BRAZOS/JMIC Small Cap Growth Portfolio
1-800-426-9157
PROSPECTUS December 31, 1996
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 Cap Growth Portfolio currently offers
only one class of shares. The securities offered in this Prospectus are shares
of one diversified, no-load Portfolio managed by John McStay Investment Counsel.
BRAZOS/JMIC Small Cap Growth Portfolio. The objective of the BRAZOS/JMIC
Small Cap Growth Portfolio (the "Portfolio") is to provide maximum capital
appreciation, consistent with reasonable risk to principal, by investin
primarily in small 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 December 31, 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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PROSPECTUS
Dated December 31,1996
Investment Adviser
JOHN McSTAY INVESTMENT COUNCIL
5949 Sherry Lane
Suite 1560
Dallas,TX 75225
RODNEY SQUARE DISTRIBUTORS, INC.
TABLE OF CONTENTS
Fund Expenses 3
Prospectus Summary 4
Risk Factors 5
Investment Objective 5
Investment Policies 6
Other Investment Policies 7
Investment Limitations 10
Purchase of Shares 11
Redemption of Shares 14
Shareholder Services 16
Valuation of Shares 17
Performance Calculations 17
Dividends, Capital Gains Distributions and Taxes 18
Investment Adviser 19
Adviser's Historical Performance 19
Administrative Servicies 21
Distributor 21
Porfolio Transactions 22
General Information 22
No person has been authorized to give any information or to make any
representations not contained in the 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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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 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
September 30, 1997.
Annual Fund Operating Expenses
(As a Percentage of Average Net Assets)
Investment Advisory Fees (After Fee Waivers) .83%
Administrative Fees .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. Without the fee waiver, the annual investment advisory fee
would be .90% of average net assets. Absent the fee waiver, the Portfolio's
total annual operating expenses are estimated to be 1.42% 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
a $12.00 redemption fee for wire redemptions.
1 Year 3 Years
BRAZOS/JMIC Small Cap Growth Portfolio $14 $43
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 annual 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
"AMINISTRATIVE 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 additional cost and the realization of capital gains.
(See "PORTFOLIO Turnover") (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.").
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INVESTMENT OBJECTIVE
The objective of the Portfolio is to provide maximum capital appreciation,
consistent with reasonable risk to principal, by investing primarily in small
capitalization companies. The Portfolio attempts to limit the risk of decline in
the value of its securities by following a stock selection process that
emphasizes the use of traditional fundamental security analysis and valuation
methods as described under "Investment Policies".
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 $1.2 billion.
The remaining 35% of the Portfolio's total assets may be invested in equity
securities of companies which have market capitalizations at the time of
purchase that are larger than $1.2 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 prce 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 total 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 total 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 o 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.
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
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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 the
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 the 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.
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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, 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
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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.
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 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) 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;
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(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 % 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 % of its total assets at fair market value.
The investment limitations described here and certain of the investment
limitations in the SAI 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, including payment in
the manner described herein, is received by the Fund. (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:
Brazos Mutual Funds
c/o Rodney Square Management Corporation
P.O. Box 8987
Wilmington, DE 19899
A purchase order sent by overnight mail should be sent to:
1105 North Market Street, 3rd Floor
Wilmington, DE 19801
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* 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 1-800-426-9157 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 #0311-0009-2
ATTENTION: Brazos Mutual Funds
REF: PORTFOLIO NAME ________________
DDA Acct. #2731-2721
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
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. Orders received after 4 p.m. ET will receive the price calculated on the
next business 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
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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
theircustomers 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 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
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* 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 19899. 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
* 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 1-800-426-9157.
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.
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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 1-800-426-9157 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);
* 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.
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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, as permitted by the SEC, including under emergency circumstances and at
times when the NYSE is closed.
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 shares of any other 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 19899 or calling 1-800-426-9157.
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 1-800-426-9157 for a copy of the Prospectus for the
Portfolio(s). Exchanges can only be made with Portfolios that are qualified 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.")
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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 1-800-426-9157.
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. In addition, a $10 fee is charged to shareholders
transferring out of a Fund IRA.
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 latest available bid price of such currencies against
U.S. dollars quoted by any major bank or by a broker.
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 asst 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.
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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 SAI.
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 distribute annually to shareholders substantially all of
its net investment income, together with any net realized capital gains.
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;
* 98% of its capital gains net income (the excess of short and long-term
capital gains over short and long-term capital losses); 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.
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<PAGE>
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 mnagement 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 November
25, 1996, 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 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.
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<PAGE>
ADVISER'S HISTORICAL PERFORMANCE
Set forth below are performance data provided by the Adviser pertaining to
the composite of all 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 performance data for the
managed accounts is net of all fees and expenses. 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 Small Capitalization Growth Portfolios
(Percentage Returns Net of Average Management Fees)
Institutional
Equity S&P MidCap
Calendar Years Accounts 400 Index 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 3/4years
(1/1/87-9/30/96) $7.35 $4.14 $3.06
* Numbers are AIMR compliant from 1/1/93 forward; prior to that time all
accounts, without regard to dollar value were equally weighted in
determining composite performance. (See note 6 below)
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<PAGE>
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 MidCap 400 and Russell 2000 are unmanaged indices which assume
reinvestment of dividends on securities in the index 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. The S&P MidCap 400 Index is an unmanaged
capitalization-weighted index that measures the performance of the
mid-range of the U.S. stock market. The Russell 2000 is composed of
the 2000 smallest socks in the Russell 3000, a market value weighted
index of the 3,000 largest U.S. publicly traded companies. The
comparative indices are not adjusted to reflect expenses or other fees
reflected in the performance of a mutual und as required by the SEC.
5. The Adviser's average annual management fee over the nine-year period
(1987-1995) was 1% or 100 basis points. On January 1, 1987, the
Adviser began managing the separate accounts using objectives,
policies and strategies substantially similar to those of the
Portfolio. 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.
6. Small Capitalization Growth Portfolios ("Composite") performance data
is AIMR compliant from 1/1/93 forward. Prior to that time, the only
difference in the calculation is that all portfolios were equally
weighted without regard to dollar value in determining Composite
performance. The Composite includes every account managed in JMIC's
small capitalization style, consistent with AIMR guidelines. This
equal weighting method follows the standards promulgated by the
Investment Management Consultants' Association which predates
standards established by AIMR. In 1990, the Composite results
reflected portfolios ranging in number from 3 to 8 and in size from $3
million to $30 million, with a median size of $13 million. In 1991,
the Composite reflected portfolios ranging in number from 8 to 18 and
in size from $1 million to $46 million, with a median size of $15
million. In 1992, the Composite reflected portfolios ranging in number
from 20 to 27 and in size from $4 million to $50 million, with a
median size of $17 million. And, from 1987 through 1989 the Composite
consisted of only one portfolio which for many years served as the
model for all accounts managed in this style.
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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 an annual fee from the Fund equal to the greater of: (1) a minimum
annual fee of $32,500 for each of the first two single-class Portfolios plus
$15,000 for any additional Portfolio, or second or additional class of a
Portfolio; or (2) an asset-based fee, equal to a percentage of the average daily
net assets of the Fund, on a Fund-wide basis, according to the following
schedule:
0.15% of the first $50 million in assets; plus
0.10% of assets between $50 million and $200 million; plus
0.07% of assets in excess of $200 million.
The Administrator's fee shall be payable monthly, as soon as practicable
after the last day of each month, based on the Fund's average daily net assets
as determined at the close of business on each business day throughout the
month. 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
19899, has been engaged pursuant to a distribution agreement dated December 31,
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.
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<PAGE>
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
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 receive 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 24, 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.
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<PAGE>
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.
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
Coopers & Lybrand L.L.P., 2400 Eleven Penn Center, Philadelphia, PA 19103,
is the independent accountants for the Fund.
REPORTS
Shareholders receive unaudited semi-annual financial statements and annual
financial statements audited by Coopers & Lybrand L.L.P.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be made by contacting the Fund c/o Rodney Square
Management Corporation, P.O. Box 8987, Wilmington, DE 19899, or by calling the
telephone number listed on the cover of this Prospectus.
LITIGATION
The Fund is not involved in any litigation.
23
<PAGE>
PROSPECTUS
December 31, 1996
T R U S T E E S
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
O F F I C E R S
BRAZOS
DAN L. HOCKENBROUGH JMIC SMALL CAP GROWTH
Chairman of the Board, SECURITIES PORTFOLIO
President and Treasurer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
--------------------
C U S T O D I A N
A NO LOAD FUND
WILMINGTON TRUST COMPANY SEEKING CAPITAL
1100 N. MARKET APPRECIATION
WILMINGTON, DELAWARE 19890
--------------------
C O U N S E L
INVESTMENT ADVISER
STRADLEY, RONON, STEVENS & YOUNG, LLP JOHN McSTAY
2600 ONE COMMERCE SQUARE INVESTMENT COUNSEL
PHILADELPHIA, PENNSYLVANIA 19103 5949 SHERRY LANE
SUITE 1560
DALLAS, TEXAS 75225
A U D I T O R S
COOPERS & LYBRAND L.L.P.
2400 ELEVEN PENN CENTER
PHILADELPHIA, PENNSYLVANIA 19103
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
December 31, 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
Cap Growth Portfolio Shares dated December 31, 1996. To obtain the Prospectus,
please call Rodney Square Management Corporation at 1-800-426-9157.
Table of Contents
Page
Investment Objective and Policies 2
Purchase of Shares 6
Redemption of Shares 6
Shareholder Services 8
Investment Limitations 9
Management of the Fund 10
Investment Adviser 11
Portfolio Transactions 12
Performance Calculations 12
General Information 16
Financial Statements 19
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies of
the BRAZOS/JMIC Small Cap 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 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 futures. Each of
these portfolio strategies is described below.
FUTURES CONTRACTS
The Portfolio may enter into futures contracts. 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
2
<PAGE>
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.
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 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.
3
<PAGE>
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' 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 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
4
<PAGE>
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 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.
5
<PAGE>
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 th 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. 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: New Year's Day, January 1, 1997; President's Day, February
17, 1997; Good Friday, March 28, 1997; Memorial Day, May 26, 1997; Independence
Day, July 4, 1997; and Labor Day, September 1, 1997; Thanksgiving Day, November
27, 1997; Christmas Day, December 25, 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 the Exchange is 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 part, in
investment securities or in cash as the Board of Trustees may deem advisable;
however, payment will be made wholly in cash unless
6
<PAGE>
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 ismade 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.
7
<PAGE>
SHAREHOLDER SERVICES
The following supplements the shareholder services information set forth in
the BRAZOS/JMIC Small Cap Growth Portfolio's Prospectus:
EXCHANGE PRIVILEGE
Shares of the BRAZOS/JMIC Small Cap Growth Portfolio may be exchanged for
shares of any Portfolio included within the Brazos Mutual Funds. Exchange
requests should be made by calling 1-800-426-9157 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.
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 1-800-426-9157.
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.
8
<PAGE>
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. Te 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;
(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;
(8) issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into options, futures or repurchase transactions.
9
<PAGE>
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:
* Daniel Hockenbrough
5949 Sherry Lane, Trustee, President and Treasurer of the
Suite 1560 Fund; Since August 1996, Business Manager
Dallas, Texas 75225 of John McStay Investment Counsel.
Age 37 Formerly, Chief Financial Officer of Waugh
Enterprises, Inc. from November 1995 until
August 1996; Assistant Controller of
Hicks, Muse, Tate & Furst Incorporated
from December 1992 to November 1995; and
Senior Associate at Coopers & Lybrand
prior to December 1992.
John H. Massey
4004 Windsor Avenue Trustee of the Fund; Private Investor and
Dallas, Texas 75205 a Director of The Paragon Group, Inc.,
Age 57 Chancellor Broadcasting, Inc., Bank of the
Southwest, Columbine JDS Systems, Inc. and
FSW Holdings, Inc. Until 1996, Chairman of
the Board and Chief Executive Officer of
Life Partners Group, Inc.
David M. Reichert
7415 Stonecrest Drive Trustee of the Fund; Private Investor;
Dallas, Texas 75240 formerly Senior Vice President of Moffet
Age 57 Capital Management, an investment
counseling firm, from January 1995 until
June 1996 and Senior Vice President and
Portfolio Manager of American Capital
Asset Management, a mutual fund management
company, from April 1989 to July 1994.
* Tricia A. Hundley
5949 Sherry Lane, Vice President, Secretary and Compliance
Suite 1560 Officer of the Fund; Partner of John
Dallas, Texas 75225 McStay Investment Counsel since 1987.
Age 46
* 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 September 30, 1997.
10
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Benefits Upon from Registrant and
From Registrant Accrued as Part of Retirement Fund Complex Paid
Fund Expenses to Trustees
<S> <C> <C> <C> <C>
Daniel Hockenbrough
Director -0- -0- -0- -0-
John H. Massey
Director $1,000 -0- -0- $6,000
David M. Reichert
Director $1,000 -0- -0- $6,000
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 1996, the following persons or organizations held of
record 5% or more of the shares of the Portfolio: John McStay Investment
Counsel. The Adviser, as the initial investor in the Fund, owns 100% of the
shares issued by the Portfolio.
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 Cap Growth Portfolio . . . . . . . . 0.90%
ADMINISTRATION FEES
In addition to the fees received for its services as Administrator to the
Fund, as set forth in the Prospectus under "ADMINISTRATIVE SERVICES," Rodney
Square receives fees from the Fund for providing transfer agency, accounting and
dividend disbursing services. Such fees are included in the calculation of
"Other Expenses" which appears under the caption heading "FUND EXPENSES" in the
Prospectus.
11
<PAGE>
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-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.
12
<PAGE>
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:
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:
13
<PAGE>
(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.
(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.
14
<PAGE>
(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.
(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 meaure 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.
15
<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 24, 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 Declaratio 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
16
<PAGE>
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 annually substantially all of the
Portfolio's net investment income, if any, together with any net realized
capital gains 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 searate "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
17
<PAGE>
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.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Brazos Mutual Funds:
We have audited the accompanying Statement of Assets and Liabilities of
Brazos Mutual Funds (the "Fund") as of December 11, 1996. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Brazos Mutual Funds as of
December 11, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 16, 1996
19
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Assets and Liabilities
as of December 11, 1996
<TABLE>
<CAPTION>
BRAZOS/JMIC BRAZOS/JMIC
Small Cap Real Estate
Growth Portfolio Securities Portfolio
<S> <C> <C>
Assets:
Cash $ 50,000 $ 50,000
Deferred Organizational and Offering Costs 61,525 61,525
-------- --------
Total Assets 111,525 111,525
-------- --------
Liabilities:
Accrued Organizational and Offering Costs 61,525 61,525
Total Liabilities 61,525 61,525
Net Assets $ 50,000 $ 50,000
======== ========
Net Asset Value, Redemption and Offering Price Per Share
(5,000 and 5,000 outstanding shares of beneficial interest,
no par value, unlimited authorization, respectively) $ 10.00 $ 10.00
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements
December 11, 1996
1. Organization:
Brazos Mutual Funds (the "Fund") was organized on October 24, 1996 as a
Delaware business trust. The Fund is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company consisting of
shares of two series -- BRAZOS/JMIC Small Cap Growth Portfolio (the "Small Cap
Portfolio") and BRAZOS/JMIC Real Estate Securities Portfolio (the "Real Estate
Securities Portfolio). The Fund has not commenced operations except those
related to organizational matters and the sale of 5,000 Small Cap Portfolio
shares of beneficial interest and 5,000 Real Estate Securities Portfolio shares
of beneficial interest (collectively, the "initial shares") to John McStay
Investment Counsel (the "Adviser") on December 11, 1996.
2. Organizational Costs, Offering Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Fund and are being
amortized over sixty months commencing with operations. In the event any of the
initial shares of the Fund are redeemed by any holder thereof during the period
that the Fund is amortizing organizational costs, the redemption proceeds
payable to the holder thereof by the Fund will be reduced by the unamortized
organizational costs in the same ratio as the number of initial shares being
redeemed bears to the number of initial shares outstanding at the time of
redemption. Offering costs, including initial registration costs, have been
deferred and will be charged to expense during the Fund's first year of
operation.
Certain trustees and officers of the Fund are also officers of the Fund's
Adviser. Such trustees and officers are paid no fees by the Fund for serving as
trustees or officers of the Fund.
21
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1996
T R U S T E E S
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
O F F I C E R S
BRAZOS
DAN L. HOCKENBROUGH JMIC SMALL CAP GROWTH
Chairman of the Board, SECURITIES PORTFOLIO
President and Treasurer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
--------------------
C U S T O D I A N
A NO LOAD FUND
WILMINGTON TRUST COMPANY SEEKING CAPITAL
1100 N. MARKET APPRECIATION
WILMINGTON, DELAWARE 19890
--------------------
C O U N S E L
INVESTMENT ADVISER
STRADLEY, RONON, STEVENS & YOUNG, LLP JOHN McSTAY
2600 ONE COMMERCE SQUARE INVESTMENT COUNSEL
PHILADELPHIA, PENNSYLVANIA 19103 5949 SHERRY LANE
SUITE 1560
DALLAS, TEXAS 75225
A U D I T O R S
COOPERS & LYBRAND L.L.P.
2400 ELEVEN PENN CENTER
PHILADELPHIA, PENNSYLVANIA 19103
<PAGE>
BRAZOS/JMIC Real Estate Securities Portfolio
1-800-426-9157
PROSPECTUS December 31, 1996
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
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 ncome 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 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 December 31, 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.
<PAGE>
PROSPECTUS
Dated December 31,1996
Investment Adviser
JOHN McSTAY INVESTMENT COUNCIL
5949 Sherry Lane
Suite 1560
Dallas,TX 75225
RODNEY SQUARE DISTRIBUTORS, INC.
TABLE OF CONTENTS
Fund Expenses 3
Prospectus Summary 4
Risk Factors 5
Investment Objective 5
Investment Policies 6
Other Investment Policies 7
Investment Limitations 10
Purchase of Shares 11
Redemption of Shares 14
Shareholder Services 16
Valuation of Shares 17
Performance Calculations 17
Dividends, Capital Gains Distributions and Taxes 18
Investment Adviser 19
Adviser's Historical Performance 19
Administrative Servicies 21
Distributor 21
Porfolio Transactions 22
General Information 22
No person has been authorized to give any information or to make any
representations not contained in the 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.
2
<PAGE>
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. The expenses and fees listed are based on estimates of
the Portfolio's operating costs to be incurred during the fiscal period ending
September 30, 1997.
Annual Fund Operating Expenses
(As a Percentage of Average Net Assets)
Investment Advisory Fees (After Fee Waivers) . . . . .55%
Administrative Fees . . . . . . . . . . . . . . . . .15%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . NONE
Other Expenses . . . . . . . . . . . . . . . . . . . .55%
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. Without the fee waiver, the annual investment advisory fee
would be .90% of average net assets. Absent the fee waiver, the Portfolio's
total annual operating expenses are estimated to 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.
3
<PAGE>
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 does not
charge the 1% redemption fee if shares are held for at least 90 days. The
Portfolio charges a $12.00 redemption fee on all wire redemptions.
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. Acutal 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."
4
<PAGE>
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:
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, possible geographic
concentration 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 190. 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.
5
<PAGE>
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. The Portfolio has
adopted a fundamental policy that its investments will be concentrated in the
real estate industry, which means that it will invest more than 25% of its
assets in such industry.
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; 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 total 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 total portfolio asses (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.
6
<PAGE>
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.
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 .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.
7
<PAGE>
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,
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 "orward 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 the
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 the 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 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.
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.
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
9
<PAGE>
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 he
companies principally engaged in the real estate industry in which the Fund
invests will have operating histories of less than three years.
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 % 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 % of its total assets at fair market value.
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The investment limitations described here and certain of the investment
limitations 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 afteran order, including payment in
the manner described herein, is received by the Fund. (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:
Brazos Mutual Funds
c/o Rodney Square Management Corporation
P.O. Box 8987
Wilmington, DE 19899
A purchase order sent by overnight mail should be sent to:
1105 North Market Street, 3rd 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 1-800-426-9157 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,
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* instruct your bank to wire the specified amount to:
RODNEY SQUARE MANAGEMENT CORPORATION
C/O WILMINGTON TRUST COMPANY
WILMINGTON, DE
ABA #0311-0009-2
ATTENTION: Brazos Mutual Funds
REF: PORTFOLIO NAME ________________
DDA Act. #2731-2721
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
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. Orders received after 4 p.m. ET will receive the price calculated on the
next business 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 conditins. Amounts paid to
Service Agents may include transaction fees and/or service fees paid by the
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<PAGE>
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 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.
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<PAGE>
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 19899. 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
* 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 1-800-426-9157.
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.
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<PAGE>
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 1-800-426-9157 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);
* 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 mus 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, as permitted by the SEC, including under emergency circumstances and at
times when the NYSE is closed.
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.
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<PAGE>
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Shares of the Portfolio may be exchanged for shares of any other 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 19899 or calling 1-800-426-9157.
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 1-800-426-9157 for a copy of the Prospectus for the
Portfolio(s). Exchanges can only be made with Portfolios that are qualified 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 1-800-426-9157.
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. In addition, a $10 fee will be charged to shareholders
transferring out of a Fund IRA.
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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 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
latest available 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 accoring 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 SAI.
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.
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<PAGE>
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;
* 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.
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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.
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 November
25, 1996, 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 .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 all 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 performance data for the
managed accounts is net of all fees and expenses. 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 Real Estate Securities Portfolio
(Percentage Returns Net of Average Management Fees)
Institutional NAREIT Wilshire
Calendar Year 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%
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 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 on securities in the index 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. NAREIT Equity Index is 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. Wilshire REIT Index is a market capitalization-weighted index
of publicly traded real estate securities. The comparative indices are not
adjusted to reflect expenses or other fees reflected in the performance of
a mutual fund as required by the SEC.
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 an annual fee from the Fund equal to the greater of: (1) a minimum
annual fee of $32,500 for each of the first two single-class Portfolios plus
$15,000 for any additional Portfolio, or second or additional class of a
Portfolio; or (2) an asset-based fee, equal to a percentage of the average daily
net assets of the Fund, on a Fund-wide basis, according to the following
schedule:
0.15% of the first $50 million in assets; plus
0.10% of assets between $50 million and $200 million; plus
0.07% of assets in excess of $200 million.
The Administrator's fee shall be payable monthly, as soon as practicable
after the last day of each month, based on the Fund's average daily net assets
as determined at the close of business on each business day throughout the
month. 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
19899, has been engaged pursuant to a distribution agreement dated December 31,
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.
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<PAGE>
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Advisor to select the
brokers or dealers that will execute the purchases adn 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
transactions of the Portfolio. The Adviser may buy and sell secutities for the
account of the portfolio through the Adviser's 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 24, 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 Portolio 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.
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<PAGE>
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.
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
Coopers & Lybrand L.L.P., 2400 Eleven Penn Center, Philadelphia, PA 19103,
is the independent accountants for the Fund.
REPORTS
Shareholders receive unaudited semi-annual financial statements and annual
financial statements audited by Coopers & Lybrand L.L.P..
SHAREHOLDER INQUIRIES
Shareholder inquiries may be made by contacting the Fund c/o Rodney Square
Management Corporation, P.O. Box 8987, Wilmington, DE 19899, 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
December 31, 1996
T R U S T E E S
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
O F F I C E R S
BRAZOS
DAN L. HOCKENBROUGH JMIC REAL ESTATE
Chairman of the Board, SECURITIES PORTFOLIO
President and Treasurer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
--------------------
C U S T O D I A N
A NO LOAD FUND
WILMINGTON TRUST COMPANY SEEKING CAPITAL
1100 N. MARKET APPRECIATION
WILMINGTON, DELAWARE 19890
--------------------
C O U N S E L
INVESTMENT ADVISER
STRADLEY, RONON, STEVENS & YOUNG, LLP JOHN McSTAY
2600 ONE COMMERCE SQUARE INVESTMENT COUNSEL
PHILADELPHIA, PENNSYLVANIA 19103 5949 SHERRY LANE
SUITE 1560
DALLAS, TEXAS 75225
A U D I T O R S
COOPERS & LYBRAND L.L.P.
2400 ELEVEN PENN CENTER
PHILADELPHIA, PENNSYLVANIA 19103
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
December 31, 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 December 31, 1996. To obtain the
Prospectus, please call Rodney Square Management Corporation at 1-800-426-9157.
Table of Contents
Page
Investment Objective and Policies 2
Purchase of Shares 6
Redemption of Shares 6
Shareholder Services 8
Investment Limitations 9
Management of the Fund 10
Investment Adviser 11
Portfolio Transactions 12
Performance Calculations 12
General Information 16
Financial Statements 19
1
<PAGE>
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 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 futures. Each of
these portfolio strategies is described below.
2
<PAGE>
FUTURES CONTRACTS
The Portfolio may enter into futures contracts. 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 th expectation of realizing profits from a fluctuation in
interest rates.
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 amounts of related securities
will have been purchased or will be purchased by the Portfolio on the settlement
date of the futures contracts.
3
<PAGE>
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 experience a decline in value of portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in
4
<PAGE>
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 secutities and
futures contracts for hedging purposes Investments in options involve some of
the same consideratins 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
5
<PAGE>
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 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 investmentportfolio 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. 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: New Year's Day, January 1, 1997; President's Day, February
17, 1997; Good Friday, March 28, 1997; Memorial Day, May 26, 1997; Independence
Day, July 4, 1997; and Labor Day, September 1, 1997; Thanksgiving Day, November
27, 1997; Christmas Day, December 25, 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 the Exchange is 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
6
<PAGE>
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 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-trm 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.
7
<PAGE>
SHAREHOLDER SERVICES
The following supplements the shareholder services information set forth in
the BRAZOS/JMIC Real Estate Securities Portfolio's Prospectus:
EXCHANGE PRIVILEGE
Shares of the BRAZOS/JMIC Real Estate Securities Portfolio may be exchanged
for shares of any other Portfolio. Exchange requests should be made by calling
the Fund at 1-800-426-9157 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 qualified for sale in the shareholder's state of residence.
Any such exchange will be based on the respective net asset vaues 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 1-800-426-9157.
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.
8
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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 he Portfolio. The Portfolio will not:
(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;
(8) issue senior securities, as defined in the 1940 Act, except that this
restrictions shall not be deemed to prohibit the Portfolio from (i) making
any permitted borrowings, mortgages or pledges, or (ii) entering into
options, futures or repurchase transactions.
In addition, the Portfolio has adopted a fundamental policy that its
investments shall be concentrated in the real estate industry.
9
<PAGE>
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:
* Daniel Hockenbrough
5949 Sherry Lane, Trustee, President and Treasurer of the
Suite 1560 Fund; Since August 1996, Business Manager
Dallas, Texas 75225 of John McStay Investment Counsel.
Age 37 Formerly, Chief Financial Officer of Waugh
Enterprises, Inc. from November 1995 until
August 1996; Assistant Controller of
Hicks, Muse, Tate & Furst Incorporated
from December 1992 to November 1995; and
Senior Associate at Coopers & Lybrand
prior to December 1992.
John H. Massey
4004 Windsor Avenue Trustee of the Fund; Private Investor and
Dallas, Texas 75205 a Director of The Paragon Group, Inc.,
Age 57 Chancellor Broadcasting, Inc., Bank of the
Southwest, Columbine JDS Systems, Inc. and
FSW Holdings, Inc. Until 1996, Chairman of
the Board and Chief Executive Officer of
Life Partners Group, Inc.
David M. Reichert
7415 Stonecrest Drive Trustee of the Fund; Private Investor;
Dallas, Texas 75240 formerly Senior Vice President of Moffet
Age 57 Capital Management, an investment
counseling firm, from January 1995 until
June 1996 and Senior Vice President and
Portfolio Manager of American Capital
Asset Management, a mutual fund management
company, from April 1989 to July 1994.
* Tricia A. Hundley
5949 Sherry Lane, Vice President, Secretary and Compliance
Suite 1560 Officer of the Fund; Partner of John
Dallas, Texas 75225 McStay Investment Counsel since 1987.
Age 46
*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 September 30, 1997.
10
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Benefits Upon from Registrant and
From Registrant Accrued as Part of Retirement Fund Complex Paid
Fund Expenses to Trustees
<S> <C> <C> <C> <C>
Daniel Hockenbrough
Director -0- -0- -0- -0-
John H. Massey
Director $1,000 -0- -0- $6,000
David M. Reichert
Director $1,000 -0- -0- $6,000
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 1996, the following persons or organizations held of
record 5% or more of the shares of the Portfolio: John McStay Investment
Counsel. The Adviser, as the initial investor in the Fund, owns 100% of the
shares issued by the Portfolio.
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 th Portfolio's average daily net assets for
the month:
BRAZOS/JMIC Real Estate Securities Portfolio 0.90%
ADMINISTRATION FEES
In addition to the fees received for its services as Administrator to the
Fund, as set forth in the Prospectus under "ADMINISTRATIVE SERVICES," Rodney
Square receives fees from the Fund for providing transfer agency, accounting and
dividend disbursing services. Such fees are included in the calculation of
"Other Expenses" which appears under the caption heading "FUND EXPENSES" in the
Prospectus.
11
<PAGE>
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-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 secified 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.
12
<PAGE>
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:
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).
13
<PAGE>
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 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 approimately 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.
14
<PAGE>
(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.
(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
15
<PAGE>
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.
(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 24, 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, P.O. Box 8987, Wilmington, DE 19890.
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number
16
<PAGE>
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.
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 sbject 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.
17
<PAGE>
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 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.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Brazos Mutual Funds:
We have audited the accompanying Statement of Assets and Liabilities of
Brazos Mutual Funds (the "Fund") as of December 11, 1996. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Brazos Mutual Funds as of
December 11, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 16, 1996
19
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Assets and Liabilities
as of December 11, 1996
<TABLE>
<CAPTION>
BRAZOS/JMIC BRAZOS/JMIC
Small Cap Real Estate
Growth Portfolio Securities Portfolio
<S> <C> <C>
Assets:
Cash $ 50,000 $ 50,000
Deferred Organizational and Offering Costs 61,525 61,525
-------- --------
Total Assets 111,525 111,525
-------- --------
Liabilities:
Accrued Organizational and Offering Costs 61,525 61,525
Total Liabilities 61,525 61,525
Net Assets $ 50,000 $ 50,000
======== ========
Net Asset Value, Redemption and Offering Price Per Share
(5,000 and 5,000 outstanding shares of beneficial interest,
no par value, unlimited authorization, respectively) $ 10.00 $ 10.00
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements
December 11, 1996
1. Organization:
Brazos Mutual Funds (the "Fund") was organized on October 24, 1996 as a
Delaware business trust. The Fund is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company consisting of
shares of two series -- BRAZOS/JMIC Small Cap Growth Portfolio (the "Small Cap
Portfolio") and BRAZOS/JMIC Real Estate Securities Portfolio (the "Real Estate
Securities Portfolio). The Fund has not commenced operations except those
related to organizational matters and the sale of 5,000 Small Cap Portfolio
shares of beneficial interest and 5,000 Real Estate Securities Portfolio shares
of beneficial interest (collectively, the "initial shares") to John McStay
Investment Counsel (the "Adviser") on December 11, 1996.
2. Organizational Costs, Offering Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Fund and are being
amortized over sixty months commencing with operations. In the event any of the
initial shares of the Fund are redeemed by any holder thereof during the period
that the Fund is amortizing organizational costs, the redemption proceeds
payable to the holder thereof by the Fund will be reduced by the unamortized
organizational costs in the same ratio as the number of initial shares being
redeemed bears to the number of initial shares outstanding at the time of
redemption. Offering costs, including initial registration costs, have been
deferred and will be charged to expense during the Fund's first year of
operation.
Certain trustees and officers of the Fund are also officers of the Fund's
Adviser. Such trustees and officers are paid no fees by the Fund for serving as
trustees or officers of the Fund.
21
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1996
T R U S T E E S
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
O F F I C E R S
BRAZOS
DAN L. HOCKENBROUGH JMIC REAL ESTATE
Chairman of the Board, SECURITIES PORTFOLIO
President and Treasurer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
--------------------
C U S T O D I A N
A NO LOAD FUND
WILMINGTON TRUST COMPANY SEEKING CAPITAL
1100 N. MARKET APPRECIATION
WILMINGTON, DELAWARE 19890
--------------------
C O U N S E L
INVESTMENT ADVISER
STRADLEY, RONON, STEVENS & YOUNG, LLP JOHN McSTAY
2600 ONE COMMERCE SQUARE INVESTMENT COUNSEL
PHILADELPHIA, PENNSYLVANIA 19103 5949 SHERRY LANE
SUITE 1560
DALLAS, TEXAS 75225
A U D I T O R S
COOPERS & LYBRAND L.L.P.
2400 ELEVEN PENN CENTER
PHILADELPHIA, PENNSYLVANIA 19103
