BRAZOS MUTUAL FUNDS
SEMI-ANNUAL REPORT
MAY 31, 1998
BRAZOS
======
JMIC SMALL CAP
GROWTH PORTOLIO
JMIC REAL ESTATE
SECURITIES PORTFOLIO
JMIC MICRO CAP
GROWTH PORTFOLIO
======
INVESTMENT ADVISER
==================
JOHN McSTAY
INVESTMENT COUNSEL
5949 SHERRY LANE
SUITE 1600
DALLAS, TEXAS 75225
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management
June 29, 1998
Dear Fellow Shareholders, Clients, and Friends:
It is a pleasure to present to you a very positive mid-year report of the Brazos
Mutual Funds. Our investment process, focusing on good companies with strong
profit growth, high measures of profitability (ROE and ROA) and management whose
interest is closely aligned with shareholders continued to work well for you in
1998. The following chart outlines Brazos performance relative to appropriate
benchmarks.
================================================================================
<TABLE>
<CAPTION>
QUARTER ENDING YEAR TO DATE INCEPTION TO
3/31/98 5/31/98 5/31/98
-----------------------------------------------
<S> <C> <C> <C>
BRAZOS SMALL CAP GROWTH(1) Inception 12/31/96 15.6% 11.6% 72.4%
Russell 2000(2) 10.1% 4.7% 28.1%
BRAZOS REAL ESTATE SECURITIES(1) Inception 12/31/96 1.5% -2.0% 26.6%
NAREIT Equity Index(2) -0.5% -4.4% 15.0%
Wilshire REIT Index(2) -1.0% -5.1% 13.5%
BRAZOS MICRO CAP(1) Inception 12/31/97 27.7% 31.0% 31.0%
Russell 2000(2) 10.1% 4.7% 4.7%
</TABLE>
================================================================================
It has been an exciting and rewarding time for Brazos shareholders since our
last letter. Notable events in which you can take pride and comfort include:
(BULLET) Continued excellent acceptance of the Brazos Small Cap Growth
Portfolio, with assets as of this writing at approximately $195
million.
(BULLET) The selection of Brazos Small Cap Growth as one of MONEY
MAGAZINE'S best 100 mutual funds.
(BULLET) Continued growth and acceptance of Brazos Real Estate Securities
Portfolio, with assets as of this writing at approximately $90
million
(BULLET) The launching of our new Micro Cap Portfolio on 12/31/97.
(1) Past performance is not indicative of future results. Investment returns
and principal values may fluctuate, so that, when redeemed, shares may be
worth more or less than their original value. Returns are higher due to the
maintenance of the portfolios' expenses by John McStay Investment Counsel.
Since inception to 3/31/98 returns are: Brazos Small Cap 78.7%, Brazos Real
Estate Securities 31.1%, Brazos Micro Cap 27.7%. 1 year ending 3/31/98
returns are: Brazos Small Cap 75.2%, Brazos Real Estate Securities 25.6%.
(2) The NAREIT Equity Index, Russell 2000 and the Wilshire REIT Index are
unmanaged indices without any associated expenses and their returns assume
the reinvestment of all dividends.
1
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
(BULLET) The Micro Cap's first quarter performance of 27.7%, was ranked
number 1 out of 47 Micro Cap funds as measured by Lipper
Analytical based on total return.
(BULLET) A BARRON'S cover story acknowledging JMIC (Brazos) as one of the
better small cap money managers.
(BULLET) The continued growth and strengthening of John McStay Investment
Counsel's investment team with the addition of three proven
investment professionals.
We are very pleased by the above events, as well as your continued positive
feedback and encouragement along the way. Rest assured that our commitment to
Brazos, and to you our valued shareholder, remains focused and intense.
Meanwhile, the markets have languished over the past several months. We have
described this period in the markets as a transition involving the passage of
time. We have suggested a transition for the following reasons: (1) the markets
have experienced three consecutive years of double digit appreciation and are
presently priced for perfection at approximately 22x 1998 earnings; (2) time is
needed to adjust to the implications of the Asian problems that will become
increasingly apparent in corporate earnings over the next six months; (3) the
continued fragile conditions in Asia raise questions regarding Japan and China
and a recession and currency devaluation, respectively; (4) earnings estimates
for many companies remain too high and shortfalls in the reported earnings of
highly visible companies will increase market volatility; and (5) clear
visibility regarding 1999 earnings (and year 2000 earnings), which should be a
positive market stimulus, is several months away.
However, there are three reasons why we believe that this transition market will
be successfully concluded and that the bull market will continue to run. These
factors include the demographic backdrop, corporate mergers, and corporate share
repurchases.
An important leg in the liquidity story is the fact that free cash flow in
corporations today is at an all-time high. Free cash flow, after dividends,
capital expenditures, etc., now represents approximately 25% of reported
earnings. On a per share basis, free cash flow has never been higher. Therefore,
in an environment with very limited pricing power, the appetite to acquire,
absorb, and rationalize is being facilitated for a period of time far beyond
most expectations. We expect this to continue. One final point: if a market
break should occur, let us say a break greater than 10%, we would expect that
corporate America would respond by buying in stock in a most aggressive fashion.
This was the reaction following the October 1987 crash and that action occurred
with corporate America's liquidity profile pale in comparison with the present
cash horde.
2
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
Demographics could hardly be more positive and the dynamics of individuals in
the 50-70 age bracket and the dynamics of boomers in the 35-50 year old range,
have remarkably positive consumption/investment implications for the economy. As
the boomer has come to grips with the fact that the Social Security System will
not be all that he hoped it would be, and as his consumption/saving posture
shifts, his allocation to equities is growing at a remarkable pace. As a
percentage of financial assets, it is now in excess of 40%. Historically, the
financial assets of individuals have grown at 8% per year; it is shocking to
note that if this growth were to continue, and if the percentage allocation to
financial assets does not change, this will amount to another 24 trillion
dollars of financial assets over the next 15 years!
As stunning as this statistic may be, one should also consider the worldwide
impact of what is transpiring in the European pension industry. Remarkably,
these individuals have only 12% of their financial assets in equities while to a
large degree, they fit the U.S. demographic profile with the same need to save
and invest. As a result, it is likely over the next decade, European investor
allocations to equities will increase dramatically. Along with the European
markets, the United States securities market will be a meaningful beneficiary.
As if that is not enough, consider the fact that a portion of your Social
Security Trust Fund is quite likely to be allocated to equities over the next
few years. These are all sources of very serious new money coming into the
market over the course of the next decade.
In conclusion, we are grateful for our good fortune, for your support and we
report to you optimistically that our 1998 effort and results will justify your
continued confidence in JMIC and the Brazos Mutual Funds.
With best wishes,
[/S/ John McStay]
John McStay
3
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited) May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
COMMON STOCK -- 96.2%
BUSINESS SERVICES -- 10.3%
Abacus Direct Corp.*....................... 47,200 $ 2,365,900
CBT Group plc*............................. 57,000 2,835,750
First Virtual Corp.*....................... 147,300 1,868,869
Harte-Hanks Communications, Inc. .......... 55,200 1,248,900
Iron Mountain, Inc.*....................... 33,300 1,382,991
Paychex, Inc. ............................. 40,500 1,458,000
Romac International, Inc.*................. 146,412 4,126,988
StaffMark, Inc.* .......................... 8,800 323,400
The Profit Recovery Group
International, Inc.*.................... 78,000 1,911,000
Vincam Group, Inc.*........................ 57,700 1,157,606
------------
TOTAL BUSINESS SERVICES................................ 18,679,404
------------
CONSUMER DURABLES -- 2.7%
Furniture Brands Intl., Inc.*.............. 62,800 1,852,600
Gentex Corp. .............................. 38,600 1,413,725
Herman Miller, Inc. ....................... 60,000 1,661,250
------------
TOTAL CONSUMER DURABLES................................ 4,927,575
------------
CONSUMER MERCHANDISING -- 17.2%
99 Cents Only Stores*...................... 44,900 1,711,812
Abercrombie & Fitch Co. ................... 35,700 1,508,325
Ames Department Stores, Inc. *............. 74,200 1,831,812
Bed, Bath & Beyond, Inc.* ................. 64,500 3,237,094
BJ's Wholesale Club, Inc.*................. 44,300 1,749,850
Blue Rhino Corporation*.................... 90,400 1,401,200
Dress Barn, Inc.*.......................... 68,600 1,987,256
Elder-Berrman Stores Corp.*................ 55,800 1,395,000
Fingerhut Co. ............................. 122,600 3,593,712
General Nutrition Companies, Inc.*......... 48,900 1,543,406
Linens 'N Things, Inc.*.................... 107,700 3,459,862
Maxwell Shoe Co., Inc.*.................... 95,600 1,876,150
Michaels Stores, Inc.*..................... 59,300 1,775,294
Starbucks Corp. ........................... 51,200 2,457,600
The Cheesecake Factory*.................... 80,100 1,617,019
------------
TOTAL CONSUMER MERCHANDISING........................... 31,145,392
------------
CONSUMER NON-DURABLES -- 2.4%
Whole Foods Market, Inc.*.................. 77,800 4,279,000
------------
CONSUMER SERVICES -- 7.4%
Bright Horizons, Inc.*..................... 97,100 2,427,500
Caliber Learning Network, Inc.*............ 35,100 579,150
4 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited)-- continued May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
Corporate Family Solutions, Inc.* 65,000 $ 1,486,875
Devry, Inc.*.............................. 68,700 2,735,119
Prime Hospitality Corp.*.................. 42,500 762,344
SFX Entertainment, Inc.* ................. 38,900 1,721,325
Sylvan Learning Systems, Inc.*............ 123,300 3,760,650
------------
TOTAL CONSUMER SERVICES................................ 13,472,963
------------
ELECTRONIC TECHNOLOGY -- 6.0%
ANTEC Corp.*.............................. 150,500 2,883,016
Harmonic Lightwaves, Inc. ................ 199,900 3,473,263
Oak Industries, Inc.*..................... 72,200 2,517,975
Orbital Sciences Corp.**.................. 23,700 968,738
Sanmina Corp.*............................ 13,900 1,082,462
------------
TOTAL ELECTRONIC TECHNOLOGY............................ 10,925,454
------------
ENERGY -- 6.6%
Cal Dive International, Inc. *............ 25,300 857,038
Dril-Quip, Inc.*.......................... 59,400 1,852,537
Enserch Exploration ...................... 173,800 1,716,275
Global Industries Ltd.*................... 116,800 2,489,300
Horizon Offshore, Inc.*................... 206,800 3,024,450
Transmontaigne Oil Co.*................... 120,300 1,947,356
------------
TOTAL ENERGY........................................... 11,886,956
------------
FINANCIAL -- 6.4%
BAMerchant Services,Inc................... 22,800 411,768
Carreker-Antinori, Inc.*.................. 186,000 2,022,750
HealthCare Financial Partners, Inc. *..... 53,900 2,647,837
Indigo Aviation AB ADR*................... 127,500 1,466,250
Metris Companies, Inc. ................... 13,600 778,600
Nova Corp. ............................... 54,200 1,785,212
Rock Financial Corp. ..................... 142,400 1,637,600
UniCapital Corp.*......................... 51,800 900,025
------------
TOTAL FINANCIAL........................................ 11,650,042
------------
HEALTHCARE PRODUCTS -- 4.9%
Arqule, Inc.*............................. 55,100 785,175
Jones Pharmaceutical, Inc.*............... 38,700 1,190,025
Medicis Pharmaceutical Corp.* ............ 65,100 2,656,894
Pharmacyclics*............................ 44,700 1,128,675
Pharmaprint, Inc.*........................ 69,900 865,012
Spiros Developement Corp. II, Inc.*....... 50,000 831,250
Waters Corp.*............................. 22,700 1,322,275
------------
TOTAL HEALTHCARE PRODUCTS.............................. 8,779,306
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 5
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited)-- continued May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
HEALTHCARE SERVICES -- 5.9%
Ameripath, Inc.*........................ 70,000 $ 1,006,250
MAXIMUS, Inc.*.......................... 98,500 2,622,562
Monarch Dental Corp.*................... 102,300 1,803,037
Orthodontic Centers of America, Inc.*... 56,000 1,186,500
Professional Detailing, Inc.*........... 39,300 825,300
Serologicals Corp.*..................... 111,600 3,292,200
------------
TOTAL HEALTHCARE SERVICES............................. 10,735,849
------------
MEDIA -- 11.9%
American Radio Systems Corp. ........... 55,000 3,636,875
Capstar Broadcasting Corp.*............. 59,200 1,124,800
Cinar Films, Inc.*...................... 124,800 2,386,800
Clear Channel Communications, Inc.*..... 43,026 4,125,118
Heftel Broadcasting Corp. (A Shares)*... 39,400 1,492,275
Outdoor Systems, Inc.*.................. 122,450 3,673,500
Specialty Teleconstructors*............. 41,000 1,968,000
The Petersen Companies, Inc.* .......... 73,100 1,800,088
TMP Worldwide, Inc.* ................... 55,400 1,440,400
------------
TOTAL MEDIA........................................... 21,647,856
------------
TECHNOLOGY SERVICES/SOFTWARE -- 12.2%
Affiliated Computer Services, Inc.*..... 138,400 4,610,450
CIBER, Inc.*............................ 35,800 1,147,838
Great Plains Software, Inc.*............ 53,500 1,952,750
Harbinger Corp.*........................ 44,100 1,026,703
Inspire Insurance Solutions, Inc.*...... 75,700 2,474,444
Metro Information Services Inc.* ....... 29,700 968,963
Network Solutions, Inc. (A Shares)*..... 33,700 1,245,847
SunGard Data Systems, Inc.*............. 67,100 2,289,788
Superior Consultant Holdings Corp.* .... 44,600 1,873,200
Transactions Systems Architects, Inc.* . 72,000 2,916,000
USWeb Corp.*............................ 75,000 1,584,375
------------
TOTAL TECHNOLOGY SERVICES/SOFTWARE.................... 22,090,358
------------
TRADITIONAL HEAVY INDUSTRY -- 1.2%
American Disposal Services, Inc.* ...... 32,100 1,256,916
Tetra Tech, Inc.*....................... 43,125 948,750
------------
TOTAL TRADITIONAL HEAVY INDUSTRY...................... 2,205,666
------------
TRANSPORTATION -- 1.1%
International Total Services, Inc.* .... 43,300 909,300
Swift Transportation Co., Inc.*......... 46,900 1,043,525
------------
TOTAL TRANSPORTATION.................................. 1,952,825
------------
TOTAL COMMON STOCK (COST $158,881,327) .............. 174,378,646
------------
6 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited)-- continued May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
MUTUAL FUNDS -- 4.7%
Samson Street Money Market Fund ....... 4,286,492 $ 4,286,492
Temp Cash Fund (Dollar Series)......... 4,286,492 4,286,492
------------
TOTAL MUTUAL FUNDS (COST $8,572,984) .................... 8,572,984
------------
Total Investments
(Cost $167,454,311)(DAGGER)-- 100.9% ...................... $182,951,630
Other Assets and Liabilities, Net-- (0.9%) .................... (1,683,032)
------------
Total Net Assets-- 100.0% ..................................... $181,268,598
============
* Non-income producing security.
(DAGGER)The cost for Federal income tax purposes was $167,517,174. At May 31,
1998, net unrealized appreciation was $15,434,456. This consisted of
aggregate gross unrealized appreciation in which there was an excess of
market value over tax cost of $18,140,693, and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $2,706,237.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 7
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Schedule of Investments (Unaudited) May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
COMMON STOCK -- 94.9%
APARTMENTS -- 18.2%
Apartment Investment & Management Co. . 18,700 $ 729,300
Avalon Properties, Inc. ............... 56,700 1,594,687
Bay Apartment Communities, Inc. ....... 73,300 2,693,775
BRE Properties, Inc. .................. 54,700 1,449,550
Camden Property Trust ................. 41,500 1,268,344
Equity Residential Property Trust ..... 73,500 3,596,906
Essex Property Trust, Inc. ............ 28,400 923,000
Irvine Apartment Communities .......... 23,000 687,125
Post Properties, Inc. ................. 14,800 608,650
Security Capital Atlantic, Inc. ....... 18,237 406,913
Security Capital Pacific Trust ........ 57,257 1,291,861
Summit Properties, Inc. ............... 55,400 1,104,537
------------
TOTAL APARTMENTS...................................... 16,354,648
------------
DIVERSIFIED/OTHER -- 7.3%
Catellus Development Corp. ............ 40,500 751,781
Cousins Properties, Inc. .............. 11,200 343,000
Crescent Real Estate Equities Co. ..... 38,400 1,315,200
First Union Real Estate Investments ... 46,500 508,594
Glenborough Realty Trust, Inc. ........ 28,300 792,400
National Golf Properties, Inc. ........ 17,400 523,087
Vornado Realty Trust .................. 61,500 2,360,063
------------
TOTAL DIVERSIFIED/OTHER............................... 6,594,125
------------
HEALTHCARE -- 2.9%
Eldertrust ............................ 69,700 1,097,775
Healthcare Realty Trust, Inc. ......... 12,700 359,569
Meditrust Corp. ....................... 39,100 1,102,131
------------
TOTAL HEALTHCARE...................................... 2,559,475
------------
HOTELS -- 17.3%
American General Hospitality Corp. .... 50,600 1,201,750
Boykin Lodging Co. .................... 57,900 1,226,756
Bristol Hotel Company* ................ 5,800 153,700
Candlewood Hotel Company, Inc. ........ 69,400 572,550
Capstar Hotel Co. ..................... 22,200 649,350
Felcor Suite Hotels, Inc. ............. 101,900 3,509,181
Innkeepers USA Trust .................. 30,300 422,306
Patriot American Hospitality, Inc. .... 144,599 3,461,339
Sholodge, Inc.* ....................... 5,700 52,725
8 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Schedule of Investments (Unaudited)-- continued May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
Starwood Hotels & Resorts Trust 88,700 $ 4,185,532
Sunstone Hotel Investors, Inc. ........ 5,400 77,625
------------
TOTAL HOTELS......................................... 15,512,814
------------
INDUSTRIAL -- 6.6%
AMB Property Corp. .................... 40,800 971,550
First Industrial Realty Trust, Inc. ... 38,300 1,187,300
Meridian Industrial Trust, Inc. ....... 32,700 760,275
Security Capital Industrial Trust ..... 41,800 1,029,325
Weeks Corp. ........................... 62,200 1,986,512
------------
TOTAL INDUSTRIAL..................................... 5,934,962
------------
MANUFACTURED HOMES -- 1.7%
Chateau Communities, Inc. ............. 23,900 708,038
Sun Communities, Inc. ................. 23,200 787,350
------------
TOTAL MANUFACTURED HOMES............................. 1,495,388
------------
MIXED: OFFICE/INDUSTRIAL -- 3.5%
Bedford Property Investors, Inc. ...... 46,300 891,275
Liberty Property Trust ................ 20,200 534,037
Reckson Associates Realty Corp. ....... 36,100 897,988
Spieker Properties, Inc. .............. 20,600 820,137
------------
TOTAL MIXED: OFFICE/INDUSTRIAL....................... 3,143,437
------------
FREE STANDING -- 0.7%
Captec Net Lease Realty, Inc. ......... 36,100 570,831
Franchise Finance Corporation
of America ........................ 2,300 59,800
------------
TOTAL FREE STANDING.................................. 630,631
------------
OFFICE -- 19.6%
Arden Realty Group, Inc. .............. 59,300 1,627,044
Boston Properties, Inc. ............... 10,300 350,200
Brandywine Realty Trust ............... 33,000 765,188
CarrAmerica Realty Corp. .............. 45,900 1,285,200
Cornerstone Properties, Inc. .......... 33,900 593,250
Equity Office Properties Trust ........ 166,978 4,591,895
Great Lakes REIT, Inc. ................ 2,200 40,150
Highwoods Properties, Inc. ............ 35,600 1,174,800
Kilroy Realty Corp. ................... 12,100 316,869
Mack-Cali Realty Corp. ................ 34,300 1,234,800
Prentiss Properties Trust ............. 44,200 1,129,863
SL Green Realty Corp. ................. 89,300 2,025,994
Tower Realty Trust, Inc. .............. 46,300 1,062,006
Trizec Hahn Corp. ..................... 65,400 1,402,013
------------
TOTAL OFFICE......................................... 17,599,272
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 9
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Schedule of Investments (Unaudited)-- continued May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
REGIONAL MALLS -- 5.8%
JP Realty, Inc. ........................ 73,800 $ 1,688,175
Rouse Company .......................... 39,600 1,190,475
Simon Debartolo Group, Inc. ............ 39,700 1,324,988
The Macerich Co. ....................... 24,500 661,500
Urban Shopping Centers, Inc. ........... 10,700 353,100
------------
TOTAL REGIONAL MALLS................................... 5,218,238
------------
STORAGE -- 5.1%
Public Storage, Inc. ................... 27,500 825,000
Sovran Self Storage, Inc. .............. 66,900 1,827,206
Storage Trust Realty ................... 52,200 1,259,325
Storage USA, Inc. ...................... 18,000 669,375
------------
TOTAL STORAGE.......................................... 4,580,906
------------
STRIP CENTERS -- 6.2%
Burnham Pacific Properties, Inc. ....... 95,200 1,338,750
Developers Diversified Realty Corp. .... 10,700 419,306
IRT Property Co. ....................... 118,200 1,344,525
JDN Realty Corp. ....................... 19,700 640,250
Philips International Realty ........... 46,600 803,850
Regency Realty Corp. ................... 42,600 1,043,700
------------
TOTAL STRIP CENTERS.................................... 5,590,381
------------
TOTAL COMMON STOCK (COST $88,105,622) ................. 85,214,277
------------
MUTUAL FUNDS -- 5.2%
Samson Street Money Market Fund ........ 2,353,120 2,353,120
Temp Cash Fund (Dollar Series).......... 2,353,120 2,353,120
------------
TOTAL MUTUAL FUNDS (COST $4,706,240) .................. 4,706,240
------------
Total Investments
(Cost $92,811,862)(DAGGER)-- 100.1% .................... $ 89,920,517
Other Assets and Liabilities, Net -- (0.1%) ................. (103,126)
------------
Total Net Assets-- 100.0% ................................... $ 89,817,391
============
* Non-income producing security.
(DAGGER)The cost for Federal income tax purposes was $92,857,390. At May 31,
1998, net unrealized depreciation was $2,936,873. This consisted of
aggregate gross unrealized appreciation in which there was an excess of
market value over tax cost of $611,178, and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $3,548,051.
10 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC MICRO CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited) May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
COMMON STOCK -- 87.5%
BUSINESS SERVICES -- 8.5%
Abacus Direct Corp.*................... 8,900 $ 446,112
Administaff, Inc.* .................... 3,200 131,200
Data Processing Resources Corp.* ...... 11,400 332,025
First Virtual Corp.*................... 27,700 351,444
Romac International, Inc.*............. 31,380 884,524
The Profit Recovery Group
International, Inc.*................ 10,400 254,800
Vincam Group, Inc.*.................... 15,900 318,994
------------
TOTAL BUSINESS SERVICES................................ 2,719,099
------------
CONSUMER DURABLES -- 1.1%
Amx Corp.* ............................ 40,000 340,000
------------
CONSUMER MERCHANDISING -- 16.7%
99 Cents Only Stores*.................. 12,000 457,500
Ames Department Stores, Inc. *......... 10,400 256,750
Blue Rhino Corporation*................ 32,100 497,550
Coldwater Creek, Inc.*................. 20,000 455,000
Dress Barn, Inc.*...................... 7,500 217,266
Elder-Berrman Stores Corp.*............ 18,800 470,000
Linens 'N Things, Inc.*................ 23,300 748,512
Maxwell Shoe Company, Inc.*............ 30,600 600,525
Michaels Stores, Inc.*................. 12,700 380,206
O'Charleys, Inc.* ..................... 23,200 482,850
PJ America, Inc.* ..................... 25,000 496,875
The Cheesecake Factory*................ 14,400 290,700
------------
TOTAL CONSUMER MERCHANDISING........................... 5,353,734
------------
CONSUMER SERVICES -- 5.2%
Bright Horizons, Inc.*................. 24,700 617,500
Caliber Learning Network, Inc.*........ 3,900 64,350
CorporateFamily Solutions, Inc.* ...... 21,900 500,962
Equity Corp.* ......................... 20,300 482,125
------------
TOTAL CONSUMER SERVICES................................ 1,664,937
------------
ELECTRONIC TECHNOLOGY -- 11.6%
ANTEC Corp.*........................... 46,700 894,597
Astropower, Inc.* ..................... 40,000 375,000
C-COR Electronics, Inc.*............... 40,300 639,762
Harmonic Lightwaves, Inc.* ............ 52,800 917,400
Oak Industries, Inc.*.................. 25,400 885,825
------------
TOTAL ELECTRONIC TECHNOLOGY............................ 3,712,584
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 11
<PAGE>
BRAZOS/JMIC MICRO CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited)-- continued May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
ENERGY -- 4.0%
Dril-Quip, Inc.*.......................... 13,800 $ 430,387
Horizon Offshore, Inc.*................... 40,700 595,238
Transmontaigne Oil Co.*................... 15,800 255,762
------------
TOTAL ENERGY............................................ 1,281,387
------------
FINANCIAL -- 11.3%
Carreker-Antinori, Inc.*.................. 64,200 698,175
First International Bancorp, Inc. ........ 33,300 524,475
HealthCare Financial Partners, Inc. *..... 11,100 545,287
Indigo Aviation AB ADR*................... 47,400 545,100
Metris Companies, Inc. ................... 2,100 120,225
Nova Corp.* .............................. 18,900 622,519
Rock Financial Corp. ..................... 50,600 581,900
------------
TOTAL FINANCIAL......................................... 3,637,681
------------
HEALTHCARE PRODUCTS -- 3.8%
Medicis Pharmaceutical Corp.* ............ 12,500 510,156
Pharmacyclics*............................ 12,100 305,525
Pharmaprint, Inc.*........................ 33,600 415,800
------------
TOTAL HEALTHCARE PRODUCTS............................... 1,231,481
------------
HEALTHCARE SERVICES -- 9.3%
American Dental Partners, Inc.*........... 40,000 680,000
Ameripath, Inc.*.......................... 19,300 277,438
MAXIMUS, Inc.*............................ 13,100 348,788
Monarch Dental Corp.*..................... 29,800 525,225
National Surgery Centers, Inc.* .......... 14,600 406,975
Professional Detailing, Inc.*............. 13,700 287,700
Serologicals Corp.*....................... 15,200 448,400
------------
TOTAL HEALTHCARE SERVICES............................... 2,974,526
------------
MEDIA -- 4.8%
Cinar Films, Inc.*........................ 21,600 413,100
Specialty Teleconstructors, Inc.*......... 7,100 340,800
The Petersen Companies, Inc.* ............ 22,400 551,600
TMP Worldwide, Inc.* ..................... 8,600 223,600
------------
TOTAL MEDIA............................................. 1,529,100
------------
TECHNOLOGY SERVICES/SOFTWARE -- 6.7%
A Consulting Team Inc.* .................. 28,900 343,188
Computer Task Group, Inc.................. 9,500 300,438
Evolving Systems, Inc.*................... 20,000 370,000
Inspire Insurance Solutions, Inc.*........ 15,200 496,850
12 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC MICRO CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited)-- continued May 31, 1998
MARKET VALUE
SHARES (NOTE 2)
---------- ------------
Mastech Corp.* 4,300 $ 81,297
Metro Information Services, Inc.* ........ 5,700 185,963
Superior Consultant Holdings Corp.* ...... 9,200 386,400
------------
TOTAL TECHNOLOGY SERVICES/SOFTWARE.................... 2,164,136
------------
TRADITIONAL HEAVY INDUSTRY -- 3.5%
American Disposal Services, Inc.* ........ 11,900 465,959
Hawk Corp.* .............................. 22,000 401,500
Tetra Tech, Inc.*......................... 11,500 253,000
------------
TOTAL TRADITIONAL HEAVY INDUSTRY...................... 1,120,459
------------
TRANSPORTATION -- 1.0%
International Total Services, Inc.* ...... 15,500 325,500
------------
TOTAL COMMON STOCK (COST $25,999,652) ................ 28,054,624
------------
MUTUAL FUNDS -- 6.9%
Samson Street Money Market Fund ..........1,105,132 1,105,132
Temp Cash Fund (Dollar Series) ...........1,105,133 1,105,133
------------
TOTAL MUTUAL FUNDS (COST $2,210,265) ................. 2,210,265
------------
GOVERNMENT SECURITIES -- 8.6%
PAR
----------
U.S. Treasury Bill, 4.28%, 06/04/98
(Cost $2,749,019).............. $2,750,000 2,749,019
------------
Total Investments
(Cost $30,958,936)(DAGGER) -- 103.0% .................. 33,013,908
Other Assets and Liabilities, Net-- (3.0%) ................. (957,979)
------------
Total Net Assets-- 100.0% .................................. $ 32,055,929
============
* Non-income producing security.
(DAGGER)Cost for Federal income tax purposes. At May 31, 1998, net unrealized
appreciation was $2,054,972. This consisted of aggregate gross unrealized
appreciation in which there was an excess of market value over tax cost of
$2,578,874, and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $523,902.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 13
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Assets and Liabilities (Unaudited) May 31, 1998
<TABLE>
<CAPTION>
SMALL CAP REAL ESTATE MICRO CAP
GROWTH SECURITIES GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost $167,454,311, $92,811,862
and $30,958,936 respectively) (Note 2)............. $182,951,630 $89,920,517 $33,013,908
Receivables for investment securites sold............... 1,114,800 1,488,966 --
Receivable for Fund shares sold......................... 211,075 5,745 41,907
Dividends and interest receivable....................... 53,646 104,724 9,708
Deferred organization costs (Note 2).................... 19,037 19,037 --
Other assets............................................ 9,062 4,618 1,372
-----------------------------------------------
Total Assets....................................... 184,359,250 91,543,607 33,066,895
-----------------------------------------------
LIABILITIES
Payables for investment securities purchased............ 2,969,985 1,579,379 690,702
Payable for Fund shares redeemed........................ 17,068 75,347 297,852
Other accrued expenses (Note 4)......................... 103,599 71,490 22,412
-----------------------------------------------
Total Liabilities.................................. 3,090,652 1,726,216 1,010,966
-----------------------------------------------
Net Assets, at market value............................. $181,268,598 $89,817,391 $32,055,929
===============================================
NET ASSETS CONSISTED OF:
Capital paid in......................................... $162,086,622 $89,423,808 $27,400,416
Undistributed net investment income (loss).............. (456,303) 855,888 (51,495)
Accumulated net realized gain........................... 4,140,960 2,429,040 2,652,036
Net unrealized appreciation (depreciation) on
investments.......................................... 15,497,319 (2,891,345) 2,054,972
-----------------------------------------------
Net assets, for 11,549,136, 8,097,528 and
2,446,564 shares outstanding, respectively......... $181,268,598 $89,817,391 $32,055,929
===============================================
NET ASSET VALUE, offering and redemption price per share
($181,268,598 (DIVIDE) 11,549,136, $89,817,391 (DIVIDE)
8,097,528 and $32,055,929 (DIVIDE) 2,446,564
outstanding shares of beneficial interest,
$0.00 par value)................................... $15.70 $11.09 $13.10
===============================================
</TABLE>
14 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Operations for the Six-Month Period Ended May 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
SMALL CAP REAL ESTATE MICRO CAP
GROWTH SECURITIES GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................... $ 86,881 $1,820,415 $ 1,345
Interest.................................................... 242,828 136,507 84,028
--------------------------------------------
Total investment income................................ 329,709 1,956,922 85,373
--------------------------------------------
EXPENSES:
Advisory fee (Note 4).................................. 585,354 330,760 102,627
Administration fee (Note 4)............................ 69,141 39,388 9,096
Accounting fee (Note 4)................................ 32,795 25,984 22,192
Custodian fee (Note 4)................................. 15,435 20,071 9,260
Transfer Agent fee (Note 4)............................ 15,786 15,724 10,427
Trustees' fees and expenses (Note 4)................... 2,663 2,676 2,471
Amortization of organization and offering
expenses (Note 2).................................. 2,257 2,257 --
Registration fees...................................... 30,142 17,082 7,530
Reports to shareholders................................ 5,851 5,491 5,478
Legal.................................................. 12,232 11,502 6,802
Audit.................................................. 6,356 5,010 4,436
Other.................................................. 8,000 3,805 3,126
--------------------------------------------
Total expenses before fee waivers.................. 786,012 479,750 183,445
Advisory fee waived (Note 4)....................... -- (20,325) (36,467)
Administration fee waived (Note 4)................. -- -- (2,124)
Accounting fee waived (Note 4)..................... -- -- (5,486)
Transfer agent fee waived (Note 4)................. -- -- (2,500)
--------------------------------------------
Total expenses, net................................ 786,012 459,425 136,868
--------------------------------------------
Net investment income (loss)........................... (456,303) 1,497,497 (51,495)
--------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions........... 4,204,080 2,637,439 2,652,036
Net unrealized appreciation (depreciation) of
investments during the period...................... 12,593,976 (3,762,786) 2,054,972
--------------------------------------------
Net gain (loss) on investments......................... 16,798,056 (1,125,347) 4,707,008
--------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS.......................................... $16,341,753 $ 372,150 $4,655,513
============================================
<FN>
(DAGGER)The Micro Cap Growth Portfolio commenced operations on December 31,
1997.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 15
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SMALL CAP REAL ESTATE MICRO CAP
GROWTH SECURITIES GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------
<S> <C> <C> <C>
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1998 (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss)...................... $ (456,303) $ 1,497,497 $ (51,495)
Net realized gain on investment transactions...... 4,204,080 2,637,439 2,652,036
Net unrealized appreciation (depreciation) of
investments during the period................. 12,593,976 (3,762,786) 2,054,972
------------------------------------------------
Net increase in net assets resulting from
operations.................................... 16,341,753 372,150 4,655,513
------------------------------------------------
Distributions to shareholders from:
Net investment income ($0.00, $0.21 and
$0.00 per share, respectively)................ -- (1,216,812) --
Net realized gain on investments ($0.10, $0.14
and $0.00 per share, respectively)............ (650,416) (715,001) --
------------------------------------------------
Total distributions............................... (650,416) (1,931,813) --
------------------------------------------------
Increase in net assets from Fund share
transactions (Note 5)............................. 84,679,279 38,068,801 27,400,416
------------------------------------------------
Total increase in net assets...................... 100,370,616 36,509,138 32,055,929
NET ASSETS:
Beginning of period............................... 80,897,982 53,308,253 --
------------------------------------------------
End of period..................................... $181,268,598 $89,817,391 $32,055,929
================================================
<FN>
(DAGGER)The Micro Cap Growth Portfolio commenced operations on December 31,
1997.
</FN>
</TABLE>
16 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Changes in Net Assets -- continued
<TABLE>
<CAPTION>
SMALL CAP REAL ESTATE
GROWTH SECURITIES
PORTFOLIO PORTFOLIO
------------------------------------
<S> <C> <C>
FOR THE PERIOD DECEMBER 31, 1996(DAGGER)
THROUGH NOVEMBER 30, 1997
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss)............................... $ (181,176) $ 1,218,804
Net realized gain on investment transactions............... 4,388,209 4,485,233
Net unrealized appreciation of investments during
the period............................................. 2,903,343 871,441
-----------------------------
Net increase in net assets resulting from operations....... 7,110,376 6,575,478
-----------------------------
Distributions to shareholders from:
Net investment income ($0.00 and $0.23 per share,
respectively).......................................... -- (643,601)
Net realized gain on investments ($1.17 and $0.93
per share, respectively)............................... (3,619,737) (3,978,631)
-----------------------------
Total distributions........................................ (3,619,737) (4,622,232)
-----------------------------
Increase in net assets from Fund share transactions (Note 5).... 77,357,343 51,305,007
-----------------------------
Total increase in net assets............................... 80,847,982 53,258,253
NET ASSETS:
Beginning of period........................................ 50,000 50,000
-----------------------------
End of period.............................................. $80,897,982 $53,308,253
=============================
<FN>
(DAGGER) Commencement of Operations.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 17
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements. They should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH PERIOD ENDED FOR THE
MAY 31, 1998 PERIOD DECEMBER 31, 1996*
(UNAUDITED) THROUGH NOVEMBER 30, 1997
---------------------- -------------------------
<S> <C> <C>
SMALL CAP GROWTH PORTFOLIO
NET ASSET VALUE-- BEGINNING OF PERIOD................... $13.49 $10.00
------ ------
INVESTMENT OPERATIONS:
Net investment loss................................ (0.04) (0.03)
Net realized and unrealized gain on
investments.................................... 2.35 4.69
------ ------
Total from investment operations................. 2.31 4.66
------ ------
DISTRIBUTIONS:
From net realized gain............................. (0.10) (1.17)
------ ------
NET ASSET VALUE-- END OF PERIOD......................... $15.70 $13.49
====== ======
TOTAL RETURN***......................................... 17.23% 47.08%
Ratios (to average net assets)/Supplemental Data
Expenses 1......................................... 1.21%** 1.35%**
Net investment loss................................ (0.70)%** (0.68)%**
Portfolio turnover rate................................. 63.03% 147.86%
Average commission rate paid(DAGGER).................... $ 0.0613 $0.0551
Net assets at end of period (000 omitted)............... $181,269 $80,898
</TABLE>
18 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights -- continued
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH PERIOD ENDED FOR THE
MAY 31, 1998 PERIOD DECEMBER 31, 1996*
(UNAUDITED) THROUGH NOVEMBER 30, 1997
---------------------- -------------------------
<S> <C> <C>
REAL ESTATE SECURITIES PORTFOLIO
NET ASSET VALUE-- BEGINNING OF PERIOD................... $11.24 $10.00
------ ------
INVESTMENT OPERATIONS:
Net investment income.............................. 0.19 0.35
Net realized and unrealized gain on
investments.................................... 0.01 2.05
------ ------
Total from investment operations................. 0.20 2.40
------ ------
DISTRIBUTIONS:
From net investment income......................... (0.21) (0.23)
From net realized gain............................. (0.14) (0.93)
------ ------
Total distributions.............................. (0.35) (1.16)
------ ------
NET ASSET VALUE-- END OF PERIOD......................... $11.09 $11.24
====== ======
TOTAL RETURN***......................................... 1.74% 24.39%
Ratios (to average net assets)/Supplemental Data:
Expenses 2......................................... 1.25%** 1.25%**
Net investment income.............................. 4.07%** 4.61%**
Portfolio turnover rate................................. 85.10% 184.74%
Average commission rate paid(DAGGER).................... $0.0648 $0.0644
Net assets at end of period (000 omitted)............... $89,817 $53,308
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 19
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights -- continued
FOR THE
PERIOD DECEMBER 31, 1997*
THROUGH MAY 31, 1998
(UNAUDITED)
------------------------
MICRO CAP GROWTH PORTFOLIO
NET ASSET VALUE-- BEGINNING OF PERIOD................. $10.00
------
INVESTMENT OPERATIONS:
Net investment loss.............................. (0.02)
Net realized and unrealized gain on investments.. 3.12
------
Total from investment operations............... 3.10
------
NET ASSET VALUE-- END OF PERIOD....................... $13.10
======
TOTAL RETURN***....................................... 31.00%
Ratios (to average net assets)/Supplemental Data:
Expenses3........................................ 1.60%**
Net investment loss.............................. (0.60)%**
Portfolio turnover rate............................... 62.09%
Average commission rate paid(DAGGER).................. $0.0621
Net assets at end of period (000 omitted)............. $32,056
* Commencement of operations.
** Annualized.
*** Unannualized.
1 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 annual expense ratio from exceeding 1.35% of its average
daily net assets. In addition the Administrator, Accounting Agent and
Transfer Agent waived a portion of their fees for the period ended November
30, 1997. Without the waiver of expenses, the annualized ratio of expenses
to average net assets would have been 1.80% for the period ended November
30, 1997.
2 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 annual expense ratio from exceeding 1.25% of its average
daily net assets. In addition the Administrator, Accounting Agent and
Transfer Agent waived a portion of their fees for the period ended November
30, 1997. Without the waiver of expenses, the annualized ratio of expenses
to average net assets would have been 1.31% for the six-month period ended
May 31, 1998 and 1.83% for the period ended November 30, 1997.
3 The Adviser has voluntarily agreed to waive a portion of its advisory fees
and assume expenses otherwise payable by the Portfolio (if necessary) in
order to keep the annual expense ratio from exceeding 1.60% of its average
daily net assets. In addition the Administrator, Accounting Agent and
Transfer Agent waived a portion of their fees for the period ended May 31,
1998. Without the waiver of expenses, the annualized ratio of expenses to
average net assets would have been 2.14% for the period ended May 31, 1998.
(DAGGER)Computed by dividing the total amount of brokerage commissions paid by
the total shares of investment securities purchased and sold during the
period for which commissions were charged.
20 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements (Unaudited) May 31, 1998
1. DESCRIPTION OF THE FUND. Brazos Mutual Funds (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as
a diversified, open-end management investment company established as a
Delaware business trust. The Declaration of Trust, dated October 28, 1996,
permits the Trustees to establish separate series or "Portfolios," each of
which may issue separate classes of shares. The authorized shares of
beneficial interest of the Fund are currently divided into three
Portfolios, the BRAZOS/JMIC Micro Cap Growth Portfolio ("Micro Cap
Portfolio"), the BRAZOS/JMIC Real Estate Securities Portfolio ("Real
Estate Portfolio") and the BRAZOS/JMIC Small Cap Growth Portfolio ("Small
Cap Portfolio") (each, a "Portfolio" and collectively, the "Portfolios").
Each Portfolio currently consists of a single class of shares. The
investment objective of the Micro Cap Portfolio is to provide maximum
capital appreciation, consistent with reasonable risk to principal by
investing primarily in micro capitalization companies. The investment
objective of the Real Estate 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. The investment objective of the Small Cap
Portfolio is to provide maximum capital appreciation, consistent with
reasonable risk to principal by investing primarily in small
capitalization companies.
Because the Real Estate Portfolio may invest a substantial portion of its
assets in Real Estate Investment Trusts ("REITs"), the Portfolio may also
be subject to certain risks associated with direct investments in REITs.
REITs may be affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants. Furthermore, REITs are
dependent upon specialized management skills, have limited diversification
and are, therefore, subject to risks inherent in financing a limited
number of projects. REITs depend generally on their ability to generate
cash flow to make distributions to shareholders and certain REITs have
self-liquidation provisions by which mortgages held may be paid in full
and distributions of capital returns may be made at any time. In addition,
the performance of a RElT may be affected by its failure to qualify for
tax-free, pass-through of income under the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code") or its failure to maintain
exemption from registration under the 1940 Act.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies of the Fund:
SECURITY VALUATION. Each Portfolio's securities, except short-term
investments with remaining maturities of 60 days or less, use the last
quoted trading price as the market value. For listed securities, the
Portfolios use the price quoted by the exchange on which the security is
primarily traded. Unlisted securities and listed securities, including
REITs, 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. Short-term
investments with remaining maturities of 60 days or less are valued at
amortized cost, which approximates market value, unless the Fund's Board
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 21
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements (Unaudited) -- continued May 31, 1998
of Trustees determines that this does not represent fair value. The value
of all other securities is determined in good faith under the direction of
the Board of Trustees. As of May 31, 1998, no securities were valued by
the Board of Trustees.
FEDERAL INCOME TAXES. Each Portfolio is treated as a separate entity and
intends to qualify as a "regulated investment company" under Subchapter M
of the Internal Revenue Code, and to distribute all of its taxable income
to its shareholders. Therefore, no provision for federal income tax is
required.
The Portfolios may be subject to a nondeductible 4% excise tax calculated
as a percentage of certain undistributed amounts of net investment income
and net capital gains. The Portfolios intend to distribute their net
investment income and capital gains as necessary to avoid this excise tax.
DISTRIBUTIONS TO SHAREHOLDERS. Each Portfolio will distribute annually to
shareholders substantially all of its net investment income and any net
realized long-term capital gains. The Portfolios may distribute net
investment income and other capital gains during interim periods when the
Fund's management determines that it is in the best interests of a
Portfolio and its shareholders to do so. It is not anticipated that
distributions of net investment income and other capital gains will be
made more frequently than quarterly.
The Real Estate Portfolio receives a majority of its dividend income from
REITs. For tax purposes, a portion of these dividends may consist of
capital gains and returns of capital. Accordingly, the Portfolio's
distributions to shareholders may include a portion that may be a return
of capital received from the REITs, as well as a return of capital
attributed to distributions of other income for financial reporting
purposes. Distributions determined to be returns of capital are not
subject to current taxation. In accordance with Statement of Position
93-2, Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies ("SOP"), distributions representing a return of capital for tax
purposes are charged to capital paid in.
DEFERRED ORGANIZATION AND OFFERING COSTS. 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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of
22
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements (Unaudited) -- continued May 31, 1998
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
OTHER. Investment security transactions are accounted for on a trade date
basis. Each Portfolio uses the specific identification method for
determining realized gain and loss on investments for both financial and
federal income tax reporting purposes. Dividend income and distributions
to shareholders are recorded on the ex-dividend date.
Interest income is recorded on the accrual basis.
3. INVESTMENT SECURITIES. During the period ended May 31, 1998, purchases
and sales of investment securities (excluding short-term investments)
aggregated as follows:
SMALL CAP REAL ESTATE MICRO CAP
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- -----------
Purchases....... $161,796,970 $93,615,544 $35,369,979
Sales........... 82,497,480 60,514,191 12,022,741
4. ADVISORY FEE AND OTHER TRANSACTION WITH AFFILIATES. The Fund, on behalf
of each Portfolio, employs John McStay Investment Counsel (the "Adviser"),
an investment counseling firm founded in 1983, to furnish investment
advisory and other services to the Fund. Under Investment Advisory
Agreements with the Fund, dated November 25, 1996, and November 14, 1997,
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. For its services under the
Advisory Agreement, the Fund pays the Adviser a monthly fee at the annual
rate of 1.20%, 0.90% and 0.90% of the average daily net assets of the
Micro Cap Portfolio, Small Cap Portfolio and Real Estate Portfolio,
respectively. The Adviser has voluntarily agreed to keep operating
expenses for the Micro Cap Portfolio, Small Cap Portfolio and Real Estate
Portfolio (excluding taxes, extraordinary expenses, brokerage commissions
and interest) from exceeding an annual rate of 1.60%, 1.35% and 1.25%,
respectively, of each Portfolio's 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 table summarizes the advisory fees for the period ended May
31, 1998:
GROSS ADVISER ADVISER
FEE FEE WAIVED
------------- ----------
Small Cap Portfolio................ $585,354 $ (0)
Real Estate Portfolio.............. 330,760 (20,325)
Micro Cap Portfolio................ 102,627 (36,467)
Prior to January 5, 1998, Rodney Square Management Corporation ("RSMC"), a
wholly owned subsidiary of Wilmington Trust Company ("WTC"), which is
wholly owned by Wilmington Trust Corporation, a publicly held bank holding
company, provided administration services to the Fund.
23
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements (Unaudited) -- continued May 31, 1998
Effective January 5, 1998, the services previously provided by RSMC are
provided by PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of
PNCBank Corp., a multi-bank holding company. For administration services
provided, the Fund pays an annual administration 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.
Each Portfolio shares in its pro-rata portion of the Fund's fee. For the
period ended January 5, 1998, RSMC fees for administration services for
the Small Cap Portfolio, Real Estate Portfolio and Micro Cap Portfolio
were $17,847, $12,156 and $1,233, respectively, of which $616 was waived
for the Micro Cap Portfolio. For the period January 5, 1998, through May
31, 1998, PFPC fees for administration services for the Small Cap
Portfolio, Real Estate Portfolio and Micro Cap Portfolio were $51,294,
$27,232 and $7,863, respectively, of which $1,508 was waived for the Micro
Cap Portfolio.
Prior to January 5, 1998, RSMC determined the net asset value per share of
the Portfolios and provided accounting services to the Portfolios.
Effective January 5, 1998, the services previously provided by RSMC are
provided by PFPC. For accounting services provided, the Fund pays an
annual fee of $45,000 per Portfolio, plus an asset-based fee, equal to a
percentage of the average daily net assets of each Portfolio, according to
the following schedule 0.03% of assets between $50 million and $100
million; plus 0.02% of assets in excess of $100 million. For the period
ending January 5, 1998, RSMC fees for accounting services for the Small
Cap Portfolio, Real Estate Portfolio and Micro Cap Portfolio were $9,716,
$8,242 and $3,699, respectively, of which $1,849 was waived for the Micro
Cap Portfolio. For the period January 5, 1998, through May 31, 1998, PFPC
fees for accounting services for the Small Cap Portfolio, Real Estate
Portfolio and Micro Cap Portfolio were $23,079, $17,742 and $18,493,
respectively, of which $3,637 was waived for the Micro Cap Portfolio.
Prior to January 5, 1998, RSMC also served as transfer and dividend
disbursing agent for the Fund pursuant to a transfer agent agreement with
the Fund, dated December 31, 1996. Effective January 5, 1998, the services
previously provided by RSMC are provided by PFPC.
Prior to January 5, 1998, WTC served as Custodian of the assets of the
Fund. Effective January 5, 1998, PNC Bank, N.A. ("PNC") replaced WTC as
Custodian of the assets of the Fund.
Prior to February 13, 1998, Pursuant to a Distribution Agreement with the
Fund dated December 31, 1995, Rodney Square Distributors, Inc. ("RSD"), a
wholly-owned subsidiary of WTC, assisted in securing purchasers for shares
of the Fund. RSD also directly, or through its affiliates, provided
investor support services. RSD received no compensation for distribution
of shares of the Fund, except for reimbursement of out-of-pocket expenses.
Effective February 13, 1998, Provident
24
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements (Unaudited) -- continued May 31, 1998
Distributors, Inc. ("Provident"), replaced RSD as distributor of the Fund.
Provident will receive no compensation for distribution of shares of the
Fund, except for reimbursement of out-of-pocket expenses. Certain trustees
and officers of the Fund are also officers of the Fund's Investment
Adviser. Such trustees and officers are paid no fees by the Fund for
serving as trustees or officers of the Fund.
5. FUND SHARES. At May 31, 1998, there were an unlimited number of shares
of beneficial interest, no par value, authorized. The following table
summarizes the activity in shares of each Portfolio:
FOR THE SIX-MONTH PERIOD
ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SMALL CAP REAL ESTATE MICRO CAP
PORTFOLIO PORTFOLIO PORTFOLIO(DAGGER)
------------------------ ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold......... 6,017,566 $91,652,118 3,397,544 $38,548,602 2,523,545 $28,397,103
Shares issued to
shareholders in
reinvestment of
distributions..... 46,937 638,350 136,468 1,540,549 -- --
Shares redeemed..... (513,749) (7,611,189) (179,285) (2,020,350) (76,981) (996,687)
--------- ----------- --------- ----------- --------- -----------
Net increase........ 5,550,754 $84,679,279 3,354,727 $38,068,801 2,446,564 $27,400,416
=========== =========== ===========
Shares outstanding:
Beginning of
period............ 5,998,382 4,742,801 --
--------- --------- ---------
End of period....... 11,549,136 8,097,528 2,446,564
=========== ========= =========
<FN>
(DAGGER) The Micro Cap Portfolio commenced operations on December 31, 1997.
</FN>
</TABLE>
25
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements (Unaudited) -- continued May 31, 1998
FOR THE PERIOD DECEMBER 31, 1996(DAGGER)
THROUGH NOVEMBER 30, 1997
SMALL CAP REAL ESTATE
PORTFOLIO PORTFOLIO
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
Shares sold......... 5,958,892 $76,803,151 4,528,484 $48,887,308
Shares issued to
shareholders in
reinvestment of
distributions..... 256,842 3,494,269 381,700 4,223,787
Shares redeemed..... (222,352) (2,940,077) (172,383) (1,806,088)
--------- ----------- --------- -----------
Net increase........ 5,993,382 $77,357,343 4,737,801 $51,305,007
=========== ===========
Shares outstanding:
Beginning of
period............ 5,000 5,000
--------- ---------
End of period....... 5,998,382 4,742,801
========= =========
(DAGGER) Commencement of Operations.
26
<PAGE>
TRUSTEES
--------
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
OFFICERS
--------
DAN L. HOCKENBROUGH
Chairman of the Board,
President and Chief Financial Officer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
LOREN J. SOETENGA
Vice President and Treasurer
ADMINISTRATOR
-------------
PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
CUSTODIAN
---------
PNC BANK, N.A.
1600 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19103
COUNSEL
-------
DRINKER, BIDDLE & REATH LLP
1345 CHESTNUT STREET
PHILADELPHIA, PENNSYLVANIA 19107
AUDITORS
--------
PRICEWATERHOUSECOOPERS L.L.P.
2400 ELEVEN PENN CENTER
PHILADELPHIA, PENNSYLVANIA 19103
BZ10
