BRAZOS MUTUAL FUNDS
(CLASS Y SHARES)
PROSPECTUS
FEBRUARY 12, 1999
AS SUPPLEMENTED ON MAY 13, 1999, JULY 15, 1999, AUGUST 16, 1999 AND OCTOBER 21,
1999.
INVESTMENT OBJECTIVE
BRAZOS Micro Cap Growth Portfolio
Micro Capitalization Growth
BRAZOS Small Cap Growth Portfolio
Small Capitalization Growth
BRAZOS Real Estate Securities Portfolio
Real Estate Growth and Income
BRAZOS Growth Portfolio
Growth
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ACCURACY OF THIS PROSPECTUS. IT IS A CRIME
FOR ANYONE TO TELL YOU OTHERWISE.
Transfer Agent:
1776 Heritage Drive,
State Street Bank and Trust Company North Quincy, MA02171
Telephone: 1-800-426-9157 Website: www.brazosfund.com
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TABLE OF CONTENTS
INVESTMENT OBJECTIVE
INVESTMENT POLICIES
INVESTMENT SUITABILITY
RISK CONSIDERATIONS
PAST PERFORMANCE
INVESTOR EXPENSES
Brazos Micro Cap Growth Portfolio ......................................... 3
Brazos Small Cap Growth Portfolio ......................................... 3
Brazos Real Estate Securities Portfolio ................................... 7
Brazos Growth Portfolio ................................................... 11
Risk Elements ............................................................. 13
Information About the Adviser ............................................. 15
Information for First Time Mutual Fund Investors .......................... 18
Valuation of Fund Shares .................................................. 19
Dividends, Capital Gains Distributions and Taxes .......................... 19
Purchase of Shares ........................................................ 20
Redemption of Shares ...................................................... 23
Retirement Plans .......................................................... 25
Year 2000 ................................................................. 26
Financial Highlights ...................................................... 27
For More Information .............................................. Back Cover
2
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BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Brazos Micro Cap Growth Portfolio
("Micro Cap") and the Brazos Small Cap Growth Portfolio ("Small Cap") are to
provide maximum capital appreciation, consistent with reasonable risk to
principal.
INVESTMENT POLICIES AND STRATEGIES
The majority of equity securities (65%) in each Portfolio will have
market capitalizations as follows:
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MARKET CAPITALIZATION SIZE
(AT TIME OF PURCHASE)
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Micro Cap $600 million1 or lower
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Small Cap $1.8 billion or lower, or a capitalization
of companies represented in the Russell
2000 Index.2
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1 The $600 million target will fluctuate based on the smallest 10% of
domestic securities in the Wilshire 5000 Index.
2 This target will fluctuate with changes in market conditions and the
composition of the Russell 2000 Index.
The Portfolios seek to achieve their objectives by investing primarily in
micro and small capitalization companies, respectively. For both Portfolios, the
remaining securities acquired may have market capitalizations that exceed the
target capitalization. Micro Cap generally seeks investment in securities of
companies with growth rates of 25%, average annual revenues under $500 million,
and low debt levels. Small Cap generally seeks investment in securities of
companies with growth rates above 20%, average annual revenues below $1 billion,
above average return on equity, and low debt levels.
The types of equity securities that can be purchased include common
stocks and securities convertible into common stocks. Convertible securities
include convertible preferred stock, convertible bonds, and American Depository
Receipts (ADRs). Investments in securities of foreign companies are expected to
be less than 5% of each portfolio and would typically be made using ADRs. Most
ADRs are traded on a U.S. stock exchange. Market conditions may lead to higher
levels (up to 100%) of temporary investments such as money market instruments or
U.S. Treasury Bills. Temporary investments are expected to be 5% to 10% of each
portfolio under normal circumstances.
3
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The investment process involves consistent communications with senior
management, suppliers, competitors and customers in an attempt to understand the
dynamics within each company's business. The Fund then selects companies with
strong growth in revenue, earnings and cash flow, predictable operating models,
seasoned management, and unique products or services. JMIC believes that smaller
companies have greater potential to deliver above average growth rates that may
not yet have been recognized by investors.
JMIC may sell securities when the value of a security or a group of
securities within a certain sector violates diversification objectives. A high
rate of portfolio turnover involves greater transaction expenses and possible
adverse tax consequences to the Portfolios' shareholders.
To manage fluctuations in the value of the Portfolios' investments, JMIC
invests across 10-12 sectors with no sector representing more than 25% of the
value of each Portfolio.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Micro Cap and Small Cap may be appropriate for investors who:
o are seeking long-term capital growth
o do not need current income
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in principal value of their
investment.
Investment in the Portfolios involves investment risks, including
possible loss of principal. The value of the Portfolios' investments could be
influenced by changes in the stock market as a whole, by changes in a certain
industry, or by changes in certain stocks. The Portfolios' investments in
instruments such as options and futures may be sensitive to interest rate
changes or values due to their structure or contract terms. The value of each
security at the time of acquisition is not expected to exceed 4% of the value of
investments in either the Micro Cap or Small Cap Portfolios.
Small companies may have certain risks that their larger counterparts may
not. Small companies may have limited product lines, financial resources, and
management teams. Additionally, the trading volume of small company securities
may make it more difficult to sell. JMIC seeks to reduce this risk by limiting
the Portfolios' holdings of a certain stock to an amount less than or equal to
the number of shares traded on the market by all traders during the last 7
business days. A more in-depth discussion of the types of risks an equity fund
could be subject to is on pages 13-14.
4
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PERFORMANCE BAR CHART
The bar charts below show the annual returns since inception for the
Small Cap and Micro Cap Portfolios. These bar charts assume reinvestment of
dividends and distributions. As with all mutual funds, the past is not a
prediction of the future.
SMALL CAP GROWTH PORTFOLIO
TOTAL ANNUAL RETURN AS OF DECEMBER 31
1997 54.5%
1998 13.6%
BEST QUARTER: Q2 1997 25.00%
WORST QUARTER: Q3 1998 -19.49%
MICRO CAP GROWTH PORTFOLIO
TOTAL ANNUAL RETURN AS OF DECEMBER 31
1998 32.8%
BEST QUARTER: Q1 1998 27.70%
WORST QUARTER: Q3 1998 -16.26%
5
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PAST PERFORMANCE
The table below shows the past performance of both the Small Cap and
Micro Cap Portfolios to that of the Russell 2000 Index, a widely recognized
unmanaged index of small stock performance. A mutual fund's comparison of its
performance to an objective index may be viewed by an investor as a relative
measure of performance. Similar to the bar charts above, this table assumes
reinvestment of dividends and distributions. As with all mutual funds, the past
is not a prediction of the future.
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SINCE
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98 1 YEAR INCEPTION1
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BRAZOS SMALL CAP GROWTH PORTFOLIO
(after expenses) 13.6% 32.4%
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BRAZOS MICRO CAP GROWTH PORTFOLIO
(after expenses) 32.8% 32.8%
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RUSSELL 2000 INDEX (before expenses) -2.5% 19.2%
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1 The commencement of operations for the Small Cap Growth Portfolio and the
Micro Cap Growth Portfolio was 12/31/96 and 12/31/97, respectively.
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in each of the
Portfolios are shown below.
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ANNUAL FUND OPERATING EXPENSES2 MICRO CAP SMALL CAP
(EXPENSES THAT ARE DEDUCTED
FROM PORTFOLIO ASSETS)
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Management fees 1.20% .90%
Other expenses .70% .31%
----- -----
Total operating expenses3 1.90% 1.21%
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2 JMIC currently waives the advisory fee to the extent total operating expenses
exceed 1.60% for Micro Cap and 1.35% for Small Cap. This waiver is expected
to continue until further notice. After fee waivers, the expenses you should
expect to pay as an investor in each of the Portfolios are shown below.
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ANNUAL FUND OPERATING EXPENSES MICRO CAP SMALL CAP
(EXPENSES THAT ARE DEDUCTED
FROM PORTFOLIO ASSETS)
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Management fees .90% .90%
Other expenses .70% .31%
----- -----
Total operating expenses3 1.60% 1.21%
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3 The Portfolios have no sales, redemption, exchange, or account fees with the
exception of a $12.00 fee for each redemption made by wire. Additionally,
some institutions may charge a fee if you buy through them.
6
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The example below shows what a shareholder could pay in expenses over
time and is intended to help you compare the cost of investing in the Portfolios
with the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolios' actual return and expenses will be different.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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MICRO CAP $193 $597 $1,026 $2,222
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SMALL CAP $123 $384 $ 665 $1,466
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BRAZOS REAL ESTATE SECURITIES PORTFOLIO
SUMMARY OF INVESTMENT OBJECTIVE
The investment objective of the Brazos Real Estate Securities Portfolio
("Real Estate" or the "Portfolio") is to invest in real estate securities that
provide a balance of income and appreciation (with reasonable risk to
principal).
INVESTMENT POLICIES AND STRATEGIES
The Portfolio seeks to achieve its objective by investing at least 65% of
its total assets in equity securities of companies principally engaged in the
real estate industry. A company is considered "principally engaged in the real
estate industry" if at least 50% of its assets, gross income, or net profits are
attributable to ownership, construction, management or sale of various real
estate. The types of equity securities that can be purchased include common
stocks and securities convertible into common stocks. Convertible securities
include convertible preferred stock, convertible bonds, and American Depository
Receipts (ADRs). Investments in securities of foreign companies are expected to
be less than 5% of the portfolio and would typically be made using ADRs traded
on a U.S. stock exchange. Market conditions may lead to higher levels (up to
100%) of temporary investments such as money market instruments or U.S. Treasury
Bills. Temporary investments are expected to be 5% to 10% of the portfolio under
normal circumstances.
Real Estate generally seeks securities of companies with strong cash
flow, management, dividend yield, dividend growth potential, and financial
strength. The list of potential investments is further filtered through the use
of fundamental security analysis and valuation methods.
JMIC may sell securities when the value of a security or a group of
securities within a certain sector violates diversification objectives. A high
rate of portfolio turnover involves greater transaction expenses and possible
adverse tax consequences to the Portfolio's shareholders.
7
<PAGE>
JMIC seeks to manage risk by investing across 10-12 property sectors,
such as hotel, office, apartment, retail and industrial sectors. No sector will
represent more than 25% of the value of the Portfolio. The risk is also managed
by investing in companies that provide geographic diversification.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Real Estate may be appropriate for investors who:
o are seeking long-term capital growth
o prefer some current income
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in the principal value of their
investment.
Investment in the Portfolio involves investment risks, including possible
loss of principal. The value of the Portfolio may significantly increase or
decrease over a short period of time. The value could be influenced by changes
in the stock market as a whole, by changes in a certain industry, or by changes
in certain stocks. The Portfolio's investments in instruments such as options
and futures may be sensitive to interest rate changes or values due to their
structure or contract terms. The value of each security at the time of
acquisition is not expected to exceed 4% of the value of the Portfolio.
The Portfolio is subject to risks, such as market forces, that may impact
the values of its underlying real estate assets, and management's skill in
managing those assets. The trading volume of small company real estate
securities may make it more difficult to sell. JMIC seeks to reduce this risk by
limiting the Portfolio's holdings of a certain stock to an amount less than or
equal to the number of shares traded on the market by all traders during the
last 7 business days. A more in depth discussion of the types of risks an equity
fund could be subject to is on pages 13-14.
8
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PERFORMANCE BAR CHART
The bar chart below shows the Portfolio's annual returns since inception.
This bar chart assumes reinvestment of dividends and distributions. As with all
mutual funds, the past is not a prediction of the future.
REAL ESTATE SECURITIES PORTFOLIO
TOTAL ANNUAL RETURN AS OF DECEMBER 31
1997 29.2%
1998 -17.4%
BEST QUARTER: Q3 1997 12.16%
WORST QUARTER: Q3 1998 -13.52%
PAST PERFORMANCE
The table below show the Portfolio's past performance to that of the
NAREIT Equity Index*, a widely recognized unmanaged index of publicly traded
real estate securities. Similar to the bar chart above, this table assumes
reinvestment of dividends and distributions. As with all mutual funds, the past
is not a prediction of the future.
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SINCE
INCEPTION
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98 1 YEAR (12/31/96)
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BRAZOS REAL ESTATE SECURITIES PORTFOLIO
(after expenses) -17.4% 3.3%
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NAREIT EQUITY INDEX (before expenses) -17.5% -0.8%
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* Effective 12/31/98, JMIC no longer uses the Wilshire REIT Index as an
additional benchmark index for the Real Estate Securities Portfolio. JMIC
believes that given the recent improvements in the calculation methodology of
the NAREIT Equity Index, the NAREIT Equity Index will now be recognized as
the most appropriate benchmark for the Real Estate Securities Portfolio.
9
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INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the fund are
shown below.
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SHAREHOLDER FEES REAL ESTATE SECURITIES
(FEE PAID DIRECTLY FROM YOUR INVESTMENT) PORTFOLIO
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Redemption Fee1 1.00%
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1 Shares of the Portfolio that are held 90 days or more may be redeemed without
cost. This fee is intended to encourage long-term investment in the
Portfolio, to avoid transaction and other expenses caused by early
redemption, and to facilitate portfolio management.
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ANNUAL FUND OPERATING EXPENSES2 REAL ESTATE SECURITIES
(EXPENSES THAT ARE DEDUCTED PORTFOLIO
FROM PORTFOLIO ASSETS)
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Management fees .90%
Other expenses .41%
------------
Total operating expenses3 1.31%
- --------------------------------------------------------------------------------
2 JMIC currently waives the advisory fee to the extent total operating expenses
exceed 1.25%. This waiver is expected to continue until further notice. After
fee waivers, the expenses you should expect to pay as an investor in the fund
are shown below.
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ANNUAL FUND OPERATING EXPENSES REAL ESTATE SECURITIES
(EXPENSES THAT ARE DEDUCTED PORTFOLIO
FROM PORTFOLIO ASSETS)
- --------------------------------------------------------------------------------
Management fees .84%
Other expenses .41%
------------
Total operating expenses3 1.25%
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3 The Portfolio has no other sales, exchange, or account fees with the
exception of a $12.00 fee for each redemption made by wire. Additionally,
some institutions may charge a fee if you buy through them.
The example below shows what a shareholder could pay in expenses over
time and is intended to help you compare the cost of investing in the Portfolio
with the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Real Estate
Securities Portfolio $133 $415 $718 $1,579
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10
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BRAZOS GROWTH PORTFOLIO
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SUMMARY OF INVESTMENT OBJECTIVE
The investment objective of Brazos Growth Portfolio ("Growth") is to
provide maximum capital growth.
INVESTMENT POLICIES AND STRATEGIES
The Portfolio seeks to achieve its objective by investing primarily in
equity securities. Growth generally seeks securities of companies with growth
rates above 20%, above average return on equity, and low debt levels.
The types of equity securities that can be purchased include common
stocks and securities convertible into common stocks. Convertible securities
include convertible preferred stock, convertible bonds, and American Depository
Receipts (ADRs). Investments in securities of foreign companies are expected to
be less than 5% of the portfolio and would typically be made using ADRs. Most
ADRs are traded on a U.S. stock exchange. Market conditions may lead to higher
levels (up to 100%) of temporary investments such as money market instruments or
U.S. Treasury Bills. Temporary investments are expected to be 5% to 10% of the
portfolio under normal circumstances.
Securities are selected based on the company's potential for strong
growth in revenue, earnings and cash flow, strong management, and leading
products or services. The possible investments are further filtered through the
use of fundamental security analysis and valuation methods.
JMIC may sell securities when the value of a security or a group of
securities within a certain sector violates diversification objectives. Annual
portfolio turnover may exceed 100% due to this policy. A high rate of portfolio
turnover involves greater transaction expenses and possible adverse tax
consequences to the Portfolio's shareholders.
To reduce any fluctuation in the value of the Portfolio's investments,
JMIC invests across 10-12 sectors with no sector representing more than 25% of
the value of the Portfolio.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
The Growth Portfolio may be appropriate for investors who:
o are seeking long-term capital growth
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in principal value of their
investment.
11
<PAGE>
Investment in the Portfolio involves investment risks, including possible
loss of principal. The value of the Growth Portfolio may advance or decline
significantly over a short period of time. The value could be influenced by
changes in the stock market as a whole, by changes in a certain industry, or by
changes in certain stocks. The Portfolio's investments in instruments such as
options and futures may be sensitive to interest rate changes or values due to
their structure or contract terms. The value of each security is expected to be
less than 4% of the value of the Portfolio over the holding period of each
security. A more in depth discussion of the types of risks an equity fund could
be subject to is on pages 13-14.
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the fund are
shown below, and are based on estimated amounts for the current fiscal year.
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ANNUAL FUND OPERATING EXPENSES1 GROWTH
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) PORTFOLIO
- --------------------------------------------------------------------------------
Management fees .90%
Other expenses .45%
------------
Total operating expenses2 1.35%
- --------------------------------------------------------------------------------
1 JMIC currently waives the advisory fee to the extent total operating expenses
exceed 1.35%. This waiver is expected to continue until further notice. After
fee waivers, the expenses you should expect to pay as an investor in the fund
are shown below.
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES GROWTH
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) PORTFOLIO
- --------------------------------------------------------------------------------
Management fees .90%
Other expenses .45%
------------
Total operating expenses2 1.35%
- --------------------------------------------------------------------------------
2 The Growth Portfolio has no sales, redemption, exchange, or account fees with
the exception of a $12.00 fee for each redemption made by wire. Additionally,
some institutions may charge a fee if you buy through them.
The example below shows what a shareholder could pay in expenses over
time and is intended to help the investor compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. It uses the same
hypothetical conditions other mutual funds use in their prospectuses: $10,000
initial investment for the time periods indicated, 5% annual total return,
expenses (without fee waiver) remain unchanged. The figures shown would be the
same whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Growth $137 $428 $739 $1,624
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A mutual fund's comparison of its performance to an objective index may
be viewed by an investor as a relative measure of performance. A performance bar
chart would give some indication of the risks of an investment in the Growth
Portfolio by comparing the Portfolio's performance with a broad measure of
market performance. There is no past performance table, performance bar chart or
financial highlights for the Growth Portfolio as it is less than one year old.
RISK ELEMENTS
In seeking to achieve its investment objective, each Portfolio will rely
on different strategies to seek rewards and returns. The objective of the Micro
Cap Growth Portfolio is to provide maximum capital appreciation, consistent with
reasonable risk to principal by investing primarily in microcapitalization
companies. The 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 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. The
objective of the Growth Portfolio is to provide maximum capital growth by
investing primarily in equity securities.
This table identifies the main elements that make up the Portfolios'
overall risk and reward characteristics described under the Risk Considerations
section for each Portfolio presented in this prospectus. It also outlines the
Portfolios' policies toward various securities, including those that are
designed to help each Portfolio manage risk. The following policies are not
fundamental and the Trustees may change such policies without shareholder
approval.
<TABLE>
<CAPTION>
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STRATEGIES TO SEEK REWARD POTENTIAL REWARDS POTENTIAL RISKS
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MARKET CONDITIONS
<S> <C> <C>
u Under normal circumstances u Stocks and bonds have u A portfolio's share price and
each portfolio plans to generally outperformed more performance will fluctuate
remain fully invested. stable investments (such as in response to stock and
short-term bonds and cash bond market movements.
u A portfolio seeks to limit risk equivalents) over the long term.
through diversification in
a large number of stocks.
- --------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
u JMIC focuses on bottom-up u A portfolio could u A portfolio could
research, fundamental outperform its underperform its benchmark
security analysis and benchmark due to its asset due to these same choices.
valuation methods to allocation and securities
enhance returns. choices.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
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<TABLE>
<CAPTION>
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STRATEGIES TO SEEK REWARD POTENTIAL REWARDS POTENTIAL RISKS
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
<S> <C> <C>
u Each portfolio anticipates a u A portfolio could realize u Increased trading would
portfolio turnover rate of gains in a short period raise the portfolios'
approximately 150%. of time. brokerage and related costs.
u Each portfolio generally u A portfolio could protect u Increased short-term
avoids short-term trading, against losses if a stock capital gains distributions
except to take advantage of is overvalued and its value would raise shareholders'
attractive or unexpected later falls. income tax liability.
opportunities or to meet
demands generated by
shareholder activity.
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REAL ESTATE INVESTMENT TRUSTS (REITS)
u JMIC invests in companies u Favorable market conditions u The value of a REIT is
that provide geographic could generate gains affected by changes in the
diversification to limit risk. or reduce losses. value of the properties
owned by the REIT OR
u These investments may offer securing mortgage loans
more attractive yields or held by the REIT.
potential growth than other
securities. u A portfolio could lose money
because of declines in the
value of real estate, risks
related to general and local
economic conditions,
overbuilding and increased
competition.
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SMALL CAP AND MICRO CAP STOCKS
u JMIC focuses on companies u Securities of companies with u The Small Cap Growth and
with potential for strong small and micro capitalizations Micro Cap Growth Portfolios
growth in revenue, earnings may have greater potential could lose money because
and cash flow; strong than large cap companies of the potentially higher risks
management; leading to deliver above-average of small companies and price
products or services; and growth rates that may not volatility than investments
potential for improvement. have yet been recognized in general equity markets.
by investors.
u 35% of the Small Cap Growth u The Micro Cap Growth
and the Micro Cap Growth Portfolio may be unable to
Portfolios may be invested sell some of its securities and
in securities of larger may be forced to hold them
capitalization companies. if the securities are thinly
traded.
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</TABLE>
14
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The following table indicates the maximum percentage, including temporary
investments, each Portfolio may make:
<TABLE>
<CAPTION>
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MICRO CAP SMALL CAP REAL ESTATE
GROWTH GROWTH SECURITIES GROWTH
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<S> <C> <C> <C> <C>
ADR's, EDR's and GDR's ....................... 5% 5% 5% 5%
Asset-backed securities ...................... -- -- -- --
Bank obligations ............................. 10% 10% 10% 10%
Foreign currency transactions ................ -- -- -- --
Foreign securities ........................... 5% 5% 5% 5%
Futures contracts ............................ 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b)
Illiquid securities .......................... 15% 15% 15% 15%
Investment companies ......................... 10% 10% 10% 10%
Lending of securities ........................ 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Mortgage-backed securities ................... -- -- -- --
Options transactions ......................... 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b)
Repurchase agreements ........................ 35% 35% 35% 35%
Reverse repurchase agreements ................ 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Warrants ..................................... 5% 5% 5% 5%
When-issued securities ....................... 33 1/3% 33 1/3% 33 1/3% 33 1/3%
TEMPORARY INVESTMENTS
Cash ......................................... 100% 100% 100% 100%
Repurchase agreements ........................ 100% 100% 100% 100%
Short-term obligations ....................... 100% 100% 100% 100%
U.S. Government obligations .................. 100% 100% 100% 100%
INVESTMENT RESTRICTIONS
Securities of any one issuer ................. 5% 5% 5% 5%
Outstanding voting securities
of any one issuer .......................... 10% 10% 10% 10%
Securities of issuers in
any one industry ........................... 25% 25% 25%(c) 25%
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</TABLE>
Percentages are of total assets (except for Illiquid Securities which are shown
as a percentage of net assets).
(a) Portfolio may not purchase futures contracts or options where premiums and
margin deposits exceed 5% of total assets.
(b) Portfolio may not enter into futures contracts or options where its
obligations would exceed 20% of total assets.
(c) Portfolio may purchase more than 25% of its assets in real estate
securities.
INFORMATION ABOUT THE ADVISER
Brazos Mutual Funds (the "Company") was created in December 1996 in
response to demand to provide a means of investing with John McStay Investment
Counsel, a limited partnership, 5949 Sherry Lane, Suite 1600, Dallas, Texas,
75225, at a lower minimum account size. John McStay Investment Counsel began
managing large accounts for pension plans, endowments, foundations and
municipalities in 1983. The senior management has worked together for
approximately 20 years.
On June 30, 1999, John McStay Investment Counsel reorganized as a
Delaware limited liability company ("JMIC" or the "Adviser") and completed the
sale of an 80% managing membership interest in JMIC to American International
Group, Inc. ("AIG") resulting in JMIC becoming a majority owned indirect
subsidiary of AIG and minority owned by the employees of
15
<PAGE>
JMIC. In connection therewith, on June 25, 1999, shareholders of each Portfolio
of the Company approved new investment advisory and management agreements with
JMIC and also approved changing the fundamental investment restrictions relating
to the ability to engage in borrowing and lending transactions with respect to
each Portfolio. The new agreements are identical to the prior agreements in all
respects except for their effective dates, termination dates and language
describing the existing authorization of the Company's Board of Trustees
permitting affiliate transactions. Although the investment advisory fee waivers
will no longer be in place, the fees will not exceed the expense caps currently
in place for each Portfolio due to a voluntary expense reimbursement by JMIC or
its affiliates. In connection with the reorganization of JMIC, the Board of
Trustees of the Company also approved the following new service providers for
the Company, effective June 25, 1999: Custodian, State Street Bank and Trust
Company; and Administrator, SunAmerica Asset Management Corp. (an AIG
affiliate).
JMIC's mission is to capture excess returns while managing risk. JMIC
seeks to accomplish this objective by:
o investing in smaller companies
o investing in rapidly growing companies
o investing in companies with highly predictable revenue and profit
streams
o investing in companies positioned to accelerate profit growth above
general expectations
o constructing diversified portfolios to moderate risk
JMIC has employed a bottom-up process in researching companies. JMIC
visits virtually every company prior to investing. Bottom-up research often
includes interviews with senior management, as well as the companies'
competitors and suppliers. The list of potential investments is further filtered
by the use of traditional fundamental security analysis and valuation methods.
JMIC manages each portfolio using a team approach. By using a team
approach, the Company avoids the risk of changes in portfolio management style
that may be encountered when a lead manager approach is utilized. The team
approach creates portfolio management stability, which provides confidence that
the process is repeatable, and has been used for the last twenty-five years.
JMIC has had minimal (one) professional turnover during the last fifteen years
of management.
For the fiscal year ended November 30, 1998, JMIC received a fee,
calculated daily and payable monthly, at the following annual rates (as a
percentage of each Portfolio's average daily net assets): 0.90% for the Small
Cap Growth Portfolio, and 0.84% for the Real Estate Securities Portfolio. The
Micro Cap Growth and Growth Portfolios pay the Adviser a fee, calculated daily
and payable monthly, of 1.20% and 0.90%, respectively, of each Portfolio's
average daily net assets.
ADVISER'S HISTORICAL PERFORMANCE
Set forth below are performance data provided by the Adviser pertaining
to the composite of all separately managed accounts of the Adviser that are
managed with substantially similar (although not necessarily identical)
objectives, policies and strategies as those of the Small Cap Growth Portfolio
and the Real Estate
16
<PAGE>
Securities Portfolio. The investment returns of the Small Cap Growth and Real
Estate Securities Portfolios may differ from those of the separately managed
accounts because such separately managed accounts may have fees and expenses
that differ from those of the Small Cap Growth and Real Estate Securities
Portfolios. Further, the separately managed accounts are not subject to
investment limitations, diversification requirements and other restrictions
imposed by the Investment Company Act of 1940 and Internal Revenue Code; such
conditions, if applicable, may have lowered the returns for the separately
managed accounts. The Adviser's separately managed account performance results
set forth below under "Institutional Equity Results" are not intended to predict
or suggest the return of the Real Estate Securities Portfolio or the Small Cap
Growth Portfolio, but rather to provide the shareholder with information about
the historical investment performance of the Portfolios' Adviser. The Indexes
used in the comparisons below are unmanaged indices which assume reinvestment of
dividends on securities in the index and are generally considered representative
of securities similar to those invested in by the Adviser for the purpose of the
composite performance numbers set forth below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ADVISER'S ADVISER'S
INSTITUTIONAL INSTITUTIONAL NAREIT
SMALL CAP RUSSELL S&P MIDCAP REAL ESTATE EQUITY
EQUITY ACCOUNTS 2000 INDEX 400 INDEX EQUITY ACCOUNTS INDEX
(AFTER (BEFORE (BEFORE (AFTER (BEFORE
EXPENSES)1 EXPENSES) EXPENSES) EXPENSES)1 EXPENSES)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CALENDAR YEARS:
1987 25.6% -8.8% -2.0% -- --
1988 24.5% 24.9% 20.9% -- --
1989 31.9% 16.2% 35.6% -- --
1990 -4.0% -19.5% -5.1% -- --
1991 68.9% 46.1% 50.1% -- --
1992 8.7% 18.4% 11.9% -- --
1993 15.3% 18.9% 14.0% -- --
1994 -0.1% -1.8% -3.6% 14.6% 3.2%
1995 30.1% 28.4% 30.9% 20.5% 15.3%
1996 32.9% 16.5% 19.2% 42.1% 35.3%
1997 23.4% 22.4% 32.3% 26.5% 20.3%
1998 10.4% -2.5% 19.1% -15.6% -17.5%
AVERAGE ANNUAL
TOTAL RETURNS
AS OF 12/31/98:
Cumulative 886.3% 284.2% 591.1% 109.5% 59.8%
Annualized 21.0% 11.9% 17.5% 15.9% 9.8%
3 Year 21.9% 11.6% 23.4% 14.9% 10.3%
5 Year 18.7% 11.9% 18.9% 15.9% 9.8%
10 Year 20.2% 12.9% 19.3% -- --
Five-Year Mean -- -- -- 17.6% 11.3%
Twelve-Year Mean 22.3% 13.3% 18.6% -- --
Value of $1 invested
from inception to $9.86 $3.84 $6.91 $2.10 $1.59
12/31/98
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The Adviser's Institutional Equity Accounts represents the composite of all
separately managed accounts of the Adviser that are managed with
substantially similar (although not identical) objectives, policies and
strategies as those of Brazos Small Cap Growth Portfolio, and those of the
Brazos Real Estate Securities Portfolio, respectively. The separately
managed accounts are subject to different expenses and governmental
regulations than the Portfolios.
17
<PAGE>
2 The annualized return of the Adviser's Institutional Equity Accounts is
calculated from monthly data, allowing for compounding. The formula used is
in accordance with the methods set forth by the Association for Investment
Management Research ("AIMR"), The Bank Administration Institute, and the
Investment Counsel Association of America. Market value of the account was
the sum of the account's total assets, including cash, cash equivalents,
short term investments, and securities valued at current market prices.
3 The cumulative return means that $1 invested in the Small Cap Equity
composite account on January 1, 1987 had grown to $9.86 by December 31, 1998
and that $1 invested in the Real Estate Equity composite account on January
1, 1994 had grown to $2.10 by December 31, 1998.
4 The twelve-year arithmetic mean is the arithmetic average of the Small Cap
Equity composite accounts' annual returns listed, and the five-year mean is
the arithmetic average of the Real Estate Equity composite accounts' annual
returns for the years listed.
5 The S&P MidCap 400, Russell 2000 and the NAREIT Equity Index are unmanaged
indices which assume reinvestment of dividends on securities in the index
and are generally considered representative of securities similar to those
invested in by the Adviser for the purpose of the composite performance
numbers set forth above. The S&P MidCap 400 Index is an unmanaged
capitalization-weighted index that measures the performance of the mid-range
of the U.S. stock market. The Russell 2000 is composed of the 2000 smallest
stocks in the Russell 3000, a market value weighted index of the 3,000
largest U.S. publicly traded companies. The NAREIT Equity Index is a
compilation of market-weighted securities data collected from all
tax-qualified equity real estate investment trusts listed on the New York
and American Stock Exchanges and the NASDAQ. The comparative indices are not
adjusted to reflect expenses or other fees reflected in the performance of a
mutual fund as required by the SEC.
6 The Adviser's average annual management fee over the twelve-year period
(1987-1998) for the Small Cap Equity composite accounts was 1% or 100 basis
points. On January 1, 1987, the Adviser began managing the separate accounts
using objectives, policies and strategies substantially similar to those of
the BRAZOS Small Cap Growth Portfolio. During the period, fees on the
Adviser's individual accounts ranged from 1% to 11/2% (100 basis points to
150 basis points). The Adviser's average annual management fee over the
five-year period (1994-1998) for the Real Estate Equity composite accounts
was .85% or 85 basis points. During the period, fees on the Adviser's
individual accounts ranged from .80% to 1% (80 basis points to 100 basis
points). Net returns to investors vary depending on the management fee.
7 Small Cap Equity composite accounts ("Composite") performance data is AIMR
compliant from 1/1/93 forward. Prior to that time, the only difference in
the calculation is that all portfolios were equally weighted without regard
to dollar value in determining Composite performance. The Composite includes
every account managed in JMIC's small capitalization style, consistent with
AIMR guidelines. This equal weighting method follows the standards
promulgated by the Investment Management Consultants' Association which
predates standards established by AIMR. In 1990, the Composite results
reflected portfolios ranging in number from 3 to 8 and in size from $3
million to $30 million, with a median size of $13 million. In 1991, the
Composite reflected portfolios ranging in number from 8 to 18 and in size
from $1 million to $46 million, with a median size of $15 million. In 1992,
the Composite reflected portfolios ranging in number from 20 to 27 and in
size from $4 million to $50 million, with a median size of $17 million. And,
from 1987 through 1989, the Composite consisted of only one portfolio which
for many years served as the model for all accounts managed in this style.
INFORMATION FOR FIRST TIME
MUTUAL FUND INVESTORS
The Federal Deposit Insurance Corporation, the Federal Reserve Board or
any other agency does not federally insure Mutual Fund shares.
Investments in Mutual Fund shares involve risks, including possible loss
of principal.
18
<PAGE>
VALUATION OF FUND SHARES
The net asset value of each Portfolio is determined by dividing the sum
of the total market value of a Portfolio's investments and other assets, less
any liabilities, by the total number of shares outstanding. Net asset value per
share for each Portfolio is determined as of the close
of the New York Stock Exchange ("NYSE") on each day that the NYSE is open for
business.
Each Portfolio uses the last quoted trading price as the market value for
equity securities. For listed securities, each Portfolio uses the price quoted
by the exchange on which the security is primarily traded. Unlisted securities
and listed securities which have not been traded on the valuation date or for
which market quotations are not readily available are valued at the average
between the last price asked and the last price bid. For valuation purposes,
quotations of foreign securities in a foreign currency are converted to U.S.
Dollar equivalents based upon the latest available bid price of such currencies
against U.S. Dollars quoted by any major bank or by any broker.
Bonds and other fixed income securities are valued according to the
broadest and most representative market which will ordinarily be the
over-the-counter market. Net asset value includes interest on fixed income
securities, which is accrued daily. Bonds and other fixed income securities may
be valued on the basis of prices provided by a pricing service when such prices
are believed to reflect the fair value market value of such securities.
Securities purchased with remaining maturities of 60 days or less are valued at
amortized cost when the Board of Trustees (the "Trustees") determines that
amortized cost reflects fair value.
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good faith
at fair value using methods determined by the Trustees.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS
AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Portfolio will distribute annually to shareholders substantially all
of its net investment income and any net realized long-term capital gains. A
Portfolio's dividends and capital gains distributions will be reinvested
automatically in additional shares unless the Company is notified in writing
that the shareholder elects to receive distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
FEDERAL TAXES
Each Portfolio intends to make distributions that may be taxed either as
ordinary income or as a capital gain. Because the Micro Cap, Growth and the
Small Cap Portfolios seek capital
19
<PAGE>
appreciation as opposed to current income, the Company anticipates that most of
these distributions will be taxed as capital gains. Distributions from the Real
Estate Portfolio are likely to represent both capital appreciation and income,
and thus are likely to constitute both capital gain and ordinary income. All
distributions, whether in the form of cash payment to the shareholder or as
reinvested in additional shares of a Portfolio, may be subject to Federal income
tax. A redemption of shares in a Portfolio would be considered to be a taxable
event under Federal Law. Any exchange of shares in a Portfolio for shares of
another Portfolio would be treated as a sale of the Portfolio's shares and any
gain on the transaction may be subject to Federal taxation.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on
distributions and redemptions. Shareholders should consult with their tax
advisers regarding the tax status of distributions in their state and locality.
PURCHASE OF SHARES
Shares of the Portfolios may be purchased without sales commission, at
the net asset value per share next determined after an order, including payment
in the manner described herein, is received by the Fund (see "Valuation of
Shares"). The Fund reserves the right to reject your purchase order and to
suspend the offering of shares of the Fund. All purchases must be in U.S.
dollars. Cash will not be accepted. There is a $25.00 fee for all checks
returned due to insufficient funds.
Effective September 15, 1999, initial investments in the shares of the
Portfolios offered in this Prospectus must be at least $1,000,000, and
subsequent minimum investments must be at least $1,000, except for the Brazos
Micro Cap Growth Portfolio, which has an initial investment of $50,000. Shares
may be purchased and subsequent investments may be made without being subject to
the minimum or subsequent investment limitations at the discretion of the
officers of the Trust.
Shares may be purchased and subsequent investments may be made by
principals, officers, associates and employees of the Company and its
affiliates, their families and their business or personal associates, either
directly or through their individual retirement accounts, and by any JMIC
pension or profit-sharing plan, without being subject to the minimum or
subsequent investment limitations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PURCHASING SHARES: OPENING AN ACCOUNT: ADDING TO AN ACCOUNT:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
By check u Make out a check for the u Make out a check for the
investment amount, payable investment amount payable
to "Brazos Mutual Funds." to "Brazos Mutual Funds."
u Mail the check and your u Fill out the detachable
completed Account Registration investment slip from an
Form to the address indicated account statement. If no slip
in "--Mailing Addresses" below. is available, include a note
specifying the Portfolio name,
your account number, and the
name(s) in which the account
is registered.
- ------------------------------------------------------------------------------------------------------------------------------------
By exchange u Call 1-800-426-9157 u Call 1-800-426-9157
to request an exchange. to request an exchange.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
By wire u Mail your completed u Instruct your bank to wire
Account Registration Form the amount of your
to the address indicated in investment to:
"--Mailing Addresses" below. State Street Bank and Trust
Company
Boston, MA
u Obtain your account number ABA #0110-00028
by calling 1-800-426-9157. DDA#99029712
Attn: Name of Portfolio
u Instruct your bank to wire the FBO: Shareholder Name/
amount of your investment to: Account Number
State Street Bank and Trust
Company u Specify the Portfolio name,
Boston, MA the new account number,
ABA #0110-00028 and the names in which the
DDA#99029712 account is registered. Your
Attn: Name of Portfolio bank may charge a fee
FBO: Shareholder Name/ to wire funds.
Account Number
u Specify the Portfolio name,
the new account number, and
the names in which the
account is registered. Your
bank may charge a fee to
wire funds.
- ------------------------------------------------------------------------------------------------------------------------------------
By telephone u See "By wire" and u Verify that your bank or
"By exchange" credit union is a member of
the Automated Clearing
House (ACH) system.
u Complete the applicable section
on the Account Registration
Form.
u Call 1-800-426-9157 to verify
that these features are in place
on your account.
u Tell the Fund representative
the Portfolio name, your
account number, the name(s)
in which the account is
registered and the amount of
your investment.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MAILING ADDRESSES
<S> <C>
u For initial investments and overnight u For subsequent investments:
or express mail: NON-RETIREMENT ACCOUNTS:
Brazos Mutual Funds Brazos Mutual Funds
Mutual Fund Operations, 3rd Floor c/o NFDS
The SunAmerica Center P.O. Box 219373
733 Third Avenue Kansas City, MO 64121-9373
New York, NY 10017-3204
RETIREMENT ACCOUNTS:
Brazos Mutual Funds
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
</TABLE>
21
<PAGE>
OTHER COMPANIES THROUGH WHICH YOU CAN PURCHASE BRAZOS MUTUAL FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS INC. CHARLES SCHWAB AND CO. JACK WHITE AND CO.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Financial Services 101 Montgomery Street National Financial Services
One World Financial Center San Francisco, CA 94104 One World Financial Center
200 Liberty Street 1-800-435-8000 200 Liberty Street
New York, NY 10281 New York, NY 10281
1-800-544-6666 1-800-233-3411
</TABLE>
AUTOMATIC INVESTMENT PLAN
Shareholders may also purchase additional Portfolio shares through an
Automatic Investment Plan. Under the Plan, SunAmerica Fund Services, Inc., at
regular intervals, will automatically debit a shareholder's bank checking
account in an amount of $50 or more (subsequent to the minimum initial
investment), as specified by the shareholder. A shareholder may elect to invest
the specified amount monthly, bimonthly, quarterly, semiannually or annually.
The purchase of Portfolio shares will be effected at their offering price at 4
p.m., Eastern time, on the date of the month designated by the shareholder. For
an Application for the Automatic Investment Plan, check the appropriate box of
the Application at the end of this Prospectus, or call 1-800-426-9157. This
service may not be provided for Service Agent clients who are provided similar
services by those organizations.
OTHER PURCHASE INFORMATION
Investments received by 4 p.m. ET (the close of the NYSE) will be
invested at the price calculated after the NYSE closes that day. Orders received
after 4 p.m. ET will receive the price calculated on the next business day.
DISTRIBUTOR
Effective October 14, 1999, SunAmerica Capital Services Inc. ("SACS"),
The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, will serve as
distributor for shares of the Portfolios. SACS will receive no compensation for
distribution of shares of the Portfolios, except for reimbursement by the
Adviser of out-of-pocket expenses.
EXCHANGE PRIVILEGE
Shares of each Portfolio may be exchanged for shares of any other
Portfolio included in the Brazos Mutual Funds. Exchange requests should be made
by writing to the Fund c/o SunAmerica Fund Services, Inc., Mutual Fund
Operations, The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204 or
calling 1-800-426-9157.
Any exchange will be based on the net asset value of the shares involved.
There is no charge of any kind for an exchange. Before making an exchange into a
Portfolio, a shareholder should read the Portfolio's Prospectus (contact
SunAmerica Fund Services, Inc. at 1-800-426-9157 for additional copies of the
Prospectus). Exchanges can only be made with Portfolios that are qualified for
sale in a shareholder's state of residence. Exchange requests may be made either
22
<PAGE>
by mail or telephone. Telephone exchanges will be accepted only if the
certificates for the shares to be exchanged have not been issued to the
shareholder and if the registration of the two accounts will be identical.
Requests for exchanges with other Portfolios received prior to 4 p.m. (ET) will
be processed as of the close of business on the same day. Requests received
after that time will be processed on the next business day. The Board of
Trustees may limit frequency and amount of exchanges permitted. For additional
information regarding telephoned instructions, see "REDEMPTION OF SHARES BY
TELEPHONE" below. An exchange into another Portfolio of the Fund is a sale of
shares and may result in capital gain or loss for income tax purposes. The Fund
may modify or terminate the exchange privilege at any time.
REDEMPTION OF SHARES
Any redemption may be more or less than the purchase price of your shares
depending on the market value of the investment securities held by your
Portfolio(s).
Shares of the Brazos Micro Cap Growth, Small Cap Growth, and Growth
Portfolios may be redeemed by mail or telephone, at any time, without cost, at
their net asset value as next determined after receipt of the redemption
request. Shareholders are charged a $12.00 fee for redemptions by wire.
Otherwise, there is no charge for redemptions.
Shares of the Brazos Real Estate Securities Portfolio may be redeemed by
mail or telephone, at any time, at the net asset value as next determined after
receipt of the redemption request. Shares held 90 days or more may be redeemed
without cost except for a $12.00 fee charged to shareholders for wire
redemptions. Shares held less than 90 days will be subject to a 1% redemption
fee which is retained by the Fund for the benefit of the remaining shareholders
and is intended to encourage long-term investment in the Brazos Real Estate
Securities Portfolio, to avoid transaction and other expenses incurred by early
redemption and to facilitate portfolio management.
23
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
REDEEMING SHARES: DESIGNED FOR: TO SELL SOME OR ALL OF YOUR SHARES:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
By letter u Accounts of any type. u Write a letter of instruction
indicating the Portfolio
u Sales of any type. name, your account number,
the names in which the
account is registered, and
the dollar value or number
of shares you wish to sell.
u Include all signatures and
any additional documents that
may be required (see next
page).
u Mail the materials to: Brazos
Mutual Funds Mutual Fund
Operations, 3rd Floor The
SunAmerica Center 733 Third
Avenue New York, New York
10017-3204
u A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
- ------------------------------------------------------------------------------------------------------------------------------------
By telephone u Most accounts. u For automated service
24 hours a day using your
u Sales of up to $100,000. touch-tone phone, dial
1-800-654-4760.
u To place an order or to speak
to a representative from Brazos
Mutual Funds, call
1-800-426-9157 between 8:30
a.m. and 7:00 p.m. (Eastern
time) on most business days.
- ------------------------------------------------------------------------------------------------------------------------------------
By wire u Requests by letter to sell u Fill out the "Telephone
any amount (accounts Redemption" section of your
of any type). new account application.
u Requests by phone to sell u To verify redemption privilege
up to $100,000 (accounts is in place on an account,
with telephone redemption or to request the forms to add
privileges). it to an existing account,
call 1-800-426-9157.
u Amounts of $1,000 or more
will be wired on the next
business day. A $12 fee will
be deducted from your account.
- ------------------------------------------------------------------------------------------------------------------------------------
By exchange u Accounts of any type. u Review the current
prospectus for the portfolio
u Sales of any amount. into which you are
exchanging.
u Call 1-800-426-9157 to
request an exchange.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
SIGNATURE GUARANTEES
Signature guarantees are required for the following redemptions:
o redemptions where the proceeds are to be sent to someone other than the
registered shareholder(s);
o redemptions where the proceeds are to be sent to someplace other than
the registered address;
o share transfer requests; or
o redemption requests that exceed $100,000.
The purpose of signature guarantees is to verify the identity of the
party who has authorized a redemption.
OTHER REDEMPTION INFORMATION
Normally, each Portfolio will make a payment for all shares redeemed
under proper procedures within one business day of and no more than seven
business days after receipt of the request. The Company may suspend the right of
redemption or postpone the date, as permitted by the SEC, including under
emergency circumstances and at times when the NYSE is closed.
If the Trustees determine that it would be detrimental to the best
interests of remaining shareholders of the Portfolios to make payment wholly or
partly in cash, the Portfolios may pay redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities so received in payment of
redemptions.
RETIREMENT PLANS
Shares of the Portfolios are available for use in certain types of
tax-deferred retirement plans such as:
o IRAs (including educational and Roth IRAs),
o employer-sponsored defined contribution plans (including 401(k) plans),
and
o tax-sheltered custodial accounts described in Section 403(b)(7) of the
Internal Revenue Code.
Qualified investors benefit from the tax-free compounding of income
dividends and capital gains distributions. Application forms and brochures
describing investments in the Portfolios for retirement plans can be obtained by
calling the Brazos Mutual Funds at 1-800-426-9157.
25
<PAGE>
YEAR 2000 DISCLOSURE
The "Year 2000" issue stems from the inability of computers and software
programs to correctly process dates in the next century. This could result in
major system or process failures or the generation of erroneous data, which
would lead to disruptions in the Portfolios' business operations.
The Portfolios have no application systems of their own and are entirely
dependent on their service providers' systems and software programs. The Adviser
has sought assurances from the Portfolios' service providers (including their
administrator, transfer agent and custodian) that they are taking all necessary
steps to ensure that their systems and software programs will accurately reflect
the Year 2000. The capability of the service providers' systems to recognize the
Year 2000 could have a negative impact on the Adviser's provision of investment
advisory services, including the handling of securities trades, pricing and
account services. At this time, however, no assurance can be given that the
Portfolios' service providers, including the Adviser, have anticipated every
step necessary to avoid any adverse effect on the Portfolios attributable to the
Year 2000 issue or that the Year 2000 issue will not have an adverse effect on
companies whose securities are held by the Portfolios or on global markets or
economies generally.
26
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows selected financial information for shares
outstanding of each of the Portfolios throughout the periods indicated. The
total return in the table represents the rate that an investor would have earned
on an investment in the Portfolio specified (assuming reinvestment of all
dividends and distributions). The information shown below has been audited by
PricewaterhouseCoopers LLP, whose report along with the Portfolios' financial
statements, are included in the Annual Report, which is available free of
charge. The Micro Cap Growth Portfolio's fiscal year is December 1 through
November 30 (however, the Micro Cap Growth Portfolio commenced operations on
December 31, 1997, indicated by the financial information shown below).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH REAL ESTATE SECURITIES MICRO CAP GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR DECEMBER 31, YEAR DECEMBER 31, DECEMBER 31,
ENDED 1996* THROUGH ENDED 1996* THROUGH 1997* THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
PER SHARE DATA 1998 1997 1998 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ........... $13.49 $10.00 $11.24 $10.00 $10.00
INCOME FROM OPERATIONS:
Net investment income (loss)1 ... (0.11) (0.03) 0.44 0.35 (0.05)
Net realized and unrealized
gains (losses)
on investments ................ 0.79 4.69 (1.90) 2.05 2.08
TOTAL FROM INVESTMENT
OPERATIONS .................... 0.68 4.66 (1.46) 2.40 2.03
Distributions from:
Net investment income ......... -- -- (0.43) (0.23) --
Net realized gains ............ (0.10) (1.17) (0.14) (0.93) --
Total distributions ............. (0.10) (1.17) (0.57) (1.16) --
NET ASSET VALUE,
END OF PERIOD ................. $14.07 $13.49 $9.21 $11.24 $12.03
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN .................... 5.06% 47.08%*** (13.64)% 24.39%*** 20.30%***
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(thousands) ................... $313,207 $80,898 $84,789 $53,308 $47,774
Ratios (to average net assets):
Expenses2 ..................... 1.21% 1.35%** 1.25% 1.25%** 1.60%**
Net investment income (loss),
including effects of waivers . (0.75)% (0.68)%** 4.19% 4.61%** (0.46)%**
Portfolio turnover rate ......... 104% 148% 157% 185% 121%
- ------------------------------------------------------------------------------------------------------------------------------------
</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 assume expenses otherwise payable by the Portfolios (if necessary) in
order to keep the annual expense ratios from exceeding 1.35%, 1.25% and
1.60% of the average daily net assets of the Small Cap Growth, Real Estate
Securities and Micro Cap Growth Portfolios, respectively. In addition, the
prior Administrator, Accounting Agent and Transfer Agent waived a portion of
their fees in the Small Cap Growth and the Real Estate Securities Portfolios
for the period ended November 30, 1997 and the Micro Cap Growth Portfolio
for the period ended November 30, 1998. Without the waiver of expenses, the
annualized ratio of expenses to average net assets would have been 1.80% and
1.83% for the Small Cap Growth and Real Estate Securities Portfolios,
respectively, for the period ended November 30, 1997. For the year ended
November 30, 1998, the ratio of expenses to average net assets would have
been 1.31% and 1.90% (annualized) for the Real Estate Securities and Micro
Cap Growth Portfolios, respectively. There was no waiver of expenses for the
Small Cap Growth Portfolio for the year ended November 30, 1998.
27
<PAGE>
FOR MORE INFORMATION
You may obtain the following and other information on
these Portfolios free of charge:
ANNUAL AND SEMI-ANNUAL REPORT TO
SHAREHOLDERS PROVIDES THE PORTFOLIOS' MOST RECENT
FINANCIAL REPORTS AND PORTFOLIO LISTINGS.
THE ANNUAL REPORT CONTAINS A DISCUSSION OF THE MARKET CONDITIONS AND
INVESTMENT STRATEGIES THAT AFFECTED THE PORTFOLIOS' PERFORMANCE
DURING THE LAST FISCAL YEAR.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED FEBRUARY 12, 1999,
AS SUPPLEMENTED ON JUNE 30, 1999, AUGUST 16, 1999
AND OCTOBER 21, 1999
PROVIDES ADDITIONAL DETAILS ABOUT THE PORTFOLIOS' POLICIES AND MANAGEMENT.
Telephone:
1-800-426-9157
Mail:
The Brazos Mutual Funds
c/o SunAmerica Fund Services, Inc.
Mutual Fund Operations
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Internet:
http://www.brazosfund.com
SEC:
Text only versions of Fund documents can be viewed online or
downloaded from: HTTP://WWW.SEC.GOV
You may review and obtain copies of Fund information at the SEC Public Reference
Room in Washington, D.C. (1-800-SEC-0330). Copies of the information may be
obtained for a fee by writing the Public Reference Section, Washington, D.C.
20549-6009.
Investment Company Act of 1940 File No. 811-7881
<PAGE>
BRAZOS MUTUAL FUNDS
(CLASS Y SHARES)
BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
BRAZOS REAL ESTATE SECURITIES PORTFOLIO
BRAZOS GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 12, 1999
AS SUPPLEMENTED ON JUNE 30, 1999, AUGUST 16, 1999 AND OCTOBER 21, 1999.
This Statement is not a Prospectus but should be read in conjunction with the
Prospectus of the Brazos Mutual Funds (the "Company") for the Class Y Shares of
the BRAZOS Micro Cap Growth, BRAZOS Small Cap Growth, BRAZOS Real Estate
Securities and BRAZOS Growth Portfolios dated February 12, 1999, as supplemented
on May 13, 1999, July 15, 1999, August 16, 1999 and October 21, 1999. To obtain
the Prospectus, please call the Company at 1-800-426-9157.
TABLE OF CONTENTS
Page
----
ABOUT THE BRAZOS MUTUAL FUNDS..................................................2
INVESTMENT OBJECTIVES AND POLICIES.............................................2
INVESTMENT LIMITATIONS........................................................10
MANAGEMENT OF THE FUND........................................................12
INVESTMENT ADVISER AND OTHER SERVICES.........................................17
PURCHASE OF SHARES............................................................21
REDEMPTION OF SHARES..........................................................22
OTHER SHAREHOLDER SERVICES....................................................24
PORTFOLIO TRANSACTIONS........................................................25
DESCRIPTION OF SHARES AND VOTING RIGHTS.......................................26
DIVIDENDS, CAPITAL GAINS AND TAXES............................................27
PERFORMANCE CALCULATIONS......................................................29
FINANCIAL STATEMENTS..........................................................34
<PAGE>
ABOUT THE BRAZOS MUTUAL FUNDS
The Company was organized as a Delaware business trust on October 28, 1996. The
Company's principal office is located at 5949 Sherry Lane, Suite 1600, Dallas,
Texas 75225; however, all investor correspondence should be directed to the
Brazos Mutual Funds, c/o SunAmerica Fund Services, Inc. ("SAFS"), The SunAmerica
Center, 733 Third Avenue, New York, NY 10017-3204. The Company is comprised of
four different Portfolios. These include the BRAZOS Micro Cap Growth, BRAZOS
Small Cap Growth, BRAZOS Real Estate Securities and BRAZOS Growth Portfolios
(each a "Portfolio" or collectively the "Portfolios"). Brazos Mutual Funds is a
diversified, open-end, management investment company.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment policies of the Portfolios as
set forth in the Prospectus:
SHORT-TERM INVESTMENTS
Occasionally, a Portfolio may invest a portion of its assets in the following
money market instruments, consistent with its investment policies.
(1) Time deposits, certificates of deposit (including marketable
variable rate certificates of deposit) and bankers' acceptances
issued by a commercial bank or savings and loan association.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time (not longer than seven days) at a stated interest
rate. Time deposits maturing from two business days through seven calendar days
will not exceed 10% of the total assets of a Portfolio under most circumstances.
Certificates of deposit are negotiable short-term obligations issued by
commercial banks or savings and loan associations collateralized by funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction.
A Portfolio will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in other
currencies, (ii) in the case of U.S. banks, it is a member of the Federal
Deposit Insurance Corporation, and (iii) in the case of foreign branches of U.S.
banks, the security is, in the opinion of the Adviser, of an investment quality
comparable to other debt securities which may be purchased by the Portfolios;
(2) Commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's or, if not rated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by Moody's or
by S&P;
(3) Short-term corporate obligations rated A or better by Moody's or
by S&P;
2
<PAGE>
(4) U.S. Government obligations including bills, notes, bonds and
other debt securities issued by the U.S. Treasury. These are
direct obligations of the U.S. Treasury, supported by the full
faith and credit pledge of the U.S. Government and differ mainly
in interest rates, maturities and dates of issue;
(5) U.S. Government agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies; and
(6) Repurchase agreements collateralized by securities listed above.
REPURCHASE AGREEMENTS
Each Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities. In addition, each Portfolio may invest in repurchase
agreements collateralized by certificates of deposit, and certain bankers'
acceptances and other securities outlined above under "Short-Term Investments."
In a repurchase agreement, a Portfolio buys a security and simultaneously
commits to sell that security back at an agreed upon price plus an agreed upon
market rate of interest. Under a repurchase agreement, the seller will be
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price if such securities mature in one year or less, or
102% of the repurchase price if such securities mature in more than one year.
The use of repurchase agreements involves certain risks. While the Company's
management acknowledges these risks, it is expected that they can be controlled
through stringent security selection criteria and careful monitoring procedures.
WHEN-ISSUED, FORWARD DELIVERY AND DELAYED SETTLEMENT SECURITIES
Each Portfolio may purchase and sell securities on a "when-issued," "delayed
settlement" or "forward delivery" basis. "When-issued" or "forward delivery"
refers to securities whose terms and indenture are available, and for which a
market exists, but which are not available for immediate delivery. When-issued
and forward delivery transactions may be expected to occur a month or more
before delivery is due. Delayed settlement is a term used to describe settlement
of a securities transaction in the secondary market which will occur sometime in
the future. No payment or delivery is made by a Portfolio until it receives
payment or delivery from the other party to any of the above transactions. A
Portfolio will maintain a separate account of cash, U.S. Government securities,
other high grade debt obligations or other liquid securities at least equal to
the value of purchase commitments until payment is made. Such segregated
securities will either mature or, if necessary, be sold on or before the
settlement date. Typically, no income accrues on securities purchased on a
delayed delivery basis prior to the time delivery is made, although a Portfolio
may earn income on securities it has deposited in a segregated account.
Each Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
When a Portfolio engages in when-issued or forward delivery transactions, it
does so to acquire securities consistent with its investment objective and
policies and not for the purpose of investment leverage.
3
<PAGE>
PORTFOLIO TURNOVER
It is expected that the annual portfolio turnover rate for the Portfolios will
not exceed 200%. In addition to Portfolio trading costs, higher rates (100% or
more) of portfolio turnover may result in the realization of capital gains, a
portion of which may be short-term or mid-term gains. See "DIVIDENDS, CAPITAL
GAINS DISTRIBUTIONS AND TAXES" for information on taxation. The Portfolios will
not normally engage in short-term trading, but each reserves the right to do so.
The tables set forth in the "Financial Highlights" section of the Prospectus
present the historical turnover rates for the BRAZOS Real Estate Securities
Portfolio, BRAZOS Small Cap Growth Portfolio and BRAZOS Micro Cap Growth
Portfolio.
INVESTMENT COMPANIES
Each Portfolio reserves the right to invest up to 10% of its total assets,
calculated at the time of investment, in securities of other open-end or
closed-end investment companies. No more than 5% of an investing Portfolio's
total assets may be invested in securities of any one investment company nor may
it acquire more than 3% of the voting securities of any investment company. A
Portfolio will indirectly bear its proportionate share of any management fees
paid by an investment company in which it invests in addition to its advisory
fee.
RESTRICTED SECURITIES
Each Portfolio may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under the
supervision of the Company's Board of Trustees, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided that
a dealer or institutional trading market in such securities exists, these
restricted securities are not treated as illiquid securities for purposes of a
Portfolio's investment limitations. A Portfolio will invest no more than 15% of
its net assets in illiquid securities. The prices realized from the sales of
these securities could be less than those originally paid by a Portfolio or less
than what would be considered the fair value of such securities.
FOREIGN INVESTMENTS
Each Portfolio may invest in common stocks of companies listed on foreign stock
exchanges, and may also invest in stocks traded in the over-the-counter market.
Common stocks for this purpose also include securities having common stock
characteristics such as rights and warrants to purchase common stocks.
Additionally, each Portfolio may also invest in foreign equity securities in the
form of American Depository Receipts (ADRs) and other similar global
instruments. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying foreign
securities. Most ADRs are traded on a U.S. stock exchange. Issuers of
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation between
such information and the market value of the unsponsored ADR.
Investing in foreign companies may involve additional risks and considerations
which are not typically associated with investing in U.S. companies. Since
stocks of foreign companies are normally denominated in foreign currencies, the
Portfolios may be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations, and may incur costs in connection with
conversions between various currencies. Some countries may withhold portions of
dividends and interest at the source. Under the Internal Revenue Code, foreign
exchange gains and losses are treated as ordinary gain or loss.
4
<PAGE>
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, comparable information may not be readily available about
certain foreign companies. Securities of some non-U.S. companies may be less
liquid and more volatile than securities of comparable U.S. companies. In
addition, in certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending investment securities,
a Portfolio attempts to increase its income through the receipt of interest on
the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the Portfolio's accounts. A
Portfolio may lend its investment securities to qualified brokers, dealers,
domestic and foreign banks or other financial institutions, so long as the
terms, the structure and the aggregate amount of such loans are not inconsistent
with the Investment Company Act of 1940, as amended, (the "1940 Act") or the
Rules and Regulations or interpretations of the Securities and Exchange
Commission (the "Commission") thereunder, which currently require that (a) the
borrower pledge and maintain with a Portfolio collateral consisting of cash, an
irrevocable letter of credit issued by a domestic U.S. bank or securities issued
or guaranteed by the United States Government having a value at all times not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by a Portfolio at any time, and (d) a Portfolio receives
reasonable interest on the loan (which may include a Portfolio investing any
cash collateral in interest bearing short-term investments). All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities so long as such fees are set forth in a written contract and approved
by the investment company's Board of Trustees. A Portfolio will continue to
retain any voting rights with respect to the loaned securities. If a material
event occurs affecting an investment on a loan, the loan must be called and the
securities voted.
HEDGING STRATEGIES
Each Portfolio may engage in various portfolio strategies to hedge against
adverse movements in the equity markets. Each Portfolio may write (i.e., sell)
covered call options on their portfolio securities, purchase put and call
options on securities and engage in transactions in related options on futures.
Each of these portfolio strategies is described below:
A) FUTURES CONTRACTS
Each Portfolio may enter into futures contracts. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency.
5
<PAGE>
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by trading an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. Each Portfolio expects to earn
interest income on their margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade and use futures
contracts with the expectation of realizing profits from a fluctuation in
interest rates.
Regulations of the CFTC applicable to the Company require that all of its
futures transactions constitute bona fide straddles positions or that the
Company's commodity futures and option positions be for other purposes, to the
extent that the aggregate initial margins and premiums required to establish
such non-hedging positions do not exceed five percent of the liquidation value
of a Portfolio. A Portfolio will only sell futures contracts to protect
securities it owns against price declines or purchase contracts to protect
against an increase in the price of securities it intends to purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contracts purchases will be "completed," that is, equivalent
amounts of related securities will have been purchased or will be purchased by
the Portfolios on the settlement date of the futures contracts.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A Portfolio will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of its total assets. In addition, a
Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would
exceed 20% of its total assets.
6
<PAGE>
RISK FACTORS IN FUTURES TRANSACTIONS
A Portfolio will minimize the risk that it will be unable to close out a futures
position by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market. However,
there can be no assurance that a liquid secondary market will exist for a
particular futures contract at any given time. Thus, it may not be possible to
close a futures position. In the event of adverse price movements, a Portfolio
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if a Portfolio has insufficient cash, it
may have to sell securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, a Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close futures positions also could have an adverse impact on a
Portfolio's ability to effectively hedge.
The risk of loss in trading futures contracts in some strategies can be
substantial due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in excess of the amount
invested in the contract. However, because the futures strategies of a Portfolio
is engaged in only for hedging purposes, the Adviser does not believe that a
Portfolio is subject to the risks of loss frequently associated with futures
transactions. A Portfolio would presumably have sustained comparable losses if,
instead of futures contracts, they had invested in the underlying financial
instrument and sold them after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying the futures
contracts have different maturities than the portfolio securities being hedged.
It is also possible that a Portfolio could lose money on futures contracts and
also experience a decline in value of portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom a Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and, therefore, does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Futures contracts may be traded on foreign exchanges. Such transactions are
subject to the risks of governmental actions affecting trading in or the prices
of the securities. The value of such positions also could be adversely affected
by (i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in
7
<PAGE>
the United States, (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (v)
lesser trading volume.
The investment by a Portfolio in futures contracts and options on futures
contracts is subject to many complex and special tax rules. The treatment by a
Portfolio of certain futures and forward contracts is generally governed by
Section 1256 of the Internal Revenue Code of 1986, as amended (the "Code").
These "Section 1256" positions generally include listed options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Portfolio will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Portfolio's fiscal year, and all
gain or loss associated with fiscal year transactions and marked-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within a Portfolio. The
acceleration of income on Section 1256 positions may require a Portfolio to
accrue taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, a Portfolio
may be required to dispose of portfolio securities that they otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of a Portfolio's shares. In these ways, any or all of these rules may affect
both the amount, character and timing of income distributed to shareholders by
the Portfolios.
B) OPTIONS
Each Portfolio may purchase and sell put and call options on securities and
futures contracts for hedging purposes. Investments in options involve some of
the same considerations that are involved in connection with investments in
futures contracts (e.g., the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying security or contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract on which it is based or the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract or securities.
WRITING COVERED CALL OPTIONS
The principal reason for writing call options is to attempt to realize, through
the receipt of premiums, a greater return than would be realized on securities
alone. By writing covered call options, a Portfolio gives up the opportunity,
while the option is in effect, to profit from any price increase in the
underlying security above the option exercise price. In addition, a Portfolio's
ability to sell the underlying security will be limited while the option is in
effect unless it effects a closing purchase transaction. A closing purchase
transaction cancels out the Portfolio's position as the writer of an option by
means of an offsetting purchase of an identical option prior to the expiration
of the option that it has written. Covered call options serve as a partial hedge
against the price of the underlying security declining. Each Portfolio writes
only covered options, which means that so long as a Portfolio is obligated as
the writer of the option it will, in a segregated account with its custodian,
maintain cash, U.S. government securities, other high grade liquid debt
securities or other liquid securities denominated in U.S. dollars with a value
equal to or greater than the exercise price of the underlying securities.
8
<PAGE>
PURCHASING OPTIONS
The amount of any appreciation in the value of the underlying security subject
to a put will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. Prior to its expiration, a put option
may be sold in a closing sale transaction and profit or loss from a sale will
depend on whether the amount received is more or less than the premium paid for
the put option plus the related transaction costs. A closing sale transaction
cancels out a Portfolio's position as purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
that it has purchased. In certain circumstances, a Portfolio may purchase call
options on securities held in their investment portfolios on which they have
written call options or on securities which they intend to purchase.
C) SHORT SALES
Each Portfolio may seek to hedge investments or realize additional gains through
short sales. A Portfolio may make short sales, which are transactions in which a
Portfolio sells a security it does not own, in anticipation of a decline in the
market value of the security. To complete such a transaction, a Portfolio must
borrow the security to make delivery to the buyer. A Portfolio then is obligated
to replace the security borrowed by purchasing it at the market price at or
prior to the time of replacement. The price at such time may be more or less
than the price at which the security was sold. Until the security is replaced, a
Portfolio is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, a Portfolio also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out. A
Portfolio also will incur transaction costs in effecting short sales.
A Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which a
Portfolio replaces the borrowed security. A Portfolio will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased by the amount of the premium,
dividends, interest, or expenses a Portfolio may be required to pay in
connection with a short sale.
No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the Portfolio's net equity. Each Portfolio similarly will limit its
short sales of the securities of any single issuer if the market value of the
securities that have been sold short would exceed two percent (2%) of the value
of a Portfolio's net equity or if such securities would constitute more than two
percent (2%) of any class of the issuer's securities.
Whenever a Portfolio engages in short sales, its custodian segregates an amount
of cash or U.S. Government securities or other high-grade liquid debt securities
equal to the difference between (a) the market value of the securities sold
short at the time they were sold short and (b) any cash or U.S. Government
securities required to be deposited with the broker in connection with the short
sale (not including the proceeds from the short sale). The segregated assets are
marked to market daily, provided that at no time will the amount deposited in it
plus the amount deposited with the broker be less than the market value of the
securities at the time they were sold short.
In addition, a Portfolio may make short sales "against the box," i.e. when a
security identical to one owned by a Portfolio is borrowed and sold short. If a
Portfolio enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required to
hold such securities while the short
9
<PAGE>
sale is outstanding. A Portfolio will incur transaction costs, in connection
with opening, maintaining, and closing short sales against the box. A short sale
may result in the recognition of gain with respect to a security for Federal
income tax purposes under certain rules which treat certain short sales of the
same or substantially identical positions with respect to such a security as a
constructive sale at the time a short position is entered into by a Portfolio.
See, "DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES."
COMPANIES WITH LIMITED OPERATING HISTORIES
The BRAZOS Real Estate Securities Portfolio may invest in securities of
companies which have limited operating histories and may not yet be profitable.
The investments in such companies offer opportunities for capital gains, but
entail significant risks including, but not limited to, the volatility of the
stock price and the viability of the firm's operations. The Company will not
invest in companies which together with predecessors have operating histories of
less than three years if immediately thereafter and as a result of such
investment the value of the Portfolio's holdings of such securities (other than
securities of companies principally engaged in the real estate industry) exceeds
20% of the value of the Portfolio's total assets. Although not an investment
policy of the Company, it is anticipated that under normal circumstances,
approximately 10% to 15% of the companies principally engaged in the real estate
industry in which the Portfolio invests will have operating histories of less
than three years.
Except as specified above and as described under "INVESTMENT LIMITATIONS" below,
the foregoing investment policies are not fundamental and the Trustees may
change such policies without an affirmative vote of a majority of the
outstanding voting securities of a Portfolio, as defined in the 1940 Act.
INVESTMENT LIMITATIONS
The following limitations supplement those set forth in the Prospectus. Whenever
an investment limitation sets forth a percentage limitation on investment or
utilization of assets, such limitation shall be determined immediately after and
as a result of a Portfolio's acquisition of such security or other asset.
Accordingly, any later increase or decrease resulting from a change in values,
net assets or other circumstances will not be considered when determining
whether the investment complies with a Portfolio's investment limitations.
Investment limitations (1) through (9) described below are fundamental policies
and cannot be changed without approval by a "majority of the outstanding shares"
(as defined in the 1940 Act) of a Portfolio. A Portfolio will not:
(1) with respect to 75% of its assets, invest more than 5% of its
total assets at the time of purchase in the securities of any
single issuer (other than obligations issued or guaranteed as to
principal and interest by the government of the U.S. or any
agency or instrumentality thereof);
(2) with respect to 75% of its assets, purchase more than 10% of any
class of the outstanding voting securities of any issuer;
(3) borrow money, except as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 331/3 % of
the Portfolio's gross assets valued at the lower of market or
cost, and the Portfolio may not purchase additional securities
when borrowings exceed 5% of total gross assets;
10
<PAGE>
(4) pledge, mortgage or hypothecate any of its assets to an extent
greater than 33% of its total assets at fair market value;
(5) invest in physical commodities or contracts on physical
commodities;
(6) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which
deal in real estate and may purchase and sell securities which
are secured by interests in real estate; additionally, the BRAZOS
Real Estate Securities Portfolio may purchase and sell
mortgage-related securities and liquidate real estate acquired as
a result of default on a mortgage and may invest in marketable
securities issued by companies such as real estate investment
trusts which deal in real estate or interests therein and
participation interests in pools of real estate mortgage loans;
(7) make loans except (i) by purchasing debt securities in accordance
with its investment objectives; (ii) by lending its portfolio
securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
1940 Act or the rules and regulations or interpretations of the
Commission thereunder; and (iii) as otherwise permitted by
exemptive order of the Commission;
(8) underwrite the securities of other issuers;
(9) issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit a Portfolio from
(i) making any permitted borrowings, mortgages or pledges, or
(ii) entering into options, futures or repurchase transactions;
(10) invest in futures and/or options on futures unless (i) not more
than 5% of the Portfolio's assets are required as deposit to
secure obligations under such futures and/or options on futures
contracts, provided, however, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing such 5%; and (ii) not more than 20%
of a Portfolio's assets are invested in futures and options;
(11) purchase on margin except as specified in (10) above;
(12) invest more than an aggregate of 15% of the net assets of a
Portfolio, determined at the time of investment, in securities
subject to legal or contractual restrictions on resale or
securities for which there are no readily available markets.
In addition, the BRAZOS Micro Cap Growth, BRAZOS Small Cap Growth and the BRAZOS
Growth Portfolios have adopted a fundamental policy that each will not acquire
any securities of companies within one industry if, as a result of such
acquisition, more than 25% of the value of each Portfolio's total assets would
be invested in securities of companies within such industry; provided, however,
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or
instruments issued by U.S. banks when each Portfolio adopts a temporary
defensive position. The Brazos Real Estate Securities Portfolio has adopted a
fundamental policy that its investments will be concentrated in the real estate
industry, which means that it will invest more than 25% of its assets in that
industry.
11
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Officers of the Company manage its day-to-day operations and are responsible
to the Company's Board of Trustees. The Trustees set broad policies for the
Company and elect its Officers. The following is a list of the Trustees and
Officers of the Company and a brief statement of their present positions and
principal occupations during the past five years:
GEORGE W. GAU
8009 Long Canyon Dr.
Austin, TX 78730
Age 51
Trustee of the Company; Professor of Finance, George S. Watson Centennial
Professor in Real Estate, College and Graduate School of Business, University of
Texas at Austin since 1988; J. Ludwig Mosle Centennial Memorial Professor in
Investments and Money Management, since 1996; and Chairman of the Board and
Chief Executive Officer, The MBA Investment Fund, L.L.C., a $10 million fund
that is the first private investment company to be managed by students, since
1994.
*DAN L. HOCKENBROUGH
5949 Sherry Lane, Suite 1600
Dallas, Texas 75225
Age 39
Trustee, President, Treasurer and Chief Financial Officer of the Company; Since
August 1996, Business Manager of John McStay Investment Counsel. Formerly, Chief
Financial Officer of Waugh Enterprises, Inc. from November 1995 until August
1996; Assistant Controller of Hicks, Muse, Tate & Furst Incorporated from
December 1992 to November 1995; and Sr. Associate at Coopers & Lybrand prior to
December 1992.
JOHN H. MASSEY
4004 Windsor Avenue
Dallas, Texas 75205
Age 59
Trustee of the Company; Private Investor and a Director of The Paragon Group,
Inc., Chancellor Broadcasting, Inc., Bank of the Southwest, Columbine JDS
Systems, Inc. and FSW Holdings, Inc. Until 1996, Chairman of the Board and Chief
Executive Officer of Life Partners Group, Inc.
DAVID M. REICHERT
7415 Stonecrest Drive
Dallas, Texas 75240
Age 59
Trustee of the Company; Private Investor; formerly Senior Vice President of
Moffet Capital Management, an investment counseling firm, from January 1995
until June 1996 and Senior Vice President and Portfolio Manager of American
Capital Asset Management, a mutual fund management company, from April 1989 to
July 1994.
*TRICIA A. HUNDLEY
5949 Sherry Lane, Suite 1560
Dallas, Texas 75225
Age 48
Vice President, Secretary and Compliance Officer of the Company; Partner of John
McStay Investment Counsel since 1987.
*LOREN J. SOETENGA
5949 Sherry Lane, Suite 1560
Dallas, Texas 75225
Age 31
Vice President of the Company; Principal of John McStay Investment Counsel.
Formerly, Partner of Chronos Management, Inc. until 1996.
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<PAGE>
*PETER C. SUTTON
The SunAmerica Center
733 Third Avenue
New York, NY 10017
Age 34
Vice President and Assistant Treasurer of the Company; Senior Vice President,
SAAMCo, since April 1997; Treasurer, SunAmerica Equity Funds, SunAmerica Income
Funds, SunAmerica Money Market Fund and Anchor Series Trust, since February
1996; Vice President and Assistant Treasurer of SunAmerica Series Trust and
Anchor Pathway Fund, since 1994; Vice President, Seasons Series Trust, since
April 1997; formerly, Vice President, SAAMCo, from 1994 to 1997; Controller,
SunAmerica Equity Funds, SunAmerica Income Funds, SunAmerica Money Market Fund
and Anchor Series Trust, from March 1993 to February 1996.
*ROBERT M. ZAKEM
The SunAmerica Center
733 Third Avennue
New York, NY 10017
Age 41
Vice President and Assistant Secretary of the Company; Senior Vice President and
General Counsel, SAAMCo, since April 1993; Executive Vice President, General
Counsel and Director, SACS, since August 1993; Vice President, General Counsel
and Assistant Secretary, SAFS, since January 1994; Vice President, SunAmerica
Series Trust, Anchor Pathway Fund and Seasons Series Trust; Secretary and Chief
Compliance Officer, Anchor Series Trust, SunAmerica Equity Funds, SunAmerica
Income Funds and SunAmerica Money Market Fund, since 1993; Secretary and Chief
Compliance Officer, Style Select Series, Inc., since 1996; Secretary, SunAmerica
Strategic Investment Series, Inc., since 1998.
*This person is deemed to be an "interested person" of the Company as that term
is defined in the 1940 Act.
REMUNERATION OF TRUSTEES AND OFFICERS
The Company pays each Trustee, who is not also an officer or affiliated person,
a $1,250 quarterly retainer fee per Portfolio which currently amounts to $5,000
per quarter. In addition, each unaffiliated Trustee receives a fee of $1,250 per
regular meeting and a fee of $1,250 per special meeting, and reimbursement for
travel and other expenses incurred while attending Board meetings. The fees are
aggregated for all the Trustees and allocated proportionately among the
Portfolios of the Company. Trustees who are also officers or affiliated persons
receive no remuneration for their service as Trustees. The Company's officers
and employees are paid by either the Adviser or the Administrator and receive no
compensation from the Company. The following table shows aggregate compensation
paid to each of the Company's Trustees for the fiscal year ended November 30,
1998.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Benefits Upon from Registrant and
From Registrant Accrued as Part of Retirement Company Complex Paid
Company Expenses to Trustees
============================ =================== ======================= ==================== =========================
<S> <C> <C> <C> <C>
George W. Gau* -0- -0- -0- -0-
Trustee
Dan L. Hockenbrough -0- -0- -0- -0-
Director
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<PAGE>
John H. Massey $8,000 -0- -0- $8,000
Director
David M. Reichert $8,000 -0- -0- $8,000
Director
</TABLE>
* Since Mr. Gau joined the Board of Trustees in May of 1999, he was not
compensated during the fiscal year ended November 30, 1998 for his services to
the Company.
PRINCIPAL HOLDERS OF SECURITIES
As of January 31, 1999, the following persons or organizations held of record 5%
or more of the shares of each Portfolio:
MICRO CAP GROWTH PORTFOLIO
Charles Schwab & Co., Inc. 11.4%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creed Drive South
Denver, CO 80246
Pershing 11.0%
Division of Donaldson, Lufkin and Jenrette
1 Pershing Plaza
Jersey City, NJ 07399
National Financial Services 8.5%
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
JMB Realty Corp. 7.0%
Savings
U/A Dated 7/1/87 900 Michigan Ave.
Chicago, IL 60611-1542
Washington & Lee University 5.9%
5949 Sherry Lane
Suite 1600
Dallas, TX 75225-8012
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<PAGE>
REAL ESTATE SECURITIES PORTFOLIO
Suntrust Bank Atlanta Custodian 10.5%
FBO University of Georgia Foundation
U/A/D 3/19/97
P.O. Box 105870
Atlanta, GA 30348-5870
Wachovia Bank N.A. 10.2%
Successor Trustee
U/A USAA Savings & Investment Plan
301 N. Main Street
P.O. Box 3073
Winston Salem, NC 27150-0001
California Province of the Society of Jesus 7.2%
Attn: Reverend Robert St. Clair
P.O. Box 519
Los Gatos, CA 95031-0519
Charles Schwab & Co., Inc. 6.8%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creed Drive South
Denver, CO 80246
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<PAGE>
SMALL CAP GROWTH PORTFOLIO
Charles Schwab & Co., Inc. 11.5%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creed Drive South
Denver, CO 80246
BNY Western Trust Co. 6.8%
Trustee for San Francisco Bay Area Rapid Transit
District Deferred Compensation Plan
U/A/D 1/2/97 550 Kearny St.
Suite 600
San Francisco, CA 94108-2527
BNY Western Turst Co. 5.9%
Trustee for San Francisco Bay Area Rapid Transit
District Money Purchase Plan
U/A/D 1/2/97 550 Kearny St.
Suite 600
San Francisco, CA 94108-2527
GROWTH PORTFOLIO
R.D. and Joan Dale Hubbard Foundation Inc. 29.7%
73-405 El Paseo #32D
Palm Desert, CA 92260
R.D. Hubbard 17.0%
73-405 El Paseo #32D
Palm Desert, CA 92260
John McStay and Ellen McStay 8.5%
JT Ten
3504 Marquette Street
Dallas, TX 75225-5015
Pershing 8.0%
Division of Donaldson, Lufkin and Jenrette
1 Pershing Plaza
Jersey City, NJ 07399
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<PAGE>
INVESTMENT ADVISER AND OTHER SERVICES
John McStay Investment Counsel ( "JMIC" or the "Adviser") which was formed as a
limited partnership in 1983, is located at 5949 Sherry Lane, Suite 1600, Dallas,
Texas 75225. On June 30, 1999, JMIC reorganized as a Delaware limited liability
company and completed the sale of an 80% managing membership interest in JMIC to
America International Group, Inc. ("AIG") resulting in JMIC becoming a majority
owned indirect subsidiary of AIG and minority owned by the employees of JMIC. In
connection therewith, on June 25, 1999, shareholders of each Portfolio of the
Company approved new investment advisory and management agreements with JMIC and
also approved changing the fundamental investment restrictions relating to the
ability to engage in borrowing and lending transactions with respect to each
Portfolio. Although the investment advisory fee waivers will no longer be in
place, the fees will not exceed the expense caps currently in place for each
Portfolio due to a voluntary expense reimbursement by JMIC or its affiliates.
As a result of the reorganization described above, arrangements for the
administration, distribution, transfer agency and shareholder servicing, and
custody and fund accounting of the Portfolios of the Company have been changed
as follows:
(i) SunAmerica Asset Management Corp. ("SAAMCo" or the
"Administrator") will act as Administrator of each Portfolio of the
Company pursuant to the Administration Agreement between SAAMCo and
the Company;
(ii) effective October 14, 1999, SunAmerica Capital Services, Inc.
("SACS"or the "Distributor") will act as Distributor for each
Portfolio of the Company pursuant to the Distribution Agreement
between SACS and the Company;
(iii) SAFS will provide transfer agency and shareholder services with
respect to each Portfolio of the Company pursuant to the Service
Agreement between SAFS and the Company; and
(iv) State Street Bank and Trust Company ("State Street") will serve
as custodian and fund accountant of the Portfolios and as transfer
agent, together with its affiliate, National Financial Data Services
("NFDS"), pursuant to the Custodian Contract and the Transfer Agency
Agreement, each between the Company and State Street.
SAAMCo, SACS and SAFS are all affiliates of each other, of JMIC, and of AIG.
Under the Administration Agreement, SAAMCo will provide certain administrative
services similar to those previously provided by Firstar Mutual Fund Services,
LLC ("Firstar"). For its services, SAAMCo will receive fees that are identical
to those fees which were paid to Firstar. SAAMCo is located at The SunAmerica
Center, 733 Third Avenue, New York, New York 10017. Under the Distribution
Agreement, SACS will provide services similar to those provided by Rafferty
Capital Markes, Inc. ("Rafferty"). Like Rafferty, SACS will receive no
compensation for the distribution of shares of the Portfolios, except for
reimbursement by the Adviser of out-of-pocket expenses. SACS is located at The
SunAmerica Center, 733 Third Avenue, New York, New York 10017. Under the Service
Agreement, SAFS will assist State Street and NFDS in connection with certain
services previously provided by Firstar. For its services, SAFS will receive a
fee, which represents the full cost of providing shareholder and transfer agency
services, at the same cost basis previously charged by Firstar. SAFS will pay a
fee to State Street and NFDS (other than out-of-pocket charges of the Transfer
Agent which are paid by the Company). SAFS is located at The SunAmerica Center,
733 Third Avenue, New York, NY 10017.
17
<PAGE>
Under the Custodian Contract and the Transfer Agency Agreement, State Street,
1776 Heritage Drive, North Quincy, MA 02171, will provide custodial and fund
accounting services similar to those previously provided by Firstar Bank
Milwaukee, N.A. and Firstar, respectively. Transfer agent functions previously
provided by Firstar will be performed for State Street by NFDS, P.O. Box 219373,
Kansas City, MO 64121-9373.
The Adviser provides investment management services to institutions and
individuals and currently has approximately $4 billion in assets under
management. John D. McStay may be deemed to control the Adviser as a result of
ownership of a majority interest in John McStay & Associates ("JMA"), the
general partner of the Adviser. JMA owns a majority interest in the Adviser.
The Adviser may compensate its affiliated companies for referring investors to
the Portfolios. The Adviser, or any of its affiliates, may, at its own expense,
compensate a Service Agent or other person for marketing, shareholder servicing,
record-keeping and/or other services performed with respect to the Company or a
Portfolio. Payments made for any of these purposes may be made from the paying
entity's revenues, its profits or any other source available to it. When such
service arrangements are in effect, they are made generally available to all
qualified service providers.
ADVISORY FEES
As compensation for services rendered by the Adviser under the Investment
Advisory Agreement, the Portfolios pay the Adviser an annual fee in monthly
installments, calculated by applying the following annual percentage rates to
the Portfolios' average daily net assets for the month:
BRAZOS Micro Cap Growth Portfolio................................... 1.20%
BRAZOS Real Estate Securities Portfolio............................. 0.90%
BRAZOS Small Cap Growth Portfolio................................... 0.90%
BRAZOS Growth Portfolio............................................. 0.90%
For the fiscal year ended November 30, 1998 the Portfolios paid the Adviser fees
and the Adviser waived fees and/or reimbursed expenses of the Portfolios as
follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
BRAZOS Micro Cap Growth Portfolio* $326,266 $76,089
BRAZOS Real Estate Securities Portfolio $712,269 $47,708
BRAZOS Small Cap Growth Portfolio $1,578,588 $ 0
For the fiscal year ended November 30, 1997 the Portfolios paid the Adviser fees
and the Adviser waived fees and/or reimbursed expenses of the Portfolios as
follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $ 237,702 $139,015
BRAZOS Small Cap Growth Portfolio $ 239,078 $107,342
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
18
<PAGE>
DISTRIBUTOR
Effective October 14, 1999, SACS will act as Distributor for each Portfolio of
the Company. SACS will receive no compensation for distribution of shares of the
Portfolios, except for reimbursement by the Adviser of out-of-pocket expenses.
ADMINISTRATION FEES
As of August 1, 1999, SAAMCo serves as Administrator to the Company and also
provides accounting services to the Company. The Administrator is a SunAmerica
Company and an indirect wholly-owned subsidiary of AIG.
The Administrator supplies office facilities, non-investment related statistical
and research date, stationery and office supplies, executive and administrative
services, internal auditing and regulatory compliance services. The
Administrator also assists in the preparation of reports to shareholders,
prepares proxy statements, updates prospectuses and makes filings with the
Securities and Exchange Commission and state securities authorities. The
Administrator performs certain budgeting and financial reporting and compliance
monitoring activities. For the services provided, the Administrator receives an
annual fee from the Company equal to the greater of: (1) a minimum annual fee of
$35,000 for the first Portfolio, $25,000 for the next three Portfolios, and
$20,000 for any additional Portfolios; or (2) an asset-based fee for each
Portfolio, equal to a percentage of the average daily net assets of such
Portfolio, according to the following schedule:
0.07% on the first $200 million;
0.06% on the next $500 million;
0.04% on the balance.
The Administrator's fee shall be payable monthly, as soon as practicable after
the last day of each month, based on the Portfolio's average daily net assets as
determined at the close of business on each business day throughout the month.
Prior to SAAMCo serving as Administrator, Firstar served as Administrator,
Accounting Agent, Transfer Agent and Dividend Paying Agent; prior to Firstar
serving in such capacities, PFPC provided similar services to the Company.
For the fiscal year ended November 30, 1998 the Company paid Firstar and PFPC**
administration fees and PFPC waived fees and/or reimbursed expenses of the
Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
BRAZOS Micro Cap Growth Portfolio* $ 25,335 $ 2,124
BRAZOS Real Estate Securities Portfolio $ 74,824 $ 0
BRAZOS Small Cap Growth Portfolio $ 156,579 $ 0
19
<PAGE>
For the fiscal year ended November 30, 1998 the Company paid Firstar and PFPC**
accounting services fees and PFPC waived fees and/or reimbursed expenses of the
Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
BRAZOS Micro Cap Growth Portfolio* $ 38,110 $ 5,486
BRAZOS Real Estate Securities Portfolio $ 50,231 $ 0
BRAZOS Small Cap Growth Portfolio $ 67,191 $ 0
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
** The Company entered into an agreement with Firstar Mutual Fund Services LLC
to provide services that were provided by PFPC, Inc. up until September 30,
1998.
For the fiscal year ended November 30, 1997 the Company paid Rodney Square**
administration fees and Rodney Square waived fees and/or reimbursed expenses of
the Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $ 41,826 $ 4,051
BRAZOS Small Cap Growth Portfolio $ 42,986 $ 4,051
For the fiscal year ended November 30, 1997 the Company paid Rodney Square**
accounting services fees and Rodney Square waived fees and/or reimbursed
expenses of the Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $ 41,352 $ 5,610
BRAZOS Small Cap Growth Portfolio $ 41,808 $ 5,610
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
** PFPC entered into an agreement with Rodney Square Management Corporation
("Rodney Square") to provide services that were provided by Rodney Square up
until January 5, 1998.
20
<PAGE>
CUSTODIAN
State Street serves as the Custodian for the Portfolios. As Custodian, State
Street has agreed to (a) maintain a separate account or accounts in the name of
the Company, (b) hold and transfer portfolio securities on account of the
Company, (c) accept receipts and make disbursements of money on behalf of the
Company, (d) collect and receive all income and other payments and distributions
on account of the Company's portfolio securities, and (e) make periodic reports
to the Company's Trustees concerning the Company's operations. State Street is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Company, provided that State Street remains
responsible for the performance of all its duties under the Custodian Agreement
and holds the Company harmless from the negligent acts and omissions of any
sub-custodian. For its services to the Company under the Custodian Agreement,
State Street receives a fee in addition to transaction charges and out-of-pocket
expenses.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Ave., Milwaukee, WI, 53202, is
the independent accountant for the Company.
PURCHASE OF SHARES
Shares of the Portfolios may be purchased without sales commission at the net
asset value per share next determined after an order is received in proper form
by the Company. The minimum initial investment required for each Portfolio is
$10,000 with certain exceptions as may be determined from time to time by the
officers of the Company. Effective September 15, 1999, initial investments in
the shares of the Portfolios must be at least $1,000,000, and subsequent minimum
investments must be at least $1,000, except for the Brazos Micro Cap Growth
Portfolio, which has an initial investment of $50,000. Shares may be purchased
and subsequent investments may be made without being subject to the minimum or
subsequent investment limitations at the discretion of the officers of the
Company.
Shares may be purchased and subsequent investments may be made by principals,
officers, associates and employees of the Company and its affiliates, their
families and their business or personal associates, either directly or through
their individual retirement accounts, and by any JMIC pension or profit-sharing
plan, without being subject to the minimum or subsequent investment limitations.
Payment does not need to be converted into Federal Funds (moneys credited to the
Company's Custodian Bank by a Federal Reserve Bank) before the Company will
accept it for investment. Specify the Portfolio in which the funds should be
invested in on the Account Registration Form. An order received in proper form
prior to the 4:00 p.m. close of the New York Stock Exchange (the "NYSE") will be
executed at the price computed on the date of receipt; and an order received not
in proper form or after the 4:00 p.m. close of the NYSE will be executed at the
price computed on the next day the NYSE is open after proper receipt. The NYSE
will be closed on the following days: New Year's Day; Martin Luther King, Jr.'s
Birthday; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor
Day; Thanksgiving Day and Christmas Day.
The Portfolios reserve the right in their sole discretion (1) to suspend the
offering of their shares, (2) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Company, and (3) to
reduce or waive the minimum for initial and subsequent investment for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolios' shares.
21
<PAGE>
Shares of the Portfolios may be purchased by customers of broker-dealers or
other financial intermediaries ("Service Agents") which deal with the Company on
behalf of their customers. Service Agents may impose additional or different
conditions on the purchase or redemption of shares of the Portfolios and may
charge transaction or other account fees. Each Service Agent is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different purchase and redemption conditions.
Shareholders who are customers of Service Agents should consult their Service
Agent for information regarding these fees and conditions. Amounts paid to
Service Agents may include transaction fees and/or service fees paid by the
Company from the Company assets attributable to the Service Agent, and which
would not be imposed if shares of the Portfolios were purchased directly from
the Company or the Distributor. The Service Agents may provide shareholder
services to their customers that are not available to a shareholder dealing
directly with the Company. A salesperson and any other person entitled to
receive compensation for selling or servicing shares of the Portfolios may
receive different compensation with respect to one particular class of shares
over another in the Company.
Service Agents, or if applicable, their designees, that have entered into
agreements with the Company or its agent, may enter confirmed purchase or
redemption orders on behalf of clients and customers, with payment to follow no
later than the Portfolios' pricing on the following business day. If payment is
not received by the Company's Transfer Agent by such time, the Service Agent
could be held liable for resulting fees or losses. A Portfolio may be deemed to
have received a purchase or redemption order when a Service Agent, or, if
applicable, its authorized designee, accepts the order. Orders received by the
Company in proper form will be priced at each Portfolio's net asset value next
computed after they are accepted by the Service Agent or its authorized
designee. Service Agents are responsible to their customers and the Company for
timely transmission of all subscription and redemption requests, investment
information, documentation and money.
REDEMPTION OF SHARES
The Portfolios may suspend redemption privileges or postpone the date of payment
(1) during any period that the Exchange is closed or trading on the Exchange is
restricted as determined by the Commission, (2) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for the Portfolios to dispose of securities
owned by it or to fairly determine the value of its assets, and (3) for such
other periods as the Commission may permit. The Company has made an election
with the Commission to pay in cash all redemptions requested by any shareholder
of record limited in amount during any 90-day period to the lesser of $250,000
or 1% of the net assets of the Company at the beginning of such period. Such
commitment is irrevocable without the prior approval of the Commission.
Redemptions in excess of the above limits may be paid, in whole or in part, in
investment securities or in cash as the Board of Trustees may deem advisable;
however, payment will be made wholly in cash unless the Board of Trustees
believe that economic or market conditions exist which would make such a
practice detrimental to the best interests of the Company. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "Valuation of Fund Shares," and a redeeming shareholder
would normally incur brokerage expenses if those securities were converted to
cash.
Any redemption may be more or less than the shareholder's initial cost depending
on the market value of the securities held by a Portfolio.
BRAZOS MICRO CAP GROWTH, BRAZOS SMALL CAP GROWTH AND BRAZOS GROWTH PORTFOLIOS.
No charge is made by these Portfolios for redemptions.
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<PAGE>
BRAZOS REAL ESTATE SECURITIES PORTFOLIO. No charge is made by the BRAZOS Real
Estate Securities Portfolio for redemptions if shares are held for at least 90
days. Shares held for less than 90 days will be subject to a 1% redemption fee
which is retained by the Company for the benefit of the remaining shareholders
and is intended to encourage long-term investment in the BRAZOS Real Estate
Securities Portfolio, to avoid transaction and other expenses caused by early
redemption and to facilitate portfolio management.
The Company and the Company's Transfer Agent will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine, and they may
be liable for any losses if they fail to do so. These procedures include
requiring the investor to provide certain personal identification at the time an
account is opened, as well as prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
of such transaction requests. The Company or Transfer Agent may be liable for
any losses due to unauthorized or fraudulent telephone instructions if the
Company or Transfer Agent does not employ the procedures described above.
Neither the Company nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
it reasonably believes to be genuine.
SIGNATURE GUARANTEES
To protect your account from fraud, the Company and SAAMCo require signature
guarantees for certain redemptions. Signature guarantees are required for (1)
redemptions where the proceeds are to be sent to someone other than the
registered shareowner(s) or the registered address, (2) share transfer requests;
or (3) redemption requests that exceed $100,000. The purpose of signature
guarantees is to verify the identity of the party who has authorized a
redemption.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. A complete definition of eligible guarantor institution is
available from the Administrator. Broker-dealers guaranteeing signatures must be
a member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program.
The signature guarantee must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Company are also
being redeemed, on the letter or stock power.
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<PAGE>
OTHER SHAREHOLDER SERVICES
The following supplements the "Purchase of Shares" and "Redemption of Shares"
information set forth in the Prospectus:
IN-KIND PURCHASES
If accepted by the Company, shares of a Portfolio may be purchased in exchange
for securities which are eligible for acquisition by the Portfolio, as described
in the Prospectus. Securities to be exchanged which are accepted by the Company
will be valued as set forth under "VALUATION OF SHARES" at the time of the next
determination of net asset value after such acceptance. Shares issued by a
Portfolio in exchange for securities will be issued at net asset value
determined as of the same time. All dividends, interest, subscription, or other
rights pertaining to such securities shall become the property of that Portfolio
and must be delivered to the Company by the investor upon receipt from the
issuer. Securities acquired through an in-kind purchase will be acquired for
investment and not for immediate resale.
The Company will not accept securities in exchange for shares of a Portfolio
unless:
o at the time of the exchange, such securities are eligible to be
included in that Portfolio and current market quotations are
readily available for such securities;
o the investor represents and agrees that all securities offered to
be exchanged are not subject to any restrictions upon their sale
by that Portfolio under the Securities Act of 1933, or otherwise;
and
o the value of any such securities (except U.S. Government
securities) being exchanged together with other securities of the
same issuer owned by that Portfolio will not exceed 5% of the net
assets of that Portfolio immediately after the transaction.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for Federal income tax purposes depending upon the cost of securities or
local currency exchanged. Investors interested in such exchanges should contact
the Adviser.
EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged for shares of any other Portfolio
included within the Brazos Mutual Funds. Exchange requests should be made by
calling 1-800-426-9157 or by writing to Brazos Mutual Funds, c/o SAFS, The
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. The exchange
privilege is only available with respect to Portfolios that are registered for
sale in the shareholder's state of residence.
Any such exchange will be based on the respective net asset values of the shares
involved. There is no sales commission or charge of any kind. Before making an
exchange into a Portfolio, a shareholder should read the Prospectus and consider
the investment objectives of the Portfolio to be purchased. You may obtain a
Prospectus for the Portfolio(s) you are interested in by calling the Company at
1-800-426-9157. Investor correspondence should be directed to the Brazos Mutual
Funds, c/o SAFS, The SunAmerica Center, 733 Third Avenue, New York, NY
10017-3204.
Exchange requests may be made either by mail or telephone. Telephone exchanges
will be accepted only if the certificates for the shares to be exchanged are
held by the Company for the account of
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<PAGE>
the shareholder and the registration of the two accounts will be identical.
Requests for exchanges received prior to 4:00 p.m. (Eastern Time) will be
processed as of the close of business on the same day. Requests received after
4:00 p.m. will be processed on the next business day. Neither the Company nor
the Administrator will be responsible for the authenticity of the exchange
instructions received by telephone. Exchanges may also be subject to limitations
as to amounts or frequency, and to other restrictions established by the Board
of Trustees to assure that such exchanges do not disadvantage the Company and
its shareholders.
For Federal income tax purposes an exchange between Portfolios is a taxable
event, and, accordingly, a capital gain or loss may be realized. In a revenue
ruling relating to circumstances similar to the Company's, an exchange between a
series of Funds was also deemed to be a taxable event. It is likely, therefore,
that a capital gain or loss would be realized on an exchange between Portfolios;
you may want to consult your tax adviser for further information in this regard.
The exchange privilege may be modified or terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolios to another person by making a
written request to the Company. The request should clearly identify the account
and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares." As in the case of redemptions, the written request must be received
in good order before any transfer can be made.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolios and directs the Adviser to use its best efforts to obtain the
best execution with respect to all transactions for the Portfolios. The Adviser
may, however, consistent with the interests of the Portfolios, select brokers on
the basis of the research, statistical and pricing services they provide to the
Portfolios. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by the
Adviser under the Investment Advisory Agreement. A commission paid to such
brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that such commissions are
paid in compliance with the Securities Exchange Act of 1934, as amended, and
that the Adviser determines in good faith that such commission is reasonable in
terms either of the transaction or the overall responsibility of the Adviser to
the Portfolios and the Adviser's other clients.
It is not the Company's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through broker-dealer firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolios or who act as agents in the purchase of shares of
the Portfolios for their clients.
Some securities considered for investment by the Portfolios may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Portfolios and one or
more of these other clients served by the Adviser is considered at or about the
same time, transactions in such securities will be allocated among the
Portfolios and clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Company's Board of Trustees.
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<PAGE>
For the fiscal year ended November 30, 1998, the Portfolios paid brokerage
commissions as follows:
PORTFOLIO BROKERAGE COMMISSION
BRAZOS Micro Cap Growth Portfolio $ 566,035
BRAZOS Real Estate Securities Portfolio $ 851,896
BRAZOS Small Cap Growth Portfolio $ 1,999,496
For the fiscal year ended November 30, 1997, the Portfolios paid brokerage
commissions as follows:
PORTFOLIO BROKERAGE COMMISSION
BRAZOS Micro Cap Growth Portfolio $ 0
BRAZOS Real Estate Securities Portfolio $ 316,900
BRAZOS Small Cap Growth Portfolio $ 132,283
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolios. The Agreement directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution for all
transactions of the Portfolios. The Adviser may buy and sell securities for the
account of a portfolio through the Adviser's affiliated broker-dealer. In such
instances, the affiliated broker-dealer will complete transactions pursuant to
procedures designed to ensure that charges for the transactions do not exceed
usual and customary levels obtainable from other, unaffiliated broker-dealers.
Such transactions and the procedures are supervised by the Company's Board of
Trustees. It is understood that the affiliated broker-dealer will not be
utilized in situations where, in the Adviser's judgment, the brokerage services
of another security firm would be in the best interest of a Portfolio. If
consistent with the interests of the Portfolios, the Adviser may select brokers
on the basis of research, statistical and pricing services these brokers provide
to the Portfolios. Information and research received from such brokers will be
in addition to, and not in lieu of, the services required to be performed by the
Adviser under the Investment Advisory Agreement. Such brokers may be paid a
higher commission than that which another qualified broker would have charged
for effecting the same transaction, provided that such commissions are paid in
compliance with the Securities Exchange Act of 1934, as amended, and that the
Adviser determines in good faith that the commission is reasonable in terms
either of the transaction or the overall responsibility of the Adviser to the
Portfolios and the Adviser's other clients.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company's Agreement and Declaration of Trust permits the Company to issue an
unlimited number of shares of beneficial interest, without par value. The
Trustees have the power to designate one or more series ("Portfolios") or
classes of shares of beneficial interest without further action by shareholders.
On each matter submitted to a vote of the shareholders, each holder of a share
shall be entitled to one vote for each whole share and a fractional vote for
each fractional share standing in his or her name on the books of the Company.
In the event of liquidation of the Company, the holders of the shares of each
Portfolio or any class thereof that has been established and designated shall be
entitled to receive, when and as declared by the
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<PAGE>
Trustees, the excess of the assets belonging to that Portfolio, or in the case
of a class, belonging to that Portfolio and allocable to that class, over the
liabilities belonging to that Portfolio or class. The assets so distributable to
the holders of shares of any particular Portfolio or class thereof shall be
distributed to the holders in proportion to the number of shares of that
Portfolio or class thereof held by them and recorded on the books of the
Company. The liquidation of any Portfolio or class thereof may be authorized at
any time by vote of a majority of the Trustees then in office.
Shareholders have no pre-emptive or other rights to subscribe to any additional
shares or other securities issued by the Company or any Portfolio, except as the
Trustees in their sole discretion shall have determined by resolution.
The shares of each Portfolio are fully paid and nonassessable, have no
preference as to conversion, exchange, dividends, retirement or other features
and have no pre-emptive rights. They have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees. A shareholder is entitled to one vote
for each full share held (and a fractional vote for each fractional share held),
then standing in his name on the books of the Company.
Annual meetings will not be held except as required by the 1940 Act and other
applicable laws. The Company has undertaken that its Trustees will call a
meeting of shareholders if such a meeting is requested in writing by the holders
of not less than 10% of the outstanding shares of the Company. The Company will
assist shareholder communications in such matters.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
The Company's policy is to distribute at least annually, substantially all of a
Portfolio's net investment income, if any, together with any net realized
capital gains in the amount and at the times that will avoid both income
(including capital gains) taxes incurred and the imposition of the Federal
excise tax on undistributed income and capital gains. The Company may distribute
a Portfolio's net investment income at interim periods. The amounts of any
income dividends or capital gains distributions cannot be predicted. The
Portfolios may distribute net investment income and other capital gains during
interim periods when the Company's management determines that it is in the best
interests of a Portfolio and its shareholders to do so. It is not anticipated
that distributions of net investment income and other capital gains will be made
more frequently than quarterly. It is possible, however, as a result of this
policy that total distributions in a year could exceed the total of a
Portfolio's current year net investment income and capital gains. If this should
occur, a portion of the distributions received by shareholders of such Portfolio
could be a nontaxable "return of capital" for federal income tax purposes and
thereby reduce the shareholder's cost basis in shares of the Portfolio. In
general, a shareholder's total cost basis in the Company will reflect the cost
of the shareholder's original investment plus the amount of any reinvestment.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of a Portfolio by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividend and capital gains distributions are automatically received
in additional shares of the respective Portfolio of the Company at net asset
value (as of the business day following the record date). This will remain in
effect until the Company is notified by the shareholder in writing at least
three days prior to the record date that
27
<PAGE>
either the Income Option (income dividends in cash and capital gains
distributions in additional shares at net asset value) or the Cash Option (both
income dividends and capital gains distributions in cash) has been elected. An
account statement is sent to shareholders whenever an income dividend or capital
gains distribution is paid.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Each Portfolio of the Company will be treated as a separate entity (and hence as
a separate "regulated investment company") for Federal tax purposes. Any net
capital gains recognized by a Portfolio will be distributed to its investors
without need to offset (for Federal income tax purposes) such gains against any
net capital losses of another Portfolio.
Each Portfolio may engage in certain transactions, such as short sales, and may
invest in certain instruments, such as futures contracts, which may result in
constructive sales of appreciated positions in securities for Federal income tax
purposes. A constructive sale generally occurs when a Portfolio has entered into
a short sale of the same or substantially identical securities or if it enters
into a futures or forward contract to deliver the same or substantially
identical securities and in certain other circumstances. If a constructive sale
occurs, a Portfolio will recognize either ordinary income or capital gain
depending on the length of time which it held the security which was
constructively sold.
Dividends paid by the Portfolios from net investment income and short-term
capital gains, either in cash or reinvested in shares, will be taxable to
shareholders as ordinary income. Dividends paid from the Portfolios will
generally qualify in part for the 70% dividends-received deductions for
corporations, but the portion of the dividends so qualified depends on the
aggregate qualifying dividend income received by the Portfolios from domestic
(U.S.) sources.
Distributions paid by the Portfolios from long-term capital gains, either in
cash or additional shares of a Portfolio, are taxable to shareholders subject to
income tax as long-term capital gains regardless of the length of time the
shareholder has owned shares in a Portfolio. Also, for those shareholders
subject to tax, if purchases of shares in a Portfolio are made shortly before
the record date for a capital gains distribution or a dividend, a portion of the
investment will be returned as a taxable distribution. Shareholders are notified
annually by the Company as to the Federal Income tax status of dividends and
distributions paid by the Portfolios. Dividends and distributions may also be
subject to state and local taxes. Dividends declared in October, November, or
December to shareholders of record in such month and paid in January of the
following year will be deemed to have been paid by a Portfolio and received by
the shareholders on December 31.
Redemptions of shares in the Portfolios are taxable events for Federal income
tax purposes.
The Portfolios are required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this withholding
requirement by certifying on the account registration form your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
In order for a Portfolio to continue to qualify for Federal income tax treatment
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"), at least 90% of a
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Portfolio's gross income for a taxable year must be derived from certain
qualifying income, i.e., dividends, interest, income derived from loans of
securities and gains from the sale or other disposition of stock, securities or
foreign currencies, or other related income, including gains from options,
futures and forward contracts, derived with respect to its business investing in
stock, securities or currencies. Any net gain realized from the closing out of
futures contracts will, therefore, generally be qualifying income for purposes
of the 90% requirement.
Except for transactions a Portfolio has identified as hedging transactions, a
Portfolio is required for Federal income tax purposes to recognize as income for
the taxable year its net unrealized gains and losses on forward currency and
futures contracts as of the end of the taxable year as well as those actually
realized during the year. In most cases, any such gain or loss recognized with
respect to a regulated futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss without regard to
the holding period of the contract. Recognized gain or loss attributable to a
foreign currency forward contract is treated as 100% ordinary income.
Furthermore, foreign currency futures contracts which are intended to hedge
against a change in the value of securities held by a Portfolio may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
A Portfolio may be subject to foreign withholding taxes on income or gains
recognized with respect to its investment in certain foreign securities. If a
Portfolio purchases shares in certain foreign investment entities, called
"passive foreign investment companies," a Portfolio may be subject to U.S.
Federal income tax and a related interest charge on a portion of any "excess
distribution" or gain from the disposition of such shares, even if such income
is distributed as a taxable dividend by a Portfolio to its shareholders. If more
than 50% of the total assets of a Portfolio are invested in securities of
foreign corporations, a Portfolio may elect to pass-through to its shareholders
their pro rata share of foreign income taxes paid by a Portfolio. If this
election is made, shareholders will be required to include in their gross income
their pro rata share of the foreign taxes paid by a Portfolio. However,
shareholders will be entitled to deduct (as an itemized deduction in the case of
individuals) their share of such foreign taxes in computing their taxable income
or to claim a credit for such taxes against their U.S. Federal income tax,
subject to certain limitation under the Code. Finally, a Portfolio may recognize
gain or loss on transactions in foreign currencies as a by-product of its
investment in foreign securities.
A Portfolio will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes (including unrealized gains
at the end of a Portfolio's taxable year) on futures transactions. Such
distribution will be combined with distributions of capital gains realized on a
Portfolio's other investments, and shareholders will be advised on the nature of
the payment.
PERFORMANCE CALCULATIONS
PERFORMANCE
The Portfolios may from time to time quote various performance figures to
illustrate past performance. Performance quotations by investment companies are
subject to rules adopted by the Commission, which require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Company be accompanied
by certain standardized performance information computed as required by the
Commission. Current yield and average annual compounded total return quotations
used by the Company are based on the standardized methods of computing
performance mandated by the Commission. An explanation of those and other
methods used to compute or express performance follows.
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YIELD
Current yield reflects the income per share earned by a Portfolio's investment.
The current yield of a Portfolio is determined by dividing the net investment
income per share earned during a 30-day base period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders
during the base period.
This figure is obtained using the following formula:
Yield = 2 [( A-B + 1)6-1]
---
cd
where: a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements)
c= the average daily number of shares outstanding during the
period that were entitled to receive income distributions
d= the maximum offering price per share on the last day
of the period.
TOTAL RETURN
The average annual total return of a Portfolio is determined by finding the
average annual compounded rates of return over 1, 5 and 10 year periods that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each 1, 5 and 10 year period and the deduction of all applicable
Company expenses on an annual basis.
These figures will be calculated according to the following formula:
P(1+T)n=ERV
where:
P= a hypothetical initial payment of $ 1,000
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of
the 1, 5 or 10 year periods (or fractional portion thereof).
Total returns for the Portfolios as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Inception Year-to-Date Inception to
Date 12/31/98 12/31/98
---- -------- --------
<S> <C> <C> <C>
BRAZOS Real Estate Securities Portfolio 12/31/96 -17.4% 6.7%
BRAZOS Small Cap Growth Portfolio 12/31/96 13.6% 75.5%
BRAZOS Micro Cap Growth Portfolio 12/31/97 32.8% 32.8%
</TABLE>
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<PAGE>
COMPARISONS
To help investors better evaluate how an investment in a Portfolio might satisfy
their investment objective, advertisements regarding the Company may discuss
various measures of Company performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications, indices and averages may be used:
(1) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
(2) Standard & Poor's 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(3) Standard & Poor's MidCap 400 Index - an unmanaged index
measuring the performance of non-S&P 500 stocks in the mid-range
sector of the U.S. stock market.
(4) The New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation
and finance stocks listed on the New York Stock Exchange.
(5) Wilshire 5000 Equity Index or its component indices - represents
the return on the market value of all common equity securities
for which daily pricing is available. Comparisons of performance
assume reinvestment of dividends.
(6) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed
Income Fund Performance Analysis measure total return and
average current yield for the mutual fund industry. Rank
individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
(7) Morgan Stanley Capital International EAFE Index and World Index
- respectively, arithmetic, market value-weighted averages of
the performance of over 900 securities listed on the stock
exchanges of countries in Europe, Australia and the Far East,
and over 1,400 securities listed on the stock exchanges of these
continents, including North America.
(8) Goldman Sachs 100 Convertible Bond Index - currently includes 67
bonds and 33 preferred. The original list of names was generated
by screening for convertible issues of 100 million or greater in
market capitalization. The index is priced monthly.
(9) Salomon Brothers GNMA Index - includes pools of mortgages
originated by private lenders and guaranteed by the mortgage
pools of the Government National Mortgage Association.
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<PAGE>
(10) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or
AAA. It is a value-weighted, total return index, including
approximately 800 issues with maturities of 12 years or greater.
(11) Salomon Brothers Broad Investment Grade Bond - is a
market-weighted index that contains approximately 4,700
individually priced investment grade corporate bonds rated BBB
or better, U.S. Treasury/agency issues and mortgage pass through
securities.
(12) Lehman Brothers Long-Term Treasury Bond - is composed of all
bonds covered by the Lehman Brothers Treasury Bond Index with
maturities of 10 years or greater.
(13) NASDAQ Industrial Index - is composed of more than 3,000
industrial issues. It is a value-weighted index calculated on
price change only and does not include income.
(14) Value Line - composed of over 1,600 stocks in the Value Line
Investment Survey.
(15) Russell 2000 - composed of the 2,000 smallest stocks in the
Russell 3000, a market value-weighted index of the 3,000 largest
U.S. publicly-traded companies.
(16) Russell 2000 Growth - measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher
forecasted growth values.
(17) Russell 2000 Value - measures the performance of those Russell
2000 companies with lower price-to-book ratios and lower
forecasted growth values.
(18) Russell 2500 - composed of the 2,500 smallest stocks in the
Russell 3000, a market value-weighted index of the 3,000 largest
U.S. publicly-traded companies.
(19) Composite Indices - 60% Standard & Poor's 500 Stock Index, 30%
Lehman Brothers Long-Term Treasury Bond and 10% U.S. Treasury
Bills; 70% Standard & Poor's 500 Stock Index and 30% NASDAQ
Industrial Index; 35% Standard & Poor's 500 Stock Index and 65%
Salomon Brothers High Grade Bond Index; all stocks on the NASDAQ
system exclusive of those traded on an exchange, and 65%
Standard & Poor's 500 Stock Index and 35% Salomon Brothers High
Grade Bond Index.
(10) CDA Mutual Fund Report published by CDA Investment Technologies,
Inc. - analyzes price, current yield, risk, total return and
average rate of return (average compounded growth rate) over
specified time periods for the mutual fund industry.
(21) Mutual Fund Source Book published by Morningstar, Inc. -
analyzes price, yield, risk and total return for equity funds.
(22) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest,
Financial Times, Global Investor, Wall Street Journal and
Weisenberger Investment Companies Service - publications that
rate fund performance over specified time periods.
(23) Consumer Price Index (or Cost of Living Index), published by the
U.S. Bureau of Labor Statistics - a statistical measure of
change over time in the price of goods and services in major
expenditure groups.
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(24) Stocks, Bonds, Bills and Inflation, published by Ibbotson
Associates - historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
U.S. Treasury bills and inflation.
(25) Savings and Loan Historical Interest Rates - as published by the
U.S. Savings & Loan League Fact Book.
(26) Lehman Brothers Government/Corporate Index - a combination of
the Government and Corporate Bond Indices. The Government Index
includes public obligations of the U.S. Treasury, issues of
Government agencies, and corporate debt backed by the U.S.
Government. The Corporate Bond Index includes fixed-rate
nonconvertible corporate debt. Also included are Yankee Bonds
and nonconvertible debt issued by or guaranteed by foreign or
international governments and agencies. All issues are
investment grade (BBB) or higher, with maturities of at least
one year and an outstanding par value of at least $100 million
for U.S. Government issues and $25 million for others. Any
security downgraded during the month is held in the index until
month-end and then removed. All returns are market value
weighted inclusive of accrued income.
(27) Lehman Brothers Intermediate Government/Corporate Index - an
unmanaged index composed of a combination of the Government and
Corporate Bond Indices. All issues are investment grade (BBB) or
higher, with maturities of one to ten years and an outstanding
par value of at least $100 million for U.S. Government issues
and $25 million for others. The Government Index includes public
obligations of the U.S. Treasury, issues of Government agencies,
and corporate debt backed by the U.S. Government. The Corporate
Bond Index includes fixed-rate nonconvertible corporate debt.
Also included are Yankee Bonds and nonconvertible debt issued by
or guaranteed by foreign or international governments and
agencies. Any security downgraded during the month is held in
the index until month-end and then removed. All returns are
market value weighted inclusive of accrued income.
(28) Historical data supplied by the research departments of First
Boston Corporation; the J.P. Morgan companies; WP Brothers;
Merrill Lynch, Pierce, Fenner & Smith; Lehman Brothers, Inc.;
and Bloomberg L.P.
(29) NAREIT Equity Index - a compilation of market-weighted
securities data collected from all tax-qualified equity real
estate investment trusts listed on the New York and American
Stock Exchanges and the NASDAQ. The index tracks performance, as
well as REIT assets, by property type and geographic region.
(30) Wilshire Real Estate Securities Index, published by Wilshire
Associates - a market capitalization-weighted index of publicly
traded real estate securities, such as real estate investment
trusts, real estate operating companies and partnerships.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in a Portfolio, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by a
Portfolio to calculate its performance. In addition, there can be no assurance
that a Portfolio will continue this performance as compared to such other
averages.
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CODE OF ETHICS
The Company has adopted a Code of Ethics which restricts, to a certain extent,
personal transactions by access persons of the Company and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The audited Financial Statements for the BRAZOS Micro Cap Growth Portfolio,
BRAZOS Small Cap Growth Portfolio and BRAZOS Real Estate Securities Portfolio,
financial highlights and notes to the Financial Statements dated November 30,
1998 were filed with the SEC on February 3, 1999. They are incorporated herein
by reference and can be obtained free of charge by calling the Brazos Mutual
Funds at 1-800-426-9157.
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