SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ________
Post-Effective Amendment No. ________
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. ________
(Check appropriate box or boxes.)
Brazos Mutual Funds
(Exact Name of Registrant as Specified in Charter)
5949 Sherry Lane, Suite 1560
Dallas, Texas 75225
(Address of Principal Executive Offices) (Zip Code)
with a copy of communications to:
Audrey C. Talley, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Registrant's Telephone Number, including Area Code (214) 365-5203
John D. McStay, 5949 Sherry Lane, Suite 1560, Dallas, Texas 75225
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Upon effective date of this
registration statement
It is proposed that this filing will become effective (check appropriate box)
/_/ immediately upon filing pursuant to paragraph (b)
/_/ on (date) pursuant to paragraph (b)
/_/ 60 days after filing pursuant to paragraph (a)(1)
/_/ on (date) pursuant to paragraph (a)(1)
/_/ 75 days after filing pursuant to paragraph (a)(2)
/_/ on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/_/ This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Calculation of Registration Fee Under the Securities Act of 1933:
An indefinite number of securities is being registered under the Securities Act
of 1933 pursuant to Rule 24f-2 thereunder.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said section 8(a)
may determine.
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TABLE OF CONTENTS
Part A INFORMATION REQUIRED IN A PROSPECTUS
Part B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Part C OTHER INFORMATION
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FORM N-1A CROSS REFERENCE
PART A INFORMATION REQUIRED IN A PROSPECTUS
Form N-1A
Item Number Location in Prospectus
Item 1. Cover Page Cover Page
Item 2. Synopsis Fund Expenses; Prospectus Summary
Risk Factors
Item 3. Condensed Financial Information Financial Highlights
(to be added by amendment);
Performance Calculations
Item 4. General Description of Prospectus Summary; Risk Factors;
Registrant Investment Objective; Investment
Policies; Other Investment
Policies; Investment Limitations
Item 5. Management of the Fund Prospectus Summary; Investment
Adviser; Administrative
Services; Portfolio
Transactions
Item 5A. Management's Discussion To be provided in Registrant's
of Fund Performance Annual Report to Shareholders
Item 6. Capital Stock and Purchase of Shares; Dividends,
Other Securities Capital Gains Distributions and Taxes;
General Information
Item 7. Purchase of Securities Purchase of Shares;
Being Offered Shareholder Services; Valuation of
Shares
Item 8. Redemption or Repurchase Redemption of Shares; Shareholder
Services
Item 9. Legal Proceedings Not Applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL
INFORMATION
Form N-1A Location in Statement of
Item Number Additional Information
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page; Table of Contents
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Item 12. General Information and History General Information
Item 13. Investment Objectives and Investment Objectives and
Policies Policies; Investment Limitations
Item 14. Management of the Registrant Management of the Fund; Investment
Adviser
Item 15. Control Persons and Principal Management of the Fund
Holders of Securities
Item 16. Investment Advisory
and Other Services Investment Adviser
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and
Other Securities General Information
Item 19. Purchase, Redemption
and Pricing of Securities
Being Offered Purchase of Shares; Redemption of
Shares; Shareholder Services
Item 20. Tax Status General Information
Item 21. Underwriters Management of the Fund
Item 22. Calculation of
Performance Data Performance Calculations
Item 23. Financial Statements Financial Statement (to be
supplied by amendment)
PART C OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
item so numbered in Part C to this Registration Statement.
Form N-1A
Item Number
Item 24. Financial Statements and Exhibits
Item 25. Persons Controlled by or Under Common Control
Item 26. Number of Holders of Securities
Item 27. Indemnification
Item 28. Business and Other Connections of Investment Adviser
Item 29. Principal Underwriters
Item 30. Location of Accounts and Records
Item 31. Management Services
Item 32. Undertakings
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BRAZOS/JMIC Small/Emerging Growth Portfolio
Institutional Class Shares
[INSERT PHONE NUMBER]
______________
PROSPECTUS
INVESTMENT OBJECTIVES
Brazos Mutual Funds (the "Fund") is an open-end, management investment
company known as a "mutual fund." The Fund consists of multiple series of shares
(known as "Portfolios") each of which has different investment objectives and
investment policies. The BRAZOS/JMIC Small/Emerging Growth Portfolio currently
offers only one class of shares. The securities offered in this Prospectus are
Institutional Class Shares of one diversified, no-load Portfolio managed by John
McStay Investment Counsel.
BRAZOS/JMIC Small/Emerging Growth Portfolio. The objective of the
BRAZOS/JMIC Small/Emerging Growth Portfolio (the "Portfolio") is to provide
maximum capital appreciation, consistent with reasonable risk to principal by
investing in small and middle market capitalization companies.
There can be no assurance that the Portfolio will meet its stated
objective.
ABOUT THIS PROSPECTUS
Keep this Prospectus for future reference. It contains information you
should know before you invest. A "Statement of Additional Information" ("SAI")
containing additional information about the Fund has been filed with the
Securities and Exchange Commission. Such Statement is dated ___________________,
1996 and has been incorporated by reference into this Prospectus. For a free
copy of the SAI write to the Fund or call the Fund's Administrator at the
telephone number above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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FUND EXPENSES
The following table illustrates expenses and fees a shareholder of the
Portfolio's Institutional Class Shares will incur. Additional transaction fees
may be charged if a broker- dealer or other financial intermediary deals with
the Fund on your behalf. Please see "Purchase of Shares" for further
information.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases . . . . . . . . . . . . . . . . . NONE
Sales Load Imposed on Reinvested Dividends. . . . . . . . . . . . NONE
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . . . NONE
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . NONE
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . NONE
The table below shows the expenses an investor in the Portfolio would bear
directly or indirectly. The expenses and fees listed are based on estimates of
the Portfolio's operating costs to be incurred during the fiscal period ending
June 30, 1997.
Annual Fund Operating Expenses
(As a Percentage of Average Net Assets)
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . .90%
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . 0.10%
12b-1 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . NONE
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .42%
Total Operating Expenses (After Fee Waivers). . . . . . . . . . . 1.35%*
The fees set forth above are estimated amounts for its first year of
operations assuming average daily net assets of $40 million.
* The Adviser has voluntarily agreed to waive a portion of its advisory
fees and to assume expenses otherwise payable by the Portfolio (if necessary) in
order to keep the expense ratio from exceeding 1.35% of its average daily net
assets. The Fund will not reimburse the Adviser for any advisory fees that are
waived or Portfolio expenses that the Adviser may bear on behalf of a Portfolio.
The following example shows the expenses that a shareholder would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return and (2) redemption at the end of each time period. The Portfolio charges
no redemption fees of any kind.
1 Year 3 Year
BRAZOS/JMIC Small/Emerging Growth Portfolio $__ $__
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or lesser than those
shown.
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PROSPECTUS SUMMARY
INVESTMENT ADVISER
John McStay Investment Counsel (the "Adviser"), an investment counseling
firm founded in 1983, is the investment adviser to the Portfolio. The Adviser
currently manages approximately $2.0 billion in assets for institutional clients
and high net worth individuals. See "INVESTMENT ADVISER."
PURCHASE OF SHARES
Shares of the Portfolio are offered through Rodney Square Distributors,
Inc. (the "Distributor" or "RSD"). The shares are available to investors at net
asset value without a sales commission. Shares can be purchased by sending
investments directly to the Fund. The minimum initial investment is $10,000. The
minimum for subsequent investments is $1,000. Certain exceptions to the initial
or minimum investment amounts may be made by Fund officers. See "PURCHASE OF
SHARES."
DIVIDENDS AND DISTRIBUTIONS
The Portfolio will normally distribute substantially all of its net
investment income in quarterly dividends. It will also annually distribute any
realized net capital gains. Distributions will automatically be reinvested in
Portfolio shares unless an investor elects to receive cash distributions. See
"DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES."
REDEMPTIONS AND EXCHANGES
Shares of the Portfolio may be redeemed without cost at any time, at the
net asset value of the Portfolio next determined after receipt of the redemption
request. The redemption price may be more or less than the purchase price. See
"REDEMPTION OF SHARES."
ADMINISTRATIVE SERVICES
Rodney Square Management Corporation (the "Administrator" or "Rodney
Square"), is responsible for performing and overseeing administration, fund
accounting, dividend disbursing and transfer agent services for the Fund. See
"ADMINISTRATIVE SERVICES."
RISK FACTORS
Prospective investors should consider the following: (1) the small
capitalization corporations in which the Portfolio will invest are more
vulnerable to financial and other risks than larger corporations and the
securities of such small capitalization corporations may involve a higher degree
of risk and price volatility than investments in the general equity markets. (2)
The Portfolio may invest a portion of its assets in derivatives including
futures contracts and options. (See "FUTURES CONTRACTS AND OPTIONS.") (3) The
Portfolio may invest in securities of foreign issuers, which may be subject to
additional risks. (See "FOREIGN SECURITIES.") (4) High rates of Portfolio
Turnover may result in
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additional cost and the realization of capital gains. (See "PORTFOLIO
Turnovers") (5) The Portfolio may use various investment practices, including
investing in repurchase agreements, when issued, forward delivery and delayed
settlement securities. (See "OTHER INVESTMENT POLICIES."). The value of
securities held by the Portfolio can be expected to vary inversely with changes
in interest rates; as interest rates decline, market value tends to increase and
vice versa.
INVESTMENT OBJECTIVE
The objective of the Portfolio is to provide maximum capital appreciation
consistent with reasonable risk to principal by investing primarily in small and
middle market capitalization companies.
INVESTMENT POLICIES
The Portfolio will invest (under normal circumstances) at least 65% of its
total assets in equity securities of a diverse spectrum of companies which have
market capitalizations at the time of purchase from $40 million to $2 billion.
The equity securities in which the Portfolio will invest consist of common
stocks and securities convertible into common stocks, including convertible
preferred stocks and convertible bonds, and ADRs.
The Adviser selects companies based on their potential for strong growth in
revenue, earnings and cash flow, strong management, leading products or services
and potential for improvement. The list of potential investments is further
filtered by the use of traditional fundamental security analysis and valuation
methods including, but not limited to, analysis of relative returns on capital
and equity, reward to risk ratios and earnings per share growth rates relative
to price earnings ratios. The Adviser believes that many companies with smaller
capitalizations have greater potential than their larger counterparts to deliver
above-average revenue and earnings growth rates that may not have yet been
recognized by investors.
The Adviser expects that a majority of investments in the Portfolio will be
in U.S. based companies, however shares of foreign based companies may be
purchased if they meet the Portfolio's investment criteria. Under normal
circumstances, investments in foreign based companies will comprise no more than
15% of portfolio assets. The Portfolio may invest up to 20% of its assets at the
time of purchase in securities of companies that have (with predecessors) a
continuous operating history of less than 3 years. Such investments may be
characterized as potentially possessing higher business risks as well as greater
stock market risks and price volatility. Such companies may face special risks
that their products or services may not prove to be commercially successful.
It is anticipated that cash reserves will represent a relatively small
percentage of portfolio assets (less than 10% under most circumstances). In
unusual circumstances, or for temporary defensive purposes when market or
economic conditions warrant, the Portfolio may invest all or a portion of its
assets in short-term investments, cash and cash equivalents. When the Portfolio
is in a defensive position, it may not be pursuing its investment objective.
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OTHER INVESTMENT POLICIES
SHORT-TERM INVESTMENTS
Occasionally, the Portfolio may invest a portion of its assets in the
following money market instruments, consistent with the Portfolio's investment
policies.
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a
commercial bank or savings and loan association.
Time deposits are nonnegotiable deposits maintained in a banking
institution for a specified period of time (not longer than seven days) at a
stated interest rate. Time deposits maturing from two business days through
seven calendar days will not exceed 10% of the total assets of a Portfolio under
most circumstances.
Certificates of deposit are negotiable short-term obligations issued by
commercial banks or savings and loan associations collateralized by funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction.
The Portfolio will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, (ii) in the case of U.S. banks, it is a member of the
Federal Deposit Insurance Corporation, and (iii) in the case of foreign branches
of U.S. banks, the security is, in the opinion of the Adviser, of an investment
quality comparable to other debt securities which may be purchased by the
Portfolio;
(2) Commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's or, if not rated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by Moody's or by
S&P;
(3) Short-term corporate obligations rated A or better by Moody's or by
S&P;
(4) U.S. Government obligations including, bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Treasury, supported by the full faith and
credit pledge of the U.S. Government and differ mainly in interest
rates, maturities and dates of issue;
(5) U.S. Government agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies; and
(6) Repurchase agreements collateralized by securities listed above.
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REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities. In addition, the Portfolio may invest in repurchase
agreements collateralized by certificates of deposit, and certain bankers'
acceptances and other securities outlined above under "Short-Term Investments."
In a repurchase agreement, a Portfolio buys a security and simultaneously
commits to sell that security back at an agreed upon price plus an agreed upon
market rate of interest. Under a repurchase agreement, the seller will be
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price if such securities mature in one year or less, or
101% of the repurchase price if such securities mature in more than one year.
The use of repurchase agreements involves certain risks. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through stringent security selection criteria and careful monitoring procedures.
LENDING OF SECURITIES
The Portfolio may lend its investment securities to qualified institutional
investors as a means of earning income. The Portfolio will not loan securities
to the extent that greater than one-third of its assets at fair market value
would be committed to loans. During the term of a loan, the Portfolio is subject
to a gain or loss depending on any increase or decrease in the market price of
the securities loaned. Lending of securities is subject to review by the Fund's
Board of Trustees. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be considered in
making decisions about securities lending.
An investment company may pay reasonable negotiated fees in connection with
loaned securities so long as such fees are set forth in a written contract and
approved by its Board of Trustees. The Portfolio will continue to retain any
voting rights with respect to loaned securities. If a material event occurs
affecting an investment on a loan, the loan must be called and the securities
voted.
WHEN-ISSUED, FORWARD DELIVERY AND DELAYED SETTLEMENT SECURITIES
The Portfolio may purchase and sell securities on a "when- issued,"
"delayed settlement" or "forward delivery" basis. "When-issued" or "forward
delivery" refers to securities whose terms and indenture are available, and for
which a market exists, but which are not available for immediate delivery.
When-issued and forward delivery transactions may be expected to occur a month
or more before delivery is due. Delayed settlement is a term used to describe
settlement of a securities transaction in the secondary market which will occur
sometime in the future. No payment or delivery is made by a Portfolio until it
receives payment or delivery from the other party to any of the above
transactions. The Portfolio will maintain a separate account of cash, U.S.
Government securities, other high grade debt obligations or other liquid
securities at least equal to the value of purchase commitments until payment is
made. Such segregated securities will either mature or, if necessary, be sold on
or before the settlement date. Typically, no income accrues on securities
purchased on a delayed delivery basis prior to the time delivery is made,
although a Portfolio may earn income on securities it has deposited in a
segregated account.
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The Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
When a Portfolio engages in when-issued or forward delivery transactions, it
does so to acquire securities consistent with its investment objective and
policies and not for the purpose of investment leverage.
PORTFOLIO TURNOVER
It is expected that the annual portfolio turnover rate for the Portfolio
will not exceed 300%. In addition to Portfolio trading costs, higher rates of
portfolio turnover may result in the realization of capital gains. See
"DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES" for information on taxation.
INVESTMENT COMPANIES
The Portfolio reserves the right to invest up to 10% of its total assets,
calculated at the time of investment, in securities of other open-end or
closed-end investment companies. No more than 5% of the investing Portfolio's
total assets may be invested in securities of any one investment company nor may
it acquire more than 3% of the voting securities of any investment company. The
Portfolio will indirectly bear its proportionate share of any management fees
paid by an investment company in which it invests in addition to the advisory
fee paid by the Portfolio.
FOREIGN INVESTMENTS
It is expected that generally, the Portfolio will invest in common stocks
of companies listed on foreign stock exchanges, but it may also invest in stocks
traded in the over-the-counter market. Common stocks for this purpose also
include securities having common stock characteristics such as rights and
warrants to purchase common stocks. The Portfolio may also invest in foreign
equity securities in the form of American Depositary Receipts (ADRs) and other
similar global instruments. ADRs (sponsored or unsponsored) are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying foreign securities. Most ADRs are traded on a U.S. stock exchange.
Issuers of unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation between
such information and the market value of the unsponsored ADR.
Investing in foreign companies may involve additional risks and
considerations which are not typically associated with investing in U.S.
companies. Since stocks of foreign companies are normally denominated in foreign
currencies, the Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
As non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to U.S. companies, comparable information may not be readily
available about certain foreign companies. Securities of some non-U.S. companies
may be less liquid and more volatile than securities of comparable U.S.
companies. In addition,
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in certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries.
FUTURES CONTRACTS AND OPTIONS
In order to remain fully invested and to reduce transaction costs, the
Portfolio may invest in appropriate futures contracts and options (also known as
derivatives). Because transaction costs associated with futures and options may
be lower than the costs of investing in stocks and bonds directly, it is
expected that use of index futures and options to facilitate cash flows may
reduce a Portfolio's overall transaction costs. The Portfolio may enter into
futures contracts provided that not more than 5% of the Portfolio's assets are
required as margin deposit to secure obligations under such contracts. A
Portfolio will engage in futures and options transactions for hedging purposes
only.
Futures and options can be volatile and involve various degrees and types
of risk. If the Portfolio judges market conditions incorrectly or employs a
strategy that does not correlate well with its investments, use of futures and
options contracts could result in a loss. The Portfolio could also suffer losses
if it is unable to liquidate its position due to an illiquid secondary market.
In the opinion of the Trustees of the Fund, the risk that the Portfolio will be
unable to close out a futures position or options contract will be minimized by
only entering into futures contracts or options transactions traded on national
exchanges and for which there appears to be a liquid secondary market.
RESTRICTED SECURITIES
The Portfolio may purchase restricted securities that are not registered
for sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under the
supervision of the Fund's Board of Trustees, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided that
a dealer or institutional trading market in such securities exists, these
restricted securities are not treated as illiquid securities for purposes of a
Portfolio's investment limitations. A Portfolio will invest no more than 15% of
its net assets in illiquid securities. The prices realized from the sales of
these securities could be less than those originally paid by the Portfolio or
less than what would be considered the fair value of such securities.
Except as specified above and as described under "INVESTMENT LIMITATIONS,"
the foregoing investment policies are not fundamental and the Trustees may
change such policies without an affirmative vote of a majority of the
outstanding voting securities of a Portfolio, as defined in the 1940 Act.
INVESTMENT LIMITATIONS
The Portfolio will not:
(a) with respect to 75% of its assets, invest more than 5% of its total
assets at the time ofpurchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the government of the U.S. or any agency or
instrumentality thereof);
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(b) with respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer;
(c) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the
Portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, or instruments
issued by U.S. banks when a Portfolio adopts a temporary defensive
position;
(d) make loans except (i) by purchasing bonds, debentures or similar
obligations which are publicly distributed, and (ii) by lending its
portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940
Act or the rules and regulations or interpretations of the SEC
thereunder;
(e) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3% of
the Portfolio's gross assets valued at the lower of market or cost,
and a Portfolio may not purchase additional securities when borrowings
exceed 5% of total gross assets; or
(f) pledge, mortgage or hypothecate any of its assets to an extent greater
than 33 1/3% of its total assets at fair market value.
The investment limitations described here and in the Statement of
Additional Information are fundamental policies and may be changed only with the
approval of the holders of a majority of the outstanding shares of the Portfolio
of the Fund. If a percentage limitation on investment or utilization of assets
as set forth above is adhered to at the time an investment is made, a later
change in percentage resulting from changes in the value or total cost of the
Portfolio's assets will not be considered a violation of the restriction.
PURCHASE OF SHARES
Shares of the Portfolio may be purchased without sales commission, at the
net asset value per share next determined after an order is received by the Fund
and payment is received by the Custodian. (See "VALUATION OF SHARES.") The
minimum initial investment required is $10,000. Certain exceptions may be made
by the officers of the Fund.
INITIAL INVESTMENTS
BY MAIL
* Complete and sign an Account Registration Form and mail
it together with a check, drawn on a U.S. bank, made
payable to Brazos Mutual Funds, to:
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Brazos Mutual Funds
c/o Rodney Square Management Corporation
P.O. Box 8987
Wilmington, DE 19890
A purchase order sent by overnight mail should be sent to:
1100 North Market Street, 19th Floor
Wilmington, DE 19801
Payment for the purchase of shares received by mail will be credited to
your account at the net asset value per share of the Portfolio next determined
after receipt. Payment does not need to be converted into Federal Funds (moneys
credited to the Fund's Custodian Bank by a Federal Reserve Bank) before the Fund
will accept it for investment. Make certain that you specify the Portfolio in
which you wish to invest on the Account Registration Form.
BY WIRE
* As soon as possible, telephone Rodney Square at __________________ and
provide the account name, address, telephone number, social security
or taxpayer identification number, Portfolio selected, amount being
wired and the name of the bank wiring the funds. An account number
will then be provided to you. Next,
* instruct your bank to wire the specified amount to:
RODNEY SQUARE MANAGEMENT CORPORATION
C/O WILMINGTON TRUST COMPANY
WILMINGTON, DE
ABA #_____
ATTENTION: Brazos Mutual Funds
REF: PORTFOLIO NAME ________________
DDA Acct. #_____
FURTHER CREDIT [SHAREHOLDER NAME AND ACCOUNT NUMBER]
* Forward a completed Account Registration Form to the Fund at the
address shown on the form. Federal Funds purchases will be accepted
only on a day on which both the New York Stock Exchange and the
Custodian Bank are open for business.
ADDITIONAL INVESTMENTS
Additional investments can be made at any time. The minimum additional
investment is $1,000. Shares can be purchased at net asset value by mailing a
check to the Fund c/o Rodney Square at the address above (payable to "Brazos
Mutual Funds") or by wiring money to the Fund using the instructions outlined
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above. When making additional investments, be sure that: the account name and
number is identified on the check or wire and the Portfolio to be purchased is
specified.
Prior to wiring additional investments, notify the Fund by calling the
number on the cover of this prospectus. Mail orders should include, when
possible, the "Invest by Mail" stub which accompanies any Fund confirmation
statement.
OTHER PURCHASE INFORMATION
Investments received by 4 p.m. ET (the close of the New York Stock Exchange
("NYSE")) will be invested at the price calculated after the NYSE closes that
day. The Fund reserves the right, in its sole discretion, to suspend the
offering of shares of the Portfolio or reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Fund. Purchases of shares will be made in full and fractional shares of the
Portfolio calculated to three decimal places. Certificates for fractional shares
will not be issued. Certificates for whole shares will not be issued except at
the written request of the shareholder.
Shares of the Portfolio may be purchased by customers of broker-dealers or
other financial intermediaries ("Service Agents") which deal with the Fund on
behalf of their customers. Service Agents may impose additional or different
conditions on the purchase or redemption of Portfolio shares and may charge
transaction or other account fees. Each Service Agent is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different purchase and redemption conditions.
Shareholders who are customers of Service Agents should consult their Service
Agent for information regarding these fees and conditions. Amounts paid to
Service Agents may include transaction fees and/or service fees paid by the Fund
from the Fund assets attributable to the Service Agent, and which would not be
imposed if shares of the Portfolio were purchased directly from the Fund or the
Distributor. The Service Agents may provide shareholder services to their
customers that are not available to a shareholder dealing directly with the
Fund. A salesperson and any other person entitled to receive compensation for
selling or servicing Portfolio shares may receive different compensation with
respect to one particular class of shares over another in the Fund.
Service Agents may enter confirmed purchase orders on behalf of their
customers. If shares of a Portfolio are purchased in this manner, the Service
Agent must receive the investment order before the close of trading on the NYSE
and transmit it to the Fund's Transfer Agent prior to the close of their
business day to receive that day's share price. Proper payment for the order
must be received by the Transfer Agent no later than the time when the Portfolio
is priced on the following business day. Service Agents are responsible to their
customers and the Fund for timely transmission of all subscription and
redemption requests, investment information, documentation and money.
IN-KIND PURCHASES
If accepted by the Fund, shares of the Portfolio may be purchased in
exchange for securities which are eligible for acquisition by the Portfolio, as
described in this Prospectus. Securities to be exchanged which are accepted by
the Fund will be valued as set forth under "VALUATION OF SHARES" at the time
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of the next determination of net asset value after such acceptance. Shares
issued by a Portfolio in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities shall become the property of the
Portfolio and must be delivered to the Fund by the investor upon receipt from
the issuer. Securities acquired through an in-kind purchase will be acquired for
investment and not for immediate resale.
The Fund will not accept securities in exchange for shares of a Portfolio
unless:
* at the time of the exchange, such securities are eligible to be
included in the Portfolio and current market quotations are readily
available for such securities;
* the investor represents and agrees that all securities offered to be
exchanged are not subject to any restrictions upon their sale by the
Portfolio under the Securities Act of 1933, or otherwise; and
* the value of any such securities (except U.S. Government securities)
being exchanged together with other securities of the same issuer
owned by the Portfolio will not exceed 5% of the net assets of the
Portfolio immediately after the action.
Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for Federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such exchanges
should contact the Adviser.
REDEMPTION OF SHARES
Shares of the Portfolio may be redeemed by mail or telephone, at any time,
without cost, at the net asset value of the Portfolio next determined after
receipt of the redemption request. Shareholders are charged a $12.00 fee for
redemptions by wire. Otherwise, there is no charge for redemptions. Any
redemption may be more or less than the purchase price of your shares depending
on the market value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its shares at the net asset value next determined
on the date the request is received in "good order." Address requests for
redemption to the Fund c/o Rodney Square Management Corporation, P.O. Box 8987,
Wilmington, DE 19890. A request to redeem shares must include:
* share certificates, if issued;
* a letter of instruction or a stock assignment specifying the number of
shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;
* any required signature guarantees (see "SIGNATURE GUARANTEES"); and
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* any other necessary legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should
contact Rodney Square at ____________.
BY TELEPHONE
In order to make a redemption request by telephone, you must:
* establish the telephone redemption privilege (and if desired, the wire
redemption privilege) by completing appropriate sections of the
Account Registration Form; and
* call the Fund and instruct that the redemption proceeds be mailed to
you or wired to your bank.
The following tasks cannot be accomplished by telephone:
* changing the name of the commercial bank or the account designated to
receive redemption proceeds (this can be accomplished only by a
written request signed by each shareholder, with each signature
guaranteed);
* redemption of certificated shares by telephone.
The Fund and the Fund's Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine, and they may be
liable for any losses if they fail to do so. These procedures include requiring
the investor to provide certain personal identification at the time an account
is opened, as well as prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
of such transaction requests. The Fund or Transfer Agent may be liable for any
losses due to unauthorized or fraudulent telephone instructions if the Fund or
Transfer Agent does not employ the procedures described above. Neither the Fund
nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that it reasonably
believes to be genuine.
Please contact Rodney Square at ________________ for further details.
SIGNATURE GUARANTEES
Signature guarantees are required for the following redemptions:
* redemptions where the proceeds are to be sent to someone other than
the registered shareowner(s);
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* redemptions where the proceeds are to be sent to someplace other than
the registered address; or
* share transfer requests.
The purpose of signature guarantees is to verify the identity of the party
who has authorized a redemption. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. Eligible guarantor institutions include banks, brokers, dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital of
at least $100,000. Credit unions must be authorized to issue signature
guarantees.
OTHER REDEMPTION INFORMATION
Normally, the Fund will make payment for all shares redeemed under proper
procedures within one business day of and no more than seven days after receipt
of the request. The Fund may suspend the right of redemption or postpone the
date at times when both the NYSE and Custodian Bank are closed, or under any
emergency circumstances as determined by the SEC.
If the Fund's Board of Trustees determines that it would be detrimental to
the best interests of remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay the redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities so received in payment of
redemptions.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Shares of the Portfolio may be exchanged for any other Institutional Class
Shares of a Portfolio included in the Brazos Mutual Funds. Exchange requests
should be made by writing to the Fund c/o Rodney Square Management Corporation,
P.O. Box 8987, Wilmington, DE 19890 or calling _______________.
Any exchange will be based on the net asset values of the shares involved.
There is no sales commission or charge of any kind for an exchange. Before
making an exchange into a Portfolio, a shareholder should read its Prospectus
and consider the investment objectives of the Portfolio to be purchased. Contact
Rodney Square at __________________ for a copy of the Prospectus for the
Portfolio(s). Exchanges can only be made with Portfolios that are registered for
sale in a shareholder's state of residence. Exchange requests may be made either
by mail or telephone. Telephone exchanges will be accepted only if the
certificates for the shares to be exchanged have not been issued to the
shareholder and if the registration of the two accounts will be identical.
Requests for exchanges with other Portfolios received prior to 4 p.m. (ET) will
be processed as of the close of business on the same day. Requests received
after that time will be processed on the next business day. The Board of
Trustees may limit
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frequency and amount of exchanges permitted. For additional information
regarding responsibility for the authenticity of telephoned instructions, see
"REDEMPTION OF SHARES BY TELEPHONE" above. An exchange into another Portfolio of
the Fund is a sale of shares and may result in a capital gain or loss for income
tax purposes. The Fund may modify or terminate the exchange privilege at any
time.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to the Fund at the above address. As in the case of
redemptions, the written request must be received in good order before any
transfer can be made. (See "REDEMPTION OF SHARES" for a definition of "good
order.")
RETIREMENT PLANS
Shares of the Fund are available for use in certain tax- deferred plans
(such as Individual Retirement Accounts ("IRAs"), defined contribution, 401(k)
and 403(b)(7) plans).
Individual Retirement Accounts
Application forms and brochures for IRAs can be obtained from Rodney Square
by calling _______________.
Wilmington Trust Company ("WTC") makes available its services as an IRA
custodian for each shareholder account that is established as an IRA. For these
services, WTC receives an annual fee of $10.00 per account, which fee is paid
directly to WTC by the IRA shareholder. If the fee is not paid by the date due,
shares of the Fund owned by the IRA will be redeemed automatically for purposes
of making the payment.
VALUATION OF SHARES
The net asset value of the Portfolio is determined by dividing the sum of
the total market value of the Portfolio's investments and other assets, less any
liabilities, by the total number of shares outstanding. Net asset value per
share of the Portfolio is determined as of the close of the NYSE on each day
that the NYSE is open for business.
The Portfolio uses the last quoted trading price as the market value for
equity securities. For listed securities, the Fund uses the price quoted by the
exchange on which the security is primarily traded. Unlisted securities and
listed securities which have not been traded on the valuation date or for which
market quotations are not readily available are valued at the average between
the last price asked and the last price bid. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents based upon the bid price of such currencies against U.S. dollars
quoted by any major bank or by a broker.
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Bonds and other fixed income securities are valued according to the
broadest and most representative market which will ordinarily be the
over-the-counter market. Net asset value includes interest on fixed income
securities, which is accrued daily. Bonds and other fixed income securities may
be valued on the basis of prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the Board of Trustees determines that amortized cost reflects fair
value.
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good faith
at fair value using methods determined by the Trustees.
PERFORMANCE CALCULATIONS
The Portfolio may advertise or quote total return data. Total return is
calculated on an average annual total return basis, and may also be calculated
on an aggregate total return basis, for various periods. Average annual total
return reflects the average annual percentage change in value of an investment
in a Portfolio over a period. Aggregate total return reflects the total
percentage change in value over a period. Both methods assume dividends and
capital gains distributions are reinvested in Portfolio shares.
The Portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported in
financial and industry publications, and various indices, all as further
described in the Portfolio's Statement of Additional Information.
The Portfolio will provide information about past performance together with
a comparison to an appropriate index in its Annual Report to Shareholders.
Following the end of the Portfolio's fiscal year, a free copy of the Portfolio's
Annual Report to Shareholders will be available upon request by writing or
calling the Fund at the address or phone number on the cover of this Prospectus.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Portfolio will normally distribute substantially all of its net
investment income to shareholders in quarterly dividends. If any net capital
gains are realized, the Portfolio will normally distribute them with the last
dividend for the fiscal year. Dividends paid shortly after the purchase of
shares by an investor, although in effect a return of capital, are taxable to
shareholders. The Portfolio's dividends and capital gains distributions will be
automatically reinvested in additional shares of the Portfolio unless the Fund
is notified in writing that the shareholder elects to receive distributions in
cash.
FEDERAL TAXES
The Portfolio intends to declare and pay dividend and capital gains
distributions so as to avoid imposition of the Federal Excise Tax. To do so, the
Portfolio expects to distribute an amount no less than:
* 98% of its calendar year ordinary income;
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* 98% of its capital gains net income (the excess of short and long-term
capital gains over short and long- term capital losses) for the
one-year period ending October 31; and
* 100% of any undistributed ordinary or capital gain net income from the
prior year.
Dividends paid by a Portfolio from net investment income, either in cash or
reinvested in shares, will be taxable to shareholders as ordinary income.
Dividends paid from the Portfolio will generally qualify in part for the 70%
dividends received deduction for corporations, but the portion of the dividends
so qualified depends on the ratio of the aggregate taxable qualifying dividend
income received by the Portfolio from domestic (U.S.) sources to the total
taxable income of the Portfolio, exclusive of long-term capital gains.
Distributions paid by a Portfolio from long-term capital gains, either in
cash or additional shares of the Portfolio (and regardless of the length of time
the shares in the Portfolio have been owned by the shareholder), are taxable to
shareholders as such. These distributions are not eligible for the dividends
received deduction. Shareholders are notified annually by the Fund as to Federal
tax status of dividends and distributions paid by a Portfolio. Dividends and
distributions may also be subject to state and local taxes. Dividends declared
in October, November, or December to shareholders on record in such month will
be deemed to have been paid by the Fund and received by the shareholders on
December 31 of such calendar year, provided that the dividends are paid before
February 1 of the following year.
Redemptions of shares in a Portfolio are taxable events for Federal income
tax purposes.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on distributions
and redemptions. Shareholders should consult with their tax advisers regarding
the tax status of distributions in their state and locality.
INVESTMENT ADVISER
John McStay Investment Counsel is a limited partnership formed in 1983 and
located at 5949 Sherry Lane, Suite 1560, Dallas, Texas 75225. The Adviser
provides investment management services to institutions and individuals. The
Adviser currently has approximately $2.0 billion in assets under management.
John D. McStay may be deemed to control the Adviser as a result of ownership of
a majority interest in John McStay & Associates ("JMA"), the general partner of
the Adviser. JMA owns a majority interest in the Adviser.
An investment policy committee is responsible for the day- to-day
management of the Portfolio's investments.
Under an Investment Advisory Agreement with the Fund, dated as of ________,
the Adviser manages the investment and reinvestment of the assets of the
Portfolios. The Adviser must adhere to the
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stated investment objectives and policies of the Portfolios, and is subject to
the control and supervision of the Fund's Board of Trustees.
As compensation for its services as an Adviser, the Portfolio pays the
Adviser an annual fee, in monthly installments, of up to 0.90% of the
Portfolio's average daily net assets for the month.
The Adviser has voluntarily agreed to keep operating expenses from
exceeding 1.35% of average daily net assets. The Fund will not reimburse the
Adviser for any advisory fees that are waived or Portfolio expenses that the
Adviser may bear on behalf of a Portfolio.
The Adviser may compensate its affiliated companies for referring investors
to the Portfolios. The Adviser, or any of its affiliates, may, at its own
expense, compensate a Service Agent or other person for marketing, shareholder
servicing, record-keeping and/or other services performed with respect to the
Fund or a Portfolio. Payments made for any of these purposes may be made from
the paying entity's revenues, its profits or any other source available to it.
When such service arrangements are in effect, they are made generally available
to all qualified service providers.
ADVISER'S HISTORICAL PERFORMANCE
Set forth below are performance data provided by the Adviser pertaining to
the composite of separately managed accounts of the Adviser that are managed
with substantially similar (although not necessarily identical) objectives,
policies and strategies as those of the Portfolio. The investment returns of the
Portfolio may differ from those of the separately managed accounts because such
separately managed accounts may have fees and expenses that differ from those of
the Portfolio. Further, the separately managed accounts are not subject to
investment limitations, diversification requirements and other restrictions
imposed by the Investment Company Act of 1940 and Internal Revenue Code; such
conditions, if applicable, may have lowered the returns for the separately
managed accounts. The results presented are not intended to predict or suggest
the return of the Portfolio or the return an investor might achieve by investing
in the Portfolio.
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John McStay Investment Counsel Small Capitalization Growth Portfolios
(Percentage Returns Net of Management Fees)
Calendar Years Institutional Equity Accounts S&P 400Index Russell 2000
1987* 25.6% -2.0% -8.8%
1988* 24.5% 20.9% 24.9%
1989* 31.9% 35.6% 16.2%
1990* -4.0% -5.1% -19.5%
1991* 68.9% 50.1% 46.1%
1992* 8.7% 11.9% 18.4%
1993 15.3% 14.0% 18.9%
1994 -0.1% -3.6% -1.8%
1995 30.1% 30.9% 28.4%
Year to Date 34.9% 12.4% 10.8%
(9/30/96)
Annualized 22.7% 15.67% 12.16%
Cumulative 634.9% 313.59% 206.23%
Nine-Year Mean 22.7% 17.0% 13.6%
Value of $1 invested
during 9 3/4 years
(1/1/87-9/30/96) $7.35 $4.14 $3.06
* Numbers are AIMR compliant from 1/1/93 forward; numbers before that time
are equal weighted.
Notes:
1. The annualized return is calculated from monthly data, allowing for
compounding. The formula used is in accordance with the acceptable methods
set forth by the Association for Investment Management Research, The Bank
Administration Institute, and the Investment Counsel Association of
America. Market value of the account was the sum of the account's total
assets, including cash, cash equivalents, short term investments, and
securities valued at current market prices.
2. The cumulative return means that $1 invested in the composite account on
January 1, 1987 had grown to 7.35 by 9/30/96.
3. The nine-year mean is the arithmetic average of the annual returns for the
years listed.
4. The S&P 400 and Russell 2000 are unmanaged indices which assume
reinvestment of dividends and are generally considered representative of
securities similar to those invested in by the Adviser for the purpose of
the composite performance numbers set forth above.
5. The Adviser's average annual management fee over the nine- year period
(1987-1995) was 1% or 100 basis points.During the period, fees on the
Adviser's individual accounts ranged from 1% to 1 1/2% (100 basis points to
150 basis points). Net returns to investors vary depending on the
management fee.
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ADMINISTRATIVE SERVICES
Rodney Square Management Corporation, 1100 N. Market Street, Wilmington, DE
19890-001, serves as Administrator, Transfer Agent and Dividend Paying Agent of
the Fund and also provides accounting services to the Fund.
As Administrator, Rodney Square supplies office facilities, non-investment
related statistical and research data, stationery and office supplies, executive
and administrative services, internal auditing and regulatory compliance
services. Rodney Square also assists in the preparation of reports to
shareholders, prepares proxy statements, updates prospectuses and makes filings
with the Securities and Exchange Commission and state securities authorities.
Rodney Square performs certain budgeting and financial reporting and compliance
monitoring activities. For the services provided as Administrator, Rodney Square
receives a monthly administration fee from the Fund at the annual rate of .15%
of the average daily net assets of the Fund on the first $50 million; .10% of
such assets in excess of $50 million to $200 million; and .07% of such assets in
excess of $200 million. Each Portfolio pays its pro-rata portion based upon
total Fund assets. Such fees are subject to a minimum fee of $50,000 per year
for one Portfolio and $15,000 minimum per year for each additional Portfolio.
Rodney Square also serves as Transfer Agent and Dividend Paying Agent of the
Fund.
Rodney Square also serves as an Accounting Agent to the Fund. As Accounting
Agent, Rodney Square determines the Fund's net asset value per share and
provides accounting services to the Fund pursuant to an Accounting Services
Agreement with the Fund.
DISTRIBUTOR
Rodney Square Distributors, Inc., 1100 N. Market Street, Wilmington, DE
19890, has been engaged pursuant to a distribution agreement dated ___________,
1996, to assist in securing purchasers for shares of the Fund. RSD also
directly, or through its affiliates, provides investor support services. RSD
will receive no compensation for distribution of shares of the Fund, except for
reimbursement of out-of-pocket expenses.
Banking laws limit deposit-taking institutions and certain of their
affiliates from underwriting or distributing securities. RSD is an affiliate of
WTC, the Fund's custodian bank for its domestic assets. RSD believes that it may
perform the services contemplated by its agreement with the Fund without
violation of applicable banking laws or regulations. If RSD were prohibited from
performing these services, it is expected that the Board of Trustees would
consider entering into agreements with other entities. It is not expected that
shareholders would suffer any adverse financial consequences as a result of such
an occurrence.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio. The Agreement directs the Adviser to use its best
efforts to obtain the best available price and most favorable execution for all
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transactions of the Portfolio. The Adviser may buy and sell securities for the
account of the portfolio through the Adviser's affiliated broker-dealer. In such
instances, the affiliated broker-dealer will complete transactions pursuant to
procedures designed to ensure that charges for the transactions do not exceed
usual and customary levels obtainable from other, unaffiliated broker- dealers.
Such transactions and the procedures are supervised by the Fund's Board of
Trustees. It is understood that the affiliated broker-dealer will not be
utilized in situations where, in the Adviser's judgment, the brokerage services
of another security firm would be in the best interest of the Portfolio. If
consistent with the interests of the Portfolio, the Adviser may select brokers
on the basis of research, statistical and pricing services these brokers provide
to the Portfolio. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by the
Adviser under the Investment Advisory Agreement. Such brokers may be paid a
higher commission than that which another qualified broker would have charged
for effecting the same transaction, provided that such commissions are paid in
compliance with the Securities Exchange Act of 1934, as amended, and that the
Adviser determines in good faith that the commission is reasonable in terms
either of the transaction or the overall responsibility of the Adviser to the
Portfolio and the Adviser's other clients. Although not a typical practice, the
Adviser may place portfolio orders with qualified broker- dealers who refer
clients to the Adviser. If a purchase or sale of securities is consistent with
the investment policies of a Portfolio and one or more other clients served by
the Adviser is considered at or about the same time, transactions in such
securities will be allocated among the Portfolio and clients in a manner deemed
fair and reasonable by the Adviser. Although there is no specified formula for
allocating such transactions, the allocations are subject to periodic review by
the Funds Trustees.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Delaware Business Trust on October ___, 1996.
The Trustees have the power to designate one or more series of shares of
beneficial interest and to classify or reclassify any unissued shares without
further action by shareholders. At its discretion, The Board of Trustees may
create additional Portfolios and Classes of shares.
The shares of each Portfolio are fully paid and nonassessable, have no
preference as to conversion, exchange, dividends, retirement or other features
and have no pre-emptive rights. They have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees. A shareholder is entitled to one vote
for each full share held (and a fractional vote for each fractional share held),
then standing in his name on the books of the Fund.
Annual meetings will not be held except as required by the 1940 Act and
other applicable laws. The Fund has undertaken that its Trustees will call a
meeting of shareholders if such a meeting is requested in writing by the holders
of not less than 10% of the outstanding shares of the Fund. The Fund will assist
shareholder communications in such matters.
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<PAGE>
CUSTODIAN
Wilmington Trust Company, Rodney Square North, 1100 North Market Street,
Wilmington, DE 19890-0001, serves as Custodian of the Fund's assets.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, 9th Floor, Boston, MA 02110, is
the independent accountants for the Fund.
REPORTS
Shareholders receive unaudited semi-annual financial statements and annual
financial statements audited by Price Waterhouse LLP.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be made by contacting the Fund c/o Rodney Square
Management Corporation, P.O. Box 8987, Wilmington, DE 19890, or by calling the
telephone number listed on the cover of this Prospectus.
LITIGATION
The Fund is not involved in any litigation
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PROSPECTUS
Dated
Investment Adviser
JOHN MCSTAY INVESTMENT COUNSEL
5949 Sherry Lane
Suite 1560
Dallas, TX 75225
-------------------
Distributor
TABLE OF CONTENTS
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Objective. . . . . . . . . . . . . . . . . . . . . . .
Investment Policies . . . . . . . . . . . . . . . . . . . . . . .
Other Investment Policies . . . . . . . . . . . . . . . . . . . .
Investment Limitations. . . . . . . . . . . . . . . . . . . . . .
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . .
Shareholder Services. . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . .
Performance Calculations. . . . . . . . . . . . . . . . . . . . .
Dividends, Capital Gains Distribution and Taxes . . . . . . . . .
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . .
Administrative Services . . . . . . . . . . . . . . . . . . . . .
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . . . . .
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Fund's Statement of
Additional Information, in connection with the offering made by this Prospectus
and, if given or made, such information or its representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offering by the Fund in any jurisdiction in which such offering
may not lawfully be made.
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BRAZOS/JMIC Real Estate Securities Portfolio
Institutional Class Shares
[INSERT PHONE NUMBER]
__________
PROSPECTUS
INVESTMENT OBJECTIVES
Brazos Mutual Funds (the "Fund") is an open-end, management investment
company known as a "mutual fund." The Fund consists of multiple series of shares
(known as "Portfolios") each of which has different investment objectives and
investment policies. The BRAZOS/JMIC Real Estate Securities Portfolio currently
offers only one class of shares. The securities offered in this Prospectus are
Institutional Class Shares of one diversified, no-load Portfolio managed by John
McStay Investment Counsel.
BRAZOS/JMIC Real Estate Securities Portfolio. The objective of the
BRAZOS/JMIC Real Estate Securities Portfolio (the "Portfolio") is to provide a
balance of income and appreciation (with reasonable risk to principal) by
investing primarily in equity securities of companies which are principally
engaged in the real estate industry.
There can be no assurance that the Portfolios will meet its stated
objective.
ABOUT THIS PROSPECTUS
Keep this Prospectus for future reference. It contains information you
should know before you invest. A "Statement of Additional Information" ("SAI")
containing additional information about the Fund has been filed with the
Securities and Exchange Commission. Such Statement is dated _________________
1996 and has been incorporated by reference into this Prospectus. For a free
copy of the SAI write to the Fund or call the Fund's Administrator at the
telephone number above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FUND EXPENSES
The following table illustrates expenses and fees a shareholder of the
Portfolio will incur. Additional transaction fees may be charged if a
broker-dealer or other financial intermediary deals with the Fund on your
behalf. Please see "Purchase of Shares" for further information.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases NONE
Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load NONE
Redemption Fees 1%*
Exchange Fees NONE
* Shares held 90 days or more may be redeemed without cost. Shares held less
than 90 days are subject to a 1% redemption fee which is retained by the
Fund for the benefit of the remaining shareholders. The fee is intended to
encourage long-term investment in the Portfolio to avoid transaction and
other expenses caused by early redemption, and to facilitate portfolio
management.
The table below shows the expenses an investor in the Portfolio would bear
directly or indirectly.
Annual Fund Operating Expenses
(As a Percentage of average Net Assets)
Investment Advisory Fees .90%
Administrative Fees 0.15%
12b-1 Fees NONE
Other Expenses .55%
Advisory Fees Waived .35%
Total Operating Expenses (After Fee Waivers) 1.25%*
The fees set forth above are estimated amounts for its first year of
operations assuming average daily net assets of $20 million.
* The Adviser has voluntarily agreed to waive a portion of its advisory fees
and to assume expenses otherwise payable by the Portfolio (if necessary) in
order to keep the expense ratio from exceeding 1.25% of its average daily
net assets. If it were not for the fee waiver, the Portfolio's total annual
operating expenses would be 1.60% of average daily net assets. The Fund
will not reimburse the Adviser for any advisory fees that are waived or
Portfolio expenses that the Adviser may bear on behalf of a Portfolio.
The following example shows the expenses that a shareholder would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return and (2) redemption at the end of each time period. The Portfolio charges
no redemption fees if shares are held for at least 90 days.
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1 Year 3 Years
BRAZOS/JMIC Real Estate Securities Portfolio $13 $40
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or lesser than those
shown.
PROSPECTUS SUMMARY
INVESTMENT ADVISER
John McStay Investment Counsel (the "Adviser"), an investment counseling
firm founded in 1983, is the investment adviser to the Portfolio. The Adviser
currently manages approximately $2 billion in assets for institutional clients
and high net worth individuals. See "INVESTMENT ADVISER."
PURCHASE OF SHARES
Shares of the Portfolio are offered through Rodney Square Distributors,
Inc. (the "Distributor" or "RSD"). The shares are available to investors at net
asset value without a sales commission. Shares can be purchased by sending
investments directly to the Fund. The minimum initial investment is $10,000.
The minimum for subsequent investments is $1,000. Certain exceptions to the
initial or minimum investment amounts may be made by Fund officers. See
"PURCHASE OF SHARES."
DIVIDENDS AND DISTRIBUTIONS
The Portfolio will normally distribute substantially all of its net
investment income in quarterly dividends. It will also annually distribute any
realized net capital gains. Distributions will automatically be reinvested in
Portfolio shares unless an investor elects to receive cash distributions. See
"DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES."
REDEMPTIONS AND EXCHANGES
Shares of the Portfolio may be redeemed at any time, at the net asset value
of the Portfolio next determined after receipt of the redemption request. Shares
held 90 days or more may be redeemed without additional fees. Shares held less
than 90 days are subject to a 1% redemption fee. The redemption price may be
more or less than the purchase price. See "REDEMPTION OF SHARES."
ADMINISTRATIVE SERVICES
Rodney Square Management Corporation (the "Administrator" or "Rodney
Square"), is responsible for performing and overseeing administration, fund
accounting, dividend disbursing and transfer account services for the Fund. See
"ADMINISTRATIVE SERVICES."
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RISK FACTORS
Prospective investors should consider the following:
Because the Fund invests primarily in the real estate industry, it could
conceivably own real estate directly as a result of a default on debt securities
it owns. If the Fund has rental income or income from the disposition of real
property, the receipt of such income may adversely affect its ability to retain
its tax status as a regulated investment company. The Portfolio's investments
may be subject to certain risks associated with the direct ownership of real
estate. These risks include: declines in the value of real estate, risks related
to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, and variations
in rental income. Generally, increases in interest rates will decrease the value
of high yielding securities and increase the costs of obtaining financing, which
could decrease the value of the portfolio's investments. The Portfolio's share
price, yield and total returns fluctuate, and your investment may be worth more
or less than your original cost when you redeem your shares.
In addition, equity real estate investment trusts may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage real estate investment trusts may be affected by the quality of credit
extended. Equity and mortgage real estate investment trusts are dependent upon
management skill, are not diversified and are subject to the risks of financing
projects. Such trusts are also subject to heavy cash flow dependency, defaults
by borrowers, self liquidation and the possibility of failing to qualify for
tax- free pass-through of income under the Internal Revenue Code and to maintain
exemption from the Investment Company Act of 1940. Changes in interest rates may
also affect the value of the debt securities in the Fund's portfolio. By
investing in real estate investment trusts indirectly through the Fund, a
Shareholder will bear not only his proportionate share of the expenses of the
Fund, but also, indirectly, similar expenses of the real estate investment
trusts.
INVESTMENT OBJECTIVE
The objective of the Portfolio is to provide a balance of income and
appreciation (with reasonable risk to principal) by investing primarily in
equity securities of companies which are principally engaged in the real estate
industry.
INVESTMENT POLICIES
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in equity securities of companies which are principally engaged in
the real estate industry. The equity securities in which the Portfolio will
invest consist of common stocks and securities convertible into common stocks,
including convertible preferred stocks and convertible bonds.
A company is "principally engaged in the real estate industry" if at least
50% of its assets (marked-to-market) gross income or net profits are
attributable to ownership, construction, management or sale of residential,
commercial or industrial real estate. Real estate industry companies include:
equity real estate investment trusts, which pool investors' funds for investment
primarily in commercial real estate properties;
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<PAGE>
mortgage real estate investment trusts, which invest pooled funds principally in
real estate related loans such as construction, development and long-term
mortgage loans, brokers or real estate developers; hybrid real estate investment
trusts, which hold properties and mortgages; and issuers with substantial real
estate holdings such as paper and lumber producers and hotel and entertainment
companies.
The Portfolio may invest up to 20% of its assets at the time of purchase in
securities of companies that have (with predecessors) a continuous operating
history of less than 3 years. Such investments may be characterized as
potentially possessing higher business risks as well as greater stock market
risks and price volatility. Such companies may face special risks that their
products or services may not prove to be commercially successful. There is no
limitation on the operating history of real estate investment trusts.
The Adviser selects companies based on their strong cash flow, strong
management, dividend yield, dividend growth potential and financial strength.
The list of potential investments is further filtered by the use of traditional
fundamental security analysis and valuation methods including, but not limited
to, analysis of relative returns on capital and equity, reward to risk ratios
and earnings and cash flow per share growth rates relative to valuation
measures.
It is anticipated that cash reserves will represent a relatively small
percentage of portfolio assets (less than 10% under most circumstances). In
unusual circumstances, or for temporary defensive purposes when market or
economic conditions warrant, the Portfolio may invest all or a portion of its
assets in short-term investments, cash and cash equivalents. When the Portfolio
is in a defensive position, it may not be pursuing its investment objective.
OTHER INVESTMENT POLICIES
SHORT-TERM INVESTMENTS
Occasionally, the Portfolio may invest a portion of its assets in the
following money market instruments, consistent with the Portfolio's investment
policies.
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a
commercial bank or savings and loan association.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (not longer than seven days) at a
stated interest rate. Time deposits maturing from two business days through
seven calendar days will not exceed 10% of the total assets of a Portfolio under
most circumstances.
Certificates of deposit are negotiable short-term obligations issued by
commercial banks or savings and loan associations collateralized by funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction.
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<PAGE>
The Portfolio will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, (ii) in the case of U.S. banks, it is a member of the
Federal Deposit Insurance Corporation, and (iii) in the case of foreign branches
of U.S. banks, the security is, in the opinion of the Adviser, of an investment
quality comparable to other debt securities which may be purchased by the
Portfolio;
(2) Commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's or, if not rated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by Moody's or by
S&P;
(3) Short-term corporate obligations rated A or better by Moody's or by
S&P;
(4) U.S. Government obligations including bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Treasury, supported by the full faith and
credit pledge of the U.S. Government and differ mainly in interest
rates, maturities and dates of issue;
(5) U.S. Government agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies; and
(6) Repurchase agreements collateralized by securities listed above.
REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities. In addition, the Portfolio may invest in repurchase
agreements collateralized by certificates of deposit and certain bankers'
acceptances and other securities outlined above under "Short-Term Investments."
In a repurchase agreement, a Portfolio buys a security and simultaneously
commits to sell that security back at an agreed upon price plus an agreed upon
market rate of interest. Under a repurchase agreement the seller will be
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price if such securities mature in one year or less or
101% of the repurchase price if such securities mature in more than one year.
The use of repurchase agreements involves certain risks. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through stringent security selection criteria and careful monitoring procedures.
LENDING OF SECURITIES
Each Portfolio may lend its investment securities to qualified
institutional investors as a means of earning income. A Portfolio will not loan
securities to the extent that greater than one-third of its assets at fair
market value would be committed to loans. During the term of a loan, the
Portfolio is subject to a gain or loss depending on any increase or decrease in
the market price of the securities loaned. Lending of securities is subject to
review by the Fund's Board of Trustees. All relevant facts and circumstances,
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<PAGE>
including the creditworthiness of the broker, dealer or institution, will be
considered in making decisions about securities lending.
An investment company may pay reasonable negotiated fees in connection with
loaned securities so long as such fees are set forth in a written contract and
approved by its Board of Trustees. The Portfolio will continue to retain any
voting rights with respect to loaned securities. If a material event occurs
affecting an investment on a loan, the loan must be called and the securities
voted.
WHEN-ISSUED, FORWARD DELIVERY AND DELAYED SETTLEMENT SECURITIES
The Portfolio may purchase and sell securities on a "when- issued,"
"delayed settlement" or "forward delivery" basis. "When- issued" or "forward
delivery" refers to securities whose terms and indenture are available, and for
which a market exists, but which are not available for immediate delivery.
When-issued and forward delivery transactions may be expected to occur a month
or more before delivery is due. Delayed settlement is a term used to describe
settlement of a securities transaction in the secondary market which will occur
sometime in the future. No payment or delivery is made by a Portfolio until it
receives payment or delivery from the other party to any of the above
transactions. The Portfolio will maintain a separate account of cash, U.S.
Government securities, other high grade debt obligations or other liquid
securities at least equal to the value of purchase commitments until payment is
made. Such segregated securities will either mature or, if necessary, be sold on
or before the settlement date. Typically, no income accrues on securities
purchased on a delayed delivery basis prior to the time delivery is made,
although a Portfolio may earn income on securities it has deposited in a
segregated account.
The Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
When a Portfolio engages in when-issued or forward delivery transactions, it
does so to acquire securities consistent with its investment objective and
policies -- not for investment leverage.
PORTFOLIO TURNOVER
It is expected that the annual portfolio turnover rate for the Portfolio
will not exceed 300%. In addition to the Portfolio trading costs, higher rates
of portfolio turnover may result in the realization of capital gains. See
"DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES" for information on taxation.
INVESTMENT COMPANIES
The Portfolio reserves the right to invest up to 10% of its total assets,
calculated at the time of investment, in securities of other open-end or
closed-end investment companies. No more than 5% of the investing the
Portfolio's total assets may be invested in securities of any one investment
company nor may it acquire more than 3% of the voting securities of any
investment company. The Portfolio will indirectly bear its proportionate share
of any management fees paid by an investment company in which it invests in
addition to the advisory fee paid by the Portfolio.
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<PAGE>
FUTURES CONTRACTS AND OPTIONS
In order to remain fully invested and to reduce transaction costs, the
Portfolio may invest in appropriate futures contracts and options (also known as
derivatives). Because transaction costs associated with futures and options may
be lower than the costs of investing in stocks and bonds directly, it is
expected that use of index futures and options to facilitate cash flows may
reduce a Portfolios overall transaction costs. The Portfolio may enter into
futures contracts provided that not more than 5% of the Portfolio's assets are
required as margin deposit to secure obligations under such contracts. A
Portfolio will engage in futures and options transactions for hedging purposes
only.
Futures and options can be volatile and involve various degrees and types
of risk. If the Portfolio judges market conditions incorrectly or employs a
strategy that does not correlate well with its investments, use of futures and
options contracts could result in a loss. The Portfolio could also suffer losses
if it is unable to liquidate its position due to an illiquid secondary market.
In the opinion of the Trustees of the Fund, the risk that the Portfolio will be
unable to close out a futures position or options contract will be minimized by
only entering into futures contracts or options transactions traded on national
exchanges and for which there appears to be a liquid secondary market.
RESTRICTED SECURITIES
The Portfolio may purchase restricted securities that are not registered
for sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under the
supervision of the Fund's Board of Trustees, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided that
a dealer or institutional trading market in such securities exists, these
restricted securities are not treated as illiquid securities for purposes of a
Portfolio's investment limitations. A Portfolio will invest no more than 15% of
its net assets in illiquid securities. The prices realized from the sales of
these securities could be less than those originally paid by the Portfolio or
less than what would be considered the fair value of such securities.
COMPANIES WITH LIMITED OPERATING HISTORIES
The Fund's portfolio may include securities of companies which have limited
operating histories and may not yet be profitable. The investments in such
companies offer opportunities for capital gains, but entail significant risks
including, but not limited to, the volatility of the stock price and the
viability of the firm's operations. The Fund will not invest in companies which
together with predecessors have operating histories of less than three years if
immediately thereafter and as a result of such investment the value of the
Fund's holdings of such securities (other than securities of companies
principally engaged in the real estate industry) exceeds 20% of the value of the
Fund's total assets. Although not an investment policy of the Fund, it is
anticipated that under normal circumstances, approximately 10% to 15% of the
companies principally engaged in the real estate industry in which the Fund
invests will have operating histories of less than three years.
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<PAGE>
Except as specified above and as described under "INVESTMENT LIMITATIONS,"
the foregoing investment policies are not fundamental and the Trustees may
change such policies without an affirmative vote of a majority of the
outstanding voting securities of a Portfolio, as defined in the 1940 Act.
INVESTMENT LIMITATIONS
The Portfolio will not:
(a) with respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the government of the U.S. or any agency or
instrumentality thereof;
(b) with respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer;
(c) make loans except (i) by purchasing bonds, debentures or similar
obligations which are publicly distributed, and (ii) by lending its
portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940
Act or the rules and regulations or interpretations of the SEC
thereunder;
(d) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event in excess of 33 1/3% of
the Portfolio's gross assets valued at the lower of market or cost,
and a Portfolio may not purchase additional securities when borrowings
exceed 5% of total gross assets; or
(e) pledge, mortgage or hypothecate any of its assets to an extent greater
than 33 1/3% of its total assets at fair market value.
The investment limitations described here and in the Statement of
Additional Information are fundamental policies and may be changed only with the
approval of the holders of a majority of the outstanding shares of the
Portfolio. If a percentage limitation on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value or total cost of the
Portfolio's assets will not be considered a violation of the restriction.
PURCHASE OF SHARES
Shares of the Portfolio may be purchased without sales commission, at the
net asset value per share next determined after an order is received by the Fund
and payment is received by the Custodian. (See "VALUATION OF SHARES.") The
minimum initial investment required is $10,000. Certain exceptions may be made
by the officers of the Fund.
INITIAL INVESTMENTS
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BY MAIL
* Complete and sign an Account Registration Form and mail it together
with a check, drawn on a U.S. bank, made payable to Brazos Mutual
Funds, to:
Brazos Mutual Funds
c/o Rodney Square Management Corporation
P.O. Box 8987
Wilmington, DE 19890
A purchase order sent by overnight mail should be sent to:
1100 North Market Street, 19th Floor
Wilmington, DE 19801
Payment for the purchase of shares received by mail will be credited to
your account at the net asset value per share of the Portfolio next determined
after receipt. Payment does not need to be converted into Federal Funds (moneys
credited to the Fund's Custodian Bank by a Federal Reserve Bank) before the Fund
will accept it for investment. Make certain that you specify the Portfolio in
which you wish to invest on the Account Registration Form.
BY WIRE
* As soon as possible, telephone Rodney Square at __________________ and
provide the account name, address, telephone number, social security
or taxpayer identification number, Portfolio selected, amount being
wired and the name of the bank wiring the funds. An account number
will then be provided to you. Next,
* instruct your bank to wire the specified amount to:
RODNEY SQUARE MANAGEMENT CORPORATION
C/O WILMINGTON TRUST COMPANY
WILMINGTON, DE
ABA #_____
ATTENTION: Brazos Mutual Funds
REF: PORTFOLIO NAME ________________
DDA Acct. #_____
FURTHER CREDIT [SHAREHOLDER NAME AND ACCOUNT NUMBER]
* Forward a completed Account Registration Form to the Fund at the
address shown on the form. Federal Funds purchases will be accepted
only on a day on which both the New York Stock Exchange and the
Custodian Bank are open for business.
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<PAGE>
ADDITIONAL INVESTMENTS
Additional investments can be made at any time. The minimum additional
investment is $1,000. Shares can be purchased at net asset value by mailing a
check to the Fund c/o Rodney Square at the address above (payable to "Brazos
Mutual Funds") or by wiring money to the Fund using the instructions outlined
above. When making additional investments, be sure that: the account name and
number is identified on the check or wire and the Portfolio to be purchased is
specified.
Prior to wiring additional investments, notify the Fund by calling the
number on the cover of this prospectus. Mail orders should include, when
possible, the "Invest by Mail" stub which accompanies any Fund confirmation
statement.
OTHER PURCHASE INFORMATION
Investments received by 4 p.m. ET (the close of the New York Stock Exchange
("NYSE")) will be invested at the price calculated after the NYSE closes that
day. The Fund reserves the right, in its sole discretion, to suspend the
offering of shares of the Portfolio or reject purchase orders when, in the
judgment of management such suspension or rejection is in the best interest of
the Fund. Purchases of shares will be made in full and fractional shares of the
Portfolio calculated to three decimal places. Certificates for fractional shares
will not be issued. Certificates for whole shares will not be issued except at
the written request of the shareholder.
Shares of the Portfolio may be purchased by customers of broker-dealers or
other financial intermediaries ("Service Agents") which deal with the Fund on
behalf of their customers. Service Agents may impose additional or different
conditions on the purchase or redemption of Portfolio shares and may charge
transaction or other account fees. Each Service Agent is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different purchase and redemption conditions.
Shareholders who are customers of Service Agents should consult their Service
Agent for information regarding these fees and conditions. Amounts paid to
Service Agents may include transaction fees and/or service fees paid by the Fund
from the Fund assets attributable to the Service Agent and which would not be
imposed if shares of the Portfolio were purchased directly from the Fund or the
Distributor. The Service Agents may provide shareholder services to their
customers that are not available to a shareholder dealing directly with the
Fund. A salesperson and any other person entitled to receive compensation for
selling or servicing Portfolio shares may receive different compensation with
respect to one particular class of shares over another in the Fund.
Service Agents may enter confirmed purchase orders on behalf of their
customers. If shares of a Portfolio are purchased in this manner, the Service
Agent must receive the investment order before the close of trading on the NYSE
and transmit it to the Fund's Transfer Agent prior to the close of their
business day to receive that day's share price. Proper payment for the order
must be received by the Transfer Agent no later than the time when the Portfolio
is priced on the following business day. Service Agents are responsible to their
customers and the Fund for timely transmission of all subscription and
redemption requests, investment information, documentation and money.
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IN-KIND PURCHASES
If accepted by the Fund, shares of the Portfolio may be purchased in
exchange for securities which are eligible for acquisition by the Portfolio, as
described in this Prospectus. Securities to be exchanged which are accepted by
the Fund will be valued as set forth under "VALUATION OF SHARES" at the time of
the next determination of net asset value after such acceptance. Shares issued
by a Portfolio in exchange for securities will be issued at net asset value
determined as of the same time. All dividends, interest, subscription, or other
rights pertaining to such securities shall become the property of the Portfolio
and must be delivered to the Fund by the investor upon receipt from the issuer.
Securities acquired through an in-kind purchase will be acquired for investment
and not for immediate resale.
The Fund will not accept securities in exchange for shares of the Portfolio
unless:
* at the time of the exchange, such securities are eligible to be
included in the Portfolio and current market quotations are readily
available for such securities;
* the investor represents and agrees that all securities offered to be
exchanged are not subject to any restrictions upon their sale by the
Portfolio under the Securities Act of 1933, or otherwise; and
* the value of any such securities (except U.S. Government securities)
being exchanged together with other securities of the same issuer
owned by the Portfolio will not exceed 5% of the net assets of the
Portfolio immediately after the transaction.
Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for Federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such exchanges
should contact the Adviser.
REDEMPTION OF SHARES
Shares of the Portfolio may be redeemed by mail or telephone, at any time,
at the net asset value of the Portfolio next determined after receipt of the
redemption request. Any redemption may be more or less than the purchase price
of your shares depending on the market value of the investment securities held
by the Portfolio. Shares held 90 days or more may be redeemed without cost
except for a $12 fee charged to shareholders for wire redemptions. Shares held
less than 90 days will be subject to a 1% redemption fee which is retained by
the Fund for the benefit of the remaining shareholders and is intended to
encourage long-term investment in the Portfolio to avoid transaction and other
expenses caused by early redemption and to facilitate portfolio management.
BY MAIL
The Portfolio will redeem its shares at the net asset value next determined
on the date the request is received in "good order." Address requests for
redemption to Rodney Square at P.O. Box 8987, Wilmington, DE 19890. A request to
redeem shares must include:
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* share certificates, if issued;
* a letter of instruction or a stock assignment specifying the number of
shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;
* any required signature guarantees (see "SIGNATURE GUARANTEES"); and
* any other necessary legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should
contact Rodney Square by calling _________________.
BY TELEPHONE
In order to make a redemption request by telephone, you must:
* establish the telephone redemption privilege (and if desired, the wire
redemption privilege) by completing appropriate sections of the
Account Registration Form; and
* call the Fund and instruct that the redemption proceeds be mailed to
you or wired to your bank.
The following tasks cannot be accomplished by telephone:
* changing the name of the commercial bank or the account designated to
receive redemption proceeds (this can be accomplished only by a
written request signed by each shareholder, with each signature
guaranteed);
* redemption of certificated shares by telephone.
The Fund and the Fund's Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine, and they may be
liable for any losses if they fail to do so. These procedures include requiring
the investor to provide certain personal identification at the time an account
is opened, as well as prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
of such transaction requests. The Fund or Transfer Agent may be liable for any
losses due to unauthorized or fraudulent telephone instructions if the Fund or
Transfer Agent does not employ the procedures described above. Neither the Fund
nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that it reasonably
believes to be genuine.
Please contact Rodney Square at ______________________ for further details.
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SIGNATURE GUARANTEES
Signature guarantees are required for the following redemptions:
* redemptions where the proceeds are to be sent to someone other than
the registered shareowner(s);
* redemptions where the proceeds are to be sent to someplace other than
the registered address; or
* share transfer requests.
The purpose of signature guarantees is to verify the identity of the party
who has authorized a redemption. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. Eligible guarantor institutions include banks, brokers, dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital of
at least $100,000. Credit unions must be authorized to issue signature
guarantees.
OTHER REDEMPTION INFORMATION
Normally, the Fund will make payment for all shares redeemed under proper
procedures within one business day of and no more than seven days after receipt
of the request. The Fund may suspend the right of redemption or postpone the
date at times when both the NYSE and Custodian Bank are closed, or under any
emergency circumstances as determined by the SEC.
If the Fund's Board of Trustees determines that it would be detrimental to
the best interests of remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay the redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities so received in payment of
redemptions.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Shares of the Portfolio may be exchanged for any other Institutional Class
Shares of a Portfolio included in the Brazos Mutual Funds. Exchange requests
should be made by writing to the Fund c/o Rodney Square Management Corporation,
P.O. Box 8987, Wilmington, DE 19890 or calling ___________________.
Any exchange will be based on the net asset values of the shares involved.
There is no sales commission or charge of any kind for an exchange. Before
making an exchange into a Portfolio, a shareholder should read its Prospectus
and consider the investment objectives of the Portfolio to be
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purchased. Contact Rodney Square at _____________________ for a copy of the
Prospectus for the Portfolio(s). Exchanges can only be made with Portfolios that
are registered for sale in a shareholder's state of residence. Exchange requests
may be made either by mail or telephone. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged have not been issued to
the shareholder and if the registration of the two accounts will be identical.
Requests for exchanges with other Portfolios received prior to 4 p.m. (ET) will
be processed as of the close of business on the same day. Requests received
after that time will be processed on the next business day. The Board of
Trustees may limit frequency and amount of exchanges permitted. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "REDEMPTION OF SHARES-BY TELEPHONE" above. An exchange into
another Portfolio of the Fund is a sale of shares and may result in a capital
gain or loss for income tax purposes. The Fund may modify or terminate the
exchange privilege at any time.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to the Fund at the above address. As in the case of
redemptions, the written request must be received in good order before any
transfer can be made. (See "REDEMPTION OF SHARES" for a definition of "good
order.")
RETIREMENT PLANS
Shares of the Fund are available for use in certain tax- deferred plans
(such as Individual Retirement Accounts ("IRAs"), defined contribution, 401(k)
and 403(b)(7) plans).
Individual Retirement Accounts
Application forms and brochures for IRAs can be obtained from Rodney Square
by calling _______________.
WTC makes available its services as an IRA custodian for each shareholder
account that is established as an IRA. For these services, WTC receives an
annual fee of $10.00 per account, which fee is paid directly to WTC by the IRA
shareholder. If the fee is not paid by the date due, shares of the Fund owned by
the IRA will be redeemed automatically for purposes of making the payment.
VALUATION OF SHARES
The net asset value of the Portfolio is determined by dividing the sum of
the total market value of the Portfolio's investments and other assets, less any
liabilities, by the total number of shares outstanding. Net asset value per
share of the Portfolio is determined as of the close of the NYSE on each day
that the NYSE is open for business.
Equity securities listed on a United States securities exchange for which
market quotations are readily available are valued at the last quoted sale price
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. Unlisted
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equity securities are valued at the last quoted sale price on the day the
valuation is made. Listed and unlisted securities not traded on the valuation
date for which market quotations are readily available are valued at the average
between the bid and asked price at the close of the NYSE on each day that the
NYSE is open for business.
Bonds and other fixed income securities are valued according to the
broadest and most representative market which will ordinarily be the
over-the-counter market. Net asset value includes interest on fixed income
securities, which is accrued daily. Bonds and other fixed income securities may
be valued on the basis of prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the Board of Trustees determines that amortized cost reflects fair
value.
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good faith
at fair value using methods determined by the Trustees.
PERFORMANCE CALCULATIONS
The Portfolio may advertise or quote total return data. Total return is
calculated on an average annual total return basis, and may also be calculated
on an aggregate total return basis, for various periods. Average annual total
return reflects the average annual percentage change in value of an investment
in a Portfolio over a period. Aggregate total return reflects the total
percentage change in value over a period. Both methods assume dividends and
capital gains distributions are reinvested in Portfolio shares.
The Portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported in
financial and industry publications, and various indices, all as further
described in the Portfolio's Statement of Additional Information.
The Portfolio will provide information about past performance together with
a comparison to an appropriate index in its Annual Report to Shareholders.
Following the end of the Portfolio's fiscal year, a free copy of the Portfolio's
Annual Report to Shareholders will be available upon request by writing or
calling the Fund at the address or phone number on the cover of this Prospectus.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Portfolio will normally distribute substantially all of its net
investment income to shareholders in quarterly dividends. If any net capital
gains are realized, the Portfolio will normally distribute them with the last
dividend for the fiscal year. Dividends paid shortly after the purchase of
shares by an investor, although in effect a return of capital, are taxable to
shareholders. The Portfolio's dividends and capital gains distributions will be
automatically reinvested in additional shares of the Portfolio unless the Fund
is notified in writing that the shareholder elects to receive distributions in
cash.
FEDERAL TAXES
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The Portfolio intends to declare and pay dividend and capital gains
distributions so as to avoid imposition of the Federal Excise Tax. To do so, the
Portfolio expects to distribute an amount no less than:
* 98% of its calendar year ordinary income;
* 98% of its capital gains net income (the excess of short and long-term
capital gains over short and long- term capital losses) for the
one-year period ending October 31; and
* 100% of any undistributed ordinary or capital gain net income from the
prior year.
Dividends paid by a Portfolio from net investment income, either in cash or
reinvested in shares, will be taxable to shareholders as ordinary income.
Dividends paid from the Portfolio will generally qualify in part for the 70%
dividends received deduction for corporations, but the portion of the dividends
so qualified depends on the ratio of the aggregate taxable qualifying dividend
income received by the Portfolio from domestic (U.S.) sources to the total
taxable income of the Portfolio, exclusive of long-term capital gains.
Distributions paid by a Portfolio from long-term capital gains, either in
cash or additional shares of the Portfolio (and regardless of the length of time
the shares in the Portfolio have been owned by the shareholder), are taxable to
shareholders as such. These distributions are not eligible for the dividends
received deduction. Shareholders are notified annually by the Fund as to Federal
tax status of dividends and distributions paid by a Portfolio. Dividends and
distributions may also be subject to state and local taxes. Dividends declared
in October, November, or December to shareholders on record in such month will
be deemed to have been paid by the Fund and received by the shareholders on
December 31 of such calendar year, provided that the dividends are paid before
February 1 of the following year.
Redemptions of shares in a Portfolio are taxable events for Federal income
tax purposes.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on distributions
and redemptions. Shareholders should consult with their tax advisers regarding
the tax status of distributions in their state and locality.
INVESTMENT ADVISER
John McStay Investment Counsel is a limited partnership formed in 1983 and
located at 5949 Sherry Lane, Suite 1560, Dallas, Texas 75225. The Adviser
provides investment management services to institutions and individuals. The
Adviser currently has approximately $2 billion in assets under management. John
D. McStay may be deemed to control the Adviser as a result of ownership of a
majority interest in John McStay & Associates ("JMA"), the general partner of
the Adviser. JMA owns a majority interest in the Adviser.
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An investment policy committee is responsible for the day- to-day
management of the Portfolio's investments.
Under an Investment Advisory Agreement with the Fund, dated as of
______________, the Adviser manages the investment and reinvestment of the
assets of the Portfolios. The Adviser must adhere to the stated investment
objectives and policies of the Portfolios, and is subject to the control and
supervision of the Fund's Board of Trustees.
As compensation for its services as an Adviser, the Portfolio pays the
Adviser an annual fee, in monthly installments, of up to .90% of the Portfolio's
average daily net assets for the month. The Adviser has voluntarily agreed to
keep operating expenses from exceeding 1.25% of average daily net assets. The
Fund will not reimburse the Adviser for any advisory fees that are waived or
Portfolio expenses that the Adviser may bear on behalf of a Portfolio.
The Adviser may compensate its affiliated companies for referring investors
to the Portfolios. The Adviser, or any of its affiliates, may, at its own
expense, compensate a Service Agent or other person for marketing, shareholder
servicing, record-keeping and/or other services performed with respect to the
Fund or a Portfolio. Payments made for any of these purposes may be made from
the paying entity's revenues, its profits or any other source available to it.
When such service arrangements are in effect, they are made generally available
to all qualified service providers.
ADVISER'S HISTORICAL PERFORMANCE
Set forth below are performance data provided by the Adviser pertaining to
the composite of separately managed accounts of the Adviser that are managed
with substantially similar (although not necessarily identical) objectives,
policies and strategies as those of the Portfolio. The investment returns of the
Portfolio may differ from those of the separately managed accounts because such
separately managed accounts may have fees and expenses that differ from those of
the Portfolio. Further, the separately managed accounts are not subject to
investment limitations, diversification requirements and other restrictions
imposed by the Investment Company Act of 1940 and Internal Revenue Code; such
conditions, if applicable, may have lowered the returns for the separately
managed accounts. The results presented are not intended to predict or suggest
the return of the Portfolio or the return an investor might achieve by investing
in the Portfolio.
John McStay Investment Counsel Real Estate Securities Portfolio
(Percentage Returns Net of Management Fees)
Calendar Year Institutional NAREIT Wilshire
Equity Accounts Equity Index REIT Index
1994 14.6% 3.2% 2.7%
1995 20.5% 15.3% 12.2%
Year to Date (9/30/96) 17.4% 13.8% 14.1%
Annualized 19.2% 11.7% 10.5%
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Cumulative 62.1% 35.4% 31.5%
(Two)-Year Mean 17.6% 9.2% 7.5%
Value of $1 invested
during 2 3/4 years
(1/1/94-9/30/96) $1.62 $1.35 $1.32
Notes:
1. The annualized return is calculated from monthly data, allowing for
compounding. The formula used is in accordance with the acceptable methods
set forth by the Association for Investment Management Research, The Bank
Administration Institute, and the Investment Counsel Association of
America. Market Value of the account was the sum of the account's total
assets, including cash, cash equivalents, short term investments, and
securities valued at current market prices.
2. The cumulative return means that $1 invested in the composite account on
January 1, 1994 had grown to $1.62 by 9/30/96.
3. The two-year mean is the arithmetic average of the annual returns for the
years listed.
4. The NAREIT Equity Index and the Wilshire REIT Index are unmanaged indices
which assume reinvestment of dividends and are generally considered
representative of securities similar to those invested in by the Adviser
for the purpose of the composite performance numbers set forth above.
5. The Adviser's average annual management fee over the two- year period
(1994-1995) was .90% or 90 basis points. During the period, fees on the
Adviser's individual accounts ranged from .80% to 1% (80 basis points to
100% basis points). Net returns to investors vary depending on the
management fee.
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ADMINISTRATIVE SERVICES
Rodney Square Management Corporation, 1100 N. Market Street, Wilmington, DE
19890-001, serves as Administrator, Transfer Agent and Dividend Paying Agent of
the Fund and also provides accounting services to the Fund.
As Administrator, Rodney Square supplies office facilities, non-investment
related statistical and research data, stationery and office supplies, executive
and administrative services, internal auditing and regulatory compliance
services. Rodney Square also assists in the preparation of reports to
shareholders, prepares proxy statements, updates prospectuses and makes filings
with the Securities and Exchange Commission and state securities authorities.
Rodney Square performs certain budgeting and financial reporting and compliance
monitoring activities. For the services provided as Administrator, Rodney Square
receives a monthly administration fee from the Fund at the annual rate of .15%
of the average daily net assets of the Fund on the first $50 million; .10% of
such assets in excess of $50 million to $200 million; and .07% of such assets in
excess of $200 million. Each Portfolio pays its pro-rata portion based upon
total Fund assets. Such fees are subject to a minimum fee of $50,000 per year
for one Portfolio and $15,000 minimum per year for each additional Portfolio.
Rodney Square also serves as Transfer Agent and Dividend Paying Agent of the
Fund.
Rodney Square also serves as an Accounting Agent to the Fund. As Accounting
Agent, Rodney Square determines the Fund's net asset value per share and
provides accounting services to the Fund pursuant to an Accounting Services
Agreement with the Fund.
DISTRIBUTOR
Rodney Square Distributors, Inc., 1100 N. Market Street, Wilmington, DE
19890, has been engaged pursuant to a distribution agreement dated ___________,
1996, to assist in securing purchasers for shares of the Fund. RSD also
directly, or through its affiliates, provides investor support services. RSD
will receive no compensation for distribution of shares of the Fund, except for
reimbursement of out-of-pocket expenses.
Banking laws limit deposit-taking institutions and certain of their
affiliates from underwriting or distributing securities. RSD is an affiliate of
Wilmington Trust Company ("WTC"), the Fund's custodian bank for its domestic
assets. RSD believes that it may perform the services contemplated by its
agreement with the Fund without violation of applicable banking laws or
regulations. If RSD were prohibited from performing these services, it is
expected that the Board of Trustees would consider entering into agreements with
other entities. It is not expected that shareholders would suffer any adverse
financial consequences as a result of such an occurrence.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio. The Agreement directs the Adviser to use its best
efforts to obtain the best available price and most favorable execution for all
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transactions of the Portfolio. The Adviser may buy and sell securities for the
account of the portfolio through the Adviser's affiliated broker-dealer. In such
instances, the affiliated broker-dealer will complete transactions pursuant to
procedures designed to ensure that charges for the transactions do not exceed
usual and customary levels obtainable from other, unaffiliated broker- dealers.
Such transactions and the procedures are supervised by the Fund's Board of
Trustees. It is understood that the affiliated broker-dealer will not be
utilized in situations where, in the Adviser's judgment, the brokerage services
of another security firm would be in the best interest of the Portfolio. If
consistent with the interests of the Portfolio, the Adviser may select brokers
on the basis of research, statistical and pricing services these brokers provide
to the Portfolio. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by the
Adviser under the Investment Advisory Agreement. Such brokers may be paid a
higher commission than that which another qualified broker would have charged
for effecting the same transaction, provided that such commissions are paid in
compliance with the Securities Exchange Act of 1934, as amended, and that the
Adviser determines in good faith that the commission is reasonable in terms
either of the transaction or the overall responsibility of the Adviser to the
Portfolios and the Adviser's other clients. Although not a typical practice, the
Adviser may place portfolio orders with qualified broker-dealers who refer
clients to the Adviser. If a purchase or sale of securities is consistent with
the investment policies of a Portfolio and one or more other clients served by
the Adviser is considered at or about the same time, transactions in such
securities will be allocated among the Portfolio and clients in a manner deemed
fair and reasonable by the Adviser. Although there is no specified formula for
allocating such transactions, the allocations are subject to periodic review by
the Fund's Trustees.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Delaware Business Trust on October ___, 1996.
The Trustees have the power to designate one or more series of shares of
beneficial interest and to classify or reclassify any unissued shares without
further action by shareholders. At its discretion, the Board of Trustees may
create additional Portfolios and Classes of shares.
The shares of each Portfolio are fully paid and nonassessable, have no
preference as to conversion, exchange, dividends, retirement or other features
and have no pre-emptive rights. They have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees. A shareholder is entitled to one vote
for each full share held (and a fractional vote for each fractional share held),
then standing in his name on the books of the Fund.
Annual meetings will not be held except as required by the 1940 Act and
other applicable laws. The Fund has undertaken that its Trustees will call a
meeting of shareholders if such a meeting is requested in writing by the holders
of not less than 10% of the outstanding shares of the Fund. The Fund will assist
shareholder communications in such matters.
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<PAGE>
CUSTODIAN
Wilmington Trust Company, Rodney Square North, 1100 North Market Street,
Wilmington, DE 19890-0001, serves as Custodian of the Fund's assets.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, 9th Floor, Boston, MA 02110, is
the independent accountants for the Fund.
REPORTS
Shareholders receive unaudited semi-annual financial statements and annual
financial statements audited by Price Waterhouse LLP.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be made by contacting the Fund c/o Rodney Square
Management Corporation, P.O. Box 8987, Wilmington, DE 19890, or by calling the
telephone number listed on the cover of this Prospectus.
LITIGATION
The Fund is not involved in any litigation.
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<PAGE>
PROSPECTUS
dated
Investment Adviser
JOHN MCSTAY INVESTMENT COUNSEL
5949 Sherry Lane
Suite 1560
Dallas, TX 75225
------------------
Distributor
TABLE OF CONTENTS
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Objective. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Calculations. . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends, Capital Gains Distributions and Taxes. . . . . . . . . . . . . . .
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advisers Historical Performance . . . . . . . . . . . . . . . . . . . . . . .
Administrative Services . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Fund's Statement of
Additional Information, in connection with the offering made by this Prospectus
and, if given or made, such information or its representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offering by the Fund in any jurisdiction in which such offering
may not lawfully be made.
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PART B
BRAZOS/JMIC SMALL/EMERGING GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
___________________, 1996
This Statement is not a Prospectus but should be read in conjunction with the
Prospectus of the Brazos Mutual Funds (the "Fund") for the BRAZOS/JMIC
Small/Emerging Growth Portfolio Shares dated _________________, 1996. To obtain
the Prospectus, please call Rodney Square Management Corporation at
____________________:
[phone number]
Table of Contents
Page
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . .
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Services. . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Limitations. . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund. . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Calculations. . . . . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . .
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies of
the BRAZOS/JMIC Small/Emerging Growth Portfolio as set forth in the Prospectus
for the Portfolio:
SECURITIES LENDING
The Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Portfolio. The Portfolio may lend its investment securities to qualified
brokers, dealers, domestic and foreign banks or other financial institutions, so
long as the terms, the structure and the aggregate amount of such loans are not
inconsistent with the Investment Company Act of 1940, as amended, (the "1940
Act") or the Rules and Regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder, which currently require that
(a) the borrower pledge and maintain with the Portfolio collateral consisting of
cash, an irrevocable letter of credit issued by a domestic U.S. bank or
securities issued or guaranteed by the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time, and (d) the
Portfolio receives reasonable interest on the loan (which may include the
Portfolio investing any cash collateral in interest bearing short-term
investments). All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities so long as such fees are set forth in a written contract and approved
by the investment company's Board of Trustees. The Portfolio will continue to
retain any voting rights with respect to the loaned securities. If a material
event occurs affecting an investment on a loan, the loan must be called and the
securities voted.
HEDGING STRATEGIES
The Portfolio may engage in various portfolio strategies to hedge against
adverse movements in the equity markets. The Portfolio may buy or sell futures
contracts, write (i.e., sell) covered call options on its portfolio securities,
purchase put and call options on securities and engage in transactions in
related options on such futures. Each of these portfolio strategies is described
below. Although certain risks are involved in options and futures transactions,
the Adviser believes that, because the Portfolio will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Portfolio will not subject it to the risks
frequently associated with the speculative use of options and futures
transactions. While the Portfolio's use of hedging strategies is intended to
reduce the volatility of the net asset value of the Portfolio shares, the
Portfolio's net asset value will fluctuate. There can be no assurance that the
Portfolio's hedging transactions will be effective. Also, the Portfolio may not
necessarily be engaging in hedging activities when movements in any particular
equity market occur.
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<PAGE>
FUTURES CONTRACTS
The Portfolio may enter into futures contracts for the purposes of hedging,
remaining fully invested and reducing transactions costs. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a
specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by trading an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Portfolio expects to earn
interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators". Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade and use
futures contracts with the expectation of realizing profits from a fluctuation
in interest rates. The Portfolio intends to use futures contracts only for
hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide straddles or that the Fund's commodity
futures and option positions be for other purposes, to the extent that the
aggregate initial margins and premiums required to establish such non-hedging
positions do not exceed five percent of the liquidation value of the Portfolio.
The Portfolio will only sell futures contracts to protect securities it owns
against price declines or purchase contracts to protect against an increase in
the price of securities it intends to purchase. As evidence of this hedging
interest, the Portfolio expects that approximately 75% of its futures contracts
purchases will be "completed", that is, equivalent
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amounts of related securities will have been purchased or will be purchased by
the Portfolio on the settlement date of the futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While the Portfolio will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Portfolio will not enter into futures contract transactions to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of its total assets. In addition,
the Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would
exceed 20% of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
The Portfolio will minimize the risk that it will be unable to close out a
futures position by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular futures contract at any given time. Thus, it may not be possible to
close a futures position. In the event of adverse price movements, the Portfolio
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if the Portfolio has insufficient cash, it
may have to sell securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, the Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close futures positions also could have an adverse impact on the
Portfolio's ability to effectively hedge.
The risk of loss in trading futures contracts in some strategies can be
substantial due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in excess of the amount
invested in the contract. However, because the futures strategies of the
Portfolio are engaged in only for hedging purposes, the Adviser does not believe
that the Portfolio is subject to the risks of loss frequently associated with
futures transactions. The Portfolio would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in the underlying
financial instrument and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying the futures
contracts have different maturities than the portfolio securities being hedged.
It is also possible that the Portfolio could lose money on futures contracts and
also
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experience a decline in value of portfolio securities. There is also the risk of
loss by the Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and, therefore, does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Futures contracts may be traded on foreign exchanges. Such transactions are
subject to the risks of governmental actions affecting trading in or the prices
of the securities. The value of such positions also could be adversely affected
by (i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Portfolio's ability to act upon economic events
occurring in foreign markets during non- business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lesser trading
volume.
OPTIONS
The Portfolio may purchase and sell put and call options on securities and
futures contracts for hedging purposes. Investments in options involve some of
the same considerations that are involved in connection with investments in
futures contracts (e.g., the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying security or contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract on which it is based or the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract or securities.
WRITING COVERED CALL OPTIONS
The principal reason for writing call options is to attempt to realize,
through the receipt of premiums, a greater return than would be realized on
securities alone. By writing covered call options, the Portfolio gives up the
opportunity, while the option is in effect, to profit from any price increase in
the underlying security above the option exercise price. In addition, the
Portfolio's ability to sell the underlying security will be limited while the
option is in effect unless the Portfolio effects a closing purchase transaction.
A closing purchase transaction cancels out the Portfolio's position as the
writer of an option by means of an offsetting purchase of an identical option
prior to the expiration of the option it has written. Covered call options serve
as a partial hedge against the price of the underlying security declining. The
Portfolio writes only covered options, which means that so long as the Portfolio
is obligated as the writer of the option it will, in a segregated account with
its custodian, maintain cash, U.S. government
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securities, other high grade liquid debt securities or other liquid securities
denominated in U.S. dollars with a value equal to or greater than the exercise
price of the underlying securities.
PURCHASING OPTIONS
The amount of any appreciation in the value of the underlying security
subject to a put will be partially offset by the amount of the premium paid for
the put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from a sale
will depend on whether the amount received is more or less than the premium paid
for the put option plus the related transaction costs. A closing sale
transaction cancels out the Portfolio's position as purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Portfolio may
purchase call options on securities held in its investment portfolio on which it
has written call options or on securities which it intends to purchase.
PURCHASE OF SHARES
Shares of the Portfolio may be purchased without sales commission at the
net asset value per share next determined after an order is received in proper
form by the Fund, and payment is received by the Fund's custodian. The minimum
initial investment required for the Portfolio is $10,000 with certain exceptions
as may be determined from time to time by the officers of the Fund. An order
received in proper form prior to the 4:00 p.m. close of the New York Stock
Exchange (the "NYSE") will be executed at the price computed on the date of
receipt; and an order received not in proper form or after the 4:00 p.m. close
of the NYSE will be executed at the price computed on the next day the NYSE is
open after proper receipt. The NYSE will be closed on the following days:
Thanksgiving Day, November 28, 1996; Christmas Day, December 25, 1996; New
Year's Day, January 1, 1997; President's Day, February 17, 1997; Good Friday,
March 28, 1997; Memorial Day, May 26, 1996; Independence Day, July 4, 1997; and
Labor Day, September 1, 1997.
The Portfolio reserves the right in its sole discretion (1) to suspend the
offering of its shares, (2) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Fund, and (3) to
reduce or waive the minimum for initial and subsequent investment for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolio's shares.
REDEMPTION OF SHARES
The Portfolio may suspend redemption privileges or postpone the date of
payment (1) during any period that both the Exchange and custodian bank are
closed or trading on the Exchange is restricted as determined by the Commission,
(2) during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
Portfolio to dispose of securities owned by it or to fairly determine the value
of its assets, and (3) for such other periods as the Commission may permit. The
Fund has made an election with the Commission to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid, in whole or in
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part, in investment securities or in cash as the Board of Trustees may deem
advisable; however, payment will be made wholly in cash unless the Board of
Trustees believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "How Share Prices are Determined," and a redeeming
shareholder would normally incur brokerage expenses if those securities were
converted to cash.
No charge is made by the Portfolio for redemptions. Any redemption may be
more or less than the shareholder's initial cost depending on the market value
of the securities held by the Portfolio.
SIGNATURE GUARANTEES
To protect your account, the Fund and Rodney Square Management Corporation
(the "Administrator") from fraud, signature guarantees are required for certain
redemptions. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareowner(s) or
the registered address or (2) share transfer requests. The purpose of signature
guarantees is to verify the identity of the party who has authorized a
redemption.
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934. Eligible
guarantor institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. A complete definition of eligible guarantor institution is
available from the Administrator. Broker-dealers guaranteeing signatures must be
a member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program.
The signature guarantee must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
The following supplements the shareholder services information set forth in
the BRAZOS/JMIC Small/Emerging Growth Portfolio's Prospectus:
EXCHANGE PRIVILEGE
Institutional Class Shares of the BRAZOS/JMIC Small/Emerging Growth
Portfolio may be exchanged for any other Institutional Class Shares of a
Portfolio included within the Brazos Mutual Funds. Exchange requests should be
made by calling _______________ or by writing to Brazos Mutual Funds, c/o Rodney
Square Management Corporation, 1100 North Market Street, 3rd Floor, Wilmington,
DE 19890. The exchange privilege is only available with respect to Portfolios
that are registered for sale in the shareholder's state of residence.
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<PAGE>
Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or charge of any kind. Before
making an exchange into a Portfolio, a shareholder should read its Prospectus
and consider the investment objectives of the Portfolio to be purchased. You may
obtain a Prospectus for the Portfolio(s) you are interested in by calling the
Administrator at _____________.
Exchange requests may be made either by mail or telephone. Telephone
exchanges will be accepted only if the certificates for the shares to be
exchanged are held by the Fund for the account of the shareholder and the
registration of the two accounts will be identical. Requests for exchanges
received prior to 4:00 p.m. (Eastern Time) will be processed as of the close of
business on the same day. Requests received after 4:00 p.m. will be processed on
the next business day. Neither the Fund nor the Administrator will be
responsible for the authenticity of the exchange instructions received by
telephone. Exchanges may also be subject to limitations as to amounts or
frequency, and to other restrictions established by the Board of Trustees to
assure that such exchanges do not disadvantage the Fund and its shareholders.
For Federal income tax purposes an exchange between Portfolios is a taxable
event, and, accordingly, a capital gain or loss may be realized. In a revenue
ruling relating to circumstances similar to the Fund's, an exchange between
series of a Fund was also deemed to be a taxable event. It is likely, therefore,
that a capital gain or loss would be realized on an exchange between Portfolios;
you may want to consult your tax adviser for further information in this regard.
The exchange privilege may be modified or terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolio to another person by
making a written request to the Fund. The request should clearly identify the
account and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares." As in the case of redemptions, the written request must be received
in good order before any transfer can be made.
INVESTMENT LIMITATIONS
The following limitations supplement those set forth in the Prospectus.
Whenever an investment limitation sets forth a percentage limitation on
investment or utilization of assets, such limitation shall be determined
immediately after and as a result of the Portfolio's acquisition of such
security or other asset. Accordingly, any later increase or decrease resulting
from a change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with the Portfolio's
investment limitations. Investment limitations (1), (2), (3) and (4) are
classified as fundamental. The Portfolio's fundamental investment limitations
cannot be changed without approval by a "majority of the outstanding shares" (as
defined in the 1940 Act) of the Portfolio. The Portfolio will not:
(1) invest in physical commodities or contracts on physical commodities;
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(2) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal
in real estate and may purchase and sell securities which are secured
by interests in real estate;
(3) make loans except (i) by purchasing debt securities in accordance with
its investment objectives and (ii) by lending its portfolio securities
to banks, brokers, dealers and other financial institutions so long as
such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the Commission thereunder;
(4) underwrite the securities of other issuers;
(5) invest in futures and/or options on futures unless (i) not more than
5% of the Portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts
provided, however, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be excluded in
computing such 5% and (ii) not more than 20% of the Portfolio's assets
are invested in futures and options;
(6) purchase on margin or sell short except as specified in (5) above;
(7) invest more than an aggregate of 15% of the net assets of the
Portfolio, determined at the time of investment, in securities subject
to legal or contractual restrictions on resale or securities for which
there are no readily available markets;
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Trustees. The Trustees set broad policies for
the Fund and elect its Officers. The following is a list of the Trustees and
Officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years:
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* This person is deemed to be an "interested person" of the Fund as that term
is defined in the 1940 Act.
REMUNERATION OF TRUSTEES AND OFFICERS
The Fund pays each Trustee, who is not also an officer or affiliated
person, a $500 quarterly retainer fee per active Portfolio which currently
amounts to $1,000 per quarter. In addition, each unaffiliated Trustee receives a
$500 meeting fee which is aggregated for all the Trustees and allocated
proportionately among the Portfolios of the Fund, and reimbursement for travel
and other expenses incurred while attending Board meetings. Trustees who are
also officers or affiliated persons receive no remuneration for their service as
Trustees. The Fund's officers and employees are paid by either the Adviser or
the Administrator and receive no compensation from the Fund. The following table
shows aggregate compensation to be paid to each of the Fund's Trustees by the
Fund in the fiscal year ending June 30, 1997.
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COMPENSATION TABLE
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Compensation
From Benefits Benefits from Registrant
Registrant* Accrued as Upon and Fund
Part of Retirement Complex Paid
Fund to Trustees
Expenses
PRINCIPAL HOLDERS OF SECURITIES
As of ________________, 1997, the following persons or organizations held
of record 5% or more of the shares of the Portfolio:
* Denotes shares held by a trustee or other fiduciary for which beneficial
ownership is disclaimed or presumed disclaimed.
INVESTMENT ADVISER
ADVISORY FEES
As compensation for services rendered by John McStay Investment Counsel
(the "Adviser") under the Investment Advisory Agreement, the Portfolio pays the
Adviser an annual fee in monthly installments, calculated by applying the
following annual percentage rates to the Portfolio's average daily net assets
for the month:
BRAZOS/JMIC Small/Emerging Growth Portfolio 0.90%
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best execution with respect to all transactions for the Portfolio.
The Adviser may, however, consistent with the interests of the Portfolio, select
brokers on the basis of the research, statistical and pricing services they
provide to the Portfolio. Information and research received from such brokers
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will be in addition to, and not in lieu of, the services required to be
performed by the Adviser under the Investment Advisory Agreement. A commission
paid to such brokers may be higher than that which another qualified broker
would have charged for effecting the same transaction, provided that such
commissions are paid in compliance with the Securities Exchange Act of 1934, as
amended, and that the Adviser determines in good faith that such commission is
reasonable in terms either of the transaction or the overall responsibility of
the Adviser to the Portfolio and the Adviser's other clients.
It is not the Fund's practice to allocate brokerage or principal business
on the basis of sales of shares which may be made through broker- dealer firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolio or who act as agents in the purchase of shares of
the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Portfolio and one or
more of these other clients served by the Adviser is considered at or about the
same time, transactions in such securities will be allocated among the Portfolio
and clients in a manner deemed fair and reasonable by the Adviser. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser, and the results of such allocations, are
subject to periodic review by the Fund's Board of Trustees.
PERFORMANCE CALCULATIONS
PERFORMANCE
The Portfolio may from time to time quote various performance figures to
illustrate past performance. Performance quotations by investment companies are
subject to rules adopted by the Commission, which require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the
Commission. Current yield and average annual compounded total return quotations
used by the Fund are based on the standardized methods of computing performance
mandated by the Commission. An explanation of those and other methods used to
compute or express performance follows.
YIELD
Current yield reflects the income per share earned by the Portfolio's
investment. The current yield of the Portfolio is determined by dividing the net
investment income per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders during the base period.
This figure is obtained using the following formula:
6
Yield=2[(a-b=1) + 1]
---
cd
where:
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a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements)
c= the average daily number of shares outstanding during the period
that were
entitled to receive income distributions
d= the maximum offering price per share on the last day of the
period.
TOTAL RETURN
The average annual total return of the Portfolio is determined by finding
the average annual compounded rates of return over 1, 5 and 10 year periods that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each 1, 5 and 10 year period and the deduction of all applicable
Fund expenses on an annual basis.
These figures will be calculated according to the following formula:
n
P(1+T) =ERV
where:
P= a hypothetical initial payment of $ 1,000
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).
COMPARISONS
To help investors better evaluate how an investment in the Portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications, indices and averages may be used:
(a) Dow Jones Composite Average or its component averages - an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow
Jones Industrial Average), 15 utilities company stocks and 20
transportation stocks. Comparisons of performance assume reinvestment
of dividends.
(b) Standard & Poor's 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks and 20 transportation stocks. Comparisons
of performance assume reinvestment of dividend.
(c) Standard & Poor's MidCap 400 Index - an unmanaged index measuring the
performance of non-S&P 500 stocks in the mid-range sector of the U.S.
stock market.
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<PAGE>
(d) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation and finance
stocks listed on the New York Stock Exchange.
(e) Wilshire 5000 Equity Index or its component indices - represents the
return on the market value of all common equity securities for which
daily pricing is available. Comparisons of performance assume
reinvestment of dividends.
(f) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income
Fund Performance Analysis - measure total return and average current
yield for the mutual fund industry. Rank individual mutual fund
performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
(g) Morgan Stanley Capital International EAFE Index and World Index -
respectively, arithmetic, market value-weighted averages of the
performance of over 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East, and over 1,400
securities listed on the stock exchanges of these continents,
including North America.
(h) Goldman Sachs 100 Convertible Bond Index - currently includes 67 bonds
and 33 preferred. The original list of names was generated by
screening for convertible issues of 100 million or greater in market
capitalization. The index is priced monthly.
(i) Salomon Brothers GNMA Index - includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the
Government National Mortgage Association.
(j) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It
is a value- weighted, total return index, including approximately 800
issues with maturities of 12 years or greater.
(k) Salomon Brothers Broad Investment Grade Bond - is a market-weighted
index that contains approximately 4,700 individually priced investment
grade corporate bonds rated BBB or better, U.S. Treasury/agency issues
and mortgage pass through securities.
(l) Lehman Brothers Long-Term Treasury Bond - is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of
10 years or greater.
(m) NASDAQ Industrial Index - is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only
and does not include income.
(n) Value Line - composed of over 1,600 stocks in the Value Line
Investment Survey.
(o) Russell 2000 - composed of the 2,000 smallest stocks in the Russell
3000, a market value-weighted index of the 3,000 largest U.S.
publicly-traded companies.
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(p) Russell 2500 - composed of the 2,500 smallest stocks in the Russell
3000, a market value-weighted index of the 3,000 largest U.S.
publicly- traded companies.
(q) Composite Indices - 60% Standard & Poor's 500 Stock Index, 30% Lehman
Brothers Long-Term Treasury Bond and 10% U.S. Treasury Bills; 70%
Standard & Poor's 500 Stock Index and 30% NASDAQ Industrial Index; 35%
Standard & Poor's 500 Stock Index and 65% Salomon Brothers High Grade
Bond Index; all stocks on the NASDAQ system exclusive of those traded
on an exchange, and 65% Standard & Poor's 500 Stock Index and 35%
Salomon Brothers High Grade Bond Index.
(r) CDA Mutual Fund Report published by CDA Investment Technologies, Inc.
- analyzes price, current yield, risk, total return and average rate
of return (average compounded growth rate) over specified time periods
for the mutual fund industry.
(s) Mutual Fund Source Book published by Morningstar, Inc. - analyzes
price, yield, risk and total return for equity funds.
(t) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial
Times, Global Investor, Wall Street Journal and Weisenberger
Investment Companies Service - publications that rate fund performance
over specified time periods.
(u) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change over time
in the price of goods and services in major expenditure groups.
(v) Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates -
historical measure of yield, price and total return for common and
small company stock, long-term government bonds, U.S. Treasury bills
and inflation.
(w) Savings and Loan Historical Interest Rates - as published by the U.S.
Savings & Loan League Fact Book.
(x) Lehman Brothers Government/Corporate Index - is a combination of the
Government and Corporate Bond Indices. The Government Index includes
public obligations of the U.S. Treasury, issues of Government
agencies, and corporate debt backed by the U.S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate
debt. Also included are Yankee Bonds and nonconvertible debt issued by
or guaranteed by foreign or international governments and agencies.
All issues are investment grade (BBB) or higher, with maturities of at
least one year and an outstanding par value of at least $100 million
for U.S. Government issues and $25 million for others. Any security
downgraded during the month is held in the index until month-end and
then removed. All returns are market value weighted inclusive of
accrued income.
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<PAGE>
(y) Lehman Brothers Intermediate Government/Corporate Index is an
unmanaged index composed of a combination of the Government and
Corporate Bond Indices. All issues are investment grade (BBB) or
higher, with maturities of one to ten years and an outstanding par
value of at least $100 million for U.S. Government issues and $25
million for others. The Government Index includes public obligations
of the U.S. Treasury, issues of Government agencies, and corporate
debt backed by the U.S. Government. The Corporate Bond Index includes
fixed-rate nonconvertible corporate debt. Also included are Yankee
Bonds and nonconvertible debt issued by or guaranteed by foreign or
international governments and agencies. Any security downgraded during
the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
(z) Historical data supplied by the research departments of First Boston
Corporation; the J.P. Morgan companies; Salomon Brothers; Merrill
Lynch, Pierce, Fenner & Smith; Lehman Brothers, Inc.; and Bloomberg
L.P.
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Portfolio,
that the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Portfolio to calculate its performance. In addition, there can be no assurance
that the Portfolio will continue this performance as compared to such other
averages.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Delaware business trust on October ____, 1996.
The Fund's principal office is located at 5949 Sherry Lane, Dallas, Texas 75225;
however, all investor correspondence should be directed to the Fund c/o Rodney
Square Management Corporation, P.O. Box 8987, Wilmington, DE 19890. The Fund's
Agreement and Declaration of Trust permits the Fund to issue an unlimited number
of shares of beneficial interest, without par value. The Trustees have the power
to designate one or more series ("Portfolios") or classes of shares of
beneficial interest without further action by shareholders.
On each matter submitted to a vote of the shareholders, each holder of a
share shall be entitled to one vote for each whole share and a fractional vote
for each fractional share standing in his or her name on the books of the Fund.
In the event of liquidation of the Fund, the holders of the shares of each
Portfolio or any class thereof that has been established and designated shall be
entitled to receive, when and as declared by the Trustees, the excess of the
assets belonging to that Portfolio, or in the case of a class, belonging to that
Portfolio and allocable to that class, over the liabilities belonging to that
Portfolio or class. The assets so distributable to the holders of shares of any
particular Portfolio or class thereof shall be distributed to the holders in
proportion to the number of shares of that Portfolio or class thereof held by
them and recorded on the books of the Fund. The liquidation of any Portfolio or
class thereof may be authorized at any time by vote of a majority of the
Trustees then in office.
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Shareholders have no pre-emptive or other rights to subscribe to any
additional shares or other securities issued by the Fund or any Portfolio,
except as the Trustees in their sole discretion shall have determined by
resolution.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of the Portfolio's net
investment income, if any, together with any net realized capital gains annually
in the amount and at the times that will avoid both income (including capital
gains) taxes incurred and the imposition of the Federal excise tax on
undistributed income and capital gains. The amounts of any income dividends or
capital gains distributions cannot be predicted. See discussion under
"Dividends, Capital Gains Distributions and Taxes" in the Prospectus.
Any dividend or distribution paid shortly after the purchase of shares of
the Portfolio by an investor may have the effect of reducing the per share net
asset value of the Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect a
return of capital, are subject to income taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividend and capital gains distributions are automatically received
in additional shares of the respective Portfolio of the Fund at net asset value
(as of the business day following the record date). This will remain in effect
until the Fund is notified by the shareholder in writing at least three days
prior to the record date that either the Income Option (income dividends in cash
and capital gains distributions in additional shares at net asset value) or the
Cash Option (both income dividends and capital gains distributions in cash) has
been elected. An account statement is sent to shareholders whenever an income
dividend or capital gains distribution is paid.
Each Portfolio of the Fund will be treated as a separate entity (and hence
as a separate "regulated investment company") for Federal tax purposes. Any net
capital gains recognized by the Portfolio will be distributed to its investors
without need to offset (for Federal income tax purposes) such gains against any
net capital losses of another Portfolio.
FEDERAL TAXES
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"), at least 90% of the Portfolio's gross income for
a taxable year must be derived from certain qualifying income, i.e., dividends,
interest, income derived from loans of securities and gains from the sale or
other disposition of stock, securities or foreign currencies, or other related
income, including gains from options, futures and forward contracts, derived
with respect to its business investing in stock, securities or currencies. Any
net gain realized from the closing out of futures contracts will, therefore,
generally be qualifying income for purposes of the 90% requirement.
Qualification as a regulated investment company also requires that less than 30%
of the Portfolio's gross income be derived from the sale or other disposition of
stock, securities, options, futures or forward contracts (including certain
foreign currencies not directly related to the Fund's business of investing in
stock or securities) held less than three months. In order to avoid realizing
excessive gains on securities held for less than three months, the Portfolio may
be required to defer the closing out of futures contracts beyond the time when
it would otherwise be advantageous to do so. It is
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anticipated that unrealized gains on futures contracts which have been open for
less than three months as of the end of the Portfolio's taxable year, and which
are recognized for tax purposes, will not be considered gains on securities held
for less than three months for the purposes of the 30% test.
Except for transactions the Portfolio has identified as hedging
transactions, the Portfolio is required for Federal income tax purposes to
recognize as income for the taxable year its net unrealized gains and losses on
forward currency and futures contracts as of the end of the taxable year as well
as those actually realized during the year. In most cases, any such gain or loss
recognized with respect to a regulated futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss without
regard to the holding period of the contract. Recognized gain or loss
attributable to a foreign currency forward contract is treated as 100% ordinary
income. Furthermore, foreign currency futures contracts which are intended to
hedge against a change in the value of securities held by the Portfolio may
affect the holding period of such securities and, consequently, the nature of
the gain or loss on such securities upon disposition.
The Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Portfolio's taxable year) on futures
transactions. Such distribution will be combined with distributions of capital
gains realized on the Portfolio's other investments, and shareholders will be
advised on the nature of the payment.
CODE OF ETHICS
The Fund has adopted a Code of Ethics which restricts, to a certain extent,
personal transactions by access persons of the Fund and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The Financial Statements for the Portfolio and selected per share data and
ratios and notes to the Financial Statements relating to corresponding periods
will be contained in this Statement of Additional Information.
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PART B
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
__________________________, 1996
This Statement is not a Prospectus but should be read in conjunction with the
Prospectus of the Brazos Mutual Funds (the "Fund") for the BRAZOS/JMIC Real
Estate Securities Portfolio Shares dated __________, 1996. To obtain the
Prospectus, please call Rodney Square Management Corporation at
[________________]:
[phone number]
Table of Contents
Page
Investment Objective and Policies .........................................
Purchase of Shares ........................................................
Redemption of Shares ......................................................
Shareholder Services ......................................................
Investment Limitations ....................................................
Management of the Fund ....................................................
Investment Adviser ........................................................
Portfolio Transactions ....................................................
Performance Calculations ..................................................
General Information .......................................................
Financial Statements ......................................................
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INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies of
the BRAZOS/JMIC Real Estate Securities Portfolio as set forth in the Prospectus
for the Portfolio:
SECURITIES LENDING
The Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Portfolio. The Portfolio may lend its investment securities to qualified
brokers, dealers, domestic and foreign banks or other financial institutions, so
long as the terms, the structure and the aggregate amount of such loans are not
inconsistent with the Investment Company Act of 1940, as amended, (the "1940
Act") or the Rules and Regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder, which currently require that
(a) the borrower pledge and maintain with the Portfolio collateral consisting of
cash, an irrevocable letter of credit issued by a domestic U.S. bank or
securities issued or guaranteed by the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time, and (d) the
Portfolio receives reasonable interest on the loan (which may include the
Portfolio investing any cash collateral in interest bearing short-term
investments). All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities so long as such fees are set forth in a written contract and approved
by the investment company's Board of Trustees. The Portfolio will continue to
retain any voting rights with respect to the loaned securities. If a material
event occurs affecting an investment on a loan, the loan must be called and the
securities voted.
HEDGING STRATEGIES
The Portfolio may engage in various portfolio strategies to hedge against
adverse movements in the equity markets. The Portfolio may buy or sell futures
contracts, write (i.e., sell) covered call options on its portfolio securities,
purchase put and call options on securities and engage in transactions in
related options on such futures. Each of these portfolio strategies is described
below. Although certain risks are involved in options and futures transactions,
the Adviser believes that, because the Portfolio will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Portfolio will not subject it to the risks
frequently associated with the speculative use of options and futures
transactions. While the Portfolio's use of hedging strategies is intended to
reduce the volatility of the net asset value of the Portfolio shares, the
Portfolio's net asset value will fluctuate. There can be no assurance that the
Portfolio's hedging transactions will be effective. Also, the Portfolio may not
necessarily be engaging in hedging activities when movements in any particular
equity market occur.
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FUTURES CONTRACTS
The Portfolio may enter into futures contracts for the purposes of hedging,
remaining fully invested and reducing transactions costs. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a
specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by trading an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Portfolio expects to earn
interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators". Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade and use
futures contracts with the expectation of realizing profits from a fluctuation
in interest rates. The Portfolio intends to use futures contracts only for
hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide straddles or that the Fund's commodity
futures and option positions be for other purposes, to the extent that the
aggregate initial margins and premiums required to establish such non-hedging
positions do not exceed five percent of the liquidation value of the Portfolio.
The Portfolio will only sell futures contracts to protect securities it owns
against price declines or purchase contracts to protect against an increase in
the price of securities it intends to purchase. As evidence of this hedging
interest, the Portfolio expects that approximately 75% of its futures contracts
purchases will be "completed", that is, equivalent
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amounts of related securities will have been purchased or will be purchased by
the Portfolio on the settlement date of the futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While the Portfolio will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Portfolio will not enter into futures contract transactions to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of its total assets. In addition,
the Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would
exceed 20% of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
The Portfolio will minimize the risk that it will be unable to close out a
futures position by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular futures contract at any given time. Thus, it may not be possible to
close a futures position. In the event of adverse price movements, the Portfolio
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if the Portfolio has insufficient cash, it
may have to sell securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, the Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close futures positions also could have an adverse impact on the
Portfolio's ability to effectively hedge.
The risk of loss in trading futures contracts in some strategies can be
substantial due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in excess of the amount
invested in the contract. However, because the futures strategies of the
Portfolio are engaged in only for hedging purposes, the Adviser does not believe
that the Portfolio is subject to the risks of loss frequently associated with
futures transactions. The Portfolio would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in the underlying
financial instrument and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying the futures
contracts have different maturities than the portfolio securities being hedged.
It is also possible that the Portfolio could lose money on futures contracts and
also
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experience a decline in value of portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and, therefore, does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Futures contracts may be traded on foreign exchanges. Such transactions are
subject to the risks of governmental actions affecting trading in or the prices
of the securities. The value of such positions also could be adversely affected
by (i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lesser trading
volume.
OPTIONS
The Portfolio may purchase and sell put and call options on securities and
futures contracts for hedging purposes. Investments in options involve some of
the same considerations that are involved in connection with investments in
futures contracts (e.g., the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying security or contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract on which it is based or the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract or securities.
WRITING COVERED CALL OPTIONS
The principal reason for writing call options is to attempt to realize,
through the receipt of premiums, a greater return than would be realized on
securities alone. By writing covered call options, the Portfolio gives up the
opportunity, while the option is in effect, to profit from any price increase in
the underlying security above the option exercise price. In addition, the
Portfolio's ability to sell the underlying security will be limited while the
option is in effect unless the Portfolio effects a closing purchase transaction.
A closing purchase transaction cancels out the Portfolio's position as the
writer of an option by means of an offsetting purchase of an identical option
prior to the expiration of the option it has written. Covered call options serve
as a partial hedge against the price of the underlying security declining. The
Portfolio writes only covered options, which means that so long as the Portfolio
is obligated as the writer of the option it will, in a segregated account with
its custodian, maintain cash, U.S. government
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securities, other high grade liquid debt securities or other liquid securities
denominated in U.S. dollars with a value equal to or greater than the exercise
price of the underlying securities.
PURCHASING OPTIONS
The amount of any appreciation in the value of the underlying security
subject to a put will be partially offset by the amount of the premium paid for
the put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from a sale
will depend on whether the amount received is more or less than the premium paid
for the put option plus the related transaction costs. A closing sale
transaction cancels out the Portfolio's position as purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Portfolio may
purchase call options on securities held in its investment portfolio on which it
has written call options or on securities which it intends to purchase.
PURCHASE OF SHARES
Shares of the Portfolio may be purchased without sales commission at the
net asset value per share next determined after an order is received in proper
form by the Fund, and payment is received by the Fund's custodian. The minimum
initial investment required for the Portfolio is $10,000 with certain exceptions
as may be determined from time to time by the officers of the Fund. An order
received in proper form prior to the 4:00 p.m. close of the New York Stock
Exchange (the "NYSE") will be executed at the price computed on the date of
receipt; and an order received not in proper form or after the 4:00 p.m. close
of the NYSE will be executed at the price computed on the next day the NYSE is
open after proper receipt. The NYSE will be closed on the following days:
Thanksgiving Day, November 28, 1996; Christmas Day, December 25, 1996; New
Year's Day, January 1, 1997; President's Day, February 17, 1997; Good Friday,
March 28, 1997; Memorial Day, May 26, 1996; Independence Day, July 4, 1997; and
Labor Day, September 1, 1997.
The Portfolio reserves the right in its sole discretion (1) to suspend the
offering of its shares, (2) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Fund, and (3) to
reduce or waive the minimum for initial and subsequent investment for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolio's shares.
REDEMPTION OF SHARES
The Portfolio may suspend redemption privileges or postpone the date of
payment (1) during any period that both the Exchange and custodian bank are
closed or trading on the Exchange is restricted as determined by the Commission,
(2) during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
Portfolio to dispose of securities owned by it or to fairly determine the value
of its assets, and (3) for such other periods as the Commission may permit. The
Fund has made an election with the Commission to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid, in whole or in
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part, in investment securities or in cash as the Board of Trustees may deem
advisable; however, payment will be made wholly in cash unless the Board of
Trustees believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "How Share Prices are Determined," and a redeeming
shareholder would normally incur brokerage expenses if those securities were
converted to cash.
No charge is made by the Portfolio for redemptions if shares are held for
at least 90 days. Shares held for less than 90 days will be subject to a 1%
redemption fee which is retained by the Fund for the benefit of the remaining
shareholders and is intended to encourage long-term investment in the Portfolio
to avoid transaction and other expenses caused by early redemption and to
facilitate portfolio management. Any redemption may be more or less than the
shareholder's initial cost depending on the market value of the securities held
by the Portfolio.
SIGNATURE GUARANTEES
To protect your account, the Fund and Rodney Square Management Corporation
(the "Administrator") from fraud, signature guarantees are required for certain
redemptions. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareowner(s) or
the registered address or (2) share transfer requests. The purpose of signature
guarantees is to verify the identity of the party who has authorized a
redemption.
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934. Eligible
guarantor institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. A complete definition of eligible guarantor institution is
available from the Administrator. Broker-dealers guaranteeing signatures must be
a member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program.
The signature guarantee must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
The following supplements the shareholder services information set forth in
the BRAZOS/JMIC Real Estate Securities Portfolio's Prospectus:
EXCHANGE PRIVILEGE
Institutional Class Shares of the BRAZOS/JMIC Real Estate Securities
Portfolio may be exchanged for any other Institutional Class Shares of a
Portfolio. Exchange requests should be made by calling the Fund at
_______________ or by writing to Brazos Mutual Funds, c/o Rodney Square
Management
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Corporation, 1100 North Market Street, 3rd Floor, Wilmington, DE 19890. The
exchange privilege is only available with respect to Portfolios that are
registered for sale in the shareholder's state of residence.
Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or charge of any kind. Before
making an exchange into a Portfolio, a shareholder should read its Prospectus
and consider the investment objectives of the Portfolio to be purchased. You may
obtain a Prospectus for the Portfolio(s) you are interested in by calling the
Administrator at __________________.
Exchange requests may be made either by mail or telephone. Telephone
exchanges will be accepted only if the certificates for the shares to be
exchanged are held by the Fund for the account of the shareholder and the
registration of the two accounts will be identical. Requests for exchanges
received prior to 4:00 p.m. (Eastern Time) will be processed as of the close of
business on the same day. Requests received after 4:00 p.m. will be processed on
the next business day. Neither the Fund nor the Administrator will be
responsible for the authenticity of the exchange instructions received by
telephone. Exchanges may also be subject to limitations as to amounts or
frequency, and to other restrictions established by the Board of Trustees to
assure that such exchanges do not disadvantage the Fund and its shareholders.
For Federal income tax purposes an exchange between Portfolios is a taxable
event, and, accordingly, a capital gain or loss may be realized. In a revenue
ruling relating to circumstances similar to the Fund's, an exchange between
series of a Fund was also deemed to be a taxable event. It is likely, therefore,
that a capital gain or loss would be realized on an exchange between Portfolios;
you may want to consult your tax adviser for further information in this regard.
The exchange privilege may be modified or terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolio to another person by
making a written request to the Fund. The request should clearly identify the
account and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares." As in the case of redemptions, the written request must be received
in good order before any transfer can be made.
INVESTMENT LIMITATIONS
The following limitations supplement those set forth in the Prospectus.
Whenever aninvestment limitation sets forth a percentage limitation on
investment or utilization of assets, such limitation shall be determined
immediately after and as a result of the Portfolio's acquisition of such
security or other asset. Accordingly, any later increase or decrease resulting
from a change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with the Portfolio's
investment limitations. Investment limitations (1), (2), (3) and (4) are
classified as fundamental. The Portfolio's fundamental investment limitations
cannot be changed without approval by a "majority of the outstanding shares" (as
defined in the 1940 Act) of the Portfolio. The Portfolio will not:
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(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate or real estate limited partnerships,
(although it may purchase and sell mortgage-related securities and
securities of companies which deal in real estate or interests therein
and may liquidate real estate acquired as a result of default on a
mortgage and may purchase and sell securities which are secured by
interests in real estate, invest in marketable securities issued by
companies such as real estate investment trusts which deal in real
estate or interests therein and participation interests in pools of
real estate mortgage loans);
(3) make loans except (i) by purchasing debt securities in accordance with
its investment objectives and (ii) by lending its portfolio securities
to banks, brokers, dealers and other financial institutions so long as
such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the Commission thereunder;
(4) underwrite the securities of other issuers;
(5) invest in futures and/or options on futures unless (i) not more than
5% of the Portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts
provided, however, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be excluded in
computing such 5% and (ii) not more than 20% of the Portfolio's assets
are invested in futures and options;
(6) purchase on margin or sell short except as specified in (5) above;
(7) invest more than an aggregate of 15% of the net assets of the
Portfolio, determined at the time of investment, in securities subject
to legal or contractual restrictions on resale or securities for which
there are no readily available markets;
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Trustees. The Trustees set broad policies for
the Fund and elect its Officers. The following is a list of the Trustees and
Officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years:
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* This person is deemed to be an "interested person" of the Fund as that term
is defined in the 1940 Act.
REMUNERATION OF TRUSTEES AND OFFICERS
The Fund pays each Trustee, who is not also an officer or affiliated
person, a $500 quarterly retainer fee per active Portfolio which currently
amounts to $1,000 per quarter. In addition, each unaffiliated Trustee receives a
$500 meeting fee which is aggregated for all the Trustees and allocated
proportionately among the Portfolios of the Fund and reimbursement for travel
and other expenses incurred while attending Board meetings. Trustees who are
also officers or affiliated persons receive no remuneration for their service as
Trustees. The Fund's officers and employees are paid by either the Adviser or
the Administrator and receive no compensation from the Fund. The following table
shows aggregate compensation to be paid to each of the Fund's Trustees by the
Fund in the fiscal year ending ________________, 1997.
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COMPENSATION TABLE
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Total
Person Compensation Retirement Annual Compensation
Position From Benefits Benefits from Registrant
Registrant* Accrued as Upon and Fund Complex
Part of Fund Retirement Paid to Trustees
PRINCIPAL HOLDERS OF SECURITIES
As of ________________, 1997, the following persons or organizations held
of record 5% or more of the shares of the Portfolio:
___________
* Denotes shares held by a trustee or other fiduciary for which beneficial
ownership is disclaimed or presumed disclaimed.
INVESTMENT ADVISER
ADVISORY FEES
As compensation for services rendered by John McStay Investment Counsel
(the "Adviser") under the Investment Advisory Agreement, the Portfolio pays the
Adviser an annual fee in monthly installments, calculated by applying the
following annual percentage rates to the Portfolio's average daily net assets
for the month:
BRAZOS/JMIC Real Estate Securities Portfolio. . . . . . . 0.90%
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PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best execution with respect to all transactions for the Portfolio.
The Adviser may, however, consistent with the interests of the Portfolio, select
brokers on the basis of the research, statistical and pricing services they
provide to the Portfolio. Information and research received from such brokers
will be in addition to, and not in lieu of, the services required to be
performed by the Adviser under the Investment Advisory Agreement. A commission
paid to such brokers may be higher than that which another qualified broker
would have charged for effecting the same transaction, provided that such
commissions are paid in compliance with the Securities Exchange Act of 1934, as
amended, and that the Adviser determines in good faith that such commission is
reasonable in terms either of the transaction or the overall responsibility of
the Adviser to the Portfolio and the Adviser's other clients.
It is not the Fund's practice to allocate brokerage or principal business
on the basis of sales of shares which may be made through broker- ealer firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolio or who act as agents in the purchase of shares of
the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Portfolio and one or
more of these other clients served by the Adviser is considered at or about the
same time, transactions in such securities will be allocated among the Portfolio
and clients in a manner deemed fair and reasonable by the Adviser. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser, and the results of such allocations, are
subject to periodic review by the Fund's Board of Trustees.
PERFORMANCE CALCULATIONS
PERFORMANCE
The Portfolio may from time to time quote various performance figures to
illustrate past performance. Performance quotations by investment companies are
subject to rules adopted by the Commission, which require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the
Commission. Current yield and average annual compounded total return quotations
used by the Fund are based on the standardized methods of computing performance
mandated by the Commission. An explanation of those and other methods used to
compute or express performance follows.
YIELD
Current yield reflects the income per share earned by the Portfolio's
investment. The current yield of the Portfolio is determined by dividing the net
investment income per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders during the base period.
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This figure is obtained using the following formula:
6
Yield=2[(a-b=1) + 1]
---
cd
where:
a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements)
c= the average daily number of shares outstanding
during the period that were
entitled to receive income distributions
d= the maximum offering price per share on the last day of the
period.
TOTAL RETURN
The average annual total return of the Portfolio is determined by finding
the average annual compounded rates of return over 1, 5 and 10 year periods that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each 1, 5 and 10 year period and the deduction of all applicable
Fund expenses on an annual basis.
These figures will be calculated according to the following formula:
n
P(1+T) =ERV
where:
P= a hypothetical initial payment of $ 1,000
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical
$1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
COMPARISONS
To help investors better evaluate how an investment in the Portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications, indices and averages may be used:
(a) Dow Jones Composite Average or its component averages - an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow
Jones Industrial Average), 15 utilities company stocks and 20
transportation stocks. Comparisons of performance assume reinvestment
of dividends.
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<PAGE>
(b) Standard & Poor's 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks and 20 transportation stocks. Comparisons
of performance assume reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation and finance
stocks listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index or its component indices - represents the
return on the market value of all common equity securities for which
daily pricing is available. Comparisons of performance assume
reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income
Fund Performance Analysis - measure total return and average current
yield for the mutual fund industry. Rank individual mutual fund
performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
(f) Morgan Stanley Capital International EAFE Index and World Index -
respectively, arithmetic, market value-weighted averages of the
performance of over 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East, and over 1,400
securities listed on the stock exchanges of these continents,
including North America.
(g) Goldman Sachs 100 Convertible Bond Index - currently includes 67 bonds
and 33 preferred. The original list of names was generated by
screening for convertible issues of 100 million or greater in market
capitalization. The index is priced monthly.
(h) Salomon Brothers GNMA Index - includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the
Government National Mortgage Association.
(i) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It
is a value-weighted, total return index, including approximately 800
issues with maturities of 12 years or greater.
(j) Salomon Brothers Broad Investment Grade Bond - is a market-weighted
index that contains approximately 4,700 individually priced investment
grade corporate bonds rated BBB or better, U.S. Treasury/agency issues
and mortgage pass through securities.
(k) Lehman Brothers Long-Term Treasury Bond - is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of
10 years or greater.
(l) NASDAQ Industrial Index - is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only
and does not include income.
(m) Value Line - composed of over 1,600 stocks in the Value Line
Investment Survey.
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<PAGE>
(n) Russell 2000 - composed of the 2,000 smallest stocks in the Russell
3000, a market value-weighted index of the 3,000 largest U.S.
publicly-traded companies.
(o) Composite Indices - 60% Standard & Poor's 500 Stock Index, 30% Lehman
Brothers Long-Term Treasury Bond and 10% U.S. Treasury Bills; 70%
Standard & Poor's 500 Stock Index and 30% NASDAQ Industrial Index; 35%
Standard & Poor's 500 Stock Index and 65% Salomon Brothers High Grade
Bond Index; all stocks on the NASDAQ system exclusive of those traded
on an exchange, and 65% Standard & Poor's 500 Stock Index and 35%
Salomon Brothers High Grade Bond Index.
(p) CDA Mutual Fund Report published by CDA Investment Technologies, Inc.
- analyzes price, current yield, risk, total return and average rate
of return (average compounded growth rate) over specified time periods
for the mutual fund industry.
(q) Mutual Fund Source Book published by Morningstar, Inc. - analyzes
price, yield, risk and total return for equity funds.
(r) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial
Times, Global Investor, Wall Street Journal and Weisenberger
Investment Companies Service - publications that rate fund performance
over specified time periods.
(s) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change over time
in the price of goods and services in major expenditure groups.
(t) Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates -
historical measure of yield, price and total return for common and
small company stock, long-term government bonds, U.S. Treasury bills
and inflation.
(u) Savings and Loan Historical Interest Rates - as published by the U.S.
Savings & Loan League Fact Book.
(v) Lehman Brothers Government/Corporate Index - is a combination of the
Government and Corporate Bond Indices. The Government Index includes
public obligations of the U.S. Treasury, issues of Government
agencies, and corporate debt backed by the U.S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate
debt. Also included are Yankee Bonds and nonconvertible debt issued by
or guaranteed by foreign or international governments and agencies.
All issues are investment grade (BBB) or higher, with maturities of at
least one year and an outstanding par value of at least $100 million
for U.S. Government issues and $25 million for others. Any security
downgraded during the month is held in the index until month-end and
then removed. All returns are market value weighted inclusive of
accrued income.
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<PAGE>
(w) Lehman Brothers Intermediate Government/Corporate Index is an
unmanaged index composed of a combination of the Government and
Corporate Bond Indices. All issues are investment grade (BBB) or
higher, with maturities of one to ten years and an outstanding par
value of at least $100 million for U.S. Government issues and $25
million for others. The Government Index includes public obligations
of the U.S. Treasury, issues of Government agencies, and corporate
debt backed by the U.S. Government. The Corporate Bond Index includes
fixed-rate nonconvertible corporate debt. Also included are Yankee
Bonds and nonconvertible debt issued by or guaranteed by foreign or
international governments and agencies. Any security downgraded during
the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
(x) Historical data supplied by the research departments of First Boston
Corporation; the J.P. Morgan companies; Salomon Brothers; Merrill
Lynch, Pierce, Fenner & Smith; Lehman Brothers, Inc.; and Bloomberg
L.P.
(y) NAREIT Equity Index - A compilation of market-weighted securities data
collected from all tax-qualified equity real estate investment trusts
listed on the New York and American Stock Exchanges and the NASDAQ.
The index tracks performance, as well as REIT assets, by property type
and geographic region.
(z) Wilshire Real Estate Securities Index, published by Wilshire
Associates - a market capitalization-weighted index of publicly traded
real estate securities, such as Real Estate Investment Trusts, Real
Estate Operating Companies and partnerships.
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Portfolio,
that the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Portfolio to calculate its performance. In addition, there can be no assurance
that the Portfolio will continue this performance as compared to such other
averages.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Delaware business trust on October ___, 1996.
The Fund's principal office is located at 5949 Sherry Lane, Suite 1560, Dallas,
Texas 75225; however, all investor correspondence should be directed to the Fund
c/o Rodney Square Management Corporation, 1100 North Market Street, 3rd Floor,
Wilmington, DE 19890. The Fund's Agreement and Declaration of Trust permits the
Fund to issue an unlimited number of shares of beneficial interest, without par
value. The Trustees have the power to designate one or more series
("Portfolios") or classes of shares of beneficial interest without further
action by shareholders.
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<PAGE>
On each matter submitted to a vote of the shareholders, each holder of a
share shall be entitled to one vote for each whole share and a fractional vote
for each fractional share standing in his or her name on the books of the Fund.
In the event of liquidation of the Fund, the holders of the shares of each
Portfolio or any class thereof that has been established and designated shall be
entitled to receive, when and as declared by the Trustees, the excess of the
assets belonging to that Portfolio, or in the case of a class, belonging to that
Portfolio and allocable to that class, over the liabilities belonging to that
Portfolio or class. The assets so distributable to the holders of shares of any
particular Portfolio or class thereof shall be distributed to the holders in
proportion to the number of shares of that Portfolio or class thereof held by
them and recorded on the books of the Fund. The liquidation of any Portfolio or
class thereof may be authorized at any time by vote of a majority of the
Trustees then in office.
Shareholders have no pre-emptive or other rights to subscribe to any
additional shares or other securities issued by the Fund or any Portfolio,
except as the Trustees in their sole discretion shall have determined by
resolution.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of the Portfolio's net
investment income, if any, together with any net realized capital gains annually
in the amount and at the times that will avoid both income (including capital
gains) taxes incurred and the imposition of the Federal excise tax on
undistributed income and capital gains. The amounts of any income dividends or
capital gains distributions cannot be predicted. See discussion under
"Dividends, Capital Gains Distributions and Taxes" in the Prospectus.
Any dividend or distribution paid shortly after the purchase of shares of
the Portfolio by an investor may have the effect of reducing the per share net
asset value of the Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect a
return of capital, are subject to income taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividend and capital gains distributions are automatically received
in additional shares of the respective Portfolio of the Fund at net asset value
(as of the business day following the record date). This will remain in effect
until the Fund is notified by the shareholder in writing at least three days
prior to the record date that either the Income Option (income dividends in cash
and capital gains distributions in additional shares at net asset value) or the
Cash Option (both income dividends and capital gains distributions in cash) has
been elected. An account statement is sent to shareholders whenever an income
dividend or capital gains distribution is paid.
Each Portfolio of the Fund will be treated as a separate entity (and hence
as a separate "regulated investment company") for Federal tax purposes. Any net
capital gains recognized by the Portfolio will be distributed to its investors
without need to offset (for Federal income tax purposes) such gains against any
net capital losses of another Portfolio.
FEDERAL TAXES
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<PAGE>
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"), at least 90% of the Portfolio's gross income for
a taxable year must be derived from certain qualifying income, i.e., dividends,
interest, income derived from loans of securities and gains from the sale or
other disposition of stock, securities or foreign currencies, or other related
income, including gains from options, futures and forward contracts, derived
with respect to its business investing in stock, securities or currencies. Any
net gain realized from the closing out of futures contracts will, therefore,
generally be qualifying income for purposes of the 90% requirement.
Qualification as a regulated investment company also requires that less than 30%
of the Portfolio's gross income be derived from the sale or other disposition of
stock, securities, options, futures or forward contracts (including certain
foreign currencies not directly related to the Fund's business of investing in
stock or securities) held less than three months. In order to avoid realizing
excessive gains on securities held for less than three months, the Portfolio may
be required to defer the closing out of futures contracts beyond the time when
it would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts which have been open for less than three months as of
the end of the Portfolio's taxable year, and which are recognized for tax
purposes, will not be considered gains on securities held for less than three
months for the purposes of the 30% test.
Except for transactions the Portfolio has identified as hedging
transactions, the Portfolio is required for Federal income tax purposes to
recognize as income for the taxable year its net unrealized gains and losses on
forward currency and futures contracts as of the end of the taxable year as well
as those actually realized during the year. In most cases, any such gain or loss
recognized with respect to a regulated futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss without
regard to the holding period of the contract. Recognized gain or loss
attributable to a foreign currency forward contract is treated as 100% ordinary
income. Furthermore, foreign currency futures contracts which are intended to
hedge against a change in the value of securities held by the Portfolio may
affect the holding period of such securities and, consequently, the nature of
the gain or loss on such securities upon disposition.
The Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Portfolio's taxable year) on futures
transactions. Such distribution will be combined with distributions of capital
gains realized on the Portfolio's other investments, and shareholders will be
advised on the nature of the payment.
CODE OF ETHICS
The Fund has adopted a Code of Ethics which restricts, to a certain extent,
personal transactions by access persons of the Fund and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The Financial Statements for the Portfolio and selected per share data and
ratios and notes to the Financial Statements relating to the corresponding
periods will be contained in this Statement of Additional Information.
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PART C
FORM N-1A
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial statements
(b) Exhibits:
(1) (a) Certificate of Trust
(b) Agreement and Declaration of Trust*
(2) Bylaws*
(3) Not Applicable
(4) Specimen Share Certificate*
(5) Investment Advisory Contract*
(6) Underwriting Contract*
(7) Not Applicable
(8) Custodian Agreement*
(9) Not Applicable
(10) Opinion and Consent of Counsel*
(11) Accountant's Consent*
(12) Not Applicable
(13) Subscription Agreement*
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
*To be filed by amendment to this N-1A.
Item 25. Persons Controlled by or Under Common Control with Registrant
Registrant is not controlled by or under common control with any
person.
Item 26. Number of Holders of Securities
As of _____________, 1996:
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Number of
Title of Class Record Holders
Shares of Beneficial Interests of:
BRAZOS/JMIC Small/Emerging Growth Portfolio
BRAZOS/JMIC Real Estate Securities Portfolio
Item 27. Indemnification
Reference is made to Article VII of Registrant's Agreement and
Declaration of Trust, which is incorporated herein by reference.
Registrant hereby also makes the undertaking consistent with Rule 484
under the Securities Act of 1933, as amended.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, office or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Reference is made to the caption "Investment Adviser" in the
Prospectuses constituting Part A of this Registration Statement and
"Investment Adviser" in Part B of this Registration Statement. The
information required by this Item 28 with respect to each director,
officer, or partner of the investment adviser of the Registrant is
incorporated by reference to the Form ADV filed by the investment
adviser listed below with the Securities and Exchange Commission
pursuant to the Investment Advisers Act of 1940, as amended, on the
date and under the File number indicated:
John McStay Investment Counsel 3-31-96 SEC File No. 801-20244
Item 29. Principal Underwriters
To be provided by amendment to this N-1A.
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<PAGE>
Item 30. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder will be maintained in the physical possession
of the Registrant, the Registrant's Adviser, the Registrant's
Transfer and Administrative Agent: Rodney Square Management
Corporation, and the Registrant's Custodian Bank: Wilmington Trust
Company.
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Registrant hereby undertakes to file a post-effective amendment,
including reasonably current financial statements which need not be
certified, for each of the BRAZOS/JMIC Small/Emerging Growth
Portfolio and the BRAZOS/JMIC Real Estate Securities Portfolio,
within four to six months from the commencement of operations of the
Portfolios.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of the removal of a Trustee
or Trustees when requested in writing to do so by the holders of at
least 10% of the Registrant's outstanding shares and in connection
with such meeting to comply with the provisions of Section 16(c) of
the Investment Company Act of 1940, as amended, relating to
shareholder communications.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Dallas, and State of Texas on the 24th day of
October, 1996.
Brazos Mutual Funds
Registrant
By Daniel Hockenbrough
Daniel Hockenbrough
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Daniel Hockenbrough
Daniel Hockenbrough Trustee, October 24, 1996
Chief Executive and
Financial Officer
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<PAGE>
Exhibit Index
Item 24(b) Exhibits Page
(1) (a) Certificate of Trust
CERTIFICATE OF TRUST
OF
BRAZOS MUTUAL FUNDS
a Delaware Business Trust
This Certificate of Trust of BRAZOS MUTUAL FUNDS (the "Trust"), dated as of
this 24th day of October, 1996, is being duly executed and filed, in order to
form a business trust pursuant to the Delaware Business Trust Act (the "Act"),
Del. Code Ann. tit. 12, ss.3801-3819.
1. NAME. The name of the business trust formed hereby is "BRAZOS MUTUAL
FUNDS."
2. REGISTERED OFFICE AND REGISTERED AGENT. The Trust will become, prior to
the issuance of beneficial interests, a registered investment company under the
Investment Company Act of 1940, as amended. Therefore, in accordance with
section 3807(b) of the Act, the Trust has and shall maintain in the State of
Delaware a registered office and a registered agent for service of process.
(a) REGISTERED OFFICE. The registered office of the Trust in Delaware
is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware
19801.
(b) REGISTERED AGENT. The registered agent for service of process on
the Trust in Delaware is The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801.
3. LIMITATION OF LIABILITY. Pursuant to section 3804(a) of the Act, in the
event that the Trust's governing instrument, as defined in section 3801(f) of
the Act, creates one or more series as provided in section 3806(b)(2) of the
Act, the debts, liabilities, obligations and expenses incurred, contracted for
or otherwise existing with respect to a particular series of the Trust shall be
enforceable against the assets of such series only, and not against the assets
of the Trust generally.
IN WITNESS WHEREOF, the Trustee named below does hereby execute this
Certificate of Trust as of the date first-above written.
Daniel Hockenbrough
Daniel Hockenbrough
5949 Sherry Lane, Suite 1560
Dallas, Texas 75225
