Rule 497(c)
STATEMENT OF ADDITIONAL INFORMATION January 31, 2000
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CONCORDE VALUE FUND
CONCORDE INCOME FUND
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, 2000. 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.
The following financial statements are incorporated by reference to
the Annual Report, dated September 30, 1999, of Concorde Funds, Inc. (File No.
811-5339), as filed with the Securities and Exchange Commission on November 24,
1999:
Concorde Value Fund
Financial Highlights
Investments in Securities
Covered Call Options Written
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
Investments in Securities
Statement of Assets and Liabilities
Statement of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Independent Auditors' Report
Shareholders may obtain a copy of the Annual Report, without charge,
by calling Firstar Mutual Fund Services, LLC at 1-800-922-0224.
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CONCORDE FUNDS, INC.
Table of Contents
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Page No.
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FUND HISTORY AND CLASSIFICATION................................................1
INVESTMENT RESTRICTIONS........................................................1
INVESTMENT POLICIES AND PRACTICES..............................................4
DIRECTORS AND OFFICERS OF THE CORPORATION.....................................16
PRINCIPAL SHAREHOLDERS........................................................18
INVESTMENT ADVISOR............................................................21
DETERMINATION OF NET ASSET VALUE..............................................22
PERFORMANCE AND YIELD INFORMATION.............................................23
RETIREMENT PLANS..............................................................26
REDEMPTION OF FUND SHARES.....................................................27
ALLOCATION OF PORTFOLIO BROKERAGE.............................................28
CUSTODIAN AND TRANSFER AGENT..................................................29
TAXES.........................................................................30
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................................31
CAPITAL STRUCTURE.............................................................31
SHAREHOLDER MEETINGS..........................................................32
DESCRIPTION OF BOND RATINGS...................................................33
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, 2000 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.
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FUND HISTORY AND CLASSIFICATION
Concorde Funds, Inc. (the "Corporation") is an open-end, diversified
management investment company consisting of two separate portfolios: "Concorde
Value Fund" (the "VALUE FUND") and "Concord Income Fund" (the "INCOME FUND")
(collectively, the "FUNDS" or individually, "FUND"). Concorde Funds, Inc. is
registered under the Investment Company Act of 1940. Concorde Funds, Inc. 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 VALUE FUND is the continuation of the original Concorde Value Fund,
Inc.
INVESTMENT RESTRICTIONS
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
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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
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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.
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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 unaffiliated 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 (which does business under the name Concorde
Investment Management), 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 INCOME FUND will have the right to call the loan and obtain the
securities loaned at any time on three business days' notice. 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.
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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
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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
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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 the INCOME 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 the INCOME FUND purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will reduce, yield to maturity. The INCOME FUND does not intend to invest in
those mortgage-backed securities, such as 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, which 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
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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.
Asset-Backed Securities
The INCOME FUND may invest in asset-backed securities. The
securitization techniques used to develop mortgage-backed securities are also
applied to a broad range of assets, primarily credit card and automobile
receivables. Other types of asset-backed securities may be developed in the
future. In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Asset-backed securities present certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the related collateral as do
mortgage-backed securities.
Illiquid Securities
The VALUE FUND may invest up to 10% of its total assets in illiquid
securities and the INCOME FUND may invest up to 15% of its total assets in
illiquid securities. 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. Illiquid securities may include restricted
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securities, repurchase agreements maturing in more than seven days and other
securities that are not readily marketable. Securities eligible to be resold
pursuant to Rule 144A under the Securities Act may be considered liquid by the
Board of Directors. Investing in Rule 144A securities could have the effect of
increasing the level of a FUND's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
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.
Repurchase Agreements and Other Short-Term Investments
Each of the FUNDS may enter into repurchase agreements with banks or
certain non-bank broker/dealers. In a repurchase agreement, the FUND buys an
interest-bearing security at one price and simultaneously agrees to sell it back
at a mutually agreed upon time and price. The repurchase price reflects an
agreed-upon interest rate during the time the FUND's money is invested in the
security. Since the security purchased constitutes security for the repurchase
obligation, a repurchase agreement can be considered as a loan collateralized by
the security purchased. The FUND's risk is the ability of the seller to pay the
agreed-upon price on the delivery date. If the seller defaults, the FUND may
incur costs in disposing of the collateral, which would reduce the amount
realized thereon. If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. To the extent the value
of the security decreases, the FUND could experience a loss. The FUNDS' Board of
Directors has established procedures to evaluate the creditworthiness of the
other parties to repurchase agreements.
In addition, each of the FUNDS may invest in commercial paper and
other cash equivalents rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's,
commercial paper master notes (which are demand instruments bearing interest at
rates which are fixed to known lending rates and automatically adjusted when
such lending rates change) of issuers whose commercial paper is rated A-1 or A-2
by S&P or Prime-1 or Prime-2 by Moody's and unrated debt securities which are
deemed by the Advisor to be of comparable quality. Each of the FUNDS may also
invest in United States Treasury bills and notes, and certificates of deposit of
domestic branches of U.S. banks or of Canadian banks, provided in each case that
the banks
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have total deposits in excess of $1,000,000,000. The FUNDS will invest in
repurchase agreements and other short-term investments only for temporary
defensive purposes or to maintain liquidity to pay FUND expenses and potential
redemption requests. However, when investing for temporary defensive purposes,
up to 100% of a FUND's assets may be invested in such securities.
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.
Foreign Securities
The FUNDS may invest in securities of foreign issuers which may be
U.S. dollar-denominated or denominated in foreign currencies. Each FUND may
invest up to 15% of its total assets in securities of foreign issuers that are
U.S. dollar-denominated. The INCOME FUND may invest up to 10% and the VALUE FUND
may invest up to 5% of its total assets in securities of foreign issuers
denominated in foreign currencies. Securities of foreign issuers in the form of
American Depository Receipts ("ADRs") that are regularly traded on recognized
U.S. exchanges or in the U.S. over-the-counter market are not considered foreign
securities for purposes of these limitations. A FUND, however, will not invest
more than 20% of its total assets in such ADRs and will only invest in ADRs that
are issuer sponsored. Investments in securities of foreign issuers involve risks
which are in addition to the usual risks inherent in domestic investments. The
value of a FUND's foreign investments may be significantly affected by changes
in currency exchange rates, and the FUND may incur certain costs in converting
securities denominated in foreign currencies to U.S. dollars. In many countries,
there is less publicly available information about issuers than is available in
the reports and ratings published about companies in the United States.
Additionally, foreign companies are not subject to uniform accounting, auditing
and financial reporting standards. Dividends and interest on foreign securities
may be subject to foreign withholding taxes which would reduce a FUND's income
without providing a tax credit for the FUND's shareholders. Although the FUNDS
intend to invest in securities of foreign issuers domiciled in nations in which
the Advisor considers as having stable and friendly governments, there is a
possibility of
B-10
<PAGE>
expropriation, confiscatory taxation, currency blockage or political or social
instability which could affect investments in those nations.
High Yield Securities
The INCOME FUND may invest in high yield, high risk, lower-rated
securities, commonly known as "junk bonds." The INCOME FUND may invest up to 20%
of its assets in securities that are rated below investment grade (i.e., rated
lower than BBB by S&P and Baa by Moody's) or in unrated securities judged by the
Advisor to be of comparable quality. The INCOME FUND, however, will not invest
in any securities rated lower than B at the time of purchase. Debt rated BB, B,
CCC, CC and C and debt rated Ba, B, Caa, Ca and C are regarded by S&P and
Moody's, respectively, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation. For S&P, BB indicates the lowest degree of speculation and C the
highest. For Moody's, Ba indicates the lowest degree of speculation and C the
highest. Low-rated securities generally offer a higher yield than that available
from higher-rated securities. However, investments in such securities are
subject to the risk factors outlined below.
The high yield market 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
B-11
<PAGE>
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.
B-12
<PAGE>
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 or 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
B-13
<PAGE>
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.
B-14
<PAGE>
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.
Securities of Other Registered Investment Companies
The FUNDS may invest up to 10% of their net assets in shares of
registered investment companies. The FUNDS will not purchase or otherwise
acquire shares of any registered investment (except as part of a plan of merger,
consolidation or reorganization
B-15
<PAGE>
approved by the shareholders of the FUNDS) if (a) the FUND and its affiliated
persons would own more than 3% of any class of securities of such registered
company; or (b) more than 5% of its net assets would be invested in the shares
of any one registered investment company.
Any investment in a registered investment company involves investment
risk. Additionally, an investor could invest directly in the registered
investment companies in which the FUND invests. By investing indirectly through
a FUND, an investor bears not only his or her proportionate share of the
expenses of the FUND (including operating costs and investment advisory fees)
but also indirect similar expenses of the registered investment companies in
which the FUND invests. An investor may also indirectly bear expenses paid by
registered investment companies in which the FUND invests related to the
distribution of such registered investment company's shares.
Portfolio Turnover
The FUNDS do not trade actively for short-term profits, but when the
circumstances warrant, securities may be sold without regard to the length of
time held. The VALUE FUND will typically hold a stock until it reaches a
valuation level such that the Advisor believes that the stock is no longer
undervalued. The Advisor is prepared to hold stocks for several years or longer,
if necessary. The Advisor intends to purchase a given security whenever it
believes it will contribute to the stated objective of a FUND, even if the same
security has only recently been sold. In selling a given security, the Advisor
keeps in mind that profits from sales of securities are taxable to certain
shareholders. Subject to those considerations, a FUND may sell a given security,
no matter for how long or for how short a period it has been held in the
portfolio, and no matter whether the sale is at a gain or at a loss, if the
Advisor believes that it is not fulfilling its purpose. Since investment
decisions are based on the anticipated contribution of the security in question
to the applicable FUND's objectives, the rate of portfolio turnover is
irrelevant when the Advisor believes a change is in order to achieve those
objectives, and each of the FUND's annual portfolio turnover rate may vary from
year to year.
The annual portfolio turnover rate indicates changes in a FUND's
portfolio and is calculated by dividing the lesser of purchases or sales of
portfolio securities (excluding securities having maturities at acquisition of
one year or less) for the fiscal year by the monthly average of the value of the
portfolio securities (excluding securities having maturities at acquisition of
one year or less) owned by the FUND during the fiscal year.
High portfolio turnover (i.e., over 100%) may involve correspondingly
greater brokerage commissions and other transaction costs, which are borne
directly by the FUNDS. In addition, high portfolio turnover may result in
increased short-term capital gains which, when distributed to shareholders, are
taxes at ordinary income rates.
DIRECTORS AND OFFICERS OF THE CORPORATION
As a Texas corporation, the business and affairs of the Corporation
are managed by its officers under the direction of the Board of Directors. The
name, address, age, principal
B-16
<PAGE>
occupations during the past five years and certain other information as of
November 1, 1999 with respect to each of the directors and officers of the
Corporation are as follows:
JOHN R. BRADFORD, Ph.D., 77
- -----------------------
3112 - 42nd Street
Lubbock, Texas 79413
(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.
JOHN H. WILSON, 57
- --------------
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. Prior to July 1998, Mr. Wilson was President and a Director of Whitehall
Corporation, which rebuilds, modifies and maintains commercial and military
aircraft. He currently serves on the Board of Directors of Capital Southwest
Corporation, a venture capital firm, 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.*, 49
- --------------------
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, Dallas, 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, and its Mexican
subsidiary, Consorcio International Hospital, S.A. de C.V., hospital
construction and
- ---------------
* Dr. Wood is a director who is an "interested person" of each FUND as that term
is defined in the Investment Company Act of 1940.
B-17
<PAGE>
management firms; and Alpha Holdings, Inc., a plastics manufacturing company and
Vice Chairman of eOriginal, Inc., an electronic commerce company. Dr. Wood
currently serves on the Board of Directors of Harken Energy Corporation, a
public corporation headquartered in Dallas, Texas, and is a director of Positron
Corporation, a public corporation headquartered in Houston, Texas.
JOHN A. STETTER, 44
- ---------------
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
(SECRETARY OF THE CORPORATION)
Mr. Stetter has been a Portfolio Manager for the Advisor since 1994.
From 1988 until 1994, he was the President of his own investment advisory firm.
During the fiscal year ended September 30, 1999 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, 1999:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Corporation and
Compensation Accrued as Part of Benefits Upon Fund Complex Paid to
Name of Person from Corporation Fund Expenses Retirement Director
- -------------- ---------------- ------------- ---------- --------
<S> <C> <C> <C> <C>
John R. Bradford, Ph.D. $0 $0 $0 $0
John H. Wilson 0 0 0 0
Gary B. Wood, Ph.D. 0 0 0 0
</TABLE>
The Corporation and the Advisor have adopted a code of ethics pursuant
to Rule 17j-1 under the Investment Company Act of 1940. This code of ethics
permits personnel subject thereto to invest in securities, including securities
that may be purchased or held by the FUNDS. This code of ethics prohibits, among
other things, persons subject thereto from purchasing or selling securities if
they know at the time of such purchase or sale the security is being considered
for purchase or sale by a FUND or is being purchased or sold by a FUND.
PRINCIPAL SHAREHOLDERS
Set forth below are the names and addresses of all holders of each
FUND's shares who as of November 1, 1999 beneficially owned more than 5% of the
then outstanding
B-18
<PAGE>
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.
VALUE FUND
- ----------
Name and Address Number of Shares Percent
of Beneficial Owner of VALUE FUND of Class
------------------- ---------------- --------
Mr. and Mrs. I.D. Bufkin 132,506 13.4%
P.O. Box 630
Brenham, TX 77834-0630
Mr. and Mrs. C.W. Nance 117,855 11.9%
214 North Bay EB
Bullard, TX 75757
William E. Watson 83,492 8.4%
MDPA Pension Plan
#3 Bent Tree Court
Lufkin, TX 75901
Mr. and Mrs. Stephen D. Chesebro 61,491 6.2%
5405 Longmont
Houston, TX 77056
Mr. and Mrs. Donald S. Taylor 60,580 6.1%
3803 Pleasant Valley Drive
Missouri City, TX 77459
Mr. And Mrs. William J. Winkelmann 55,676 5.6%
7147 Brookshire Circle
Dallas, TX 75230
Mr. and Mrs. R.S. Cunningham 52,916 5.3%
1511 Nantucket Drive
Houston, TX 77057
Charles Schwab & Co. 764,311 77.1%
101 Montgomery Street
San Francisco, CA 94104
Officers and Directors 10,820 1.1%
as a group (4 persons)
- ---------------
* At November 1, 1999, Charles Schwab & Co. owned of record 764,311 shares of
the VALUE FUND or 77.1% 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 Mr. and Mrs. I.D. Bufkin, Mr. and Mrs. C.W. Nance, Mr. and Mrs. R.S.
Cunningham, Mr. and Mrs. William J. Winkelmann and Mr. and Mrs. Stephen D.
Chesebro.
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<PAGE>
INCOME FUND
- -----------
Name and Address of Number of Shares Percent
Beneficial Owner Of INCOME FUND of Class
---------------- -------------- --------
William E. Watson MDPA 74,064 13.6%
Pension Plan
#3 Bent Tree Court
Lufkin, TX 75901
Mr. and Mrs. I.D. Bufkin 53,744 9.8%
P.O. Box 630
Brenham, TX 77834-0630
Gaynell C. Methvin 37,657 6.9%
7222 Fisher Road
Dallas, TX 75214
Gary B. Wood 37,283 6.8%
3712 Greenbrier
Dallas, TX 75225
Mr. And Mrs. Charles M. Rampacek 34,992 6.4%
3816 Olympia Drive
Houston, TX 77019
Mr. and Mrs. Edgar J. Milan 34,974 6.4%
701 Hermann Drive, #3303
Houston, TX 77004
Mr. and Mrs. W. J. Stetter 30,584 5.6%
4322 Melissa Lane
Dallas, TX 75229
Charles Schwab & Co. 381,540 69.8%
101 Montgomery Street
San Francisco, CA 94104
Officers and Directors as a 49,428 9.0%
group (4 persons)
- -----------------------
* At November 1, 1999, Charles Schwab & Co. owned of record 381,540 shares of
the INCOME FUND or 69.8% of the then outstanding shares. All of the shares owned
by Charles Schwab & Co. were owned of record only and included shares held by
Mr. and Mrs. I.D. Bufkin, Mr. and Mrs. W. J. Stetter, Mr. and Mrs. Edgar J.
Milan, Mr. And Mrs. Charles M. Rampacek and Gaynell C. Methvin. The officers and
directors owned 49,428 shares and includes the 37,283 shares held by Gary B.
Wood.
B-20
<PAGE>
INVESTMENT ADVISOR
The investment advisor to the FUNDS is Concorde Financial Corporation,
which does business under the name Concorde Investment Management (the
"Advisor"). The Advisor is controlled by Gary B. Wood, Ph.D. Dr. Wood is also
president, treasurer and a director of the Corporation. 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. For its services to the FUNDS, the Advisor
receives a monthly fee based on the average daily net assets of each FUND at the
annual rate of 0.9% for the VALUE FUND and 0.7% for the INCOME FUND. During the
fiscal years ended September 30, 1999, September 30, 1998 and September 30,
1997, the VALUE FUND incurred advisory fees of $144,394, $160,844 and $131,036,
respectively. During the fiscal years ended September 30, 1999, September 30,
1998 and September 30, 1997, the INCOME FUND incurred advisory fees of $33,381,
$31,277 and $21,235, respectively. During the fiscal year ended September 30,
1999, the Advisor voluntarily reimbursed $23,935 to the INCOME FUND for expenses
in excess of 1.88% of average daily net assets.
Under the Agreement, the Advisor, at its own expense and without
separate reimbursement from the FUNDS, furnishes office space and all necessary
office facilities, equipment, and executive personnel for managing the FUNDS and
maintaining its organization; bears all sales and promotional expenses of the
FUNDS, other than expenses incurred in complying with the laws regulating the
issue or sale of securities; and pays salaries and fees of all officers and
directors of the FUNDS (except the fees paid to disinterested directors as such
term is defined under the Investment Company Act of 1940).
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
B-21
<PAGE>
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. For the
fiscal year ending September 30, 2000, the Advisor will voluntarily reimburse
the INCOME FUND for expenses in excess of 1.75% of average daily net assets.
During the fiscal years ended September 30, 1999, September 30, 1998 and
September 30, 1997, the Advisor voluntarily reimbursed the INCOME FUND for
expenses in excess of 1.88%, 1.89% and 1.99%, respectively. During the fiscal
years ended September 30, 1999, September 30, 1998 and September 30, 1997, the
Advisor reimbursed the INCOME FUND $23,935, $25,222 and $38,502, respectively.
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
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, Dr. Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Additionally, if any of the aforementioned
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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 per share net asset value of each FUND is determined by dividing
the total value of the FUND's net assets (meaning its assets less its
liabilities) by the total number of its shares outstanding at that time. In
calculating net asset value of the FUNDS, portfolio securities that are listed
on a national securities exchange or quoted on the Nasdaq Stock Market are
valued at the last sale price on the day the valuation is made, or if not traded
on the valuation date, the most recent bid price. Other securities for which
market quotations are readily available are valued at the latest quoted bid
price. Debt securities are valued at the latest bid prices furnished by
independent pricing services. Options purchased or written by the FUNDS are
valued at the closing current bid price, when available. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Board of Directors. Short-term
instruments (those with remaining maturities of 60 days or less) are valued at
amortized cost, which approximates market.
PERFORMANCE AND YIELD INFORMATION
The FUNDS may provide performance data from time to time in
advertisements, reports to shareholders and other communications with
shareholders. FUND performance may be shown by presenting one or more
performance measurements, including "average annual total return," "total
return," "cumulative total return" and "yield."
Average annual total return and total return figures measure both the
net investment income generated by, and the effect of any realized and
unrealized appreciation or depreciation of, the underlying investments in a FUND
for the stated period, assuming the reinvestment of all dividends. Thus, these
figures reflect the change in the value of an investment in a FUND during a
specified period. Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. Total return figures are not annualized and represent the aggregate
percentage of dollar value change over the period in question. Cumulative total
return reflects a FUND's performance over a stated period of time.
A FUND's yield is a measure of the net investment income per share
earned by the FUND over a specified one-month period expressed as a percentage
of the maximum offering price of the FUND's shares at the end of the period.
Yield is an annualized figure, which means that it is assumed that the FUND
generated the same level of net investment income over a one-year period. Net
investment income is assumed to be compounded semiannually when it is
annualized.
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
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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 $1,000. 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:
P(1+T)n = 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.
The VALUE FUND's average annual compounded rate of return for the one,
five and 10 year periods ended September 30, 1999 were 18.38%, 12.80% and 8.67%,
respectively. An initial investment of $1,000 in the VALUE FUND at December 4,
1987 (commencement of operations) would have been worth $2,939.06 as of
September 30, 1999.
The INCOME FUND'S average annual compounded rate of return for the
period from January 22, 1996, the day the INCOME FUND commenced operations,
through September 30, 1999 was 2.38%. The average annual compounded rate of
return for the one year period ended September 30, 1999 was -2.80%. An initial
investment of $1,000 in the INCOME FUND at January 22, 1996 would have been
worth $1,090.85 as of September 30, 1999.
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. Such performance results for the INCOME FUND also reflect
reimbursements made by the Advisor during the period from January 22, 1996
(commencement of operations) through September 30, 1999 to keep aggregate annual
operating expenses at or below 2% of daily net assets. For example, the INCOME
FUND's ratio of total expenses to average net assets for
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the year ended September 30, 1999 was 1.88% and, absent reimbursements, 2.38%.
An investment in a FUND will fluctuate in value and at redemption its value may
be more or less than the initial investment.
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
YIELD=2[(---+1)6-1]
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.
Capital gains and losses are not included in the yield calculation.
The INCOME FUND's yield for the thirty days ended September 30, 1999
was 5.531%. Yield fluctuations may reflect changes in the INCOME FUND's net
income, and portfolio changes resulting from net purchases or net redemptions of
INCOME FUND shares may affect its yield. Accordingly, the INCOME FUND's yield
may vary from day to day, and the yield stated for a particular past period is
not necessarily representative of its future yield. The INCOME FUND's yield is
not guaranteed, nor is its principal insured.
The FUNDS may also compare their performance to other mutual funds
with similar investment objectives and to the industry as a whole as reported by
Lipper Analytical Services, Inc., Morningstar Principia Pro, Money, Forbes,
Business Week and Barron's magazines and The Wall Street Journal. (Lipper
Analytical Services, Inc. and Morningstar Principia Pro are independent ranking
services that rank mutual funds based upon total return performance.) The FUNDS
may also compare their performance to the Dow Jones Industrial Average, NASDAQ
Composite Index, NASDAQ Industrials Index, Value Line Composite Index, the
Standard & Poor's 500 Stock Index, the Standard & Poor's/Barra Value Index, the
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Russell 2000 Index, the Wilshire Mid Cap Value Index, the Consumer Price Index
and the Lehman Brothers Intermediate Government/Corporate Index.
RETIREMENT PLANS
The FUNDS offer the following retirement plans that may be funded with
purchases of shares of the FUNDS and may allow investors to reduce their income
taxes:
Individual Retirement Accounts
Individual shareholders may establish their own Individual Retirement
Accounts ("IRA"). Each of the FUNDS currently offers two types of IRAs that can
be adopted by executing the appropriate Internal Revenue Service ("IRS") Form.
Traditional IRA. In a Traditional IRA, amounts contributed to the IRA
may be tax deductible at the time of contribution depending on whether the
shareholder is an "active participant" in an employer-sponsored retirement plan
and the shareholder's income. Distributions from a Traditional IRA will be taxed
at distribution except to the extent that the distribution represents a return
of the shareholder's own contributions for which the shareholder did not claim
(or was not eligible to claim) a deduction. Distributions prior to age 59-1/2
may be subject to an additional 10% tax applicable to certain premature
distributions. Distributions must commence by April 1 following the calendar
year in which the shareholder attains age 70-l/2. Failure to begin distributions
by this date (or distributions that do not equal certain minimum thresholds) may
result in adverse tax consequences. Roth IRA. In a Roth IRA, amounts contributed
to the IRA are taxed at the time of contribution, but distributions from the IRA
are not subject to tax if the shareholder has held the IRA for certain minimum
periods of time (generally, until age 59-1/2). Shareholders whose incomes exceed
certain limits are ineligible to contribute to a Roth IRA. Distributions that do
not satisfy the requirements for tax-free withdrawal are subject to income taxes
(and possibly penalty taxes) to the extent that the distribution exceeds the
shareholder's contributions to the IRA. The minimum distribution rules
applicable to Traditional IRAs do not apply during the lifetime of the
shareholder. Following the death of the shareholder, certain minimum
distribution rules apply.
For Traditional and Roth IRAs, the maximum annual contribution
generally is equal to the lesser of $2,000 or 100% of the shareholder's
compensation (earned income). An individual may also contribute to a Traditional
IRA or Roth IRA on behalf of his or her spouse provided that the individual has
sufficient compensation (earned income). Contributions to a Traditional IRA
reduce the allowable contribution under a Roth IRA, and contributions to a Roth
IRA reduce the allowable contribution to a Traditional IRA.
Simplified Employee Pension Plan
A Traditional IRA may also be used in conjunction with a Simplified
Employee Pension Plan ("SEP-IRA"). A SEP-IRA is established through execution of
Form 5305-SEP
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<PAGE>
together with a Traditional IRA established for each eligible employee.
Generally, a SEP-IRA allows an employer (including a self-employed individual)
to purchase shares with tax deductible contributions, which may not exceed
annually for any one participant 15% of compensation (disregarding for this
purpose compensation in excess of $160,000 per year). The $160,000 compensation
limit applies for 1999 and is adjusted periodically for cost of living
increases. A number of special rules apply to SEP Plans, including a requirement
that contributions generally be made on behalf of all employees of the employer
(including for this purpose a sole proprietorship or partnership) who satisfy
certain minimum participation requirements.
403(b)(7) Custodial Account
A 403(b)(7) Custodial Account is available for use in conjunction with
the 403(b)(7) program established by certain educational organizations and other
organizations that are exempt from tax under 501(c)(3) of the Internal Revenue
Code, as amended (the "Code"). Amounts contributed to the custodial account in
accordance with the employer's 403(b)(7) program will be invested on a
tax-deductible basis in shares of any Fund. Various contribution limits apply
with respect to 403(b)(7) arrangements.
Defined Contribution Retirement Plan (401(k))
A prototype defined contribution plan is available for employers who
wish to purchase shares of a FUND with tax deductible contributions. The plan is
a cash or deferred arrangement profit sharing plan for employers who wish to
allow eligible employees to elect to reduce their compensation and have such
amounts contributed to the plan. The limit on employee salary reduction
contributions is $10,000 annually (as adjusted for cost-of-living increases)
although lower limits may apply as a result of non-discrimination requirements
incorporated into the plan.
Retirement Plan
A profit-sharing plan and pension plan are available for use by sole
proprietors, partnerships and corporations.
Requests for information and forms concerning the retirement plans
should be directed to the Corporation. Because a retirement program may involve
commitments covering future years, it is important that the investment objective
of the FUNDS be consistent with the participant's retirement objectives.
Premature withdrawal from a retirement plan will result in adverse tax
consequences. Consultation with a competent financial and tax adviser regarding
the retirement plans is recommended.
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
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<PAGE>
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.
The right to redeem shares of the FUNDS will be suspended for any
period during which the New York Stock Exchange is closed because of financial
conditions or any other extraordinary reason and may be suspended for any period
during which (a) trading on the New York Stock Exchange is restricted pursuant
to rules and regulations of the Securities and Exchange Commission, (b) the
Securities and Exchange Commission has by order permitted such suspension, or
(c) an emergency, as defined by rules and regulations of the Securities and
Exchange Commission, exists as a result of which it is not reasonably
practicable for the Funds to dispose of their securities or fairly to determine
the value of their net assets.
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 (i.e., "markups" when the
market maker sells a security and "markdowns" when the market maker purchases a
security) 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
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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, 1999, September 30, 1998 and September 30, 1997 to brokers totaled
$47,629 on transactions involving securities having a total market value of
$14,134,173, $56,006 on transactions involving securities having a total market
value of $17,845,529 and $28,624 on transactions involving securities having a
total market value of $8,983,205, respectively. Brokerage commissions paid by
the INCOME FUND during the fiscal years ended September 30, 1999, September 30,
1998 and September 30, 1997 to brokers totaled $3,775 on transactions involving
securities having a total market value of $1,137,501, $4,492 on transactions
involving securities having a total market value of $1,365,885 and $4,210 on
transactions involving securities having a total market value of $1,019,905,
respectively. All of such brokers provided research services to the Advisor.
CUSTODIAN AND TRANSFER AGENT
Firstar Bank, N.A., 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, acts as custodian for the FUNDS. As such, Firstar Bank, N.A. 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 Bank, N.A. 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 Mutual Fund Services, LLC, an
affiliate of Firstar Bank, N.A., acts as the FUNDS' fund accountant, transfer
agent and dividend disbursing agent. Firstar Mutual Fund Services, LLC has
entered into a fund accounting services agreement with the FUNDS pursuant to
which it acts as fund accountant. As fund accountant Firstar Mutual Fund
Services, LLC 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 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, 1999, September 30, 1998
and September 30, 1997, the VALUE FUND paid $24,200, $23,774 and $23,890,
respectively, pursuant to the fund accounting services agreement. During the
fiscal years ended September 30, 1999, September 30, 1998 and September 30,
1997, the INCOME FUND paid $25,302, $27,895 and $24,385, respectively, pursuant
to the fund accounting services agreement.
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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"). Each of the FUNDS has so
qualified in each of its fiscal years. If a FUND fails to qualify as a regulated
investment company under Subchapter M in any fiscal year, it will be treated as
a corporation for federal income tax purposes. As such, the FUND would be
required to pay income taxes on its net investment income and net realized
capital gains, if any, at the rates generally applicable to corporations.
Shareholders of a FUND that did not qualify as a regulated investment company
under Subchapter M would not be liable for income tax on the FUND's net
investment income or net realized capital gains in their individual capacities.
Distributions to shareholders, whether from the FUND's net investment income or
net realized capital gain, would be treated as taxable dividends to the extent
of accumulated earnings and profits of the FUND.
Each of the FUNDS intends to distribute substantially all of its net
investment income and net capital gains each fiscal year. Dividends from each
FUND's net investment income, including short-term capital gains, are taxable to
shareholders as ordinary income, while distributions from each FUND's net
realized long-term capital gains are taxable as long-term capital gains
regardless of the shareholder's holding period for the shares. Such dividends
and distributions are taxable to shareholders, whether received in cash or
additional shares of a FUND. A portion of the income distributions of the FUNDS
may be eligible for the 70% dividends-received deduction for domestic corporate
shareholders.
Any dividend or capital gains distribution paid shortly after a
purchase of shares of a FUND 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 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.
Redemptions of shares will generally result in a capital gain or loss
for income tax purposes. Such capital gain or loss will be long term or short
term, depending upon the holding period. However, if a loss is realized on
shares held for six months or less, and the shareholder received a capital gain
distribution during that period, then such loss is treated as a long-term
capital loss to the extent of the capital gain distribution received.
Each FUND 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 such FUND with his social security number or other
tax 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
underreporting of income. The certification form is included as part of the
share purchase application and should be completed when the account is opened.
This section is not intended to be a complete discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors may also be
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subject to state and local taxes. Investors are urged to consult with their
respective advisers for a complete review of the tax ramifications of an
investment in a FUND.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Wallace Sanders & Company, Irving, Texas, has been selected as the
independent certified public accountants for the FUNDS. Wallace Sanders &
Company acquired the business of Kinder & Wyman, P.C., effective October 1,
1999.
CAPITAL STRUCTURE
The Corporation's Articles of Incorporation permit the Board of
Directors to issue 30,000,000 shares of Common Stock, $1.00 par value. The
Common Stock is divisible into an unlimited number of "series," each of which is
a separate FUND. Each share of a FUND represents an equal proportionate interest
in that FUND. Shareholders are entitled: (i) to one vote per full share of
Common Stock; (ii) to such distributions as may be declared by the Corporation's
Board of Directors out of funds legally available; and (iii) upon liquidation,
to participate ratably in the assets available for distribution. There are no
conversion or sinking fund provisions applicable to the shares, and the holders
have no preemptive rights and may not cumulate their votes in the election of
directors. Consequently, the holders of more than 50% of the shares of Common
Stock voting for the election of directors can elect the entire Board of
Directors and in such event the holders of the remaining shares voting for the
election of directors will not be able to elect any person or persons to the
Board of Directors. The shares are redeemable and are transferable. All shares
issued and sold by the FUNDS will be fully paid and non-assessable. Fractional
shares of Common Stock entitle the holder to the same rights as whole shares.
The Board of Directors may classify or reclassify any unissued shares
of the FUNDS and may designate or redesignate the name of any outstanding series
of shares of the FUNDS. As a general matter, shares are voted in the aggregate
and not by series, except where voting by series would be required by Texas law
or the Investment Company Act of 1940 (e.g., a change in investment policy or
approval of an investment advisory agreement). All consideration received from
the sale of shares of any series of the FUNDS' shares, together with all income,
earnings, profits and proceeds thereof, belong to that series and will be
charged with the liabilities in respect of that series and of that series' share
of the general liabilities of the FUNDS in the proportion that the total net
assets of the series bear to the total net assets of all series of the FUNDS'
shares. The net asset value of a share of any series is based on the assets
belonging to that series less the liabilities charged to that series and
dividends may be paid on shares of any series of Common Stock only out of
lawfully available assets belonging to that series. In the event of liquidation
or dissolution of the FUNDS, the holders of each series will be entitled out of
the assets of the FUNDS available for distribution, to the assets belonging to
that series.
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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 fact or 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
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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
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 debt 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.
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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.
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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.
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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.
B-35
