<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management
January 22, 1999
Dear Fellow Shareholders, Clients and Friends:
The last twelve months witnessed a period of extremes: fear of inflation and
fear of deflation, irrational exuberance and capitulation, from untouchable to
impeached, and finally both war and peace. It was enough to make any investor's
head spin. Not surprisingly, we witnessed market whirlwinds aplenty in 1998 in-
cluding a genuine financial panic during the late summer and early fall. This
was not the best environment for your Brazos portfolios, nevertheless, we are
comforted in knowing that our investment process has again been proven to work
in a difficult market environment. The following chart outlines Brazos perfor-
mance relative to appropriate benchmarks.
<TABLE>
<CAPTION>
Quarter Ending Year To Date Inception to
12/31/98 12/31/98 12/31/98
-------------- ------------ ------------
<S> <C> <C> <C>
Brazos Small Cap Growth(/1/)
Inception 12/31/96 20.9% 13.6% 75.5%
Russell 2000 Index 16.3% -2.5% 19.2%
Brazos Real Estate Securities(/1/)
Inception 12/31/96 -2.2% -17.4% 6.7%
NAREIT Equity Index -2.9% -17.5% -0.8%
Wilshire REIT Index -2.1% -17.0% -0.7%
Brazos Micro Cap Growth(/1/)
Inception 12/31/97 20.5% 32.8% 32.8%
Russell 2000 Index 16.3% -2.5% -2.5%
</TABLE>
(1) Past performance is not indicative of future results. Investment returns
and principal values may fluctuate, so that, when redeemed, shares may be
worth more or less than their original value.
The Cal Ripken market, as we have referred to this bull market, has come to
an end. After sixteen years and some twenty six hundred plus consecutive games,
Cal took some time off this year and so did the stock market. Curiously,
Ripken's record paralleled that of the market in a number of ways, more than
just the time frame of 1983 to 1998.
1
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
Just as Cal finished the year strong, so is your market finishing strong. In
spite of the considerable damage and pain inflicted by the market over the past
several months, it has created unusual opportunity. In spite of the interim
damage that our portfolios suffered, they are recovering very nicely. Many in-
vestors are unaware that during the summer bear market environments, most
stocks suffered declines far in excess of the larger cap indices like the Dow
Jones Industrial Average. Herein lies our opportunity. The portfolio
manager/analysts working on your behalf could not be more excited about the po-
tential for the companies owned in your portfolio today. Our Small Cap Growth
Portfolio and our Micro Cap Growth Portfolio own the highest quality, fastest
growing companies in America. And, these companies are at relative valuation
levels not seen since 1973. Yes, the 1970s! Today, smaller stocks are cheaper
than following the serious market declines of the third quarter of 1990 and the
fourth quarter of 1987.
On another front, we have been quite surprised at the absolute decline in
real estate securities in 1998. In retrospect, this decline is largely ex-
plained by three factors: that they are small capitalization securities; that
mutual fund flows became negative (reduced demand); and that fears regarding
anticipated offerings (supply) increased. Having been very right on REITs for
five years and very wrong on REITs for ten months, our humbled view is as fol-
lows. We expect that investors' returns from REITs over the next twelve months
will be very positive. One catalyst of the turn is beginning to occur as more
enlightened REIT managements sell assets and repurchase their own cheap shares.
While these repurchases are already underway, we anticipate it occurring to an
even greater degree. In fact, we may even see LBOs in the REIT arena as the
fundamentals are exceptional. The stock prices of many of these companies now
sell below asset value. Meaningfully, as a group, REITs offer highly predict-
able 10% earnings growth through 1999 with valuation levels at a ten-year low.
Yields too are near an all-time high relative to the ten-year government bond
(7.5% versus 5.1%). Our message--stay the course.
We choose to see the glass as more than half full. The major positives are as
follows. First, inflation is likely to remain subdued; interest rates are very
low by historical standards, and short-term rates continue to decline as the
Federal Reserve shifts its focus away from fighting inflation. Second, earnings
and corporate profitability are most likely to increase in 1999, probably again
in the year 2000, and we expect no recession. Third, The Great Liquidity Story
remains intact as it is based on solid fundamentals of demographics, liquidity,
and retirement issues. As it relates to the retirement issues, we continue to
believe that over the next several years some small percentage of social secu-
rity funds will ultimately be invested in equities. Further, as European coun-
tries and Japan come to grips with their inadequate retirement systems, very
significant dollars will increasingly be allocated to equities and an increas-
ing percentage of those equities will be allocated to the United States market.
2
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
We firmly believe that small cap stocks offer excess returns over long-term
holding periods. History supports this axiom. Further, we believe your portfo-
lio consists of some of the best smaller businesses in the United States. Fi-
nally, one last very important source of our optimism is valuation. The prices
of quality smaller companies at the present time are the cheapest they have
been in nearly thirty years. While we cannot time the turn, we are quite confi-
dent this combination of secular strength and attractive valuation will prove
to be a very rewarding financial chemistry.
In closing, we would like to take this opportunity to announce the January
introduction of our fourth Brazos mutual fund portfolio. The Brazos Growth
Portfolio will be managed by the same team of portfolio managers/analysts. We
will employ the same disciplines as our other equity fund portfolios with in-
vestments selected from a universe consisting of somewhat larger growth compa-
nies. For more information, please call Loren Soetenga at (214) 365-5233.
Thank you for your confidence in JMIC as demonstrated by investing your mon-
ies alongside ours in Brazos.
Sincerely,
/s/ John McStay
John McStay
3
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
[CHART APPEARS HERE]
BRAZOS SMALL CAP GROWTH PORTFOLIO
Avg. Annual Total Returns
(as of 11/30/98)
1 Year Since Inception
Small Cap Growth Portfolio 5.06% 25.47%
Russell 2000 Index -6.62% 12.30%
<TABLE>
<CAPTION>
Measurement Period Brazos Russell 2000
(Fiscal Year Covered) Small Cap Index
- ------------------- ---------- ------------
<S> <C> <C>
FYE 12/31/96 $10,000 $10,000
FYE 2/28/97 $10,840 $ 9,952
FYE 5/31/97 $11,960 $10,567
FYE 8/31/97 $14,313 $11,797
FYE 11/30/97 $14,709 $12,026
FYE 2/28/98 $16,903 $12,934
FYE 5/31/98 $17,243 $12,812
FYE 8/31/98 $13,542 $ 9,508
FYE 11/30/98 $15,453 $11,229
</TABLE>
This chart assumes an initial gross investment of $10,000
made on December 31, 1996 (commencement of operations).
Returns shown include the reinvestment of all dividends. 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.
4
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
[CHART APPEARS HERE]
BRAZOS REAL ESTATE SECURITIES PORTFOLIO
Avg. Annual Total Return
(as of 11/30/98)
1 Year Since Inception
Real Estate Securities Portfolio -13.64% 3.61%
Wilshire REIT Index -13.56% 1.02%
NAREIT Equity Index -12.69% 2.92%
<TABLE>
<CAPTION>
Measurement Period Brazos Wilshire REIT NAREIT Equity
(Fiscal Year Covered) Real Estate Index Index
- ------------------- ---------- ------------- -------------
<S> <C> <C> <C>
FYE 12/31/96 $10,000 $10,000 $10,000
FYE 2/28/97 $10,350 $10,025 $10,055
FYE 5/31/97 $10,560 $10,023 $10,055
FYE 8/31/97 $11,640 $10,799 $10,874
FYE 11/30/97 $12,439 $11,686 $11,790
FYE 2/28/98 $12,760 $11,571 $11,791
FYE 5/31/98 $12,655 $11,344 $11,534
FYE 8/31/98 $10,251 $ 9,552 $ 9,744
FYE 11/30/98 $10,743 $10,103 $10,294
</TABLE>
This chart assumes an initial gross investment of $10,000
made on December 31, 1996 (commencement of operations).
Returns shown include the reinvestment of all dividends. 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.
5
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management -- continued
[CHART APPEARS HERE]
BRAZOS MICRO CAP GROWTH PORTFOLIO
Aggregate Total Return
For the period December 31, 1997
through November 30, 1998
MicroCap Growth Portfolio 20.30%
Russell 2000 Index 6.24%
<TABLE>
<CAPTION>
Measurement Period Russell 2000
(Fiscal Year Covered) Brazos Index
- ------------------- ---------- ------------
<S> <C> <C>
FYE 12/31/97 $10,000 $10,000
FYE 2/28/98 $11,510 $10,570
FYE 5/31/98 $13,100 $10,471
FYE 8/31/98 $10,520 $ 7,770
FYE 11/30/98 $12,030 $ 9,177
</TABLE>
This chart assumes an initial gross investment of $10,000
made on December 31, 1997 (commencement of operations).
Returns shown include the reinvestment of all dividends. 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.
6
<PAGE>
BRAZOS MUTUAL FUNDS -- SMALL CAP GROWTH PORTFOLIO
Schedule of Portfolio Investments November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
--------- ------------
<S> <C> <C>
Common Stock -- 97.7%
Business Services -- 11.2%
Abacus Direct Corp.*................................. 64,029 $ 3,685,669
BA Merchant Services, Inc.*.......................... 155,288 2,601,074
Harte-Hanks, Inc..................................... 73,594 1,738,658
Iron Mountain, Inc.*................................. 91,315 2,670,964
Metzler Group Inc.*.................................. 138,200 5,735,300
NOVA Corp.*.......................................... 227,167 7,226,750
Paychex, Inc.*....................................... 97,323 4,841,819
Romac International, Inc.*........................... 164,584 2,293,890
The Profit Recovery Group International, Inc.*....... 126,188 4,258,845
------------
35,052,969
------------
Consumer Merchandising -- 14.3%
99 Cents Only Stores*................................ 95,331 4,099,233
Abercrombie & Fitch Co.*............................. 137,800 7,716,800
Ames Department Stores, Inc.*........................ 88,330 2,097,838
BJs Wholesale Club, Inc.*............................ 55,318 2,133,200
Blue Rhino Corporation*.............................. 196,100 4,020,050
Cost Plus, Inc.*..................................... 92,900 3,065,700
Fingerhut Companies, Inc............................. 200,260 2,227,893
Guitar Center, Inc.*................................. 148,700 3,401,513
Linens 'N Things, Inc.*.............................. 202,036 6,187,352
Rare Hospitality International, Inc.*................ 129,800 1,598,162
Regis Corporation.................................... 49,025 1,642,337
Starbucks Corp.*..................................... 84,100 3,879,112
The Cheesecake Factory, Inc.*........................ 101,156 2,630,056
------------
44,699,246
------------
Consumer Non-Durables -- 0.9%
Wild Oats Markets, Inc.*............................. 93,761 2,672,189
------------
2,672,189
------------
Consumer Services -- 11.3%
Bright Horizons, Inc.*............................... 364,573 8,613,037
DeVry, Inc.*......................................... 212,326 5,600,098
Education Management Corp.*.......................... 79,600 3,641,700
International Speedway Corp.......................... 186,605 6,624,477
SFX Entertainment, Inc.*............................. 99,700 4,997,463
Sylvan Learning Systems, Inc.*....................... 208,356 6,055,346
------------
35,532,121
------------
Electronic Technology -- 6.1%
ANTECH Corp.*........................................ 235,883 4,363,835
C-COR Electronics, Inc.*............................. 171,900 2,492,550
Harmonic Lightwaves, Inc.*........................... 313,700 3,960,463
Oak Industries Inc.*................................. 107,337 3,314,030
Orbital Sciences Corp.*.............................. 129,000 4,934,250
------------
19,065,128
------------
</TABLE>
See accompanying Notes to Financial Statements
7
<PAGE>
BRAZOS MUTUAL FUNDS -- SMALL CAP GROWTH PORTFOLIO
Schedule of Portfolio Investments -- continued November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
--------- ------------
<S> <C> <C>
Energy -- 1.6%
EEX Corp.*........................................... 285,148 $ 1,015,840
Global Industries, Ltd.*............................. 4,563 25,952
Newfield Exploration Co.*............................ 92,123 1,796,399
Transmontaigne Oil Co.*.............................. 141,898 2,128,470
------------
4,966,661
------------
Financial -- 9.7%
ALBANK Financial Corp................................ 34,905 2,364,814
AmeriCredit Corp.*................................... 187,276 2,586,750
Bank United Corp..................................... 36,600 1,605,825
Carreker-Antinori, Inc.*............................. 257,300 1,415,150
FirstMerit Corp...................................... 66,178 1,737,172
Golden State Bancorp Inc.*........................... 110,100 2,119,425
HealthCare Financial Partners, Inc.*................. 217,294 7,143,540
Indigo Aviation AB ADR*.............................. 319,957 2,719,634
Litchfield Financial Corp............................ 83,987 1,501,268
Metris Companies, Inc................................ 165,941 5,538,279
Scottish Annuity & Life Holdings, Ltd.*.............. 63,000 795,375
St. Paul Bancorp, Inc................................ 45,900 969,638
------------
30,496,870
------------
Healthcare Products -- 4.3%
Jones Pharma Incorporated............................ 108,440 3,903,840
Medicis Pharmaceutical Corp.*........................ 75,578 4,761,414
Pharmaprint, Inc.*................................... 151,500 1,846,406
Waters Corp.*........................................ 39,436 3,041,501
------------
13,553,161
------------
Healthcare Services -- 8.2%
Boron Lepore & Associates*........................... 96,650 2,971,987
Concentra Managed Care, Inc.*........................ 303,000 3,579,188
Henry Schein, Inc.*.................................. 37,600 1,334,800
MAXIMUS, Inc.*....................................... 124,912 3,809,816
Monarch Dental Corp.*................................ 102,300 1,138,087
Omnicare, Inc........................................ 123,600 3,538,050
PAREXEL International Corp.*......................... 139,971 3,647,994
Serologicals Corp.*.................................. 197,428 5,799,448
------------
25,819,370
------------
Media -- 12.2%
American Tower Corporation*.......................... 177,206 4,097,889
Capstar Broadcasting Corp.*.......................... 223,000 3,986,125
</TABLE>
See accompanying Notes to Financial Statements
8
<PAGE>
BRAZOS MUTUAL FUNDS -- SMALL CAP GROWTH PORTFOLIO
Schedule of Portfolio Investments -- continued November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
---------- ------------
<S> <C> <C>
Media -- 12.2% (continued)
Chancellor Media Corp.*............................ 100,900 $ 3,802,669
Cinar Films, Inc.*................................. 215,920 4,858,200
Clear Channel Communications, Inc.*................ 111,261 5,201,452
Heftel Broadcasting Corp. (A Shares)*.............. 94,226 4,393,287
Outdoor Systems, Inc.*............................. 326,481 8,814,987
TMP Worldwide, Inc.*............................... 91,771 2,936,672
------------
38,091,281
------------
Technology Services & Software -- 16.9%
Affiliated Computer Services, Inc.*................ 190,456 7,296,845
CIBER, Inc.*....................................... 104,623 2,360,556
CSG Systems, Inc.*................................. 47,954 3,009,114
Data Processing Resources Corp.*................... 114,600 2,721,750
Great Plains Software, Inc.*....................... 69,900 2,743,575
Inspire Insurance Solutions, Inc.*................. 189,004 6,331,634
Metro Information Services, Inc.*.................. 53,000 1,378,000
Network Solutions, Inc. (A Shares)*................ 63,632 4,175,850
Pervasive Software, Inc.*.......................... 208,500 2,319,563
SunGard Data Systems, Inc.*........................ 263,392 8,428,544
Superior Consultant Holdings Corp.*................ 44,600 1,627,900
Transaction Systems Architects, Inc.*.............. 177,262 6,735,956
USWeb Corp.*....................................... 164,117 3,733,662
------------
52,862,949
------------
Traditional Heavy Industry -- 1.0%
Tetra Tech, Inc.*.................................. 145,313 3,051,573
------------
3,051,573
------------
Total Common Stocks (Cost $280,767,980)......................... 305,863,518
------------
Mutual Funds -- 0.4%
Firstar Institutional Money Market................. 657,561 657,561
Firstar U.S. Government Money Market............... 657,561 657,561
------------
Total Mutual Funds (Cost $1,315,122)............................ 1,315,122
------------
<CAPTION>
Par Value
----------
<S> <C> <C>
Government Securities -- 2.2%
U.S. Treasury Bill, 4.13%, 1/07/99................. $7,000,000 6,970,287
------------
Total Government Securities (Cost $6,970,287)................... 6,970,287
------------
Total Investments -- 100.3% (Cost $289,053,389)....... 314,148,927
Other Assets and Liabilities (Net) -- (0.3%).......... (941,620)
------------
Total Net Assets -- 100%.............................. $313,207,307
============
</TABLE>
* Denotes non-income producing security.
See accompanying Notes to Financial Statements
9
<PAGE>
BRAZOS MUTUAL FUNDS -- REAL ESTATE SECURITIES PORTFOLIO
Schedule of Portfolio Investments November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
--------- ------------
<S> <C> <C>
Common Stock -- 92.6%
Apartments -- 17.8%
Apartment Investment & Management Company............ 49,100 $ 1,681,675
Archstone Communities Trust.......................... 85,757 1,790,177
Avalonbay Communities, Inc........................... 58,062 1,966,850
BRE Properties, Inc.................................. 47,700 1,150,762
Camden Property Trust................................ 64,900 1,667,119
Equity Residential Property Trust.................... 77,400 3,274,987
Essex Property Trust, Inc............................ 26,100 807,469
Home Properties NY................................... 24,200 595,925
Irvine Apartment Communities......................... 24,800 664,950
Post Properties, Inc................................. 20,900 799,425
Walden Residential................................... 33,100 682,688
------------
15,082,027
------------
Diversified/Other -- 7.9%
Catellus Development Corp............................ 42,100 592,031
Cousins Properties, Inc.............................. 3,900 120,413
Crescent Real Estate Equities Co..................... 68,500 1,699,656
Glenborough Realty Trust, Inc........................ 68,800 1,470,600
Pacific Gulf Properties, Inc......................... 4,600 88,550
St. Joe Corp......................................... 6,100 143,731
Vornado Operating Company............................ 3,520 22,440
Vornado Realty Trust................................. 66,400 2,523,200
------------
6,660,621
------------
Free-Standing -- 1.1%
CAPTEC Net Lease Realty, Inc......................... 54,500 640,375
Franchise Finance Corp. of America................... 12,200 299,663
------------
940,038
------------
Healthcare -- 2.9%
Eldertrust........................................... 87,100 1,045,200
Healthcare Realty Trust, Inc......................... 20,900 480,700
Meditrust Corp....................................... 64,800 984,150
------------
2,510,050
------------
Industrial -- 4.2%
AMB Property Corp.................................... 7,100 157,975
First Industrial Realty Trust, Inc................... 61,500 1,487,531
Meridian Industrial Trust, Inc....................... 13,000 313,625
Prologis Trust....................................... 73,400 1,623,975
------------
3,583,106
------------
Lodging/Resorts -- 9.8%
Candlewood Hotel Company, Inc........................ 91,500 388,875
Felcor Suite Hotels, Inc............................. 119,587 2,847,665
</TABLE>
See accompanying Notes to Financial Statements
10
<PAGE>
BRAZOS MUTUAL FUNDS -- REAL ESTATE SECURITIES PORTFOLIO
Schedule of Portfolio Investments -- continued November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
---------- ------------
<S> <C> <C>
Lodging/Resorts -- 9.8% (continued)
Innkeepers USA Trust................................ 400 $ 4,425
Meristar Hospitality Corp. ......................... 25,422 494,140
Patriot American Hospitality, Inc. ................. 270,899 1,997,880
Prime Hospitality Corp. ............................ 57,100 499,625
Starwood Hotels & Resorts Trust..................... 67,600 2,053,350
------------
8,285,960
------------
Manufactured Homes -- 2.0%
Chateau Properties, Inc. ........................... 18,500 529,562
Manufactured Home Communities, Inc. ................ 23,500 575,750
Sun Communities, Inc. .............................. 18,200 592,638
------------
1,697,950
------------
Mixed: Office/Industrial -- 4.4%
Bedford Property Investors, Inc. ................... 53,100 942,525
Duke Realty Investments, Inc. ...................... 14,200 322,162
Liberty Property Trust.............................. 14,300 352,137
Reckson Associates Realty Corp. .................... 27,700 638,831
Spieker Properties, Inc. ........................... 40,700 1,470,288
------------
3,725,943
------------
Office -- 21.4%
Arden Realty Group, Inc............................. 89,500 2,058,500
Boston Properties, Inc.............................. 20,800 656,500
Brandywine Realty Trust............................. 61,400 1,105,200
CarrAmerica Realty Corp............................. 70,200 1,702,350
Cornerstone Properties, Inc......................... 72,300 1,134,206
Equity Office Properties Trust...................... 193,278 4,856,110
Highwoods Properties, Inc........................... 45,000 1,223,438
Kilroy Realty Corp.................................. 44,000 984,500
Mack-Cali Realty Corp............................... 34,900 1,036,094
Prentiss Properties Trust........................... 45,900 998,325
SL Green Realty Corp................................ 48,500 1,036,688
Tower Realty Trust, Inc............................. 34,900 656,556
Trizec Hahn Corp.................................... 33,400 688,875
------------
18,137,342
------------
Regional Malls -- 7.6%
General Growth Properties........................... 23,600 893,850
JP Realty, Inc...................................... 19,500 435,094
Rouse Company....................................... 40,200 1,097,963
Simon Property Group, Inc........................... 106,600 3,158,025
The Macherich Co.................................... 14,800 394,050
Westfield America, Inc.............................. 29,600 518,000
------------
6,496,982
------------
</TABLE>
See accompanying Notes to Financial Statements
11
<PAGE>
BRAZOS MUTUAL FUNDS -- REAL ESTATE SECURITIES PORTFOLIO
Schedule of Portfolio Investments -- continued November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
--------- ------------
<S> <C> <C>
Specialty -- 0.6%
Golf Trust of America, Inc......................... 19,000 $ 496,375
------------
496,375
------------
Storage -- 4.4%
Public Storage, Inc. .............................. 49,700 1,320,156
Sovran Self Storage, Inc. ......................... 9,500 242,250
Storage Trust Realty............................... 34,300 769,606
Storage USA, Inc................................... 44,000 1,397,000
------------
3,729,012
------------
Strip Centers -- 8.5%
Burnham Pacific Properties, Inc.................... 40,100 516,288
Developers Diversified Realty Corp................. 38,400 741,600
First Washington Realty Trust, Inc................. 14,400 331,200
IRT Property Co.................................... 94,400 944,000
JDN Realty Corp.................................... 28,100 581,319
Kimco Realty Corp.................................. 31,200 1,207,050
New Plan Executive Realty Trust.................... 42,700 934,063
Pan Pacific Retail Properties, Inc................. 33,900 675,881
Philips International Realty....................... 37,600 582,800
Regency Realty Corp................................ 28,100 655,081
------------
7,169,282
------------
Total Common Stocks (Cost $87,177,639)......................... 78,514,688
------------
Mutual Funds -- 7.3%
Firstar Institutional Money Market................. 3,181,056 3,181,056
Firstar U.S. Government Money Market............... 2,986,694 2,986,694
------------
Total Mutual Funds (Cost $6,167,750)........................... 6,167,750
------------
Total Investments -- 99.9% (Cost $93,345,389).................... 84,682,438
Other Assets and Liabilities (Net) -- 0.1%....................... 106,585
------------
Total Net Assets -- 100%......................................... $ 84,789,023
============
</TABLE>
See accompanying Notes to Financial Statements
12
<PAGE>
BRAZOS MUTUAL FUNDS -- MICRO CAP GROWTH PORTFOLIO
Schedule of Portfolio Investments November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
--------- ------------
<S> <C> <C>
Common Stock -- 82.4%
Business Services -- 6.9%
Abacus Direct Corp.*................................. 13,400 $ 771,337
BA Merchant Services, Inc.*.......................... 45,000 753,750
Market Facts, Inc.*.................................. 36,200 886,900
The Profit Recovery Group International, Inc.*....... 13,800 465,750
Romac International, Inc.*........................... 31,380 437,359
-----------
3,315,096
-----------
Consumer Merchandising -- 18.6%
99 Cents Only Stores*................................ 23,750 1,021,250
Ames Department Stores, Inc.*........................ 30,400 722,000
Blue Rhino Corporation*.............................. 69,000 1,414,500
Chico's Fas, Inc.*................................... 10,000 218,750
Cost Plus, Inc.*..................................... 22,500 742,500
Fingerhut Companies, Inc............................. 40,000 445,000
Guitar Center, Inc.*................................. 47,200 1,079,700
Michaels Stores, Inc.*............................... 16,800 302,400
O'Charleys, Inc.*.................................... 62,400 834,600
PJ America, Inc.*.................................... 45,000 880,312
Rare Hospitality International, Inc.*................ 37,200 458,025
The Cheesecake Factory*.............................. 29,400 764,400
-----------
8,883,437
-----------
Consumer Non-Durables -- 1.0%
Wild Oats Markets, Inc.*............................. 17,000 484,500
-----------
484,500
-----------
Consumer Services -- 7.2%
Bright Horizons, Inc.*............................... 66,010 1,559,486
CustomTracks Corp.*.................................. 100,000 875,000
Education Management Corp.*.......................... 21,800 997,350
-----------
3,431,836
-----------
Electronic Technology -- 10.5%
ANTEC Corp.*......................................... 55,900 1,034,150
Astropower, Inc.*.................................... 100,000 862,500
C-COR Electronics, Inc.*............................. 58,700 851,150
Harmonic Lightwaves, Inc.*........................... 67,600 853,450
Oak Industries, Inc.*................................ 34,200 1,055,925
Orbital Sciences Corp.*.............................. 8,700 332,775
-----------
4,989,950
-----------
Energy -- 0.6%
Transmontaigne Oil Co.*.............................. 19,000 285,000
-----------
285,000
-----------
</TABLE>
See accompanying Notes to Financial Statements
13
<PAGE>
BRAZOS MUTUAL FUNDS -- MICRO CAP GROWTH PORTFOLIO
Schedule of Portfolio Investments -- continued November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
--------- ------------
<S> <C> <C>
Financial -- 5.6%
Carreker-Antinori, Inc.*............................. 64,200 $ 353,100
HealthCare Financial Partners, Inc.*................. 11,300 371,487
Indigo Aviation AB ADR*.............................. 97,400 827,900
Litchfield Financial Corp............................ 20,100 359,288
Scottish Annuity & Life Holdings, Ltd.*.............. 62,000 782,750
-----------
2,694,525
-----------
Healthcare Products -- 3.5%
Medicis Pharmaceutical Corp.*........................ 16,300 1,026,900
Pharmaprint, Inc.*................................... 54,200 660,563
-----------
1,687,463
-----------
Healthcare Services -- 14.8%
American Medical Security Group, Inc................. 78,500 1,123,531
Boron Lepore & Associates*........................... 26,400 811,800
Concentra Managed Care, Inc.*........................ 70,000 826,875
Healthcare Recoveries, Inc.*......................... 35,000 581,875
MAXIMUS, Inc.*....................................... 26,900 820,450
Monarch Dental Corp.*................................ 54,700 608,537
Orthodontic Centers of America, Inc.*................ 37,500 717,188
PAREXEL International Corp.*......................... 20,000 521,250
Serologicals Corp.*.................................. 35,500 1,042,813
-----------
7,054,319
-----------
Media -- 3.2%
Cinar Films, Inc.*................................... 49,700 1,118,250
TMP Worldwide, Inc.*................................. 13,500 432,000
-----------
1,550,250
-----------
Technology Services & Software -- 9.7%
A Consulting Team, Inc.*............................. 49,200 384,375
Data Processing Resources*........................... 21,200 503,500
Great Plains Software, Inc.*......................... 16,500 647,625
Inspire Insurance Solutions, Inc.*................... 36,000 1,206,000
Metro Information Services, Inc.*.................... 14,500 377,000
Pervasive Software, Inc.*............................ 70,500 784,313
Superior Consultant Holdings Corp.*.................. 19,600 715,400
-----------
4,618,213
-----------
Traditional Heavy Industry -- 0.8%
Tetra Tech, Inc.*.................................... 19,075 400,575
-----------
400,575
-----------
Total Common Stocks (Cost $36,658,274)........................... 39,395,164
-----------
</TABLE>
See accompanying Notes to Financial Statements
14
<PAGE>
BRAZOS MUTUAL FUNDS -- MICRO CAP GROWTH PORTFOLIO
Schedule of Portfolio Investments -- continued November 30, 1998
<TABLE>
<CAPTION>
Shares Market Value
---------- --------------
<S> <C> <C>
Mutual Funds -- 7.0%
Firstar Institutional Money Market............... 1,666,735 $ 1,666,735
Firstar U.S. Government Money Market............. 1,666,735 1,666,735
--------------
Total Mutual Funds (Cost $3,333,470).......................... 3,333,470
--------------
<CAPTION>
Par Value
----------
<S> <C> <C>
Government Securities-- 11.3%
U.S. Treasury Bills, 3.85%, 12/03/98............. $ 700,000 699,850
U.S. Treasury Bills, 4.34%, 3/04/99.............. 4,750,000 4,696,745
--------------
Total Government Securities (Cost $5,396,595)................. 5,396,595
--------------
Total Investments -- 100.7% (Cost $45,388,339).................. 48,125,229
Other Assets and Liabilities (Net) -- (0.7)%.................... (351,244)
--------------
Total Net Assets -- 100%........................................ $ 47,773,985
==============
</TABLE>
* Denotes non-income producing security
See accompanying Notes to Financial Statements
15
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Assets and Liabilities November 30, 1998
<TABLE>
<CAPTION>
Small Cap Real Estate Micro Cap
Growth Securities Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
-----------------------------------------
Assets:
Investments, at market value (cost
$289,053,389, $93,345,389 and
$45,388,339, respectively)......... $314,148,927 $84,682,438 $48,125,229
Cash................................ 11,032 60,914 13,684
Receivables for investment
securities sold.................... 4,379,642 818,539 3,750
Dividends and interest receivable... 47,772 109,880 12,445
Deferred organization costs......... 18,193 18,193 --
Other assets........................ 25,172 25,882 26,656
-----------------------------------------
Total Assets...................... 318,630,738 85,715,846 48,181,764
-----------------------------------------
Liabilities:
Payables for investment securities
purchased.......................... 5,079,651 819,591 310,509
Payable to Adviser.................. 218,656 50,923 42,658
Other accrued expenses.............. 125,124 56,309 54,612
-----------------------------------------
Total Liabilities................. 5,423,431 926,823 407,779
-----------------------------------------
Net Assets.......................... $313,207,307 $84,789,023 $47,773,985
=========================================
Net Assets Consisted Of:
Capital paid in..................... $308,074,367 $100,608,626 $45,605,030
Undistributed net investment income
................................... -- 435,600 --
Accumulated net realized loss....... (19,962,598) (7,592,252) (567,935)
Net unrealized appreciation
(depreciation) on investments...... 25,095,538 (8,662,951) 2,736,890
-----------------------------------------
Net Assets.......................... $313,207,307 $84,789,023 $47,773,985
=========================================
Shares of beneficial interest
outstanding (unlimited shares of no
par value authorized).............. 22,263,322 9,207,237 3,972,438
Net Asset Value, offering and
redemption price per share......... $14.07 $9.21 $12.03
=========================================
</TABLE>
See accompanying Notes to Financial Statements
16
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Operations for the Year ended November 30, 1998
<TABLE>
<CAPTION>
Small Cap Real Estate Micro Cap
Growth Securities Growth
Portfolio Portfolio Portfolio+
<S> <C> <C> <C>
--------------------------------------
Investment Income:
Dividends (net of foreign taxes
withheld of $556, $0 and $0,
respectively)....................... $ 152,076 $ 4,076,921 $ 5,513
Interest............................. 658,554 236,442 304,400
--------------------------------------
Total investment income............ 810,630 4,313,363 309,913
--------------------------------------
Expenses:
Advisory fees........................ 1,578,588 712,269 326,266
Administration fees.................. 156,579 74,824 25,335
Accounting fees...................... 67,191 50,231 38,110
Custodian fees....................... 48,042 46,941 18,139
Transfer agent fees and expenses..... 54,284 37,077 42,467
Trustees' fees and expenses.......... 5,333 5,384 5,334
Amortization of organization and
offering expenses................... 11,488 11,488 --
Registration fees.................... 105,331 47,938 37,279
Reports to shareholders.............. 31,094 11,758 11,048
Professional fees.................... 70,537 36,831 11,465
Other................................ 4,065 2,230 5,777
--------------------------------------
Total expenses before fee waivers.. 2,132,532 1,036,971 521,220
Advisory fees waived............... -- (47,708) (76,089)
Administration fees waived......... -- -- (2,124)
Accounting fees waived............. -- -- (5,486)
Transfer agent fees waived......... -- -- (2,500)
--------------------------------------
Total expenses, net................ 2,132,532 989,263 435,021
--------------------------------------
Net investment income (loss)......... (1,321,902) 3,324,100 (125,108)
--------------------------------------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized loss on investment
transactions........................ (19,900,633) (7,566,179) (567,935)
Net unrealized appreciation
(depreciation) of investments during
the period.......................... 22,192,195 (9,733,110) 2,736,890
--------------------------------------
Net gain (loss) on investments....... 2,291,562 (17,299,289) 2,168,955
--------------------------------------
Net increase (decrease) in net assets
resulting
from operations....................... $ 969,660 $(13,975,189) $2,043,847
======================================
</TABLE>
+ The Micro Cap Growth Portfolio commenced operations on December 31, 1997.
See accompanying Notes to the Financial Statements
17
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Small Cap Real Estate Micro Cap
Growth Securities Growth
Portfolio Portfolio Portfolio+
<S> <C> <C> <C>
---------------------------------------
For the Year Ended November 30, 1998
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss)........ $ (1,321,902) $ 3,324,100 $ (125,108)
Net realized loss on investment
transactions....................... (19,900,633) (7,566,179) (567,935)
Net unrealized appreciation
(depreciation) of investments
during the period.................. 22,192,195 (9,733,110) 2,736,890
---------------------------------------
Net increase (decrease) in net
assets resulting from operations... 969,660 (13,975,189) 2,043,847
---------------------------------------
Distributions to shareholders from:
Net investment income............... -- (3,252,946) --
Net realized gain on investments.... (650,416) (567,899) --
---------------------------------------
Total distributions................. (650,416) (3,820,845) --
---------------------------------------
Increase in net assets from Fund share
transactions......................... 231,990,081 49,276,804 45,730,138
---------------------------------------
Total increase in net assets........ 232,309,325 31,480,770 47,773,985
Net Assets:
Beginning of period................. 80,897,982 53,308,253 --
---------------------------------------
End of period....................... $313,207,307 $ 84,789,023 $47,773,985
=======================================
Undistributed Net Investment Income
included in Net Assets at December
31, 1998........................... $ -- $ 435,600 $ --
=======================================
</TABLE>
+ The Micro Cap Growth Portfolio commenced operations on December 31, 1997.
See accompanying Notes to the Financial Statements
18
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Changes in Net Assets -- continued
<TABLE>
<CAPTION>
Small Cap Real Estate
Growth Securities
Portfolio Portfolio
<S> <C> <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.......................... -- (643,601)
Net realized gain on investments............... (3,619,737) (3,978,631)
------------------------
Total distributions............................ (3,619,737) (4,622,232)
------------------------
Increase in net assets from Fund share
transactions.................................... 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
========================
Undistributed Net Investment Income included in
Net Assets at December 31, 1998............... $ -- $ 575,203
=============================
</TABLE>
* Commencement of Operations.
See accompanying Notes to Financial Statements
19
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights
The following tables include selected per-share data for a share outstanding
for the entire period and other performance information derived from the finan-
cial statements. They should be read in conjunction with the financial state-
ments and notes thereto.
<TABLE>
<CAPTION>
For the
For the Year Ended Period December 31, 1996*
November 30, 1998 through November 30, 1997
------------------ -------------------------
<S> <C> <C>
Small Cap Growth Portfolio
Net Asset Value -- Beginning of
Period........................... $ 13.49 $ 10.00
-------- -------
Investment Operations:
Net investment loss............. (0.11)/1/ (0.03)
Net realized and unrealized
gains on investments........... 0.79 4.69
-------- -------
Total from investment
operations................... 0.68 4.66
-------- -------
Distributions:
From net realized gains......... (0.10) (1.17)
-------- -------
Net Asset Value -- End of Period.. $ 14.07 $ 13.49
======== =======
Ratios and Supplemental Data:
Total Return...................... 5.06% 47.08%***
Ratios (to average net assets)....
Expenses/2..................../. 1.21% 1.35%**
Net investment loss, including
effects of waivers............. (0.75)% (0.68)%**
Portfolio turnover rate........... 104% 148%
Net assets at end of period (000
omitted)......................... $313,207 $80,898
</TABLE>
See accompanying Notes to Financial Statements
20
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights -- continued
<TABLE>
<CAPTION>
For the
For the Year Ended Period December 31, 1996*
November 30, 1998 through November 30, 1997
------------------ -------------------------
<S> <C> <C>
Real Estate Securities Portfolio
Net Asset Value -- Beginning of
Period........................... $11.24 $10.00
-------- -------
Investment Operations:
Net investment income........... 0.44/1/ 0.35
Net realized and unrealized
gains (losses) on investments.. (1.90) 2.05
-------- -------
Total from investment
operations..................... (1.46) 2.40
-------- -------
Distributions:
From net investment income...... (.43) (0.23)
From net realized gains......... (.14) (0.93)
-------- -------
Total distributions............. (.57) (1.16)
-------- -------
Net Asset Value -- End of Period.. $ 9.21 $11.24
======== =======
Ratios and Supplemental Data:
Total Return...................... (13.64)% 24.39%***
Ratios (to average net assets):
Expenses/3..................../. 1.25% 1.25%**
Net investment income, including
effects of waivers............. 4.19% 4.61%**
Portfolio turnover rate........... 157% 185%
Net assets at end of period (000
omitted)......................... $84,789 $53,308
</TABLE>
See accompanying Notes to Financial Statements
21
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights -- continued
<TABLE>
<CAPTION>
For the
Period December 31, 1997*
through November 30, 1998
-------------------------
<S> <C>
Micro Cap Growth Portfolio
Net Asset Value -- Beginning of Period................ $10.00
-------
Investment Operations:
Net investment loss................................. (0.05)/1/
Net realized and unrealized gains on investments.... 2.08
-------
Total from investment operations.................... 2.03
-------
Net Asset Value -- End of Period...................... $12.03
=======
Ratios and Supplemental Data:
Total Return.......................................... 20.30%***
Ratios (to average net assets):
Expenses/4......................................../. 1.60%**
Net investment loss, including effects of waivers... (0.46)%**
Portfolio turnover rate............................... 121%
Net assets at end of period (000 omitted)............. $47,774
</TABLE>
* Commencement of operations.
** Annualized.
*** Not annualized.
1 Net investment income (loss) per share represents net investment income
(loss) divided by the average shares outstanding throughout the period.
2 The Adviser has voluntarily agreed to waive a portion of its advisory fees
and to assume expenses otherwise payable by the Portfolio (if necessary) in
order to keep the annual expense ratio from exceeding 1.35% of its average
daily net assets. In addition, the Administrator, Accounting Agent and Trans-
fer 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 av-
erage net assets would have been 1.80% for the period ended November 30,
1997.
3 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 Trans-
fer 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 av-
erage net assets would have been 1.31% for the year ended November 30, 1998
and 1.83% for the period ended November 30, 1997.
4 The Adviser has voluntarily agreed to waive a portion of its advisory fees
and assume expenses otherwise payable by the Portfolio (if necessary) in or-
der to keep the annual expense ratio from exceeding 1.60% of its average
daily net assets. In addition, the prior Administrator, Accounting Agent and
Transfer Agent waived a portion of their fees for the period ended November
30, 1998. Without the waiver of expenses, the annualized ratio of expenses to
average net assets would have been 1.90% for the period ended November 30,
1998.
See accompanying Notes to Financial Statements
22
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements
1. Description of the Fund. Brazos Mutual Funds (the "Fund") is registered un-
der the Investment Company Act of 1940, as amended (the "1940 Act"), as a di-
versified, open-end management investment company established as a Delaware
business trust. The Declaration of Trust, dated October 28, 1996, permits the
Trustees to establish separate series or "Portfolios," each of which may issue
separate classes of shares. The authorized shares of beneficial interest of the
Fund are currently divided into three Portfolios, the BRAZOS Micro Cap Growth
Portfolio ("Micro Cap Growth Portfolio"), the BRAZOS Real Estate Securities
Portfolio ("Real Estate Securities Portfolio") and the BRAZOS Small Cap Growth
Portfolio ("Small Cap Growth Portfolio") (each, a "Portfolio" and collectively,
the "Portfolios"). Each Portfolio currently consists of a single class of
shares. The investment objective of the Micro Cap Growth Portfolio is to pro-
vide maximum capital appreciation, consistent with reasonable risk to princi-
pal, by investing primarily in micro capitalization companies. The investment
objective of the Real Estate Securities Portfolio is to provide a balance of
income and appreciation, consistent with reasonable risk to principal, by in-
vesting primarily in equity securities of companies which are principally en-
gaged in the real estate industry. 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.
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 de-
pend generally on their ability to generate cash flow to make distributions to
shareholders and certain REITs have self-liquidation provisions by which mort-
gages 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 Rev-
enue Code of 1986, as amended (the "Internal Revenue Code") or its failure to
maintain exemption from registration under the 1940 Act.
2. Significant Accounting Policies. The following is a summary of the signifi-
cant 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 valu-
ation 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 amor-
tized cost, which ap-
23
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements -- continued
proximates market value, unless the Fund's Board of Trustees determines that
this does not represent fair value. The value of all other securities is deter-
mined in good faith under the direction of the Board of Trustees. As of Novem-
ber 30, 1998, no securities were valued by the Board of Trustees.
Federal Income Taxes. Each Portfolio is treated as a separate entity and in-
tends to qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code, and to distribute all of its taxable income to its
shareholders. Therefore, no provision for federal income tax is required.
The Portfolios may be subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of net investment income and net
capital gains. The Portfolios intend to distribute their net investment income
and capital gains as necessary to avoid this excise tax.
Distributions to Shareholders. Each Portfolio will distribute annually to
shareholders substantially all of its net investment income and any net real-
ized capital gains. The character of distributions made during the year from
net investment income or net realized gains may differ from the characteriza-
tion for federal income tax purposes due to differences in the recognition of
income and expense items for financial statement and tax purposes. Where appro-
priate, reclassifications between net asset accounts are made for such differ-
ences that are permanent in nature.
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 capi-
tal 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 ("SOP") 93-2, Determination, Disclosure and Financial
Statement Presentation of Income, Capital Gain and Return of Capital Distribu-
tions by Investment Companies, distributions representing a return of capital
for tax purposes are charged to capital paid in.
Deferred Organization Costs. Organizational costs have been capitalized by the
Fund and are being amortized over sixty months commencing with operations by
the Small Cap Growth Portfolio and the Real Estate Securities Portfolio. 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 redemp-
tion 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.
Use of Estimates in the Preparation of Financial Statements. The preparation of
financial statements in conformity will generally accepted accounting princi-
ples requires management to
24
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements -- continued
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 dur-
ing the reporting period. Actual results could differ from those estimates.
Other. Investment security transactions are accounted for on a trade date ba-
sis. Each Portfolio uses the specific identification method for determining re-
alized gain and loss on investments for both financial and federal income tax
reporting purposes. Dividend income and distributions to shareholders are re-
corded on the ex-dividend date. Interest income is recorded on the accrual ba-
sis.
3. Investment Securities. The aggregate purchases and sales of long-term secu-
rities for the year ended November 30, 1998 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Small Cap Growth Portfolio........................... $397,158,349 $169,450,110
Real Estate Securities Portfolio..................... 158,976,242 116,013,295
Micro Cap Growth Portfolio........................... 66,646,610 29,420,778
</TABLE>
4. Advisory Fees and Other transactions with Affiliates. The Fund, on behalf of
each Portfolio, employs John McStay Investment Counsel (the "Adviser"), an in-
vestment counseling firm founded in 1983, to furnish investment advisory and
other services to the Fund. Under Investment Advisory Agreements with the Fund,
dated November 25, 1996, and November 14, 1997, the Adviser manages the invest-
ment and reinvestment of the assets of the Portfolios. The Adviser must adhere
to the stated investment objectives and policies of the Portfolios, and is sub-
ject to the control and supervision of the Fund's Board of Trustees. For its
services under the Advisory Agreement, the Portfolios' pay the Adviser a
monthly fee at the annual rate of 1.20%, 0.90% and 0.90% of the average daily
net assets of the Micro Cap Growth Portfolio, Small Cap Growth Portfolio and
Real Estate Securities Portfolio, respectively. The Adviser has voluntarily
agreed to keep operating expenses for the Micro Cap Growth Portfolio, Small Cap
Growth Portfolio and Real Estate Securities Portfolio (excluding taxes, ex-
traordinary expenses, brokerage commissions and interest) from exceeding an an-
nual rate of 1.60%, 1.35% and 1.25%, respectively, of each Portfolio's average
daily net assets.
The following table summarizes the advisory fees for the period ended November
30, 1998:
<TABLE>
<CAPTION>
Gross
Adviser Adviser Fee
Fee Waived
---------- -----------
<S> <C> <C>
Small Cap Growth Portfolio............................ $1,578,588 $ --
Real Estate Securities Portfolio...................... 712,269 47,708
Micro Cap Growth Portfolio............................ 326,266 76,089
</TABLE>
Effective October 1, 1998, the administration, accounting and transfer agent
services previously provided by PFPC Inc. ("PFPC") are provided by Firstar Mu-
tual Fund Services, LLC, a subsidiary of Firstar Bank Milwaukee, NA ("Firstar
Bank"). Firstar Bank serves as custodian for the Portfolios.
25
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements -- continued
Prior to January 5, 1998, the services provided by PFPC were provided by Rodney
Square Management Corporation ("RSMC"). The following table summarizes the ad-
ministration, accounting and transfer agent fees waived by both PFPC and RSMC
in the Micro Cap Growth Portfolio for the year ended November 30, 1998:
<TABLE>
<CAPTION>
Administration Fees Accounting Fees Transfer Agent Fees
Waived Waived Waived
------------------- --------------- -------------------
<S> <C> <C> <C>
PFPC.................... $1,508 $3,637 $2,500
RSMC.................... 616 1,849 --
------ ------ ------
Total Fees Waived....... $2,124 $5,486 $2,500
====== ====== ======
</TABLE>
Pembrook Securities ("Pembrook"), a brokerage firm directly owned by the Ad-
viser of the Portfolios, directly effects purchases and sales of securities for
the Portfolios. In connection therewith, brokerage commissions paid by the
Portfolios for the year ended November 30, 1998 totaled $203,723.
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 from the Fund for distribution of shares
of the Portfolios, although it will receive reimbursement by the Adviser of
out-of-pocket expenses.
5. Fund Shares. At November 30, 1998, there were an unlimited number of shares
of beneficial interest, no par value, authorized. The following table summa-
rizes the activity in shares of each Portfolio:
For the Year EndedNovember 30, 1998
<TABLE>
<CAPTION>
Small Cap Real Estate Micro Cap
Growth Portfolio Securities Portfolio Growth Portfolio+
------------------------ ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold............. 18,407,184 $262,346,037 4,926,396 $53,668,701 4,701,406 $54,365,739
Shares issued to
shareholders in
reinvestment of
distributions.......... 46,937 638,350 260,983 2,785,442 -- --
Shares redeemed......... (2,189,181) (30,994,306) (722,943) (7,177,339) (728,968) (8,635,601)
---------- ------------ --------- ----------- --------- -----------
Net increase............ 16,264,940 $231,990,081 4,464,436 $49,276,804 3,972,438 $45,730,138
============ =========== ===========
Shares outstanding:
Beginning of period..... 5,998,382 4,742,801 --
---------- --------- ---------
End of period........... 22,263,322 9,207,237 3,972,438
========== ========= =========
</TABLE>
+ The Micro Cap Growth Portfolio commenced operations on December 31, 1997.
26
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements -- continued
For the Period Ended 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
========= =========
</TABLE>
++ Commencement of operations.
6. Income Tax Information. At November 30, 1998, the investment cost, gross
unrealized appreciation and depreciation on investments and capital loss carry-
overs (which may be carried over to offset future capital gains through Novem-
ber 30, 2006) for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Net Net Capital
Federal Tax Unrealized Unrealized Appreciation/ Loss
Cost Appreciation Depreciation (Depreciation) Carryovers
------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Small Cap Growth
Portfolio.............. $289,609,344 $42,022,373 $(17,482,790) $ 24,539,583 $(19,664,261)
Real Estate Securities
Portfolio.............. 98,512,270 705,749 (14,535,581) (13,829,832) (2,392,996)
Micro Cap Growth
Portfolio.............. 45,509,352 5,223,133 (2,607,256) 2,615,877 (451,347)
</TABLE>
For corporate shareholders in the Real Estate Securities Portfolio, the per-
centages of dividend income distributed for the year ended November 30, 1998
which is designated as qualifying for the dividends-received deduction is 100%
(unaudited).
27
<PAGE>
BRAZOS MUTUAL FUNDS
Report of Independent Accountants December 30, 1998
To the Shareholders and Board of Trustees of the
Brazos Mutual Funds:
In our opinion, the accompanying statements of assets and liabilities, includ-
ing the schedules of portfolio investments, and the related statements of oper-
ations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Brazos Mutual
Funds (comprising respectively, the Brazos Small Cap Growth Portfolio, Brazos
Real Estate Securities Portfolio and Brazos Micro Cap Growth Portfolio) (the
"Portfolios") at November 30, 1998, the results of each of their operations,
the changes in each of their net assets and financial highlights for the peri-
ods indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Portfolios' management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in accor-
dance with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presenta-
tion. We believe that our audits, which included confirmation of securities at
November 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
December 30, 1998
28
<PAGE>
TRUSTEES
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
OFFICERS
DAN L. HOCKENBROUGH
Chairman of the Board,
President and Chief Financial Officer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
LOREN J. SOETENGA
Vice President and Treasurer
ADMINISTRATOR
FIRSTAR MUTUAL FUND SERVICES LLC
615 E. MICHIGAN STREET
MILWAUKEE, WISCONSIN 53202
CUSTODIAN
FIRSTAR BANK MILWAUKEE, N.A.
615 E. MICHIGAN STREET
MILWAUKEE, WISCONSIN 53202
COUNSEL
DRINKER, BIDDLE & REATH LLP
1345 CHESTNUT STREET
PHILADELPHIA, PENNSYLVANIA 19107
AUDITORS
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
MILWAUKEE, WISCONSIN 53202
ANNUAL REPORT
NOVEMBER 30, 1998
BRAZOS
SMALL CAP
GROWTH PORTFOLIO
REAL ESTATE
SECURITIES PORTFOLIO
MICRO CAP
GROWTH PORTFOLIO
----------
INVESTMENT ADVISER
JOHN McSTAY
INVESTMENT COUNSEL
5949 SHERRY LANE
SUITE 1600
DALLAS, TEXAS 75225
BRAZOS MUTUAL FUNDS
BRAZOS MUTUAL FUNDS
