STATEMENT OF ADDITIONAL INFORMATION April 29, 1996
THE AQUINAS FUNDS, INC.
5310 Harvest Hill Road
Suite 248
Dallas, Texas 75230
Call 1-214-233-6655
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of The Aquinas Funds,
Inc. dated April 29, 1996. Requests for copies of the Prospectus should
be made by writing to The Aquinas Funds, Inc., 5310 Harvest Hill Road,
Dallas, Texas 75230, Attention: Corporate Secretary, or by calling 1-
214-233-6655.
THE AQUINAS FUNDS, INC.
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . B-1
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . B-3
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . B-14
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . B-14
DIRECTORS AND OFFICERS OF THE COMPANY . . . . . . . . . . . . . . . . B-14
INVESTMENT ADVISER, PORTFOLIO MANAGERS AND ADMINISTRATOR . . . . . . B-17
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . B-20
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . B-21
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . B-21
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . B-21
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-23
STOCKHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . B-24
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . B-25
DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . . . B-26
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . B-32
INVESTMENT RESTRICTIONS
The Aquinas Funds, Inc. (the "Company") is an open-end
diversified management investment company which is authorized to establish
and operate one or more separate series of mutual funds (herein "Funds" or
individually a "Fund"). The Company currently consists of four funds:
the Aquinas Fixed Income Fund (the "Fixed Income Fund"), the Aquinas
Equity Income Fund (the "Equity Income Fund"), the Aquinas Equity Growth
Fund (the "Equity Growth Fund") and the Aquinas Balanced Fund (the
"Balanced Fund"). As set forth in the Prospectus dated April 29, 1996 of
the Company under the caption "INFORMATION ABOUT INVESTMENT OBJECTIVES AND
POLICIES," the investment objective of the Fixed Income Fund is to provide
a high level of current income, with a reasonable opportunity for capital
appreciation; the investment objective of the Equity Income Fund is to
produce long-term growth of capital and a high level of current income;
the investment objective of the Equity Growth Fund is to produce long-term
capital appreciation; and the investment objective of the Balanced Fund is
to provide long-term capital growth consistent with reasonable risk to
principal. Consistent with these investment objectives, each of the Funds
has adopted the following 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 stockholder's 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.
1. Each of the Funds will diversify its assets in different
companies and will not purchase securities of any issuer if, as a result
of such purchase, the Fund would own more than 10% of the outstanding
voting securities of such issuer or more than 5% of the Fund's assets
would be invested in securities of such issuer (except that up to 25% of
the value of the Fund's total assets may be invested without regard to
this limitation). This restriction does not apply to obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities.
2. None of the Funds will purchase securities on margin,
participate in a joint trading account or sell securities short (except
for such short term credits as are necessary for the clearance of
transactions); provided, however, that the Fixed Income Fund and the
Balanced Fund may (i) enter into interest rate swap transactions; (ii)
purchase or sell futures contracts; (iii) make initial and variation
margin payments in connection with purchases or sales of futures contracts
or options on futures contracts; (iv) write or invest in put or call
options; and (v) enter into foreign currency exchange contracts.
3. None of the Funds will borrow money or issue senior
securities, except the Funds may borrow for temporary or emergency
purposes, and then only from banks, in an amount not exceeding 25% of the
value of the Fund's total assets. The Funds will not borrow money for the
purpose of investing in securities, and the Funds will not purchase any
portfolio securities while any borrowed amounts remain outstanding.
Notwithstanding the foregoing, the Fixed Income Fund and the Balanced Fund
may enter into options, futures, options on futures, foreign currency
exchange contracts and interest rate swap transactions.
4. None of the Funds will pledge or hypothecate its assets,
except to secure borrowings for temporary or emergency purposes.
5. None of the Funds will act as an underwriter or distributor
of securities other than shares of the applicable Fund (except to the
extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933, as amended, in the disposition of
restricted securities).
6. None of the Funds will make loans, except through (i) the
acquisition of debt securities from the issuer or others which are
publicly distributed or are of a type normally acquired by institutional
investors; or (ii) repurchase agreements and except that the Funds may
make loans of portfolio securities to unaffiliated persons who are deemed
to be creditworthy if any such loans are secured continuously by
collateral at least equal to the market value of the securities loaned in
the form of cash and/or securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and provided that no such
loan will be made if upon the making of that loan more than 30% of the
value of the lending Fund's total assets would be the subject of such
loans.
7. None of the Funds will concentrate 25% or more of its total
assets, determined at the time an investment is made, in securities issued
by companies primarily engaged in the same industry. This restriction
does not apply to obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities.
8. None of the Funds will purchase or sell real estate or real
estate mortgage loans and will not make any investments in real estate
limited partnerships but the Funds may purchase and sell securities that
are backed by real estate or issued by companies that invest in or deal in
real estate. Certain of the Funds may purchase mortgage-backed securities
and similar securities in accordance with their investment objectives and
policies.
9. None of the Funds will purchase or sell any interest in any
oil, gas or other mineral exploration or development program, including
any oil, gas or mineral leases.
10. None of the Funds will purchase or sell commodities or
commodities contracts, except that the Fixed Income Fund and the Balanced
Fund may enter into futures contracts and options on futures contracts.
Each of the Funds has adopted certain other investment
restrictions which are not fundamental policies and which may be changed
without stockholder approval. These additional restrictions are as
follows:
1. The Funds will not acquire or retain any security
issued by a company, an officer or director of which is an
officer or director of the Company or an officer, director or
other affiliated person of the Funds' investment adviser.
2. None of the Funds will 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. None of the Funds will purchase securities of other
investment companies (as defined in the Investment Company Act
of 1940 (the "1940 Act")), except as part of a plan of merger,
consolidation, reorganization or acquisition of assets.
4. No Fund's investments in illiquid securities will
exceed 5% of the total value of its net assets.
5. None of the Funds will make investments for the
purpose of exercising control or management of any company.
6. No Fund's investment in warrants, valued at the lower
of cost or market, will exceed 5% of the total value of the
Fund's net assets. Included within that amount, but not to
exceed 2% of the total value of the Fund's net assets, may be
warrants that are not listed on the New York Stock Exchange or
the American Stock Exchange.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is
made. If these restrictions are adhered to at the time an investment is
made, and such percentage subsequently changes as a result of changing
market values or some similar event, no violation of a Fund's fundamental
restrictions will be deemed to have occurred. Any changes in a Fund's
investment restrictions made by the Board of Directors will be
communicated to stockholders prior to their implementation.
INVESTMENT POLICIES AND TECHNIQUES
In addition to the policies described above and in the
Prospectus, the investment policies and techniques described below have
been adopted by the Funds as indicated.
Lending Portfolio Securities
Each of the Funds may lend a portion of its portfolio securities
although none of the Funds intends to engage in any such transaction if it
would cause more than 5% 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 lending Fund
could allow the borrower to receive the income from the collateral and
charge the borrower a fee. In either event, the Fund would receive the
amount of dividends or interest paid on the loaned securities.
Usually these loans would be made to brokers, dealers or
financial institutions. Loans would be fully secured by collateral
deposited with the 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 Aquinas Investment Advisers,
Inc., the Funds' investment adviser (the "Adviser") and the Funds'
portfolio managers, to be of good standing. Loans will not be made
unless, in the judgment of the Adviser, the consideration which can be
earned from such loans justifies the risk.
The borrower, upon notice, must redeliver the loaned securities
within 5 business days. In the event that voting rights with respect to
the loaned securities pass to the borrower and a material proposal
affecting the securities arises, the loan may be called or the Fund will
otherwise secure or be granted a valid proxy in time for it to vote on the
proposal.
In making such loans, the Fund may utilize the services of a
loan broker and pay a fee therefor. The Fund may incur additional
custodian fees for services in connection with lending of securities.
Mortgage-Backed Securities
The Fixed Income Fund and the Balanced Fund may invest in
Mortgage-Backed Securities, which are securities that directly or
indirectly represent a participation in, or are secured by and payable
from, mortgage loans secured by real property. Mortgage-Backed Securities
include: (i) Guaranteed Government Agency Mortgage-Backed Securities;
(ii) Privately-Issued Mortgage-Backed Securities; and (iii) collateralized
mortgage obligations and multiclass pass-through securities. These
securities are described below.
Guaranteed Government Agency Mortgage-Backed Securities.
Mortgage-Backed Securities include Guaranteed Government Agency 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 Fixed Income Fund and the Balanced 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 ordinarily may
not invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each Fannie Mae Certificate will entitle the registered holder
thereof to receive amounts representing such holder's pro rata interest in
scheduled principal payments and interest payments (at such Fannie Mae
Certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), and any principal
prepayments, on the mortgage loans in the pool represented by such Fannie
Mae Certificate and such holder's proportionate interest in the full
principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest
on each Fannie Mae Certificate will be guaranteed by Fannie Mae, which
guarantee is not backed by the full faith and credit of the United States
Government.
Freddie Mac Certificates. Freddie Mac is a corporate
instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970, as amended (the "FHLMC Act"). Freddie Mac was
established primarily for the purpose of increasing the availability of
mortgage credit for the financing of needed housing. The principal
activity of Freddie Mac currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in
the form of mortgage securities, primarily Freddie Mac Certificates.
Freddie Mac guarantees to each registered holder of a Freddie
Mac Certificate the timely payment of interest at the rate provided for by
such Freddie Mac Certificate, whether or not received. Freddie Mac also
guarantees to each registered holder of a Freddie Mac Certificate ultimate
collection of all principal of the related mortgage loans, without any
offset or deduction, but, generally, does not guarantee the timely payment
of scheduled principal. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on
an underlying mortgage loan, but not later than 30 days following
(i) foreclosure sale, (ii) payment of claim by any mortgage insurer, or
(iii) the expiration of any right of redemption, whichever occurs later,
but in any event no later than one year after demand has been made upon
the mortgagor for accelerated payment of principal. The obligations of
Freddie Mac under its guarantee are obligations solely of Freddie Mac and
are not backed by the full faith and credit of the United States
Government.
Privately-Issued Mortgage-Backed Securities. Privately-Issued
Mortgage-Backed Securities 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 and investors in mortgage loans, including
savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
Privately-Issued Agency Mortgage-Backed Securities usually are backed by a
pool of Ginnie Mae, Fannie Mae and Freddie Mac Certificates. Privately-
Issued Non-Agency Mortgage-Backed Securities usually are backed by a pool
of conventional fixed rate or adjustable rate mortgage loans that are not
guaranteed by an entity having the credit status of Ginnie Mae, Fannie Mae
or Freddie Mac, and generally are structured with one or more types of
credit enhancement. As more fully described below, these securities may
include collateralized mortgage obligations, multiclass pass-through
securities and stripped mortgage-backed securities.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. Mortgage-Backed Securities include collateralized mortgage
obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but
also may be collateralized by other Mortgage-Backed Securities or whole
loans (such collateral collectively hereinafter referred to as "Mortgage
Assets"). CMOs include multiclass pass-through securities, which can be
equity interests in a trust composed of Mortgage Assets. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs or make
scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the United States
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate
Mortgage Investment Conduit.
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as a "tranche,"
is issued at a specific fixed or floating coupon rate and has a stated
maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates. Interest is
paid or accrues on classes of the CMOs on a monthly, quarterly or
semiannual basis. The principal of and interest on the Mortgage Assets
may be allocated among the several classes of a CMO series in innumerable
ways, some of which bear substantially more risk than others.
Miscellaneous. The yield characteristics of Mortgage-Backed
Securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans generally may be prepaid at any
time. As a result, if a Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have
the opposite effect of increasing yield to maturity. Conversely, if a
Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Derivative 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, 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 possibly loss of principal.
Prepayments on a pool of mortgage loans are influenced by a
variety of economic, geographic, social and other factors, including
changes in the mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed rate mortgage loans
will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Accordingly, amounts available
for reinvestment by a 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 Company's
Board of Directors. In accordance with such guidelines, the Adviser and
the portfolio managers will monitor each Fund's investments in such
securities with particular regard to trading activity, availability of
reliable price information and other relevant information.
Interest rates on variable rate Mortgage-Backed Securities are
subject to periodic adjustment based on changes or multiples of changes in
an applicable index. The One-Year Treasury Index and LIBOR are among the
common interest rate indexes. The One Year Treasury Index is the figure
derived from the average weekly quoted yield on U.S. Treasury Securities
adjusted to a constant maturity of one year. LIBOR, the London interbank
offered rate, is the interest rate that the most creditworthy
international banks dealing in U.S. dollar-denominated deposits and loans
charge each other for large dollar-denominated loans. LIBOR is also
usually the base rate for large dollar-denominated loans in the
international market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or twelve month intervals.
Illiquid Securities
Each of the Funds may invest in illiquid securities, which
include certain restricted securities (privately placed securities),
repurchase agreements maturing in more than seven days and other
securities that are not readily marketable. However, no Fund will acquire
illiquid securities if, as a result, they would comprise more than 5% of
the value of the Fund's net assets. The Board of Directors of the Company
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 this 5% limitation. Securities eligible to be
resold pursuant to Rule 144A under the Securities Act may be considered
liquid by the Board of Directors.
Restricted securities may be sold 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, a 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 Fund may be permitted to sell a security
under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a 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 Company. If through the appreciation of
restricted securities or the depreciation of unrestricted securities, a
Fund should be in a position where more than 5% of the value of its net
assets are invested in illiquid assets, including restricted securities,
the Fund will take such steps as is deemed advisable, if any, to protect
liquidity.
U.S. Government Securities
Each of the Funds may invest in securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities which include
Treasury securities which differ only in their interest rates, maturities
and times of issuance. Treasury Bills have initial maturities of one year
or less; Treasury Notes have initial maturities of one to ten years; and
Treasury Bonds generally have initial maturities of greater than ten
years. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities, for example, Ginnie Mae Certificates, are supported
by the full faith and credit of the U.S. Treasury; others, such as those
of the Federal Home Loan Banks, by the right of the issuer to borrow 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.
Hedging Instruments
The Fixed Income Fund and the Balanced Fund may engage in
various transactions including futures and options on futures which will
be used primarily to attempt to minimize adverse principal fluctuations
and unfavorable fluctuations in interest rates.
Futures Contracts. When a Fund purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future
date. When a Fund sells a futures contract, it agrees to sell the
underlying instrument at a specified future date. The price at which the
purchase and sale will take place is fixed when the Fund enters into the
contract. Futures can be held until their delivery dates, or can be
closed out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease
in tandem with the value of its underlying instrument. Therefore,
purchasing futures contracts will tend to increase a Fund's exposure to
positive and negative price fluctuations in the underlying instrument,
much as if the Fund had purchased the underlying instrument directly.
When the Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the market.
Selling futures contracts, therefore, will tend to offset both positive
and negative market price changes, much as if the underlying instrument
had been sold.
Futures Margin Payments. The purchaser or seller of a futures
contract is not required to deliver or pay for the underlying instrument
unless the contract is held until the delivery date. However, both the
purchaser and seller are required to deposit "initial margin" with a
futures broker known as a Futures Commission Merchant (FCM), when the
contract is entered into. Initial margin deposits are equal to a
percentage of the contract's value. If the value of either party's
position declines, that party will be required to make additional
"variation margin" payments to settle the change in value on a daily
basis. The party that has a gain may be entitled to receive all or a
portion of this amount. Initial and variation margin payments do not
constitute purchasing securities on margin for purposes of a Fund's
investment limitations. In the event of the bankruptcy of an FCM that
holds margin on behalf of a Fund, the Fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's
other customers, potentially resulting in losses to the Fund.
Purchasing Put and Call Options. By purchasing a put option, a
Fund obtains the right (but not the obligation) to sell the option's
underlying instrument at a fixed strike price. In return for this right,
the Fund pays the current market price for the option (known as the option
premium). A Fund may purchase options on futures contracts on debt
securities. The Fund may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. If the
option is allowed to expire, the Fund will lose the entire premium it
paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a
put option position by closing it out in the secondary market at its
current price, if a liquid secondary market exists. The buyer of a put
option can expect to realize a gain if security prices fall substantially.
However, if the underlying instrument's price does not fall enough to
offset the cost of purchasing the option, a put buyer can expect to suffer
a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those
of put options, except that the purchaser of a call option obtains the
right to purchase, rather than sell, the underlying instrument at the
option's strike price. A call buyer attempts to participate in potential
price increases of the underlying instrument with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can
expect to suffer a loss if security prices do not rise sufficiently to
offset the cost of the option. Only exchange listed options will be
acquired.
Writing Call and Put Options. When a Fund writes a call option,
it receives a premium and agrees to sell the related investments to a
purchaser of the call during the call period (usually not more than nine
months) at a fixed exercise price (which may differ from the market price
of the related investments) regardless of market price changes during the
call period. If the call is exercised, the Fund forgoes any gain from an
increase in the market price over the exercise price. When writing an
option on a futures contract the Fund will be required to make margin
payments to an FCM as described above for futures contracts.
To terminate its obligation on a call which it has written, the
Fund may purchase a call in a "closing purchase transaction." (As
discussed above, the Fund may also purchase calls other than as part of
such closing transactions.) A profit or loss will be realized depending
on the amount of option transaction costs and whether the premium
previously received is more or less than the price of the call purchased.
A profit may also be realized if the call lapses unexercised, because the
Fund retains the premium received. Any such profits are considered short-
term gains for federal income tax purposes and, when distributed, are
taxable as ordinary income.
Writing calls generally is a profitable strategy if prices
remain the same or fall. Through receipt of the option premium, a call
writer mitigates the effects of a price decline. At the same time,
because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security
price increases.
When a Fund writes a put option, it takes the opposite side of
the transaction from the option's purchaser. In return for receipt of a
premium, the Fund assumes the obligation to pay the strike price for the
option's underlying instrument if the other party to the option chooses to
exercise it. The Funds may only write covered puts. For a put to be
covered, the Fund must maintain in a segregated account cash or high-
quality, short-term readily marketable obligations equal to the option
price. A profit or loss will be realized depending on the amount of
option transaction costs and whether the premium previously received is
more or less than the put purchased in a closing purchase transaction. A
profit may also be realized if the put lapses unexercised because the Fund
retains the premium received. Any such profits are considered short-term
gains for federal income tax purposes and, when distributed, are taxable
as ordinary income.
Combined Option Positions. The Funds may purchase and write
options (subject to the limitations discussed above) in combination with
each other to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a
call option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option
in the event of a substantial price increase. Because combined options
involve multiple trades, they result in higher transaction costs and may
be more difficult to open and close out.
Correlation of Price Changes. Because there are a limited
number of types of exchange-traded options and futures contracts, it is
likely that the standardized contracts available will not match a Fund's
current or anticipated investments. A Fund may invest in options and
futures contracts based on securities which differ from the securities in
which it typically invests. This involves a risk that the options or
futures position will not track the performance of the Fund's investments.
Options and futures prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures prices are affected by such
factors as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same
way. Imperfect correlation may also result from differing levels of
demand in the options and futures markets and the securities markets, from
structural differences in how options and futures and securities are
traded, or from imposition of daily price fluctuation limits or trading
halts. A Fund may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends
to purchase in order to attempt to compensate for differences in
historical volatility between the contract and the securities, although
this may not be successful in all cases. If price changes in the Fund's
options or futures positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains or result
in losses that are not offset by gains in other investments. Successful
use of these techniques requires skills different from those needed to
select portfolio securities.
Liquidity of Options and Futures Contracts. There is no
assurance a liquid secondary market will exist for any particular options
or futures contract at any particular time. Options may have relatively
low trading volume and liquidity if their strike prices are not close to
the underlying instruments' current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures
contracts, and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is imposed,
it may be impossible for a Fund to enter into new positions or close out
existing positions. If the secondary market for a contract is not liquid
because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require a Fund
to continue to hold a position until delivery or expiration regardless of
changes in its value. As a result, the Fund's access to other assets held
to cover its options or futures positions could also be impaired.
Asset Coverage for Futures and Options Positions. The Funds
will comply with guidelines established by the Securities and Exchange
Commission with respect to coverage of options and futures strategies by
mutual funds, and if the guidelines so require will set aside U.S.
Government securities, cash or liquid high grade debt securities in a
segregated custodial account in the amount prescribed. Securities held in
a segregated account cannot be sold while the futures or option strategy
is outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a large percentage of
the Fund's assets could impede portfolio management or the Fund's ability
to meet redemption requests or other current obligations.
Limitations on Futures and Options Transactions. The Fixed
Income Fund and the Balanced Fund filed a notice of eligibility for
exclusion from the definition of the term "commodity pool operator" with
the Commodity Futures Trading Commission (CFTC) and the National Futures
Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the following
representations:
(1) The Fund will use futures contracts and related
options solely for bona fide hedging purposes within the meaning
of CFTC regulations; provided that the Fund may hold positions
in futures contracts or options that do not fall within the
definition of bona fide hedging transactions if the aggregate
initial margin and premiums required to establish such positions
will not exceed 5% of the liquidation value of the Fund's
assets, after taking into account unrealized profits and losses
on any such contracts (subject to limited exclusions for options
that are in-the-money at the time of purchase); and
(2) The Fund will not market participations to the public
as or in a commodity pool or otherwise as or in a vehicle for
trading in the commodities futures or commodity option markets.
Possible Tax Limitations on Portfolio and Hedging Strategies
The Company intends that the Fixed Income Fund and the Balanced
Fund each qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code for each taxable year. In order to so qualify,
each Fund must, among other things, derive less than 30% of its gross
income from the sale or other disposition of stock or securities (or
options thereon) held less than three months. Due to this limitation,
each Fund will limit the extent to which it engages in the following
activities, but will not be precluded from them: (i) selling investments,
including futures, held for less than three months, whether or not they
were purchased on the exercise of a call; (ii) the writing of calls on
investments held less than three months; (iii) the writing or purchasing
of calls or the purchasing of puts which expire in less than three months;
(iv) effecting closing transactions with respect to calls written or
purchased or puts purchased less than three months previously; and (v)
exercising certain puts or calls held for less than three months.
Special Risks of Hedging and Income Enhancement Strategies
Participation in the options or futures markets involves
investment risks and transactions costs to which the Fixed Income Fund and
the Balanced Fund would not be subject absent the use of these strategies.
If a Fund's portfolio manager(s)' prediction of movements in the direction
of the securities and interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of futures
contracts and options on futures contracts include (i) dependence on the
portfolio manager(s)' ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (ii)
imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities being
hedged; (iii) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (iv) the
possible absence of a liquid secondary market for any particular
instrument at any time; and (v) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "DETERMINATION
OF NET ASSET VALUE," the net asset value of each of the Funds will be
determined as of the close of regular trading (currently 4:00 p.m. Eastern
time) on each day the New York Stock Exchange is open for trading. The
New York Stock Exchange is open for trading Monday through Friday except
New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday,
the New York Stock Exchange will not be open for trading on the succeeding
Monday, unless unusual business conditions exist, such as the ending of a
monthly or the yearly accounting period.
PURCHASE OF SHARES
Each of the Funds has adopted procedures pursuant to Rule 17a-7
under the 1940 Act pursuant to which a Fund may effect a purchase and sale
transaction with an affiliated person of the Fund (or an affiliated person
of such an affiliated person) in which the Fund issues its shares in
exchange for securities of a character which is a permitted investment for
the Fund. For purposes of determining the number of shares to be issued,
the securities to be exchanged will be valued in the manner required by
Rule 17a-7.
DIRECTORS AND OFFICERS OF THE COMPANY
The name, address, age, position(s) with the Company, principal
occupation(s) during the past five years, and certain other information
with respect to each of the directors and officers of the Company are as
follows:
BERNARD P. DiFIORE*, 46, Director, President and Treasurer.
5310 Harvest Hill Road
Suite 248
Dallas, Texas 75230
Mr. DiFiore has been the Executive Director of The Catholic
Foundation since May 1990. The Catholic Foundation provides an endowment
fund for educational, religious and charitable activities and is also a
registered investment adviser providing investment advisory services for
the Foundation, religious organizations, nonprofit agencies and
individuals with substantial portfolios. The Adviser is a wholly-owned
subsidiary of The Catholic Foundation. Mr. DiFiore has been President and
a Director of the Adviser since October 1993. From 1987 to 1990, Mr.
DiFiore was Vice President of August International, a third party health
care administrator and utilization review company.
MICHAEL R. CORBOY, 65, Director.
#2 Braewick Court
Dallas, Texas 75225
Mr. Corboy is President of Corboy Investment Company, a private
investment company. Prior to establishing this firm in 1992, Mr. Corboy
was Chairman and Chief Executive Officer of Amtech Corporation, an
electronics company.
IMELDA GONZALEZ, CDP, 55, Director.
P.O. Box 197
Helotes, Texas 78023
Sister Gonzalez has been the Treasurer General and Chief
Financial Officer of the Congregation of Divine Providence of San Antonio,
Texas since 1987.
THOMAS J. MARQUEZ, 58, Director.
8300 Douglas Avenue,
Suite 800
Dallas, Texas 75225
Mr. Marquez has been a self-employed private investor since
1990. From 1987 to 1990, Mr. Marquez was Chairman of the Board of
Carrington Laboratories, Inc., a pharmaceutical concern.
C. WILLIAM POLLOCK, 47, Director.
2626 Cole Avenue
Suite 300
Dallas, Texas 75204
Mr. Pollock has been chief executive officer of Stratford
Energy, Inc. since January 1993. From 1990 to 1992 he was chief executive
officer of United Gas Pipeline Co. Prior thereto he was chief executive
officer and president of Hanover Energy, Inc.
JOHN L. STRAUSS*, 56, Director.
200 Crescent Court
Suite 1900
Dallas, Texas 75201
Mr. Strauss is a principal of Barrow, Hanley, Mewhinney &
Strauss, an investment advisory firm. Mr. Strauss is a director of the
Adviser.
CHARLES J. TUSA*, 53, Director, Vice President and Secretary.
100 Crescent Court
Suite 1700
Dallas, Texas 75201
Mr. Tusa has been President of Rosewood Management Corp., an
investment counseling firm, since January 1991. Prior thereto, he was
senior vice president of Rosewood Corp., the holding company of Rosewood
Management Corp. Mr. Tusa is a director of the Adviser.
FRANK RAUSCHER, 52, Vice President.
5310 Harvest Hill Road
Suite 245
Dallas, Texas 75230
Mr. Rauscher has been the Chief Operating Officer of Aquinas
Investment Advisers, Inc. since August 1994. Prior thereto he was
President and Chief Executive Officer of American Federal Bank.
_______________
* Messrs. DiFiore, Strauss and Tusa are "interested persons" of the
Company as that term is defined in the 1940 Act.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement Estimated From
Compensation Benefits Accrued Annual Corporation and
from as Part of Fund Benefits Upon Fund Complex
Name of Person Corporation Expenses Retirement Paid to Directors
<S> <C> <C> <C> <C>
Bernard P. DiFiore $0 $0 $0 $0
Michael R. Corboy 0 0 0 0
Imelda Gonzalez, CDP 0 0 0 0
Thomas J. Marquez 0 0 0 0
C. William Pollock 0 0 0 0
John L. Strauss 0 0 0 0
Charles J. Tusa 0 0 0 0
</TABLE>
Although the Company did not compensate directors for services
rendered to the Company, it may reimburse directors for travel expenses
incurred in order to attend meetings of the Board of Directors. During
the fiscal year ended December 31, 1995, there were no reimbursements for
travel expenses. Commencing in fiscal 1996, each director will receive
$500 for each meeting of the Board of Directors attended. Sister Gonzalez
has assigned all directors fees that she receives to her religious order.
As of March 31, 1996, the officers and directors of the Fund as
a group owned less than 1% of the outstanding securities of each Fund. At
March 31, 1996, The Catholic Foundation, 5310 Harvest Hill Road, Suite
248, Dallas, Texas, owned 3,467,047 shares (96.5% of the outstanding) of
the Fixed Income Fund, of which 2,689,768 shares (74.9%) were owned as
trustee and 777,279 shares (21.6%) were beneficially owned; 3,229,460
shares (89.0% of the outstanding) of the Equity Income Fund, of which
2,491,546 shares (68.6%) were owned as trustee and 737,914 shares (20.4%)
were beneficially owned; 962,139 shares (74.0% of the outstanding) of the
Equity Growth Fund, of which 686,512 shares (52.8%) were owned as trustee
and 275,627 shares (21.2%) were beneficially owned; and 2,318,004 shares
(97.0% of the outstanding) of the Balanced Fund, of which 777,024 shares
(32.5%) were owned as trustee and 1,540,980 shares (64.5%) were
beneficially owned. No other person owns of record or beneficially 5% or
more of the outstanding securities of any Fund. By virtue of its stock
ownership, The Catholic Foundation is deemed to "control," as that term is
defined in the 1940 Act, the Balanced Fund. Although The Catholic
Foundation controls the Balanced Fund, it does not control the Company.
INVESTMENT ADVISER, PORTFOLIO MANAGERS AND ADMINISTRATOR
The Board of Directors of the Company supervises the management,
activities and affairs of the Funds and has approved contracts with the
following business organizations to provide, among other services, day-to-
day management required by the Funds.
Investment Adviser. As set forth in the Prospectus under the
caption "MANAGEMENT OF THE FUNDS," the investment adviser to the Funds is
Aquinas Investment Advisers, Inc., 5310 Harvest Hill, Suite 248, Dallas,
Texas 75230 (the "Adviser"). The Adviser is a wholly-owned subsidiary of
The Catholic Foundation and was organized to become the investment adviser
to the Funds. Pursuant to investment advisory agreements entered into
between each of the Funds and the Adviser (the "Management Agreements"),
the Adviser provides consulting, investment and administrative services to
the Funds. The specific investments for each Fund will be made by
portfolio managers selected for the Funds by the Adviser. The Adviser has
overall responsibility for assets under management, provides overall
investment strategies and programs for the Funds, selects portfolio
managers, allocates assets among the portfolio managers and monitors and
evaluates portfolio managers' performance. The Adviser and the Funds
enter into advisory agreements with the portfolio managers. The Adviser
also provides the Funds with office space, equipment and personnel
necessary to operate and administer the Funds' business and to supervise
the provision of services by third parties such as the transfer agent and
the custodian.
For the fiscal year ended December 31, 1995, the Adviser waived
its advisory fees with respect to each of the Funds to the extent that the
aggregate annual operating expenses, including the investment advisory fee
and the administration fee but excluding interest, taxes, brokerage
commissions and other costs incurred in connection with the purchase or
sale of portfolio securities, and extraordinary items, exceeded that
percentage of the average net assets of the Fund for such year, as
determined by valuations made as of the close of each business day of the
year, which is the most restrictive percentage provided by the state laws
of the various states in which the shares of the Funds are qualified for
sale. As of the date of this Statement of Additional Information, the
percentage applicable to each Fund is 2-1/2% on the first $30,000,000 of its
average net assets, 2% on the next $70,000,000 of its average net assets
and 1-1/2% on net assets in excess of $100,000,000. Additionally, the
Adviser voluntarily agreed to reimburse each Fund to the extent aggregate
annual operating expenses as described above exceeded 1.00%, 1.50%, 1.50%
and 1.50% of the average daily net assets of the Fixed Income Fund, Equity
Income Fund, Equity Growth Fund and Balance Fund, respectively. The
Adviser may voluntarily continue to waive all or a portion of the advisory
fees otherwise payable by the Funds. Such a waiver may be terminated at
any time in the Adviser's discretion. Each Fund monitors its expense
ratio on a monthly basis. If the accrued amount of the expenses of the
Fund exceeds the expense limitation, the Fund creates an account
receivable from the Adviser for the amount of such excess. In such a
situation the monthly payment of the Adviser's fee is 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.
For the fiscal year ended December 31, 1995 and the period from
January 3, 1994 (commencement of operations) through December 31, 1994,
the fees paid to the Adviser for management and investment advisory
services were $200,763 and (net of waivers of $31,991) $137,298,
respectively, for the Fixed Income Fund, $367,212 and $330,721,
respectively, for the Equity Income Fund, (net of waivers of $13,165)
$110,950 and (net of waivers of $22,334) $62,902, respectively, for the
Equity Growth Fund and $296,312 and $301,801, respectively, for the
Balanced Fund.
Each Management Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Company or by the vote of a majority (as defined in the
1940 Act) of the outstanding shares of the applicable Fund, and (ii) by
the vote of a majority of the directors of the Company who are not parties
to the Management Agreement or interested persons of the Adviser, cast in
person at a meeting called for the purpose of voting on such approval.
Each Management Agreement provides that it may be terminated at any time
without the payment of any penalty, by the Board of Directors of the
Company or by vote of the majority of the applicable Fund's stockholders
on sixty (60) days' written notice to the Adviser, and by the Adviser on
the same notice to the Fund, and that it shall be automatically terminated
if it is assigned.
Portfolio Managers. Each portfolio manager makes specific
portfolio investments for that segment of the assets of a Fund under its
management in accordance with the particular Fund's investment objective
and the portfolio manager's investment approach and strategies.
Portfolio managers are employed or terminated by the Adviser
subject to prior approval by the Board of Directors of the Company. The
employment of a new portfolio manager currently requires the prior
approval of the shareholders of the affected Fund. The Funds, however,
have requested an order of the Securities and Exchange Commission
exempting the Funds from the requirements under the Investment Company Act
of 1940 relating to shareholder approval of new portfolio managers. There
can be no assurance that such an order will be granted to the Funds.
Selection and retention criteria for portfolio managers include (i) their
historical performance records; (ii) an investment approach that is
distinct in relation to the approaches of each of the Funds' other
portfolio managers; (iii) consistent performance in the context of the
markets and preservation of capital in declining markets; (iv)
organizational stability and reputation; (v) the quality and depth of
investment personnel; and (vi) the ability of the portfolio manager to
apply its approach consistently. Each portfolio manager will not
necessarily exhibit all of the criteria to the same degree. Portfolio
managers are paid by the Adviser (not the Funds).
In general, the policy of the Adviser with respect to each Fund
is to allocate assets approximately equally among the portfolio managers
of each Fund and to maintain such an equal allocation at regular
intervals. Ordinarily, assets will not be allocated from a portfolio
manager whose performance is less than that of the other portfolio
managers of the Fund. These assets of each Fund are reallocated at least
quarterly but may be reallocated more frequently at the discretion of the
Adviser depending on cash flow and the evaluation of each portfolio
manager's performance. The allocation among portfolio managers within a
Fund may be temporarily unequal when portfolio managers are added to or
removed from a Fund or in the event of a net redemption. A portfolio
manager may purchase a particular security for the Fund at the same time
another portfolio manager is selling the same security for the Fund.
The portfolio managers' activities are subject to general
supervision by the Adviser and the Board of Directors of the Company.
Although the Adviser and Board do not evaluate the investment merits of
the portfolio managers' specific securities selections, they do review the
performance of each portfolio manager relative to the selection criteria.
Administrator. As set forth in the Prospectus under the caption
"MANAGEMENT OF THE FUNDS," the administrator and fund accountant to the
Funds is Sunstone Financial Group, Inc. (the "Administrator"). The
administration and fund accounting agreement entered into between the
Funds and the Administrator (the "Administration Agreement") will remain
in effect as long as its continuance is specifically approved at least
annually (i) by the Board of Directors of the Company or by the vote of a
majority (as defined in the 1940 Act) of the outstanding shares of the
Company, and (ii) by a vote of a majority of the directors of the Company
who are not interested persons (as defined in the 1940 Act) of any party
to the Administration Agreement, cast in person at a meeting called for
the purpose of voting on such approval. The Administration Agreement may
be terminated on not less than 60 days' notice after the expiration of the
initial term, without the payment of any penalty, by the Board of
Directors of the Company, by a vote of a majority (as defined in the 1940
Act) of the outstanding shares of the Funds, or by the Administrator. For
the fiscal year ended December 31, 1995 and the period from January 3,
1994 (commencement of operations) through December 31, 1994, the fees paid
to the Administrator were $67,763 and $60,122, respectively, for the Fixed
Income Fund, $74,366 and $70,609, respectively, for the Equity Income
Fund, $25,062 and $18,197, respectively, for the Equity Growth Fund and
(net of waivers of $1,787) $58,199 and $64,436, respectively, for the
Balanced Fund.
The Management Agreements, agreements with the portfolio
managers and the Administration Agreement provide that the Adviser, the
portfolio managers and the Administrator, as the case may be, shall not be
liable to the Funds or their stockholders for anything other than willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties. The Management Agreements, agreements with the
portfolio managers and the Administration Agreement also provide that the
Adviser, the portfolio managers and the Administrator, as the case may
be, and their 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 services to others.
EXCHANGE PRIVILEGE
Investors may exchange shares of a Fund having a value of $500
or more for shares of any other Fund. Investors who are interested in
exercising the exchange privilege should first contact the Funds to obtain
instructions and any necessary forms.
The exchange privilege will not be available if the proceeds
from a redemption of shares of the Funds are paid directly to the investor
or at his or her discretion to any persons other than the Funds. There is
currently no limitation on the number of exchanges an investor may make.
The exchange privilege may be terminated by the Funds upon at least 60
days prior notice to investors.
For federal income tax purposes, a redemption of shares of the
Funds pursuant to the exchange privilege will result in a capital gain if
the proceeds received exceed the investor's tax-cost basis of the shares
of Common Stock redeemed. Such a redemption may also be taxed under state
and local tax laws, which may differ from the Internal Revenue Code of
1986, as amended (the "Code").
CUSTODIAN AND TRANSFER AGENT
United Missouri Bank N.A. ("United Missouri"), P.O. Box 419226,
Kansas City, Missouri 64141, acts as custodian for the Funds. As such,
United Missouri 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 Funds. United Missouri 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.
DST Systems, Inc., 1004 Baltimore, Kansas City,
Missouri 64105-1807, acts as the Funds' transfer agent and dividend
disbursing agent.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, 100 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, has been selected as the independent accountants for
each of the Funds.
ALLOCATION OF PORTFOLIO BROKERAGE
The Funds' securities trading and brokerage policies and
procedures are reviewed by and subject to the supervision of the Company's
Board of Directors. Decisions to buy and sell securities for the Funds
are made by the portfolio managers subject to review by the Adviser and
the Company's Board of Directors. In placing purchase and sale orders for
portfolio securities for a Fund, it is the policy of the portfolio
managers 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. Many of these
transactions involve payment of a brokerage commission by a Fund. In some
cases, transactions are with firms who act as principals for their own
accounts. 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 portfolio manager'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 reputation, 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. Over-the-
counter securities are generally purchased and sold directly with
principal market makers who retain the difference in their cost in the
security and its selling price. In some instances, the portfolio managers
may determine that better prices are available from non-principal market
makers who are paid commissions directly. Although the Funds do not
intend to market their shares through intermediary broker-dealers, a Fund
may place portfolio orders with broker-dealers who recommend the purchase
of Fund shares to clients (if the portfolio managers believe the
commissions and transaction quality are comparable to that available from
other brokers) and may allocate portfolio brokerage on that basis.
In allocating brokerage business for a Fund, the portfolio
managers also take 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 portfolio managers believe these services have
substantial value, they are considered supplemental to their own efforts
in the performance of their duties. Other clients of the portfolio
managers may indirectly benefit from the availability of these services to
the portfolio managers, and the Fund may indirectly benefit from services
available to the portfolio managers as a result of transactions for other
clients. Each of the portfolio managers may cause a Fund to pay a broker
which provides brokerage and research services to the portfolio manager a
commission for effecting a securities transaction in excess of the amount
another broker would have charged for effecting the transaction, if the
portfolio manager 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 portfolio manager's overall responsibilities with
respect to the Fund and the other accounts as to which he exercises
investment discretion.
For the fiscal year ended December 31, 1995, the Equity Income
Fund paid brokerage commissions of $47,391 on total transactions of
$27,533,105, the Equity Growth Fund paid brokerage commissions of $37,473
on total transactions of $20,235,626 and the Balanced Fund paid brokerage
commissions of $49,004 on total transactions of $24,917,091. Since
January 3, 1994 (commencement of operations) through December 31, 1994,
the Equity Income Fund paid brokerage commissions of $90,281 on total
transactions of $101,107,006, the Equity Growth Fund paid brokerage
commissions of $28,636 on total transactions of $25,512,039 and the
Balanced Fund paid brokerage commissions of $53,806 on total transactions
of $97,455,026. Substantially all of the brokers to whom commissions were
paid provided research services to the portfolio managers.
Any commission, fee or other remuneration paid to a portfolio
manager who causes a Fund to pay an affiliated broker-dealer is paid in
compliance with procedures adopted in accordance with Rule 17e-1 under the
Investment Company Act of 1940. The Funds do not expect that a
significant portion of any Fund's total brokerage business will be
effected with broker-dealers affiliated with portfolio managers. However,
a portfolio manager may effect portfolio transactions for the segments of
a Fund's portfolio assigned to it with a broker-dealer affiliated with the
portfolio manager, as well as with broker-dealers affiliated with other
portfolio managers. No such fees were paid to affiliated broker-dealers
for the fiscal year ended December 31, 1995 and the period from January 3,
1994 (commencement of operations) through December 31, 1994.
TAXES
As set forth in the Prospectus under the caption "TAXES," each
Fund will endeavor to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the
Code.
Dividends from each Fund's earnings and profits, and
distributions of each Fund's net long-term realized capital gains, are
taxable to investors, whether received in cash or in additional shares of
a Fund. Dividends are taxable as ordinary income, whereas capital gain
distributions are taxable as long-term capital gains. The 70% dividends-
received deduction for corporations will apply only to the proportionate
share of the dividend attributable to dividends received by a Fund from
domestic corporations.
Any dividend or capital gain 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, even if the net asset value of the shares of
such Fund immediately after a dividend or distribution is less than the
cost of such shares to the investor, the dividend or distribution will be
taxable to the investor.
Redemption 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 investor 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.
Investors may also be subject to state and local taxes.
Each Fund will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividend payments and redemption
and exchange proceeds if an investor fails to furnish the Fund with his
social security number or other tax identification number or fails to
certify under penalty of perjury that such number is correct or 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 full discussion of present
or proposed federal income tax laws and the effect of such laws on an
investor. Investors are urged to consult with their respective tax
advisers for a complete review of the tax ramifications of an investment
in a Fund.
STOCKHOLDER MEETINGS
The Maryland General Corporation Law permits registered
investment companies, such as the Company, to operate without an annual
meeting of stockholders under specified circumstances if an annual meeting
is not required by the 1940 Act. The Company 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 stockholders under said Act.
The Company's Bylaws also contain procedures for the removal of
directors by its stockholders. At any meeting of stockholders, duly
called and at which a quorum is present, the stockholders 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
not less than ten percent (10%) of all the votes entitled to be cast at
such meeting, the Secretary of the Company shall promptly call a special
meeting of stockholders for the purpose of voting upon the question of
removal of any director. Whenever ten or more stockholders 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 Company's Secretary in
writing, stating that they wish to communicate with other stockholders
with a view to obtaining signatures to a request for a meeting as
described above 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: (i) afford to such applicants access to a
list of the names and addresses of all stockholders as recorded on the
books of the Company; or (ii) inform such applicants as to the approximate
number of stockholders 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
(ii) 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 stockholders 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 Board of 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 Board of 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 stockholders with reasonable promptness
after the entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
Average annual total return measures both the net investment
income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in a Fund's
investment portfolio. Each Fund's average annual total return figures are
computed in accordance with the standardized method prescribed by the
Securities and Exchange Commission by determining the average annual
compounded rates of return over the periods indicated, that would equate
the initial amount invested to the ending redeemable value, according to
the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value or the appropriate reinvestment dates as
described in the Prospectus, and (ii) deducts all recurring fees, such as
advisory fees, charged as expenses to all investor accounts.
Total return is the cumulative rate of investment growth which
assumes that income dividends and capital gains are reinvested. It is
determined by assuming a hypothetical investment at the net asset value at
the beginning of the period, adding in the reinvestment of all income
dividends and capital gains, calculating the ending value of the
investment at the net asset value as of the end of the specified time
period, subtracting the amount of the original investment, and dividing
this amount by the amount of the original investment. This calculated
amount is then expressed as a percentage by multiplying by 100.
The total return for the one year period ended December 31, 1995
was 16.26% for the Fixed Income Fund, 35.62% for the Equity Income Fund,
30.29% for the Equity Growth Fund and 23.14% for the Balanced Fund. The
average annual compounded return for the period from January 3, 1994
(commencement of operations) through December 31, 1995 was 6.17% for the
Fixed Income Fund, 14.80% for the Equity Income Fund, 10.25% for the
Equity Growth Fund and 9.30% for the Balanced Fund.
The Fixed Income Fund's yield is computed in accordance with a
standardized method prescribed by the rules of the Securities and Exchange
Commission. Under that method, the current yield quotation for the Fixed
Income Fund is based on a one month or 30-day period. The Fixed Income
Fund's yield is computed by dividing the net investment income per share
earned during the 30-day or one month period by the maximum offering price
per share on the last day of the period, according to the following
formula:
6
YIELD = 2 [(a-b + 1) - 1]
-----
cd
Where a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
The Fixed Income Fund's SEC 30-day yield for the period from
December 1, 1995 through December 31, 1995 was 5.20%.
Yield fluctuations may reflect changes in the Fixed Income
Fund's net income, and portfolio changes resulting from net purchases or
net redemptions of the Fixed Income Fund's shares may affect the yield.
Accordingly, the Fixed 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 Fixed Income Fund's yield is not
guaranteed and its principal is not insured.
DESCRIPTION OF SECURITIES RATINGS
As set forth in the Prospectus under the caption "INFORMATION
ABOUT INVESTMENT OBJECTIVES AND POLICIES," the Fixed Income Fund may
invest in bonds and debentures assigned one of the four highest ratings of
either Standard & Poor's Corporation ("Standard & Poor's") or Moody's
Investors Service, Inc. ("Moody's"). As also set forth therein, each Fund
may invest in commercial paper and commercial paper master notes rated A-2
or better by Standard & Poor's or Prime-2 or better by Moody's. A brief
description of the ratings symbols and their meanings follows.
Standard & Poor's Debt Ratings. A Standard & Poor's corporate
or municipal debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may
take into consideration obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform any audit in connection with
any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes
in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights;
AAA - Debt rated AAA has the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in the
higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debts 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 large
uncertainties or major risk exposures to adverse conditions.
Moody's Bond Ratings.
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 to be medium-
grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's bond rating symbols may contain numerical modifiers of a
generic rating classification. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the
company ranks in the lower end of its generic rating category.
Fitch Investors Service, Inc. Bond Ratings. The Fitch Bond
Rating provides a guide to investors in determining the investment risk
associated with a particular security. The rating represents its
assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner. Fitch bond ratings are
not recommendations to buy, sell or hold securities since they incorporate
no information on market price or yield relative to other debt
instruments.
The rating takes into consideration special features of the
issue, its relationship to other obligations of the issuer, the record of
the issuer and of any guarantor, as well as the political and economic
environment that might affect the future financial strength and credit
quality of the issuer.
Bonds which have the same rating are of similar but not
necessarily identical investment quality since the limited number of
rating categories cannot fully reflect small differences in the degree of
risk. Moreover, the character of the risk factor varies from industry and
between corporate, health care and municipal obligations.
In assessing credit risk, Fitch Investors Service relies on
current information furnished by the issuer and/or guarantor and other
sources which it considers reliable. Fitch does not perform an audit of
the financial statements used in assigning a rating.
Ratings may be changed, withdrawn or suspended at any time to
reflect changes in the financial condition of the issuer, the status of
the issue relative to other debt of the issuer, or any other circumstances
that Fitch considers to have a material effect on the credit of the
obligor.
AAA rated bonds are considered to be investment grade and of
the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably
foreseeable events.
AA rated bonds are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject
to possible change over the term of the issue.
A rated bonds are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB rated bonds are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds
with higher ratings.
Duff & Phelps, Inc. Long-Term Ratings. These ratings represent
a summary opinion of the issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative factors which may
vary according to the basic economic and financial characteristics of each
industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts,
cost structure, and management depth and expertise. The projected
viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of security
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.).
The extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the
different security classes in the capital structure, the overall credit
strength of the issuer and the nature of covenant protection. Review of
indenture restrictions is important to the analysis of a company's
operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once
per quarter (more frequently, if necessary).
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than for risk-free
U.S. Treasury debt.
AA High credit quality. Protection factors are strong.
Risk is modest, but may vary slightly from time to time
because of economic conditions
A Protection factors are average but adequate. However,
risk factors are more variable and greater in periods
of economic stress.
BBB Below average protection factors but still considered
sufficient for prudent investment. Considerable
variability in risk during economic cycles.
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment on issues with this
designation is satisfactory. However the relative degree of safety is not
as high as for issuers designed "A-1".
A-3. Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designation.
Moody's Short-Term Debt Ratings. Moody's short-term debt
ratings are opinions of the ability of issuers to repay punctually senior
debt obligations which have an original maturity not exceeding one year.
Obligations relying upon support mechanisms such as letters-of-credit and
bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment ability of rated
issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions)
have a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Fitch Investors Service, Inc. Short-Term Ratings. Fitch's
short-term ratings apply to debt obligations that are payable on demand or
have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal
and investment notes. Although the credit analysis is similar to Fitch's
bond rating analysis, the short-term rating places greater emphasis on the
existence of liquidity necessary to meet the issuer's obligations in a
timely manner. Relative strength or weakness of the degree of assurance
for timely payment determine whether the issuer's short-term debt is rated
Fitch-1, Fitch-2 or Fitch-3.
Duff & Phelps, Inc. Short-Term Ratings. Duff & Phelps' short-
term ratings are consistent with the rating criteria utilized by money
market participants. The ratings apply to all obligations with maturities
of under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit and current maturities of long-
term debt. Asset-backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined as not only
cash from operations, but also access to alternative sources of funds
including trade credit, bank lines and the capital markets. An important
consideration is the level of an obligor's reliance on short-term funds on
an ongoing basis. Relative differences in these factors determine whether
the issuer's short-term debt is rated Duff 1, Duff 2 or Duff 3.
FINANCIAL STATEMENTS
The following audited financial statements for each of the Funds
are incorporated by reference to The Aquinas Funds, Inc. Annual Report
dated December 31, 1995 (File No. 811-8122), as filed with the Securities
and Exchange Commission through the EDGAR System on February 29, 1996:
(1) Report of Independent Public Accountants
(2) Schedule of Investments at December 31, 1995
(3) Statements of Assets and Liabilities at December 31, 1995
(4) Statements of Operations for the year ended December 31,
1995
(5) Statements of Changes in Net Assets for the year ended
December 31, 1995 and the period from January 3, 1994 to
December 31, 1994
(6) Financial Highlights for the year ended December 31, 1995
and the period from January 3, 1994 to December 31, 1994
(7) Notes to Financial Statements
