SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
SEC File 33-14943 and 811-7881
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Pre-Effective Amendment No. |_|
-------
Post-Effective Amendment No. 4 |X|
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 6
----
(Check appropriate box or boxes.)
Brazos Mutual Funds
(Exact Name of Registrant as Specified in Charter)
5949 Sherry Lane, Suite 1560
Dallas, Texas 75225
(Address of Principal Executive Offices) (Zip Code)
with a copy of communications to:
Audrey C. Talley, Esquire
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107-3496
Registrant's Telephone Number, including Area Code (214) 365-5200
Dan L. Hockenbrough, 5949 Sherry Lane, Suite 1560, Dallas, Texas 75225
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Upon effective date of
this registration statement It is proposed that this filing will become
effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|_| on pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|X| on December 31, 1998, pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
<PAGE>
TABLE OF CONTENTS
Part A INFORMATION REQUIRED IN A PROSPECTUS
Part B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Part C OTHER INFORMATION
<PAGE>
FORM N-1A CROSS REFERENCE
<TABLE>
<CAPTION>
PART A INFORMATION REQUIRED IN A PROSPECTUS
Form N-1A
Item Number Location in Prospectus
----------- ----------------------
<S> <C> <C>
Item 1. Front and Back Cover Pages.................................. Front Cover Page; Back Cover Page
Item 2. Risk/Return Summary: Investments, Risks and Performance.... Front Cover Page; Brazos Micro Cap Growth
Portfolio; Brazos Small Cap Growth
Portfolio; Brazos Real Estate Securities
Portfolio; Brazos Growth Portfolio; Risk and
Reward Elements; Year 2000
Item 3. Risk/Return Summary: Fee Table............................. Brazos Micro Cap Growth Portfolio; Brazos
Small Cap Growth Portfolio; Brazos Real
Estate Securities Portfolio; Brazos Growth
Portfolio; Year 2000
Item 4. Investment Objectives, Principal Investment Strategies, and Front Cover Page; Brazos Micro Cap Growth
Related Risks............................................... Portfolio; Brazos Small Cap Growth
Portfolio; Brazos Real Estate Securities
Portfolio; Brazos Growth Portfolio; Risk and
Reward Elements; Year 2000
Item 5. Management's Discussion of Fund Performance................. Information About the Adviser
Item 6. Management, Organization, and Capital Structure............. Information About the Adviser
Item 7. Shareholder Information..................................... Valuation of Fund Shares; Dividends, Capital
Gains Distributions and Taxes; Purchase of
Shares; Redemption of Shares; Retirement
Plans
Item 8. Distribution Arrangements................................... Not Applicable
Item 9. Financial Highlights Information............................ Financial Highlights
<PAGE>
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Form N-1A Location in Statement
Item Number of Additional Information
----------- -------------------------
Item 10. Cover Page and Table of Contents.......................... Cover Page; Table of Contents
Item 11. Fund History.............................................. About the Brazos Mutual Funds
Item 12. Description of the Fund and Its Investments and Risks..... Investment Objectives and
Policies; Investment Limitations
Item 13. Management of the Fund.................................... Management of the Funds
Item 14. Control Persons and Principal Holders of Securities....... Management of the Fund
Item 15. Investment Advisory and Other Services.................... Investment Adviser and Other
Services
Item 16. Brokerage Allocation and Other Practices.................. Portfolio Transactions
Item 17. Capital Stock and Other Securities........................ Description of Shares and Voting Rights
Item 18. Purchase, Redemption and Pricing of Shares................ Purchase of Shares; Redemption of Shares; Other
Shareholder Services
Item 19. Taxation of the Fund...................................... Other Dividends, Capital Gains and Taxes
Item 20. Underwriters.............................................. Management of the Fund
Item 21. Calculation of Performance Data........................... Performance Calculations
Item 22. Financial Statements...................................... Financial Statements
</TABLE>
PART C OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
item so numbered in Part C to this Registration Statement.
Form N-1A
Item Number
Item 23. Exhibits
Item 24. Persons Controlled by or Under Common Control with the Fund
Item 25. Indemnification
Item 26. Business and Other Connections of Investment Adviser
Item 27. Principal Underwriters
Item 28. Location of Accounts and Records
Item 29. Management Services
Item 30. Undertakings
<PAGE>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell nor is it meant to solicit an offer to buy these securities in any state
where the offer or sale is not permitted.
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BRAZOS MUTUAL FUNDS
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PROSPECTUS
DECEMBER 31, 1998
INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
BRAZOS Micro Cap Growth Portfolio Micro Capitalization
Growth
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BRAZOS Small Cap Growth Portfolio Small Capitalization
Growth
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BRAZOS Real Estate Securities Portfolio Real Estate
Growth and Income
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BRAZOS Growth Portfolio Growth
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The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the accuracy of this prospectus. It is a crime
for anyone to tell you otherwise.
Transfer Agent:
Firstar Mutual Fund Services, LLC 615 East Michigan Street,
Telephone: 1-800-426-9157 Milwaukee, WI 53202-5207
Website: www.brazosfund.com
<PAGE>
CONTENTS
Investment Objective
Investment Policies Brazos Micro Cap Growth Portfolio................... 2
Investment Suitability
Risk Considerations Brazos Small Cap Growth Portfolio................... 2
Past Performance
Investor Expenses Brazos Real Estate Securities Portfolio............. 6
Brazos Growth Portfolio.............................10
Risk and Reward Elements.....................................................12
Information About the Adviser................................................14
Valuation of Fund Shares.....................................................15
Dividends, Capital Gains Distributions and Taxes.............................16
Purchase of Shares...........................................................17
Redemption of Shares.........................................................20
Retirement Plans.............................................................22
Year 2000....................................................................23
Financial Highlights.........................................................24
For More Information.........................................................25
<PAGE>
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BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objectives of the Brazos Micro Cap Growth Portfolio ("Micro Cap")
and the Brazos Small Cap Growth Portfolio ("Small Cap") are to provide maximum
capital appreciation, while exposing shareholder principal to reasonable risk by
investing primarily in micro and small capitalization companies, respectively.
INVESTMENT POLICIES
The majority of equity securities (65%) in each Portfolio will have market
capitalizations as follows:
-----------------------------------------------------
Market Capitalization Size
(at time of purchase)
-----------------------------------------------------
Micro Cap $600 million(1) or lower
Small Cap Between $40 million and $1.2 billion
-----------------------------------------------------
(1) The $600 million target will fluctuate based on
the smallest 10% of domestic securities in the
Wilshire 5000 Index.
For both Portfolios, the remaining securities acquired may have market
capitalizations that exceed the target capitalization. Micro Cap generally seeks
investment in securities of companies with growth rates of 25%, average annual
revenues under $500 million, and low debt levels. Small Cap generally seeks
investment in securities of companies with growth rates above 20%, average
annual revenues below $1 billion, above average return on equity, and low debt
levels.
The types of equity securities that can be purchased include common stocks and
securities convertible into common stocks. Convertible securities include
convertible preferred stock, convertible bonds, and American Depository Receipts
(ADRs). Investments in securities of foreign companies are expected to be less
than 5% of each portfolio and would typically be made using ADRs. Most ADRs are
traded on a U.S. stock exchange. Market conditions may lead to higher levels (up
to 100%) of temporary investments such as money market instruments or U.S.
Treasury Bills. Temporary investments are expected to be 5% to 10% of each
portfolio under normal circumstances.
Securities are selected based on the company's potential for strong growth in
revenue, earnings and cash flow, leading products or services, and strong
management. The possible investments are further filtered through the use of
fundamental security analysis and valuation methods. JMIC believes that smaller
companies have greater potential to deliver above average growth rates that may
not yet have been recognized by investors.
JMIC may sell securities when the value of a security or a group of securities
within a certain sector violates diversification objectives. A high rate of
portfolio turnover involves greater transaction expenses and possible adverse
tax consequences to the Portfolio's shareholders.
2
<PAGE>
INVESTMENT SUITABILITY
Micro Cap and Small Cap may be appropriate for investors who:
o are seeking long-term capital growth
o do not need current income
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in principal value of their
investment
RISK CONSIDERATIONS
The value of investments in the Micro Cap and Small Cap Portfolios may
significantly increase or decrease over a short period of time. The value could
be influenced by changes in the stock market as a whole, by changes in a certain
industry, or by changes in certain stocks. JMIC seeks to manage this risk by
investing across 10-12 sectors with no sector representing more than 25% of the
value of each of the Portfolios. The value of each security at the time of
acquisition is not expected to exceed 4% of the value of investments in either
the Micro Cap or Small Cap Portfolios.
Small companies may have certain risks that their larger counterparts may not.
Small companies may have limited product lines, financial resources, and
management teams. Additionally, the trading volume of small company securities
may make it more difficult to sell. JMIC seeks to reduce this risk by limiting
the Portfolios' holdings of a certain stock to an amount less than or equal to
the number of shares traded on the market by all traders during the last 7
business days. A more in-depth discussion of the types of risks an equity fund
could be subject to is on pages 15-16.
PAST PERFORMANCE
The table below compares the Small Cap's past performance to that of the Russell
2000 Index, a widely recognized unmanaged index of small stock performance. A
mutual fund's comparison of its performance to an objective index may be viewed
by an investor as a relative measure of performance. This table assumes
reinvestment of dividends and distributions. As with all mutual funds, the past
is not a prediction of the future. Past performance of the Micro Cap Portfolio
is not shown as this portfolio is less than one year old.
<TABLE>
<CAPTION>
Average annual total
return as of 12/31/97 SINCE INCEPTION
1 YEAR 3 YEAR 5 YEAR 10 YEAR (12/31/96)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BRAZOS SMALL CAP GROWTH
PORTFOLIO (after 54.5% N/A N/A N/A 54.5%
expenses)
- ---------------------------------------------------------------------------------------------
RUSSELL 2000 INDEX
(before expenses)
22.4% 22.4% 16.4% 15.8% 22.4%
- ---------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
PERFORMANCE BAR CHART
The bar chart below shows Small Cap's annual returns since inception. Similar to
the table above, this bar chart assumes reinvestment of dividends and
distributions. As with all mutual funds, the past is not a prediction of the
future. A performance bar chart of the Micro Cap Portfolio is not shown as this
portfolio is less than one year old.
Total Annual Return as of 12/31/97
Small Cap Growth Portfolio 1997: 54.5%
[GRAPHIC OMITTED - PERFORMANCE BAR CHART]
Best Quarter: Q2 1997 25.00%
Worst Quarter: Q4 1997 -1.56%
The Portfolio's year-to-date annual return as of 8/31/98 was -12.37%
INVESTOR EXPENSES
The Portfolios have no sales, redemption, exchange, or account fees with the
exception of a $12.00 fee for each redemption made by wire. Additionally, some
institutions may charge a fee if you buy through them. The expenses you should
expect to pay as an investor in each of the Portfolios are shown below.
Micro Cap Small Cap
Annual Fund Operating Expenses
(expenses that are deducted from Without Fee Waiver(1) Without Fee Waiver(1)
Portfolio assets)
Management fees 1.20% .90%
Marketing (12b-1) fees None None
Other expenses .50% .90%
---- -----
Total operating expenses 1.70% 1.80%
(1)JMIC currently waives the advisory fee to the extent total operating expenses
exceed 1.60% for Micro Cap and 1.35% for Small Cap. This waiver is expected to
continue until further notice.
Micro Cap Small Cap
Annual Fund Operating Expenses
(expenses that are deducted from Actual Fees Actual Fees
Portfolio assets)
Management fees 1.10% .90%
Marketing (12b-1) fees None None
Other expenses .50% .45%
---- -----
Total operating expenses 1.60% 1.35%
4
<PAGE>
The example below shows what a shareholder could pay in expenses over time and
is intended to help you compare the cost of investing in the Portfolios with the
cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolios' actual return and expenses will be different.
1 Year 3 Years 5 Years 10 Years
Micro Cap $173 $536 $923 $2,009
Small Cap $183 $566 $975 $2,116
5
<PAGE>
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BRAZOS REAL ESTATE SECURITIES PORTFOLIO
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INVESTMENT OBJECTIVE
The investment objective of the Brazos Real Estate Securities Portfolio ("Real
Estate" or the "Portfolio") is to provide a balance of income and appreciation,
while exposing shareholder principal to reasonable risk, by investing in
companies engaged in the real estate industry.
INVESTMENT POLICIES
At least 65% of Real Estate's total assets will be invested in equity securities
of companies principally engaged in the real estate industry. A company is
considered "principally engaged in the real estate industry" if at least 50% of
its assets, gross income, or net profits are attributable to ownership,
construction, management or sale of various real estate. The types of equity
securities that can be purchased include common stocks and securities
convertible into common stocks. Convertible securities include convertible
preferred stock, convertible bonds, and American Depository Receipts (ADRs).
Investments in securities of foreign companies are expected to be less than 5%
of the portfolio and would typically be made using ADRs traded on an U.S. stock
exchange. Market conditions may lead to higher levels (up to 100%) of temporary
investments such as money market instruments or U.S. Treasury Bills. Temporary
investments are expected to be 5% to 10% of the portfolio under normal
circumstances.
Real Estate generally seeks securities of companies with strong cash flow,
management, dividend yield, dividend growth potential, and financial strength.
The list of potential investments is further filtered through the use of
fundamental security analysis and valuation methods.
JMIC may sell securities when the value of a security or a group of securities
within a certain sector violates diversification objectives. A high rate of
portfolio turnover involves greater transaction expenses and possible adverse
tax consequences to the Portfolio's shareholders.
INVESTMENT SUITABILITY
Real Estate may be appropriate for investors who:
o are seeking long-term capital growth
o prefer some current income
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in the principal value of their
investment
RISK CONSIDERATIONS
The value of the Portfolio may significantly increase or decrease over a short
period of time. The value could be influenced by changes in the stock market as
a whole, by changes in a certain industry, or by changes in certain stocks. JMIC
seeks to manage this risk by investing across 10-12 property sectors with no
sector representing more than 25% of the value of the Portfolio. The risk is
also managed by investing in companies that provide geographic diversification.
The value of each security at the time of acquisition is not expected to exceed
4% of the value of the Portfolio.
6
<PAGE>
The Portfolio's performance will reflect not only the fundamentals of its
underlying real estate assets, but also management's skill in managing those
assets. The trading volume of small company real estate securities may make it
more difficult to sell. JMIC seeks to reduce this risk by limiting the
Portfolio's holdings of a certain stock to an amount less than or equal to the
number of shares traded on the market by all traders during the last 7 business
days. A more in depth discussion of the types of risks an equity fund could be
subject to is on pages 15-16.
PAST PERFORMANCE
The table below compares the Portfolio's past performance to that of the
Wilshire REIT Index and the NAREIT Equity Index, both widely recognized
unmanaged indices of publicly traded real estate securities. This table assumes
reinvestment of dividends and distributions. As with all mutual funds, the past
is not a prediction of the future.
Average annual total SINCE INCEPTION
return as of 12/31/97 1 YEAR 3 YEAR (12/31/96)
- ----------------------------------------------------------------------
BRAZOS REAL ESTATE GROWTH
PORTFOLIO 29.2% N/A 29.2%
(after expenses)
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WILSHIRE REIT
INDEX 19.7% 22.5% 19.7%
(before expenses)
- ----------------------------------------------------------------------
NAREIT EQUITY INDEX
(before expenses) 20.3% 23.3% 20.3%
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PERFORMANCE BAR CHART
The bar chart below shows the Portfolio's annual returns since inception.
Similar to the table above, this bar chart assumes reinvestment of dividends and
distributions. As with all mutual funds, the past is not a prediction of the
future.
7
<PAGE>
Total Annual Return as of 12/31/97
Real Estate Securities Portfolio 1997: 29.2%
[GRAPHIC OMITTED - PERFORMANCE BAR CHART]
Best Quarter: Q3 1997 12.16%
Worst Quarter: Q4 1997 3.08%
The Portfolio's year-to-date annual return as of 8/31/98 was -20.65%.
INVESTOR EXPENSES
Shares of the Portfolio that are held 90 days or more may be redeemed without
cost. Shares of the Portfolio held less than 90 days will be subject to a 1%
redemption fee which is retained by the Portfolio for the benefit of the
remaining shareholders. This 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 Portfolio has no other
sales, exchange, or account fees with the exception of a $12.00 fee for each
redemption made by wire. Additionally, some institutions may charge a fee if you
buy through them. The expenses you should expect to pay as an investor in the
fund are shown below.
Real Estate
Securities Portfolio
Annual Fund Operating Expenses
(expenses that are deducted from Without Fee Waiver(1)
Portfolio assets)
Management fees .90%
Marketing (12b-1) fees None
Other expenses .93%
-----
Total operating expenses 1.83%
(1)JMIC currently waives the advisory fee to the extent total operating expenses
exceed 1.25%. This waiver is expected to continue until further notice.
Real Estate
Securities Portfolio
Annual Fund Operating Expenses
(expenses that are deducted from Actual Fees
Portfolio assets)
Management fees .90%
Marketing (12b-1) fees None
Other expenses .35%
-----
Total operating expenses 1.25%
8
<PAGE>
The example below shows what a shareholder could pay in expenses over time and
is intended to help you compare the cost of investing in the Portfolio with the
cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
1 Year 3 Years 5 Years 10 Years
Real Estate
Securities $186 $576 $990 $2,148
Portfolio
An investor would pay the following expenses if he or she redeemed Portfolio
shares held less than 90 days. This example uses the same hypothetical
conditions as above, but also assumes the 1% redemption fee incurred by the
investor if shares are redeemed within 90 days of the initial purchase.
90 Days
Real Estate
Securities $146
Portfolio
9
<PAGE>
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BRAZOS GROWTH PORTFOLIO
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INVESTMENT OBJECTIVE
The investment objective of Brazos Growth Portfolio ("Growth") is to provide
maximum capital growth by investing primarily in equity securities.
INVESTMENT POLICIES
Growth generally seeks securities of companies with growth rates above 20%,
above average return on equity, and low debt levels.
The types of equity securities that can be purchased include common stocks and
securities convertible into common stocks. Convertible securities include
convertible preferred stock, convertible bonds, and American Depository Receipts
(ADRs). Investments in securities of foreign companies are expected to be less
than 5% of the portfolio and would typically be made using ADRs. Most ADRs are
traded on a U.S. stock exchange. Market conditions may lead to higher levels (up
to 100%) of temporary investments such as money market instruments or U.S.
Treasury Bills. Temporary investments are expected to be 5% to 10% of the
portfolio under normal circumstances.
Securities are selected based on the company's potential for strong growth in
revenue, earnings and cash flow, strong management, and leading products or
services. The possible investments are further filtered through the use of
fundamental security analysis and valuation methods.
JMIC may sell securities when the value of a security or a group of securities
within a certain sector violates diversification objectives. Annual portfolio
turnover may exceed 100% due to this policy. A high rate of portfolio turnover
involves greater transaction expenses and possible adverse tax consequences to
the Portfolio's shareholders.
INVESTMENT SUITABILITY
The Growth Portfolio may be appropriate for investors who:
o are seeking long-term capital growth
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in principal value of their
investment
RISK CONSIDERATIONS
The value of the Growth Portfolio may advance or decline significantly over a
short period of time. The value could be influenced by changes in the stock
market as a whole, by changes in a certain industry, or by changes in certain
stocks. JMIC seeks to manage this risk by investing across 10-12 sectors with no
sector representing more than 25% of the value of the Portfolio. The value of
each security is expected to less than 4% of the value of the Portfolio over the
holding period of each security. A more in depth discussion of the types of
risks an equity fund could be subject to is on pages 15-16.
10
<PAGE>
INVESTOR EXPENSES
The Growth Portfolio has no sales, redemption, exchange, or account fees with
the exception of a $12.00 fee for each redemption made by wire. Additionally,
some institutions may charge a fee if you buy through them. The expenses you
should expect to pay as an investor in the fund are shown below, and are based
on estimated amounts for the current fiscal year.
Growth Portfolio
Annual Fund Operating Expenses
(expenses that are deducted from Without Fee Waiver(1)
Portfolio assets)
Management fees .90%
Marketing (12b-1) fees None
Other expenses .45%
-----
Total operating expenses 1.35%
(1)JMIC currently waives the advisory fee to the extent total operating expenses
exceed 1.35%. This waiver is expected to continue until further notice.
Growth Portfolio
Annual Fund Operating Expenses
(expenses that are deducted from Actual Fees
Portfolio assets)
Management fees .90%
Marketing (12b-1) fees None
Other expenses .45%
-----
Total operating expenses 1.35%
The example below shows what a shareholder could pay in expenses over time and
is intended to help the investor compare the cost of investing in the Portfolio
with the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
1 Year 3 Years 5 Years 10 Years
Growth $137 $428 N/A N/A
A mutual fund's comparison of its performance to an objective index may be
viewed by an investor as a relative measure of performance. A performance bar
chart would give some indication of the risks of an investment in the Growth
Portfolio by comparing the Portfolio's performance with a broad measure of
market performance. There is no past performance table, performance bar chart or
financial highlights for the Growth Portfolio as it is less than one year old.
11
<PAGE>
RISK AND REWARD ELEMENTS
This table identifies the main elements that make up the Portfolios' overall
risk and reward characteristics described under the Risk Considerations section
for each Portfolio presented in this prospectus. It also outlines the
Portfolios' policies toward various securities, including those that are
designed to help each Portfolio manage risk. The following policies are not
fundamental and the Trustees may change such policies without shareholder
approval.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market Conditions
o A portfolio's share price and o Stocks and bonds have generally o Under normal circumstances each
performance will fluctuate in outperformed more stable portfolio plans to remain fully
response to stock and bond market investments (such as short-term invested.
movements. bonds and cash equivalents) over
the long term. o A portfolio seeks to limit risk
through diversification in a
large number of stocks.
Management Choices
o A portfolio could underperform o A portfolio could outperform its o JMIC focuses on bottom-up
its benchmark due to its asset benchmark due to these same research, fundamental security
allocation and securities choices. choices. analysis and valuation methods
to enhance returns.
Short-Term Trading
o Increased trading would raise the o A portfolio could realize gains o Each portfolio anticipates a
portfolios' brokerage and related in a short period of time. portfolio turnover rate of
costs. approximately 150%.
o A portfolio could protect
o Increased short-term capital against losses if a stock is o Each portfolio generally avoids
gains distributions would raise overvalued and its value later short- term trading, except to
shareholders' income tax liability. falls. take advantage of attractive or
unexpected opportunities or to
meet demands generated by
shareholder activity.
Real Estate Investment Trusts (REITs)
o The value of a REIT is affected o Favorable market conditions
by changes in the value of the could generate gains or reduce
properties owned by the REIT or losses.
securing mortgage loans held by
the REIT. o These investments may offer more o JMIC invests in companies that
attractive yields or potential provide geographic
o A portfolio could lose money growth than other securities. diversification to limit risk.
because of declines in the value
of real estate, risks related to
general and local economic
conditions, overbuilding and
increased competition.
Small Cap and Micro Cap Stocks
o The Small Cap Growth and Micro o Securities of companies with o JMIC focuses on companies with
Cap Growth Portfolios could lose small and micro capitalizations potential for strong growth in
money because of the potentially may have greater potential than revenue, earnings and cash flow;
higher risks of small companies large cap companies to deliver strong management; leading
and price volatility than above-average growth rates that products or services; and
investments in general equity may not have yet been recognized potential for improvement.
markets. by investors.
o 35% of the Small Cap Growth and
o The Micro Cap Growth Portfolio the Micro Cap Growth Portfolios
may be unable to sell some of its may be invested in securities of
securities and may be forced to larger capitalization companies.
hold them if the securities are
thinly traded.
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</TABLE>
12
<PAGE>
The following table indicates the maximum percentage, including temporary
investments, each Portfolio may make:
<TABLE>
<CAPTION>
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Real Estate
Micro Cap Growth Small Cap Growth Securities Growth
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADR's, EDR's and GDR's 5% 5% 5% 5%
Asset-backed securities - - - -
Bank obligations 10% 10% 10% 10%
Foreign currency transactions - - - -
Foreign securities 5% 5% 5% 5%
Futures contracts 5% (a) 20% (b) 5% (a) 20% (b) 5% (a) 20% (b) 5% (a) 20% (b)
Illiquid securities 15% 15% 15% 15%
Investment companies 10% 10% 10% 10%
Lending of securities 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Mortgage-backed securities - - - -
Options transactions 5% (a) 20% (b) 5% (a) 20% (b) 5% (a) 20% (b) 5% (a) 20% (b)
Repurchase agreements 10% 10% 10% 10%
Reverse repurchase agreements 33 1/3% 33 1/3% 33 1/3% 33 1/3%
U.S. Government obligations 100% 100% 100% 100%
Warrants 5% 5% 5% 5%
When-issued securities 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Temporary Investments
Cash 100% 100% 100% 100%
Short-term obligations 100% 100% 100% 100%
Investment Restrictions
Securities of any one issuer 5% 5% 5% 5%
Outstanding voting securities of 10% 10% 10% 10%
any one issuer
Securities of issuers in any one 25% 25% 25% 25%
industry
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Percentages are of total assets (except for Illiquid Securities which are shown
as a percentage of net assets).
(a) Portfolio may not purchase futures contracts or options where premiums and
margin deposits exceed 5% of total assets.
(b) Portfolio may not enter into futures contracts or options where its
obligations would exceed 20% of total assets.
13
<PAGE>
INFORMATION ABOUT THE ADVISER
Brazos Mutual Funds (the "Company") was created in December 1996 in response to
demand to provide a means of investing with John McStay Investment Counsel
("JMIC" or the "Adviser"), 5949 Sherry Lane, Suite 1600, Dallas, Texas, 75225,
at a lower minimum account size. JMIC began managing large accounts for pension
plans, endowments, foundations and municipalities in 1983. The senior management
has worked together for approximately 20 years.
JMIC's mission is to capture excess returns while managing risk. JMIC seeks to
accomplish this objective by:
o investing in smaller companies
o investing in rapidly growing companies
o investing in companies with highly predictable revenue and profit
streams
o investing in companies positioned to accelerate profit growth above
general expectations
o constructing diversified portfolios to moderate risk
JMIC has employed a bottom-up process in researching companies. JMIC visits
virtually every company prior to investing. Bottom-up research often includes
interviews with senior management, as well as the companies' competitors and
suppliers. The list of potential investments is further filtered by the use of
traditional fundamental security analysis and valuation methods.
JMIC manages each portfolio using a team approach. By using a team approach, the
Company avoids the risk of changes in portfolio management style that may be
encountered when a lead manager approach is utilized. The team approach creates
portfolio management stability, which provides confidence that the process is
repeatable, and has been used for the last twenty-five years. JMIC has had
minimal (one) professional turnover during the last fifteen years of management.
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 Small Cap Growth Portfolio and the Real
Estate Securities Portfolio. The Adviser's separately managed account
performance results set forth below under "Institutional Equity Results" are not
intended to predict or suggest the return of the Real Estate Securities
Portfolio or the Small Cap Growth Portfolio, but rather to provide the
shareholder with information about the historical investment performance of the
Portfolios' Adviser. The Indexes used in the comparisons below 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
below.
14
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Adviser's Adviser's
Institutional Institutional
Small Cap Russell 2000 S&P Midcap Real Estate Nareit Equity Wilshire REIT
Equity Accounts Index 400 Index Equity Accounts Index Index
(after (before (before (after (before (before expenses)
expenses)(1) expenses) expenses) expenses)(1) expenses)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calendar Years:
1987 25.6% -8.8% -2.0% - - -
1988 24.5% 24.9% 20.9% - - -
1989 31.9% 16.2% 35.6% - - -
1990 -4.0% -19.5% -5.1% - - -
1991 68.9% 46.1% 50.1% - - -
1992 8.7% 18.4% 11.9% - - -
1993 15.3% 18.9% 14.0% - - -
1994 -0.1% -1.8% -3.6% 14.6% 3.2% 2.7%
1995 30.1% 28.4% 30.9% 20.5% 15.3% 12.2%
1996 32.9% 16.5% 19.2% 42.1% 35.3% 37.0%
1997 23.4% 22.4% 32.3% 26.5% 20.3% 19.7%
Average Annual Total
Returns as 12/31/97:
Cumulative 793.4% 294.2% 480.1% 148.2% 93.7% 88.9%
Annualized 22.0% 13.3% 17.3% 25.5% 18.0% 17.2%
3 Year 28.7% 22.4% 27.3% 29.4% 23.3% 22.5%
5 Year 19.7% 16.4% 17.8% - - -
10 Year 21.7% 15.8% 19.5% - - -
Four-Year Mean - - - 25.9% 18.5% 17.9%
Eleven-Year Mean 23.4% 14.7% 18.6% - - -
Value of $1 invested
during 11 years $8.93 $3.94 $5.80 $2.48 $1.94 $1.89
(1/1/87-12/31/97)
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The Adviser's Institutional Equity Accounts represents the composite of all
separately managed accounts of the Adviser that are managed with substantially
similar (although not identical) objectives, policies and strategies as those of
Brazos Small Cap Growth Portfolio, and those of the Brazos Real Estate
Securities Portfolio, respectively. The separately managed accounts are subject
to different expenses and governmental regulations than the Portfolios.
</FN>
</TABLE>
INFORMATION FOR FIRST TIME MUTUAL FUND INVESTORS
The Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency does not federally insure Mutual Fund shares.
Investments in Mutual Fund shares involve risks, including possible loss of
principal.
MANAGEMENT VALUATION OF FUND SHARES
The net asset value of the each Portfolio is determined by dividing the sum of
the total market value of a Portfolio's investments and other assets, less any
liabilities, by the total number of shares outstanding. Net asset value per
share for each Portfolio is determined as of the close of the New York Stock
Exchange ("NYSE") on each day that the NYSE is open for business.
Each Portfolio uses the last quoted trading price as the market value for equity
securities. For listed securities, each Portfolio 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 any broker.
15
<PAGE>
Bonds and other fixed income securities are valued according to the broadest and
most representative market which will ordinarily be the over-the-counter market.
Net asset value includes interest on fixed income securities, which is accrued
daily. Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair value 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 (the "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.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Dividends and Capital Gains Distributions
Each Portfolio will distribute annually to shareholders substantially all of its
net investment income and any net realized long-term capital gains. A
Portfolio's dividends and capital gains distributions will be reinvested
automatically in additional shares unless the Company is notified in writing
that the shareholder elects to receive distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Federal Taxes
Each Portfolio intends to make distributions that may be taxed either as
ordinary income or as a capital gain. Because the Micro Cap and the Small Cap
Portfolios seek capital appreciation as opposed to current income, the Company
anticipates that most of these distributions will be taxed as capital gains.
Distributions from the Real Estate Portfolio are likely to represent both
capital appreciation and income, and thus are likely to constitute both capital
gain and ordinary income. All distributions, whether in the form of cash payment
to the shareholder or as reinvested in additional shares of a Portfolio, may be
subject to Federal income tax. A redemption of shares in a Portfolio would be
considered to be a taxable event under Federal Law. Any exchange of shares in a
Portfolio for shares of another Portfolio would be treated as a sale of the
Portfolio's shares and any gain on the transaction may be subject to Federal
taxation.
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.
16
<PAGE>
PURCHASE OF SHARES
Shares of the Portfolios 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 Fund reserves the right to reject your purchase order and to suspend the
offering of shares of the Fund. All purchases must be in U.S. dollars.
Cash will not be accepted.
Minimum Investments* Subsequent Automatic
Initial Investment
Regular Accounts $10,000 $ 1,000 $ 50
Individual Retirement Accounts $ 2,000 $ 100 $ 50
*The Fund reserves the right to vary the initial investment minimum
and minimums for additional investments at any time.
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchasing shares: Opening an account: Adding to an account:
By check o Make out a check for the o Make out a check for the
investment amount, payable investment amount payable to
[GRAPHIC OMITTED] to "Brazos Mutual Funds." "Brazos Mutual Funds."
o Mail the check and your o Fill out the detachable
completed Account investment slip from an
Registration Form to the account statement. If no
address below. slip is available, include a
note specifying the
Portfolio name, your account
number, and the name(s) in
which the account is
registered.
- -----------------------------------------------------------------------------------------------------------
By exchange o Call 1-800-426-9157 to o Call 1-800-426-9157 to
request an exchange. request an exchange.
[GRAPHIC OMITTED]
- -----------------------------------------------------------------------------------------------------------
By wire o Mail your completed Account o Instruct your bank to wire
Registration Form to the the amount of your
[GRAPHIC OMITTED] address below. investment to Firstar Bank
Milwaukee N.A. (see below).
o Obtain your account number
by calling 1-800-426-9157. o Specify the Portfolio name,
the new account number,
o Instruct your bank to wire and the names in which the
the amount of your account is registered. Your
investment to Firstar Bank bank may charge a fee to
Milwaukee N.A. (see below). wire funds.
o Specify the Portfolio name, the
new account number, and the names
in which the account is
registered. Your bank may charge a
fee to wire funds.
- -----------------------------------------------------------------------------------------------------------
17
<PAGE>
- -----------------------------------------------------------------------------------------------------------
By phone o See "By wire" and "By o Verify that your bank or
exchange" credit union is a member of
[GRAPHIC OMITTED] the Automated Clearing House
(ACH) system.
o Complete the applicable section
on the Account Registration Form.
o Call 1-800-426-9157 to verify that
these features are in place on
your account.
o Tell the Fund representative the
Portfolio name, your account
number, the name(s) in which the
account is registered and the
amount of your investment.
- -----------------------------------------------------------------------------------------------------------
Mail to: Wire Information: Overnight or Express Mail to:
BRAZOS MUTUAL FUNDS Firstar Bank Milwaukee N.A. BRAZOS MUTUAL FUNDS
c/o Firstar Trust Company ABA#: 075000022 c/o Firstar Trust Company
Mutual Fund Services Account#: 112952137 Mutual Fund Services
P.O. Box 701 Credit: Firstar Trust Company 615 East Michigan Street
Milwaukee, WI 53201-0701 Brazos Mutual Funds Milwaukee, WI 53202
Portfolio Name
Please include Shareholder Name,
Account Number, and Account
Registration (if known).
Other Companies through which you can purchase Brazos Mutual Funds
Fidelity Investments Inc. Charles Schwab and Co. Jack White and Co.
National Financial Services 101 Montgomery Street National Financial Services
San Francisco, CA 94104 One World Financial Center
One World Financial Center 200 Liberty Street
200 Liberty Street 1-800-435-8000 New York, NY 10281
New York, NY 10281 1-800-233-3411
1-800-544-6666
</TABLE>
Automatic Investment Plan
Shareholders may also purchase additional Portfolio shares through an Automatic
Investment Plan. Under the Plan, Firstar Trust Company, at regular intervals,
will automatically debit a shareholder's bank checking account in an amount of
$50 or more (subsequent to the minimum initial investment), as specified by the
shareholder. A shareholder may elect to invest the specified amount monthly,
bimonthly, quarterly, semiannually or annually. The purchase of Portfolio shares
will be effected at their offering price at 12 noon, Eastern time, on the date
of the month designated by the shareholder. For an Application for the Automatic
Investment Plan, check the appropriate box of the Application at the end of this
Prospectus, or call 1-800-426-9157. This service may not be provided for Service
Agent clients who are provided similar services by those organizations.
18
<PAGE>
Other Purchase Information
Investments received by 4 p.m. ET (the close of the 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.
Distributor
Rafferty Capital Markets, Inc., 550 Mamaroneck Avenue, Harrison, NY 10528, has
been engaged to assist in securing purchasers for shares of the Portfolios.
Rafferty will receive no compensation for distribution of shares of the
Portfolios, except for reimbursement by the Adviser of out-of-pocket expenses.
19
<PAGE>
REDEMPTION OF SHARES
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 your
Portfolio(s).
Shares of the Brazos Micro Cap Growth, Small Cap Growth, and Growth Portfolios
may be redeemed by mail or telephone, at any time, without cost, at their net
asset value as 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.
Shares of the Brazos Real Estate Securities Portfolio may be redeemed by mail or
telephone, at any time, at the net asset value as next determined after receipt
of the redemption request. Shares held 90 days or more may be redeemed without
cost except for a $12.00 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 Brazos Real Estate Securities
Portfolio, to avoid transaction and other expenses incurred by early redemption
and to facilitate portfolio management.
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Redeeming shares: Designed for: To sell some or all of your shares:
By letter o Accounts of any type. o Write a letter of
instruction or complete a
[GRAPHIC OMITTED] o Sales of any type. stock power indicating the
Portfolio name, your account
number, the names in which
the account is registered,
and the dollar value or
number of shares you wish to
sell.
o Include all signatures and any
additional documents that may be
required (see next page).
o Mail the materials to the above
address.
o A check will be mailed to the
name(s) and address in which the
account is registered, or
otherwise according to your
letter of instruction.
- --------------------------------------------------------------------------------------------------------------
By phone o Most accounts. o For automated service 24
hours a day using your
[GRAPHIC OMITTED] o Sales of up to $100,000. touch-tone phone, dial
1-800-426-9157.
o To place your order with a
representative from Brazos Mutual
Funds, call 1-800-426-9157
between 8 a.m. and 4 p.m. Eastern
Time on most business days.
- -------------------------------------------------------------------------------------------------------------
By wire or electronic funds o Requests by letter to sell o Fill out the "Telephone
transfer (EFT) any amount (accounts of any Redemption" section of your
type). new account application.
[GRAPHIC OMITTED]
o Requests by phone to sell up o To verify redemption
to $100,000 (accounts with privilege is in place on an
telephone redemption account, or to request the
privileges). forms to add it to an
existing account, call
1-800-426-9157.
- -------------------------------------------------------------------------------------------------------------
20
<PAGE>
o Amounts of $1,000 or more will be
wired on the next business day. A
$12 fee will be deducted from
your account.
o Amounts of less than $1,000 may be
sent by EFT or by check. Funds
from EFT transactions are
generally available by the second
business day. Your bank may
charge a fee for this service.
- --------------------------------------------------------------------------------------------------------------
By exchange o Accounts of any type. o Review the current
prospectus for the portfolio
[GRAPHIC OMITTED] o Sales of any amount. into which you are exchanging.
o Call 1-800-426-9157 to
request an exchange.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Signature Guarantees
Signature guarantees are required for the following redemptions:
o redemption where the proceeds are to be sent to someone other than the
registered shareholder(s);
o redemptions where the proceeds are to be sent to someplace other than the
registered address; or
o share transfer requests.
The purpose of signature guarantees is to verify the identity of the party who
has authorized a redemption.
Other Redemption Information
Normally, each Portfolio will make a payment for all shares redeemed under
proper procedures within one business day of and no more than seven business
days after receipt of the request. The Company 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 Trustee's determines that it would be detrimental to the best interests
of remaining shareholders of the Portfolios' to make payment wholly or partly in
cash, the Portfolios' may pay 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.
21
<PAGE>
RETIREMENT PLANS
Shares of the Portfolios are available for use in certain types of tax-deferred
retirement plans such as:
o IRAs,
o employer-sponsored defined contribution plans (including 401(k) plans), and
o tax-sheltered custodial accounts described in Section 403(b)(7) of the
Internal Revenue Code.
Qualified investors benefit from the tax-free compounding of income dividends
and capital gains distributions. Application forms and brochures describing
investments in the Portfolios for retirement plans can be obtained by calling
the Brazos Mutual Fund at 1-800-426-9157. Below is a brief description of the
types of retirement plans that may invest in the Portfolios.
Individual Retirement Accounts (IRAs)
You are eligible to contribute on a deductible basis to an IRA account if you
are not active participants in an employer maintained retirement plan and, when
a joint return is filed, you do not have a spouse who is an active participant.
The IRA deduction is also available for individual taxpayers and married couples
with adjusted gross incomes not exceeding certain limits. All individuals who
have earned income may make nondeductible IRA contributions to the extent that
they are not eligible for a deductible contribution. Income earned by an IRA
account will continue to be tax deferred. Roth IRAs are also available.
A special IRA program is available for employers under which the employers may
establish IRA accounts for their employees in lieu of establishing tax qualified
retirement plans. SEP-IRAs (Simplified Employee Pension-IRA) free the employer
of many of the recordkeeping requirements of establishing and maintaining a tax
qualified retirement plan trust.
- --------------------------
ROTH IRAs
- --------------------------
Roth IRAs permit tax free
distributions of account
balances if the assets have
been invested for five years
or more and the
distributions meet certain
qualifying restrictions.
Investors filing as single
taxpayers who have adjusted
gross incomes of $95,000 or
more, and investors filing
as joint taxpayers with
adjusted gross incomes of
$150,000 or more may find
their participation in this
IRA to be restricted.
- --------------------------
If you are entitled to receive a distribution from a qualified retirement plan,
you may rollover all or part of that distribution into the Portfolio's IRA. Your
rollover contribution is not subject to the limits on annual IRA contributions.
You can continue to defer Federal income taxes on your contribution and on any
income that is earned on that contribution.
Firstar Trust Company makes available its services as an IRA Custodian for each
shareholder account established as an IRA. For these services, Firstar Trust
Company receives an annual fee of $10.00 per account, which is paid directly to
Firstar Trust Company by the IRA shareholder. If the fee is not paid by the date
due, shares of the Portfolio owned by the shareholder in the IRA account will be
redeemed automatically for purposes of making the payment. In addition, a $10
fee is charged to shareholders transferring out of a Portfolio IRA.
401(k) Plans and other Defined Contribution Plans
Both self-employed individuals (including sole proprietorships and partnerships)
and corporations may use shares of the Portfolio as a funding medium for a
retirement plan qualified under the Internal Revenue Code. Such plans typically
allow investors to make annual deductible contributions, which may be matched by
their employers up to certain percentages based on the investor's
pre-contribution earned income.
403(b)(7) Retirement Plans
Schools, hospitals, and certain other tax-exempt organizations or associations
may use shares of the Fund as a funding medium for a retirement plan for their
employees. Contributions are made to the 403(b)(7) Plan as a reduction to the
employee's regular compensation. Such contributions
22
<PAGE>
are excludable from the gross income of the employee for Federal Income tax
purposes to the extent they do not exceed applicable limitations (including a
generally applicable limitation of $9,500 per year).
YEAR 2000 DISCLOSURE
The "Year 2000" issue stems from the inability of computers and software
programs to correctly process dates in the next century. This could result in
major system or process failures or the generation of erroneous data, which
would lead to disruptions in the Portfolios' business operations.
The Portfolios have no application systems of their own and are entirely
dependent on their service providers' systems and software programs. The Adviser
has sought assurances from the Portfolios' service providers (including their
administrator, transfer agent and custodian) that they are taking all necessary
steps to ensure that their systems and software programs will accurately reflect
the Year 2000. At this time, however, no assurance can be given that the
Portfolios' service providers, including the Adviser, have anticipated every
step necessary to avoid any adverse effect on the Portfolios attributable to the
Year 2000 issue.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows selected financial information for shares outstanding
of each of the Portfolios throughout the periods indicated. The total return in
the table represents the rate that an investor would have earned on an
investment in the Portfolio specified (assuming reinvestment of all dividends
and distributions). The information for the period ended November 30, 1997 has
been audited by PricewaterhouseCoopers, LLP, whose report along with the
Portfolios' financial statements, are included in the Annual Report, which is
available free of charge. The Micro Cap Growth Portfolio's fiscal year is
December 1 through November 30 (however, Micro Cap Growth Portfolio commenced
operations on December 31, 1997, indicated by the financial information shown
below).
<TABLE>
<CAPTION>
Small Cap Growth Real Estate Securities Micro Cap
Growth
For the For the Period For the For the For the
Six-Month December 31, Six-Month Period Period
Period Ended 1996* through Period Ended December 31, December
Per Share Data May 31, 1998 November 30, May 31, 1998 1996* through 31, 1997*
(Unaudited) 1997 (Unaudited) November 30, through
(Audited) 1997 May 31,
(Audited) 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of $13.49 $10.00 $11.24 $10.00 $10.00
period
Income from operations:
Net investment income (loss) (0.04) (0.03) 0.19 0.35 (0.02)
Net realized and unrealized 2.35 4.69 0.01 2.05 3.12
---- ---- ---- ---- ----
gain on investments
Total from investment operations 2.31 4.66 0.20 2.40 3.10
Distributions from:
Net investment income - - (0.21) (0.23) -
Net realized gain (0.10) (1.17) (0.14) (0.93) -
------ ------ ------ ------
Total distributions (0.10) (1.17) (0.35) (1.16)
Net asset value, end of period $15.70 $13.49 $11.09 $11.24 $13.10
- ----------------------------------------------------------------------------------------------------------------
Total Return*** 17.23% 47.08% 1.74% 24.39% 31.00%
Ratios/Supplemental Data
Net assets at end of period $181,269 $80,898 $89,817 $53,308 $32,056
(thousands)
Ratio of expenses to average
net assets (after waivers)(1) 1.21%** 1.35%** 1.25%** 1.25%** 1.60%**
Net investment income (loss) (0.68%)** 4.61%**
Portfolio turnover rate 63.03% 147.86% 85.10% 184.74% 62.09%
<FN>
* Commencement of operations
** Annualized
*** Unannualized
(1) The Adviser has voluntarily agreed to waive a portion of its advisory fees
and assume expenses otherwise payable by the Portfolios (if necessary) in order
to keep the annual expense ratios from exceeding 1.35%, 1.25% and 1.60% of the
average daily net assets of the Small Cap Growth, Real Estate Securities and
Micro Cap Growth Portfolios, respectively. 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% and 1.83% for the
Small Cap Growth and Real Estate Securities Portfolios, respectively, for the
period ended November 30, 1997. For the period ended May 31, 1998, the
annualized ratio of expenses to average net assets would have been 1.31% and
2.14% for the Real Estate Securities and Micro Cap Growth Portfolios,
respectively. There was no waiver of expenses for the Small Cap Growth Portfolio
for the period ended May 31, 1998.
</FN>
</TABLE>
24
<PAGE>
FOR MORE INFORMATION
You may obtain the following and other information
on these Portfolios free of charge:
Annual and Semi-annual Report to Shareholders
Provides the Portfolios' most recent financial reports and portfolio listings.
The annual report contains a discussion of the market conditions and investment
strategies that affected the Portfolios' performance during the last fiscal
year.
Statement of Additional Information (SAI) dated December 31, 1998
Provides additional details about the Portfolios' policies and management.
Telephone:
1-800-426-9157
Mail:
The Brazos Mutual Funds
c/o Firstar Trust Company
Mutual Fund Services
615 East Michigan Street
Milwaukee, WI 53202-5207
Internet:
http://www.brazosfund.com
SEC:
Text only versions of Fund documents can be viewed online or
downloaded from: http://www.sec.gov
You may review and obtain copies of Fund information at the SEC Public Reference
Room in Washington, D.C. (1-800-SEC-0330). Copies of the information may be
obtained for a fee by writing the Public Reference Section, Washington, D.C.
20549-6009.
Investment Company Act of 1940 File No. 811-7881
25
<PAGE>
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
BRAZOS MUTUAL FUNDS
BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
BRAZOS REAL ESTATE SECURITIES PORTFOLIO
BRAZOS GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1998
This Statement is not a Prospectus but should be read in conjunction with the
Prospectus of the Brazos Mutual Funds (the "Company") for Shares of the BRAZOS
Micro Cap Growth, BRAZOS Small Cap Growth, BRAZOS Real Estate Securities and
BRAZOS Growth Portfolios dated December 31, 1998. To obtain the Prospectus,
please call Firstar Mutual Fund Services, LLC at 1-800-426-9157.
TABLE OF CONTENTS
Page
ABOUT THE BRAZOS MUTUAL FUNDS................................................2
INVESTMENT OBJECTIVES AND POLICIES...........................................2
INVESTMENT LIMITATIONS......................................................10
MANAGEMENT OF THE FUND......................................................12
INVESTMENT ADVISER AND OTHER SERVICES.......................................14
PURCHASE OF SHARES..........................................................17
REDEMPTION OF SHARES........................................................18
OTHER SHAREHOLDER SERVICES..................................................19
PORTFOLIO TRANSACTIONS......................................................21
DESCRIPTION OF SHARES AND VOTING RIGHTS.....................................22
DIVIDENDS, CAPITAL GAINS AND TAXES..........................................23
PERFORMANCE CALCULATIONS....................................................25
FINANCIAL STATEMENTS........................................................29
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ABOUT THE BRAZOS MUTUAL FUNDS
The Company was organized as a Delaware business trust on October 28, 1996. The
Company's principal office is located at 5949 Sherry Lane, Suite 1600, Dallas,
Texas 75225; however, all investor correspondence should be directed to the
Brazos Mutual Funds, c/o Firstar Mutual Fund Services, LLC 615 East Michigan
Street, Milwaukee, WI 53202. The Company is comprised of four different
Portfolios. These include the BRAZOS Micro Cap Growth, BRAZOS Small Cap Growth,
BRAZOS Real Estate Securities and BRAZOS Growth Portfolios (each a "Portfolio"
or collectively the "Portfolios"). Brazos Mutual Funds is a diversified,
open-end, management investment company.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment policies of the Portfolios as
set forth in the Prospectus:
Short-Term Investments
Occasionally, a Portfolio may invest a portion of its assets in the following
money market instruments, consistent with its 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.
A 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 Portfolios;
(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
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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
Each Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities. In addition, each 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 Company's
management acknowledges these risks, it is expected that they can be controlled
through stringent security selection criteria and careful monitoring procedures.
When-Issued, Forward Delivery And Delayed Settlement Securities
Each 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. A
Portfolio will maintain a separate account of cash, U.S. Government securities,
other high grade debt obligations or other liquid securities at least equal to
the value of purchase commitments until payment is made. Such segregated
securities will either mature or, if necessary, be sold on or before the
settlement date. Typically, no income accrues on securities purchased on a
delayed delivery basis prior to the time delivery is made, although a Portfolio
may earn income on securities it has deposited in a segregated account.
Each Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
When a Portfolio engages in when-issued or forward delivery transactions, it
does so to acquire securities consistent with its investment objective and
policies and not for the purpose of investment leverage.
Portfolio Turnover
It is expected that the annual portfolio turnover rate for the Portfolios will
not exceed 200%. In addition to Portfolio trading costs, higher rates (100% or
more) of portfolio turnover may result in the realization of capital gains, a
portion of which may be short-term or mid-term gains. See "DIVIDENDS, CAPITAL
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GAINS DISTRIBUTIONS AND TAXES" for information on taxation. The Portfolios will
not normally engage in short-term trading, but each reserves the right to do so.
The tables set forth in the "Financial Highlights" section of the Prospectus
present the historical turnover rates for the BRAZOS Real Estate Securities
Portfolio and the BRAZOS Small Cap Growth Portfolio.
Investment Companies
Each 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 an 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. A
Portfolio will indirectly bear its proportionate share of any management fees
paid by an investment company in which it invests in addition to its advisory
fee.
Restricted Securities
Each 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 Company'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 a Portfolio or less
than what would be considered the fair value of such securities.
Foreign Investments
Each Portfolio may invest in common stocks of companies listed on foreign stock
exchanges, and 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.
Additionally, each Portfolio may also invest in foreign equity securities in the
form of American Depository 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
Portfolios 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. Some countries may withhold portions of
dividends and interest at the source. Under the Internal Revenue Code, foreign
exchange gains and losses are treated as ordinary gain or loss.
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
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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.
Securities Lending
Each 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 investment securities,
a 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 Portfolio's accounts. A
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 a 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 a Portfolio at any time, and (d) a Portfolio receives
reasonable interest on the loan (which may include a 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. A 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
Each Portfolio may engage in various portfolio strategies to hedge against
adverse movements in the equity markets. Each Portfolio may write (i.e., sell)
covered call options on their 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:
a) Futures Contracts
Each 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
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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. Each Portfolio expects to earn
interest income on their 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 Company require that all of its
futures transactions constitute bona fide straddles positions or that the
Company'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 a Portfolio. A 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 Portfolios expect that approximately 75%
of their futures contracts purchases will be "completed", that is, equivalent
amounts of related securities will have been purchased or will be purchased by
the Portfolios on the settlement date of the futures contracts.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a 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
A 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, a
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.
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Risk Factors In Futures Transactions
A 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, a Portfolio
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if a 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, a 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 a
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 a Portfolio
is engaged in only for hedging purposes, the Adviser does not believe that a
Portfolio is subject to the risks of loss frequently associated with futures
transactions. A Portfolio would presumably have sustained comparable losses if,
instead of futures contracts, they had invested in the underlying financial
instrument and sold them after the decline.
Utilization of futures transactions by a 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 a 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 a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom a 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 a Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in
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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.
The investment by a Portfolio in futures contracts and options on futures
contracts is subject to many complex and special tax rules. The treatment by a
Portfolio of certain futures and forward contracts is generally governed by
Section 1256 of the Internal Revenue Code of 1986, as amended (the "Code").
These "Section 1256" positions generally include listed options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Portfolio will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Portfolio's fiscal year, and all
gain or loss associated with fiscal year transactions and marked-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within a Portfolio. The
acceleration of income on Section 1256 positions may require a Portfolio to
accrue taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, a Portfolio
may be required to dispose of portfolio securities that they otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of a Portfolio's shares. In these ways, any or all of these rules may affect
both the amount, character and timing of income distributed to shareholders by
the Portfolios.
b) Options
Each 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, a 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, a Portfolio's
ability to sell the underlying security will be limited while the option is in
effect unless it 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. Each Portfolio writes
only covered options, which means that so long as a 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.
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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 a 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, a Portfolio may purchase call options
on securities held in their investment portfolios on which they have written
call options or on securities which they intend to purchase.
c) Short Sales
Each Portfolio may seek to hedge investments or realize additional gains through
short sales. A Portfolio may make short sales, which are transactions in which a
Portfolio sells a security it does not own, in anticipation of a decline in the
market value of the security. To complete such a transaction, a Portfolio must
borrow the security to make delivery to the buyer. A Portfolio then is obligated
to replace the security borrowed by purchasing it at the market price at or
prior to the time of replacement. The price at such time may be more or less
than the price at which the security was sold. Until the security is replaced, a
Portfolio is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, a Portfolio also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out. A
Portfolio also will incur transaction costs in effecting short sales.
A Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which a
Portfolio replaces the borrowed security. A Portfolio will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased by the amount of the premium,
dividends, interest, or expenses a Portfolio may be required to pay in
connection with a short sale.
No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the Portfolio's net equity. Each Portfolio similarly will limit its
short sales of the securities of any single issuer if the market value of the
securities that have been sold short would exceed two percent (2%) of the value
of a Portfolio's net equity or if such securities would constitute more than two
percent (2%) of any class of the issuer's securities.
Whenever a Portfolio engages in short sales, its custodian segregates an amount
of cash or U.S. Government securities or other high-grade liquid debt securities
equal to the difference between (a) the market value of the securities sold
short at the time they were sold short and (b) any cash or U.S. Government
securities required to be deposited with the broker in connection with the short
sale (not including the proceeds from the short sale). The segregated assets are
marked to market daily, provided that at no time will the amount deposited in it
plus the amount deposited with the broker be less than the market value of the
securities at the time they were sold short.
In addition, a Portfolio may make short sales "against the box," i.e. when a
security identical to one owned by a Portfolio is borrowed and sold short. If a
Portfolio enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities
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convertible or exchangeable into such securities) and is required to hold such
securities while the short sale is outstanding. A Portfolio will incur
transaction costs, in connection with opening, maintaining, and closing short
sales against the box. A short sale may result in the recognition of gain with
respect to a security for Federal income tax purposes under certain rules which
treat certain short sales of the same or substantially identical positions with
respect to such a security as a constructive sale at the time a short position
is entered into by a Portfolio. See, "DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND
TAXES."
Companies With Limited Operating Histories
The BRAZOS Real Estate Securities Portfolio may invest in 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 Company 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 Portfolio's holdings of such securities (other than
securities of companies principally engaged in the real estate industry) exceeds
20% of the value of the Portfolio's total assets. Although not an investment
policy of the Company, it is anticipated that under normal circumstances,
approximately 10% to 15% of the companies principally engaged in the real estate
industry in which the Portfolio invests will have operating histories of less
than three years.
Except as specified above and as described under "INVESTMENT LIMITATIONS" below,
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 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 a 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 a Portfolio's investment limitations.
Investment limitations (1) through (8) described below are fundamental policies
and cannot be changed without approval by a "majority of the outstanding shares"
(as defined in the 1940 Act) of a Portfolio. A Portfolio will not:
(1) 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);
(2) with respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer;
(3) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 331/3 % of
the Portfolio's gross assets valued at the lower of market or cost,
and the Portfolio may not purchase additional securities when
borrowings exceed 5% of total gross assets; or
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(4) pledge, mortgage or hypothecate any of its assets to an extent greater
than 33% of its total assets at fair market value.
(5) invest in physical commodities or contracts on physical commodities;
(6) 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; additionally, the BRAZOS Real Estate
Securities Portfolio may purchase and sell mortgage-related securities
and liquidate real estate acquired as a result of default on a
mortgage and may 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;
(7) 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;
(8) underwrite the securities of other issuers;
(9) 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 a Portfolio's assets
are invested in futures and options;
(10) purchase on margin except as specified in (9) above;
(11) invest more than an aggregate of 15% of the net assets of a 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;
(12) issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into options, futures or repurchase transactions.
In addition, the BRAZOS Micro Cap Growth, BRAZOS Small Cap Growth and the BRAZOS
Growth Portfolios will not acquire any securities of companies within one
industry if, as a result of such acquisition, more than 25% of the value of each
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 each
Portfolio adopts a temporary defensive position.
11
<PAGE>
MANAGEMENT OF THE FUND
Trustees And Officers
The Officers of the Company manage its day-to-day operations and are responsible
to the Company's Board of Trustees. The Trustees set broad policies for the
Company and elect its Officers. The following is a list of the Trustees and
Officers of the Company and a brief statement of their present positions and
principal occupations during the past five years:
<TABLE>
<S> <C>
*Dan L. Hockenbrough Trustee, President and Chief Financial Officer of the Company; Since August
5949 Sherry Lane, Suite 1600 1996, Business Manager of John McStay Investment Counsel. Formerly, Chief
Dallas, Texas 75225 Financial Officer of Waugh Enterprises, Inc. from November 1995 until August
Age 39 1996; Assistant Controller of Hicks, Muse, Tate & Furst Incorporated from
December 1992 to November 1995; and Sr. Associate at Coopers & Lybrand prior
to December 1992.
John H. Massey Trustee of the Company; Private Investor and a Director of The Paragon Group,
4004 Windsor Avenue Inc., Chancellor Broadcasting, Inc., Bank of the Southwest, Columbine JDS
Dallas, Texas 75205 Systems, Inc. and FSW Holdings, Inc. Until 1996, Chairman of the Board and
Age 59 Chief Executive Officer of Life Partners Group, Inc.
David M. Reichert Trustee of the Company; Private Investor; formerly Senior Vice President of
7415 Stonecrest Drive Moffet Capital Management, an investment counseling firm, from January 1995
Dallas, Texas 75240 until June 1996 and Senior Vice President and Portfolio Manager of American
Age 59 Capital Asset Management, a mutual fund management company, from April 1989
to July 1994.
*Tricia A. Hundley Vice President, Secretary and Compliance Officer of the Company; Partner of
5949 Sherry Lane, Suite 1560 John McStay Investment Counsel since 1987.
Dallas, Texas 75225
Age 48
*Loren J. Soetenga Vice President and Treasurer of the Company; Principal of John McStay
5949 Sherry Lane, Suite 1560 Investment Counsel. Formerly, Partner of Chronos Management, Inc. until 1996.
Dallas, Texas 75225
Age 31
</TABLE>
*This person is deemed to be an "interested person" of the Company as that term
is defined in the 1940 Act.
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<PAGE>
Remuneration Of Trustees And Officers
The Company pays each Trustee, who is not also an officer or affiliated person,
a $500 quarterly retainer fee per active Portfolio which currently amounts to
$1,500 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 Company, 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 Company's officers and employees are paid by either the
Adviser or the Administrator and receive no compensation from the Company. The
following table shows aggregate compensation paid to each of the Company's
Trustees for the fiscal period ended November 30, 1997.
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 Company Complex Paid
Company Expenses to Trustees
===================================================================================================================
<S> <C> <C> <C> <C>
Dan L. Hockenbrough -0- -0- -0- -0-
Director
John H. Massey $6,000 -0- -0- $6,000
Director
David M. Reichert $6,000 -0- -0- $6,000
Director
</TABLE>
Principal Holders Of Securities
As of November 30, 1998, the following persons or organizations held of record
5% or more of the shares of each Portfolio:
Micro Cap Growth Portfolio
Real Estate Securities Portfolio
Small Cap Growth Portfolio
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<PAGE>
INVESTMENT ADVISER AND OTHER SERVICES
John McStay Investment Counsel (the "Adviser") 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
and currently has approximately $3 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.
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 Company 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.
Advisory Fees
As compensation for services rendered by the Adviser under the Investment
Advisory Agreement, the Portfolios pay the Adviser an annual fee in monthly
installments, calculated by applying the following annual percentage rates to
the Portfolios' average daily net assets for the month:
BRAZOS Micro Cap Growth Portfolio......................................... 1.20%
BRAZOS Real Estate Securities Portfolio................................... 0.90%
BRAZOS Small Cap Growth Portfolio ........................................ 0.90%
BRAZOS Growth Portfolio....................................................0.90%
For the semi-annual period ended May 31, 1998 the Portfolios paid the Adviser
fees and the Adviser waived fees and/or reimbursed expenses of the Portfolios as
follows:
Fees paid
Portfolio (After Waivers) Waivers
BRAZOS Micro Cap Growth Portfolio* $ 102,627 $ 36,467
BRAZOS Real Estate Securities Portfolio $ 330,760 $ 20,325
BRAZOS Small Cap Growth Portfolio $ 585,354 $ 0
For the fiscal year ended November 30, 1997 the Portfolios paid the Adviser fees
and the Adviser waived fees and/or reimbursed expenses of the Portfolios as
follows:
Fees paid
Portfolio (After Waivers) Waivers
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $ 98,687 $ 139,015
BRAZOS Small Cap Growth Portfolio $ 131,736 $ 107,342
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
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<PAGE>
Distributor
Rafferty Capital Markets, Inc., 550 Mamaroneck Avenue, Harrison, NY 10528, acts
as Distributor for the Company. Rafferty will receive no compensation for
distribution of shares of the Portfolios, except for reimbursement by the
Adviser of out-of-pocket expenses.
Administration Fees
As of October 1, 1998, Firstar Mutual Fund Services, LLC (the "Administrator" or
"Firstar"), 615 E. Michigan Street, Milwaukee, WI 53202 serves as Administrator,
Transfer Agent and Dividend Paying Agent of the Company and also provides
accounting services to the Company. Firstar is an indirect wholly-owned
subsidiary of Firstar Corp., a multi-bank holding company.
As Administrator, Firstar supplies office facilities, non-investment related
statistical and research data, stationery and office supplies, executive and
administrative services, internal auditing and regulatory compliance services.
Firstar 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. Firstar performs certain
budgeting and financial reporting and compliance monitoring activities. For the
services provided as Administrator, Firstar receives an annual fee from the Fund
equal to the greater of: (1) a minimum annual fee of $35,000 for the first
single-class Portfolio plus $25,000 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:
0.06% of the first $200 million in assets; plus
0.05% of assets between $200 million and $700 million; plus
0.03% of assets in excess of $700 million.
The Administrator's fee shall be payable monthly, as soon as practicable after
the last day of each month, based on the Company's average daily net assets as
determined at the close of business on each business day throughout the month.
Firstar also serves as Transfer Agent and Dividend Paying Agent of the Company.
Firstar also serves as an Accounting Agent to the Company. As Accounting Agent,
Firstar determines each Portfolio's net asset value per share and provides
accounting services to the Company pursuant to an Accounting Services Agreement
with the Company. In addition to the fees received for its services as
Administrator and Accounting Agent to the Company, Firstar receives fees from
the Company for providing transfer agency and dividend disbursing services. Such
fees are included in the calculation of "Other Expenses" which appears under the
caption heading "INVESTOR EXPENSES" in the Prospectus. Prior to Firstar serving
as Administrator, Accounting Agent, Transfer Agent and Dividend Paying Agent,
PFPC provided similar services to the Company.
For the semi-annual period ended May 31, 1998 the Company paid PFPC**
administration fees and PFPC waived fees and/or reimbursed expenses of the
Portfolios as follows:
Fees paid
Portfolio (After Waivers) Waivers
BRAZOS Micro Cap Growth Portfolio* $ 9,096 $ 2,124
BRAZOS Real Estate Securities Portfolio $ 39,388 $ 0
BRAZOS Small Cap Growth Portfolio $ 69,141 $ 0
15
<PAGE>
For the semi-annual period ended May 31, 1998 the Company paid PFPC** accounting
services fees and PFPC waived fees and/or reimbursed expenses of the Portfolios
as follows:
Fees paid
Portfolio (After Waivers) Waivers
BRAZOS Micro Cap Growth Portfolio* $ 22,192 $ 5,486
BRAZOS Real Estate Securities Portfolio $ 25,984 $ 0
BRAZOS Small Cap Growth Portfolio $ 32,795 $ 0
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
** The Company entered into an agreement with Firstar Mutual Fund Services LLC
to provide services that were provided by PFPC, Inc. up until September 30,
1998.
For the fiscal year ended November 30, 1997 the Company paid Rodney Square**
administration fees and Rodney Square waived fees and/or reimbursed expenses of
the Portfolios as follows:
Fees paid
Portfolio (After Waivers) Waivers
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $ 37,775 $ 4,051
BRAZOS Small Cap Growth Portfolio $ 38,935 $ 4,051
For the fiscal year ended November 30, 1997 the Company paid Rodney Square**
accounting services fees and Rodney Square waived fees and/or reimbursed
expenses of the Portfolios as follows:
Fees paid
Portfolio (After Waivers) Waivers
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $ 35,742 $ 5,610
BRAZOS Small Cap Growth Portfolio $ 36,198 $ 5,610
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
** PFPC entered into an agreement with Rodney Square Management Corporation
("Rodney Square") to provide services that were provided by Rodney Square up
until January 5, 1998.
Custodian
Firstar Bank, N.A. (the "Bank") serves as the Custodian for the Portfolios. As
Custodian, the Bank has agreed to (a) maintain a separate account or accounts in
the name of the Company, (b) hold and transfer portfolio securities on account
of the Company, (c) accept receipts and make disbursements of money on behalf of
the Company, (d) collect and receive all income and other payments and
distributions on account of the Company's portfolio securities, and (e) make
periodic reports to the Company's Trustees concerning the Company's operations.
The Bank is authorized to select one or more banks or trust
16
<PAGE>
companies to serve as sub-custodian on behalf of the Company, provided that
Firstar Bank remains responsible for the performance of all its duties under the
Custodian Agreement and holds the Company harmless from the negligent acts and
omissions of any sub-custodian. For its services to the Company under the
Custodian Agreement, the Bank receives a fee in addition to transaction charges
and out-of-pocket expenses.
Independent Accountants
PricewaterhouseCoopers LLP, 100 East Wisconsin Ave., Milwaukee, WI, 53202, is
the independent accountant for the Company.
PURCHASE OF SHARES
Shares of the Portfolios 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 Company. The minimum initial investment required for each Portfolio is
$10,000 with certain exceptions as may be determined from time to time by the
officers of the Company. Payment does not need to be converted into Federal
Funds (moneys credited to the Company's Custodian Bank by a Federal Reserve
Bank) before the Company will accept it for investment. Specify the Portfolio in
which the funds should be invested in on the Account Registration Form. 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; Martin Luther King, Jr.'s Birthday; Presidents' Day; Good Friday;
Memorial Day; Independence Day; Labor Day; Thanksgiving Day and Christmas Day.
The Portfolios reserve the right in their sole discretion (1) to suspend the
offering of their shares, (2) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Company, 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 Portfolios' shares.
Shares of the Portfolios may be purchased by customers of broker-dealers or
other financial intermediaries ("Service Agents") which deal with the Company on
behalf of their customers. Service Agents may impose additional or different
conditions on the purchase or redemption of shares of the Portfolios 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
Company from the Company assets attributable to the Service Agent, and which
would not be imposed if shares of the Portfolios were purchased directly from
the Company or the Distributor. The Service Agents may provide shareholder
services to their customers that are not available to a shareholder dealing
directly with the Company. A salesperson and any other person entitled to
receive compensation for selling or servicing shares of the Portfolios may
receive different compensation with respect to one particular class of shares
over another in the Company.
17
<PAGE>
Service Agents, or if applicable, their designees, that have entered into
agreements with the Company or its agent, may enter confirmed purchase or
redemption orders on behalf of clients and customers, with payment to follow no
later than the Portfolios' pricing on the following business day. If payment is
not received by the Company's Transfer Agent by such time, the Service Agent
could be held liable for resulting fees or losses. A Portfolio may be deemed to
have received a purchase or redemption order when a Service Agent, or, if
applicable, its authorized designee, accepts the order. Orders received by the
Company in proper form will be priced at each Portfolio's net asset value next
computed after they are accepted by the Service Agent or its authorized
designee. Service Agents are responsible to their customers and the Company for
timely transmission of all subscription and redemption requests, investment
information, documentation and money.
REDEMPTION OF SHARES
The Portfolios 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 Portfolios 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 Company 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 Company 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 Company. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "Valuation of Fund Shares," and a redeeming shareholder
would normally incur brokerage expenses if those securities were converted to
cash.
Any redemption may be more or less than the shareholder's initial cost depending
on the market value of the securities held by a Portfolio.
BRAZOS Micro Cap Growth, BRAZOS Small Cap Growth and BRAZOS Growth Portfolios.
No charge is made by these Portfolios for redemptions.
BRAZOS Real Estate Securities Portfolio. No charge is made by the BRAZOS Real
Estate Securities 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 Company for the benefit of the remaining shareholders
and is intended to encourage long-term investment in the BRAZOS Real Estate
Securities Portfolio, to avoid transaction and other expenses caused by early
redemption and to facilitate portfolio management.
The Company and the Company'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 Company or Transfer Agent
18
<PAGE>
may be liable for any losses due to unauthorized or fraudulent telephone
instructions if the Company or Transfer Agent does not employ the procedures
described above. Neither the Company 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.
Signature Guarantees
To protect your account, the Company and Firstar Mutual Fund Services (the
"Administrator" or "Firstar") 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 Company are also
being redeemed, on the letter or stock power.
OTHER SHAREHOLDER SERVICES
The following supplements the "Purchase of Shares" and "Redemption of Shares"
information set forth in the Prospectus:
In-Kind Purchases
If accepted by the Company, shares of a Portfolio may be purchased in exchange
for securities which are eligible for acquisition by the Portfolio, as described
in the Prospectus. Securities to be exchanged which are accepted by the Company
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 that Portfolio
and must be delivered to the Company 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 Company will not accept securities in exchange for shares of a Portfolio
unless:
o at the time of the exchange, such securities are eligible to be
included in that Portfolio and current market quotations are readily
available for such securities;
19
<PAGE>
o the investor represents and agrees that all securities offered to be
exchanged are not subject to any restrictions upon their sale by that
Portfolio under the Securities Act of 1933, or otherwise; and
o the value of any such securities (except U.S. Government securities)
being exchanged together with other securities of the same issuer
owned by that Portfolio will not exceed 5% of the net assets of that
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.
Exchange Privilege
Shares of a Portfolio may be exchanged for shares of any other 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 Firstar Mutual
Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701. 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 the 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 Company 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 Company 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 Company 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 Company's, an exchange between a
series of Funds 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 Portfolios to another person by making a
written request to the Company. 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
20
<PAGE>
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.
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 Portfolios and directs the Adviser to use its best efforts to obtain the
best execution with respect to all transactions for the Portfolios. The Adviser
may, however, consistent with the interests of the Portfolios, select brokers on
the basis of the research, statistical and pricing services they provide to the
Portfolios. 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 Portfolios and the Adviser's other clients.
It is not the Company'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 Portfolios or who act as agents in the purchase of shares of
the Portfolios for their clients.
Some securities considered for investment by the Portfolios may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Portfolios 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
Portfolios 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 Company's Board of Trustees.
For the semi-annual period ended May 31, 1998, the Portfolios paid brokerage
commissions as follows:
Portfolio Brokerage Commission
BRAZOS Micro Cap Growth Portfolio $ 30,028
BRAZOS Real Estate Securities Portfolio $ 337,087
BRAZOS Small Cap Growth Portfolio $ 215,941
For the fiscal year ended November 30, 1997, the Portfolios paid brokerage
commissions as follows:
Portfolio Brokerage Commission
BRAZOS Micro Cap Growth Portfolio $ 0
BRAZOS Real Estate Securities Portfolio $ 316,900
BRAZOS Small Cap Growth Portfolio $ 132,283
21
<PAGE>
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 Portfolios. 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 Portfolios. The Adviser may buy and sell securities for the
account of a 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 Company'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 a Portfolio. If
consistent with the interests of the Portfolios, the Adviser may select brokers
on the basis of research, statistical and pricing services these brokers provide
to the Portfolios. 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.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company's Agreement and Declaration of Trust permits the Company 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 Company.
In the event of liquidation of the Company, 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 Company. 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 Company or any Portfolio, except as the
Trustees in their sole discretion shall have determined by resolution.
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 Company.
22
<PAGE>
Annual meetings will not be held except as required by the 1940 Act and other
applicable laws. The Company 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 Company. The Company will
assist shareholder communications in such matters.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
The Company's policy is to distribute at least annually, substantially all of a
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 Company may distribute
a Portfolio's net investment income at interim periods. The amounts of any
income dividends or capital gains distributions cannot be predicted. The
Portfolios may distribute net investment income and other capital gains during
interim periods when the Company'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. It is possible, however, as a result of this
policy that total distributions in a year could exceed the total of a
Portfolio's current year net investment income and capital gains. If this should
occur, a portion of the distributions received by shareholders of such Portfolio
could be a nontaxable "return of capital" for federal income tax purposes and
thereby reduce the shareholder's cost basis in shares of the Portfolio. In
general, a shareholder's total cost basis in the Company will reflect the cost
of the shareholder's original investment plus the amount of any reinvestment.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of a 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 Company at net asset
value (as of the business day following the record date). This will remain in
effect until the Company 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.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Each Portfolio of the Company 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 a 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.
23
<PAGE>
Each Portfolio may engage in certain transactions, such as short sales, and may
invest in certain instruments, such as futures contracts, which may result in
constructive sales of appreciated positions in securities for Federal income tax
purposes. A constructive sale generally occurs when a Portfolio has entered into
a short sale of the same or substantially identical securities or if it enters
into a futures or forward contract to deliver the same or substantially
identical securities and in certain other circumstances. If a constructive sale
occurs, a Portfolio will recognize either ordinary income or capital gain
depending on the length of time which it held the security which was
constructively sold.
Dividends paid by the Portfolios from net investment income and short-term
capital gains, either in cash or reinvested in shares, will be taxable to
shareholders as ordinary income. Dividends paid from the Portfolios will
generally qualify in part for the 70% dividends-received deductions for
corporations, but the portion of the dividends so qualified depends on the
aggregate qualifying dividend income received by the Portfolios from domestic
(U.S.) sources.
Distributions paid by the Portfolios from long-term capital gains, either in
cash or additional shares of a Portfolio, are taxable to shareholders subject to
income tax as long-term capital gains regardless of the length of time the
shareholder has owned shares in a Portfolio. Also, for those shareholders
subject to tax, if purchases of shares in a Portfolio are made shortly before
the record date for a capital gains distribution or a dividend, a portion of the
investment will be returned as a taxable distribution. Shareholders are notified
annually by the Company as to the Federal Income tax status of dividends and
distributions paid by the Portfolios. Dividends and distributions may also be
subject to state and local taxes. Dividends declared in October, November, or
December to shareholders of record in such month and paid in January of the
following year will be deemed to have been paid by a Portfolio and received by
the shareholders on December 31.
Redemptions of shares in the Portfolios are taxable events for Federal income
tax purposes.
The Portfolios are required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this withholding
requirement by certifying on the account registration form your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
In order for a 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 a 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.
Except for transactions a Portfolio has identified as hedging transactions, a
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
24
<PAGE>
held by a Portfolio may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition.
A Portfolio may be subject to foreign withholding taxes on income or gains
recognized with respect to its investment in certain foreign securities. If a
Portfolio purchases shares in certain foreign investment entities, called
"passive foreign investment companies", a Portfolio may be subject to U.S.
Federal income tax and a related interest charge on a portion of any "excess
distribution" or gain from the disposition of such shares, even if such income
is distributed as a taxable dividend by a Portfolio to its shareholders. If more
than 50% of the total assets of a Portfolio are invested in securities of
foreign corporations, a Portfolio may elect to pass-through to its shareholders
their pro rata share of foreign income taxes paid by a Portfolio. If this
election is made, shareholders will be required to include in their gross income
their pro rata share of the foreign taxes paid by a Portfolio. However,
shareholders will be entitled to deduct (as an itemized deduction in the case of
individuals) their share of such foreign taxes in computing their taxable income
or to claim a credit for such taxes against their U.S. Federal income tax,
subject to certain limitation under the Code. Finally, a Portfolio may recognize
gain or loss on transactions in foreign currencies as a by-product of its
investment in foreign securities.
A 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 a Portfolio's taxable year) on futures transactions. Such
distribution will be combined with distributions of capital gains realized on a
Portfolio's other investments, and shareholders will be advised on the nature of
the payment.
PERFORMANCE CALCULATIONS
Performance
The Portfolios 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 Company 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 Company are based on the standardized methods of computing
performance mandated by the Commission. An explanation of those and other
methods used to compute or express performance follows.
Yield
Current yield reflects the income per share earned by a Portfolio's investment.
The current yield of a 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.
25
<PAGE>
Total Return
The average annual total return of a 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
Company 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).
Total return for the Portfolios for the period ended May 31, 1998 was:
<TABLE>
<CAPTION>
Inception Year-to-Date Inception to
Date 5/31/98 5/31/98
<S> <C> <C> <C>
BRAZOS Real Estate Securities Portfolio 12/31/96 -2.0% 26.6%
BRAZOS Small Cap Growth Portfolio 12/31/96 11.6% 72.4%
BRAZOS Micro Cap Growth Portfolio 12/31/97 31.0% 31.0%
</TABLE>
Comparisons
To help investors better evaluate how an investment in a Portfolio might satisfy
their investment objective, advertisements regarding the Company may discuss
various measures of Company 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:
(1) 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.
(2) 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.
26
<PAGE>
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Salomon Brothers GNMA Index - includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the
Government National Mortgage Association.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) Value Line - composed of over 1,600 stocks in the Value Line
Investment Survey.
(15) 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.
27
<PAGE>
(16) Russell 2000 Growth - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted
growth values.
(17) Russell 2000 Value - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth
values.
(18) 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.
(19) 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.
(20) 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.
(21) Mutual Fund Source Book published by Morningstar, Inc. - analyzes
price, yield, risk and total return for equity funds.
(22) 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.
(23) 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.
(24) 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.
(25) Savings and Loan Historical Interest Rates - as published by the U.S.
Savings & Loan League Fact Book.
(26) Lehman Brothers Government/Corporate Index - 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.
28
<PAGE>
(27) Lehman Brothers Intermediate Government/Corporate Index - 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.
(28) Historical data supplied by the research departments of First Boston
Corporation; the J.P. Morgan companies; WP Brothers; Merrill Lynch,
Pierce, Fenner & Smith; Lehman Brothers, Inc.; and Bloomberg L.P.
(29) 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.
(30) 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 a 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 a
Portfolio to calculate its performance. In addition, there can be no assurance
that a Portfolio will continue this performance as compared to such other
averages.
CODE OF ETHICS
The Company has adopted a Code of Ethics which restricts, to a certain extent,
personal transactions by access persons of the Company and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The audited Financial Statements for the BRAZOS Micro Cap Growth Portfolio,
BRAZOS Small Cap Growth Portfolio and BRAZOS Real Estate Securities Portfolio
and selected per share data and ratios and notes to the Financial Statements
dated May 31, 1998 were filed with the SEC on June 29, 1998. They are
incorporated herein by reference and can be obtained free of charge by calling
the Brazos Mutual Funds at 1-800-426-9157.
29
<PAGE>
PART C
FORM N-1A
OTHER INFORMATION
Item 23. Exhibits
(a) (1) Certificate of Trust*
(2) Agreement and Declaration of Trust**
(b) Bylaws**
Amended Bylaws******
(c) Not Applicable
(d) (1) Investment Advisory Contract re: BRAZOS
Small Cap Growth Portfolio and BRAZOS Real
Estate Securities Portfolio**
(2) Investment Advisory Contract re: BRAZOS
Micro Cap Growth Portfolio*****
(3) Investment Advisory Contract re: BRAZOS
Growth Portfolio
(e) Underwriting Contract and Selected Dealer Agreement
(f) Not Applicable
(g) Custodian Agreement
(h) (1) Administration Agreement
(2) Transfer Agency Agreement
(3) Accounting Services Agreement
(4) Fulfillment Agreement
(i) Opinion and Consent of Counsel
(j) Consent of Independent Accountant
(k) Not Applicable
(l) Subscription Agreement***
(m) Not Applicable
(n) Financial Data Schedules as of May 31, 1998 re:
BRAZOS Real Estate Securities Portfolio and
BRAZOS Small Cap Growth Portfolio
(o) Not Applicable
*Previously filed with the Registration Statement on Form N-1A on
October 28, 1996 and incorporated herein by reference.
**Previously filed with Pre-Effective Amendment No. 1 to the
Registration Statement on December 2, 1996 and incorporated herein by reference.
***Previously filed with Pre-Effective Amendment No. 2 to the
Registration Statement on December 17, 1996 and incorporated herein by
reference.
****Previously filed with Post-Effective Amendment No. 1 to the
Registration Statement on June 27, 1997 and incorporated herein by reference.
*****Previously filed with Post-Effective Amendment No. 2 to the
Registration Statement on October 15, 1997 and incorporated herein by reference.
******Previously filed with Post-Effective Amendment No. 3 to the
Registration Statement on February 17, 1998 and incorporated herein by
reference.
30
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
Registrant is not controlled by or under common control with any
person.
Item 25. Indemnification
Reference is made to Article VII of Registrant's Agreement and
Declaration of Trust, which is incorporated herein by reference.
Registrant hereby also makes the undertaking consistent with Rule 484
under the Securities Act of 1933, as amended.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, office or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
Reference is made to the caption "Information about the Adviser" in
the Prospectuses constituting Part A of this Registration Statement
and "Investment Adviser and Other Services" in Part B of this
Registration Statement. The information required by this Item 26 with
respect to each director, officer, or partner of the investment
adviser of the Registrant is incorporated by reference to the Form ADV
filed by the investment adviser listed below with the Securities and
Exchange Commission pursuant to the Investment Advisers Act of 1940,
as amended, on the date and under the File number indicated:
John McStay Investment Counsel 3-31-96 SEC File No. 801-20244
Item 27. Principal Underwriters
(a) Investment Companies for which Rafferty Capital Markets, Inc.
also acts as principal underwriter:
Badgley Funds
Home State Funds
Potomac Funds
Texas Capital Value Funds
Golf Associated Fund
(b) Reference is made to the caption "Distributor" in the
Prospectuses constituting Part A of this Registration Statement.
The information required by this Item 27 with respect to each
director of the underwriter is incorporated by reference
31
<PAGE>
to the Form BD filed by the Underwriter with the Commission
pursuant to the Securities Exchange Act of 1934, as amended under
the File Number indicated:
Rafferty Capital Markets, Inc. NASD File No. 23682
Item 28. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder will be maintained in the physical possession
of the Registrant, Brazos Mutual Funds, 5949 Sherry Lane, Dallas, TX
75225; the Registrant's Adviser, John McStay Investment Counsel, 5949
Sherry Lane, Dallas, TX 75225; the Registrant's Transfer and
Administrative Agent, Firstar Mutual Fund Services, LLC, 615 E.
Michigan Street, Milwaukee, WI 53202; and the Registrant's Custodian
Bank, Firstar Bank, N.A., 615 E. Michigan Street, Milwaukee, WI 53202.
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of the removal of a Trustee or
Trustees when requested in writing to do so by the holders of at least
10% of the Registrant's outstanding shares and in connection with such
meeting to comply with the provisions of Section 16(c) of the
Investment Company Act of 1940, as amended, relating to shareholder
communications.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to whom a
prospectus is delivered.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(a) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 4 to the Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Dallas, and State of Texas on the 13th day of October, 1998.
Brazos Mutual Funds
Registrant
By /s/ Dan L. Hockenbrough*
Dan L. Hockenbrough
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 4 to the Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
/s/ Dan L. Hockenbrough*
Dan L. Hockenbrough Trustee, Chief Executive October 13, 1998
and Financial Officer
/s/ John H. Massey*
John H. Massey Trustee October 13, 1998
/s/ David M. Reichert*
David M. Reichert Trustee October 13, 1998
* Pursuant to authority granted in a Power of Attorney filed with
Pre-Effective Amendment No. 2
By: /s/ Audrey C. Talley
Audrey C. Talley
Attorney-in-Fact
<PAGE>
Exhibit Index
Item 23 Exhibit
(B5) Investment Advisory Contract re: Brazos Growth Portfolio
(B6) Underwriting Contract and Selected Dealer Agreement
(B8) Custodian Agreement
(B9.1) Administration Agreement
(B9.2) Transfer Agency Agreement
(B9.3) Accounting Services Agreement
(B9.4) Fulfillment Agreement
(B10) Opinion and Consent of Counsel
(B11) Consent of Independent Accountant
(27.1) Financial Data Schedule for BRAZOS Real Estate Securities Portfolio
(27.2) Financial Data Schedule for BRAZOS Small Cap Growth Portfolio
Exhibit B5
INVESTMENT ADVISORY AGREEMENT
BRAZOS MUTUAL FUNDS
AGREEMENT made this 31 day of December, 1998 by and between Brazos Mutual Funds,
a Delaware business trust (the "Trust") and John McStay Investment Counsel, a
limited partnership (the "Adviser").
1. Duties of Adviser. The Trust hereby appoints the Adviser to act as
investment adviser to the Trust for the period and on such terms as set forth in
this Agreement. The Trust employs the Adviser to manage the investment and
reinvestment of the assets of its portfolios of securities, to continuously
review, supervise and administer the investment program of the portfolios, to
determine in its discretion the securities to be purchased or sold and the
portion of the Trust's assets to be held uninvested, to provide the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Trust's officers and Board of
Trustees concerning the Adviser's discharge of the foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to the
control of the officers and the Board of Trustees of the Trust, and in
compliance with the objectives, policies and limitations set forth in the
Trust's prospectus and applicable laws and regulations. The Adviser accepts such
employment and agrees to render the services and to provide, at its own expense,
the office space, furnishings and equipment and the personnel required by it to
perform the services on the terms and for the compensation provided herein.
<PAGE>
2. Portfolio Transactions. The Adviser is authorized to select the brokers
or dealers that will execute the purchases and sales of securities of the Trust
and is directed to use its best efforts to obtain the best available price and
most favorable execution, except as prescribed herein. Subject to policies
established by the Board of Trustees of the Trust, the Adviser may also be
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if the Adviser determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage or research services provided by such broker or dealer, viewed
in terms of either that particular transaction or the Adviser's overall
responsibilities with respect to the Trust. The execution of such transactions
shall not be deemed to represent an unlawful act or breach of any duty created
by this Agreement or otherwise. The Adviser will promptly communicate to the
officers and Trustees of the Trust such information relating to portfolio
transactions as they may reasonably request.
3. Compensation of the Adviser. For the services to be rendered by the
Adviser as provided in Section 1 of this Agreement, the Trust shall pay to the
Adviser in monthly installments, an advisory fee calculated by applying the
following annual percentage rates to the Trust's average daily net assets for
the month:
BRAZOS Growth Portfolio 0.90%
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is in effect subject to a pro rata adjustment based
on the number of days elapsed in the current fiscal
<PAGE>
month as a percentage of the total number of days in such month.
4. Other Services. At the request of the Trust, the Adviser in its
discretion may make available to the Trust office facilities, equipment,
personnel and other services. Such office facilities, equipment, personnel and
services shall be provided for or rendered by the Adviser and billed to the
Trust at the Adviser's cost.
5. Reports. The Trust and the Adviser agree to furnish to each other
current prospectuses, proxy statements, reports to shareholders, certified
copies of their financial statements, and such other information with regard to
their affairs as each may reasonably request.
6. Status of Adviser. The services of the Adviser to the Trust are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others so long as its services to the Trust are not impaired thereby.
7. Liability of Adviser. In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940 ("1940
Act"), the Adviser shall not be subject to any liability whatsoever to the
Trust, or to any shareholder of the Trust, for any error of judgment, mistake of
law or any other act or omission in the course of, or connected with, rendering
services hereunder including, without limitation, for any losses that may be
sustained
<PAGE>
in connection with the purchase, holding, redemption or sale of any security on
behalf of the Trust.
8. Permissible Interests. Subject to and in accordance with the Certificate
of Trust and Agreement and Declaration of Trust of the Trust and the Certificate
of Limited Partnership and Partnership Agreement of the Adviser, Trustees,
officers, agents and shareholders of the Trust are or may be interested in the
Adviser (or any successor thereof) as Trustees, officers, agents, shareholders
or otherwise; Trustees, officers, agents and shareholders of the Adviser are or
may be interested in the Trust as Trustees, officers, agents, shareholders or
otherwise; and the Adviser (or any successor) is or may be interested in the
Trust as a shareholder or otherwise; and the effect of any such
interrelationships shall be governed by said organizational documents and the
provisions of the 1940 Act.
9. Duration and Termination. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of November 14, 1999 or the
date of the first annual or special meeting of the shareholders of the Trust, if
any, and, if approved by a majority of the outstanding voting securities of the
Trust, thereafter shall continue for periods of one year so long as such
continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Board of Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or (c) by vote of a majority of the
outstanding voting securities of the Trust; provided however, that if the
shareholders of the Trust fail to approve the Agreement as provided herein, the
Adviser may
<PAGE>
continue to serve in such capacity in the manner and to the extent permitted by
the 1940 Act and rules thereunder. This Agreement may be terminated by the Trust
at any time, without the payment of any penalty, by vote of a majority of the
entire Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Trust on 60 days' written notice to the
Adviser. This Agreement may be terminated by the Adviser at any time, without
the payment of any penalty, upon 90 days' written notice to the Trust. This
Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing, addressed
and delivered or mailed postpaid, to the other party at the principal office of
such party.
As used in this Section 9, the terms "assignment," "interested persons,"
and "a vote of a majority of the outstanding voting securities" shall have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the 1940 Act.
10. Amendment of Agreement. This Agreement may be amended by mutual
consent, but the consent of the Trust must be approved (a) by vote of a majority
of those members of the Board of Trustees of the Trust who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Trust.
11. Severability. If any provisions of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of this ____ day of ___________, 1998.
JOHN McSTAY INVESTMENT COUNSEL BRAZOS MUTUAL FUNDS
By
--------------------------------- -----------------------------------
President Chairman of the Board and President
Exhibit B6
DISTRIBUTION AGREEMENT
between
RAFFERTY CAPITAL MARKETS
and
BRAZOS MUTUAL FUNDS
THIS AGREEMENT is made as of October 1, 1998, between Brazos Mutual Funds
("Fund"), a Delaware business trust, and Rafferty Capital Markets, Inc. ("RCM"),
a corporation organized and existing under the laws of the State of New York.
WHEREAS the Fund is registered under the Investment Company Act of 1940, as
amended ("1940 Act"), as an open-end management investment company, and has
registered one or more distinct series of shares of beneficial interest
("Shares") for sale to the public under the Securities Act of 1933, as amended
("1933 Act"), and has qualified its shares for sale to the public under various
state securities laws; and
WHEREAS the Fund desires to retain RCM as principal underwriter in
connection with the offering and sale of the Shares of each series listed on
Schedule A (as amended from time to time) to this Agreement; and
WHEREAS this Agreement has been approved by a vote of the Fund's board of
trustees or directors ("Board") and its disinterested trustees/directors in
conformity with Section 15(c) under the 1940 Act; and
WHEREAS RCM is willing to act as principal underwriter for the Fund on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints RCM as its agent to be the
principal underwriter so as to hold itself out as available to receive and
accept orders for the purchase and redemption of the Shares and redemption of
Shares on behalf of the Fund, subject to the terms and for the period set forth
in this Agreement. RCM hereby accepts such appointment and agrees to act
hereunder. The Fund understands that any solicitation activities conducted on
behalf of the Fund will be conducted primarily, if not exclusively, by employees
of the Fund's sponsor who shall become registered representatives of RCM.
<PAGE>
2. Services and Duties of RCM.
(a) RCM agrees to sell Shares on a best efforts basis from time to
time during the term of this Agreement as agent for the Fund and upon the terms
described in the Registration Statement. As used in this Agreement, the term
"Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the 1933 Act and the
1940 Act.
(b) RCM will hold itself available to receive purchase and redemption
orders satisfactory to RCM for Shares and will accept such orders on behalf of
the Fund. Such purchase orders shall be deemed effective at the time and in the
manner set forth in the Registration Statement.
(c) RCM, with the operational assistance of the Fund's transfer agent,
shall make Shares available through the National Securities Clearing
Corporation's Fund/Serv System.
(d) RCM shall provide to investors and potential investors only such
information regarding the Fund as the Fund shall provide or approve. RCM shall
assist in the production of advertising and sales literature; review and file
all proposed advertisements and sales literature with appropriate regulators;
and consult with the Fund regarding any comments provided by regulators with
respect to such materials.
(e) The offering price of the Shares shall be the price determined in
accordance with, and in the manner set forth in, the most current Prospectus.
The Fund shall make available to RCM a statement of each computation of net
asset value and the details of entering into such computation.
(f) RCM at its sole discretion may repurchase Shares offered for sale
by the shareholders. Repurchase of Shares by RCM shall be at the price
determined in accordance with, and in the manner set forth in, the most current
Prospectus. At the end of each business day, RCM shall notify, by any
appropriate means, the Fund and its transfer agent of the orders for repurchase
of Shares received by RCM since the last such report, the amount to be paid for
such Shares, and the identity of the shareholders offering Shares for
repurchase. The Fund reserves the right to suspend such repurchase right upon
written notice to RCM. RCM further agrees to act as agent for the Fund to
receive and transmit promptly to the Fund's transfer agent shareholder requests
for redemption of Shares.
(g) RCM shall not be obligated to sell any certain number of Shares.
(h) RCM shall prepare reports for the Board regarding its activities
under this Agreement as from time to time shall be reasonably requested by the
Board.
<PAGE>
(i) RCM may enter into selling agreements with selected dealers and
others for the sale of Trust Shares, and will act only on its own behalf as
principal in entering into such selling agreements.
(j) The rights granted to RCM shall be non-exclusive in that the Trust
reserves the right to sell its Shares to investors on applications received and
accepted by the Trust. Further, the Trust reserves the right to issue Shares in
connection with (a) the merger or consolidation, or acquisition by the Trust
through purchase or otherwise, with any other investment company, trust or
personal holding company, and (b) a pro rata distribution directly to the
holders of Shares in the nature of a stock dividend or split-up.
(k) If and whenever the determination of net asset value is suspended
and until such suspension is terminated, no further orders for Shares shall be
processed by RCM except such unconditional orders placed with RCM before it had
knowledge of the suspension. In addition, the Trust reserves the right to
suspend sales and RCM's authority to process orders for Shares on behalf of the
Trust if, in the judgment of the Trust, it is in the best interests of the Trust
to do so. Suspension will continue for such period as may be determined by the
Trust. In addition, RCM reserves the right to reject any purchase order.
3. Duties of the Fund.
(a) The Fund shall keep RCM fully informed of its affairs and shall
provide to RCM from time to time copies of all information, financial
statements, and other papers that RCM may reasonably request for use in
connection with the distribution of Shares, including, without limitation,
certified copies of any financial statements prepared for the Fund by its
independent public accountant and such reasonable number of copies of the most
current Prospectus, Statement of Additional Information ("SAI"), and annual and
interim reports as RCM may request, and the Fund shall fully cooperate in the
efforts of RCM to sell and arrange for the sale of Shares.
(b) The Fund shall maintain a currently effective Registration
Statement on Form N-1A with the Securities and Exchange Commission (the "SEC"),
maintain qualification with applicable states and file such reports and other
documents as may be required under applicable federal and state laws. The Fund
shall notify RCM in writing of the states in which the Shares may be sold and
shall notify RCM in writing of any changes to such information.
(c) The Fund shall not use any advertisements or other sales materials
that have not been (i) submitted to RCM for its review and approval, and (ii)
filed with the appropriate regulators.
<PAGE>
(d) The Fund represents and warrants that its Registration Statement
and any advertisements and sales literature (excluding statements relating to
RCM and the services it provides that are based upon written information
furnished by RCM expressly for inclusion therein) of the Fund, that have been
approved by the Fund, shall not contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and that all statements or
information furnished to RCM, pursuant to Section 3(a) hereof, shall be true and
correct in all material respects.
4. Other Broker-Dealers. RCM in its discretion may enter into agreements to
sell Shares to such registered and qualified retail dealers, as reasonably
requested by the Fund. In making agreements with such dealers, RCM shall act
only as principal and not as agent for the Fund. The form of any such dealer
agreement shall be mutually agreed upon and approved by the Fund and RCM.
5. Withdrawal of Offering. The Fund reserves the right at any time to
withdraw all offerings of any or all Shares by written notice to RCM at its
principal office. No Shares shall be offered by either RCM or the Fund under any
provisions of this Agreement and no orders for the purchase or sale of Shares
hereunder shall be accepted by the Fund if and so long as effectiveness of the
Registration Statement then in effect or any necessary amendments thereto shall
be suspended under any of the provisions of the 1933 Act, or if and so long as a
current prospectus as required by Section 5(b)(2) of the 1933 Act is not on file
with the SEC.
6. Services Not Exclusive. The services furnished by RCM hereunder are not
to be deemed exclusive and RCM shall be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby.
7. Expenses of the Fund.
(a) The Trust shall pay all fees and expenses:
(i) in connection with the preparation, setting in type and
filing of any Registration statement, Prospectus and SAI
under the 1933 Act, and any amendments thereto, for the
issue of its Shares;
(ii) in connection with the registration and qualification of
Shares for sale in the various states or other jurisdictions
in which the Board of Trustees (the "Trustees") of the Trust
shall determine it advisable to qualify such Shares for sale
(including registering the Trust or Series as a broker or
dealer or any officer of the Trust as agent or salesperson
in any state);
(iii)of preparing, setting in type, printing and mailing any
report or
<PAGE>
other communication to shareholders of the Trust in their
capacity as such; and
(iv) of preparing, setting in type, printing and mailing
Prospectuses, SAIs, and any supplements thereto, sent to
existing shareholders.
(b) RCM shall pay expenses of:
(i) printing and distributing Prospectuses, SAIs, and reports
prepared for its use in connection with the offering of the
Shares for sale to the public;
(ii) any other literature used in connection with such offering;
and
(iii) advertising in connection with such offering.
(c) In addition to the services described above, RCM will provide
services including, without limitation, assistance in the production of
marketing and advertising materials for the sale of Shares of the Trust and
their review for compliance with applicable regulatory requirements and making
any required filings with regulatory authorities; and entering into dealer
agreements with broker-dealers to sell Shares of the Trust.
8. Compensation. In connection with the services to be provided by RCM
under this Agreement, RCM shall receive fees from the Trust's investment
adviser, and, when appropriate, reimbursement of expenses. Notwithstanding
anything to the contrary, amounts owed by the Trust to RCM shall only be paid
out of the assets and property of the particular Fund involved.
9. Share Certificates. The Fund shall not issue certificates representing
Shares unless requested to do so by a shareholder. If such request is
transmitted through RCM, the Fund will cause certificates evidencing the Shares
owned to be issued in such names and denominations as RCM shall from time to
time direct.
10. Status of RCM. RCM is an independent contractor and shall be agent of
the Fund only with respect to the sale and redemption of Shares.
11. Indemnification.
(a) Fund agrees to indemnify, defend, and hold RCM, its officers and
directors, and any person who controls RCM within the meaning of Section 15 of
the 1933 Act, free and harmless from and against any and all claims, demands,
liabilities, and expenses
<PAGE>
(including the cost of investigating or defending such claims, demands, or
liabilities and any counsel fees incurred in connection therewith) that RCM, its
officers, directors, or any such controlling person may incur under the 1933
Act, or under common law or otherwise, arising out of or based upon any (i)
alleged untrue statement of a material fact contained in the Registration
Statement, Prospectus, SAI or sales literature, (ii) alleged omission to state a
material fact required to be stated in the either thereof or necessary to make
the statements therein not misleading (except for information furnished by RCM
as stated in Section 11(d) of this Agreement), or (iii) failure by the Fund to
comply with the terms of the Agreement; provided, that in no event shall
anything contained herein be so construed as to protect RCM against any
liability to the Fund or its shareholders to which RCM would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations under this Agreement.
(b) The Fund shall not be liable to RCM under this Agreement with
respect to any claim made against RCM or any person indemnified unless RCM or
other such person shall have notified the Fund in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon RCM or such
other person (or after RCM or the person shall have received notice of service
on any designated agent). However, failure to notify the Fund of any claim shall
not relieve the Fund from any liability that it may have to RCM or any person
against whom such action is brought otherwise than on account of this Agreement.
(c) The Fund shall be entitled to participate at its own expense in
the defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this Agreement. If the Fund elects to assume the
defense of any such claim, the defense shall be conducted by counsel chosen by
the Fund and satisfactory to indemnified defendants in the suit whose approval
shall not be unreasonably withheld. In the event that the Fund elects to assume
the defense of any suit and retain counsel, the indemnified defendants shall
bear the fees and expenses of any additional counsel retained by them. If the
Fund does not elect to assume the defense of a suit, it will reimburse the
indemnified defendants for the reasonable fees and expenses of any counsel
retained by the indemnified defendants. The Fund agrees to promptly notify RCM
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of its
Shares.
(d) RCM agrees to indemnify, defend, and hold the Fund, its officers
and directors, and any person who controls the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities, and expenses (including the cost of investigating
or defending against such claims, demands, or liabilities and any counsel fees
incurred in connection therewith) that the Fund, its directors or officers, or
any such controlling person may incur under the 1933 Act, or under common law or
otherwise, resulting from RCM's willful misfeasance, bad faith or gross
negligence in the performance of
<PAGE>
its obligations and duties under this Agreement, or arising out of or based upon
any alleged untrue statement of a material fact contained in information
furnished in writing by RCM to the Fund for use in the Registration Statement,
Prospectus, SAI, or sales literature arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in either thereof or necessary to make such information not
misleading.
(e) RCM shall be entitled to participate, at its own expense, in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce the claim, but if RCM elects to assume the defense, the defense shall be
conducted by counsel chosen by RCM and satisfactory to the indemnified
defendants whose approval shall not be unreasonably withheld. In the event that
RCM elects to assume the defense of any suit and retain counsel, the defendants
in the suit shall bear the fees and expenses of any additional counsel retained
by them. If RCM does not elect to assume the defense of any suit, it will
reimburse the indemnified defendants in the suit for the reasonable fees and
expenses of any counsel retained by them. RCM agrees to notify the Trust
promptly of the commencement of any litigation or proceedings against it in
connection with the issue and sale of any of the Shares.
12. Duration and Termination.
(a) This Agreement shall become effective on the date first written
above or such later date as indicated in Schedule A and, unless sooner
terminated as provided herein, will continue in effect for two years from the
above written date. Thereafter, if not terminated this Agreement shall continue
in effect for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a vote of a majority of the
Fund's Board who are neither interested persons (as defined in the 1940 Act) of
the Fund ("Independent trustees/directors") or RCM, cast in person at a meeting
called for the purpose of voting on such approval, and (ii) by the Board or by
vote of a majority of the outstanding voting securities of the Fund.
(b) Notwithstanding the foregoing, this Agreement may be terminated in
its entirety at any time, without the payment of any penalty, by vote of the
Board, by vote of a majority of the Independent trustees/directors, or by vote
of a majority of the outstanding voting securities of the Fund on sixty days'
written notice to RCM or by RCM at any time, without the payment of any penalty,
on sixty days' written notice to the Fund. This Agreement will automatically
terminate in the event of its assignment (as defined in the 1940 Act).
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge, or termination is sought. This Agreement may be amended with the
approval of the Board or of a majority of the outstanding voting securities of
the Fund; provided, that in either case, such amendment also shall be approved
by a majority of the Independent trustees/directors.
<PAGE>
14. Limitation of Liability. RCM is hereby expressly put on notice of the
limitation of shareholder liability as set forth in the Trust Instrument of the
Trust and agrees that obligations assumed by the Trust pursuant to this
Agreement shall be limited in all cases to the Trust and its assets, and if the
liability relates to one or more series, the obligations hereunder shall be
limited to the respective assets of such series. RCM further agrees that it
shall not seek satisfaction of any obligation from the shareholders or any
individual shareholder of a series of the Trust, nor from the Trustees or any
individual Trustee of the Trust.
<PAGE>
15. Notice. Any notice required or permitted to be given by either party to
the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
Miscellaneous. The captions in this agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule, or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities",
"interested person", and "assignment" shall have the same meaning as such terms
have in the 1940 Act.
16. Governing Law. This Agreement shall be construed in accordance with the
laws of the State of New York and the 1940 Act. To the extent that the
applicable laws of the State of New York conflict with the applicable provisions
of the 1940 Act, the latter shall control.
17. Year 2000 Compliant. At the present time, RCM does not offer, provide
or propose to offer or provide any computer system product or service to the
Fund under the Agreement. Any such product or services are to be provided to the
Fund by the Fund's Transfer Agent/Custodian or other third party vendors to be
selected by the Fund.
18. Proprietary and Confidential Information. RCM agrees on behalf of
itself and its directors, officers, and employees to treat confidentially and as
proprietary information of the Trust all records and other information relative
to the Trust and prior, present, or potential shareholders of the Trust (and
clients of said shareholders), and not to use such records and information for
any purpose other than the performance of its responsibilities and duties
hereunder, except after prior notification to and approval in writing by the
Trust, which approval shall not be unreasonably withheld and may not be withheld
where RCM may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
Exhibit B8
CUSTODIAN SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of October,
1998, by and between Brazos Mutual Funds, Inc., a Delaware business trust
(hereinafter referred to as the "Trust"), and Firstar Bank Milwaukee, N.A., a
bank organized under the laws of the State of Wisconsin (hereinafter referred to
as the "Custodian" or the "Bank").
WHEREAS, the Trust is an open-end management investment company which is
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust is authorized to create separate series, each with its
own separate investment portfolio; and
WHEREAS, the Trust desires that the securities and cash of the Small Cap
Growth Portfolio (the "Fund") and each additional series of the Trust listed on
Exhibit A attached hereto, as may be amended from time to time, shall be
hereafter held and administered by Custodian pursuant to the terms of this
Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and Custodian agree as follows:
1. Definitions
The word "securities" as used herein includes stocks, shares, bonds,
debentures, notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same, or evidencing or representing any other rights or
interests therein, or in any property or assets.
The words "officers' certificate" shall mean a request or direction or
certification in writing signed in the name of the Trust by any two of the
President, a Vice President, the Secretary and the Treasurer of the Trust, or
any other persons duly authorized to sign by the Board of Trustees.
The word "Board" shall mean Board of Trustees of the Brazos Mutual Funds.
<PAGE>
2. Names, Titles, and Signatures of the Company's Officers
An officer of the Trust will certify to Custodian the names and signatures
of those persons authorized to sign the officers' certificates described in
Section 1 hereof, and the names of the members of the Board of Trustees,
together with any changes which may occur from time to time.
3. Receipt and Disbursement of Money
A. Custodian shall open and maintain a separate account or accounts in the
name of each Fund, subject only to draft or order by Custodian acting pursuant
to the terms of this Agreement. Custodian shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Trust. Custodian shall make payments of cash to, or for the
account of, the Trust from such cash only:
(a) for the purchase of securities for the portfolio of the Fund upon the
delivery of such securities to Custodian, registered in the name of
the Trust or of the nominee of Custodian referred to in Section 7 or
in proper form for transfer;
(b) for the purchase or redemption of shares of the common stock of the
Fund upon delivery thereof to Custodian, or upon proper instructions
from the Trust;
(c) for the payment of interest, dividends, taxes, investment adviser's
fees or operating expenses (including, without limitation thereto,
fees for legal, accounting, auditing and custodian services and
expenses for printing and postage);
(d) for payments in connection with the conversion, exchange or surrender
of securities owned or subscribed to by the Fund held by or to be
delivered to Custodian; or
(e) for other proper corporate purposes certified by resolution of the
Board of Trustees of the Trust.
Before making any such payment, Custodian shall receive (and may rely
upon) an officers' certificate requesting such payment and stating that it is
for a purpose permitted under
<PAGE>
the terms of items (a), (b), (c), or (d) of this Subsection A, and also, in
respect of item (e), upon receipt of an officers' certificate specifying the
amount of such payment, setting forth the purpose for which such payment is to
be made, declaring such purpose to be a proper corporate purpose, and naming the
person or persons to whom such payment is to be made, provided, however, that an
officers' certificate need not precede the disbursement of cash for the purpose
of purchasing a money market instrument, or any other security with same or
next-day settlement, if the President, a Vice President, the Secretary or the
Treasurer of the Trust issues appropriate oral or facsimile instructions to
Custodian and an appropriate officers' certificate is received by Custodian
within two business days thereafter.
B. Custodian is hereby authorized to endorse and collect all checks, drafts
or other orders for the payment of money received by Custodian for the account
of each Fund.
C. Custodian shall, upon receipt of proper instructions, make federal funds
available to the Trust as of specified times agreed upon from time to time by
the Trust and the Custodian in the amount of checks received in payment for
shares of the Fund which are deposited into the Fund's account.
D. If so directed by the Trust, Custodian will invest any and all available
cash in overnight cash-equivalent investments as specified by the investment
manager.
4. Segregated Accounts
Upon receipt of proper instructions, the Custodian shall establish and
maintain a segregated account(s) for and on behalf of each Fund, into which
account(s) may be transferred cash and/or securities.
5. Transfer, Exchange, Redelivery, etc. of Securities
Custodian shall have sole power to release or deliver any securities of the
Trust held by it pursuant to this Agreement. Custodian agrees to transfer,
exchange or deliver securities held by it hereunder only:
(a) for sales of such securities for the account of the Fund upon receipt
by Custodian of payment therefore;
<PAGE>
(b) when such securities are called, redeemed or retired or otherwise
become payable;
(c) for examination by any broker selling any such securities in
accordance with "street delivery" custom;
(d) in exchange for, or upon conversion into, other securities alone or
other securities and cash whether pursuant to any plan of merger,
consolidation, reorganization, recapitalization or readjustment, or
otherwise;
(e) upon conversion of such securities pursuant to their terms into other
securities;
(f) upon exercise of subscription, purchase or other similar rights
represented by such securities;
(g) for the purpose of exchanging interim receipts or temporary securities
for definitive securities;
(h) for the purpose of redeeming in kind shares of common stock of the
Fund upon delivery thereof to Custodian; or
(i) for other proper corporate purposes.
As to any deliveries made by Custodian pursuant to items (a), (b), (d),
(e), (f), and (g), securities or cash receivable in exchange therefor shall be
deliverable to Custodian.
Before making any such transfer, exchange or delivery, Custodian shall
receive (and may rely upon) an officers' certificate requesting such transfer,
exchange or delivery, and stating that it is for a purpose permitted under the
terms of items (a), (b), (c), (d), (e), (f), (g), or (h) of this Section 5 and
also, in respect of item (i), upon receipt of an officers' certificate
specifying the securities to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made, provided, however, that an officers' certificate need not precede
any such transfer, exchange or delivery of a money market instrument, or any
other security with same or next-day settlement, if the President, a Vice
President, the Secretary or the Treasurer of the Trust issues appropriate oral
or facsimile instructions to Custodian and an appropriate officers' certificate
is received by Custodian within two business days thereafter.
<PAGE>
6. Custodian's Acts Without Instructions
Unless and until Custodian receives an officers' certificate to the
contrary, Custodian shall: (a) present for payment all coupons and other income
items held by it for the account of each Fund, which call for payment upon
presentation and hold the cash received by it upon such payment for the account
of the Fund; (b) collect interest and cash dividends received, with notice to
the Trust, for the account of the Fund; (c) hold for the account of the Fund
hereunder all stock dividends, rights and similar securities issued with respect
to any securities held by it hereunder; and (d) execute, as agent on behalf of
the Trust, all necessary ownership certificates required by the Internal Revenue
Code of 1986, as amended (the "Code") or the Income Tax Regulations (the
"Regulations") of the United States Treasury Department (the "Treasury
Department") or under the laws of any state now or hereafter in effect,
inserting the Trust's name on such certificates as the owner of the securities
covered thereby, to the extent it may lawfully do so.
7. Registration of Securities
Except as otherwise directed by an officers' certificate, Custodian shall
register all securities, except such as are in bearer form, in the name of a
registered nominee of Custodian as defined in the Internal Revenue Code and any
Regulations of the Treasury Department issued thereunder or in any provision of
any subsequent federal tax law exempting such transaction from liability for
stock transfer taxes, and shall execute and deliver all such certificates in
connection therewith as may be required by such laws or regulations or under the
laws of any state. All securities held by Custodian hereunder shall be at all
times identifiable in its records held in an account or accounts of Custodian
containing only the assets of the particular Fund.
The Trust shall from time to time furnish to Custodian appropriate
instruments to enable Custodian to hold or deliver in proper form for transfer,
or to register in the name of its registered nominee, any securities which it
may hold for the account of the Trust and which may from time to time be
registered in the name of the Trust.
8. Voting and Other Action
Neither Custodian nor any nominee of Custodian shall vote any of the
securities held hereunder by or for the account of a Fund, except in accordance
with the instructions contained in an officers' certificate. Custodian shall
deliver, or cause to be executed and delivered, to the Trust all notices,
proxies and proxy soliciting materials with respect to such securities, such
<PAGE>
proxies to be executed by the registered holder of such securities (if
registered otherwise than in the name of the Trust), but without indicating the
manner in which such proxies are to be voted.
9. Transfer Tax and Other Disbursements
The Trust shall pay or reimburse Custodian from time to time for any
transfer taxes payable upon transfers of securities made hereunder, and for all
other necessary and proper disbursements and expenses made or incurred by
Custodian in the performance of this Agreement.
Custodian shall execute and deliver such certificates in connection with
securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any state, to exempt
from taxation any exempt transfers and/or deliveries of any such securities.
10. Concerning Custodian
Custodian shall be paid as compensation for its services pursuant to this
Agreement such compensation as may from time to time be agreed upon in writing
between the two parties. Until modified in writing, such compensation shall be
as set forth in Exhibit A attached hereto. Notwithstanding anything to the
contrary, amounts owed by the Trust to the Bank shall only be paid out of the
assets and property of the particular Fund involved.
Custodian shall not be liable for any action taken in good faith and
without negligence and willful misconduct upon any certificate herein described
or certified copy of any resolution of the Board, and may rely on the
genuineness of any such document which it may in good faith believe to have been
validly executed.
The Trust agrees to indemnify and hold harmless Custodian and its nominee
from all taxes, charges, expenses, assessments, claims and liabilities
(including reasonable counsel fees) incurred or assessed against it or by its
nominee in connection with the performance of this Agreement, except such as may
arise from its or its nominee's own bad faith, negligent action, negligent
failure to act or willful misconduct. In the event of any advance of cash for
any purpose made by Custodian resulting from orders or instructions of the
Trust, any property at any time held for the account of the Trust shall be
security therefor.
<PAGE>
Custodian agrees to indemnify and hold harmless the Trust from all charges,
expenses, assessments, and claims/liabilities (including reasonable counsel
fees) incurred or assessed against it in connection with the performance of this
Agreement, except such as may arise from the Fund's own bad faith, negligent
action, negligent failure to act, or willful misconduct.
The Bank is hereby expressly put on notice of the limitation of shareholder
liability as set forth in the Trust Instrument of the Trust and agrees that
obligations assumed by the Trust pursuant to this Agreement shall be limited in
all cases to the Trust and its assets, and if the liability relates to one or
more series, the obligations hereunder shall be limited to the respective assets
of such series. The Bank further agrees that it shall not seek satisfaction of
any such obligation from the shareholder or any individual shareholder of a
series of the Trust, nor from the Trustees or any individual Trustee of the
Trust.
11. Subcustodians
Custodian is hereby authorized to engage another bank or trust company as a
subcustodian for all or any part of the Company's assets, so long as any such
bank or trust company is itself qualified under the 1940 Act and the rules and
regulations thereunder and provided further that, if the Custodian utilizes the
services of a subcustodian, the Custodian shall remain fully liable and
responsible for any losses caused to the Trust by the subcustodian as fully as
if the Custodian was directly responsible for any such losses under the terms of
this Agreement.
Notwithstanding anything contained herein, if the Trust requires the
Custodian to engage specific subcustodians for the safekeeping and/or clearing
of assets, the Trust agrees to indemnify and hold harmless Custodian from all
claims, expenses and liabilities incurred or assessed against it in connection
with the use of such subcustodian in regard to the Company's assets, except as
may arise from Custodian's own bad faith, negligent action, negligent failure to
act or willful misconduct.
12. Reports by Custodian
Custodian shall furnish the Trust periodically as agreed upon with a
statement summarizing all transactions and entries for the account of Trust.
Custodian shall furnish to the Trust, at the end of every month, a list of the
portfolio securities for the Fund showing the aggregate cost of each issue. The
books and records of Custodian pertaining to its actions under
<PAGE>
this Agreement shall be open to inspection and audit at reasonable times by
officers of, and by auditors employed by, the Trust.
13. Termination or Assignment
This Agreement may be terminated by the Trust, or by Custodian, on ninety
(90) days notice, given in writing and sent by registered mail to:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
or to the Company at:
John McStay Investment Counsel
5949 Sherry Lane, Suite 1600
Dallas, TX 75225
as the case may be. Upon any termination of this Agreement, pending appointment
of a successor to Custodian or a vote of the shareholders of the Fund to
dissolve or to function without a custodian of its cash, securities and other
property, Custodian shall not deliver cash, securities or other property of the
Fund to the Trust, but may deliver them to a bank or trust company of its own
selection that meets the requirements of the 1940 Act as a Custodian for the
Trust to be held under terms similar to those of this Agreement, provided,
however, that Custodian shall not be required to make any such delivery or
payment until full payment shall have been made by the Trust of all liabilities
constituting a charge on or against the properties then held by Custodian or on
or against Custodian, and until full payment shall have been made to Custodian
of all its fees, compensation, costs and expenses, subject to the provisions of
Section 10 of this Agreement.
This Agreement may not be assigned by Custodian without the consent of the
Trust, authorized or approved by a resolution of its Board of Trustees.
<PAGE>
14. Deposits of Securities in Securities Depositories
No provision of this Agreement shall be deemed to prevent the use by
Custodian of a central securities clearing agency or securities depository,
provided, however, that Custodian and the central securities clearing agency or
securities depository meet all applicable federal and state laws and
regulations, and the Board of Trustees of the Trust approves by resolution the
use of such central securities clearing agency or securities depository.
15. Records
Custodian shall keep records relating to its services to be performed
hereunder, in the form and manner, and for such period, as it may deem advisable
and is agreeable to the Trust but not inconsistent with the rules and
regulations of appropriate government authorities, in particular Section 31 of
the 1940 Act and the rules thereunder. Custodian agrees that all such records
prepared or maintained by the Custodian relating to the services performed by
Custodian hereunder are the property of the Trust and will be preserved,
maintained, and made available in accordance with such section and rules of the
1940 Act and will be promptly surrendered to the Trust on and in accordance with
its request.
16. Governing Law
This Agreement shall be governed by Wisconsin law. However, nothing herein
shall be construed in a manner inconsistent with the 1940 Act or any rule or
regulation promulgated by the Securities and Exchange Commission thereunder.
17. Proprietary and Confidential Information
The Custodian agrees on behalf of itself and its directors, officers, and
employees to treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and prior, present, or
potential shareholders of the Trust (and clients of said shareholders), and not
to use such records and information for any purpose other than the performance
of its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld where the Custodian may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Trust.
<PAGE>
18. No Agency Relationship
Nothing herein contained shall be deemed to authorize or empower the Bank
to act as agent for the other party to this Agreement, or to conduct business in
the name of, or for the account of the other party to this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer or one or more counterparts as of the day
and year first written above.
BRAZOS MUTUAL FUNDS FIRSTAR BANK MILWAUKEE, N.A.
By:______________________________ By: ________________________________
Attest: __________________________ Attest: ___________________________
<PAGE>
Custody Services
Annual Fee Schedule - Domestic Funds
Exhibit A
Separate Series of Brazos Mutual Funds
Name of Series Date Added
Small Cap Growth Portfolio October 1, 1998
Micro Cap Growth Portfolio October 1, 1998
Real Estate Securities Portfolio October 1, 1998
Annual fee based upon market value
2 basis points per year
Minimum annual fee per fund - $3,000
Investment transactions (purchase, sale, exchange, tender, redemption, maturity,
receipt, delivery):
$12.00 per book entry security (depository or Federal Reserve system)
$25.00 per definitive security (physical)
$25.00 per mutual fund trade
$75.00 per Euroclear
$ 8.00 per principal reduction on pass-through certificates
$35.00 per option/futures contract
$15.00 per variation margin
$15.00 per Fed wire deposit or withdrawal
Variable Amount Demand Notes: Used as a short-term investment, variable amount
notes offer safety and prevailing high interest rates. Our charge, which is 1/4
of 1%, is deducted from the variable amount note income at the time it is
credited to your account.
Plus out-of-pocket expenses, and extraordinary expenses based upon complexity
Fees and out-of-pocket expenses are billed to the fund monthly, based upon
market value at the beginning of the month
Exhibit B9.1
FUND ADMINISTRATION SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of October,
1998, by and between Brazos Mutual Funds, a Delaware business trust (hereinafter
referred to as the "Trust") and Firstar Mutual Fund Services, LLC, a corporation
organized under the laws of the State of Wisconsin (hereinafter referred to as
"FMFS").
WHEREAS, the Company is an open-end management investment company which is
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust is authorized to create separate series, each with its
own separate investment portfolio;
WHEREAS, FMFS is a trust company and, among other things, is in the
business of providing fund administration services for the benefit of its
customers; and
WHEREAS, the Trust desires to retain FMFS to act as Administrator for the
Small Cap Growth Portfolio (the "Fund") and for each additional series of the
Trust listed on Exhibit A attached hereto, as may be amended from time to time.
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and FMFS agree as follows:
1. Appointment of Administrator
The Trust hereby appoints FMFS as Administrator of the Trust on the terms
and conditions set forth in this Agreement, and FMFS hereby accepts such
appointment and agrees to perform the services and duties set forth in this
Agreement in consideration of the compensation provided for herein.
2. Duties and Responsibilities of FMFS
A. General Fund Management
<PAGE>
1. Act as liaison among all Fund service providers
2. Supply:
a. Corporate secretarial services
b. Office facilities (which may be in FMFS's or its affiliate's
own offices)
c. Non-investment-related statistical and research data as
needed
3. Coordinate board communication by:
a. Establish meeting agendas
b. Preparing board reports based on financial and
administrative data
c. Evaluating independent auditor
d. Securing and monitoring fidelity bond and director and
officer liability coverage, and making the necessary SEC
filings relating thereto
e. Preparing minutes of meetings of the board and shareholders
f. Recommend dividend declarations to the Board, prepare and
distribute to appropriate parties notices announcing
declaration of dividends and other distributions to
shareholders
g. Provide personnel to serve as officers of the Trust if so
elected by the Board and attend Board meetings to present
materials for Board review
4. Audits
a. Prepare appropriate schedules and assist independent
auditors
b. Provide information to SEC and facilitate audit process
c. Provide office facilities
5. Assist in overall operations of the Fund
6. Pay Fund expenses upon written authorization from the Trust
7. Monitor arrangements under shareholder services or similar plan
B. Compliance
1. Regulatory Compliance
a. Monitor compliance with 1940 Act requirements, including:
1) Asset diversification tests
<PAGE>
2) Total return and SEC yield calculations
3) Maintenance of books and records under Rule 31a-3
4) Code of Ethics for the disinterested trustees of the
Fund
b. Monitor Fund's compliance with the policies and investment
limitations of the Trust as set forth in its Prospectus and
Statement of Additional Information
c. Maintain awareness of applicable regulatory and operational
service issues and recommend dispositions
2. Blue Sky Compliance
a. Prepare and file with the appropriate state securities
authorities any and all required compliance filings relating
to the registration of the securities of the Trust so as to
enable the Trust to make a continuous offering of its shares
in all states
b. Monitor status and maintain registrations in each state
c. Provide information regarding material developments in state
securities regulation
3. SEC Registration and Reporting
a. Assist Trust counsel in updating Prospectus and Statement of
Additional Information and in preparing proxy statements and
Rule 24f-2 notices
b. Prepare annual and semiannual reports, Form N-SAR filings
and Rule 24f-2 notices
c. Coordinate the printing, filing and mailing of publicly
disseminated Prospectuses and reports
d. File fidelity bond under Rule 17g-1
e. File shareholder reports under Rule 30b2-1
f. Monitor sales of each Fund's shares and ensure that such
shares are properly registered with the SEC and the
appropriate state authorities
g. File Rule 24f-2 notices
4. IRS Compliance
a. Monitor Company's status as a regulated investment company
under Subchapter M, including without limitation, review of
the following:
<PAGE>
1) Asset diversification requirements
2) Qualifying income requirements
3) Distribution requirements
b. Calculate required distributions (including excise tax
distributions)
C. Financial Reporting
1. Provide financial data required by Fund's Prospectus and
Statement of Additional Information;
2. Prepare financial reports for officers, shareholders, tax
authorities, performance reporting companies, the board, the SEC,
and independent auditors;
3. Supervise the Company's Custodian and Trust Accountants in the
maintenance of the Company's general ledger and in the
preparation of the Fund's financial statements, including
oversight of expense accruals and payments, of the determination
of net asset value of the Company's net assets and of the
Company's shares, and of the declaration and payment of dividends
and other distributions to shareholders;
4. Compute the yield, total return and expense ratio of each class
of each Portfolio, and each Portfolio's portfolio turnover rate;
and
5. Monitor the expense accruals and notify Trust management of any
proposed adjustments.
6. Prepare monthly financial statements, which will include without
limitation the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses
7. Prepare quarterly broker security transaction summaries.
D. Tax Reporting
1. Prepare and file on a timely basis appropriate federal and state
tax returns including, without limitation, Forms 1120/8610 with
any necessary schedules
2. Prepare state income breakdowns where relevant
<PAGE>
3. File Form 1099 Miscellaneous for payments to trustees and other
service providers
4. Monitor wash losses
5. Calculate eligible dividend income for corporate shareholders
3. Compensation
The Trust, on behalf of the Fund, agrees to pay FMFS for the performance of
the duties listed in this Agreement, the fees and out-of-pocket expenses as
set forth in the attached Exhibit A. Notwithstanding anything to the
contrary, amounts owed by the Trust to FMFS shall only be paid out of the
assets and property of the particular Fund involved.
These fees may be changed from time to time, subject to mutual written
Agreement between the Trust and FMFS.
The Trust agrees to pay all fees and reimbursable expenses within ten (10)
business days following the receipt of the billing notice.
4. Performance of Service; Limitation of Liability
A. FMFS shall exercise reasonable care in the performance of its
duties under this Agreement. FMFS shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in
connection with matters to which this Agreement relates, including losses
resulting from mechanical breakdowns or the failure of communication or
power supplies beyond FMFS's control, except a loss arising out of or
relating to FMFS's refusal or failure to comply with the terms of this
Agreement or from bad faith, negligence, or willful misconduct on its part
in the performance of its duties under this Agreement. Notwithstanding any
other provision of this Agreement, if FMFS has exercised reasonable care in
the performance of its duties under this Agreement, the Trust shall
indemnify and hold harmless FMFS from and against any and all claims,
demands, losses, expenses, and liabilities (whether with or without basis
in fact or law) of any and every nature (including reasonable attorneys'
fees) which FMFS may sustain or incur or which may be asserted against FMFS
by any person arising out of any action taken or omitted to be taken by it
in performing the services hereunder, except for any and all claims,
demands, losses, expenses, and liabilities arising out of or relating to
FMFS's refusal or failure to comply with the terms of this Agreement or
from bad faith, negligence or from willful misconduct on its part in
performance of its duties under this
<PAGE>
Agreement, (i) in accordance with the foregoing standards, or (ii) in
reliance upon any written or oral instruction provided to FMFS by any duly
authorized officer of the Trust, such duly authorized officer to be
included in a list of authorized officers furnished to FMFS and as amended
from time to time in writing by resolution of the Board of Trustees of the
Trust.
FMFS shall indemnify and hold the Trust harmless from and against
any and all claims, demands, losses, expenses, and liabilities (whether
with or without basis in fact or law) of any and every nature (including
reasonable attorneys' fees) which the Trust may sustain or incur or which
may be asserted against the Trust by any person arising out of any action
taken or omitted to be taken by FMFS as a result of FMFS's refusal or
failure to comply with the terms of this Agreement, its bad faith,
negligence, or willful misconduct.
In the event of a mechanical breakdown or failure of
communication or power supplies beyond its control, FMFS shall take all
reasonable steps to minimize service interruptions for any period that such
interruption continues beyond FMFS's control. FMFS will make every
reasonable effort to restore any lost or damaged data and correct any
errors resulting from such a breakdown at the expense of FMFS. FMFS agrees
that it shall, at all times, have reasonable contingency plans with
appropriate parties, making reasonable provision for emergency use of
electrical data processing equipment to the extent appropriate equipment is
available. Representatives of the Trust shall be entitled to inspect FMFS's
premises and operating capabilities at any time during regular business
hours of FMFS, upon reasonable notice to FMFS.
Regardless of the above, FMFS reserves the right to reprocess and
correct administrative errors at its own expense.
B. In order that the indemnification provisions contained in this
section shall apply, it is understood that if in any case the indemnitor
may be asked to indemnify or hold the indemnitee harmless, the indemnitor
shall be fully and promptly advised of all pertinent facts concerning the
situation in question, and it is further understood that the indemnitee
will use all reasonable care to notify the indemnitor promptly concerning
any situation which presents or appears likely to present the probability
of a claim for indemnification. The indemnitor shall have the option to
defend the indemnitee against any claim which may be the subject of this
indemnification. In the event that the indemnitor so elects, it will so
notify the indemnitee and thereupon the indemnitor shall
<PAGE>
take over complete defense of the claim, and the indemnitee shall in such
situation initiate no further legal or other expenses for which it shall
seek indemnification under this section. The indemnitee shall in no case
confess any claim or make any compromise in any case in which the
indemnitor will be asked to indemnify the indemnitee except with the
indemnitor's prior written consent.
C. FMFS is hereby expressly put on notice of the limitation of
shareholder liability as set forth in the Trust Instrument of the Trust and
agrees that obligations assumed by the Trust pursuant to this Agreement
shall be limited in all cases to the Trust and its assets, and if the
liability relates to one or more series, the obligations hereunder shall be
limited to the respective assets of such series. FMFS further agrees that
it shall not seek satisfaction of any such obligation from the shareholder
or any individual shareholder of a series of the Trust, nor from the
Trustees or any individual Trustee of the Trust.
5. Proprietary and Confidential Information
FMFS agrees on behalf of itself and its directors, officers, and employees
to treat confidentially and as proprietary information of the Trust all
records and other information relative to the Trust and prior, present, or
potential shareholders of the Trust (and clients of said shareholders), and
not to use such records and information for any purpose other than the
performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be withheld where FMFS may
be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities,
or when so requested by the Trust.
6. Data Necessary to Perform Services
The Trust or its agent, which may be FMFS, shall furnish to FMFS the data
necessary to perform the services described herein at times and in such
form as mutually agreed upon if FMFS is also acting in another capacity for
the Trust, nothing herein shall be deemed to relieve FMFS of any of its
obligations in such capacity.
<PAGE>
7. Term of Agreement
This Agreement shall become effective as of the date hereof and, unless
sooner terminated as provided herein, shall continue subject to Board
approval in effect for successive annual periods. The Agreement may be
terminated by either party upon giving ninety (90) days prior written
notice to the other party or such shorter period as is mutually agreed upon
by the parties. However, this Agreement may be amended by mutual written
consent of the parties.
8. Notices
Notices of any kind to be given by either party to the other party shall be
in writing and shall be duly given if mailed or delivered as follows:
Notice to FMFS shall be sent to:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Trust shall be sent to:
John McStay Investment Counsel
5949 Sherry Lane, Suite 1600
Dallas, TX 75225
9. No Agency Relationship
Nothing herein contained shall be deemed to authorize or empower FMFS to
act as agent for the other party to this Agreement, or to conduct business
in the name of, or for the account of the other party to this Agreement.
10. Proprietary and Confidential Information
FMFS agrees on behalf of itself and its directors, officers, and employees
to treat confidentially and as proprietary information of the Trust all
records and other information relative to the Trust and prior, present, or
potential shareholders of the Trust (and clients of said shareholders), and
not to use such records and information for any purpose other than the
performance of its responsibilities and
<PAGE>
duties hereunder, except after prior notification to and approval in
writing by the Trust, which approval shall not be unreasonably withheld and
may not be withheld where FMFS may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the
Trust.
11. Duties in the Event of Termination
In the event that, in connection with termination, a successor to any of
FMFS's duties or responsibilities hereunder is designated by the Trust by
written notice to FMFS, FMFS will promptly, upon such termination and at
the expense of the Trust, transfer to such successor all relevant books,
records, correspondence, and other data established or maintained by FMFS
under this Agreement in a form reasonably acceptable to the Trust (if such
form differs from the form in which FMFS has maintained, the Trust shall
pay any expenses associated with transferring the data to such form), and
will cooperate in the transfer of such duties and responsibilities,
including provision for assistance from FMFS's personnel in the
establishment of books, records, and other data by such successor.
12. Governing Law
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Wisconsin. However,
nothing herein shall be construed in a manner inconsistent with the 1940
Act or any rule or regulation promulgated by the Securities and Exchange
Commission thereunder.
13. Records
FMFS shall keep records relating to the services to be performed hereunder,
in the form and manner, and for such period as it may deem advisable and is
agreeable to the Trust but not inconsistent with the rules and regulations
of appropriate government authorities, in particular, Section 31 of the
1940 Act and the rules thereunder. FMFS agrees that all such records
prepared or maintained by FMFS relating to the services to be performed by
FMFS hereunder are the property of the Trust and will be preserved,
maintained, and made available in accordance with such section and rules of
the 1940 Act and will be promptly surrendered to the Trust on and in
accordance with its request.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by a duly authorized officer or one or more counterparts as of the day and year
first written above.
BRAZOS MUTUAL FUNDS FIRSTAR MUTUAL FUND SERVICES, LLC
By:______________________________ By: ________________________________
Attest: __________________________ Attest:_____________________________
<PAGE>
Fund Administration and Compliance
Annual Fee Schedule - Domestic Funds
Exhibit A
Separate Series of Brazos Mutual Funds
Name of Series Date Added
Small Cap Growth Portfolio October 1, 1998
Micro Cap Growth Portfolio October 1, 1998
Real Estate Securities Portfolio October 1, 1998
Annual fee based upon average net fund assets per class
7 basis points on the first $200 million
6 basis points on the next $500 million
4 basis points on the balance
Minimum annual fee: $35,000 first fund
$25,000 /fund next three funds
$20,000 /fund additional funds
Plus out-of-pocket expense reimbursements, including but not limited to:
Postage
Programming
Stationery
Proxies
Retention of records
Special reports
Federal and state regulatory filing fees
Certain insurance premiums
Expenses from board of trustees meetings
Auditing and legal expenses
Fees and out-of-pocket expense reimbursements are billed monthly
Exhibit B9.2
TRANSFER AGENT SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of October,
1998, by and between Brazos Mutual Funds, a Delaware business trust (hereinafter
referred to as the "Trust") and Firstar Mutual Fund Services, LLC, a corporation
organized under the laws of the State of Wisconsin (hereinafter referred to as
the "FMFS").
WHEREAS, the Trust is an open-end management investment company which is
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust is authorized to create separate series, each with its
own separate investment portfolio;
WHEREAS, FMFS is a trust company and, among other things, is in the
business of administering transfer and dividend disbursing agent functions for
the benefit of its customers; and
WHEREAS, the Trust desires to retain FMFS to provide transfer and dividend
disbursing agent services to the Small Cap Growth Portfolio (the "Fund") and
each additional series of the Trust listed on Exhibit A attached hereto, as may
be amended from time to time.
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and FMFS agree as follows:
1. Appointment of Transfer Agent
The Trust hereby appoints FMFS as Transfer Agent of the Trust on the terms
and conditions set forth in this Agreement, and FMFS hereby accepts such
appointment and agrees to perform the services and duties set forth in this
Agreement in consideration of the compensation provided for herein
<PAGE>
2. Duties and Responsibilities of FMFS
FMFS shall perform all of the customary services of a transfer agent and
dividend disbursing agent, and as relevant, agent in connection with
accumulation, open account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to:
A. Receive orders for the purchase of shares;
B. Process purchase orders with prompt delivery, where appropriate, of
payment and supporting documentation to the Company's custodian, and
issue the appropriate number of uncertificated shares with such
uncertificated shares being held in the appropriate shareholder
account;
C. Arrange for issuance of Shares obtained through transfers of funds
from Shareholders' accounts at financial institutions and arrange for
the exchange of Shares for shares of other eligible investment
companies, when permitted by Prospectus.
D. Process redemption requests received in good order and, where
relevant, deliver appropriate documentation to the Company's
custodian;
E. Pay monies upon receipt from the Company's custodian, where relevant,
in accordance with the instructions of redeeming shareholders;
F. Process transfers of shares in accordance with the shareholder's
instructions;
G. Process exchanges between funds and/or classes of shares of funds both
within the same family of funds and with the Firstar Money Market
Fund, if applicable;
H. Prepare and transmit payments for dividends and distributions declared
by the Trust with respect to the Fund, after deducting any amount
required to be withheld by any applicable laws, rules and regulations
and in accordance with shareholder instructions;
I. Make changes to shareholder records, including, but not limited to,
address changes in plans (i.e., systematic withdrawal, automatic
investment, dividend reinvestment, etc.);
<PAGE>
J. Record the issuance of shares of the Fund and maintain, pursuant to
Rule 17ad-10(e) promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), a record of the total number of
shares of the Fund which are authorized, issued and outstanding;
K. Prepare shareholder meeting lists and, if applicable, mail, receive
and tabulate proxies;
L. Mail shareholder reports and prospectuses to current shareholders;
M. Prepare and file U.S. Treasury Department Forms 1099 and other
appropriate information returns required with respect to dividends and
distributions for all shareholders;
N. Provide shareholder account information upon request and prepare and
mail confirmations and statements of account to shareholders for all
purchases, redemptions and other confirmable transactions as agreed
upon with the Trust;
O. Mail requests for shareholders' certifications under penalties of
perjury and pay on a timely basis to the appropriate Federal
authorities any taxes to be withheld on dividends and distributions
paid by the Trust, all as required by applicable Federal tax laws and
regulations;
P. Provide a Blue Sky System which will enable the Trust to monitor the
total number of shares of the Fund sold in each state. In addition,
the Trust or its agent, including FMFS, shall identify to FMFS in
writing those transactions and assets to be treated as exempt from the
Blue Sky reporting for each state. The responsibility of FMFS for the
Company's Blue Sky state registration status is solely limited to the
initial compliance by the Trust and the reporting of such transactions
to the Trust or its agent;
Q. Answer correspondence from shareholders, securities brokers and others
relating to FMFS's duties hereunder and such other correspondence as
may from time to time be mutually agreed upon between FMFS and the
Trust.
<PAGE>
3. Compensation
The Trust agrees to pay FMFS for the performance of the duties listed in
this agreement as set forth on Exhibit A attached hereto; the fees and
out-of-pocket expenses include, but are not limited to the following: printing,
postage, forms, stationery, record retention (if requested by the Trust),
mailing, insertion, programming (if requested by the Trust), labels, shareholder
lists and proxy expenses.
These fees and reimbursable expenses may be changed from time to time
subject to mutual written agreement between the Trust and FMFS.
The Trust agrees to pay all fees and reimbursable expenses within ten (10)
business days following the receipt of the billing notice.
Notwithstanding anything to the contrary, amounts owed by the Trust to FMFS
shall only be paid out of assets and property of the particular Fund involved.
4. Representations of FMFS
FMFS represents and warrants to the Trust that:
A. It is a trust company duly organized, existing and in good standing
under the laws of Wisconsin;
B. It is a registered transfer agent under the Exchange Act.
C. It is duly qualified to carry on its business in the State of
Wisconsin;
D. It is empowered under applicable laws and by its charter and bylaws to
enter into and perform this Agreement;
E. All requisite corporate proceedings have been taken to authorize it to
enter and perform this Agreement;
F. It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement; and
<PAGE>
G. It will comply with all applicable requirements of the Securities Act
of 1933, as amended, and the Exchange Act, the 1940 Act, and any laws,
rules, and regulations of governmental authorities having
jurisdiction.
5. Representations of the Trust
The Trust represents and warrants to FMFS that:
A. The Trust is an open-ended non diversified investment company under
the 1940 Act;
B. The Trust is a business trust organized, existing, and in good
standing under the laws of Delaware;
C. The Trust is empowered under applicable laws and by its Articles of
Incorporation and Bylaws to enter into and perform this Agreement;
D. All necessary proceedings required by the Articles of Incorporation
have been taken to authorize it to enter into and perform this
Agreement;
E. The Trust will comply with all applicable requirements of the
Securities Act, the Exchange Act, the 1940 Act, and any laws, rules
and regulations of governmental authorities having jurisdiction; and
F. A registration statement under the Securities Act will be made
effective and will remain effective, and appropriate state securities
law filings have been made and will continue to be made, with respect
to all shares of the Trust being offered for sale.
6. Covenants of the Trust and FMFS
The Trust shall furnish the Agent a certified copy of the resolution of the
Board of Trustees of the Fund authorizing the appointment of FMFS and the
execution of this Agreement. The Trust shall provide to the Agent a copy of its
Articles of Incorporation and Bylaws, and all amendments thereto.
FMFS shall keep records relating to the services to be performed hereunder,
in the form and manner as it may deem advisable. To the extent required by
Section 31 of the 1940 Act, and the rules thereunder, FMFS agrees that all such
records prepared or maintained by FMFS relating
<PAGE>
to the services to be performed by FMFS hereunder are the property of the Trust
and will be preserved, maintained and made available in accordance with such
section and rules and will be surrendered to the Trust on and in accordance with
its request.
7. Performance of Service; Limitation of Liability
FMFS shall exercise reasonable care in the performance of its duties under
this Agreement. FMFS shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Trust in connection with matters to which
this Agreement relates, including losses resulting from mechanical breakdowns or
the failure of communication or power supplies beyond FMFS's control, except a
loss arising out of or relating to the Agent's refusal or failure to comply with
the terms of this Agreement or from bad faith, negligence, or willful misconduct
on its part in the performance of its duties under this Agreement.
Notwithstanding any other provision of this Agreement, if FMFS has exercised
reasonable care in the performance of its duties under this Agreement, the Trust
shall indemnify and hold harmless FMFS from and against any and all claims,
demands, losses, expenses, and liabilities (whether with or without basis in
fact or law) of any and every nature (including reasonable attorneys' fees)
which FMFS may sustain or incur or which may be asserted against FMFS by any
person arising out of any action taken or omitted to be taken by it in
performing the services hereunder, except for any and all claims, demands,
losses expenses, and liabilities arising out of or relating to FMFS's refusal or
failure to comply with the terms of this Agreement or from bad faith, negligence
or from willful misconduct on its part in performance of its duties under this
Agreement, (i) in accordance with the foregoing standards, or (ii) in reliance
upon any written or oral instruction provided to FMFS by any duly authorized
officer of the Trust, such duly authorized officer to be included in a list of
authorized officers furnished to FMFS and as amended from time to time in
writing by resolution of the Board of Trustees of the Trust.
FMFS shall indemnify and hold the Trust harmless from and against any and
all claims, demands, losses, expenses, and liabilities (whether with or without
basis in fact or law) of any and every nature (including reasonable attorneys'
fees) which the Trust may sustain or incur or which may be asserted against the
Trust by any person arising out of any action taken or omitted to be taken by
FMFS as a result of FMFS's refusal or failure to comply with the terms of this
Agreement, its bad faith, negligence, or willful misconduct.
In the event of a mechanical breakdown or failure of communication or power
supplies beyond its control, FMFS shall take all reasonable steps to minimize
service interruptions for any period that such interruption continues beyond
FMFS's control. FMFS will make every
<PAGE>
reasonable effort to restore any lost or damaged data and correct any errors
resulting from such a breakdown at the expense of FMFS. FMFS agrees that it
shall, at all times, have reasonable contingency plans with appropriate parties,
making reasonable provision for emergency use of electrical data processing
equipment to the extent appropriate equipment is available. Representatives of
the Trust shall be entitled to inspect FMFS's premises and operating
capabilities at any time during regular business hours of FMFS, upon reasonable
notice to FMFS.
Regardless of the above, FMFS reserves the right to reprocess and correct
administrative errors at its own expense.
In order that the indemnification provisions contained in this section
shall apply, it is understood that if in any case the indemnitor may be asked to
indemnify or hold the indemnitee harmless, the indemnitor shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the indemnitee will use all reasonable care to
notify the indemnitor promptly concerning any situation which presents or
appears likely to present the probability of a claim for indemnification. The
indemnitor shall have the option to defend the indemnitee against any claim
which may be the subject of this indemnification. In the event that the
indemnitor so elects, it will so notify the indemnitee and thereupon the
indemnitor shall take over complete defense of the claim, and the indemnitee
shall in such situation initiate no further legal or other expenses for which it
shall seek indemnification under this section. The indemnitee shall in no case
confess any claim or make any compromise in any case in which the indemnitor
will be asked to indemnify the indemnitee except with the indemnitor's prior
written consent.
FMFS is hereby expressly put on notice of the limitation of shareholder
liability as set forth in the Trust Instrument of the Trust and agrees that
obligations assumed by the Trust pursuant to this Agreement shall be limited in
all cases to the Trust and its assets, and if the liability relates to one or
more series, the obligations hereunder shall be limited to the respective assets
of such series. FMFS further agrees that it shall not seek satisfaction of any
such obligation from the shareholder or any individual shareholder of a series
of the Trust, nor from the Trustees or any individual Trustee of the Trust.
8. Proprietary and Confidential Information
FMFS agrees on behalf of itself and its directors, officers, and employees
to treat confidentially and as proprietary information of the Trust all records
and other information relative to the Trust and prior, present, or potential
shareholders (and clients of said shareholders)
<PAGE>
and not to use such records and information for any purpose other than the
performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust, which approval shall not
be unreasonably withheld and may not be withheld where FMFS may be exposed to
civil or criminal contempt proceedings for failure to comply after being
requested to divulge such information by duly constituted authorities, or when
so requested by the Trust.
9. Term of Agreement
This Agreement shall become effective as of the date hereof and, unless
sooner terminated as provided herein, shall continue automatically in effect for
successive annual periods. The Agreement may be terminated by either party upon
giving ninety (90) days prior written notice to the other party or such shorter
period as is mutually agreed upon by the parties. However, this Agreement may be
amended by mutual written consent of the parties.
10. Notices
Notices of any kind to be given by either party to the other party shall be
in writing and shall be duly given if mailed or delivered as follows: Notice to
FMFS shall be sent to:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Trust shall be sent to:
John McStay Investment Counsel
5949 Sherry Lane, Suite 1600
Dallas, TX 75225
11. Duties in the Event of Termination
In the event that, in connection with termination, a successor to any of
FMFS's duties or responsibilities hereunder is designated by the Trust by
written notice to FMFS, FMFS will promptly, upon such termination and at the
expense of the Trust, transfer to such successor all relevant books, records,
correspondence, and other data established or maintained by FMFS
<PAGE>
under this Agreement in a form reasonably acceptable to the Trust (if such form
differs from the form in which FMFS has maintained, the Trust shall pay any
expenses associated with transferring the data to such form), and will cooperate
in the transfer of such duties and responsibilities, including provision for
assistance from FMFS's personnel in the establishment of books, records, and
other data by such successor.
12. Governing Law
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Wisconsin. However,
nothing herein shall be construed in a manner inconsistent with the 1940 Act or
any rule or regulation promulgated by the Securities and Exchange Commission
thereunder.
13. Stock Certificates
If at any time the Trust issues stock certificates, the following
provisions will apply:
(i) In the case of the loss or destruction of any certificate
representing Shares, no new certificate shall be issued in lieu
thereof, unless there shall first have been furnished an
appropriate bond of indemnity issued by the surety company
approved by FMFS.
(ii) Upon receipt of signed stock certificates, which shall be in
proper form for transfer, and upon cancellation or destruction
thereof, FMFS shall countersign, register and issue new
certificates for the same number of Shares and shall deliver them
pursuant to instructions received from the transferor, the rules
and regulations of the SEC, and the laws of the state of Delaware
relating to the transfer of shares of beneficial interest.
(iii) Upon receipt of the stock certificates, which shall be in proper
form for transfer, together with the shareholder's instructions
to hold such stock certificates for safekeeping, FMFS shall
reduce such Shares to uncertificated status, while retaining the
appropriate registration in the name of the shareholder upon the
transfer books.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by a duly authorized officer or one or more counterparts as of the day and year
first written above.
BRAZOS MUTUAL FUNDS FIRSTAR MUTUAL FUND SERVICES, LLC
By:______________________________ By: ________________________________
Attest: __________________________ Attest:_____________________________
<PAGE>
Schedule A
BRAZOS MUTUAL FUNDS
Service to be Performed
FMFS will perform the following functions as transfer agent on an ongoing basis
with respect to each Fund:
(a) furnish state-by-state registration reports;
(b) calculate sales load or compensation payment and provide such information;
(c) calculate dealer commissions;
(d) provide toll-free lines for direct shareholder use, plus customer liaison
staff with on-line inquiry capacity;
(e) mail duplicate confirmations to dealers of their client's activity, whether
executed through the dealer or directly with FMFS;
(f) provide detail for underwriter or broker confirmations and other
participating dealer shareholder accounting, in accordance with such procedures
as may be agreed upon between the Trust and FMFS;
(g) provide statistical information concerning accounts of each Fund to the
Trust; and
(h) provide timely notification of Fund activity and such other information as
may be agreed upon from time to time between FMFS and each Fund or the
Custodian, to the Trust or the Custodian.
<PAGE>
Schedule B
BRAZOS MUTUAL FUNDS
Shareholder Records
FMFS shall maintain records of the accounts for each shareholder showing the
following information:
(a) name, address and United States Tax Identification or Social Security
number;
(b) number of Shares held and number of Shares for which certificates, if any,
have been issued, including certificate numbers and denominations;
(c) historical information regarding the account of each shareholder, including
dividends and distributions paid and the date and price for all transactions on
a shareholder's account;
(d) any stop or restraining order placed against a shareholder account;
(e) any correspondence relating to the current maintenance of a shareholder's
account;
(f) information with respect to withholdings; and
(g) any information required in order for FMFS to perform any calculations
contemplated or required by this Agreement.
<PAGE>
Transfer Agent and Shareholder Servicing
Annual Fee Schedule
Exhibit A
Separate Series of Brazos Mutual Funds
Name of Series Date Added
Small Cap Growth Portfolio October 1, 1998
Micro Cap Growth Portfolio October 1, 1998
Real Estate Securities Portfolio October 1, 1998
Annual Fee
$14.00 per shareholder account -- no-load fund
Minimum annual fees of $22,500 for the first fund, $10,000 for each
additional fund or class
Plus Out-of-Pocket Expenses, including but not limited to:
Telephone - toll-free lines Proxies
Postage Retention of records (with prior
approval)
Programming (with prior approval) Microfilm/fiche of records
Stationery/envelopes Special reports
Mailing ACH fees
Insurance NSCC charges
ACH Shareholder Services
$125.00 per month per fund group
$ .50 per account setup and/or change
$ .50 per item for AIP purchases
$ .35 per item for EFT payments and purchases
$3.50 per correction, reversal, return item
<PAGE>
Qualified Plan Fees (Billed to Investors)
Annual maintenance fee per account $12.50 / acct. (Cap at $25.00 per SSN)
Transfer to successor trustee $15.00 / trans.
Distribution to participant $15.00 / trans. (Exclusive of SWP)
Refund of excess contribution $15.00 / trans.
Additional Shareholder Fees (Billed to Investors)
Any outgoing wire transfer $12.00 / wire
Telephone Exchange $ 5.00 / exchange transaction
Return check fee $20.00 / item
Stop payment $20.00 / stop
(Liquidation, dividend, draft check)
Research fee $ 5.00 / item
(For requested items of the second calendar year [or previous] to the
request)(Cap at $25.00)
<PAGE>
NSCC and DAZL
Out-of-Pocket Charges
NSCC Interfaces
Setup:
Fund/SERV, Networking ACATS, Exchanges $5,000 setup (one time)
Commissions $5,000 setup (one time)
Processing:
Fund/SERV $ 50 / month
Networking $ 250 / month
CPU Access $ 40 / month
Fund/SERV Transactions $ .35 / trade
Networking - per item $ .025/monthly dividend fund
Networking - per item $ .015/non-mo. dividend fund
First Data $ .10 / next-day Fund/SERV trade
First Data $ .15 / same-day Fund/SERV trade
NSCC Implementation
8 to 10 weeks lead time (target availability 10/1/97)
DAZL (Direct Access Zip Link - Electronic mail interface to financial advisor
network)
Setup $5,000 / fund group
Monthly Usage $1,000 / month
Transmission $ .015 / price record
$ .025 / other record
Enhancement $ 125 / hour
Fees and out-of-pocket expenses are billed to the fund monthly
Exhibit B9.3
FUND ACCOUNTING SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of October,
1998, by and between Brazos Mutual Funds, Inc., a Delaware business trust
(hereinafter referred to as the "Trust") and Firstar Mutual Fund Services, LLC,
a corporation organized under the laws of the State of Wisconsin (hereinafter
referred to as "FMFS").
WHEREAS, the Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust is authorized to create separate series, each with its
own separate investment portfolio;
WHEREAS, FMFS is in the business of providing, among other things, mutual
fund accounting services to investment companies; and
WHEREAS, the Trust desires to retain FMFS to provide accounting services to
the Small Cap Growth Portfolio (the "Fund") and each additional series of the
Trust listed on Exhibit A attached hereto, as it may be amended from time to
time.
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and FMFS agree as follows:
1. Appointment of Fund Accountant
The Trust hereby appoints FMFS as Fund Accountant of the Trust on the terms
and conditions set forth in this Agreement, and FMFS hereby accepts such
appointment and agrees to perform the services and duties set forth in this
Agreement in consideration of the compensation provided for herein.
<PAGE>
2. Duties and Responsibilities of FMFS
A. Portfolio Accounting Services:
(1) Maintain portfolio records on a trade date+1 basis using security
trade information communicated from the investment manager.
(2) For each valuation date, obtain prices from a pricing source
approved by the Board of Trustees of the Trust and apply those prices to
the portfolio positions. For those securities where market quotations are
not readily available, the Board of Trustees of the Trust shall approve, in
good faith, the method for determining the fair value for such securities.
(3) Identify interest and dividend accrual balances as of each
valuation date and calculate gross earnings on investments for the
accounting period.
(4) Determine gain/loss on security sales and identify them as,
short-term or long-term; account for periodic distributions of gains or
losses to shareholders and maintain undistributed gain or loss balances as
of each valuation date.
B. Expense Accrual and Payment Services:
(1) For each valuation date, calculate the expense accrual amounts as
directed by the Trust as to methodology, rate or dollar amount.
(2) Record payments for Fund expenses upon receipt of written
authorization from the Trust.
(3) Account for Fund expenditures and maintain expense accrual
balances at the level of accounting detail, as agreed upon by FMFS and the
Trust.
(4) Provide expense accrual and payment reporting.
C. Fund Valuation and Financial Reporting Services:
<PAGE>
(1) Account for Fund share purchases, sales, exchanges, transfers,
dividend reinvestments, and other Fund share activity as reported by the
transfer agent on a timely basis.
(2) Apply equalization accounting as directed by the Trust.
(3) Determine net investment income (earnings) for the Fund as of each
valuation date. Account for periodic distributions of earnings to
shareholders and maintain undistributed net investment income balances as
of each valuation date.
(4) Maintain a general ledger and other accounts, books, and financial
records for the Fund in the form as agreed upon.
(5) Determine the net asset value of the Fund according to the
accounting policies and procedures set forth in the Fund's Prospectus.
(6) Calculate per share net asset value, per share net earnings, and
other per share amounts reflective of Fund operations at such time as
required by the nature and characteristics of the Fund.
(7) Communicate, at an agreed upon time, the per share price for each
valuation date to parties as agreed upon from time to time.
(8) Prepare monthly reports which document the adequacy of accounting
detail to support month-end ledger balances.
D. Tax Accounting Services:
(1) Maintain accounting records for the investment portfolio of the
Fund to support the tax reporting required for IRS-defined regulated
investment companies.
(2) Maintain tax lot detail for the investment portfolio.
(3) Calculate taxable gain/loss on security sales using the tax lot
relief method designated by the Trust.
<PAGE>
(4) Provide the necessary financial information to support the taxable
components of income and capital gains distributions to the transfer agent
to support tax reporting to the shareholders.
E. Compliance Control Services:
(1) Support reporting to regulatory bodies and support financial
statement preparation by making the Fund's accounting records available to
the Trust, the Securities and Exchange Commission, and the outside
auditors.
(2) Maintain accounting records according to the 1940 Act and
regulations provided thereunder
F. FMFS will perform the following accounting functions on a daily basis:
(1) Reconcile cash and investment balances of each Portfolio with the
Custodian, and provide the Advisor with the beginning cash balance
available for investment purposes;
(2) Update the cash availability throughout the day as required by the
Advisor;
(3) Transmit or mail a copy of the portfolio valuation to the Advisor;
(4) Review the impact of current day's activity on a per share basis,
review changes in market value of securities, and review yields for
reasonableness.
G. In addition, FMFS will:
(1) Prepare monthly security transactions listings;
(2) Supply various Trust, Portfolio and class statistical data as
requested on an ongoing basis.
<PAGE>
3. Pricing of Securities
For each valuation date, obtain prices from a pricing source selected by FMFS
but approved by the Company's Board of Trustees and apply those prices to the
portfolio positions of the Fund. For those securities where market quotations
are not readily available, the Company's Board of Trustees shall approve, in
good faith, the method for determining the fair value for such securities.
If the Trust desires to provide a price which varies from the pricing source,
the Trust shall promptly notify and supply FMFS with the valuation of any such
security on each valuation date. All pricing changes made by the Trust will be
in writing and must specifically identify the securities to be changed by CUSIP,
name of security, new price or rate to be applied, and, if applicable, the time
period for which the new price(s) is/are effective.
4. Changes in Accounting Procedures
Any resolution passed by the Board of Trustees of the Trust that affects
accounting practices and procedures under this Agreement shall be effective upon
written receipt and acceptance by the FMFS.
5. Changes in Equipment, Systems, Service, Etc.
FMFS reserves the right to make changes from time to time, as it deems
advisable, relating to its services, systems, programs, rules, operating
schedules and equipment, so long as such changes do not adversely affect the
service provided to the Trust under this Agreement.
6. Compensation
FMFS shall be compensated for providing the services set forth in this Agreement
in accordance with the Fee Schedule attached hereto as Exhibit A and as mutually
agreed upon and amended from time to time. The Trust agrees to pay all fees and
reimbursable expenses within ten (10) business days following the receipt of the
billing notice. Notwithstanding anything to the contrary, amounts owed by the
Trust to FMFS shall only be paid out of the assets and property of the
particular Fund involved.
<PAGE>
7. Performance of Service; Limitation of Liability
A. FMFS shall exercise reasonable care in the performance of its
duties under this Agreement. FMFS shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in
connection with matters to which this Agreement relates, including losses
resulting from mechanical breakdowns or the failure of communication or
power supplies beyond FMFS's control, except a loss arising out of or
relating to FMFS's refusal or failure to comply with the terms of this
Agreement or from bad faith, negligence, or willful misconduct on its part
in the performance of its duties under this Agreement. Notwithstanding any
other provision of this Agreement, if FMFS has exercised reasonable care in
the performance of its duties under this Agreement, the Trust shall
indemnify and hold harmless FMFS from and against any and all claims,
demands, losses, expenses, and liabilities (whether with or without basis
in fact or law) of any and every nature (including reasonable attorneys'
fees) which FMFS may sustain or incur or which may be asserted against FMFS
by any person arising out of any action taken or omitted to be taken by it
in performing the services hereunder, except for any and all claims,
demands, losses, expenses, and liabilities arising out of or relating to
FMFS's refusal or failure to comply with the terms of this Agreement or
from bad faith, negligence or from willful misconduct on its part in
performance of its duties under this Agreement, (i) in accordance with the
foregoing standards, or (ii) in reliance upon any written or oral
instruction provided to FMFS by any duly authorized officer of the Trust,
such duly authorized officer to be included in a list of authorized
officers furnished to FMFS and as amended from time to time in writing by
resolution of the Board of Trustees of the Trust.
FMFS shall indemnify and hold the Trust harmless from and against any
and all claims, demands, losses, expenses, and liabilities (whether with or
without basis in fact or law) of any and every nature (including reasonable
attorneys' fees) which the Trust may sustain or incur or which may be
asserted against the Trust by any person arising out of any action taken or
omitted to be taken by FMFS as a result of FMFS's refusal or failure to
comply with the terms of this Agreement, its bad faith, negligence, or
willful misconduct.
In the event of a mechanical breakdown or failure of communication or
power supplies beyond its control, FMFS shall take all reasonable steps to
minimize service interruptions for any period that such interruption
continues beyond FMFS's control. FMFS will make every reasonable effort to
restore any lost or damaged data and correct
<PAGE>
any errors resulting from such a breakdown at the expense of FMFS. FMFS
agrees that it shall, at all times, have reasonable contingency plans with
appropriate parties, making reasonable provision for emergency use of
electrical data processing equipment to the extent appropriate equipment is
available. Representatives of the Trust shall be entitled to inspect FMFS's
premises and operating capabilities at any time during regular business
hours of FMFS, upon reasonable notice to FMFS.
Regardless of the above, FMFS reserves the right to reprocess and
correct administrative errors at its own expense.
B. In order that the indemnification provisions contained in this
section shall apply, it is understood that if in any case the indemnitor
may be asked to indemnify or hold the indemnitee harmless, the indemnitor
shall be fully and promptly advised of all pertinent facts concerning the
situation in question, and it is further understood that the indemnitee
will use all reasonable care to notify the indemnitor promptly concerning
any situation which presents or appears likely to present the probability
of a claim for indemnification. The indemnitor shall have the option to
defend the indemnitee against any claim which may be the subject of this
indemnification. In the event that the indemnitor so elects, it will so
notify the indemnitee and thereupon the indemnitor shall take over complete
defense of the claim, and the indemnitee shall in such situation initiate
no further legal or other expenses for which it shall seek indemnification
under this section. Indemnitee shall in no case confess any claim or make
any compromise in any case in which the indemnitor will be asked to
indemnify the indemnitee except with the indemnitor's prior written
consent.
C. FMFS is hereby expressly put on notice of the limitation of
shareholder liability as set forth in the Trust Instrument of the Trust and
agrees that obligations assumed by the Trust pursuant to this Agreement
shall be limited in all cases to the Trust and its assets, and if the
liability relates to one or more series, the obligations hereunder shall be
limited to the respective assets of such series. FMFS further agrees that
it shall not seek satisfaction of any such obligation from the shareholder
or any individual shareholder of a series of the Trust, nor from the
Trustees or any individual Trustee of the Trust.
<PAGE>
8. No Agency Relationship
Nothing herein contained shall be deemed to authorize or empower FMFS to act as
agent for the other party to this Agreement, or to conduct business in the name
of, or for the account of the other party to this Agreement.
9. Records
FMFS shall keep records relating to the services to be performed hereunder, in
the form and manner, and for such period as it may deem advisable and is
agreeable to the Trust but not inconsistent with the rules and regulations of
appropriate government authorities, in particular, Section 31 of the 1940 Act,
and the rules thereunder. FMFS agrees that all such records prepared or
maintained by FMFS relating to the services to be performed by FMFS hereunder
are the property of the Trust and will be preserved, maintained, and made
available in accordance with such section and rules of the 1940 Act and will be
promptly surrendered to the Trust on and in accordance with its request.
10. Data Necessary to Perform Services
The Trust or its agent, which may be FMFS, shall furnish to FMFS the data
necessary to perform the services described herein at such times and in such
form as mutually agreed upon. If FMFS is also acting in another capacity for the
Trust, nothing herein shall be deemed to relieve FMFS of any of its obligations
in such capacity.
11. Notification of Error
The Trust will notify FMFS of any balancing or control error caused by FMFS the
later of: within three (3) business days after receipt of any reports rendered
by FMFS to the Trust; within three (3) business days after discovery of any
error or omission not covered in the balancing or control procedure, or within
three (3) business days of receiving notice from any shareholder.
12. Proprietary and Confidential Information
FMFS agrees on behalf of itself and its directors, officers, and employees to
treat confidentially and as proprietary information of the Trust all records and
other information relative to the Trust and prior, present, or potential
shareholders of the Trust (and clients of said shareholders), and not to use
such records and information for any purpose other than the performance of its
<PAGE>
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld where FMFS may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the Trust.
13. Term of Agreement
This Agreement shall become effective as of the date hereof and, unless sooner
terminated as provided herein, shall continue automatically in effect for
successive annual periods. This Agreement may be terminated by either party upon
giving ninety (90) days prior written notice to the other party or such shorter
period as is mutually agreed upon by the parties. However, this Agreement may be
replaced or modified by a subsequent agreement between the parties.
14. Notices
Notices of any kind to be given by either party to the other party shall be in
writing and shall be duly given if mailed or delivered as follows: Notice to
FMFS shall be sent to:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Trust shall be sent to:
John McStay Investment Counsel
5949 Sherry Lane, Suite 1600
Dallas, TX 75225
15. Duties in the Event of Termination
In the event that in connection with termination, a successor to any of FMFS's
duties or responsibilities hereunder is designated by the Trust by written
notice to FMFS, FMFS will promptly, upon such termination and at the expense of
the Trust transfer to such successor all relevant books, records, correspondence
and other data established or maintained by FMFS under this Agreement in a form
reasonably acceptable to the Trust (if such form differs from the form in which
FMFS has maintained the same, the Trust shall pay any expenses associated with
<PAGE>
transferring the same to such form), and will cooperate in the transfer of such
duties and responsibilities, including provision for assistance from FMFS's
personnel in the establishment of books, records and other data by such
successor.
16. Governing Law
This Agreement shall be construed in accordance with the laws of the State of
Wisconsin. However, nothing herein shall be construed in a manner inconsistent
with the 1940 Act or any rule or regulation promulgated by the SEC thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer on one or more counterparts as of the day
and year first written above.
BRAZOS MUTUAL FUNDS FIRSTAR MUTUAL FUND SERVICES, LLC
By:______________________________ By: ________________________________
Attest: _________________________ Attest:_____________________________
<PAGE>
Fund Accounting Services
Annual Fee Schedule
Exhibit A
Separate Series of Brazos Mutual Funds
Name of Series Date Added
Small Cap Growth Portfolio October 1, 1998
Micro Cap Growth Portfolio October 1, 1998
Real Estate Securities Portfolio October 1, 1998
Domestic Equity Funds
$22,000 for the first $40 million
1 basis point on the next $200 million
.5 basis point on average net assets exceeding $240 million
Domestic Balanced Funds
$23,500 for the first $40 million
1.5 basis points on the next $200 million
1 basis points on average net assets exceeding $240 million
Domestic Fixed Income, International Equity Funds
$25,000 for the first $40 million
2 basis points on the next $200 million
1 basis point on average net assets exceeding $240 million
Plus out-of-pocket expenses, including pricing service:
Domestic and Canadian Equities $.15
Options $.15
Corp/Gov/Agency Bonds $.50
CMO's $.80
International Equities and Bonds $.50
<PAGE>
Municipal Bonds $.80
Money Market Instruments $.80
Fees and out-of-pocket expenses are billed to the fund monthly
Exhibit B9.4
FULFILLMENT SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of October,
1998, by and between John McStay Investment Counsel, Texas limited partnership
(hereinafter referred to as the "Adviser"), Brazos Mutual Funds, a Delaware
business trust (hereinafter referred to as the "Trust"), Rafferty Capital
Markets, Inc., a corporation organized under the laws of the state of New York
(hereinafter referred to as the "Distributor"), and Firstar Mutual Fund
Services, LLC, a corporation organized under the laws of the State of Wisconsin
(hereinafter referred to as "FMFS").
WHEREAS, the Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended;
WHEREAS, the Adviser serves as investment adviser to the Trust, a
registered investment company under the Investment Company Act of 1940, as
amended, which is authorized to create separate series of funds;
WHEREAS, the Distributor is a registered broker-dealer under the Securities
Exchange Act of 1934, as amended, and serves as principal distributor of Company
shares;
WHEREAS, FMFS provides fulfillment services to mutual funds;
WHEREAS, the Adviser desires to retain FMFS to provide fulfillment
services for the Small Cap Growth Portfolio (the "Fund") and each additional
series of the Trust listed on Exhibit A attached hereto, as may be amended from
time to time.
NOW, THEREFORE, the parties agree as follows:
1. Duties and Responsibilities of FMFS
1. Answer all prospective shareholder calls concerning the Fund.
2. Send all available Fund material requested by the prospect within 24
hours from time of call.
<PAGE>
3. Receive and update all Fund fulfillment literature so that the most
current information is sent and quoted.
4. Provide 24 hour answering service to record prospect calls made after
hours (7 p.m. to 8 a.m. CT).
5. Maintain and store Fund fulfillment inventory.
6. Send periodic fulfillment reports to the Trust as agreed upon between
the parties.
2. Duties and Responsibilities of the Trust
1. Provide Fund fulfillment literature updates to FMFS as necessary.
2. File with the NASD, SEC and State Regulatory Agencies, as appropriate,
all fulfillment literature that the Fund requests FMFS send to
prospective shareholders.
3. Supply FMFS with sufficient inventory of fulfillment materials as
requested from time to time by FMFS.
4. Provide FMFS with any sundry information about the Fund in order to
answer prospect questions.
3. Indemnification
The Trust agrees to indemnify FMFS from any liability arising out of the
distribution of fulfillment literature which has not been approved by the
appropriate Federal and State Regulatory Agencies. FMFS agrees to indemnify the
Trust from any liability arising from the improper use of fulfillment literature
during the performance of duties and responsibilities identified in this
agreement. FMFS will be liable for bad faith, negligence or willful misconduct
on its part in its duties under this Agreement.
4. Compensation
The Adviser or the Distributor (the Distributor only through the collection of
sufficient distribution expenses from the Fund, if applicable) agrees to
compensate FMFS for the services performed under this Agreement in accordance
with the attached Exhibit A. All invoices shall be paid within ten days of
receipt.
<PAGE>
5. Proprietary and Confidential Information
FMFS agrees on behalf of itself and its directors, officers, and employees to
treat confidentially and as proprietary information of the Trust all records and
other information relative to the Trust and prior, present, or potential
shareholders of the Trust (and clients of said shareholders), and not to use
such records and information for any purpose other than the performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld where FMFS may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the Trust.
6. Termination
This Agreement may be terminated by either party upon 30 days written notice.
FMFS is hereby expressly put on notice of the limitation of shareholder
liability as set forth in the Trust Instrument of the Trust and agrees that
obligations assumed by the Trust pursuant to this Agreement shall be limited in
all cases to the Trust and its assets, and if the liability relates to one or
more series, the obligations hereunder shall be limited to the respective assets
of such series. FMFS further agrees that it shall not seek satisfaction of any
such obligation from the shareholder or any individual shareholder of a series
of the Trust, nor from the Trustees or any individual Trustee of the Trust.
7. No Agency Relationship
Nothing herein contained shall be deemed to authorize or empower FMFS to act as
agent for the other party to this Agreement, or to conduct business in the name
of, or for the account of the other party to this Agreement.
8. Data Necessary to Perform Services
The Trust or its agent, which may be FMFS, shall furnish to FMFS the data
necessary to perform the services described herein at such times and in such
form as mutually agreed upon. If FMFS is also acting in another capacity for the
Trust, nothing herein shall be deemed to relieve FMFS of any of its obligations
in such capacity.
<PAGE>
9. Notification of Error
The Trust will notify FMFS of any balancing or control error caused by FMFS the
later of: within three (3) business days after receipt of any reports rendered
by FMFS to the Trust; within three (3) business days after discovery of any
error or omission not covered in the balancing or control procedure, or within
three (3) business days of receiving notice from any shareholder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by a duly authorized officer or one or more counterparts as of the day and year
first written above.
BRAZOS MUTUAL FUNDS FIRSTAR MUTUAL FUND SERVICES, LLC
By:______________________________ By: ________________________________
Attest:__________________________ Attest:_____________________________
RAFFERTY CAPITAL MARKETS, JOHN McSTAY INVESTMENT COUNSEL
INC.
By:______________________________ By: ________________________________
Attest: _________________________ Attest:_____________________________
<PAGE>
Literature Fulfillment Services
Annual Fee Schedule
Exhibit A
Separate Series of Brazos Mutual Funds
Name of Series Date Added
Small Cap Growth Portfolio October 1, 1998
Micro Cap Growth Portfolio October 1, 1998
Real Estate Securities Portfolio October 1, 1998
Customer Service
State registration compliance edits
Literature database
Record prospect request and profile
Prospect servicing 8:00 am to 7:00 pm CT
Recording and transcription of requests received off-hours
Periodic reporting of leads to client
Service Fee: $.99 / minute
$100 / month minimum
$780 one-time setup
Assembly and Distribution of Literature Requests
Generate customized prospect letters
Assembly and insertion of literature items
Inventory tracking
Inventory storage, reporting
Periodic reporting of leads by state, items requested, market source
Service Fee: $.45 / lead - insertion of up to 4 items/lead
$.15 / additional inserts
Fees and out-of-pocket expenses are billed to the fund monthly
Exhibit B10
DRINKER BIDDLE & REATH LLP
PNB Building, Suite 1100
1345 Chestnut Street
Philadelphia, PA 19107-3496
Direct Dial (215) 988-2719
October 13, 1998
Brazos Mutual Funds
5949 Sherry Lane
Suite 1600
Dallas, Texas 75225
Re: Brazos Mutual Funds
Gentlemen:
We have acted as counsel for Brazos Mutual Funds, a Delaware business trust
(the "Fund"), in connection with the registration by the Fund of its shares of
beneficial interest, without par value. The Agreement and Declaration of Trust
of the Fund authorizes the issuance of an indefinite number of shares of
beneficial interest, which are divided into multiple classes. The Board of
Trustees of the Fund (the "Board") has previously classified certain of the
shares of beneficial interest and has previously authorized the issuance of
shares of these series to the public. The shares of beneficial interest
designated into each such series are referred to herein as the "Current Series
Beneficial Interests"; the shares of Beneficial Interests that are not
designated into series are referred to herein as the "Future Beneficial
Interests"; and the Current Series Beneficial Interests and the Future
Beneficial Interests are referred to collectively herein as the "Beneficial
Interests." You have asked for our opinion on certain matters relating to the
Beneficial Interests.
We have reviewed the Fund's Agreement and Declaration of Trust and By-laws,
resolutions of the Board, certificates of public officials and of the Fund's
officers and such other legal and factual matters as we have deemed appropriate.
We have also reviewed the Fund's
<PAGE>
Registration Statement on Form N-1A under the Securities Act of 1933 (the
"Registration Statement"), as amended through Post-Effective Amendment No. 4
thereto.
This opinion is based exclusively on the laws of the Delaware Business
Trust Act and the federal law of the United States of America.
We have assumed the following for purposes of this opinion:
1. The Current Series Beneficial Interests have been, and will continue to
be, issued in accordance with the Agreement and Declaration of Trust and By-laws
of the Fund and resolutions of the Board and shareholders relating to the
creation, authorization and issuance of the Current Series Beneficial Interests.
2. Prior to the issuance of any Future Beneficial Interests, the Board (a)
will duly authorize the issuance of such Future Beneficial Interests, (b) will
determine with respect to each class of such Future Beneficial Interests the
preferences, limitations and relative rights applicable thereto and (c) if such
Future Beneficial Interests are classified into separate series, will duly take
the action necessary to create such series and to determine the number of shares
of such series and the relative designations, preferences, limitations and
relative rights thereof ("Future Series Designations").
3. With respect to the Future Beneficial Interests, there will be
compliance with the terms, conditions and restrictions applicable to the
issuance of such shares that are set forth in (i) the Fund's Agreement and
Declaration of Trust and By-laws, each as amended as of the date of such
issuance, and (ii) the applicable Future Series Designations.
4. The Board will not change the number of shares of any series of
Beneficial Interests, or the preferences, limitations or relative rights of any
class or series of Beneficial Interests after any shares of such class or series
have been issued.
Based upon the foregoing, we are of the opinion that:
1. The Fund is authorized to issue an indefinite number of Beneficial
Interests.
<PAGE>
2. The Board is authorized (i) to create from time to time one or more
additional series of Beneficial Interests and (ii) to determine, at the time of
creation of any such series, the number of shares of such series and the
designations, preferences, limitations and relative rights thereof.
3. All necessary action by the Fund to authorize the Current Series
Beneficial Interests has been taken, and the Fund has the power to issue the
Current Series Beneficial Interests.
4. The Beneficial Interests will be, when issued in accordance with, and
sold for the consideration described in, the Registration Statement validly
issued, fully paid and non-assessable by the Fund, provided that (i) the price
of such shares is not less than the par value thereof and (ii) the number of
shares of any class or series issued does not exceed the authorized number of
shares for such class or series as of the date of issuance of the shares.
We consent to the filing of this opinion with Post-Effective Amendment No.
4 to the Registration Statement to be filed by the Fund with the Securities and
Exchange Commission.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
DRINKER BIDDLE & REATH LLP
Exhibit B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post-Effective Amendment No. 4 to the
Registration Statement of Brazos Small Cap Growth Portfolio and Brazos Real
Estate Securities Portfolio, each a series of Brazos Mutual Funds (the "Funds")
on Form N-1A (File No. 333-14943 and 811-7881) of our report dated January 16,
1998, on our audit of the financial statements and financial highlights of the
Funds, which report is included in the Annual Report to Shareholders for the
year ended November 30, 1997, which is included in the Post-Effective Amendment
to the Registration Statement. We also consent to the reference to our Firm
under the caption "Financial Highlights," in the Prospectus and "Independent
Accountants" in the Statement of Additional Information.
PRICEWATERHOUSECOOPERS, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 13, 1998
<TABLE> <S> <C>
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<NAME> BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
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<NAME> BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
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<INTEREST-INCOME> 117
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<EXPENSES-NET> 330
<NET-INVESTMENT-INCOME> 1219
<REALIZED-GAINS-CURRENT> 4485
<APPREC-INCREASE-CURRENT> 871
<NET-CHANGE-FROM-OPS> 6575
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 644
<DISTRIBUTIONS-OF-GAINS> 3978
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4528
<NUMBER-OF-SHARES-REDEEMED> 172
<SHARES-REINVESTED> 382
<NET-CHANGE-IN-ASSETS> 53258
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 238
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 483
<AVERAGE-NET-ASSETS> 28778
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.35
<PER-SHARE-GAIN-APPREC> 2.05
<PER-SHARE-DIVIDEND> (0.23)
<PER-SHARE-DISTRIBUTIONS> (0.93)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.24
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
<SERIES>
<NUMBER> 2
<NAME> BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-START> DEC-31-1996
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<INVESTMENTS-AT-COST> 77220
<INVESTMENTS-AT-VALUE> 80123
<RECEIVABLES> 678
<ASSETS-OTHER> 31
<OTHER-ITEMS-ASSETS> 1841
<TOTAL-ASSETS> 82673
<PAYABLE-FOR-SECURITIES> 1616
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 159
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<PAID-IN-CAPITAL-COMMON> 77408
<SHARES-COMMON-STOCK> 5998
<SHARES-COMMON-PRIOR> 5
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<OVERDISTRIBUTION-NII> 0
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<ACCUM-APPREC-OR-DEPREC> 2903
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<NET-INVESTMENT-INCOME> (181)
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<APPREC-INCREASE-CURRENT> 2903
<NET-CHANGE-FROM-OPS> 7110
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 3620
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<NUMBER-OF-SHARES-SOLD> 5959
<NUMBER-OF-SHARES-REDEEMED> 222
<SHARES-REINVESTED> 258
<NET-CHANGE-IN-ASSETS> 80848
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<GROSS-EXPENSE> 479
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.03)
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</TABLE>
