STATEMENT OF ADDITIONAL INFORMATION January 31, 1997
CONCORDE FUNDS, INC.
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the prospectus of Concorde Funds, Inc.
dated January 31, 1997. Requests for copies of the prospectus should be
made in writing to Concorde Funds, Inc., 1500 Three Lincoln Centre, 5430
LBJ Freeway, Dallas, Texas 75240, Attention: Corporate Secretary or by
calling (972) 387-8258.
CONCORDE FUNDS, INC.
Table of Contents
Page No.
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . B-1
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . B-1
INVESTMENT POLICIES AND PRACTICES . . . . . . . . . . . . . . . . . . B-4
DIRECTORS AND OFFICERS OF THE CORPORATION . . . . . . . . . . . . . . B-16
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . B-18
INVESTMENT ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . B-19
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE . . . . . . . . . . B-21
REDEMPTION OF FUND SHARES . . . . . . . . . . . . . . . . . . . B-23
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . B-23
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . B-26
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . B-26
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . B-27
DESCRIPTION OF BOND RATINGS . . . . . . . . . . . . . . . . . . . . . B-28
No person has been authorized to give any information or to make
any representations other than those contained in this Statement of
Additional Information and the Prospectus dated January 31, 1997 and, if
given or made, such information or representations may not be relied upon
as having been authorized by Concorde Funds, Inc.
This Statement of Additional Information does not constitute an
offer to sell securities.
GENERAL INFORMATION
Concorde Funds, Inc. (the "Corporation") was incorporated under
the laws of Texas on September 21, 1987. The Corporation was called
"Concorde Value Fund, Inc." from September 21, 1987 until November 21,
1995. The Corporation is authorized to establish and operate one or more
separate series of mutual funds. The Corporation currently consists of
two separate funds namely "Concorde Value Fund" (the "VALUE FUND") and
"Concord Income Fund" (the "INCOME FUND") (collectively, the "FUNDS" or
individually, "FUND"). The VALUE FUND is the continuation of the original
Concorde Value Fund, Inc.
INVESTMENT RESTRICTIONS
As set forth in the prospectus dated January 31, 1997 of the
FUNDS under the caption "WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES AND
POLICIES?", the investment objective of the VALUE FUND is to produce long-
term growth of capital, without exposing capital to undue risk. The VALUE
FUND invests principally in undervalued common stocks. The investment
objective of the INCOME FUND is to produce current income, primarily
through investing in a diversified portfolio of income providing
securities. Growth of capital is a secondary objective of the INCOME
FUND. Consistent with these investment objectives, each of the FUNDS has
adopted certain investment restrictions which are matters of fundamental
policy and cannot be changed without approval of the holders of the lesser
of: (i) 67% of the FUND's shares present or represented at a shareholders
meeting at which the holders of more than 50% of such shares are present
or represented; or (ii) more than 50% of the outstanding shares of the
FUND as follows:
1. The FUNDS will not sell securities short, buy securities on
margin, purchase warrants, participate in a joint-trading account or deal
in options; provided, however, that the FUNDS may invest in and commit
their assets to writing and purchasing put and call options on securities
and stock indexes to the extent permitted by the Investment Company Act of
1940, as amended.
2. The VALUE FUND's investments in warrants, valued at the
lower of cost or market, will not exceed 5% of the value of the VALUE
FUND's net assets and of such 5% not more than 2% of the Value Fund's net
assets at the time of purchase may be invested in warrants that are not
listed on the New York or American Stock Exchanges. Warrants are options
to purchase securities at a specified price, valid for a specified period
of time. Warrants are pure speculation in that they have no voting
rights, pay no dividends and have no rights with respect to the assets of
the corporation issuing them. If the VALUE FUND does not exercise a
warrant, its loss will be the purchase price of the warrant.
3. Neither FUND will borrow money or issue senior securities,
except for temporary bank borrowings or for emergency or extraordinary
purposes (but not for the purpose of purchase of investments) and then
only in an amount not in excess of 5% of the value of its total assets,
and will not pledge any of its assets except to secure borrowings and then
only to an extent not greater than 10% of the value of the FUND's net
assets. Neither FUND will purchase securities while it has any
outstanding borrowings.
4. The VALUE FUND will not lend money (except by purchasing
publicly distributed debt securities) and will not lend its portfolio
securities. The INCOME FUND will not make loans, except it may acquire
debt securities from the issuer or others which are publicly distributed
or are of a type normally acquired by institutional investors and except
that it may make loans of portfolio securities if any such loans are
secured continuously by collateral at least equal to the market value of
the securities loaned in the form of cash and/or securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
provided that no such loan will be made if upon the making of that loan
more than 10% of the value of the INCOME FUND'S total assets would be the
subject of such loans.
5. Neither FUND will make investments for the purpose of
exercising control or management of any company.
6. Each FUND will limit its purchases of securities of any
issuer (other than the United States or an instrumentality of the United
States) in such a manner that it will satisfy at all times the
requirements of Sections 5(b)(1) of the Investment Company Act of 1940
(i.e., that at least 75% of the value of its total assets is represented
by cash and cash items (including receivables), U.S. Government
Securities, securities of other investment companies and other securities
for the purpose of the foregoing limited in respect to any one issuer to
an amount not greater than 5% of the value of the total assets of the FUND
and not more than 10% of the outstanding voting securities of such
issuer.)
7. Neither FUND will concentrate 25% or more of the value of
its assets, determined at the time an investment is made, exclusive of
U.S. government securities, in securities issued by companies engaged in
the same industry.
8. Neither FUND will purchase from or sell to any of its
officers or directors or firms for which any of them is an officer or
director any securities except shares of the FUNDS.
9. Neither FUND will acquire or retain any security issued by
a company if any of the directors or officers of the Corporation, or
directors, officers or other affiliated persons of its investment advisor,
beneficially own more than 1/2% of such company's securities and all of
the above persons owning more than 1/2% own together more than 5% of its
securities.
10. Neither FUND will act as an underwriter or distributor of
securities other than shares of the FUNDS and the VALUE FUND will not
purchase any securities which are restricted from sale to the public
without registration under the Securities Act of 1933, as amended. The
INCOME FUND may invest in restricted securities subject to the limitations
set forth in investment restriction 14.
11. Neither FUND will purchase or sell real estate or real
estate mortgage loans; provided, however, that the INCOME FUND may invest
in mortgage-backed securities.
12. Neither FUND will purchase or sell commodities or
commodities contracts.
13. The VALUE FUND will not invest more than 5% of its total
assets in securities of issuers which have a record of less than three
years of continuous operation, including the operation of any predecessor
business of a company which came into existence as a result of any merger,
consolidation, reorganization or purchase of substantially all of the
assets of such predecessor business.
14. The VALUE FUND's investments in illiquid and/or not readily
marketable securities (including repurchase agreements maturing in more
than seven days) will not exceed 10% of its total assets and the INCOME
FUND'S investments in such illiquid securities will not exceed 15% of its
total assets.
15. Neither FUND will invest in oil, gas and other mineral
leases, or enter into arbitrage transactions.
The FUNDS have adopted certain other investment restrictions
which are not fundamental policies and which may be changed by the
Corporation's Board of Directors without shareholder approval. These
additional restrictions are as follows:
1. The INCOME FUND'S investments in warrants will be limited
to 5% of the INCOME FUND'S net assets. Included within that amount, but
not to exceed 2% of the total value of the INCOME FUND'S net assets, may
be warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange.
2. The INCOME FUND will not invest more than 5% of its total
assets in securities of any issuer which has 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.
3. Neither FUND will purchase securities of other investment
companies except (a) as part of a plan of merger, consolidation or
reorganization approved by the shareholders of the FUND or (b) securities
of registered closed-end investment companies on the open market where no
commission or profit results, other than the usual and customary broker's
commission and where as a result of such purchase the FUND would hold less
than 3% of any class of securities, including voting securities, of any
registered closed-end investment company and less than 10% of the FUND's
net assets, taken at current value, would be invested in securities of
registered closed-end investment companies. The Advisor will not waive
its investment advisory fee with respect to those FUND assets, if any,
invested in registered closed-end investment companies.
If a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a
change in values of a FUND's assets will not constitute a violation of
that restriction.
INVESTMENT POLICIES AND PRACTICES
Lending Portfolio Securities
The INCOME FUND may lend a portion of its portfolio securities
although the INCOME FUND will not engage in any such transaction if it
would cause more than 10% of its net assets to be subject to such loans.
Income may be earned on collateral received to secure the loans. Cash
collateral would be invested in money market instruments. U.S. Government
securities collateral would yield interest or earn discount. Part of this
income might be shared with the borrower. Alternatively, the INCOME FUND
could allow the borrower to receive the income from the collateral and
charge the borrower a fee. In either event, the INCOME FUND would receive
the amount of dividends or interest paid on the loaned securities.
Usually these loans would be made to brokers, dealers or
financial institutions. Loans would be fully secured by collateral
deposited with the INCOME FUND's custodian in the form of cash and/or
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. This collateral must be increased within one business
day in the event that its value shall become less than the market value of
the loaned securities. While there may be delays in recovery or even loss
of rights in the collateral should the borrower fail financially, the
loans will be made only to firms deemed by Concorde Financial Corporation,
the FUNDS' investment advisor (the "Advisor") to be of good standing.
Loans will not be made unless, in the judgment of the Advisor, the
consideration which can be earned from such loans justifies the risk.
The borrower, upon notice, must redeliver the loaned securities
within three business days. In the event that voting rights with respect
to the loaned securities pass to the borrower and a material proposal
affecting the securities arises, the loan may be called or the INCOME FUND
will otherwise secure or be granted a valid proxy in time for it to vote
on the proposal.
In making such loans, the INCOME FUND may utilize the services
of a loan broker and pay a fee therefor. The INCOME FUND may incur
additional custodian fees for services in connection with the lending of
securities.
Mortgage-Backed Securities
The INCOME FUND may invest in Mortgage-Backed Securities, which
are securities that directly or indirectly represent a participation in,
or are secured by and payable from, mortgage loans secured by real
property. Mortgage-Backed Securities include: (i) Guaranteed Government
Agency Mortgage-Backed Securities; (ii) Privately-Issued Mortgage-Backed
Securities; and (iii) collateralized mortgage obligations and multiclass
pass-through securities. These securities are described below.
Guaranteed Government Agency Mortgage-Backed Securities.
Mortgage-Backed Securities include Guaranteed Government Mortgage-Backed
Securities, which represent participation interests in pools of
residential mortgage loans originated by United States governmental or
private lenders and guaranteed, to the extent provided in such securities,
by the United States government or one of its agencies or
instrumentalities. Such securities, with the exception of collateralized
mortgage obligations, are ownership interests in the underlying mortgage
loans and provide for monthly payments that are a "pass-through" of the
monthly interest and principal payments (including any prepayments) made
by the individual borrowers on the pooled mortgage loans, net of any fees
paid to the guarantor of such securities and the servicer of the
underlying mortgage loans.
The Guaranteed Government Agency Mortgage-Backed Securities in
which the INCOME FUND may invest will include those issued or guaranteed
by the Government National Mortgage Association ("Ginnie Mae"), the
Federal National Mortgage Association ("Fannie Mae") and the Federal Home
Loan Mortgage Corporation ("Freddie Mac"). As more fully described below,
these securities may include collateralized mortgage obligations,
multiclass pass-through securities and stripped mortgage-backed
securities.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the
"Housing Act"), authorizes Ginnie Mae to guarantee the timely payment of
the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration
Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by
the Veterans' Administration under the Servicemen's Readjustment Act of
1944, as amended ("VA Loans"), or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit of the
United States government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. To meet its obligations under
such guarantee, Ginnie Mae is authorized to borrow from the United States
Treasury with no limitations as to amount.
Fannie Mae Certificates. Fannie Mae is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder owned and privately managed corporation by legislation enacted
in 1968. Fannie Mae provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby replenishing
their funds for additional lending. Fannie Mae acquires funds to purchase
home mortgage loans from many capital market investors that originally may
not invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each Fannie Mae Certificate will entitle the registered holder
thereof to receive amounts representing such holder's pro rata interest in
scheduled principal payments and interest payments (at such Fannie Mae
Certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), and any principal
prepayments, on the mortgage loans in the pool represented by such Fannie
Mae Certificate and such holder's proportionate interest in the full
principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest
on each Fannie Mae Certificate will be guaranteed by Fannie Mae, which
guarantee is not backed by the full faith and credit of the United States
government.
Freddie Mac Certificates. Freddie Mac is a corporate
instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970, as amended (the "FHLMC Act"). Freddie Mac was
established primarily for the purpose of increasing the availability of
mortgage credit for the financing of needed housing. The principal
activity of Freddie Mac currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in
the form of mortgage securities, primarily Freddie Mac Certificates.
Freddie Mac guarantees to each registered holder of a Freddie
Mac Certificate the timely payment of interest at the rate provided for by
such Freddie Mac Certificate, whether or not received. Freddie Mac also
guarantees to each registered holder of a Freddie Mac Certificate ultimate
collection of all principal of the related mortgage loans, without any
offset or deduction, but, generally, does not guarantee the timely payment
of scheduled principal. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on
an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of claim by any mortgage insurer, or (iii)
the expiration of any right of redemption, whichever occurs later, but in
any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. The obligations of
Freddie Mac under its guarantee are obligations solely of Freddie Mac and
are not backed by the full faith and credit of the United States
government.
Privately-Issued Mortgage-Backed Securities. Mortgage-Backed
Securities include Privately-Issued Mortgage-Backed Securities, which are
issued by private issuers and represent an interest in or are
collateralized by (i) Mortgage-Backed Securities issued or guaranteed by
the U.S. Government or one of its agencies or instrumentalities
("Privately-Issued Agency Mortgage-Backed Securities"), or (ii) whole
mortgage loans or non-Agency collateralized Mortgage-Backed Securities
("Privately-Issued Non-Agency Mortgage-Backed Securities"). These
securities are structured similarly to the Ginnie Mae, Fannie Mae and
Freddie Mac mortgage pass-through securities described above and are
issued by originators of the investors in mortgage loans, including
savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
Privately-Issued Agency Mortgage-Backed Securities usually are backed by a
pool of Ginnie Mae, Fannie Mae and Freddie Mac Certificates. Privately-
Issued Non-Agency Mortgage-Backed Securities usually are backed by a pool
of conventional fixed rate or adjustable rate mortgage loans that are not
guaranteed by an entity having the credit status of Ginnie Mae, Fannie Mae
or Freddie Mac, and generally are structured with one or more types of
credit enhancement. As more fully described below, these securities may
include collateralized mortgage obligations, multiclass pass-through
securities and stripped mortgage-backed securities.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. Mortgage-Backed Securities include collateralized mortgage
obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but
also may be collateralized by other Mortgage-Backed Securities or whole
loans (such collateral collectively hereinafter referred to as "Mortgage
Assets"). CMOs include multiclass pass-through securities, which can be
equity interests in a trust composed of Mortgage Assets. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs or make
scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the United States
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate
Mortgage Investment Conduit.
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as a "tranche,"
is issued at a specific fixed or floating coupon rate and has a stated
maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates. Interest is
paid or accrues on classes of the CMOs on a monthly, quarterly or
semiannual basis. The principal of and interest on the Mortgage Assets
may be allocated among the several classes of a CMO series in innumerable
ways, some of which bear substantially more risk than others.
Miscellaneous. The yield characteristics of Mortgage-Backed
Securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans generally may be prepaid at any
time. As a result, if a Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have
the opposite effect of increasing yield to maturity. Conversely, if a
Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Certain classes of CMOs and other types of
mortgage pass-through securities, including those whose interest rates
fluctuate based on multiples of a stated index, are designed to be highly
sensitive to changes in prepayment and interest rates and can subject the
holders thereof to extreme reductions of yield and loss of principal.
Prepayments on a pool of mortgage loans are influenced by a
variety of economic, geographic, social and other factors, including
changes in the mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed rate mortgage loans
will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Accordingly, amounts available
for reinvestment by the INCOME FUND are likely to be greater during a
period of declining interest rates and, as a result, likely to be
reinvested at lower interest rates than during a period of rising interest
rates. Mortgage-Backed Securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed income
securities from declining interest rates because of the risk of
prepayment.
No assurance can be given as to the liquidity of the market for
certain Mortgage-Backed Securities, such as CMOs and multiclass pass-
through securities. Determination as to the liquidity of such securities
will be made in accordance with guidelines established by the
Corporation's Board of Directors. In accordance with such guidelines, the
Advisor will monitor the INCOME FUND's investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information.
Interest rates on variable rate Mortgage-Backed Securities are
subject to periodic adjustment based on changes or multiples of changes in
an applicable index. The One-Year Treasury Index and LIBOR are among the
common interest rate indexes. The One Year Treasury Index is the figure
derived from the average weekly quoted yield on U.S. Treasury Securities
adjusted to a constant maturity of one year. LIBOR, the London interbank
offered rate, is the interest rate that the most creditworthy
international banks dealing in U.S. dollar-denominated deposits and loans
charge each other for large dollar-denominated loans. LIBOR is also
usually the base rate for large dollar-denominated loans in the
international market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or twelve month intervals.
Illiquid Securities
Each of the FUNDS may invest in illiquid securities subject to
the limitations set forth in investment restriction 14. The Board of
Directors of the Corporation or its delegate has the ultimate authority to
determine, to the extent permissible under the federal securities laws,
which securities are liquid or illiquid for purposes of those limitations.
Securities eligible to be resold pursuant to Rule 144A under the
Securities Act may be considered liquid by the Board of Directors.
Restricted securities, which may be purchased only by the INCOME
FUND, may be sold by the INCOME FUND only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, the INCOME FUND may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the INCOME FUND may be permitted
to sell a security under an effective registration statement. If, during
such a period, adverse market conditions were to develop, the INCOME FUND
might obtain a less favorable price than prevailed when it decided to
sell. Restricted securities will be priced at fair value as determined in
good faith by the Board of Directors of the Corporation. If through the
appreciation of restricted securities or the depreciation of unrestricted
securities, the INCOME FUND should be in a position where more than 15% of
the value of its net assets are invested in illiquid assets, including
restricted securities, the INCOME FUND will take such steps as it deemed
advisable, if any, to protect liquidity.
U.S. Government Securities
Each of the FUNDS may invest in securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities which include
Treasury securities which differ only in their interest rates, maturities
and times of issuance. Treasury Bills have initial maturities of one year
or less; Treasury Notes have initial maturities of one to ten years; and
Treasury Bonds generally have initial maturities of greater than ten
years. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities, for example, Ginnie Mae Certificates, are supported
by the full faith and credit of the U.S. Treasury; others, such as those
of the Federal Home Loan Banks, by the right of the issuer to borrower
from the Treasury; others, such as those issued by Fannie Mae, by
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as those
issued by the Student Loan Marketing Association, only by the credit of
the agency or instrumentality. While the U.S. Government provides
financial support to such U.S. Government sponsored agencies or
instrumentalities, no assurance can be given that it will always do so
since it is not so obligated by law.
High Yield Securities
As set forth in the Prospectus, the INCOME FUND may invest in
high yield, high risk, lower-rated securities, commonly known as "junk
bonds." Investments in such securities are subject to the risk factors
outlined below.
The high yield market is relatively new and at times is subject
to substantial volatility. An economic downturn or increase in interest
rates may have a more significant effect on the high yield securities in
an underlying registered investment company's portfolio and their markets,
as well as on the ability of securities' issuers to repay principal and
interest. Issuers of high yield securities may be of low creditworthiness
and the high yield securities may be subordinated to the claims of senior
lenders. During periods of economic downturn or rising interest rates the
issuers of high yield securities may have greater potential for insolvency
and a higher incidence of high yield bond defaults may be experienced.
The prices of high yield securities have been found to be less
sensitive to interest rate changes than higher-rated investments but are
more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress
which would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals, and to
obtain additional financing. If the issuer of a high yield security owned
by the INCOME FUND defaults, the INCOME FUND may incur additional expenses
in seeking recovery. Periods of economic uncertainty and changes can be
expected to result in increased volatility of market prices of high yield
securities and the INCOME FUND's net asset value. Yields on high yield
securities will fluctuate over time. Furthermore, in the case of high
yield securities structured as zero coupon or pay-in-kind securities,
their market prices are affected to a greater extent by interest rate
changes and thereby tend to be more volatile than market prices of
securities which pay interest periodically and in cash.
Certain securities held by the INCOME FUND, including high yield
securities, may contain redemption or call provisions. If an issuer
exercises these provisions in a declining interest rate market, the INCOME
FUND would have to replace the security with a lower yield security,
resulting in a decreased return for the investor. Conversely, a high
yield security's value will decrease in a rising interest rate market, as
will the value of the INCOME FUND's assets.
The secondary market for high yield securities may at times
become less liquid or respond to adverse publicity or investor perceptions
making it more difficult for the INCOME FUND to value accurately high
yield securities or dispose of them. To the extent the INCOME FUND owns
or may acquire illiquid or restricted high yield securities, these
securities may involve special registration responsibilities, liabilities
and costs, and liquidity difficulties, and judgment will play a greater
role in valuation because there is less reliable and objective data
available.
Special tax considerations are associated with investing in high
yield bonds structured as zero coupon or pay-in-kind securities. The
INCOME FUND will report the interest on these securities as income even
though it receives no cash interest until the security's maturity or
payment date. Further, the INCOME FUND must distribute substantially all
of its income to its shareholders to qualify for pass-through treatment
under the tax law. Accordingly, the INCOME FUND may have to dispose of
its portfolio securities under disadvantageous circumstances to generate
cash or may have to borrow to satisfy distribution requirements.
Credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield securities. Since
credit rating agencies may fail to timely change the credit ratings to
reflect subsequent events, the Advisor will monitor the issuers of high
yield securities in the portfolio to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments, and to attempt to assure the securities' liquidity so the INCOME
FUND can meet redemption requests. To the extent that the INCOME FUND
invests in high yield securities, the achievement of its investment
objective may be more dependent on its own credit analysis than is the
case for higher quality bonds. The INCOME FUND may retain a portfolio
security whose rating has been changed.
Hedging Instruments
Index Options Transactions. The FUNDS may purchase put and call
options and write call options on stock indexes. A stock index fluctuates
with changes in the market values of the stock included in the index.
Options on stock indexes give the holder the right to receive an amount of
cash upon exercise of the options. Receipt of this cash amount will
depend upon the closing level of the stock index upon which the option is
based being greater than (in the case of a call) or less than (in the case
of a put) the exercise price of the option. The amount of cash received,
if any, will be the difference between the closing price of the index and
the exercise price of the option, multiplied by a specified dollar
multiple. The writer (seller) of the option is obligated, in return for
the premiums received from the purchaser of the option, to make delivery
of this amount to the purchaser. Unlike the options on securities
discussed below, all settlements of index options transactions are in
cash.
Some stock index options are based on a broad market index such
as the S&P 500 Index, the NYSE Composite Index or the AMEX Major Market
Index, or on a narrower index such as the Philadelphia Stock Exchange
Over-the-Counter Index. Options currently are traded on the Chicago Board
of Options Exchange, the AMEX and other exchanges. Over-the-counter index
options, purchased over-the-counter options and the cover for any written
over-the-counter options would be subject to the VALUE FUND's 10%
limitation and the INCOME FUND's 15% limitation on investment in illiquid
securities. See "Illiquid Securities."
Each of the exchanges has established limitations governing the
maximum number of call or put options on the same index which may be
bought or written (sold) by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts
or through one or more brokers). Under these limitations, options
positions of certain other accounts advised by the same investment adviser
are combined for purposes of these limits. Pursuant to these limitations,
an exchange may order the liquidation of positions and may impose other
sanctions or restrictions. These position limits may restrict the number
of listed options which the FUNDS may buy or sell; however, the Advisor
intends to comply with all limitations.
Index options are subject to substantial risks, including the
risk of imperfect correlation between the option price and the value of
the underlying securities comprising the stock index selected and the risk
that there might not be a liquid secondary market for the option. Because
the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the FUNDS will
realize a gain or loss from the purchase of writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market
segment, rather than upon movements in the price of a particular stock.
Trading in index options requires different skills and techniques than are
required for predicting changes in the prices of individual stocks. The
FUNDS will not enter into an option position that exposes a FUND to an
obligation to another party, unless the FUND either (i) owns an offsetting
position in securities or other options; and/or (ii) maintains with the
FUND'S custodian bank (and marks-to-market, on a daily basis) a segregated
account consisting of cash or liquid securities that, when added to the
premiums deposited with respect to the option, are equal to the market
value of the underlying stock index not otherwise covered.
The Advisor may utilize index options as a technique to leverage
the portfolios of the FUNDS. If the Advisor is correct in its assessment
of the future direction of stock prices, the share prices of the FUNDS
will be enhanced. If the Advisor has the FUNDS take a position in options
and stock prices move in a direction contrary to the Advisor's forecast
however, the FUNDS would incur losses greater than the FUNDS would have
incurred without the options position.
Options on Securities. The FUNDS may buy put and call options
and write (sell) call options on securities. By writing a call option and
receiving a premium, a FUND may become obligated during the term of the
option to deliver the securities underlying the option at the exercise
price if the option is exercised. By buying a put option, a FUND has the
right, in return for a premium paid during the term of the option, to sell
the securities underlying the option at the exercise price. By buying a
call option, a FUND has the right, in return for a premium paid during the
term of the option, to purchase the securities underlying the option at
the exercise price. Options on securities written by the FUNDS will be
traded on recognized securities exchanges.
When writing call options on securities, a FUND may cover its
position by owning the underlying security on which the option is written.
Alternatively, the FUND may cover its position by owning a call option on
the underlying security, on a share for share basis, which is deliverable
under the option contract at a price no higher than the exercise price of
the call option written by the FUND or, if higher, by owning such call
option and depositing and maintaining in a segregated account cash or
liquid securities equal in value to the difference between the two
exercise prices. In addition, the FUNDS may cover their position by
depositing and maintaining in a segregated account cash or liquid
securities equal in value to the exercise price of the call option written
by the FUND. The principal reason for the FUNDS to write call options on
stocks held by the FUNDS is to attempt to realize, through the receipt of
premiums, a greater return than would be realized on the underlying
securities alone.
When a FUND wishes to terminate the FUND's obligation with
respect to an option it has written, the FUND may effect a "closing
purchase transaction." The FUND accomplishes this by buying an option of
the same series as the option previously written by the FUND. The effect
of the purchase is that the writer's position will be canceled. However,
a writer may not effect a closing purchase transaction after the writer
has been notified of the exercise of an option. When a FUND is the holder
of an option, it may liquidate its position by effecting a "closing sale
transaction." The FUND accomplishes this by selling an option of the same
series as the option previously purchased by the FUND. There is no
guarantee that either a closing purchase or a closing sale transaction can
be effected. If any call or put option is not exercised or sold, the
option will become worthless on its expiration date.
A FUND will realize a gain (or a loss) on a closing purchase
transaction with respect to a call option previously written by the FUND
if the premium, plus commission costs, paid by the FUND to purchase the
put option is less (or greater) than the premium, less commission costs,
received by the FUND on the sale of the call option. A FUND also will
realize a gain if a call option which the FUND has written lapses
unexercised, because the FUND would retain the premium.
A FUND will realize a gain (or a loss) on a closing sale
transaction with respect to a call or a put option previously purchased by
the FUND if the premium, less commission costs, received by the FUND on
the sale of the call or the put option is greater (or less) than the
premium, plus commission costs, paid by the FUND to purchase the call or
the put option. If a put or a call option which the FUND has purchased
expires out-of-the-money, the option will become worthless on the
expiration date, and the FUND will realize a loss in the amount of the
premium paid, plus commission costs.
Although certain securities exchanges attempt to provide
continuously liquid markets in which holders and writers of options can
close out their positions at any time prior to the expiration of the
option, no assurance can be given that a market will exist at all times
for all outstanding options purchased or sold by the FUNDS. In such
event, the FUNDS would be unable to realize their profits or limit their
losses until the FUNDS would exercise options they hold and the FUNDS
would remain obligated until options they wrote were exercised or expired.
Because option premiums paid or received by the FUNDS are small
in relation to the market value of the investments underlying the options,
buying and selling put and call options can be more speculative than
investing directly in common stocks.
The hours of trading for options may not conform to the hours
during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
markets that cannot be reflected in the options markets. The purchase and
writing of options is a highly specialized activity which involves
investment techniques and risks different from those associated with
ordinary portfolio securities transactions.
Municipal Securities
The INCOME FUND may invest in debt obligations issued by or on
behalf of the governments of states, territories or possessions of the
United States, the District of Columbia and their political subdivisions,
agencies and instrumentalities, certain interstate agencies and certain
territories of the United States. The two principal classifications of
municipal securities are "general obligation" and "revenue" securities.
"General obligation" securities are secured by the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. "Revenue" securities are usually payable only from the revenues
derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit
standing of the industrial user involved. Within these principal
classifications of municipal securities, there are a variety of categories
of municipal securities, including fixed and variable rate securities,
municipal bonds, municipal notes, municipal leases, custodial receipts and
participation certificates. Certain of the municipal securities in which
the INCOME FUND may invest represent relatively recent innovations in the
municipal securities markets. Because the INCOME FUND does not intend to
invest a substantial amount of its assets in municipal securities, the
interest on which is exempt from federal income tax, the INCOME FUND does
not expect to be entitled to pass through to its shareholders the tax-
exempt nature of any interest income attributable to investments in
municipal securities.
DIRECTORS AND OFFICERS OF THE CORPORATION
The name, address, age, principal occupations during the past
five years and certain other information with respect to each of the
directors and officers of the Corporation as of November 1, 1996 are as
follows:
JOHN R. BRADFORD, Ph.D., 74
7619 University Avenue
Suite 2A
Lubbock, Texas 79423
(A DIRECTOR OF THE CORPORATION)
Dr. Bradford is Vice President of Development of Compliance
Services Group, Inc., an international integrated environmental management
consulting and engineering service company.
GILBERT F. HARTWELL, 72
6810 Larkwood Street
Houston, Texas 77074
(A DIRECTOR OF THE CORPORATION)
Mr. Hartwell is a Director of Century Business Machines,
Houston, Texas, an office business machine company and the successor to
Hartwell's Office World, Inc. Mr. Hartwell was the Chairman and founder
of Hartwell's Office World, Inc.
JOHN H. WILSON, 54
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
(A DIRECTOR OF THE CORPORATION)
Mr. Wilson is President of U.S. Equity Corporation, a venture
capital firm. Mr. Wilson is also President and a Director of Whitehall
Corporation, a multifaceted manufacturing concern. He currently serves on
the Board of Directors of Capital Southwest Corporation, a venture capital
firm, Norwood Promotional Products, Inc., a manufacturer of advertising
specialty products, Encore Wire Corporation, a manufacturer of electrical
wire and cable, and Palm Harbor Homes, Inc., a producer of manufactured
homes.
GARY B. WOOD, Ph.D.*, 46
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
(PRESIDENT, TREASURER AND A DIRECTOR OF THE CORPORATION)
Dr. Wood is President, Secretary, Treasurer and a director of
the Advisor and Concorde Capital Corporation, an investment advisory firm
affiliated with the Advisor. He is also Chairman of the Board and a
director of OmniMed Corporation, Houston, Texas, a medical equipment
business and has been an officer and director of such corporation and its
predecessor Uro-Tech Management Corporation, Dallas, Texas, since June,
1983. He is also Chairman of the Board of International Hospital
Corporation, Dallas, Texas, a hospital construction and management firm.
Dr. Wood currently serves on the Board of Directors of Harken Energy
Corporation, a public corporation headquartered in Dallas, Texas, and is
Chairman of the Board and a director of Positron Corporation, a public
corporation headquartered in Houston, Texas.
____________
* Dr. Wood is a director who is an "interested person" of the FUND as that
term is defined in the Investment Company Act of 1940.
ELIZABETH L. FOSTER, 41
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
(SECRETARY OF THE CORPORATION)
Ms. Foster is currently a Portfolio Manager for the Advisor and
has been employed by such firm in various capacities since 1983.
During the fiscal year ended September 30, 1996 the Corporation
did not pay any directors' fees. The Corporation's standard arrangement
with directors is to reimburse each director for expenses incurred in
connection with attendance at meetings of the Board of Directors.
The table below sets forth the compensation paid by the
Corporation to each of the current directors of the Corporation during the
fiscal year ended September 30, 1996:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual from Corporation
Compensation from as Part of Fund Benefits Upon and Fund Complex
Name of Person Corporation Expenses Retirement Paid to Director
<S> <C> <C> <C> <C>
John R. Bradford, Ph.D. $0 $0 $0 $0
Gilbert F. Hartwell 0 0 0 0
John H. Wilson 0 0 0 0
Gary B. Wood, Ph.D. 0 0 0 0
</TABLE>
PRINCIPAL SHAREHOLDERS
Set forth below are the names and addresses of all holders of
each FUND's shares who as of October 31, 1996 beneficially owned more than
5% of the then outstanding shares of a FUND as well as the number of
shares of each FUND beneficially owned by all officers and directors of
the Corporation as a group.
Name and Address Number of Shares Percent
of Beneficial Owner of VALUE FUND of Class
I. David and Lee R. Bufkin
R.R. 5, Box 390
Brenham, Texas 77833 129,696 15.5%
William E. Watson
MDPA Pension Plan
#3 Bent Tree Court
Lufkin, TX 75901 82,449 9.8%
C. Wayne and Jane A. Nance
214 North Bay EB
Bullard, Texas 75757 89,354 10.6%
Ralph S. and Deborah E.
Cunningham
#2 Saddlewood Estates
Houston, Texas 77024 55,485 6.6%
Charles Schwab & Co.
101 Montgomery Street
San Francisco, CA 94104 589,739 70.3%
Officers and Directors
as a group (5 persons) 12,462 1.5%
_______________
* At October 31, 1996, Charles Schwab & Co. owned of record
589,739 shares of the VALUE FUND or 70.3% of the then
outstanding shares. All of the shares owned by Charles
Schwab & Co. were owned of record only and included the shares
held by I. David and Lee R. Bufkin, C. Wayne and Jane A. Nance
and Ralph S. and Deborah E. Cunningham.
Name and Address Number of Shares Percent
of Beneficial Owner of VALUE FUND of Class
I. David and Lee R. Bufkin
R.R. 5, Box 390
Brenham, TX 44833 41,237 17.4%
William E. Watson MDPA
Pension Plan
#3 Bent Tree Court
Lufkin, TX 75901 40,528 17.1%
Walter J. Stetter
IRA Rollover
4322 Melissa Lane
Dallas, TX 75229 31,901 13.5%
Gerrett B. Lok IRA Rollover
12544 Matisse Lane
Dallas, TX 75230 25,000 10.6%
NationsBank of Texas,
Trustee
Debrahlee G. Kung Trust
5500 Preston Road
Dallas, TX 75205 20,305 8.6%
Mr. and Mrs. S.D. Chesebro
5473 Sugar Hill Drive
Houston, TX 77056 12,260 5.2%
L. W. Wright IRA Rollover
7315 Lane Park Court
Dallas, TX 75225 17,143 7.2%
C. M. Rampacek IRA Rollover
2203 Bluff Creek
Kingwood, TX 77345 13,296 5.6%
Charles Schwab & Co.
101 Montgomery Street
San Francisco, CA 94104 165,664 69.9%
Officers and Directors as a
group (5 persons) 1,350 .6%
_______________________
* At October 31, 1996, Charles Schwab & Co. owned of record 165,664
shares of the VALUE FUND or 69.9% of the then outstanding shares. All of
the shares owned by Charles Schwab & Co. were owned of record only and
included shares held by I. David and Lee R. Bufkin, Walter J. Stetter IRA
Rollover, Gerrett B. Lok IRA Rollover, Mr. and Mrs. S. D. Chesebro, L. W.
Wright IRA Rollover and C. M. Rampacek IRA Rollover.
INVESTMENT ADVISOR
As set forth in the Prospectus under the caption "WHO MANAGES
THE FUNDS?" the investment advisor to the FUNDS is Concorde Financial
Corporation (the "Advisor"). The Advisor is controlled by Gary B. Wood,
Ph.D. Pursuant to an investment advisory agreement between each FUND and
the Advisor (the "Agreement"), the Advisor furnishes continuous investment
advisory and management services to the FUNDS. During the fiscal years
ended September 30, 1996, September 30, 1995 and September 30, 1994 the
VALUE FUND paid the Advisor advisory fees of $112,373, $104,664 and
$110,669, respectively. During the period from January 22, 1996
(commencement of operations) through September 30, 1996, the INCOME FUND
paid the Advisor advisory fees of $9,440.
Each FUND pays all of its expenses not assumed by the Advisor
including, but not limited to: the costs of preparing and printing its
registration statements required under the Securities Act of 1933 and the
Investment Company Act of 1940 and any amendments thereto; the expense of
registering its shares with the Securities and Exchange Commission and in
the various states; the printing and distribution cost of prospectuses
mailed to existing shareholders; the cost of director and officer
liability insurance, reports to shareholders, reports to government
authorities and proxy statements; interest charges; brokerage commissions
and expenses incurred in connection with portfolio transactions. The FUND
also pays: the fees of directors who are not interested persons of the
Corporation; compensation of administrative and clerical personnel;
association membership dues; auditing and accounting services; legal fees
and expenses; fees and expenses of any custodian or trustees having
custody of a FUND's assets; expenses of calculating the net asset value
and repurchasing and redeeming shares; charges and expenses of dividend
disbursing agents; registrars and stock transfer agents, including the
cost of keeping all necessary shareholder records and accounts and
handling any problems related thereto.
The Advisor has undertaken to reimburse each FUND to the extent
that the aggregate annual operating expenses, including the investment
advisory fee but excluding interest, taxes, brokerage commissions and
extraordinary items, exceed that percentage of the average net assets of
the FUND for such year, as determined by valuations made as of the close
of each business day of the year, which is the most restrictive percentage
provided by the state laws of the various states in which the shares of
the FUND are qualified for sale. If the states in which the shares of the
FUND are qualified for sale impose no such restrictions, the Advisor will
not be obligated to reimburse the FUND. As of the date of this Statement
of Additional Information the shares of the FUNDS are not qualified for
sale in any state which imposes an expense limitation. Each FUND monitors
its expense ratio on a monthly basis. If the accrued amount of the
expenses of the FUND exceeds an applicable expense limitation, the FUND
will create an account receivable from the Advisor for the amount of such
excess. In such a situation, the monthly payment of the Advisor's fee
will be reduced by the amount of such excess, subject to adjustment month
by month during the balance of the FUND's fiscal year if accrued expenses
thereafter fall below this limit. The adjustment will be reconciled at
the end of the fiscal year and not carried forward.
Each Agreement will remain in effect as long as its continuance
is specifically approved at least annually, by (i) the Board of Directors
of the Corporation, or by the vote of a majority (as defined in the
Investment Company Act of 1940) of the outstanding shares of the
Corporation, and (ii) by the vote of a majority of the directors of the
Corporation who are not parties to the Agreement or interested persons of
the Advisor, cast in person at a meeting called for the purpose of voting
on such approval. Each Agreement provides that it may be terminated at
any time without the payment of any penalty, by the Board of Directors of
the Corporation or by vote of a majority of a FUND's shareholders, on
sixty days written notice to the Advisor, and by the Advisor on the same
notice to the FUND and that it shall be automatically terminated if it is
assigned.
Each Agreement provides that the Advisor will not be liable to
the FUND or its shareholders for anything other than willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or
duties. The Agreement also provides that the Advisor and its officers,
directors and employees may engage in other businesses, devote time and
attention to any other business whether of a similar or dissimilar nature,
and render investment advisory services to others.
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
As set forth in the Prospectus under the caption "HOW IS A
FUND'S SHARE PRICE DETERMINED?" the net asset value of the FUND will be
determined as of the close of trading on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the
aforementioned holidays falls on a Saturday, the New York Stock Exchange
will not be open for trading on the preceding Friday and when any such
holiday falls on a Sunday, the New York Stock Exchange will not be open
for trading on the succeeding Monday, unless unusual business conditions
exist, such as the ending of a monthly or the yearly accounting period.
The New York Stock Exchange also may be closed on national days of
mourning.
The FUNDS may occasionally advertise performance data such as
total return or, with respect to the INCOME FUND only, yield. To
facilitate the comparability of these statistics from one mutual fund to
another, the Securities and Exchange Commission has developed guidelines
for the calculation of these statistics. Any total rate of return
quotation for a FUND will be for a period of three or more months and will
assume the reinvestment of all dividends and capital gains distributions
which were made by the FUND during that period. Any period total rate of
return quotation of a FUND will be calculated by dividing the net change
in value of a hypothetical shareholder account established by an initial
payment of $1,000 at the beginning of the period by $1000. The net change
in the value of a shareholder account is determined by subtracting $1,000
from the product obtained by multiplying the net asset value per share at
the end of the period by the sum obtained by adding (A) the number of
shares purchased at the beginning of the period plus (B) the number of
shares purchased during the period with reinvested dividends and
distributions. Any average annual compounded total rate of return
quotation of a FUND will be calculated by dividing the redeemable value at
the end of the period (i.e. the product referred to in the preceding
sentence) by $1,000. A root equal to the period, measured in years, in
question is then determined and 1 is subtracted from such root to
determine the average annual compounded total rate of return.
The foregoing computation may also be expressed by the following
formula:
n
P(1+T) = ERV
P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment
made at the beginning of the stated periods at the end
of the stated periods.
A yield quotation is based upon a 30 day period and is
computed by dividing the net investment income per share earned during a
30-day (or one-month) period by the net asset value per share on the last
day of the period and annualizing the result on a semiannual basis by
adding one to the quotient, raising the sum to the power of six,
subtracting one from the result and then doubling the difference. The
INCOME FUND's net investment income per share earned during the period is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned
during the period minus expenses accrued for the period, net of
reimbursements.
This calculation can be expressed as follows:
a-b 6
Yield = 2[(----+1) -1]
cd
Where: a= dividends and interest earned during the period.
b= expenses accrued for the period (net of
reimbursements).
c= the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d= maximum offering price per share on the last day of
the period.
The total return of the VALUE FUND for the period December 4,
1987, the day the VALUE FUND commenced operations, through September 30,
1996 was 107.28%. An initial investment of $1,000 in the VALUE FUND at
December 4, 1987 would have been worth $2,072 as of September 30, 1996.
The average annual compounded rate of return of the VALUE FUND over this
period was 8.61%. The average annual compounded rate of return of the
VALUE FUND for the 5-year period ended September 30, 1996 was 11.82%. The
VALUE FUND's compounded rate of return for the 1-year period ended
September 30, 1996 was 13.64%.
The INCOME FUND'S total return for the period from January 22,
1996, the day the INCOME FUND commenced operations, through September 30,
1996 was 0.71%.
The foregoing performance results are based on historical
earnings and should not be considered as representative of the performance
of the FUNDS in the future. An investment in a FUND will fluctuate in
value and at redemption its value may be more or less than the initial
investment.
REDEMPTION OF FUND SHARES
Subject to a FUND's compliance with applicable regulations, each
FUND has reserved the right to pay the redemption price of shares
redeemed, either totally or partially, by a distribution in kind of
securities (instead of cash) from the FUND's portfolio. The securities so
distributed would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares redeemed. If a holder of
FUND shares receives a distribution in kind, he would incur brokerage
charges when converting the securities to cash. Holders of FUND shares
who in any 90 day period redeem no more than the lesser of $250,000 or 1%
of the FUND's net assets at the beginning of the 90 day period will be
paid the redemption price in cash.
ALLOCATION OF PORTFOLIO BROKERAGE
Decisions to buy and sell securities for the FUNDS are made by
the Advisor subject to review by the Corporation's Board of Directors. In
placing purchase and sale orders for portfolio securities for a FUND, it
is the policy of the Advisor to seek the best execution of orders at the
most favorable price in light of the overall quality of brokerage and
research services provided, as described in this and the following
paragraph. In selecting brokers to effect portfolio transactions, the
determination of what is expected to result in best execution at the most
favorable price involves a number of largely judgmental considerations.
Among these are the Advisor's evaluation of the broker's efficiency in
executing and clearing transactions, block trading capability (including
the broker's willingness to position securities) and the broker's
financial strength and stability. The most favorable price to a FUND
means the best net price without regard to the mix between purchase or
sale price and commission, if any. For example, over-the-counter
securities may be purchased and sold directly with principal market makers
who retain the difference in their cost in the security and its selling
price or from non-principal market makers who are paid commissions
directly. A FUND may allocate portfolio brokerage on the basis of
recommendations to purchase shares of the FUND made by brokers if the
Advisor reasonably believes the commissions and transaction quality are
comparable to that available from other brokers.
In allocating brokerage business for the FUNDS, the Advisor also
takes into consideration the research, analytical, statistical and other
information and services provided by the broker, such as general economic
reports and information, reports or analyses of particular companies or
industry groups, market timing and technical information, and the
availability of the brokerage firm's analysts for consultation. While the
Advisor believes these services have substantial value, they are
considered supplemental to the Advisor's own efforts in the performance of
its duties under the Agreement. Other clients of the Advisor may
indirectly benefit from the availability of these services to the Advisor,
and the FUNDS may indirectly benefit from services available to the
Advisor as a result of transactions for other clients. The Agreement
provides that the Advisor may cause a FUND to pay a broker which provides
brokerage and research services to the Advisor a commission for effecting
a securities transaction in excess of the amount another broker would have
charged for effecting the transaction, if the Advisor determines in good
faith that such amount of commission is reasonable in relation to the
value of brokerage and research services provided by the executing broker
viewed in terms of either the particular transaction or the Advisor's
overall responsibilities with respect to the FUND and the other accounts
as to which he exercises investment discretion. Brokerage commissions
paid by the VALUE FUND during the fiscal years ended September 30, 1996,
September 30, 1995 and September 30, 1994 to brokers totaled $14,755 on
transactions involving securities having a total market value of
$6,955,104, $26,409 on transactions involving securities having a total
market value of $8,166,815 and $97,234 on transactions involving
securities having a total market value of $17,933,157, respectively.
Brokerage commissions paid by the INCOME FUND during the period from
January 22, 1996 (commencement of operations) through September 30, 1996
to brokers totaled $4,548 on transactions involving securities having a
total market value of $2,761,110. All of such brokers provided research
services to the Advisor.
CUSTODIAN
Firstar Trust Company, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the FUNDS. As such, Firstar Trust
Company holds all securities and cash of the FUNDS, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as
directed by officers of the Corporation. Firstar Trust Company does not
exercise any supervisory function over the management of the FUNDS, the
purchase and sale of securities or the payment of distributions to
stockholders. Firstar Trust Company also acts as the FUNDS' fund
accountant, transfer agent and dividend disbursing agent. Firstar Trust
Company has entered into a fund accounting services agreement with the
FUNDS pursuant to which it acts as fund accountant. As fund accountant
Firstar Trust Company maintains and keeps current the books, accounts,
journals and other records of original entry relating to the business of
each FUND and calculates each FUND's net asset value on a daily basis. In
consideration of such services, the FUNDS pays monthly to Firstar Trust
Company a fee based on its average daily net assets, with a minimum annual
amount, and reimburses it for its out-of-pocket expenses. During the
fiscal years ended September 30, 1996, September 30, 1995 and September
30, 1994, the VALUE FUND paid Firstar Trust Company $25,054, $24,216 and
$23,464, respectively, pursuant to the fund accounting services agreement.
During the period from January 22, 1996 (commencement of operations)
through September 30, 1996, the INCOME FUND paid Firstar Trust Company
$12,641.
TAXES
As set forth in the Prospectus under the caption "WHAT ABOUT
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES?" the FUNDS will endeavor
to qualify annually for and elect tax treatment applicable to a regulated
investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code").
Dividends from a FUND's net investment income and distributions
from the FUND's net realized capital gains are taxable to shareholders,
whether received in cash or in additional shares of Common Stock. The 70%
dividends-received deduction for corporations may apply to such dividends
and distributions, subject to proportionate reductions if the aggregate
dividends received by the FUND from domestic corporations in any year are
less than 100% of the net investment company income taxable distributions
made by the FUND.
Any dividend or capital gains distribution paid shortly after a
purchase of shares of Common Stock, will have the effect of reducing the
per share net asset value of such shares by the amount of the dividend or
distribution. Furthermore, if the net asset value of the shares of Common
Stock immediately after a dividend or distribution is less than the cost
of such shares to the shareholder, the dividend or distribution will be
taxable to the shareholder even though it results in a return of capital
to him.
Shareholders may realize a capital gain or capital loss in any
year in which they redeem shares of Common Stock. The gain or loss is the
difference between the shareholder's basis (cost) and the redemption price
of the shares redeemed.
The FUNDS may be required to withhold Federal income tax at a
rate of 31% ("backup withholding") from dividend payments and redemption
proceeds if a shareholder fails to furnish the FUNDS with his Social
Security or other taxpayer identification number and certify under penalty
of perjury that such number is correct and that he is not subject to
backup withholding due to the under reporting of income. The
certification form is included as part of the share purchase application
and should be completed when the account is opened.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Kinder & Wyman, P.C., Dallas, Texas, has been selected as the
independent certified public accountants for the FUNDS. The selection of
the FUNDS' independent certified public accountants is subject to annual
ratification by the FUNDS' shareholders.
FINANCIAL STATEMENTS
The following audited financial statements are incorporated by
reference to the Concorde Funds, Inc. Annual Report dated September 30,
1996 (File No. 811-5339), as filed with the Securities and Exchange
Commission on November 27, 1996:
Concorde Value Fund
Financial Highlights
Portfolio of Investments in Securities
Statement of Assets and Liabilities
Statement of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Independent Auditors' Report
Concorde Income Fund
Financial Highlights
Portfolio of Investments in Securities
Statement of Assets and Liabilities
Statement of Operations for the period from January 22,
1996 (inception) through September 30, 1996
Statement of Changes in Net Assets for the period from
January 22, 1996 (inception) through September 30,
1996
Notes to Financial Statements
SHAREHOLDER MEETINGS
The Texas Business Corporation Act permits registered investment
companies, such as the Corporation, to operate without an annual meeting
of shareholders under specified circumstances if an annual meeting is not
required by the Investment Company Act of 1940. The Corporation has
adopted the appropriate provisions in its Bylaws and may, at its
discretion, not hold an annual meeting in any year in which the election
of directors is not required to be acted on by shareholders under said
Act.
The Corporation's Bylaws also contain procedures for the removal
of directors by its shareholders. At any meeting of shareholders duly
called and held at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be
cast thereon, remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of removed directors.
Upon the written request of the holders of shares entitled to
vote not less than 10% of the FUNDS' outstanding shares, the Secretary of
the Corporation shall promptly call a meeting of shareholders for the
purpose of voting upon the question of removal of any director. Whenever
ten or more shareholders of record who have been such for at least six
months preceding the date of application, and who hold in the aggregate
either shares having a net asset value of at least $25,000 or at least one
percent (1%) of the total outstanding shares, whichever is less, shall
apply to the Secretary in writing, stating that they wish to communicate
with other shareholders with a view to obtaining signatures to a request
for a meeting of shareholders and accompanied by a form of communication
and request which they wish to transmit, the Secretary shall within five
business days after such application either: (1) afford to such
applicants access to a list of the names and addresses of all shareholders
as recorded on the books of the Corporation; or (2) inform such applicants
as to the approximate number of shareholders of record and the approximate
cost of mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause
(2) of the last sentence of the preceding paragraph, the Secretary, upon
the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall,
with reasonable promptness, mail such material to all shareholders of
record at their addresses as recorded on the books unless within five
business days after such tender the Secretary shall mail to such
applicants and file with the Securities and Exchange Commission, together
with a copy of the material to be mailed, a written statement signed by at
least a majority of the directors to the effect that in their opinion
either such material contains untrue statements of factor omits to state
facts necessary to make the statements contained therein not misleading,
or would be in violation of applicable law, and specifying the basis of
such opinion.
After opportunity for hearing upon the objections specified in
the written statement so filed, the Securities and Exchange Commission
may, and if demanded by the directors or by such applicants shall, enter
an order either sustaining one or more of such objections or refusing to
sustain any of them. If the Securities and Exchange Commission shall
enter an order refusing to sustain any of such objections, or if, after
the entry of an order sustaining one or more of such objections, the
Securities and Exchange Commission shall find, after notice and
opportunity for hearing, that all objections so sustained have been met,
and shall enter an order so declaring,the Secretary shall mail copies of
such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
DESCRIPTION OF BOND RATINGS
As set forth in the Prospectus under the caption "WHAT ARE THE
FUNDS' INVESTMENT OBJECTIVES AND POLICIES?" the FUNDS may invest in
publicly distributed debt securities assigned one of the highest four
ratings of either Standard & Poor's Corporation or Moody's Investors
Service, Inc., and the INCOME FUND may invest up to 20% of its assets in
securities that are rated below investment grade, but not lower than a B
rating. A brief description of the ratings symbols and their meanings
follows.
Standard & Poor's Corporation. A Standard & Poor's corporate or
municipal debt rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. This assessment may
take into consideration obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform any audit in connection with
any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes
in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the
obligation in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights;
AAA - Debt rated AAA has the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in the
higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by larger
uncertainties or major risk exposures to adverse conditions.
Moody's Investors Service, Inc.
Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by
a large, or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are Aa are judged to be of 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 securities or
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A - Bonds which are 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 which are 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
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are 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 which are 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 which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's bond rating symbols may contain numerical modifiers of a
generic rating classification. The modifier 1 indicates that the bond
ranks at the higher end of its category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
