BUILDERS FIXED INCOME FUND, INC.
SEMI-ANNUAL REPORT TO SHAREHOLDERS
JUNE 30, 1999
THIS REPORT IS PROVIDED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
BUILDERS FIXED INCOME FUND, INC. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
<PAGE>
Dear Shareholder,
As Chairman of the Builders Fixed Income Fund, Inc., I would like to express my
sincere appreciation for your participation in the Fund. It is a privilege to
serve the needs of our investors by delivering quality core investment results
and service, while working in the community providing ProLoan mortgages to new
home buyers and employment opportunities for organized building trades. We
actively participate in coordinating the origination and securitization of home
mortgages resulting in the hands-on approach needed to have an impact in our
targeted mortgage markets. This semiannual report contains financial statements
for the period ending June 30, 1999.
The Builders Fixed Income Fund, Inc. has been delivering quality core fixed
income management to its investors. The Fund actively participated in the
coordination, origination and securitization of home mortgages in various cities
in the Midwest generating approximately 364 loan applications for a total of
$51,337,644. The program's performance has been strong in both St Louis and
Chicago in a period of historically low interest rates. As interest rates have
risen during the last quarter, the demand for a ProLoan mortgage has increased
and the ProLoan Lenders have increased production of mortgage loans.
During the first half of 1999, the Fund experienced an increase in total assets
from $178,875,095 to $187,007,421 representing approximately 5% growth. This
pattern of growth is attributable to the increase in the mortgage loan pipeline
from $46,195,235 to $55,330,648. Over the second half of 1999, we anticipate
several new investors in the Fund. Already, Louisville and Pittsburgh have
invested funds during the first week of July 1999.
During the first six months of 1999 the investment performance of the Fund was
- -1.26%. This performance, generated by our sub-advisor, Commerce Bank and
Portfolio Manager, Scott Colbert, CFA, convincingly outperformed our peer group
by 23 basis points. Please see the included sub advisor report for a detailed
discussion of the performance.
As the Fund enters the second half of 1999 and approaches its two year
anniversary in October, we look forward to another successful year of investment
performance and continued growth in the ProLoan program. As always, I am
available to discuss any aspect of the Fund with any investor so please do not
hesitate to call or write.
Sincerely,
/s/ John W. Stewart
John W. Stewart, Chairman
Builders Fixed Income Fund, Inc.
<PAGE>
COMMERCE BANK
INVESTMENT SUB ADVISOR REPORT
INVESTMENT RESULTS
Commerce Bank, NA, the investment sub-advisor for the Builder's Fixed Income
Fund is very pleased to report investment results for the period ending June 30,
1999. The return for the first half of 1999 was -1.26%. This compares favorably
to the Fund's mutual fund peer group return of -1.49% as measured by Lipper
Analytical services. For the past year the fund also posted a positive return
relative to its peer group of 1.66% vs. 1.50%. Since inception, the Fund has
generated an annualized return of 4.03%. This also compares favorably to the
annualized Lipper return of 3.55%.
6 months 1 year Since inception*
-------- ------ ----------------
Builders Fixed -1.26 1.66 4.03
Lipper Peer Group** -1.49 1.50 3.55
Relative Performance .23 .15 .48
- ----------
* Annualized returns since inception 10/31/97
** Custom Lipper Index consists of the Lipper U.S. Mortgage Fund Index from
inception through 1/31/99 and the Lipper Intermediate Investment Grade
Index from 2/1/99 forward.
FUND NAME CHANGE
On January 28, 1999, the Fund's name and investment restrictions were changed by
resolution of the Fund's Board of Directors. Specifically, the Fund's name was
changed from Builders ProLoan Fund, Inc. to the Builders Fixed Income Fund, Inc.
The name change allowed the Fund to reduce the mandated exposure in ProLoan
mortgages from a minimum of 65% of total assets to a minimum of 30% of net
assets. This change will allow the Fund to focus its investment characteristics
on a core investment strategy rather than the previously concentrated mortgage
backed strategy. Accordingly, we have also changed the Fund's peer group from
the Lipper US Mortgage Fund Index to the Lipper Intermediate Investment Grade
Index at the end of January 1999.
ANALYSIS OF INVESTMENT RESULT
While the Fund has consistently managed to beat its peer group, the nominal
results for the first half of the year were negative. Bond prices move inversely
with the direction of interest rates, and interest rates rose materially over
the first half of the year. While short term rates, as measured by the Federal
Funds rate, only rose 25 basis points when the Federal Reserve hiked rates at
the end of June, longer maturity bonds were dramatically impacted as they
<PAGE>
Commerce Bank
Builders Fixed Income Fund, Inc.
Page 2
discounted the potential for further Fed intervention. Five year Treasuries rose
110 basis points and ten year Treasuries rose slightly more to yield 5.78% at
mid year.
The Fund managed to outperform the peer group despite having a longer duration
than its peer group. This was largely accomplished by maintaining a net
overweight towards the mortgage sector through either actual holdings or
pipeline commitments. While the overall market, as measured by the Lehman
Aggregate Index returned -1.37%, the mortgage sector actually generated a small
positive return. We also managed to keep up with the market after fees while
generating in excess of $50 million worth of mortgage commitments to build 364
homes. This was quite an accomplishment given the costs involved with the
mortgage origination process.
Going forward we expect short-term interest rates to remain under pressure and
expect to see the Fed hike rates at least one more time prior to the end of the
year. Economic growth remains quite healthy, having grown at 3.9% for the first
half of the year. Fortunately, gains in productivity have more than offset wage
and cost pressures that have resulted in a remarkably benign inflation level.
The Fed's preemptive policies will still likely error on the conservative side,
figuring that modest interest rate hikes today will pay dividends later in the
form of stable prices. This means that bond investors should expect coupon like
returns for the second half of the year.
Scott M. Colbert, CFA
Director of Fixed Income
Commerce Bancshares, Inc.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
% of Market
Par Value Net Assets Value
- --------- ---------- ------
U.S. GOVERNMENT AGENCY 1.5%
Federal National Mortgage Association**
5.75% 4/15/2003
2,000,000 (Cost $2,016,875) $1,978,806
----------
U.S. GOVERNMENT AGENCY -
MORTGAGE BACKED SECURITIES 8.4%
GOVERNMENT NATIONAL MORTGAGE ASSOCATION II 0.3%
Pool 1470
34,862 9.00% 9/20/2020 36,795
Pool 1472
13,918 10.00% 9/20/2020 15,072
Pool 1507
19,609 9.50% 11/20/2020 20,971
Pool 1614
25,865 9.00% 5/20/2021 27,296
Pool 1615
24,922 9.50% 5/20/2021 26,650
Pool 1740
65,446 9.00% 12/20/2021 69,064
Pool 1920
208,942 7.50% 12/20/2024 210,630
----------
406,478
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCATION II 3.0%
VARIABLE RATE*
Pool 8373
190,030 6.88% 2/20/2024 193,173
Pool 8386
70,885 6.88% 3/20/2024 72,054
Pool 8387
33,486 6.88% 3/20/2024 34,036
Pool 8471
194,196 6.63% 8/20/2024 197,944
Pool 8494
169,568 6.63% 9/20/2024 172,833
Pool 8538
201,768 6.13% 11/20/2024 204,793
Pool 8575
121,807 6.88% 1/20/2025 123,754
Pool 8576
131,611 6.88% 1/20/2025 133,712
Pool 8578
168,248 6.88% 1/20/2025 170,934
Pool 8590
115,323 6.88% 2/20/2025 117,169
Pool 8607
189,272 6.88% 3/20/2025 192,275
Pool 8191
205,305 6.97% 5/20/2023 206,622
See Accompanying Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
% of Market
Par Value Net Assets Value
- --------- ---------- ------
GOVERNMENT NATIONAL MORTGAGE ASSOCATION II - CONTINUED
Pool 8302
185,844 6.21% 10/20/2023 $ 188,769
Pool 8315
33,830 6.21% 11/20/2023 34,360
Pool 8324
71,507 6.21% 11/20/2023 72,628
Pool 8340
65,496 6.21% 12/20/2023 66,519
Pool 8419
107,838 6.97% 5/20/2024 109,977
Pool 8420
318,088 6.97% 5/20/2024 324,365
Pool 8479
218,684 6.72% 8/20/2024 222,889
Pool 8482
30,857 6.72% 8/20/2024 31,446
Pool 8502
167,706 6.72% 9/20/2024 170,909
Pool 8503
101,508 6.72% 9/20/2024 103,435
Pool 8539
228,511 6.21% 11/20/2024 231,914
Pool 8540
181,421 6.21% 11/20/2024 184,123
Pool 8705
179,222 6.72% 9/20/2025 182,398
Pool 833684
230,753 6.21% 11/20/2023 234,252
----------
3,977,283
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCATION 0.7%
Pool 349645
427,853 7.00% 6/15/2023 424,535
Pool 349646
32,857 8.50% 9/15/2024 34,440
Pool 349647
43,865 7.50% 7/15/2023 44,398
Pool 367574
31,151 8.50% 6/15/2025 32,694
Pool 388962
68,990 7.50% 1/15/2026 69,945
Pool 102990
63,262 12.50% 12/15/2013 72,983
Pool 340649
210,977 7.50% 6/15/2023 214,048
----------
893,043
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION 0.1%
Series 1403 Class J
61,000 6.50% 7/15/2019 61,175
----------
See Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
% of Market
Par Value Net Assets Value
- --------- ---------- ------
<S> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION 0.1%
VARIABLE RATE*
Pool 635235
156,963 6.84% 6/1/2025 $ 160,231
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 3.3%
Series 1992-25 Class J
60,000 7.50% 12/25/2006 61,010
Series 1992-181 Class PH
61,000 6.50% 9/25/2019 60,919
Series 1993-30 Class PG
12,798 6.65% 9/25/2017 12,853
Pool 50698
4,838 7.50% 3/1/2023 4,908
Pool 185857
62,509 8.00% 11/1/2002 63,995
Pool 185861
24,247 9.00% 2/1/2006 25,310
Pool 185862
28,044 9.00% 10/1/2005 29,274
Pool 185863
47,990 9.50% 8/1/2004 49,883
Pool 337670
292,257 8.00% 11/1/2026 300,480
Pool 363714
453,888 8.00% 11/1/2026 466,657
Pool 392423
441,383 7.50% 6/1/2027 447,311
Pool 395131
276,493 7.50% 8/1/2027 280,207
Pool 397941
572,460 7.50% 8/1/2027 580,149
Pool 400581
658,838 7.50% 9/1/2027 667,686
Pool 403662
222,456 7.50% 10/1/2027 225,445
Pool 496714
1,099,327 6.50% 5/1/2029 1,064,679
------------
4,340,766
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.9%
VARIABLE RATE*
Pool 295899
164,692 7.60% 7/1/2025 168,928
Pool 305512
115,067 7.65% 5/1/2025 117,796
Pool 308627
124,732 6.38% 3/1/2025 128,323
Pool 308634
113,019 7.52% 6/1/2025 115,674
Pool 321228
285,343 7.86% 8/1/2025 292,277
</TABLE>
See Accompanying Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
% of Market
Par Value Net Assets Value
- --------- ---------- ------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - CONTINUED
VARIABLE RATE*
Pool 321229
190,574 7.86% 8/1/2025 $ 195,071
Pool 322170
7,641 7.65% 8/1/2025 7,805
Pool 365957
134,716 7.66% 6/1/2025 137,291
-----------
1,163,165
-----------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE BACKED SECURITIES
(COST $11,125,023) 11,002,141
-----------
ASSET BACKED SECURITIES 16.5%
Advanta Mortgage Loan Trust
1,459,880 8.92% 1/25/2026 1,509,800
Armesco Residential Securities Mortgage Loan
3,000,000 7.27% 2/25/2025 3,024,375
Asset Securitization Corporation
500,000 7.75% 1/13/2030 519,233
CMC Securities Corporation III
549,093 6.00% 2/25/2009 543,864
Countrywide Funding Corporation
50,000 6.50% 5/25/2024 48,623
Green Tree Financial Corporation
3,000,000 9.00% 6/15/2025 2,970,930
Green Tree Financial Corporation
1,450,000 7.30% 9/15/2026 1,439,625
Green Tree Financial Corporation
2,500,000 7.30% 12/15/2026 2,385,150
Green Tree Financial Corporation
4,000,000 7.75% 7/15/2027 4,144,918
Green Tree Financial Corporation
2,500,000 7.53% 7/15/2028 2,542,563
First Union - Lehman Brothers - Bank of America**
1,000,000 6.64% 3/18/2011 953,465
Metris Master Trust
1,500,000 6.87% 10/20/2005 1,525,972
-----------
TOTAL ASSET BACKED SECURITIES
(COST $22,198,632) 21,608,518
-----------
CORPORATE BONDS 28.8%
BANK 3.1%
Citicorp
1,000,000 6.38% 11/15/2008 951,590
Swiss Bank Corporation**
1,500,000 7.38% 6/15/2017 1,482,880
Swiss Bank Corporation**
1,700,000 7.50% 7/15/2025 1,678,429
-----------
4,112,899
-----------
See Accompanying Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
% of Market
Par Value Net Assets Value
- --------- ---------- ------
FINANCE 12.4%
Donaldson, Lufkin & Jenrette**
2,000,000 6.11% 5/15/2001 $ 1,990,540
Equitable Life Assurance**
2,750,000 7.70% 12/1/2015 2,849,910
Ford Motor Credit**
1,000,000 6.63% 6/30/2003 1,002,575
General Motors Acceptance Corp.
3,000,000 6.15% 4/5/2007 2,875,065
General Motors Acceptance Corporation**
1,000,000 7.50% 5/10/2004 1,063,438
Goldman Sachs Group LP - Rule 144A**
1,500,000 6.63% 12/1/2004 1,487,016
Lehman Brothers**
3,000,000 6.63% 4/1/2004 2,930,046
Metropolitan Life Insurance Company**
2,000,000 7.70% 11/1/2015 2,062,714
-----------
16,261,304
-----------
INDUSTRIAL 9.2%
Cargill Inc.
2,000,000 6.30% 4/15/2009 1,886,526
Conoco**
1,000,000 6.35% 4/15/2009 959,735
Lafarge Corp.
1,600,000 6.38% 7/15/2005 1,560,670
Lubrizol Corporation**
2,000,000 5.88% 12/1/2008 1,882,694
Ryder System, Inc.
1,500,000 6.60% 11/15/2005 1,451,895
ServiceMaster
2,500,000 7.10% 3/1/2018 2,240,383
WMX Technologies
2,000,000 6.70% 5/1/2001 2,008,764
-----------
11,990,667
-----------
TRANSPORTATION 1.7%
Ford Motor Company**
2,350,000 6.50% 8/1/2018 2,156,611
-----------
UTILITIES 2.4%
AT&T Corp.
1,000,000 6.50% 3/15/2029 902,500
GTE Corp.
2,400,000 6.84% 4/15/2018 2,295,811
-----------
3,198,311
-----------
TOTAL CORPORATE BONDS
(COST $39,524,339) 37,719,792
-----------
See Accompanying Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
% of Market
Par Value Net Assets Value
- --------- ---------- ------
PROLOAN PIPELINE 40.7%
56,105,120 When-Issued Commitments $ 53,273,040
------------
(Cost $56,105,120)
SHORT TERM INVESTMENTS 46.8%
COMMERCIAL PAPER 44.5%
AT&T Corp.**
3,000,000 4.82% 8/4/1999 2,985,942
Bell South Telecommunications**
5,000,000 4.96% 8/9/1999 4,972,444
Coca Cola Co.**
4,000,000 4.88% 8/13/1999 3,976,142
Ford Motor Credit Co.**
6,000,000 5.11% 9/7/1999 5,941,235
Genenral Electric Capital Corp.
5,000,000 4.85% 7/29/1999 4,980,465
Household Finance Corp.
5,000,000 4.92% 7/19/1999 4,987,201
Merrill Lynch**
5,000,000 4.80% 7/6/1999 4,996,000
National Rural Utilities
5,000,000 4.83% 7/22/1999 4,985,242
Procter & Gamble Corp.
5,000,000 4.78% 7/13/1999 4,991,370
Schering Plough**
10,000,000 5.18% 10/5/1999 9,860,428
Trans America Financial Corp.**
5,750,000 5.08% 9/21/1999 5,682,655
------------
58,359,124
------------
REPURCHASE AGREEMENT 2.3%
Northern Trust Repurchase Agreement
4.29% 7/1/99 (Collateralized by $3,136,000
3,066,000 FNMA Discount Notes 0%, due July 19, 1999) $ 3,066,000
------------
TOTAL SHORT TERM INVESTMENTS
(COST $61,425,124) 61,425,124
------------
TOTAL INVESTMENTS IN SECURITIES 142.7%
(COST $ 192,395,113) $187,007,421
------------
Liabilities in Excess of
Other Assets (42.7%) (55,989,496)
------------
NET ASSETS 100.0% $131,017,925
============
* The rate shown on variable rate securities represents the rate at June 30,
1999.
** Security segregated at custodian for "when-issued" commitments.
See Accompanying Notes to Financial Statements.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments in securities at market value
(cost $192,395,113) $ 187,007,421
Cash (888)
Receivables:
Interest 680,415
Securities sold 635
Deferred organization costs, net 72,751
Other assets 35,129
-------------
Total assets 187,795,463
-------------
LIABILITIES
Payables:
Investment securities purchased - when-issued 56,105,120
For distributions to shareholders 600,252
Due to advisor (Note 3) 16,124
Due to distributor (Note 3) 6,603
Other accrued expenses 49,439
-------------
Total liabilities 56,777,538
-------------
NET ASSETS $ 131,017,925
=============
COMPOSITION OF NET ASSETS
Paid-in capital $ 135,485,626
Undistributed net investment income 1,827
Undistributed net realized gain
on investments 918,164
Net unrealized depreciation on investments (5,387,692)
-------------
Net assets $ 131,017,925
=============
Number of shares issued and outstanding
(unlimited shares authorized no par value) 9,006,219
=============
Net asset value per share $ 14.55
=============
See Accompanying Notes to Financial Statements.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income $ 3,972,255
-----------
EXPENSES:
Subadviser fees (Note 3) 138,064
Management fees (Note 3) 98,464
Distribution fees (Note 3) 65,643
Fund accounting fees 31,822
Administration fees (Note 3) 24,795
Professional fees 20,439
Custodian fees 12,679
Amortization of deferred organization costs 10,715
Miscellaneous expenses 8,231
Insurance 8,134
Directors fees (Note 3) 6,943
Transfer agent fees 6,788
Registration fees 1,379
-----------
Total expenses 434,096
Subadviser fees waived (Note 3) (29,753)
Distribution fees waived (Note 3) (13,777)
-----------
Net expenses 390,566
-----------
NET INVESTMENT INCOME 3,581,689
-----------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments 14
Net change in unrealized depreciation on investments (5,316,073)
-----------
Net loss on investments (5,316,059)
-----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ($1,734,370)
===========
See Accompanying Notes to Financial Statements.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
- --------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
---------------- -----------------
INCREASE IN NET ASSETS
Operations:
Net investment income $ 3,581,689 $ 6,717,468
Net realized gain on investments 14 1,729,573
Net change in unrealized depreciation
on investments (5,316,073) (522,996)
------------ ------------
Net increase/(decrease) in net assets
resulting from operations (1,734,370) 7,924,045
------------ ------------
Distributions to shareholders:
From net investment income (3,581,689) (6,717,468)
From capital gains -- (896,900)
------------ ------------
Total distributions (3,581,689) (7,614,368)
------------ ------------
Capital share transactions:
Proceeds from shares sold 505,000 8,600,000
Net asset value of shares issued on
reinvestment of distributions 2,981,437 3,289,154
------------ ------------
Net increase from capital share
transactions 3,486,437 11,889,154
------------ ------------
NET DECREASE IN NET ASSETS (1,829,622) 12,198,831
NET ASSETS
Beginning of period 132,847,547 120,648,716
------------ ------------
End of period (including undistributed net
investment income of $1,827 and $1,827,
respectively) $131,017,925 $132,847,547
============ ============
CHANGE IN SHARES
Shares sold 34,150 565,141
Shares issued on reinvestment of distributions 199,620 215,905
Shares redeemed -- --
------------ ------------
Net increase 233,770 781,046
============ ============
See Accompanying Notes to Financial Statements.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
- --------------------------------------------------------------------------------
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS SEMI-ANNUAL REPORT. THE
CALCULATIONS ARE BASED ON AVERAGE NUMBER OF SHARES OUTSTANDING FOR THE PERIOD.
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
October 31, 1997*
Six Months Ended Year Ended through
June 30, 1999 December 31, 1998 December 31, 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $15.14 $15.10 $15.00
------ ------ ------
Income from investment operations
Net investment income 0.40 0.80 0.14
Net realized and unrealized gains/(loss)
on investments (0.59) 0.15 0.10
------ ------ ------
Total from investment operations (0.19) 0.95 0.24
------ ------ ------
Distributions
Net investment income (0.40) (0.80) (0.14)
Capital gains - (0.11) -
------ ------ ------
(0.40) (0.91) (0.14)
------ ------ ------
Net asset value, end of period $14.55 $15.14 $15.10
====== ====== ======
Total return -1.26%+ 6.48% 1.58%+
Net assets at end of period (in 000's) $131,018 $132,848 $120,649
Ratio of expenses to average net assets:
Before expenses waived 0.66%# 0.71% 0.63%#
After expenses waived 0.60%# 0.60% 0.58%#
Ratio of net investment income to average
net assets (net of expenses waived) 5.46%# 5.36% 5.41%#
Portfolio turnover rate 44.34%+ 39.39% 1.29%+
</TABLE>
- ----------
* Commencement of Operation.
+ Not Annualized.
# Annualized.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
The Builders ProLoan Fund (the "Fund"), constituting the initial series of
The Builders ProLoan Fund, Inc. (the "Corporation"), was organized as a
Maryland corporation on June 13, 1997 and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified, no-load, open-end management investment company issuing
its shares in series, each series representing a distinct portfolio with
its own investment objectives and policies. The only series presently
authorized is the Builders Fixed Income Fund, prior to January 29, 1999,
known as the Builders ProLoan Fund. Investment operations of the Fund began
on October 31, 1997. The investment objective of the Fund is current
income.
The Fund typically invests in mortgage-backed securities which represent
interests in single- or multi-family home mortgages originated through the
ProLoan program. The ProLoan program is a coordinated effort involving real
estate professionals, home builders, mortgage originators and organized
building trade unions. To qualify for a ProLoan home mortgage loan, a
borrower's single- or multi-family home must be: (1) substantially
union-built, as determined by the Manager, and (2) newly constructed or
substantially renovated. In addition, the borrower's mortgage loan must be
eligible to be secured by a Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") or Federal Home
Loan Mortgage Corporation ("FHLMC") guarantee. Each mortgage loan meeting
the above qualifications, as established by the Manager, is referred to
hereinafter as a "ProLoan." The Fund also may purchase whole loan mortgages
originated through the ProLoan program and not eligible to be secured by a
GNMA, FNMA or FHLMC guarantee.
The ProLoan interest rate and points generally are established by the
Subadviser each week, based on its survey of local markets and the ability
of the Fund to invest in additional mortgage-backed securities. The Fund
has entered into agreements with selected banks, mortgage lenders and other
financial institutions (collectively, the "Lenders"), pursuant to which the
Lenders agree to originate ProLoans at the established interest rate and
points. The ProLoan program allows a borrower to reduce interest rate
exposure by locking in the interest rate on a ProLoan, typically for 180
days prior to the closing of the ProLoan, to allow time for construction or
renovation of the borrower's home. This interest rate protection is offered
in exchange for a commitment fee from the borrower, which is refundable to
the borrower at closing. These commitment fees may not fully compensate the
Fund for the additional interest rate risk it will bear during the 180-day
interest rate lock-in period and thus, the Fund may incur a loss. In the
event that the borrower does not close a ProLoan, the unrefunded commitment
fees are allocated between the Fund and the Lender in amounts agreed to by
the Fund and the Lender. A borrower may be offered the opportunity to
reduce the interest rate on a ProLoan prior to closing if market interest
rates have declined from the interest rate set on the commitment date in
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
exchange for a stated fee, which typically is one-half of one percent of
the borrower's principal loan amount. This "float-down" fee is retained by
the Fund. A borrower also may be offered the opportunity to purchase
additional 30-day extensions of interest rate protection, at the discretion
of the Subadviser, if the borrower's home or renovations are not completed
by the date initially set for closing. This extended interest rate
protection is longer than the 45- to 60-day standard interest rate
protection offered with respect to most ordinary mortgages. The advantage
to the borrower is that interest rate risk is reduced for an effective
period of time during the construction or renovation of the borrower's
home. The advantage to home builders and real estate agents is that the
ProLoan program may attract potential home buyers. The ProLoan program is
designed to encourage the use of union craftsmen and promote employment in
the home building trade and related industries. There is no assurance that
the ProLoan program will achieve these objectives.
To create mortgage-backed securities from the underlying ProLoans, each
Lender pools its ProLoans and submits these pools to GNMA, FNMA or FHLMC
for securitization and the appropriate agency's guarantee. Or, at the
Subadvisers discretion, a closed ProLoan may be sold instead of being
included in a pool by a Lender, The Fund purchases the ProLoan
mortgage-backed securities guarantees by GNMA, FNMA, or FHLMC from the
Lenders at established prices based on the face value of such ProLoans, as
determined pursuant to an agreement between the Fund and the Lenders. The
mortgage-backed securities typically are delivered to the Fund after the
interest rate security period and after the underlying ProLoans have
closed, usually within 60 days after closing. The ProLoan program is
currently operating in the Missouri, Illinois, Ohio, and Michigan
metropolitan area. The Fund's principal investor is the Carpenters'
District Council of Greater St. Louis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles
("GAAP"). The presentation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(a) Investment Valuation
Securities are valued at market value based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Securities
(including restricted securities) for which market quotations are not
readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general
supervision of the Board of Directors. Short-term securities with
remaining maturities of sixty days or less for which quotation are not
readily available are valued at amortized costs or original cost plus
accrued income, both of which approximate current value.
QUALIFIED MORTGAGE LOAN COMMITMENTS are valued at an amount equal to
the principal amount of the underlying mortgage commitments multiplied
by any positive difference between par and the six-month forward
to-be-announced ("TBA") price of Federal National Mortgage Association
("FNMA") mortgage-backed securities with a coupon nearest to, but not
greater than, the rate for such securities that have a coupon equal to
the weighted average yield for all such loans, minus 0.625% (the
approximate amount that would be spent by the Fund for servicing,
guarantee fees and securitization costs had such loans been
securitized).
WHEN-ISSUED AND FORWARD COMMITMENTS. The Fund's commitment to acquire
mortgage-backed securities originated through the ProLoan program
constitute "when-issued" commitments. When the Fund agrees to acquire
securities on a when-issued basis, its Custodian will segregate cash
or other liquid assets equal to the amount of the commitment. The
value of the securities underlying the when-issued commitment, and any
subsequent fluctuations in their value, will be taken into account
when determining the Fund's net asset value starting on the day that
the Fund agrees to purchase the securities. The Fund does not earn
interest on the securities it has committed to acquire until they are
paid for and delivered on the settlement date. When the Fund engages
in when-issued transactions, it relies on the other party to
consummate the trade. Failure of that party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous. The Fund will make commitments to
acquire securities on a when-issued basis only with the intention of
completing the transaction and actually purchasing the securities. If
deemed advisable as a matter of investment strategy, however, the Fund
may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. In those
cases, the Fund may realize a capital gain or loss. Under normal
circumstances, the Fund does not intend to commit more than 33 1/3% of
its total assets to these commitments.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(b) Organization Costs
Costs incurred by the Fund in connection with its organization,
registration and the initial public offering of shares have been
deferred and will be amortized over 5 years. If any of the original
shares of the Fund are redeemed by any holder thereof prior to the end
of the amortization period, the redemption proceeds will be reduced by
the pro rata share of the unamortized expenses as of the date of
redemption. The pro rata share by which the proceeds are reduced will
be derived by dividing the number of original shares outstanding at
the time of redemption.
(c) Federal Income and Excise Taxes
The Fund intends to continue to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute substantially all investment company net taxable income and
net realized capital gains to shareholders in a manner which results
in no tax cost to the Fund. Therefore, no federal income or excise tax
provision is required.
(d) Distribution to Shareholders
Dividends from net investment income are declared daily and paid
monthly. Distributions of net realized gains, if any, will be declared
at least annually. Distributions to shareholders are recorded on the
ex-dividend date. The Fund periodically makes reclassifications among
certain of its capital accounts as a result of the recognition and
characterization of certain income and capital gain distributions
determined annually in accordance with federal tax regulations which
may differ from generally accepted accounting principles.
(e) Other
Investment transactions are accounted for on the trade date. The Fund
uses the identified cost method for determining realized gain or loss
on investments. Interest income is recognized on an accrual basis.
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(3) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
(a) Management Fee
The Fund has an Investment Management Agreement with Capital Mortgage
Management, Inc. (the "Manager"), to provide or oversee all
administrative, investment advisory and portfolio management services
to the Fund. Under the terms of this agreement, the Fund will pay the
Manager an annual fee as follows: 0.15% of the first $300 million of
the Fund's average daily net assets; and 0.13% of average daily net
assets in excess of $300 million. The fee will be accrued daily and
payable monthly.
(b) Subadvisor Fee
The Advisor has entered into an Investment Subadvisory Agreement with
Commerce Bank, N.A. (the "Subadvisor"). Under the terms of this
agreement, the Manager will pay the Sub-advisor an annual fee as
follows: .25% of the first $50 million of the Fund's average daily net
assets; .20% of the next $50 million of average daily net assets; and
.165% of average daily net assets in excess of $100 million. The fee
will be accrued daily and payable monthly. The Subadvisor has agreed
to waive its subadvisory fees such that the fees do not exceed .165%
of the Fund's average daily net assets until December 31, 1999. For
the six months ended June 30, 1999, the Subadvisor waived $29,753 of
its fees.
(c) Administration Fee
The Corporation has entered into an Administration Agreement with
Investment Company Administration, L.L.C. (the "Administrator") to
supervise the overall administration of the Fund including, among
other responsibilities, the preparation and filing of all documents
required for compliance by the Fund with applicable laws and
regulations, arranging for the maintenance of books and record of the
Fund, and supervise other organizations that provide services to the
Fund. The Fund will pay the Administrator an annual fee of $50,000 for
average daily net assets up to $150 million and 0.05% for average
daily net assets greater than $150 million, payable monthly.
(d) Distributor and Distribution Plan
Pursuant to Rule 12b-1 under the 1940 Act, the Corporation has adopted
a Distribution Plan (the "Plan"). Under the Plan, the Fund is
authorized to pay Huntleigh Fund Distributors, Inc. (the
"Distributor") at an annual rate of 0.10% of the Fund's average daily
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
net assets, payable monthly to compensate the Distributor for
distribution and shareholder service activities. The Distributor has
agreed to limit the Fund's operating expenses (excluding advisory,
sub-advisory and distribution fees) to .18% per annum of the Fund's
average daily net assets during a period which will end on December
31, 2002. The Fund will reimburse the distributor for such expenses
incurred in the previous three year period to the extent that the
reimbursement does not cause the Fund's operating expenses to exceed
the .18% expense limitation. For the six months ended June 30, 1999,
the Distributor waived $13,777 of its fees.
Certain officers and directors of the Corporation are also officers
and directors of the Manager, Distributor and Administrator. Certain
"independent directors", as defined by the Investment Company 1940
Act, are compensated by the Fund an annual fee of $2,000 and is
reimbursed for any expenses incurred in attending meetings.
(4) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the six months ended June 30, 1999, is
summarized below:
Purchases $42,827,175
Sales $80,304,939
At June 30, 1999 gross unrealized appreciation and depreciation of
investments, based on cost for the federal income tax purposes of
$192,395,113 were as follows:
Gross unrealized appreciation $ 53,284,806
Gross unrealized depreciation (58,672,498)
Net unrealized depreciation on investments $ (5,387,692)
(5) IN-KIND CONTRIBUTION TRANSACTIONS
At the Fund's inception on October 31, 1997, the Carpenters' District
Council of Greater St. Louis purchased 7,951,789 Fund shares through
nontaxable in-kind contributions of securities with a market value totaling
$119,516,324. These securities were deemed to be in accordance with the
investment objective of the Fund.
