majority of the Fund(s)' outstanding voting
securities means the lesser of (a) more than 50% of its
outstanding voting securities, or (b) 67% or more of the
voting securities present at a meeting at which more than
50% of the outstanding voting securities are present or
represented by proxy. The Fund(s)' investment objectives, as
well as those policies and restrictions which are not
fundamental, may be modified by the Board of Directors
without shareholder approval if, in the reasonable exercise of
the Board of Director's business judgment, modification is
determined to be necessary or appropriate to carry out the
Fund(s)' objectives. However, the Fund(s) will not change
investment policies or restrictions without written notice to
shareholders.
In order to permit the sale of the Fund(s)' shares in certain
states, the Fund(s) may make commitments with respect to
the Fund(s) which are more restrictive than the investment
policies listed above and in the Prospectus. Should the
Fund(s) determine that any commitment made to permit the
sale of the Fund(s)' shares in any state is no longer in the best
interests of the Fund(s), it will revoke the commitment by
terminating sales of the Fund(s)' shares in the state involved.
Further Information on the Nature of the Fund Investments
General Characteristics of Convertible Securities. The
Fund(s) may invest only in high grade convertible securities,
that is, bonds, notes, debentures, preferred stocks and other
securities which are convertible into common stocks. "High
grade" securities are those rated within the three highest
ratings categories of Standard & Poor's Corporation ("S&P")
or Moody's Investors Service, Inc. ("Moody's") or that are
determined by the investment advisor to be of equivalent
quality. Investments in convertible securities may provide
incidental income through interest and dividend payments
and/or an opportunity for capital appreciation by virtue of
their conversion or exchange features.
Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both
debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the
market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and,
therefore, also tends to follow movements in the general
market for equity securities. As the market price of the
underlying common stock declines, convertible securities tend
to trade increasingly on a yield basis and so may not
experience market value declines to the same extent as the
underlying common stock. When the market price of the
underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value
of the underlying common stock, although typically not as
much as the underlying common stock. While no securities
investments are without risk, investments in convertible
securities generally entail less risk than investments in
common stock of the same issuer.
As debt securities, convertible securities are investments
which provide for a stream of income (or in the case of zero
coupon securities, accretion of income) with generally higher
yields than common stocks. Convertible securities generally
offer lower yields than non-convertible securities of similar
quality because of their conversion or exchange features.
Convertible securities are generally subordinated to other
similar but non-convertible securities of the same issuer,
although convertible bonds, as corporate debt obligations,
enjoy seniority in right of payment to all equity securities, and
convertible preferred stock is senior to common stock of the
same issuer. However, because of the subordination feature,
convertible bonds and convertible preferred stock typically
have lower ratings than similar non-convertible securities.
General Characteristics of Foreign Securities. Foreign
securities involve certain inherent risks that are different from
those of domestic issuers, including political or economic
instability of the issuer or the country of issue, diplomatic
developments which could affect U.S. investments in those
countries, changes in foreign currency and exchange rates
and the possibility of adverse changes in investment or
exchange control regulations. As a result of these and other
factors, foreign securities purchased by the Fund(s)s may be
subject to greater price fluctuation than securities of U.S.
companies.
Most foreign stock markets are not as large or liquid as in the
United States. Furthermore, the fixed commissions on
foreign stock exchanges are generally higher than the
negotiated commissions on U.S. exchanges and there is
generally less government supervision and regulation of
foreign stock exchanges, brokers and companies than in the
United States.
Investors should recognize that foreign markets have different
clearance and settlement procedures and in certain markets
there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making
it difficult to conduct such transactions. Delays in settlement
could result in temporary periods when assets of the Fund(s)
are uninvested and no return is earned thereon. The inability
of the Fund(s) to make intended security purchases due to
settlement problems could cause the Fund(s) to miss attractive
investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in
losses to the Fund(s) due to subsequent declines in value of
the portfolio security or, if the Fund(s) have entered into a
contract to sell the security, could result in a possible liability
to the purchaser. Payment for securities without delivery may
be required in certain foreign markets. Further, the Fund(s)
may encounter difficulties or be unable to pursue legal
remedies and obtain judgments in foreign courts. Foreign
governments can also levy confiscatory taxes, expropriate
assets, and limit repatriations of assets. Typically, there is
less publicly available information about a foreign company
than about a U.S. company, and foreign companies may be
subject to less stringent reserve, auditing and reporting
requirements. It may be more difficult for the Fund(s)' agents
to keep currently informed about corporate actions such as
stock dividends or other matters which may affect the prices
of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within
the United States thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates
portfolio securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of
payments position.
Because investments in foreign securities will usually involve
currencies of foreign countries and because the Fund(s) may
hold foreign currencies, the value of the assets of the Fund(s)
as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Fund(s) may incur
costs in connection with conversions between various
currencies. Although the Fund(s) values its assets daily in
terms of U.S. dollars, the Fund(s) do not intend to convert its
holdings of foreign currencies into U.S. dollars on a daily
basis. It will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between
the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund(s) at one rate, while offering a lesser rate of
exchange should the Fund(s) desire to resell that currency to
the dealer. The Fund(s) will conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market.
General Characteristics of Securities Lending. In compliance
with Securities and Exchange Commission guidelines, any
loans by the Fund(s) of securities in its portfolio would be
required to be secured with collateral (consisting of any
combination of U.S. currency, securities issued or guaranteed
by the United States Government or any agency thereof, or
irrevocable letters of credit or other debt securities issued by
entities rated within the two highest grades assigned by S&P
or Moody's or which are determined by the investment
advisor to be of equivalent quality).
The borrower must agree to add to such collateral to cover
increases in the market value of the loaned securities and the
Fund(s) must be entitled to terminate any loan at any time,
with the borrower obligated to redeliver borrowed securities
within five trading days. The borrower must agree that the
Fund(s) will receive all dividends, interest or other
distributions on loaned securities and the Fund(s) must be
able to vote loaned securities whenever the right to vote is
material to the Fund(s)'s performance.
Investment in Unseasoned Issuers. The Fund(s) may invest in
securities of issuers which have a record of less than three (3)
years of continuous operation, including the operation of any
predecessor business of a company which came into existence
as a result of a merger, consolidation, reorganization or
purchase of substantially all of the assets of such predecessor
business, if such purchase would not cause the value of the
Fund(s)'s investments in all such companies to exceed 5% of
the value of its net assets.
DIRECTORS AND OFFICERS
The Directors and Officers of the Fund(s), their positions held
with the Fund(s) and their principal occupations during the
past five years are set forth below.
Mark A. Coffelt, C.F.A.
4201 Long Champ Drive
Austin, Texas 78746
Chairman and President of the Texas Capital Value Funds,
Inc. and (Interested) Director, Chief Investment Officer of the
Value & Growth Portfolio and Growth & Income Portfolio.
Principal Occupations During Past Five Years
President of First Austin Capital Management, Inc. (1988-
Present)
Occidental College, B.A. economics
Wharton School, University of Pennsylvania, MBA
Chartered Financial Analyst of the Association of Investment
Management and Research.
Paul Martin
600 W. 10th Street, #740
Austin, Texas 78701
(Interested) Director, and Chief Investment Officer of the
Texas Opportunity Fund.
Principal Occupations During Past Five Years
Chief Investment Officer of Martin Capital Management
(1988-Present)
U.S. Naval Reserve Officer.
St. John's College in Santa Fe, New Mexico, BA liberal arts.
Janis A. Claflin,
2508 Timberline
Austin, Texas 78746
Director
Principal Occupations During Past Five Years
President and owner of Claflin & Associates (1985-Present)
Chairperson of the Trustee Program Committee on the Board
of Directors of the Fetzer Institute (1987-Present)
Licensed Marriage and Family Therapist
George Peabody College for Teachers, B.A. in English
Yale Divinity School in Religion, M.A. in Religion.
Edward K. Clark, Attorney, CPA
605 Coquina Lane
Austin, Texas 78746
Director
Principal Occupations During Past Five Years
Clark & Clark of Austin, Texas (1995-Present)
Sole Practitioner (1994-1995)
Partner, McGinnis, Lockridge & Kilgore L.L.P. (1993-1994)
Scofield & Clark, P.C. (1991-1992)
Ford & Ferraro, L.L.P. (1991-1992)
General Counsel/Chief Financial Officer of Jefferson Service
Company, Inc. Board Certified in Tax Law by the Texas
Board of Legal Specialization
Certified Public Accountant
University of Texas, B.B.A. and M.P.A. (Master in
Professional Accounting) University of Houston College of
Law, J.D.
John Henry McDonald, CFP
4411 Spicewood, #603
Austin, TX 78759
Director
Principal Occupations During Past Five Years
President and founder of Austin Asset Management( 1990-
Present)
CFP from the College for Financial Planning
Member of the CFP Board of Standards
President of the Austin Society of Institute of Certified
Financial Planners.
Eric Barden
4605 Ave. A, Apt 111
Austin, TX 78751
Secretary, Texas Capital Value Funds, Inc. (1996-Present)
Principal Occupations During Past Five Years
Compliance Officer and Investment Advisor for First Austin
Capital Management, Inc. (1995-Present) University of
Texas, B.A. in Economics and Government (1991-1995)
Note: "Director (Interested)" denotes a Director of the
Company who is "interested person" of the Company, as
defined in the Investment Company Act of 1940 (the "1940
Act"). The Directors of the Fund who are officers or
employees of the investment advisors or the Distributor
receive no remuneration from the Fund(s). Each of the other
Directors is paid an annual retainer of $2,000 and is
reimbursed for expenses of attending meetings.
COMPENSATION TABLE
NAME & AGGREGATE
PENSION ESTIMATED ANNUAL
TOTAL
POSITION COMPENSATION
BENEFITS RETIREMENT BENEFITS
COMP.
Mark A. Coffelt $0 $0
$0 $0
President &
Chief Investment
Officer of the Value
& Growth , Portfolio
and the Growth &
Income Portfolio
Paul Martin $0 $0
$0 $0
Director & Chief
Investment Officer of
the Texas Opportunity
Fund
Edward D. Clark $2,000* $0
$0 $2,000
Director
John Henry McDonald $2,000* $0
$0 $2,000
Director
Janis Claflin $2,000* $0
$0 $2,000
Director
*Denotes disinterested director
CONTROL PERSONS
As of August 27, 1996, the Texas Opportunity Fund is
controlled by Paul Martin. Prior to the public offering of the
shares of the Fund, Mr. Paul Martin retains all voting rights.
Control Person: Paul Martin
Address: 600 W. 10th Street, #740
Austin, Texas 78701
Percent of Voting Shares: 100%
To the knowledge of the Fund's management, as of July 31,
1996 the persons owning beneficially more than 5% of the
outstanding shares of the Value & Growth portfolio were as
follows:
Name & Address Percentage of Ownership
Mark Coffelt 12.8
1600 West 38th Street Suite 412
Austin, TX 78731
Coffelt Family Limited Partnership 9.7
1600 West 38th Street Suite 412
Austin, TX 78731
Jim Kaighin 12.7
5900 Balcones Drive
Austin, TX 78731
Eddie Harris 5.1
906 Wash Lane
Round Rock, TX 78681
The officers and directors of the Texas Capital Value Funds,
Inc own, as a group, 14.8% of the Value & Growth portfolio.
INVESTMENT ADVISORS
First Austin Capital Management is controlled by Mark A.
Coffelt and Guy D. Coffelt who each own 50% of the
outstanding shares of First Austin Capital Management.
Mark A. Coffelt is the President of Texas Capital Value
Funds, Inc., Chief Investment Officer of the Value & Growth
Portfolio and the Growth & Income Portfolio, as well as
President of First Austin Capital Management, Inc. Guy D.
Coffelt is retired from First Austin Capital Management, Inc.
Martin Capital Management is controlled by Paul Martin who
owns 100% of the company. Mr. Martin is the Chief
Investment Officer of the Texas Opportunity Fund, as well as
General Director of Martin Capital Management.
PORTFOLIO TURNOVER
While it is difficult to predict, the Advisor expect that the
annual portfolio turnover rate of the Fund(s) will not exceed
150%. A greater rate may be experienced during periods of
marketplace volatility which necessitates more active trading.
A higher portfolio turnover rate involves greater transaction
costs to the Fund(s) and may result in the realization of net
capital gains which would be taxable to shareholders when
distributed.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Directors, decisions to buy
and sell securities for the Fund(s) and negotiation of its
brokerage commission rates are made by the investment
advisor. Transactions on United States stock exchanges
involve the payment by the Fund(s) of negotiated brokerage
commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market but
the price paid by the Fund(s) usually includes an undisclosed
dealer commission or mark-up. In certain instances, the
Fund(s) may make purchases of underwritten issues at prices
which include underwriting fees.
In selecting a broker to execute each particular transaction,
the investment advisor will take the following into
consideration: the best net price available; the reliability,
integrity and financial condition of the broker; the size of
and difficulty in executing the order; the value of the expected
contribution of the broker to the investment performance of
the Fund(s) on a continuing basis as well as the expected
contribution of the broker in selling shares of the Fund(s).
Accordingly, the cost of the brokerage commissions to the
Fund(s) in any transaction may be greater than that available
from other brokers if the difference is reasonably justified by
other aspects of the portfolio execution services offered. For
example, the investment advisor will consider the research
and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of the Fund(s) or
the investment advisor's other clients. Such research and
investment services include statistical and economic data and
research reports on particular companies and industries as
well as research software. Subject to such policies and
procedures as the Directors may determine, the investment
advisor shall not be deemed to have acted unlawfully or to
have breached any duty solely by reason of its having caused
the Fund(s) to pay a broker that provides research services to
the investment advisor an amount of commission for effecting
a portfolio investment transaction in excess of the amount
another broker would have charged for effecting that
transaction, if the investment advisor determines in good faith
that such amount of commission was reasonable in relation to
the value of the research services provided by such broker
viewed in terms of either that particular transaction or the
investment advisor's ongoing responsibilities with respect to
the Fund(s).
Research and investment information is provided by these
and other brokers at no cost to the investment advisor and is
available for the benefit of other accounts advised by the
investment advisor and its affiliates, and not all of the
information will be used in connection with the Fund(s).
While this information may be useful in varying degrees and
may tend to reduce the investment advisor's expenses, it is not
possible to estimate its value and, in the opinion of the
investment advisor, it does not reduce the investment
advisor's expenses in a determinable amount. The extent to
which the investment advisor makes use of statistical,
research and other services furnished by brokers is considered
by the investment advisor in the allocation of brokerage
business but there is no formula by which such business is
allocated. The investment advisor does so in accordance with
its judgment of the best interests of the Fund and its
shareholders.
DISTRIBUTION OF THE FUND(S)
The Company has entered into a distribution agreement with
Choice Investments, Inc., to act as the principal underwriter
of the shares of the Fund(s). The Distributor agrees to use its
best efforts to promote, offer for sale and sell the shares of the
Fund(s) to the public on a continuous basis whenever and
wherever it is legally authorized to do so.
PERFORMANCE INFORMATION
From time to time, quotations of the Fund(s)'s performance
may be included in advertisements, sales literature or reports
to shareholders or prospective investors. These performance
figures are calculated in the following manner.
Average Annual Total Return
Average annual total return is the average annual compound
rate of return for periods of one year, five years and ten years,
all ending on the last day of a recent calendar quarter.
Average annual total return quotations reflect changes in the
price of the Fund(s)'s shares and assume that all dividends
and capital gains distributions during the respective periods
were reinvested in Fund shares. Average annual total return
is calculated by computing the average annual compound
rates of return of a hypothetical investment over such periods,
according to the following formula (average annual total
return is then expressed as a percentage):
T = (ERV/P)1/n - 1
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable period.
It should be noted that average annual total return is based on
historical earnings and is not intended to indicate future
performance. Average annual total return for the Fund(s)
will vary based on changes in market conditions and the level
of the Fund(s)'s expenses.
In connection with communicating its average annual total
return to current or prospective shareholders, the Fund(s) may
also compare these figures to the performance of other mutual
funds tracked by mutual fund rating services or to unmanaged
indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and
management costs.
Comparison of Portfolio Performance
Comparison of the quoted non-standardized performance of
various investments is valid only if performance is calculated
in the same manner. Since there are different methods of
calculating performance, investors should consider the effect
of the methods used to calculate performance when
comparing performance of the Fund(s) with performance
quoted with respect to other investment companies or types of
investments.
In connection with communicating its performance to current
or prospective shareholders, the Fund(s) may compare its
performance to the performance of unmanaged indices which
may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to
the Dow Jones Industrial Average, the Consumer Price Index,
Standard & Poor's 500 Composite Stock Price Index (S&P
500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, and the Russell 2000 Index.
From time to time, in advertising, marketing and other Fund
literature, the performance of the Fund(s) may be compared to
the performance of broad groups of mutual funds with similar
goals, as tracked by independent organizations such as
Investment Company Data, Inc., Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc., Morningstar, Inc.,
Value Line Mutual Fund Survey and other independent
organizations. When these organizations' tracking results are
used, the Fund(s) will be compared to the appropriate fund
category, that is, by fund objective and portfolio holdings or
the appropriate volatility grouping, where volatility is a
measure of the Fund(s)'s risk. From time to time, the average
price-earnings ratio and other attributes of the Fund(s)'s or
the model portfolio's securities may be compared to the
average price-earnings ratio and other attributes of the
securities that comprise the S&P 500.
Statistical and other information, as provided by the Social
Security Administration, may be used in marketing materials
pertaining to retirement planning in order to estimate future
payouts of social security benefits. Estimates may be used of
demographic and economic data.
Marketing and other Fund literature may include a
description of the potential risks and rewards associated with
an investment in the Fund(s). The description may include a
"risk/return spectrum" which compares the Fund(s) to broad
categories of funds, such as money market, bond or equity
funds, in terms of potential risks and returns. Money Market
funds are designed to maintain a constant $1.00 share price
and have a fluctuating yield. Share price, yield and total
return of a bond fund will fluctuate. The share price and
return of an equity fund also will fluctuate. The description
may also compare the Fund(s) to bank products, such as
certificates of deposit. Unlike mutual funds, certificates of
deposit are insured up to $100,000 by the U.S. government
and offer a fixed rate of return.
Risk/return spectrums also may depict funds that invest in
both domestic and foreign securities or a combination of bond
and equity securities.
TAX STATUS
The Fund(s) intends to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, the Fund(s)
generally 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 securities loans,
gains from the sale or other disposition of stock, securities or
foreign currencies, and other income derived from its
business of investing in such stock, securities or currencies;
(b) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of certain assets
held less than three months, namely: (i) stock or securities;
(ii) options, futures, or forward contracts (other than those on
foreign currencies); or (iii) foreign currencies (or options,
futures, or forward contracts on foreign currencies) that are
not directly related to the Fund(s)'s principal business of
investing in stock or securities (or options and futures with
respect to stock or securities) (the "30% Limitation"); and (c)
diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Fund(s)'s assets is
represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of
the Fund(s)'s total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities and the
securities of other regulated investment companies).
As a regulated investment company, the Fund(s) generally
will not be subject to U.S. federal income tax on income and
gains that it distributes to shareholders, if at least 90% of the
Fund(s)'s investment company taxable income (which
includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term
capital losses) for the taxable year is distributed. The Fund(s)
intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with
a calendar year distribution requirement are subject to a
nondeductible 4% excise tax at the Fund(s) level. To avoid
the tax, the Fund(s) must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses)
for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary
losses) for a one-year period generally ending on October 31
of the calendar year, and (3) all ordinary income and capital
gains for previous years that were not distributed during such
years. To avoid application of the excise tax, the Fund(s)
intends to make distributions in accordance with the
calendar year distribution requirement. A distribution will be
treated as paid on December 31 of the current calendar year if
it is declared by the Fund(s) in October, November or
December of that year with a record date in such a month,
and paid by the Fund(s) during January of the following year.
Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared rather
than the calendar year in which the distributions are received.
Currency Fluctuations -- "Section 988" Gains or Losses
Gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund(s) accrues income or
other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund(s)
actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt
securities, gains or losses attributable to fluctuations in the
value of the foreign currency between the acquisition and
disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as
"section 988" gains or losses, increase or decrease the amount
of the Fund(s)'s investment company taxable income available
to be distributed to its shareholders as ordinary income. If
section 988 losses exceed other investment company taxable
income during a taxable year, the Fund(s) would not be able
to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized
as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or
her Fund shares.
Distributions
Distributions of investment company taxable income are
taxable to a U.S. shareholder as ordinary income, whether
paid in cash or shares. Dividends paid by the Fund(s) to a
corporate shareholder, to the extent such dividends are
attributable to dividends received from U.S. corporations by
the Fund(s), may qualify for the dividends received deduction.
However, the revised alternative minimum tax applicable to
corporations may reduce the value of the dividends received
deduction. Distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses),
if any, designated by the Fund(s) as capital gain dividends,
are taxable as long-term capital gains, whether paid in cash
or in shares, regardless of how long the shareholder has held
the Fund(s)'s shares, and are not eligible for the dividends
received deduction. Shareholders will be notified annually as
to the U.S. federal tax status of distributions, and
shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of
the shares received.
If the net asset value of shares is reduced below a
shareholder's cost as a result of a distribution by the Fund(s),
such distribution generally will be taxable even though it
represents a return of invested capital. Investors should be
careful to consider the tax implications of buying shares of
the Fund(s) just prior to a distribution. The price of shares
purchased at this time may reflect the amount of the
forthcoming distribution. Those purchasing just prior to a
distribution will receive a distribution which generally will be
taxable to them.
Disposition of Shares
Upon a redemption, sale or exchange of a shareholder's
shares of the Fund(s), such shareholder will realize a taxable
gain or loss depending upon his or her basis in the shares. A
gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, and generally
will be long-term or short-term depending upon the
shareholder's holding period for the shares. Any loss realized
on a redemption, sale or exchange will be disallowed to the
extent the shares disposed of are replaced (including through
reinvestment of dividends) within a period of 61 days,
beginning 30 days before and ending 30 days after the day the
shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any
loss realized by a shareholder on the disposition of the
Fund(s)'s shares held by the shareholder for six months or
less will be treated for tax purposes as a long-term capital loss
to the extent of any distributions of capital gain dividends
received or treated as having been received by the
shareholder with respect to such shares.
Backup Withholding
The Fund(s) will be required to report to the Internal Revenue
Service (the "IRS") all distributions and gross proceeds from
the redemption of the Fund(s)' shares, except in the case of
certain exempt shareholders. All distributions and proceeds
from the redemption of Fund shares will be subject to
withholding of federal income tax at a rate of 31% ("backup
withholding") in the case of non-exempt shareholders if (1)
the shareholder fails to furnish the Fund(s) with the
shareholder's correct taxpayer identification number or social
security number and to certify the same as correct, (2) the IRS
notifies the shareholder or the Fund(s) that the shareholder
has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or
(3) when required to do so, the shareholder fails to certify that
he or she is not subject to backup withholding. If the
withholding provisions are applicable, any such distributions
or proceeds, whether reinvested in additional shares or taken
in cash, will be reduced by the amounts required to be
withheld.
Other Taxation
Distributions may also be subject to additional state, local and
foreign taxes depending on each shareholder's particular
situation. Non-U.S. shareholders may be subject to U.S. tax
rules that differ significantly from those summarized above.
This discussion does not purport to deal with all of the tax
consequences applicable to the Fund(s) or shareholders.
Shareholders are advised to consult their own tax advisors
with respect to the particular tax consequences to them of an
investment in a Fund.
NET ASSET VALUE
The Fund(s)' net asset value per share will be calculated
separately from the per share net asset value of any other fund
of the Company. "Assets belonging to" a fund consist of the
consideration received upon the issuance of shares of the
particular fund together with all net investment income,
earnings, profits, realized gains/losses and proceeds derived
from the investment thereof, including any proceeds from the
sale of such investments, any funds or payments derived from
any reinvestment of such proceeds, and a portion of any
general assets of the Company not belonging to a particular
series. Each fund of the Company will be charged with the
direct liabilities of that fund and with a share of the general
liabilities of the Company's funds. Subject to the provisions
of the Articles of Incorporation and the Bylaws of the
Company, determinations by the Directors as to the direct and
allocable expenses and the allocable portion of any general
assets with respect to a particular fund are conclusive.
CAPITAL STRUCTURE
Description of Shares
The Company is an open-end management investment
company organized as a Maryland corporation on June 26th,
1995. The Company's Articles of Incorporation authorize the
Board of Directors to issue shares of common stock, par value
$.0001 per share. Twenty-Five million shares of the
Company's authorized common stock have been initially
allocated to each Fund. Each share of the Fund(s) has equal
voting, dividend, distribution and liquidation rights.
Shares of the Company have no preemptive rights and only
such conversion or exchange rights as the Board may grant in
its discretion. When issued for payment as described in the
Prospectus, the Company's shares will be fully paid and non-
assessable.
Shareholders are entitled to one vote for each full share held,
and fractional votes for fractional shares held, and will vote
in the aggregate and not by class or series except as otherwise
required by the 1940 Act or the Maryland General
Corporation Law.
Rule l8f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding
voting securities of an investment company such as the
Company shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares
of each fund of the Company affected by the matter. A fund
is affected by a matter unless it is clear that the interests of
each fund in the matter are substantially identical or that the
matter does not affect any interest of such fund. Under Rule
l8f-2, the approval of an investment advisory agreement or
12b-1 distribution plan or any change in a fundamental
investment policy would be effectively acted upon with
respect to a fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also
provides that the ratification of independent public
accountants, the approval of principal underwriting contracts
and the election of Directors may be effectively acted upon by
shareholders of the Company voting without regard to
particular funds.
Notwithstanding any provision of the Maryland General
Corporation Law requiring for any purpose the concurrence
of a proportion greater than a majority of all votes entitled to
be cast at a meeting at which a quorum is present, the
affirmative vote of the holders of a majority of the total
number of shares of the Company outstanding (or of a class
or series of the Company, as applicable) will be effective,
except to the extent otherwise required by the 1940 Act and
rules thereunder. In addition, the Articles of Incorporation
provide that, to the extent consistent with the General
Corporation Law of Maryland and other applicable law, the
Bylaws of the Company may provide for authorization to be
given by the affirmative vote of the holders of less than a
majority of the total number of shares of the Company
outstanding (or of a class or series).
HOW TO REDEEM SHARES
The right of redemption may be suspended by the Fund(s), or
the date of payment postponed by the Fund(s), beyond the
normal seven-day period, under the following conditions
authorized by the 1940 Act: (1) for any period (a) during
which the New York Stock Exchange is closed, other than
customary weekend or holiday closings, or (b) during which
trading on the New York Stock Exchange is restricted; (2)
for any period during which an emergency exists as a result of
which (a) disposal by the Fund(s) of securities owned by it is
not reasonably practical, or (b) it is not reasonably practical
for the Fund(s) to determine the fair value of its net assets;
and (3) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of the
Fund(s)' shareholders.
The value of shares of the Fund(s) on redemption may be
more or less than the shareholder's cost, depending upon the
market value of the Fund(s)' assets at the time. Shareholders
should note that if a loss has been realized on the sale of
shares of the Fund(s), the loss may be disallowed for tax
purposes if shares of the same Fund are purchased within
(before or after) 30 days of the sale.
It is possible that conditions may exist in the future which
would, in the opinion of the Board of Directors, make it
undesirable for the Fund(s) to pay for redemptions in cash. In
such cases the Board may authorize payment to be made in
portfolio securities of the Fund(s). However, the Fund(s) has
obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder up to
$250,000 (or 1% of the Fund(s)'s net assets if that is less) in
any 90-day period. Securities delivered in payment of
redemptions are valued at the same value assigned to them in
computing the net asset value per share. Shareholders
receiving such securities generally will incur brokerage costs
on their sales.
RATINGS OF INVESTMENT SECURITIES
A rating of a rating service represents the service's opinion as
to the credit quality of the security being rated. However, the
ratings are general and are not absolute standards of quality
or guarantees as to the creditworthiness of an issuer.
Consequently, the Fund(s)' investment advisor believes that
the quality of debt securities in which the Fund(s) invests
should be continuously reviewed. A rating is not a
recommendation to purchase, sell or hold a security, because
it does not take into account market value or suitability for a
particular investor. When a security has received a rating
from more than one service, each rating should be evaluated
independently. Ratings are based on current information
furnished by the issuer or obtained by the ratings services
from other sources which they consider reliable. Ratings may
be changed, suspended or withdrawn as a result of changes in
or unavailability of such information, or for other reasons.
The following is a description of the characteristics of ratings
used by Moody's Investors Service, Inc. and Standard &
Poor's Corporation.
Moody's Investors Service, Inc. Ratings
Aaa: Bonds rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt-edge". Interest payments are protected by
a large or by an exceptionally stable margin and principal is
secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely
to impair the Fund(s)amentally strong position of such
bonds.
Aa: Bonds rated Aa are judged to be high quality by all
standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa bonds or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long term risk appear
somewhat larger than in Aaa bonds.
A: Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may
be lacking or may be uncharacteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba: Bonds rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. Such bonds may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds rated Ca represent obligations which are
speculative in a high degree. Such bonds are often in default
or have other marked shortcomings.
Standard & Poor's Corporation Rating
AAA: Bonds rated AAA have the highest rating. Capacity to
pay principal and interest is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay
principal and interest and differ from AAA bonds only in
small degree.
A: Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this
capacity than for bonds in higher rated categories.
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are
regarded on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation among such bonds
and CC the highest degree of speculation. Although such
bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
