BRAZOS MUTUAL FUNDS
Report From Management
January 15, 1998
Dear Fellow Shareholders, Clients and Friends:
A very fine year for the market, the economy and for Brazos Mutual Funds has
come to a close. However, many important dynamics relative to the market and the
economy closed out the year in a tumultuous manner. The confidence in the global
financial markets has been shaken severely as several economies and currencies
have sharply deteriorated. However, the bumpy close should not dim what has been
a very solid year characterized by the following: a slow, but steadily growing
economy; excellent market returns; a world at relative peace; and a quiet
domestic political environment.
During the past year, both your Small Cap Growth portfolio and your Real Estate
Securities portfolio have performed superbly. It is an understatement to say
that the performance of these funds, as well as their acceptance in the
marketplace, has far exceeded our expectations. The following chart outlines the
Brazos Funds' performance relative to the appropriate benchmarks.
Since
Quarter Ending Inception
12-31-97 (12-31-96 - 12-31-97)
- --------------------------------------------------------------------------------
Brazos Small Cap Growth * -1.6% 54.5%
Russell 2000 -3.3% 22.4%
NASDAQ Industrials -11.2% 10.4%
Brazos Real Estate Sec.* 3.1% 29.2%
NAREIT Equity Index 1.8% 20.3%
Wilshire REIT Index 1.1% 19.7%
Past performance is not indicative of future results. Investment returns and
principal values may fluctuate, so that, when redeemed, shares may be worth more
or less than their original value. Returns are higher due to the maintenance of
the portfolios' expenses by John McStay Investment Counsel.
Investing in small company stocks can involve higher risk and volatility than
investing in large company stocks. The NASDAQ Industrials and Russell 2000 are
unmanaged stock market indices without any associated expenses and their returns
assume the reinvestment of all dividends.
The Real Estate Securities portfolio's investments may be subject to certain
risks associated with the direct ownership of real estate. The NAREIT Equity
Index and the Wilshire REIT Index are unmanaged indices without any associated
expenses and their returns assume the reinvestment of all dividends.
1
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
Our positive position on the market remains unchanged, though admittedly more
challenged. Our rationale is based on the following key points:
1. Continued economic growth in the United States is highly predictable;
slower, but very visible. This is in sharp contrast to most economies
around the world.
2. The deflationary implications of recent international events improve
(lower) the outlook for inflation and interest rates in the United
States.
3. The recent turmoil in the markets around the world, both in terms of
sequential weakness and in terms of the stark lack of market
liquidity, causes the U.S. financial markets to appear relatively more
attractive compared to foreign investment alternatives.
4. Valuation, while not cheap, is supported by its historical
relationship to inflation and interest rates in a slow growth economic
environment. This is particularly so of rapidly growing companies.
We expect capital flows will seek the best relative value within the safest
haven. At present, the relative values offered by smaller domestic based
companies stand out as unique opportunities in the world's mosaic.
Your portfolio is well positioned to benefit from this scenario. Not only is the
quantitative valuation compelling, but dissecting the analysis to a deeper
level, the qualitative aspects of your portfolio are compelling as well. You are
invested in companies which overwhelmingly serve domestic end markets and you
are invested in businesses with a high degree of recurring revenue - good
companies operating good businesses.
Our enthusiasm for Real Estate Securities is as strong as ever. These companies
are growing FFO (funds from operation) at double digit rates of growth while
yielding around 5.5%. They are certainly attractive relative to the corporate
environment as a whole. Additionally, the major secular trends relating to the
securitization of real estate, which we early identified and have often written
about, remain a powerful secular force.
Your Small Cap Growth Portfolio is positioned well to continue to benefit from
the success of the Y2K companies (charged with the responsibility of correcting
the year 2000 software problem) and media companies (enjoying the trends of
consolidation and demographic growth), as well as other rapidly growing
companies characterized by highly predictable and recurring revenue growth. Our
research efforts in these areas continue to find exciting opportunities for your
benefit.
2
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
As you are aware from our December 1, 1997 letter, our mutual fund company
launched its third portfolio, the Brazos Micro Cap portfolio, at the end of
1997. This portfolio is focusing on the smallest 10% of all domestic marketable
securities. The portfolio's goal is to allow our shareholders to benefit from
the perceived significant opportunities available from the smallest and most
rapidly growing companies. We are extremely excited about Brazos' ability to
utilize our strong, fundamental bottom-up research skills in this relatively
inefficient sector of the market
We thank you for your continued confidence in John McStay Investment Counsel,
the advisor to Brazos, and we thank you for co-investing with us in our
portfolios.
With my best wishes.
Sincerely,
/s/ John McStay
John McStay Investment Counsel
3
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
[GRAPHIC OMITTED: Line Chart showing Growth of a Dollar for Brazos, Russell 2000
and S&P Midcap for the period December 31, 1996 through November 30, 1997.]
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
GROWTH OF A DOLLAR*
Brazos Russell 2000 S&P 400 Midcap
Dec 10000 10000 10000
Jan 10930 10200 10375
Feb 10840 9952 10290
Mar 10200 9483 9851
Apr 10370 9509 10107
May 11922 10567 10991
Jun 12751 11020 11299
Jul 13969 11533 12418
Aug 14316 11797 12403
Sep 15700 12660 13116
Oct 15039 12104 12545
Nov 14710 12026 12731
TOTAL RETURN
FOR THE PERIOD DECEMBER 31, 1996+
THROUGH NOVEMBER 30, 1997.
FUND 47.08%
Assumes reinvestment of dividends and capital gains. Past performance is not
indicative of future results. Investment returns and principal values may
fluctuate, so that, when redeemed, shares may be worth more or less than their
original investment.
* Assuming initial investment of $10,000
+ Commencement of operations
4
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
[GRAPHIC OMITTED: Line Chart showing Growth of a Dollar for Brazos, Wishire REIT
and NAREIT Equity for the period December 31, 1996 through November 30, 1997.]
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
GROWTH OF A DOLLAR*
Brazos Wilshire REIT NAREIT Equity
Dec 10000 10000 10000
Jan 10270 10060 10110
Feb 10350 10025 10090
Mar 10439 10101 10068
Apr 10288 9731 9792
May 10560 10022 10080
Jun 11175 10571 10570
Jul 11600 10860 10897
Aug 11641 10798 10871
Sep 12533 11827 11820
Oct 12104 11450 11500
Nov 12439 11699 11749
TOTAL RETURN
FOR THE PERIOD DECEMBER 31, 1996+
THROUGH NOVEMBER 30, 1997.
FUND 24.39%
Assumes reinvestment of dividends and capital gains. Past performance is not
indicative of future results. Investment returns and principal values may
fluctuate, so that, when redeemed, shares may be worth more or less than their
original investment.
* Assuming initial investment of $10,000
+ Commencement of operations
5
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Statement of Net Assets November 30, 1997
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)+
<S> <C> <C>
COMMON STOCK -- 96.7%
BASIC RESOURCES (NON-ENERGY) -- 1.5%
Cable Design Technologies*.................................... 15,700 $ 635,850
Millenium Chemicals Inc....................................... 24,700 568,100
-------------
TOTAL BASIC RESOURCES (NON-ENERGY) ............................................. 1,203,950
-------------
BUSINESS SERVICES -- 9.4%
Abacus Direct Corp.*.......................................... 25,600 1,068,800
Administaff, Inc.............................................. 31,200 694,200
Airnet Systems, Inc. *........................................ 33,100 670,275
CBT Group plc*................................................ 28,500 2,012,813
Harte-Hanks Communications, Inc............................... 11,000 379,500
Mac-Gray Corp.*............................................... 41,000 604,750
Paychex, Inc.................................................. 27,000 1,107,000
Pierce Leahy Corp.*........................................... 15,000 365,625
Romac International, Inc.*.................................... 34,400 670,800
-------------
TOTAL BUSINESS SERVICES ........................................................ 7,573,763
-------------
CONSUMER DURABLES -- 2.1%
Herman Miller, Inc............................................ 15,000 761,250
Varlen Corp................................................... 34,650 948,544
-------------
TOTAL CONSUMER DURABLES ........................................................ 1,709,794
-------------
CONSUMER MERCHANDISING -- 6.7%
Central Garden and Pet Co.*................................... 18,400 522,100
Cort Business Services Corp.*................................. 9,600 319,800
Cost Plus, Inc.*.............................................. 12,900 427,312
General Nutrition Companies, Inc.*............................ 30,900 1,054,462
Landry's Seafood Restaurants, Inc.*........................... 24,100 677,813
Michaels Stores, Inc.*........................................ 43,800 1,418,025
Renters Choice, Inc.*......................................... 24,800 558,000
The Cheesecake Factory*....................................... 14,000 430,500
-------------
TOTAL CONSUMER MERCHANDISING ................................................... 5,408,012
-------------
CONSUMER NON-DURABLES -- 0.8%
Whole Foods Market, Inc.*..................................... 14,900 683,537
-------------
CONSUMER SERVICES -- 6.4%
Bright Horizons, Inc.*........................................ 40,900 649,287
CHS Electronics, Inc.*........................................ 11,600 218,950
Devry, Inc.*.................................................. 41,100 1,099,425
Felcor Suite Hotels, Inc...................................... 22,600 820,663
Interstate Hotels Co.*........................................ 9,200 340,400
</TABLE>
6 See accompanying Notes to Financial Statements
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Statement of Net Assets--continued November 30, 1997
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
<S> <C> <C>
Rent-Way, Inc.*............................................... 23,600 $ 407,100
Sylvan Learning Systems, Inc.*................................ 41,100 1,674,825
-------------
TOTAL CONSUMER SERVICES ........................................................ 5,210,650
-------------
ELECTRONIC TECHNOLOGY -- 8.2%
ADC Telecommunications, Inc.*................................. 21,900 814,406
Comverse Technology, Inc.*.................................... 24,900 838,819
FEI Company *................................................. 28,600 471,900
Innova Corp.*................................................. 17,800 311,500
Nice-Systems Ltd.*............................................ 11,600 506,050
Peak International Ltd.*...................................... 45,000 995,625
Radisys Corp.*................................................ 24,600 1,100,850
Sanmina Corp.*................................................ 13,900 945,200
Sequent Computer Systems, Inc.*............................... 29,200 678,900
-------------
TOTAL ELECTRONIC TECHNOLOGY .................................................... 6,663,250
-------------
ENERGY -- 8.0%
Basin Exploration, Inc.*...................................... 67,300 1,245,050
BJ Services Co.*.............................................. 8,100 581,681
Dawson Geophysical Co.*....................................... 52,500 997,500
Dril-Quip, Inc.*.............................................. 20,900 625,694
Transmontaigne Oil Co.*....................................... 80,300 1,204,500
Veritas DGC, Inc.*............................................ 20,100 804,000
Vintage Petroleum, Inc........................................ 51,600 999,750
-------------
TOTAL ENERGY ................................................................... 6,458,175
-------------
FINANCIAL -- 4.9%
E*trade Group, Inc.*.......................................... 38,400 962,400
Firstmerit Corp............................................... 21,700 575,050
Franchise Mortgage Acceptance Co.*............................ 10,700 187,250
Peoples Heritage Financial Group, Inc......................... 9,500 404,938
Security Capital Group, Inc.- (B Shares)...................... 19,900 639,288
The Finova Group, Inc. (B Shares)............................. 13,800 650,325
Westamerica Bancorporation.................................... 5,900 539,113
-------------
TOTAL FINANCIAL ................................................................ 3,958,364
-------------
HEALTHCARE PRODUCTS -- 5.4%
Arqule, Inc.*................................................. 24,800 511,500
Jones Medical Industries, Inc................................. 31,200 1,029,600
Ocular Sciences, Inc.*........................................ 17,400 439,350
Safeskin Corp................................................. 10,700 509,587
Steris Corp.*................................................. 11,600 545,200
Waters Corp.*................................................. 31,100 1,331,469
-------------
TOTAL HEALTHCARE PRODUCTS ...................................................... 4,366,706
-------------
</TABLE>
See accompanying Notes to Financial Statements 7
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Statement of Net Assets--continued November 30, 1997
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)+
<S> <C> <C>
HEALTHCARE SERVICES -- 8.2%
Ameripath, Inc.*.............................................. 43,300 $ 725,275
Concentra Managed Care, Inc.*................................. 42,186 1,429,051
Diagnostic Health Services, Inc.*............................. 43,200 507,600
Maximus, Inc.*................................................ 20,300 489,737
Monarch Dental Corp.*......................................... 30,000 414,375
National Research Corp.*...................................... 20,500 401,031
Orthodontic Centers of America, Inc.*......................... 56,000 1,015,000
Parexel International Corp.*.................................. 19,400 669,300
Serologicals Corp.*........................................... 44,800 996,800
-------------
TOTAL HEALTHCARE SERVICES ...................................................... 6,648,169
-------------
MEDIA -- 10.3%
Cinar Films, Inc.*............................................ 35,800 1,476,750
Clear Channel Communications, Inc.*........................... 20,300 1,375,325
Heftel Broadcasting Corp. (A Shares)*......................... 26,800 1,979,850
Outdoor Systems, Inc.*........................................ 55,700 1,719,737
TMP Worldwide, Inc............................................ 37,900 691,675
Universal Outdoor Holdings, Inc.*............................. 24,600 1,097,775
-------------
TOTAL MEDIA .................................................................... 8,341,112
-------------
TECHNOLOGY SERVICES/ SOFTWARE -- 19.3%
Affiliated Computer Services, Inc.* .......................... 17,400 406,725
Ciber, Inc.*.................................................. 24,900 1,095,600
Complete Business Solutions, Inc.*............................ 54,900 1,866,600
Computer Horizons Corp.*...................................... 52,700 1,739,100
Great Plains Software, Inc.*.................................. 28,500 641,250
Harbinger Corp.*.............................................. 29,400 882,000
Inspire Insurance Solutions, Inc.*............................ 29,100 552,900
Keane, Inc.*.................................................. 25,400 804,862
Level One Communications, Inc.*............................... 21,800 910,150
Mastech Corp.*................................................ 36,500 1,067,625
Metro Information Services, Inc............................... 29,700 764,775
National Instruments Corp.*................................... 16,800 451,500
Network Solutions, Inc. (A Shares)*........................... 33,700 547,625
Realnetworks, Inc.*........................................... 25,000 384,375
Software AG Systems, Inc.*.................................... 114,200 1,163,412
Sungard Data Systems, Inc.*................................... 67,100 1,736,213
Transaction Systems Architects, Inc.*......................... 15,600 604,987
-------------
TOTAL TECHNOLOGY SERVICES/ SOFTWARE ............................................ 15,619,699
-------------
</TABLE>
8 See accompanying Notes to Financial Statements
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Statement of Net Assets--continued November 30, 1997
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
<S> <C> <C>
TRADITIONAL HEAVY INDUSTRY -- 3.6%
Federal-Mogul Corp............................................ 16,600 $ 682,675
Halter Marine Group, Inc.*.................................... 17,100 476,663
Oregon Steel Mills, Inc....................................... 47,300 928,263
Tetra Tech, Inc.*............................................. 32,300 825,669
-------------
TOTAL TRADITIONAL HEAVY INDUSTRY ............................................... 2,913,270
-------------
TRANSPORTATION -- 1.9%
Jevic Transportation, Inc.*................................... 40,000 660,000
Swift Transportation Co., Inc.*............................... 15,300 424,575
US Xpress Enterprises, Inc.*.................................. 19,800 438,075
-------------
TOTAL TRANSPORTATION ........................................................... 1,522,650
-------------
TOTAL COMMON STOCK (COST $75,377,758)............................................ 78,281,101
-------------
MUTUAL FUNDS -- 2.3%
Scudder Managed Cash Fund, (Cost $1,842,140).................. 1,842,140 1,842,140
-------------
Total Investments (Cost $77,219,898)+-- 99.0%........................................... $ 80,123,241
Other Assets and Liabilities, Net-- 1.0%................................................ 774,741
-------------
Net Assets-- 100.0%..................................................................... $ 80,897,982
=============
Net Asset Value, offering and redemption price per share ($80,897,982/ 5,998,382
outstanding shares of beneficial interest, no par value)........................... $13.49
=============
Amount
At November 30,1997, Net Assets consisted of:
Capital Paid-In......................................................................... $ 77,407,343
Accumulated net realized gain........................................................... 587,296
Net unrealized appreciation of investments.............................................. 2,903,343
-------------
Net Assets, for 5,998,382 shares outstanding............................................ $ 80,897,982
=============
<FN>
* Non-income producing security.
+ The cost for Federal income tax purposes was $77,282,753. At November 30,
1997, net unrealized appreciation was $2,840,488. This consisted of
aggregate gross unrealized appreciation in which there was an excess of
market value over tax cost of $6,700,691, and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $3,860,203.
</FN>
</TABLE>
See accompanying Notes to Financial Statements 9
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Statement of Net Assets November 30, 1997
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
<S> <C> <C>
COMMON STOCK -- 99.8%
APARTMENTS -- 19.7%
Apartment Investment & Management Co.......................... 10,800 $ 382,050
Avalon Properties, Inc........................................ 27,800 854,850
Bay Apartment Communities, Inc................................ 19,100 762,806
Equity Residential Property Trust............................. 41,300 2,065,000
Irvine Apartment Communities.................................. 8,900 276,456
Oasis Residential, Inc........................................ 12,500 272,656
Post Properties, Inc.......................................... 41,600 1,606,800
Security Capital Atlantic, Inc................................ 63,737 1,378,313
Security Capital Pacific Trust................................ 79,457 1,931,798
Summit Properties, Inc........................................ 46,600 966,950
-------------
TOTAL APARTMENTS................................................................ 10,497,679
-------------
DIVERSIFIED/OTHER -- 7.8%
Glenborough Realty Trust, Inc................................. 37,800 1,020,600
Golf Trust of America, Inc.*.................................. 27,700 747,900
National Golf Properties, Inc................................. 44,000 1,397,000
Pacific Gulf Properties, Inc.................................. 18,800 420,650
Trammell Crow Co.............................................. 25,900 569,800
-------------
TOTAL DIVERSIFIED/OTHER......................................................... 4,155,950
-------------
HEALTHCARE -- 2.0%
Healthcare Realty Trust, Inc.................................. 35,800 1,047,150
-------------
HOTELS -- 9.0%
Candlewood Hotel Company, Inc.*............................... 45,400 397,250
Extended Stay America, Inc.*.................................. 62,100 714,150
Felcor Suite Hotels, Inc...................................... 61,600 2,236,850
Innkeepers USA Trust.......................................... 26,800 430,475
Patriot American Hospitality, Inc............................. 10,099 315,594
Starwood Hotels & Resorts Trust............................... 13,500 723,938
-------------
TOTAL HOTRLS.................................................................... 4,818,257
-------------
INDUSTRIAL -- 7.1%
AMB Property Corp............................................. 23,900 549,700
Centerpoint Properties Corp................................... 15,600 516,750
Meridian Industrial Trust..................................... 31,000 720,750
Weeks Corp.................................................... 62,200 1,990,400
-------------
TOTAL INDUSTRIAL................................................................ 3,777,600
-------------
MANUFACTURED HOMES -- 1.2%
Sun Communities, Inc.......................................... 17,700 644,944
-------------
MIXED: OFFICE/INDUSTRIAL -- 3.0%
Bedford Property Investors, Inc............................... 43,300 884,944
</TABLE>
10 See accompanying Notes to Financial Statements
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Statement of Net Assets--continued November 30, 1997
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
<S> <C> <C>
Liberty Property Trust ....................................... 25,200 $ 704,025
-------------
TOTAL MIXED..................................................................... 1,588,969
-------------
NET LEASE -- 2.8%
Captec Net Lease Realty, Inc.*................................ 69,800 1,186,600
Franchise Finance Corporation of America...................... 12,400 328,600
-------------
TOTAL NET LEASE................................................................. 1,515,200
-------------
OFFICE -- 12.3%
Beacon Properties Corp........................................ 11,700 526,500
Carramerica Realty Corp....................................... 13,200 397,650
Cousins Properties Inc........................................ 10,300 311,575
Highwoods Properties, Inc. ................................... 15,200 546,250
Kilroy Realty Corp............................................ 58,900 1,546,125
Mgi Properties, Inc........................................... 12,200 282,888
Prentiss Properties Trust..................................... 55,000 1,423,125
SL Green Realty Corp.......................................... 25,300 657,800
Tower Realty Trust, Inc....................................... 36,000 877,500
-------------
TOTAL OFFICE.................................................................... 6,569,413
-------------
OUTLET -- 0.9%
Chelsea GCA Realty, Inc....................................... 12,000 456,000
-------------
REGIONAL MALLS -- 12.0%
CBL & Associates Properties, Inc.............................. 37,400 899,938
General Growth Properties..................................... 21,400 789,125
JP Realty, Inc................................................ 63,500 1,587,500
Simon Debartolo Group, Inc.................................... 36,500 1,193,094
The Macerich Co............................................... 46,600 1,264,025
Urban Shopping Centers, Inc................................... 19,800 659,588
-------------
TOTAL REGIONAL MALLS............................................................ 6,393,270
-------------
STORAGE -- 10.9%
Public Storage, Inc........................................... 59,100 1,632,637
Sovran Self Storage, Inc...................................... 53,500 1,631,750
Storage Trust Realty.......................................... 58,500 1,455,187
Storage USA, Inc.............................................. 27,700 1,082,031
-------------
TOTAL STORAGE................................................................... 5,801,605
-------------
STRIP CENTERS -- 11.1%
Bradley Real Estate, Inc...................................... 27,500 556,875
Developers Diversified Realty Corp............................ 33,700 1,312,194
IRT Property Co............................................... 68,300 823,869
JDN Realty Corp............................................... 29,300 910,131
Kimco Realty Corp............................................. 32,100 1,103,437
Pan Pacific Retail Properties, Inc............................ 8,700 178,350
</TABLE>
See accompanying Notes to Financial Statements 11
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Statement of Net Assets--continued November 30, 1997
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
<S> <C> <C>
Regency Realty Corp........................................... 39,800 $ 1,057,187
-------------
TOTAL STRIP CENTERS............................................................. 5,942,043
-------------
TOTAL COMMON STOCK (COST $52,322,616)............................................ 53,208,080
-------------
WARRANTS -- 0.1%
Security Capital Group (Cost $44,187) ........................ 5,612 30,164
-------------
MUTUAL FUNDS -- 3.8%
Scudder Managed Cash Fund (Cost $2,032,861)................... 2,032,861 2,032,861
-------------
U.S. TREASURY OBLIGATIONS -- 0.9%
Par
U.S. Treasury Bill, 4.67%, 12/04/97 (Cost $499,806)........... $500,000 499,806
-------------
Total Investments (Cost $54,899,470)+-- 104.6%.......................................... 55,770,911
Other Assets and Liabilities, Net-- (4.6)%.............................................. (2,462,658)
-------------
Net Assets-- 100.0%..................................................................... $ 53,308,253
=============
Net Asset Value, offering and redemption per share ($53,308,253/4,742,801
outstanding shares of beneficial interest, no par value) ............................... $ 11.24
============
Amount
At November 30, 1997, Net Assets consisted of:
Capital Paid-In ........................................................................ $ 51,355,007
Undistributed net investment income .................................................... 575,203
Accumulated net realized gain .......................................................... 506,602
Net unrealized appreciation of investments ............................................. 871,441
------------
Net Assets, for 4,742,801 shares outstanding ........................................... $ 53,308,253
============
<FN>
* Non-income producing security.
+ The cost for Federal income tax purposes was $54,925,543. At November 30,
1997, net unrealized appreciation was $845,368. This consisted of aggregate
gross unrealized appreciation in which there was an excess of market value
over tax cost of $1,556,868, and aggregate gross unrealized depreciation
for all securities in which there was an excess of tax cost over market
value of $711,500.
</FN>
</TABLE>
12 See accompanying Notes to Financial Statements
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Operations for the Period December 31, 1996+ through November 30,
1997
<TABLE>
<CAPTION>
Small Cap Real Estate
Growth Securities
Portfolio Portfolio
<S> <C> <C>
Investment Income:
Dividends ..................................................... $ 56,496 $ 1,432,388
Interest ....................................................... 120,947 116,561
-----------------------------
Total investment income.................................... 177,443 1,548,949
-----------------------------
Expenses:
Advisory fee (Note 4) ....................................... 239,078 237,702
Administration fee (Note 4) ................................. 42,986 41,826
Accounting fee (Note 4) ..................................... 41,808 41,352
Custodian fee (Note 4) ...................................... 26,145 25,891
Transfer Agent fee (Note 4).................................. 31,695 31,642
Trustees' fees and expenses (Note 4) ........................ 6,000 6,000
Amortization of organization and offering expenses
(Note 2) .............................................. 30,061 30,061
Registration fees ........................................... 14,858 16,477
Reports to shareholders ..................................... 12,801 14,198
Legal ....................................................... 12,905 16,504
Audit ....................................................... 14,000 14,000
Other ....................................................... 7,035 6,918
-----------------------------
Total expenses before fee waivers ......................... 479,372 482,571
Advisory fee waived (Note 4) .............................. (107,342) (139,015)
Administration fee waived (Note 4)......................... (4,051) (4,051)
Accounting fee waived (Note 4)............................. (5,610) (5,610)
Transfer agent fee waived (Note 4)......................... (3,750) (3,750)
-----------------------------
Total expenses, net ....................................... 358,619 330,145
-----------------------------
Net investment income (loss) ................................ (181,176) 1,218,804
-----------------------------
Realized and unrealized gain on investments:
Net realized gain on investment transactions ................ 4,388,209 4,485,233
Net unrealized appreciation of investments during
the period............................................. 2,903,343 871,441
-----------------------------
Net gain on investments ................................... 7,291,552 5,356,674
-----------------------------
Net increase in net assets resulting from operations .......... $ 7,110,376 $ 6,575,478
=============================
</TABLE>
+ Commencement of Operations.
See accompanying Notes to Financial Statements 13
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Small Cap Real Estate
Growth Securities
Portfolio Portfolio
<S> <C> <C>
For the Period December 31, 1996+
through November 30, 1997
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss)................................. $ (181,176) $ 1,218,804
Net realized gain on investment transactions ................ 4,388,209 4,485,233
Net unrealized appreciation of investments during
the period ................................................ 2,903,343 871,441
------------------------------
Net increase in net assets resulting from operations ........ 7,110,376 6,575,478
------------------------------
Distributions to shareholders from:
Net investment income ($0.00 and $0.23 per share,
respectively) ......................................... -- (643,601)
Net realized gain on investments ($1.17 and $0.93 per
share, respectively)..................................... (3,619,737) (3,978,631)
------------------------------
Total distributions.......................................... (3,619,737) (4,622,232)
------------------------------
Increase in net assets from Fund share transactions (Note 5) ... 77,357,343 51,305,007
------------------------------
Total increase in net assets ................................ 80,847,982 53,258,253
Net Assets:
Beginning of period ....................................... 50,000 50,000
------------------------------
End of period.............................................. $80,897,982 $ 53,308,253
==============================
</TABLE>
+ Commencement of operations.
14 See accompanying Notes to Financial Statements
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements. They should be read in conjunction with the financial statements and
notes thereto.
For the Period December 31, 1996*
through November 30, 1997
Small Cap Growth Portfolio
Net Asset Value-- Beginning of Period .............. $ 10.00
-------
Investment Operations:
Net investment loss.............................. (0.03)
Net realized and unrealized gain on
investments ............................... 4.69
-------
Total from investment operations.............. 4.66
-------
Distributions:
From net realized gain........................... (1.17)
-------
Net Asset Value-- End of Period ................... $13.49
=======
Total Return*** .................................... 47.08%
Ratios (to average net assets)/Supplemental Data
Expenses + ...................................... 1.35%**
Net investment loss.............................. (0.68)%**
Portfolio turnover rate ............................ 147.86%
Average commission rate paid 1 ..................... $0.0551
Net assets at end of period (000 omitted) .......... $80,898
See accompanying Notes to Financial Statements 15
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights
For the Period December 31, 1996*
through November 30, 1997
Real Estate Securities Portfolio
Net Asset Value-- Beginning of Period ............. $ 10.00
-------
Investment Operations:
Net investment income............................ 0.35
Net realized and unrealized gain on
investments ............................... 2.05
-------
Total from investment operations ............. 2.40
-------
Distributions:
From net investment income....................... (0.23)
From net realized gain........................... (0.93)
-------
Total distributions........................... (1.16)
-------
Net Asset Value-- End of Period .................... $ 11.24
=======
Total Return*** .................................... 24.39%
Ratios (to average net assets)/Supplemental Data:
Expenses++........................................ 1.25%**
Net investment income............................ 4.61%**
Portfolio turnover rate ............................ 184.74%
Average commission rate paid 1 ..................... $0.0644
Net assets at end of period (000 omitted)........... $53,308
* Commencement of operations.
** Annualized.
*** Unannualized.
+ The Adviser has voluntarily agreed to waive a portion of its advisory fees
and to assume expenses otherwise payable by the Portfolio (if necessary) in
order to keep the annual expense ratio from exceeding 1.35% of its average
daily net assets. In addition the Administrator, Accounting Agent and
Transfer Agent have agreed to waive a portion of their fees. Without the
assumption of and waivers of expenses, the annualized ratio of expenses to
average daily net assets would have been 1.80% for the period ended
November 30, 1997.
++ The Adviser has voluntarily agreed to waive a portion of its advisory fees
and to assume expenses otherwise payable by the Portfolio (if necessary) in
order to keep the annual expense ratio from exceeding 1.25% of its average
daily net assets. In addition the Administrator, Accounting Agent and
Transfer Agent have agreed to waive a portion of their fees. Without the
assumption of and waivers of expenses, the annualized ratio of expenses to
average daily net assets would have been 1.83% for the period ended
November 30, 1997.
1 Computed by dividing the total amount of brokerage commissions paid by the
total shares of investment securities purchased and sold during the period
for which commissions were charged.
16 See accompanying Notes to Financial Statements
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements November 30, 1997
1. Description of the Fund. The Brazos Mutual Funds (the "Fund" ) is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as a
diversified, open-end management investment company established as a Delaware
business trust. The Declaration of Trust, dated October 28, 1996, permits the
Trustees to establish separate series or "Portfolios," each of which may issue
separate classes of shares. The authorized shares of beneficial interest of the
Fund are currently divided into two Portfolios, the BRAZOS/JMIC Small Cap Growth
Portfolio ("Small Cap Growth Portfolio") and the BRAZOS/JMIC Real Estate
Securities Portfolio ("Real Estate Securities Portfolio")(each, a "Portfolio"
and collectively, the "Portfolios"). Each Portfolio currently consists of a
single class of shares. The investment objective of the Small Cap Growth
Portfolio is to provide maximum capital appreciation, consistent with reasonable
risk to principal, by investing primarily in small capitalization companies. The
investment objective of the Real Estate Securities Portfolio is to provide a
balance of income and appreciation (with reasonable risk to principal) by
investing primarily in equity securities of companies which are principally
engaged in the real estate industry.
Because the Real Estate Securities Portfolio may invest a substantial portion of
its assets in Real Estate Investment Trusts ("REITs"), the Portfolio may also be
subject to certain risks associated with direct investments in REITs. REITs may
be affected by changes in the value of their underlying properties and by
defaults by borrowers or tenants. Furthermore, REITs are dependent upon
specialized management skills, have limited diversification and are, therefore,
subject to risks inherent in financing a limited number of projects. REITs
depend generally on their ability to generate cash flow to make distributions to
shareholders and certain REITs have self-liquidation provisions by which
mortgages held may be paid in full and distributions of capital returns may be
made at any time. In addition, the performance of a REIT may be affected by its
failure to qualify for tax-free, pass-through of income under the Internal
Revenue Code or its failure to maintain exemption from registration under the
1940 Act.
2. Significant Accounting Policies. The following is a summary of the
significant accounting policies of the Fund:
Security Valuation. Each Portfolio's securities, except short-term investments
with remaining maturities of 60 days or less, use the last quoted trading price
as the market value. For listed securities, the Portfolios use the price quoted
by the exchange on which the security is primarily traded. Unlisted securities
and listed securities, including REITs, which have not been traded on the
valuation date or for which market quotations are not readily available are
valued at the average between the last price asked and the last price bid.
Short-term investments with remaining maturities of 60 days or less are valued
at amortized cost, which approximates market value, unless the Fund's Board of
Trustees determines that this does not represent fair value. The value of all
other securities is determined in good faith under the direction of the Board of
Trustees. As of November 30, 1997, no securities were valued by the Board of
Trustees.
17
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements - continued November 30, 1997
Federal Income Taxes. Each Portfolio is treated as a separate entity and intends
to qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986 and to distribute all of its taxable income to its
shareholders. Therefore, no provision for federal income tax is required.
The Portfolios may be subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of net investment income and net
capital gains. The Portfolios intend to distribute their net investment income
and capital gains as necessary to avoid this excise tax.
Distributions to Shareholders. The Small Cap Growth Portfolio will normally
distribute substantially all of its net investment income in an annual dividend.
The Real Estate Securities Portfolio will normally distribute substantially all
of its net investment income in quarterly dividends. Both Portfolios will
distribute any realized net capital gains annually.
The Real Estate Securities Portfolio receives a majority of its dividend income
from REITs. For tax purposes, a portion of these dividends may consist of
capital gains and returns of capital. Accordingly, the Portfolio's distributions
to shareholders may include a portion that may be a return of capital received
from the REITs, as well as a return of capital attributed to distributions of
other income for financial reporting purposes. Distributions determined to be
returns of capital are not subject to current taxation. In accordance with
Statement of Position 93-2, Determination, Disclosure and Financial Statement
Presentation of Income, Capital Gain and Return of Capital Distributions by
Investment Companies ("SOP"), distributions representing a return of capital for
tax purposes are charged to capital paid in.
Deferred Organization and Offering Costs. Organizational costs have been
capitalized by the Fund and are being amortized over sixty months commencing
with operations. In the event any of the initial shares of the Fund are redeemed
by any holder thereof during the period that the Fund is amortizing
organizational costs, the redemption proceeds payable to the holder thereof by
the Fund will be reduced by the unamortized organizational costs in the same
ratio as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption. Offering costs, including
initial registration costs, have been deferred and will be charged to expense
during the Fund's first year of operation.
Use of Estimates in the Preparation of Financial Statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Other. Investment security transactions are accounted for on a trade date basis.
Each Portfolio uses the specific identification method for determining realized
gain and loss on investments for both financial and federal income tax reporting
purposes. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
18
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements - continued November 30, 1997
3. Investment Securities. During the period ended November 30, 1997, purchases
and sales of investment securities (excluding short-term investments) aggregated
as follows:
Small Cap Growth Real Estate Securities
Portfolio Portfolio
Purchases.......................... $111,525,646 $ 97,544,991
Sales.............................. 40,535,804 49,663,741
4. Advisory Fee and Other Transactions with Affiliates. The Fund, on behalf of
each Portfolio, employs John McStay Investment Counsel (the "Adviser"), an
investment counseling firm founded in 1983, to furnish investment advisory and
other services to the Fund. Under an Investment Advisory Agreement with the
Fund, dated November 25, 1996, the Adviser manages the investment and
reinvestment of the assets of the Portfolios. The Adviser must adhere to the
stated investment objectives and policies of the Portfolios, and is subject to
the control and supervision of the Fund's Board of Trustees. For its services
under the Advisory Agreement, the Fund pays the Adviser a monthly fee at the
annual rate of 0.90% of the average daily net assets of each Portfolio. The
Adviser has voluntarily agreed to keep operating expenses for the Small Cap
Growth Portfolio and Real Estate Securities Portfolio (excluding taxes,
extraordinary expenses, brokerage commissions and interest) from exceeding an
annual rate of 1.35% and 1.25%, respectively, of each Portfolio's average daily
net assets. The Fund will not reimburse the Adviser for any advisory fees that
are waived or Portfolio expenses that the Adviser may bear on behalf of a
Portfolio.
The following table summarizes the advisory fees for the period ended November
30, 1997:
Gross Adviser Adviser
Fee Fee Waived
Small Cap Growth Portfolio.................... $239,078 $ (107,342)
Real Estate Securities Portfolio.............. 237,702 (139,015)
Rodney Square Management Corporation ("RSMC"), a wholly owned subsidiary of
Wilmington Trust Company ("WTC"), which is wholly owned by Wilmington Trust
Corporation, a publicly held bank holding company, provides administration
services to the Fund. For administration services provided, RSMC receives an
annual administration fee from the Fund equal to the greater of: (1) a minimum
annual fee of $32,500 for each of the first two single-class Portfolios plus
$15,000 for any additional Portfolio, or second or additional class of a
Portfolio; or (2) an asset-based fee, equal to a percentage of the average daily
net assets of the Fund, on a Fund-wide basis, according to the following
schedule: 0.15% of the first $50 million in assets; plus 0.10% of assets between
$50 million and $200 million; plus 0.07%
19
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements - continued November 30, 1997
of assets in excess of $200 million. Each Portfolio shares in its pro-rata
portion of the Fund's fee. For the period ended November 30, 1997, RSMC fees for
administration services for the Small Cap Growth Portfolio and Real Estate
Securities Portfolio were $42,986 and $41,826, respectively, of which $4,051 per
portfolio was waived.
RSMC determines the net asset value per share of the Portfolios and provides
accounting services to the Portfolios. For accounting services provided RSMC
receives an annual fee of $45,000 per Portfolio, plus an asset-based fee, equal
to a percentage of the average daily net assets of each Portfolio, according to
the following schedule: 0.03% of assets between $50 million and $100 million;
plus 0.02% of assets in excess of $100 million. For the period ended November
30, 1997, RSMC fees for accounting services for the Small Cap Growth Portfolio
and Real Estate Securities Portfolio were $41,808 and $41,352, respectively, of
which $5,610 per Portfolio was waived.
RSMC also serves as Transfer and Dividend Paying Agent for the Fund pursuant to
a Transfer Agent Agreement with the Fund, dated December 31, 1996. For the
period ended November 30, 1997, RSMC fees for transfer agent services for the
Small Cap Growth Portfolio and Real Estate Securities Portfolio were $31,695 and
$31,642, respectively, of which $3,750 per portfolio was waived. WTC serves as
Custodian of the assets of the Fund. For the period ended November 30, 1997, WTC
fees for custody services for the Small Cap Growth Portfolio and Real Estate
Securities Portfolio were $26,145 and $25,891, respectively.
Pursuant to a Distribution Agreement with the Fund dated December 31, 1996,
Rodney Square Distributors, Inc. ("RSD"), a wholly-owned subsidiary of WTC,
assists in securing purchasers for shares of the Fund. RSD also directly, or
through its affiliates, provides investor support services. RSD receives no
compensation for distribution of shares of the Fund, except for reimbursement of
out-of-pocket expenses.
Certain trustees and officers of the Fund are also officers of the Fund's
Investment Adviser. Such trustees and officers are paid no fees by the Fund for
serving as trustees or officers of the Fund.
20
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements - continued November 30, 1997
5. Fund Shares. At November 30, 1997, there were an unlimited number of shares
of beneficial interest, no par value, authorized. The following table summarizes
the activity in shares of each Portfolio:
For the Period December 31, 1996+
through November 30, 1997
<TABLE>
<CAPTION>
Small Cap Real Estate
Growth Portfolio Securities Portfolio
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold.............................. 5,958,892 $76,803,151 4,528,484 $48,887,308
Shares issued to shareholders in
reinvestment of distributions....... 256,842 3,494,269 381,700 4,223,787
Shares redeemed.......................... (222,352) (2,940,077) (172,383) (1,806,088)
--------- ----------- --------- -----------
Net increase............................. 5,993,382 $77,357,343 4,737,801 $51,305,007
=========== ===========
Shares outstanding:
Beginning of period...................... 5,000 5,000
--------- ---------
End of period............................ 5,998,382 4,742,801
========= =========
<FN>
+ Commencement of Operations.
</FN>
</TABLE>
6. Subsequent Event. RSMC has entered into an agreement with PFPC, Inc. ("PFPC")
pursuant to which PFPC will acquire the fund accounting, administration and
transfer agent business of RSMC. Effective January 5, 1998, the services
previously provided to the Fund by RSMC will be provided by PFPC.
21
<PAGE>
BRAZOS MUTUAL FUNDS
Report of Independent Accountants November 30, 1997
To the Shareholders and Board of Trustees
of Brazos Mutual Funds:
We have audited the accompanying statements of net assets of the Brazos/JMIC
Small Cap Growth Portfolio and the Brazos/JMIC Real Estate Securities Portfolio,
each a series of Brazos Mutual Funds, as of November 30, 1997, and the related
statements of operations, changes in net assets and financial highlights for the
period from December 31, 1996 (commencement of operations) through November 30,
1997. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 1997, by
correspondence with custodians and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Brazos/JMIC Small Cap Growth Portfolio and the Brazos/JMIC Real Estate
Securities Portfolio as of November 30, 1997, the results of their operations,
changes in net assets, and their financial highlights for the period from
December 31, 1996 (commencement of operations) through November 30, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 16, 1998
<PAGE>
BRAZOS MUTUAL FUNDS
Tax Information (Unaudited) November 30, 1997
For the fiscal year ended November 30, 1997, the Small Cap Growth Portfolio and
Real Estate Securities Portfolio paid distributions of $1.17 and $0.93 per
share, respectively, from net short-term capital gains.
23
<PAGE>
TRUSTEES
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
OFFICERS
DAN L. HOCKENBROUGH
Chairman of the Board,
President and Chief Financial Officer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
LOREN J. SOETENGA
Vice President and Treasurer
CUSTODIAN
WILMINGTON TRUST COMPANY
1100 N. MARKET
WILMINGTON, DELAWARE 19890
COUNSEL
DRINKER, BIDDLE & REATH LLP
1345 CHESTNUT STREET
PHILADELPHIA, PENNSYLVANIA 19107
AUDITORS
COOPERS & LYBRAND L.L.P.
2400 ELEVEN PENN CENTER
PHILADELPHIA, PENNSYLVANIA 19103
BRAZOS MUTUAL FUNDS
ANNUAL REPORT
November 30, 1997
BRAZOS
JMIC SMALL CAP
GROWTH PORTFOLIO
JMIC REAL ESTATE
SECURITIES PORTFOLIO
INVESTMENT ADVISER
JOHN MCSTAY
INVESTMENT COUNSEL
5949 SHERRY LANE
SUITE 1560
DALLAS, TEXAS 75225
