BRAZOS MUTUAL FUNDS
(CLASS Y SHARES)
PROSPECTUS
December 31, 1999
INVESTMENT OBJECTIVE
BRAZOS Micro Cap Growth Portfolio Micro Capitalization Growth
BRAZOS Small Cap Growth Portfolio Small Capitalization Growth
BRAZOS Mid Cap Growth Portfolio Mid Capitalization Growth
BRAZOS Real Estate Securities Portfolio Real Estate Growth and Income
BRAZOS Multi Cap Growth Portfolio Multi Cap Growth
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OF THIS PROSPECTUS. IT IS A CRIME FOR
ANYONE TO TELL YOU OTHERWISE.
Transfer Agent:
State Street Bank and Trust Company Website: www.brazosfund.com
Telephone: 1-800-426-9157
<PAGE>
TABLE OF CONTENTS
Brazos Micro Cap Growth Portfolio ................ 3
INVESTMENT OBJECTIVE
INVESTMENT POLICIES Brazos Small Cap Growth Portfolio ................ 3
INVESTMENT SUITABILITY
RISK CONSIDERATIONS Brazos Mid Cap Growth Portfolio .................. 3
PAST PERFORMANCE
INVESTOR EXPENSES Brazos Real Estate Securities Portfolio .......... 8
Brazos Multi Cap Growth Portfolio ................ 12
Risk Elements .............................................................. 14
Information About the Adviser .............................................. 16
Information for First Time Mutual Fund Investors ........................... 19
Valuation of Shares ........................................................ 20
Dividends, Capital Gains Distributions and Taxes ........................... 20
Purchase of Shares ......................................................... 21
Redemption of Shares ....................................................... 25
Retirement Plans ........................................................... 27
Year 2000 Disclosure ....................................................... 28
Financial Highlights ....................................................... 30
For More Information ................................................ Back Cover
2
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BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
BRAZOS MID CAP GROWTH PORTFOLIO
SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Brazos Micro Cap Growth Portfolio ("Micro
Cap"), the Brazos Small Cap Growth Portfolio ("Small Cap") and the Brazos Mid
Cap Growth Portfolio ("Mid 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 million or lower(1) or a capitalization of domestic
companies represented in the lower 50% of the Russell 2000
Index at the time of the Portfolio's investment.
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Small Cap $1.8 billion or lower(2) or a capitalization of companies
represented in the Russell 2000 Index at the time of the
Portfolio's investment.
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Mid Cap $235 million to $12.9 billion(3) or a capitalization of
companies represented in the S&P MidCap 400 Index at the
time of the Portfolio's investment.
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(1) The $600 million target will fluctuate with changes in market conditions
and the composition of the Russell 2000 Index. As of December 22, 1999, the
company with the largest market capitalization in the lower 50% of the
Russell 2000 Index was $467 million.
(2) This target will fluctuate with changes in market conditions and the
composition of the Russell 2000 Index. As of December 22, 1999, the company
with the largest market capitalization in the Russell 2000 Index was $11.3
billion.
(3) This range will fluctuate with changes in market conditions and the
composition of the S&P MidCap 400 Index. As of November 30, 1999, the
company with the largest market capitalization in the S&P MidCap 400 Index
was $23.4 billion.
3
<PAGE>
The Portfolios seek to achieve their objectives by investing primarily in
micro, small and mid capitalization companies, respectively. For each of the
Portfolios, the remaining securities acquired may have market capitalizations
that exceed the target capitalization. Micro Cap generally seeks investment in
securities of companies with high growth rates, average annual revenues under
$500 million, and low debt levels. Small Cap generally seeks investment in
securities of companies with above average growth rates, average annual revenues
below $1 billion, above average return on equity, and low debt levels. Mid Cap
generally seeks investment in securities of companies John McStay Investment
Counsel ("JMIC" or "the Adviser") expects to grow at a faster rate than the
average company. There can be no assurance that any securities of companies in
which a Portfolio of the Fund invests will achieve the targeted growth rates.
The types of equity securities that can be purchased include common stocks
and securities convertible into common stocks. 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.
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.
To manage fluctuations in the value of the Portfolios' investments, JMIC
invests across 10-12 industry sectors with no industry sector representing more
than 25% of the value of each Portfolio. JMIC may sell securities when the value
of a security or a group of securities within a certain industry sector violates
diversification objectives. A high rate of portfolio turnover involves greater
transaction expenses and possible adverse tax consequences to the Portfolios'
shareholders, which may reduce performance.
The value of each security at the time of acquisition is not expected to
exceed 4% of the value of investments in each of the Micro Cap, Small Cap or Mid
Cap Portfolios. JMIC seeks to reduce 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.
4
<PAGE>
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Micro Cap, Small Cap and Mid 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 the risk
that investors may lose money. 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 performance results presented
below may reflect periods of above average performance attributable to a
Portfolio's investment in certain securities during the initial public offering,
the performance of a limited number of the securities in the Portfolio, or other
non-recurring factors. It is possible that the performance may not be repeated
in the future.
Each Portfolio may, for temporary defensive purposes, invest a percentage
of its total assets, without limitation, in cash or various U.S.
dollar-denominated money market instruments. The value of money market
instruments tends to fall when current interest rates rise. Money market
instruments are generally less sensitive to interest rate changes than
longer-term securities. When a Portfolio's assets are invested in these
instruments, a Portfolio may not be achieving its investment objective.
To the extent each Portfolio invests in small companies, it may be exposed
to greater risk than if it invested in larger, more established companies. Small
companies may have limited product lines, financial resources, and management
teams. Additionally, the trading volume of small company securities may make
them more difficult to sell. In addition, Micro Cap may be subject to the risk
that microcapitalization stocks may fail to reach their apparent value at the
time of investment or may even fail as a business. Microcapitalization companies
may lack resources to take advantage of a valuable product or favorable market
position or may be unable to withstand the competitive pressures of larger, more
established competitors. A more in-depth discussion of the types of risks an
equity fund could be subject to is on pages 14-16.
5
<PAGE>
PERFORMANCE BAR CHART
The bar charts below show the variability of the annual returns since
inception for the Small Cap and Micro Cap Portfolios, and provide an indication
of the risks of investing in a Portfolio by showing changes in the performance
of the Portfolio's shares from year to year. There is no past performance table
for the Mid Cap Growth Portfolio, as it has yet to commence operations. These
bar charts assume reinvestment of dividends and distributions. As with all
mutual funds, the past is not a prediction of the future.
BRAZOS SMALL CAP GROWTH
TOTAL ANNUAL RETURN AS OF DECEMBER 31
[Graphic Omitted]
1997 54.5%
1998 13.6%
BEST QUARTER: Q2 1997 25.00%
WORST QUARTER: Q3 1998 -19.49%
BRAZOS MICRO CAP GROWTH
TOTAL ANNUAL RETURN AS OF DECEMBER 31
[Graphic Omitted]
1998 32.8%
BEST QUARTER: Q1 1998 27.70%
WORST QUARTER: Q3 1998 -16.26%
6
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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 INCEPTION(1)
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BRAZOS SMALL CAP GROWTH PORTFOLIO 13.6% 32.4%
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BRAZOS MICRO CAP GROWTH PORTFOLIO 32.8% 32.8%
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RUSSELL 2000 INDEX(2) -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.
(2) The Russell 2000 Index figures do not reflect any fees or expenses.
Investors cannot invest directly in the Index.
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 EXPENSES(1) MICRO CAP SMALL CAP MID CAP
(EXPENSES THAT ARE DEDUCTED FROM
PORTFOLIO ASSETS)
Management fees 1.20% .90% .90%
Other Expenses .70% .31% .45%
----- ----- -----
Total operating expenses(2) 1.90% 1.21% 1.35%
(1) JMIC currently reimburses fund expenses and waives advisory fees to the
extent total operating expenses exceed 1.60% for Micro Cap, 1.35% for
Small Cap, and 1.35% for Mid Cap. This cap on expenses is expected to
continue until further notice.
(2) 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.
7
<PAGE>
The example below shows what a shareholder could pay in expenses over time
and is intended to help you compare the cost of investing in the Portfolios with
the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolios' actual return and expenses will be different.
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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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MID CAP $137 $428 $739 $1,624
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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. 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 seeks to manage risk by investing across 10-12 property sectors, such
as hotel, office, apartment, retail and industrial sectors. No property 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. JMIC
may sell securities when the value of a security or a group of securities within
8
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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, which may reduce performance.
The value of each security at the time of acquisition is not expected to
exceed 4% of the value of the Portfolio. JMIC seeks to reduce 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.
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 the risk
that investors may lose money. 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 performance results presented below may
reflect periods of above average performance attributable to the Portfolio's
investments in certain securities and non-recurring factors. It is possible that
the performance may not be repeated in the future. Because the Portfolio
concentrates its investments in a specific industry it is subject to greater
risk of loss as a result of adverse economic, business or other developments
than if its investments were diversified across different industries.
The Portfolio may, for temporary defensive purposes, invest a percentage of
its total assets, without limitation, in cash or various U.S. dollar-denominated
money market instruments. The value of money market instruments tends to fall
when current interest rates rise. Money market instruments are generally less
sensitive to interest rate changes than longer-term securities. When the
Portfolio's assets are invested in these instruments, it may not be achieving
its investment objective.
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 Portfolio invests primarily in companies in the real
estate industry and, therefore, may be subject to risks associated with the
direct ownership of real estate, such as decreases in real estate value,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Moreover, the trading volume of real estate securities due to their low volume
may make them more difficult to sell. A more in depth discussion of the types of
risks an equity fund could be subject to is on pages 14-16.
9
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PERFORMANCE BAR CHART
The bar chart below shows the variability of the Portfolio's annual returns
since inception, and provides an indication of the risks of investing in the
Portfolio by showing changes in the performance of the Portfolio's shares from
year to year. This bar chart assumes reinvestment of dividends and
distributions. As with all mutual funds, the past is not a prediction of the
future.
BRAZOS REAL ESTATE SECURITIES PORTFOLIO
TOTAL ANNUAL RETURN AS OF DECEMBER 31
[Graphic Omitted]
1997 29.2%
1998 -17.4%
BEST QUARTER: Q3 1997 12.16%
WORST QUARTER: Q3 1998 -13.52%
PAST PERFORMANCE
The table below shows 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 -17.4% 3.3%
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NAREIT EQUITY INDEX(1) -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.
(1) The NAREIT Equity Index figures do not reflect any fees or expenses.
Investors cannot invest directly in the Index.
10
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INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the Portfolio 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 EXPENSES(2) REAL ESTATE SECURITIES
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) PORTFOLIO
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Management fees .90%
Other expenses .41%
Total operating expenses3 1.31%
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(2) JMIC currently reimburses fund expenses and waives advisory fees to the
extent total operating expenses exceed 1.25%. This cap on expenses is
expected to continue until further notice.
(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.
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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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BRAZOS MULTI CAP GROWTH PORTFOLIO
SUMMARY OF INVESTMENT OBJECTIVE
The investment objective of the Brazos Multi Cap Growth Portfolio ("Multi
Cap") is to provide maximum capital growth.
INVESTMENT POLICIES AND STRATEGIES
The Portfolio seeks to achieve its objective by investing primarily in
equity securities. Multi Cap Growth generally seeks securities of companies with
above average growth rates, above average return on equity, and low debt levels.
There can be no assurance that any securities of companies in which the
Portfolio invests will achieve the targeted growth rate.
The types of equity securities that can be purchased include common stocks
and securities convertible into common stocks. 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.
To reduce any fluctuation in the value of the Portfolio's investments, JMIC
invests across 10-12 industry sectors with no industry sector representing more
than 25% of the value of the Portfolio. JMIC may sell securities when the value
of a security or a group of securities within a certain industry 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,
which may reduce performance.
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.
Multi Cap was previously named the Brazos Growth Portfolio. However, the
Portfolio's investment objective remains unchanged.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Multi Cap 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.
12
<PAGE>
Investment in the Portfolio involves investment risks, including the risk
that investors may lose money. The value of the 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 performance results of the Portfolio may reflect
periods of above average performance attributable to the Portfolio's investment
in certain securities during their initial public offering, the performance of a
limited number of the securities in the Portfolio, or other non-recurring
factors. It is possible that the performance may not be repeated in the future.
The Portfolio may, for temporary defensive purposes, invest a percentage of
its total assets, without limitation, in cash or various U.S. dollar-denominated
money market instruments. The value of money market instruments tends to fall
when current interest rates rise. Money market instruments are generally less
sensitive to interest rate changes than longer-term securities. When the
Portfolio's assets are invested in these instruments, it may not be achieving
its investment objective. A more in depth discussion of the types of risks an
equity fund could be subject to is on pages 14-16.
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the Portfolio are
shown below, and are based on estimated amounts for the current fiscal year.
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ANNUAL FUND OPERATING EXPENSES(1)
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) MULTI CAP
- --------------------------------------------------------------------------------
Management fees .90%
Other expenses .45%
-----
Total operating expenses(2) 1.35%
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(1) JMIC currently reimburses fund expenses and waives advisory fees to the
extent total operating expenses exceed 1.35% for Multi Cap. This cap on
expenses is expected to continue until further notice.
(2) The 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.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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MULTI CAP $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 Portfolio
by comparing the Portfolio's performance with a broad measure of market
performance. There is no past performance table or performance bar chart for the
Multi Cap Portfolio, as Multi Cap 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 Mid Cap Growth
Portfolio is to provide maximum capital appreciation, consistent with reasonable
risk to principal by investing primarily in midcapitalization 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 Multi Cap 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.
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STRATEGIES TO SEEK REWARD POTENTIAL REWARDS POTENTIAL RISKS
- --------------------------------------------------------------------------------
MARKET CONDITIONS
o Under normal o Stocks and bonds have o A portfolio's share
circumstances each generally outperformed price and
portfolio plans to more stable investments performance will
remain fully invested. (such as short-term fluctuate in
bonds and cash response to stock
o A portfolio seeks to equivalents) over the and bond market
limit risk through long term. movements.
diversification in a
large number of stocks.
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MANAGEMENT CHOICES
o JMIC focuses on o A portfolio could o A portfolio could
bottom-up research, outperform its underperform its
fundamental security benchmark due to its benchmark due to
analysis and asset allocation and these same choices
valuation methods to securities choices. and due to expenses.
enhance returns.
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<PAGE>
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STRATEGIES TO SEEK REWARD POTENTIAL REWARDS POTENTIAL RISKS
- --------------------------------------------------------------------------------
SHORT-TERM TRADING
o Each portfolio's o A portfolio could o Increasing trading
turnover rate realize gains in a would raise the
generally will not short period of time. portfolios' brokerage
exceed 150%. and related costs.
o A portfolio could
o Each portfolio protect against o Increased short-term
generally avoids losses if a stock is capital gains
short-term trading, overvalued and its distributions would
except to take value later falls. raise shareholders'
advantage of income tax liability.
attractive or
unexpected
opportunities or to
meet demands
generated by
shareholder activity.
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REAL ESTATE INVESTMENT TRUSTS (REITS)
o JMIC invests in o Favorable market o The value of a REIT
companies that conditions could is affected by
provide geographic generate gains or changes in the value
diversification to reduce losses. of the properties
limit risk. owned by the REIT or
o These investments may securing mortgage
offer more attractive loans held by the
yields or potential REIT.
growth than other
securities. o A portfolio could
lose money because of
decline 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
o JMIC focuses on o Securities of o The Small Cap Growth
companies with companies with small and Micro Cap Growth
potential for strong and micro Portfolios could lose
growth in revenue, capitalizations may money because of the
earnings and cash have greater potentially higher
flow; strong potential than large risks of small
management; leading cap companies to companies and price
products or services; deliver above-average volatility than
and potential for growth rates that may investments in
improvement. not have yet been general equity
recognized by markets.
o 35% of the Small Cap investors.
Growth and the Micro o The Micro Cap Growth
Cap Growth Portfolios Portfolio may be
may be invested in unable to sell some
securities of larger of its securities and
capitalization may be forced to hold
companies. them if the
securities are thinly
traded.
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15
<PAGE>
The following table indicates the maximum percentage under normal
conditions, each Portfolio may make:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MICRO CAP SMALL CAP MID CAP REAL ESTATE MULTI CAP
GROWTH GROWTH GROWTH SECURITIES GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ADR's, EDR's and GDR's ............................. 5% 5% 5% 5% 5%
Asset-backed securities ............................ -- -- -- -- --
Bank obligations ................................... 10% 10% 10% 10% 10%
Foreign currency transactions ...................... -- -- -- -- --
Foreign securities ................................. 5% 5% 5% 5% 5%
Futures contracts .................................. 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b)
Illiquid securities ................................ 15% 15% 15% 15% 15%
Investment companies ............................... 10% 10% 10% 10% 10%
Lending of securities .............................. 33 1/3% 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) 5%(a) 20%(b)
Repurchase agreements .............................. -- -- -- -- --
Reverse repurchase agreements ...................... 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
U.S. Government obligations ........................ 100% 100% 100% 100% 100%
Warrants ........................................... 5% 5% 5% 5% 5%
When-issued securities ............................. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
TEMPORARY INVESTMENTS(D)
Cash ............................................... 100% 100% 100% 100% 100%
Short-term obligations ............................. 100% 100% 100% 100% 100%
INVESTMENT RESTRICTIONS
Securities of any one issuer ....................... 5% 5% 5% 5% 5%
Outstanding voting securities of any one issuer ... 10% 10% 10% 10% 10%
Securities of issuers in any one industry ......... 25% 25% 25% 25%(c) 25%
- ------------------------------------------------------------------------------------------------------------------------------------
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.
(d) The Portfolios will invest up to 100% of their assets in temporary investments only when market conditions so require.
</TABLE>
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 JMIC, a limited
partnership, 5949 Sherry Lane, Suite 1600, Dallas, Texas, 75225, at a lower
minimum account size. JMIC began managing large accounts for pension plans,
endowments, foundations and municipalities in 1983. The senior management has
worked together for approximately 20 years.
On June 30, 1999, JMIC reorganized 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 JMIC. In connection therewith, on June
25, 1999, shareholders of each Portfolio of the Company
16
<PAGE>
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, Mid Cap Growth and the Multi Cap Growth Portfolios pay the
Adviser a fee, calculated daily and payable monthly, of 1.20%, 0.90% 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, the Mid Cap
Growth Portfolio and the Real Estate Securities Portfolio. The
17
<PAGE>
investment returns of the Small Cap Growth, Mid 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, Mid 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 Small Cap Growth Portfolio, the Mid Cap Growth
Portfolio or the Real Estate Securities 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 ADVISER'S
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL NAREIT
SMALL CAP RUSSELL MID CAP S & P MIDCAP REAL ESTATE EQUITY
EQUITY ACCOUNTS 2000 INDEX COMPOSITE 400 INDEX EQUITY ACCOUNTS INDEX
(AFTER (BEFORE EQUITY (BEFORE (AFTER (BEFORE
EXPENSES) EXPENSES) ACCOUNTS EXPENSES) EXPENSES) EXPENSES)
CALENDAR YEARS:
<S> <C> <C> <C> <C> <C> <C>
1987 25.6% - 8.8% -- -- -- --
1988 24.5% 24.9% -- -- -- --
1989 31.9% 16.2% 32.5% 35.6% -- --
1990 - 4.0% -19.5% -3.5% -5.1% -- --
1991 68.9% 46.1% 67.1% 50.1% -- --
1992 8.7% 18.4% 6.5% 11.9% -- --
1993 15.3% 18.9% 16.5% 14.0% -- --
1994 - 0.1% -1.8% - 4.9% -3.6% 14.6% 3.2%
1995 30.1% 28.4% 31.2% 30.9% 20.5% 15.3%
1996 32.9% 16.5% 23.3% 19.2% 42.1% 35.3%
1997 23.4% 22.4% 30.1% 32.3% 26.5% 20.3%
1998 10.4% -2.5% 15.3% 19.1% -15.6% -17.5%
AVERAGE ANNUAL
TOTAL RETURNS
AS OF 12/31/98:
Cumulative 886.3% 284.2% 511.8% 483.7% 109.5% 59.8%
Annualized 21.0% 11.9% 19.9% 19.3% 15.9% 9.8%
3 Year 21.9% 11.6% 22.8% 23.4% 14.9% 10.3%
5 Year 18.7% 11.9% 18.2% 18.9% 15.9% 9.8%
10 Year 20.2% 12.9% 19.9% 19.3% -- --
Five-Year Mean 19.3% 12.6% 19.0% 19.6% 17.6% 11.3%
Twelve-Year Mean 22.3% 13.3% -- -- -- --
Value of $1 invested
During 12 years
(1/1/87 - 12/31/98) $9.86 $3.84 -- -- $2.10 $1.59
- ------------------------------------------------------------------------------------------------------------------------------------
</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, those of the
Brazos Real Estate Securities Portfolio, and those of the Brazos Mid Cap
Growth Portfolio, respectively. The separately managed accounts are subject
to different expenses and governmental regulations than the Portfolios.
18
<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, that $1 invested in the Real Estate Equity composite account on
January 1, 1994 had grown to $2.10 by December 31, 1998 and that $1
invested in the Mid Cap Equity composite account on January 1, 1989 had
grown to $6.11 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 1.5% (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). The Adviser's average annual management fee over the nine-year
period (1989-1998) for the Mid Cap Equity composite accounts was 1% or 100
basis points. During the period, fees on the Adviser's individual accounts
ranged from 1% to 1.5% (100 basis points to 150 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.
19
<PAGE>
VALUATION OF 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.
20
<PAGE>
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, Small Cap, Mid Cap
and Multi Cap Portfolios seek capital appreciation as opposed to current income,
the Company anticipates that most of these distributions will be taxed as
capital gains. Distributions from the Real Estate Portfolio are likely to
represent both capital appreciation and income, and thus are likely to
constitute both capital gain and ordinary income. All distributions, whether in
the form of cash payment to the shareholder or as reinvested in additional
shares of a Portfolio, may be subject to Federal income tax. A redemption of
shares in a Portfolio would be considered to be a taxable event under Federal
Law. Any exchange of shares in a Portfolio for shares of another Portfolio would
be treated as a sale of the Portfolio's shares and any gain on the transaction
may be subject to Federal taxation.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on distributions
and redemptions. Shareholders should consult with their tax advisers regarding
the tax status of distributions in their state and locality.
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, and
individuals who are shareholders of any Portfolio of the Fund, 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.
21
<PAGE>
- --------------------------------------------------------------------------------
PURCHASING SHARES: OPENING AN ACCOUNT: ADDING TO AN ACCOUNT:
- --------------------------------------------------------------------------------
By check o Make out a check for o Make out a check for
the investment the investment amount
[GRAPHIC OMITTED] amount, payable to payable to "Brazos
"Brazos Mutual Mutual Funds."
Funds."
o Fill out the
o Mail the check and detachable investment
your completed slip from an account
Account Registration statement. If no slip
Form to the address is available, include
indicated in a note specifying the
"Mailing Addresses" Portfolio name, your
below. account number, and
the name(s) in which
the account is
registered.
- --------------------------------------------------------------------------------
By exchange o Call 1-800-426-9157 o Call 1-800-426-9157
to request an to request an
[GRAPHIC OMITTED] exchange. exchange.
- --------------------------------------------------------------------------------
By wire o Mail your completed o Instruct your bank to
Account Registration wire the amount of
[GRAPHIC OMITTED] Form to the address your investment to:
indicated in "Mailing State Street Bank and
Addresses" below. Trust Company Boston,
MA ABA #0110-00028
o Obtain your account DDA #99029712
number by calling Attn:--Name of
1-800-426-9157. Portfolio FBO:
Shareholder Name/
0 Instruct your bank to Account Number
wire the amount of
your investment to: o Specify the Portfolio
State Street Bank and name, the new account
Trust Company Boston, number, and the names
MA ABA #0110-00028 in which the account
DDA #99029712 Attn: is registered. Your
Name of Portfolio bank may charge a fee
FBO: Shareholder to wire funds.
Name/ Account Number
o Specify the Portfolio
name, the new account
number, and the names
in which the account
is registered. Your
bank may charge a fee
to wire funds.
- --------------------------------------------------------------------------------
22
<PAGE>
MAILING ADDRESSES
o For initial investments and o For subsequent investments:
overnight or express mail: NON-RETIREMENT ACCOUNTS:
Brazos Mutual Funds Brazos Mutual Funds
Mutual Fund Operations, 3rd Floor c/o NFDS P.O. Box 219373
The SunAmerica Center Kansas City, MO 64121-9373
733 Third Avenue
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
OTHER COMPANIES THROUGH WHICH YOU CAN PURCHASE BRAZOS MUTUAL FUNDS
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS, INC. CHARLES SCHWAB AND CO. JACK WHITE AND CO.
- --------------------------------------------------------------------------------
National Financial Services 101 Montgomery Street National Financial Services
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
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.
Shares of the Portfolios may be purchased by customers of broker-dealers or
other financial intermediaries ("Service Agents") which deal with the Fund on
behalf of their customers. Service Agents may impose additional or different
conditions on the purchase or redemption of shares of 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
23
<PAGE>
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 Fund from the Fund assets
attributable to the Service Agent, and which would not be imposed if shares of
the Portfolios were purchased directly from the Fund or the Distributor. The
Service Agents may provide shareholder services to their customers that are not
available to shareholders dealing directly with the Fund. 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 Fund.
Service Agents, or if applicable, their designees, that have entered into
agreements with the Fund 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 Fund'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 Fund 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 Fund for timely transmission
of all subscription and redemption requests, investment information,
documentation and money.
DISTRIBUTOR
SunAmerica Capital Services Inc. ("SACS"), The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204, serves 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). All exchanges are subject to applicable minimum initial investment
requirements. Exchanges can only be made with Portfolios that are qualified for
sale in a shareholder's state of residence. Exchanges of shares generally will
constitute a taxable transaction except for IRAs, Keogh Plans and other
qualified or tax exempt accounts. The exchange privilege may be terminated or
modified upon 60 days' written notice. 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 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
24
<PAGE>
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, Mid Cap Growth and
Multi Cap Growth Portfolios may be redeemed by mail (subject to a fee of $15.00
for overnight courier) 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 (subject to a fee of $15.00 for overnight courier) 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.
REDEEMING SHARES: DESIGNED FOR: TO SELL SOME OR ALL OF YOUR SHARES:
By letter o Accounts of any o Write a letter of
type. instruction
[GRAPHIC OMITTED] indicating the
o Sales of less than Portfolio name, your
$100,000. account number, the
names in which the
o Sales of $100,000 or account is
more require a registered, and the
signature guarantee. dollar value or
number of shares you
wish to sell.
o Include all
signatures and any
additional documents
that may be required
(see next page).
o Mail the materials to:
Brazos Mutual Funds
Mutual Fund Operations,
3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
o A check will be
mailed to the
name(s) and address
in which the account
is registered, or
otherwise according
to your letter of
instruction.
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
REDEEMING SHARES: DESIGNED FOR: TO SELL SOME OR ALL OF YOUR SHARES:
- --------------------------------------------------------------------------------
By telephone o Most accounts. o For automated service 24
hours a day using your
[GRAPHIC OMITTED] o Sales of less than touch-tone phone, dial
$100,000. 1-800-654-4760.
o 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 o Requests by letter o Fill out the "Telephone
to sell any amounts Redemption" section of your
[GRAPHIC OMITTED] (accounts of any new account application.
type).
o Amounts of $1,000 or more
o Requests by phone to will be wired on the next
sell less than business day. A $12 fee
$100,000. will be deducted from your
account.
- --------------------------------------------------------------------------------
By exchange o Accounts of any type. o Review the current
prospectus for the
[GRAPHIC OMITTED] o Sales of any amount. portfolio into which you
are exchanging.
o Call 1-800-426-9157 to
request an exchange.
- --------------------------------------------------------------------------------
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 are $100,000 or more.
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.
26
<PAGE>
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 education 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.
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.
27
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows selected financial information for shares
outstanding of each of the Portfolios throughout the periods indicated. The
total return in the table represents the rate that an investor would have earned
on an investment in the Portfolio specified (assuming reinvestment of all
dividends and distributions). The information for the periods through November
30, 1998 has been audited by PricewaterhouseCoopers LLP, whose report along with
the Portfolios' financial statements, is included in the Annual Report, which is
available free of charge. The information provided for the period ended May 31,
1999 has not been audited. The Multi Cap Growth Portfolio's fiscal year is
December 1 through November 30 (however, the Multi Cap Growth Portfolio
commenced operations on December 31, 1998, indicated by the financial
information shown below).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
SIX-MONTH FOR THE YEAR DECEMBER 31,
PERIOD ENDED ENDED 1996* THROUGH
MAY 31, 1999 NOVEMBER 30, NOVEMBER 30,
PER SHARE DATA (UNAUDITED) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ........................... $14.07 $13.49 $10.00
INCOME FROM OPERATIONS:
Net investment income (loss) .................... (0.05) (0.11)1 (0.03)(1)
Net realized and unrealized
Gains (losses) on
Investments ................................... (2.23) 0.79 4.69
TOTAL FROM INVESTMENT
OPERATIONS .................................... (2.18) 0.68 4.66
Distributions from:
Net investment income ......................... -- -- --
Net realized gains ............................ -- (0.10) (1.17)
Total distributions ............................. -- (0.10) (1.17)
NET ASSET VALUE,
END OF PERIOD ................................. $16.25 $14.07 $13.49
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN .................................... 15.49%*** 5.06% 47.08%***
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(000 omitted) ................................. $507,743 $313,207 $80,898
Ratios (to average net assets):
Expenses2 ..................................... 1.10%** 1.21% 1.35%**
Net investment income (loss),
Including effects of waivers (0.76)%** (0.75)% (0.68)%**
Portfolio turnover rate ......................... 42% 104% 148%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
REAL ESTATE SECURITIES
- -----------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
SIX-MONTH FOR THE YEAR DECEMBER 31,
PERIOD ENDED ENDED 1996* THROUGH
MAY 31, 1999 NOVEMBER 30, NOVEMBER 30,
PER SHARE DATA (UNAUDITED) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ...................... $9.21 $11.24 $10.00
INCOME FROM OPERATIONS:
Net investment income (loss) ............... 0.26 0.441 0.35(1)
Net realized and unrealized
Gains (losses) on
Investments .............................. 0.38 (1.90) 2.05
TOTAL FROM INVESTMENT
OPERATIONS ............................... 0.64 (1.46) 2.40
Distributions from:
Net investment income .................... (0.21) (0.43) (0.23)
Net realized gains ....................... 0.00 (0.14) (0.93)
Total distributions ........................ (0.21) (0.57) (1.16)
NET ASSET VALUE,
END OF PERIOD ............................ $9.64 $9.21 $11.24
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN ............................... 7.19%*** (13.64)% 24.39%***
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(000 omitted) ............................ $129,798 $84,789 $53,308
Ratios (to average net assets):
Expenses2 ................................ 1.21%** 1.25% 1.25%**
Net investment income (loss),
Including effects of waivers 6.13%** 4.19% 4.61%**
Portfolio turnover rate .................... 53% 157% 185%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MICRO CAP GROWTH MULTI CAP GROWTH
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE PERIOD FOR THE PERIOD
SIX-MONTH DECEMBER 31, DECEMBER 31,
PERIOD ENDED 1997* THROUGH 1998* THROUGH
MAY 31, 1999 NOVEMBER 30, MAY 31, 1999
PER SHARE DATA (UNAUDITED) 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ....................... $12.03 $10.00 $10.00
INCOME FROM OPERATIONS:
Net investment income (loss) ................ (0.06) (0.05)1 (0.02)(1)
Net realized and unrealized
Gains (losses) on
Investments ............................... 3.59 2.08 3.30
TOTAL FROM INVESTMENT
OPERATIONS ................................ 3.53 2.03 3.28
Distributions from:
Net investment income ..................... -- -- --
Net realized gains ........................ -- -- --
Total distributions ......................... -- -- --
NET ASSET VALUE,
END OF PERIOD ............................. $15.56 $12.03 $13.28
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN ................................ 29.34%*** 20.30%*** 32.80%***
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(000 omitted) ............................. $77,654 $47,774 $10,433
Ratios (to average net assets):
Expenses2 ................................. 1.52%** 1.60%** 1.35%**
Net investment income (loss),
Including effects of waivers (1.03)%** (0.46)%** (0.45)%**
Portfolio turnover rate ..................... 73% 121% 106%
- -----------------------------------------------------------------------------------------------------------------------------
</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%, 1.60%
and 1.35% of the average daily net assets of the Small Cap Growth, Real
Estate Securities, Micro Cap Growth and Multi 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. For the
period ended May 31, 1999, the Administrator, Accounting Agent and Transfer
Agent waived a portion of their fees in the Multi Cap Growth Portfolio; without
the waiver of expenses, the ratio of expenses to average net assets would have
been 3.07% (annualized) for the Multi Cap Growth Portfolio.
29
<PAGE>
FOR MORE INFORMATION
You may obtain the following and other information
on these Portfolios free of charge:
ANNUAL AND SEMI-ANNUAL REPORT TO SHAREHOLDERS
PROVIDES THE PORTFOLIOS' MOST RECENT FINANCIAL REPORTS AND PORTFOLIO LISTINGS.
THE ANNUAL REPORT CONTAINS A DISCUSSION OF THE MARKET CONDITIONS AND
INVESTMENT STRATEGIES THAT AFFECTED THE PORTFOLIOS' PERFORMANCE
DURING THE LAST FISCAL YEAR.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED DECEMBER 31, 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. (1-202-942-8090). Copies of the information may be
obtained for a fee by writing the Public Reference Section, Washington, D.C.
20549-0102, or by electronic request to [email protected].
Investment Company Act of 1940 File No. 811-7881
BYRPR
<PAGE>
BRAZOS MUTUAL FUNDS
(CLASS Y SHARES)
BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
BRAZOS MID CAP GROWTH PORTFOLIO
BRAZOS REAL ESTATE SECURITIES PORTFOLIO
BRAZOS MULTI CAP GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 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 Small Cap Growth, BRAZOS Micro Cap Growth, BRAZOS Mid Cap Growth,
BRAZOS Real Estate Securities, and the BRAZOS Multi Cap Growth Portfolios dated
December 31, 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 TRUST.......................................................11
INVESTMENT ADVISER AND OTHER SERVICES.........................................18
PURCHASE OF SHARES............................................................23
REDEMPTION OF SHARES..........................................................24
OTHER SHAREHOLDER SERVICES....................................................25
PORTFOLIO TRANSACTIONS........................................................27
DESCRIPTION OF SHARES AND VOTING RIGHTS.......................................28
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES..............................29
PERFORMANCE CALCULATIONS......................................................31
FINANCIAL STATEMENTS..........................................................36
APPENDIX ....................................................................A-1
<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 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
five different Portfolios. These include the BRAZOS Micro Cap Growth, BRAZOS
Small Cap Growth, BRAZOS Mid Cap Growth, BRAZOS Real Estate Securities, and
BRAZOS Multi Cap 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.
PORTFOLIO TURNOVER
It is expected that the annual portfolio turnover rate for the Portfolios will
not exceed 150%. 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 gains. See "DIVIDENDS, CAPITAL GAINS
3
<PAGE>
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, BRAZOS Micro Cap Growth Portfolio and BRAZOS
Multi Cap Growth Portfolio.
INVESTMENT COMPANIES
Each Portfolio reserves the right to invest up to 10% of its total assets,
calculated at the time of investment, in securities of other open-end or
closed-end investment companies. No more than 5% of an investing Portfolio's
total assets may be invested in securities of any one investment company nor may
it acquire more than 3% of the voting securities of any investment company. A
Portfolio will indirectly bear its proportionate share of any management fees
paid by an investment company in which it invests in addition to its advisory
fee.
RESTRICTED SECURITIES
Each Portfolio may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under the
supervision of the Company's Board of Trustees, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided that
a dealer or institutional trading market in such securities exists, these
restricted securities are not treated as illiquid securities for purposes of a
Portfolio's investment limitations. A Portfolio will invest no more than 15% of
its net assets in illiquid securities. The prices realized from the sales of
these securities could be less than those originally paid by a Portfolio or less
than what would be considered the fair value of such securities.
FOREIGN INVESTMENTS
Each Portfolio may invest in common stocks of companies listed on foreign stock
exchanges, and may also invest in stocks traded in the over-the-counter market.
Common stocks for this purpose also include securities having common stock
characteristics such as rights and warrants to purchase common stocks.
Additionally, each Portfolio may also invest in foreign equity securities in the
form of American Depository Receipts (ADRs) and other similar global
instruments. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying foreign
securities. Most ADRs are traded on a U.S. stock exchange. Issuers of
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation between
such information and the market value of the unsponsored ADR.
Investing in foreign companies may involve additional risks and considerations
which are not typically associated with investing in U.S. companies. Since
stocks of foreign companies are normally denominated in foreign currencies, the
Portfolios may be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations, and may incur costs in connection with
conversions between various currencies. Some countries may withhold portions of
dividends and interest at the source. Under the Internal Revenue Code, foreign
exchange gains and losses are treated as ordinary gain or loss.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, comparable information may not be readily available about
certain foreign companies. Securities of some non-U.S. companies may be less
liquid and more volatile than securities of comparable U.S. companies. In
addition, in certain
4
<PAGE>
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending investment securities,
a Portfolio attempts to increase its income through the receipt of interest on
the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the Portfolio's accounts. A
Portfolio may lend its investment securities to qualified brokers, dealers,
domestic and foreign banks or other financial institutions, so long as the
terms, the structure and the aggregate amount of such loans are not inconsistent
with the Investment Company Act of 1940, as amended, (the "1940 Act") or the
rules and regulations or interpretations of the Securities and Exchange
Commission (the "Commission") thereunder, which currently require that (a) the
borrower pledge and maintain with a Portfolio collateral consisting of cash, an
irrevocable letter of credit issued by a domestic U.S. bank or securities issued
or guaranteed by the United States Government having a value at all times not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by a Portfolio at any time, and (d) a Portfolio receives
reasonable interest on the loan (which may include a Portfolio investing any
cash collateral in interest bearing short-term investments). All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities so long as such fees are set forth in a written contract and approved
by the investment company's Board of Trustees. A Portfolio will continue to
retain any voting rights with respect to the loaned securities. If a material
event occurs affecting an investment on a loan, the loan must be called and the
securities voted.
HEDGING STRATEGIES
Each Portfolio may engage in various portfolio strategies to hedge against
adverse movements in the equity markets. Each Portfolio may write (i.e., sell)
covered call options on their portfolio securities, purchase put and call
options on securities and engage in transactions in related options on futures.
Each of these portfolio strategies is described below:
A) FUTURES CONTRACTS
Each Portfolio may enter into futures contracts. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or 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
5
<PAGE>
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 contract 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.
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
6
<PAGE>
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 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").
7
<PAGE>
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.
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
8
<PAGE>
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 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."
9
<PAGE>
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 33
1/3 % 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;
(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
10
<PAGE>
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, BRAZOS Mid
Cap Growth, and the BRAZOS Multi Cap 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.
MANAGEMENT OF THE TRUST
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:
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
GEORGE W. GAU Trustee of the Company, Professor of Finance, George S. Watson Centennial
8009 Long Canyon Dr. Professor in Real Estate, College and Graduate School of Business, University
Austin, TX 78730 of Texas at Austin since 1988; J. Ludwig Mosle Centennial Memorial Professor
Age 52 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 Trustee, President, Treasurer and Chief Financial Officer of the Company;
5949 Sherry Lane, Suite 1600 Since August 1996, Business Manager of John McStay Investment Counsel.
Dallas, Texas 75225 Formerly, Chief Financial Officer of Waugh Enterprises, Inc. from November
Age 40 1995 until August 1996; and Assistant Controller of Hicks, Muse, Tate & Furst
Incorporated from December 1992 to November 1995.
JOHN H. MASSEY Trustee of the Company; Private Investor and a Director of The Paragon Group,
4004 Windsor Avenue Inc., Chancellor Broadcasting, Inc., Bank of the Southwest, Columbine JDS
Dallas, Texas 75205 Systems, Inc. and FSW Holdings, Inc. and Director of the Sunrise Television
Age 60 Group, Inc.; Chairman of the Board and Chief Executive Officer of Life
Partners Group, Inc. from October 1994 until August 1996.
DAVID M. REICHERT Trustee of the Company; Private Investor; formerly Senior Vice President and
7415 Stonecrest Drive Portfolio Manager of Moffet Capital Management, an investment counseling firm,
Dallas, Texas 75240 from January 1995 until June 1996 and Senior Vice President and Portfolio
Age 60 Manager of American Capital Asset Management, a mutual fund management
company, from April 1989 to December 1994.
*TRICIA A. HUNDLEY Vice President, Secretary and Compliance Officer of the Company; Partner of
5949 Sherry Lane, Suite 1600 John McStay Investment Counsel since 1987.
Dallas, Texas 75225
Age 49
*LOREN J. SOETENGA Vice President of the Company, Principal of John McStay Investment Counsel.
5949 Sherry Lane, Suite 1600 Formerly, Partner of Chronos Management, Inc. until 1996.
Dallas, Texas 75225
Age 31
*PETER C. SUTTON Vice President and Assistant Treasurer of the Company; Senior Vice President,
The SunAmerica Center SunAmerica Asset Management Corp. ("SAAMCo"), since April 1997; Treasurer,
733 Third Avenue SunAmerica Equity Funds, SunAmerica Income Funds, SunAmerica Money Market
New York, NY 10017 Fund and Anchor Series Trust, since February 1996; Vice President and
Age 35 Assistant Treasurer of SunAmerica Series Trust and Anchor Pathway Fund, since
1994; Vice President, Seasons Series Trust, since 1997; formerly, Vice
President, SAAMCo., from 1994 to 1997; Controller, SunAmerica Mutual Funds and
Anchor Series Trust from March 1993 to February 1996.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*ROBERT M. ZAKEM Vice President and Assistant Treasurer of the Company; Senior Vice President
The SunAmerica Center and General Counsel, SAAMCo, since April 1993; Executive Vice President,
733 Third Avenue General Counsel and Director, SunAmerica Capital Services, Inc. since August
New York, NY 10017 1993, Vice President, General Counsel and Assistant Secretary, SunAmerica
Age 41 Fund Services, Inc. ("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.
</TABLE>
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 $6,250
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 period ended November 30, 1999.
13
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Benefits Upon from Registrant and
From Registrant Accrued as Part of Retirement Company Complex Paid
Company Expenses to Trustees
<S> <C> <C> <C> <C>
============================ =================== ======================= ==================== =========================
George W. Gau 20,000 -0- -0- 20,000
Trustee
Dan L. Hockenbrough -0- -0- -0- -0-
Trustee
John H. Massey 24,750 -0- -0- 24,750
Trustee
David M. Reichert 24,750 -0- -0- 24,750
Trustee
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
Upon the commencement of the offering of the Class Y shares of the Mid Cap
Growth Portfolio, the Adviser will be the sole shareholder of such Class and
will be deemed a controlling person of such Class.
As of September 30, 1999, the Trustees and officers of the Trust owned in the
aggregate less than 1% of the total outstanding shares of each Class of each
Portfolio other than the Mid Cap Growth Portfolio.
As of September 30, 1999, the following persons or organizations held of record
5% or more of the shares of each Portfolio:
<TABLE>
<CAPTION>
Micro Cap Growth Portfolio Class Y Percentage
---------------------------------- ----------
<S> <C>
Charles Schwab & Co., Inc. 14.0%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creek Drive South
Denver, CO 80246
National Financial Services 8.0%
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
National Investor Services Corporation 6.0%
Mutual Funds
55 Water Street FL32
New York, NY 10041-3299
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Real Estate Securities Portfolio Class Y Percentage
---------------------------------------- ----------
<S> <C>
Suntrust Bank Atlanta Custodian 8.0%
FBO University of Georgia Foundation
U/A/D 3/19/97
P.O. Box 105870
Atlanta, GA 30348-5870
Wachovia Bank N.A. 7.0%
Successor Trustee
U/A USAA Savings & Investment Plan
301 N. Main Street
P.O. Box 3073
Winston Salem, NC 27150-0001
Clarian Health Partners Inc. 7.0%
ATTN: Rick Vorheis
1515 N. Senate Ave. FL 1
Indianapolis, IN 46202-2212
Texas Tech University 6.0%
PO Box 41098
Lubbock, TX 79409-1098
Charles Schwab & Co., Inc. 6.0%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creek Drive South
Denver, CO 80246
The Lemelson Foundation 5.0%
PMB #363 930 Tahoe Blvd. #802
Incline Village, NV 89451
California Province of the Society of Jesus 5.0%
Attn: Reverend Robert St. Clair
P.O. Box 519
Los Gatos, CA 95031-0519
University of Nebraska Foundation 5.0%
Daniel H. Mortin VP & Treasurer
PO Box 82555
Lincoln, NE 68501-2555
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Small Cap Growth Portfolio Class Y Percentages
---------------------------------- -----------
<S> <C>
Charles Schwab & Co., Inc. 12.0%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creek Drive South
Denver, CO 80246
Multi Cap Growth Portfolio Class Y Percentages
---------------------------------- -----------
US Trust Company 16.0%
FBO Community Foundation
Silicon Valley
4380 SW Macadam Ave. Ste. 450
Portland, OR 97201-6407
R.D. and Joan Dale Hubbard Foundation Inc. 13.0%
73-405 El Paseo #32D
Palm Desert, CA 92260
R.D. Hubbard 8.0%
73-405 El Paseo #32D
Palm Desert, CA 92260
Thomas J. Musick 8.0%
5949 Sherry Lane Ste. 1600
Dallas, TX 75225-8012
John McStay and Ellen McStay 6.0%
JT Ten
5949 Sherry Lane Ste. 1600
Dallas, TX 75225-8012
Pershing 5.0%
Division of Donaldson, Lufkin and Jenrette
1 Pershing Plaza
Jersey City, NJ 07399-0001
Real Estate Securities Portfolio Class A Percentage
---------------------------------------- -----------
SunAmerica Asset Management Corp. 99.0%
733 Third Avenue 4th Floor
New York, NY 10017-3204
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Small Cap Growth Portfolio Class A Percentage
---------------------------------------- ----------
<S> <C>
SunAmerica Asset Management Corp. 96.0%
733 Third Avenue 4th Floor
New York, NY 10017-3204
Real Estate Securities Portfolio Class B Percentage
---------------------------------------- -----------
SunAmerica Asset Management Corp. 99.0%
733 Third Avenue 4th Floor
New York, NY 10017-3204
Small Cap Growth Portfolio Class B Percentages
---------------------------------------- -----------
SunAmerica Asset Management Corp. 86.0%
733 Third Avenue 4th Floor
New York, NY 10017-3204
Donaldson Lufkin & Jenrette 13.0%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Real Estate Securities Portfolio Class II Percentage
---------------------------------------- -----------
SunAmerica Asset Management Corp. 99.0%
733 Third Avenue 4th Floor
New York, NY 10017-3204
Small Cap Growth Portfolio Class II Percentages
---------------------------------------- -----------
SunAmerica Asset Management Corp. 92.0%
733 Third Avenue 4th Floor
New York, NY 10017-3204
Resources Trust UA 5.0%
USHA Pharmacy Inc. PSP
FBO Vinod F. Shah
2 Dupont Ct.
Dix Hills, NY 11746-6259
</TABLE>
17
<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 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 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) SunAmerica Capital Services, Inc. ("SACS" or the "Distributor")
acts as Distributor for each Portfolio of the Company pursuant to the
Distribution Agreement between SACS and the Company;
(iii) SunAmerica Fund Services, Inc. ("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, NY 10017. Under the Distribution Agreement,
SACS will provide services similar to those provided by Rafferty Capital
Markets, 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, NY 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 and other service charges of the Transfer Agent
which are paid by the
18
<PAGE>
Company). SAFS is located at The SunAmerica Center, 733 Third Avenue, New York,
NY 10017. 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 $4.5 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 Multi Cap Growth Portfolio .................................. 0.90%
BRAZOS Mid Cap Growth Portfolio..................................... 0.90%
For the semi-annual period ended May 31, 1999, 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 $ 375,275 $ 0
BRAZOS Real Estate Securities Portfolio $ 477,518 $ 0
BRAZOS Small Cap Growth Portfolio $1,905,910 $ 0
BRAZOS Multi Cap Growth Portfolio* $ 28,161 $28,161
* The Multi Cap Growth Portfolio commenced operations on 12/31/98.
For the fiscal year ended November 30, 1998, the portfolios paid the Adviser
fees and/or reimbursed expenses of the Portfolios as follows:
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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
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
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.
DISTRIBUTOR
SACS acts as Distributor for each Portfolio of the Company. SACS receives 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 supplies office facilities, non-investment related statistical
and research data, 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.
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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, Inc. ("PFPC") provided similar services to the
Company; prior to PFPC serving in such capacities, Rodney Square Management
Corporation ("Rodney Square") provided similar services to the Company.
For the semi-annual period ended May 31, 1999, the Company paid Firstar
administration fees and Firstar waived fees and/or reimbursed expenses of the
Portfolios as follows:
Fees paid
Portfolio (Before Waivers) Waivers
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio $ 21,327 $ 0
BRAZOS Real Estate Securities Portfolio $ 37,745 $ 0
BRAZOS Small Cap Growth Portfolio $139,457 $ 0
BRAZOS Multi Cap Growth Portfolio* $ 10,570 $3,125
* The Multi Cap Growth Portfolio commenced operations on 12/31/98.
For the semi-annual period ended May 31, 1999, the Company paid Firstar
accounting services fees and Firstar waived fees and/or reimbursed expenses of
the Portfolios as follows:
Fees paid
Portfolio (Before Waivers) Waivers
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio $13,579 $ 0
BRAZOS Real Estate Securities Portfolio $16,305 $ 0
BRAZOS Small Cap Growth Portfolio $30,002 $ 0
BRAZOS Multi Cap Growth Portfolio* $ 9,888 $2,750
* The Multi Cap Growth Portfolio commenced operations on 12/31/98.
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
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* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
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* $ 38,100 $ 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.
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
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
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.
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
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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, 1177 Avenue of the Americas, New York, New York
10036, 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. 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.
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
23
<PAGE>
Company from the Company's 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 NYSE is closed or trading on the NYSE 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 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, BRAZOS MID CAP GROWTH AND
BRAZOS MULTI CAP GROWTH PORTFOLIOS. No charge is made by these Portfolios for
redemptions.
BRAZOS REAL ESTATE SECURITIES PORTFOLIO. No charge is made by the BRAZOS Real
Estate Securities Portfolio for redemptions if shares are held for at least 90
days. Shares held for less than 90 days will be subject to a 1% redemption fee
which is retained by the Company for the benefit of the remaining shareholders
and is intended to encourage long-term investment in the BRAZOS Real Estate
Securities Portfolio, to avoid transaction and other expenses caused by early
redemption and to facilitate portfolio management.
24
<PAGE>
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 are $100,000 or more. 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 an eligible guarantor institution is
available from the Administrator. Broker-dealers guaranteeing signatures must be
a member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program.
The signature guarantee must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Company are also
being redeemed, on the letter or stock power.
OTHER SHAREHOLDER SERVICES
The following supplements the "Purchase of Shares" and "Redemption of Shares"
information set forth in the Prospectus:
IN-KIND PURCHASES
If accepted by the Company, shares of a Portfolio may be purchased in exchange
for securities which are eligible for acquisition by the Portfolio, as described
in the Prospectus. Securities to be exchanged which are accepted by the Company
will be valued as set forth under "VALUATION OF SHARES" at the time of the next
determination of net asset value after such acceptance. Shares issued by a
Portfolio in exchange for securities will be issued at net asset value
determined as of the same time. All dividends, interest, subscription, or other
rights pertaining to such securities shall become the property of that Portfolio
and must be delivered to the Company by the investor upon receipt from the
issuer. Securities acquired through an in-kind purchase will be acquired for
investment and not for immediate resale.
25
<PAGE>
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 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
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.
26
<PAGE>
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.
For the semi-annual period ended May 31, 1999, the Portfolios paid brokerage
commissions as follows:
Portfolio Brokerage Commission
- --------- --------------------
BRAZOS Micro Cap Growth Portfolio $ 71,600
BRAZOS Real Estate Securities Portfolio $456,746
BRAZOS Small Cap Growth Portfolio $318,280
BRAZOS Multi Cap Growth Portfolio $ 16,911
For the fiscal year ended November 30, 1998, the Portfolios paid brokerage
commissions as follows:
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<PAGE>
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 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
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<PAGE>
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 or gains at interim periods. The amounts of
any income dividends or capital gains distributions cannot be predicted. The
Portfolios may distribute net investment income and other capital gains during
interim periods when the Company's management determines that it is in the best
interests of a Portfolio and its shareholders to do so. It is not anticipated
that distributions of net investment income and other capital gains will be made
more frequently than quarterly. It is possible, however, as a result of this
policy that total distributions in a year could exceed the total of a
Portfolio's current year net investment income and capital gains. If this should
occur, a portion of the distributions received by shareholders of such Portfolio
could be a nontaxable "return of capital" for Federal income tax purposes and
thereby reduce the shareholder's cost basis in shares of the Portfolio. In
general, a shareholder's total cost basis in the Company will reflect the cost
of the shareholder's original investment plus the amount of any reinvestment.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of a Portfolio by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividend and capital gains distributions are automatically received
in additional shares of the respective Portfolio of the Company at net asset
value (as of the business day following the record date). This will remain in
effect until the Company is notified by the shareholder in writing at least
three days prior to the record date that either the Income Option (income
dividends in cash and capital gains distributions in additional shares at net
asset value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected. An account statement is sent to
shareholders whenever an income dividend or capital gains distribution is paid.
29
<PAGE>
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 Code, at least 90% of a Portfolio's
gross income for a taxable year must be derived from certain qualifying income,
i.e., dividends, interest, income derived from loans of securities and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other related income, including gains from options, futures and forward
contracts, derived with respect to its business investing in stock, securities
or currencies. Any net gain realized from the closing out of futures contracts
will, therefore, generally be qualifying income for purposes of the 90%
requirement.
30
<PAGE>
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.
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.
31
<PAGE>
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).
32
<PAGE>
Total returns for the Portfolios for the period ended May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Inception Year-to-Date Inception to
Date 5/31/99 5/31/99
--------- ------------ ------------
<S> <C> <C> <C>
BRAZOS Real Estate Securities Portfolio 12/31/96 7.9% 6.0%
BRAZOS Small Cap Growth Portfolio 12/31/96 1.7% 27.1%
BRAZOS Micro Cap Growth Portfolio 12/31/97 17.2% 36.7%
BRAZOS Multi Cap Growth Portfolio 12/31/98 32.8% 32.8%
</TABLE>
COMPARISONS
To help investors better evaluate how an investment in a Portfolio might satisfy
their investment objective, advertisements regarding the Company may discuss
various measures of Company performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications, indices and averages may be used:
(1) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial
corporation stocks (Dow Jones Industrial Average), 15
utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(2) Standard & Poor's 500 Stock Index or its component indices -
an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation
stocks. Comparisons of performance assume reinvestment of
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.
33
<PAGE>
(8) Goldman Sachs 100 Convertible Bond Index - currently includes
67 bonds and 33 preferred stocks. The original list of names
was generated by screening for convertible issues of 100
million or greater in market capitalization. The index is
priced monthly.
(9) Salomon Brothers GNMA Index - includes pools of mortgages
originated by private lenders and guaranteed by the mortgage
pools of the Government National Mortgage Association.
(10) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or
AAA. It is a value-weighted, total return index, including
approximately 800 issues with maturities of 12 years or
greater.
(11) Salomon Brothers Broad Investment Grade Bond - is a
market-weighted index that contains approximately 4,700
individually priced investment grade corporate bonds rated BBB
or better, U.S. Treasury/agency issues and mortgage pass
through securities.
(12) Lehman Brothers Long-Term Treasury Bond - is composed of all
bonds covered by the Lehman Brothers Treasury Bond Index with
maturities of 10 years or greater.
(13) NASDAQ Industrial Index - is composed of more than 3,000
industrial issues. It is a value-weighted index calculated on
price change only and does not include income.
(14) Value Line - composed of over 1,600 stocks in the Value Line
Investment Survey.
(15) Russell 2000 - composed of the 2,000 smallest stocks in the
Russell 3000, a market value-weighted index of the 3,000
largest U.S. publicly-traded companies.
(16) Russell 2000 Growth - measures the performance of those
Russell 2000 companies with higher price-to-book ratios and
higher forecasted growth values.
(17) Russell 2000 Value - measures the performance of those Russell
2000 companies with lower price-to-book ratios and lower
forecasted growth values.
(18) Russell 2500 - composed of the 2,500 smallest stocks in the
Russell 3000, a market value-weighted index of the 3,000
largest U.S. publicly-traded companies.
(19) Composite Indices - 60% Standard & Poor's 500 Stock Index, 30%
Lehman Brothers Long-Term Treasury Bond and 10% U.S. Treasury
Bills; 70% Standard & Poor's 500 Stock Index and 30% NASDAQ
Industrial Index; 35% Standard & Poor's 500 Stock Index and
65% Salomon Brothers High Grade Bond Index; all stocks on the
NASDAQ system exclusive of those traded on an exchange, and
65% Standard & Poor's 500 Stock Index and 35% Salomon Brothers
High Grade Bond Index.
(20) CDA Mutual Fund Report published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk,
total return and average rate of return (average compounded
growth rate) over specified time periods for the mutual fund
industry.
(21) Mutual Fund Source Book published by Morningstar, Inc. -
analyzes price, yield, risk and total return for equity funds.
(22) Financial publications: Business Week, Changing Times,
Financial World, Forbes, Fortune, Money, Barron's, Consumer's
Digest, Financial Times, Global Investor,
34
<PAGE>
Wall Street Journal and Weisenberger Investment Companies
Service - publications that rate fund performance over
specified time periods.
(23) Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of
change over time in the price of goods and services in major
expenditure groups.
(24) Stocks, Bonds, Bills and Inflation, published by Ibbotson
Associates - historical measure of yield, price and total
return for common and small company stock, long-term
government bonds, U.S. Treasury bills and inflation.
(25) Savings and Loan Historical Interest Rates - as published by
the U.S. Savings & Loan League Fact Book.
(26) Lehman Brothers Government/Corporate Index - a combination of
the Government and Corporate Bond Indices. The Government
Index includes public obligations of the U.S. Treasury, issues
of Government agencies, and corporate debt backed by the U.S.
Government. The Corporate Bond Index includes fixed-rate
nonconvertible corporate debt. Also included are Yankee Bonds
and nonconvertible debt issued by or guaranteed by foreign or
international governments and agencies. All issues are
investment grade (BBB) or higher, with maturities of at least
one year and an outstanding par value of at least $100 million
for U.S. Government issues and $25 million for others. Any
security downgraded during the month is held in the index
until month-end and then removed. All returns are market value
weighted inclusive of accrued income.
(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
35
<PAGE>
a Portfolio, that the averages are generally unmanaged, and that the items
included in the calculations of such averages may not be identical to the
formula used by a Portfolio to calculate its performance. In addition, there can
be no assurance that a Portfolio will continue this performance as compared to
such other averages.
CODE OF ETHICS
The Company has adopted a Code of Ethics which restricts, to a certain extent,
personal transactions by access persons of the Company and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The unaudited Financial Statements for the BRAZOS Micro Cap Growth Portfolio,
BRAZOS Small Cap Growth Portfolio, BRAZOS Real Estate Securities Portfolio and
BRAZOS Multi Cap Growth Portfolio, financial highlights and notes to the
Financial Statements dated May 31, 1999, were filed with the SEC on July 27,
1999. They and the audited Financial Statements for the BRAZOS Small Cap Growth,
Real Estate Securities and the Micro Cap Growth Portfolios dated November 30,
1998 are incorporated herein by reference and can be obtained free of charge by
calling the Brazos Mutual Funds at 1-800-426-9157.
36
<PAGE>
APPENDIX
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and Poor's for commercial
paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
A-2
<PAGE>
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
A-4
<PAGE>
"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB," but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected
A-5
<PAGE>
by a large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa." The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
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"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for
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timely payment of financial commitments is considered adequate, but adverse
changes in circumstances and in economic conditions are more likely to impair
this capacity.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is
a real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to denote relative standing within
these major rating categories.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
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"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned by
Thomson Financial BankWatch to non-investment grade long-term debt. Such issues
are regarded as having speculative characteristics regarding the likelihood of
timely repayment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is
in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
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A Standard and Poor's note rating reflects the liquidity
factors and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
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"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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