As filed with the Securities and Exchange Commission on January 30, 2002.
Registration No. 333-69803
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __ [ ] Post-Effective Amendment No. __
(Check appropriate box or boxes)
Exact Name of Registrant as Specified in Charter:
THE CATHOLIC FUNDS, INC.
Area Code and Telephone Number: (414) 278-6550
Address of Principal Executive Offices (Number, Street, City, State, Zip Code):
1100 West Wells Street
Milwaukee, Wisconsin 53233
Name and Address of Agent for Service: With a copy to:
Theodore F. Zimmer, Esq. Fredrick G. Lautz, Esq.
The Catholic Funds, Inc. Quarles & Brady LLP
1100 West Wells Street 411 East Wisconsin Avenue
Milwaukee, Wisconsin 53233 Milwaukee, Wisconsin 53202
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective under the Securities Act of 1933,
as amended.
Title of Securities Being Registered: Shares of Class A Common Stock, par
value $0.001 per share, of The Catholic Equity Fund, a series of the Registrant.
The Registrant has previously registered an indefinite number of its shares
of common stock, par value $0.001 per share, pursuant to Section 24(f) under the
Investment Company Act of 1940, as amended. Accordingly, no filing fee is due in
reliance on Section 24(f).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
February __, 2002
Dear Shareholder:
I am writing to you about a matter of primary importance to all
shareholders of The Catholic Equity Income Fund (the "Equity Income Fund"). We
believe it would be in your best interests if the Equity Income Fund were
combined with and become a part of The Catholic Equity Fund (the "New Equity
Fund"), a newly designated series of The Catholic Funds. In the process, your
shares in the Equity Income Fund would be exchanged for shares of the New Equity
Fund, and you thereby would become a shareholder of the New Equity Fund (the
"Reorganization"). Your board of directors is recommending simultaneous
consolidations of our other two equity funds, namely The Catholic Large-Cap
Growth Fund and The Catholic Disciplined Capital Appreciation Fund, into the New
Equity Fund.
The proposed transactions would make it possible for you to enjoy the
potential benefits that can arise from owning shares in a larger combined fund,
including a potentially lower operating expense ratio, while at the same time
allowing you to continue a broad market equity investment that adheres to
certain core Catholic values. The transaction would be structured as a tax-free
reorganization, meaning that, for federal income tax purposes, you would
recognize no gain or loss on the exchange of your shares in the Equity Income
Fund for shares in the New Equity Fund.
The enclosed Proxy Statement/Prospectus describes and seeks your approval
of a Plan of Reorganization and Liquidation (the "Plan") that sets forth the
terms of the Reorganization. Those materials also describe the similarities and
differences between the Equity Income and New Equity Funds. As a result of the
Reorganization proposed in the Plan, substantially all of the assets of the
Equity Income Fund would be transferred to the New Equity Fund, and you would
receive shares of the New Equity Fund in exchange for your Equity Income Fund
shares. Immediately following the transfer, we expect that the dollar value of
your account will be the same as it was immediately before the transfer. No
sales charge would be imposed on this exchange. The board of directors of The
Catholic Funds has unanimously approved the transaction for the reasons
described in the Proxy Statement/Prospectus.
This package contains information about the proposal and includes all the
material you will need to vote by mail. The current prospectus for the Equity
Income Fund is enclosed for your convenience.
Attached are answers to questions we anticipate some of you may have.
Please read the enclosed Proxy Statement/Prospectus carefully and cast your vote
by completing and returning the enclosed proxy card. To help avoid additional
expense, be sure to vote promptly. If you have any questions, please call us at
1-877-846-2372. We will be glad to help you.
Thank you for your consideration and continued support.
Sincerely,
Allan G. Lorge, President
IMPORTANT INFORMATION TO HELP YOU
UNDERSTAND AND VOTE ON THE REORGANIZATION
Although you should read the full text of the enclosed Proxy
Statement/Prospectus, we hope this brief overview will explain why The Catholic
Funds board of directors believes you should vote FOR the Plan of Reorganization
and Liquidation (the "Plan") involving the transfer of substantially all of the
assets of The Catholic Equity Income Fund (the "Equity Income Fund") to The
Catholic Equity Fund (the "New Equity Fund"), a newly designated series of The
Catholic Funds, Inc. ("The Catholic Funds"), and the exchange of your shares in
the Equity Income Fund for shares of the New Equity Fund in a tax-free
reorganization (the "Reorganization").
Why has your board of directors decided to recommend the Plan?
The board unanimously approved the Plan and the Reorganization primarily
because it would enable the shareholders of the Equity Income Fund to own
shares of a larger combined fund with a simpler investment strategy, the
same sales load and improved fee structure, and because it offers
shareholders the opportunity to continue to participate in a broad based
equity fund that adheres to certain core Catholic values. In addition, the
board believes the combined New Equity Fund offers the potential for
increased sales and resulting growth in assets through access to multiple
distribution channels, which should bring economies of scale and
efficiencies that frequently are associated with larger funds. The
Reorganization is also intended to be tax-free to the Equity Income Fund
shareholders.
The board considered alternatives to the Reorganization, including seeking
another existing fund as a merger partner for the Equity Income Fund or
simply liquidating the Equity Income Fund. The board concluded that the
Reorganization is the best alternative given the board's commitment, and
the dedication of Catholic Financial Services Corporation, the adviser and
distributor for the Equity Income Fund, to provide shareholders with a
broad equity investment product that adheres to certain core Catholic
values.
What are the anticipated advantages of the Reorganization to shareholders?
To date, the Equity Income Fund has not generated sales and asset growth at
the level that CFSC anticipated when it started this Fund in May of 1999.
For reasons discussed in more detail in the accompanying Proxy
Statement/Prospectus, CFSC and the board of The Catholic Funds do not
believe that sales will accelerate significantly in the near future under
the Equity Income Fund's current structure. The small size of the Equity
Income Fund puts it a competitive disadvantage with its peers and with
alternative investment options. The proposed consolidation of the Equity
Income Fund and the anticipated simultaneous consolidations of The Catholic
Funds' other two existing equity funds into the New Equity Fund would
result in a significant and immediate increase in the asset size of the
consolidated Fund. Also, the New Equity Fund has multiple classes of shares
designed to facilitate distribution in different channels to reach a
broader base of prospective investors. Finally, the New Equity Fund will be
passively managed to substantially replicate the composition of the S&P 500
Index, which will minimize the New Equity Fund's reliance for performance
on the subjective judgment and stock selection of the portfolio manager.
The board believes the features of this New Equity Fund will appeal to a
broader base of investors, will increase the potential for future growth in
sales and assets, and will enhance the ability of the New Equity Fund to
compete more effectively with its peers and with other equity investment
alternatives. Most importantly, these benefits will be available to
shareholders while the New Equity Fund at the same time adheres to certain
core Catholic values in its investment program.
Will the New Equity Fund adhere to the same Catholic values in the same manner
as the Equity Income Fund?
Like the Equity Income Fund, the New Equity Fund will adhere to the
Catholic value of the sanctity of human life by not investing in the stocks
of companies that directly participate in abortion. The New Equity Fund
also will adhere to the Catholic value of the dignity of the human person.
However, rather than avoiding investing in stocks of companies that have
business practices or policies that are inconsistent with this value, the
adviser instead will initiate shareholder advocacy programs designed to
persuade those companies to reform their offending practices and policies.
Given the global trend toward the reduction in nuclear arms, biological
weapons and other weapons of mass and indiscriminate destruction, and given
recent technological developments that have produced more effective
precision weapons, the board has concluded that our efforts and resources
are best focused on adherence to these two values. Therefore, unlike the
Equity Income Fund, the New Equity Fund will not screen for or monitor
adherence to the Catholic value of no unjust wars.
Do the New Equity Fund's investment objective and policies resemble those of the
Equity Income Fund?
The investment objective of the Equity Income Fund is to obtain both a
reasonable level of current income and long-term capital growth. The Equity
Income Fund is designed for investors who seek capital growth and, at that
the same time, wish to receive current income at a level that is greater
than the average dividend rates of common stocks generally. The investment
objective of the New Equity Fund, on the other hand, is to obtain a total
return from dividends and capital gains which is equal to the total return
of the S&P 500 Index, less the Fund's operating expenses. The New Equity
Fund therefore does not focus on the dividend paying rate of the stocks of
companies in its investment selections. The New Equity Fund is designed for
investors who seek long-term capital appreciation, can tolerate
fluctuations in portfolio value and have no need for current income from
their investment in the Fund.
The Equity Income Fund employs an active investment management strategy,
which relies on the portfolio manager's subjective judgment to select
dividend-paying stocks that exhibit long-term growth potential. The New
Equity Fund, on the other hand, employs a passive investment management
strategy to achieve its objective, in which the portfolio manager
constructs an investment portfolio that substantially conforms to the
composition and market weightings of the stocks of companies included in
the S&P 500 Index. Because of the New Equity Fund's exclusionary sanctity
of human life screen, as well as for other reasons described in more detail
in the accompanying Proxy Statement/Prospectus, the New Equity Fund's
investment portfolio will not precisely match the S&P 500 Index. However,
its passive management strategy minimizes reliance on the subjective
judgment of the portfolio manager to select and dispose of stocks and other
investments. We expect that its performance will closely track that of the
S&P 500 Index.
What are the federal tax implications of the Reorganization?
In order for the Reorganization to be completed, the board of directors of
The Catholic Funds must obtain a legal opinion from its counsel that,
subject to certain conditions, the transaction will be tax-free for federal
income tax purposes to shareholders of the Equity Income Fund and to each
of the Funds. However, you will recognize a capital gain (or loss) if you
sell your Equity Income Fund shares before the Reorganization or if you
sell or exchange the New Equity Fund shares you receive in the
Reorganization.
What will be the size of the New Equity Fund after the Reorganization and what
impact is that expected to have on the shareholders of the Equity Income Fund?
As of December 31, 2001, the net assets of the Equity Income Fund and the
combined net assets of the other two existing equity funds of The Catholic
Funds were approximately $5.7 million and $11.3 million, respectively.
Accordingly, if the Reorganization of the Equity Income Fund and the other
two existing equity funds into the New Equity Fund had occurred on December
31, 2001, the net assets of the combined New Equity Fund after the
Reorganization would have been approximately $17.0 million. As a result,
current shareholders of the Equity Income Fund may derive benefits such as
relatively lower risk and costs that typically are associated with a larger
fund with a more diversified portfolio.
How will you determine the number of shares of the New Equity Fund that I will
receive in the Reorganization?
As of the opening of trading on the date that the Reorganization is
completed, Equity Income Fund shareholders will receive the number of full
and fractional shares of the New Equity Fund that is equal in dollar value
to the aggregate net asset value of their shares of the Equity Income Fund
on that date. That closing date is expected to be on or about March __,
2002.
Will I have to take any steps to receive shares of the New Equity Fund in the
Reorganization?
If the Reorganization is approved by shareholders of the Equity Income Fund
at the meeting and subsequently is completed, you will automatically
receive the number of shares of the New Equity Fund which you are entitled
to receive in exchange for your shares of the Equity Income Fund. You will
not be required to take any steps to receive these shares.
Will I be able to make additional investments in the New Equity Fund after the
Reorganization?
You will be free to make additional investments in the New Equity Fund
after the Reorganization, on the terms generally applicable to purchases of
such shares as described in the New Equity Fund's then current prospectus.
What if there are not enough votes to reach a quorum by the scheduled date of
the special shareholder meeting, or if insufficient votes are received to
approve the Reorganization?
Catholic Knights, the ultimate parent company of Catholic Financial
Services Corporation, the adviser and distributor of the Equity Income
Fund, holds a majority of all outstanding shares of the Equity Income Fund.
Catholic Knights has indicated its present intention to vote all of its
shares in favor of the Plan and the Reorganization. Therefore, the
representation of Catholic Knights' shares at the meeting and its vote in
favor of the Plan and Reorganization will be sufficient both to constitute
a quorum for the conduct of business at the meeting and for approval of the
Plan and the Reorganization.
How many votes am I entitled to cast?
You are entitled to one vote for each share (and a fractional vote for each
fractional share) of the Equity Income Fund that you owned on the record
date. The record date is February __, 2002.
How do I vote my shares?
Voting is easy. You can vote your shares by completing and signing the
enclosed proxy card and mailing it in the enclosed postage-paid envelope.
If you need any assistance or have any questions concerning the proposal or
how to vote your shares, please call The Catholic Funds at (877) 846-2372.
How do I sign the proxy card?
Individual Accounts:Shareholders should sign exactly as their names appear on
the account registration shown on the card.
Joint Accounts: Both owners must sign exactly as their names appear in the
registration.
All Other Accounts: The person signing must indicate his or her capacity. For
example, a trustee for a trust or other entity should sign,
"Jane F. Doe, Trustee."
This material may be used only when preceded or accompanied by a prospectus.
Catholic Financial Services Corporation, distributor.
THE CATHOLIC EQUITY INCOME FUND
(A Series of The Catholic Funds, Inc.)
THE CATHOLIC EQUITY FUND
(A Series of The Catholic Funds, Inc.)
PROXY STATEMENT/PROSPECTUS
February ___, 2002
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of The Catholic Funds, Inc.
("The Catholic Funds" or "CFI") for use at a Special Meeting of Shareholders of
The Catholic Equity Income Fund ("The Equity Income Fund"), a series of The
Catholic Funds, to be held at [time?], Central Time, on [day?], [date?], 2002 at
[place?] (the "Meeting"). Proxy materials are being mailed to shareholders of
The Equity Income Fund on or about [date?], 2002.
The purpose of the Shareholder Meeting is to consider and vote on a Plan of
Reorganization and Liquidation (the "Plan") involving The Equity Income Fund and
The Catholic Equity Fund ("The New Equity Fund"), another series of The Catholic
Funds. A copy of the Plan is attached to this Proxy Statement/Prospectus as
Appendix A.
Pursuant to the Plan, substantially all of the assets of The Equity Income
Fund, net of its liabilities, would be transferred to and acquired by The New
Equity Fund in exchange solely for shares of common stock of The New Equity
Fund. Shares of The New Equity Fund received by The Equity Income Fund in the
transaction would then be distributed pro-rata to shareholders of The Equity
Income Fund, and The Equity Income Fund would be liquidated and discontinued as
a separate mutual fund portfolio of The Catholic Funds (these transactions are
referred to together in this Proxy Statement/Prospectus as the
"Reorganization"). For each shareholder of The Equity Income Fund, it is
expected that the dollar value of your account in The New Equity Fund
immediately after the Reorganization will be the same as the dollar value of
your account in The Equity Income Fund immediately prior to the Reorganization.
The Reorganization is intended to qualify as a tax-free reorganization, meaning
that shareholders of The Equity Income Fund will not recognize any gain or loss
through the exchange of their shares in the Reorganization. No sales charge or
commission will be imposed upon The New Equity Fund shares issued in the
Reorganization.
Similar reorganization transactions affecting the other two existing equity
funds of The Catholic Funds, namely The Catholic Large-Cap Growth Fund and The
Catholic Disciplined Capital Appreciation Fund, are being recommended for
approval by the shareholders of those two funds. Subject to shareholder
approval, those two funds will be consolidated with and into The New Equity Fund
concurrent with the completion of the Reorganization of The Equity Income Fund
with and into The New Equity Fund. As a result, The New Equity Fund's assets
would consist of the combined assets of all three of the existing equity funds
of The Catholic Funds. However, the Reorganization of The Equity Income Fund is
not dependent upon the approval and concurrent consolidation of the other two
existing equity funds with and into The New Equity Fund. Rather, subject to
approval by the shareholders of The Equity Income Fund and the satisfaction of
other customary closing conditions to a transaction of this nature, the
Reorganization will be completed regardless of whether either or both of the
reorganizations affecting the other two existing equity funds are approved and
completed.
The New Equity Fund is a newly designated series of The Catholic Funds. The
New Equity Fund differs from The Equity Income Fund in several important
respects. One such difference relates to the investment objective and program of
The New Equity Fund. The New Equity Fund seeks to obtain a total return from
dividends and capital gains which is equal to the total return of the S&P 500
Index, less the Fund's operating expenses. Unlike The Equity Income Fund, which
employs active management strategies with respect to the selection and
disposition of the stocks of companies in which it invests, The New Equity Fund
will employ a passive management strategy. It will invest its assets so as to
replicate, as nearly as possible, the composition and market capitalization
weightings of the S&P 500 Index, except that The New Equity Fund will not invest
in the stocks of those companies included on the S&P 500 Index which employ
policies and practices that are inconsistent with the sanctity of human life, as
determined under guidelines established and monitored by the board of directors
of The Catholic Funds. This passive management style differs from that of
actively managed funds, such as The Equity Income Fund, where the manager
selects stocks to purchase and sell which are consistent with the objective and
investment program of the Fund based on the manager's own judgment.
Another important way in which The New Equity Fund differs from The Equity
Income Fund relates to the core Catholic values and the means of their
implementation. Like The Equity Income Fund, the New Equity Fund will avoid
investing in companies whose policies and practices are inconsistent with the
sanctity of human life. However, rather than avoiding investment in companies
whose policies and practices may be inconsistent with other important Catholic
values, The New Equity Fund instead will engage in shareholder advocacy
activities in an effort to persuade those companies to change their offensive
policies and practices. The New Equity Fund anticipates that its shareholder
advocacy activities will focus principally on policies and practices that affect
the dignity of the human person in the workplace. Advocacy activities might
include initiating letter writing campaigns to the management of companies in
which The New Equity Fund invests and/or initiating a dialog with managerial
personnel, proposing shareholder resolutions at annual and special meetings of
shareholders of the companies in which The New Equity Fund invests (perhaps in a
cooperative effort with other socially and/or morally responsible investors),
participating in proxy campaigns for the election of directors of those
companies, and the like.
The principal executive office of The Catholic Funds is located at 1100
West Wells Street, Milwaukee, Wisconsin 53233, telephone: (877) 846-2372.
This Proxy Statement/Prospectus sets forth concisely the information that
shareholders of The Equity Income Fund should know before voting on the Plan and
the Reorganization. It also constitutes an offering of shares of The New Equity
Fund. Please read this Proxy Statement/Prospectus carefully and retain it for
future reference.
The Securities and Exchange Commission has not approved or disapproved The
New Equity Fund shares to be issued in the Reorganization or determined if this
Proxy Statement/Prospectus is truthful or complete. If anyone tells you
otherwise, they are committing a crime.
Neither The Catholic Funds nor Catholic Financial Services Corporation is
sponsored or endorsed by the Roman Catholic Church, nor has the Church approved
or disapproved the shares of The Catholic Funds.
A Statement of Additional Information, dated February ___, 2002, relating
to this Proxy Statement/Prospectus (the "Reorganization SAI") has been filed
with the Securities and Exchange Commission (the "SEC" or the "Commission") and
is incorporated herein by reference. Copies of the Reorganization SAI may be
obtained without charge by writing to Catholic Financial Services Corporation at
1100 West Wells Street, Milwaukee, Wisconsin 53233, or by calling (877)
222-2402. We will send you a copy of the Reorganization SAI by first class mail
within one business day of the date on which we receive your request.
In addition, the Prospectus of The Equity Income Fund, dated February 1,
2001 (the "Equity Income Fund Prospectus"), the Statement of Additional
Information of The Catholic Funds, dated February 1, 2001 (which includes
information regarding The Equity Income Fund) (the "Equity Income Fund SAI"),
and the Annual Report of The Catholic Funds for the year ended September 30,
2001 (which includes information regarding The Equity Income Fund) (the "Equity
Income Fund Annual Report") have been filed with the Commission and are
incorporated herein by reference. The Equity Income Fund Prospectus accompanies
this Proxy Statement/Prospectus, and the Equity Income Fund SAI and the Equity
Income Fund Annual Report may be obtained without charge by writing Catholic
Financial Services Corporation at 1100 West Wells Street, Milwaukee, Wisconsin
53233, or by calling (877) 222-2402.
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION.........................................................2
INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS.............................2
SYNOPSIS .....................................................................5
Introduction.........................................................5
The Plan ............................................................6
Reasons For The Proposed Reorganization..............................7
Federal Tax Consequences.............................................10
Comparison of The Equity Income and The New Equity Funds.............10
RISK FACTORS..................................................................18
Market Risk..........................................................18
Objective Risk.......................................................18
Interest Rate and Credit Risk........................................19
Convertible Securities - Junk Bonds..................................19
Foreign Securities...................................................20
Securities Selection Risk............................................20
Index Correlation Risk...............................................20
Non-Fundamental Investment Objective.................................21
COMPARISON OF INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES..................21
Investment Objectives................................................21
Principal Strategies.................................................21
Implementation of Catholic Values....................................25
APPROVAL OF THE PLAN AND REORGANIZATION.......................................28
Description of the Plan..............................................28
Other Terms..........................................................30
Background to Reorganization.........................................30
Reasons For The Proposed Reorganization..............................33
Federal Tax Considerations...........................................35
CAPITALIZATION................................................................36
OWNERSHIP OF FUND SHARES......................................................37
DESCRIPTION OF SECURITIES TO BE ISSUED AND RIGHTS OF SHAREHOLDERS.............37
SHAREHOLDER INFORMATION AND SERVICES..........................................38
Shareholder Information..............................................38
Reinvestment of Fund Distributions...................................39
Distribution Fees....................................................39
Redeeming Your Class A Shares of The New Equity Fund.................40
MISCELLANEOUS.................................................................43
Independent Public Accountants.......................................43
Interests of Experts and Counsel.....................................44
Other Matters........................................................44
AVAILABLE INFORMATION
The Catholic Funds has filed with the Commission a Registration Statement
on Form N-14 (the "Registration Statement") with respect to the shares of The
New Equity Fund offered hereby. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus omits certain information, exhibits
and undertakings contained in the Registration Statement. Such additional
information can be inspected at the principal office of the Commission at 450
Fifth Street N.W., Washington, D.C. 20549, as well as the Commission's regional
office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60621. Copies of the Registration Statement can be obtained from the Commission
at prescribed rates by writing to the Commission at either address. For further
information, reference is made to the Registration Statement and to the exhibits
attached to it.
In addition to the above, The Equity Income Fund is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports and other information with the SEC.
Proxy materials, reports and other information about The Equity Income Fund
which are of public record also can be inspected and copied at public reference
facilities maintained by the Commission at the addresses shown above. Copies of
these materials can be inspected and copied at the Commission's principal and
regional offices described above and can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, SEC, Washington, D.C. 20549. The Commission also maintains a Website
at http://www.sec.gov that contains certain other publicly available documents
about The Catholic Funds, The Equity Income Fund and The New Equity Fund.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus.
If any such other information or representations are given or made, they must
not be relied upon as having been authorized by The Catholic Funds. This Proxy
Statement/Prospectus does not constitute an offer to sell securities in any
state or other jurisdiction to any person to whom it would be unlawful to make
such offer in such state or jurisdiction.
INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS
This Proxy Statement/Prospectus is being furnished to the shareholders of
The Equity Income Fund in connection with the solicitation of proxies by the
Board of Directors of The Catholic Funds to be used at a Special Meeting of
Shareholders of The Equity Income Fund to be held on [DAY?], [DATE?], 2002, at
[TIME?], Central Time, at [LOCATION?]. At the meeting, shareholders of The
Equity Income Fund will consider and vote on the Plan and the Reorganization
described in the Plan pursuant to which The New Equity Fund would acquire
substantially all of the assets of The Equity Income Fund, net of its
liabilities, in exchange for shares of common stock of The New Equity Fund. The
shares of The New Equity Fund so issued to The Equity Income Fund would be
distributed pro-rata to the shareholders of The Equity Income Fund. The Equity
Income Fund would be liquidated and discontinued.
Similar transactions are being proposed for consideration by shareholders
of The Catholic Fund's other two equity funds, namely The Catholic Large-Cap
Growth Income Fund and The Catholic Disciplined Capital Appreciation Fund,
whereby those two funds also would be consolidated with and into The Catholic
New Equity Fund. However, the Reorganization with respect to The Equity Income
Fund is not dependent upon the approval and concurrent consolidation of those
other two equity funds.
Our mailing of this Proxy Statement/Prospectus and the accompanying proxy
card is the principal means by which proxies will be solicited for approval of
the Reorganization. Proxies also may be solicited in person, or by telephone or
facsimile or, without special compensation, by officers of The Catholic Funds or
by officers and employees of Catholic Financial Services Corporation, the
investment adviser and distributor for The Equity Income Fund. Upon request, we
will reimburse brokers, dealers, banks and voting trustees or their nominees for
reasonable expenses incurred in forwarding copies of the proxy materials to the
beneficial owners of shares which such persons hold of record. We estimate that
the total expenses to be incurred by The Equity Income Fund in connection with
the Reorganization will be approximately $25,000. Catholic Financial Services
Corporation has agreed to pay all such expenses.
Any proxy which is properly executed and returned in time to be voted at
the Meeting will be voted in accordance with instructions marked thereon. In the
absence of such instructions, the proxy will be voted "FOR" approval of the
Plan. The duly appointed proxies may, in their discretion, vote upon such other
matters as may come before the Meeting or any adjournments thereof. A
shareholder may revoke his or her proxy at any time prior to its exercise by
delivering written notice of revocation to the Secretary of The Catholic Funds
or by executing and delivering a later dated proxy to The Catholic Funds or by
attending the Meeting in person to vote the shares of The Equity Income Fund
held by such shareholder. The shares of The Equity Income Fund will be voted as
a separate series on approval of the Plan, and holders of shares of the other
series of The Catholic Funds will not be entitled to vote on the Reorganization
as it relates to The Equity Income Fund.
The presence at the meeting, in person or by proxy, of shareholders
representing one-third of all outstanding shares of The Equity Income Fund
entitled to vote on the Reorganization constitutes a quorum for the transaction
of business. Abstentions and broker non-votes (proxies from brokers or other
nominee owners indicating that such persons have not received instructions from
the beneficial owners or other persons entitled to vote the shares as to a
matter with respect to which the brokers or other nominee owners do not have
discretionary voting power) will be treated as present for purposes of
determining the presence or absence of a quorum.
Approval of the Plan and the Reorganization contemplated by the Plan will
require the affirmative vote of "a majority of the outstanding voting
securities" of The Equity Income Fund, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"). Under the 1940 Act, a "majority of the
outstanding voting securities" means the lesser of:
o 67% or more of The Equity Income Fund's shares present at the Meeting, if
shareholders who are the owners of more than 50% of The Equity Income
Fund's outstanding shares are present in person or by proxy; or
o More than 50% of The Equity Income Fund's outstanding shares.
Accordingly, abstentions and broker non-votes will have the same effect as
votes cast against approval of the Plan.
In the event sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Meeting, the persons named as proxies in
the enclosed proxy may propose and vote in favor of one or more adjournments of
the Meeting regarding the Reorganization to permit further solicitation of
proxies without the necessity of further notice. Any such adjournment will
require the affirmative vote of a majority of the shares present at the session
of the Meeting to be adjourned.
Shareholders of record of The Equity Income Fund at the close of business
on [RECORD DATE?] (the "Record Date") will be entitled to notice of and to vote
at the Meeting or any adjournment thereof. Each such shareholder will be
entitled to one vote for each share (and a fractional vote for each fractional
share) held by such shareholder on each matter presented at the Meeting. As of
the Record Date, there were a total of _____ shares of common stock of The
Equity Income Fund outstanding. Catholic Knights, the ultimate parent company of
Catholic Financial Services Corporation, beneficially owns and has the right to
vote in excess of 50% of all of the presently issued and outstanding shares of
common stock of The Equity Income Fund. Catholic Knights has indicated its
present intention to vote its shares in favor of approval of the Reorganization.
Consequently, subject to any change in the stated intentions of Catholic
Knights, shareholder approval of the Reorganization is assured.
Under Maryland law, shareholders of The Equity Income Fund will not be
entitled to any appraisal or similar rights in connection with the
Reorganization contemplated by the Plan. However, shareholders may redeem their
shares of The Equity Income Fund at net asset value prior to the closing of the
proposed Reorganization in the manner specified in the Equity Income Fund
Prospectus.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus (including a copy of the Plan attached hereto as
Appendix A), as well as the Equity Income Fund Prospectus, which accompanies
this Proxy Statement/Prospectus and is incorporated by reference herein. The
Equity Income Fund Prospectus describes the investment objective and principal
strategies of The Equity Income Fund and provides information about the
shareholder fees and operating expenses of, management and other services
provided to, and purchases and redemptions of shares of, that Fund. This summary
is not intended to be complete and is qualified in all respects by reference to
the more detailed information appearing elsewhere in this Proxy
Statement/Prospectus, the Plan and the Equity Income Fund Prospectus.
Introduction
Shareholders of The Equity Income Fund will be asked at the Meeting to
approve the Plan and the Reorganization described in the Plan and as described
herein. If approved, the Reorganization is expected to be completed as of the
opening of business on or about [DATE?], 2002, or such other date as the parties
may determine, assuming that all conditions to closing have been satisfied.
The New Equity Fund is a newly designated series of The Catholic Funds. It
will first commence business operations upon and following the closing of the
Reorganization. Catholic Financial Services Corporation ("CFSC"), a Wisconsin
corporation organized in 1994, is the investment adviser and distributor for
both The New Equity Fund and The Equity Income Fund. As the adviser, CFSC makes
the investment decisions for the Funds. As the distributor, CFSC sells the
Funds' shares to investors. The majority of the outstanding stock of CFSC is
owned by Catholic Knights Financial Services, Inc., which functions as an
administrative holding company and is a wholly-owned subsidiary of Catholic
Knights. Catholic Knights is a non-profit, non-stock membership organization,
licensed to do business as a fraternal benefit society. The remaining
outstanding stock in CFSC is owned by Catholic Order of Foresters (a non-profit,
non-stock Illinois fraternal benefit society), Catholic Knights of America (a
non-profit, non-stock Missouri fraternal benefit society), and Catholic Union of
Texas, The KJT (a Texas fraternal benefit society). These four Catholic
fraternals are referred to in this Proxy Statement/Prospectus as the "Catholic
Fraternal Alliance."
Mellon Equity Associates, LLP ("Mellon" or the "sub-adviser") is the
sub-adviser for The New Equity Fund. Mellon is a wholly owned, independently
managed subsidiary of Mellon Financial Corporation, organized as a limited
liability partnership. Mellon's principal executive offices are located at 500
Grant Street, Suite 4200, Pittsburgh, Pennsylvania 15258.
CFSC and Mellon are sometimes referred to together herein as the adviser.
The Plan
The Plan describes the essential terms of the proposed Reorganization and
is set forth in full as Appendix A attached to this Proxy Statement/Prospectus.
Pursuant to the Plan, substantially all of the assets of The Equity Income Fund,
net of its liabilities, will be transferred to The New Equity Fund in exchange
solely for the issuance to The Equity Income Fund of shares of Class A Common
Stock of The New Equity Fund. The Equity Income Fund will then immediately make
a pro rata distribution to the shareholders of The Equity Income Fund of the
shares of The New Equity Fund it receives in that exchange. As a result of the
Reorganization, each shareholder of The Equity Income Fund will receive that
number of full and fractional shares of The New Equity Fund which is equal in
value to the shareholder's pro rata interest in the net assets transferred to
The New Equity Fund as of the "Valuation Date" (as defined below).
Shareholders of The Equity Income Fund will not pay any sales load or sales
commissions on the shares of The New Equity Fund that they receive in the
Reorganization or on the shares of The Equity Income Fund that they surrender in
the Reorganization. Additionally, it is a condition to the closing of the
Reorganization that The Catholic Funds receive a legal opinion to the effect
that the Reorganization will qualify as a tax-free reorganization for federal
income tax purposes. Assuming the Reorganization so qualifies, shareholders of
The Equity Income Fund will not recognize any income, gain or loss for federal
income tax purposes as a result of the exchange in the Reorganization of their
shares in The Equity Income Fund for shares of The New Equity Fund. For
additional information about the tax consequences of the Reorganization see
"Approval of the Plan and Reorganization - Federal Tax Considerations" below.
Contemporaneously with the closing and the distribution of the shares of
The New Equity Fund to shareholders of The Equity Income Fund, The Equity Income
Fund will satisfy its liabilities (applying any liquidating assets retained in
the Reorganization for such purpose), liquidate and be discontinued as a
separate series of The Catholic Funds. Accordingly, the shareholders of The
Equity Income Fund will become shareholders of The New Equity Fund. It is
expected that the value of each shareholder's account in The New Equity Fund
immediately after the Reorganization will be the same as the value of that
shareholder's account in The Equity Income Fund immediately prior to the
Reorganization.
Although each party to the Plan will bear its own out-of-pocket expenses,
CFSC has agreed to pay all of the expenses incurred by each of the Funds.
Completion of the Reorganization is subject to a number of conditions which
are customary for transactions of this kind, in addition to the receipt of the
tax opinion described above.
Reasons For The Proposed Reorganization
CFSC has served as investment adviser and distributor to all three of the
existing equity funds of The Catholic Funds, including The Catholic Large-Cap
Growth Fund and The Catholic Discipline Capital Appreciation Fund, in addition
to The Equity Income Fund, since their inceptions on May 3, 1999. As of December
31, 2001, these three equity funds had total assets of approximately $17.0
million, reflecting asset growth and investments far below that initially
anticipated by CFSC in its business plan when it conceived the three equity
funds. CFSC and management of The Catholic Funds attribute the disappointing
growth primarily to the volatile, uncertain and declining stock market
environment that has persisted in the United States since quite soon after these
three equity funds commenced their operations. That market environment made
investors reticent to invest in any mutual fund, let alone small, new funds with
no long-term performance history such as The Catholic Funds. This also made
licensed securities representatives and insurance agents of the Catholic
Fraternal Alliance less inclined to become licensed with CFSC in order to market
and promote the sale of shares of The Catholic Funds. The lack of a sizeable
sales force has further frustrated sales and growth.
The present small size of The Equity Income Fund and the other two existing
equity funds of The Catholic Funds puts them at a competitive disadvantage with
their peers. This is true in part because all mutual funds have certain fixed
costs that are spread over all of the assets of the fund, including such things
as legal fees, accounting fees, director fees, blue sky qualification fees and
the like. These fixed fees cause The Catholic Funds to have higher expense
ratios which detract from their investment performance as compared to their
larger peers. In order to offset the negative effects of these expenses, CFSC
has been waiving fees and reimbursing expenses so that the operating expenses of
The Equity Income Fund would not exceed 1.65% of average daily net assets for
any fiscal year, but CFSC is not prepared to continue subsidizing The Equity
Income Fund indefinitely into the future. Accordingly, CFSC has for some time
been considering strategic options to increase sales and build assets sufficient
to make The Equity Income Fund viable as a self-sustaining entity. In
considering and designing strategic marketing options for The Equity Income
Fund, the paramount requirement of CFSC and management and the board of
directors of The Catholic Funds has been the adherence to the principle that
Catholic values should remain a differentiating factor between The Catholic
Funds and its peers.
CFSC retained the services of Precision Marketing Partners, LLC ("Precision
Marketing"), a Milwaukee, Wisconsin-based financial services sales and marketing
firm to help it assess strategic options and to select a distribution strategy
to frame and communicate long-term sales and marketing alternatives for The
Catholic Funds. Precision Marketing was founded by a group of individuals with
many years of successful experience and expertise in marketing mutual funds and
distributing their shares. Its chairman and chief executive officer, Ms.
Rochelle Lamm, and other members of her management team worked together in
former capacities to build and manage several nationally recognized investment
management and broker/dealer organizations, including a family of mutual funds
sponsored by a fraternal benefit society that today has over $10 billion in
assets.
In a report first presented to the board of directors at a special meeting
held on October 26, 2001, Precision Marketing identified a number of factors
that have contributed to the lack of sales of The Catholic Funds, including the
following:
o The three existing equity funds of The Catholic Funds have not been
perceived by investors as clearly distinguishable investment options. While
their investment objectives and investment programs are somewhat different,
their implementation has created investment portfolios with significant
overlap in stock selection. This creates confusion among investors and
selling representatives, thereby frustrating the goal of creating a diverse
family of mutual funds.
o Neither CFSC nor the sub-advisers of the three existing equity funds are
household names that attract investors, and the performance of the three
existing equity funds, while above average, has not been so outstanding
that it alone attracts investors.
o The sales force of CFSC has not grown as expected and, given the relatively
modest universe of insurance agents and securities representatives licensed
with the Catholic Fraternal Alliance, it is not likely that CFSC will have
sufficient sales representatives in the near future to generate the volume
of sales that CFSC projected in its business plan.
Given these obstacles, Precision Marketing suggested three possible
alternatives, namely: liquidate and discontinue all three of the existing equity
funds; seek one or more other fund families with mutual funds comparable to The
Catholic Funds that might be possible merger partners for the three existing
equity funds; or, restructure The Catholic Funds in a manner designed to:
o Eliminate the confusion created by multiple, similar funds through a
consolidation of all three equity funds into a core equity fund with an
investment program that is easy to understand;
o Eliminate sub-adviser name recognition and investment performance as
competitive issues by adopting a passive management style which tracks a
major index, such as the S&P 500 Index;
o Adopt additional classes of shares with expense structures designed to be
attractive for direct marketing programs and wholesaling/ institutional
client marketing programs, thereby reducing the reliance on a retail
brokerage network for asset growth; and
o Continue to adhere to selected core Catholic values in the investment
program.
The board of directors of The Catholic Funds held a special meeting on
October 26, 2001 at which management of CFSC and The Catholic Funds, together
with a principal from Precision Marketing, presented Precision Marketing's
report and management's recommendations of the Reorganization based thereon. The
board further considered and approved the Reorganization in principle on
November 12, 2001, and formally ratified the Plan on February 14, 2002, subject
to approval by the shareholders of The Equity Income Fund. At these meetings,
the board of directors requested and reviewed information about the investment
objective and program of The New Equity Fund and the Catholic values to which
The New Equity Fund would adhere and the manner in which those Catholic values
would be implemented. The board of directors also requested and reviewed
information about Mellon and the sub-advisory agreement entered into with
Mellon, asked questions of and received answers from management of Mellon, CFSC
and management of The Catholic Funds, and made inquiries of CFSC regarding the
terms of the Reorganization and its anticipated benefits to the shareholders of
The Equity Income Fund. The board also consulted with The Catholic Funds' legal
counsel, and considered alternatives, including the alternatives identified in
Precision Marketing's report.
In approving the Plan, the board considered numerous factors, including:
o CFSC's strong desire and continuing commitment to provide Catholics with an
attractive, core equity investment product that enables them to adhere to
certain core Catholic values;
o The unlikelihood of successfully finding a merger partner that would adhere
to the Catholic values; and
o The reasonableness of the proposed Reorganization to address and
successfully resolve the factors that have inhibited growth of The Equity
Income Fund, as identified in Precision Marketing's report.
In addition, in approving the Plan, the board considered numerous other
factors, including the investment philosophy, performance, personnel, resources
and financial condition of CFSC and Mellon; the nature, quality, scope and cost
of advisory services; the differences between The Equity Income Fund and The New
Equity Fund in terms of their investment objectives, principal strategies and
risks, portfolio management, and fee and expense structure; the selection and
method for implementing the Catholic values; the terms of the Plan, including
the structure of the Reorganization as a tax-free transaction; and other factors
deemed relevant by the board.
The board believes the reorganization offers the following benefits to the
shareholders of The Equity Income Fund, among others:
o The continuation of an opportunity to invest in an equity fund that adheres
to certain core Catholic values important to them;
o The elimination of multiple equity investment options that are confusing
and somewhat overlapping;
o A simple, easy to understand passive investment strategy designed to follow
the performance of the S&P 500 Index;
o A higher potential for future asset growth;
o Potential for lower annual fund operating expenses; and
o Potential for increased portfolio diversification, greater buying power,
lower transaction costs and other economies of scale associated with a
larger combined fund.
For these and other reasons, the board of directors of The Catholic Funds,
including the directors who are not "interested persons" of The Catholic Funds
(as that term is defined in the 1940 Act), has concluded that the Reorganization
is fair to, and in the best interests of, the shareholders of The Equity Income
Fund and that their economic interests will not be diluted as a result of the
Reorganization.
The board of directors of The Catholic Funds unanimously recommends that
shareholders of The Equity Income Fund vote FOR approval of the Plan and the
Reorganization.
Federal Tax Consequences
A condition to completion of the Reorganization is the receipt of a legal
opinion from Quarles & Brady LLP that the Reorganization will constitute a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, no gain or loss will
be recognized for federal income tax purposes by the shareholders of The Equity
Income Fund or by The Equity Income Fund or The New Equity Fund as a result of
the Reorganization. However, it is anticipated that, immediately following the
Reorganization, The New Equity Fund will adjust the investment portfolio it
acquires from The Equity Income Fund to conform to the S&P 500 Index. We
anticipate that The New Equity Fund will recognize a net capital loss on the
sale of portfolio securities that it acquires in the Reorganization from The
Equity Income Fund.
Comparison of The Equity Income and The New Equity Funds
Below is a brief comparison of the principal features of The Equity Income
Fund and The New Equity Fund. For more detailed information about The Equity
Income Fund, please refer to the Equity Income Fund Prospectus which accompanies
this Proxy Statement/Prospectus.
Investment Objectives and Principal Strategies
Summary. The Equity Income Fund and The New Equity Fund both involve
investment in a diversified portfolio of common stocks. However they have
somewhat different focuses in their investment objectives and strive to obtain
their objectives through substantially different investment strategies and
programs. In particular, The Equity Income Fund's objective focuses both on
current income and long-term capital growth. The New Equity Fund's investment
objective focuses on overall total return that approximates the total return of
the S&P 500 Index, without regard to whether the components of that total return
are driven by capital appreciation, current income in the form of dividends, or
a combination of the two. The Equity Income Fund relies on the subjective
judgment and skill of the portfolio manager to select stocks that have a
potential to help the Fund achieve its objective, while The New Equity Fund
instead employs a passive management style in which the portfolio manager
constructs an investment portfolio for the Fund that is substantially similar to
the composition of the S&P 500 Index.
In terms of their Catholic values, both Funds avoid investing in securities
of companies that manufacture products, provide services or engage in business
practices which are inconsistent with the sanctity of human life, but there are
some differences in other Catholic values adhered to by the Funds and the manner
in which they implement those other Catholic values.
The Equity Income Fund. The Equity Income Fund seeks both a reasonable
level of current income and long-term capital growth. To achieve this objective,
the Fund invests primarily in a diversified portfolio of dividend-paying stocks
that have a market capitalization of at least $1.0 billion and that exhibit
long-term growth potential. The Equity Income Fund's portfolio manager normally
invests at least 75% of the Fund's total assets in the securities. The Fund has
the flexibility, however, to invest the balance of its assets in all types of
domestic securities, including investment-grade bonds and convertible,
fixed-income securities (some of which may be below investment grade) and
nondividend-paying stocks. The Fund also may invest in securities of foreign
issuers traded on a U.S. national securities exchange or the NASDAQ National
Market System.
The New Equity Fund. The New Equity Fund seeks to obtain a total return
from dividends and capital gains which is equal to the total return of the S&P
500 Index, less the Fund's operating expenses. The Fund attempts to achieve its
objective by investing in a portfolio of common stocks that substantially
replicates the composition of the S&P 500 Index. When the adviser receives
notification of a change in the composition of the Index, the adviser generally
makes a corresponding change in the composition of the Fund's investment
portfolio.
Certain companies included in the S&P 500 Index from time to time may
manufacture products, provide services or engage in other business practices
which are inconsistent with the Fund's Catholic value regarding the sanctity of
human life (the "sanctity of life exclusionary screen"), which is described in
more detail below. As of the date of this Proxy Statement/Prospectus, less than
2% of the total market capitalization of the S&P 500 Index consisted of stocks
of companies that the Fund would exclude by applying this screen. To reduce the
performance tracking error between the Fund and S&P 500 Index that will result
from the Fund's exclusion of those stocks, the subadviser will use modeling
techniques to quantify the tracking error and will rebalance the Fund's
portfolio among the remaining Index stocks in an attempt to minimize the
tracking error.
Thus, unlike The Equity Income Fund, which relies on the judgment and
expertise of its managers to select stocks which meet the investment criteria of
The Equity Income Fund and have the potential for superior performance, the
adviser passively manages The New Equity Fund's investments to conform to the
S&P 500 Index, subject to the sanctity of life exclusionary screen. This passive
management style reduces the reliance on the portfolio manager's subjective
judgment.
Catholic Values. The Equity Income Fund adheres to three important Catholic
values selected by the board of directors of The Catholic Funds, namely the
sanctity of human life, no unjust wars and the dignity of the human person. The
Equity Income Fund will not invest in securities of companies that manufacture
products, provide services or engage in other business practices that CFSC
determines are inconsistent with any of these three Catholic values, based on
guidelines established by the board of directors.
The New Equity Fund focuses on two of these same three Catholic values,
namely the sanctity of human life and the dignity of the human person. Like The
Equity Income Fund, The New Equity Fund does not invest in securities of
companies whose businesses CFSC determines are inconsistent with the sanctity of
human life. However, with respect to the dignity of the human person value,
rather than excluding those companies from The New Equity Fund's investment
portfolio, CFSC engages in shareholder advocacy actions designed to persuade
such companies to reform their offending business practices and policies to
better reflect this important Catholic value. Presently, these advocacy efforts
focus on how employers treat members of the work force, which the board believes
is likely to be representative of a company's general policy toward issues of
human dignity. The board further believes this advocacy approach offers greater
potential to persuade companies to reform their practices and policies that
offend the dignity of the human person, as opposed to an exclusionary policy
that potentially goes unnoticed by management of the offending company. However,
because of the extremely fundamental nature of the sanctity of human life value,
the board of directors believes it would be inappropriate for The New Equity
Fund to invest in the securities of companies that do not adhere to this value,
even under an advocacy program.
Risk Factors
Both The Equity Income Fund and The New Equity Fund experience market risk,
which is the risk that market prices overall will rise and fall over short and
even extended periods. Both Funds also experience objective risk, which is the
risk that a Fund's investments will depend not only on the movement of the
market in general, but on factors that affect the individual stocks (and, in the
case of The Equity Income Fund, bonds) held in the Fund's portfolio, such as a
company's financial performance, management and business trends.
Because the investment program of the New Equity Fund focuses on stocks of
large companies, that Fund is exposed to the risk that the large capitalization
stocks included in its portfolio may trail returns from the overall stock market
for short or even extended periods.
The Equity Income Fund also is exposed to securities selection risk, which
is the risk that the securities selected by the portfolio manager may not
perform as well as other securities the manager could select consistent with The
Equity Income Fund's investment program. As a passively managed fund, The New
Equity Fund is not subject to this same manager selection risk, however it is
exposed to the risk that the return on its investment portfolio may not
precisely track that of the S&P 500 Index. This risk results from a number of
factors that will preclude The New Equity Fund's investment portfolio from
precisely mirroring the composition of the S&P 500 Index at all times.
Both Funds also are exposed to the risk that the implementation of their
Catholic value exclusionary screens may limit investments available to the Funds
as compared to their peers, and the return on the securities that the Funds can
purchase may be less than similar securities they might otherwise purchase (or,
in the case of The New Equity Fund, other securities included in the S&P 500
Index).
The Equity Income Fund is exposed to several additional risks that do not
apply to The New Equity Fund. Because The Equity Income Fund invests in bonds
and other fixed-income securities in addition to common stocks, it is exposed to
interest rate risk and credit risk. Interest rate risk is the possibility that
rising interest rates will cause declines in the prices of the bonds that The
Equity Income Fund holds. Credit risk is the possibility that the borrower of
the proceeds of non-treasury bonds in which The Equity Income Fund invests, or
the guarantor of those bonds, will not be able to make principal and interest
payments on a timely basis. Finally, because The Equity Income Fund may invest
in foreign securities, it is exposed to special risks associated with investing
in foreign securities that are not typically associated with investing in
securities of U.S. companies. For a more detailed description of risks
associated with investing in The Equity Income Fund, see the section of the
Equity Income Fund Prospectus captioned "Investment Risks." For a more detailed
discussion of risks associated with investing in The New Equity Fund, see the
section of this Proxy Statement/Prospectus captioned "Risk Factors."
Performance
The New Equity Fund has not yet commenced operations, and therefore has no
performance history. However, in the concurrent consolidations of the three
existing equity funds of The Catholic Funds into The New Equity Fund, The
Catholic Disciplined Capital Appreciation Fund will be considered the surviving
fund, because its investment program, strategy and portfolio most closely
resemble those of The New Equity Fund. Accordingly, The New Equity Fund will
retain and will advertise the performance history of The Catholic Disciplined
Capital Appreciation Fund as its own. Please read The Equity Income Fund Annual
Report, which was previously mailed to you, for more information on the
performance of The Catholic Disciplined Capital Appreciation and of The Equity
Income Fund through September 30, 2001.
Size of Funds
On December 31, 2001, The Equity Income Fund had an aggregate net asset
value of $5.7 million, and the other two existing equity funds of The Catholic
Funds had aggregate net assets of $11.3 million, consisting of $6.3 million in
The Catholic Large-Cap Fund and $5.0 million in The Catholic Disciplined Capital
Appreciation Fund. Accordingly, if shareholders of all three of the existing
equity funds approve the respective reorganizations into The New Equity Fund,
The New Equity Fund would have approximately $17.0 million in net assets
following the Reorganization.
Classes of Shares
The Equity Income Fund offers only shares of Class A Common Stock, which
have a front-end sales charge of up to 4.00% and a Rule 12b-1 distribution fee
of 0.25%. The New Equity Fund offers three classes of shares, including Class A
Common Stock with a sales load structure and 12b-1 fee identical to shares of
Class A Common Stock of The Equity Income Fund. The New Equity Fund also offers
Class C Common Stock and Class I Common Stock, but will not issue any shares of
those classes in connection with the Reorganization. Those Classes of shares
have different sales load structures, rule 12b-1 distribution fees and minimum
investment requirements as compared to The New Equity Fund's Class A Common
Stock. The performance of the various classes of shares will vary based on those
differences in sales charges and fees.
Expenses
The following table compares the fees and expenses that you may pay if you
buy and hold shares of Class A Common Stock of The Equity Income Fund and The
New Equity Fund. The information for The New Equity Fund is estimated by
management (based on the assumption that the Reorganization and the concurrent
reorganizations of the other two existing equity funds with and into The New
Equity Fund are completed).
THE EQUITY THE NEW
INCOME FUND EQUITY FUND
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on 4.00% 4.00%
Purchases (as a percentage of offering
price)(1)
Maximum Deferred Sales Charge (Load) None None
Imposed on Redemptions (as a percentage of
original purchase price or redemption
proceeds, whichever is less)
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Management Fees 0.80% 0.50%
Distribution (12b-1) Fees 0.25% 0.25%
Other Expenses(2) 1.65% 0.75%
----- -----
Total Annual Fund Operating Expenses 2.70% 1.50%
===== =====
Less: Fee Waivers and Expense 1.05% 0.55%
Reimbursements(3) ----- -----
Net Annual Fund Operating Expenses 1.65% 0.95%
===== =====
(1) The maximum initial sales charge for Class A shares of each Fund applies to
investments of up to $25,000, and is reduced for larger investments. No
initial sales charge will be imposed on shares of The New Equity Fund
issued to shareholders of The Equity Income Fund in the Reorganization.
(2) "Other expenses" are based on amounts actually incurred during the fiscal
year ended September 30, 2001 for The Equity Income Fund, and are based on
management's estimated amounts for the fiscal year ending September 30,
2002 for The New Equity Fund assuming the completion of the Reorganization
and the concurrent reorganizations of the other two existing equity funds
into The New Equity Fund.
(3) CFSC has contractually agreed, for the current fiscal year, to reimburse
expenses and waive fees to the extent necessary so that "Annual Total Fund
Operating Expenses" will not exceed 1.65% for The Equity Income Fund and
0.95% for The New Equity Fund.
Example
The following Example is intended to help you compare the cost of investing
in The Equity Income Fund (and investing in The New Equity Fund giving effect to
the Reorganization and the concurrent reorganizations of the other two existing
equity funds with and into The New Equity Fund) with the cost of investing in
other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of those time periods.
The Example also assumes that your investment has a 5% return each year and that
each Fund's operating expenses remain the same (with fee waivers and expense
reimbursements for The Equity Income Fund and The New Equity Fund in effect for
one year). Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
The Equity Income Fund $561 $1,109 $1,683 $3,237
The New Equity Fund(1) $493 $955
(1) Because The Equity Income Fund shareholders will not have to pay a sales
load on shares of The New Equity Fund they receive in the Reorganization,
the pro forma expenses they would pay on a $10,000 investment in such
shares (and assuming a 5% annual return and redemption at the end of each
time period) would be as follows: $493 - 1 year and $691 - 3 years. These
lower expenses do not reflect any front-end sales load paid at the time of
initial investment in the Class A shares of The Equity Income Fund that
shareholders surrender in exchange for Class A shares of The New Equity
Fund in the Reorganization.
Sales Charges. The front-end sales charges imposed on purchases of Class A
shares of The New Equity Fund are the same as those for shares of The Equity
Income Fund. For a description of those sales charges, please see the section of
the Equity Income Fund Prospectus captioned "How to Invest."
Minimum Purchases. The minimum investment amounts to open and to add to an
account for Class A shares of The New Equity Fund are the same as for The Equity
Income Fund. For a description of those minimum investment amounts, see the
section of the Equity Income Fund Prospectus captioned "How to Invest."
Redemption Procedures. The redemption procedures that apply to sales of
Class A shares of The New Equity Fund are the same as those that apply with
respect to the redemption of shares of The Equity Income Fund. For a description
of those redemption procedures, see the section of this Proxy
Statement/Prospectus captioned "Shareholder Information and Services - Redeeming
Your Class A Shares of The New Equity Fund" with respect to The New Equity Fund,
and the section of the Equity Income Fund Prospectus captioned "Selling Your
Shares" with respect to The Equity Income Fund.
Exchanges. As a shareholder of The Equity Income Fund, you have exchange
privileges among The Catholic Money Market Fund and the other two existing
equity funds of The Catholic Funds. Following the Reorganization, and assuming
the concurrent reorganization of the other two existing equity funds of The
Catholic Funds with and into The New Equity Fund, The Catholic Funds will have
only two series, namely The New Equity Fund and The Catholic Money Market Fund.
Therefore, following the Reorganization, exchanges will be available only
between those two Funds. Those exchanges will be subject to the same
requirements and procedures as presently apply to exchanges between The Equity
Income Fund and The Catholic Money Market Fund. For a detailed description of
the requirements and procedures that apply to exchanges among the various funds
of The Catholic Funds, please see the section of the Equity Income Fund
Prospectus captioned "Selling Your Shares - Exchange Privilege."
Other Shareholder Services. The New Equity Fund offers other shareholder
services which are the same as those presently offered by The Equity Income
Fund, including purchases and sales by telephone, purchases and sales by wire,
automatic investment plans and automatic withdrawal plans. For a detailed
description of these shareholder services, please refer to the sections of the
Equity Income Fund Prospectus captioned "How to Invest" and "Selling Your
Shares."
Dividends and Distributions. The Equity Income Fund distributes its
investment income quarterly, and distributes all net realized long and
short-term capital gains at least annually. The New Equity Fund will distribute
any net investment income annually, and will distribute any net realized long or
short-term capital gains at least annually. For a more detailed description of
The New Equity Fund's distribution practices and policies, see the section of
this Proxy Statement/Prospectus captioned "Shareholder Information and
Services." For The Equity Income Fund, see the section of the Equity Income Fund
Prospectus captioned "Shareholder Information."
Management and Operations. CFSC serves as adviser and distributor to both
The Equity Income and The New Equity Funds. Under the terms of an investment
advisory agreement between The Catholic Funds and CFSC, CFSC, together with the
sub-advisers and subject to the supervision of the board of directors of The
Catholic Funds, manages the investment and reinvestment of the Funds' assets,
provides the Funds with personnel, facilities and administrative services, and
supervises the Funds' daily business affairs. CFSC also formulates and
implements a continuous investment program for the Funds consistent with each
Fund's investment objectives, policies and restrictions. For providing these
services, CFSC receives an annual advisory fee at the rate of 0.80 of 1% of the
average daily net assets of The Equity Income Fund, and 0.50 of 1% of the
average daily net assets of The New Equity Fund.
Todd Investment Advisors, Inc. ("Todd") serves as the sub-adviser for The
Equity Income Fund. The Western and Southern Life Insurance Company
("Western-Southern") indirectly owns all of the outstanding capital stock of
Todd through Western-Southern's investment adviser subsidiary, Fort Washington
Investment Advisors, Inc. Curtiss M. Scott, Jr., CFA, is the portfolio manager
for The Equity Income Fund. Information about Todd and Mr. Scott is included in
the Section of the Equity Income Fund Prospectus captioned, "Management -
Sub-Advisers - The Catholic Equity Income Fund." For its services as
sub-adviser, Todd receives an annual fee which CFSC pays out of its advisory fee
as follows: 0.38 of 1% on the first $10 million of The Equity Income Fund's
average daily net assets; 0.35 of 1% on the next $40 million; and 0.30 of 1% on
average daily net assets over $50 million.
Mellon Equity Associates, LLP serves as sub-adviser for The New Equity
Fund. Mellon is an independently run, wholly owned subsidiary of Mellon
Financial Corporation, organized as a limited liability partnership. The firm
became a separate legal entity from the equity management group of the Mellon
Bank trust department in January 1987, managing domestic equity accounts for
U.S. tax-exempt clients. The equity management group has managed institutional,
tax-exempt assets since 1947. The firm's proprietary investment process,
developed by its current principal officers, has been used to manage domestic
equity accounts for U.S. tax-exempt clients since January 1983. Today, Mellon
manages nearly $23 billion in assets for approximately 140 clients.
Thomas J. Durante, a chartered financial analyst, will manage the
day-to-day investment of the assets of The New Equity Fund. Mr. Durante
specializes in the management of indexed and enhanced-indexed equity products
for Mellon. Before joining Mellon in 2000, Mr. Durante was a controller of funds
at Dreyfus Corporation for over 18 years. He earned a Bachelor of Science degree
in accounting from Fairfield University.
From its advisory fees, CFSC pays Mellon a sub-advisory fee for managing
the assets of The New Equity Fund at the annual rate of 12 basis points (0.12%)
on the first $50 million of the Fund's average daily net assets, and six basis
points (0.06%) on the Fund's average daily net assets in excess of $50 million.
The distribution services that CFSC provides to The New Equity Fund are
provided on the same basis and under identical terms and conditions as the
distribution services it provides to The Equity Income Fund, and the rule 12b-1
distribution plan and related fees applicable to Class A shares are the same for
both Funds. For a description of these arrangements, please refer to the section
of this Proxy Statement/Prospectus captioned "Shareholder Information and
Services - Distribution Fees" for The New Equity Fund, and to the section of the
Equity Income Fund Prospectus captioned "Shareholder Information - Distribution
Fees" for The Equity Income Fund.
RISK FACTORS
In evaluating whether to approve the Plan and invest in The New Equity
Fund, shareholders should carefully consider the following summary of
comparative risk factors relating to The New Equity Fund and The Equity Income
Fund, in addition to the other information set forth in this Proxy
Statement/Prospectus.
Market Risk
Both Funds are subject to market risk, which is the risk that the overall
prices of the securities in which they invest will rise and fall over short and
even extended periods. The equity markets (and, in the case of The Equity Income
Fund, the fixed-income markets as well) tend to move in cycles, and the net
asset value of both Funds (and therefore their share prices) will fluctuate with
these price changes and market fluctuations. You could lose money investing in
either Fund.
Objective Risk
Both Funds are subject to objective risk, which is the risk that the value
of their investments will be affected not only by movements in the market
generally, but also by factors that affect the individual securities held in
their investment portfolios, such as a company's financial performance,
management and business trends. The New Equity Fund also is exposed to the risk
that large capitalization stocks in which it invests may trail returns from the
overall stock market for short or even extended periods.
Interest Rate and Credit Risk
The value of the bonds in which The Equity Income Fund Invests will
fluctuate based on several factors, but primarily credit quality and interest
rate changes. Because The Equity Income Fund primarily will purchase
investment-grade bonds, the principal risk associated with its bonds investments
is interest rate risk. Interest rate risk is the possibility that rising
interest rates will cause declines in the prices of the bonds that The Equity
Income Fund holds. Bond prices typically move in the opposite direction of
interest rates, with the prices of bonds with longer maturities typically
changing more than the prices of those with shorter maturities.
Non-treasury bonds in which The Equity Income Fund invests are subject to
credit risks. Credit risk is the possibility that the borrower of bond proceeds,
or the guarantor of the bond, will not be able to make principal and interest
payments on a timely basis. Creditworthiness could deteriorate because of
general economic conditions, adverse developments that affect the industry in
which the borrower conducts its business or adverse developments that affect the
borrower's business uniquely.
Because The New Equity Fund does not invest in bonds and other fixed-income
securities, its results are not directly exposed to interest rate and credit
risks.
Convertible Securities - Junk Bonds
Convertible bonds that The Equity Income Fund purchases often are rated
below investment grade or are not rated because they fall below debt obligations
and just above equity in order of preference on a company's balance sheet. As a
result, an issuer with investment-grade, senior debt may offer convertible bonds
which are below investment grade (sometimes referred to as junk bonds). Junk
bonds in which The Equity Income Fund may invest generally are more vulnerable
to default than higher-grade bonds, and are more susceptible to adverse
business, financial and economic conditions that reduce the capacity and
willingness of borrowers to make scheduled interest and principal payments. The
market prices of these convertible bonds may fluctuate more in times of economic
uncertainty than is the case for higher-rated bonds. Also, because the bond is
convertible into the company's common stock, the market price of the bond tends
to rise and fall with the price of the company's common stock. Under some market
conditions, this feature can cause the bond's market price to be more erratic
than junk bonds generally.
Because The New Equity Fund does not invest in bonds and other fixed-income
securities, it is not exposed to risks associated with investing in convertible
securities.
Foreign Securities
The Equity Income Fund may invest in foreign securities. Foreign securities
involve special risks and considerations not typically associated with investing
in securities of U.S. companies. These include: fluctuation in value of foreign
portfolio investments due to changes in currency rates and control regulations
(e.g., currency blockage); lack of public information about foreign issuers;
lack of uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers; and greater difficulties in
commencing lawsuits against foreign issuers.
Because The New Equity Fund invests only in U.S. companies, it is not
exposed to these risks.
Securities Selection Risk
The Equity Income Fund depends on the portfolio manager's ability to select
securities that perform well. The Fund is subject to the risk that these
selections may not achieve the desired current income and/or appreciation in
value, and may even decline in value.
Because The New Equity Fund is managed passively to conform substantially
to the S&P 500 Index, it is not significantly exposed to this risk.
Index Correlation Risk
The New Equity Fund is exposed to the risk that its performance will not
track that of the S&P 500 Index at all times. This is so for a number of
reasons. First, the application of The New Equity Fund's sanctity of life
exclusionary screen will prevent the adviser from purchasing stocks of all of
the companies included in the S&P 500 Index, and the Fund's investment portfolio
therefore will not precisely replicate the composition and capitalization
weightings of companies included in the S&P 500 Index. Also, The New Equity Fund
from time to time will hold uninvested cash. This might occur, for example, when
the Fund receives the proceeds of new investments pending the adviser's
investment of those proceeds in stocks of the S&P 500 Index. Also, the adviser
may from time to time choose to hold uninvested cash to meet anticipated
redemptions. In either case, the cash assets will create further deviations
between the composition of the Fund's investment portfolio and that of the S&P
500 Index. These deviations in portfolio composition will affect the performance
of The New Equity Fund relative to the S&P 500 Index.
Finally, unlike the S&P 500 Index, The New Equity Fund incurs transaction
and operating costs (e.g., brokerage commissions, investment management fees,
custodian and transfer agent fees, legal and accounting fees, and the like).
These fees and expenses will reduce the total return of the Fund as compared to
that of the S&P 500 Index.
Non-Fundamental Investment Objective
The investment objective of The New Equity Fund is not fundamental. This
means that the Fund's investment objective could be changed by action of CFI's
Board of Directors, without the consent or approval of the shareholders of the
Fund. For example, the Board may find it necessary to change the investment
objective of the Fund if the composition of the S&P 500 Index should become so
heavily weighted with stocks of companies that the Fund could not hold under its
sanctity of life exclusionary policy, the Fund may be unable to construct a
portfolio of stocks that reasonably can be expected to track the performance of
the S&P 500 Index. Under these circumstances, the Board may find it necessary to
modify the investment objective of The New Equity Fund. The Fund would provide
shareholders with at least 60 days advanced written notice before making any
such change in its investment objective.
COMPARISON OF INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
Investment Objectives
While the Funds have somewhat different investment objectives, they are
both designed for investors who want long-term capital appreciation, can
tolerate fluctuations in portfolio value and have no need for current income
from their investment in the relevant Fund.
The New Equity Fund. The New Equity Fund seeks to obtain a total return
from dividends and capital gains which is equal to the total return of the S&P
500 Index, less The Fund's operating expenses.
The Equity Income Fund. The Equity Income Fund seeks both a reasonable
level of current income and long-term capital
growth.
Principal Strategies
General. The Equity Income Fund uses an active management style, where the
portfolio manager selects individual securities that meet the investment
criteria of the Fund to construct a portfolio of dividend-paying stocks with
market capitalizations of at least $1.0 billion which exhibit long-term growth
potential. This Fund therefore relies on the subjective judgment of the
portfolio manager to make prudent selections. For a detailed description of the
investment program of The Equity Income Fund, please refer to the section of the
Equity Income Fund Prospectus captioned "The Catholic Equity Income Fund."
The New Equity Fund, on the other hand, uses a passive management strategy.
Under this strategy, the portfolio manager attempts to match, as closely as
possible, the performance of the S&P 500 Index by holding each stock found in
the Index in roughly the same proportion (measured by market capitalization) as
represented in the Index itself, subject to the application of the Fund's
sanctity of life exclusionary screen. For example, if 3% of the total market
capitalization of the S&P 500 Index consisted of the common stock of a
particular company, then the Fund generally would invest 3% of its assets in
shares of common stock of that company.
Certain companies included in the S&P 500 Index from time to time may
manufacture products or provide services which are inconsistent with the Fund's
sanctity of life exclusionary screen, and the Fund will not invest in the common
stocks of those companies. Accordingly, the Fund will not fully replicate the
Index at all times. Presently there are six companies included in the S&P 500
Index in which the Fund may not invest because of this exclusionary screen.
Together those companies comprise less than 2% of the total market
capitalization of the S&P 500 Index. To reduce the performance tracking error
between the Fund and the S&P 500 Index that will result from the Fund's
exclusion of those stocks, the subadviser will use modeling techniques to
quantify the tracking error and will rebalance the Fund's portfolio among the
remaining Index stocks in an attempt to minimize the tracking error. The adviser
does not believe that the application of this exclusionary screen will adversely
affect the ability of the Fund to achieve its objective.
Passive Management. Passive management appeals to many investors for a
number of reasons, including the following:
o Simplicity - it is a straightforward market matching strategy;
o Diversification - broad indices such as the S&P 500 Index cover a wide
variety of companies and industries;
o Relative performance predictability - a passively managed fund is expected
to move in the same direction - up or down - as its target index;
o Comparatively low cost - passively managed funds do not have many of the
expenses of an actively-managed mutual fund, such as research and company
visits; and
o Relatively low portfolio turnover rates (assuming the composition of the
relevant index remains fairly stable), which reduces transaction costs
(brokerage commissions, etc.) and capital gains.
The performance of a passively managed fund generally will trail the
performance of the index it attempts to track. This is true because the mutual
fund and its investors incur operating costs and transaction expenses that are
not shared by an index. For example, investors may pay sales charges which
result in less than all of the price they pay for their mutual fund shares being
invested in common stocks of companies included in the index. Investors in The
New Equity Fund pay a front-end sales charge for Class A shares at the time of
purchase. A sales charge reduces the total return on your investment as compared
to a direct investment in stocks.
Additionally, when a mutual fund invests the cash proceeds it receives from
investors in common stocks of companies included in an index, the mutual fund
must pay brokerage commissions, which further reduce the amount invested. As the
composition of the index changes, the mutual fund must make corresponding
adjustments in its holdings, giving rise to additional brokerage commissions.
Also, mutual funds incur other operating expenses, including investment
management fees, custodial and transfer agent fees, legal and accounting fees,
director fees and frequently rule 12b-1 service and distribution fees. These
fees and expenses reduce the mutual funds total return as compared to the index
it attempts to track, because no such costs affect the total return of the
index.
Also, because of liquidity needs, unavoidable delays in immediately
investing the proceeds of the sale of fund shares and other constraints under
which mutual funds operate, passively managed funds generally need to retain a
small portion of their assets in cash or cash equivalents. This inability to be
fully invested in index stocks at all times creates further deviations between
the composition of a passively managed fund's investment portfolio and the index
it attempts to track. The deviations are referred to as tracking error.
In order to reduce the tracking error between the performance of The New
Equity Fund and the S&P 500 Index that results from the Fund holding uncommitted
cash from time to time, the sub-adviser may invest the uncommitted cash in
shares of publicly traded closed-end funds that hold a portfolio of stocks
designed to replicate the S&P 500 Index, such as S&P Depository Receipts, or
SPDRs. This practice, known as equitizing cash, facilitates the ability of The
New Equity Fund to earn a return on its uncommitted cash which more closely
tracks the performance of the S&P 500 Index. Under no circumstances will the
sub-adviser purchase the shares of such a closed-end fund if, immediately after
doing so, more than 5% of The New Equity Fund's net assets would be invested in
shares of any one closed-end fund or if more than 10% of the Fund's net assets
would be invested in such closed-end funds in the aggregate.
As The New Equity Fund increases in size, it may become efficient in the
future for it to use exchange-traded index futures contracts to equitize cash,
in addition to or in lieu of publicly traded closed end funds. An index futures
contract is a contract to buy or sell units of a particular index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time The New Equity Fund enters into and terminates an index futures
contract, the Fund may realize a gain or loss. Losses involving index futures
contracts can sometimes be substantial, in part because a relatively small price
movement in an index futures contract may result in an immediate and substantial
loss or gain for The New Equity Fund. The New Equity Fund will not use futures
contracts for speculative purposes or as leveraged investments that magnify the
gains or losses on an investment. The New Equity Fund may not invest in futures
contracts to the extent that doing so would require the Fund to commit more than
5% of its total assets for margin on futures contracts, or if more than 20% of
the Fund's total assets would be committed to futures contracts.
There is a risk of an imperfect correlation between movements in prices of
futures contracts on the S&P 500 Index and movements in the value of the S&P 500
Index itself. There is also a possibility that no liquid secondary market will
exist for a futures contract that will enable The New Equity Fund to close a
futures position prior to its maturity date. The Fund will seek to reduce this
liquidity risk by entering into futures contracts on registered security
exchanges with an active and liquid secondary market.
In addition to the holding of uncommitted cash, the application of The New
Equity Fund's sanctity of life exclusionary screen also creates deviations
between the composition of The New Equity Fund's investment portfolio and the
composition of the S&P 500 Index. These mismatches between passively managed
funds and the indices that they attempt to track create variances in their
relative performances.
For these reasons, you should expect that the performance of The New Equity
Fund will lag that of the S&P 500 Index. In part for this reason, The New Equity
Fund compares its gross return (total return before deducting the Fund's
operating expenses and transaction costs) to the S&P 500 Index, rather than its
net return.
S&P 500 Index. The S&P 500 Index is an index compiled and maintained by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). The
Index consists of 500 stocks chosen by S&P for market size, liquidity and
industry group representation. It is a market-value weighted index (stock price
times the number of shares outstanding) with each stock's weight in the Index
proportionate to its market value.
While the S&P 500 Index has proven a good measure of large-cap stock
performance over time, you should bear in mind that it does not represent the
entire U.S. stock market. Historically, the market has gone through cycles where
large-cap stocks included in the S&P 500 Index have outperformed and
underperformed the broader U.S. stock market. For example, in the mid-to-late
1990's, technology companies experienced rapid growth and comprised an
increasing percentage of the S&P 500 Index, exceeding 25% of the Index at
various times. The S&P 500 Index experienced significant volatility during this
period, much of it attributable to the performance of these technology stocks.
For these reasons, while we expect the Fund's performance will closely track
that of the S&P 500 Index, you should not expect that the Fund's performance
will track that of the broader U.S. equity markets at all times.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of S&P. S&P makes no representation or warranty,
implied or expressed, for the shareholders of The New Equity Fund, or any member
of the public regarding the advisability of investing in index or other
passively managed funds generally, or in The New Equity Fund in particular, or
the ability of The New Equity Fund to track general stock market performance.
S&P's only relationship to this Fund is the licensing of the S&P 500 Index which
is determined, composed and calculated by S&P without regard to this Fund.
Implementation of Catholic Values
The Equity Income Fund. The Equity Income Fund focuses on three core
Catholic values selected by the board of directors of The Catholic Funds for
adherence in connection with its investment program. Those values consist of the
following:
o Sanctity of Human Life - Human life deserves protection from the moment of
conception.
o No Unjust Wars - The indiscriminate destruction of civilians is wrong, even
in the course of an otherwise justifiable war.
o Dignity of the Human Person - Every person is entitled to be treated with
dignity and justice, because every human being is created in the image and
likeness of God.
The board of directors has adopted guidelines which the adviser uses to
identify companies whose products, services and/or business practices are
inconsistent with one or more of these core Catholic values, and the adviser
refrains from acquiring the securities of those companies for the investment
portfolio of The Equity Income Fund. A more detailed description of the
implementation of these Catholic Values with respect to The Equity Income Fund
is included in the Equity Income Fund Prospectus under the caption "Investment
Philosophy Statement."
The New Equity Fund. In considering the core Catholic values that would be
implemented with respect to The New Equity Fund, and given its experience with
the application of the exclusionary screens of The Catholic Funds to date, the
board of directors determined that it would be prudent to cease screening for
the "no unjust wars" principle in the future (following the Reorganization). In
coming to this conclusion, the board was cognizant of the global trend toward
the reduction in nuclear arms, biological weapons and other weapons of mass and
indiscriminant destruction, and the concurrent technological developments that
have given rise to more effective precision weapons. Since the commencement of
The Catholic Funds, this screen has resulted in the exclusion of only a
negligible number of companies from the portfolios of the three existing equity
funds. For these reasons, the board has determined that The New Equity Fund will
strive to invest its assets in a manner that promotes two important core
Catholic values: namely, the sanctity of human life and the dignity of the human
person.
To implement the sanctity of human life value in its investment program,
The New Equity Fund will avoid investing in securities of companies that
directly participate in abortion.
With respect to the dignity of the human person, the board has determined
to focus on the practices and policies of employers with respect to members of
the work force. The board believes the manner in which a company treats its
employees is a good measure of the company's attitude toward the dignity of the
human person generally. If The New Equity Fund's investment strategy should
cause it to invest in securities and obligations of a company or other issuer
whose employment and other business practices are substantially inconsistent
with the dignity and primacy of the human person, CFSC will engage in advocacy
activities designed to influence the company's practices to better reflect and
promote the dignity of the human person. Examples of practices that The Catholic
Funds and CFSC likely would determine are inconsistent with this principle
include, without limitation:
o Not providing a livable wage as dictated by the standards of the particular
region;
o Not providing safe, sanitary or humane working conditions;
o Failing to maintain a board of directors composed of a majority of
individuals who are independent of management and free from other material
conflicts and personal interests that potentially could compromise their
ability and incentive to vigorously promote and protect the interests of
the shareholders;
o Not maintaining fair and equitable compensation structures which allow
employees at all levels to share financially in the success of the company
through stock-option, employee-ownership or other types of programs that
benefit all employees; or
o Employing executive compensation systems which overcompensate or unjustly
enrich executive management at the expense of shareholders and lower-level
employees.
The board of directors selected these two particular core Catholic values
because they are grounded in the very fundamental Catholic value that every
person is made in the image and likeness of God. Also, each relates to the
protection of innocent victims who have no choice or whose choices are extremely
limited under the relevant circumstances, such as unborn children and people who
need to earn a living. Finally, the board believes that the adviser can
practically and efficiently implement each of these values in making day-to-day
investment and advocacy decisions, and that the board effectively can monitor
and direct compliance with these values.
The board of directors may from time to time select different or additional
core Catholic values that The New Equity Fund will implement in its investment
program. For example, the board of directors may determine to add or substitute
a selected core Catholic value in response to official doctrinal statements of
the Catholic Church. In any event, the board of directors has the sole and
exclusive authority to select the core Catholic values that we will implement in
the Funds' investment programs, and to determine the manner in which they will
be implemented.
Because the board of directors views the sanctity of human life as so
fundamental to the doctrines of the Catholic Church, the board determined to
retain an exclusionary practice with respect to the implementation of this
value. However, with respect to the dignity of the human person value, the board
of directors determined that an advocacy approach to implementation potentially
could have a greater effect. The board determined that an exclusionary practice
with respect to this value likely would have little impact on the conduct and
behavior of companies, insofar as The New Equity Fund's exclusion of those
companies from its investment portfolio likely would go unnoticed. However, a
proactive shareholder advocacy approach potentially could cause such companies
to reform their offending practices to better comport with the value of the
dignity of the human person. Accordingly, the board elected to adopt an advocacy
program as a means to implement this value in the investment program of The New
Equity Fund.
The board of directors of The Catholic Funds has adopted policies and
procedures designed to implement the selected Catholic values in the investment
practices of The New Equity Fund. These procedures delegate to the adviser the
day-to-day responsibility for monitoring the Fund's investments to identify any
products, services or business practices which are inconsistent with the board's
selected Catholic values. The adviser also is responsible to enforce the
sanctity of the human life exclusionary screen and to initiate action under the
advocacy program. The adviser is subject to the oversight of a Catholic Screen
Review Committee appointed by the board, to which management of the adviser
reports monthly on the screening and advocacy activities. The adviser and the
Catholic Screens Review Committee are both subject to oversight by The Catholic
Funds' board of directors, to which they report quarterly.
The adviser has access to a commercial service which enables it to use
application software systems designed to screen companies for various social
issues. Using this tool and other available information, the adviser conducts an
analysis on each company whose securities are newly added to The New Equity Fund
to produce a screening profile on the company. Members of the Catholic Screens
Review Committee review these profiles monthly, except for those that the
adviser determines raise no issues with respect to the selected Catholic values.
If the adviser or the Catholic Screens Review Committee determines that a
company participates directly in abortion, that company's securities will not be
purchased by The New Equity Fund. If this determination is made after a
company's securities already are owned by the Fund, the adviser will direct the
subadviser promptly to arrange for the sale of those securities in an orderly
fashion. If it is determined that a company engages in practices which are
inconsistent with the dignity of the human person, management of the adviser
will consider appropriate advocacy actions.
On an ongoing basis, the adviser monitors the practices and policies of
companies in which The New Equity Fund invests by selectively reviewing their
annual reports to shareholders, proxy statements and other public communications
that they periodically issue. The adviser also monitors news reports and
websites oriented to socially responsible investing, and obtains and reviews
information from proxy research and voting services firms that it may retain
from time to time, as well as information it obtains through membership in one
or more organizations that provide information and assistance in connection with
shareholder advocacy efforts.
Advocacy activities that the adviser might initiate include such things as
writing letters to management of the relevant companies, encouraging
shareholders of The New Equity Fund to do the same, engaging in direct dialog
with management of these companies, voting shares of the company held by The New
Equity Fund in a manner that promotes the dignity of the human person on
relevant matters, submitting shareholder proposals for consideration at annual
and special meetings of shareholders either individually or together with other
social activists and shareholder groups, participating in or initiating proxy
contests for the election of directors, and the like. The adviser also may
request companies to provide copies of policies that pertain to the selected
Catholic values, and may propose specific questions or conduct surveys
pertaining to these Catholic values for response by companies in which The New
Equity Fund invests. We cannot provide any assurance that our advocacy efforts
will be successful in persuading companies to reform their offending practices.
If a company fails to reform its practices as requested, that fact alone will
not require The New Equity Fund to dispose of the securities of that company. In
fact the Fund may elect to continue to hold those securities, but likely would
continue its advocacy efforts. The adviser will pay all costs incurred in
connection with these advocacy efforts.
Investors should bear in mind that we consider only certain core Catholic
values when selecting investments for the Funds and when determining whether and
what advocacy actions to take. Therefore, it is likely that The New Equity Fund
from time to time will own stocks of companies that engage in business and
employment activities and practices that may be perceived by some to be
inconsistent with important Catholic values other than those described above,
and with respect to which we employ no exclusionary policy and take no advocacy
actions.
APPROVAL OF THE PLAN AND REORGANIZATION
The board of directors of The Catholic Funds unanimously recommends that
the shareholders of The Equity Income Fund vote to approve the Plan and the
Reorganization described in the Plan. The board of directors approved the Plan
in the belief that it is fair to, and in the best interests of, the shareholders
of The Equity Income Fund.
Description of the Plan
The terms and conditions under which the proposed Reorganization would be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus.
The Plan contemplates the transfer of substantially all of the assets of
The Equity Income Fund, net of its liabilities, to The New Equity Fund in
exchange solely for shares of Class A Common Stock of The New Equity Fund, and
the immediate pro rata distribution of such shares to the shareholders of The
Equity Income Fund. If approved by the shareholders of The Equity Income Fund,
the Reorganization would occur on or about [Date?] (the "Closing Date"), or such
other date as The Catholic Funds may determine.
The New Equity Fund would acquire substantially all of the assets of The
Equity Income Fund, net of the liabilities, including without limitation all
cash, cash equivalents, securities, receivables and other property owned by The
Equity Income Fund, but excluding cash and other assets of The Equity Income
Fund sufficient to pay all of its accrued but unpaid liabilities as of the
Closing Date. The New Equity Fund would not assume any debts, liabilities,
obligations or duties of The Equity Income Fund. Rather, The Equity Income Fund
will reserve sufficient assets to pay all of its liabilities as of the Closing
Date. Such liabilities may include without limitation: (a) amounts owed to
shareholders of The Equity Income Fund with respect to capital gains
distributions and/or dividends declared but remaining unpaid as of the Closing
Date; and (b) accounts payable, taxes and other accrued and unpaid expenses, if
any, incurred in the normal operation of the business of The Equity Income Fund
up to and including the Closing Date and/or expected to be incurred following
the Closing Date in connection with the winding up and dissolution of The Equity
Income Fund.
In consideration for the assets of The Equity Income Fund transferred in
the Reorganization, The New Equity Fund would issue to The Equity Income Fund
Class A shares of The New Equity Fund having an aggregate net asset value equal
to the value of the assets transferred by The Equity Income Fund. The assets of
The Equity Income Fund and the per share net asset value of The New Equity Fund
shares would be valued as of the close of business on the New York Stock
Exchange on the business day next preceding the Closing Date. All such
valuations would be conducted in accordance with the policies and procedures of
The Equity Income Fund and The New Equity Fund.
On the Closing Date, The Equity Income Fund would distribute pro rata to
its shareholders of record the Class A shares of The New Equity Fund received by
The Equity Income Fund. Such distribution would be accomplished by opening
accounts on the books of The New Equity Fund in the names of shareholders of The
Equity Income Fund and by transferring the shares credited to the account of The
Equity Income Fund on the books of The New Equity Fund. Each account opened
would represent the respective pro rata number of The New Equity Fund shares due
to each shareholder of The Equity Income Fund. Fractional shares of The New
Equity Fund would be rounded to the nearest thousandth of a share. Each
shareholder will receive that number of Class A shares of The New Equity Fund
that has an aggregate net asset value equal to the aggregate net asset value of
all of the shareholder's shares of The Equity Income Fund.
Accordingly, every shareholder of The Equity Income Fund would own Class A
shares of The New Equity Fund immediately after the Reorganization, the
aggregate net asset value of which is expected to be equal to the aggregate net
asset value of such shareholder's shares of The Equity Income Fund immediately
prior to the Reorganization. Moreover, because The New Equity Fund shares would
be issued at net asset value in exchange for the net assets of The Equity Income
Fund, and the aggregate value of those assets would equal the aggregate value of
The New Equity Fund shares issued in exchange therefor, the net asset value per
share of The New Equity Fund would not change as a result of the Reorganization.
Thus, the Reorganization would not result in economic dilution to any
shareholder of either The Equity Income Fund or The New Equity Fund.
Prior to the Closing Date, The Equity Income Fund would declare and pay a
dividend to its shareholders of record, so that for the short taxable year that
ends on the Closing Date, it would have declared an aggregate amount of
dividends that: (a) is equal to at least the sum of its respective net capital
gain and 90% of its investment company taxable income for such year, and (b) is
sufficient to avoid any excise tax for the calendar year in which the Closing
Date occurs.
Other Terms
The consummation of the Reorganization is subject to the conditions
precedent set forth in the Plan, including, without limitation, (a) approval of
the Reorganization by The Equity Income Fund shareholders; (b) receipt of a
legal opinion of Quarles & Brady LLP that the Reorganization will not result in
recognition of gain or loss for federal income tax purposes by The New Equity
Fund, The Equity Income Fund or The Equity Income Fund shareholders; (c) the
Registration Statement on Form N-14 shall have become effective under the
Securities Act of 1933, no stop orders suspending the effectiveness thereof
shall have been issued with respect thereto, and, to the knowledge of The
Catholic Funds, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the Securities Act;
(d) a post-effective amendment to The Catholic Funds' Registration Statement on
Form N-1A with respect to The New Equity Fund shall have become effective and
shall remain effective as of the Closing Date; and (e) The Catholic Funds shall
have received necessary relief from the SEC from certain provisions of The
Investment Company Act of 1940 which otherwise would prohibit the completion of
the Reorganization on its proposed terms.
Notwithstanding approval of The Equity Income Fund's shareholders, the
Reorganization may be terminated at any time prior to the Closing Date by The
Catholic Funds in its discretion, and will be terminated by The Catholic Funds
if any of the conditions to Closing are not satisfied on or before the Closing
Date.
Each participant in the Reorganization will bear its own legal, accounting
and other related expenses in connection with the Reorganization. However, CFSC
has agreed to pay the cost of soliciting the vote of shareholders of The Equity
Income Fund on the transactions contemplated in the Agreement, including costs
of preparation, printing, and distribution of proxy materials, legal and tax
opinions, transfer and stamp taxes, and the costs of printing and distributing
prospectus supplements describing such matters, and the fees of Quarles & Brady
LLP, The Catholic Funds' legal counsel, in connection with the Reorganization.
CFSC also has agreed to pay all costs by The New Equity Fund incurred in
connection with the Reorganization, if any.
Background to Reorganization
Catholic Knights and the other members of the Catholic Fraternal Alliance,
through their ownership of CFSC, established The Catholic Funds in 1998 as a
means to provide their members with a financially prudent investment program
that would adhere to certain core Catholic values. Their plan contemplated that
over time The Catholic Funds would include a broad array of mutual funds that
members of the Catholic fraternals could use to develop a comprehensive
investment program suitable for their needs, and that the availability of The
Catholic Funds would attract new members to the Catholic fraternals. The
Catholic Fraternal Alliance's plan also anticipated that each member Catholic
fraternal eventually would cause many of its agents to become licensed with CFSC
to participate in the sale and distribution of shares of The Catholic Funds, and
that this sales force would effectively reach all of the members of the Catholic
fraternals within the Catholic Fraternal Alliance. The Catholic Fraternal
Alliance anticipated that Catholics would be attracted by the opportunity to
participate in investment programs with above-average performance and adherence
to important core Catholic values.
The Catholic Fraternal Alliance planned to retain a sub-adviser with
expertise and experience in investment management strategies relevant to the
investment objective and investment program of each fund. These sub-advisers
would manage the investment and reinvestment of each fund's assets on a
day-to-day basis. The Catholic Alliance Fraternal and the board of directors of
The Catholic Funds believed the use of experienced, well staffed sub-advisers
would increase the likelihood that each fund might achieve performance superior
to its peers, rather than trying to build those staffing resources at CFSC with
respect to each fund.
To this end, the Catholic Fraternal Alliance, through CFSC, organized and
sponsored The Catholic Funds in 1998 with three equity funds, namely The
Catholic Equity Income Fund, The Catholic Large-Cap Growth Fund and The Catholic
Disciplined Capital Appreciation Fund. In 2000, The Catholic Funds added The
Catholic Money Market Fund as an additional series.
To date, The Catholic Funds, including The Equity Income Fund, have fallen
short of the asset growth and asset level projected by the original business
plan of CFSC. The small size of The Equity Income Fund puts it at a competitive
disadvantage to its peers. This is so because, like all mutual funds, The Equity
Income Fund has certain fixed costs, such as accounting fees, legal fees,
director fees, and minimum fees for fund accounting, transfer agent, custodial
services and other administrative services. When these fixed fees are spread
over a small asset base, they result in higher expense ratios as compared to
other mutual funds with larger asset sizes. Also, investment management and
transaction based fees frequently decline with larger asset sizes, thereby
putting small funds at a further competitive disadvantage. While CFSC has been
waiving fees and reimbursing expenses so that the annual operating expenses of
The Equity Income Fund would not exceed 1.65% of its average daily net assets in
any fiscal year, even these measures have been insufficient to bring the expense
ratios of The Equity Income Fund into line with its peer group. Moreover, CFSC
has indicated that it is not willing to continue to subsidize The Equity Income
Fund indefinitely.
CFSC and the board of directors of The Catholic Funds believe that the
failure of The Equity Income Fund to meet its expectations can be attributed to
a combination of numerous factors. First, the timing of the startup of The
Equity Income Fund has proven unfortunate, given the general decline, high
volatility and uncertainty that has characterized the domestic securities market
in recent periods. These conditions have made investors apprehensive, and also
have made it difficult for CFSC to recruit selling representatives from among
the ranks of the Catholic fraternals. Indeed, CFSC's mutual fund sales force is
only a fraction of the size anticipated in its business plan. Finally, while the
performance of The Equity Income Fund has been acceptable on a relative basis,
it is not so outstanding as to attract the attention of the investing public. In
short, sales and asset growth have been disappointing, and the board of
directors believes it is unlikely that these conditions will improve in the near
term.
Management of CFSC and The Catholic Funds have discussed these matters with
the board on a regular basis during recent quarterly meetings of the board.
During the summer of 2001, CFSC retained the services of Precision Marketing, a
Milwaukee-based professional mutual fund distribution/marketing consulting firm
to complete a study on The Catholic Funds and CFSC and to provide
recommendations. At a special meeting of the board of directors held on October
26, 2001, CFSC presented the results of Precision Marketing's report and CFSC's
recommendations based on that report. The report made several observations
regarding CFSC's and The Catholic Funds' growth plan, including the following:
o It appears that, while the members of the Catholic fraternals are attracted
to investment products that adhere to core Catholic values, their
investment habits do not indicate a strong inclination to confine their
entire investment program to those types of products. Accordingly, the
concept of The Catholic Funds to build a family of mutual funds sufficient
to meet the needs of comprehensive investment programs for all of the
members of the Catholic fraternals is potentially unnecessary as a strategy
to maximize sales and asset growth.
o The Equity Income Fund and the other two existing equity funds of The
Catholic Funds are difficult for selling representatives and investors to
differentiate and to understand how they should be used in an overall
investment program.
o It is unlikely that, in the near term, CFSC successfully can recruit a
mutual fund sales force sufficient to achieve retail sales of shares of The
Equity Income Fund that will support asset growth to the point where the
Fund will be self-sustaining and achieve a competitive expense ratio.
Therefore, it is necessary to consider alternative distribution channels,
such as direct sales by CFSC to members of the Catholic fraternals and
members of other Catholic groups and sales to Catholic institutions, such
as parishes, schools and the like.
o The performance of The Equity Income Fund, while acceptable compared to its
peers, is not at a level that attracts the attention of the investing
public.
Based on these and other observations, CFSC developed and presented to the
board a new strategic plan, which, among other things, proposed the
establishment of The New Equity Fund and the consolidation of all three of the
existing equity funds, including The Equity Income Fund, with and into The New
Equity Fund. The board discussed the new strategic plan and the reorganization
with management of CFSC and The Catholic Funds and a principal of Precision
Marketing at the special meeting of the board held on October 26, 2001. The
board further considered and unanimously approved the reorganization in
principle at its regular quarterly meeting held on November 12, 2001, and
approved the sub-adviser for The New Equity Fund and formally approved the Plan,
subject to approval by the shareholders of The Equity Income Fund, at a meeting
held on February 14, 2002. During those meetings the board reviewed and made
inquiries regarding Precision Marketing's report and CFSC's strategic plan,
requested and reviewed information about Mellon Equity Associates, asked
questions of and received answers from management of Mellon, made inquiries of
CFSC regarding the terms of the Reorganization and its benefits to the
shareholders of The Equity Income Fund and consulted with legal counsel.
The board also considered alternatives, including the possibility of
liquidating The Equity Income Fund or seeking another mutual fund as a merger
partner for The Equity Income Fund. The latter alternative was not viewed as
viable, insofar as the possible merger candidates that adhere to Catholic values
is extremely limited, and those candidates generally face challenges comparable
to or even greater than those presently faced by The Equity Income Fund. The
board and CFSC remain committed to provide Catholics with an investment option
that adheres to certain core Catholic values, so the board viewed liquidation as
an alternative of last resort.
Reasons For The Proposed Reorganization
The board of directors of The Catholic Funds has unanimously determined
that the interest of the shareholders of The Equity Income Fund will not be
diluted as a result of the Reorganization, and that the Reorganization is fair
to, and in the best interests of, the shareholders of The Equity Income Fund. In
reaching this conclusion, the board of directors considered a number of factors,
including the following:
(1) The Reorganization of The Equity Income Fund with and into The New Equity
Fund and the anticipated concurrent reorganizations of the other two
existing equity funds of The Catholic Funds with and into The New Equity
Fund will create a single mutual fund with total assets of approximately
$17.0 million, which will enhance the ability of The New Equity Fund to be
self sustaining and to achieve an expense ratio competitive with its peers.
(2) While the investment objective and program of The New Equity Fund is not
the same as that of The Equity Income Fund, the board of directors believes
that The New Equity Fund is an appropriate investment for the same type of
investors for whom The Equity Income Fund is appropriate, namely, investors
who want long-term capital appreciation, can tolerate fluctuations in
portfolio value and have no need for current income from their investment
in The New Equity Fund.
(3) The New Equity Fund will adhere to two of the three core Catholic values
followed by The Equity Income Fund in its investment program. The sanctity
of human life will be implemented through an exclusionary screen process
identical to that presently employed by The Equity Income Fund. The dignity
of the human person value will be implemented through a shareholder
advocacy program, as opposed to the exclusionary screen utilized by The
Equity Income Fund. The board believes this advocacy approach offers
greater potential for The New Equity Fund to influence and possibly reform
offending practices and policies of businesses, as opposed to an outright
exclusionary policy that likely would go unnoticed by the offending
businesses.
(4) The investment objective and passive management style of The New Equity
Fund substantially reduces the issue of relative performance that may be
hampering the success of The Equity Income Fund.
(5) The multi-class structure of The New Equity Fund increases the potential
for asset growth through sales in distribution channels other then the
broker-assisted retail channel, including direct sales by CFSC to members
of the Catholic fraternals comprising the Catholic Fraternal Alliance and
other Catholics, and to institutions such as Catholic parishes, schools and
the like.
(6) The advisory fee for The New Equity Fund is lower than the advisory fee for
The Equity Income Fund and is in line with advisory fees of other passively
managed funds, which should enhance the ability of The New Equity Fund to
perform competitively relative to its peers.
(7) The fact that the Reorganization has been structured to be tax-free to
shareholders of The Equity Income Fund.
(8) The extensive experience and past performance of Mellon Equity Associates
in managing mutual funds and other investment portfolios with a passive
management investment strategy under social screens, and in managing index
funds based on the S&P 500 Index in particular.
(9) The financial commitment that CFSC has demonstrated to The Catholic Funds
over the years, and its assurances to the board of its continued commitment
under this new strategic plan, as well as CFSC's stated unwillingness to
continue subsidizing The Equity Income Fund indefinitely into the future
under the current structure.
(10) The relative superiority of the benefits of the Reorganization to
shareholders of The Equity Income Fund as compared to other alternatives.
The board believes that, overall, the Reorganization offers a viable
solution to further the board's desire to provide shareholders of The Equity
Income Fund with an investment option that is appropriate for them from a
financial stewardship standpoint, and which offers them the opportunity to
invest their savings in a manner that adheres to certain core Catholic values.
The board believes that the Reorganization increases the opportunity for future
sales and asset growth sufficient for The New Equity Fund to become self
sustaining and competitive with its peers. Shorter term, the proposed
consolidation in The New Equity Fund of the assets of The Equity Income Fund and
of the other two existing equity funds of the Catholic Funds will create a fund
with an asset level that should immediately reduce the expense ratio as compared
to The Equity Income Fund, and over time should enable shareholders to benefit
from economies of scale that potentially will result in an even lower overall
expense ratio. There can be no assurance, however, that these economies of scale
and lower overall expense ratios will be achieved, or that The New Equity Fund
will become competitive and self-sustaining.
Federal Tax Considerations
The Reorganization is conditional upon receipt by The Catholic Funds of the
opinion from Quarles & Brady LLP described below. No rulings have been requested
from the Internal Revenue Service with respect to these matters and the opinion
of Quarles & Brady LLP is not binding on the Internal Revenue Service or the
courts. Additionally, the opinion of Quarles & Brady LLP is based upon various
representations and assumptions described therein.
The opinion is based on the current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
No attempt has been made to comment on all federal income tax consequences of
the Reorganization that may be relevant to particular holders, including holders
that are subject to special rules such as dealers in securities, foreign
persons, insurance companies, and tax exempt entities.
In the opinion of Quarles & Brady LLP, the principal Federal income tax
consequences that will result from the Reorganization, under currently
applicable law, are as follows: (i) the Reorganization will qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and The Equity Income Fund and The New
Equity Fund will each be a "party to" the Reorganization within the meaning of
Section 368(b) of the Code; (ii) no gain or loss will be recognized by The
Equity Income Fund upon the transfer of substantially all of its assets to The
New Equity Fund in exchange solely for Class A shares of The New Equity Fund;
(iii) no gain or loss will be recognized by The New Equity Fund upon its receipt
of substantially all of the assets of The Equity Income Fund in exchange solely
for shares of The New Equity Fund; (iv) no gain or loss will be recognized by
any shareholder of The Equity Income Fund upon the liquidation of The Equity
Income Fund and the related surrender of their shares of The Equity Income Fund
in exchange for shares of The New Equity Fund; (v) the tax basis of the shares
of The New Equity Fund to be received by a shareholder of The Equity Income Fund
will be the same as the tax basis of the shares of The Equity Income Fund
surrendered in the Reorganization; (vi) the holding period of the shares of The
New Equity Fund to be received by a shareholder of The Equity Income Fund will
include the holding period for which such shareholder held the shares of The
Equity Income Fund exchanged therefor, provided that such shares of The Equity
Income Fund are a capital asset in the hands of such shareholder as of the
Closing; (vii) The New Equity Fund's basis in the assets acquired from The
Equity Income Fund will be the same as the basis of such assets in the hands of
The Equity Income Fund immediately prior to the Reorganization; (viii) the
holding period of the assets of The Equity Income Fund in the hands of The New
Equity Fund will include the period during which such assets were being held by
The Equity Income Fund; and (ix) The New Equity Fund will succeed to and take
into account as of the Closing Date the items of The Equity Income Fund
described in Section 381(c) of the Code, subject to the conditions and
limitations specified in Sections 381(b) and (c), 382, 383 and 384 of the Code
and the applicable Treasury Regulations thereunder.
The foregoing description of the Federal income tax consequences of the
Reorganization is made without regard to the particular facts and circumstances
of any shareholder of The Equity Income Fund. Shareholders of The Equity Income
Fund are urged to consult their own tax advisers as to the specific consequences
to them of the Reorganization, including the applicability and effect of state,
local, foreign and other tax laws.
CAPITALIZATION
The following table shows the capitalization of Class A shares of The
Equity Income Fund as of September 30, 2001, and of The New Equity Fund giving
effect to the Reorganization and the concurrent reorganizations of the other two
existing equity funds of The Catholic Funds, based on the net assets and number
of outstanding shares of each of the three existing equity funds of The Catholic
Funds, including The Equity Income Fund, as of September 30, 2001.
The Catholic The Catholic Disciplined The Catholic
Equity Income Fund Capital Appreciation Fund Large-Cap The Catholic
Growth Fund Equity Fund
Net assets $5,372,776 $4,525,315 $5,276,634 $15,174,725
Net asset value per share $9.09 $8.43 $7.91 $8.43
Shares outstanding 590,954 536,765 666,850 1,789,569
OWNERSHIP OF FUND SHARES
As of December 31, 2001, no person was known to own of record or
beneficially 5% or more of the outstanding shares of The Equity Income Fund,
other then as set forth below:
Holder Number of Shares Percentage of Outstanding Shares
------ ---------------- --------------------------------
Catholic Knights 407,495 69.07%
1100 West Wells Street
Milwaukee, WI 53233
Catholic Order of Foresters 76,769 13.01%
355 Shuman Boulevard
P.O. Box 3012
Naperville, IL 60566
Because The New Equity Fund will first commence operations with and
following the Reorganization, at December 31, 2001 it had no shares outstanding.
DESCRIPTION OF SECURITIES TO BE ISSUED AND RIGHTS OF SHAREHOLDERS
The Catholic Funds is an open-end management investment company
incorporated on December 16, 1998 under the laws of the State of Maryland. The
Catholic Funds presently offers shares of four separate series or mutual funds,
each with its own investment objective, including The Equity Income Fund. The
New Equity Fund is a newly designated series of shares of The Catholic Funds
which has not yet commenced operations. Both The Equity Income Fund and The New
Equity Fund are diversified funds as defined in the 1940 Act.
The Equity Income Fund offers its shares in a single class, namely Class A
Common Stock. These shares of The Equity Income Fund have rights and privileges
which are identical to shares of Class A Common Stock of The New Equity Fund.
The New Equity Fund has three classes of shares of common stock: Class A
shares, Class C shares and Class I shares. Shares of a particular class give the
holders of those shares an interest only in the assets of that class. In a
liquidation of the Fund, shares of the same class will share pro rata in the
distribution of the net assets of the Fund with all other shares of that class.
Shares of a particular class are equal in all respects to the other shares of
that class. Each share has one vote and each fractional share has a
proportionate fractional vote on each matter presented to that class of
shareholders. When the Class A shares of The New Equity Fund to be issued in the
Reorganization are issued in accordance with the terms of the Plan, they will be
fully paid and non-assessable by The Catholic Funds. Shares may be exchanged as
described in this Proxy Statement/Prospectus, but will have no other preference,
conversion, exchange or preemptive rights. Neither its Articles of
Incorporation, the 1940 Act, Maryland law nor any other authority requires The
Catholic Funds to hold any annual or special meeting of shareholders except,
under certain circumstances, to amend an investment advisory or sub-advisory
agreement or certain fundamental investment restrictions, to elect and remove
Directors, to reorganize The Catholic Funds or any series or class thereof and
to act upon certain other business matters. With respect to a liquidation, sale
of substantially all of a fund's assets, change in a fundamental investment
restriction or approval of an investment advisory or sub-advisory agreement, the
right to vote is limited to the holders of shares of the particular mutual fund
affected by the proposal.
Unless a shareholder meeting is required by the 1940 Act or other
applicable law, The Catholic Funds does not intend to have an annual or special
meeting of shareholders. However, as represented to the SEC, The Catholic Funds
will call a special meeting of shareholders for the purpose of considering the
removal of one or more Directors upon written request from shareholders holding
ten percent or more of the outstanding votes of The Catholic Funds, and The
Catholic Funds will assist those shareholders in communicating with other
shareholders as required by Section 16(c) of the 1940 Act. At such a meeting, a
quorum of shareholders (constituting one-third of all outstanding shares of The
Catholic Funds) has the power to remove one or more Directors with or without
cause by the affirmative vote of a majority of all outstanding shares of all
series and classes voting together.
SHAREHOLDER INFORMATION AND SERVICES
Shareholder Information
Share Price Calculation. Like The Equity Income Fund, the price at which
you purchase and redeem Class A shares of The New Equity Fund is equal to the
net asset value (NAV) per share (plus any applicable sales charge in the case of
purchases) determined on the effective date of the purchase or redemption. The
Fund's NAV per share is calculated at the close of the regular trading session
of the NYSE, which is usually 3:00 p.m. Central Time. We do not calculate the
net asset value for the Fund on the days when the NYSE is closed for trading.
NAV EQUALS TOTAL ASSETS MINUS LIABILITIES DIVIDED BY NUMBER OF SHARES
OUTSTANDING.
Like The Equity Income Fund, we value securities owned by The New Equity
Fund at current market value. For securities with readily available market
quotations, we use the quotations to price the security. If a security does not
have a readily available quotation, we value the security as determined in good
faith in accordance with guidance and policies established by the board of
directors. The board of directors approves the use of pricing services to assist
us in the determination of net asset values.
Dividends, Capital Gains and Taxes. This section summarizes some of the
consequences under current federal tax law of an investment in The New Equity
Fund. It is not a substitute for personal tax advice. Consult your personal tax
adviser about the potential tax consequences of an investment in The New Equity
Fund under all applicable tax laws.
The New Equity Fund will distribute any net investment income annually and
will distribute any net realized long or short-term capital gains at least
annually. The Fund may also pay a special distribution to comply with federal
tax requirements.
If your account is a taxable account, you will pay tax on dividends and
distributions from the Fund whether you receive them in cash or additional
shares.
If you redeem shares of The New Equity Fund or exchange them for shares of
The Money Market Fund, any gain on the transaction may be subject to tax.
The New Equity Fund intends to make distributions that will either be taxed
as ordinary income or capital gains. Capital gains distributions may be taxable
at different rates depending on the length of time the Fund has held the assets
sold.
Federal law requires us to withhold 31% of a shareholder's reportable
payments (which include dividends, capital gain distributions and redemption
proceeds) for those who have not properly certified that the Social Security or
other taxpayer identification number they provided is correct and that he or she
is not subject to backup withholding. We do not provide information on state and
local tax consequences of owning shares in The New Equity Fund.
Reinvestment of Fund Distributions
If you have requested that all of your income dividends and/or capital
gains distributions on your shares of The Equity Income Fund be reinvested in
additional shares of that Fund, we will honor that request with respect to
distributions on the Class A shares of The New Equity Fund that you receive in
the Reorganization. You will not pay any sales charge on these additional
shares. If, on the other hand, you are receiving your distributions on your
shares of The Equity Income Fund in cash, you will continue to receive your
distributions on the Class A shares of The New Equity Fund that you receive in
the Reorganization in cash. As with The Equity Income Fund, when you receive a
distribution you may have to pay taxes whether or not you reinvest the
distribution or have it paid out to you in cash. If you have requested cash
distributions and we cannot locate you, we will reinvest your dividends and
other distributions.
Distribution Fees
The Catholic Funds has adopted a plan under Rule 12b-1 of the Investment
Company Act of 1940 that allows The New Equity Fund to pay distribution fees for
the sale and distribution of its shares and continuing services to shareholder
accounts. The Rule 12b-1 fee for Class A shares of The New Equity Fund is
computed at the annual rate of 0.25 of 1% of the Fund's average daily net
assets, which is the same as the rule 12b-1 fee presently paid by The Equity
Income Fund. This fee is for services provided by CFSC, in its capacity as
distributor, to existing shareholders. This shareholder servicing fee is a
reimbursement fee, meaning that it is paid only to the extent that CFSC, as the
distributor, demonstrates it has incurred expenses in servicing shareholders at
least equal to the applicable fee. Because this fee is paid on The New Equity
Fund's net assets on a continuing basis, over time this fee will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
Redeeming Your Class A Shares of The New Equity Fund
In General. You may redeem (sell) the Class A shares of The New Equity Fund
that you receive in the Reorganization in the same manner as you presently may
sell your shares of The Equity Income Fund. More precisely, you can sell your
shares on any business day. When you sell your shares you receive the net asset
value per share. If we receive your request in good order before the close of
the New York Stock Exchange ("NYSE") (normally 3:00 p.m. Central Time) you will
receive that day's price. If we receive your redemption request in good order
after the close of the NYSE, or on a holiday, weekend or a day the NYSE is
closed, we will process your transaction at the closing price on the next
business day. A redemption request is in good order when it contains all account
owners' signatures (including signature guarantees when needed) the required
information listed below, and any legally required additional information and
documentation. You can sell shares by mail, telephone or wire.
By Mail
Please include the following in your redemption request:
o Name(s) of the account owner(s);
o Account number(s);
o Amount you want to receive or the number of shares you want to sell;
o Tax withholding information, if required, for retirement accounts; and
o Signatures of all account owners.
YOU MUST HAVE YOUR SIGNATURE GUARANTEED FOR WRITTEN SELL ORDERS IF:
1. You want to sell shares with a value of more than $25,000;
2. You want the proceeds sent to an address other than the one listed for
your account; or
3. You want the check payable to someone other than the account owner(s).
You can usually obtain a signature guarantee at commercial banks, trust
companies or broker-dealers. A SIGNATURE GUARANTEE IS NOT THE SAME AS A
NOTARIZED SIGNATURE. Accounts held by a corporation, trust, estate,
custodianship, guardianship, partnership or pension and profit sharing plan may
require more documentation.
REGULAR MAIL
THE CATHOLIC FUNDS, INC.
C/O US BANCORP FUND SERVICES, LLC
P.O. BOX 701
MILWAUKEE, WI 53201-0701
EXPRESS MAIL/PRIVATE DELIVERY
THE CATHOLIC FUNDS, INC.
C/O US BANCORP FUND SERVICES, LLC
THIRD FLOOR
615 EAST MICHIGAN STREET
MILWAUKEE, WI 53202
By Telephone
To make investing in The New Equity Fund more convenient, as is the case
for The Equity Income Fund, you may buy, sell or exchange shares by telephone.
We have established reasonable procedures to protect against anyone who attempts
to use the telephone service fraudulently. Please be aware, however, that The
Catholic Funds, the custodian, the transfer agent or any of their employees will
not be liable for losses suffered by you that result from following telephone
instructions reasonably believed to be authentic after verification pursuant to
these procedures. Once you have made a telephone request you cannot cancel or
modify it! During periods of extreme volume caused by dramatic economic or stock
market changes, or when the telephone system is not fully functional, you may
have difficulty reaching us by telephone and telephone transactions may be
difficult to implement at those times. We reserve the right to temporarily
discontinue or limit the telephone purchase, redemption or exchange privileges
at any time during such periods.
The following rules and/or guidelines for selling by telephone apply:
o You must call shareholder services toll-free at 1-877-222-2402
o You must provide a form of personal identification to confirm your
identity;
o You can sell up to $25,000 worth of shares;
o The Catholic Funds will mail a check only to the person(s) named on
the account registration and only to the address on the account;
o Retirement plan accounts are not eligible;
o You can do only one telephone redemption within any 30-day period for
each authorized account;
o Telephone redemptions are not available if the address on the account
has been changed in the preceding 60 days; and
o If we receive your request in good order before the close of the NYSE
(normally 3:00 p.m. Central Time), you will receive that day's price.
By Wire
The following rules and/or guidelines for selling by wire apply:
o You must have given us written authorization, including the signatures
of all the owners of the account, on The Catholic Funds Application
that you completed when you opened your account in The Equity Income
Fund, or you must complete an Account Change Form;
o You can make a wire redemption for any amount;
o You pay a $12.00 fee for each wire redemption;
o We must receive your request in good order before the close of the
NYSE (normally 3:00 p.m. Central Time) for you to receive that day's
price; and
o Wire redemptions may not be available to you for all retirement plan
accounts.
Systematic Withdrawal Plan
You can have money automatically withdrawn from your account in The New
Equity Fund on a regular basis by using our systematic withdrawal plan. The plan
allows you to receive funds or pay a bill at regular intervals. If you already
have instituted a Systematic Withdrawal Plan with respect to your account in The
Equity Income Fund, it automatically will be continued with respect to your
account in The New Equity Fund following the Reorganization. The following rules
and/or guidelines apply:
o You need a minimum of $5,000 in your account to start the plan;
o You must withdraw a minimum of $100 monthly;
o You can select the date(s) on which the money is withdrawn. If you
don't select the date(s), we will withdraw the money automatically
from your account on the 15th of the month;
o To start the plan or change the payee(s), you must notify us in
writing at least 13 business days prior to the first withdrawal and
you must have all account owner(s) sign the appropriate form;
o To stop or change your plan, you must notify us at least five business
days prior to the next withdrawal; and
o Because of sales charges on Class A shares, you must consider
carefully the costs of frequent investments in and withdrawals from
your account.
Closing Small Accounts
All shareholders in The Catholic Funds share the high cost of maintaining
accounts with low balances. To reduce this cost, we reserve the right, subject
to legal restrictions, if any, to close an account when, due to a redemption,
its value is less than $1,000. This does not apply to retirement plan accounts,
automatic investment plans or UGMA/ UTMA accounts. We will notify you in writing
before closing any account, and you will have 30 days to add money to bring the
balance up to $1,000.
Reinstatement Privilege for Class A Shares
As is the case for The Equity Income Fund, you have 60 days after you sell
Class A shares of The New Equity Fund to reinvest the dollar amount you redeemed
without having to pay another sales charge. You will pay the net asset value per
Class A share on the day when you've made your reinstatement and not on the day
when you sold your investment. The following rules apply:
o You may use this privilege only once per account;
o You must send a written request and a check for the amount you wish to
reinstate to the Fund's transfer agent;
o The dollar amount you reinstate cannot exceed the dollar amount you
sold; and
o The sale of your Class A shares may be a taxable event despite the
reinstatement.
MISCELLANEOUS
Independent Public Accountants
The firm of Arthur Andersen LLP provides independent auditing services to
all of the mutual funds of The Catholic Funds, including The Equity Income Fund
and The New Equity Fund. Arthur Andersen LLP has no direct or indirect financial
interest in The Catholic Funds, including either The Equity Income Fund or The
New Equity Fund, except for the fees it receives as independent public
accountants. No representative of Arthur Andersen LLP is expected to be present
at the Meeting.
Interests of Experts and Counsel
No expert or counsel named herein has a substantial interest in The
Catholic Funds or either of The Equity Income or The New Equity Funds, the
Reorganization, or any other transaction contemplated by this Proxy
Statement/Prospectus.
Other Matters
The board of directors of The Catholic Funds has not been informed and is
not aware that any other matter will be brought before the Meeting. However,
unless expressly indicated otherwise on the enclosed form of proxy, proxies may
be voted with discretionary authority with respect to any other matter that may
properly be presented at the Meeting or any adjournment thereof. Shareholders of
any mutual fund series of The Catholic Funds wishing to submit proposals for
inclusion in a proxy statement and form of proxy for any future shareholder
meetings should send their written proposals to the Secretary of The Catholic
Funds, 1100 West Wells Street, Milwaukee, Wisconsin 53233.
APPENDIX A
THE CATHOLIC EQUITY INCOME FUND
PLAN OF REORGANIZATION AND LIQUIDATION
This Plan of Reorganization and Liquidation (this "Plan") is made as of
this 7th day of January, 2002, by The Catholic Funds, Inc. ("The Catholic Funds
"), on behalf of its two series known as The Catholic Equity Income Fund (the
"Equity Income Fund") and The Catholic Equity Fund (the "New Equity Fund").
R E C I T A L S
WHEREAS, The Catholic Funds: (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland; (b) is
registered as an open-end, series, management investment company under the
Investment Company Act; and (c) currently has designated five separate series or
investment portfolios, including the Equity Income Fund and the New Equity Fund;
WHEREAS, the Reorganization will comprise the transfer of all of the assets
of the Equity Income Fund (net of its liabilities) to the New Equity Fund in
exchange for shares of New Equity Fund Class A Common Stock, and the
constructive distribution at the Effective Time of such shares to the
shareholders of the Equity Income Fund in liquidation of the Equity Income Fund,
all upon the terms and conditions set forth in this Plan;
WHEREAS, this Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the adoption and performance of this Plan has been authorized by
the Board of Directors of The Catholic Funds and, prior to the Closing Date,
will have been duly authorized by all other necessary corporate action on the
part of The Catholic Funds, including approval by the shareholders of the Equity
Income Fund.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Definitions
For purposes of this Plan, the following terms shall have the respective
meanings set forth below:
1.1 "Closing" means the transfer to the New Equity Fund of the assets of
the Equity Income Fund (net of its liabilities) against delivery to
the Equity Income Fund of the New Equity Fund Shares as described in
Section 2.1 of this Plan.
1.2 "Closing Date" means that date selected by The Catholic Funds which is
no more than twenty (20) business days after the date on which the
last of the conditions precedent to the Reorganization provided in
this Plan is satisfied or lawfully waived.
1.3 "Code" means the Internal Revenue Code of 1986, as amended.
1.4 "Custodian" means US Bank N.A., acting in its capacity as custodian
with respect to the assets of the Equity Income Fund and the New
Equity Fund.
1.5 "Effective Time" means 5:01 p.m. Central Time on the Closing Date.
1.6 "Equity Income Fund" means The Catholic Equity Income Fund, a
designated series of The Catholic Funds.
1.7 "Equity Income Fund Shareholders" means the holders of record of the
issued and outstanding shares of Common Stock of the Equity Income
Fund as of the Closing Date.
1.8 "Equity Income Fund Shareholder Meeting" means a special meeting of
the shareholders of the Equity Income Fund to be convened in
accordance with applicable law and the Articles of Incorporation and
Bylaws of The Catholic Funds to consider and vote upon the approval of
this Plan and the transactions contemplated hereby.
1.9 "Equity Income Fund Shares" means the issued and outstanding shares of
Common Stock of the Equity Income Fund.
1.10 "Excluded Assets" shall have the meaning set forth in Section 2.3 of
this Plan.
1.11 "Investment Company Act" means the Investment Company Act of 1940, as
amended, and all of the rules and regulations adopted thereunder by
the SEC.
1.12 "New Equity Fund" means the New Equity Fund, a newly-designated series
of The Catholic Funds which will commence operations as of the first
business day following the Effective Time.
1.13 "New Equity Fund Shares" means the shares of Class A Common Stock of
the New Equity Fund to be issued pursuant to this Plan, as described
in Section 2.1 hereof.
1.14 "Person" means an individual or a corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization, or other entity, as the context requires.
1.15 "Plan" means this Plan of Reorganization and Liquidation, together
with all schedules and exhibits attached hereto, as the same may be
amended from time to time in accordance with the terms hereof.
1.16 "Reorganization" means the transactions described in and contemplated
by this Plan.
1.17 "Required Equity Income Fund Shareholder Vote" shall have the meaning
specified in Section 3.1 of this Plan.
1.18 "SEC" means the United States Securities and Exchange Commission.
1.19 "Securities Act" means the Securities Act of 1933, as amended, and all
rules and regulations adopted by the SEC pursuant thereto.
1.20 "The Catholic Funds" means The Catholic Funds, Inc., a corporation
which: (a) is duly organized, validly existing and in good standing
under the laws of the State of Maryland; (b) is registered as an
open-end, series, management investment company under the Investment
Company Act; and (c) presently has designated five separate series of
its Common Stock, par value $.001 per share, including the Equity
Income Fund and the New Equity Fund.
1.21 "The Catholic Funds Registration Statement" means the Registration
Statement on Form N-1A of The Catholic Funds, as amended (1933 Act
Reg. No. 333-69803; 1940 Act File No. 09177).
(a) "Equity Income Fund Prospectus" means the current prospectus
relating to the Equity Income Fund which is included in The
Catholic Funds Registration Statement, as such Prospectus may be
supplemented or amended as of the relevant time of inquiry.
(b) "New Equity Fund Prospectus" means the current prospectus
relating to the New Equity Fund which is included in The Catholic
Funds Registration Statement, as such Prospectus may be
supplemented or amended as of the relevant time of inquiry.
2. Reorganization and Liquidation of the Equity Income Fund.
2.1 Transfer of Equity Income Fund Assets; Issuance of New Equity Fund
Shares. At or prior to the Effective Time, all of the assets of the
Equity Income Fund, except the Excluded Assets, shall be delivered to
the Custodian for the account of the New Equity Fund, in exchange for,
and against delivery to the Equity Income Fund at the Effective Time
of, that number of shares of Class A Common Stock of the New Equity
Fund (including, if applicable, fractional shares rounded to the
nearest thousandth of one whole share) (the "New Equity Fund Shares")
having an aggregate net asset value equal to the net value of the
assets of the Equity Income Fund so delivered, all determined and
adjusted as provided in Section 2.2 of this Plan. As of the Effective
Time and following delivery of such assets to the Custodian, the New
Equity Fund shall receive good and marketable title to such assets
free and clear of all liens, security interests, pledges, charges,
claims or encumbrances of any and every kind.
2.2 Computation of Net Asset Value.
(a) The net asset value of the New Equity Fund Shares and the net
value of the assets of the Equity Income Fund transferred
pursuant to this Plan shall, in each case, be determined as of
the close of business on the New York Stock Exchange on the
Closing Date.
(b) The net asset value of the New Equity Fund Shares shall be
computed in accordance with the practices and procedures of the
New Equity Fund described in the New Equity Fund Prospectus.
Likewise, the value of the assets of the Equity Income Fund to be
transferred pursuant to this Plan shall be computed in accordance
with the practices and procedures of the Equity Income Fund
described in the Equity Income Fund Prospectus.
2.3 Excluded Assets. There shall be deducted from the assets of the Equity
Income Fund described in Section 2.1 all organizational expenses and
other assets of the Equity Income Fund that would not have value to
the New Equity Fund, as well as cash in an amount estimated by The
Catholic Funds to be sufficient to pay all liabilities of the Equity
Income Fund accrued and unpaid as of the Effective Time, including
without limitation: (a) amounts owed or to be owed to any Equity
Income Fund Shareholder, including declared but unpaid dividends and
capital gains distributions; (b) accounts payable, taxes and other
accrued and unpaid expenses, if any, incurred in the normal operation
of the business of the Equity Income Fund up to and including the
Closing Date and estimated to be incurred after the Closing Date in
connection with winding up the affairs of, and liquidating, the Equity
Income Fund; and (c) costs and expenses incurred by the Equity Income
Fund in connection with the Reorganization, including preparing and
distributing proxy materials, soliciting proxies and holding the
Equity Income Fund Shareholder Meeting (together the "Excluded
Assets") except to the extent such expenses are borne by Catholic
Financial Services Corporation or another party.
2.4 Closing of Books. The assets of the Equity Income Fund and the per
share net asset value of the New Equity Fund Shares shall be valued as
of the close of trading on the New York Stock Exchange on the Closing
Date. The stock transfer books of the Equity Income Fund shall be
permanently closed as of the close of business on the Closing Date,
and only requests for the redemption of shares of the Equity Income
Fund received in proper form prior to the close of trading on the New
York Stock Exchange on the Closing Date shall be accepted by the
Equity Income Fund. Redemption requests thereafter received by the
Equity Income Fund shall be deemed to be redemption requests for New
Equity Fund Shares (assuming that the transactions contemplated by
this Plan have been consummated) to be distributed to the Equity
Income Fund Shareholders pursuant to this Plan.
2.5 Declaration of Dividends and Distributions by the Equity Income Fund.
On or prior to the Closing Date, the Equity Income Fund will declare a
dividend to shareholders of record of the Equity Income Fund as of the
date of such dividend declaration so that, for the short taxable year
of the Equity Income Fund ending on the date on which it is completely
liquidated and discontinued, the Equity Income Fund will have declared
an aggregate amount of dividends which: (a) is equal to at least the
sum of its net capital gain, if any, (within the meaning of Section
852(b)(3) of the Code) and ninety percent (90%) of its investment
company taxable income (determined under Section 852(b)(2) of the
Code, but without regard to Section 852(b)(2)(D) of the Code) for such
taxable year; and (b) is sufficient to avoid any excise tax on the
Equity Income Fund under Section 4982 of the Code for the calendar
year in which the Closing Date occurs, provided that the dividends
that have been so declared but have not been paid on or before such
Closing Date are in fact paid by the Equity Income Fund prior to the
end of such calendar year to the shareholders of the Equity Income
Fund as of the record date for determining shareholders entitled to
receive payment of such dividend.
2.6 Liquidation. As soon as reasonably practicable after the Closing Date,
the Equity Income Fund shall pay or make provisions for all of its
debts, liabilities and taxes, and distribute all remaining assets,
including the New Equity Fund Shares received by it in the
Reorganization and the balance, if any, of the Excluded Assets, to the
Equity Income Fund Shareholders, and the Equity Income Fund's status
as a designated series of shares of The Catholic Funds shall be
terminated.
2.7 Issuance of New Equity Fund Shares. On the Closing Date, The Catholic
Funds shall instruct its transfer agent to record on The Catholic
Funds' books and records the pro rata interest of each of the Equity
Income Fund Shareholders in the New Equity Fund Shares in the name of
such Equity Income Fund Shareholder. All Equity Income Fund Shares
then issued and outstanding shall thereupon be canceled on the books
of the New Equity Fund. New Equity Fund shall forward a confirmation
of such ownership to each of the Equity Income Fund Shareholders. No
redemption or repurchase of such New Equity Fund Shares credited to
any Equity Income Fund Shareholder in respect of his or her Equity
Income Fund Shares which are represented by an unsurrendered stock
certificate shall be permitted until such certificate has been
surrendered to The Catholic Funds for cancellation, or if such
certificate is lost or misplaced, until a lost certificate affidavit
has been executed and delivered to The Catholic Funds.
2.8 Liabilities and Expenses. The New Equity Fund shall not assume any
liability of the Equity Income Fund, and the Equity Income Fund shall
use its best efforts to discharge all known liabilities, so far as may
be possible, prior to the Closing Date.
3. Conditions Precedent to Closing
The Closing of the Reorganization is subject to the conditions that on or
before the Closing Date:
3.1 Approval of Plan By Shareholders of the Equity Income Fund. The Equity
Income Fund Shareholder Meeting shall have been duly called and held
in accordance with the provisions of the Investment Company Act, the
Maryland General Corporate Law and the Articles of Incorporation and
Bylaws of The Catholic Funds, including compliance with the notice and
quorum requirements thereunder, and at such meeting the Plan shall
have been approved by the affirmative vote of the lesser of (a) 67% or
more of the Equity Income Fund Shares present at the Equity Income
Fund Shareholder Meeting, if shareholders who are the owners of more
than 50% of the Equity Income Fund Shares outstanding and entitled to
vote on the Plan at the Equity Income Fund Shareholder Meeting are
present at such Meeting in person or by proxy; or (b) more than 50% of
the Equity Income Fund Shares outstanding and entitled to vote on
approval of the Plan at the Equity Income Fund Shareholder Meeting
(the "Required Equity Income Fund Shareholder Vote").
3.2 No Adverse Actions. On the Closing Date, no action, suit or other
proceeding shall be pending before any court or governmental agency in
which it is sought to restrain or prohibit or obtain damages or other
relief in connection with this Plan or the transactions contemplated
hereby.
3.3 Consents and Approvals. All consents of other parties and all other
consents, orders and permits of federal, state and local regulatory
authorities (including those of the SEC and of state Blue Sky or
securities authorities) deemed necessary by The Catholic Funds to
permit consummation, in all material respects, of the transactions
contemplated hereby, shall have been obtained.
3.4 Effectiveness of Registration Statement on Form N-14. The Catholic
Funds' Registration Statement on Form N-14 to be prepared and filed
with the SEC with respect to the New Equity Fund Shares, including the
Proxy Statement of the Equity Income Fund soliciting approval of the
Plan at the Equity Income Fund Shareholder Meeting constituting a part
thereof, shall have become effective under the Securities Act and no
stop order suspending the effectiveness thereof shall have been issued
and, to the knowledge of The Catholic Funds, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the Securities Act.
3.5 Continued Effectiveness and Amendment of Registration Statement on
Form N-1A.
(a) The Catholic Funds Registration Statement including the Equity
Income Fund Prospectus shall remain effective with the SEC from
and after the date of this Agreement and continuing up to and
including the Closing Date, and no stop order suspending the
effectiveness thereof shall have been issued and, to the
knowledge of The Catholic Funds, no investigation or proceeding
for that purpose shall have been instituted or be pending,
threatened or contemplated under the Securities Act.
(b) A Post-Effective Amendment to The Catholic Funds Registration
Statement shall have been filed by The Catholic Funds to include
therein the New Equity Fund Prospectus registering shares of the
New Equity Fund to be offered to the public, and such
post-effective amendment shall have become effective under the
Securities Act and no stop orders suspending the effectiveness
thereof shall have been issued and, to the knowledge of The
Catholic Funds, no investigation or proceeding for that purpose
shall have been instituted or be pending, threatened or
contemplated under the Securities Act.
3.6 Disposition of Ineligible Investments by New Equity Fund. Immediately
following the Closing Date, the New Equity Fund shall sell, liquidate
or otherwise dispose of such securities and instruments (or portions
thereof) transferred to it in the Reorganization from the Equity
Income Fund as and to the extent necessary to enable the New Equity
Fund to own or hold all of the remaining securities and instruments so
transferred from the Equity Income Fund's investment portfolio without
causing a violation of any of the New Equity Fund's investment
restrictions or policies; provided that, after taking into account
sales of securities and instruments (or portions thereof) by the
Equity Income Fund prior to the Reorganization for the purposes of
meeting the investment objectives and policies of the New Equity Fund,
the New Equity Fund will hold at least 34% of the historic assets of
the Equity Income Fund.
3.7 Declaration of Dividends and Distributions by the Equity Income Fund.
Prior to or on the Closing Date, the Equity Income Fund shall have
declared a dividend or dividends which, together with all previous
such dividends, shall have the effect of distributing to its
shareholders all of the Equity Income Fund's investment company
taxable income for taxable years ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and
all of its net capital gain realized in taxable years ending on or
prior to the Closing Date (after reduction for any capital loss
carried forward).
3.8 Acquisition of Substantially All of the Assets of the Equity Income
Fund. The assets of the Equity Income Fund to be acquired by the New
Equity Fund shall constitute at least 90% of the fair market value of
the net assets and at least 70% of the fair market value of the gross
assets of the Equity Income Fund immediately prior to the
Reorganization. For these purposes, assets used by the Equity Income
Fund to pay the expenses it incurs in connection with this Agreement
and the Reorganization and to effect all shareholder redemptions and
distributions (other than regular, normal dividends and regular,
normal redemptions pursuant to the Investment Company Act, and not in
excess of the requirements of Section 852 of the Code, occurring in
the ordinary course of the Equity Income Fund's business as an
open-end diversified management investment company) after the date of
this Agreement shall be included as assets of the Equity Income Fund
immediately prior to the Reorganization.
3.9 Tax Opinion. The Catholic Funds shall have received on or before the
Closing Date an opinion of Quarles & Brady LLP regarding the tax
consequences of the Reorganization in substantially the form attached
as Exhibit 1 attached to this Agreement.
3.10 Regulatory Relief. The Catholic Funds shall have received from the SEC
such exemptive, no-action or other formal or informal relief from the
applicable prohibitions of Section 17 under the Investment Company Act
as may be necessary to enable The Catholic Funds to consummate the
Reorganization consistent with said Section 17.
4. Expenses
The Equity Income Fund and the New Equity Fund will bear their respective
expenses in connection with the entering into and carrying out the provisions of
this Plan; provided, however, it is not expected that the New Equity Fund will
incur any expenses; provided further, however, that it is expected that Catholic
Financial Services Corporation will bear the expenses of the Equity Income Fund.
5. Termination
5.1 By The Catholic Funds. This Plan may be terminated at any time by The
Catholic Funds, and will be terminated by The Catholic Funds if any of
the conditions precedent to the Reorganization set forth in Article 3
have not been satisfied as of the Closing Date.
5.2 Effects of Termination. In the event of any such termination, there
shall be no liability for damage on the part of either the Equity
Income Fund or the New Equity Fund.
6. Amendment
This Plan may be amended, modified or supplemented in such manner as The
Catholic Funds determines; provided, however, that following approval of the
Plan by the Required Equity Income Fund Shareholder Vote, no such amendment may
have the effect of changing the provisions for determining the number of New
Equity Fund Shares to be issued to the Equity Income Fund Shareholders pursuant
to this Plan to the detriment of the Equity Income Fund Shareholders without
their further approval.
7. Miscellaneous
7.1 Headings. The Article and Section headings contained in this Plan will
have reference purposes only and shall not affect in any way the
meaning or interpretation of this Plan.
7.2 Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the State of Maryland, The Catholic Funds'
Articles of Incorporation and Bylaws, and the Large-Cap and New Equity
Funds Prospectuses.
IN WITNESS WHEREOF, on the authority of the Board of Directors of The
Catholic Funds, this Plan has been executed by its duly authorized officer as of
the day and year first written above.
BY ORDER OF THE BOARD OF DIRECTORS OF THE CATHOLIC FUNDS, INC.
(On Behalf of The Catholic Equity Income and New Equity Funds)
By: /s/ Allan G. Lorge
-------------------------
Allan G. Lorge, President
THE CATHOLIC FUNDS, INC.
THE CATHOLIC EQUITY INCOME FUND
Revocable Proxy for Special Meeting of Shareholders. This Proxy is Solicited on
Behalf of the Board of Directors. The undersigned hereby appoints Daniel
Steininger, Allan Lorge or Theodore Zimmer, and each of them, proxy, with full
power of substitution, to vote all shares of stock the undersigned is entitled
to vote at the Special Meeting of Shareholders of The Catholic Equity Income
Fund to be held at ___________, ________________________, ___________________,
Wisconsin at ________, on ___________________, 2002 or at any adjournment
thereof, with respect to the matters set forth on this proxy and described in
the Notice of Special Meeting and Proxy Statement/Prospectus, receipt of which
is hereby acknowledged.
Shares listed below represent the total number of shares of The Catholic Equity
Income Fund registered in the name printed below.
Dated: _____________________________, 2002
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(Please sign exactly as name appears at left)
(If stock is owned by more than one person, all owners should sign. Persons
signing as executors, administrators, trustees or in similar capacities should
so indicate.)
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Shares represented by this proxy will be voted as directed by the stockholder.
IF NO DIRECTION IS SUPPLIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
Please vote by filling in the appropriate boxes below, as shown, using blue or
black ink or dark pencil.
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FOR AGAINST ABSTAIN
1. To approve a Plan of Reorganization and Liquidation (the "Plan") providing
for (a) the transfer of substantially all of the assets of The Catholic
Equity Income Fund (net of its liabilities) to The Catholic Equity Fund in
exchange solely for shares of The Catholic Equity Fund, followed by (b) the
distribution of shares of The Catholic Equity Fund, pro rata, to The
Catholic Equity Income Fund shareholders in dissolution of The Catholic
Equity Income Fund.
2. In their discretion, the proxies are authorized to vote on such other
matters as may properly come before the meeting.
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February __, 2002
Dear Shareholder:
I am writing to you about a matter of primary importance to all
shareholders of The Catholic Large-Cap Growth Fund (the "Large-Cap Fund"). We
believe it would be in your best interests if the Large-Cap Fund were combined
with and become a part of The Catholic Equity Fund (the "Equity Fund"), a newly
designated series of The Catholic Funds. In the process, your shares in the
Large-Cap Fund would be exchanged for shares of the Equity Fund, and you thereby
would become a shareholder of the Equity Fund (the "Reorganization"). Your board
of directors is recommending simultaneous consolidations of our other two equity
funds, namely The Catholic Equity Income Fund and The Catholic Disciplined
Capital Appreciation Fund, into this new Equity Fund.
The proposed transactions would make it possible for you to enjoy the
potential benefits that can arise from owning shares in a larger combined fund,
including a potentially lower operating expense ratio, while at the same time
allowing you to continue a broad market equity investment that adheres to
certain core Catholic values. The transaction would be structured as a tax-free
reorganization, meaning that, for federal income tax purposes, you would
recognize no gain or loss on the exchange of your shares in the Large-Cap Fund
for shares in the Equity Fund.
The enclosed Proxy Statement/Prospectus describes and seeks your approval
of a Plan of Reorganization and Liquidation (the "Plan") that sets forth the
terms of the Reorganization. Those materials also describe the similarities and
differences between the Large-Cap and Equity Funds. As a result of the
Reorganization proposed in the Plan, substantially all of the assets of the
Large-Cap Fund would be transferred to the Equity Fund, and you would receive
shares of the Equity Fund in exchange for your Large-Cap Fund shares.
Immediately following the transfer, we expect that the dollar value of your
account will be the same as it was immediately before the transfer. No sales
charge would be imposed on this exchange. The board of directors of The Catholic
Funds has unanimously approved the transaction for the reasons described in the
Proxy Statement/Prospectus.
This package contains information about the proposal and includes all the
material you will need to vote by mail. The current prospectus for the Large-Cap
Fund is enclosed for your convenience.
Attached are answers to questions we anticipate some of you may have.
Please read the enclosed Proxy Statement/Prospectus carefully and cast your vote
by completing and returning the enclosed proxy card. To help avoid additional
expense, be sure to vote promptly. If you have any questions, please call us at
1-877-846-2372. We will be glad to help you.
Thank you for your consideration and continued support.
Sincerely,
--------------------------
Allan G. Lorge, President
IMPORTANT INFORMATION TO HELP YOU
UNDERSTAND AND VOTE ON THE REORGANIZATION
Although you should read the full text of the enclosed Proxy
Statement/Prospectus, we hope this brief overview will explain why The Catholic
Funds board of directors believes you should vote FOR the Plan of Reorganization
and Liquidation (the "Plan") involving the transfer of substantially all of the
assets of The Catholic Large-Cap Growth Fund (the "Large-Cap Fund") to The
Catholic Equity Fund (the "Equity Fund"), a newly designated series of The
Catholic Funds, Inc. ("The Catholic Funds"), and the exchange of your shares in
the Large-Cap Fund for shares of the Equity Fund in a tax-free reorganization
(the "Reorganization").
Why has your board of directors decided to recommend the Plan?
The board unanimously approved the Plan and the Reorganization primarily
because it would enable the shareholders of the Large-Cap Fund to own
shares of a larger combined fund with a simpler investment strategy, the
same sales load and improved fee structure, and because it offers
shareholders the opportunity to continue to participate in a broad based
equity fund that adheres to certain core Catholic values. In addition, the
board believes the combined Equity Fund offers the potential for increased
sales and resulting growth in assets through access to multiple
distribution channels, which should bring economies of scale and
efficiencies that frequently are associated with larger funds. The
Reorganization is also intended to be tax-free to the Large-Cap Fund
shareholders.
The board considered alternatives to the Reorganization, including seeking
another existing fund as a merger partner for the Large-Cap Fund or simply
liquidating the Large-Cap Fund. The board concluded that the Reorganization
is the best alternative given the board's commitment, and the dedication of
Catholic Financial Services Corporation, the adviser and distributor for
the Large-Cap Fund, to provide shareholders with a broad equity investment
product that adheres to certain core Catholic values.
What are the anticipated advantages of the Reorganization to shareholders?
To date, the Large-Cap Fund has not generated sales and asset growth at the
level that CFSC anticipated when it started this Fund in May of 1999. For
reasons discussed in more detail in the accompanying Proxy
Statement/Prospectus, CFSC and the board of The Catholic Funds do not
believe that sales will accelerate significantly in the near future under
the Large-Cap Fund's current structure. The small size of the Large-Cap
Fund puts it a competitive disadvantage with its peers and with alternative
investment options. The proposed consolidation of the Large-Cap Fund and
the anticipated simultaneous consolidations of The Catholic Funds' other
two existing equity funds into the new Equity Fund would result in a
significant and immediate increase in the asset size of the consolidated
Fund. Also, the Equity Fund has multiple classes of shares designed to
facilitate distribution in different channels to reach a broader base of
prospective investors. Finally, the Equity Fund will be passively managed
to substantially replicate the composition of the S&P 500 Index, which will
minimize the Equity Fund's reliance for performance on the subjective
judgment and stock selection of the portfolio manager. The board believes
the features of this new Equity Fund will appeal to a broader base of
investors, will increase the potential for future growth in sales and
assets, and will enhance the ability of the Equity Fund to compete more
effectively with its peers and with other equity investment alternatives.
Most importantly, these benefits will be available to shareholders while
the Equity Fund at the same time adheres to certain core Catholic values in
its investment program.
Will the Equity Fund adhere to the same Catholic values in the same manner as
the Large-Cap Fund?
Like the Large-Cap Fund, the Equity Fund will adhere to the Catholic value
of the sanctity of human life by not investing in the stocks of companies
that directly participate in abortion. The Equity Fund also will adhere to
the Catholic value of the dignity of the human person. However, rather than
avoiding investing in stocks of companies that have business practices or
policies that are inconsistent with this value, the adviser instead will
initiate shareholder advocacy programs designed to persuade those companies
to reform their offending practices and policies. Given the global trend
toward the reduction in nuclear arms, biological weapons and other weapons
of mass and indiscriminate destruction, and given recent technological
developments that have produced more effective precision weapons, the board
has concluded that our efforts and resources are best focused on adherence
to these two values. Therefore, unlike the Large-Cap Fund, the Equity Fund
will not screen for or monitor adherence to the Catholic value of no unjust
wars.
Do the Equity Fund's investment objective and policies resemble those of the
Large-Cap Fund?
Both Funds are designed for investors who want long-term capital
appreciation, can tolerate fluctuations in portfolio value and have no need
for current income from their investment in the Fund. The Large-Cap Fund's
objective is long-term capital growth, which it seeks to achieve by
investing primarily in high-quality growth stocks of companies with large
market capitalizations. The Large-Cap Fund employs an active investment
management strategy, which relies on the portfolio manager's subjective
judgment to select fast-growing companies with the potential to produce
superior, long-term results.
The investment objective of the Equity Fund is to obtain a total return
from dividends and capital gains which is equal to the total return of the
S&P 500 Index, less the Fund's operating expenses. Unlike the Large-Cap
Fund, the Equity Fund employs a passive investment management strategy to
achieve its objective, in which the portfolio manager constructs an
investment portfolio that substantially conforms to the composition and
market weightings of the stocks of companies included in the S&P 500 Index.
Because of the Equity Fund's exclusionary sanctity of human life screen, as
well as for other reasons described in more detail in the accompanying
Proxy Statement/Prospectus, the Equity Fund's investment portfolio will not
precisely match the S&P 500 Index. However, its passive management strategy
minimizes reliance on the subjective judgment of the portfolio manager to
select and dispose of stocks and other investments. We expect that its
performance will closely track that of the S&P 500 Index.
What are the federal tax implications of the Reorganization?
In order for the Reorganization to be completed, the board of directors of
The Catholic Funds must obtain a legal opinion from its counsel that,
subject to certain conditions, the transaction will be tax-free for federal
income tax purposes to shareholders of the Large-Cap Fund and to each of
the Funds. However, you will recognize a capital gain (or loss) if you sell
your Large-Cap Fund shares before the Reorganization or if you sell or
exchange the Equity Fund shares you receive in the Reorganization.
What will be the size of the Equity Fund after the Reorganization and what
impact is that expected to have on the shareholders of the Large-Cap Fund?
As of December 31, 2001, the net assets of the Large-Cap Fund and the
combined net assets of the other two existing equity funds of The Catholic
Funds were approximately $6.3 million and $10.7 million, respectively.
Accordingly, if the Reorganization of the Large-Cap Fund and the other two
existing equity funds into the Equity Fund had occurred on December 31,
2001, the net assets of the combined Equity Fund after the Reorganization
would have been approximately $17.0 million. As a result, current
shareholders of the Large-Cap Fund may derive benefits such as relatively
lower risk and costs that typically are associated with a larger fund with
a more diversified portfolio.
How will you determine the number of shares of the Equity Fund that I will
receive in the Reorganization?
As of the opening of trading on the date that the Reorganization is
completed, Large-Cap Fund shareholders will receive the number of full and
fractional shares of the Equity Fund that is equal in dollar value to the
aggregate net asset value of their shares of the Large-Cap Fund on that
date. That closing date is expected to be on or about March __, 2002.
Will I have to take any steps to receive shares of the Equity Fund in the
Reorganization?
If the Reorganization is approved by shareholders of the Large-Cap Fund at
the meeting and subsequently is completed, you will automatically receive
the number of shares of the Equity Fund which you are entitled to receive
in exchange for your shares of the Large-Cap Fund. You will not be required
to take any steps to receive these shares.
Will I be able to make additional investments in the Equity Fund after the
Reorganization?
You will be free to make additional investments in the Equity Fund after
the Reorganization, on the terms generally applicable to purchases of such
shares as described in the Equity Fund's then current prospectus.
What if there are not enough votes to reach a quorum by the scheduled date of
the special shareholder meeting, or if insufficient votes are received to
approve the Reorganization?
Catholic Knights, the ultimate parent company of Catholic Financial
Services Corporation, the adviser and distributor of the Large-Cap Fund,
and Catholic Order of Foresters, another fraternal benefit society that is
a shareholder of Catholic Financial Services Corporation together hold a
majority of all outstanding shares of the Large-Cap Fund. Both
organizations have indicated their present intention to vote all of their
shares in favor of the Plan and the Reorganization. Therefore, the
representation of those organizations' shares at the meeting and their
votes in favor of the Plan and Reorganization will be sufficient both to
constitute a quorum for the conduct of business at the meeting and for
approval of the Plan and the Reorganization.
How many votes am I entitled to cast?
You are entitled to one vote for each share (and a fractional vote for each
fractional share) of the Large-Cap Fund that you owned on the record date.
The record date is February __, 2002.
How do I vote my shares?
Voting is easy. You can vote your shares by completing and signing the
enclosed proxy card and mailing it in the enclosed postage-paid envelope.
If you need any assistance or have any questions concerning the proposal or
how to vote your shares, please call The Catholic Funds at (877) 846-2372.
How do I sign the proxy card?
Individual Accounts: Shareholders should sign exactly as their names
appear on the account registration shown on the
card.
Joint Accounts: Both owners must sign exactly as their names
appear in the registration.
All Other Accounts: The person signing must indicate his or her
capacity. For example, a trustee for a trust
or other entity should sign, "Jane F. Doe,
Trustee."
This material may be used only when preceded or accompanied by a
prospectus. Catholic Financial Services Corporation, distributor.
THE CATHOLIC LARGE-CAP GROWTH FUND
(A Series of The Catholic Funds, Inc.)
THE CATHOLIC EQUITY FUND
(A Series of The Catholic Funds, Inc.)
PROXY STATEMENT/PROSPECTUS
February ___, 2002
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of The Catholic Funds, Inc.
("The Catholic Funds" or "CFI") for use at a Special Meeting of Shareholders of
The Catholic Large-Cap Growth Fund ("The Large-Cap Fund"), a series of The
Catholic Funds, to be held at [time?], Central Time, on [day?], [date?], 2002 at
[place?] (the "Meeting"). Proxy materials are being mailed to shareholders of
The Large-Cap Fund on or about [date?], 2002.
The purpose of the Shareholder Meeting is to consider and vote on a Plan of
Reorganization and Liquidation (the "Plan") involving The Large-Cap Fund and The
Catholic Equity Fund ("The Equity Fund"), another series of The Catholic Funds.
A copy of the Plan is attached to this Proxy Statement/Prospectus as Appendix A.
Pursuant to the Plan, substantially all of the assets of The Large-Cap
Fund, net of its liabilities, would be transferred to and acquired by The Equity
Fund in exchange solely for shares of common stock of The Equity Fund. Shares of
The Equity Fund received by The Large-Cap Fund in the transaction would then be
distributed pro-rata to shareholders of The Large-Cap Fund, and The Large-Cap
Fund would be liquidated and discontinued as a separate mutual fund portfolio of
The Catholic Funds (these transactions are referred to together in this Proxy
Statement/Prospectus as the "Reorganization"). For each shareholder of The
Large-Cap Fund, it is expected that the dollar value of your account in The
Equity Fund immediately after the Reorganization will be the same as the dollar
value of your account in The Large-Cap Fund immediately prior to the
Reorganization. The Reorganization is intended to qualify as a tax-free
reorganization, meaning that shareholders of The Large-Cap Fund will not
recognize any gain or loss through the exchange of their shares in the
Reorganization. No sales charge or commission will be imposed upon The Equity
Fund shares issued in the Reorganization.
Similar reorganization transactions affecting the other two existing equity
funds of The Catholic Funds, namely The Catholic Equity Income Fund and The
Catholic Disciplined Capital Appreciation Fund, are being recommended for
approval by the shareholders of those two funds. Subject to shareholder
approval, those two funds will be consolidated with and into The Equity Fund
concurrent with the completion of the Reorganization of The Large-Cap Fund with
and into The Equity Fund. As a result, The Equity Fund's assets would consist of
the combined assets of all three of the existing equity funds of The Catholic
Funds. However, the Reorganization of The Large-Cap Fund is not dependent upon
the approval and concurrent consolidation of the other two existing equity funds
with and into The Equity Fund. Rather, subject to approval by the shareholders
of The Large-Cap Fund and the satisfaction of other customary closing conditions
to a transaction of this nature, the Reorganization will be completed regardless
of whether either or both of the reorganizations affecting the other two
existing equity funds are approved and completed.
The Equity Fund is a newly designated series of The Catholic Funds. The
Equity Fund differs from The Large-Cap Fund in several important respects. One
such difference relates to the investment objective and program of The Equity
Fund. The Equity Fund seeks to obtain a total return from dividends and capital
gains which is equal to the total return of the S&P 500 Index, less the Fund's
operating expenses. Unlike The Large-Cap Fund, which employs active management
strategies with respect to the selection and disposition of the stocks of
companies in which it invests, The Equity Fund will employ a passive management
strategy. It will invest its assets so as to replicate, as nearly as possible,
the composition and market capitalization weightings of the S&P 500 Index,
except that The Equity Fund will not invest in the stocks of those companies
included on the S&P 500 Index which employ policies and practices that are
inconsistent with the sanctity of human life, as determined under guidelines
established and monitored by the board of directors of The Catholic Funds. This
passive management style differs from that of actively managed funds, such as
The Large-Cap Fund, where the manager selects stocks to purchase and sell which
are consistent with the objective and investment program of the Fund based on
the manager's own judgment.
Another important way in which The Equity Fund differs from The Large-Cap
Fund relates to the core Catholic values and the means of their implementation.
Like The Large-Cap Fund, the Equity Fund will avoid investing in companies whose
policies and practices are inconsistent with the sanctity of human life.
However, rather than avoiding investment in companies whose policies and
practices may be inconsistent with other important Catholic values, The Equity
Fund instead will engage in shareholder advocacy activities in an effort to
persuade those companies to change their offensive policies and practices. The
Equity Fund anticipates that its shareholder advocacy activities will focus
principally on policies and practices that affect the dignity of the human
person in the workplace. Advocacy activities might include initiating letter
writing campaigns to the management of companies in which The Equity Fund
invests and/or initiating a dialog with managerial personnel, proposing
shareholder resolutions at annual and special meetings of shareholders of the
companies in which The Equity Fund invests (perhaps in a cooperative effort with
other socially and/or morally responsible investors), participating in proxy
campaigns for the election of directors of those companies, and the like.
The principal executive office of The Catholic Funds is located at 1100
West Wells Street, Milwaukee, Wisconsin 53233, telephone: (877) 846-2372.
This Proxy Statement/Prospectus sets forth concisely the information that
shareholders of The Large-Cap Fund should know before voting on the Plan and the
Reorganization. It also constitutes an offering of shares of The Equity Fund.
Please read this Proxy Statement/Prospectus carefully and retain it for future
reference.
The Securities and Exchange Commission has not approved or disapproved The
Equity Fund shares to be issued in the Reorganization or determined if this
Proxy Statement/Prospectus is truthful or complete. If anyone tells you
otherwise, they are committing a crime.
Neither The Catholic Funds nor Catholic Financial Services Corporation is
sponsored or endorsed by the Roman Catholic Church, nor has the Church approved
or disapproved the shares of The Catholic Funds.
A Statement of Additional Information, dated February __, 2002, relating to
this Proxy Statement/Prospectus (the "Reorganization SAI") has been filed with
the Securities and Exchange Commission (the "SEC" or the "Commission") and is
incorporated herein by reference. Copies of the Reorganization SAI may be
obtained without charge by writing to Catholic Financial Services Corporation at
1100 West Wells Street, Milwaukee, Wisconsin 53233, or by calling (877)
222-2402. We will send you a copy of the Reorganization SAI by first class mail
within one business day of the date on which we receive your request.
In addition, the Prospectus of The Large-Cap Fund, dated February 1, 2001
(the "Large-Cap Fund Prospectus"), the Statement of Additional Information of
The Catholic Funds, dated February 1, 2001 (which includes information regarding
The Large-Cap Fund) (the "Large-Cap Fund SAI"), and the Annual Report of The
Catholic Funds for the year ended September 30, 2001 (which includes information
regarding The Large-Cap Fund) (the "Large-Cap Fund Annual Report") have been
filed with the Commission and are incorporated herein by reference. The
Large-Cap Fund Prospectus accompanies this Proxy Statement/Prospectus, and the
Large-Cap Fund SAI and the Large-Cap Fund Annual Report may be obtained without
charge by writing Catholic Financial Services Corporation at 1100 West Wells
Street, Milwaukee, Wisconsin 53233, or by calling (877) 222-2402.
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION..........................................................1
INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS..............................1
SYNOPSIS ......................................................................4
Introduction..........................................................4
The Plan .............................................................5
Reasons For The Proposed Reorganization...............................5
Federal Tax Consequences..............................................9
Comparison of The Large-Cap and The Equity Funds......................9
RISK FACTORS..................................................................16
Market Risk..........................................................16
Objective Risk.......................................................17
Foreign Securities...................................................17
Stock Selection Risk.................................................17
Index Correlation Risk...............................................17
Non-Fundamental Investment Objective.................................18
COMPARISON OF INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES..................18
Investment Objectives................................................18
Principal Strategies.................................................18
Implementation of Catholic Values....................................22
APPROVAL OF THE PLAN AND REORGANIZATION.......................................25
Description of the Plan..............................................25
Other Terms..........................................................27
Background to Reorganization.........................................27
Reasons For The Proposed Reorganization..............................30
Federal Tax Considerations...........................................32
CAPITALIZATION................................................................33
OWNERSHIP OF FUND SHARES......................................................33
DESCRIPTION OF SECURITIES TO BE ISSUED AND RIGHTS OF SHAREHOLDERS.............34
SHAREHOLDER INFORMATION AND SERVICES..........................................35
Shareholder Information..............................................35
Reinvestment of Fund Distributions...................................36
Distribution Fees....................................................36
Redeeming Your Class A Shares of The Equity Fund.....................36
MISCELLANEOUS.................................................................40
Independent Public Accountants.......................................40
Interests of Experts and Counsel.....................................40
Other Matters........................................................40
AVAILABLE INFORMATION
The Catholic Funds has filed with the Commission a Registration Statement
on Form N-14 (the "Registration Statement") with respect to the shares of The
Equity Fund offered hereby. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus omits certain information, exhibits
and undertakings contained in the Registration Statement. Such additional
information can be inspected at the principal office of the Commission at 450
Fifth Street N.W., Washington, D.C. 20549, as well as the Commission's regional
office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60621. Copies of the Registration Statement can be obtained from the Commission
at prescribed rates by writing to the Commission at either address. For further
information, reference is made to the Registration Statement and to the exhibits
attached to it.
In addition to the above, The Large-Cap Fund is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports and other information with the SEC.
Proxy materials, reports and other information about The Large-Cap Fund which
are of public record also can be inspected and copied at public reference
facilities maintained by the Commission at the addresses shown above. Copies of
these materials can be inspected and copied at the Commission's principal and
regional offices described above and can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, SEC, Washington, D.C. 20549. The Commission also maintains a Website
at http://www.sec.gov that contains certain other publicly available documents
about The Catholic Funds, The Large-Cap Fund and The Equity Fund.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus.
If any such other information or representations are given or made, they must
not be relied upon as having been authorized by The Catholic Funds. This Proxy
Statement/Prospectus does not constitute an offer to sell securities in any
state or other jurisdiction to any person to whom it would be unlawful to make
such offer in such state or jurisdiction.
INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS
This Proxy Statement/Prospectus is being furnished to the shareholders of
The Large-Cap Fund in connection with the solicitation of proxies by the Board
of Directors of The Catholic Funds to be used at a Special Meeting of
Shareholders of The Large-Cap Fund to be held on [DAY?], [DATE?], 2002, at
[TIME?], Central Time, at [LOCATION?]. At the meeting, shareholders of The
Large-Cap Fund will consider and vote on the Plan and the Reorganization
described in the Plan pursuant to which The Equity Fund would acquire
substantially all of the assets of The Large-Cap Fund, net of its liabilities,
in exchange for shares of common stock of The Equity Fund. The shares of The
Equity Fund so issued to The Large-Cap Fund would be distributed pro-rata to the
shareholders of The Large-Cap Fund. The Large-Cap Fund would be liquidated and
discontinued.
Similar transactions are being proposed for consideration by shareholders
of The Catholic Fund's other two equity funds, namely The Catholic Equity Income
Fund and The Catholic Disciplined Capital Appreciation Fund, whereby those two
funds also would be consolidated with and into The Catholic Equity Fund.
However, the Reorganization with respect to The Large-Cap Fund is not dependent
upon the approval and concurrent consolidation of those other two equity funds.
Our mailing of this Proxy Statement/Prospectus and the accompanying proxy
card is the principal means by which proxies will be solicited for approval of
the Reorganization. Proxies also may be solicited in person, or by telephone or
facsimile or, without special compensation, by officers of The Catholic Funds or
by officers and employees of Catholic Financial Services Corporation, the
investment adviser and distributor for The Large-Cap Fund. Upon request, we will
reimburse brokers, dealers, banks and voting trustees or their nominees for
reasonable expenses incurred in forwarding copies of the proxy materials to the
beneficial owners of shares which such persons hold of record. We estimate that
the total expenses to be incurred by The Large-Cap Fund in connection with the
Reorganization will be approximately $25,000. Catholic Financial Services
Corporation has agreed to pay all such expenses.
Any proxy which is properly executed and returned in time to be voted at
the Meeting will be voted in accordance with instructions marked thereon. In the
absence of such instructions, the proxy will be voted "FOR" approval of the
Plan. The duly appointed proxies may, in their discretion, vote upon such other
matters as may come before the Meeting or any adjournments thereof. A
shareholder may revoke his or her proxy at any time prior to its exercise by
delivering written notice of revocation to the Secretary of The Catholic Funds
or by executing and delivering a later dated proxy to The Catholic Funds or by
attending the Meeting in person to vote the shares of The Large-Cap Fund held by
such shareholder. The shares of The Large-Cap Fund will be voted as a separate
series on approval of the Plan, and holders of shares of the other series of The
Catholic Funds will not be entitled to vote on the Reorganization as it relates
to The Large-Cap Fund.
The presence at the meeting, in person or by proxy, of shareholders
representing one-third of all outstanding shares of The Large-Cap Fund entitled
to vote on the Reorganization constitutes a quorum for the transaction of
business. Abstentions and broker non-votes (proxies from brokers or other
nominee owners indicating that such persons have not received instructions from
the beneficial owners or other persons entitled to vote the shares as to a
matter with respect to which the brokers or other nominee owners do not have
discretionary voting power) will be treated as present for purposes of
determining the presence or absence of a quorum.
Approval of the Plan and the Reorganization contemplated by the Plan will
require the affirmative vote of "a majority of the outstanding voting
securities" of The Large-Cap Fund, as defined in the Investment Company Act of
1940, as amended (the "1940 Act"). Under the 1940 Act, a "majority of the
outstanding voting securities" means the lesser of:
o 67% or more of The Large-Cap Fund's shares present at the
Meeting, if shareholders who are the owners of more than 50% of
The Large-Cap Fund's outstanding shares are present in person or
by proxy; or
o More than 50% of The Large-Cap Fund's outstanding shares.
Accordingly, abstentions and broker non-votes will have the same effect as
votes cast against approval of the Plan.
In the event sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Meeting, the persons named as proxies in
the enclosed proxy may propose and vote in favor of one or more adjournments of
the Meeting regarding the Reorganization to permit further solicitation of
proxies without the necessity of further notice. Any such adjournment will
require the affirmative vote of a majority of the shares present at the session
of the Meeting to be adjourned.
Shareholders of record of The Large-Cap Fund at the close of business on
[RECORD DATE?] (the "Record Date") will be entitled to notice of and to vote at
the Meeting or any adjournment thereof. Each such shareholder will be entitled
to one vote for each share (and a fractional vote for each fractional share)
held by such shareholder on each matter presented at the Meeting. As of the
Record Date, there were a total of _____ shares of common stock of The Large-Cap
Fund outstanding. Catholic Knights, the ultimate parent company of Catholic
Financial Services Corporation, and Catholic Order of Foresters, another
fraternal benefit society that is a shareholder of Catholic Financial Services
Corporation, together beneficially own and have the right to vote in excess of
50% of all of the presently issued and outstanding shares of common stock of The
Large-Cap Fund. Both organizations have indicated their present intentions to
vote their shares in favor of approval of the Reorganization. Consequently,
subject to any change in the stated intentions of those organizations,
shareholder approval of the Reorganization is assured.
Under Maryland law, shareholders of The Large-Cap Fund will not be entitled
to any appraisal or similar rights in connection with the Reorganization
contemplated by the Plan. However, shareholders may redeem their shares of The
Large-Cap Fund at net asset value prior to the closing of the proposed
Reorganization in the manner specified in the Large-Cap Fund Prospectus.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus (including a copy of the Plan attached hereto as
Appendix A), as well as the Large-Cap Fund Prospectus, which accompanies this
Proxy Statement/Prospectus and is incorporated by reference herein. The
Large-Cap Fund Prospectus describes the investment objective and principal
strategies of The Large-Cap Fund and provides information about the shareholder
fees and operating expenses of, management and other services provided to, and
purchases and redemptions of shares of, that Fund. This summary is not intended
to be complete and is qualified in all respects by reference to the more
detailed information appearing elsewhere in this Proxy Statement/Prospectus, the
Plan and the Large-Cap Fund Prospectus.
Introduction
Shareholders of The Large-Cap Fund will be asked at the Meeting to approve
the Plan and the Reorganization described in the Plan and as described herein.
If approved, the Reorganization is expected to be completed as of the opening of
business on or about [DATE?], 2002, or such other date as the parties may
determine, assuming that all conditions to closing have been satisfied.
The Equity Fund is a newly designated series of The Catholic Funds. It will
first commence business operations upon and following the closing of the
Reorganization. Catholic Financial Services Corporation ("CFSC"), a Wisconsin
corporation organized in 1994, is the investment adviser and distributor for
both The Equity Fund and The Large-Cap Fund. As the adviser, CFSC makes the
investment decisions for the Funds. As the distributor, CFSC sells the Funds'
shares to investors. The majority of the outstanding stock of CFSC is owned by
Catholic Knights Financial Services, Inc., which functions as an administrative
holding company and is a wholly-owned subsidiary of Catholic Knights. Catholic
Knights is a non-profit, non-stock membership organization, licensed to do
business as a fraternal benefit society. The remaining outstanding stock in CFSC
is owned by Catholic Order of Foresters (a non-profit, non-stock Illinois
fraternal benefit society), Catholic Knights of America (a non-profit, non-stock
Missouri fraternal benefit society), and Catholic Union of Texas, The KJT (a
Texas fraternal benefit society). These four Catholic fraternals are referred to
in this Proxy Statement/Prospectus as the "Catholic Fraternal Alliance."
Mellon Equity Associates, LLP ("Mellon" or the "sub-adviser") is the
sub-adviser for The Equity Fund. Mellon is a wholly owned, independently managed
subsidiary of Mellon Financial Corporation, organized as a limited liability
partnership. Mellon's principal executive offices are located at 500 Grant St.,
Suite 4200, Pittsburgh, Pennsylvania 15258.
CFSC and Mellon are sometimes referred to together herein as the adviser.
The Plan
The Plan describes the essential terms of the proposed Reorganization and
is set forth in full as Appendix A attached to this Proxy Statement/Prospectus.
Pursuant to the Plan, substantially all of the assets of The Large-Cap Fund, net
of its liabilities, will be transferred to The Equity Fund in exchange solely
for the issuance to The Large-Cap Fund of shares of Class A Common Stock of The
Equity Fund. The Large-Cap Fund will then immediately make a pro rata
distribution to the shareholders of The Large-Cap Fund of the shares of The
Equity Fund it receives in that exchange. As a result of the Reorganization,
each shareholder of The Large-Cap Fund will receive that number of full and
fractional shares of The Equity Fund which is equal in value to the
shareholder's pro rata interest in the net assets transferred to The Equity Fund
as of the "Valuation Date" (as defined below).
Shareholders of The Large-Cap Fund will not pay any sales load or sales
commissions on the shares of The Equity Fund that they receive in the
Reorganization or on the shares of The Large-Cap Fund that they surrender in the
Reorganization. Additionally, it is a condition to the closing of the
Reorganization that The Catholic Funds receive a legal opinion to the effect
that the Reorganization will qualify as a tax-free reorganization for federal
income tax purposes. Assuming the Reorganization so qualifies, shareholders of
The Large-Cap Fund will not recognize any income, gain or loss for federal
income tax purposes as a result of the exchange in the Reorganization of their
shares in The Large-Cap Fund for shares of The Equity Fund. For additional
information about the tax consequences of the Reorganization see "Approval of
the Plan and Reorganization - Federal Tax Considerations" below.
Contemporaneously with the closing and the distribution of the shares of
The Equity Fund to shareholders of The Large-Cap Fund, The Large-Cap Fund will
satisfy its liabilities (applying any liquidating assets retained in the
Reorganization for such purpose), liquidate and be discontinued as a separate
series of The Catholic Funds. Accordingly, the shareholders of The Large-Cap
Fund will become shareholders of The Equity Fund. It is expected that the value
of each shareholder's account in The Equity Fund immediately after the
Reorganization will be the same as the value of that shareholder's account in
The Large-Cap Fund immediately prior to the Reorganization.
Although each party to the Plan will bear its own out-of-pocket expenses,
CFSC has agreed to pay all of the expenses incurred by each of the Funds.
Completion of the Reorganization is subject to a number of conditions which
are customary for transactions of this kind, in addition to the receipt of the
tax opinion described above.
Reasons For The Proposed Reorganization
CFSC has served as investment adviser and distributor to all three of the
existing equity funds of The Catholic Funds, including The Catholic Equity
Income Fund and The Catholic Discipline Capital Appreciation Fund, in addition
to The Large-Cap Fund, since their inceptions on May 3, 1999. As of December 31,
2001, these three equity funds had total assets of approximately $17.0 million,
reflecting asset growth and investments far below that initially anticipated by
CFSC in its business plan when it conceived the three equity funds. CFSC and
management of The Catholic Funds attribute the disappointing growth primarily to
the volatile, uncertain and declining stock market environment that has
persisted in the United States since quite soon after these three equity funds
commenced their operations. That market environment made investors reticent to
invest in any mutual fund, let alone small, new funds with no long-term
performance history such as The Catholic Funds. This also made licensed
securities representatives and insurance agents of the Catholic Fraternal
Alliance less inclined to become licensed with CFSC in order to market and
promote the sale of shares of The Catholic Funds. The lack of a sizeable sales
force has further frustrated sales and growth.
The present small size of The Large-Cap Fund and the other two existing
equity funds of The Catholic Funds puts them at a competitive disadvantage with
their peers. This is true in part because all mutual funds have certain fixed
costs that are spread over all of the assets of the fund, including such things
as legal fees, accounting fees, director fees, blue sky qualification fees and
the like. These fixed fees cause The Catholic Funds to have higher expense
ratios which detract from their investment performance as compared to their
larger peers. In order to offset the negative effects of these expenses, CFSC
has been waiving fees and reimbursing expenses so that the operating expenses of
The Large-Cap Fund would not exceed 1.75% of average daily net assets for any
fiscal year, but CFSC is not prepared to continue subsidizing The Large-Cap Fund
indefinitely into the future. Accordingly, CFSC has for some time been
considering strategic options to increase sales and build assets sufficient to
make The Large-Cap Fund viable as a self-sustaining entity. In considering and
designing strategic marketing options for The Large-Cap Fund, the paramount
requirement of CFSC and management and the board of directors of The Catholic
Funds has been the adherence to the principle that Catholic values should remain
a differentiating factor between The Catholic Funds and its peers.
CFSC retained the services of Precision Marketing Partners, LLC ("Precision
Marketing"), a Milwaukee, Wisconsin-based financial services sales and marketing
firm to help it assess strategic options and to select a distribution strategy
to frame and communicate long-term sales and marketing alternatives for The
Catholic Funds. Precision Marketing was founded by a group of individuals with
many years of successful experience and expertise in marketing mutual funds and
distributing their shares. Its chairman and chief executive officer, Ms.
Rochelle Lamm, and other members of her management team worked together in
former capacities to build and manage several nationally recognized investment
management and broker/dealer organizations, including a family of mutual funds
sponsored by a fraternal benefit society that today has over $10 billion in
assets.
In a report first presented to the board of directors at a special meeting
held on October 26, 2001, Precision Marketing identified a number of factors
that have contributed to the lack of sales of The Catholic Funds, including the
following:
o The three existing equity funds of The Catholic Funds have not
been perceived by investors as clearly distinguishable investment
options. While their investment objectives and investment
programs are somewhat different, their implementation has created
investment portfolios with significant overlap in stock
selection. This creates confusion among investors and selling
representatives, thereby frustrating the goal of creating a
diverse family of mutual funds.
o Neither CFSC nor the sub-advisers of the three existing equity
funds are household names that attract investors, and the
performance of the three existing equity funds, while above
average, has not been so outstanding that it alone attracts
investors.
o The sales force of CFSC has not grown as expected and, given the
relatively modest universe of insurance agents and securities
representatives licensed with the Catholic Fraternal Alliance, it
is not likely that CFSC will have sufficient sales
representatives in the near future to generate the volume of
sales that CFSC projected in its business plan.
Given these obstacles, Precision Marketing suggested three possible
alternatives, namely: liquidate and discontinue all three of the existing equity
funds; seek one or more other fund families with mutual funds comparable to The
Catholic Funds that might be possible merger partners for the three existing
equity funds; or, restructure The Catholic Funds in a manner designed to:
o Eliminate the confusion created by multiple, similar funds
through a consolidation of all three equity funds into a core
equity fund with an investment program that is easy to
understand;
o Eliminate sub-adviser name recognition and investment performance
as competitive issues by adopting a passive management style
which tracks a major index, such as the S&P 500 Index;
o Adopt additional classes of shares with expense structures
designed to be attractive for direct marketing programs and
wholesaling/ institutional client marketing programs, thereby
reducing the reliance on a retail brokerage network for asset
growth; and
o Continue to adhere to selected core Catholic values in the
investment program.
The board of directors of The Catholic Funds held a special meeting on
October 26, 2001 at which management of CFSC and The Catholic Funds, together
with a principal from Precision Marketing, presented Precision Marketing's
report and management's recommendations of the Reorganization based thereon. The
board further considered and approved the Reorganization in principle on
November 12, 2001, and formally ratified the Plan on February 14, 2002, subject
to approval by the shareholders of The Large-Cap Fund. At these meetings, the
board of directors requested and reviewed information about the investment
objective and program of The Equity Fund and the Catholic values to which The
Equity Fund would adhere and the manner in which those Catholic values would be
implemented. The board of directors also requested and reviewed information
about Mellon and the sub-advisory agreement entered into with Mellon, asked
questions of and received answers from management of Mellon, CFSC and management
of The Catholic Funds, and made inquiries of CFSC regarding the terms of the
Reorganization and its anticipated benefits to the shareholders of The Large-Cap
Fund. The board also consulted with The Catholic Funds' legal counsel, and
considered alternatives, including the alternatives identified in Precision
Marketing's report.
In approving the Plan, the board considered numerous factors, including:
o CFSC's strong desire and continuing commitment to provide
Catholics with an attractive, core investment product that
enables them to adhere to certain core Catholic values;
o The unlikelihood of successfully finding a merger partner that
would adhere to the Catholic values; and
o The reasonableness of the proposed Reorganization to address and
successfully resolve the factors that have inhibited growth of
The Large-Cap Fund, as identified in Precision Marketing's
report.
In addition, in approving the Plan, the board considered numerous other
factors, including the investment philosophy, performance, personnel, resources
and financial condition of CFSC and Mellon; the nature, quality, scope and cost
of advisory services; the differences between The Large-Cap Fund and The Equity
Fund in terms of their investment objectives, principal strategies and risks,
portfolio management, and fee and expense structure; the selection and method
for implementing the Catholic values; the terms of the Plan, including the
structure of the Reorganization as a tax-free transaction; and other factors
deemed relevant by the board.
The board believes the reorganization offers the following benefits to the
shareholders of The Large-Cap Fund, among others:
o The continuation of an opportunity to invest in an equity fund
that adheres to certain core Catholic values important to them;
o The elimination of multiple equity investment options that are
confusing and somewhat overlapping;
o A simple, easy to understand passive investment strategy designed
to follow the performance of the S&P 500 Index;
o A higher potential for future asset growth;
o Potential for lower annual fund operating expenses; and
o Potential for increased portfolio diversification, greater buying
power, lower transaction costs and other economies of scale
associated with a larger combined fund.
For these and other reasons, the board of directors of The Catholic Funds,
including the directors who are not "interested persons" of The Catholic Funds
(as that term is defined in the 1940 Act), has concluded that the Reorganization
is fair to, and in the best interests of, the shareholders of The Large-Cap Fund
and that their economic interests will not be diluted as a result of the
Reorganization.
The board of directors of The Catholic Funds unanimously recommends that
shareholders of The Large-Cap Fund vote FOR approval of the Plan and the
Reorganization.
Federal Tax Consequences
A condition to completion of the Reorganization is the receipt of a legal
opinion from Quarles & Brady LLP that the Reorganization will constitute a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, no gain or loss will
be recognized for federal income tax purposes by the shareholders of The
Large-Cap Fund or by The Large-Cap Fund or The Equity Fund as a result of the
Reorganization. However, it is anticipated that, immediately following the
Reorganization, The Equity Fund will adjust the investment portfolio it acquires
from The Large-Cap Fund to conform to the S&P 500 Index. We anticipate that The
Equity Fund will recognize a net capital loss on the sale of portfolio
securities that it acquires in the Reorganization from The Large-Cap Fund.
Comparison of The Large-Cap and The Equity Funds
Below is a brief comparison of the principal features of The Large-Cap Fund
and The Equity Fund. For more detailed information about The Large-Cap Fund,
please refer to the Large-Cap Fund Prospectus which accompanies this Proxy
Statement/Prospectus.
Investment Objectives and Principal Strategies
Summary. Both of The Equity Fund and The Large-Cap Fund are designed for
investors who want long-term capital appreciation, can tolerate fluctuations in
portfolio value and have no need for current income from the respective Funds.
However, these two Funds have somewhat different investment objectives and
strive to obtain their objectives through substantially different investment
strategies and programs. In terms of their Catholic values, both Funds avoid
investing in securities of companies that manufacture products, provide services
or engage in business practices which are inconsistent with the sanctity of
human life, but there are some differences in other Catholic values adhered to
by the Funds and the manner in which they implement those other Catholic values.
The Large-Cap Fund. The Large-Cap Fund seeks long-term capital growth by
investing primarily in high-quality growth stocks of companies with large market
capitalizations. To attain this objective, the Fund seeks fast-growing companies
with the potential to produce superior, long-term results. The Fund's
investments consist primarily of stocks with market capitalizations above $5
billion which have exhibited rapid earnings gains in relation to the average of
companies in the S&P 500 Index, and which have superior returns on capital and
below-average levels of debt. The Fund typically will be fully invested in
equities and, under normal condition, will invest at least 75% of its total
assets in the common stocks of companies with large market capitalizations. The
Fund has the flexibility to invest in other market capitalizations in various
types of domestic securities and in the securities of foreign issuers traded on
a U.S. national securities exchange or the NASDAQ national market system.
The Equity Fund. The Equity Fund seeks to obtain a total return from
dividends and capital gains which is equal to the total return of the S&P 500
Index, less the Fund's operating expenses. The Fund attempts to achieve its
objective by investing in a portfolio of common stocks that substantially
replicates the composition of the S&P 500 Index. When the adviser receives
notification of a change in the composition of the Index, the adviser generally
makes a corresponding change in the composition of the Fund's investment
portfolio.
Certain companies included in the S&P 500 Index from time to time may
manufacture products, provide services or engage in other business practices
which are inconsistent with the Fund's Catholic value regarding the sanctity of
human life (the "sanctity of life exclusionary screen"), which is described in
more detail below. As of the date of this Proxy Statement/Prospectus, less than
2% of the total market capitalization of the S&P 500 Index consisted of stocks
of companies that the Fund would exclude by applying this screen. To reduce the
performance tracking error between the Fund and S&P 500 Index that will result
from the Fund's exclusion of those stocks, the subadviser will use modeling
techniques to quantify the tracking error and will rebalance the Fund's
portfolio among the remaining Index stocks in an attempt to minimize the
tracking error.
Thus, unlike The Large-Cap Fund, which relies on the judgment and expertise
of its managers to select stocks which meet the investment criteria of The
Large-Cap Fund and have the potential for superior performance, the adviser
passively manages The Equity Fund's investments to conform to the S&P 500 Index,
subject to the sanctity of life exclusionary screen. This passive management
style reduces the reliance on the portfolio manager's subjective judgment.
Catholic Values. The Large-Cap Fund adheres to three important Catholic
values selected by the board of directors of The Catholic Funds, namely the
sanctity of human life, no unjust wars and the dignity of the human person. The
Large-Cap Fund will not invest in securities of companies that manufacture
products, provide services or engage in other business practices that CFSC
determines are inconsistent with any of these three Catholic values, based on
guidelines established by the board of directors.
The Equity Fund focuses on two of these same three Catholic values, namely
the sanctity of human life and the dignity of the human person. Like The
Large-Cap Fund, The Equity Fund does not invest in securities of companies whose
businesses CFSC determines are inconsistent with the sanctity of human life.
However, with respect to the dignity of the human person value, rather than
excluding those companies from The Equity Fund's investment portfolio, CFSC
engages in shareholder advocacy actions designed to persuade such companies to
reform their offending business practices and policies to better reflect this
important Catholic value. Presently, these advocacy efforts focus on how
employers treat members of the work force, which the board believes is likely to
be representative of a company's general policy toward issues of human dignity.
The board further believes this advocacy approach offers greater potential to
persuade companies to reform their practices and policies that offend the
dignity of the human person, as opposed to an exclusionary policy that
potentially goes unnoticed by management of the offending company. However,
because of the extremely fundamental nature of the sanctity of human life value,
the board of directors believes it would be inappropriate for The Equity Fund to
invest in the securities of companies that do not adhere to this value, even
under an advocacy program.
Risk Factors
The primary risks of The Large-Cap Fund and The Equity Fund are similar,
but not identical. Both experience market risk, which is the risk that common
stock prices overall will rise and fall over short and even extended periods.
Both also experience objective risk, which is the risk that a Fund's investments
will depend not only on the movement of the market in general, but on factors
that affect the individual stocks held in the Fund's portfolio, such as a
company's financial performance, management and business trends. In addition,
there is a risk that the large capitalization stocks included in the Funds'
portfolios may trail returns from the overall stock market for short or even
extended periods.
The Large-Cap Fund also is exposed to stock selection risk, which is the
risk that the stocks selected by the adviser may not perform as well as other
stocks the adviser could select consistent with The Large-Cap Fund's investment
program. As a passively managed fund, The Equity Fund is not subject to this
same stock selection risk, however it is exposed to the risk that the return on
its investment portfolio may not precisely track that of the S&P 500 Index. This
risk results from a number of factors that will preclude The Equity Fund's
investment portfolio from precisely mirroring the composition of the S&P 500
Index at all times.
Both Funds also are exposed to the risk that the implementation of their
Catholic value exclusionary screens may limit investments available to the Funds
as compared to their peers, and the return on the securities that the Funds can
purchase may be less than similar securities they might otherwise purchase (or,
in the case of The Equity Fund, other securities included in the S&P 500 Index).
Finally, because The Large-Cap Fund may invest in foreign securities, it is
exposed to special risks associated with investing in foreign securities that
are not typically associated with investing in securities of U.S. companies. For
a more detailed description of risks associated with investing in The Large-Cap
Fund, see the section of the Large-Cap Fund Prospectus captioned "Investment
Risks."
For a more detailed discussion of risks associated with investing in The
Equity Fund, see the section of this Proxy Statement/Prospectus captioned "Risk
Factors."
Performance
The Equity Fund has not yet commenced operations, and therefore has no
performance history. However, in the concurrent consolidations of the three
existing equity funds of The Catholic Funds into The Equity Fund, The Catholic
Disciplined Capital Appreciation Fund will be considered the surviving fund,
because its investment program, strategy and portfolio most closely resemble
those of The Equity Fund. Accordingly, The Equity Fund will retain and will
advertise the performance history of The Catholic Disciplined Capital
Appreciation Fund as its own. Please read The Large-Cap Fund Annual Report,
which was previously mailed to you, for more information on the performance of
The Large-Cap Fund and of The Catholic Disciplined Capital Appreciation Fund
through September 30, 2001.
Size of Funds
On December 31, 2001, The Large-Cap Fund had an aggregate net asset value
of $6.3 million, and the other two existing equity funds of The Catholic Funds
had aggregate net assets of $10.7 million, consisting of $5.7 million in The
Catholic Equity Income Fund and $5.0 million in The Catholic Disciplined Capital
Appreciation Fund. Accordingly, if all three reorganizations had been completed
as of that date, The Equity Fund would have had approximately $17.0 million in
net assets immediately following those reorganizations.
Classes of Shares
The Large-Cap Fund offers only shares of Class A Common Stock, which have a
front-end sales charge of up to 4.00% and a Rule 12b-1 distribution fee of
0.25%. The Equity Fund offers three classes of shares, including Class A Common
Stock with a sales load structure and 12b-1 fee identical to shares of Class A
Common Stock of The Large-Cap Fund. The Equity Fund also offers Class C Common
Stock and Class I Common Stock, but will not issue any shares of those classes
in connection with the Reorganization. Those Classes of shares have different
sales load structures, rule 12b-1 distribution fees and minimum investment
requirements as compared to The Equity Fund's Class A Common Stock. The
performance of the various classes of shares will vary based on those
differences in sales charges and fees.
Expenses
The following table compares the fees and expenses that you may pay if you
buy and hold shares of Class A Common Stock of The Large-Cap Fund and The Equity
Fund. The information for The Equity Fund is estimated by management (based on
the assumption that the Reorganization and the concurrent reorganizations of the
other two existing equity funds with and into The Equity Fund are completed).
THE LARGE-CAP FUND THE EQUITY FUND
Shareholder Fees (fees paid directly from
your investment)
Maximum Sales Charge (Load) Imposed on 4.00% 4.00%
Purchases (as a percentage of offering
price)(1)
Maximum Deferred Sales Charge (Load) None None
Imposed on Redemptions (as a percentage of
original purchase price or redemption
proceeds, whichever is less)
Annual Fund Operating Expenses (expenses that
are deducted from fund assets)
Management Fees 0.90% 0.50%
Distribution (12b-1) Fees 0.25% 0.25%
Other Expenses(2) 1.50% 0.75%
----- -----
Total Annual Fund Operating Expenses 2.65% 1.50%
===== =====
Less: Fee Waivers and Expense 0.90% 0.55%
Reimbursements(3) ----- -----
Net Annual Fund Operating Expenses 1.75% 0.95%
===== =====
- ------------------------------------
(1) The maximum initial sales charge for Class A shares of each Fund applies to
investments of up to $25,000, and is reduced for larger investments. No
initial sales charge will be imposed on shares of The Equity Fund issued to
shareholders of The Large-Cap Fund in the Reorganization.
(2) "Other expenses" are based on amounts actually incurred during the fiscal
year ended September 30, 2001 for The Large-Cap Fund, and are based on
management's estimated amounts for the fiscal year ending September 30,
2002 for The Equity Fund assuming the completion of the Reorganization and
the concurrent reorganizations of the other two existing equity funds into
The Equity Fund.
(3) CFSC has contractually agreed, for the current fiscal year, to reimburse
expenses and waive fees to the extent necessary so that "Annual Total Fund
Operating Expenses" will not exceed 1.75% for The Large-Cap Fund and 0.95%
for The Equity Fund.
Example
The following Example is intended to help you compare the cost of investing
in The Large-Cap Fund (and investing in The Equity Fund giving effect to the
Reorganization and the concurrent reorganizations of the other two existing
equity funds with and into The Equity Fund) with the cost of investing in other
mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of those time periods.
The Example also assumes that your investment has a 5% return each year and that
each Fund's operating expenses remain the same (with fee waivers and expense
reimbursements for The Large-Cap Fund and The Equity Fund in effect for one
year). Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
The Large-Cap Fund $571 $1,108 $1,672 $3,200
The Equity Fund(1) $493 $955
- --------------------------
(1) Because The Large-Cap Fund shareholders will not have to pay a sales load
on shares of The Equity Fund they receive in the Reorganization, the pro
forma expenses they would pay on a $10,000 investment in such shares (and
assuming a 5% annual return and redemption at the end of each time period)
would be as follows: $493 -1 year and $691 - 3 years. These lower expenses
do not reflect any front-end sales load paid at the time of initial
investment in the Class A shares of The Large-Cap Fund that shareholders
surrender in exchange for Class A shares of The Equity Fund in the
Reorganization.
Sales Charges
The front-end sales charges imposed on purchases of Class A shares of The
Equity Fund are the same as those for shares of The Large-Cap Fund. For a
description of those sales charges, please see the section of the Large-Cap Fund
Prospectus captioned "How to Invest."
Minimum Purchases
The minimum investment amounts to open and to add to an account for Class A
shares of The Equity Fund are the same as for The Large-Cap Fund. For a
description of those minimum investment amounts, see the section of the
Large-Cap Fund Prospectus captioned "How to Invest."
Redemption Procedures
The redemption procedures that apply to Class A shares of The Equity Fund
are the same as those that apply with respect to the redemption of shares of The
Large-Cap Fund. For a description of those redemption procedures, see the
section of this Proxy Statement/Prospectus captioned "Shareholder Information
and Services - Redeeming Your Class A Shares of The Equity Fund" with respect to
The Equity Fund, and the section of the Large-Cap Fund Prospectus captioned
"Selling Your Shares" with respect to The Large-Cap Fund.
Exchanges
As a shareholder of The Large-Cap Fund, you have exchange privileges among
The Catholic Money Market Fund and the other two existing equity funds of The
Catholic Funds. Following the Reorganization, and assuming the concurrent
reorganization of the other two existing equity funds of The Catholic Funds with
and into The Equity Fund, The Catholic Funds will have only two series, namely
The Equity Fund and The Catholic Money Market Fund. Therefore, following the
Reorganization, exchanges will be available only between those two Funds. Those
exchanges will be subject to the same requirements and procedures as presently
apply to exchanges between The Large-Cap Fund and The Catholic Money Market
Fund. For a detailed description of the requirements and procedures that apply
to exchanges among the various funds of The Catholic Funds, please see the
section of the Large-Cap Fund Prospectus captioned "Selling Your Shares -
Exchange Privilege."
Other Shareholder Services
The Equity Fund offers other shareholder services which are the same as
those presently offered by The Large-Cap Fund, including purchases and sales by
telephone, purchases and sales by wire, automatic investment plans and automatic
withdrawal plans. For a detailed description of these shareholder services,
please refer to the sections of the Large-Cap Fund Prospectus captioned "How to
Invest" and "Selling Your Shares."
Dividends and Distributions
Like The Large-Cap Fund, The Equity Fund will distribute any net investment
income annually, and will distribute any net realized long or short-term capital
gains at least annually. For a more detailed description of The Equity Fund's
distribution practices and policies, see the section of this Proxy
Statement/Prospectus captioned "Shareholder Information and Services." For The
Large-Cap Fund, see the section of the Large-Cap Fund Prospectus captioned
"Shareholder Information."
Management and Operations
CFSC serves as adviser and distributor to both The Large-Cap and The Equity
Funds. Under the terms of an investment advisory agreement between The Catholic
Funds and CFSC, CFSC, together with the sub-advisers and subject to the
supervision of the board of directors of The Catholic Funds, manages the
investment and reinvestment of the Funds' assets, provides the Funds with
personnel, facilities and administrative services, and supervises the Funds'
daily business affairs. CFSC also formulates and implements a continuous
investment program for the Funds consistent with each Fund's investment
objectives, policies and restrictions. For providing these services, CFSC
receives an annual advisory fee at the rate of 0.90 of 1% of the average daily
net assets of The Large-Cap Fund, and 0.50 of 1% of the average daily net assets
of The Equity Fund.
Peregrine Capital Management Inc., a wholly owned subsidiary of Wells Fargo
& Company, serves as the sub-adviser for The Large-Cap Growth Fund. John S.
Dale, CFA, and Gary Nussbaum, CFA, serve as co-portfolio managers of The
Large-Cap Fund. Information about Peregrine Capital Management and Messrs. Dale
and Nussbaum is included in the section of the Large-Cap Fund Prospectus
captioned "Management - Sub-Advisers - The Catholic Large-Cap Growth Fund." For
its services as sub-adviser, Peregrine Capital Management receives an annual fee
which CFSC pays out of its advisory fee as follows: 0.50 of 1% on the first $25
million of The Large-Cap Fund's average daily net assets; 0.45 of 1% on the next
$25 million of average daily net assets; and 0.40 of 1% on average daily net
assets over $50 million.
Mellon Equity Associates, LLP serves as sub-adviser for The Equity Fund.
Mellon is an independently run, wholly owned subsidiary of Mellon Financial
Corporation, organized as a limited liability partnership. The firm became a
separate legal entity from the equity management group of the Mellon Bank trust
department in January 1987, managing domestic equity accounts for U.S.
tax-exempt clients. The equity management group has managed institutional,
tax-exempt assets since 1947. The firm's proprietary investment process,
developed by its current principal officers, has been used to manage domestic
equity accounts for U.S. tax-exempt clients since January 1983. Today, Mellon
manages nearly $23 billion in assets for approximately 140 clients.
Thomas J. Durante, a chartered financial analyst, will manage the
day-to-day investment of the assets of The Equity Fund. Mr. Durante specializes
in the management of indexed and enhanced-indexed equity products for Mellon.
Before joining Mellon in 2000, Mr. Durante was a controller of funds at Dreyfus
Corporation for over 18 years. He earned a Bachelor of Science degree in
accounting from Fairfield University.
From its advisory fees, CFSC pays Mellon a sub-advisory fee for managing
the assets of The Equity Fund at the annual rate of 12 basis points (0.12%) on
the first $50 million of the Fund's average daily net assets, and six basis
points (0.06%) on the Fund's average daily net assets in excess of $50 million.
The distribution services that CFSC provides to The Equity Fund are
provided on the same basis and under identical terms and conditions as the
distribution services it provides to The Large-Cap Fund, and the rule 12b-1
distribution plan and related fees applicable to Class A shares are the same for
both Funds. For a description of these arrangements, please refer to the section
of this Proxy Statement/Prospectus captioned "Shareholder Information and
Services - Distribution Fees" for The Equity Fund, and to the section of the
Large-Cap Fund Prospectus captioned "Shareholder Information - Distribution
Fees" for The Large-Cap Fund.
RISK FACTORS
In evaluating whether to approve the Plan and invest in The Equity Fund,
shareholders should carefully consider the following summary of comparative risk
factors relating to The Equity Fund and The Large-Cap Fund, in addition to the
other information set forth in this Proxy Statement/Prospectus. The risks
associated with investing in The Equity Fund are similar to the risks associated
with investing in The Large-Cap Fund in that both Funds invest in equity
securities of larger-sized companies, although there are some differences as
well.
Market Risk
Both Funds are subject to market risk, which is the risk that the overall
prices of the common stocks in which they invest will rise and fall over short
and even extended periods. The equity markets tend to move in cycles, and the
net asset value of both Funds (and therefore their share prices) will fluctuate
with these price changes and market fluctuations. You could lose money investing
in either Fund.
Objective Risk
Both Funds also are subject to objective risk, which is the risk that the
value of their investments will be affected not only by movements in the stock
market generally, but also by factors that affect the individual stocks held in
their investment portfolios, such as a company's financial performance,
management and business trends. There also is a risk that large capitalization
stocks in which these two Funds invest may trail returns from the overall stock
market for short or even extended periods.
Foreign Securities
The Large-Cap Fund may invest in foreign securities. Foreign securities
involve special risks and considerations not typically associated with investing
in securities of U.S. companies. These include: fluctuation in value of foreign
portfolio investments due to changes in currency rates and control regulations
(e.g., currency blockage); lack of public information about foreign issuers;
lack of uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers; and greater difficulties in
commencing lawsuits against foreign issuers.
Because The Equity Fund invests only in U.S. companies, it is not exposed
to these risks.
Stock Selection Risk
The Large-Cap Fund depends on the adviser's and sub-adviser's ability to
select stocks that perform well. The Fund is subject to the risk that these
stock selections may not achieve the desired appreciation in value, and may even
decline in value.
Because The Equity Fund is managed passively to conform substantially to
the S&P 500 Index, it is not significantly exposed to this risk.
Index Correlation Risk
The Equity Fund is exposed to the risk that its performance will not track
that of the S&P 500 Index at all times. This is so for a number of reasons.
First, the application of The Equity Fund's sanctity of life exclusionary screen
will prevent the adviser from purchasing stocks of all of the companies included
in the S&P 500 Index, and the Fund's investment portfolio therefore will not
precisely replicate the composition and capitalization weightings of companies
included in the S&P 500 Index. Also, The Equity Fund from time to time will hold
uninvested cash. This might occur, for example, when the Fund receives the
proceeds of new investments pending the adviser's investment of those proceeds
in stocks of the S&P 500 Index. Also, the adviser may from time to time choose
to hold uninvested cash to meet anticipated redemptions. In either case, the
cash assets will create further deviations between the composition of the Fund's
investment portfolio and that of the S&P 500 Index. These deviations in
portfolio composition will affect the performance of The Equity Fund relative to
the S&P 500 Index.
Finally, unlike the S&P 500 Index, The Equity Fund incurs transaction and
operating costs (e.g., brokerage commissions, investment management fees,
custodian and transfer agent fees, legal and accounting fees, and the like).
These fees and expenses will reduce the total return of the Fund as compared to
that of the S&P 500 Index.
Non-Fundamental Investment Objective
The investment objective of The New Equity Fund is not fundamental. This
means that the Fund's investment objective could be changed by action of CFI's
Board of Directors, without the consent or approval of the shareholders of the
Fund. For example, the Board may find it necessary to change the investment
objective of the Fund if the composition of the S&P 500 Index should become so
heavily weighted with stocks of companies that the Fund could not hold under its
sanctity of life exclusionary policy, the Fund may be unable to construct a
portfolio of stocks that reasonably can be expected to track the performance of
the S&P 500 Index. Under these circumstances, the Board may find it necessary to
modify the investment objective of The Equity Fund. The Fund would provide
shareholders with at least 60 days advanced written notice before making any
such change in its investment objective.
COMPARISON OF INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
Investment Objectives
While the Funds have somewhat different investment objectives, they are
both designed for investors who want long-term capital appreciation, can
tolerate fluctuations in portfolio value and have no need for current income
from their investment in the relevant Fund.
The Equity Fund. The Equity Fund seeks to obtain a total return from
dividends and capital gains which is equal to the total return of the S&P 500
Index, less The Fund's operating expenses.
The Large-Cap Fund. The Large-Cap Fund seeks long-term capital growth by
investing primarily in high-quality growth stocks of companies with large market
capitalizations.
Principal Strategies
General. Both Funds generally invest in common stocks of large
capitalization companies. The Large-Cap Fund uses an active management style,
where the portfolio manager selects individual stocks that meet the investment
criteria of the Fund to construct a portfolio that the manager believes will
outperform the market over time. This Fund therefore relies on the subjective
judgment of the portfolio manager to make prudent selections. For a detailed
description of the investment program of The Large-Cap Fund, please refer to the
section of the Large-Cap Fund Prospectus captioned "The Catholic Large-Cap
Growth Fund."
The Equity Fund, on the other hand, uses a passive management strategy.
Under this strategy, the portfolio manager attempts to match, as closely as
possible, the performance of the S&P 500 Index by holding each stock found in
the Index in roughly the same proportion (measured by market capitalization) as
represented in the Index itself, subject to the application of the Fund's
sanctity of life exclusionary screen. For example, if 3% of the total market
capitalization of the S&P 500 Index consisted of the common stock of a
particular company, then the Fund generally would invest 3% of its assets in
shares of common stock of that company.
Certain companies included in the S&P 500 Index from time to time may
manufacture products or provide services which are inconsistent with the Fund's
sanctity of life exclusionary screen, and the Fund will not invest in the common
stocks of those companies. Accordingly, the Fund will not fully replicate the
Index at all times. Presently there are six companies included in the S&P 500
Index in which the Fund may not invest because of this exclusionary screen.
Together those companies comprise less than 2% of the total market
capitalization of the S&P 500 Index. To reduce the performance tracking error
between the Fund and the S&P 500 Index that will result from the Fund's
exclusion of those stocks, the subadviser will use modeling techniques to
quantify the tracking error and will rebalance the Fund's portfolio among the
remaining Index stocks in an attempt to minimize the tracking error. The adviser
does not believe that the application of this exclusionary screen will adversely
affect the ability of the Fund to achieve its objective.
Passive Management. Passive management appeals to many investors for a
number of reasons, including the following:
o Simplicity - it is a straightforward market matching strategy;
o Diversification - broad indices such as the S&P 500 Index cover a
wide variety of companies and industries;
o Relative performance predictability - a passively managed fund is
expected to move in the same direction - up or down - as its
target index;
o Comparatively low cost - passively managed funds do not have many
of the expenses of an actively-managed mutual fund, such as
research and company visits; and
o Relatively low portfolio turnover rates (assuming the composition
of the relevant index remains fairly stable), which reduces
transaction costs (brokerage commissions, etc.) and capital
gains.
The performance of a passively managed fund generally will trail the
performance of the index it attempts to track. This is true because the mutual
fund and its investors incur operating costs and transaction expenses that are
not shared by an index. For example, investors may pay sales charges which
result in less than all of the price they pay for their mutual fund shares being
invested in common stocks of companies included in the index. Investors in The
Equity Fund pay a front-end sales charge for Class A shares at the time of
purchase. A sales charge reduces the total return on your investment as compared
to a direct investment in stocks.
Additionally, when a mutual fund invests the cash proceeds it receives from
investors in common stocks of companies included in an index, the mutual fund
must pay brokerage commissions, which further reduce the amount invested. As the
composition of the index changes, the mutual fund must make corresponding
adjustments in its holdings, giving rise to additional brokerage commissions.
Also, mutual funds incur other operating expenses, including investment
management fees, custodial and transfer agent fees, legal and accounting fees,
director fees and frequently rule 12b-1 service and distribution fees. These
fees and expenses reduce the mutual funds total return as compared to the index
it attempts to track, because no such costs affect the total return of the
index.
Also, because of liquidity needs, unavoidable delays in immediately
investing the proceeds of the sale of fund shares and other constraints under
which mutual funds operate, passively managed funds generally need to retain a
small portion of their assets in cash or cash equivalents. This inability to be
fully invested in index stocks at all times creates further deviations between
the composition of a passively managed fund's investment portfolio and the index
it attempts to track. These deviations are referred to as tracking error.
In order to reduce the tracking error between the performance of The Equity
Fund and the S&P 500 Index that results from the Fund holding uncommitted cash
from time to time, the sub-adviser may invest the uncommitted cash in shares of
publicly traded closed-end funds that hold a portfolio of stocks designed to
replicate the S&P 500 Index, such as S&P Depository Receipts, or SPDRs. This
practice, known as equitizing cash, facilitates the ability of The Equity Fund
to earn a return on its uncommitted cash which more closely tracks the
performance of the S&P 500 Index. Under no circumstances will the sub-adviser
purchase the shares of such a closed-end fund if, immediately after doing so,
more than 5% of The Equity Fund's net assets would be invested in shares of any
one closed-end fund or if more than 10% of the Fund's net assets would be
invested in such closed-end funds in the aggregate.
As The Equity Fund increases in size, it may become efficient in the future
for it to use exchange-traded index futures contracts to equitize cash, in
addition to or in lieu of publicly traded closed end funds. An index futures
contract is a contract to buy or sell units of a particular index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time The New Equity Fund enters into and terminates an index futures
contract, the Fund may realize a gain or loss. Losses involving index futures
contracts can sometimes be substantial, in part because a relatively small price
movement in an index futures contract may result in an immediate and substantial
loss or gain for The Equity Fund. The Fund will not use futures contracts for
speculative purposes or as leveraged investments that magnify the gains or
losses on an investment. The Equity Fund may not invest in futures contracts to
the extent that doing so would require the Fund to commit more than 5% of its
total assets for margin on futures contracts, or if more than 20% of the Fund's
total assets would be committed to futures contracts.
There is a risk of an imperfect correlation between movements in prices of
futures contracts on the S&P 500 Index and movements in the value of the S&P 500
Index itself. There is also a possibility that no liquid secondary market will
exist for a futures contract that will enable The Equity Fund to close a futures
position prior to its maturity date. The Fund will seek to reduce this liquidity
risk by entering into futures contracts on registered security exchanges with an
active and liquid secondary market.
In addition to the holding of uncommitted cash, the application of The
Equity Fund's sanctity of life exclusionary screen also creates deviations
between the composition of The Equity Fund's investment portfolio and the
composition of the S&P 500 Index. These mismatches between passively managed
funds and the indices that they attempt to track create variances in their
relative performances.
For these reasons, you should expect that the performance of The Equity
Fund will lag that of the S&P 500 Index. In part for this reason, The Equity
Fund compares its gross return (total return before deducting the Fund's
operating expenses and transaction costs) to the S&P 500 Index, rather than its
net return.
S&P 500 Index. The S&P 500 Index is an index compiled and maintained by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). The
Index consists of 500 stocks chosen by S&P for market size, liquidity and
industry group representation. It is a market-value weighted index (stock price
times the number of shares outstanding) with each stock's weight in the Index
proportionate to its market value.
While the S&P 500 Index has proven a good measure of large-cap stock
performance over time, you should bear in mind that it does not represent the
entire U.S. stock market. Historically, the market has gone through cycles where
large-cap stocks included in the S&P 500 Index have outperformed and
underperformed the broader U.S. stock market. For example, in the mid-to-late
1990's, technology companies experienced rapid growth and comprised an
increasing percentage of the S&P 500 Index, exceeding 25% of the Index at
various times. The S&P 500 Index experienced significant volatility during this
period, much of it attributable to the performance of these technology stocks.
For these reasons, while we expect the Fund's performance will closely track
that of the S&P 500 Index, you should not expect that the Fund's performance
will track that of the broader U.S. equity markets at all times.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of S&P. S&P makes no representation or warranty,
implied or expressed, for the shareholders of The Equity Fund, or any member of
the public regarding the advisability of investing in index or other passively
managed funds generally, or in The Equity Fund in particular, or the ability of
The Equity Fund to track general stock market performance. S&P's only
relationship to this Fund is the licensing of the S&P 500 Index which is
determined, composed and calculated by S&P without regard to this Fund.
Implementation of Catholic Values
The Large-Cap Fund. The Large-Cap Fund focuses on three core Catholic
values selected by the board of directors of The Catholic Funds for adherence in
connection with its investment program. Those values consist of the following:
o Sanctity of Human Life - Human life deserves protection from the
moment of conception.
o No Unjust Wars - The indiscriminate destruction of civilians is
wrong, even in the course of an otherwise justifiable war.
o Dignity of the Human Person - Every person is entitled to be
treated with dignity and justice, because every human being is
created in the image and likeness of God.
The board of directors has adopted guidelines which the adviser uses to
identify companies whose products, services and/or business practices are
inconsistent with one or more of these core Catholic values, and the adviser
refrains from acquiring the securities of those companies for the investment
portfolio of The Large-Cap Fund. A more detailed description of the
implementation of these Catholic Values with respect to The Large-Cap Fund is
included in the Large-Cap Fund Prospectus under the caption "Investment
Philosophy Statement."
The Equity Fund. In considering the core Catholic values that would be
implemented with respect to The Equity Fund, and given its experience with the
application of the exclusionary screens of The Catholic Funds to date, the board
of directors determined that it would be prudent to cease screening for the "no
unjust wars" principle in the future (following the Reorganization). In coming
to this conclusion, the board was cognizant of the global trend toward the
reduction in nuclear arms, biological weapons and other weapons of mass and
indiscriminant destruction, and the concurrent technological developments that
have given rise to more effective precision weapons. Since the commencement of
The Catholic Funds, this screen has resulted in the exclusion of only a
negligible number of companies from the portfolios of the three existing equity
funds. For these reasons, the board has determined that The Equity Fund will
strive to invest its assets in a manner that promotes two important core
Catholic values: namely, the sanctity of human life and the dignity of the human
person.
To implement the sanctity of human life value in its investment program,
The Equity Fund will avoid investing in securities of companies that directly
participate in abortion.
With respect to the dignity of the human person, the board has determined
to focus on the practices and policies of employers with respect to members of
the work force. The board believes the manner in which a company treats its
employees is a good measure of the company's attitude toward the dignity of the
human person generally. If The Equity Fund's investment strategy should cause it
to invest in securities and obligations of a company or other issuer whose
employment and other business practices are substantially inconsistent with the
dignity and primacy of the human person, CFSC will engage in advocacy activities
designed to influence the company's practices to better reflect and promote the
dignity of the human person. Examples of practices that The Catholic Funds and
CFSC likely would determine are inconsistent with this principle include,
without limitation:
o Not providing a livable wage as dictated by the standards of the
particular region;
o Not providing safe, sanitary or humane working conditions;
o Failing to maintain a board of directors composed of a majority
of individuals who are independent of management and free from
other material conflicts and personal interests that potentially
could compromise their ability and incentive to vigorously
promote and protect the interests of the shareholders;
o Not maintaining fair and equitable compensation structures which
allow employees at all levels to share financially in the success
of the company through stock-option, employee-ownership or other
types of programs that benefit all employees; or
o Employing executive compensation systems which overcompensate or
unjustly enrich executive management at the expense of
shareholders and lower-level employees.
The board of directors selected these two particular core Catholic values
because they are grounded in the very fundamental Catholic value that every
person is made in the image and likeness of God. Also, each relates to the
protection of innocent victims who have no choice or whose choices are extremely
limited under the relevant circumstances, such as unborn children and people who
need to earn a living. Finally, the board believes that the adviser can
practically and efficiently implement each of these values in making day-to-day
investment and advocacy decisions, and that the board effectively can monitor
and direct compliance with these values.
The board of directors may from time to time select different or additional
core Catholic values that The Equity Fund will implement in its investment
program. For example, the board of directors may determine to add or substitute
a selected core Catholic value in response to official doctrinal statements of
the Catholic Church. In any event, the board of directors has the sole and
exclusive authority to select the core Catholic values that we will implement in
the Funds' investment programs, and to determine the manner in which they will
be implemented.
Because the board of directors views the sanctity of human life as so
fundamental to the doctrines of the Catholic Church, the board determined to
retain an exclusionary practice with respect to the implementation of this
value. However, with respect to the dignity of the human person value, the board
of directors determined that an advocacy approach to implementation potentially
could have a greater effect. The board determined that an exclusionary practice
with respect to this value likely would have little impact on the conduct and
behavior of companies, insofar as The Equity Fund's exclusion of those companies
from its investment portfolio likely would go unnoticed. However, a proactive
shareholder advocacy approach potentially could cause such companies to reform
their offending practices to better comport with the value of the dignity of the
human person. Accordingly, the board elected to adopt an advocacy program as a
means to implement this value in the investment program of The Equity Fund.
The board of directors of The Catholic Funds has adopted policies and
procedures designed to implement the selected Catholic values in the investment
practices of The Equity Fund. These procedures delegate to the adviser the
day-to-day responsibility for monitoring the Fund's investments to identify any
products, services or business practices which are inconsistent with the board's
selected Catholic values. The adviser also is responsible to enforce the
sanctity of the human life exclusionary screen and to initiate action under the
advocacy program. The adviser is subject to the oversight of a Catholic Screen
Review Committee appointed by the board, to which management of the adviser
reports monthly on the screening and advocacy activities. The adviser and the
Catholic Screens Review Committee are both subject to oversight by The Catholic
Funds' board of directors, to which they report quarterly.
The adviser has access to a commercial service which enables it to use
application software systems designed to screen companies for various social
issues. Using this tool and other available information, the adviser conducts an
analysis on each company whose securities are newly added to The Equity Fund to
produce a screening profile on the company. Members of the Catholic Screens
Review Committee review these profiles monthly, except for those that the
adviser determines raise no issues with respect to the selected Catholic values.
If the adviser or the Catholic Screens Review Committee determines that a
company participates directly in abortion, that company's securities will not be
purchased by The Equity Fund. If this determination is made after a company's
securities already are owned by the Fund, the adviser will direct the subadviser
promptly to arrange for the sale of those securities in an orderly fashion. If
it is determined that a company engages in practices which are inconsistent with
the dignity of the human person, management of the adviser will consider
appropriate advocacy actions.
On an ongoing basis, the adviser monitors the practices and policies of
companies in which The Equity Fund invests by selectively reviewing their annual
reports to shareholders, proxy statements and other public communications that
they periodically issue. The adviser also monitors news reports and websites
oriented to socially responsible investing, and obtains and reviews information
from proxy research and voting services firms that it may retain from time to
time, as well as information it obtains through membership in one or more
organizations that provide information and assistance in connection with
shareholder advocacy efforts.
Advocacy activities that the adviser might initiate include such things as
writing letters to management of the relevant companies, encouraging
shareholders of The Equity Fund to do the same, engaging in direct dialog with
management of these companies, voting shares of the company held by The Equity
Fund in a manner that promotes the dignity of the human person on relevant
matters, submitting shareholder proposals for consideration at annual and
special meetings of shareholders either individually or together with other
social activists and shareholder groups, participating in or initiating proxy
contests for the election of directors, and the like. The adviser also may
request companies to provide copies of policies that pertain to the selected
Catholic values, and may propose specific questions or conduct surveys
pertaining to these Catholic values for response by companies in which The
Equity Fund invests. We cannot provide any assurance that our advocacy efforts
will be successful in persuading companies to reform their offending practices.
If a company fails to reform its practices as requested, that fact alone will
not require The Equity Fund to dispose of the securities of that company. In
fact the Fund may elect to continue to hold those securities, but likely would
continue its advocacy efforts. The adviser will pay all costs incurred in
connection with these advocacy efforts.
Investors should bear in mind that we consider only certain core Catholic
values when selecting investments for the Funds and when determining whether and
what advocacy actions to take. Therefore, it is likely that The Equity Fund from
time to time will own stocks of companies that engage in business and employment
activities and practices that may be perceived by some to be inconsistent with
important Catholic values other than those described above, and with respect to
which we employ no exclusionary policy and take no advocacy actions.
APPROVAL OF THE PLAN AND REORGANIZATION
The board of directors of The Catholic Funds unanimously recommends that
the shareholders of The Large-Cap Fund vote to approve the Plan and the
Reorganization described in the Plan. The board of directors approved the Plan
in the belief that it is fair to, and in the best interests of, the shareholders
of The Large-Cap Fund.
Description of the Plan
The terms and conditions under which the proposed Reorganization would be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus.
The Plan contemplates the transfer of substantially all of the assets of
The Large-Cap Fund, net of its liabilities, to The Equity Fund in exchange
solely for shares of Class A Common Stock of The Equity Fund, and the immediate
pro rata distribution of such shares to the shareholders of The Large-Cap Fund.
If approved by the shareholders of The Large-Cap Fund, the Reorganization would
occur on or about [Date?] (the "Closing Date"), or such other date as The
Catholic Funds may determine.
The Equity Fund would acquire substantially all of the assets of The
Large-Cap Fund, net of the liabilities, including without limitation all cash,
cash equivalents, securities, receivables and other property owned by The
Large-Cap Fund, but excluding cash and other assets of The Large-Cap Fund
sufficient to pay all of its accrued but unpaid liabilities as of the Closing
Date. The Equity Fund would not assume any debts, liabilities, obligations or
duties of The Large-Cap Fund. Rather, The Large-Cap Fund will reserve sufficient
assets to pay all of its liabilities as of the Closing Date. Such liabilities
may include without limitation: (a) amounts owed to shareholders of The
Large-Cap Fund with respect to capital gains distributions and/or dividends
declared but remaining unpaid as of the Closing Date; and (b) accounts payable,
taxes and other accrued and unpaid expenses, if any, incurred in the normal
operation of the business of The Large-Cap Fund up to and including the Closing
Date and/or expected to be incurred following the Closing Date in connection
with the winding up and dissolution of The Large-Cap Fund.
In consideration for the assets of The Large-Cap Fund transferred in the
Reorganization, The Equity Fund would issue to The Large-Cap Fund Class A shares
of The Equity Fund having an aggregate net asset value equal to the value of the
assets transferred by The Large-Cap Fund. The assets of The Large-Cap Fund and
the per share net asset value of The Equity Fund shares would be valued as of
the close of business on the New York Stock Exchange on the business day next
preceding the Closing Date. All such valuations would be conducted in accordance
with the policies and procedures of The Large-Cap Fund and The Equity Fund.
On the Closing Date, The Large-Cap Fund would distribute pro rata to its
shareholders of record the Class A shares of The Equity Fund received by The
Large-Cap Fund. Such distribution would be accomplished by opening accounts on
the books of The Equity Fund in the names of shareholders of The Large-Cap Fund
and by transferring the shares credited to the account of The Large-Cap Fund on
the books of The Equity Fund. Each account opened would represent the respective
pro rata number of The Equity Fund shares due to each shareholder of The
Large-Cap Fund. Fractional shares of The Equity Fund would be rounded to the
nearest thousandth of a share. Each shareholder will receive that number of
Class A shares of The Equity Fund that has an aggregate net asset value equal to
the aggregate net asset value of all of the shareholder's shares of The
Large-Cap Fund.
Accordingly, every shareholder of The Large-Cap Fund would own Class A
shares of The Equity Fund immediately after the Reorganization, the aggregate
net asset value of which is expected to be equal to the aggregate net asset
value of such shareholder's shares of The Large-Cap Fund immediately prior to
the Reorganization. Moreover, because The Equity Fund shares would be issued at
net asset value in exchange for the net assets of The Large-Cap Fund, and the
aggregate value of those assets would equal the aggregate value of The Equity
Fund shares issued in exchange therefor, the net asset value per share of The
Equity Fund would not change as a result of the Reorganization. Thus, the
Reorganization would not result in economic dilution to any shareholder of
either The Large-Cap Fund or The Equity Fund.
Prior to the Closing Date, The Large-Cap Fund would declare and pay a
dividend to its shareholders of record, so that for the short taxable year that
ends on the Closing Date, it would have declared an aggregate amount of
dividends that: (a) is equal to at least the sum of its respective net capital
gain and 90% of its investment company taxable income for such year, and (b) is
sufficient to avoid any excise tax for the calendar year in which the Closing
Date occurs.
Other Terms
The consummation of the Reorganization is subject to the conditions
precedent set forth in the Plan, including among others, (a) approval of the
Reorganization by The Large-Cap Fund shareholders; (b) receipt of a legal
opinion of Quarles & Brady LLP that the Reorganization will not result in
recognition of gain or loss for federal income tax purposes by The Equity Fund,
The Large-Cap Fund or The Large-Cap Fund shareholders; (c) the Registration
Statement on Form N-14 shall have become effective under the Securities Act of
1933, no stop orders suspending the effectiveness thereof shall have been issued
with respect thereto, and, to the knowledge of The Catholic Funds, no
investigation or proceeding for that purpose shall have been instituted or be
pending, threatened or contemplated under the Securities Act; (d) a
post-effective amendment to The Catholic Funds' Registration Statement on Form
N-1A with respect to The Equity Fund shall have become effective and shall
remain effective as of the Closing Date; and (e) The Catholic Funds shall have
received necessary relief from the SEC from certain provisions of the Investment
Company Act of 1940 which otherwise would prohibit the completion of the
Reorganization on its proposed terms.
Notwithstanding approval of The Large-Cap Fund's shareholders, the
Reorganization may be terminated at any time prior to the Closing Date by The
Catholic Funds in its discretion, and will be terminated by The Catholic Funds
if any of the conditions to Closing are not satisfied on or before the Closing
Date.
Each participant in the Reorganization will bear its own legal, accounting
and other related expenses in connection with the Reorganization. However, CFSC
has agreed to pay the cost of soliciting the vote of shareholders of The
Large-Cap Fund on the transactions contemplated in the Agreement, including
costs of preparation, printing, and distribution of proxy materials, legal and
tax opinions, transfer and stamp taxes, and the costs of printing and
distributing prospectus supplements describing such matters, and the fees of
Quarles & Brady LLP, The Catholic Funds' legal counsel, in connection with the
Reorganization. CFSC also has agreed to pay all costs by The Equity Fund
incurred in connection with the Reorganization, if any.
Background to Reorganization
Catholic Knights and the other members of the Catholic Fraternal Alliance,
through their ownership of CFSC, established The Catholic Funds in 1998 as a
means to provide their members with a financially prudent investment program
that would adhere to certain core Catholic values. Their plan contemplated that
over time The Catholic Funds would include a broad array of mutual funds that
members of the Catholic fraternals could use to develop a comprehensive
investment program suitable for their needs, and that the availability of The
Catholic Funds would attract new members to the Catholic fraternals. The
Catholic Fraternal Alliance's plan also anticipated that each member Catholic
fraternal eventually would cause many of its agents to become licensed with CFSC
to participate in the sale and distribution of shares of The Catholic Funds, and
that this sales force would effectively reach all of the members of the Catholic
fraternals within the Catholic Fraternal Alliance. The Catholic Fraternal
Alliance anticipated that Catholics would be attracted by the opportunity to
participate in investment programs with above-average performance and adherence
to important core Catholic values.
The Catholic Fraternal Alliance planned to retain a sub-adviser with
expertise and experience in investment management strategies relevant to the
investment objective and investment program of each fund. These sub-advisers
would manage the investment and reinvestment of each fund's assets on a
day-to-day basis. The Catholic Alliance Fraternal and the board of directors of
The Catholic Funds believed the use of experienced, well staffed sub-advisers
would increase the likelihood that each fund might achieve performance superior
to its peers, rather than trying to build those staffing resources at CFSC with
respect to each fund.
To this end, the Catholic Fraternal Alliance, through CFSC, organized and
sponsored The Catholic Funds in 1998 with three equity funds, namely The
Catholic Equity Income Fund, The Catholic Large-Cap Growth Fund and The Catholic
Disciplined Capital Appreciation Fund. In 2000, The Catholic Funds added The
Catholic Money Market Fund as an additional series.
To date, The Catholic Funds, including The Large-Cap Fund, have fallen
short of the asset growth and asset level projected by the original business
plan of CFSC. The small size of The Large-Cap Fund puts it at a competitive
disadvantage to its peers. This is so because, like all mutual funds, The
Large-Cap Fund has certain fixed costs, such as accounting fees, legal fees,
director fees, and minimum fees for fund accounting, transfer agent, custodial
services and other administrative services. When these fixed fees are spread
over a small asset base, they result in higher expense ratios as compared to
other mutual funds with larger asset sizes. Also, investment management and
transaction based fees frequently decline with larger asset sizes, thereby
putting small funds at a further competitive disadvantage. While CFSC has been
waiving fees and reimbursing expenses so that the annual operating expenses of
The Large-Cap Fund would not exceed 1.75% of its average daily net assets in any
fiscal year, even these measures have been insufficient to bring the expense
ratios of The Large-Cap Fund into line with its peer group. Moreover, CFSC has
indicated that it is not willing to continue to subsidize The Large-Cap Fund
indefinitely.
CFSC and the board of directors of The Catholic Funds believe that the
failure of The Large-Cap Fund to meet its expectations can be attributed to a
combination of numerous factors. First, the timing of the startup of The
Large-Cap Fund has proven unfortunate, given the general decline, high
volatility and uncertainty that has characterized the domestic stock market in
recent periods. These conditions have made investors apprehensive, and also have
made it difficult for CFSC to recruit selling representatives from among the
ranks of the Catholic fraternals. Indeed, CFSC's mutual fund sales force is only
a fraction of the size anticipated in its business plan. Finally, while the
performance of The Large-Cap Fund has been acceptable on a relative basis, it is
not so outstanding as to attract the attention of the investing public. In
short, sales and asset growth have been disappointing, and the board of
directors believes it is unlikely that these conditions will improve in the near
term.
Management of CFSC and The Catholic Funds have discussed these matters with
the board on a regular basis during recent quarterly meetings of the board.
During the summer of 2001, CFSC retained the services of Precision Marketing, a
Milwaukee-based professional mutual fund distribution/marketing consulting firm
to complete a study on The Catholic Funds and CFSC and to provide
recommendations. At a special meeting of the board of directors held on October
26, 2001, CFSC presented the results of Precision Marketing's report and CFSC's
recommendations based on that report. The report made several observations
regarding CFSC's and The Catholic Funds' growth plan, including the following:
o It appears that, while the members of the Catholic fraternals are
attracted to investment products that adhere to core Catholic
values, their investment habits do not indicate a strong
inclination to confine their entire investment program to those
types of products. Accordingly, the concept of The Catholic Funds
to build a family of mutual funds sufficient to meet the needs of
comprehensive investment programs for all of the members of the
Catholic fraternals is potentially unnecessary as a strategy to
maximize sales and asset growth.
o The Large-Cap Fund and the other two existing equity funds of The
Catholic Funds are difficult for selling representatives and
investors to differentiate and to understand how they should be
used in an overall investment program.
o It is unlikely that, in the near term, CFSC successfully can
recruit a mutual fund sales force sufficient to achieve retail
sales of shares of The Large-Cap Fund that will support asset
growth to the point where the Fund will be self-sustaining and
achieve a competitive expense ratio. Therefore, it is necessary
to consider alternative distribution channels, such as direct
sales by CFSC to members of the Catholic fraternals and members
of other Catholic groups and sales to Catholic institutions, such
as parishes, schools and the like.
o The performance of The Large-Cap Fund, while acceptable compared
to its peers, is not at a level that attracts the attention of
the investing public.
Based on these and other observations, CFSC developed and presented to the
board a new strategic plan, which, among other things, proposed the
establishment of The Equity Fund and the consolidation of all three of the
existing equity funds, including The Large-Cap Fund, with and into The Equity
Fund. The board discussed the new strategic plan and the reorganization with
management of CFSC and The Catholic Funds and a principal of Precision Marketing
at the special meeting of the board held on October 26, 2001. The board further
considered and unanimously approved the reorganization in principle at its
regular quarterly meeting held on November 12, 2001, and approved the
sub-adviser for The Equity Fund and formally approved the Plan, subject to
approval by the shareholders of The Large-Cap Fund, at a meeting held on
February 14, 2002. During those meetings the board reviewed and made inquiries
regarding Precision Marketing's report and CFSC's strategic plan, requested and
reviewed information about Mellon Equity Associates, asked questions of and
received answers from management of Mellon, made inquiries of CFSC regarding the
terms of the Reorganization and its benefits to the shareholders of The
Large-Cap Fund and consulted with legal counsel.
The board also considered alternatives, including the possibility of
liquidating The Large-Cap Fund or seeking another mutual fund as a merger
partner for The Large-Cap Fund. The latter alternative was not viewed as viable,
insofar as the possible merger candidates that adhere to Catholic values is
extremely limited, and those candidates generally face challenges comparable to
or even greater than those presently faced by The Large-Cap Fund. The board and
CFSC remain committed to provide Catholics with an investment option that
adheres to certain core Catholic values, so the board viewed liquidation as an
alternative of last resort.
Reasons For The Proposed Reorganization
The board of directors of The Catholic Funds has unanimously determined
that the interest of the shareholders of The Large-Cap Fund will not be diluted
as a result of the Reorganization, and that the Reorganization is fair to, and
in the best interests of, the shareholders of The Large-Cap Fund. In reaching
this conclusion, the board of directors considered a number of factors,
including the following:
(1) The Reorganization of The Large-Cap Fund with and into The Equity
Fund and the anticipated concurrent reorganizations of the other
two existing equity funds of The Catholic Funds with and into The
Equity Fund will create a single mutual fund with total assets of
approximately $17.0 million which will enhance the ability of The
Equity Fund to be self sustaining and to achieve an expense ratio
competitive with its peers.
(2) While the investment objective and program of The Equity Fund is
not the same as that of The Large-Cap Fund, the board of
directors believes that The Equity Fund is an appropriate
investment for the same type of investors for whom The Large-Cap
Fund is appropriate, namely, investors who want long-term capital
appreciation, can tolerate fluctuations in portfolio value and
have no need for current income from their investment in The
Equity Fund.
(3) The Equity Fund will adhere to two of the three core Catholic
values followed by The Large-Cap Fund in its investment program.
The sanctity of human life will be implemented through an
exclusionary screen process identical to that presently employed
by The Large-Cap Fund. The dignity of the human person value will
be implemented through a shareholder advocacy program, as opposed
to the exclusionary screen utilized by The Large-Cap Fund. The
board believes this advocacy approach offers greater potential
for The Equity Fund to influence and possibly reform offending
practices and policies of businesses, as opposed to an outright
exclusionary policy that likely would go unnoticed by the
offending businesses.
(4) The investment objective and passive management style of The
Equity Fund substantially reduces the issue of relative
performance to shareholders and prospective investors.
(5) The multi-class structure of The Equity Fund increases the
potential for asset growth through sales in distribution channels
other then the broker-assisted retail channel, including direct
sales by CFSC to members of the Catholic fraternals comprising
the Catholic Fraternal Alliance and other Catholics, and to
institutions such as Catholic parishes, schools and the like.
(6) The advisory fee for The Equity Fund is lower than the advisory
fee for The Large-Cap Fund and is in line with advisory fees of
other passively managed funds, which should enhance the ability
of The Equity Fund to perform competitively relative to its
peers.
(7) The fact that the Reorganization has been structured to be
tax-free to shareholders of The Large-Cap Fund.
(8) The extensive experience and past performance of Mellon Equity
Associates in managing mutual funds and other investment
portfolios with a passive management investment strategy under
social screens, and in managing index funds based on the S&P 500
Index in particular.
(9) The financial commitment that CFSC has demonstrated to The
Catholic Funds over the years, and its assurances to the board of
its continued commitment under this new strategic plan, as well
as CFSC's stated unwillingness to continue subsidizing The
Large-Cap Fund indefinitely into the future under the current
structure.
(10) The relative superiority of the benefits of the Reorganization to
shareholders of The Large-Cap Fund as compared to other
alternatives.
The board believes that, overall, the Reorganization offers a viable
solution to further the board's desire to provide shareholders of The Large-Cap
Fund with an investment option that is appropriate for them from a financial
stewardship standpoint, and which offers them the opportunity to invest their
savings in a manner that adheres to certain core Catholic values. The board
believes that the Reorganization increases the opportunity for future sales and
asset growth sufficient for The Equity Fund to become self sustaining and
competitive with its peers. Shorter term, the proposed consolidation in The
Equity Fund of the assets of The Large-Cap Fund and of the other two existing
equity funds of the Catholic Funds will create a fund with an asset level that
should immediately reduce the expense ratio as compared to The Large-Cap Fund,
and over time should enable shareholders to benefit from economies of scale that
potentially will result in an even lower overall expense ratio. There can be no
assurance, however, that these economies of scale and lower overall expense
ratios will be achieved, or that The Equity Fund will become competitive and
self-sustaining.
Federal Tax Considerations
The Reorganization is conditional upon receipt by The Catholic Funds of the
opinion from Quarles & Brady LLP described below. No rulings have been requested
from the Internal Revenue Service with respect to these matters and the opinion
of Quarles & Brady LLP is not binding on the Internal Revenue Service or the
courts. Additionally, the opinion of Quarles & Brady LLP is based upon various
representations and assumptions described in the opinion.
The opinion is based on the current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
No attempt has been made to comment on all federal income tax consequences of
the Reorganization that may be relevant to particular holders, including holders
that are subject to special rules such as dealers in securities, foreign
persons, insurance companies, and tax exempt entities.
In the opinion of Quarles & Brady LLP, the principal Federal income tax
consequences that will result from the Reorganization, under currently
applicable law, are as follows: (i) the Reorganization will qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and The Large-Cap Fund and The Equity
Fund will each be a "party to" the Reorganization within the meaning of Section
368(b) of the Code; (ii) no gain or loss will be recognized by The Large-Cap
Fund upon the transfer of substantially all of its assets to The Equity Fund in
exchange solely for Class A shares of The Equity Fund; (iii) no gain or loss
will be recognized by The Equity Fund upon its receipt of substantially all of
the assets of The Large-Cap Fund in exchange solely for shares of The Equity
Fund; (iv) no gain or loss will be recognized by any shareholder of The
Large-Cap Fund upon the liquidation of The Large-Cap Fund and the related
surrender of their shares of The Large-Cap Fund in exchange for shares of The
Equity Fund; (v) the tax basis of the shares of The Equity Fund to be received
by a shareholder of The Large-Cap Fund will be the same as the tax basis of the
shares of The Large-Cap Fund surrendered in the Reorganization; (vi) the holding
period of the shares of The Equity Fund to be received by a shareholder of The
Large-Cap Fund will include the holding period for which such shareholder held
the shares of The Large-Cap Fund exchanged therefor, provided that such shares
of The Large-Cap Fund are a capital asset in the hands of such shareholder as of
the Closing; (vii) The Equity Fund's basis in the assets acquired from The
Large-Cap Fund will be the same as the basis of such assets in the hands of The
Large-Cap Fund immediately prior to the Reorganization; (viii) the holding
period of the assets of The Large-Cap Fund in the hands of The Equity Fund will
include the period during which such assets were being held by The Large-Cap
Fund; and (ix) The Equity Fund will succeed to and take into account as of the
Closing Date the items of The Large-Cap Fund described in Section 381(c) of the
Code, subject to the conditions and limitations specified in Sections 381(b) and
(c), 382, 383 and 384 of the Code and the applicable Treasury Regulations
thereunder.
The foregoing description of the Federal income tax consequences of the
Reorganization is made without regard to the particular facts and circumstances
of any shareholder of The Large-Cap Fund. Shareholders of The Large-Cap Fund are
urged to consult their own tax advisers as to the specific consequences to them
of the Reorganization, including the applicability and effect of state, local,
foreign and other tax laws.
CAPITALIZATION
The following table shows the capitalization of Class A shares of The
Large-Cap Fund as of September 30, 2001, and of The Equity Fund giving effect to
the Reorganization and the concurrent reorganizations of the other two existing
equity funds of The Catholic Funds, based on the net assets and number of
outstanding shares of each of the three existing equity funds of The Catholic
Funds, including The Large-Cap Fund, as of September 30, 2001.
The Catholic
The Catholic Disciplined Capital The Catholic Equity The Catholic
Large-Cap Appreciation Fund Income Equity Fund
Growth Fund Fund
Net assets $5,276,634 $4,525,315 $5,372,776 $15,174,725
Net asset value per share $7.91 $8.43 $9.09 $8.43
Shares outstanding 666,850 536,765 590,954 1,789,569
OWNERSHIP OF FUND SHARES
As of December 31, 2001, no person was known to own of record or
beneficially 5% or more of the outstanding shares of The Large-Cap Fund, other
then as set forth below:
Holder Number of Shares Percentage of Outstanding Shares
------ ---------------- --------------------------------
Catholic Knights 317,886 46.76%
1100 West Wells Street
Milwaukee, WI 53233
Catholic Order of Foresters 70,845 10.42%
355 Shuman Boulevard
P.O. Box 3012
Naperville, IL 60566
Because The Equity Fund will first commence operations with and following
the Reorganization, at December 31, 2001 it had no shares outstanding.
DESCRIPTION OF SECURITIES TO BE ISSUED AND RIGHTS OF SHAREHOLDERS
The Catholic Funds is an open-end management investment company
incorporated on December 16, 1998 under the laws of the State of Maryland. The
Catholic Funds presently offers shares of four separate series or mutual funds,
each with its own investment objective, including The Large-Cap Fund. The Equity
Fund is a newly designated series of shares of The Catholic Funds which has not
yet commenced operations. Both The Large-Cap Fund and The Equity Fund are
diversified funds as defined in the 1940 Act.
The Large-Cap Fund offers its shares in a single class, namely Class A
Common Stock. These shares of The Large-Cap Fund have rights and privileges
which are identical to shares of Class A Common Stock of The Equity Fund.
The Equity Fund has three classes of shares of common stock: Class A
shares, Class C shares and Class I shares. Shares of a particular class give the
holders of those shares an interest only in the assets of that class. In a
liquidation of the Fund, shares of the same class will share pro rata in the
distribution of the net assets of the Fund with all other shares of that class.
Shares of a particular class are equal in all respects to the other shares of
that class. Each share has one vote and each fractional share has a
proportionate fractional vote on each matter presented to that class of
shareholders. When the Class A shares of The Equity Fund to be issued in the
Reorganization are issued in accordance with the terms of the Plan, they will be
fully paid and non-assessable by The Catholic Funds. Shares may be exchanged as
described in this Proxy Statement/Prospectus, but will have no other preference,
conversion, exchange or preemptive rights. Neither its Articles of
Incorporation, the 1940 Act, Maryland law nor any other authority requires The
Catholic Funds to hold any annual or special meeting of shareholders except,
under certain circumstances, to amend an investment advisory or sub-advisory
agreement or certain fundamental investment restrictions, to elect and remove
Directors, to reorganize The Catholic Funds or any series or class thereof and
to act upon certain other business matters. With respect to a liquidation, sale
of substantially all of a fund's assets, change in a fundamental investment
restriction or approval of an investment advisory or sub-advisory agreement, the
right to vote is limited to the holders of shares of the particular mutual fund
affected by the proposal.
Unless a shareholder meeting is required by the 1940 Act or other
applicable law, The Catholic Funds does not intend to have an annual or special
meeting of shareholders. However, as represented to the SEC, The Catholic Funds
will call a special meeting of shareholders for the purpose of considering the
removal of one or more Directors upon written request from shareholders holding
ten percent or more of the outstanding votes of The Catholic Funds, and The
Catholic Funds will assist those shareholders in communicating with other
shareholders as required by Section 16(c) of the 1940 Act. At such a meeting, a
quorum of shareholders (constituting one-third of all outstanding shares of The
Catholic Funds) has the power to remove one or more Directors with or without
cause by the affirmative vote of a majority of all outstanding shares of all
series and classes voting together.
SHAREHOLDER INFORMATION AND SERVICES
Shareholder Information
Share Price Calculation. Like The Large-Cap Fund, the price at which you
purchase and redeem Class A shares of The Equity Fund is equal to the net asset
value (NAV) per share (plus any applicable sales charge in the case of
purchases) determined on the effective date of the purchase or redemption. The
Fund's NAV per share is calculated at the close of the regular trading session
of the NYSE, which is usually 3:00 p.m. Central Time. We do not calculate the
net asset value for the Fund on the days when the NYSE is closed for trading.
NAV EQUALS TOTAL ASSETS MINUS LIABILITIES DIVIDED BY NUMBER OF SHARES
OUTSTANDING.
Like The Large-Cap Fund, we value securities owned by The Equity Fund at
current market value. For securities with readily available market quotations,
we use the quotations to price the security. If a security does not have a
readily available quotation, we value the security as determined in good faith
in accordance with guidance and policies established by the board of directors.
The board of directors approves the use of pricing services to assist us in the
determination of net asset values.
Dividends, Capital Gains and Taxes. This section summarizes some of the
consequences under current federal tax law of an investment in The Equity Fund.
It is not a substitute for personal tax advice. Consult your personal tax
adviser about the potential tax consequences of an investment in The Equity Fund
under all applicable tax laws.
The Equity Fund will distribute any net investment income annually and will
distribute any net realized long or short-term capital gains at least annually.
The Fund may also pay a special distribution to comply with federal tax
requirements.
If your account is a taxable account, you will pay tax on dividends and
distributions from the Fund whether you receive them in cash or additional
shares.
If you redeem shares of The Equity Fund or exchange them for shares of The
Money Market Fund, any gain on the transaction may be subject to tax.
The Equity Fund intends to make distributions that will either be taxed as
ordinary income or capital gains. Capital gains distributions may be taxable at
different rates depending on the length of time the Fund has held the assets
sold.
Federal law requires us to withhold 31% of a shareholder's reportable
payments (which include dividends, capital gain distributions and redemption
proceeds) for those who have not properly certified that the Social Security or
other taxpayer identification number they provided is correct and that he or she
is not subject to backup withholding. We do not provide information on state and
local tax consequences of owning shares in The Equity Fund.
Reinvestment of Fund Distributions
If you have requested that all of your income dividends and/or capital
gains distributions on your shares of The Large-Cap Fund be reinvested in
additional shares of that Fund, we will honor that request with respect to
distributions on the Class A shares of The Equity Fund that you receive in the
Reorganization. You will not pay any sales charge on these additional shares.
If, on the other hand, you are receiving your distributions on your shares of
The Large-Cap Fund in cash, you will continue to receive your distributions on
the Class A shares of The Equity Fund that you receive in the Reorganization in
cash. As with The Large-Cap Fund, when you receive a distribution you may have
to pay taxes whether or not you reinvest the distribution or have it paid out to
you in cash. If you have requested cash distributions and we cannot locate you,
we will reinvest your dividends and other distributions.
Distribution Fees
The Catholic Funds has adopted a plan under Rule 12b-1 of the Investment
Company Act of 1940 that allows The Equity Fund to pay distribution fees for the
sale and distribution of its shares and continuing services to shareholder
accounts. The Rule 12b-1 fee for Class A shares of The Equity Fund is computed
at the annual rate of 0.25 of 1% of the Fund's average daily net assets, which
is the same as the rule 12b-1 fee presently paid by The Large-Cap Fund. This fee
is for services provided by CFSC, in its capacity as distributor, to existing
shareholders. This shareholder servicing fee is a reimbursement fee, meaning
that it is paid only to the extent that CFSC, as the distributor, demonstrates
it has incurred expenses in servicing shareholders at least equal to the
applicable fee. Because this fee is paid on The Equity Fund's net assets on a
continuing basis, over time this fee will increase the cost of your investment
and may cost you more than paying other types of sales charges.
Redeeming Your Class A Shares of The Equity Fund
In General. You may redeem (sell) the Class A shares of The Equity Fund
that you receive in the Reorganization in the same manner as you presently may
sell your shares of The Large-Cap Fund. More precisely, you can sell your shares
on any business day. When you sell your shares you receive the net asset value
per share. If we receive your request in good order before the close of the New
York Stock Exchange ("NYSE") (normally 3:00 p.m. Central Time) you will receive
that day's price. If we receive your redemption request in good order after the
close of the NYSE, or on a holiday, weekend or a day the NYSE is closed, we will
process your transaction at the closing price on the next business day. A
redemption request is in good order when it contains all account owners'
signatures (including signature guarantees when needed) the required information
listed below, and any legally required additional information and documentation.
You can sell shares by mail, telephone or wire.
By Mail
Please include the following in your redemption request:
o Name(s) of the account owner(s);
o Account number(s);
o Amount you want to receive or the number of shares you want to
sell;
o Tax withholding information, if required, for retirement
accounts; and
o Signatures of all account owners.
YOU MUST HAVE YOUR SIGNATURE GUARANTEED FOR WRITTEN SELL ORDERS IF:
1. You want to sell shares with a value of more than $25,000;
2. You want the proceeds sent to an address other than the one
listed for your account; or
3. You want the check payable to someone other than the account
owner(s).
You can usually obtain a signature guarantee at commercial banks, trust
companies or broker-dealers. A SIGNATURE GUARANTEE IS NOT THE SAME AS A
NOTARIZED SIGNATURE. Accounts held by a corporation, trust, estate,
custodianship, guardianship, partnership or pension and profit sharing plan may
require more documentation.
REGULAR MAIL
THE CATHOLIC FUNDS, INC.
C/O US BANCORP FUND SERVICES, LLC
P.O. BOX 701
MILWAUKEE, WI 53201-0701
EXPRESS MAIL/PRIVATE DELIVERY
THE CATHOLIC FUNDS, INC.
C/O US BANCORP FUND SERVICES, LLC
THIRD FLOOR
615 EAST MICHIGAN STREET
MILWAUKEE, WI 53202
By Telephone
To make investing in The Equity Fund more convenient, as is the case for
The Large-Cap Fund, you may buy, sell or exchange shares by telephone. We have
established reasonable procedures to protect against anyone who attempts to use
the telephone service fraudulently. Please be aware, however, that The Catholic
Funds, the custodian, the transfer agent or any of their employees will not be
liable for losses suffered by you that result from following telephone
instructions reasonably believed to be authentic after verification pursuant to
these procedures. Once you have made a telephone request you cannot cancel or
modify it! During periods of extreme volume caused by dramatic economic or stock
market changes, or when the telephone system is not fully functional, you may
have difficulty reaching us by telephone and telephone transactions may be
difficult to implement at those times. We reserve the right to temporarily
discontinue or limit the telephone purchase, redemption or exchange privileges
at any time during such periods.
The following rules and/or guidelines for selling by telephone apply:
o You must call shareholder services toll-free at 1-877-222-2402;
o You must provide a form of personal identification to confirm
your identity;
o You can sell up to $25,000 worth of shares;
o The Catholic Funds will mail a check only to the person(s) named
on the account registration and only to the address on the
account;
o Retirement plan accounts are not eligible;
o You can do only one telephone redemption within any 30-day period
for each authorized account;
o Telephone redemptions are not available if the address on the
account has been changed in the preceding 60 days; and
o If we receive your request in good order before the close of the
NYSE (normally 3:00 p.m. Central Time), you will receive that
day's price.
By Wire
The following rules and/or guidelines for selling by wire apply:
o You must have given us written authorization, including the
signatures of all the owners of the account, on The Catholic
Funds Application that you completed when you opened your account
in The Large-Cap Fund, or you must complete an Account Change
Form;
o You can make a wire redemption for any amount;
o You pay a $12.00 fee for each wire redemption;
o We must receive your request in good order before the close of
the NYSE (normally 3:00 p.m. Central Time) for you to receive
that day's price; and
o Wire redemptions may not be available to you for all retirement
plan accounts.
Systematic Withdrawal Plan
You can have money automatically withdrawn from your account in The Equity
Fund on a regular basis by using our systematic withdrawal plan. The plan allows
you to receive funds or pay a bill at regular intervals. If you already have
instituted a Systematic Withdrawal Plan with respect to your account in The
Large-Cap Fund, it automatically will be continued with respect to your account
in The Equity Fund following the Reorganization. The following rules and/or
guidelines apply:
o You need a minimum of $5,000 in your account to start the plan;
o You must withdraw a minimum of $100 monthly;
o You can select the date(s) on which the money is withdrawn. If
you don't select the date(s), we will withdraw the money
automatically from your account on the 15th of the month;
o To start the plan or change the payee(s), you must notify us in
writing at least 13 business days prior to the first withdrawal
and you must have all account owner(s) sign the appropriate form;
o To stop or change your plan, you must notify us at least five
business days prior to the next withdrawal; and
o Because of sales charges on Class A shares, you must consider
carefully the costs of frequent investments in and withdrawals
from your account.
Closing Small Accounts
All shareholders in The Catholic Funds share the high cost of maintaining
accounts with low balances. To reduce this cost, we reserve the right, subject
to legal restrictions, if any, to close an account when, due to a redemption,
its value is less than $1,000. This does not apply to retirement plan accounts,
automatic investment plans or UGMA/ UTMA accounts. We will notify you in writing
before closing any account, and you will have 30 days to add money to bring the
balance up to $1,000.
Reinstatement Privilege for Class A Shares
As is the case for The Large-Cap Fund, you have 60 days after you sell
Class A shares of The Equity Fund to reinvest the dollar amount you redeemed
without having to pay another sales charge. You will pay the net asset value per
Class A share on the day when you've made your reinstatement and not on the day
when you sold your investment. The following rules apply:
o You may use this privilege only once per account;
o You must send a written request and a check for the amount you
wish to reinstate to the Fund's transfer agent;
o The dollar amount you reinstate cannot exceed the dollar amount
you sold; and
o The sale of your Class A shares may be a taxable event despite
the reinstatement.
MISCELLANEOUS
Independent Public Accountants
The firm of Arthur Andersen LLP provides independent auditing services to
all of the mutual funds of The Catholic Funds, including The Large-Cap Fund and
The Equity Fund. Arthur Andersen LLP has no direct or indirect financial
interest in The Catholic Funds, including either The Large-Cap Fund or The
Equity Fund, except for the fees it receives as independent public accountants.
No representative of Arthur Andersen LLP is expected to be present at the
Meeting.
Interests of Experts and Counsel
No expert or counsel named herein has a substantial interest in The
Catholic Funds or either of The Large-Cap or The Equity Funds, the
Reorganization, or any other transaction contemplated by this Proxy
Statement/Prospectus.
Other Matters
The board of directors of The Catholic Funds has not been informed and is
not aware that any other matter will be brought before the Meeting. However,
unless expressly indicated otherwise on the enclosed form of proxy, proxies may
be voted with discretionary authority with respect to any other matter that may
properly be presented at the Meeting or any adjournment thereof. Shareholders of
any mutual fund series of The Catholic Funds wishing to submit proposals for
inclusion in a proxy statement and form of proxy for any future shareholder
meetings should send their written proposals to the Secretary of The Catholic
Funds, 1100 West Wells Street, Milwaukee, Wisconsin 53233.
APPENDIX A
THE CATHOLIC LARGE-CAP GROWTH FUND
PLAN OF REORGANIZATION AND LIQUIDATION
This Plan of Reorganization and Liquidation (this "Plan") is made as of
this 7th day of January 2002, by The Catholic Funds, Inc. ("The Catholic Funds
"), on behalf of its two series known as The Catholic Large-Cap Growth Fund (the
"Large-Cap Fund") and The Catholic Equity Fund (the "New Equity Fund").
R E C I T A L S
WHEREAS, The Catholic Funds: (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland; (b) is
registered as an open-end, series, management investment company under the
Investment Company Act; and (c) currently has designated five separate series or
investment portfolios, including the Large-Cap Fund and the New Equity Fund;
WHEREAS, the Reorganization will comprise the transfer of all of the assets
of the Large-Cap Fund (net of its liabilities) to the New Equity Fund in
exchange for shares of New Equity Fund Class A Common Stock, and the
constructive distribution at the Effective Time of such shares to the
shareholders of the Large-Cap Fund in liquidation of the Large-Cap Fund, all
upon the terms and conditions set forth in this Plan;
WHEREAS, this Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the adoption and performance of this Plan has been authorized by
the Board of Directors of The Catholic Funds and, prior to the Closing Date,
will have been duly authorized by all other necessary corporate action on the
part of The Catholic Funds, including approval by the shareholders of the
Large-Cap Fund.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Definitions
For purposes of this Plan, the following terms shall have the respective
meanings set forth below:
1.1 "Closing" means the transfer to the New Equity Fund of the assets of
the Large-Cap Fund (net of its liabilities) against delivery to the Large-Cap
Fund of the New Equity Fund Shares as described in Section 2.1 of this Plan.
1.2 "Closing Date" that date selected by The Catholic Funds which is no
more than twenty (20) business days after the date on which the last of the
conditions precedent to the Reorganization provided in this Plan is satisfied or
lawfully waived.
1.3 "Code" means the Internal Revenue Code of 1986, as amended.
1.4 "Custodian" means US Bank N.A., acting in its capacity as custodian
with respect to the assets of the Large-Cap Fund and the New Equity Fund.
1.5 "Effective Time" means 5:01 p.m. Central Time on the Closing Date.
1.6 "Excluded Assets" shall have the meaning set forth in Section 2.3 of
this Plan.
1.7 "Investment Company Act" means the Investment Company Act of 1940, as
amended, and all of the rules and regulations adopted thereunder by the SEC.
1.8 "Large-Cap Fund" means The Catholic Large-Cap Growth Fund, a designated
series of The Catholic Funds.
1.9 "Large-Cap Fund Shareholders" means the holders of record of the issued
and outstanding shares of Common Stock of the Large-Cap Fund as of the Closing
Date.
1.10 "Large-Cap Fund Shareholder Meeting" means a special meeting of the
shareholders of the Large-Cap Fund to be convened in accordance with applicable
law and the Articles of Incorporation and Bylaws of The Catholic Funds to
consider and vote upon the approval of this Plan and the transactions
contemplated hereby.
1.11 "Large-Cap Fund Shares" means the issued and outstanding shares of
Common Stock of the Large-Cap Fund.
1.12 "New Equity Fund" means the New Equity Fund, a newly-designated series
of The Catholic Funds which will commence operations as of the first business
day following the Effective Time.
1.13 "New Equity Fund Shares" means the shares of Class A Common Stock of
the New Equity Fund to be issued pursuant to this Plan, as described in Section
2.1 hereof.
1.14 "Person" means an individual or a corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization, or other entity, as the context requires.
1.15 "Plan" means this Plan of Reorganization and Liquidation, together
with all schedules and exhibits attached hereto, as the same may be amended from
time to time in accordance with the terms hereof.
1.16 "Reorganization" means the transactions described in and contemplated
by this Plan.
1.17 "Required Large-Cap Fund Shareholder Vote" shall have the meaning
specified in Section 3.1 of this Plan.
1.18 "SEC" means the United States Securities and Exchange Commission.
1.19 "Securities Act" means the Securities Act of 1933, as amended, and all
rules and regulations adopted by the SEC pursuant thereto.
1.20 "The Catholic Funds" means The Catholic Funds, Inc., a corporation
which: (a) is duly organized, validly existing and in good standing under the
laws of the State of Maryland; (b) is registered as an open-end, series,
management investment company under the Investment Company Act; and (c)
presently has designated five separate series of its Common Stock, par value
$.001 per share, including the Large-Cap Fund and the New Equity Fund.
1.21 "The Catholic Funds Registration Statement" means the Registration
Statement on Form N-1A of The Catholic Funds, as amended (1933 Act Reg. No.
333-69803; 1940 Act File No. 09177).
(a) "Large-Cap Fund Prospectus" means the current prospectus relating
to the Large-Cap Fund which is included in The Catholic Funds Registration
Statement, as such Prospectus may be supplemented or amended as of the
relevant time of inquiry.
(b) "New Equity Fund Prospectus" means the current prospectus relating
to the New Equity Fund which is included in The Catholic Funds Registration
Statement, as such Prospectus may be supplemented or amended as of the
relevant time of inquiry.
2. Reorganization and Liquidation of the Large-Cap Fund.
2.1 Transfer of Large-Cap Fund Assets; Issuance of New Equity Fund Shares.
At or prior to the Effective Time, all of the assets of the Large-Cap Fund,
except the Excluded Assets, shall be delivered to the Custodian for the account
of the New Equity Fund, in exchange for, and against delivery to the Large-Cap
Fund at the Effective Time of, that number of shares of Class A Common Stock of
the New Equity Fund (including, if applicable, fractional shares rounded to the
nearest thousandth of one whole share) (the "New Equity Fund Shares") having an
aggregate net asset value equal to the net value of the assets of the Large-Cap
Fund so delivered, all determined and adjusted as provided in Section 2.2 of
this Plan. As of the Effective Time and following delivery of such assets to the
Custodian, the New Equity Fund shall receive good and marketable title to such
assets free and clear of all liens, security interests, pledges, charges, claims
or encumbrances of any and every kind.
2.2 Computation of Net Asset Value.
(a) The net asset value of the New Equity Fund Shares and the net
value of the assets of the Large-Cap Fund transferred pursuant to this Plan
shall, in each case, be determined as of the close of business on the New
York Stock Exchange on the Closing Date.
(b) The net asset value of the New Equity Fund Shares shall be
computed in accordance with the practices and procedures of the New Equity
Fund described in the New Equity Fund Prospectus. Likewise, the value of
the assets of the Large-Cap Fund to be transferred pursuant to this Plan
shall be computed in accordance with the practices and procedures of the
Large-Cap Fund described in the Large-Cap Fund Prospectus.
2.3 Excluded Assets. There shall be deducted from the assets of the
Large-Cap Fund described in Section 2.1 all organizational expenses and other
assets of the Large-Cap Fund that would not have value to the New Equity Fund,
as well as cash in an amount estimated by The Catholic Funds to be sufficient to
pay all liabilities of the Large-Cap Fund accrued and unpaid as of the Effective
Time, including without limitation: (a) amounts owed or to be owed to any
Large-Cap Fund Shareholder, including declared but unpaid dividends and capital
gains distributions; (b) accounts payable, taxes and other accrued and unpaid
expenses, if any, incurred in the normal operation of the business of the
Large-Cap Fund up to and including the Closing Date and estimated to be incurred
after the Closing Date in connection with winding up the affairs of, and
liquidating, the Large-Cap Fund; and (c) costs and expenses incurred by the
Large-Cap Fund in connection with the Reorganization, including preparing and
distributing proxy materials, soliciting proxies and holding the Large-Cap Fund
Shareholder Meeting (together the "Excluded Assets") except to the extent such
expenses are borne by Catholic Financial Services Corporation or another party.
2.4 Closing of Books. The assets of the Large-Cap Fund and the per share
net asset value of the New Equity Fund Shares shall be valued as of the close of
trading on the New York Stock Exchange on the Closing Date. The stock transfer
books of the Large-Cap Fund shall be permanently closed as of the close of
business on the Closing Date, and only requests for the redemption of shares of
the Large-Cap Fund received in proper form prior to the close of trading on the
New York Stock Exchange on the Closing Date shall be accepted by the Large-Cap
Fund. Redemption requests thereafter received by the Large-Cap Fund shall be
deemed to be redemption requests for New Equity Fund Shares (assuming that the
transactions contemplated by this Plan have been consummated) to be distributed
to the Large-Cap Fund Shareholders pursuant to this Plan.
2.5 Declaration of Dividends and Distributions by the Large-Cap Fund. On or
prior to the Closing Date, the Large-Cap Fund will declare a dividend to
shareholders of record of the Large-Cap Fund as of the date of such dividend
declaration so that, for the short taxable year of the Large-Cap Fund ending on
the date on which it is completely liquidated and discontinued, the Large-Cap
Fund will have declared an aggregate amount of dividends which: (a) is equal to
at least the sum of its net capital gain, if any, (within the meaning of Section
852(b)(3) of the Code) and ninety percent (90%) of its investment company
taxable income (determined under Section 852(b)(2) of the Code, but without
regard to Section 852(b)(2)(D) of the Code) for such taxable year; and (b) is
sufficient to avoid any excise tax on the Large-Cap Fund under Section 4982 of
the Code for the calendar year in which the Closing Date occurs, provided that
the dividends that have been so declared but have not been paid on or before
such Closing Date are in fact paid by the Large-Cap Fund prior to the end of
such calendar year to the shareholders of the Large-Cap Fund as of the record
date for determining shareholders entitled to receive payment of such dividend.
2.6 Liquidation. As soon as reasonably practicable after the Closing Date,
the Large-Cap Fund shall pay or make provisions for all of its debts,
liabilities and taxes, and distribute all remaining assets, including the New
Equity Fund Shares received by it in the Reorganization and the balance, if any,
of the Excluded Assets, to the Large-Cap Fund Shareholders, and the Large-Cap
Fund's status as a designated series of shares of The Catholic Funds shall be
terminated.
2.7 Issuance of New Equity Fund Shares. On the Closing Date, The Catholic
Funds shall instruct its transfer agent to record on The Catholic Funds' books
and records the pro rata interest of each of the Large-Cap Fund Shareholders in
the New Equity Fund Shares in the name of such Large-Cap Fund Shareholder. All
Large-Cap Fund Shares then issued and outstanding shall thereupon be canceled on
the books of the New Equity Fund. New Equity Fund shall forward a confirmation
of such ownership to each of the Large-Cap Fund Shareholders. No redemption or
repurchase of such New Equity Fund Shares credited to any Large-Cap Fund
Shareholder in respect of his or her Large-Cap Fund Shares which are represented
by an unsurrendered stock certificate shall be permitted until such certificate
has been surrendered to The Catholic Funds for cancellation, or if such
certificate is lost or misplaced, until a lost certificate affidavit has been
executed and delivered to The Catholic Funds.
2.8 Liabilities and Expenses. The New Equity Fund shall not assume any
liability of the Large-Cap Fund, and the Large-Cap Fund shall use its best
efforts to discharge all known liabilities, so far as may be possible, prior to
the Closing Date.
3. Conditions Precedent to Closing
The Closing of the Reorganization is subject to the conditions that on or
before the Closing Date:
3.1 Approval of Plan By Shareholders of the Large-Cap Fund. The Large-Cap
Fund Shareholder Meeting shall have been duly called and held in accordance with
the provisions of the Investment Company Act, the Maryland General Corporate Law
and the Articles of Incorporation and Bylaws of The Catholic Funds, including
compliance with the notice and quorum requirements thereunder, and at such
meeting the Plan shall have been approved by the affirmative vote of the lesser
of (a) 67% or more of the Large-Cap Fund Shares present at the Large-Cap Fund
Shareholder Meeting, if shareholders who are the owners of more than 50% of the
Large-Cap Fund Shares outstanding and entitled to vote on the Plan at the
Large-Cap Fund Shareholder Meeting are present at such Meeting in person or by
proxy; or (b) more than 50% of the Large-Cap Fund Shares outstanding and
entitled to vote on approval of the Plan at the Large-Cap Fund Shareholder
Meeting (the "Required Large-Cap Fund Shareholder Vote").
3.2 No Adverse Actions. On the Closing Date, no action, suit or other
proceeding shall be pending before any court or governmental agency in which it
is sought to restrain or prohibit or obtain damages or other relief in
connection with this Plan or the transactions contemplated hereby.
3.3 Consents and Approvals. All consents of other parties and all other
consents, orders and permits of federal, state and local regulatory authorities
(including those of the SEC and of state Blue Sky or securities authorities)
deemed necessary by The Catholic Funds to permit consummation, in all material
respects, of the transactions contemplated hereby, shall have been obtained.
3.4 Effectiveness of Registration Statement on Form N-14. The Catholic
Funds' Registration Statement on Form N-14 to be prepared and filed with the SEC
with respect to the New Equity Fund Shares, including the Proxy Statement of the
Large-Cap Fund soliciting approval of the Plan at the Large-Cap Fund Shareholder
Meeting constituting a part thereof, shall have become effective under the
Securities Act and no stop order suspending the effectiveness thereof shall have
been issued and, to the knowledge of The Catholic Funds, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the Securities Act.
3.5 Continued Effectiveness and Amendment of Registration Statement on Form
N-1A.
(a) The Catholic Funds Registration Statement including the Large-Cap
Fund Prospectus shall remain effective with the SEC from and after the date
of this Agreement and continuing up to and including the Closing Date, and
no stop order suspending the effectiveness thereof shall have been issued
and, to the knowledge of The Catholic Funds, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the Securities Act.
(b) A Post-Effective Amendment to The Catholic Funds Registration
Statement shall have been filed by The Catholic Funds to include therein
the New Equity Fund Prospectus registering shares of the New Equity Fund to
be offered to the public, and such post-effective amendment shall have
become effective under the Securities Act and no stop orders suspending the
effectiveness thereof shall have been issued and, to the knowledge of The
Catholic Funds, no investigation or proceeding for that purpose shall have
been instituted or be pending, threatened or contemplated under the
Securities Act.
3.6 Disposition of Ineligible Investments by New Equity Fund. Immediately
following the Closing Date, the New Equity Fund shall sell, liquidate or
otherwise dispose of such securities and instruments (or portions thereof)
transferred to it in the Reorganization from the Large-Cap Fund as and to the
extent necessary to enable the New Equity Fund to own or hold all of the
remaining securities and instruments so transferred from the Large-Cap Fund's
investment portfolio without causing a violation of any of the New Equity Fund's
investment restrictions or policies; provided that, after taking into account
sales of securities and instruments (or portions thereof) by the Large-Cap Fund
prior to the Reorganization for the purposes of meeting the investment
objectives and policies of the New Equity Fund, the New Equity Fund will hold at
least 34% of the historic assets of the Large-Cap Fund.
3.7 Declaration of Dividends and Distributions by the Large-Cap Fund. Prior
to or on the Closing Date, the Large-Cap Fund shall have declared a dividend or
dividends which, together with all previous such dividends, shall have the
effect of distributing to its shareholders all of the Large-Cap Fund's
investment company taxable income for taxable years ending on or prior to the
Closing Date (computed without regard to any deduction for dividends paid) and
all of its net capital gain realized in taxable years ending on or prior to the
Closing Date (after reduction for any capital loss carried forward).
3.8 Acquisition of Substantially All of the Assets of the Large-Cap Fund.
The assets of the Large-Cap Fund to be acquired by the New Equity Fund shall
constitute at least 90% of the fair market value of the net assets and at least
70% of the fair market value of the gross assets of the Large-Cap Fund
immediately prior to the Reorganization. For these purposes, assets used by the
Large-Cap Fund to pay the expenses it incurs in connection with this Agreement
and the Reorganization and to effect all shareholder redemptions and
distributions (other than regular, normal dividends and regular, normal
redemptions pursuant to the Investment Company Act, and not in excess of the
requirements of Section 852 of the Code, occurring in the ordinary course of the
Large-Cap Fund's business as an open-end diversified management investment
company) after the date of this Agreement shall be included as assets of the
Large-Cap Fund immediately prior to the Reorganization.
3.9 Tax Opinion. The Catholic Funds shall have received on or before the
Closing Date an opinion of Quarles & Brady LLP regarding the tax consequences of
the Reorganization in substantially the form attached as Exhibit 1 attached to
this Agreement.
3.10 Regulatory Relief. The Catholic Funds shall have received from the SEC
such exemptive, no-action or other formal or informal relief from the applicable
prohibitions of Section 17 under the Investment Company Act as may be necessary
to enable The Catholic Funds to consummate the Reorganization consistent with
said Section 17.
4. Expenses
The Large-Cap Fund and the New Equity Fund will bear their respective
expenses in connection with the entering into and carrying out the provisions of
this Plan; provided, however, it is not expected that the New Equity Fund will
incur any expenses; provided further, however, that it is expected that Catholic
Financial Services Corporation will bear the expenses of the Large-Cap Fund.
5. Termination
5.1 By The Catholic Funds. This Plan may be terminated at any time by The
Catholic Funds, and will be terminated by The Catholic Funds if any of the
conditions precedent to the Reorganization set forth in Article 3 have not been
satisfied as of the Closing Date.
5.2 Effects of Termination. In the event of any such termination, there
shall be no liability for damage on the part of either the Large-Cap Fund or the
New Equity Fund.
6. Amendment
This Plan may be amended, modified or supplemented in such manner as The
Catholic Funds determines; provided, however, that following approval of the
Plan by the Required Large-Cap Fund Shareholder Vote, no such amendment may have
the effect of changing the provisions for determining the number of New Equity
Fund Shares to be issued to the Large-Cap Fund Shareholders pursuant to this
Plan to the detriment of the Large-Cap Fund Shareholders without their further
approval.
7. Miscellaneous
7.1 Headings. The Article and Section headings contained in this Plan will
have reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
7.2 Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the State of Maryland, The Catholic Funds' Articles
of Incorporation and Bylaws, and the Large-Cap and New Equity Funds
Prospectuses.
IN WITNESS WHEREOF, on the authority of the Board of Directors of The
Catholic Funds, this Plan has been executed by its duly authorized officer as of
the day and year first written above.
BY ORDER OF THE BOARD OF DIRECTORS
OF THE CATHOLIC FUNDS, INC.
(On Behalf of The Catholic Large-Cap
Growth and New Equity Funds)
By: /s/ Allan G. Lorge
--------------------------------
Allan G. Lorge, President
THE CATHOLIC FUNDS, INC.
THE CATHOLIC LARGE-CAP GROWTH FUND
Revocable Proxy for Special Meeting of Shareholders. This Proxy is Solicited on
Behalf of the Board of Directors.
The undersigned hereby appoints Daniel Steininger, Allan Lorge or Theodore
Zimmer, and each of them, proxy, with full power of substitution, to vote all
shares of stock the undersigned is entitled to vote at the Special Meeting of
Shareholders of The Catholic Large-Cap Growth Fund to be held at ___________,
________________________, ___________________, Wisconsin at ________, on
___________________, 2002 or at any adjournment thereof, with respect to the
matters set forth on this proxy and described in the Notice of Special Meeting
and Proxy Statement/Prospectus, receipt of which is hereby acknowledged.
Shares listed below represent the total number of shares of The Catholic
Large-Cap Growth Fund registered in the name printed below.
Dated: _____________________________, 2002
------------------------------------------------
(Please sign exactly as name appears at left)
------------------------------------------------
(If stock is owned by more than one person,
all owners should sign. Persons signing as
executors, administrators, trustees or in
similar capacities should so indicate.)
- --------------------------------------------------------------------------------
Shares represented by this proxy will be voted as directed by the stockholder.
IF NO DIRECTION IS SUPPLIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. Please
vote by filling in the appropriate boxes below, as shown, using blue or black
ink or dark pencil.
- --------------------------------------------------------------------------------- -------- ---------- ----------
FOR AGAINST ABSTAIN
1. To approve a Plan of Reorganization and Liquidation (the "Plan") providing ____ _____ _____
for (a) the transfer of substantially all of the assets of The Catholic
Large-Cap Growth Fund (net of its liabilities) to The Catholic Equity Fund
in exchange solely for shares of The Catholic Equity Fund, followed by (b)
the distribution of shares of The Catholic Equity Fund, pro rata, to The
Catholic Large-Cap Growth Fund shareholders in dissolution of The Catholic
Large-Cap Growth Fund.
2. In their discretion, the proxies are authorized to vote on such other
matters as may properly come before the meeting.
- --------------------------------------------------------------------------------- -------- ---------- ----------
February __, 2002
Dear Shareholder:
I am writing to you about a matter of primary importance to all
shareholders of The Catholic Disciplined Capital Appreciation Fund (the "Capital
Appreciation Fund"). We believe it would be in your best interests if the
Capital Appreciation Fund were combined with and become a part of The Catholic
Equity Fund (the "Equity Fund"), a newly designated series of The Catholic
Funds. In the process, your shares in the Capital Appreciation Fund would be
exchanged for shares of the Equity Fund, and you thereby would become a
shareholder of the Equity Fund (the "Reorganization"). Your board of directors
is recommending simultaneous consolidations of our other two equity funds,
namely The Catholic Equity Income Fund and The Catholic Large-Cap Growth Fund,
into this new Equity Fund.
The proposed transactions would make it possible for you to enjoy the
potential benefits that can arise from owning shares in a larger combined fund,
including a potentially lower operating expense ratio, while at the same time
allowing you to continue a broad market equity investment that adheres to
certain core Catholic values. The transaction would be structured as a tax-free
reorganization, meaning that, for federal income tax purposes, you would
recognize no gain or loss on the exchange of your shares in the Capital
Appreciation Fund for shares in the Equity Fund.
The enclosed Proxy Statement/Prospectus describes and seeks your approval
of a Plan of Reorganization and Liquidation (the "Plan") that sets forth the
terms of the Reorganization. Those materials also describe the similarities and
differences between the Capital Appreciation and Equity Funds. As a result of
the Reorganization proposed in the Plan, substantially all of the assets of the
Capital Appreciation Fund would be transferred to the Equity Fund, and you would
receive shares of the Equity Fund in exchange for your Capital Appreciation Fund
shares. Immediately following the transfer, we expect that the dollar value of
your account will be the same as it was immediately before the transfer. No
sales charge would be imposed on this exchange. The board of directors of The
Catholic Funds has unanimously approved the transaction for the reasons
described in the Proxy Statement/Prospectus.
This package contains information about the proposal and includes all the
material you will need to vote by mail. The current prospectus for the Capital
Appreciation Fund is enclosed for your convenience.
Attached are answers to questions we anticipate some of you may have.
Please read the enclosed Proxy Statement/Prospectus carefully and cast your vote
by completing and returning the enclosed proxy card. To help avoid additional
expense, be sure to vote promptly. If you have any questions, please call us at
1-877-846-2372. We will be glad to help you.
Thank you for your consideration and continued support.
Sincerely,
Allan G. Lorge, President
IMPORTANT INFORMATION TO HELP YOU
UNDERSTAND AND VOTE ON THE REORGANIZATION
Although you should read the full text of the enclosed Proxy
Statement/Prospectus, we hope this brief overview will explain why The Catholic
Funds board of directors believes you should vote FOR the Plan of Reorganization
and Liquidation (the "Plan") involving the transfer of substantially all of the
assets of The Catholic Disciplined Capital Appreciation Fund (the "Capital
Appreciation Fund") to The Catholic Equity Fund (the "Equity Fund"), a newly
designated series of The Catholic Funds, Inc. ("The Catholic Funds"), and the
exchange of your shares in the Capital Appreciation Fund for shares of the
Equity Fund in a tax-free reorganization (the "Reorganization").
Why has your board of directors decided to recommend the Plan?
The board unanimously approved the Plan and the Reorganization primarily
because it would enable the shareholders of the Capital Appreciation Fund
to own shares of a larger combined fund with a simpler investment strategy,
the same sales load and improved fee structure, and because it offers
shareholders the opportunity to continue to participate in a broad based
equity fund that adheres to certain core Catholic values. In addition, the
board believes the combined Equity Fund offers the potential for increased
sales and resulting growth in assets through access to multiple
distribution channels, which should bring economies of scale and
efficiencies that frequently are associated with larger funds. The
Reorganization is also intended to be tax-free to the Capital Appreciation
Fund shareholders.
The board considered alternatives to the Reorganization, including seeking
another existing fund as a merger partner for the Capital Appreciation Fund
or simply liquidating the Capital Appreciation Fund. The board concluded
that the Reorganization is the best alternative given the board's
commitment, and the dedication of Catholic Financial Services Corporation,
the adviser and distributor for the Capital Appreciation Fund, to provide
shareholders with a broad equity investment product that adheres to certain
core Catholic values.
What are the anticipated advantages of the Reorganization to shareholders?
To date, the Capital Appreciation Fund has not generated sales and asset
growth at the level that CFSC anticipated when it started this Fund in May
of 1999. For reasons discussed in more detail in the accompanying Proxy
Statement/Prospectus, CFSC and the board of The Catholic Funds do not
believe that sales will accelerate significantly in the near future under
the Capital Appreciation Fund's current structure. The small size of the
Capital Appreciation Fund puts it a competitive disadvantage with its peers
and with alternative investment options. The proposed consolidation of the
Capital Appreciation Fund and the anticipated simultaneous consolidations
of The Catholic Funds' other two existing equity funds into the new Equity
Fund would result in a significant and immediate increase in the asset size
of the consolidated Fund. Also, the Equity Fund has multiple classes of
shares designed to facilitate distribution in different channels to reach a
broader base of prospective investors. Finally, the Equity Fund will be
passively managed to substantially replicate the composition of the S&P 500
Index, which will minimize the Equity Fund's reliance for performance on
the subjective judgment and stock selection of the portfolio manager. The
board believes the features of this new Equity Fund will appeal to a
broader base of investors, will increase the potential for future growth in
sales and assets, and will enhance the ability of the Equity Fund to
compete more effectively with its peers and with other equity investment
alternatives. Most importantly, these benefits will be available to
shareholders while the Equity Fund at the same time adheres to certain core
Catholic values in its investment program.
Will the Equity Fund adhere to the same Catholic values in the same manner as
the Capital Appreciation Fund?
Like the Capital Appreciation Fund, the Equity Fund will adhere to the
Catholic value of the sanctity of human life by not investing in the stocks
of companies that directly participate in abortion. The Equity Fund also
will adhere to the Catholic value of the dignity of the human person.
However, rather than avoiding investing in stocks of companies that have
business practices or policies that are inconsistent with this value, the
adviser instead will initiate shareholder advocacy programs designed to
persuade those companies to reform their offending practices and policies.
Given the global trend toward the reduction in nuclear arms, biological
weapons and other weapons of mass and indiscriminate destruction, and given
recent technological developments that have produced more effective
precision weapons, the board has concluded that our efforts and resources
are best focused on adherence to these two values. Therefore, unlike the
Capital Appreciation Fund, the Equity Fund will not screen for or monitor
adherence to the Catholic value of no unjust wars.
Do the Equity Fund's investment objective and policies resemble those of the
Capital Appreciation Fund?
Both Funds are designed for investors who want long-term capital
appreciation, can tolerate fluctuations in portfolio value and have no need
for current income from their investment in the Fund. The Capital
Appreciation Fund's objective is long-term capital growth with controlled
risk, which it seeks to achieve by investing primarily in common stocks of
companies in a broad range of market capitalizations. The Capital
Appreciation Fund is managed using a systematic, computer-driven model to
objectively identify attractive stocks solely based on numerical measures
of growth and value. The continuous application of this model is designed
to ensure that stocks are evaluated solely on their relative values, and
are not influenced by analyst biases. The model used by the Capital
Appreciation Fund to select stocks was developed by its sub-adviser, and
includes limits on industry and individual stock concentrations designed to
control portfolio risk.
The investment objective of the Equity Fund is to obtain a total return
from dividends and capital gains which is equal to the total return of the
S&P 500 Index, less the Fund's operating expenses. The Equity Fund employs
a passive investment management strategy to achieve its objective, in which
the portfolio manager constructs an investment portfolio that substantially
conforms to the composition and market weightings of the stocks of
companies included in the S&P 500 Index. Because of the Equity Fund's
exclusionary sanctity of human life screen, as well as for other reasons
described in more detail in the accompanying Proxy Statement/Prospectus,
the Equity Fund's investment portfolio will not precisely match the S&P 500
Index. However, its passive management strategy minimizes reliance on the
subjective judgment of the portfolio manager to select and dispose of
stocks and other investments. We expect that its performance will closely
track that of the S&P 500 Index.
What are the federal tax implications of the Reorganization?
In order for the Reorganization to be completed, the board of directors of
The Catholic Funds must obtain a legal opinion from its counsel that,
subject to certain conditions, the transaction will be tax-free for federal
income tax purposes to shareholders of the Capital Appreciation Fund and to
each of the Funds. However, you will recognize a capital gain (or loss) if
you sell your Capital Appreciation Fund shares before the Reorganization or
if you sell or exchange the Equity Fund shares you receive in the
Reorganization.
What will be the size of the Equity Fund after the Reorganization and what
impact is that expected to have on the shareholders of the Capital Appreciation
Fund?
As of December 31, 2001, the net assets of the Capital Appreciation Fund
and the combined net assets of the other two existing equity funds of The
Catholic Funds were approximately $5.0 million and $12.0 million,
respectively. Accordingly, if the Reorganization of the Capital
Appreciation Fund and the other two existing equity funds into the Equity
Fund had occurred on December 31, 2001, the net assets of the combined
Equity Fund after the Reorganization would have been approximately $17.0
million. As a result, current shareholders of the Capital Appreciation Fund
may derive benefits such as relatively lower risk and costs that typically
are associated with a larger fund with a more diversified portfolio.
How will you determine the number of shares of the Equity Fund that I will
receive in the Reorganization?
As of the opening of trading on the date that the Reorganization is
completed, Capital Appreciation Fund shareholders will receive the number
of full and fractional shares of the Equity Fund that is equal in dollar
value to the aggregate net asset value of their shares of the Capital
Appreciation Fund on that date. That closing date is expected to be on or
about March __, 2002.
Will I have to take any steps to receive shares of the Equity Fund in the
Reorganization?
If the Reorganization is approved by shareholders of the Capital
Appreciation Fund at the meeting and subsequently is completed, you will
automatically receive the number of shares of the Equity Fund which you are
entitled to receive in exchange for your shares of the Capital Appreciation
Fund. You will not be required to take any steps to receive these shares.
Will I be able to make additional investments in the Equity Fund after the
Reorganization?
You will be free to make additional investments in the Equity Fund after
the Reorganization, on the terms generally applicable to purchases of such
shares as described in the Equity Fund's then current prospectus.
What if there are not enough votes to reach a quorum by the scheduled date of
the special shareholder meeting, or if insufficient votes are received to
approve the Reorganization?
Catholic Knights, the ultimate parent company of Catholic Financial
Services Corporation, the adviser and distributor of the Capital
Appreciation Fund, holds a majority of all outstanding shares of the
Capital Appreciation Fund. Catholic Knights has indicated its present
intention to vote all of its shares in favor of the Plan and the
Reorganization. Therefore, the representation of Catholic Knights' shares
at the meeting and its vote in favor of the Plan and Reorganization will be
sufficient both to constitute a quorum for the conduct of business at the
meeting and for approval of the Plan and the Reorganization.
How many votes am I entitled to cast?
You are entitled to one vote for each share (and a fractional vote for each
fractional share) of the Capital Appreciation Fund that you owned on the
record date. The record date is February __, 2002.
How do I vote my shares?
Voting is easy. You can vote your shares by completing and signing the
enclosed proxy card and mailing it in the enclosed postage-paid envelope.
If you need any assistance or have any questions concerning the proposal or
how to vote your shares, please call The Catholic Funds at (877) 846-2372.
How do I sign the proxy card?
Individual Accounts: Shareholders should sign exactly as their
names appear on the account registration
shown on the card.
Joint Accounts: Both owners must sign exactly as their names
appear in the registration.
All Other Accounts: The person signing must indicate his or her
capacity. For example, a trustee for a trust
or other entity should sign, "Jane F. Doe,
Trustee."
This material may be used only when preceded or accompanied by a
prospectus. Catholic Financial Services Corporation, distributor.
THE CATHOLIC DISCIPLINED CAPITAL APPRECIATION FUND
(A Series of The Catholic Funds, Inc.)
THE CATHOLIC EQUITY FUND
(A Series of The Catholic Funds, Inc.)
PROXY STATEMENT/PROSPECTUS
February ___, 2002
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of The Catholic Funds, Inc.
("The Catholic Funds" or "CFI") for use at a Special Meeting of Shareholders of
The Catholic Disciplined Capital Appreciation Fund ("The Capital Appreciation
Fund"), a series of The Catholic Funds, to be held at [time?], Central Time, on
[day?], [date?], 2002 at [place?] (the "Meeting"). Proxy materials are being
mailed to shareholders of The Capital Appreciation Fund on or about [date?],
2002.
The purpose of the Shareholder Meeting is to consider and vote on a Plan of
Reorganization and Liquidation (the "Plan") involving The Capital Appreciation
Fund and The Catholic Equity Fund ("The Equity Fund"), another series of The
Catholic Funds. A copy of the Plan is attached to this Proxy
Statement/Prospectus as Appendix A.
Pursuant to the Plan, substantially all of the assets of The Capital
Appreciation Fund, net of its liabilities, would be transferred to and acquired
by The Equity Fund in exchange solely for shares of common stock of The Equity
Fund. Shares of The Equity Fund received by The Capital Appreciation Fund in the
transaction would then be distributed pro-rata to shareholders of The Capital
Appreciation Fund, and The Capital Appreciation Fund would be liquidated and
discontinued as a separate mutual fund portfolio of The Catholic Funds (these
transactions are referred to together in this Proxy Statement/Prospectus as the
"Reorganization"). For each shareholder of The Capital Appreciation Fund, it is
expected that the dollar value of your account in The Equity Fund immediately
after the Reorganization will be the same as the dollar value of your account in
The Capital Appreciation Fund immediately prior to the Reorganization. The
Reorganization is intended to qualify as a tax-free reorganization, meaning that
shareholders of The Capital Appreciation Fund will not recognize any gain or
loss through the exchange of their shares in the Reorganization. No sales charge
or commission will be imposed upon The Equity Fund shares issued in the
Reorganization.
Similar reorganization transactions affecting the other two existing equity
funds of The Catholic Funds, namely The Catholic Equity Income Fund and The
Catholic Large-Cap Growth Fund, are being recommended for approval by the
shareholders of those two funds. Subject to shareholder approval, those two
funds will be consolidated with and into The Equity Fund concurrent with the
completion of the Reorganization of The Capital Appreciation Fund with and into
The Equity Fund. As a result, The Equity Fund's assets would consist of the
combined assets of all three of the existing equity funds of The Catholic Funds.
However, the Reorganization of The Capital Appreciation Fund is not dependent
upon the approval and concurrent consolidation of the other two existing equity
funds with and into The Equity Fund. Rather, subject to approval by the
shareholders of The Capital Appreciation Fund and the satisfaction of other
customary closing conditions to a transaction of this nature, the Reorganization
will be completed regardless of whether either or both of the reorganizations
affecting the other two existing equity funds are approved and completed.
The Equity Fund is a newly designated series of The Catholic Funds. While
The Equity Fund and The Capital Appreciation Fund are similar in many respects,
they also differ in several important respects. Both Funds are designed for
investors who want long-term capital appreciation, but who can tolerate
fluctuations in portfolio value and have no need for current income from their
investment. The investment objective The Capital Appreciation Fund is long-term
capital appreciation, while The Equity Fund seeks to obtain a total return from
dividends and capital gains which is equal to the total return of the S&P 500
Index, less the Fund's operating expenses. Both Funds seek to attain their
objectives by investing in a portfolio of common stocks of companies selected by
the application of an investment strategy designed to minimize reliance on the
subjective judgment of the portfolio manager. The Capital Appreciation Fund
determines what common stocks to purchase by the application of a quantitative
investment strategy based on an analytical, computerized model designed by the
Fund's sub-adviser. The Equity Fund, on the other hand, constructs and holds a
portfolio of common stocks which substantially replicates the composition and
market capitalization weightings of the S&P 500 Index. While both investment
strategies are somewhat passive, the strategy of The Equity Fund relies less on
the skill and judgment of the sub-adviser than that of The Capital Appreciation
Fund, insofar as the analytical, computerized model used by The Capital
Appreciation Fund was designed and constructed, and from time to time is
modified and refined, based upon the judgment, skill and experience of the
sub-adviser's personnel. Nonetheless, approximately two-thirds of the common
stocks selected and held by The Capital Appreciation Fund through the
application of this analytical, computerized model historically have consisted
of stocks of companies included in the S&P 500 Index.
One important way in which The Equity Fund differs from The Capital
Appreciation Fund relates to the core Catholic values and the means of their
implementation. Like The Capital Appreciation Fund, the Equity Fund will avoid
investing in companies whose policies and practices are inconsistent with the
sanctity of human life. However, rather than avoiding investment in companies
whose policies and practices may be inconsistent with other important Catholic
values, The Equity Fund instead will engage in shareholder advocacy activities
in an effort to persuade those companies to change their offensive policies and
practices. The Equity Fund anticipates that its shareholder advocacy activities
will focus principally on policies and practices that affect the dignity of the
human person in the workplace. Advocacy activities might include initiating
letter writing campaigns to the management of companies in which The Equity Fund
invests and/or initiating a dialog with managerial personnel, proposing
shareholder resolutions at annual and special meetings of shareholders of the
companies in which The Equity Fund invests (perhaps in a cooperative effort with
other socially and/or morally responsible investors), participating in proxy
campaigns for the election of directors of those companies, and the like.
The principal executive office of The Catholic Funds is located at 1100
West Wells Street, Milwaukee, Wisconsin 53233, telephone: (877) 846-2372.
This Proxy Statement/Prospectus sets forth concisely the information that
shareholders of The Capital Appreciation Fund should know before voting on the
Plan and the Reorganization. It also constitutes an offering of shares of The
Equity Fund. Please read this Proxy Statement/Prospectus carefully and retain it
for future reference.
The Securities and Exchange Commission has not approved or disapproved The
Equity Fund shares to be issued in the Reorganization or determined if this
Proxy Statement/Prospectus is truthful or complete. If anyone tells you
otherwise, they are committing a crime.
Neither The Catholic Funds nor Catholic Financial Services Corporation is
sponsored or endorsed by the Roman Catholic Church, nor has the Church approved
or disapproved the shares of The Catholic Funds.
A Statement of Additional Information, dated February __, 2002, relating to
this Proxy Statement/Prospectus (the "Reorganization SAI") has been filed with
the Securities and Exchange Commission (the "SEC" or the "Commission") and is
incorporated herein by reference. Copies of the Reorganization SAI may be
obtained without charge by writing to Catholic Financial Services Corporation at
1100 West Wells Street, Milwaukee, Wisconsin 53233, or by calling (877)
222-2402. We will send you a copy of the Reorganization SAI by first class mail
within one business day of the date on which we receive your request.
In addition, the Prospectus of The Capital Appreciation Fund, dated
February 1, 2001 (the "Capital Appreciation Fund Prospectus"), the Statement of
Additional Information of The Catholic Funds, dated February 1, 2001 (which
includes information regarding The Capital Appreciation Fund) (the "Capital
Appreciation Fund SAI"), and the Annual Report of The Capital Appreciation Fund
for the year ended September 30, 2001 (which includes information regarding The
Capital Appreciation Fund) (the "Capital Appreciation Fund Annual Report") have
been filed with the Commission and are incorporated herein by reference. The
Capital Appreciation Fund Prospectus accompanies this Proxy
Statement/Prospectus, and the Capital Appreciation Fund SAI and the Capital
Appreciation Fund Annual Report may be obtained without charge by writing
Catholic Financial Services Corporation at 1100 West Wells Street, Milwaukee,
Wisconsin 53233, or by calling (877) 222-2402.
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION..........................................................1
INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS..............................1
SYNOPSIS ......................................................................4
Introduction..........................................................4
The Plan .............................................................5
Reasons For The Proposed Reorganization...............................6
Federal Tax Consequences..............................................9
Comparison of The Capital Appreciation and The Equity Funds...........9
RISK FACTORS..................................................................17
Market Risk..........................................................18
Objective Risk.......................................................18
Foreign Securities...................................................18
Stock Selection Risk.................................................18
Index Correlation Risk...............................................19
Non-Fundamental Investment Objective.................................19
COMPARISON OF INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES..................19
Investment Objectives................................................19
Principal Strategies.................................................20
Implementation of Catholic Values....................................23
APPROVAL OF THE PLAN AND REORGANIZATION.......................................27
Description of the Plan..............................................27
Other Terms..........................................................28
Background to Reorganization.........................................29
Reasons For The Proposed Reorganization..............................32
Federal Tax Considerations...........................................33
CAPITALIZATION................................................................35
OWNERSHIP OF FUND SHARES......................................................35
DESCRIPTION OF SECURITIES TO BE ISSUED AND RIGHTS OF SHAREHOLDERS.............36
SHAREHOLDER INFORMATION AND SERVICES..........................................37
Shareholder Information..............................................37
Reinvestment of Fund Distributions...................................38
Distribution Fees....................................................38
Redeeming Your Class A Shares of The Equity Fund.....................38
MISCELLANEOUS.................................................................42
Independent Public Accountants.......................................42
Interests of Experts and Counsel.....................................42
Other Matters........................................................42
AVAILABLE INFORMATION
The Catholic Funds has filed with the Commission a Registration Statement
on Form N-14 (the "Registration Statement") with respect to the shares of The
Equity Fund offered hereby. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus omits certain information, exhibits
and undertakings contained in the Registration Statement. Such additional
information can be inspected at the principal office of the Commission at 450
Fifth Street N.W., Washington, D.C. 20549, as well as the Commission's regional
office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60621. Copies of the Registration Statement can be obtained from the Commission
at prescribed rates by writing to the Commission at either address. For further
information, reference is made to the Registration Statement and to the exhibits
attached to it.
In addition to the above, The Capital Appreciation Fund is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports and other information with the SEC.
Proxy materials, reports and other information about The Capital Appreciation
Fund which are of public record also can be inspected and copied at public
reference facilities maintained by the Commission at the addresses shown above.
Copies of these materials can be inspected and copied at the Commission's
principal and regional offices described above and can be obtained at prescribed
rates from the Public Reference Branch, Office of Consumer Affairs and
Information Services, SEC, Washington, D.C. 20549. The Commission also maintains
a Website at http://www.sec.gov that contains certain other publicly available
documents about The Catholic Funds, The Capital Appreciation Fund and The Equity
Fund.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus.
If any such other information or representations are given or made, they must
not be relied upon as having been authorized by The Catholic Funds. This Proxy
Statement/Prospectus does not constitute an offer to sell securities in any
state or other jurisdiction to any person to whom it would be unlawful to make
such offer in such state or jurisdiction.
INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS
This Proxy Statement/Prospectus is being furnished to the shareholders of
The Capital Appreciation Fund in connection with the solicitation of proxies by
the Board of Directors of The Catholic Funds to be used at a Special Meeting of
Shareholders of The Capital Appreciation Fund to be held on [DAY?], [DATE?],
2002, at [TIME?], Central Time, at [LOCATION?]. At the meeting, shareholders of
The Capital Appreciation Fund will consider and vote on the Plan and the
Reorganization described in the Plan pursuant to which The Equity Fund would
acquire substantially all of the assets of The Capital Appreciation Fund, net of
its liabilities, in exchange for shares of common stock of The Equity Fund. The
shares of The Equity Fund so issued to The Capital Appreciation Fund would be
distributed pro-rata to the shareholders of The Capital Appreciation Fund. The
Capital Appreciation Fund would be liquidated and discontinued.
Similar transactions are being proposed for consideration by shareholders
of The Catholic Fund's other two equity funds, namely The Catholic Equity Income
Fund and The Catholic Large-Cap Growth Fund, whereby those two funds also would
be consolidated with and into The Catholic Equity Fund. However, the
Reorganization with respect to The Capital Appreciation Fund is not dependent
upon the approval and concurrent consolidation of those other two equity funds.
Our mailing of this Proxy Statement/Prospectus and the accompanying proxy
card is the principal means by which proxies will be solicited for approval of
the Reorganization. Proxies also may be solicited in person, or by telephone or
facsimile or, without special compensation, by officers of The Catholic Funds or
by officers and employees of Catholic Financial Services Corporation, the
investment adviser and distributor for The Capital Appreciation Fund. Upon
request, we will reimburse brokers, dealers, banks and voting trustees or their
nominees for reasonable expenses incurred in forwarding copies of the proxy
materials to the beneficial owners of shares which such persons hold of record.
We estimate that the total expenses to be incurred by The Capital Appreciation
Fund in connection with the Reorganization will be approximately $25,000.
Catholic Financial Services Corporation has agreed to pay all such expenses.
Any proxy which is properly executed and returned in time to be voted at
the Meeting will be voted in accordance with instructions marked thereon. In the
absence of such instructions, the proxy will be voted "FOR" approval of the
Plan. The duly appointed proxies may, in their discretion, vote upon such other
matters as may come before the Meeting or any adjournments thereof. A
shareholder may revoke his or her proxy at any time prior to its exercise by
delivering written notice of revocation to the Secretary of The Catholic Funds
or by executing and delivering a later dated proxy to The Catholic Funds or by
attending the Meeting in person to vote the shares of The Capital Appreciation
Fund held by such shareholder. The shares of The Capital Appreciation Fund will
be voted as a separate series on approval of the Plan, and holders of shares of
the other series of The Catholic Funds will not be entitled to vote on the
Reorganization as it relates to The Capital Appreciation Fund.
The presence at the meeting, in person or by proxy, of shareholders
representing one-third of all outstanding shares of The Capital Appreciation
Fund entitled to vote on the Reorganization constitutes a quorum for the
transaction of business. Abstentions and broker non-votes (proxies from brokers
or other nominee owners indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote the
shares as to a matter with respect to which the brokers or other nominee owners
do not have discretionary voting power) will be treated as present for purposes
of determining the presence or absence of a quorum.
Approval of the Plan and the Reorganization contemplated by the Plan will
require the affirmative vote of "a majority of the outstanding voting
securities" of The Capital Appreciation Fund, as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the 1940 Act, a
"majority of the outstanding voting securities" means the lesser of:
o 67% or more of The Capital Appreciation Fund's shares present at the
Meeting, if shareholders who are the owners of more than 50% of The
Capital Appreciation Fund's outstanding shares are present in person
or by proxy; or
o More than 50% of The Capital Appreciation Fund's outstanding shares.
Accordingly, abstentions and broker non-votes will have the same effect as
votes cast against approval of the Plan.
In the event sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Meeting, the persons named as proxies in
the enclosed proxy may propose and vote in favor of one or more adjournments of
the Meeting regarding the Reorganization to permit further solicitation of
proxies without the necessity of further notice. Any such adjournment will
require the affirmative vote of a majority of the shares present at the session
of the Meeting to be adjourned.
Shareholders of record of The Capital Appreciation Fund at the close of
business on [RECORD DATE?] (the "Record Date") will be entitled to notice of and
to vote at the Meeting or any adjournment thereof. Each such shareholder will be
entitled to one vote for each share (and a fractional vote for each fractional
share) held by such shareholder on each matter presented at the Meeting. As of
the Record Date, there were a total of _____ shares of common stock of The
Capital Appreciation Fund outstanding. Catholic Knights, the ultimate parent
company of Catholic Financial Services Corporation, beneficially owns and has
the right to vote in excess of 50% of all of the presently issued and
outstanding shares of common stock of The Capital Appreciation Fund. Catholic
Knights has indicated its present intention to vote its shares in favor of
approval of the Reorganization. Consequently, subject to any change in the
stated intentions of Catholic Knights, shareholder approval of the
Reorganization is assured.
Under Maryland law, shareholders of The Capital Appreciation Fund will not
be entitled to any appraisal or similar rights in connection with the
Reorganization contemplated by the Plan. However, shareholders may redeem their
shares of The Capital Appreciation Fund at net asset value prior to the closing
of the proposed Reorganization in the manner specified in the Capital
Appreciation Fund Prospectus.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus (including a copy of the Plan attached hereto as
Appendix A), as well as the Capital Appreciation Fund Prospectus, which
accompanies this Proxy Statement/Prospectus and is incorporated by reference
herein. The Capital Appreciation Fund Prospectus describes the investment
objective and principal strategies of The Capital Appreciation Fund and provides
information about the shareholder fees and operating expenses of, management and
other services provided to, and purchases and redemptions of shares of, that
Fund. This summary is not intended to be complete and is qualified in all
respects by reference to the more detailed information appearing elsewhere in
this Proxy Statement/Prospectus, the Plan and the Capital Appreciation Fund
Prospectus.
Introduction
Shareholders of The Capital Appreciation Fund will be asked at the Meeting
to approve the Plan and the Reorganization described in the Plan and as
described herein. If approved, the Reorganization is expected to be completed as
of the opening of business on or about [DATE?], 2002, or such other date as the
parties may determine, assuming that all conditions to closing have been
satisfied.
The Equity Fund is a newly designated series of The Catholic Funds. It will
first commence business operations upon and following the closing of the
Reorganization. Catholic Financial Services Corporation ("CFSC"), a Wisconsin
corporation organized in 1994, is the investment adviser and distributor for
both The Equity Fund and The Capital Appreciation Fund. As the adviser, CFSC
makes the investment decisions for the Funds. As the distributor, CFSC sells the
Funds' shares to investors. The majority of the outstanding stock of CFSC is
owned by Catholic Knights Financial Services, Inc., which functions as an
administrative holding company and is a wholly-owned subsidiary of Catholic
Knights. Catholic Knights is a non-profit, non-stock membership organization,
licensed to do business as a fraternal benefit society. The remaining
outstanding stock in CFSC is owned by Catholic Order of Foresters (a non-profit,
non-stock Illinois fraternal benefit society), Catholic Knights of America (a
non-profit, non-stock Missouri fraternal benefit society), and Catholic Union of
Texas, The KJT (a Texas fraternal benefit society). These four Catholic
fraternals are referred to in this Proxy Statement/Prospectus as the "Catholic
Fraternal Alliance."
Mellon Equity Associates, LLP ("Mellon" or the "sub-adviser") is the
sub-adviser for The Equity Fund. Mellon is a wholly owned, independently managed
subsidiary of Mellon Financial Corporation, organized as a limited liability
partnership. Mellon's principal executive offices are located at 500 Grant St.,
Suite 4200, Pittsburgh, Pennsylvania 15258.
CFSC and Mellon are sometimes referred to together herein as the adviser.
The Plan
The Plan describes the essential terms of the proposed Reorganization and
is set forth in full as Appendix A attached to this Proxy Statement/Prospectus.
Pursuant to the Plan, substantially all of the assets of The Capital
Appreciation Fund, net of its liabilities, will be transferred to The Equity
Fund in exchange solely for the issuance to The Capital Appreciation Fund of
shares of Class A Common Stock of The Equity Fund. The Capital Appreciation Fund
will then immediately make a pro rata distribution to the shareholders of The
Capital Appreciation Fund of the shares of The Equity Fund it receives in that
exchange. As a result of the Reorganization, each shareholder of The Capital
Appreciation Fund will receive that number of full and fractional shares of The
Equity Fund which is equal in value to the shareholder's pro rata interest in
the net assets transferred to The Equity Fund as of the "Valuation Date" (as
defined below).
Shareholders of The Capital Appreciation Fund will not pay any sales load
or sales commissions on the shares of The Equity Fund that they receive in the
Reorganization or on the shares of The Capital Appreciation Fund that they
surrender in the Reorganization. Additionally, it is a condition to the closing
of the Reorganization that The Catholic Funds receive a legal opinion to the
effect that the Reorganization will qualify as a tax-free reorganization for
federal income tax purposes. Assuming the Reorganization so qualifies,
shareholders of The Capital Appreciation Fund will not recognize any income,
gain or loss for federal income tax purposes as a result of the exchange in the
Reorganization of their shares in The Capital Appreciation Fund for shares of
The Equity Fund. For additional information about the tax consequences of the
Reorganization see "Approval of the Plan and Reorganization - Federal Tax
Considerations" below.
Contemporaneously with the closing and the distribution of the shares of
The Equity Fund to shareholders of The Capital Appreciation Fund, The Capital
Appreciation Fund will satisfy its liabilities (applying any liquidating assets
retained in the Reorganization for such purpose), liquidate and be discontinued
as a separate series of The Catholic Funds. Accordingly, the shareholders of The
Capital Appreciation Fund will become shareholders of The Equity Fund. It is
expected that the value of each shareholder's account in The Equity Fund
immediately after the Reorganization will be the same as the value of that
shareholder's account in The Capital Appreciation Fund immediately prior to the
Reorganization.
Although each party to the Plan will bear its own out-of-pocket expenses,
CFSC has agreed to pay all of the expenses incurred by each of the Funds.
Completion of the Reorganization is subject to a number of conditions which
are customary for transactions of this kind, in addition to the receipt of the
tax opinion described above.
Reasons For The Proposed Reorganization
CFSC has served as investment adviser and distributor to all three of the
existing equity funds of The Catholic Funds, including The Catholic Equity
Income Fund and The Catholic Large-Cap Growth Fund, in addition to The Capital
Appreciation Fund, since their inceptions on May 3, 1999. As of December 31,
2001, these three equity funds had total assets of approximately $17.0 million,
reflecting asset growth and investments far below that initially anticipated by
CFSC in its business plan when it conceived the three equity funds. CFSC and
management of The Catholic Funds attribute the disappointing growth primarily to
the volatile, uncertain and declining stock market environment that has
persisted in the United States since quite soon after these three equity funds
commenced their operations. That market environment made investors reticent to
invest in any mutual fund, let alone small, new funds with no long-term
performance history such as The Catholic Funds. This also made licensed
securities representatives and insurance agents of the Catholic Fraternal
Alliance less inclined to become licensed with CFSC in order to market and
promote the sale of shares of The Catholic Funds. The lack of a sizeable sales
force has further frustrated sales and growth.
The present small size of The Capital Appreciation Fund and the other two
existing equity funds of The Catholic Funds puts them at a competitive
disadvantage with their peers. This is true in part because all mutual funds
have certain fixed costs that are spread over all of the assets of the fund,
including such things as legal fees, accounting fees, director fees, blue sky
qualification fees and the like. These fixed fees cause The Catholic Funds to
have higher expense ratios which detract from their investment performance as
compared to their larger peers. In order to offset the negative effects of these
expenses, CFSC has been waiving fees and reimbursing expenses so that the
operating expenses of The Capital Appreciation Fund would not exceed 1.75% of
average daily net assets for any fiscal year, but CFSC is not prepared to
continue subsidizing The Capital Appreciation Fund indefinitely into the future.
Accordingly, CFSC has for some time been considering strategic options to
increase sales and build assets sufficient to make The Capital Appreciation Fund
viable as a self-sustaining entity. In considering and designing strategic
marketing options for The Capital Appreciation Fund, the paramount requirement
of CFSC and management and the board of directors of The Catholic Funds has been
the adherence to the principle that Catholic values should remain a
differentiating factor between The Catholic Funds and its peers.
CFSC retained the services of Precision Marketing Partners, LLC ("Precision
Marketing"), a Milwaukee, Wisconsin-based financial services sales and marketing
firm to help it assess strategic options and to select a distribution strategy
to frame and communicate long-term sales and marketing alternatives for The
Catholic Funds. Precision Marketing was founded by a group of individuals with
many years of successful experience and expertise in marketing mutual funds and
distributing their shares. Its chairman and chief executive officer, Ms.
Rochelle Lamm, and other members of her management team worked together in
former capacities to build and manage several nationally recognized investment
management and broker/dealer organizations, including a family of mutual funds
sponsored by a fraternal benefit society that today has over $10 billion in
assets.
In a report first presented to the board of directors at a special meeting
held on October 26, 2001, Precision Marketing identified a number of factors
that have contributed to the lack of sales of The Catholic Funds, including the
following:
o The three existing equity funds of The Catholic Funds have not been
perceived by investors as clearly distinguishable investment options.
While their investment objectives and investment programs are somewhat
different, their implementation has created investment portfolios with
significant overlap in stock selection. This creates confusion among
investors and selling representatives, thereby frustrating the goal of
creating a diverse family of mutual funds.
o Neither CFSC nor the sub-advisers of the three existing equity funds
are household names that attract investors, and the performance of the
three existing equity funds, while above average, has not been so
outstanding that it alone attracts investors.
o The sales force of CFSC has not grown as expected and, given the
relatively modest universe of insurance agents and securities
representatives licensed with the Catholic Fraternal Alliance, it is
not likely that CFSC will have sufficient sales representatives in the
near future to generate the volume of sales that CFSC projected in its
business plan.
Given these obstacles, Precision Marketing suggested three possible
alternatives, namely: liquidate and discontinue all three of the existing equity
funds; seek one or more other fund families with mutual funds comparable to The
Catholic Funds that might be possible merger partners for the three existing
equity funds; or, restructure The Catholic Funds in a manner designed to:
o Eliminate the confusion created by multiple, similar funds through a
consolidation of all three equity funds into a core equity fund with
an investment program that is easy to understand;
o Eliminate sub-adviser name recognition and investment performance as
competitive issues by adopting a passive management style which tracks
a major index, such as the S&P 500 Index;
o Adopt additional classes of shares with expense structures designed to
be attractive for direct marketing programs and wholesaling/
institutional client marketing programs, thereby reducing the reliance
on a retail brokerage network for asset growth; and
o Continue to adhere to selected core Catholic values in the investment
program.
The board of directors of The Catholic Funds held a special meeting on
October 26, 2001 at which management of CFSC and The Catholic Funds, together
with a principal from Precision Marketing, presented Precision Marketing's
report and management's recommendations of the Reorganization based thereon. The
board further considered and approved the Reorganization in principle on
November 12, 2001, and formally ratified the Plan on February 14, 2002, subject
to approval by the shareholders of The Capital Appreciation Fund. At these
meetings, the board of directors requested and reviewed information about the
investment objective and program of The Equity Fund and the Catholic values to
which The Equity Fund would adhere and the manner in which those Catholic values
would be implemented. The board of directors also requested and reviewed
information about Mellon and the sub-advisory agreement entered into with
Mellon, asked questions of and received answers from management of Mellon, CFSC
and management of The Catholic Funds, and made inquiries of CFSC regarding the
terms of the Reorganization and its anticipated benefits to the shareholders of
The Capital Appreciation Fund. The board also consulted with The Catholic Funds'
legal counsel, and considered alternatives, including the alternatives
identified in Precision Marketing's report.
In approving the Plan, the board considered numerous factors, including:
o CFSC's strong desire and continuing commitment to provide Catholics
with an attractive, core investment product that enables them to
adhere to certain core Catholic values;
o The unlikelihood of successfully finding a merger partner that would
adhere to the Catholic values; and
o The reasonableness of the proposed Reorganization to address and
successfully resolve the factors that have inhibited growth of The
Capital Appreciation Fund, as identified in Precision Marketing's
report.
In addition, in approving the Plan, the board considered numerous other
factors, including the investment philosophy, performance, personnel, resources
and financial condition of CFSC and Mellon; the nature, quality, scope and cost
of advisory services; the differences between The Capital Appreciation Fund and
The Equity Fund in terms of their investment objectives, principal strategies
and risks, portfolio management, and fee and expense structure; the selection
and method for implementing the Catholic values; the terms of the Plan,
including the structure of the Reorganization as a tax-free transaction; and
other factors deemed relevant by the board.
The board believes the reorganization offers the following benefits to the
shareholders of The Capital Appreciation Fund, among others:
o The continuation of an opportunity to invest in an equity fund that
adheres to certain core Catholic values important to them;
o The elimination of multiple equity investment options that are
confusing and somewhat overlapping;
o A simple, easy to understand passive investment strategy designed to
follow the performance of the S&P 500 Index;
o A higher potential for future asset growth;
o Potential for lower annual fund operating expenses; and
o Potential for increased portfolio diversification, greater buying
power, lower transaction costs and other economies of scale associated
with a larger combined fund.
For these and other reasons, the board of directors of The Catholic Funds,
including the directors who are not "interested persons" of The Catholic Funds
(as that term is defined in the 1940 Act), has concluded that the Reorganization
is fair to, and in the best interests of, the shareholders of The Capital
Appreciation Fund and that their economic interests will not be diluted as a
result of the Reorganization.
The board of directors of The Catholic Funds unanimously recommends that
shareholders of The Capital Appreciation Fund vote FOR approval of the Plan and
the Reorganization.
Federal Tax Consequences
A condition to completion of the Reorganization is the receipt of a legal
opinion from Quarles & Brady LLP that the Reorganization will constitute a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, no gain or loss will
be recognized for federal income tax purposes by the shareholders of The Capital
Appreciation Fund or by The Capital Appreciation Fund or The Equity Fund as a
result of the Reorganization. However, it is anticipated that, immediately
following the Reorganization, The Equity Fund will adjust the investment
portfolio it acquires from The Capital Appreciation Fund to conform to the S&P
500 Index. We anticipate that The Equity Fund will recognize a net capital loss
on the sale of portfolio securities that it acquires in the Reorganization from
The Capital Appreciation Fund.
Comparison of The Capital Appreciation and The Equity Funds
Below is a brief comparison of the principal features of The Capital
Appreciation Fund and The Equity Fund. For more detailed information about The
Capital Appreciation Fund, please refer to the Capital Appreciation Fund
Prospectus which accompanies this Proxy Statement/Prospectus.
Investment Objectives and Principal Strategies
Summary. Both of The Equity Fund and The Capital Appreciation Fund are
designed for investors who want long-term capital appreciation, can tolerate
fluctuations in portfolio value and have no need for current income from the
respective Funds. However, these two Funds have somewhat different investment
objectives and strive to obtain their objectives through substantially different
investment strategies and programs. In terms of their Catholic values, both
Funds avoid investing in securities of companies that manufacture products,
provide services or engage in business practices which are inconsistent with the
sanctity of human life, but there are some differences in other Catholic values
adhered to by the Funds and the manner in which they implement those other
Catholic values.
The Capital Appreciation Fund. The Capital Appreciation Fund seeks
long-term growth of capital with controlled risk by investing in a diversified
portfolio, primarily in common stocks of companies in a broad range of market
capitalizations. To attain this objective, the Fund employs a systematic,
computer-driven model to objectively identify attractive stocks solely based on
numerical measures of growth and value. The Fund consistently and continuously
applies this model to ensure that stocks are evaluated solely on their relative
values, and that stock selections and dispositions are not influenced by analyst
biases. This disciplined process of stock selection has built-in portfolio risk
controls that limit industry and individual stock concentration. The Fund's
portfolio is diversified with approximately 100 stocks across many industries,
normally with the majority of the issues in companies with market
capitalizations between $1 billion and $10 billion at the time of purchase. A
significant portion of the Fund's total assets will be invested in companies
with medium market capitalizations. The Fund has the flexibility to invest in
other market capitalizations and other types of securities, including the
securities of foreign issuers traded on a U.S. national securities exchange or
on the NASDAQ National Market System.
The Equity Fund. The Equity Fund seeks to obtain a total return from
dividends and capital gains which is equal to the total return of the S&P 500
Index, less the Fund's operating expenses. The Fund attempts to achieve its
objective by investing in a portfolio of common stocks that substantially
replicates the composition of the S&P 500 Index. When the adviser receives
notification of a change in the composition of the Index, the adviser generally
makes a corresponding change in the composition of the Fund's investment
portfolio.
Certain companies included in the S&P 500 Index from time to time may
manufacture products, provide services or engage in other business practices
which are inconsistent with the Fund's Catholic value regarding the sanctity of
human life (the "sanctity of life exclusionary screen"), which is described in
more detail below. As of the date of this Proxy Statement/Prospectus, less than
2% of the total market capitalization of the S&P 500 Index consisted of stocks
of companies that the Fund would exclude by applying this screen. To reduce the
performance tracking error between the Fund and S&P 500 Index that will result
from the Fund's exclusion of those stocks, the subadviser will use modeling
techniques to quantify the tracking error and will rebalance the Fund's
portfolio among the remaining Index stocks in an attempt to minimize the
tracking error.
The Equity Fund's passive investment strategy is somewhat similar to the
investment strategy of The Capital Appreciation Fund. The Capital Appreciation
Fund seeks long-term capital appreciation by investing in common stocks in a
broad range of capitalizations. Its portfolio manager utilizes an analytical,
computerized model to determine what stocks to purchase, hold and sell for the
Fund. Like the passive investment management style of The Equity Fund, use of
this analytical, quantitative investment strategy minimizes reliance on the
subjective judgment of the portfolio manager. While the skill, judgment and
expertise of personnel of the sub-adviser for The Capital Appreciation Fund
certainly were, and continue to be, instrumental in the design, construction and
continuing modification and refinement of this model, and while some subjective
judgment of the portfolio manager inevitably must be exercised with respect to
the application of the model in the investment program of The Capital
Appreciation Fund, historically approximately two-thirds of The Capital
Appreciation Fund's investment portfolio has consisted of common stocks of
companies included in the S&P 500 Index, and the Fund's performance has been
quite similar to that of the S&P 500 Index.
Catholic Values. The Capital Appreciation Fund adheres to three important
Catholic values selected by the board of directors of The Catholic Funds, namely
the sanctity of human life, no unjust wars and the dignity of the human person.
The Capital Appreciation Fund will not invest in securities of companies that
manufacture products, provide services or engage in other business practices
that CFSC determines are inconsistent with any of these three Catholic values,
based on guidelines established by the board of directors.
The Equity Fund focuses on two of these same three Catholic values, namely
the sanctity of human life and the dignity of the human person. Like The Capital
Appreciation Fund, The Equity Fund does not invest in securities of companies
whose businesses CFSC determines are inconsistent with the sanctity of human
life. However, with respect to the dignity of the human person value, rather
than excluding those companies from The Equity Fund's investment portfolio, CFSC
engages in shareholder advocacy actions designed to persuade such companies to
reform their offending business practices and policies to better reflect this
important Catholic value. Presently, these advocacy efforts focus on how
employers treat members of the work force, which the board believes is likely to
be representative of a company's general policy toward issues of human dignity.
The board further believes this advocacy approach offers greater potential to
persuade companies to reform their practices and policies that offend the
dignity of the human person, as opposed to an exclusionary policy that
potentially goes unnoticed by management of the offending company. However,
because of the extremely fundamental nature of the sanctity of human life value,
the board of directors believes it would be inappropriate for The Equity Fund to
invest in the securities of companies that do not adhere to this value, even
under an advocacy program.
Risk Factors
The primary risks of The Capital Appreciation Fund and The Equity Fund are
similar, but not identical. Both experience market risk, which is the risk that
common stock prices overall will rise and fall over short and even extended
periods. Both also experience objective risk, which is the risk that a Fund's
investments will depend not only on the movement of the market in general, but
on factors that affect the individual stocks held in the Fund's portfolio, such
as a company's financial performance, management and business trends. In
addition, The Equity Fund is exposed to a risk that the large capitalization
stocks included in its portfolio may trail returns from the overall stock market
for short or even extended periods. Because The Capital Appreciation Fund
invests in stocks in a broader range of market capitalizations, its results are
less dependent on the performance of companies within any particular range of
market capitalization.
The Capital Appreciation Fund also is exposed to the risk that the stocks
selected under its quantitative, analytical model may not perform as well as
other stocks the adviser could select consistent with The Capital Appreciation
Fund's investment program. As a passively managed fund, The Equity Fund is not
subject to this same selection risk, however it is exposed to the risk that the
return on its investment portfolio may not precisely track that of the S&P 500
Index. This risk results from a number of factors that will preclude The Equity
Fund's investment portfolio from precisely mirroring the composition of the S&P
500 Index at all times.
Both Funds also are exposed to the risk that the implementation of their
Catholic value exclusionary screens may limit investments available to the Funds
as compared to their peers, and the return on the securities that the Funds can
purchase may be less than similar securities they might otherwise purchase (or,
in the case of The Equity Fund, other securities included in the S&P 500 Index).
Finally, because The Capital Appreciation Fund may invest in foreign securities,
it is exposed to special risks associated with investing in foreign securities
that are not typically associated with investing in securities of U.S.
companies.
For a more detailed description of risks associated with investing in The
Capital Appreciation Fund, see the section of the Capital Appreciation Fund
Prospectus captioned "Investment Risks." For a more detailed discussion of risks
associated with investing in The Equity Fund, see the section of this Proxy
Statement/Prospectus captioned "Risk Factors."
Performance
The Equity Fund has not yet commenced operations, and therefore has no
performance history. However, in the concurrent consolidations of the three
existing equity funds of The Catholic Funds into The Equity Fund, The Capital
Appreciation Fund will be considered the surviving fund, because its investment
program, strategy and portfolio most closely resemble those of The Equity Fund.
Accordingly, The Equity Fund will retain and will advertise the performance
history of The Capital Appreciation Fund as its own. Please read The Capital
Appreciation Fund Annual Report, which was previously mailed to you, for more
information on the performance of The Capital Appreciation Fund through
September 30, 2001.
Size of Funds
On December 31, 2001, The Capital Appreciation Fund had an aggregate net
asset value of $5.0 million, and the other two existing equity funds of The
Catholic Funds had aggregate net assets of $12.0 million, consisting of $5.7
million in The Catholic Equity Income Fund and $6.3 million in The Catholic
Large-Cap Growth Fund. Accordingly, if all three of the reorganizations had been
completed as of that date, The Equity Fund would have had approximately $17.0
million in net assets immediately following those reorganizations.
Classes of Shares
The Capital Appreciation Fund offers only shares of Class A Common Stock,
which have a front-end sales charge of up to 4.00% and a Rule 12b-1 distribution
fee of 0.25%. The Equity Fund offers three classes of shares, including Class A
Common Stock with a sales load structure and 12b-1 fee identical to shares of
Class A Common Stock of The Capital Appreciation Fund. The Equity Fund also
offers Class C Common Stock and Class I Common Stock, but will not issue any
shares of those classes in connection with the Reorganization. Those Classes of
shares have different sales load structures, rule 12b-1 distribution fees and
minimum investment requirements as compared to The Equity Fund's Class A Common
Stock. The performance of the various classes of shares will vary based on those
differences in sales charges and fees.
Expenses
The following table compares the fees and expenses that you may pay if you
buy and hold shares of Class A Common Stock of The Capital Appreciation Fund and
The Equity Fund. The information for The Equity Fund is estimated by management
(based on the assumption that the Reorganization and the concurrent
reorganizations of the other two existing equity funds with and into The Equity
Fund are completed).
THE CAPITAL
APPRECIATION FUND THE EQUITY FUND
------------------ ---------------
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on 4.00% 4.00%
Purchases (as a percentage of offering
price)(1)
Maximum Deferred Sales Charge (Load) None None
Imposed on Redemptions (as a percentage of
original purchase price or redemption
proceeds, whichever is less)
Annual Fund Operating Expenses (expenses that are deducted
from fund assets)
Management Fees 0.90% 0.50%
Distribution (12b-1) Fees 0.25% 0.25%
Other Expenses(2) 1.90% 0.75%
----- -----
Total Annual Fund Operating Expenses 3.05% 1.50%
===== =====
Less: Fee Waivers and Expense 1.30% 0.55%
Reimbursements(3) ----- -----
Net Annual Fund Operating Expenses 1.75% 0.95%
===== =====
- ------------------------------------
(1) The maximum initial sales charge for Class A shares of each Fund applies to
investments of up to $25,000, and is reduced for larger investments. No
initial sales charge will be imposed on shares of The Equity Fund issued to
shareholders of The Capital Appreciation Fund in the Reorganization.
(2) "Other expenses" are based on amounts actually incurred during the fiscal
year ended September 30, 2001 for The Capital Appreciation Fund, and are
based on management's estimated amounts for the fiscal year ending
September 30, 2002 for The Equity Fund assuming the completion of the
Reorganization and the concurrent reorganizations of the other two existing
equity funds into The Equity Fund.
(3) CFSC has contractually agreed, for the current fiscal year, to reimburse
expenses and waive fees to the extent necessary so that "Annual Total Fund
Operating Expenses" will not exceed 1.75% for The Capital Appreciation Fund
and 0.95% for The Equity Fund.
Example
The following Example is intended to help you compare the cost of investing
in The Capital Appreciation Fund (and investing in The Equity Fund giving effect
to the Reorganization and the concurrent reorganizations of the other two
existing equity funds with and into The Equity Fund) with the cost of investing
in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of those time periods.
The Example also assumes that your investment has a 5% return each year and that
each Fund's operating expenses remain the same (with fee waivers and expense
reimbursements for The Capital Appreciation Fund and The Equity Fund in effect
for one year). Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
The Capital Appreciation Fund $571 $1,187 $1,828 $3,542
The Equity Fund(1) $493 $955
- --------------------------
(1) Because The Capital Appreciation Fund shareholders will not have to pay a
sales load on shares of The Equity Fund they receive in the Reorganization,
the pro forma expenses they would pay on a $10,000 investment in such
shares (and assuming a 5% annual return and redemption at the end of each
time period) would be as follows: $493 - 1 year and $691 - 3 years. These
lower expenses do not reflect any front-end sales load paid at the time of
initial investment in the Class A shares of The Capital Appreciation Fund
that shareholders surrender in exchange for Class A shares of The Equity
Fund in the Reorganization.
Sales Charges
The front-end sales charges imposed on purchases of Class A shares of The
Equity Fund are the same as those for shares of The Capital Appreciation Fund.
For a description of those sales charges, please see the section of the Capital
Appreciation Fund Prospectus captioned "How to Invest."
Minimum Purchases
The minimum investment amounts to open and to add to an account for Class A
shares of The Equity Fund are the same as for The Capital Appreciation Fund. For
a description of those minimum investment amounts, see the section of the
Capital Appreciation Fund Prospectus captioned "How to Invest."
Redemption Procedures
The redemption procedures that apply to Class A shares of The Equity Fund
are the same as those that apply with respect to the redemption of shares of The
Capital Appreciation Fund. For a description of those redemption procedures, see
the section of this Proxy Statement/Prospectus captioned "Shareholder
Information and Services - Redeeming Your Class A Shares of The Equity Fund"
with respect to The Equity Fund, and the section of the Capital Appreciation
Fund Prospectus captioned "Selling Your Shares" with respect to The Capital
Appreciation Fund.
Exchanges
As a shareholder of The Capital Appreciation Fund, you have exchange
privileges among The Catholic Money Market Fund and the other two existing
equity funds of The Catholic Funds. Following the Reorganization, and assuming
the concurrent reorganization of the other two existing equity funds of The
Catholic Funds with and into The Equity Fund, The Catholic Funds will have only
two series, namely The Equity Fund and The Catholic Money Market Fund.
Therefore, following the Reorganization, exchanges will be available only
between those two Funds. Those exchanges will be subject to the same
requirements and procedures as presently apply to exchanges between The Capital
Appreciation Fund and The Catholic Money Market Fund. For a detailed description
of the requirements and procedures that apply to exchanges among the various
funds of The Catholic Funds, please see the section of the Capital Appreciation
Fund Prospectus captioned "Selling Your Shares - Exchange Privilege."
Other Shareholder Services
The Equity Fund offers other shareholder services which are the same as
those presently offered by The Capital Appreciation Fund, including purchases
and sales by telephone, purchases and sales by wire, automatic investment plans
and automatic withdrawal plans. For a detailed description of these shareholder
services, please refer to the sections of the Capital Appreciation Fund
Prospectus captioned "How to Invest" and "Selling Your Shares."
Dividends and Distributions
Like The Capital Appreciation Fund, The Equity Fund will distribute any net
investment income annually, and will distribute any net realized long or
short-term capital gains at least annually. For a more detailed description of
The Equity Fund's distribution practices and policies, see the section of this
Proxy Statement/Prospectus captioned "Shareholder Information and Services." For
The Capital Appreciation Fund, see the section of the Capital Appreciation Fund
Prospectus captioned "Shareholder Information."
Management and Operations
CFSC serves as adviser and distributor to both The Capital Appreciation and
The Equity Funds. Under the terms of an investment advisory agreement between
The Catholic Funds and CFSC, CFSC, together with the sub-advisers and subject to
the supervision of the board of directors of The Catholic Funds, manages the
investment and reinvestment of the Funds' assets, provides the Funds with
personnel, facilities and administrative services, and supervises the Funds'
daily business affairs. CFSC also formulates and implements a continuous
investment program for the Funds consistent with each Fund's investment
objectives, policies and restrictions. For providing these services, CFSC
receives an annual advisory fee at the rate of 0.90 of 1% of the average daily
net assets of The Capital Appreciation Fund, and 0.50 of 1% of the average daily
net assets of The Equity Fund.
Vantage Global Advisors, Inc. (d/b/a Vantage Investment Advisors)
("Vantage"), 2005 Market Street, Philadelphia, Pennsylvania 19103, serves as the
sub-adviser to The Capital Appreciation Fund. Vantage, which is registered an
investment adviser under the securities laws, is wholly-owned by Lincoln
National Corporation. A committee of investment professionals comprised of
Vantage personnel overseen by its chief investment officer manages the assets of
The Capital Appreciation Fund. For its services as sub-adviser, Vantage receives
an annual fee at the following rate: 0.50 of 1% on the first $50 million of The
Capital Appreciation Fund's average daily net assets; 0.45 of 1% on the next $50
million; and 0.40 of 1% of average daily net assets over $100 million. This
sub-advisory fee is paid by CFSC out of its advisory fee. For more information
about Vantage and its services, please refer to the section of The Capital
Appreciation Fund Prospectus captioned "Management - Sub-Advisers - The Catholic
Disciplined Capital Appreciation Fund."
Mellon Equity Associates, LLP serves as sub-adviser for The Equity Fund.
Mellon is an independently run, wholly owned subsidiary of Mellon Financial
Corporation, organized as a limited liability partnership. The firm became a
separate legal entity from the equity management group of the Mellon Bank trust
department in January 1987, managing domestic equity accounts for U.S.
tax-exempt clients. The equity management group has managed institutional,
tax-exempt assets since 1947. The firm's proprietary investment process,
developed by its current principal officers, has been used to manage domestic
equity accounts for U.S. tax-exempt clients since January 1983. Today, Mellon
manages nearly $23 billion in assets for approximately 140 clients.
Thomas J. Durante, a chartered financial analyst, will manage the
day-to-day investment of the assets of The Equity Fund. Mr. Durante specializes
in the management of indexed and enhanced-indexed equity products for Mellon.
Before joining Mellon in 2000, Mr. Durante was a controller of funds at Dreyfus
Corporation for over 18 years. He earned a Bachelor of Science degree in
accounting from Fairfield University.
From its advisory fees, CFSC pays Mellon a sub-advisory fee for managing
the assets of The Equity Fund at the annual rate of 12 basis points (0.12%) on
the first $50 million of the Fund's average daily net assets, and six basis
points (0.06%) on the Fund's average daily net assets in excess of $50 million.
The distribution services that CFSC provides to The Equity Fund are
provided on the same basis and under identical terms and conditions as the
distribution services it provides to The Capital Appreciation Fund, and the rule
12b-1 distribution plan and related fees applicable to Class A shares are the
same for both Funds. For a description of these arrangements, please refer to
the section of this Proxy Statement/Prospectus captioned "Shareholder
Information and Services - Distribution Fees" for The Equity Fund, and to the
section of the Capital Appreciation Fund Prospectus captioned "Shareholder
Information - Distribution Fees" for The Capital Appreciation Fund.
RISK FACTORS
In evaluating whether to approve the Plan and invest in The Equity Fund,
shareholders should carefully consider the following summary of comparative risk
factors relating to The Equity Fund and The Capital Appreciation Fund, in
addition to the other information set forth in this Proxy Statement/Prospectus.
The risks associated with investing in The Equity Fund are similar to the risks
associated with investing in The Capital Appreciation Fund in that both Funds
invest in equity securities of mid to large size companies, although there are
some differences as well.
Market Risk
Both Funds are subject to market risk, which is the risk that the overall
prices of the common stocks in which they invest will rise and fall over short
and even extended periods. The equity markets tend to move in cycles, and the
net asset value of both Funds (and therefore their share prices) will fluctuate
with these price changes and market fluctuations. You could lose money investing
in either Fund.
Objective Risk
Both Funds also are subject to objective risk, which is the risk that the
value of their investments will be affected not only by movements in the stock
market generally, but also by factors that affect the individual stocks held in
their investment portfolios, such as a company's financial performance,
management and business trends. There also is a risk that stocks in the market
capitalization ranges in which these two Funds invest may trail returns from the
overall stock market for short or even extended periods.
Foreign Securities
The Capital Appreciation Fund may invest in foreign securities. Foreign
securities involve special risks and considerations not typically associated
with investing in securities of U.S. companies. These include: fluctuation in
value of foreign portfolio investments due to changes in currency rates and
control regulations (e.g., currency blockage); lack of public information about
foreign issuers; lack of uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic issuers; and greater
difficulties in commencing lawsuits against foreign issuers.
Because The Equity Fund invests only in U.S. companies, it is not exposed
to these risks.
Stock Selection Risk
The Capital Appreciation Fund depends on the design of the quantitative,
analytical model developed by its sub-adviser to select stocks that perform
well, and the ability of its management team to apply that model to the Fund's
investment program. The Fund is subject to the risk that the model may not prove
to achieve its intended results, and that the persons applying the model may
exercise imprudent or incorrect judgment. As a result of either of these
factors, the stocks selected for the Fund may not achieve the desired
appreciation in value, and may even decline in value.
Because The Equity Fund is managed passively to conform substantially to
the S&P 500 Index, it is not significantly exposed to this risk.
Index Correlation Risk
The Equity Fund is exposed to the risk that its performance will not track
that of the S&P 500 Index at all times. This is so for a number of reasons.
First, the application of The Equity Fund's sanctity of life exclusionary screen
will prevent the adviser from purchasing stocks of all of the companies included
in the S&P 500 Index, and the Fund's investment portfolio therefore will not
precisely replicate the composition and capitalization weightings of companies
included in the S&P 500 Index. Also, The Equity Fund from time to time will hold
uninvested cash. This might occur, for example, when the Fund receives the
proceeds of new investments pending the adviser's investment of those proceeds
in stocks of the S&P 500 Index. Also, the adviser may from time to time choose
to hold uninvested cash to meet anticipated redemptions. In either case, the
cash assets will create further deviations between the composition of the Fund's
investment portfolio and that of the S&P 500 Index. These deviations in
portfolio composition will affect the performance of The Equity Fund relative to
the S&P 500 Index.
Finally, unlike the S&P 500 Index, The Equity Fund incurs transaction and
operating costs (e.g., brokerage commissions, investment management fees,
custodian and transfer agent fees, legal and accounting fees, and the like).
These fees and expenses will reduce the total return of the Fund as compared to
that of the S&P 500 Index.
Non-Fundamental Investment Objective
The investment objective of The Equity Fund is not fundamental. This means
that the Fund's investment objective could be changed by action of CFI's Board
of Directors, without the consent or approval of the shareholders of the Fund.
For example, the Board may find it necessary to change the investment objective
of the Fund if the composition of the S&P 500 Index should become so heavily
weighted with stocks of companies that the Fund could not hold under its
sanctity of life exclusionary policy, the Fund may be unable to construct a
portfolio of stocks that reasonably can be expected to track the performance of
the S&P 500 Index. Under these circumstances, the Board may find it necessary to
modify the investment objective of The Equity Fund. The Fund would provide
shareholders with at least 60 days advanced written notice before making any
such change in its investment objective.
COMPARISON OF INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
Investment Objectives
While the Funds have somewhat different investment objectives, they are
both designed for investors who want long-term capital appreciation, can
tolerate fluctuations in portfolio value and have no need for current income
from their investment in the relevant Fund.
The Equity Fund. The Equity Fund seeks to obtain a total return from
dividends and capital gains which is equal to the total return of the S&P 500
Index, less The Fund's operating expenses.
The Capital Appreciation Fund. The Capital Appreciation Fund seeks
long-term capital growth of capital with controlled risk by investing in a
diversified portfolio, primarily in common stocks of companies in a broad range
of market capitalizations.
Principal Strategies
General. Both Funds generally invest in common stocks. While The Equity
Fund focuses on stocks of companies with large capitalization, The Capital
Appreciation Fund generally invests a significant portion of its total assets in
companies with medium market capitalizations. The Capital Appreciation Fund is
managed under a strategy which uses a systematic, computer-driven model to
objectively identify attractive stocks solely based on numerical measures of
growth and value. The consistent and continuous application of this model
ensures that stocks are evaluated solely on their relative values and that stock
selection is not influenced by analyst biases. Nonetheless, there is still a
good deal of subjective judgment involved in applying this analytical model to
the investment program of The Capital Appreciation Fund. In addition, the
success of this strategy to select stocks which will achieve The Capital
Appreciation Fund's objective is dependent on the judgment and skills of the
persons who designed the model and who monitor and modify the model from time to
time. Thus, while this strategy reduces some of the subjective judgment involved
in the day-to-day management of many actively managed funds, the performance of
The Capital Appreciation Fund nonetheless is still significantly dependent upon
the judgment and skill of the sub-adviser. For a detailed description of the
investment program of The Capital Appreciation Fund, please refer to the section
of the Capital Appreciation Fund Prospectus captioned "The Catholic Disciplined
Capital Appreciation Fund."
The Equity Fund, on the other hand, uses a passive management strategy.
Under this strategy, the portfolio manager attempts to match, as closely as
possible, the performance of the S&P 500 Index by holding each stock found in
the Index in roughly the same proportion (measured by market capitalization) as
represented in the Index itself, subject to the application of the Fund's
sanctity of life exclusionary screen. For example, if 3% of the total market
capitalization of the S&P 500 Index consisted of the common stock of a
particular company, then the Fund generally would invest 3% of its assets in
shares of common stock of that company.
Certain companies included in the S&P 500 Index from time to time may
manufacture products or provide services which are inconsistent with the Fund's
sanctity of life exclusionary screen, and the Fund will not invest in the common
stocks of those companies. Accordingly, the Fund will not fully replicate the
Index at all times. Presently there are six companies included in the S&P 500
Index in which the Fund may not invest because of this exclusionary screen.
Together those companies comprise less than 2% of the total market
capitalization of the S&P 500 Index. To reduce the performance tracking error
between the Fund and the S&P 500 Index that will result from the Fund's
exclusion of those stocks, the subadviser will use modeling techniques to
quantify the tracking error and will rebalance the Fund's portfolio among the
remaining Index stocks in an attempt to minimize the tracking error. The adviser
does not believe that the application of this exclusionary screen will adversely
affect the ability of the Fund to achieve its objective.
Passive Management. Passive management appeals to many investors for a
number of reasons, including the following:
o Simplicity - it is a straightforward market matching strategy;
o Diversification - broad indices such as the S&P 500 Index cover a
wide variety of companies and industries;
o Relative performance predictability - a passively managed fund is
expected to move in the same direction - up or down - as its
target index;
o Comparatively low cost - passively managed funds do not have many
of the expenses of an actively-managed mutual fund, such as
research and company visits; and
o Relatively low portfolio turnover rates (assuming the composition
of the relevant index remains fairly stable), which reduces
transaction costs (brokerage commissions, etc.) and capital
gains.
The performance of a passively managed fund generally will trail the
performance of the index it attempts to track. This is true because the mutual
fund and its investors incur operating costs and transaction expenses that are
not shared by an index. For example, investors may pay sales charges which
result in less than all of the price they pay for their mutual fund shares being
invested in common stocks of companies included in the index. Investors in The
Equity Fund pay a front-end sales charge for Class A shares at the time of
purchase. A sales charge reduces the total return on your investment as compared
to a direct investment in stocks.
Additionally, when a mutual fund invests the cash proceeds it receives from
investors in common stocks of companies included in an index, the mutual fund
must pay brokerage commissions, which further reduce the amount invested. As the
composition of the index changes, the mutual fund must make corresponding
adjustments in its holdings, giving rise to additional brokerage commissions.
Also, mutual funds incur other operating expenses, including investment
management fees, custodial and transfer agent fees, legal and accounting fees,
director fees and frequently rule 12b-1 service and distribution fees. These
fees and expenses reduce the mutual funds total return as compared to the index
it attempts to track, because no such costs affect the total return of the
index.
Also, because of liquidity needs, unavoidable delays in immediately
investing the proceeds of the sale of fund shares and other constraints under
which mutual funds operate, passively managed funds generally need to retain a
small portion of their assets in cash or cash equivalents. This inability to be
fully invested in index stocks at all times creates further deviations between
the composition of a passively managed fund's investment portfolio and the index
it attempts to track. These deviations are referred to as tracking error.
In order to reduce the tracking error between the performance of The Equity
Fund and the S&P 500 Index that results from the Fund holding uncommitted cash
from time to time, the sub-adviser may invest the uncommitted cash in shares of
publicly traded closed-end funds that hold a portfolio of stocks designed to
replicate the S&P 500 Index, such as S&P Depository Receipts, or SPDRs. This
practice, known as equitizing cash, facilitates the ability of The Equity Fund
to earn a return on its uncommitted cash which more closely tracks the
performance of the S&P 500 Index. Under no circumstances will the sub-adviser
purchase the shares of such a closed-end fund if, immediately after doing so,
more than 5% of The Equity Fund's net assets would be invested in shares of any
one closed-end fund or if more than 10% of the Fund's net assets would be
invested in such closed-end funds in the aggregate.
As The Equity Fund increases in size, it may become efficient in the future
for it to use exchange-traded index futures contracts to equitize cash, in
addition to or in lieu of publicly traded closed end funds. An index futures
contract is a contract to buy or sell units of a particular index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time The Equity Fund enters into and terminates an index futures
contract, the Fund may realize a gain or loss. Losses involving index futures
contracts can sometimes be substantial, in part because a relatively small price
movement in an index futures contract may result in an immediate and substantial
loss or gain for The Equity Fund. The Fund will not use futures contracts for
speculative purposes or as leveraged investments that magnify the gains or
losses on an investment. The Equity Fund may not invest in futures contracts to
the extent that doing so would require the Fund to commit more than 5% of its
total assets for margin on futures contracts, or if more than 20% of the Fund's
total assets would be committed to futures contracts.
There is a risk of an imperfect correlation between movements in prices of
futures contracts on the S&P 500 Index and movements in the value of the S&P 500
Index itself. There is also a possibility that no liquid secondary market will
exist for a futures contract that will enable The Equity Fund to close a futures
position prior to its maturity date. The Fund will seek to reduce this liquidity
risk by entering into futures contracts on registered security exchanges with an
active and liquid secondary market.
In addition to the holding of uncommitted cash, the application of The
Equity Fund's sanctity of life exclusionary screen also creates deviations
between the composition of The Equity Fund's investment portfolio and the
composition of the S&P 500 Index. These mismatches between passively managed
funds and the indices that they attempt to track create variances in their
relative performances.
For these reasons, you should expect that the performance of The Equity
Fund will lag that of the S&P 500 Index. In part for this reason, The Equity
Fund compares its gross return (total return before deducting the Fund's
operating expenses and transaction costs) to the S&P 500 Index, rather than its
net return.
S&P 500 Index. The S&P 500 Index is an index compiled and maintained by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). The
Index consists of 500 stocks chosen by S&P for market size, liquidity and
industry group representation. It is a market-value weighted index (stock price
times the number of shares outstanding) with each stock's weight in the Index
proportionate to its market value.
While the S&P 500 Index has proven a good measure of large-cap stock
performance over time, you should bear in mind that it does not represent the
entire U.S. stock market. Historically, the market has gone through cycles where
large-cap stocks included in the S&P 500 Index have outperformed and
underperformed the broader U.S. stock market. For example, in the mid-to-late
1990's, technology companies experienced rapid growth and comprised an
increasing percentage of the S&P 500 Index, exceeding 25% of the Index at
various times. The S&P 500 Index experienced significant volatility during this
period, much of it attributable to the performance of these technology stocks.
For these reasons, while we expect the Fund's performance will closely track
that of the S&P 500 Index, you should not expect that the Fund's performance
will track that of the broader U.S. equity markets at all times.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of S&P. S&P makes no representation or warranty,
implied or expressed, for the shareholders of The Equity Fund, or any member of
the public regarding the advisability of investing in index or other passively
managed funds generally, or in The Equity Fund in particular, or the ability of
The Equity Fund to track general stock market performance. S&P's only
relationship to this Fund is the licensing of the S&P 500 Index which is
determined, composed and calculated by S&P without regard to this Fund.
Implementation of Catholic Values
The Capital Appreciation Fund. The Capital Appreciation Fund focuses on
three core Catholic values selected by the board of directors of The Catholic
Funds for adherence in connection with its investment program. Those values
consist of the following:
o Sanctity of Human Life - Human life deserves protection from the
moment of conception.
o No Unjust Wars - The indiscriminate destruction of civilians is
wrong, even in the course of an otherwise justifiable war.
o Dignity of the Human Person - Every person is entitled to be
treated with dignity and justice, because every human being is
created in the image and likeness of God.
The board of directors has adopted guidelines which the adviser uses to
identify companies whose products, services and/or business practices are
inconsistent with one or more of these core Catholic values, and the adviser
refrains from acquiring the securities of those companies for the investment
portfolio of The Capital Appreciation Fund. A more detailed description of the
implementation of these Catholic Values with respect to The Capital Appreciation
Fund is included in the Capital Appreciation Fund Prospectus under the caption
"Investment Philosophy Statement."
The Equity Fund. In considering the core Catholic values that would be
implemented with respect to The Equity Fund, and given its experience with the
application of the exclusionary screens of The Catholic Funds to date, the board
of directors determined that it would be prudent to cease screening for the "no
unjust wars" principle in the future (following the Reorganization). In coming
to this conclusion, the board was cognizant of the global trend toward the
reduction in nuclear arms, biological weapons and other weapons of mass and
indiscriminant destruction, and the concurrent technological developments that
have given rise to more effective precision weapons. Since the commencement of
The Catholic Funds, this screen has not resulted in the exclusion of a
significant number of companies from the portfolios of the three existing equity
funds. For these reasons, the board has determined that The Equity Fund will
strive to invest its assets in a manner that promotes two important core
Catholic values: namely, the sanctity of human life and the dignity of the human
person.
To implement the sanctity of human life value in its investment program,
The Equity Fund will avoid investing in securities of companies that directly
participate in abortion.
With respect to the dignity of the human person, the board has determined
to focus on the practices and policies of employers with respect to members of
the work force. The board believes the manner in which a company treats its
employees is a good measure of the company's attitude toward the dignity of the
human person generally. If The Equity Fund's investment strategy should cause it
to invest in securities and obligations of a company or other issuer whose
employment and other business practices are substantially inconsistent with the
dignity and primacy of the human person, CFSC will engage in advocacy activities
designed to influence the company's practices to better reflect and promote the
dignity of the human person. Examples of practices that The Catholic Funds and
CFSC likely would determine are inconsistent with this principle include,
without limitation:
o Not providing a livable wage as dictated by the standards of the
particular region;
o Not providing safe, sanitary or humane working conditions;
o Failing to maintain a board of directors composed of a majority
of individuals who are independent of management and free from
other material conflicts and personal interests that potentially
could compromise their ability and incentive to vigorously
promote and protect the interests of the shareholders;
o Not maintaining fair and equitable compensation structures which
allow employees at all levels to share financially in the success
of the company through stock-option, employee-ownership or other
types of programs that benefit all employees; or
o Employing executive compensation systems which overcompensate or
unjustly enrich executive management at the expense of
shareholders and lower-level employees.
The board of directors selected these two particular core Catholic values
because they are grounded in the very fundamental Catholic value that every
person is made in the image and likeness of God. Also, each relates to the
protection of innocent victims who have no choice or whose choices are extremely
limited under the relevant circumstances, such as unborn children and people who
need to earn a living. Finally, the board believes that the adviser can
practically and efficiently implement each of these values in making day-to-day
investment and advocacy decisions, and that the board effectively can monitor
and direct compliance with these values.
The board of directors may from time to time select different or additional
core Catholic values that The Equity Fund will implement in its investment
program. For example, the board of directors may determine to add or substitute
a selected core Catholic value in response to official doctrinal statements of
the Catholic Church. In any event, the board of directors has the sole and
exclusive authority to select the core Catholic values that we will implement in
the Funds' investment programs, and to determine the manner in which they will
be implemented.
Because the board of directors views the sanctity of human life as so
fundamental to the doctrines of the Catholic Church, the board determined to
retain an exclusionary practice with respect to the implementation of this
value. However, with respect to the dignity of the human person value, the board
of directors determined that an advocacy approach to implementation potentially
could have a greater effect. The board determined that an exclusionary practice
with respect to this value likely would have little impact on the conduct and
behavior of companies, insofar as The Equity Fund's exclusion of those companies
from its investment portfolio likely would go unnoticed. However, a proactive
shareholder advocacy approach potentially could cause such companies to reform
their offending practices to better comport with the value of the dignity of the
human person. Accordingly, the board elected to adopt an advocacy program as a
means to implement this value in the investment program of The Equity Fund.
The board of directors of The Catholic Funds has adopted policies and
procedures designed to implement the selected Catholic values in the investment
practices of The Equity Fund. These procedures delegate to the adviser the
day-to-day responsibility for monitoring the Fund's investments to identify any
products, services or business practices which are inconsistent with the board's
selected Catholic values. The adviser also is responsible to enforce the
sanctity of the human life exclusionary screen and to initiate action under the
advocacy program. The adviser is subject to the oversight of a Catholic Screen
Review Committee appointed by the board, to which management of the adviser
reports monthly on the screening and advocacy activities. The adviser and the
Catholic Screens Review Committee are both subject to oversight by The Catholic
Funds' board of directors, to which they report quarterly.
The adviser has access to a commercial service which enables it to use
application software systems designed to screen companies for various social
issues. Using this tool and other available information, the adviser conducts an
analysis on each company whose securities are newly added to The Equity Fund to
produce a screening profile on the company. Members of the Catholic Screens
Review Committee review these profiles monthly, except for those that the
adviser determines raise no issues with respect to the selected Catholic values.
If the adviser or the Catholic Screens Review Committee determines that a
company participates directly in abortion, that company's securities will not be
purchased by The Equity Fund. If this determination is made after a company's
securities already are owned by the Fund, the adviser will direct the subadviser
promptly to arrange for the sale of those securities in an orderly fashion. If
it is determined that a company engages in practices which are inconsistent with
the dignity of the human person, management of the adviser will consider
appropriate advocacy actions.
On an ongoing basis, the adviser monitors the practices and policies of
companies in which The Equity Fund invests by selectively reviewing their annual
reports to shareholders, proxy statements and other public communications that
they periodically issue. The adviser also monitors news reports and websites
oriented to socially responsible investing, and obtains and reviews information
from proxy research and voting services firms that it may retain from time to
time, as well as information it obtains through membership in one or more
organizations that provide information and assistance in connection with
shareholder advocacy efforts.
Advocacy activities that the adviser might initiate include such things as
writing letters to management of the relevant companies, encouraging
shareholders of The Equity Fund to do the same, engaging in direct dialog with
management of these companies, voting shares of the company held by The Equity
Fund in a manner that promotes the dignity of the human person on relevant
matters, submitting shareholder proposals for consideration at annual and
special meetings of shareholders either individually or together with other
social activists and shareholder groups, participating in or initiating proxy
contests for the election of directors, and the like. The adviser also may
request companies to provide copies of policies that pertain to the selected
Catholic values, and may propose specific questions or conduct surveys
pertaining to these Catholic values for response by companies in which The
Equity Fund invests. We cannot provide any assurance that our advocacy efforts
will be successful in persuading companies to reform their offending practices.
If a company fails to reform its practices as requested, that fact alone will
not require The Equity Fund to dispose of the securities of that company. In
fact the Fund may elect to continue to hold those securities, but likely would
continue its advocacy efforts. The adviser will pay all costs incurred in
connection with these advocacy efforts.
Investors should bear in mind that we consider only certain core Catholic
values when selecting investments for the Funds and when determining whether and
what advocacy actions to take. Therefore, it is likely that The Equity Fund from
time to time will own stocks of companies that engage in business and employment
activities and practices that may be perceived by some to be inconsistent with
important Catholic values other than those described above, and with respect to
which we employ no exclusionary policy and take no advocacy actions.
APPROVAL OF THE PLAN AND REORGANIZATION
The board of directors of The Catholic Funds unanimously recommends that
the shareholders of The Capital Appreciation Fund vote to approve the Plan and
the Reorganization described in the Plan. The board of directors approved the
Plan in the belief that it is fair to, and in the best interests of, the
shareholders of The Capital Appreciation Fund.
Description of the Plan
The terms and conditions under which the proposed Reorganization would be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus.
The Plan contemplates the transfer of substantially all of the assets of
The Capital Appreciation Fund, net of its liabilities, to The Equity Fund in
exchange solely for shares of Class A Common Stock of The Equity Fund, and the
immediate pro rata distribution of such shares to the shareholders of The
Capital Appreciation Fund. If approved by the shareholders of The Capital
Appreciation Fund, the Reorganization would occur on or about [Date?] (the
"Closing Date"), or such other date as The Catholic Funds may determine.
The Equity Fund would acquire substantially all of the assets of The
Capital Appreciation Fund, net of the liabilities, including without limitation
all cash, cash equivalents, securities, receivables and other property owned by
The Capital Appreciation Fund, but excluding cash and other assets of The
Capital Appreciation Fund sufficient to pay all of its accrued but unpaid
liabilities as of the Closing Date. The Equity Fund would not assume any debts,
liabilities, obligations or duties of The Capital Appreciation Fund. Rather, The
Capital Appreciation Fund will reserve sufficient assets to pay all of its
liabilities as of the Closing Date. Such liabilities may include without
limitation: (a) amounts owed to shareholders of The Capital Appreciation Fund
with respect to capital gains distributions and/or dividends declared but
remaining unpaid as of the Closing Date; and (b) accounts payable, taxes and
other accrued and unpaid expenses, if any, incurred in the normal operation of
the business of The Capital Appreciation Fund up to and including the Closing
Date and/or expected to be incurred following the Closing Date in connection
with the winding up and dissolution of The Capital Appreciation Fund.
In consideration for the assets of The Capital Appreciation Fund
transferred in the Reorganization, The Equity Fund would issue to The Capital
Appreciation Fund Class A shares of The Equity Fund having an aggregate net
asset value equal to the value of the assets transferred by The Capital
Appreciation Fund. The assets of The Capital Appreciation Fund and the per share
net asset value of The Equity Fund shares would be valued as of the close of
business on the New York Stock Exchange on the business day next preceding the
Closing Date. All such valuations would be conducted in accordance with the
policies and procedures of The Capital Appreciation Fund and The Equity Fund.
On the Closing Date, The Capital Appreciation Fund would distribute pro
rata to its shareholders of record the Class A shares of The Equity Fund
received by The Capital Appreciation Fund. Such distribution would be
accomplished by opening accounts on the books of The Equity Fund in the names of
shareholders of The Capital Appreciation Fund and by transferring the shares
credited to the account of The Capital Appreciation Fund on the books of The
Equity Fund. Each account opened would represent the respective pro rata number
of The Equity Fund shares due to each shareholder of The Capital Appreciation
Fund. Fractional shares of The Equity Fund would be rounded to the nearest
thousandth of a share. Each shareholder will receive that number of Class A
shares of The Equity Fund that has an aggregate net asset value equal to the
aggregate net asset value of all of the shareholder's shares of The Capital
Appreciation Fund.
Accordingly, every shareholder of The Capital Appreciation Fund would own
Class A shares of The Equity Fund immediately after the Reorganization, the
aggregate net asset value of which is expected to be equal to the aggregate net
asset value of such shareholder's shares of The Capital Appreciation Fund
immediately prior to the Reorganization. Moreover, because The Equity Fund
shares would be issued at net asset value in exchange for the net assets of The
Capital Appreciation Fund, and the aggregate value of those assets would equal
the aggregate value of The Equity Fund shares issued in exchange therefor, the
net asset value per share of The Equity Fund would not change as a result of the
Reorganization. Thus, the Reorganization would not result in economic dilution
to any shareholder of either The Capital Appreciation Fund or The Equity Fund.
Prior to the Closing Date, The Capital Appreciation Fund would declare and
pay a dividend to its shareholders of record, so that for the short taxable year
that ends on the Closing Date, it would have declared an aggregate amount of
dividends that: (a) is equal to at least the sum of its respective net capital
gain and 90% of its investment company taxable income for such year, and (b) is
sufficient to avoid any excise tax for the calendar year in which the Closing
Date occurs.
Other Terms
The consummation of the Reorganization is subject to the conditions
precedent set forth in the Plan, including among other things (a) approval of
the Reorganization by The Capital Appreciation Fund shareholders; (b) receipt of
a legal opinion of Quarles & Brady LLP that the Reorganization will not result
in recognition of gain or loss for federal income tax purposes by The Equity
Fund, The Capital Appreciation Fund or The Capital Appreciation Fund
shareholders; (c) the Registration Statement on Form N-14 shall have become
effective under the Securities Act of 1933, no stop orders suspending the
effectiveness thereof shall have been issued with respect thereto, and, to the
knowledge of The Catholic Funds, no investigation or proceeding for that purpose
shall have been instituted or be pending, threatened or contemplated under the
Securities Act; (d) a post-effective amendment to The Catholic Funds'
Registration Statement on Form N-1A with respect to The Equity Fund shall have
become effective and shall remain effective as of the Closing Date; and (e) The
Catholic Funds shall have received necessary relief from the SEC from certain
provisions of the Investment Company Act of 1940 which otherwise would prohibit
the completion of the Reorganization on its proposed terms.
Notwithstanding approval of The Capital Appreciation Fund's shareholders,
the Reorganization may be terminated at any time prior to the Closing Date by
The Catholic Funds in its discretion, and will be terminated by The Catholic
Funds if any of the conditions to Closing are not satisfied on or before the
Closing Date.
Each participant in the Reorganization will bear its own legal, accounting
and other related expenses in connection with the Reorganization. However, CFSC
has agreed to pay the cost of soliciting the vote of shareholders of The Capital
Appreciation Fund on the transactions contemplated in the Agreement, including
costs of preparation, printing, and distribution of proxy materials, legal and
tax opinions, transfer and stamp taxes, and the costs of printing and
distributing prospectus supplements describing such matters, and the fees of
Quarles & Brady LLP, The Catholic Funds' legal counsel, in connection with the
Reorganization. CFSC also has agreed to pay all costs by The Equity Fund
incurred in connection with the Reorganization, if any.
Background to Reorganization
Catholic Knights and the other members of the Catholic Fraternal Alliance,
through their ownership of CFSC, established The Catholic Funds in 1998 as a
means to provide their members with a financially prudent investment program
that would adhere to certain core Catholic values. Their plan contemplated that
over time The Catholic Funds would include a broad array of mutual funds that
members of the Catholic fraternals could use to develop a comprehensive
investment program suitable for their needs, and that the availability of The
Catholic Funds would attract new members to the Catholic fraternals. The
Catholic Fraternal Alliance's plan also anticipated that each member Catholic
fraternal eventually would cause many of its agents to become licensed with CFSC
to participate in the sale and distribution of shares of The Catholic Funds, and
that this sales force would effectively reach all of the members of the Catholic
fraternals within the Catholic Fraternal Alliance. The Catholic Fraternal
Alliance anticipated that Catholics would be attracted by the opportunity to
participate in investment programs with above-average performance and adherence
to important core Catholic values.
The Catholic Fraternal Alliance planned to retain a sub-adviser with
expertise and experience in investment management strategies relevant to the
investment objective and investment program of each fund. These sub-advisers
would manage the investment and reinvestment of each fund's assets on a
day-to-day basis. The Catholic Alliance Fraternal and the board of directors of
The Catholic Funds believed the use of experienced, well staffed sub-advisers
would increase the likelihood that each fund might achieve performance superior
to its peers, rather than trying to build those staffing resources at CFSC with
respect to each fund.
To this end, the Catholic Fraternal Alliance, through CFSC, organized and
sponsored The Catholic Funds in 1998 with three equity funds, namely The
Catholic Equity Income Fund, The Catholic Large-Cap Growth Fund and The Catholic
Disciplined Capital Appreciation Fund. In 2000, The Catholic Funds added The
Catholic Money Market Fund as an additional series.
To date, The Catholic Funds, including The Capital Appreciation Fund, have
fallen short of the asset growth and asset level projected by the original
business plan of CFSC. The small size of The Capital Appreciation Fund puts it
at a competitive disadvantage to its peers. This is so because, like all mutual
funds, The Capital Appreciation Fund has certain fixed costs, such as accounting
fees, legal fees, director fees, and minimum fees for fund accounting, transfer
agent, custodial services and other administrative services. When these fixed
fees are spread over a small asset base, they result in higher expense ratios as
compared to other mutual funds with larger asset sizes. Also, investment
management and transaction based fees frequently decline with larger asset
sizes, thereby putting small funds at a further competitive disadvantage. While
CFSC has been waiving fees and reimbursing expenses so that the annual operating
expenses of The Capital Appreciation Fund would not exceed 1.75% of its average
daily net assets in any fiscal year, even these measures have been insufficient
to bring the expense ratios of The Capital Appreciation Fund into line with its
peer group. Moreover, CFSC has indicated that it is not willing to continue to
subsidize The Capital Appreciation Fund indefinitely.
CFSC and the board of directors of The Catholic Funds believe that the
failure of The Capital Appreciation Fund to meet its expectations can be
attributed to a combination of numerous factors. First, the timing of the
startup of The Capital Appreciation Fund has proven unfortunate, given the
general decline, high volatility and uncertainty that has characterized the
domestic stock market in recent periods. These conditions have made investors
apprehensive, and also have made it difficult for CFSC to recruit selling
representatives from among the ranks of the Catholic fraternals. Indeed, CFSC's
mutual fund sales force is only a fraction of the size anticipated in its
business plan. Finally, while the performance of The Capital Appreciation Fund
has been strong on a relative basis, it is not so outstanding as to attract the
attention of the investing public. In short, sales and asset growth have been
disappointing, and the board of directors believes it is unlikely that these
conditions will improve in the near term.
Management of CFSC and The Catholic Funds have discussed these matters with
the board on a regular basis during recent quarterly meetings of the board.
During the summer of 2001, CFSC retained the services of Precision Marketing, a
Milwaukee-based professional mutual fund distribution/marketing consulting firm
to complete a study on The Catholic Funds and CFSC and to provide
recommendations. At a special meeting of the board of directors held on October
26, 2001, CFSC presented the results of Precision Marketing's report and CFSC's
recommendations based on that report. The report made several observations
regarding CFSC's and The Catholic Funds' growth plan, including the following:
o It appears that, while the members of the Catholic fraternals are
attracted to investment products that adhere to core Catholic
values, their investment habits do not indicate a strong
inclination to confine their entire investment program to those
types of products. Accordingly, the concept of The Catholic Funds
to build a family of mutual funds sufficient to meet the needs of
comprehensive investment programs for all of the members of the
Catholic fraternals is potentially unnecessary as a strategy to
maximize sales and asset growth.
o The Capital Appreciation Fund and the other two existing equity
funds of The Catholic Funds are difficult for selling
representatives and investors to differentiate and to understand
how they should be used in an overall investment program.
o It is unlikely that, in the near term, CFSC successfully can
recruit a mutual fund sales force sufficient to achieve retail
sales of shares of The Capital Appreciation Fund that will
support asset growth to the point where the Fund will be
self-sustaining and achieve a competitive expense ratio.
Therefore, it is necessary to consider alternative distribution
channels, such as direct sales by CFSC to members of the Catholic
fraternals and members of other Catholic groups and sales to
Catholic institutions, such as parishes, schools and the like.
o The performance of The Capital Appreciation Fund, while
acceptable compared to its peers, is not at a level that attracts
the attention of the investing public.
Based on these and other observations, CFSC developed and presented to the
board a new strategic plan, which, among other things, proposed the
establishment of The Equity Fund and the consolidation of all three of the
existing equity funds, including The Capital Appreciation Fund, with and into
The Equity Fund. The board discussed the new strategic plan and the
reorganization with management of CFSC and The Catholic Funds and a principal of
Precision Marketing at the special meeting of the board held on October 26,
2001. The board further considered and unanimously approved the reorganization
in principle at its regular quarterly meeting held on November 12, 2001, and
approved the sub-adviser for The Equity Fund and formally approved the Plan,
subject to approval by the shareholders of The Capital Appreciation Fund, at a
meeting held on February 14, 2002. During those meetings the board reviewed and
made inquiries regarding Precision Marketing's report and CFSC's strategic plan,
requested and reviewed information about Mellon Equity Associates, asked
questions of and received answers from management of Mellon, made inquiries of
CFSC regarding the terms of the Reorganization and its benefits to the
shareholders of The Capital Appreciation Fund and consulted with legal counsel.
The board also considered alternatives, including the possibility of
liquidating The Capital Appreciation Fund or seeking another mutual fund as a
merger partner for The Capital Appreciation Fund. The latter alternative was not
viewed as viable, insofar as the possible merger candidates that adhere to
Catholic values is extremely limited, and those candidates generally face
challenges comparable to or even greater than those presently faced by The
Capital Appreciation Fund. The board and CFSC remain committed to provide
Catholics with an investment option that adheres to certain core Catholic
values, so the board viewed liquidation as an alternative of last resort.
Reasons For The Proposed Reorganization
The board of directors of The Catholic Funds has unanimously determined
that the interest of the shareholders of The Capital Appreciation Fund will not
be diluted as a result of the Reorganization, and that the Reorganization is
fair to, and in the best interests of, the shareholders of The Capital
Appreciation Fund. In reaching this conclusion, the board of directors
considered a number of factors, including the following:
(1) The Reorganization of The Capital Appreciation Fund with and into
The Equity Fund and the anticipated concurrent reorganizations of
the other two existing equity funds of The Catholic Funds with
and into The Equity Fund will create a single mutual fund with
total assets of approximately $17.0 million which will enhance
the ability of The Equity Fund to be self sustaining and to
achieve an expense ratio competitive with its peers.
(2) While the investment objective and program of The Equity Fund is
not the same as that of The Capital Appreciation Fund, the board
of directors believes that The Equity Fund is an appropriate
investment for the same type of investors for whom The Capital
Appreciation Fund is appropriate, namely, investors who want
long-term capital appreciation, can tolerate fluctuations in
portfolio value and have no need for current income from their
investment in The Equity Fund.
(3) The Equity Fund will adhere to two of the three core Catholic
values followed by The Capital Appreciation Fund in its
investment program. The sanctity of human life will be
implemented through an exclusionary screen process identical to
that presently employed by The Capital Appreciation Fund. The
dignity of the human person value will be implemented through a
shareholder advocacy program, as opposed to the exclusionary
screen utilized by The Capital Appreciation Fund. The board
believes this advocacy approach offers greater potential for The
Equity Fund to influence and possibly reform offending practices
and policies of businesses, as opposed to an outright
exclusionary policy that likely would go unnoticed by the
offending businesses.
(4) The investment objective and passive management style of The
Equity Fund substantially reduces the issue of relative
performance to shareholders and prospective investors.
(5) The multi-class structure of The Equity Fund increases the
potential for asset growth through sales in distribution channels
other then the broker-assisted retail channel, including direct
sales by CFSC to members of the Catholic fraternals comprising
the Catholic Fraternal Alliance and other Catholics, and to
institutions such as Catholic parishes, schools and the like.
(6) The advisory fee for The Equity Fund is lower than the advisory
fee for The Capital Appreciation Fund and is in line with
advisory fees of other passively managed funds, which should
enhance the ability of The Equity Fund to perform competitively
relative to its peers.
(7) The fact that the Reorganization has been structured to be
tax-free to shareholders of The Capital Appreciation Fund.
(8) The extensive experience and past performance of Mellon Equity
Associates in managing mutual funds and other investment
portfolios with a passive management investment strategy under
social screens, and in managing index funds based on the S&P 500
Index in particular.
(9) The financial commitment that CFSC has demonstrated to The
Catholic Funds over the years, and its assurances to the board of
its continued commitment under this new strategic plan, as well
as CFSC's stated unwillingness to continue subsidizing The
Capital Appreciation Fund indefinitely into the future under the
current structure.
(10) The relative superiority of the benefits of the Reorganization to
shareholders of The Capital Appreciation Fund as compared to
other alternatives.
The board believes that, overall, the Reorganization offers a viable
solution to further the board's desire to provide shareholders of The Capital
Appreciation Fund with an investment option that is appropriate for them from a
financial stewardship standpoint, and which offers them the opportunity to
invest their savings in a manner that adheres to certain core Catholic values.
The board believes that the Reorganization increases the opportunity for future
sales and asset growth sufficient for The Equity Fund to become self sustaining
and competitive with its peers. Shorter term, the proposed consolidation in The
Equity Fund of the assets of The Capital Appreciation Fund and of the other two
existing equity funds of the Catholic Funds will create a fund with an asset
level that should immediately reduce the expense ratio as compared to The
Capital Appreciation Fund, and over time should enable shareholders to benefit
from economies of scale that potentially will result in an even lower overall
expense ratio. There can be no assurance, however, that these economies of scale
and lower overall expense ratios will be achieved, or that The Equity Fund will
become competitive and self-sustaining.
Federal Tax Considerations
The Reorganization is conditional upon receipt by The Catholic Funds of the
opinion from Quarles & Brady LLP described below. No rulings have been requested
from the Internal Revenue Service with respect to these matters and the opinion
of Quarles & Brady LLP is not binding on the Internal Revenue Service or the
courts. Additionally, the opinion of Quarles & Brady LLP is based upon various
representations and assumptions described therein.
The opinion is based on the current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
No attempt has been made to comment on all federal income tax consequences of
the Reorganization that may be relevant to particular holders, including holders
that are subject to special rules such as dealers in securities, foreign
persons, insurance companies, and tax exempt entities.
In the opinion of Quarles & Brady LLP, the principal Federal income tax
consequences that will result from the Reorganization, under currently
applicable law, are as follows: (i) the Reorganization will qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and The Capital Appreciation Fund and The
Equity Fund will each be a "party to" the Reorganization within the meaning of
Section 368(b) of the Code; (ii) no gain or loss will be recognized by The
Capital Appreciation Fund upon the transfer of substantially all of its assets
to The Equity Fund in exchange solely for Class A shares of The Equity Fund;
(iii) no gain or loss will be recognized by The Equity Fund upon its receipt of
substantially all of the assets of The Capital Appreciation Fund in exchange
solely for shares of The Equity Fund; (iv) no gain or loss will be recognized by
any shareholder of The Capital Appreciation Fund upon the liquidation of The
Capital Appreciation Fund and the related surrender of their shares of The
Capital Appreciation Fund in exchange for shares of The Equity Fund; (v) the tax
basis of the shares of The Equity Fund to be received by a shareholder of The
Capital Appreciation Fund will be the same as the tax basis of the shares of The
Capital Appreciation Fund surrendered in the Reorganization; (vi) the holding
period of the shares of The Equity Fund to be received by a shareholder of The
Capital Appreciation Fund will include the holding period for which such
shareholder held the shares of The Capital Appreciation Fund exchanged therefor,
provided that such shares of The Capital Appreciation Fund are a capital asset
in the hands of such shareholder as of the Closing; (vii) The Equity Fund's
basis in the assets acquired from The Capital Appreciation Fund will be the same
as the basis of such assets in the hands of The Capital Appreciation Fund
immediately prior to the Reorganization; (viii) the holding period of the assets
of The Capital Appreciation Fund in the hands of The Equity Fund will include
the period during which such assets were being held by The Capital Appreciation
Fund; and (ix) The Equity Fund will succeed to and take into account as of the
Closing Date the items of The Capital Appreciation Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the applicable
Treasury Regulations thereunder.
The foregoing description of the Federal income tax consequences of the
Reorganization is made without regard to the particular facts and circumstances
of any shareholder of The Capital Appreciation Fund. Shareholders of The Capital
Appreciation Fund are urged to consult their own tax advisers as to the specific
consequences to them of the Reorganization, including the applicability and
effect of state, local, foreign and other tax laws.
CAPITALIZATION
The following table shows the capitalization of Class A shares of The
Capital Appreciation Fund as of September 30, 2001, and of The Equity Fund
giving effect to the Reorganization and the concurrent reorganizations of the
other two existing equity funds of The Catholic Funds, based on the net assets
and number of outstanding shares of each of the three existing equity funds of
The Catholic Funds, including The Capital Appreciation Fund, as of September 30,
2001.
The Catholic
Disciplined
Capital The Catholic Large-Cap The Catholic Equity
Appreciation Growth Fund Income Fund The Catholic
Fund Equity Fund
Net assets $4,525,315 $5,276,634 $5,372,776 $15,174,725
Net asset value per share $8.43 $7.91 $9.09 $8.43
Shares outstanding 536,765 666,850 590,954 1,789,569
OWNERSHIP OF FUND SHARES
As of December 31, 2001, no person was known to own of record or
beneficially 5% or more of the outstanding shares of The Capital Appreciation
Fund, other then as set forth below:
Holder Number of Shares Percentage of Outstanding Shares
------ ---------------- --------------------------------
Catholic Knights 347,713 63.88%
1100 West Wells Street
Milwaukee, WI 53233
Catholic Order of Foresters 75,199 13.83%
355 Shuman Boulevard
P.O. Box 3012
Naperville, IL 60566
Because The Equity Fund will first commence operations with and following
the Reorganization, at December 31, 2001 it had no shares outstanding.
DESCRIPTION OF SECURITIES TO BE ISSUED AND RIGHTS OF SHAREHOLDERS
The Catholic Funds is an open-end management investment company
incorporated on December 16, 1998 under the laws of the State of Maryland. The
Catholic Funds presently offers shares of four separate series or mutual funds,
each with its own investment objective, including The Capital Appreciation Fund.
The Equity Fund is a newly designated series of shares of The Catholic Funds
which has not yet commenced operations. Both The Capital Appreciation Fund and
The Equity Fund are diversified funds as defined in the 1940 Act.
The Capital Appreciation Fund offers its shares in a single class, namely
Class A Common Stock. These shares of The Capital Appreciation Fund have rights
and privileges which are identical to shares of Class A Common Stock of The
Equity Fund.
The Equity Fund has three classes of shares of common stock: Class A
shares, Class C shares and Class I shares. Shares of a particular class give the
holders of those shares an interest only in the assets of that class. In a
liquidation of the Fund, shares of the same class will share pro rata in the
distribution of the net assets of the Fund with all other shares of that class.
Shares of a particular class are equal in all respects to the other shares of
that class. Each share has one vote and each fractional share has a
proportionate fractional vote on each matter presented to that class of
shareholders. When the Class A shares of The Equity Fund to be issued in the
Reorganization are issued in accordance with the terms of the Plan, they will be
fully paid and non-assessable by The Catholic Funds. Shares may be exchanged as
described in this Proxy Statement/Prospectus, but will have no other preference,
conversion, exchange or preemptive rights. Neither its Articles of
Incorporation, the 1940 Act, Maryland law nor any other authority requires The
Catholic Funds to hold any annual or special meeting of shareholders except,
under certain circumstances, to amend an investment advisory or sub-advisory
agreement or certain fundamental investment restrictions, to elect and remove
Directors, to reorganize The Catholic Funds or any series or class thereof and
to act upon certain other business matters. With respect to a liquidation, sale
of substantially all of a fund's assets, change in a fundamental investment
restriction or approval of an investment advisory or sub-advisory agreement, the
right to vote is limited to the holders of shares of the particular mutual fund
affected by the proposal.
Unless a shareholder meeting is required by the 1940 Act or other
applicable law, The Catholic Funds does not intend to have an annual or special
meeting of shareholders. However, as represented to the SEC, The Catholic Funds
will call a special meeting of shareholders for the purpose of considering the
removal of one or more Directors upon written request from shareholders holding
ten percent or more of the outstanding votes of The Catholic Funds, and The
Catholic Funds will assist those shareholders in communicating with other
shareholders as required by Section 16(c) of the 1940 Act. At such a meeting, a
quorum of shareholders (constituting one-third of all outstanding shares of The
Catholic Funds) has the power to remove one or more Directors with or without
cause by the affirmative vote of a majority of all outstanding shares of all
series and classes voting together.
SHAREHOLDER INFORMATION AND SERVICES
Shareholder Information
Share Price Calculation. Like The Capital Appreciation Fund, the price at
which you purchase and redeem Class A shares of The Equity Fund is equal to the
net asset value (NAV) per share (plus any applicable sales charge in the case of
purchases) determined on the effective date of the purchase or redemption. The
Fund's NAV per share is calculated at the close of the regular trading session
of the NYSE, which is usually 3:00 p.m. Central Time. We do not calculate the
net asset value for the Fund on the days when the NYSE is closed for trading.
NAV EQUALS TOTAL ASSETS MINUS LIABILITIES DIVIDED BY NUMBER OF SHARES
OUTSTANDING.
Like The Capital Appreciation Fund, we value securities owned by The Equity
Fund at current market value. For securities with readily available market
quotations, we use the quotations to price the security. If a security does not
have a readily available quotation, we value the security as determined in good
faith in accordance with guidance and policies established by the board of
directors. The board of directors approves the use of pricing services to assist
us in the determination of net asset values.
Dividends, Capital Gains and Taxes. This section summarizes some of the
consequences under current federal tax law of an investment in The Equity Fund.
It is not a substitute for personal tax advice. Consult your personal tax
adviser about the potential tax consequences of an investment in The Equity Fund
under all applicable tax laws.
The Equity Fund will distribute any net investment income annually and will
distribute any net realized long or short-term capital gains at least annually.
The Fund may also pay a special distribution to comply with federal tax
requirements.
If your account is a taxable account, you will pay tax on dividends and
distributions from the Fund whether you receive them in cash or additional
shares.
If you redeem shares of The Equity Fund or exchange them for shares of The
Money Market Fund, any gain on the transaction may be subject to tax.
The Equity Fund intends to make distributions that will either be taxed as
ordinary income or capital gains. Capital gains distributions may be taxable at
different rates depending on the length of time the Fund has held the assets
sold.
Federal law requires us to withhold 31% of a shareholder's reportable
payments (which include dividends, capital gain distributions and redemption
proceeds) for those who have not properly certified that the Social Security or
other taxpayer identification number they provided is correct and that he or she
is not subject to backup withholding. We do not provide information on state and
local tax consequences of owning shares in The Equity Fund.
Reinvestment of Fund Distributions
If you have requested that all of your income dividends and/or capital
gains distributions on your shares of The Capital Appreciation Fund be
reinvested in additional shares of that Fund, we will honor that request with
respect to distributions on the Class A shares of The Equity Fund that you
receive in the Reorganization. You will not pay any sales charge on these
additional shares. If, on the other hand, you are receiving your distributions
on your shares of The Capital Appreciation Fund in cash, you will continue to
receive your distributions on the Class A shares of The Equity Fund that you
receive in the Reorganization in cash. As with The Capital Appreciation Fund,
when you receive a distribution you may have to pay taxes whether or not you
reinvest the distribution or have it paid out to you in cash. If you have
requested cash distributions and we cannot locate you, we will reinvest your
dividends and other distributions.
Distribution Fees
The Catholic Funds has adopted a plan under Rule 12b-1 of the Investment
Company Act of 1940 that allows The Equity Fund to pay distribution fees for the
sale and distribution of its shares and continuing services to shareholder
accounts. The Rule 12b-1 fee for Class A shares of The Equity Fund is computed
at the annual rate of 0.25 of 1% of the Fund's average daily net assets, which
is the same as the rule 12b-1 fee presently paid by The Capital Appreciation
Fund. This fee is for services provided by CFSC, in its capacity as distributor,
to existing shareholders. This shareholder servicing fee is a reimbursement fee,
meaning that it is paid only to the extent that CFSC, as the distributor,
demonstrates it has incurred expenses in servicing shareholders at least equal
to the applicable fee. Because this fee is paid on The Equity Fund's net assets
on a continuing basis, over time this fee will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Redeeming Your Class A Shares of The Equity Fund
In General. You may redeem (sell) the Class A shares of The Equity Fund
that you receive in the Reorganization in the same manner as you presently may
sell your shares of The Capital Appreciation Fund. More precisely, you can sell
your shares on any business day. When you sell your shares you receive the net
asset value per share. If we receive your request in good order before the close
of the New York Stock Exchange ("NYSE") (normally 3:00 p.m. Central Time) you
will receive that day's price. If we receive your redemption request in good
order after the close of the NYSE, or on a holiday, weekend or a day the NYSE is
closed, we will process your transaction at the closing price on the next
business day. A redemption request is in good order when it contains all account
owners' signatures (including signature guarantees when needed) the required
information listed below, and any legally required additional information and
documentation. You can sell shares by mail, telephone or wire.
By Mail
Please include the following in your redemption request:
o Name(s) of the account owner(s);
o Account number(s);
o Amount you want to receive or the number of shares you want to
sell;
o Tax withholding information, if required, for retirement
accounts; and
o Signatures of all account owners.
YOU MUST HAVE YOUR SIGNATURE GUARANTEED FOR WRITTEN SELL ORDERS IF:
1. You want to sell shares with a value of more than $25,000;
2. You want the proceeds sent to an address other than the one
listed for your account; or
3. You want the check payable to someone other than the account
owner(s).
You can usually obtain a signature guarantee at commercial banks, trust
companies or broker-dealers. A SIGNATURE GUARANTEE IS NOT THE SAME AS A
NOTARIZED SIGNATURE. Accounts held by a corporation, trust, estate,
custodianship, guardianship, partnership or pension and profit sharing plan may
require more documentation.
REGULAR MAIL
THE CATHOLIC FUNDS, INC.
C/O US BANCORP FUND SERVICES, LLC
P.O. BOX 701
MILWAUKEE, WI 53201-0701
EXPRESS MAIL/PRIVATE DELIVERY
THE CATHOLIC FUNDS, INC.
C/O US BANCORP FUND SERVICES, LLC
THIRD FLOOR
615 EAST MICHIGAN STREET
MILWAUKEE, WI 53202
By Telephone
To make investing in The Equity Fund more convenient, as is the case for
The Capital Appreciation Fund, you may buy, sell or exchange shares by
telephone. We have established reasonable procedures to protect against anyone
who attempts to use the telephone service fraudulently. Please be aware,
however, that The Catholic Funds, the custodian, the transfer agent or any of
their employees will not be liable for losses suffered by you that result from
following telephone instructions reasonably believed to be authentic after
verification pursuant to these procedures. Once you have made a telephone
request you cannot cancel or modify it! During periods of extreme volume caused
by dramatic economic or stock market changes, or when the telephone system is
not fully functional, you may have difficulty reaching us by telephone and
telephone transactions may be difficult to implement at those times. We reserve
the right to temporarily discontinue or limit the telephone purchase, redemption
or exchange privileges at any time during such periods.
The following rules and/or guidelines for selling by telephone apply:
o You must call shareholder services toll-free at 1-877-222-2402;
o You must provide a form of personal identification to confirm
your identity;
o You can sell up to $25,000 worth of shares;
o The Catholic Funds will mail a check only to the person(s) named
on the account registration and only to the address on the
account;
o Retirement plan accounts are not eligible;
o You can do only one telephone redemption within any 30-day period
for each authorized account;
o Telephone redemptions are not available if the address on the
account has been changed in the preceding 60 days; and
o If we receive your request in good order before the close of the
NYSE (normally 3:00 p.m. Central Time), you will receive that
day's price.
By Wire
The following rules and/or guidelines for selling by wire apply:
o You must have given us written authorization, including the
signatures of all the owners of the account, on The Catholic
Funds Application that you completed when you opened your account
in The Capital Appreciation Fund, or you must complete an Account
Change Form;
o You can make a wire redemption for any amount;
o You pay a $12.00 fee for each wire redemption;
o We must receive your request in good order before the close of
the NYSE (normally 3:00 p.m. Central Time) for you to receive
that day's price; and
o Wire redemptions may not be available to you for all retirement
plan accounts.
Systematic Withdrawal Plan
You can have money automatically withdrawn from your account in The Equity
Fund on a regular basis by using our systematic withdrawal plan. The plan allows
you to receive funds or pay a bill at regular intervals. If you already have
instituted a Systematic Withdrawal Plan with respect to your account in The
Capital Appreciation Fund, it automatically will be continued with respect to
your account in The Equity Fund following the Reorganization. The following
rules and/or guidelines apply:
o You need a minimum of $5,000 in your account to start the plan;
o You must withdraw a minimum of $100 monthly;
o You can select the date(s) on which the money is withdrawn. If
you don't select the date(s), we will withdraw the money
automatically from your account on the 15th of the month;
o To start the plan or change the payee(s), you must notify us in
writing at least 13 business days prior to the first withdrawal
and you must have all account owner(s) sign the appropriate form;
o To stop or change your plan, you must notify us at least five
business days prior to the next withdrawal; and
o Because of sales charges on Class A shares, you must consider
carefully the costs of frequent investments in and withdrawals
from your account.
Closing Small Accounts
All shareholders in The Catholic Funds share the high cost of maintaining
accounts with low balances. To reduce this cost, we reserve the right, subject
to legal restrictions, if any, to close an account when, due to a redemption,
its value is less than $1,000. This does not apply to retirement plan accounts,
automatic investment plans or UGMA/ UTMA accounts. We will notify you in writing
before closing any account, and you will have 30 days to add money to bring the
balance up to $1,000.
Reinstatement Privilege for Class A Shares
As is the case for The Capital Appreciation Fund, you have 60 days after
you sell Class A shares of The Equity Fund to reinvest the dollar amount you
redeemed without having to pay another sales charge. You will pay the net asset
value per Class A share on the day when you've made your reinstatement and not
on the day when you sold your investment. The following rules apply:
o You may use this privilege only once per account;
o You must send a written request and a check for the amount you
wish to reinstate to the Fund's transfer agent;
o The dollar amount you reinstate cannot exceed the dollar amount
you sold; and
o The sale of your Class A shares may be a taxable event despite
the reinstatement.
MISCELLANEOUS
Independent Public Accountants
The firm of Arthur Andersen LLP provides independent auditing services to
all of the mutual funds of The Catholic Funds, including The Capital
Appreciation Fund and The Equity Fund. Arthur Andersen LLP has no direct or
indirect financial interest in The Catholic Funds, including either The Capital
Appreciation Fund or The Equity Fund, except for the fees it receives as
independent public accountants. No representative of Arthur Andersen LLP is
expected to be present at the Meeting.
Interests of Experts and Counsel
No expert or counsel named herein has a substantial interest in The
Catholic Funds or either of The Capital Appreciation or The Equity Funds, the
Reorganization, or any other transaction contemplated by this Proxy
Statement/Prospectus.
Other Matters
The board of directors of The Catholic Funds has not been informed and is
not aware that any other matter will be brought before the Meeting. However,
unless expressly indicated otherwise on the enclosed form of proxy, proxies may
be voted with discretionary authority with respect to any other matter that may
properly be presented at the Meeting or any adjournment thereof. Shareholders of
any mutual fund series of The Catholic Funds wishing to submit proposals for
inclusion in a proxy statement and form of proxy for any future shareholder
meetings should send their written proposals to the Secretary of The Catholic
Funds, 1100 West Wells Street, Milwaukee, Wisconsin 53233.
Appendix A
THE CATHOLIC DISCIPLINED CAPITAL APPRECIATION FUND
PLAN OF REORGANIZATION AND LIQUIDATION
This Plan of Reorganization and Liquidation (this "Plan") is made as of
this 7th day of January 2002, by The Catholic Funds, Inc. ("The Catholic Funds
"), on behalf of its two series known as The Catholic Disciplined Capital
Appreciation Fund (the "Disciplined Capital Appreciation Fund") and The Catholic
Equity Fund (the "New Equity Fund").
R E C I T A L S
WHEREAS, The Catholic Funds: (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland; (b) is
registered as an open-end, series, management investment company under the
Investment Company Act; and (c) currently has designated five separate series or
investment portfolios, including the Disciplined Capital Appreciation Fund and
the New Equity Fund;
WHEREAS, the Reorganization will comprise the transfer of all of the assets
of the Disciplined Capital Appreciation Fund (net of its liabilities) to the New
Equity Fund in exchange for shares of New Equity Fund Class A Common Stock, and
the constructive distribution at the Effective Time of such shares to the
shareholders of the Disciplined Capital Appreciation Fund in liquidation of the
Disciplined Capital Appreciation Fund, all upon the terms and conditions set
forth in this Plan;
WHEREAS, this Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the adoption and performance of this Plan has been authorized by
the Board of Directors of The Catholic Funds and, prior to the Closing Date,
will have been duly authorized by all other necessary corporate action on the
part of The Catholic Funds, including approval by the shareholders of the
Disciplined Capital Appreciation Fund.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Definitions
For purposes of this Plan, the following terms shall have the respective
meanings set forth below:
1.1 "Closing" means the transfer to the New Equity Fund of the assets of
the Disciplined Capital Appreciation Fund (net of its liabilities) against
delivery to the Disciplined Capital Appreciation Fund of the New Equity Fund
Shares as described in Section 2.1 of this Plan.
1.2 "Closing Date" means that date selected by The Catholic Funds which is
no more than twenty (20) business days after the date on which the last of the
conditions precedent to the Reorganization provided in this Plan is satisfied or
lawfully waived.
1.3 "Code" means the Internal Revenue Code of 1986, as amended.
1.4 "Custodian" means US Bank N.A., acting in its capacity as custodian
with respect to the assets of the Disciplined Capital Appreciation Fund and the
New Equity Fund.
1.5 "Disciplined Capital Appreciation Fund" means The Catholic Disciplined
Capital Appreciation Fund, a designated series of The Catholic Funds.
1.6 "Disciplined Capital Appreciation Fund Shareholders" means the holders
of record of the issued and outstanding shares of Common Stock of the
Disciplined Capital Appreciation Fund as of the Closing Date.
1.7 "Disciplined Capital Appreciation Fund Shareholder Meeting" means a
special meeting of the shareholders of the Disciplined Capital Appreciation Fund
to be convened in accordance with applicable law and the Articles of
Incorporation and Bylaws of The Catholic Funds to consider and vote upon the
approval of this Plan and the transactions contemplated hereby.
1.8 "Disciplined Capital Appreciation Fund Shares" means the issued and
outstanding shares of Common Stock of the Disciplined Capital Appreciation Fund.
1.9 "Effective Time" means 5:01 p.m. Central Time on the Closing Date.
1.10 "Excluded Assets" shall have the meaning set forth in Section 2.3 of
this Plan.
1.11 "Investment Company Act" means the Investment Company Act of 1940, as
amended, and all of the rules and regulations adopted thereunder by the SEC.
1.12 "New Equity Fund" means the New Equity Fund, a newly-designated series
of The Catholic Funds which will commence operations as of the first business
day following the Effective Time.
1.13 "New Equity Fund Shares" means the shares of Class A Common Stock of
the New Equity Fund to be issued pursuant to this Plan, as described in Section
2.1 hereof.
1.14 "Person" means an individual or a corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization, or other entity, as the context requires.
1.15 "Plan" means this Plan of Reorganization and Liquidation, together
with all schedules and exhibits attached hereto, as the same may be amended from
time to time in accordance with the terms hereof.
1.16 "Reorganization" means the transactions described in and contemplated
by this Plan.
1.17 "Required Disciplined Capital Appreciation Fund Shareholder Vote"
shall have the meaning specified in Section 3.1 of this Plan.
1.18 "SEC" means the United States Securities and Exchange Commission.
1.19 "Securities Act" means the Securities Act of 1933, as amended, and all
rules and regulations adopted by the SEC pursuant thereto.
1.20 "The Catholic Funds" means The Catholic Funds, Inc., a corporation
which: (a) is duly organized, validly existing and in good standing under the
laws of the State of Maryland; (b) is registered as an open-end, series,
management investment company under the Investment Company Act; and (c)
presently has designated five separate series of its Common Stock, par value
$.001 per share, including the Disciplined Capital Appreciation Fund and the New
Equity Fund.
1.21 "The Catholic Funds Registration Statement" means the Registration
Statement on Form N-1A of The Catholic Funds, as amended (1933 Act Reg. No.
333-69803; 1940 Act File No. 09177).
(a) "Disciplined Capital Appreciation Fund Prospectus" means the
current prospectus relating to the Disciplined Capital Appreciation Fund
which is included in The Catholic Funds Registration Statement, as such
Prospectus may be supplemented or amended as of the relevant time of
inquiry.
(b) "New Equity Fund Prospectus" means the current prospectus relating
to the New Equity Fund which is included in The Catholic Funds Registration
Statement, as such Prospectus may be supplemented or amended as of the
relevant time of inquiry.
2. Reorganization and Liquidation of the Disciplined Capital Appreciation
Fund.
2.1 Transfer of Disciplined Capital Appreciation Fund Assets; Issuance of
New Equity Fund Shares. At or prior to the Effective Time, all of the assets of
the Disciplined Capital Appreciation Fund, except the Excluded Assets, shall be
delivered to the Custodian for the account of the New Equity Fund, in exchange
for, and against delivery to the Disciplined Capital Appreciation Fund at the
Effective Time of, that number of shares of Class A Common Stock of the New
Equity Fund (including, if applicable, fractional shares rounded to the nearest
thousandth of one whole share) (the "New Equity Fund Shares") having an
aggregate net asset value equal to the net value of the assets of the
Disciplined Capital Appreciation Fund so delivered, all determined and adjusted
as provided in Section 2.2 of this Plan. As of the Effective Time and following
delivery of such assets to the Custodian, the New Equity Fund shall receive good
and marketable title to such assets free and clear of all liens, security
interests, pledges, charges, claims or encumbrances of any and every kind.
2.2 Computation of Net Asset Value.
(a) The net asset value of the New Equity Fund Shares and the net
value of the assets of the Disciplined Capital Appreciation Fund
transferred pursuant to this Plan shall, in each case, be determined as of
the close of business on the New York Stock Exchange on the Closing Date.
(b) The net asset value of the New Equity Fund Shares shall be
computed in accordance with the practices and procedures of the New Equity
Fund described in the New Equity Fund Prospectus. Likewise, the value of
the assets of the Disciplined Capital Appreciation Fund to be transferred
pursuant to this Plan shall be computed in accordance with the practices
and procedures of the Disciplined Capital Appreciation Fund described in
the Disciplined Capital Appreciation Fund Prospectus.
2.3 Excluded Assets. There shall be deducted from the assets of the
Disciplined Capital Appreciation Fund described in Section 2.1 all
organizational expenses and other assets of the Disciplined Capital Appreciation
Fund that would not have value to the New Equity Fund, as well as cash in an
amount estimated by The Catholic Funds to be sufficient to pay all liabilities
of the Disciplined Capital Appreciation Fund accrued and unpaid as of the
Effective Time, including without limitation: (a) amounts owed or to be owed to
any Disciplined Capital Appreciation Fund Shareholder, including declared but
unpaid dividends and capital gains distributions; (b) accounts payable, taxes
and other accrued and unpaid expenses, if any, incurred in the normal operation
of the business of the Disciplined Capital Appreciation Fund up to and including
the Closing Date and estimated to be incurred after the Closing Date in
connection with winding up the affairs of, and liquidating, the Disciplined
Capital Appreciation Fund; and (c) costs and expenses incurred by the
Disciplined Capital Appreciation Fund in connection with the Reorganization,
including preparing and distributing proxy materials, soliciting proxies and
holding the Disciplined Capital Appreciation Fund Shareholder Meeting (together
the "Excluded Assets") except to the extent such expenses are borne by Catholic
Financial Services Corporation or another party.
2.4 Closing of Books. The assets of the Disciplined Capital Appreciation
Fund and the per share net asset value of the New Equity Fund Shares shall be
valued as of the close of trading on the New York Stock Exchange on the Closing
Date. The stock transfer books of the Disciplined Capital Appreciation Fund
shall be permanently closed as of the close of business on the Closing Date, and
only requests for the redemption of shares of the Disciplined Capital
Appreciation Fund received in proper form prior to the close of trading on the
New York Stock Exchange on the Closing Date shall be accepted by the Disciplined
Capital Appreciation Fund. Redemption requests thereafter received by the
Disciplined Capital Appreciation Fund shall be deemed to be redemption requests
for New Equity Fund Shares (assuming that the transactions contemplated by this
Plan have been consummated) to be distributed to the Disciplined Capital
Appreciation Fund Shareholders pursuant to this Plan.
2.5 Declaration of Dividends and Distributions by the Disciplined Capital
Appreciation Fund. On or prior to the Closing Date, the Disciplined Capital
Appreciation Fund will declare a dividend to shareholders of record of the
Disciplined Capital Appreciation Fund as of the date of such dividend
declaration so that, for the short taxable year of the Disciplined Capital
Appreciation Fund ending on the date on which it is completely liquidated and
discontinued, the Disciplined Capital Appreciation Fund will have declared an
aggregate amount of dividends which: (a) is equal to at least the sum of its net
capital gain, if any, (within the meaning of Section 852(b)(3) of the Code) and
ninety percent (90%) of its investment company taxable income (determined under
Section 852(b)(2) of the Code, but without regard to Section 852(b)(2)(D) of the
Code) for such taxable year; and (b) is sufficient to avoid any excise tax on
the Disciplined Capital Appreciation Fund under Section 4982 of the Code for the
calendar year in which the Closing Date occurs, provided that the dividends that
have been so declared but have not been paid on or before such Closing Date are
in fact paid by the Disciplined Capital Appreciation Fund prior to the end of
such calendar year to the shareholders of the Disciplined Capital Appreciation
Fund as of the record date for determining shareholders entitled to receive
payment of such dividend.
2.6 Liquidation. As soon as reasonably practicable after the Closing Date,
the Disciplined Capital Appreciation Fund shall pay or make provisions for all
of its debts, liabilities and taxes, and distribute all remaining assets,
including the New Equity Fund Shares received by it in the Reorganization and
the balance, if any, of the Excluded Assets, to the Disciplined Capital
Appreciation Fund Shareholders, and the Disciplined Capital Appreciation Fund's
status as a designated series of shares of The Catholic Funds shall be
terminated.
2.7 Issuance of New Equity Fund Shares. On the Closing Date, The Catholic
Funds shall instruct its transfer agent to record on The Catholic Funds' books
and records the pro rata interest of each of the Disciplined Capital
Appreciation Fund Shareholders in the New Equity Fund Shares in the name of such
Disciplined Capital Appreciation Fund Shareholder. All Disciplined Capital
Appreciation Fund Shares then issued and outstanding shall thereupon be canceled
on the books of the New Equity Fund. New Equity Fund shall forward a
confirmation of such ownership to each of the Disciplined Capital Appreciation
Fund Shareholders. No redemption or repurchase of such New Equity Fund Shares
credited to any Disciplined Capital Appreciation Fund Shareholder in respect of
his or her Disciplined Capital Appreciation Fund Shares which are represented by
an unsurrendered stock certificate shall be permitted until such certificate has
been surrendered to The Catholic Funds for cancellation, or if such certificate
is lost or misplaced, until a lost certificate affidavit has been executed and
delivered to The Catholic Funds.
2.8 Liabilities and Expenses. The New Equity Fund shall not assume any
liability of the Disciplined Capital Appreciation Fund, and the Disciplined
Capital Appreciation Fund shall use its best efforts to discharge all known
liabilities, so far as may be possible, prior to the Closing Date.
3. Conditions Precedent to Closing
The Closing of the Reorganization is subject to the conditions that on or
before the Closing Date:
3.1 Approval of Plan By Shareholders of the Disciplined Capital
Appreciation Fund. The Disciplined Capital Appreciation Fund Shareholder Meeting
shall have been duly called and held in accordance with the provisions of the
Investment Company Act, the Maryland General Corporate Law and the Articles of
Incorporation and Bylaws of The Catholic Funds, including compliance with the
notice and quorum requirements thereunder, and at such meeting the Plan shall
have been approved by the affirmative vote of the lesser of (a) 67% or more of
the Disciplined Capital Appreciation Fund Shares present at the Disciplined
Capital Appreciation Fund Shareholder Meeting, if shareholders who are the
owners of more than 50% of the Disciplined Capital Appreciation Fund Shares
outstanding and entitled to vote on the Plan at the Disciplined Capital
Appreciation Fund Shareholder Meeting are present at such Meeting in person or
by proxy; or (b) more than 50% of the Disciplined Capital Appreciation Fund
Shares outstanding and entitled to vote on approval of the Plan at the
Disciplined Capital Appreciation Fund Shareholder Meeting (the "Required
Disciplined Capital Appreciation Fund Shareholder Vote").
3.2 No Adverse Actions. On the Closing Date, no action, suit or other
proceeding shall be pending before any court or governmental agency in which it
is sought to restrain or prohibit or obtain damages or other relief in
connection with this Plan or the transactions contemplated hereby.
3.3 Consents and Approvals. All consents of other parties and all other
consents, orders and permits of federal, state and local regulatory authorities
(including those of the SEC and of state Blue Sky or securities authorities)
deemed necessary by The Catholic Funds to permit consummation, in all material
respects, of the transactions contemplated hereby, shall have been obtained.
3.4 Effectiveness of Registration Statement on Form N-14. The Catholic
Funds' Registration Statement on Form N-14 to be prepared and filed with the SEC
with respect to the New Equity Fund Shares, including the Proxy Statement of the
Disciplined Capital Appreciation Fund soliciting approval of the Plan at the
Disciplined Capital Appreciation Fund Shareholder Meeting constituting a part
thereof, shall have become effective under the Securities Act and no stop order
suspending the effectiveness thereof shall have been issued and, to the
knowledge of The Catholic Funds, no investigation or proceeding for that purpose
shall have been instituted or be pending, threatened or contemplated under the
Securities Act.
3.5 Continued Effectiveness and Amendment of Registration Statement on Form
N-1A.
(a) The Catholic Funds Registration Statement including the
Disciplined Capital Appreciation Fund Prospectus shall remain effective
with the SEC from and after the date of this Agreement and continuing up to
and including the Closing Date, and no stop order suspending the
effectiveness thereof shall have been issued and, to the knowledge of The
Catholic Funds, no investigation or proceeding for that purpose shall have
been instituted or be pending, threatened or contemplated under the
Securities Act.
(b) A Post-Effective Amendment to The Catholic Funds Registration
Statement shall have been filed by The Catholic Funds to include therein
the New Equity Fund Prospectus registering shares of the New Equity Fund to
be offered to the public, and such post-effective amendment shall have
become effective under the Securities Act and no stop orders suspending the
effectiveness thereof shall have been issued and, to the knowledge of The
Catholic Funds, no investigation or proceeding for that purpose shall have
been instituted or be pending, threatened or contemplated under the
Securities Act.
3.6 Disposition of Ineligible Investments by New Equity Fund. Immediately
following the Closing Date, the New Equity Fund shall sell, liquidate or
otherwise dispose of such securities and instruments (or portions thereof)
transferred to it in the Reorganization from the Disciplined Capital
Appreciation Fund as and to the extent necessary to enable the New Equity Fund
to own or hold all of the remaining securities and instruments so transferred
from the Disciplined Capital Appreciation Fund's investment portfolio without
causing a violation of any of the New Equity Fund's investment restrictions or
policies; provided that, after taking into account sales of securities and
instruments (or portions thereof) by the Disciplined Capital Appreciation Fund
prior to the Reorganization for the purposes of meeting the investment
objectives and policies of the New Equity Fund, the New Equity Fund will hold at
least 34% of the historic assets of the Disciplined Capital Appreciation.
3.7 Declaration of Dividends and Distributions by the Disciplined Capital
Appreciation Fund. Prior to or on the Closing Date, the Disciplined Capital
Appreciation Fund shall have declared a dividend or dividends which, together
with all previous such dividends, shall have the effect of distributing to its
shareholders all of the Disciplined Capital Appreciation Fund's investment
company taxable income for taxable years ending on or prior to the Closing Date
(computed without regard to any deduction for dividends paid) and all of its net
capital gain realized in taxable years ending on or prior to the Closing Date
(after reduction for any capital loss carried forward).
3.8 Acquisition of Substantially All of the Assets of the Disciplined
Capital Appreciation Fund. The assets of the Disciplined Capital Appreciation
Fund to be acquired by the New Equity Fund shall constitute at least 90% of the
fair market value of the net assets and at least 70% of the fair market value of
the gross assets of the Disciplined Capital Appreciation Fund immediately prior
to the Reorganization. For these purposes, assets used by the Disciplined
Capital Appreciation Fund to pay the expenses it incurs in connection with this
Agreement and the Reorganization and to effect all shareholder redemptions and
distributions (other than regular, normal dividends and regular, normal
redemptions pursuant to the Investment Company Act, and not in excess of the
requirements of Section 852 of the Code, occurring in the ordinary course of the
Disciplined Capital Appreciation Fund's business as an open-end diversified
management investment company) after the date of this Agreement shall be
included as assets of the Disciplined Capital Appreciation Fund immediately
prior to the Reorganization.
3.9 Tax Opinion. The Catholic Funds shall have received on or before the
Closing Date an opinion of Quarles & Brady LLP regarding the tax consequences of
the Reorganization in substantially the form attached as Exhibit 1 attached to
this Agreement.
3.10 Regulatory Relief. The Catholic Funds shall have received from the SEC
such exemptive, no-action or other formal or informal relief from the applicable
prohibitions of Section 17 under the Investment Company Act as may be necessary
to enable The Catholic Funds to consummate the Reorganization consistent with
said Section 17.
4. Expenses
The Disciplined Capital Appreciation Fund and the New Equity Fund will bear
their respective expenses in connection with the entering into and carrying out
the provisions of this Plan; provided, however, it is not expected that the New
Equity Fund will incur any expenses; provided further, however, that it is
expected that Catholic Financial Services Corporation will bear the expenses of
the Disciplined Capital Appreciation Fund.
5. Termination
5.1 By The Catholic Funds. This Plan may be terminated at any time by The
Catholic Funds, and will be terminated by The Catholic Funds if any of the
conditions precedent to the Reorganization set forth in Article 3 have not been
satisfied as of the Closing Date.
5.2 Effects of Termination. In the event of any such termination, there
shall be no liability for damage on the part of either the Disciplined Capital
Appreciation Fund or the New Equity Fund.
6. Amendment
This Plan may be amended, modified or supplemented in such manner as The
Catholic Funds determines; provided, however, that following approval of the
Plan by the Required Disciplined Capital Appreciation Fund Shareholder Vote, no
such amendment may have the effect of changing the provisions for determining
the number of New Equity Fund Shares to be issued to the Disciplined Capital
Appreciation Fund Shareholders pursuant to this Plan to the detriment of the
Disciplined Capital Appreciation Fund Shareholders without their further
approval.
7. Miscellaneous
7.1 Headings. The Article and Section headings contained in this Plan will
have reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
7.2 Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the State of Maryland, The Catholic Funds' Articles
of Incorporation and Bylaws, and the Disciplined Capital Appreciation and New
Equity Funds Prospectuses.
IN WITNESS WHEREOF, on the authority of the Board of Directors of The
Catholic Funds, this Plan has been executed by its duly authorized officer as of
the day and year first written above.
BY ORDER OF THE BOARD OF
DIRECTORS OF THE CATHOLIC
FUNDS, INC.
(On Behalf of The Catholic Disciplined
Capital Appreciation and New Equity
Funds)
By: /s/ Allan G. Lorge
----------------------------------
Allan G. Lorge, President
THE CATHOLIC FUNDS, INC.
THE CATHOLIC DISCIPLINED CAPITAL APPRECIATION FUND
Revocable Proxy for Special Meeting of Shareholders. This Proxy is Solicited on
Behalf of the Board of Directors. The undersigned hereby appoints Daniel
Steininger, Allan Lorge or Theodore Zimmer, and each of them, proxy, with full
power of substitution, to vote all shares of stock the undersigned is entitled
to vote at the Special Meeting of Shareholders of The Catholic Disciplined
Capital Appreciation Fund to be held at ___________, ________________________,
___________________, Wisconsin at ________, on ___________________, 2002 or at
any adjournment thereof, with respect to the matters set forth on this proxy and
described in the Notice of Special Meeting and Proxy Statement/Prospectus,
receipt of which is hereby acknowledged.
Shares listed below represent the total number of shares of The Catholic
Disciplined Capital Appreciation Fund registered in the name printed below.
Dated: _____________________________, 2002
-----------------------------------------------
-----------------------------------------------
(Please sign exactly as name appears at left)
(If stock is owned by more than one person,
all owners should sign. Persons signing as
executors, administrators, trustees or in
similar capacities should so indicate.)
- --------------------------------------------------------------------------------
Shares represented by this proxy will be voted as directed by the stockholder.
IF NO DIRECTION IS SUPPLIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. Please
vote by filling in the appropriate boxes below, as shown, using blue or black
ink or dark pencil.
- -------------------------------------------------------------------------------- ----- --------- ---------
FOR AGAINST ABSTAIN
1. To approve a Plan of Reorganization and Liquidation (the "Plan") providing ____ _____ _____
for (a) the transfer of substantially all of the assets of The Catholic
Disciplined Capital Appreciation Fund (net of its liabilities) to The
Catholic Equity Fund in exchange solely for shares of The Catholic Equity
Fund, followed by (b) the distribution of shares of The Catholic Equity
Fund, pro rata, to The Catholic Disciplined Capital Appreciation Fund
shareholders in dissolution of The Catholic Disciplined Capital
Appreciation Fund.
2. In their discretion, the proxies are authorized to vote on such other
matters as may properly come before the meeting.
- -------------------------------------------------------------------------------- ----- --------- ---------
STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY ___, 2002
FOR THE REORGANIZATIONS OF EACH OF
THE EQUITY INCOME FUND
THE CATHOLIC LARGE-CAP GROWTH FUND
AND
THE CATHOLIC DISCIPLINED CAPITAL APPRECIATION FUND
(each an existing series of The Catholic Funds, Inc.)
with and into
THE CATHOLIC EQUITY FUND
(a newly designated series of The Catholic Funds, Inc.)
The Catholic Funds, Inc.
1100 West Wells Street
Milwaukee, WI 53233
This Statement of Additional Information is not a prospectus, and should be
read in conjunction with the Proxy Statements/Prospectuses, dated February ___,
2002, relating to the separate reorganizations (the "Reorganizations") of The
Equity Income Fund (the "Equity Income Fund"), The Catholic Large-Cap Growth
Fund (the "Large-Cap Fund") and The Catholic Disciplined Capital Appreciation
Fund (the "Capital Appreciation Fund") (referred to together as the "Existing
Funds"), each a series of The Catholic Funds, Inc. ("The Catholic Funds" or
"CFI"), with and into The Equity Fund (the "Equity Fund"), a newly designated
series of The Catholic Funds.
In connection with the Reorganizations, the Equity Fund would acquire
substantially all of the assets (net of liabilities) of each of the Existing
Funds. In consideration of each Existing Fund's transfer of assets to the Equity
Fund, the Equity Fund would issue to the respective Existing Funds Class A
shares of the Equity Fund having an aggregate net asset value equal to the
aggregate value of the assets transferred to it by the respective Existing
Funds. Each of the Existing Funds thereafter would distribute the shares of the
Equity Fund so received to its shareholders on a pro rata basis, and each
Existing Fund subsequently would be liquidated and discontinued. For purposes of
historic financial and performance information, the Capital Appreciation Fund
will be deemed the survivor of the Reorganizations, because its investment
program, strategies and portfolio most closely resemble those of the Equity
Fund.
As a result of these Reorganizations, shareholders of each Existing Fund
would become shareholders of The Equity Fund. It is expected that the aggregate
net asset value of the shares of the Equity Fund received by each shareholder of
each Existing Fund in the separate Reorganizations would be equal, immediately
following such Reorganization, to the aggregate net asset value of the shares of
the Existing Fund held by such shareholder immediately prior to the respected
Reorganizations. The Reorganizations are expected to be tax-free to the
shareholders of each Existing Fund. None of the Reorganizations are conditioned
on the occurrence of either or both of the other Reorganizations. In other
words, if the shareholders of any Existing Fund approve the Reorganization
relating to that Existing Fund and other conditions to the completion of that
Reorganization are fulfilled, then that Reorganization will be completed
regardless of whether either or both of the other two Reorganizations are
approved and completed.
The information otherwise required to be set forth in this Statement of
Additional Information is included in: (a) the combined Statement of Additional
Information of the Existing Funds, dated January __, 2002 (the "Existing Funds
SAI"); and (b) the Annual Report to Shareholders of The Catholic Funds
(including each of the Existing Funds), dated September 30, 2001 (the "Existing
Funds Annual Report"). The Existing Funds SAI and the Existing Funds Annual
Report are incorporated by reference herein. Copies of those documents and of
the Proxy Statement/Prospectus for each Reorganization to which this Statement
of Additional Information relates may be obtained without charge by writing
Catholic Financial Services Corporation at 1100 West Wells Street, Milwaukee,
Wisconsin 53233, or by calling (877) 222-2402.
TABLE OF CONTENTS
Page
INVESTMENT TECHNIQUES AND STRATEGIES - THE EQUITY FUND.........................1
INVESTMENT RESTRICTIONS - THE EQUITY FUND......................................4
MANAGEMENT.....................................................................6
PERFORMANCE INFORMATION OF THE EQUITY FUND....................................14
DETERMINATION OF NET ASSET VALUE PER SHARE OF THE EQUITY FUND.................16
DISTRIBUTION OF SHARES OF THE EQUITY FUND.....................................17
DISTRIBUTION PLAN.............................................................17
REGULATED INVESTMENT COMPANY STATUS...........................................18
DESCRIPTION OF SHARES OF THE EQUITY FUND......................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................20
CODE OF ETHICS................................................................21
PAYMENTS "IN KIND"............................................................21
ACCOUNTING, FULFILLMENT, CUSTODIAN AND TRANSFER AGENT SERVICES................21
EXPERTS .....................................................................22
HISTORICAL FINANCIAL STATEMENTS...............................................22
PRO FORMA FINANCIAL STATEMENTS................................................23
NOTES TO PRO FORMA FINANCIAL STATEMENTS.......................................31
ADDITIONAL INFORMATION ABOUT THE CATHOLIC FUNDS AND THE CATHOLIC EQUITY INCOME
FUND, THE CATHOLIC LARGE-CAP GROWTH FUND AND THE CATHOLIC DISCIPLINED CAPITAL
APPRECIATION FUND
For additional information about The Catholic Funds and each of the
Existing Funds, please see the Existing Funds SAI, which is incorporated by
reference herein.
INVESTMENT TECHNIQUES AND STRATEGIES - THE EQUITY FUND
The investment objective and policies of The Equity Fund are described in
the Proxy Statement/Prospectus relating to each Reorganization. Set forth below
is supplemental information about those policies and the types of securities in
which the Equity Fund may invest.
Repurchase Agreements
The Equity Fund may acquire securities subject to repurchase agreements for
liquidity purposes to meet anticipated redemptions, or pending the investment of
the proceeds from sales of Fund shares, or pending the settlement of purchases
of portfolio securities. In a repurchase transaction, a Fund acquires a security
from, and simultaneously resells it to, an approved vendor. An "approved vendor"
is a U.S. commercial bank or the U.S. branch of a foreign bank or a
broker-dealer which has been designated a primary dealer in government
securities which must meet credit requirements set by the Board of Directors
from time to time. The repurchase price exceeds the purchase price by an amount
that reflects an agreed-upon interest rate effective for the period during which
the repurchase agreement is in effect. The majority of these transactions run
from day to day, and delivery pursuant to the resale typically will occur within
one to five days of the purchase. Repurchase agreements are considered "loans"
under the 1940 Act, collateralized by the underlying security. The Fund's
repurchase agreements require that at all times while the repurchase agreement
is in effect, the value of the collateral must equal or exceed the repurchase
price to fully collateralize the repayment obligation. Additionally, the Adviser
will impose creditworthiness requirements to confirm that the vendor is
financially sound and will continuously monitor the collateral's value.
Repurchase agreements have some risks. If the other party defaults on its
obligation at a time when the value of the security has declined, the Fund may
incur a loss. If the other party becomes insolvent a court may find that the
underlying security is collateral for a loan by the Fund and the Fund may not
have complete control over the collateral. It is also possible that the Fund may
not be able to prove its interest in the underlying security and may be treated
as an unsecured creditor. While the Adviser and Sub-adviser acknowledge these
risks, they expect to control them.
Index Futures Contracts
As discussed in the Proxy Statements/Prospectuses, The Catholic Equity Fund
may invest in exchange traded futures contracts on the S&P 500 Index. A futures
contract on an index is an agreement by which one party agrees to accept
delivery of, and the other party agrees to make delivery of, an amount of cash
equal to the difference between the value of the underlying index at the close
of the last trading day of the futures contract and the price at which the
contract originally was written. Although the value of an index may be a
function of the value of certain specified securities, no physical delivery of
those securities is made.
When a purchase or sale of a futures contract is made by the Equity Fund,
the Fund is required to deposit with its Custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government Securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Equity Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Equity Fund expects to earn interest income on its initial margin
deposits. A futures contract held by the Equity Fund is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the daily change
in the value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the Equity
Fund, but is instead a settlement between the Fund and the broker of the amount
one would owe the other if the futures contract expired. In computing daily net
asset value, the Equity Fund will mark to market all of its open futures
positions.
While the Equity Fund maintains an open futures position, it must maintain
with its Custodian, in a segregated account, assets with a market value
sufficient to cover the Fund's exposure on the position (less the amount of the
margin deposit associated with the position). The Equity Fund's exposure on a
futures contract is equal to the amount paid for the contract by the Fund.
Index futures contracts in which the Equity Fund may invest are closed out
prior to delivery by offsetting purchases or sales of matching futures contracts
(same exchange, same underlying index and same delivery date), or in cash. If an
offsetting purchase price is less than the original sales price, the Equity Fund
would realize a capital gain, or if it is more, the Fund would realize a capital
loss. Conversely, if an offsetting sale price is more than the original purchase
price, the Fund would realize a capital gain, or if it is less, the Equity Fund
would realize a capital loss. The transaction costs also would affect the amount
of any gain or loss.
There are several risks associated with the use of futures contracts in the
manner proposed by the Equity Fund. A purchase or sale of a futures contract
could result in losses in excess of the amount invested in the futures contract.
There are significant differences between the securities and futures markets
that could result in an imperfect correlation between the markets, causing an
equitizing strategy not to achieve its objective. The degree of imperfection of
correlation depends on circumstances such as variations in speculative market
demand for futures.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of the futures contract may vary either up or
down from the previous days' settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract, no more
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day, and therefore does
not limit potential losses because the limit may work to prevent the liquidation
of unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses. There can be no assurance that a
liquid market will exist at a time when the Equity Fund seeks to close out a
futures position, and the Fund could be forced to continue to meet margin
requirements until the position is closed.
The Equity Fund will limit its futures strategies to equitizing uninvested
cash held temporarily by the Fund from time to time. The Equity Fund will only
enter into futures contracts which are standardized and traded on a U.S.
exchange, board of trade, or similar entity, or quoted on an automated quotation
system. The Equity Fund will not enter into a futures contract if, immediately
after the transaction, the initial margin deposits for futures contracts held by
the Fund would exceed 5% of the Fund's total assets or if more than 20% of the
Fund's total assets were committed to such contracts.
Taxation of Futures
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of the delivery notice date
or the expiration date. Should the Equity Fund ever deliver securities under a
futures contract (which is not expected to occur), the Fund would realize a
capital gain or loss on those securities.
For federal income tax purposes, the Equity Fund generally is required to
recognize as income for each taxable year its net unrealized gains and losses as
of the end of the year on futures positions ("year-end mark to market").
Generally any gain or loss recognized with respect to such positions (either by
year-end mark to market or by actually closing of the positions) is considered
to be 60% long term and 40% short term, without regard to the holding periods of
the contracts. The Equity Fund distributes to shareholders annually any net
capital gains which have been recognized for federal income tax purposes
(including year-end mark to market gains) on futures transactions. Such
distributions are combined with distributions of capital gains realized on the
Equity Fund's other investments, and shareholders are advised of the nature of
the payments.
INVESTMENT RESTRICTIONS - THE EQUITY FUND
Fundamental Investment Restrictions
The following are fundamental policies for the Equity Fund, meaning they
cannot be changed without the vote of a "majority" of the outstanding voting
securities of the Equity Fund. Such a "majority" vote is defined in the 1940 Act
as the vote of the holders of the lesser of: (i) 67% or more of the shares
present or represented by proxy at a shareholder meeting, if the holders of more
than 50% of the outstanding shares are present, or (ii) more than 50% of the
outstanding shares. The Equity Fund may not:
(1) Purchase securities on margin, make short sales or write or purchase
put and call options, except for bonafide hedging purposes and to
equitize cash as described in the Proxy Statement/Prospectus and this
Statement of Additional Information and subject to the conditions and
limitations described therein and herein;
(2) Buy or sell commodities or commodity contracts, except that the Fund
may invest in futures contracts as described in the Proxy
Statement/Prospectus and this Statement of Additional Information;
(3) Purchase securities of closed-end investment companies, except (a) in
the open market where no commission other than the ordinary broker's
commission is paid, which purchases are limited to a maximum of (i) 3%
of the total outstanding voting stock of any one closed-end investment
company, (ii) 5% of the Fund's net assets with respect to the
securities issued by any one closed-end investment company, and (iii)
10% of the Fund's net assets in the aggregate, or (b) those received
as part of a merger or consolidation;
(4) Make loans to other persons, except that we reserve freedom of action,
consistent with the Fund's other investment policies and restrictions
and as described in the Proxy Statement/Prospectus and this Statement
Of Additional Information, to: (a) invest in debt obligations,
including those that are either publicly offered or of a type
customarily purchased by institutional investors, even though the
purchase of such debt obligations may be deemed the making of loans;
and (b) enter into repurchase agreements;
(5) Issue senior securities or borrow, except that we may borrow for the
Fund in amounts not in excess of 10% of its net assets, taken at
current value, and then only from banks as a temporary measure for
extraordinary or emergency purposes (we will not borrow money for the
Fund to increase income, but only to meet redemption requests that
otherwise might require untimely dispositions of portfolio securities;
interest paid on any such borrowing will reduce the Fund's net
income);
(6) Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund, except as
may be necessary in connection with and subject to the limits in
restriction (5), and except in connection with entering into futures
contracts. Collateral arrangements with respect to initial or
variation margin for futures contracts will not be deemed to be
pledges of the Fund's assets;
(7) Underwrite any issue of securities, except to the extent that we
purchase securities directly from an issuer thereof in accord with the
Fund's investment objectives and policies we may be deemed to be
underwriting or to the extent that in connection with the disposition
of portfolio securities we may be deemed an underwriter for the Fund
under federal securities laws;
(8) Invest more than 25% of the Fund's total assets, taken at current
value at the time of each investment, in securities of issuers whose
principal business activities are in any single industry or issuer
(except the U.S. government or any agency or instrumentality thereof);
(9) Invest in oil, gas or mineral related programs or leases except as may
be included in the definition of public utilities, although we may
invest in securities of enterprises engaged in oil, gas or mineral
exploration;
(10) Invest in repurchase agreements maturing in more than seven days or in
other securities with legal or contractual restrictions on resale if,
as a result thereof, more than 10% of the Fund's net assets (taken at
current value at the time of such investment) would be invested in
such securities; or
(11) Purchase more than 10% of the outstanding voting securities of an
issuer or invest for the purpose of exercising control or management.
Non-Fundamental Investment Restrictions
The following operating policies of the Equity Fund, together with the
Fund's investment objective, are not fundamental policies and, as such, may be
changed by a majority vote of the Board of Directors without shareholder
approval. These additional restrictions provide that for the Equity Fund, we may
not:
(1) Purchase or sell real estate, or real estate limited partnership
interests provided that we may invest in securities for the Fund
secured by real estate or interests therein or issued by companies
that invest in real estate or interests therein;
(2) Invest in any security if as a result the Fund would have more than 5%
of its net assets invested in securities of companies which, together
with any predecessors, have been in continuous operation for less than
three years; or
(3) Purchase securities or other investment companies, if the purchase
would cause more than 10% of the value of the Fund's net assets to be
invested in investment company securities provided that (a) no
investment will be made in the securities of any one investment
company if immediately after such investment more than 3% of the
outstanding voting securities of such company would be owned by the
Fund or more than 5% of the value of the Fund's net assets would be
invested in such company; and (b) no restrictions shall apply to a
purchase of investment company securities in connection with a merger,
consolidation acquisition or reorganization.
MANAGEMENT
Directors and Officers
Under applicable law, the Board of Directors is responsible for management
of CFI, and provides broad supervision over its affairs. Among other important
duties, the Board of Directors selects advisers and sub-advisers to manage the
day-to-day investment of the Equity Fund's assets and its other day-to-day
operations. The Board of Directors annually reviews the investment advisory and
the sub-advisory agreement, and those agreements continue from year to year only
subject to annual approval by the Board of Directors (including at least a
majority of the Directors who are not "interested persons" (as that term is
defined in the 1940 Act) of CFI or its investment adviser, distributor or any
sub-adviser, such Directors being referred to herein as the "Independent
Directors"). The Board also annually reviews the terms and operation of the
Equity Fund's Rule 12b-1 Distribution Plan, and annual continuation of that Plan
is subject to approval by the Board of Directors, including at least a majority
of the Independent Directors. The Board also annually approves the selection of
independent public accountants for the Equity Fund, and appoints officers to
oversee the day-to-day operations of CFI and the Fund. In addition, the Board of
Directors establishes, monitors and periodically reviews numerous policies and
procedures governing the conduct of CFI's business, including such things as the
Catholic values to be adhered to by the Equity Fund and the methods and means by
which they are implemented, policies and procedures pursuant to which the Equity
Fund's securities are priced, a code of ethics governing personal securities
trading by persons involved in the management of the Equity Fund, and numerous
other policies and procedures.
The following table presents information about each Director and Officer of
CFI, including biographical information about their business experience and
information about their relationships with CFI and its affiliates.
Term of
Office and
Length of Number of Other Principal Occupation
Position Time Portfolios Directorships During Past
Name, Address and Age with CFI Served(1) Overseen Held Five Years
- --------------------- -------- --------- --------- ------------ ---------------------
Interested Directors
and Officers:
Daniel J. Steininger(2) Director, Since 1999 2 None President of Catholic
1100 West Wells Street Chairman of Knights since 1981;
Milwaukee, WI 53233 the Board Chairman of the Board
D.O.B. 5/1/45 of Catholic Financial
Services Corporation
since 1996; President,
Catholic Brokerage
Services Corp. since
November, 1994;
President, Catholic
Knights Financial
Services, Inc. since
1994.
Allan G. Lorge(2) President, Since 1999 2 None Secretary/Treasurer of
1100 West Wells Street Director Catholic Knights since
Milwaukee, WI 53233 1986; President of
D.O.B. 12/9/49 Catholic Financial
Services Corporation
since 1996; Secretary/
Treasurer of Catholic
Brokerage Services Corp.
since November, 1994;
Secretary/Treasurer and
Vice President of
Catholic Knights
Financial Services, Inc.
since 1994.
Thomas J. Munninghoff(3) Director Since 1999 2 None President, Munninghoff,
231 Scott Boulevard Lange and Co.
Covington, KY 41011 (accounting firm) since
D.O.B. 8/27/47 1983, Director Catholic
Order of Foresters,
since 1999.
Mark K. Forbord Chief Since 1999 N/A None Controller of Catholic
1100 West Wells Street Financial Knights Financial
Milwaukee, WI 53233 Officer Services, Inc. since
D.O.B. 1/21/54 April 19, 1996;
Controller of Catholic
Brokerage Services Corp.
since April 19, 1996;
Senior Financial Analyst
of Catholic Knights
since July 1995;
Instructor at The
University of Wisconsin
-Milwaukee since Jan.
1986; and Instructor
at Cardinal-Stritch
University since
September 1990.
Russell J. Kafka Treasurer Since 1999 N/A None Director and Vice
1100 West Wells Street President - Investments
Milwaukee, WI 53233 of Catholic Financial
D.O.B. 6/20/44 Services Corporation
since 1996; Director
of Catholic Knights
Financial Services,Inc.
since June 1994;
Brokerage Services Corp.
since November 1994;
and Vice President
-Investments of Catholic
Knights since January
1985.
Theodore F. Zimmer Vice Since 1999 N/A None General Counsel, Catholic
1100 West Wells Street President Knights, since September
Milwaukee, WI 53233 and 1997; Vice President (since
D.O.B. 12/17/40 Secretary 1999) and Secretary (since
June, 2001), Catholic
Financial Services
Corporation; Partner at
Miller, Simon, McGinn
and Clark (law firm)
from October 1996 to
Sept. 1997; and prior
to October, 1996,
Partner at Quarles &
Brady LLP.
Independent Directors:
Thomas A. Bausch, PhD Director Since 1999 2 None Professor of Management,
1715 N. 71st Street Marquette University
Milwaukee, WI 53213 since 1978.
D.O.B. 06/06/38
J. Michael Borden Director Since 1999 2 Trustee, Chief Executive Officer
P.O. Box 591 Jefferson of HUFCOR
Janesville, WI 53547 Fund Group (1978-present).
D.O.B. 12/21/36 Mutual Funds
(1995-
present)
Daniel R. Doucette Director Since 1999 2 None President and CEO
250 North Sunnyslope Road Milwaukee Insurance,
Suite 250 1989 to present,
Brookfield, WI 53005 President, Milwaukee
D.O.B. 9/03/49 Rampage, 1994 to
present, Wisconsin
Rebels, 1997 to present
Director, Zink the
Zebra Foundation, 1997
to present, St Ann
Center 1998 to present,
National Sports Law
Institute, 1999 to
present, Medical
College of Wisconsin
1999 to present,
Chairman of the Board,
Resolute Systems, Inc.
Conrad L. Sobczak Director Since 1999 2 None President and CEO,
6015 Washington Blvd. Family Health Systems,
Wauwatosa, WI 53213 1987 to 1998, Director
D.O.B. 10/20/38 of St. Ann Center, UWM
Foundation, and
Continuing Care Center
respectively 1998 to
present, Field Surveyor,
Joint Commission, 1998
to present.
- ----------------------------
(1) Officers of CFI serve one-year terms, subject to annual reappointment by
the Board of Directors. Directors of CFI serve a term of indefinite length
until their resignation or removal, and stand for re-election by
shareholders only as and when required under the 1940 Act.
(2) Messrs. Steininger and Lorge are considered to be "interested persons" (as
defined in the 1940 Act) of CFI by virtue of their positions with Catholic
Knights and Catholic Financial Services Corporation.
(3) Mr. Munninghoff is considered to be an "interested person" (as defined in
the 1940 Act) of CFI by virtue of the fact that he is a director of
Catholic Order of Foresters, a shareholder of Catholic Financial Services
Corporation.
The standing committees of CFI's Board of Directors include an Audit
Committee, a Nominating Committee and the Catholic Screen Review Committee. The
Audit and Nominating Committees consist of all of the Independent Directors.
The Audit Committee annually selects independent public accountants for the
Equity Fund and oversees the preparation of the Equity Fund's financial
statements. In this capacity, the Audit Committee meets at least annually with
the independent public accountants to discuss with them any issues surrounding
the preparation of the Fund's financial statements. The Audit Committee also
discusses with the independent public accountants the strengths and weaknesses
of the systems and operating procedures employed in connection with the
preparation of the Equity Fund's internal financial statements, pricing
procedures and the like, as well as the performance and cooperation of staff
members responsible for these functions. The Audit Committee held one meeting
during the fiscal year ended September 30, 2001.
The Nominating Committee meets as needed to nominate candidates for
appointment to the Board of Directors to fill vacancies and to nominate
candidates for election and re-election to the Board as and when required under
the provisions of the 1940 Act. The Nominating Committee does not accept
recommendations for nominations by shareholders of CFI. The Nominating Committee
did not meet during the fiscal year ended September 30, 2001.
The Catholic Screen Review Committee consists of several Directors and one
or more officers of CFI. It provides ongoing review of the implementation of
CFI's principle of Responsible Catholic Stewardship.
The dollar range of equity securities beneficially owned by each director
in The Catholic Money Market Fund, in each of the Existing Funds and in the
aggregate in all Funds as of December 31, 2001, valued as of that date, is shown
in the following table.
Dollar Range of Equity Securities in
Aggregate Dollar
Range of Equity
Securities in All
Registered Investment
Companies Overseen
by Director
Capital Equity in the Family
Large-Cap Appreciation Income Fund Money Market of Investment
Growth Fund Fund Fund Companies
Thomas A. Bausch, PhD. None None None None None
J. Michael Borden None None None None None
Daniel R. Doucette $1-$10,000 $1-$10,000 $1-$10,000 $1-$10,000 $1-$10,000
Conrad L. Sobczak $10,000-$50,000 None None None $10,000-$50,000
Thomas Munninghoff $1-$10,000 None $10,000-$50,000 None $10,000-$50,000
Dan Steininger $10,000-$50,000 $10,000-$50,000 None $1-$10,000 $50,000-$100,000
Allan Lorge $10,000-$50,000 $10,000-$50,000 $10,000-$50,000 $10,000-$50,000 $50,000-$100,000
As of December 31, 2001, no Independent Directors nor any immediate family
members of an Independent Director beneficially owned any securities in Catholic
Financial Services Corporation, any of the sub-advisers or any person
controlling, controlled by or under common control with any of them.
Each of the Existing Funds and The Catholic Money Market Fund pays an equal
portion of the fees and expenses of the four Independent Directors. Such fees
consist of an annual retainer in the amount of $500 and $250 per Board meeting
attended. Additionally, Directors and Officers may purchase Class A shares
without a front-end sales change. The annual compensation paid by CFI to each of
the Directors is set forth in the table below.
Total
Aggregate Retirement Benefits Compensation from
Compensation from from the Fund the Fund
the Fund Complex Complex Complex
Thomas A. Bausch, PhD, Director $1,250 $-0- $1,250
J. Michael Borden, $1,000 $-0- $1,000
Director
Daniel R. Doucette, $1,500 $-0- $1,500
Director
Conrad L. Sobczak, $1,250 $-0- $1,250
Director
Thomas Munninghoff, $-0- $-0- $-0-
Director
Dan Steininger, Director $-0- $-0- $-0-
Allan Lorge, Director $-0- $-0- $-0-
As of December 31, 2001, management is unaware of any person who
beneficially owned more than 5% of the outstanding shares of any of the Existing
Funds or The Catholic Money Market Fund other than those reflected in the
following table.
Capital The Catholic
Appreciation Equity Money
Large-Cap Fund Fund Income Fund Market Fund
Catholic Knights 46.8% 63.9% 69.1% 55.6%
Catholic Order of Foresters 10.4% 13.8% 13.0% 18.8%
Catholic Financial Services -0- -0- -0- 7.2%
Corporation
Catholic Aid Association (a -0- -0- -0- 5.0%
fraternal benefit society)
Officers and Directors of CFI 1.4% 1.3% 1.1% 1.6%
(as a group - ten persons)**
- ---------------------------
* No officer or director owned individually more than 1% of the outstanding
shares of The Catholic Money Market Fund.
As reflected in the Director and Officer biographical table included at the
beginning of this section caption "Management - Directors and Officers," certain
officers of CFSC also serve as officers of Catholic Knights and other of its
affiliates. Likewise, some individual officers of the sub-adviser also are
officers of affiliates of the sub-advisers, and/or serve as portfolio managers
for other investment companies managed by the sub-advisers and their affiliates
and provide investment advisory services in those capacities.
THE INVESTMENT ADVISERS. Each Fund is managed by Catholic Financial
Services Corporation ("CFSC") pursuant to an Investment Advisory Agreement.
Mellon Equity Associates, LLP ("Mellon") has been engaged as sub-adviser to
manage the assets of The Catholic Equity Fund. Basic information about CFSC and
the Advisory Agreement and about Mellon is set forth in the Proxy
Statement/Prospectus under "Management."
The Advisory Agreement with CFSC requires CFSC, at its expense, to provide
CFI with adequate office space, facilities and equipment, and to provide and
supervise the activities of all administrative and clerical personnel required
to provide effective corporate administration for the Equity Fund, including the
compilation and maintenance of records with respect to its operations, the
preparation and filing of specified reports, and composition of proxy materials
and registration statements for continuous public sale of shares of the Fund.
Expenses relating to the Equity Fund not expressly assumed by the adviser
under the Investment Advisory Agreement, the sub-adviser under the Sub-Advisory
Agreement, or by the Distributor under the Distribution Agreement, are paid by
the Equity Fund.
The Sub-Advisory Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
reckless disregard for obligations and duties under the Sub- Advisory Agreement,
the sub-adviser is not liable for any loss resulting from a good faith error or
omission on its part with respect to any of its duties thereunder.
At a meeting held on February 14, 2002, the Board of Directors, including
all of the Independent Directors, approved the selection of CFSC and Mellon
Equity Associates as investment adviser and sub-adviser, respectively, for The
Catholic Equity Fund, and also approved the extension of the Advisory Agreement
with CFSC to that Fund and approved the terms of a new Sub-Advisory Agreement
with Mellon Equity Associates. In approving these matters, the Board of
Directors considered the following factors, among others:
o The scope of services to be provided by CFSC and Mellon Equity
Associates.
o Mellon Equity Associates' experience and past performance in managing
mutual funds and other investment portfolios with a passive management
investment strategy, and in managing index funds based on the S&P 500
Index in particular.
o The special expertise and experience of CFSC and Mellon Equity
Associates in managing investment portfolios under social values and
screens, and CFSC's particular experience in implementing CFI's
Catholic values.
o The benefits to CFSC and Mellon Equity Associates and their affiliates
that potentially could be obtained as a result of their management
agreements with respect to The Catholic Equity Fund, apart from cash
compensation, including, in the case of CFSC, the possible sale of
insurance and other products to investors in The Catholic Equity Fund
and a possible increase in its membership base.
o With respect to the selection of CFSC, the fact that The Catholic
Equity Fund is being established as a result of the consolidation of
three existing equity funds of CFI.
o With respect to the selection of Mellon Equity Associates, comparative
information regarding alternative sub-advisers, including their
relevant experience, past performance and proposed fees.
o The management fees proposed by CFSC and Mellon Equity Associates as
compared to traditional S&P 500 Index funds, including CFSC's
commitment to reimburse expenses and waive fees as necessary to cap
the Fund's annual operating expenses for Class A, Class C and Class I
shares at 0.95%, 1.20% and 0.70%, respectively, of average daily net
assets for the fiscal year ending September 30, 2002.
PERFORMANCE INFORMATION OF THE EQUITY FUND
Total Return
From time to time the Equity Fund may advertise its "total return." "Total
return" of the Fund refers to the annual average return for 1, 5, and 10-year
periods (or the portion thereof during which the Fund has been in existence).
Total return is the change in redemption value of shares purchased with an
initial $1,000 investment, assuming the reinvestment of dividends and capital
gain distributions and the redemption of the shares at the end of the period.
The Catholic Disciplined Capital Appreciation Fund is considered the
surviving entity of the Reorganizations, and therefore is the predecessor to the
Equity Fund. Accordingly, performance information of the Equity Fund for periods
prior to the completion of the Reorganizations and the commencement of
operations of the Equity Fund actually will be performance information of The
Catholic Disciplined Capital Appreciation Fund. When quoting or advertising
performance information, the Equity Fund will make clear that performance
information for periods prior to that time reflects the performance of The
Catholic Disciplined Capital Appreciation Fund.
Performance information should be considered in light of the Fund's
investment objectives and policies, characteristics and quality of its portfolio
securities, and the market conditions during the applicable period, and should
not be considered as a representation of what may be achieved in the future.
Investors should consider these factors and possible differences in the methods
used in calculating performance information when comparing a Fund's performance
to performance figures published for other investment vehicles.
Average annual total return is computed by finding the average annual
compounded rates of return over the 1, 5, and 10-year periods (or the portion
thereof during which the Fund has been in existence) ended on the date of the
Fund's balance sheet that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T) n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10 year
periods at the end of the 1, 5, or 10 year periods
(or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
1, 5, and 10 year periods or a shorter period dating from the effectiveness of
the Registration Statement of the Fund. In calculating the ending redeemable
value, all dividends and distributions by the Fund are assumed to have been
reinvested at net asset value as described in the Prospectus on the reinvestment
dates during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5, and 10
year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
The table below shows the average annual total returns for The Catholic
Disciplined Capital Appreciation Fund (the predecessor in interest to The
Catholic Equity Fund) for the one-year period ended on September 30, 2001, and
since the commencement of its operations on May 3, 1999 through September 30,
2001.
From
Commencement
of Operations on
1 Year Ended May 3, 1999 through
Fund September 30, 2001 September 30, 2001
---- ------------------ ------------------
The Catholic Disciplined Capital -22.81% -6.67%
Appreciation Fund
Average Annual Total Return After Taxes on Distributions and Redemption
The Equity Fund's average annual total return after taxes on distributions
and redemption is calculated by finding the average annual compounded rates of
return over the 1-, 5-, and 10-year periods (or for the periods of the Fund's
operations) that would equate the initial amount invested to the ending value,
according to the following formula:
P(1 + T)n = ATVDR
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on
distributions and redemption).
n = number of years.
ATVDR = ending value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at
the end of the 1-, 5-, or 10-year periods (or
ractional portion), after taxes on fund distributions
and redemption.
If the Equity Fund advertises its total return for a 1-, 2-, or 3-year
period, or the total return since the Fund commenced operations, the Fund will
adjust the values used in computing return to correspond to the length of the
period for which the information is provided.
The taxes due are computed using the highest individual marginal federal
income tax rates in effect on the reinvestment date. The rates used correspond
to the tax character of each component of the distributions (e.g., ordinary
income rate for ordinary income distributions, short-term capital gain rate for
short-term capital gain distributions, long-term capital gain rate for long-term
capital gain distributions). Please note that the required tax rates may vary
over the measurement period. Potential state and local tax liabilities other
than federal tax liabilities are not included in these figures. In addition,
these numbers do not include the effect of phaseouts of certain exemptions,
deductions, and credits at various income levels; and the impact of the federal
alternative minimum tax.
The table below shows the average annual total return, after taxes on
distributions and redemptions, for The Catholic Disciplined Capital Appreciation
Fund (the predecessor in interest to The Catholic Equity Fund) for the one-year
period ended on September 30, 2001, and since commencement of its operations on
May 3, 1999 through September 30, 2001.
From
Commencement
of Operations on
1 Year Ended May 3, 1999 through
Fund September 30, 2001 September 30, 2001
---- ------------------ ------------------
The Catholic Disciplined Capital
Appreciation Fund
The Equity Fund will compare its performance to that of the S&P 500 Index
and from time to time may compare its performance to other mutual funds with
similar investment objectives and to the industry as a whole, as quoted by
ranking services and publications, such as Lipper Analytical Services, Inc.,
Morningstar, Inc., FORBES, FORTUNE, MONEY, BUSINESS WEEK, VALUE LINE, INC. AND
THE WALL STREET JOURNAL. These rating services and magazines rank the
performance of the Funds against all funds over specified periods and in
specified categories.
DETERMINATION OF NET ASSET VALUE PER SHARE OF THE EQUITY FUND
The Equity Fund's shares are sold at their next determined net asset value
per share, plus any applicable sales charge. The Fund determines the net asset
value per share by subtracting the Fund's liabilities (including accrued
expenses and dividends payable) from the Fund's total assets (the value of the
securities a Fund holds plus cash or other assets, including interest accrued
but not yet received) and dividing the result by the total number of shares
outstanding.
Any retail investor may purchase Class A shares of the Equity Fund. The
public offering price of Class A shares is the net asset value plus a maximum
front-end sales charge equal to a percentage of the offering price. The maximum
front-end sales charge is 4.00% of the offering price (4.17% of the NAV).
The front-end sales charge on Class A shares of the Equity Fund may be
reduced or waived on certain purchases or under certain circumstances. If you
are eligible for a reduction, you must notify us or your Registered
Representative at the time you purchase shares.
DISTRIBUTION OF SHARES OF THE EQUITY FUND
Catholic Financial Services Corporation, the Equity Fund's investment
adviser, also acts as distributor of the shares of the Fund. CFSC has agreed to
use its "best-efforts" to distribute the Fund's shares, but has not committed to
purchase or sell any specific number of shares. The Distribution Agreement for
the Fund is renewable annually by the vote of the directors at a meeting called
for such purpose and may be terminated upon 30 days' written notice by either
party. Under the Agreement, CFSC will pay for the costs and expenses of
preparing, printing and distributing materials not prepared by the Fund and used
by CFSC in connection with its offering of shares for sale to the public,
including the additional costs of printing copies of the prospectus and of
annual and interim reports to shareholders other than copies required for
distribution to shareholders or for filing under the federal securities laws,
and any expenses of advertising incurred by CFSC in connection with the offering
of the shares. Brokers who sell Class A shares of the Equity Fund pursuant to a
selling agreement receive the entire front-end sales charge.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Distribution Plan") pursuant
to Rule 12b-1 of the Investment Company Act. Under the Plan, CFSC provides the
Directors, after the end of each quarter, a written report setting forth all
amounts expended under the Plan, including all amounts paid to dealers as
distribution or service fees. In approving the Plan in accordance with the
requirements of Rule 12b-1, the Directors considered various factors, including
the amount of the distribution fee. The Directors determined that there is a
reasonable likelihood that the Plan will benefit the Fund and the shareholders
of the Fund.
The Plan may be terminated by vote of a majority of the Independent
Directors, or by vote of the majority of the outstanding voting securities of
the Fund. Any change in the Plan that would materially increase the distribution
cost to the Fund requires shareholder approval; otherwise it may be amended by
the Directors, including a majority of the Independent Directors, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as a Distribution Plan is in effect, the selection or nomination of the
Independent Directors is committed to the discretion of such Independent
Directors.
The Distribution Plan of the Fund may be terminated by the Directors at any
time on 60 days written notice without payment of any penalty by the Adviser, by
vote of a majority of the outstanding voting securities of the Fund, or by vote
of a majority of the Independent Directors.
The Distribution Plan will continue in effect for successive one-year
periods, if not sooner terminated in accordance with its terms, provided that
each such continuance is specifically approved by the vote of the Directors,
including a majority of the Independent Directors.
The maximum amount of fees payable under the Distribution Plan during any
year with respect to Class A shares of the Equity Fund is twenty-five basis
points or (0.25 of 1%) of the average daily net assets of the Fund which are
attributable to its Class A shares.
REGULATED INVESTMENT COMPANY STATUS
As a regulated investment company (a "RIC") under Subchapter M of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), the Equity Fund is not
subject to Federal income taxes on the net investment income and capital gains
that the Fund distributes to the Fund's shareholders. The distribution of net
investment income and capital gains will be taxable to Fund shareholders
regardless of whether the shareholder elects to receive these distributions in
cash or in additional shares. Distributions reported to Fund shareholders as
capital gains from property held for more than one year will be taxable as such,
regardless of how long the shareholder has owned the shares. Fund shareholders
will be notified annually by the Fund as to the Federal tax status of all
distributions made by the Fund. Distributions may be subject to state and local
taxes. To qualify as a RIC, the Code requires that at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's total
assets be invested in cash, U.S. Government Securities, the securities of other
regulated investment companies, and other securities, with such securities of
any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of Fund's total assets and 10% of the outstanding
voting securities of any one issuer, and (ii) not more than 25% of the value of
the Fund's total assets be invested in the securities of any one issuer (other
than U.S. Government Securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses, or related
trades or businesses.
The Equity Fund will seek to qualify for treatment as a RIC under the Code.
Provided that the Fund (i) is a RIC and (ii) distributes at least 90% of the
Fund's net investment income (including, for this purpose, net realized
short-term capital gains), the Fund itself will not be subject to Federal income
taxes to the extent the Fund's net investment income and the Fund's net realized
long and short-term capital gains, if any, are distributed to the Fund's
shareholders. To avoid an excise tax on its undistributed the Fund generally
must distribute annually at least 98% of its income, including its net long-term
capital gains as calculated on a calendar year basis as defined by the Code. One
of several requirements for RIC qualification is that the Fund must receive at
least 90% of the Fund's gross income each year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of securities or foreign currencies, or other income derived with
respect to the Fund's investments in stock, securities, and foreign currencies
(the "90% Test").
In the event of a failure by the Equity Fund to qualify as a RIC, the Fund
would be subject to Federal income taxes on its taxable income and the Fund's
distributions, to the extent that such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute dividends that
would be taxable to the shareholders of the Fund as ordinary income and would be
eligible for the dividends received deduction for corporate shareholders. This
treatment would also apply to any portion of the distributions that might have
been treated in the shareholder's hands as long-term capital gains, as discussed
below, had the Fund qualified as a RIC.
If the Equity Fund were to fail to qualify as a RIC for one or more taxable
years, the Fund could then qualify (or requalify) as a RIC for a subsequent
taxable year only if the Fund had distributed to the Fund's shareholders a
taxable dividend equal to the full amount of any earnings or profits (less the
interest charge mentioned below, if applicable) attributable to such period. In
addition, pursuant to the Code and an interpretative notice issued by the IRS,
if the Fund should fail to qualify as a RIC and should thereafter seek to
qualify as a RIC, the Fund may be subject to tax on the excess (if any) of the
fair market of the Fund's assets over the Fund's basis in such assets, as of the
day immediately before the first taxable year for which the Fund seeks to
qualify as a RIC. A similar rule may apply if the Fund initially qualifies as a
RIC, then fails to qualify for more than one taxable year, and subsequently
requalifies as a RIC.
If the Equity Fund determines that will not qualify as a RIC under
Subchapter M of the Code, it will establish procedures to reflect the
anticipated tax liability in the Fund's net asset value.
DESCRIPTION OF SHARES OF THE EQUITY FUND
In the interest of economy and convenience, certificates representing
shares purchased in the Equity Fund are not issued. However, such purchases are
confirmed to the investor and credit to their accounts on the books maintained
by US Bancorp Fund Services, LLC (the "Agent"), Milwaukee, Wisconsin. The
investor will have the same rights of ownership with respect to such shares as
if certificates had been issued.
Shareholders have the right to vote on the election of Directors at each
meeting of shareholders at which Directors are to be elected and on other
matters as provided by law or the Articles of Incorporation or Bylaws of CFI.
CFI's Bylaws do not require that meetings of shareholders be held annually.
However, special meetings of shareholders may be called for purposes such as
electing or removing directors, changing fundamental policies, or approving
investment advisory contacts. Shareholders of each series of a series company,
such as the CFI, vote together with each share of each series of the company on
matters affecting all series (such as election of directors), with each share
entitled to a single vote. On matters affecting only one series (such as a
change in that series' fundamental investment restrictions), only the
shareholders of that series are entitled to vote. On matters relating to all the
series but affecting the series differently (such as a new Investment Advisory
Agreement), separate votes by series are required. The same rules govern the
separate or joint voting of Classes of shares within a series.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Investment Advisory and Sub-Advisory Agreement (referred to
hereinafter in this section as the "Advisory Agreements"), the adviser and
subadviser (hereinafter referred to in this section as the "advisers") have the
authority to direct the placement of orders for the purchase and sale of the
Equity Fund's portfolio securities.
The cost of securities transactions for the Equity Fund will consist
primarily of brokerage commissions or dealer or underwriter spreads.
Occasionally, securities may be purchased directly from the issuer. For
securities traded primarily in the over-the-counter market, the sellers who make
a market in the securities will be dealt with directly unless better prices and
execution are available elsewhere. Such dealers usually act as principals for
their own account. In placing portfolio transactions, the advisers seek the best
combination of price and execution.
In determining which brokers provide best execution, the advisers look
primarily to the stock price quoted by the broker, and normally places orders
with the broker through which the most favorable price can be obtained. It is
expected that securities will ordinarily be purchased in the primary markets,
and that in assessing the best net price and execution available to the Equity
Fund, the advisers will consider all factors they deem relevant, including the
breadth or the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any (for the specific transaction and on a
continuing basis). Although it is expected that sales of shares of the Fund will
be made only by the distributor, the adviser may in the future consider the
willingness of particular brokers to sell shares of the Fund as a factor in the
selection of brokers for the Fund's portfolio transactions, subject to the
overall best price and execution standard.
Assuming equal execution capabilities, other factors may be taken into
account in selecting brokers or dealers to execute particular transactions and
in evaluating the best net price and execution available. The advisers may
consider "brokerage and research services" (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934), statistical quotations,
specifically the quotations necessary to determine the Fund's net asset values,
and other information provided to the Fund, to the advisers (or their
affiliates)). The advisers may also cause the Equity Fund to pay to a broker or
dealer who provides such brokerage and research services a commission for
executing a portfolio transaction which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction. The
advisers must determine, in good faith, however, that such commission was
reasonable in relation to the value of the brokerage and research services
provided, viewed in terms of that particular transaction or in terms of all the
accounts over which the advisers exercise investment discretion. It is possible
that certain of the services received by the advisers attributable to a
particular transaction will benefit one or more other accounts for which
investment discretion is exercised by the advisers.
CODE OF ETHICS
The Catholic Funds, the advisers and the distributor have adopted a Code of
Ethics designed to prevent employees who may have access to nonpublic
information about the trading activities of the Equity Fund (access persons)
from profiting from that information. The Code permits access persons to invest
in securities for their own accounts, including securities that may be held by
the Fund, but requires reporting and places restrictions on their trading
activities.
The Board of The Catholic Funds also has reviewed the Code of Ethics
adopted by the sub-adviser of the Equity Fund, which covers the sub-adviser's
employees. That Code prohibits portfolio managers from trading a security the
same day as it is traded for a client's account.
PAYMENTS "IN KIND"
Payment for shares of the Equity Fund tendered for redemption ordinarily
will be made in cash. However, the board of directors may determine that it
would be detrimental to the best interests of the remaining shareholders of the
Equity Fund to make payment of a redemption order wholly or partly in cash. In
that case the Fund may pay the redemption proceeds in whole or in part by a
distribution "in kind" of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the Securities and Exchange
Commission. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act, pursuant to which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net assets of the Fund
during any 90-day period for any one shareholder. If shares are redeemed in
kind, the redeeming shareholder might incur brokerage or other costs in selling
the securities for cash. The method of valuing securities used to make
redemptions in kind will be the same as the method the Equity Fund uses to value
its portfolio securities described above under "Determination of Net Asset Value
Per Share of the Equity Fund," and that valuation will be made as of the time
the redemption price is determined.
ACCOUNTING, FULFILLMENT, CUSTODIAN AND TRANSFER AGENT SERVICES
US Bancorp Fund Services, LLC ("US Bancorp") provides fund accounting,
fulfillment, custodian and transfer agent services to the Equity Fund.
US Bancorp provides fund accounting services pursuant to the terms of a
Fund Accounting Servicing Agreement. The current rate of payment for these
services for the Equity Fund per year is $22,000 for the first $40 million; .001
of 1% on average daily net assets on the next $200 million; and .005 of 1% of
average daily net assets exceeding $240 million. The Fund Accounting Servicing
Agreement will continue in effect from year to year.
Under a Fulfillment Servicing Agreement, US Bancorp is entitled to a fee
based on the volume of transactions. The Equity Fund pays a minimum monthly fee
of $100.
US Bancorp serves as the custodian of the Equity Fund's assets, pursuant to
a Custodian Servicing Agreement. The Custodian Servicing Agreement provides that
US Bancorp is entitled to receive an annual fee set at .002 of 1% on average
daily net asset value. US Bancorp is entitled to receive a minimum annual fee of
$3,000 from the Fund.
US Bancorp provides transfer agent and dividend disbursing services to the
Equity Fund pursuant to the terms of a Transfer Agent Servicing Agreement. Under
the terms of the Transfer Agent Servicing Agreement, US Bancorp is entitled to
annual compensation, including a minimum annual fee of $17,500. US Bancorp is
also entitled to reimbursement for all out of pocket expenses incurred in
providing such services. The Transfer Agent Servicing Agreement will continue in
effect until terminated, and may be terminated by either party without cause on
ninety (90) days' prior written notice.
EXPERTS
The financial statements and financial highlights of each of the Existing
Funds incorporated by reference into this Statement of Additional Information
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
HISTORICAL FINANCIAL STATEMENTS
The following audited historical financial statements and footnotes thereto
for each of the Existing Funds, together with the Report of the Independent
Accounts thereon, are incorporated herein by reference from the Existing Funds
Annual Report:
1. Statements of Assets and Liabilities of the Existing Funds as of
September 30, 2001.
2. Statements of Operations of the Existing Funds for the year ended
September 30, 2001.
3. Statements of Changes in Net Assets of the Existing Funds for the
fiscal years ended September 30, 2001 and 2000.
4. Schedule of Investments for the Existing Funds as of September 30,
2001.
5. Financial Highlights for the Existing Funds.
6. Notes to Financial Statements.
A copy of the Existing Funds' Annual Report dated September 30, 2001 may be
obtained free of charge by writing Catholic Financial Services Corporation, at
1100 West Wells Street, Milwaukee, Wisconsin 53233, or by calling shareholder
services at (877) 222-2402.
PRO FORMA FINANCIAL STATEMENTS
Set forth below are the following unaudited pro forma financial statements:
1. Unaudited Pro Forma Combining Statement of Assets and Liabilities for
the Existing Funds and the Equity Fund as of September 30, 2001
(assuming each Reorganization had been consummated on that date);
2. Unaudited Pro Forma Combining Statement of Operations for each of the
Existing Funds and the Equity Fund for the fiscal year ended September
30, 2001 (assuming each Reorganization had been consummated on October
1, 2000, the beginning of the most recently completed fiscal year of
each of the Existing Funds);
3. Unaudited Pro Forma Combining Schedule of Investments of each of the
Existing Funds and the Equity Fund as of September 30, 2001 (assuming
each Reorganization had been consummated on that date); and
4. Notes to Pro Forma Financial Statements (Unaudited).
The Pro Form Combining Schedule of Investments contains information about
securities holdings of the Existing Funds as of September 30, 2001, which has,
and will continue, to change over time due to the normal portfolio turnover
inherent in managing a portfolio of securities. Since the Equity Fund is
changing its investment approach, it is likely that some of the holdings at
September 30, 2001 also will need to be sold to accommodate this investment
approach. These anticipated sales of portfolio securities are being incurred as
a part of the Reorganizations.
These unaudited pro forma financial statements should be read in
conjunction with, and are qualified in their entirety by, the historical
financial statements of each of the Existing Funds incorporated by reference
into this Statement of Additional Information. These unaudited pro forma
financial statements are intended for information purposes only, and are not
necessarily indicative of the future financial position or future results of the
Equity Fund.
Unaudited Pro Forma Combining Statement of Assets and Liabilities for The
Catholic Disciplined Capital Appreciation Fund, The Catholic Equity Income Fund,
The Catholic Large-Cap Growth Fund and The Catholic Equity
Fund As of September 30, 2001
The
Catholic
Disciplined The The Catholic
Capital Catholic The Catholic Equity Fund
Appreciation Equity Large-Cap Pro Forma
Fund Income Fund Growth Fund Adjustments Financials
Investments, at cost $5,516,787 $5,683,686 $6,623,310 $ - $ 17,823,783
==================================================================
Investments, at value $4,533,106 $5,371,465 $5,222,414 $ - $ 15,126,985
Income receivable 4,811 15,976 2,321 - 23,108
Receivable for securities sold - - - - -
Receivable for fund shares sold - - 63,234 - 63,234
Receivable from adviser 5,552 2,037 4,795 - 12,384(3)
Other assets 6,198 6,657 6,508 - 19,363
--------------------------------------------------- -------------
Total Assets 4,549,667 5,396,135 5,299,272 - 15,245,074
Accrued expenses and other liabilities 24,352 23,359 22,638 - 70,349
Payable for fund shares redeemed - - - 5 5
Distributions payable - - - 95,209 95,209
--------------------------------------------------- -------------
Total Liabilities 24,352 23,359 22,638 95,214 165,563
--------------------------------------------------- -------------
Net Assets $4,525,315 $5,372,776 $5,276,634 $(95,214) $15,079,511
=================================================== =============
Net assets consist of:
Paid in capital $5,415,570 $5,849,061 $6,978,104 $ (5)(4) $18,242,730
Undistributed net investment income
(loss) - 1,783 - (1,783)(1) -
Undistributed net gain (loss) 93,426 (165,847) (300,574) (93,426)(1) (466,421)
Net unrealized depreciation on
investments (983,681) (312,221) (1,400,896) - (2,696,798)
--------------------------------------------------- -------------
Net Assets $4,525,315 $5,372,776 $5,276,634 $(95,214) $15,079,511
=================================================== =============
Class A:
Shares Authorized ($.001 par value) 50,000,000 50,000,000 50,000,000 (50,000,000) 100,000,000(2)
Issued and outstanding 536,765 590,954 666,850 (5,000) 1,789,569
Net asset value, redemption price and
minimum offering price per share $ 8.43 $ 9.09 $ 7.91 $ - $ 8.43
Maximum offering price per share $ 8.78 $ 9.47 $ 8.24 $ - $ 8.78
Class C:
Net Assets $ - $ - $ - $ - $ -
Shares Authorized ($.001 par value) - - - - -
Shares Outstanding - - - - -
Net asset value, redemption price
and minimum offering price per share $ - $ - $ - $ - $ -
Maximum offering price per share $ - $ - $ - $ - $ -
Class I:
Net Assets $ - $ - $ - $ - $ -
Shares Authorized ($.001 par value) - - - - -
Shares Outstanding - - - - -
Net asset value, redemption price
and minimum offering price per share $ - $ - $ - $ - $ -
Maximum offering price per share $ - $ - $ - $ - $ -
1) Reflects the payment of undistributed net investment income and
undistributed net realized capital gains.
2) Total shares authorized for The Catholic Equity Fund are 100 million. This
amount is allocable amongst the three share classes. Upon reorganization,
all shares of the existing funds will be converted to Class A shares of The
Catholic Equity Fund.
3) Reflects amount due from the adviser under the voluntary expense
reimbursement agreement. This amount was paid to the fund in October 2001.
4) Adjustment reflects conversion of shares to new fund. Outstanding shares
will change as the existing values of the funds differ. The shareholders
will receive shares in The Catholic Equity Fund equal to the value they
currently have invested.
Unaudited Pro Forma Combining Statement of Operation for The Catholic
Disciplined Capital Appreciation Fund, The Catholic Equity Income Fund, The
Catholic Large-Cap Growth Fund, and The Catholic Equity Fund For the Year Ended
September 30, 2001
The
Catholic
Disciplined The The Catholic
Capital Catholic The Catholic Equity Fund
Appreciation Equity Large-Cap Pro Forma
Fund Income Fund Growth Fund Adjustments Financials
Dividend income $ 62,619 $ 87,023 $ 22,930 $ - $ 172,572
Interest income 2,042 38,894 10,484 - 51,420
---------------------------------------------------- -------------
Total Income 64,661 125,917 33,414 - 223,992
Investment advisory fees 44,710 40,969 55,195 - 140,874
Portfolio accounting fees 27,992 23,769 23,005 (44,766)(1) 30,000
Transfer agent fees and expenses 17,079 15,850 18,280 (23,209)(1) 28,000
Distribution fees 12,419 12,803 15,332 - 40,554
Audit fees 12,701 12,396 12,501 (24,598)(1) 13,000
Federal and state registration fees 10,160 10,079 10,159 - 30,398
Printing and postage expenses 10,535 9,042 12,994 - 32,571
Legal fees 4,535 4,664 4,807 - 14,006
Custody fees 6,140 3,667 4,882 - 14,689
Directors' fees and expenses 1,519 1,470 1,520 - 4,509
Other 3,580 3,390 4,071 - 11,041
---------------------------------------------------- -------------
Total Expenses 151,370 138,099 162,746 (92,573) 359,642
Less waivers and reimbursements by
adviser (64,435) (53,600) (55,423) - (173,458)
---------------------------------------------------- -------------
Net Expenses 86,935 84,499 107,323 (92,573) 186,184
---------------------------------------------------- -------------
Net Investment Income (Loss) (22,274) 41,418 (73,909) 92,573 37,808
Net realized gain (loss) on
investments 93,437 ( 155,367) (289,658) - (351,588)
Net change in unrealized depreciation
on investments (1,330,066) (253,001) (2,708,848) - (4,291,915)
---------------------------------------------------- -------------
Net Realized and Unrealized Loss on
Investments (1,236,629) (408,368) (2,998,506) - (4,643,503)
---------------------------------------------------- -------------
Change in Net Assets Resulting from
Operations (1,258,903) $ (366,950) ($ 3,072,415) $ 92,573 $ (4,605,695)
===================================================== =============
1) Reflects an estimated savings as a result of the Reorganization through
fewer audits and consolidation of accounting, transfer agent, printing and
legal fees.
Unaudited Combining Scheduel of Invesments for The Catholic Disciplined Capital
Appreciated Fund,The Catholic Equity Income Fund, The Catholic Large-Cap Growth
Fund and The Catholic Equity Fund As of'"September 30, 2001.
The
Catholic The
Disciplined The Catholic The Catholic
Capital Catholic Large-Cap Equity Fund
Appreciation Equity Growth Pro Forma
Fund Income Fund Fund Adjustments Financials
Schedule of Investments (Pro Forma)
Industry Shares Investments
Air
Transportation 800 Delta Air Lines, Inc. $ - $ 21,080 $ - $ - $ 21,080
-----------------------------------------------------------
Total - 21,080 - - 21,080
Appliances 500 Maytag Corporation 12,320 - - - 12,320
-----------------------------------------------------------
Total 12,320 - - - 12,320
Autos & Trucks 3,000 Ford Motor Company 24,290 27,760 - - 52,050
-----------------------------------------------------------
Total 24,290 27,760 - - 52,050
Banking 1,700 Bank of America
Corporation - 99,280 - - 99,280
1,300 Bank One Corporation - 40,911 - - 40,911
538 Charter One Financial,
Inc. 15,171 - - - 15,171
400 Comerica Incorporated 22,160 - - - 22,160
600 Dime Bancorp, Inc. 23,592 - - - 23,592
2,800 FleetBoston Financial 33,075 69,825 - - 102,900
Corporation
2,200 State Street
Corporation - - 100,100 - 100,100
600 UnionBanCal
Corporation 20,304 - - - 20,304
1,100 U.S. Bancorp 24,398 - - - 24,398
2,100 Wachovia Corporation - 65,100 - - 65,100
1,050 Wachovia Corporation - 504 - - 504
Contra Account
400 Wells Fargo & Company 17,780 - - - 17,780
-----------------------------------------------------------
Total 156,480 275,620 100,100 - 532,200
Biomedical 800 Amgen Inc.* 47,016 - - - 47,016
300 Genentech, Inc.* 13,200 - - - 13,200
-----------------------------------------------------------
Total 60,216 - - - 60,216
Building & 600 KB HOME 17,046 - - - 17,046
Building 500 York International 14,320 - - - 14,320
Products Corporation -----------------------------------------------------------
Total 31,366 - - - 31,366
Business
Services 3,300 Cintas Corporation - - 132,990 - 132,990
6,825 Paychex, Inc. - - 215,056 - 215,056
-----------------------------------------------------------
Total - - 348,046 - 348,046
Cable TV 500 Adelphia
Communications 11,100 - - - 11,100
Corporation, Class A
1,100 Comcast Corporation, 39,457 - - - 39,457
Special Class A*
-----------------------------------------------------------
Total 50,557 - - - 50,557
Casinos &
Hotels 600 Mandalay Resort Group* 9,738 - - - 9,738
-----------------------------------------------------------
Total 9,738 - - - 9,738
Chemicals 2,900 The Dow Chemical
Company 22,932 72,072 - - 95,004
500 The Lubrizol
Corporation 15,800 - - - 15,800
-----------------------------------------------------------
Total 38,732 72,072 - - 110,804
Commercial
Services 1,500 The ServiceMaster
Company 16,635 - - - 16,635
-----------------------------------------------------------
Total 16,635 - - - 16,635
Computer
Products 750 Adobe Systems
& Services Incorporated 17,985 - - - 17,985
15,600 Cisco Systems, Inc.* 36,540 20,706 132,762 - 190,008
1,500 Compaq Computer
Corporation 12,465 - - - 12,465
2,300 Computer Sciences - 76,291 - - 76,291
Corporation*
2,300 DST Systems, Inc.* - - 99,475 - 99,475
7,700 EMC Corporation* 21,150 - 69,325 - 90,475
1,100 Hewlett-Packard
Company 17,710 - - - 17,710
800 International Business 73,840 - - - 73,840
Machines Corporation
(IBM)
1,824 Maxtor Corporation* 6,512 - - - 6,512
12,300 Microsoft Corporation* 127,925 194,446 307,020 - 629,391
3,100 Oracle Corporation* 38,998 - - - 38,998
2,200 Sun Microsystems, Inc.* 18,194 - - - 18,194
5,200 SunGard Data Systems
Inc.* - 60,762 60,762 - 121,524
900 Sybase, Inc.* 8,370 - - - 8,370
100 VeriSign, Inc.* 4,190 - - - 4,190
1,000 VERITAS Software 5,532 - 12,908 - 18,440
Corporation*
-----------------------------------------------------------
Total 389,411 352,205 682,252 - 1,423,868
Consumer
Products 400 The Clorox Company 14,800 - - - 14,800
800 Newell Rubbermaid Inc. 18,168 - - - 18,168
900 Tupperware Corporation 17,946 - - - 17,946
-----------------------------------------------------------
Total 50,914 - - - 50,914
Cosmetics & 700 Avon Products, Inc. 32,375 - - - 32,375
Toiletries 600 The Gillette Company 17,880 - - - 17,880
2,950 Kimberly-Clark
Corporation 37,200 145,700 - - 182,900
-----------------------------------------------------------
Total 87,455 145,700 - - 233,155
Data Processing 2,300 Automatic Data - - 108,192 - 108,192
Processing, Inc.
4,800 First Data Corporation 17,478 - 262,170 - 279,648
4,500 Fiserv, Inc.* 10,260 - 143,640 - 153,900
-----------------------------------------------------------
Total 27,738 - 514,002 - 541,740
Distributors 350 Tech Data Corporation* 13,265 - - - 13,265
-----------------------------------------------------------
Total 13,265 - - - 13,265
Diversified 1,400 Honeywell
Services & International Inc. 36,960 - - - 36,960
Manufacturing 700 Pentair, Inc. 21,539 - - - 21,539
2,400 Tyco International Ltd. 54,600 54,600 - - 109,200
-----------------------------------------------------------
Total 113,099 54,600 - - 167,699
Drugs & Medical 407 AmerisourceBergen 28,877 - - - 28,877
Supplies Corporation*
400 Baxter International,
Inc. 22,020 - - - 22,020
600 Becton, Dickinson and 22,200 - - - 22,200
Company
3,200 Bristol-Myers Squibb 72,228 105,564 - - 177,792
Company
3,600 Cardinal Health, Inc. - 122,017 144,202 - 266,219
300 Eli Lilly and Company 24,210 - - - 24,210
10,900 IMS Health
Incorporated 25,050 - 247,995 - 273,045
1,300 Johnson & Johnson 72,020 - - - 72,020
2,100 McKesson Corporation - 79,359 - - 79,359
6,450 Medtronic, Inc. - - 280,575 - 280,575
4,250 Merck & Co., Inc. 93,240 129,870 59,940 - 283,050
11,700 Pfizer Inc. 132,330 - 336,840 - 469,170
1,700 Schering-Plough
Corporation 63,070 - - - 63,070
1,300 Wellpoint Health 21,830 120,065 - - 141,895
Networks Inc.* -----------------------------------------------------------
Total 577,075 556,875 1,069,552 - 2,203,502
Electrical
Equipment 2,700 Emerson Electric Co. - 127,062 - - 127,062
6,700 General Electric
Company 148,800 100,440 - - 249,240
-----------------------------------------------------------
Total 148,800 227,502 - - 376,302
Electronics 700 Advanced Micro 5,705 - - - 5,705
Devices, Inc.*
2,200 Applied Materials,
Inc.* - 62,568 - - 62,568
400 Avnet, Inc. 7,276 - - - 7,276
700 AVX Corporation 11,389 - - - 11,389
1,600 Flextronics
International - 26,464 - - 26,464
Ltd.*
15,300 Intel Corporation 59,276 40,880 212,576 - 312,732
1,000 Micron Technology,
Inc.* 18,830 - - - 18,830
500 Sanmina Corporation* 6,790 - - - 6,790
8,200 Solectron Corporation* - - 95,530 - 95,530
1,700 Symbol Technologies,
Inc. 17,833 - - - 17,833
1,200 Texas Instruments 29,976 - - - 29,976
Incorporated -----------------------------------------------------------
Total 157,075 129,912 308,106 - 595,093
Financial
Services 400 Ambac Financial Group,
Inc. 21,884 - - - 21,884
1,000 American Express
Company 29,060 - - - 29,060
300 The Bear Stearns 15,003 - - - 15,003
Companies Inc.
13,850 The Charles Schwab - - 159,275 - 159,275
Corporation
2,300 Citigroup Inc. 93,150 - - - 93,150
1,400 Concord EFS, Inc.* - - 68,530 - 68,530
400 Countrywide Credit 17,572 - - - 17,572
Industries, Inc.
300 Deluxe Corporation 10,362 - - - 10,362
1,700 Fannie Mae 40,030 96,072 - - 136,102
600 Freddie Mac 39,000 - - - 39,000
3,550 The Goldman Sachs
Group, Inc. 24,973 - 228,320 - 253,293
5,200 H&R Block, Inc. - 200,512 - - 200,512
1,200 Household
International, Inc. 11,276 56,380 - - 67,656
3,460 J.P. Morgan Chase & Co. 72,056 46,103 - - 118,159
500 Lehman Brothers
Holdings Inc. 28,425 - - - 28,425
1,200 MBIA, Inc. - 60,000 - - 60,000
3,200 MBNA Corporation - 96,928 - - 96,928
300 Merrill Lynch & Co.,
Inc. 12,180 - - - 12,180
2,000 Morgan Stanley Dean 27,810 - 64,890 - 92,700
Witter & Co.
1,400 PNC Financial Services - 80,150 - - 80,150
Group
500 Stilwell Financial,
Inc. 9,750 - - - 9,750
3,800 T. Rowe Price Group
Inc. - - 111,340 - 111,340
400 Washington Mutual,Inc. 15,392 - - - 15,392
-----------------------------------------------------------
Total 467,923 636,145 632,355 - 1,736,423
Food & Beverage 2,700 Anheuser-Busch - 113,076 - - 113,076
Companies, Inc.
900 The Coca-Cola Company 42,165 - - - 42,165
700 General Mills, Inc. 31,850 - - - 31,850
700 McCormick & Company, 32,060 - - - 32,060
Incorporated
2,300 McDonald's Corporation 13,570 48,852 - - 62,422
300 The Pepsi Bottling 13,821 - - - 13,821
Group, Inc.
850 PepsiCo, Inc. 41,225 - - - 41,225
3,700 Safeway Inc.* 31,776 115,188 - - 146,964
1,200 SUPERVALU INC. 24,276 - - - 24,276
-----------------------------------------------------------
Total 230,743 277,116 - - 507,859
Health
Maintenance 400 Oxford Health Plans,
Organization Inc.* 11,360 - - - 11,360
-----------------------------------------------------------
Total 11,360 - - - 11,360
Industrial
Gases 300 Praxair, Inc. 12,600 - - - 12,600
-----------------------------------------------------------
Total 12,600 - - - 12,600
Insurance 150 Allmerica Financial 6,728 - - - 6,728
Corporation
1,100 The Allstate
Corporation 41,085 - - - 41,085
4,537 American International 54,600 - 299,286 - 353,886
Group, Inc.
300 CIGNA Corporation 24,885 - - - 24,885
770 Fidelity National 20,705 - - - 20,705
Financial, Inc.
300 The Hartford Financial 17,622 - - - 17,622
Services Group, Inc.
1,450 MGIC Investment
Corporation 9,801 84,942 - - 94,743
500 The MONY Group Inc. 16,560 - - - 16,560
200 Nationwide Financial 7,436 - - - 7,436
Services, Inc.
700 Old Republic
International 18,347 - - - 18,347
Corporation
500 UnumProvident
Corporation 12,625 - - - 12,625
-----------------------------------------------------------
Total 230,394 84,942 299,286 - 614,622
Internet 400 Yahoo! Inc.* 3,524 - - - 3,524
----------------------------------------------------------
Total 3,524 - - - 3,524
Leisure & 600 Brunswick Corporation 9,882 - - - 9,882
Recreational
Product -----------------------------------------------------------
Total 9,882 - - - 9,882
Machinery - 500 Ingersoll-Rand Company 16,900 - - - 16,900
Diversified
-----------------------------------------------------------
Total 16,900 - - - 16,900
Manufacturing 400 Avery Dennison
Corporation 18,924 - - - 18,924
1,000 Corning Incorporated 8,820 - - - 8,820
600 Energizer Holdings,
Inc.* 9,972 - - - 9,972
-----------------------------------------------------------
Total 37,716 - - - 37,716
Metal 400 Alcoa Inc. 12,404 - - - 12,404
-----------------------------------------------------------
Total 12,404 - - - 12,404
Multimedia 5,900 AOL Time Warner Inc.* 59,580 - 135,710 - 195,290
300 Clear Channel 11,925 - - - 11,925
Communications, Inc.*
500 Gemstar-TV Guide 9,855 - - - 9,855
International, Inc.*
1,000 Viacom Inc., Class B* 34,500 - - - 34,500
1,300 The Walt Disney
Company 24,206 - - - 24,206
-----------------------------------------------------------
Total 140,066 - 135,710 - 275,776
Office
Furnishings 500 Herman Miller, Inc. 9,735 - - - 9,735
-----------------------------------------------------------
Total 9,735 - - - 9,735
Oil 300 Anadarko Petroleum 14,424 - - - 14,424
Corporation
400 Apache Corporation 17,200 - - - 17,200
600 Baker Hughes
Incorporated 17,370 - - - 17,370
700 BJ Services Company* 12,453 - - - 12,453
2,248 BP Plc, ADR - 110,534 - - 110,534
1,000 Burlington Resources
Inc. - 34,210 - - 34,210
300 Chevron Corporation 25,425 - - - 25,425
5,500 Conoco Inc., Class A - 139,865 - - 139,865
600 EOG Resources, Inc. 17,358 - - - 17,358
2,900 Exxon Mobil
Corporation 114,260 - - - 114,260
950 Kerr-McGee Corporation - 49,315 - - 49,315
600 Noble Drilling
Corporation* 14,400 - - - 14,400
1,700 Phillips Petroleum
Company - 91,698 - - 91,698
400 Royal Dutch Petroleum 20,100 - - - 20,100
Company
850 Schlumberger Limited - 38,845 - - 38,845
1,800 Texaco Inc. 19,500 97,500 - - 117,000
400 Tidewater Inc. 10,676 - - - 10,676
500 Ultramar Diamond
Shamrock 23,970 - - - 23,970
Corporation
600 USX-Marathon Group 16,050 - - - 16,050
-----------------------------------------------------------
Total 323,186 561,967 - - 885,153
Optical
Supplies 300 Allergan, Inc. 19,890 - - - 19,890
300 Bausch & Lomb
Incorporated 8,490 - - - 8,490
-----------------------------------------------------------
Total 28,380 - - - 28,380
Painting
Products 1,900 The Sherwin-Williams 42,218 - - - 42,218
Company ----------------------------------------------------------
Total 42,218 - - - 42,218
Paper Products 400 Boise Cascade
Corporation 11,800 - - - 11,800
500 Georgia-Pacific Group 14,395 - - - 14,395
----------------------------------------------------------
Total 26,195 - - - 26,195
Photo Equipment 500 Eastman Kodak Company 16,265 - - - 16,265
& Supplies
----------------------------------------------------------
Total 16,265 - - - 16,265
Pipelines 1,845 El Paso Corporation - 76,660 - - 76,660
1,800 Enron Corp. - - 49,014 - 49,014
400 Equitable Resources,
Inc. 12,004 - - - 12,004
300 The Williams Companies, 8,190 - - - 8,190
Inc. -----------------------------------------------------------
Total 20,194 76,660 49,014 - 145,868
Printing & 400 Dow Jones & Company,
Inc. 18,172 - - - 18,172
Publishing
300 Knight-Ridder, Inc. 16,755 - - - 16,755
300 Lexmark International, 13,413 - - - 13,413
Inc.* -----------------------------------------------------------
Total 48,340 - - - 48,340
Professional 500 Fluor Corporation 19,250 - - - 19,250
Services
-----------------------------------------------------------
Total 19,250 - - - 19,250
Real Estate 500 AMB Property
Investment Corporation 12,250 - - - 12,250
Trusts 2,000 Archstone Communities
Trust - 52,200 - - 52,200
1,200 Duke Realty
Corporation - 28,428 - - 28,428
2,021 Equity Office
Properties Trust 19,200 45,472 - - 64,672
1,200 Equity Residential 11,680 58,400 - - 70,080
Properties Trust
1,800 First Industrial
Realty - 54,000 - - 54,000
Trust, Inc.
1,500 Mack-Cali Realty - 46,500 - - 46,500
Corporation
700 ProLogis Trust 14,770 - - - 14,770
1,300 Simon Property Group,
Inc. 13,455 21,528 - - 34,983
-----------------------------------------------------------
Total 71,355 306,528 - - 377,883
Retail 400 BJ's Wholesale Club,
Inc.* 19,044 - - - 19,044
500 Brinker International, 11,810 - - - 11,810
Inc.*
700 Circuit City Stores 8,400 - - - 8,400
-Circuit City Group
6,800 Costco Wholesale - - 241,808 - 241,808
Corporation*
700 CVS Corporation 23,240 - - - 23,240
800 Fastenal Company - - 45,584 - 45,584
900 Federated Department 25,380 - - - 25,380
Stores, Inc.*
7,600 The Home Depot, Inc. 11,511 - 280,101 - 291,612
2,000 The Limited, Inc. 19,000 - - - 19,000
800 Lowe's Companies, Inc. 25,320 - - - 25,320
500 The May Department
Stores Company 14,510 - - - 14,510
900 Ross Stores, Inc. 26,325 - - - 26,325
4,900 Target Corporation - 155,575 - - 155,575
300 Tricon Global 11,766 - - - 11,766
Restaurants, Inc.*
1,100 Wal-Mart Stores, Inc. 54,450 - - - 54,450
600 Winn-Dixie Stores, Inc. 6,870 - - - 6,870
-----------------------------------------------------------
Total 257,626 155,575 567,493 - 980,694
Semiconductors 200 Teradyne, Inc.* 3,900 - - - 3,900
300 Xilinx, Inc.* 7,059 - - - 7,059
-----------------------------------------------------------
Total 10,959 - - - 10,959
Tele-
communications 350 ALLTEL Corporation 20,282 - - - 20,282
1,200 AT&T Corp. 23,160 - - - 23,160
386 AT&T Wireless Services 5,767 - - - 5,767
Inc.*
500 Broadwing Inc.* 8,040 - - - 8,040
900 CenturyTel, Inc. 30,150 - - - 30,150
1,300 Crown Castle
International Corp.* 11,700 - - - 11,700
2,550 JDS Uniphase
Corporation* 1,896 - 14,220 - 16,116
1,700 Nextel Communications, 14,688 - - - 14,688
Inc., Class A*
7,900 Nokia Oyj - - 123,635 - 123,635
900 QUALCOMM Inc.* 42,786 - - - 42,786
4,900 SBC Communications Inc. 89,528 141,360 - - 230,888
3,000 Sprint Corporation 19,208 52,822 - - 72,030
700 Sprint Corp. (PCS
Group)* 18,403 - - - 18,403
4,037 Verizon Communications
Inc. 70,343 148,099 - - 218,442
1,800 WorldCom, Inc.-
WorldCom Group* 27,072 - - - 27,072
-----------------------------------------------------------
Total 383,023 342,281 137,855 - 863,159
Transportation 600 FedEx Corp.* 22,050 - - - 22,050
Services -----------------------------------------------------------
Total 22,050 - - - 22,050
Travel 700 Galileo International,
Inc. 14,532 - - - 14,532
-----------------------------------------------------------
Total 14,532 - - - 14,532
Utilities 400 Ameren Corporation 15,360 - - - 15,360
500 Calpine Corporation* 11,405 - - - 11,405
300 Constellation Energy 7,260 - - - 7,260
Group, Inc.
3,000 Duke Energy
Corporation - 113,550 - - 113,550
1,700 KeySpan Corporation 19,944 36,564 - - 56,508
400 Mirant Corporation* 8,760 - - - 8,760
900 NRG Energy, Inc.* 14,589 - - - 14,589
300 Public Service
Enterprise 12,765 - - - 12,765
Group Incorporated
2,700 TECO Energy, Inc. - 73,170 - - 73,170
-----------------------------------------------------------
Total 90,083 223,284 - - 313,367
Total Common Stock 4,522,069 4,527,824 4,843,771 - 13,893,664
-----------------------------------------------------------
Fixed-Income
Investments $50,000 Associates Corporation - 52,143 - - 52,143
of North America,
5.80%, 4-20/2004
25,000 Atlantic Richfield - 25,484 - - 25,484
Company (ARCO), 5.90%,
4/15/20-9
25,000 Citigroup Inc., 5.70%, - 25,896 - - 25,896
2/06/2004
25,000 The Dow Chemical
Company, 5.25%,
5/14/2004 (Acquired
6/08/01; Cost $24,946) r - 25,748 - - 25,748
25,000 General Motors - 24,985 - - 24,985
Acceptance Corporation,
6.125%, 9/15/2006
25,000 Jones Apparel Group, - 26,183 - - 26,183
Inc.,7.875%, 6/15/2006
50,000 Morgan Stanley Dean - 51,714 - - 51,714
Witter & Co.,
5.625%, 1/20/2004
25,000 Nielsen Media Research, - 25,849 - - 25,849
Inc., 7.60%, 6/15/2009
25,000 Northwest Pipeline - 25,435 - - 25,435
Corp., 6.625%,
12/01/2007
50,000 Tyco International - 51,955 - - 51,955
Group S.A., 6.375%,
2/15/2006
50,000 Wells Fargo & Company, - 53,472 - - 53,472
6.625%, 7/15/2004 -----------------------------------------------------------
Total Fixed-Income
Investments - 388,864 - - 388,864
-----------------------------------------------------------
Short-Term
Investments 196,404 American Family - 55,475 140,929 - 196,404
Financial Services,
Inc., 2.3156%
380,458 Wisconsin Corporate 9,884 192,423 178,151 - 380,458
Central Credit Union,
2.3363%
267,595 Wisconsin Electric 1,153 206,879 59,563 - 267,595
Power Company, 2.3156% -----------------------------------------------------------
Total Short-Term
Investments 11,037 454,777 378,643 - 844,457
-----------------------------------------------------------
Total Investments $4,533,106 $ 5,371,465 $5,222,414 $ - $ 15,126,985
===========================================================
[FOOTNOTES]
* Non- Income Producing
r Security exempt from registration under Rule 144A of the Securities Act of
1933. These issues may only be sold to other qualified institutional buyers
and are considered to be liquid under guidelines established by the board
of directors. The market value of this security was $25,478 (0.48% of net
assets) at September 30, 2001.
Notes to PRO FORMA Financial Statements
September 30, 2001
(1) Organization
The Catholic Funds, Inc. was incorporated on December 16, 1998 as a
Maryland Corporation and is registered as a diversified open-end management
investment company under the Investment Company Act of 1940. The Catholic
Disciplined Capital Appreciation Fund, The Catholic Equity Income Fund, The
Catholic Large-Cap Growth Fund, The Catholic Equity Fund and The Catholic Money
Market Fund (collectively, the Funds) are separate, diversified portfolios of
The Catholic Funds, Inc.
These unaudited combined financial statements reflect the pro forma effect
of the reorganization of The Catholic Disciplined Capital Appreciation Fund, The
Catholic Equity Income Fund, and The Catholic Large-Cap Growth Fund in to The
Catholic Equity Fund (the Fund). The Reorganization was approved by the Board of
Directors of The Catholic Funds, Inc. on November 12, 2001 and is expected to be
consummated during 2002. The reorganization will be accomplished by a tax-free
exchange of shares in The Catholic Equity Fund for the net assets of The
Catholic Disciplined Capital Appreciation Fund, The Catholic Equity Income Fund,
and The Catholic Large-Cap Growth Fund. The reorganization expenses incurred
will be paid for by Catholic Financial Services Corporation. The Catholic Equity
Fund will offer three classes of shares. Shares of Class A will be sold with a
front-end sales charge. Shares of Class C may be subject to a contingent
deferred sales charge. Shares of Class I will be offered without a sales charge.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with accounting principles generally accepting in the
United States (i.e., GAAP). The presentation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and
assumptions.
A. Investment Valuation
Securities traded over-the-counter or on a national securities exchange are
valued on the basis of market value in their principal and most
representative market. Securities where the principal and most
representative market is a national securities exchange are valued at the
latest reported sale price on such exchange. Securities traded on only
over-the-counter markets are valued at the latest bid prices. Debt
securities (other than short-term obligations) are valued at prices
furnished by a pricing service, subject to review by the Funds' adviser.
Short-term obligations (maturing within 60 days) are valued on an amortized
cost basis, which approximates market value. Securities for which
quotations are not readily available are valued at fair value as determined
in good faith by the adviser under the supervision of the board of
directors.
B. Delayed Delivery Transactions
The Funds may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more after
the date of the transaction. The price of the underlying securities and the
date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. Losses may arise due to changes in the
market value of the underlying securities or if the counterparty does not
perform under the contract.
C. Federal Income Taxes
No provision for federal income taxes has been made since the Funds have
complied to date with the provisions of the Internal Revenue Code available
to regulated investment companies and intend to continue to so comply in
future years.
In accordance with Revenue Code Section 368(a), this reorganization
qualifies as a tax-free transaction. The capital loss carryforwards of the
merging funds will be assumed by The Catholic Equity Fund. As of September
30, 2001, The Catholic Equity Income Fund had a federal income tax capital
loss carryover of $102,018 expiring in the tax year ending September 30,
2009. As of September 30, 2001, The Catholic Large-Cap Growth Fund had a
federal income tax capital loss carryover of $36,955, of which $9,803
expires in the tax year ending September 30, 2008 and $27,152 expires in
the tax year ending September 30, 2009.
D. Expenses
Each Fund is charged for those expenses that are directly attributable to
it, such as investment advisory and custody fees. Expenses that are not
directly attributable to a specific Fund are either allocated equally among
the Funds or in proportion to their respective net assets when appropriate.
Costs incurred in conjunction with the reorganization will be borne by the
adviser.
E. Other
For financial reporting purposes, investment transactions are accounted for
on the trade date. The Funds determine the gain or loss realized from
investment transactions by comparing the original cost of the security lot
sold with the net sale proceeds. Dividend income is recognized on the
ex-dividend date and interest income is recognized on an accrual basis.
(3) Investment Advisory and Other Agreements with Related Parties
The Catholic Equity Fund proposes to enter into an agreement with Catholic
Financial Services Corporation, the adviser, with whom certain officers and
directors of the Funds are affiliated, to furnish investment advisory services
to the Fund. Under the terms of this agreement, the Fund will pay the adviser a
fee, compounded daily and payable monthly, at the annual rate of 0.50% of
average daily net assets. The Fund and the adviser have entered into a
sub-advisory agreement with Mellon Equity Associates, LLP. The annual fees for
the subadviser, payable from fees paid to the adviser, are 0.12% on the first
$50 million of the Fund's average daily net assets and 0.06% of the Fund's daily
net assets in excess of $50 million.
The adviser has voluntarily agreed to reimburse its management fee to the
extent that total annual operating expenses (exclusive of interest, taxes,
brokerage commissions and other costs incurred in connection with the purchase
or sale of portfolio securities, and extraordinary items) exceed 0.95% of the
average daily net assets for Class A shares, 1.20% of the average daily net
assets for Class C shares, and 0.70% of the average daily net assets of Class I
shares.
The Fund plans to enter into a Distribution Plan ("the Plan") pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The Plan authorizes the
Fund to use annually 0.25% of the average daily net assets for Class A shares
and 0.75% of the average daily net assets for Class C shares to finance certain
activities relating to the distribution of its shares to investors. The adviser
will act as distributor for the shares of each Fund.
THE CATHOLIC FUNDS, INC.
FORM N-14
PART C
OTHER INFORMATION
Item 15. Indemnification
Reference is made to Article IX of the Registrant's By-laws filed as
Exhibit (b) to Registrant's Registration Statement with respect to
Indemnification of Registrant's officers and directors, which is set
forth below:
Section 9.1. Indemnification of Officers, Directors, Employees and
Agents. The Corporation shall indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative ("Proceeding"), by reason of the fact
that he is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as
a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all
expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such Proceeding to the fullest extent permitted by
law; provided that:
(a) Whether or not there is an adjudication of liability in such
Proceeding, the Corporation shall not indemnify any person for
any liability arising by reason of such person's willful
misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office or under any
contract or agreement with the Corporation ("disabling conduct");
and
(b) The Corporation shall not indemnify any person unless:
(1) The court or other body before which the Proceeding was
brought (i) dismisses the Proceeding for insufficiency of
evidence of any disabling conduct, or (ii) reaches a final
decision on the merits that such person was not liable by
reason of disabling conduct; or
(2) Absent such a decision, a reasonable determination is made,
based upon a review of the facts, by (i) the vote of a
majority of a quorum of the Directors of the Corporation who
are neither interested persons of the Corporation as defined
in the Investment Company Act of 1940 nor parties to the
Proceeding, or (ii) if such quorum is not obtainable, or
even if obtainable, if a majority of a quorum of Directors
described in paragraph (b)(2)(i) above so directs, by
independent legal counsel in a written opinion, that such
person was not liable by reason of disabling conduct.
Expenses (including attorneys' fees) incurred in defending a
Proceeding will be paid by the Corporation in advance of the
final disposition thereof upon an undertaking by such person to
repay such expenses (unless it is ultimately determined that he
is entitled to indemnification), if:
(1) Such person shall provide adequate security for his
undertaking;
(2) The Corporation shall be insured against losses arising by
reason of such advance; or
(3) A majority of a quorum of the Directors of the Corporation
who are neither interested persons of the Corporation as
defined in the Investment Company Act of 1940 nor parties to
the Proceeding, or independent legal counsel in a written
opinion, shall determine, based on a review of readily
available facts, that there is reason to believe that such
person will be found to be entitled to indemnification.
Section 9.2. Insurance of Officers, Directors, Employees and
Agents. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a Director, officer,
employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a Director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability
asserted against him and incurred by him in or arising out
of his position. However, in no event will the Corporation
purchase insurance to indemnify any such person for any act
for which the Corporation itself is not permitted to
indemnify him.
Item 16. Exhibits
See Exhibit Index following the Signature Page of this Registration
Statement, which Index is incorporated herein by this reference.
Item 17. Undertakings
(1) Not applicable.
(2) Not applicable.
Registrant undertakes that it will file by post-effective amendment
within a reasonable period of time following receipt thereof, opinions
of counsel with respect to the tax consequences of each of the three
separate Reorganizations.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement on Form N-14 to be signed on its behalf
by the undersigned, thereunto duly authorized, all in the City of Milwaukee,
State of Wisconsin on this 25th day of January, 2002.
THE CATHOLIC FUNDS, INC.
By: /s/ Allan G. Lorge
-----------------------------------
Allan G. Lorge, President and CEO
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on this 25th day of January, 2002, by the
following persons in the capacities indicated.
Signature Title
/s/ Daniel J. Steininger Chairman of the Board and Director
- ------------------------------------
Daniel J. Steininger
/s/ Allan G. Lorge President, Chief Executive Officer
- ------------------------------------ and Director
Allan G. Lorge
/s/ Russell J. Kafka Treasurer (Chief Financial Officer)
- ------------------------------------
Russell J. Kafka
/s/ Mark K. Forbord Principal Accounting Officer
- ------------------------------------
Mark K. Forbord
Thomas A. Bausch* Director
- ------------------------------------
Thomas A. Bausch
J. Michael Borden* Director
- ------------------------------------
J. Michael Borden
Daniel R. Doucette* Director
- ------------------------------------
Daniel R. Doucette
Thomas J. Munninghoff* Director
- ------------------------------------
Thomas J. Munninghoff
Conrad L. Sobczak* Director
- ------------------------------------
Conrad L. Sobczak
*By: /s/ Allan G. Lorge
-----------------------------------------------
Allan G. Lorge, pursuant to a Power
of Attorney dated December 17, 2001,
a copy of which is filed herewith as Exhibit 16
EXHIBIT INDEX
Previously Filed and Incorporated By
Reference From
Exhibit No. Description Filing Date Filed Filed Herewith
- ----------- ----------- ------ ---------- --------------
(1)(a) Articles of Incorporation Registrant's Initial 12/28/98
Registration Statement
on Form N-1A (1933 Act
Reg. No. 333-69803;
1940 Act File No.
811-09177) ("Form
N-1A")
(1)(b) Articles of Amendment Pre-Effective 4/28/99
changing name to Amendment No. 1 to
The Catholic Funds, Inc. Form N-1A
(1)(c) Most Recent Articles Post-Effective 1/9/02
Supplementary Amendment No. 4 to
Form N-1A
(2) Bylaws Initial Registration 12/28/98
on Form N-1A
(3) Not applicable
(4)(a) Plan of Reorganization and Attached as Appendix A to
Liquidation with respect to the Proxy Statement/
The Catholic Equity Income Fund Prospectus for The Catholic
Equity Fund included in Part
A of this Registration
Statement
(4)(b) Plan of Reorganization and Attached as Appendix A to
Liquidation with respect to the Proxy Statement/
The Catholic Large-Cap Growth Prospectus for The Catholic
Fund Large-Cap Fund included in
Part A of this Registration
Statement included in Part A
of this Registration
Statement
(4)(c) Plan of Reorganization and Attached as Appendix A to
Liquidation with respect to the Proxy Statement/
The Catholic Disciplined Prospectus for The Catholic
Capital Appreciation Fund Disciplined Capital
Appreciation Fund included
in Part A of this
Registration Statement
(5) Not Applicable
(6)(a) Investment Advisory Agreement Pre-Effective 4/28/99
with Catholic Financial Amendment No. 1 to
Services Corporation Form N-1A
(6)(b) Amendment to Add The Catholic To Be Filed By Pre-Effective
Equity Fund Amendment
(6)(c) Sub-Advisory Agreement with To Be Filed By Pre-Effective
Mellon Equity Associates, LLP Amendment
for The Catholic Equity Fund
(7) Distribution Agreement Initial Registration 12/28/98
on Form N-1A
(8) Not Applicable
(9) Custodian Servicing Agreement Pre-Effective 4/28/99
Amendment No. 1 to
Form N-1A
(10)(a) Rule 12b-1 Plan Post-Effective
Amendment No. 4 to
Form N-1A
(10)(b) Multi-Class Plan Pursuant to Post-Effective 1/9/02
Rule 18f-3 Amendment No. 4 to
Form N-1A
(11) Opinion as to legality of *
shares offered hereby,
including consent of counsel
(12)(a) Form of Tax Opinion and *
Consent of Counsel regarding
the Reorganization of The
Catholic Equity Income Fund
(12)(b) Form of Tax Opinion and *
Consent of Counsel regarding
the Reorganization of The
Catholic Large-Cap Growth Fund
(12)(c) Form of Tax Opinion and *
Consent of Counsel regarding
the Reorganization of The
Catholic Disciplined Capital
Appreciation Fund
(13)(a) Transfer Agent Servicing Pre-Effective 4/28/99
Agreement Amendment No. 1 to
Form N-1A
(13)(b) Fund Accounting Servicing Pre-Effective 4/28/99
Agreement Amendment No. 1 to
Form N-1A
(13)(c) Fulfillment Servicing Agreement Pre-Effective 4/28/99
Amendment No. 1 to
Form N-1A
(14) Consent of Independent Public *
Accountants
(15) Not Applicable
(16) Power of Attorney *
(17) None