<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
LETTER TO SHAREHOLDERS
December 1, 1997
Dear Shareholder:
We are pleased to bring you our first annual report of The FBR Family of
Funds for the fiscal year ended October 31, 1997. The launch of the Funds has
been a success by any measure. We concluded the fiscal year with approximately
3,800 shareholder accounts and $75.6 million in net assets under management.
Our first fiscal year was particularly notable from the standpoint of total
return for shareholders. The inception date for our funds was the opening bell
on January 2, 1997 and all of our Funds began the year with net asset values
("NAV") of $12.00. On October 31, 1997, the FBR Financial Services Fund closed
with a NAV of $16.03 up 33.58% from inception. For the same period the Lipper
Financial Services Fund Index returned 36.71% and the total return on the S&P
500 was 25.87%. The FBR Small Cap Financial Fund closed the fiscal year with a
NAV of $17.53 representing a gain of 46.08% from inception. This compares
favorably with the Russell 2000 and the Lipper Financial Services Fund Index,
which were up 22.09% and 36.71%, respectively. Finally, the FBR Small Cap
Growth/ Value Fund had an outstanding first ten months, closing on October 31,
1997, with a NAV of $16.70 up 39.17% from inception. This is considerably ahead
of the Lipper Small Cap Fund Index, which gained 17.45% and the Russell 2000,
which was up 22.09%. As you can see, across the board we have done extremely
well on both an absolute and a relative basis.
We are blessed to have outstanding portfolio managers working on your behalf
and the annual report is a great forum for them to communicate their thoughts
directly to shareholders. In the following sections David Ellison and Chuck Akre
will outline their distinctive approaches to the investment process.
DAVID ELLISON, PORTFOLIO MANAGER - FBR FINANCIAL SERVICES FUND AND FBR SMALL CAP
FINANCIAL FUND
The past ten months have been an exciting learning experience for me. It was
exciting to start the Funds from scratch on January 2, 1997, and watch them
grow. It has been a learning experience talking to some of you about our
business and how we at FBR can do better. With your continued support I hope
there is much more growth and learning ahead for the Funds.
I have owned mutual funds for quite some time now. I still have difficulty
making sense of all the numbers and ratios presented. That may sound crazy
coming from a mutual fund manager, but I have spent the last fourteen years
looking at financial companies not mutual fund documents. I always end up
looking at what a fund owns and wonder why the manager buys those specific
companies. You can look at the fund type, such as growth or income to get some
clue, but they usually have so many different companies in them it is hard to
know anything except that it is a widely diversified mutual fund.
What you also get within the numbers is text about how the fund performed.
They use descriptive words like performance, relative and outlook, which say
very little about the investment strategies the fund follows.
<PAGE>
What I hope to do in the following paragraphs is explain some of what I have
learned about investing in the financial services business. This will hopefully
give you a better understanding of my investment process, and why the Funds own
what they own. There is nothing new or hard to understand here; no fancy numbers
or big words.
The first and most important lesson is that nothing has changed. The
financial services business is still about assets and liabilities. There are no
new paradigms here. It's about lending people money and getting it back with
interest. It's about getting people to give you money at a lower rate than which
it was lent out. It's about serving customers and keeping costs under control.
It's about management adapting to changes in the marketplace, but keeping those
changes in perspective. It's about not trying to be all things to all people. A
financial services company's assets and liabilities are people.
The second lesson: Honest accounting still counts. Is reported income real
American dollars or some accounting game? The big mistake many analysts make is
looking at just the income statement and ignoring the balance sheet and cash
flow statements. Looking at all three together usually gives you a very good
picture of the truth. All three should work together. When times are good they
should all look good and vice versa. I always get concerned when a company says
they have record earnings but need more of your money to grow. I say "what
happened to the record earnings? Don't the earnings give you enough to grow?"
Record earnings do not always mean record "cash" earnings. Eventually reported
earnings will equal cash earnings. If the analyst is only looking at earnings,
investors have no clue why earnings might be falling or negative. If a stock is
down big, they can only listen to the CNBC "Big Movers" segment for relief,
hoping to see other stocks they do not own being beaten up for similar reasons.
The third lesson: Good management is ALWAYS better. There is no substitute
for management that understands its business and can articulate it clearly.
These companies always do better because they know how to respond to changing
operating conditions. It's a lot easier to deal with tomorrow if you understand
today.
The fourth lesson: Understand what you own. This is the simplest lesson of
all, and the easiest to violate. In those cases where I have violated this
lesson I have never made money. I find this lesson the hardest because nobody
wants to be left out of a hot issue or a new way to make money. It's the instant
gratification gene in all of us.
The fifth lesson: Invest in the safest, best managed and lowest valued
earning stream you can find. The time to do well in the fund management business
is when times are tough. If you can do decently when times are tough and average
when times are good, over the long pull you have a decent record. The financial
services industry offers many low risk earnings streams. My job is to find the
best managed companies and then buy the cheapest among them.
The sixth lesson: Liabilities are the real asset in the financial services
business. Companies that have the cheapest, most stable source of liabilities
(borrowings and deposits) will be the long-term winners. It keeps them solvent
when times are bleak (like 1991), and requires less risk with the assets (loans
and investments) when times are good (like now). Almost all failures in the
financial services business happen because the company cannot secure refinancing
of liabilities. Recent examples include Jayhawk Acceptance in the U.S., and more
recently, Yamaichi Securities (I can't pronounce it either) in Japan.
The funds I run reflect these lessons. I buy easy to understand companies
that are well managed, with stable, low cost funding sources, with honest
accounting, at the lowest price to earning ratios possible. Groups within the
financial services industry that best fit this mold include banks, thrifts and
life insurance companies. It should come as no surprise that most of our
investments are in these three groups - which I expect to be the case going
forward.
2
<PAGE>
CHUCK AKRE, PORTFOLIO MANAGER - FBR SMALL CAP GROWTH/VALUE FUND
I have commented to a number of shareholders that the wind was surely at our
back this year, helping us achieve a result that in no instance should be used
to extrapolate future return expectations.
While it is easy for me to say that we have been more fortunate than
expected, it is our goal to invest in a style that we feel is likely to produce
better than "market" returns. In addition to this lofty goal, our style is such
that one can anticipate relatively low turnover rates, which should mean lower
tax consequences.
Several of you have questioned me about the phrase "Growth/Value" in our
fund's name, asking what it means. I will use the analogy of an old fashioned
milking stool, the kind that has only three legs, to explain our "Growth/ Value"
moniker. There is a dual utilitarian purpose for the three legs. The first is
for ease of construction, and our portfolio is put together in an uncomplicated
way as well. The second is for stability on uneven barn floors. Each investment
we make is made with the belief that it can withstand uncertainty, giving us
confidence that the portfolio is rock solid. Common sense dictates that our
stool won't stand when missing one of the three legs, and so it is with our
portfolio.
The first leg of the stool represents the QUALITY OF THE BUSINESS. We are
looking for companies which have earned a high return on shareholders equity for
some period of time, AND we believe are also likely to continue to earn these
attractive high returns for some time to come. Occasionally we identify a
company because it has compounded book value per share at a high rate for
several years. The bottom line purpose of this guideline is to identify
businesses, which have some inherent competitive advantage, and accordingly earn
much higher rates of return on our owners' capital than businesses in general.
The second leg of the stool represents the QUALITY OF THE MANAGEMENT TEAM
running the business. We look for managers who are owners, and who have always
acted in the best interest of ALL shareholders. This leg is the trickiest: our
experience shows us that we must follow what these managers have actually done,
rather than what it is that they have said they have done. (You know, just the
reverse of our parents' admonition: "do as I say, not as I do"). This focus on
management is important for many reasons, but two stand out. First, because we
anticipate being shareholders for a long time period, we want the confidence
that we are in very able hands. Second, believing that we have able hands
running the business, we want to be sure that all of the business value being
created is flowing through on a per share basis equally to all shareholders.
The third leg of the stool represents a company's internal REINVESTMENT
OPPORTUNITY. In the situations we focus on, an opportunity to reinvest excess
profits, at equally attractive high rates of return, often exists because of the
characteristics of the business and the skill of the management. For our capital
to compound at high rates, our businesses must be able to absorb increasing
amounts of capital and continue to put it to work at high rates.
Once we have identified these superior businesses we impose fairly strict
price disciplines, refusing to pay lofty prices for these prizes. When we have
identified the return that these individual businesses generate internally, our
ability to capture that return in our portfolio is affected, in large measure,
by our starting price. In sum, our success is determined by our ability to
identify outstanding companies, each of which has three strong legs, and making
purchases only when the price is right. Our preference is to own just a few of
these, and accordingly we are set up as a non-diversified fund. As a
non-diversified fund we can concentrate our holdings. On October 31, 1997, we
had 30 holdings with the top 10 representing close to 60% of total assets. We
stress quality, price and concentration. Our goal is simply to capture the
attractive underlying economics in each of our companies. It is no more and no
less.
The bottom line of all investing, whether it be Aunt Tillie's C.D. or Uncle
Jack's venture fund, is compound rate of return. We at the FBR Small Cap
Growth/Value Fund are striving to compound our fellow shareholder's capital at
3
<PAGE>
higher rates, while incurring low turnover, low tax liabilities, and lower risk
than the overall market. The experience of the most recent three years is likely
an anomaly, and the long-term return of 10% per year compounded is likely to
prevail. Our goal is to achieve returns modestly better than the market, while
recognizing that the vast majority of mutual fund managers fail to do as well as
the market over long periods of time. We are ambitious. Each of my immediate
family is committed, as are many FBR colleagues. Thank you for your interest in
this new fund.
IN CONCLUSION
We hope the previous portfolio manager discussions help you better
understand the substance behind our investment performance. Your support is
appreciated. We look forward to serving you and growing with you in the years
ahead. If you have any questions, please call The FBR Family of Funds toll-free
information line at 1-888-888-0025.
Sincerely,
[SIGNATURE] [SIGNATURE]
Eric F. Billings C. Eric Brugel
Chairman President
The FBR Family of Funds The FBR Family of Funds
4
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FBR FINANCIAL SERVICES FUND(1)(2) VS. VARIOUS INDICES
(UNAUDITED)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FBR FINANCIAL S&P 500 LIPPER FINANCIAL
SERVICES FUND COMPOSITE INDEX SERVICES FUND INDEX
<S> <C> <C> <C>
Jan. 3, 1997 $10,000 $10,000 $10,000
$10,292 $10,678 $10,679
Feb. 28, 1997 $10,942 $10,761 $11,133
$10,042 $10,318 $10,405
Apr. 30, 1997 $10,567 $10,934 $11,001
$11,067 $11,599 $11,586
Jun. 30, 1997 $11,842 $12,118 $12,246
$12,917 $13,081 $13,425
Aug. 31, 1997 $12,400 $12,347 $12,866
$13,417 $13,023 $13,902
Oct. 31, 1997 $13,358 $12,587 $13,671
Past performance is not predictive of future
performance.
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
FOR THE PERIOD ENDED
OCTOBER 31,
1997(2)(3)
---------------------
<S> <C>
FBR Financial Services Fund................ 33.58%
S&P 500 Composite Index.................... 25.87
Lipper Financial Services Fund Index....... 36.71
</TABLE>
- ------------------------
(1) The chart assumes a hypothetical $10,000 initial investment in the Fund and
reflects all Fund expenses. Investors should note that the Fund is a
professionally managed mutual fund while the indices are either unmanaged
and do not incur expenses and/or are not available for investment.
(2) FBR Fund Advisers, Inc. waived a portion of its advisory fee and agreed to
voluntarily reimburse a portion of the Fund's operating expenses, as
necessary, to maintain the expense limitation, as set forth in the notes to
the financial statements. Total returns shown include fee waivers and
expense reimbursements, if any; total returns would have been lower had
there been no assumption of fees and/or expenses in excess of expense
limitations. Total returns are not annualized.
(3) For the period January 3, 1997 (commencement of investment operations)
through October 31, 1997.
5
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR SMALL CAP FINANCIAL FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FBR SMALL CAP FINANCIAL FUND(1)(2) VS. VARIOUS INDICES
(UNAUDITED)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FBR SMALL CAP RUSSELL 2000 LIPPER FINANCIAL
FINANCIAL FUND INDEX SERVICES FUND INDEX
<S> <C> <C> <C>
Jan. 3, 1997 $10,000 $10,000 $10,000
$10,258 $10,301 $10,679
Feb. 28, 1997 $10,908 $10,052 $11,133
$10,658 $9,579 $10,405
Apr. 30, 1997 $10,617 $9,603 $11,001
$11,167 $10,673 $11,586
Jun. 30, 1997 $12,125 $11,127 $12,246
$12,775 $11,646 $13,425
Aug. 31, 1997 $12,883 $11,909 $12,866
$14,158 $12,778 $13,902
Oct. 31, 1997 $14,608 $12,209 $13,671
Past performance is not predictive of future
performance.
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
FOR THE PERIOD ENDED
OCTOBER 31,
1997(2)(3)
---------------------
<S> <C>
FBR Small Cap Financial Fund............... 46.08%
Russell 2000 Index......................... 22.09
Lipper Financial Services Fund Index....... 36.71
</TABLE>
- ------------------------
(1) The chart assumes a hypothetical $10,000 initial investment in the Fund and
reflects all Fund expenses. Investors should note that the Fund is a
professionally managed mutual fund while the indices are either unmanaged
and do not incur expenses and/or are not available for investment.
(2) FBR Fund Advisers, Inc. waived a portion of its advisory fee and agreed to
voluntarily reimburse a portion of the Fund's operating expenses, as
necessary, to maintain the expense limitation, as set forth in the notes to
the financial statements. Total returns shown include fee waivers and
expense reimbursements, if any; total returns would have been lower had
there been no assumption of fees and/or expenses in excess of expense
limitations. Total returns are not annualized.
(3) For the period January 3, 1997 (commencement of investment operations)
through October 31, 1997.
6
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR SMALL CAP GROWTH/VALUE FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FBR SMALL CAP GROWTH/VALUE FUND(1)(2) VS. VARIOUS INDICES
(UNAUDITED)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FBR SMALL CAP RUSSELL 2000 LIPPER SMALL
GROWTH/VALUE FUND INDEX CAP FUND INDEX
<S> <C> <C> <C>
Jan. 3, 1997 $10,000 $10,000 $10,000
$10,192 $10,301 $10,352
Feb. 28, 1997 $9,925 $10,052 $9,759
$9,883 $9,579 $9,168
Apr. 30, 1997 $9,750 $9,603 $9,091
$11,083 $10,673 $10,229
Jun. 30, 1997 $11,333 $11,127 $10,732
$12,675 $11,646 $11,351
Aug. 31, 1997 $13,042 $11,909 $11,481
$13,917 $12,778 $12,369
Oct. 31, 1997 $13,917 $12,209 $11,745
Past performance is not predictive of future
performance.
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
FOR THE PERIOD ENDED
OCTOBER 31,
1997(2)(3)
---------------------
<S> <C>
FBR Small Cap Growth/Value Fund............ 39.17%
Russell 2000 Index......................... 22.09
Lipper Small Cap Fund Index................ 17.45
</TABLE>
- ------------------------
(1) The chart assumes a hypothetical $10,000 initial investment in the Fund and
reflects all Fund expenses. Investors should note that the Fund is a
professionally managed mutual fund while the indices are either unmanaged
and do not incur expenses and/or are not available for investment.
(2) FBR Fund Advisers, Inc. waived a portion of its advisory fee and agreed to
voluntarily reimburse a portion of the Fund's operating expenses, as
necessary, to maintain the expense limitation, as set forth in the notes to
the financial statements. Total returns shown include fee waivers and
expense reimbursements, if any; total returns would have been lower had
there been no assumption of fees and/or expenses in excess of expense
limitations. Total returns are not annualized.
(3) For the period January 3, 1997 (commencement of investment operations)
through October 31, 1997.
7
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 95.5%
BANKS - COMMERCIAL -- 14.6%
5,000 GBC Bancorp.............. $ 270,000
5,000 Imperial Bancorp*........ 218,125
14,500 North Fork
Bancorporation, Inc.... 426,844
8,600 Providian Financial
Corporation............ 318,200
9,400 Regions Financial
Corporation............ 345,450
5,503 Summit Bancorp........... 234,909
4,700 TCF Financial
Corporation............ 267,313
5,000 Union Planters Corp...... 296,562
3,200 UnionBanCal Corp......... 292,800
7,200 United Bankshares,
Inc.**................. 323,100
8,400 Webster Financial
Corporation............ 517,650
-----------
3,510,953
-----------
BANKS - MONEY CENTER -- 10.0%
5,100 Bank of New York Co.,
Inc. (The)............. 240,019
5,100 BankAmerica Corp......... 364,650
6,000 BankBoston Corp.......... 486,375
1,000 Bankers Trust New York
Corporation............ 118,000
4,300 Chase Manhattan Corp..... 496,112
1,900 Citicorp................. 237,619
6,200 First Chicago NBD
Corporation............ 451,050
-----------
2,393,825
-----------
BANKS - SUPER REGIONAL -- 18.7%
4,700 Comerica, Inc............ 371,594
4,000 CoreStates Financial
Corp................... 291,000
11,300 First Union Corp......... 554,406
8,200 Fleet Financial Group,
Inc.................... 527,362
8,300 KeyCorp.................. 507,856
5,800 Mellon Bank Corp......... 299,062
8,900 NationsBank Corp......... 532,887
10,400 Norwest Corp............. 333,450
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
BANKS - SUPER REGIONAL (CONTINUED)
8,100 PNC Bank Corp............ $ 384,750
2,900 U.S. Bancorp............. 294,894
1,300 Wells Fargo & Co.**...... 378,787
-----------
4,476,048
-----------
FINANCIAL SERVICES -- 11.2%
3,500 Associates First Capital
Corp................... 222,687
4,000 Beneficial Corporation... 306,750
5,400 CMAC Investment
Corp.**................ 295,312
6,900 Fannie Mae............... 334,219
4,600 Lehman Brothers Holdings,
Inc.................... 216,487
5,100 Morgan Stanley, Dean
Witter, Discover and
Co..................... 249,900
5,800 PMI Group, Inc.
(The)**................ 350,538
3,300 SLM Holding
Corporation............ 463,237
5,000 Student Loan
Corporation............ 245,938
-----------
2,685,068
-----------
INSURANCE - LIFE/HEALTH -- 5.0%
5,900 American General
Corporation............ 300,900
9,600 AmerUs Life Holdings,
Inc., Class A.......... 298,200
5,000 Hartford Life, Inc.,
Class A**.............. 184,688
3,100 Jefferson-Pilot Corp..... 239,669
6,000 Nationwide Financial
Services, Inc., Class
A...................... 182,625
-----------
1,206,082
-----------
INSURANCE - MULTI-LINE -- 3.6%
9,900 Allmerica Financial
Corporation............ 464,063
1,200 CIGNA Corporation........ 186,300
2,500 Hartford Financial
Services Group Inc.
(The).................. 202,500
-----------
852,863
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
INSURANCE - PROPERTY/CASUALTY -- 0.7%
4,000 NAC Re Corp.**........... $ 178,000
-----------
REAL ESTATE INVESTMENT TRUST -- 3.3%
7,700 Equity Office Properties
Trust**................ 235,331
5,000 Equity Residential
Properties Trust....... 252,500
5,000 Starwood Lodging
Trust**................ 299,063
-----------
786,894
-----------
SAVINGS & LOANS - SAVINGS BANKS --
28.4%
10,200 ALBANK Financial
Corporation............ 471,750
10,200 Astoria Financial
Corp................... 532,950
14,200 BostonFed Bancorp,
Inc.................... 291,100
8,950 Charter One Financial,
Inc.................... 520,219
9,900 Commercial Federal
Corp.**................ 480,150
13,800 Dime Bancorp, Inc........ 331,200
15,435 Downey Financial Corp.... 405,169
15,000 FirstFed Financial
Corp.*................. 525,000
8,800 Golden State Bancorp
Inc.*.................. 292,600
6,100 Golden West Financial
Corp................... 529,175
5,300 GreenPoint Financial
Corp................... 341,188
6,300 H. F. Ahmanson &
Company................ 371,700
6,000 Long Island Bancorp,
Inc.................... 267,000
7,000 Ocean Financial Corp..... 262,500
6,600 Peoples Heritage
Financial Group,
Inc.................... 259,875
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
SAVINGS & LOANS - SAVINGS
BANKS (CONTINUED)
15,600 Washington Federal,
Inc.................... $ 460,200
6,920 Washington Mutual,
Inc.................... 473,588
-----------
6,815,364
-----------
Total Common Stocks
(Cost $19,950,868)..... 22,905,097
-----------
<CAPTION>
PRINCIPAL
AMOUNT
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT -- 8.1%
REPURCHASE AGREEMENT -- 8.1%
1,941,507 Bear, Stearns & Co. Inc.
(Agreement dated
10/31/97 to be
repurchased at
$1,942,397.) 5.55%,
11/03/97(Note 6)
(Cost $1,941,507)...... 1,941,507
-----------
Total Investments --
103.6%
(Cost $21,892,375)..... 24,846,604
Liabilities in Excess
of Other Assets --
(3.6)%................. (861,176)
-----------
Net Assets -- 100.0%..... $23,985,428
-----------
-----------
</TABLE>
- ------------------
* Non-income producing.
** Security or a portion thereof is out on loan.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR SMALL CAP FINANCIAL FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 89.4%
BANKS - COMMERCIAL -- 5.7%
14,500 Capital Corp of the
West*/**............... $ 203,000
8,600 Columbia Bancorp**....... 251,550
22,500 Granite State Bankshares,
Inc.**................. 568,125
21,000 North County Bancorp*.... 279,562
11,000 SierraWest Bancorp....... 302,500
4,700 Webster Financial
Corporation............ 289,638
18,000 Western Bancorp.......... 573,750
-----------
2,468,125
-----------
FINANCIAL SERVICES -- 1.7%
12,500 First Sierra Financial,
Inc.*.................. 246,875
38,500 Long Beach Financial
Corporation*........... 481,250
-----------
728,125
-----------
INSURANCE - LIFE/HEALTH -- 0.6%
9,000 AmerUs Life Holdings,
Inc., Class A**........ 279,562
-----------
INSURANCE - MULTI-LINE -- 0.7%
17,000 Summit Holding Southeast
Inc.*.................. 306,000
-----------
SAVINGS & LOANS - SAVINGS BANKS -
CENTRAL -- 17.9%
10,000 Alliance Bancorp......... 260,000
11,500 Calumet Bancorp, Inc.*... 580,750
15,000 Camco Financial
Corporation............ 341,250
19,500 Cameron Financial
Corporation............ 372,937
13,900 Coastal Bancorp, Inc..... 390,938
16,500 D&N Financial
Corporation............ 414,563
23,000 Delphos Citizens Bancorp,
Inc.*.................. 408,250
25,600 Flagstar Bancorp,
Inc.**................. 483,200
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
SAVINGS & LOANS - SAVINGS BANKS -
CENTRAL (CONTINUED)
24,500 Hallmark Capital
Corp.*................. $ 716,625
22,000 Hemlock Federal Financial
Corporation............ 374,000
14,500 Industrial Bancorp,
Inc.................... 253,750
30,500 Logansport Financial
Corp.**................ 468,938
15,000 MAF Bancorp, Inc......... 481,875
13,200 Marion Capital
Holdings............... 353,100
13,000 Mississippi View Holding
Company**.............. 229,125
38,800 North Central Bancshares,
Inc.................... 703,250
15,600 Peoples Bancorp**........ 544,050
10,800 QCF Bancorp, Inc.*/**.... 291,600
5,500 Wells Financial Corp..... 101,750
-----------
7,769,951
-----------
SAVINGS & LOANS - SAVINGS BANKS -
EAST -- 45.8%
14,300 Abington Bancorp, Inc.... 507,650
11,225 Affiliated Community
Bancorp, Inc........... 328,331
11,700 ALBANK Financial
Corporation............ 541,125
17,000 Andover Bancorp, Inc..... 624,750
52,000 Bayonne Bancshares,
Inc.................... 663,000
16,100 BostonFed Bancorp,
Inc.................... 330,050
28,000 Catskill Financial
Corporation............ 497,000
14,500 Commonwealth Bancorp,
Inc.................... 264,625
18,200 Dime Community Bancorp,
Inc.................... 384,475
13,600 Dime Financial
Corporation............ 414,800
9,000 Eagle Financial Corp..... 452,250
22,500 Emerald Isle Bancorp
Inc.................... 714,375
19,400 First Bell Bancorp,
Inc.................... 339,500
5,600 First Federal Savings &
Loan Association of
East Hartford.......... 197,050
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR SMALL CAP FINANCIAL FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
SAVINGS & LOANS - SAVINGS BANKS -
EAST (CONTINUED)
18,400 First Keystone Financial,
Inc.................... $ 552,000
22,200 First Shenango Bancorp,
Inc.................... 754,800
23,900 FIRSTFED AMERICA BANCORP,
INC.*.................. 489,950
10,800 GA Financial, Inc........ 210,600
8,000 Harris Financial, Inc.... 456,000
13,700 Haven Bancorp, Inc....... 585,675
1,000 KSB Bancorp, Inc.**...... 14,375
8,000 Leeds Federal Savings
Bank................... 252,000
9,933 MASSBANK Corp............ 429,602
22,500 Mechanics Savings
Bank*.................. 570,937
15,900 Medford Savings Bank..... 568,425
22,500 MSB Bancorp, Inc......... 630,000
16,500 Northwest Savings Bank... 495,000
14,000 Ocean Financial Corp..... 525,000
26,000 Pamrapo Bancorp, Inc..... 643,500
29,625 Parkvale Financial
Corporation............ 833,203
14,500 PennFed Financial
Services, Inc.......... 435,000
24,800 PennFirst Bancorp,
Inc.................... 455,700
3,000 Peoples Bank**........... 98,250
5,000 Peoples Bancorp Inc...... 180,000
7,400 Progressive Bank, Inc.... 256,225
26,500 Pulse Bancorp, Inc....... 662,500
5,800 Reliance Bancorp, Inc.... 187,050
25,000 Roslyn Bancorp, Inc.**... 534,375
15,800 SIS Bancorp, Inc......... 539,175
14,700 Skaneateles Bancorp,
Inc.................... 455,700
40,900 Statewide Financial
Corporation............ 879,350
8,000 TR Financial Corp........ 262,000
8,200 WSFS Financial
Corporation*........... 147,600
15,800 WVS Financial Corp....... 505,600
-----------
19,868,573
-----------
<CAPTION>
- ---------------------------------------------------
SHARES VALUE
- ---------------------------------------------------
<C> <S> <C>
SAVINGS & LOANS - SAVINGS BANKS -
SOUTH -- 7.0%
6,000 Fidelity Bankshares,
Inc.................... $ 169,500
13,500 First Federal Bancshares
of Arkansas, Inc....... 290,250
8,000 First Palm Beach
Bancorp................ 308,000
8,500 First Savings Bancorp,
Inc.................... 197,625
8,000 GS Financial Corp........ 139,000
23,000 HCB Bancshares, Inc...... 320,563
7,500 ISB Financial
Corporation............ 184,688
33,900 Jacksonville Bancorp,
Inc.................... 627,150
30,400 Texarkana First Financial
Corporation............ 792,300
-----------
3,029,076
-----------
SAVINGS & LOANS - SAVINGS BANKS -
WEST -- 10.0%
6,000 Bay View Capital
Corporation**.......... 183,000
26,000 First Colorado Bancorp,
Inc.**................. 529,750
4,000 First Savings Bank of
Washington Bancorp,
Inc.................... 95,000
24,200 FirstFed Financial
Corporation*........... 847,000
27,500 ITLA Capital
Corporation*/**........ 550,000
13,400 Klamath First Bancorp.... 299,825
46,000 Oregon Trail Financial
Corp.*................. 741,750
47,700 Pacific Crest Capital,
Inc.*.................. 787,050
14,750 Quaker City Bancorp,
Inc.*.................. 302,375
-----------
4,335,750
-----------
Total Common Stocks
(Cost $34,485,676)..... 38,785,162
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR SMALL CAP FINANCIAL FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT -- 16.2%
REPURCHASE AGREEMENT -- 16.2%
6,996,173 Bear, Stearns & Co. Inc.
(Agreement dated
10/31/97 to be
repurchased at
$6,999,380.) 5.55%,
11/03/97 (Note 6)
(Cost $6,996,173)...... $ 6,996,173
-----------
Total Investments --
105.6%
(Cost $41,481,849)..... 45,781,335
Liabilities in Excess
of Other Assets --
(5.6)%................. (2,419,497)
-----------
Net Assets -- 100.0%..... $43,361,838
-----------
-----------
</TABLE>
- ------------------
* Non-income producing.
** Security or a portion thereof is out on loan.
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR SMALL CAP GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------
SHARES VALUE
- ----------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 96.4%
BUSINESS SERVICES -- 15.0%
1,650 Air Express International
Corporation............ $ 50,531
1,800 BARRA, Inc.*............. 46,350
2,200 Catalina Marketing
Corporation*........... 100,512
5,000 Duff & Phelps Credit
Rating Company......... 188,750
4,000 Fair, Isaac and Company,
Incorporated........... 173,750
15,000 Jackson Hewitt, Inc.*.... 678,750
----------
1,238,643
----------
COMPUTER - SERVICES -- 9.7%
26,000 New Horizons Worldwide
Inc.*.................. 377,000
40,000 Video Lottery
Technologies, Inc.*.... 425,000
----------
802,000
----------
CONSUMER SERVICES -- 1.3%
4,322 PCA International,
Inc.................... 105,889
----------
DIRECT MARKETING -- 2.3%
25,000 Audio Book Club,
Inc.*/**............... 190,625
----------
ELECTRONICS -- 1.5%
5,000 Fluke Corporation........ 120,313
----------
FINANCE - SPECIALTY -- 2.0%
3,000 Charles Schwab
Corporation (The)...... 102,375
1,000 Jefferies Group, Inc..... 66,250
----------
168,625
----------
GAMING -- 7.7%
10,000 Colonial Downs Holdings,
Inc., Class A*......... 65,000
<CAPTION>
- ----------------------------------------------------
SHARES VALUE
- ----------------------------------------------------
<C> <S> <C>
GAMING (CONTINUED)
35,800 Penn National Gaming,
Inc.*.................. $ 575,037
----------
640,037
----------
HOLDING COMPANY -- 1.4%
80 Berkshire Hathaway, Inc.,
Class B*............... 117,520
----------
INSURANCE - LIFE -- 6.7%
10,000 Life Re Corporation...... 551,250
----------
INSURANCE - MULTI-LINE -- 2.3%
30,000 PICO Holdings,
Inc.*/**............... 187,500
----------
INSURANCE - PROPERTY/CASUALTY -- 7.0%
3,800 Markel Corporation*...... 583,063
----------
MANUFACTURING - SPECIALTY -- 10.2%
1,000 Action Performance
Companies, Inc.*....... 25,625
15,000 II-VI, Incorporated*..... 388,594
4,200 Kaydon Corporation....... 127,575
10,000 Oshkosh B'Gosh, Inc.,
Class A**.............. 305,000
----------
846,794
----------
MOTOR SPORTS -- 15.6%
20,000 Dover Downs
Entertainment, Inc..... 395,000
30,000 Grand Prix Association of
Long Beach, Inc.*...... 446,250
21,000 International Speedway
Corporation, Class
B**.................... 441,000
275 Penske Motorsports,
Inc.*.................. 8,147
----------
1,290,397
----------
MOVIES & ENTERTAINMENT -- 5.5%
14,000 Carmike Cinemas, Inc.,
Class A*............... 455,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR SMALL CAP GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------
SHARES VALUE
- ----------------------------------------------------
<C> <S> <C>
POWER PRODUCERS -- 0.7%
1,400 AES Corporation*......... $ 55,475
----------
RESTAURANTS -- 4.2%
15,000 Lone Star Steakhouse &
Saloon, Inc.*.......... 346,875
----------
TECHNOLOGY -- 3.3%
5,000 ATMI Inc.*............... 134,375
10,000 Lo-Jack Corporation*..... 138,750
----------
273,125
----------
Total Common Stocks
(Cost $6,918,865)...... 7,973,131
----------
<CAPTION>
NUMBER OF
CONTRACTS
- -------------
<C> <S> <C>
CALL OPTIONS PURCHASED -- 2.2%
BANKS - SUPER REGIONAL -- 1.6%
20 NationsBank, Corp.,
Expiring 01/16/98 @
$57.50*................ 10,500
40 Wells Fargo & Co.,
Expiring 01/15/99 @
$320.00*............... 115,500
----------
126,000
----------
RADIO BROADCASTING -- 0.6%
50 American Radio Systems
Corporation,
Expiring 04/17/98 @
$40.00*................ 51,875
----------
Total Call Options
Purchased
(Cost $155,518)........ 177,875
----------
<CAPTION>
- ----------------------------------------------------
SHARES VALUE
- ----------------------------------------------------
<C> <S> <C>
WARRANTS -- 0.3%
BANKS - MONEY CENTER -- 0.3%
200 Bank of New York Co.,
Inc. (The), Expiring
11/29/98 @ $15.50*/**
(Cost $20,170)......... $ 25,550
----------
<CAPTION>
PRINCIPAL
AMOUNT
- -------------
<C> <S> <C>
SHORT-TERM INVESTMENT -- 1.1%
REPURCHASE AGREEMENT -- 1.1%
94,377 Bear, Stearns & Co. Inc.
(Agreement dated
10/31/97 to be
repurchased at
$94,420.) 5.55%,
11/03/97 (Note 6) (Cost
$94,377)............... 94,377
----------
Total Investments --
100.0%
(Cost $7,188,930)...... 8,270,933
Liabilities in Excess
of Other Assets --
(0.0)%................. (2,415)
----------
Net Assets -- 100.0%..... $8,268,518
----------
----------
</TABLE>
- ------------------
* Non-income producing.
** Security or a portion thereof is out on loan.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
<TABLE>
<CAPTION>
FBR
FBR SMALL CAP FBR
FINANCIAL FINANCIAL SMALL CAP
SERVICES FUND FUND GROWTH/VALUE FUND
------------- ------------- ------------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost -- $21,892,375, $41,481,849, $7,188,930,
respectively)........................................................ $ 24,846,604 $45,781,335 $ 8,270,933
Collateral received for securities loaned............................. 1,402,883 1,516,381 424,292
Receivable for Fund shares sold....................................... 39,493 566,388 3,700
Receivable from investment adviser.................................... 12,872 3,004 --
Receivable for investments sold....................................... -- 319,002 --
Dividends and interest receivable..................................... 28,267 46,201 3,026
Deferred organization costs and other assets.......................... 68,845 68,656 67,500
------------- ------------- ------------------
Total assets........................................................ 26,398,964 48,300,967 8,769,451
------------- ------------- ------------------
LIABILITIES
Payable upon return of securities loaned.............................. 1,402,883 1,516,381 424,292
Payable for Fund shares redeemed...................................... 146,080 286,738 --
Payable for investments purchased..................................... 749,095 3,017,534 --
Distribution fee payable.............................................. 5,107 6,985 1,728
Organization costs payable............................................ 24,942 24,942 24,941
Accrued expenses and other liabilities................................ 85,429 86,549 49,972
------------- ------------- ------------------
Total liabilities................................................... 2,413,536 4,939,129 500,933
------------- ------------- ------------------
NET ASSETS
Capital stock (unlimited number of shares authorized,
with no par value)................................................... 20,682,928 38,538,110 6,937,073
Undistributed net investment income................................... 57,764 55,672 --
Accumulated net realized gain from investments and
options transactions, if any......................................... 290,507 468,570 249,442
Net unrealized appreciation on investments and
options transactions, if any......................................... 2,954,229 4,299,486 1,082,003
------------- ------------- ------------------
Net assets applicable to shares outstanding......................... $ 23,985,428 $43,361,838 $ 8,268,518
------------- ------------- ------------------
------------- ------------- ------------------
Net assets............................................................ $ 23,985,428 $43,361,838 $ 8,268,518
------------- ------------- ------------------
Shares outstanding.................................................... 1,495,976 2,473,976 495,069
------------- ------------- ------------------
Net asset value, offering and redemption price per share.............. $16.03 $17.53 $16.70
------------- ------------- ------------------
------------- ------------- ------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 3, 1997* THROUGH OCTOBER 31, 1997
<TABLE>
<CAPTION>
FBR FBR
FINANCIAL SMALL CAP FBR
SERVICES FINANCIAL SMALL CAP
FUND FUND GROWTH/VALUE FUND
------------ ------------- ------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends............................................................. $ 187,234 $ 147,501 $ 8,756
Interest.............................................................. 38,629 67,990 15,330
------------ ------------- ------------------
225,863 215,491 24,086
------------ ------------- ------------------
EXPENSES
Advisory fees......................................................... 91,690 87,174 25,311
Administration and accounting fees.................................... 22,603 22,747 10,016
Distribution fees..................................................... 25,470 24,215 7,031
Federal and state registration fees................................... 22,845 28,082 17,681
Transfer agent fees and expenses...................................... 34,818 19,976 14,750
Amortization of organization expenses................................. 10,045 10,045 10,044
Trustees' fees and expenses........................................... 13,563 13,563 13,563
Custodian fees and expenses........................................... 16,190 20,111 7,778
Printing.............................................................. 11,900 11,955 11,900
Audit and legal fees.................................................. 51,550 45,150 25,400
Insurance expenses.................................................... 9,517 13,183 8,842
Other................................................................. 2,250 1,999 1,999
------------ ------------- ------------------
Total expenses before waivers and related reimbursements............ 312,441 298,200 154,315
Less: waivers and related reimbursements............................ (144,342) (138,381) (107,911)
------------ ------------- ------------------
Total expenses after waivers and related reimbursements............. 168,099 159,819 46,404
------------ ------------- ------------------
Net investment income/(loss).......................................... 57,764 55,672 (22,318)
------------ ------------- ------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND OPTIONS TRANSACTIONS
Net realized gain from:
Investments......................................................... 290,507 468,570 177,875
Options transactions................................................ -- -- 93,885
Net change in unrealized appreciation on:
Investments......................................................... 2,954,229 4,299,486 1,059,645
Options transactions................................................ -- -- 22,358
------------ ------------- ------------------
Net realized and unrealized gain on investments and
options transactions................................................. 3,244,736 4,768,056 1,353,763
------------ ------------- ------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................... $3,302,500 $ 4,823,728 $ 1,331,445
------------ ------------- ------------------
------------ ------------- ------------------
</TABLE>
- ------------------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JANUARY 3, 1997* THROUGH OCTOBER 31, 1997
<TABLE>
<CAPTION>
FBR
FBR SMALL CAP FBR
FINANCIAL FINANCIAL SMALL CAP
SERVICES FUND FUND GROWTH/VALUE FUND
------------- ------------- ------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS
Net investment income/(loss).......................................... $ 57,764 $ 55,672 $ (22,318)
Net realized gain from investments and
options transactions, if any......................................... 290,507 468,570 271,760
Net change in unrealized appreciation on investments and
options transactions, if any......................................... 2,954,229 4,299,486 1,082,003
------------- ------------- ------------------
Net increase in net assets resulting from operations.................. 3,302,500 4,823,728 1,331,445
------------- ------------- ------------------
Increase in net assets derived from capital share transactions.......... 20,649,595 38,504,777 6,903,739
------------- ------------- ------------------
Total increase in net assets........................................ 23,952,095 43,328,505 8,235,184
NET ASSETS
Beginning of period................................................... 33,333 33,333 33,334
------------- ------------- ------------------
End of period (includes undistributed net investment income of
$57,764, $55,672 and $0, respectively)............................... $ 23,985,428 $43,361,838 $ 8,268,518
------------- ------------- ------------------
------------- ------------- ------------------
</TABLE>
- ------------------
* Commencement of investment operations.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 3, 1997* THROUGH OCTOBER 31, 1997
- --------------------------------------------------------------------------------
Contained below is per share operating performance data for each share
outstanding, total investment return, ratios to average net assets and other
supplemental data for the period. This information has been derived from
information provided in the financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FBR FBR FBR
FINANCIAL SMALL CAP SMALL CAP
SERVICES FUND FINANCIAL FUND GROWTH/VALUE FUND
------------- -------------- -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period.............................. $12.00 $12.00 $12.00
------------- ------- -------
Net investment income/(loss)(1)................................... 0.04 0.02 (0.05)
Net realized and unrealized gain on investments and
options transactions, if any(2).................................. 3.99 5.51 4.75
------------- ------- -------
Net increase in net assets resulting from operations.............. 4.03 5.53 4.70
------------- ------- -------
Net asset value, end of period.................................... $16.03 $17.53 $16.70
------------- ------- -------
------------- ------- -------
Total investment return(3)........................................ 33.58% 46.08% 39.17%
------------- ------- -------
------------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)......................... $23,985 $43,362 $8,269
Ratio of expenses to average net assets(1)(5)..................... 1.65% 1.65% 1.65%
Ratio of net investment income/(loss) to average net
assets(1)(5)..................................................... 0.57% 0.57% (0.79)%
Increase/(Decrease) reflected in above expense ratios and net
investment income/(loss) due to waivers and related
reimbursements(5)................................................ 1.42% 1.43% 3.84%
Portfolio turnover rate........................................... 49.68% 35.41% 42.59%
Average commission rate per share(4).............................. $0.0571 $0.0524 $0.0488
</TABLE>
- ------------------
* Commencement of investment operations.
** Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
actual shares outstanding on the dates of distributions.
(1) Reflects waivers and related reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accordance with the changes in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of Fund
shares in relation to fluctuating net asset value during the period.
(3) Total investment return is calculated assuming a purchase of shares on the
first day and a sale of shares on the last day of the period reported and
will include reinvestments of dividends and distributions, if any. Total
investment return is not annualized.
(4) Computed by dividing the total amount of commissions paid by the total
shares of investment securities purchased and sold during the period for
which commissions were charged, as required by the Securities and Exchange
Commission.
(5) Annualized.
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The FBR Family of Funds (the "Trust") is an open-end management investment
company organized under the laws of the State of Delaware on April 30, 1996. The
Trust currently consists of four series which represent interests in one of the
following investment portfolios: FBR Financial Services Fund ("Financial
Services Fund"), FBR Small Cap Financial Fund ("Small Cap Financial Fund"), FBR
Small Cap Growth/Value Fund ("Growth/Value Fund") (collectively, the "Funds")
and FBR Information Technologies Fund. Financial Services Fund and Small Cap
Financial Fund are diversified portfolios and Growth/Value Fund and FBR
Information Technologies Fund are non-diversified portfolios. Each Fund has an
unlimited number of shares authorized with no par value. Financial Services
Fund, Small Cap Financial Fund and Growth/Value Fund commenced investment
operations on January 3, 1997. Currently, shares of the FBR Information
Technologies Fund are not being offered.
ORGANIZATIONAL MATTERS -- Prior to commencing investment operations on January
3, 1997, the Funds did not have any transactions other than those relating to
organizational matters and the sale of 2,777, 2,778, 2,778 shares of beneficial
interest of Financial Services Fund, Small Cap Financial Fund and Growth/Value
Fund, respectively, to Friedman, Billings, Ramsey & Co., Inc. ("FBR" or the
"Distributor") on December 16, 1996. Costs of approximately $60,727, $60,727 and
$60,726 which were incurred by Financial Services Fund, Small Cap Financial Fund
and Growth/Value Fund, respectively, in connection with the organization,
including fees and expenses incurred to register and qualify the Funds' shares
for distribution under Federal securities regulations, have been deferred and
are being amortized using the straight-line method over the period of benefit
not exceeding sixty months, beginning with the commencement of investment
operations of each Fund. In the event that the Distributor or any transferee of
the Distributor redeems any of its original shares in any of the Funds prior to
the end of the sixty month period, the proceeds of the redemption payable in
respect of such shares shall be reduced by the pro rata share (based on the
proportionate share of the original shares redeemed to the total number of
original shares outstanding at the time of the redemption) of the unamortized
deferred organization expenses as of the date of such redemption. In the event
that any of the Funds are liquidated prior to the end of the sixty month period,
the Distributor or the transferee of the Distributor shall bear the unamortized
deferred organization expenses.
MANAGEMENT ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
certain estimates and assumptions that may affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
PORTFOLIO VALUATION -- The net asset value of each Fund is determined as of 4:15
p.m., New York time, on each business day. Each Fund's securities are valued at
the last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is
19
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
used when no asked price is available. Short-term investments are carried at
amortized cost, which approximates value. Any securities or other assets (of
which there were none as of October 31, 1997) for which recent market quotations
are not readily available are valued at fair value as determined in good faith
by the Funds' Board of Trustees. Restricted securities, as well as securities or
other assets for which market quotations are not readily available, or are not
valued by a pricing service approved by the Board of Trustees, are valued at
fair value in good faith by the Board of Trustees. The Board of Trustees will
review the method of valuations on a current basis. Expenses and fees, including
the investment advisory fee and distribution fee, are accrued daily and taken
into account for the purpose of determining the net asset value of each Fund's
shares.
OPTIONS -- Each Fund may buy and sell call and put options to hedge against
changes in net asset value or to attempt to realize a greater current return.
The risk associated with purchasing an option is that a Fund pays a premium
whether or not the option is exercised. Additionally, a Fund bears the risk of
loss of premium and change in market value should the counterparty not perform
under the contract. Put and call options purchased are accounted for in the same
manner as portfolio securities. The cost of securities acquired through the
exercise of call options is increased by the premiums paid. The proceeds from
securities sold through the exercise of put options are decreased by the
premiums paid. Financial Services Fund and Small Cap Financial Fund did not
engage in options transactions during the period January 3, 1997 (commencement
of investment operations) through October 31, 1997.
<TABLE>
<CAPTION>
CALL OPTIONS
--------------------------
GROWTH/VALUE FUND CONTRACTS PREMIUMS
- --------------------------------------------- ------------- -----------
<S> <C> <C>
Outstanding, at beginning of period.......... -- --
Options purchased............................ 230 $205,253
Options sold................................. (120) (49,735)
------------- -----------
Outstanding, at end of period................ 110 $155,518
------------- -----------
------------- -----------
</TABLE>
REPURCHASE AGREEMENTS -- Each Fund has agreed to purchase securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed-upon time and price ("repurchase agreement"). The financial
institutions with whom each Fund enters into repurchase agreements are banks and
broker/dealers which FBR Fund Advisers, Inc. (the "Adviser") considers
creditworthy pursuant to criteria approved by the Trust's Board of Trustees. The
seller under a repurchase agreement will be required to maintain the value of
the securities as collateral, subject to the agreement at not less than the
repurchase price plus accrued interest. The Adviser marks to market daily the
value of the collateral, and, if necessary, requires the seller to maintain
additional securities, to ensure that the value is not less than the repurchase
price. Default by or bankruptcy of the seller would, however, expose each Fund
to possible loss because of adverse market action or delays in connection with
the disposition of the underlying securities.
20
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME -- Transactions are accounted for
on the trade date (the day in which the order to buy or sell is executed). The
cost of investments sold is determined by use of the specific identification
method for both financial reporting and income tax purposes in determining
realized gains and losses on investments. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. Expenses not
directly attributable to a specific Fund are allocated based on relative net
assets of each Fund.
DIVIDENDS AND DISTRIBUTIONS -- Dividends from net investment income, if any,
will be declared and paid at least annually to shareholders. Distributions from
net realized capital gains, if any, will be distributed at least annually.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gain distributions are determined in accordance with
U.S. federal income tax regulations which may differ from generally accepted
accounting principles.
At October 31, 1997, the Growth/Value Fund reclassified $22,318 of net
investment loss to accumulated net realized gain from investments and options
transactions.
U.S. FEDERAL TAX STATUS -- No provision is made for U.S. federal income taxes as
it is each Fund's intention to qualify for and elect the tax treatment
applicable to regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended, and make the requisite distributions to its
shareholders which will be sufficient to relieve it from U.S. federal income and
excise taxes.
2. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
FBR Fund Advisers, Inc. serves as each Fund's investment adviser. For its
advisory services, the Adviser is entitled to receive from the Funds a monthly
fee equal to an annual rate of 0.90% of each Fund's average daily net assets,
computed daily and paid monthly.
The Adviser has voluntarily undertaken to limit each Fund's total operating
expenses (exclusive of brokerage commissions, taxes, interest and extraordinary
items) to the extent that such expenses exceed 1.65% of each Fund's average
daily net assets. As necessary, this limitation is effected by waivers by the
Adviser of its advisory fees and reimbursements of expenses exceeding the
advisory fee. For the period January 3, 1997 (commencement of investment
operations) through October 31, 1997, investment advisory fees, waivers and
reimbursements of expenses were as follows:
<TABLE>
<CAPTION>
GROSS NET
ADVISORY ADVISORY ADVISORY EXPENSE
FUND FEES FEE WAIVERS FEES REIMBURSEMENTS
- ----------------------------------------------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Financial Services Fund........................ $ 91,690 $ (85,021) $ 6,669 $ 59,321
Small Cap Financial Fund....................... 87,174 (79,894) 7,280 58,487
Growth/Value Fund.............................. 25,311 (25,311) -- 82,600
</TABLE>
21
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Funds will not pay the Adviser at a later time for any amounts it may waive
nor will the Funds reimburse the Adviser for any amounts it may assume.
The Trust, on behalf of each of the Funds, has entered into a Distribution Plan
(the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended. Under the Plan in effect for the period January 3, 1997 (commencement
of investment operations) through October 31, 1997, each Fund paid the
Distributor a fee at an annual rate of 0.25% of each Fund's average daily net
assets and are accrued daily and paid quarterly. For the period January 3, 1997
(commencement of investment operations) through October 31, 1997, the fees paid
to the Distributor under the Plan are payable without regard to actual expenses
incurred. The Distributor earned $25,470, $24,215 and $7,031 for Financial
Services Fund, Small Cap Financial Fund and Growth/Value Fund, respectively, in
distribution fees. The Distributor uses these fees to pay its dealers whose
clients hold Fund shares and for other distribution-related activities.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as administrator for each of the Funds. For
providing administrative services BSFM is entitled to receive a monthly fee from
each Fund equal to an annual rate of 0.075% on the first $250 million of each
Fund's average daily net assets and 0.050% of each Fund's average daily net
assets in excess of $250 million, subject to a minimum annual fee of $75,000.
For the period January 3, 1997 (commencement of investment operations) through
October 31, 1997, BSFM has waived its minimum annual fee requirement. The Funds
will not pay BSFM at a later time for any amounts it may waive.
PFPC Inc. ("PFPC"), provides certain administration and accounting services to
the Funds. For providing these services, PFPC is entitled to receive a monthly
fee equal to an annual rate of 0.075% on the first $1 billion of each Fund's
average daily net assets, and 0.050% of each Fund's average daily net assets
over $1 billion, subject to a minimum annual fee of $75,000. For the period
January 3, 1997 (commencement of investment operations) through October 31,
1997, PFPC, at its discretion, voluntarily agreed to waive a portion of its fees
for each of the Funds. PFPC also acts as the Funds' transfer agent, dividend
disbursing agent and registrar.
3. INVESTMENT IN SECURITIES AND OPTIONS
For U.S. federal income tax purposes, the costs of securities and options owned
at October 31, 1997, were $21,913,754, $41,483,900 and $7,189,106 for Financial
Services Fund, Small Cap Financial Fund and
22
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Growth/Value Fund, respectively. Accordingly, the net unrealized appreciation on
investments and options transactions, if any, were as follows:
<TABLE>
<CAPTION>
FUND APPRECIATION DEPRECIATION NET APPRECIATION
- --------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Financial Services Fund.................................. $ 3,085,936 $ (153,086) $ 2,932,850
Small Cap Financial Fund................................. 4,406,679 (109,244) 4,297,435
Growth/Value Fund........................................ 1,257,066 (175,239) 1,081,827
</TABLE>
For the period January 3, 1997 (commencement of investment operations) through
October 31, 1997, aggregate purchases and sales of investment securities and
options transactions (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ----------------------------------------------------------- -------------- -------------
<S> <C> <C>
Financial Services Fund.................................... $ 25,867,366 $ 6,207,001
Small Cap Financial Fund................................... 38,484,587 4,467,481
Growth/Value Fund.......................................... 8,315,750 1,472,782
</TABLE>
4. CAPITAL SHARE TRANSACTIONS
As of October 31, 1997, each Fund has an unlimited number of shares authorized,
with no par value, of which FBR owned 2,777, 2,778 and 2,778 of Financial
Services Fund, Small Cap Financial Fund and Growth/Value Fund, respectively.
Transactions in capital shares for the period January 3, 1997 (commencement of
investment operations) through October 31, 1997, were as follows:
<TABLE>
<CAPTION>
SALES REPURCHASES
---------------------------- -------------------------
FUND SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------- ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C>
Financial Services Fund..................... 1,780,567 $ 24,819,794 287,368 $ 4,177,025
Small Cap Financial Fund.................... 2,658,638 41,558,998 187,440 3,063,008
Growth/Value Fund........................... 506,468 7,100,953 14,177 197,856
</TABLE>
There is a 1.00% redemption fee on shares redeemed, which have been held 90 days
or less. For the period January 3, 1997 (commencement of investment operations)
through October 31, 1997, these fees amounted to $6,826, $8,787 and $642 for
Financial Services Fund, Small Cap Financial Fund and Growth/Value Fund,
respectively. The redemption fees are collected and retained by each Fund for
the benefit of the remaining shareholders.
23
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SECURITIES LENDING
Loans of securities are required at all times to be secured by collateral equal
to at least 102% of the market value of the securities on loan. However, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings. In the
event that the borrower fails to return securities, and cash collateral being
maintained by the borrower is insufficient to cover the value of loaned
securities and provided such collateral insufficiency is not the result of
investment losses, the lending agent has agreed to pay the amount of the
shortfall to the Funds. The value of securities on loan to brokers and the
related value of cash collateral and indemnification received at October 31,
1997, was as follows:
<TABLE>
<CAPTION>
VALUE OF SECURITIES ON VALUE OF COLLATERAL AND
FUND LOAN INDEMNIFICATION
- ---------------------------------------------------- ----------------------- -------------------------
<S> <C> <C>
Financial Services Fund............................. $ 1,367,849 $ 1,402,883
Small Cap Financial Fund............................ 1,478,702 1,516,381
Growth/Value Fund................................... 397,811 424,292
</TABLE>
The cash collateral was reinvested into repurchase agreements which was in turn
collateralized as follows:
FINANCIAL SERVICES FUND:
DLJ Mortgage Acceptance Corp., Series
1994-Q8
Independent National Mortgage
Corporation, Series 1994-M, Class B1A
SMALL CAP FINANCIAL FUND:
Saxon Mortgage Securities Corporation,
Series 1994-6
DLJ Mortgage Acceptance Corp., Series
1994-Q8
GROWTH/VALUE FUND:
Salomon Brothers Mortgage Securities
VII, Series 1992-5, Class M1
Independent National Mortgage
Corporation, Series 1994-M, Class B1A
For the period January 3, 1997 (commencement of investment operations) through
October 31, 1997, income from securities lending was $2,250, $2,694 and $1,067
for Financial Services Fund, Small Cap Financial Fund and Growth/Value Fund,
respectively. Such income from securities lending is included under the caption
INTEREST in the Statement of Operations.
24
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COLLATERAL FOR REPURCHASE AGREEMENTS
Listed below is the collateral associated with the repurchase agreements with
Bear, Stearns & Co. Inc., outstanding at October 31, 1997:
FINANCIAL SERVICES FUND
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
ISSUER AMOUNT MATURITY RATE VALUE
- ----------------------------------------------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
DLJ Mortgage Acceptance Corp., Series 1994-Q8........ 1,710,539 05/25/24 7.250% $ 1,503,571
Independent National Mortgage Corporation, Series
1994-M, Class B1A................................... 490,000 09/25/24 8.462% 477,340
-------------
Total............................................................................................ $ 1,980,911
-------------
-------------
</TABLE>
SMALL CAP FINANCIAL FUND
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
ISSUER AMOUNT MATURITY RATE VALUE
- ----------------------------------------------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Saxon Mortgage Securities Corporation, Series
1994-6.............................................. 4,915,000 06/25/24 8.571% $ 5,043,051
DLJ Mortgage Acceptance Corp., Series 1994-Q8........ 2,385,000 05/25/24 7.250% 2,096,425
-------------
Total............................................................................................ $ 7,139,476
-------------
-------------
</TABLE>
GROWTH/VALUE FUND
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
ISSUER AMOUNT MATURITY RATE VALUE
- ----------------------------------------------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Salomon Brothers Mortgage Securities VII, Series
1992-5, Class M1.................................... 405,000 11/25/22 7.929% $ 68,035
Independent National Mortgage Corporation, Series
1994-M, Class B1A................................... 30,000 09/25/24 8.462% 29,225
-------------
Total............................................................................................ $ 97,260
-------------
-------------
</TABLE>
25
<PAGE>
THE
FBR FAMILY OF FUNDS
----------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF THE FBR FAMILY OF FUNDS:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the FBR Financial Services Fund, FBR Small Cap
Financial Fund and FBR Small Cap Growth/Value Fund of The FBR Family of Funds
(the "Trust") as of October 31, 1997, and the related statements of operations,
changes in net assets and financial highlights for the period presented. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
FBR Financial Services Fund, FBR Small Cap Financial Fund and FBR Small Cap
Growth/Value Fund of The FBR Family of Funds as of October 31, 1997, the results
of their operations, changes in their net assets, and financial highlights for
the period presented, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, DC
December 12, 1997
26
<PAGE>
THE
FBR FAMILY OF FUNDS
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
1-888-888-0025
e-mail: [email protected]
Internet: http://www.fbrfunds.com
INVESTMENT ADVISER
FBR Fund Advisers, Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
DISTRIBUTOR
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
ADMINISTRATOR
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
ADMINISTRATION AND ACCOUNTING SERVICES/
TRANSFER AGENT
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
8000 Towers Cresent Drive
Vienna, VA 22182
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, DC 20005
This report is submitted for the general information of the
shareholders of each Fund. It is not authorized for the distribution
to prospective investors in each Fund unless it is preceded or
accompanied by a current prospectus which includes details regarding
each Fund's objectives, policies, fees and other information. Total
return is based on historical results and is not intended to
indicate future performance. The investment return and principal
value of an investment in each Fund will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than
original cost.
THE
FBR FAMILY OF FUNDS
---------------
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
[LOGO]
ANNUAL REPORT
OCTOBER 31, 1997
