UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT ON REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-09177
THE CATHOLIC FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
1100 WEST WELLS STREET
MILWAUKEE, WISCONSIN 53233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
DANIEL J. STEININGER, PRESIDENT
THE CATHOLIC FUNDS, INC.
1100 WEST WELLS STREET
MILWAUKEE, WISCONSIN 53233
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH A COPY TO:
FREDRICK G. LAUTZ, ESQ.
QUARLES & BRADY LLP
411 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (414) 278-6500
DATE OF FISCAL YEAR END: SEPTEMBER 30, 2006
DATE OF REPORTING PERIOD: MARCH 31, 2006
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection and policymaking roles.
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burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS
(THE CATHOLIC FUNDS LOGO)
GIVING VOICE TO CATHOLIC VALUES
THE CATHOLIC EQUITY FUND
SEMI-ANNUAL REPORT
MARCH 31, 2006
The Catholic Funds
1-877-222-2402
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2 Letter to Shareholders
4 The Catholic Equity Fund
8 Allocation of Portfolio Assets
9 Schedule of Investments
14 Schedule of Futures Contracts
15 Statement of Assets & Liabilities
16 Statement of Operations
17 Statements of Changes in Net Assets
18 Financial Highlights
20 Notes to Financial Statements
26 Board Approval of Investment Advisory and Subadvisory Agreements
32 Matters Submitted to a Vote of Shareholders
Letter to Shareholders
Dear Shareholder:
PRUDENT FINANCIAL STEWARDSHIP
During the period covered by this report (October 1, 2005 through March 31,
2006), the Catholic Equity Fund changed its investment objective and strategy.
Once a passive S&P 500(R) Index Fund, the Catholic Equity Fund became an
enhanced index fund on February 1, 2006, comprising approximately 200 companies,
managed with the objective of obtaining a total return that exceeds, before
deducting the Fund's operating expenses, the total return of the S&P 500 Index.
The investment information on the following pages reflects four months in the
old mode and two months in the new.
RESPONSIBLE CATHOLIC STEWARDSHIP
This investment change did not interfere with the Fund's program of Responsible
Catholic Stewardship. The Fund continues to exclude from its portfolio the
stock of any company that directly participates in abortion and continues to
follow its Catholic-value based guidelines in exercising its right to vote at
the annual shareholder meetings of all the companies in the portfolio.
In addition, the Fund continued its active program of using dialogue and
shareholder resolutions to try to influence corporate behavior to better reflect
and promote the dignity of the human person. We focused on three problem areas
that ultimately stem from a failure to value the worth and contribution of
workers and other stakeholders.
FAIR TREATMENT OF WORKERS -- We are working to improve the lot of workers,
particularly those who toil for a company or its vendors in foreign countries in
which there is limited legal protection for workers. Working with Catholic
religious orders and other faith-based investment institutions, we are
encouraging ten companies to consider various improvements in their practices.
The companies are Apple Computer, Caterpillar, Chevron, Coca Cola, General
Electric, General Motors, Halliburton, Hasbro, Monsanto, and Wal-Mart.
FAIR TREATMENT OF INDIGENOUS PEOPLES -- We are also working with two companies
in the resource-extraction sector to address concerns of the people living near
their worksites. The companies are Burlington Resources (now ConocoPhilips) and
Newmont Mining.
BOARD OF DIRECTORS RESPONSIBILITY -- It is the responsibility of the board of
directors of every company to oversee the performance of the company, address
concerns of shareholders, and achieve profitable returns for the shareholders.
We identified companies that have underperformed relative to their peers and
whose boards have been given one or more unfavorable rankings by Forbes,
Business Week, and the Corporate Library in regard to company performance versus
CEO compensation. We think it appropriate that shareholders of such companies
have a greater ability to influence the directors in regard to executive
compensation and other issues. Therefore, we have proposed that the
shareholders of these companies should have the right to vote on the
compensation of the directors every year. Shareholders of AT&T, Cendant, Exxon
Mobil, Honeywell, Merrill Lynch, and Wells Fargo will vote on our resolution
this spring.
ADDITIONAL INFORMATION -- We encourage you to take a look at our website--
www.catholicfunds.com. You will find complete information about our dialogue
and resolution efforts, as well as a summary of our proxy voting guidelines.
Thank you for your continued trust and investment.
/s/Daniel J. Steininger /s/Theodore F. Zimmer
Daniel J. Steininger Theodore F. Zimmer
Chairman, The Catholic Funds President, The Catholic Funds
"S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc., and has been
licensed for use by The Catholic Equity Fund. The Catholic Equity Fund is not
sponsored, endorsed, sold or promoted by Standard and Poor's and Standard and
Poor's makes no representation regarding the advisability of investing in the
Fund. An investment cannot be made directly in the index.
The Catholic Church has not sponsored or endorsed The Catholic Equity Fund nor
approved or disapproved of the Fund as an investment.
The Catholic Equity Fund is distributed through Catholic Financial Services
Corporation, 1100 W. Wells St., Milwaukee, WI 53233, (414) 278-6550. Member NASD
and SIPC.
The Catholic Equity Fund
MANAGEMENT:
The Fund is managed by a team of professionals employed by its subadvisor,
Ziegler Capital Management, LLC. Those professionals include, among others,
Brian K. Andrew and Donald J. Nesbitt.
Mr. Brian K. Andrew joined Ziegler in 1994 after spending seven years working as
an analyst and portfolio manager for bank trust and investment advisory firms.
He was also a managing director and partner in a private investment advisory
firm. Mr. Andrew is currently Ziegler's Chief Investment Officer and a Senior
Managing Director serving on Ziegler's management committee, and is a member of
the Investment Services Group equity and fixed income committees.
Prior to joining Ziegler, he created an investment program to manage indentured
funds, managed municipal funds and monies for organizations in the health care
and senior living industry. He has experience crafting investment policies and
educating organizational management and boards regarding those policies and
their implementation.
Mr. Andrew received his B.S. in Business/Finance from the University of
Minnesota. He has also earned his Chartered Financial Analyst (CFA), and
Certified Cash Manager (CCM) designations. He is a member of the Milwaukee
Investment Analyst Society, the CFA Institute and the Treasury Management
Association. Mr. Andrew currently serves as the President for the Great Lakes
Hemophilia Foundation. He has also been active in the establishment of a
Community Development Authority board for a local Milwaukee municipality where
he most recently served as the Board's Vice Chair. He has also been active in
adult education teaching investment topics through the University of Wisconsin,
Milwaukee, Center for Financial Training and the American Bankers Association.
He has also taught undergraduate courses in finance at Concordia University.
Mr. Donald J. Nesbitt joined Ziegler in early 2002 after having spent nearly
four years at Qwest Communication's pension plan in Denver, Colorado, where he
managed $6 billion of equities, using research-enhanced, quantitative
approaches. Prior to joining Qwest, Mr. Nesbitt spent nine years at the
Illinois Teachers' Retirement System where, as Director of Investments, he was
responsible for the management of $20 billion across various asset classes.
Mr. Nesbitt holds a B.S. in economics from Saint Cloud State University, St.
Cloud, Minnesota, and a M.S. in financial analysis from the University of
Wisconsin-Milwaukee. He holds a Chartered Financial Analyst (CFA) designation
and has been actively involved with the CFA Institute. Mr. Nesbitt has also
instructed investment courses at the University of Illinois-Springfield and has
spoken at numerous industry conferences on the topics of enhanced equity
management and derivative investment strategies.
MARKET COMMENTARY
For the six months ended March 31, 2006, the Catholic Equity Fund ("Fund")
produced a total return of 7.17% (Class A without sales load), which exceeded
the return of the S&P 500 Composite Stock Price Index ("Index") by 0.78% for
that period. The positive out-performance was primarily due to an enhancement
strategy that was implemented at the beginning of February. The management
approach for the Fund was modified from a passive to an enhanced-index approach
in February 2006, with the employment of Ziegler Capital Management as the new
subadvisor. Fund expenses, which adversely affect the Fund's performance
relative to the Index, were offset completely by the enhancement strategy.
The enhanced index approach is designed to provide enough excess return relative
to the S&P 500 benchmark to offset the fees and expenses of Class A shares of
the Fund. This is accomplished primarily through applying stock selection,
sector allocation and over- and under-weight decisions relative to the
underlying Index. For the two months the enhancement was in place, most of the
excess return was generated through stock selection and over-/under- weight
decisions.
The investment philosophy driving the enhancement feature is based on behavioral
finance. At its most basic, behavioral finance proposes that superior long-term
results can be achieved by systematically exploiting the biases and behavioral
weaknesses that influence the decisions of many investors. These biases include
the tendency to use the past as a prediction of the future, wrongly equate a
good company with a good investment, and to develop a "mindset" about a company,
ignoring statistical evidence. One of the basic tenets of behavioral finance
says that if a company did well in the recent past investors believe it will do
well into the future, and that this investor assumption will influence the
company's stock price, and vice versa, regardless of the company's underlying
fundamentals.
The enhancement strategy seeks to identify and over-weight, relative to the
benchmark index, stocks that represent superior value and have been neglected by
investors. The strategy also recognizes stocks that have had their prices bid
up by investors to levels that are not sustainable by the company's earnings and
under-weights these holdings relative to their weight in the benchmark index.
The Fund continues to exclude securities that have been identified as being
inconsistent with the Catholic Church's values regarding the sanctity of life.
The current economic cycle has entered its fifth year of expansion, which is
fairly long as growth cycles go. Although economic growth experienced a slight
slowdown in the fourth quarter of 2005, it seems to have rebounded in early
2006, moving back in line with the 3.1% real growth rate produced over the last
five years. Many stock indices are near five year highs, while interest rates
have approached 5%, a level that has not been seen since early 2000. The Fed
has now raised rates fifteen times since June of 2004. Four of those increases
were realized during the past six months and the Fed Funds rate now stands at
4.75%. Given the late stage of this economic growth cycle and no indication of
increasing core inflation, we believe that the Fed is within 0.5% of being
finished with this tightening cycle. At these interest rate levels, the current
equity market valuation looks reasonable, but many investors are concerned with
the sustainability of corporate earnings growth. The fourth quarter of 2005
marked the tenth consecutive quarter of double-digit earnings growth for the S&P
500 index, an unprecedented event in a 45-year time period that measures back to
1950! Earnings growth for the first half of 2006 seems to be well positioned to
continue its positive advance.
The composition of the Fund's industry sector allocation reflects that of the
S&P 500 Index, with only a slight variation in those allocations produced by the
enhancement strategy. Materials, industrials, telecommunications and finance
were the best performing sectors over the six month period ended March, 31,
2006. The industrials sector comprised 11.3% of the S&P 500 Index at period-end,
while the Fund held 12.5% in that sector. The over-weight helped the Fund, as
the sector rose 12.4% over the performance measurement period. Financial stocks
comprise 21.1% of the S&P 500 Index, its largest individual sector exposure.
The Fund's exposure to the financial sector exceeded that of the Index by only
0.4%, but superior stock selection within the sector, as well as the sector's
11.7% return, were major contributors to the Fund's positive performance. The
enhancement strategy left the Fund 0.3% over-weighted in telecommunication
stocks, relative to the benchmark's 3.3% holding, and the sector's 14.3%
increase contributed to the Fund's total performance.
Materials posted a 19.3% return over the six month period ended March 31, 2006,
making it the top performing sector within the S&P 500 Index. However, the
enhancement strategy resulted in the Fund's exposure to these stocks being less
than one-half of the 3.0% weight of the sector's representation in the S&P 500
Index. The Fund also carried an underweight in utility stocks, which were the
poorest performing sector in the Index, falling by 6.6% over the six month
period.
In summary, given that interest rates remain steady and earnings growth remains
positive, we are still expecting U.S. equity markets to produce positive returns
over the remainder of year. However, the degree of those returns may vary
amongst industry sectors. We foresee no immediate reversal of the economic
trends that have been supporting the Fund's enhancement strategy, as we believe
that investors will continue to seek out stocks that represent superior value
over high beta, "glamour" stocks.
THE CATHOLIC EQUITY FUND - CLASS A
GROWTH OF A $10,000 INVESTMENT
The Catholic Equity The Catholic Equity
Date Fund - Class A Fund - Class A w/load S&P 500 Index
---- ------------------- --------------------- -------------
5/3/99 $10,000 $9,597 $10,000
6/30/99 $10,290 $9,875 $10,158
9/30/99 $9,690 $9,299 $9,523
12/31/99 $10,855 $10,417 $10,940
3/31/2000 $11,155 $10,705 $11,191
6/30/2000 $10,945 $10,504 $10,894
9/30/2000 $10,965 $10,523 $10,789
12/31/2000 $10,302 $9,886 $9,944
3/31/2001 $9,338 $8,961 $8,765
6/30/2001 $10,000 $9,597 $9,278
9/30/2001 $8,464 $8,123 $7,917
12/31/2001 $9,385 $9,007 $8,762
3/31/2002 $9,334 $8,958 $8,787
6/30/2002 $8,044 $7,720 $7,609
9/30/2002 $6,632 $6,365 $6,295
12/31/2002 $7,208 $6,918 $6,826
3/31/2003 $6,962 $6,681 $6,611
6/30/2003 $8,019 $7,696 $7,629
9/30/2003 $8,204 $7,874 $7,830
12/31/2003 $9,163 $8,794 $8,784
3/31/2004 $9,298 $8,923 $8,933
6/30/2004 $9,453 $9,072 $9,086
9/30/2004 $9,246 $8,873 $8,917
12/31/2004 $10,112 $9,704 $9,740
3/31/2005 $9,882 $9,484 $9,531
6/30/2005 $9,997 $9,594 $9,661
9/30/2005 $10,362 $9,945 $10,009
12/31/2005 $10,580 $10,047 $10,218
3/31/2006 $11,106 $10,547 $10,648
AVERAGE ANNUAL RETURNS
March 31, 2006 (Unaudited)
Since Inception
1 Year 5 Year Inception Date
------ ------ --------- ---------
Class A (without sales load) 12.38% 3.53% 1.53% 5/3/99
Class A (with sales load) 6.75% 2.47% 0.77% 5/3/99
S&P 500 Index 11.73% 3.97% 0.91% 5/3/99
Class I (without sales load) 12.76% n/a 5.04% 4/3/02
Class I (with sales load) 12.41% n/a 5.04% 4/3/02
S&P 500 Index 11.73% 3.97% 5.44% 4/3/02
Past performance is not an indication of future results. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more or
less than their original cost. At various times, the Fund's adviser waived its
management fees and/or reimbursed Fund expenses. Had the adviser not done so,
the Fund's total return would have been lower. The returns shown in the graph
and table above do not reflect taxes a shareholder would pay on distributions
and redemptions.
Class A share performance categories shown for periods prior to 4/3/02 are for
the Catholic Equity Fund's predecessor fund, The Catholic Disciplined Capital
Appreciation Fund. Class I shares were first available on 4/2/02.
Class A performance has been restated to reflect the maximum sales charge of
5%. Class I performance would reflect the maximum contingent sales charge
(CDSC) of 0.35% terminating on the anniversary date of your purchase of shares.
Class I shares are for institutional shareholders only.
The S&P 500 is an unmanaged index comprised of 500 common stocks representative
of the stock market as a whole. It is not possible to invest directly in an
index.
Current performance maybe lower or higher than the performance data quoted.
Performance data current to the most recent month-end can be found at our
website, www.CatholicFunds.com.
March 31, 2006
(Unaudited)
Ticker Symbols Net Asset Values
-------------- ----------------
Equity A CTHQX $10.55
Equity I CTHRX $10.56
TOP 10 HOLDINGS
March 31, 2006 (Unaudited)
Percentage
of
Rank Ticker Security Name Net Assets
---- ------ ------------- ----------
1 GE General Electric Company 4.22%
2 XOM Exxon Mobil Corporation 3.37%
3 JNJ Johnson & Johnson 3.10%
4 MSFT Microsoft Corporation 2.80%
5 AIG American International
Group, Inc. 2.73%
6 CVX Chevron Corporation 2.35%
7 MO Altria Group, Inc. 2.28%
8 USB US Bancorp 2.18%
9 WM Washington Mutual, Inc. 1.96%
10 VZ Verizon Communications 1.94%
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and exchange fees;
and (2) ongoing costs, including management fees; distribution and/or service
(12b-1) fees; and other Fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from October 1, 2005, to March 31, 2006.
ACTUAL EXPENSES
For each class, the first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number in the first line under the heading entitled "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
For each class, the second line of the table below provides information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expense you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second line
of the table for each class is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different funds. In
addition, if these transaction costs were included, your costs would have been
higher.
EXPENSE EXAMPLES
Expenses Paid
Beginning Account Ending Account During Period1<F1> Annualized
Value (10/1/2005) Value (3/31/2006) (10/1/2005 to 3/31/2006) Expense Ratio2<F2>
----------------- ----------------- ------------------------ ------------------
Class A Actual $1,000.00 $1,071.80 $5.17 1.00%
Class A Hypothetical
(5% return before expenses) $1,000.00 $1,019.95 $5.04 1.00%
Class I Actual $1,000.00 $1,073.20 $3.10 0.60%
Class I Hypothetical
(5% return before expenses) $1,000.00 $1,021.94 $3.02 0.60%
1<F1> Expenses are equal to the Fund's annualized expense ratio multiplied
by the average account value over the period, multiplied by the number
of days in the most recent half-year/365 days (to reflect the one-half
year period).
2<F2> On February 1, 2006, the adviser adjusted its expense reimbursements
and fee waivers for each class of Fund shares, thereby increasing the
expense ratios for Class A from 0.60% to 1.00% and Class I from 0.35%
to 0.60%.
ALLOCATION OF PORTFOLIO ASSETS
(Calculated as a Percentage of Net Assets1<F3>)
Financials2<F4> 21.91%
Information Technology2<F4> 16.27%
Industrials2<F4> 12.83%
Health Care2<F4> 12.22%
Energy2<F4> 10.90%
Consumer Staples2<F4> 9.13%
Consumer Discretionary2<F4> 8.93%
Telecommunication Services2<F4> 2.92%
Utilities2<F4> 2.47%
Materials2<F4> 1.66%
Investment Companies 0.24%
Futures Contracts 0.23%
First American Prime Obligation 0.21%
1<F3> Total Net Assets on March 31, 2006 were $57,253,494
2<F4> Sectors based on Global Industry Classification Standard (GICS(R))
SCHEDULE OF INVESTMENTS
MARCH 31, 2006 (UNAUDITED)
THE CATHOLIC EQUITY FUND
Common Stocks (99.24%) Shares Value
- ---------------------- ------ -----
Consumer Discretionary - 8.93%
Amazon.Com, Inc. (a)<F5> 120 $4,381
AutoNation, Inc. (a)<F5> 18,450 397,597
Bed Bath &
Beyond Inc. (a)<F5> 145 5,568
Carnival Corporation 1,625 76,976
Centex Corporation 230 14,258
Coach, Inc. (a)<F5> 310 10,720
Darden Restaurants, Inc. 7,625 312,854
DR Horton, Inc. 440 14,617
Federated Department
Stores, Inc. 6,835 498,955
Ford Motor Company 1,955 15,562
General Motors
Corporation 225 4,786
The Goodyear Tire &
Rubber Company (a)<F5> 9,060 131,189
Harley-Davidson, Inc. 310 16,083
Hasbro, Inc. 260 5,486
The Home Depot, Inc. 18,050 763,515
The Interpublic Group
of Companies, Inc. (a)<F5> 16 153
J.C. Penney Company,
Inc. - Holding Company 6,225 376,052
Kohl's Corporation (a)<F5> 1,760 93,298
Limited Brands 9,230 225,766
Lowe's Companies, Inc. 2,735 176,243
McDonald's Corporation 480 16,493
Newell Rubbermaid Inc. 12,125 305,429
News Corporation -
Class A 11,115 184,620
Omnicom Group Inc. 2,380 198,135
Payless Shoesource,
Inc. (a)<F5> 7,090 162,290
Pulte Homes, Inc. 420 16,136
Target Corporation 2,590 134,706
TRW Automotive
Holdings Corp. (a)<F5> 3,065 71,414
Univision
Communications Inc. -
Class A (a)<F5> 1,775 61,184
Viacom Inc (a)<F5> 3,320 128,816
The Walt Disney
Company 10,190 284,199
Whirlpool Corporation 4,450 407,042
-----------
5,114,523
-----------
Consumer Staples - 9.13%
Altria Group, Inc. 18,400 1,303,824
The Coca-Cola Company 18,245 763,918
ConAgra Foods, Inc. 800 17,168
CVS Corporation 3,630 108,428
Kellogg Company 5,035 221,741
The Kroger Co. (a)<F5> 12,290 250,224
PepsiCo, Inc. 9,785 565,475
The Procter &
Gamble Company 18,125 1,044,363
Safeway Inc. 15,145 380,443
Wal-Mart Stores, Inc. 12,035 568,534
-----------
5,224,118
-----------
Energy - 10.90%
Amerada Hess
Corporation 1,400 199,360
Anadarko Petroleum
Corporation 8,200 828,282
Burlington
Resources Inc. 30 2,757
ChevronTexaco
Corporation 23,214 1,345,716
ConocoPhillips 8,028 506,968
Devon Energy
Corporation 1,495 91,449
Exxon Mobil Corporation 31,728 1,930,966
Halliburton Company 1,805 131,801
Occidental Petroleum
Corporation 2,560 237,184
Pride International,
Inc. (a)<F5> 4,430 138,127
Schlumberger Limited 4,885 618,295
Valero Energy
Corporation 3,035 181,432
XTO Energy, Inc. 680 29,628
-----------
6,241,965
-----------
Financials - 21.91%
The Allstate Corporation 2,595 135,225
American Express
Company 8,890 467,169
American Financial
Group Inc. 4,740 197,231
American International
Group, Inc. 23,637 1,562,169
Ameriprise Financial Inc. 3,115 140,362
Aon Corporation 4,560 189,286
The Bank of New York
Company, Inc. 3,560 128,302
The Bear Stearns
Companies Inc. 1,350 187,245
Capital One Financial
Corporation 200 16,104
Comerica Incorporated 2,530 146,664
Countrywide Financial
Corporation 2,963 108,742
E*TRADE Financial
Corporation (a)<F5> 470 12,681
Fannie Mae 5,365 275,761
Golden West Financial
Corporation 240 16,296
The Goldman Sachs
Group, Inc. 6,565 1,030,442
JPMorgan Chase & Co. 22,490 936,484
Lehman Brothers
Holdings Inc. 5,490 793,470
Loews Corporation 2,280 230,736
Marsh & McLennan
Companies, Inc. 550 16,148
MBIA Inc. 270 16,235
Merrill Lynch & Co., Inc. 1,525 120,109
MetLife, Inc. 320 15,478
MoneyGram
International, Inc. 5,440 167,117
Moody's Corporation 780 55,739
Morgan Stanley 1,495 93,916
National City Corporation 490 17,101
Principal Financial
Group, Inc. 22,335 1,089,948
Rayonier, Inc. 11,745 535,455
Regions Financial
Corporation 492 17,304
Sovereign Bancorp, Inc. 770 16,871
The St. Paul Travelers
Companies, Inc. 351 14,668
SunTrust Banks, Inc. 230 16,735
U.S. Bancorp 40,850 1,245,925
Wachovia Corporation 12,959 726,352
Washington Mutual, Inc. 26,285 1,120,267
Wells Fargo & Company 10,745 686,283
-----------
12,546,020
-----------
Health Care - 12.22%
Abbott Laboratories 10,635 451,668
Aetna Inc. 9,445 464,127
Allergan, Inc. 335 36,347
Amgen Inc. (a)<F5> 7,255 527,801
Applera Corporation -
Applied Biosystems
Group 580 15,741
Baxter International Inc. 460 17,853
Biogen Idec Inc. (a)<F5> 5,415 255,046
Boston Scientific
Corporation (a)<F5> 5,135 118,362
Bristol-Myers Squibb
Company 9,875 243,024
Cardinal Health, Inc. 770 57,380
Caremark Rx, Inc. (a)<F5> 1,475 72,540
CIGNA Corporation 2,090 272,996
Dade Behring
Holdings, Inc. 1,865 66,599
Eli Lilly and Company 11,500 635,950
Fisher Scientific
International Inc. (a)<F5> 2,530 172,167
Forest Laboratories,
Inc. (a)<F5> 740 33,026
Genzyme Corporation (a)<F5> 80 5,378
Johnson & Johnson 29,930 1,772,455
King Pharmaceuticals,
Inc. (a)<F5> 10,060 173,535
McKesson Corporation 320 16,682
MedImmune, Inc. (a)<F5> 1,010 36,946
Medtronic, Inc. 100 5,075
Merck & Co. Inc. 16,200 570,726
Mylan Laboratories Inc. 860 20,124
Schering-Plough
Corporation 870 16,521
UnitedHealth Group
Incorporated 5,275 294,662
Watson Pharmaceuticals,
Inc. (a)<F5> 490 14,083
WellPoint Inc. (a)<F5> 4,490 347,661
Wyeth 4,560 221,251
Zimmer Holdings,
Inc. (a)<F5> 880 59,488
-----------
6,995,214
-----------
Industrials - 12.83%
3M Co. 6,515 493,120
Amerco, Inc. (a)<F5> 210 20,784
The Boeing Company 5,305 413,419
Burlington Northern
Santa Fe Corporation 5,325 443,732
Caterpillar Inc. 1,685 121,000
Cendant Corporation 6,700 116,245
Cooper Industries
Ltd. - Class A 1,390 120,791
CSX Corporation 11,500 687,700
Cummins Inc. 170 17,867
General Electric
Company 69,535 2,418,427
Honeywell
International Inc. 2,965 126,813
Norfolk Southern
Corporation 4,550 246,019
PACCAR Inc. 225 15,858
Steelcase, Inc. 1,000 18,000
Textron Inc. 8,060 752,723
Union Pacific Corporation 3,575 333,726
United Parcel Service,
Inc. - Class B 6,325 502,079
United Technologies
Corporation 4,935 286,082
USG Corp. (a)<F5> 2,240 212,710
-----------
7,347,095
-----------
Information Technology - 16.27%
Adobe Systems
Incorporated 570 19,904
Advanced Micro
Devices, Inc. (a)<F5> 4,500 149,220
Altera Corporation (a)<F5> 880 18,163
Analog Devices, Inc. 1,975 75,623
Apple Computer, Inc. (a)<F5> 5,415 339,629
Applied Micro Circuits
Corporation (a)<F5> 1,735 7,061
Avaya Inc. (a)<F5> 1,575 17,798
Broadcom Corporation -
Class A (a)<F5> 1,240 53,518
Cadence Design
Systems, Inc. (a)<F5> 19,065 352,512
Ceridian Corp. (a)<F5> 11,835 301,201
Ciena Corporation (a)<F5> 4,410 22,976
Cisco Systems, Inc. (a)<F5> 34,640 750,649
Computer Sciences
Corporation (a)<F5> 4,540 252,197
Corning Incorporated (a)<F5> 5,195 139,797
Dell Inc. (a)<F5> 1,905 56,693
Earthlink, Inc. (a)<F5> 22,435 214,254
Electronic Data Systems
Corporation 8,845 237,311
EMC Corporation (a)<F5> 11,550 157,427
Freescale Semiconductor,
Inc. - Class B (a)<F5> 662 18,384
Hewlett-Packard
Company 25,602 842,306
Imation Corp. 2,110 90,540
International Business
Machines Corporation
(IBM) 7,390 609,453
KLA-Tencor Corporation 1,785 86,323
Lexmark International,
Inc. (a)<F5> 2,530 114,811
LSI Logic Corporation (a)<F5> 1,815 20,981
Maxim Integrated
Products, Inc. 3,220 119,623
Microsoft Corporation 58,825 1,600,628
Motorola, Inc. 8,220 188,320
National Semiconductor
Corporation 580 16,147
NCR Corporation (a)<F5> 4,360 182,204
Network Appliance,
Inc. (a)<F5> 700 25,221
Novellus Systems,
Inc. (a)<F5> 570 13,680
NVIDIA Corporation (a)<F5> 1,100 62,986
ON Semiconductor
Corp. (a)<F5> 24,705 179,358
Oracle Corporation (a)<F5> 31,295 428,429
QLogic Corporation (a)<F5> 840 16,254
QUALCOMM Inc. 6,155 311,505
Seagate Technology 14,285 376,124
Sybase, Inc. (a)<F5> 3,935 83,107
Symantec
Corporation (a)<F5> 1,862 31,338
Texas Instruments
Incorporated 11,825 383,958
Western Digital Corp. (a)<F5> 240 4,663
Yahoo! Inc. (a)<F5> 10,625 342,763
-----------
9,315,039
-----------
Materials - 1.66%
Crown Holdings, Inc. (a)<F5> 6,465 114,689
Newmont Mining
Corporation 550 28,539
Phelps Dodge
Corporation 3,750 301,987
Praxair, Inc. 3,025 166,829
Sonoco Products Co. 4,610 156,141
Temple-Inland Inc. 3,610 160,826
United States Steel
Corporation 290 17,597
-----------
946,608
-----------
Telecommunication Services - 2.92%
AT&T, Inc. 4,332 117,137
BellSouth Corporation 12,285 425,675
CenturyTel, Inc. 505 19,756
Verizon Communications
Inc. 32,532 1,108,040
-----------
1,670,608
-----------
Utilities - 2.47%
American Electric Power
Company, Inc. 8,475 288,319
Edison International 6,750 277,965
FirstEnergy Corp. 4,935 241,322
FPL Group, Inc. 400 16,056
KeySpan Corporation 460 18,800
PG&E Corporation 5,730 222,897
TECO Energy, Inc. 21,610 348,353
-----------
1,413,712
-----------
TOTAL COMMON STOCKS
(COST $50,864,444) 56,814,902
-----------
Investment
Companies - 0.24%
- -----------------
SPDR Trust Series 1 1,070 138,918
-----------
TOTAL INVESTMENT COMPANIES
(COST $138,470) 138,918
-----------
Short-Term Principal
Investments - 0.21% Amount
- ------------------- ---------
First American Prime
Obligations - Class Y,
4.240%, 12/31/2055 $120,807 120,807
-----------
TOTAL SHORT-TERM INVESTMENTS
(COST $120,807) 120,807
-----------
TOTAL INVESTMENTS - 99.69%
(COST $51,123,721) 57,074,627
OTHER ASSETS IN
EXCESS OF LIABILITIES - 0.31% 178,867
-----------
TOTAL NET ASSETS -
100.00% $57,253,494
-----------
-----------
(a)<F5> Non-income producing security.
The accompanying Notes to Financial Statements are an integral part of this
schedule.
SCHEDULE OF FUTURES CONTRACTS
MARCH 31, 2006 (UNAUDITED)
THE CATHOLIC EQUITY FUND
Unrealized
Futures Contracts Purchased Contracts Depreciation
- --------------------------- --------- ------------
S&P 500 Index E-mini Futures Contracts
Expiring June 2006 (Underlying Face Amount at
Market Value $130,340) 2 $(280)
------
TOTAL FUTURES CONTRACTS PURCHASED $(280)
------
------
The accompanying Notes to Financial Statements are an integral part of this
schedule.
STATEMENT OF ASSETS & LIABILITIES
MARCH 31, 2006 (UNAUDITED)
The Catholic
Equity Fund
------------
ASSETS
- ------
Investments, at cost $51,123,721
-----------
Investments, at value $57,074,627
Dividend receivable 80,227
Interest receivable 401
Receivable for Fund shares sold 60,308
Receivable from Adviser 6,148
Other assets 107,815
-----------
TOTAL ASSETS 57,329,526
-----------
LIABILITIES
- -----------
Payable for Fund shares redeemed 2,236
Payable to broker 420
Accrued expenses and other liabilities 73,376
-----------
TOTAL LIABILITIES 76,032
-----------
NET ASSETS $57,253,494
-----------
-----------
NET ASSETS CONSIST OF:
- ----------------------
Paid in capital $52,366,531
Undistributed net investment income 179,113
Undistributed net realized loss on
investments sold and futures contracts (1,242,776)
Net unrealized appreciation (depreciation) on:
Investments 5,950,906
Futures contracts (280)
-----------
NET ASSETS $57,253,494
-----------
-----------
CLASS A SHARES
- --------------
Net assets $12,802,870
Shares authorized ($0.001 par value) 100,000,000(1)
<F6>
Shares issued and outstanding 1,213,584
Net asset value, redemption price
and minimum offering price per share $10.55
Maximum offering price per share ($10.55/0.95) $11.11
CLASS I SHARES
- --------------
Net assets $44,450,624
Shares authorized ($0.001 par value) 100,000,000(1)
<F6>
Shares issued and outstanding 4,210,020
Net asset value, redemption price and offering price per share $10.56
(1)<F6> Represents authorized shares of the Fund. Authorized shares are not
allotted to the separate classes.
The accompanying Notes to Financial Statements are an integral part of these
statements.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2006 (UNAUDITED)
The Catholic
Equity Fund
------------
INVESTMENT INCOME
- -----------------
Dividend income $470,327
Interest income 12,164
Other income 680
----------
TOTAL INCOME 483,171
----------
EXPENSES
- --------
Investment advisory fees (Note 3) 124,054
Legal fees 51,528
Transfer agent fees and expenses 43,618
Portfolio accounting fees 33,286
Advocacy expenses 24,520
Insurance fees 21,475
Federal and state registration fees 16,598
Audit fees 13,176
Custody fees 12,618
Printing and postage expenses 9,248
Directors' fees and expenses 4,842
12b-1 fees - Class A 12,461
12b-1 fees - Class C (Note 1) 5,576
Other 2,940
----------
TOTAL EXPENSES 375,940
Less waivers and reimbursements by adviser (245,180)
----------
NET EXPENSES 130,760
----------
NET INVESTMENT INCOME 352,411
----------
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------
Net realized gain on:
Investments 3,132,208
Futures contracts 5,933
Net change in unrealized appreciation (depreciation) on:
Investments (6,667)
Futures contracts 4,870
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,136,344
----------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $3,488,755
----------
----------
The accompanying Notes to Financial Statements are an integral part of these
statements.
STATEMENTS OF CHANGES IN NET ASSETS
THE CATHOLIC EQUITY FUND
For the Six For the
Months Ended Year Ended
March 31, 2006 September 30,
(Unaudited) 2005
-------------- -------------
OPERATIONS
- ----------
Net investment income $352,411 $593,944
Net realized gain on
investments and futures contracts 3,138,141 56,189
Net change in unrealized appreciation (depreciation)
on investments and futures contracts (1,797) 3,458,313
----------- -----------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 3,488,755 4,108,446
----------- -----------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS
- -------------------------------------
Distributions from net investment income (74,946) (78,529)
DISTRIBUTIONS TO CLASS C SHAREHOLDERS
- -------------------------------------
Distributions from net investment income (13,207) (16,732)
DISTRIBUTIONS TO CLASS I SHAREHOLDERS
- -------------------------------------
Distributions from net investment income (472,442) (313,225)
----------- -----------
CHANGE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (560,595) (408,486)
----------- -----------
CAPITAL SHARE TRANSACTIONS
- --------------------------
Proceeds from shareholder purchases 15,723,448 5,329,443
Net asset value of shares issued to shareholders
in payment of distributions declared 396,138 396,620
Cost of shares redeemed (1,589,634) (1,661,397)
----------- -----------
CHANGE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS 14,529,952 4,064,666
----------- -----------
CHANGE IN NET ASSETS $17,458,112 $7,764,626
----------- -----------
----------- -----------
NET ASSETS, BEGINNING OF PERIOD $39,795,382 $32,030,756
----------- -----------
----------- -----------
NET ASSETS, END OF PERIOD $57,253,494 $39,795,382
----------- -----------
----------- -----------
UNDISTRIBUTED NET INVESTMENT INCOME $179,113 $387,297
----------- -----------
----------- -----------
The accompanying Notes to Financial Statements are an integral part of these
statements.
FINANCIAL HIGHLIGHTS
THE CATHOLIC EQUITY FUND - CLASS A
For the Six
Months Ended For the Year Ended September 30,
March 31, 2006(3)<F9> -------------------------------------------------------------------
(Unaudited) 2005(3) 2004(3) 2003(3) 2002(3) 2001(3)
<F9> <F9> <F9> <F9> <F9>
--------------------- ------- ------- ------- ------- -------
NET ASSET VALUE,
BEGINNING OF PERIOD $9.93 $8.95 $7.99 $6.48 $8.43 $10.95
------ ------ ------ ------ ------ ------
Net investment income (loss) 0.06(10) 0.13 0.08 0.04 0.06 (0.04)(2)
<F16> <F8>
Net realized and unrealized
gain (loss) on investments 0.65 0.95 0.93 1.49 (1.83) (2.45)
------ ------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT OPERATIONS 0.71 1.08 1.01 1.53 (1.77) (2.49)
------ ------ ------ ------ ------ ------
Distributions from net
investment income (0.09) (0.10) (0.05) (0.02) -- --
Distributions from net
realized gain -- -- -- -- (0.18) (0.03)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (0.09) (0.10) (0.05) (0.02) (0.18) (0.03)
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $10.55 $9.93 $8.95 $7.99 $6.48 $8.43
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return(1)<F7> 7.18% 12.07% 12.70% 23.71% (21.65)% (22.81)%
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net assets, end of year $12,802,870 $8,451,198 $6,868,111 $4,683,756 $2,865,775 $4,525,315
Ratio of expenses to
average net assets:
Before expense waivers
and reimbursements(6)<F12> 1.69% 1.89% 1.94% 2.44% 2.48% 3.05%
After expense waivers
and reimbursements(6)<F12> 0.74%(8) 0.64%(7) 0.95% 0.95% 1.23% 1.75%
<F14> <F13>
Ratio of net investment income
(loss) to average net assets:
Before expense waivers
and reimbursements(6)<F12> 0.27% 0.20% (0.22)% (0.66)% (0.94)% (1.75)%
After expense waivers
and reimbursements(6)<F12> 1.22% 1.45% 0.77% 0.83% 0.31% (0.45)%
Portfolio turnover rate 55.95%(9) 5.31% 1.88% 9.46%(4) 31.23%(5) 39.17%
<F15> <F10> <F11>
(1)<F7> Based on net asset value, which does not reflect the sales charge.
(2)<F8> Per share net investment loss has been calculated prior to tax
adjustments.
(3)<F9> Information for the periods ended September 30, 2001 and October 1,
2001 through April 2, 2002 reflect the operations of The Catholic
Disciplined Capital Appreciation Fund. Information for the period
April 3, 2002 through March 31, 2006 reflects the operations of The
Catholic Equity Fund.
(4)<F10> Portfolio turnover rate excludes purchases and sales from merger of
The Catholic Values Investment Trust and The Catholic Equity Fund.
(5)<F11> Portfolio turnover reflects the operations of the Catholic Equity
Fund for the period April 3, 2002 through September 30, 2002.
(6)<F12> Computed on an annualized basis.
(7)<F13> On November 15, 2004, the adviser voluntarily increased its expense
reimbursements and fee waivers to the Fund, thereby decreasing its
expense ratio from 0.95% to 0.60%.
(8)<F14> On February 1, 2006, the adviser adjusted its expense
reimbursements and fee waivers to the Fund, thereby increasing its
expense ratio from 0.60% to 1.00%.
(9)<F15> On February 1, 2006, the adviser changed the Fund's investment
objective from an S&P 500 Index strategy to an enhanced index
strategy, per Board approval.
(10)<F16> Calculated using average shares outstanding method.
The accompanying Notes to Financial Statements are an integral part of these
statements.
THE CATHOLIC EQUITY FUND - CLASS I
For the Six For the
Months Ended For the Year Ended September 30, Period Ended
March 31, 2006 ---------------------------------- September 30,
(Unaudited) 2005 2004 2003 2002(1)<F17>
-------------- ---- ---- ---- ------------
NET ASSET VALUE,
BEGINNING OF PERIOD $9.95 $8.96 $8.00 $6.49 $9.02
------ ------ ------ ------ ------
Net investment income 0.08(8) 0.16 0.09 0.07 0.02
<F24>
Net realized and unrealized
gain (loss) on investments 0.64 0.95 0.94 1.49 (2.55)
------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT OPERATIONS 0.72 1.11 1.03 1.56 (2.53)
------ ------ ------ ------ ------
Distributions from net
investment income (0.11) (0.12) (0.07) (0.05) --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (0.11) (0.12) (0.07) (0.05) --
------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $10.56 $9.95 $8.96 $8.00 $6.49
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 7.32% 12.41% 12.89% 24.19% (28.05)%(2)<F18>
RATIOS TO AVERAGE NET ASSETS
- ----------------------------
Net assets, end of period $44,450,624 $27,824,251 $21,818,191 $18,540,009 $9,831,101
Ratio of expenses
to average net assets:
Before expense waivers
and reimbursements(3)<F19> 1.44% 1.64% 1.69% 2.19% 2.55%
After expense waivers
and reimbursements(3)<F19> 0.44%(6) 0.39%(5) 0.70% 0.70% 0.70%
<F22> <F21>
Ratio of net investment income
(loss) to average net assets:
Before expense waivers
and reimbursements(3)<F19> 0.49% 0.45% 0.03% (0.41)% (0.82)%
After expense waivers
and reimbursements(3)<F19> 1.49% 1.70% 1.02% 1.08% 1.03%
Portfolio turnover rate 55.95%(7) 5.31% 1.88% 9.46%(4) 31.23%(2)
<F23> <F20> <F18>
(1)<F17> Reflects operations for the period from April 3, 2002 (commencement
of operations), to September 30, 2002.
(2)<F18> Not annualized.
(3)<F19> Computed on an annualized basis.
(4)<F20> Portfolio turnover rate excludes purchases and sales from the merger
of The Catholic Values Investment Trust and The Catholic Equity
Fund.
(5)<F21> On November 15, 2004, the adviser voluntarily increased its expense
reimbursements and fee waivers to the Fund, thereby decreasing its
expense ratio from 0.70% to 0.35%.
(6)<F22> On February 1, 2006, the adviser adjusted its expense reimbursements
and fee waivers to the Fund, thereby increasing its expense ratio
from 0.35% to 0.60%.
(7)<F23> On February 1, 2006, the adviser changed the Fund's investment
objective from an S&P 500 Index strategy to an enhanced index
strategy, per Board approval.
(8)<F24> Calculated using average shares outstanding method.
The accompanying Notes to Financial Statements are an integral part of these
statements.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006 (UNAUDITED)
1. ORGANIZATION
- ---------------
The Catholic Funds, Inc. (the "Company") was incorporated on December 16, 1998,
as a Maryland Corporation, and is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended. The
Company consists of one diversified series, the Catholic Equity Fund (the
"Fund"). At the close of business on April 2, 2002, the Fund acquired, through
a non-taxable reorganization, substantially all of the net assets of the
Catholic Equity Income, Large-Cap Growth and Disciplined Capital Appreciation
Funds. The Catholic Disciplined Capital Appreciation Fund ("Disciplined Capital
Appreciation Fund") was deemed to be the accounting survivor of the
reorganization.
In 2002, the Company designated three classes of Fund shares: Class A, Class C
and Class I. All outstanding shares of the Disciplined Capital Appreciation
Fund were redesignated as Class A shares effective on March 25, 2002. On
January 31, 2006, pursuant to a Plan of Reorganization and Liquidation approved
by the Class C shareholders, Class C shares were liquidated and holders of Class
C shares received, as liquidation proceeds, Class A shares having a net asset
value equal to the net asset value of their Class C shares at the time of the
liquidation. Effective on February 1, 2006, the Company designated a new class
of Fund shares known as Class D shares. As a result of these transactions, the
Fund currently has three classes of shares: Class A, Class D and Class I. The
three classes differ principally in their respective distribution expenses and
arrangements as well as their respective sales and redemption fee arrangements.
All classes of shares have identical rights to earnings, assets and voting
privileges, except for class specific expenses and exclusive rights to vote on
matters affecting only individual classes.
Class A shares are subject to an initial maximum sales charge of 5.00% imposed
at the time of purchase. The sales charge declines as the amount purchased
increases in accordance with the Fund's prospectus. Class D shares became
effective on February 1, 2006, but, as of March 31, 2006, no Class D shares had
been sold. Class D shares are subject to a contingent deferred sales charge
("CDSC") for redemptions made within 18 months of purchase, in accordance with
the Fund's prospectus. The CDSC is 1.00% of the lesser of the original purchase
price or the value of shares being redeemed. Class I shares became effective on
March 25, 2002 and were first sold on April 3, 2002. Effective February 1,
2006, Class I shares are subject to a CDSC for redemptions made within one year
of purchase, in accordance with the Fund's prospectus. The CDSC is 0.35% of the
lesser of the original purchase price or the value of shares being redeemed.
The Fund is managed by Catholic Financial Services Corporation (the "Adviser").
At the close of business on May 22, 2003, the Fund acquired, through a non-
taxable reorganization, substantially all of the net assets of The Catholic
Values Investment Trust Equity Fund ("CVIT").
2. SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------
The following is a summary of significant accounting policies consistently
followed by the Funds in preparation of their financial statements. These
policies are in conformity with accounting principles generally accepted in the
United States of America (i.e., GAAP).
A) INVESTMENT VALUATION
Securities listed on the NASDAQ National Market are valued at the NASDAQ
Official Closing Price ("NOCP"). Other securities traded on the national
securities exchange are valued at the last sales price on the exchange where
primarily traded. Exchange-traded securities for which there were no
transactions that day are valued at the latest bid prices. Securities traded on
only over-the-counter markets other than NASDAQ 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 and other assets are valued at fair value as determined in
good faith by the Adviser under the supervision of the Board of Directors.
Securities not currently traded or those for which the NOCP, last sales price or
bid price, as the case may be, is deemed unreliable are valued at fair value as
determined in good faith under procedures approved by the Board of Directors.
If an event occurs that will affect the value of a Fund's portfolio securities
before the NAV has been calculated, the security will generally be priced using
a fair value procedure. The Board has adopted specific procedures for valuing
portfolio securities and delegated the responsibility of fair value
determinations to a Valuation Committee. Some of the factors that may be
considered by the Valuation Committee in determining fair value are fundamental
analytical data relating to the investment; the nature and duration of any
restriction on the disposition; trading in similar securities of the same issuer
or comparable companies; information from broker-dealers; and an evaluation of
the forces that influence the market in which the securities are purchased or
sold.
B) STOCK INDEX FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts. Upon entering
into a contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the Fund
as unrealized gains and losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. As
collateral for futures contracts, the Fund is required under the 1940 Act to
maintain assets consisting of cash, cash equivalents or liquid securities. The
Fund's exposure on a futures contract is equal to the amount paid for the
contract by the Fund.
C) FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of Subchapter M of the Internal
Revenue Code necessary to qualify as a regulated investment company and to make
the requisite distributions of income and capital gains to its shareholders
sufficient to relieve it from all or substantially all federal income taxes.
Therefore, no federal income tax provision has been recorded.
D) DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute any net investment income and any net realized long or
short-term capital gains at least annually. Distributions from net realized
gains for book purposes may include short-term capital gains. All short-term
capital gains are included in ordinary income for tax purposes. Distributions
to shareholders are recorded on the ex-dividend date. The Fund may also pay a
special distribution at the end of the calendar year to comply with federal tax
requirements.
The tax character of distributions paid during the six months ended March 31,
2006 and the fiscal year end September 30, 2005 were as follows:
Equity Fund
--------------------------------------
For the Six For the
Months Ended Year Ended
March 31, 2006 September 30, 2005
-------------- ------------------
Ordinary Income $560,595 $408,486
Long-term Capital Gains -- --
Due to inherent differences in the recognition of income, expenses and realized
gains/losses under GAAP and federal income tax purposes, permanent differences
between book and tax basis of reporting have been identified and appropriately
reclassified on the Statements of Assets and Liabilities.
As of September 30, 2005, the Fund had net capital loss carryforwards of
$3,685,235 that will expire in varying amounts through 2012 ($108,401 in 2006,
$9,803 in 2007, $1,691,715 in 2008, $1,135,875 in 2009, $5,488 in 2010, $388,847
in 2011, and $345,106 in 2012). To the extent the Fund realizes future net
capital gains, those gains will be offset by any unused capital loss
carryforwards, subject to certain IRS limitations.
As of September 30, 2005, the components of capital on a tax basis were as
follows:
Equity Fund
-----------
Cost of investments $34,531,653
-----------
-----------
Gross unrealized appreciation $ 8,575,815
Gross unrealized depreciation (3,317,933)
-----------
Net unrealized appreciation/depreciation $ 5,257,882
-----------
-----------
Undistributed ordinary income $ 386,156
Undistributed long-term capital gain --
-----------
Total distributable earnings $ 386,156
-----------
-----------
Other accumulated gain/losses $(3,685,235)
-----------
Total accumulated earnings/losses $ 1,958,803
-----------
-----------
The Fund designates 100% of dividends declared from net investment income during
the fiscal year ended September 30, 2005 as qualified income under Jobs and
Growth Tax Relief Reconciliation Act of 2003 (unaudited).
For corporate shareholders in the Fund, the percentage of ordinary dividend
income distributed for the year ended September 30, 2005, which is designated as
qualifying for the dividends-received deduction, is 100% (unaudited).
E) EXPENSES
The 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 any class of shares of the Equity Fund are allocated between
each class' respective net assets when appropriate. Fees paid under the
Distribution Plan (the "Plan") are borne by the specific class of shares of the
Equity Fund to which the Distribution Plan applies.
F) OTHER
For financial reporting purposes, investment transactions are accounted for on
the trade date. The Fund determines the gain or loss realized from investment
transactions by comparing the original cost of the security lot sold with the
net sale proceeds.
Income Recognition - Interest income is accrued as earned. Dividend income is
recorded on the ex-dividend date. Income and realized and unrealized gains or
losses on investments are allocated to each class of shares based on its
relative net assets. All discounts and premiums are amortized on the effective
interest method for tax and financial reporting purposes.
The preparation of financial statements in conformity with accounting principles
generally accepted in the Untied States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
3. INVESTMENT ADVISORY AND OTHER AGREEMENTS WITH RELATED PARTIES
- ----------------------------------------------------------------
The Fund has entered into an agreement with the Adviser, with whom certain
Officers and Directors of the Fund are affiliated, to furnish investment
advisory services to the Fund. The terms of the agreement are as follows:
The Fund pays the Adviser a monthly fee at the annual rate of 0.50% of the
Fund's average daily net assets. Pursuant to a voluntary reimbursement and fee
waiver, the Adviser waived its management fee and/or reimbursed the Fund's
operating expenses (exclusive of brokerage, interest, taxes and extraordinary
expenses) to ensure that the Fund's operating expenses did not exceed 0.60%,
0.85% and 0.35% of the average daily net assets of Fund - Class A, Class C and
Class I shares, respectively, through January 31, 2006. Pursuant to an expense
cap agreement, the Adviser has contractually committed to waive its management
fee and/or reimburse the Fund's operating expenses (exclusive of brokerage,
interest, taxes and extraordinary expenses) to ensure that the Fund's operating
expenses do not exceed 1.00%, 1.75% and 0.60% of the average daily net assets of
Fund - Class A, Class D and Class I shares, respectively, from February 1, 2006
through at least the end of the Fund's current fiscal year ending September 30,
2006.
Until January 31, 2006, Mellon Equity Associates, LLP ("Mellon") served as sub-
adviser to the Fund. The annual rates of the fees, payable from fees paid to
the Adviser, as a percent of average daily net assets under the sub-advisory
agreement were as follows: 0.12% on the first $50 million; 0.06% of the Fund's
average daily net assets in excess of $50 million.
As of February 1, 2006, pursuant to shareholder approval, the Adviser entered
into a sub-advisory agreement with Ziegler Capital Management, LLC ("ZCM"). The
annual rates of the fees, payable from fees paid to the Adviser, as a percent of
average daily net assets under the sub-advisory agreement are as follows: 0.20%
on the first $250 million of the Fund's average daily net assets; 0.18% of the
Fund's average daily net assets above $250 million and up to $500 million; and
0.15% of the Fund's average daily net assets in excess of $500 million.
For the six months ended March 31, 2006, expenses of $245,180 were reimbursed by
the Adviser for the Fund. The Adviser may terminate or adjust the waiver and
expense reimbursement at any time after September 30, 2006.
The Fund has adopted a Distribution Plan ( the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. Under the Plan, the Fund may pay
annually up to 0.25% and 1.00% of its net assets associated with Class A and
Class D shares, respectively, to finance certain activities relating to the
distribution of its shares to investors. For the six months ended March 31,
2006, 12b-1 distribution expenses of $12,461 were paid with respect to Class A
shares. Because no Class D shares had been sold as of March 31, 2006, no 12b-1
distribution expenses were paid with respect to Class D shares. These expenses
for Class A shares were remitted to the Adviser, who also serves as distributor
for the shares of the Fund.
The Adviser also received sales charges from the sale of Class A shares of
$15,391 for the six months ended March 31, 2006. There were no CDSC paid to the
Adviser for the redemption of Class D or Class I shares during the six months
ended March 31, 2006. Sales charges are not an expense of the Fund and are not
included in the financial statements of the Fund.
4. CAPITAL SHARE TRANSACTIONS
- -----------------------------
Transactions of shares of the Fund were as follows:
THE CATHOLIC EQUITY FUND - CLASS A SHARES
For the Six Months Ended For the Year Ended
March 31, 2006 September 30, 2005
-------------------------- --------------------------
Amount Shares Amount Shares
------ ------ ------ ------
Shares sold $577,233 56,466 $1,545,817 162,985
Shares transferred from
Class C reorganization
and liquidation (Note 1) 3,535,673 347,657 -- --
Shares issued to holders in
reinvestment of distributions 69,964 6,927 72,993 7,517
Shares redeemed (496,882) (48,671) (828,294) (86,835)
---------- ------- ---------- -------
NET INCREASE $3,685,988 362,379 $790,516 83,667
---------- ------- ---------- -------
---------- ------- ---------- -------
THE CATHOLIC EQUITY FUND - CLASS C SHARES
For the Six Months Ended For the Year Ended
March 31, 2006(1)<F25> September 30, 2005
-------------------------- --------------------------
Amount Shares Amount Shares
------ ------ ------ ------
Shares sold $83,658 8,376 $245,364 21,908
Shares transferred from
Class C reorganization
and liquidation (Note 1) (3,535,673) (347,006) -- --
Shares issued to holders in
reinvestment of distributions 12,605 1,246 15,991 1,649
Shares redeemed (178,142) (17,943) (447,457) (43,891)
----------- -------- ---------- -------
NET INCREASE (DECREASE) $(3,617,552) (355,327) $(186,102) (20,334)
----------- -------- ---------- -------
----------- -------- ---------- -------
(1)<F25> Class C shares were liquidated as of January 31, 2006.
THE CATHOLIC EQUITY FUND - CLASS I SHARES
For the Six Months Ended For the Year Ended
March 31, 2006 September 30, 2005
-------------------------- --------------------------
Amount Shares Amount Shares
------ ------ ------ ------
Shares sold $15,062,557 1,471,306 $3,538,262 372,855
Shares issued to holders in
reinvestment of distributions 313,569 31,047 307,636 31,682
Shares redeemed (914,610) (89,375) (385,646) (41,969)
----------- --------- ---------- -------
NET INCREASE $14,461,516 1,412,978 $3,460,252 362,568
----------- --------- ---------- -------
----------- --------- ---------- -------
5. INVESTMENT TRANSACTIONS
- --------------------------
The aggregate purchases and sales of securities, excluding short-term
investments for the Fund, for the six months ended March 31, 2006 were
$41,993,063 and $27,252,824 respectively. There were no purchases and sales of
U.S. government securities for the Fund.
Transactions in futures contracts for the six months ended March 31, 2006 were
as follows:
Equity Fund
--------------------------------
Number of Aggregate Face
Contracts Value of Contracts
--------- ------------------
Outstanding at beginning of period 8 $ 745,730
Contracts opened 9 831,105
Contracts closed (15) (1,446,215)
--- -----------
Outstanding at end of period 2 $ 130,620
--- -----------
--- -----------
6. GUARANTEES AND INDEMNIFICATIONS
- ----------------------------------
In the normal course of business, the Fund enters into contracts with service
providers that contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown as this would involve future claims
against the Fund that have not yet occurred. Based on experience, the Fund
expects the risk of loss to be remote.
BOARD APPROVAL OF INVESTMENT ADVISORY AND SUBADVISORY AGREEMENTS
BOARD APPROVAL OF SUBADVISORY AGREEMENT
At its meeting on November 15, 2005, the Board of Directors, including a
majority of the Directors who are not "interested persons" (as defined in the
Investment Company Act of 1940) of the Fund or of Catholic Financial Services
Corporation ("CFSC") (the "Independent Directors"), voted to approve a new
subadvisory agreement among the Fund, CFSC and Ziegler Capital Management, LLC
("ZCM") (the "Subadvisory Agreement"). In connection with its approval of the
Subadvisory Agreement, the Board considered the following factors:
o The nature, extent and quality of the services to be provided by ZCM;
o The anticipated effect of the proposed investment strategy to be
implemented by ZCM on the investment performance of the Fund and ZCM's
previous success with this and similar investment strategies;
o The reasonableness of the cost of the services to be provided by ZCM;
and
o The extent to which economies of scale may be realized as the Fund grows
and whether fee breakpoint levels reflect these economies of scale for
the benefit of the Fund's shareholders.
In connection with the Subadvisory Agreement approval process undertaken at a
November 8, 2005 meeting of the Governance and Contract Committee of the Board
(the "Contracts Committee"), which consists solely of Independent Directors, the
Contracts Committee reviewed information relating to the factors listed above.
This information included:
o Reports prepared by management regarding the proposed investment
strategy to be implemented by ZCM and the anticipated effect of the
proposed strategy on Fund performance, including model return charts and
growth summaries;
o Due diligence reports prepared by management regarding the investment
capabilities of ZCM to manage the Fund;
o Information regarding the types of services to be furnished to the Fund
by ZCM;
o Summaries of compliance systems and procedures maintained by ZCM and
reports on their compliance with those systems and procedures, including
especially business codes of conduct and codes of ethics; and
o Other performance, expense and related information prepared by
management of the Fund.
The Contracts Committee and the Board also received a memorandum from Fund legal
counsel summarizing the responsibilities of the Board and the Independent
Directors under the Investment Company Act of 1940 in approving advisory
contracts.
Nature, Extent and Quality of Services. During the approval process, the Board
- ---------------------------------------
of Directors met with the management of ZCM, including the portfolio manager
that would be responsible for the management of the Fund. The Board discussed
with ZCM's management and the portfolio manager the proposed investment strategy
to be used for the Fund and ZCM's experience with such an investment strategy.
ZCM's management also provided the Board with an explanation of the services to
be provided by ZCM under the new Subadvisory Agreement. These meetings gave the
Board an opportunity to evaluate and draw favorable impressions of the abilities
and experience of ZCM and the quality of the services it would provide to the
Fund.
The Fund's management reviewed with the Board the compliance systems and
procedures maintained by ZCM to assure regulatory compliance. The Board
determined that ZCM had a strong compliance system, practice and culture. The
Fund's Chief Compliance Officer explained that all future quarterly reports to
the Board on any and all compliance issues that arise during the relevant
quarter would include relevant reports from ZCM. These reports will help
confirm the Board's assessment of the strong compliance focus of ZCM. The Board
considered the importance of these compliance and oversight functions to the
successful operation of the Fund, and expressed satisfaction with the quality of
ZCM's compliance culture.
The Board views these actions, reports and information as significant factors in
approving the new Subadvisory Agreement with ZCM, as they demonstrate the
commitment of ZCM to provide the Fund with comprehensive, quality service and
competitive investment performance.
Investment Performance. The Contracts Committee requested and carefully
- -----------------------
reviewed the back-testing performed by management under the proposed investment
strategy, and reviewed an analysis of the anticipated effect of the proposed
investment strategy on the Fund's performance. These tests were run with the
elimination of the four stocks, which the advocacy screen would have removed,
and the results showed that, under the proposed investment strategy, the Fund's
performance would have exceeded the S&P 500 Index return over the three-year
period being tested. In addition, the testing and analysis completed by ZCM
showed that the potential for excess return over the S&P 500 Index was
sufficient to cover at least a portion of the Fund's expenses if the Fund's
portfolio is structured to stay within a specified tracking tolerance
(volatility band). The Board also reviewed a graph comparing the S&P 500 Index
and the Fund, under the proposed strategy, over a ten-year period. The graph
demonstrated that the Fund would have outperformed the Index during this period.
Management explained that ZCM will use a disciplined, quantitative investment
strategy to manage the Fund and provided the Board with information
demonstrating ZCM's previous success, in separately managed accounts and in
mutual funds, with this and similar approaches. The Board concluded that the
back-testing indicated that the Fund's performance could significantly benefit
from the implementation of the proposed strategy under ZCM's management. The
Board viewed favorably the breadth of ZCM's experience in managing investments,
particularly its experience in managing index funds that utilize "optimization"
and "enhancement" objectives and strategies, and ZCM's historic investment
performance on investment products which seek to enhance the return of an Index.
Cost of Services. The Contracts Committee and the Board also reviewed
- -----------------
information prepared by management regarding the advisory fees to be paid by the
Fund. The Board acknowledged that the subadvisory fee ZCM would receive for
managing the Fund's assets is greater than the fee charged by the Fund's
previous subadviser, but the Board determined that this increased fee was
appropriate given the increased resources, skill, experience, time and effort
that would be required to manage the Fund's assets under this optimization and
enhancement strategy, as compared to the passive replication strategy previously
employed by the Fund. The Board viewed favorably the fact that ZCM is offering
to provide these management services to the Fund at a substantial discount as
compared to the fee ZCM receives for managing the assets of the other mutual
funds and its privately-managed accounts under similar strategies. Finally, the
Board observed that the increased subadvisory fee would not result in any
increase in the overall advisory fees paid by the Fund. To the contrary, the
Board noted that CFSC was offering a breakpoint reduction in the rate of the
advisory fee on assets over $500 million in connection with the proposed change
in subadviser, and has committed voluntarily to continue to cap expenses on each
Class of shares of the Fund, albeit at a somewhat higher level.
Based on this and other information provided by management, the Board concluded
that the subadvisory fee to be paid to ZCM was reasonable in light of the
nature, scope and quality of the services ZCM will provide. Furthermore, based
on other information provided by management, the Board concluded that ZCM
maintains a healthy capital position and has capital resources sufficient to
enable it to provide the necessary services to the Fund.
Economies of Scale and Fee Breakpoints. Although the Fund's relatively small
- ---------------------------------------
size and historically slow growth may cause a consideration of the economies of
scale and fee breakpoint levels to be premature at this time, the Board
favorably viewed ZCM's contractual agreement to break subadvisory fees at
various asset levels. The Board also favorably viewed CFSC's contractual
commitment to reduce the rate of the advisory fee on assets over $500 million.
The Board concluded that these breakpoints would assist the Fund in realizing
economies of scale as the Fund grows.
Based on the factors discussed above, the Contracts Committee recommended
approval of the Subadvisory Agreement, and the Board, including all of the
Independent Directors present at the meeting, approved continuation of the
Subadvisory Agreement. In conjunction with the approval of the Subadvisory
Agreement, the Board also approved the proposed investment strategy. Pursuant
to shareholder approval on January 23, 2006, the proposed investment strategy
was implemented and ZCM began serving as subadviser to the Fund on February 1,
2006.
BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT
At its meeting on February 6, 2006, the Board of Directors, including the five
Directors present at the meeting who are not "interested persons" (as defined in
the Investment Company Act of 1940) of the Fund or of Catholic Financial
Services Corporation ("CFSC") (the "Independent Directors") (the two other
Independent Directors were not able to attend the meeting), voted to reapprove
the current investment advisory agreement between the Fund and CFSC (the
"Advisory Agreement"). In connection with its reapproval of the Advisory
Agreement, the Board considered the following factors:
o The nature, extent and quality of the services provided by CFSC;
o The investment performance of the Fund both on an absolute basis and on
a relative basis in comparison to its peers; and
o The reasonableness of the cost of the services provided by CFSC.
Because of its relatively small size and historic slow growth, the Board did not
deem it relevant at this time to consider economies of scale that might be
realized at a substantially greater asset size, nor did it consider appropriate
fee breakpoint levels which would reflect such economies of scale. However, the
Board favorably viewed CFSC's contractual commitment to reduce the rate of the
advisory fee on assets over $500 million and concluded that this breakpoint
would assist the Fund in realizing economies of scale as the Fund grows.
In connection with the Advisory Agreement renewal process undertaken at a
January 25, 2006 meeting of the Governance and Contract Committee of the Board
(the "Contracts Committee"), which consists entirely of Independent Directors,
the Contracts Committee reviewed information it previously had requested from
management of CFSC addressing the factors listed above. This information
included:
o Information regarding the performance of the Fund, including
standardized returns of the Fund and graphs demonstrating the "growth of
$10,000" in the Fund versus its benchmark;
o Reports assembled by US Bancorp Fund Services, which compare the
advisory fees and the total operating expenses of the Fund to a peer
group of funds;
o Financial statements of CFSC, including profit and loss statements;
o Information regarding the types of services furnished to the Fund by
CFSC; and
o Other performance, expense and related information prepared by
management of the Fund.
The Contracts Committee and the Board also received a memorandum from Fund legal
counsel summarizing the responsibilities of the Board and the Independent
Directors under the Investment Company Act of 1940 in reviewing advisory
contracts.
Nature, Extent and Quality of Services. At each quarterly meeting of the Board
- ---------------------------------------
of Directors, management presents information describing the services furnished
to the Fund by CFSC under the Advisory Agreement, including reports on the
investment management, portfolio trading and compliance functions they perform.
The Board also receives reports at each of its quarterly meetings from the
Fund's Chief Compliance Officer in private sessions in which the officers of the
Fund and the Directors who are interested persons of CFSC do not participate.
These latter meetings give the Board an opportunity to discuss the abilities and
experience of these personnel and the quality of the services they provide to
the Fund.
During the course of the year, management also reviewed with the Board existing,
enhanced and new compliance systems and procedures designed to assure regulatory
compliance by CFSC in connection with its provision of management and
administrative services to the Fund, and reviewed oversight functions
implemented by CFSC to monitor and assure regulatory compliance by the Fund's
other service providers, including the subadviser. The Board determined that
CFSC had a strong compliance system, practice and culture. The Fund's Chief
Compliance Officer quarterly reports to the Board on any and all compliance
issues that arise during the relevant quarter. These reports have confirmed the
Board's assessment of the strong compliance focus of CFSC. The Board considered
the importance of these compliance and oversight functions to the successful
operation of the Fund, and expressed satisfaction with the quality of service
provided by CFSC in this regard.
Management also reviewed with the Board its commitment to the Fund. In this
regard, the Board noted in particular that CFSC had taken the initiative to
change the strategy and objective of the Fund; committed to continue financially
subsidizing the Fund's operations through an expense cap on each Class of shares
of the Fund, albeit at a somewhat higher level; committed to provide the stock
screening services required to administer the Fund's sanctity of human life
value at no additional charge; and reduced the amount of investment advisory
fees it receives in order to pay a higher subadvisory fee to the new subadviser.
In addition, the Board noted that CFSC was offering a breakpoint reduction in
the rate of the advisory fee on assets over $500 million in connection with the
change in subadviser.
The Board views these actions, reports and information as significant factors in
approving the current Advisory Agreement, as they demonstrate the commitment of
CFSC to provide the Fund with comprehensive, quality service and competitive
investment performance.
Investment Performance. The Contracts Committee requested and carefully
- -----------------------
reviewed the comparative performance information. The information showed that
all classes of the Fund performed close to, but below the S&P 500 Index due to
the Fund's expenses. The Board also noted that this tight correlation was
achieved notwithstanding the Fund's exclusion of certain index companies which
fail the Fund's abortion screen. As a passively-managed index fund, the Board
noted that this performance was consistent with the Fund's objective. With the
implementation of the new investment strategy managed by the new subadviser, the
Board noted that the performance of the Fund should improve, decreasing the gap
between the Fund's performance and the Index's performance. The Board concluded
that the past performance of the Fund was satisfactory compared to the
performance of the S&P 500 Index.
Cost of Services. The Contracts Committee and the Board also reviewed
- -----------------
information prepared by management with the assistance of US Bancorp Fund
Services comparing the Fund's contractual advisory fees with a peer group of
funds, and comparing the Fund's overall expense ratio to the expense ratios of a
peer group of funds. The Board reviewed comparative information for the Fund's
previous peer group as well as a new, more appropriate peer group given the
Fund's change in investment strategy. In comparison to the new peer group, the
information showed that the total operating expenses for Class A and I shares is
below the average for the group and that the total operating expenses for Class
D shares is slightly above the average. In considering and evaluating the total
operating expenses of the Fund, the Board noted that the Fund incurs expenses
for its advocacy program, which other funds in its peer group do not incur. The
Board gave consideration to the fact that a portion of the expenses related to
the Fund's advocacy program are absorbed by CFSC. The contractual advisory fees
for all of the Classes are in line with the Fund's peers.
Based on this information, the Board concluded that the Fund's expenses are
reasonable, and that management of CFSC is doing a credible job of effectively
managing expenses, notwithstanding that the Fund's small size presents
challenges given the lack of the ability to spread fixed costs and minimum fees,
such as fund accounting fees, auditing fees, legal fees, transfer agent fees,
custody fees, etc., over a larger base of assets.
The Contracts Committee and the Board also reviewed CFSC's Profit and Loss
Statement for calendar years 2004 and 2005, noting that CFSC had operating
losses of approximately $1.0 million in 2004 and operating losses of
approximately $800,000 in 2005. CFSC's fee waivers and expense reimbursements
resulted in costs to CFSC of approximately $350,000 in 2004 and $500,000 in
2005. Based on this and other information provided by management, the Board
concluded that CFSC's financial commitment to the Fund and its operations to
date is exemplary. Furthermore, based on other information provided by
management of CFSC, the Board concluded that CFSC continues to maintain a
healthy capital position and has capital resources sufficient to enable it to
continue to financially support the Fund's growth and operations.
Based on the factors discussed above, the Contracts Committee recommended
continuation of the Advisory Agreement, and the Board, including all of the
Independent Directors present at the meeting, approved continuation of the
Advisory Agreement.
MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS
On January 23, 2006, a Special Meeting of Shareholders was held to consider the
following three proposals: (i) a proposal to approve a new Investment
Subadvisory Agreement with Ziegler Capital Management, LLC ("ZCM") to act as
subadviser for the Catholic Equity Fund (the "Fund"); (ii) a proposal to elect
Amelia E. Macareno and Bernard E. Reidy to the Board of Directors of the
Catholic Funds, Inc.; and (iii) for Class C shareholders of the Fund only, a
proposal to approve a Plan of Reorganization and Liquidation pursuant to which
Class C shares of the Fund would be liquidated, and Class C shareholders would
receive, as liquidation proceeds, Class A shares having a net asset value equal
to the net asset value of their Class C shares.
The proposal to approve a new Investment Subadvisory Agreement with ZCM to act
as subadviser for the Fund was approved by the shareholders of the Fund pursuant
to the following vote:
Shares
Shares Eligible Represented at Shares Voted Shares Voted Broker
to Vote the Meeting For Against Abstentions Non-Votes
--------------- -------------- ------------ ------------ ----------- ---------
5,379,383 3,429,275 3,322,622 6,688 1,015 98,950
The proposal to elect Amelia E. Macareno and Bernard E. Reidy to the Board of
Directors of the Catholic Funds, Inc. was approved by the shareholders of the
Fund pursuant to the following vote:
Shares
Shares Eligible Represented at Shares Voted Shares
to Vote the Meeting For Withheld
--------------- -------------- ------------ --------
Amelia E. Macareno 5,379,383 3,429,275 3,417,978 11,297
Bernard E. Reidy 5,379,383 3,429,275 3,417,978 11,297
After the Special Meeting, Daniel J. Steininger, Thomas A. Bausch, J. Michael
Borden, Daniel R. Doucette, Allan G. Lorge, Thomas Munninghoff and Conrad L.
Sobczak continued indefinitely as Directors of the Catholic Funds, Inc., until
their resignation or removal or until their re-election is required under the
Investment Company Act of 1940.
The proposal to approve a Plan of Reorganization and Liquidation was approved by
the Class C shareholders of the Fund pursuant to the following vote:
Shares
Shares Eligible Represented at Shares Voted Shares Voted Broker
to Vote the Meeting For Against Abstentions Non-Votes
--------------- -------------- ------------ ------------ ----------- ---------
348,876 179,343 148,695 3,912 795 25,941
A NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained in this semi-annual report for The
Catholic Funds, Inc., the matters discussed in these reports may constitute
forward-looking statements made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. These include any adviser, subadviser
and/or portfolio manager prediction, assessment, analysis or outlook for
individual securities, industries, market sectors and/or markets. These
statements involve risks and uncertainties. In addition to general risks
described for the Fund in the current prospectus, other factors bearing on these
reports include the accuracy of the forecasts and predictions and the
appropriateness of the investment strategies designed by the adviser, any
subadviser or portfolio manager to implement their strategies efficiently and
effectively. Any one or more of these factors, as well as other risks affecting
the securities markets and investment instruments generally, could cause the
actual results of the Fund to differ materially as compared to benchmarks
associated with the Fund.
BOARD OF DIRECTORS
- ------------------
Daniel Steininger,
Chairman of the Board
Thomas Bausch
J. Michael Borden
Daniel Doucette
Allan Lorge
Amelia Macareno
Thomas Munninghoff
Bernard Reidy
Conrad Sobczak
OFFICERS
- --------
Daniel Steininger, President
Allan Lorge,
Vice President, Secretary, Chief Financial
Officer and Chief Compliance Officer
Russell Kafka, Treasurer
Mark Forbord, Controller
INVESTMENT ADVISER
- ------------------
Catholic Financial Services Corporation
1100 West Wells Street
Milwaukee, WI 53233
SUBADVISER
- ----------
Ziegler Capital Management, LLC
250 East Wisconsin Avenue, Suite 2000
Milwaukee, WI 53202
LEGAL COUNSEL
- -------------
Quarles & Brady LLP
CUSTODIAN
- ---------
U.S. Bank, N.A.
TRANSFER AGENT
- --------------
U.S. Bancorp Fund Services, LLC
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- ---------------------------------------------
PricewaterhouseCoopers LLP
SHAREHOLDER SERVICES
- --------------------
The Catholic Funds
c/o U.S. Bancorp Fund Services, LLC
615 East Michigan Street
P.O. Box 710
Milwaukee, WI 53201-0701
THE CATHOLIC
FRATERNAL ALLIANCE
- ------------------
Catholic Knights
Daniel Steininger, President
1100 West Wells Street
Milwaukee, WI 53233
Catholic Order of Foresters
David E. Huber, High Chief Ranger
355 Shuman Boulevard
P.O. Box 3012
Naperville, IL 60566-7012
Catholic Union of Texas (The KJT)
Elo J. Goerig, President
P.O. Box 297
LaGrange, TX 78945
The Fund's Statement of Additional Information contains additional information
about the Fund's Directors and is available without charge upon request by
calling 1-877-222-2402.
The Fund's Proxy Voting Policies and Procedures are available without charge
upon request by calling 1-877-222-2402, on the Fund's website,
www.catholicfunds.com, or on the SEC's website, at www.sec.gov. Information
--------------------- -----------
regarding how the Fund voted proxies relating to portfolio securities during the
twelve months ended June 30, 2005 is available, without charge, upon request, on
or through the Fund's website, at www.catholicfunds.com, and on the SEC's
---------------------
website, at www.sec.gov.
-----------
The Fund files a complete schedule of portfolio holdings for the first and third
quarters of each fiscal year with the SEC on Form N-Q. The Form N-Q will be
available without charge, upon request, by calling 1-877-222-2402, on the Fund's
website, at www.catholicfunds.com, and on the SEC's website, at www.sec.gov.
--------------------- -----------
You may also review and copy the Form N-Q for the Fund at the SEC's Public
Reference Room in Washington, DC. You may get information about the operation
of the Public Reference Room by calling 1-800-SEC-0330.
This report is intended for shareholders of The Catholic Funds. It is not
authorized for distribution to prospective investors unless preceded or
accompanied by a current prospectus. The Catholic Church has not sponsored or
endorsed The Catholic Funds nor approved or disapproved of the Funds as an
investment.
(CATHOLIC FINANCIAL SERVICES CORPORATION LOGO)
GIVING VOICE TO CATHOLIC VALUES
1100 West Wells Street o Milwaukee, WI 53233
1-414-278-6550
Member NASD and SIPC
The Catholic Funds are not available in all states.
ITEM 2. CODE OF ETHICS
Not required in Semi-Annual Reports on Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
Not required in Semi-Annual Reports on Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not required in Semi-Annual Reports on Form N-CSR.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to this Registrant, insofar as the Registrant is not a
"listed issuer" within the meaning of Rule 10A-3 under the Securities Exchange
Act of 1934.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments in securities of unaffiliated issuers is
provided in the Registrant's Semi-Annual Report to Shareholders dated as of
March 31, 2006 provided under Item 1 of this Report.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable to this Registrant, insofar as the Registrant is not a
closed-end management investment company.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable to this Registrant, insofar as the Registrant is not a
closed-end management investment company.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable to this Registrant, insofar as the Registrant is not a
closed-end management investment company.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Registrant has not made any material changes to the procedures by which
shareholders may recommend nominees to the registrant's board of directors since
the Registrant's Board of Directors adopted the resolution disclosed in the
Registrant's semi-annual report on Form N-CSR for the period ended March 31,
2004.
ITEM 11. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Within 90 days prior to the
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filing of this report on Form N-CSR, the Registrant's President (Principal
Executive Officer) and its Chief Financial Officer (Principal Financial Officer)
reviewed the Registrant's disclosure controls and procedures (as defined in
Rule 30a-3(c) of the Investment Company Act of 1940) and evaluated their
effectiveness. Based on their evaluation, such officers determined that the
disclosure controls and procedures adequately ensure that information required
to be disclosed by the Registrant in this report on Form N-CSR is recorded,
processed, summarized and reported within the time periods required by the
Securities and Exchange Commission's rules and forms.
(b) Change in Internal Controls. There were no changes in the
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Registrant's internal control over financial reporting (as defined in Rule 30a-
3(d) under the Investment Company Act of 1940) that occurred during the
Registrant's second fiscal quarter of the period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS
The following exhibits are attached to this Form N-CSR:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
12(a)(2)(A) Certification of Principal Executive Officer
Required by Section 302 of the Sarbanes-Oxley Act of
2002 is filed herewith
12(a)(2)(B) Certification of Principal Financial Officer
Required by Section 302 of the Sarbanes-Oxley Act of
2002 is filed herewith
12(b) Certification of Chief Executive Officer and Chief
Financial Officer Required by Section 906 of the
Sarbanes-Oxley Act of 2002 is furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on this 17th
day of May, 2006.
THE CATHOLIC FUNDS, INC.
By: /s/ Daniel J. Steininger
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Daniel J. Steininger, President
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
this 17th day of May, 2006.
By: /s/ Daniel J. Steininger
-------------------------------
Daniel J. Steininger, President
(Principal Executive Officer)
By: /s/ Allan G. Lorge
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Allan G. Lorge, Vice President,
Secretary, Chief Compliance
Officer and Chief Financial Officer
(Principal Financial Officer)