<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
SEC File 33-14943 and 811-7881
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. ____ [_]
Post-Effective Amendment No. 6 [X]
-----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 8 [X]
----
(Check appropriate box or boxes.)
Brazos Mutual Funds
-------------------
(Exact Name of Registrant as Specified in Charter)
5949 Sherry Lane, Suite 1600
Dallas, Texas 75225
--------------------
(Address of Principal Executive Offices) (Zip Code)
with a copy of communications to:
Audrey C. Talley, Esquire
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107-3496
Robert M. Zakem, Esquire
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue
New York, NY 10017
Registrant's Telephone Number, including Area Code (214) 365-5200
--------------
Dan L. Hockenbrough, 5949 Sherry Lane, Suite 1600, Dallas, Texas 75225
----------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Upon effective date of this
---------------------------
registration statement It is proposed that this filing will become effective
- ----------------------
(check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
<PAGE>
______________, 1999 PROSPECTUS
BRAZOS MUTUAL FUNDS
BRAZOS SMALL CAP GROWTH FUND
BRAZOS REAL ESTATE SECURITIES FUND
BRAZOS GROWTH FUND
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
BRAZOS
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS......................................................... 1
FINANCIAL HIGHLIGHTS.................................................... 9
SHAREHOLDER ACCOUNT INFORMATION......................................... 11
MORE INFORMATION ABOUT THE FUNDS........................................ 23
Fund Investment StrategieS......................................... 23
Glossary........................................................... 26
Investment Terminology.......................................... 26
Risk Terminology................................................ 27
FUND MANAGEMENT......................................................... 29
FOR MORE INFORMATION.................................................... 32
-i-
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following questions and answers are designed to give you an overview of
Brazos Mutual Funds (the "Trust"), and to provide you information about three of
the Trust's investment portfolios, or "Funds," and their investment goals,
principal strategies and principal investment techniques. The Trust consists of
four Funds. Class Y shares of all four of the Funds are offered through a
separate prospectus. Classes A, B and II shares of the Brazos Small Cap Growth
Fund, Brazos Real Estate Securities Fund and Brazos Growth Fund are offered
through a separate prospectus. There can be no assurance that any Fund's
investment goal will be met or that the net return on an investment in a Fund
will exceed what could have been obtained through other investment or savings
vehicles. More complete investment information is provided in the chart, under
"More Information About the Funds," which is on page 22, and the glossary that
follows on page 25.
[side column]
MARKET CAPITALIZATION represents the total market value of the outstanding
securities of a corporation.
A fund engages in ACTIVE TRADING when it frequently trades its portfolio
securities to achieve its investment goal.
The "GROWTH" ORIENTED philosophy to which the Small Cap Growth and Growth Funds
subscribe--that of investing in securities believed to offer the potential for
capital appreciation--focuses on securities which are considered to have a
historical record of above average growth rate; to have significant growth
potential; to have above average earnings growth or value or the ability to
sustain earnings growth; to offer proven or unusual products or services; or to
operate in industries experiencing increasing demand.
CONSERVATION OF PRINCIPAL is a goal which aims to invest in a manner that tries
to protect the value of your investment against market movements and other
economic events.
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 real estate assets.
[end side column]
Q: WHAT ARE THE FUNDS' INVESTMENT GOALS, STRATEGIES AND TECHNIQUES?
A:
<TABLE>
<CAPTION>
INVESTMENT PRINCIPAL
FUND GOAL INVESTMENT STRATEGY PRINCIPAL INVESTMENT TECHNIQUES
<S> <C> <C> <C>
Brazos Small Cap Growth Fund capital growth invests primarily by active trading
appreciation in common stocks and securities
convertible into common stocks that
demonstrate the potential for capital
appreciation, issued by companies
with market capitalizations between
$40 million and $1.2 billion
Brazos Real Estate Securities Fund a balance of growth invests primarily by active trading
income and and income in common stocks and securities
appreciation convertible into common stocks
issued by companies principally
engaged in the real estate industry
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
INVESTMENT INVESTMENT
FUND GOAL STRATEGY PRINCIPAL INVESTMENT TECHNIQUES
<S> <C> <C> <C>
Brazos Growth Fund capital growth growth invests primarily by active trading
in common stocks and securities
convertible into common stocks
issued by companies with growth
rates above 20%, above average
return on equity, and low debt levels
</TABLE>
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?
A: The following section describes the principal risks of each Fund, while the
chart on page __ describes various additional risks.
RISK OF INVESTING IN EQUITY SECURITIES
The Brazos Small Cap Growth, Brazos Real Estate Securities and Brazos
Growth Funds invest primarily in equity securities. As with any equity
fund, the value of your investment in any of these Funds may fluctuate in
response to stock market movements. You should be aware that the
performance of different types of equity stocks may rise or decline under
varying market conditions - for example, "value" stocks may perform well
under circumstances in which "growth" stocks in general have fallen. In
addition, individual stocks selected for any of these Funds may
underperform the market generally.
ADDITIONAL PRINCIPAL RISKS
Shares of the Funds are not bank deposits and are not guaranteed or insured
by any bank, government entity or the Federal Deposit Insurance
Corporation. As with any mutual fund, there is no guarantee that a Fund
will be able to achieve its investment goals. If the value of the assets of
a Fund goes down, you could lose money.
ADDITIONAL RISKS SPECIFIC TO THE BRAZOS SMALL CAP GROWTH FUND
Stocks of smaller companies may be more volatile than, and not as readily
marketable as, those of larger 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.
ADDITIONAL RISKS SPECIFIC TO THE BRAZOS REAL ESTATE SECURITIES FUND
The Brazos Real Estate Securities Fund is subject to risks, such as market
forces, that may impact the values of its underlying real estate assets,
and management's skill in managing those assets. The trading volume of
small company real estate securities may make them more difficult to sell.
Q: HOW HAVE THE FUNDS PERFORMED HISTORICALLY?
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<PAGE>
A: The following Risk/Return Bar Charts and Tables illustrate the risks of
investing in the Funds by showing changes in the Funds' performance from
calendar year to calendar year, and compare the Funds' average annual
returns to those of an appropriate market index. Sales charges are not
reflected in the bar charts. If these amounts were reflected, returns would
be less than those shown. Of course, past performance is not necessarily an
indication of how a Fund will perform in the future. The Brazos Growth Fund
has not been in operation for a full calendar year.
BRAZOS SMALL CAP GROWTH FUND/(1)/ (CLASS Y)/(2)/
[Graphic Omitted - Performance Bar Chart]
YEAR RETURN
---- ------
1998 13.6%
1997 54.5%
(1) Return for the quarter ended 3/31/99: -1.06%
(2) For each Fund, the returns shown in the bar chart above are for a class of
shares which is not offered in this prospectus that has substantially
similar annual returns because its shares are invested in the same
portfolio of securities. In reviewing this performance information,
however, you should be aware that returns would differ to the extent that
Class Y shares do not have the same expenses and sales loads as Class A, B
and II shares which are set forth in the table in page __ of this
prospectus.
During the two-year period shown in the bar chart, the highest return for a
quarter was 25.00% (quarter ended 6/30/97) and the lowest return for a quarter
was -19.49% (quarter ended 09/30/98).
<TABLE>
<CAPTION>
Return Since Inception*
Average Annual Total Returns (as of the calendar Past One Fund Russell 2000
year ended December 31, 1998) Year Index***
<S> <C> <C> <C> <C>
Brazos Small Cap Growth Fund** Class Y 13.6% 75.5% 19.2%
Russell 2000 Index*** -2.5%
</TABLE>
* Inception Date: Class Y: 12/31/96
** Includes expenses.
*** The Russell 2000 Index is an unmanaged broad-based index of 2,000 smaller
capitalization companies.
-3-
<PAGE>
BRAZOS REAL ESTATE SECURITIES FUND/(1)/ (CLASS Y)/(2)/
[Graphic Omitted - Performance Bar Chart]
YEAR RETURN
---- ------
1998 -17.4%
1997 29.2%
(1) Return for the quarter ended 3/31/99: -4.09%
(2) For each Fund, the returns shown in the bar chart above are for a class of
shares which is not offered in this prospectus that has substantially
similar annual returns because its shares are invested in the same
portfolio of securities. In reviewing this performance information,
however, you should be aware that returns would differ to the extent that
Class Y shares do not have the same expenses and sales loads as Class A, B
and II shares which are set forth in the table on page __ of this
prospectus.
During the two-year period shown in the bar chart, the highest return for a
quarter was 12.16% (quarter ended 9/30/97) and the lowest return for a quarter
was - 13.52% (quarter ended 9/30/98).
<TABLE>
<CAPTION>
Return Since Inception*
Past One Fund NAREIT
Average Annual Total Returns (as of the Year Equity
calendar year ended December 31, 1998) Index***
<S> <C> <C> <C>
Brazos Real Estate Securities Fund** Class Y -17.4% 6.7% -0.8%
NAREIT Equity Index -17.5%
</TABLE>
* Inception Date: Class Y: 12/31/96
** Includes expenses.
*** The NAREIT Equity Index is a widely recognized, unmanaged index of
publicly traded real estate securities.
-4-
<PAGE>
BRAZOS GROWTH FUND
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 Brazos
Growth Fund by comparing the Fund's performance with a broad measure of market
performance. There is no past performance table, performance bar chart or
financial highlights for the Brazos Growth Fund as it is less than one year old.
Inception date: 12/31/98.
-5-
<PAGE>
Q: WHAT ARE THE FUNDS' EXPENSES?
A: The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Funds.
<TABLE>
<CAPTION>
Brazos Small Cap Growth Fund Brazos Real Estate Securities Fund
---------------------------- ----------------------------------
Class A Class B Class II Class A Class B Class II
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your
investment)
Maximum Sales Charge (Load) Imposed on 5.75% None 1.00% 5.75% None 1.00%
Purchases (as a percentage of offering price)/(1)/
Maximum Deferred Sales Charge (Load) (as a None 4.00% 1.00% None 4.00% 1.00%
percentage of amount redeemed)/(2)/
Maximum Sales Charge (Load) Imposed on None None None None None None
Reinvested Dividends
Redemption Fee (as a percentage of amount None None None 1.00%/(4)/ 1.00%/(4)/ 1.00%/(4)/
redeemed)/(3)/
Exchange Fee None None None None None None
Maximum Account Fee None None None None None None
Annual Fund Operating Expenses(5)
(expenses that are deducted from
Fund assets)
Management Fees 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%
Distribution (12b-1) Fees/(6)/ 0.35% 1.00% 1.00% 0.35% 1.00% 1.00%
Other Expenses 0.31% 0.31% _____ 0.41% 0.41% _____
Total Annual Fund Operating Expenses/(7)/ _____ _____ _____ _____ _____ _____
Expense Reimbursement _____ _____ _____ _____ _____ _____
Net Expenses 1.65% 2.30% 2.30% 1.65% 2.30% 2.30%
_____ _____ _____ _____ _____ _____
</TABLE>
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1 million or more.
(2) Purchases of Class A shares over $1 million will be subject to a contingent
deferred sales charge (CDSC) on redemptions made within one year of
purchase. The CDSC on Class B shares applies only if shares are redeemed
within six years of their purchase. The CDSC on Class II shares applies
only if shares are redeemed within eighteen months of their purchase.
(3) A $15.00 fee may be imposed on wire redemptions.
(4) Shares of the Brazos Real Estate Securities Fund that are held 90 days or
more may be redeemed without cost. This fee is intended to encourage long-
term investment in the Fund, to avoid transaction and other expenses caused
by early redemption, and to facilitate portfolio management, and will be
paid to the Fund.
(5) The Annual Fund Operating Expenses for Class A, B and II shares are based
on each Fund's expenses for the prior fiscal year, but have been restated
to reflect the estimated expenses of each Class.
(6) Because these fees are paid out of a Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost
you more than paying other types of sales charges.
-6-
<PAGE>
<TABLE>
<CAPTION>
Brazos Growth Fund
-----------------------------
Class A Class B Class II
-------- -------- ---------
<S> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a 5.75% None 1.00%
percentage of offering price)(1)
Maximum Deferred Sales Charge (Load) (as a percentage None 4.00% 1.00%
of amount redeemed)(2)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None None
Redemption Fee(3) None None None
Exchange Fee None None None
Maximum Account Fee None None None
Annual Fund Operating Expenses(5) (expenses that are deducted from
Fund assets)
Management Fees 0.90% 0.90% 0.90%
Distribution (12b-1) Fees(6) 0.35% 1.00% 1.00%
Other Expenses 0.45% 0.45% _____
Total Annual Fund Operating Expenses(7) _____ _____ _____
Expense Reimbursement _____ _____ _____
1.65% 2.30% 2.30%
Net Expenses _____ _____ _____
</TABLE>
(7) The offering of Class A, B and II shares commenced for these Funds on
______________. The amounts shown are estimated based on expenses expected
to have been incurred if Class A, B and II shares had been in existence for
these Funds throughout the fiscal year ended ______________. Nevertheless,
SunAmerica Asset Management Corp. has undertaken to cap the expense ratios
set forth above should Total Annual Fund Operating Expenses exceed such net
expense ratios. This cap on expenses is expected to continue until further
notice.
-7-
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Funds
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions and if you redeemed your investment
at the end of the periods indicated your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
BRAZOS SMALL CAP GROWTH FUND
(Class A shares) 733 1065 1420 2417
------- ------- -------- --------
(Class B shares) 633 1018 1430 2397
------- ------- -------- --------
(Class II shares) 431 811 1318 2709
------- ------- -------- --------
BRAZOS REAL ESTATE SECURITIES FUND
(Class A shares) 733 1065 1420 2417
------- ------- -------- --------
(Class B shares) 633 1018 1430 2397
------- ------- -------- --------
(Class II shares) 431 811 1318 2709
------- ------- -------- --------
BRAZOS GROWTH FUND
(Class A shares) 733 1065
------- -------
(Class B shares) 633 1018
------- -------
(Class II shares) 431 811
------- -------
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
BRAZOS SMALL CAP GROWTH FUND
(Class A shares) 733 1065 1420 2417
------- ------- -------- --------
(Class B shares) 233 718 1230 2397
------- ------- -------- --------
(Class II shares) 331 811 1318 2709
------- ------- -------- --------
BRAZOS REAL ESTATE SECURITIES FUND
(Class A shares) 733 1065 1420 2417
------- ------- -------- --------
(Class B shares) 233 718 1230 2397
------- ------- -------- --------
(Class II shares) 331 811 1318 2709
------- ------- -------- --------
BRAZOS GROWTH FUND
(Class A shares) 733 1065
------- -------
(Class B shares) 233 718
------- -------
(Class II shares) 331 811
------- -------
</TABLE>
-8-
<PAGE>
FINANCIAL HIGHLIGHTS
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The Financial Highlights table for each Fund is intended to help you understand
the Fund's financial performance since its inception. Certain information
reflects financial results for a single Fund share. The total returns in each
table represent the rate that an investor would have earned (or lost) on an
investment in a Fund (assuming reinvestment of all dividends and distributions).
The Financial Highlights shown are for a class of shares not offered in this
prospectus and would differ to the extent that it does not have the same
expenses and sales loads as Class A, B or II. This information has been audited
by PricewaterhouseCoopers LLP, whose report, along with each Fund's financial
statements, is included in the Statement of Additional Information (SAI), which
is available upon request.
BRAZOS SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
Ratio
of net
Net gain invest
(loss) on Ratio -ment
Net invest- Total Divid- of income
Asset Net ments from ends Distri- Net Net expenses (loss)
Value, invest (both invest- from butions Asset Assets to to
begin- -ment realized ment invest- from Total Value, end of average average Portfo-
ning of income and un- oper- ment capital distri- end of Total period net net lio
Period Ended period (loss) realized) ations income gains butions period Return (000's) assets assets(1) turnover
- ------------ ------- ------ ---------- ------- ------ -------- ------- ------ ------ ------- -------- ------- --------
Class Y
---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96*-
11/30/97 $10.00* $(0.03) $4.69 $4.66 -- $(1.17) $(1.17) $13.49 47.08%** $ 80,898 1.35%*** (0.68)%*** 148%**
11/30/98 $13.49 $(0.11)(2) $0.79 $0.68 -- $(0.10) $(0.10) $14.07 5.06% $313,207 1.21% (0.75)% 104%
</TABLE>
_________________________
* Commencement of operations
** Not Annualized
*** Annualized
/1/ The Adviser has agreed to waive a portion of its advisory fees and assume
expenses otherwise payable by the Brazos Small Cap Growth Fund (if necessary) in
order to keep the annual expense ratios from exceeding 1.35% of the average
daily net assets of the Fund. In addition, the prior Administrator, Accounting
Agent and Transfer Agent waived a portion of their fees in the Brazos Small Cap
Growth Fund for the period ended November 30, 1997. Without the waiver of
expenses, the annualized ratio of expenses to average net assets would have been
1.80% for the Brazos Small Cap Growth Fund for the period ended November 30,
1997. There was no waiver of expenses for the Brazos Small Cap Growth Fund for
the year ended November 30, 1998.
/2/ Net investment income (loss) per share represents net investment income
(loss) divided by the average shares outstanding throughout the period.
-9-
<PAGE>
BRAZOS REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
Ratio
of net
Net gain invest
(loss) on Ratio -ment
Net invest- Total Divid- of income
Asset Net ments from ends Distri- Net Net expenses (loss)
Value, invest (both invest- from butions Asset Assets to to
begin- -ment realized ment invest - from Total Value, end of average average Portfo-
ning of income and un- oper- ment capital distri- end of Total period net net lio
Period Ended period (loss) realized) ations income gains butions period Return (000's) assets assets(1) turnover
- ------------ ------- ------ ---------- ------- ------ -------- ------- ------ ------ ------- -------- ------- --------
Class Y
---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96*-
11/30/97 $10.00 $0.35 $ 2.05 $ 2.40 $(0.23) $(0.93) $(1.16) $11.24 24.39%** $53,308 1.25%*** 4.61%*** 185%**
11/30/98 $11.24 $0.44(2) $(1.90) $(1.46) $(0.43) $(0.14) $(0.57) $ 9.21 (13.64)% $84,789 1.25% 4.19% 157%
</TABLE>
_______________________
* Commencement of operations
** Not Annualized
*** Annualized
/1/ The Adviser has agreed to waive a portion of its advisory fees and assume
expenses otherwise payable by the Brazos Real Estate Securities Fund (if
necessary) in order to keep the annual expense ratios from exceeding 1.25% of
the average daily net assets of the Fund. In addition, the prior Administrator,
Accounting Agent and Transfer Agent waived a portion of their fees in the Brazos
Real Estate Securities Fund for the period ended November 30, 1997. Without the
waiver of expenses, the annualized ratio of expenses to average net assets would
have been 1.83% (annualized) for the Brazos Real Estate Securities Fund 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% for the Brazos Real
Estate Securities Fund.
/2/ Net investment income (loss) per share represents net investment income
(loss) divided by the average shares outstanding throughout the period.
-10-
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
SELECTING A SHARE CLASS
Each Fund offers three Classes of shares through this prospectus: Class A, Class
B and Class II shares.
Each class of shares has its own cost structure, so you can choose the one best
suited to your investment needs. Your broker or financial advisor can help you
determine which class is right for you.
CLASS A
. Front-end sales charges, as
described below. There are
several ways to reduce these
charges, also described below.
. Lower annual expenses than Class
B or Class II shares.
CLASS B
. No front-end sales charge; all
your money goes to work for you
right away.
. Higher annual expenses than
Class A shares.
. Deferred sales charge on shares
you sell within six years of
purchase, as described below.
. Automatic conversion to Class A
shares approximately one year
after such time that no CDSC
would be payable upon redemption,
as described below, thus
reducing future annual expenses.
CLASS II
. Front-end sales charge, as
described below.
. Higher annual expenses than
Class A shares.
. Deferred sales charge on shares
you sell within eighteen months of
purchase, as described below.
. No conversion to Class A.
CALCULATION OF SALES CHARGES
CLASS A. Sales Charges are as follows:
Concession
Sales Charge to Dealers
-----------------------------------
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
YOUR INVESTMENT PRICE INVESTED PRICE
-----------------------------------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.75% 4.99% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.00%
$250,000 but less than $500,000 3.00% 3.09% 2.25%
$500,000 but less than $1,000,000 2.10% 2.15% 1.35%
$1,000,000 or more None None 1.00%
INVESTMENTS OF $1 MILLION OR MORE: Class A shares are available with no front-
end sales charge. However, there is a 1% CDSC on any shares you sell within one
year of purchase.
CLASS B. Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a CDSC on shares you sell within six
years of buying them. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
-11-
<PAGE>
Class B. deferred charges:
Years after purchase CDSC on shares being sold
1st or 2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
7th year and thereafter None
For purposes of the CDSC, we count all purchases you make during a calendar
month as having been made on the FIRST day of that month.
Class II. Sales Charges are as follows:
Concession
Sales Charge to Dealers
--------------------------------------------------------------
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
PRICE INVESTED PRICE
--------------------------------------------------------------
1.00% 1.01% 1.00%
There is also a CDSC of 1% on shares you sell within eighteen months after you
buy them.
DETERMINATION OF CDSC: Each CDSC is based on the original purchase cost or the
current market value of the shares being sold, whichever is less. There is no
CDSC on shares you purchase through reinvestment of dividends. To keep your CDSC
as low as possible, each time you place a request to sell shares we will first
sell any shares in your account that are not subject to a CDSC. If there are not
enough of these shares available, we will sell shares that have the lowest CDSC.
SALES CHARGE REDUCTIONS AND WAIVERS
WAIVERS FOR CERTAIN INVESTORS. Various individuals and institutions may purchase
Class A shares without front-end sales charges, including:
. financial planners, institutions, broker-dealer representatives or
registered investment advisers utilizing Fund shares in fee-based
investment products under an agreement with the Distributor (this
waiver may also apply to front-end sales charges of Class II shares)
. participants in certain retirement plans that meet applicable
conditions
. Fund Trustees and other individuals who are affiliated with the Funds
or other SunAmerica Mutual Funds and their families
. selling brokers and their employees and sales representatives and
their families
We will generally waive the CDSC for CLASS B or CLASS II shares in the following
cases:
. within one year of the shareholder's death or becoming disabled
. taxable distributions or loans to participants made by qualified
retirement plans or retirement accounts (not including rollovers) for
which the Adviser serves as a fiduciary
-12-
<PAGE>
. Trustees and other individuals who are affiliated with any Fund or
other SunAmerica Mutual Funds and their families
. to make taxable distributions from certain retirement plans
. to make payments through the Systematic Withdrawal Plan (subject to
certain conditions)
REDUCING YOUR CLASS A SALES CHARGES. There are several special purchase plans
that allow you to combine multiple purchases of Class A shares of SunAmerica
Mutual Funds to take advantage of the breakpoints in the sales charge schedule.
For information about the "Rights of Accumulation," "Letter of Intent,"
"Combined Purchase Privilege," and "Reduced Sales Charges for Group Purchases,"
contact your broker or financial advisor, or consult the SAI.
To utilize: if you think you may be eligible for a sales charge reduction or
CDSC waiver, contact your broker or financial advisor.
REINSTATEMENT PRIVILEGE. If you sell shares of a Fund, you may invest some or
all of the proceeds in the same share class of the same Fund within one year
without a sales charge. If you paid a CDSC when you sold your shares, we will
credit your account with the dollar amount of the CDSC at the time of sale. All
accounts involved must be registered in the same name(s).
12b-1 FEES
Each class of shares of each Fund has its own 12b-1 plan that provides for
distribution and service fees (payable to the Distributor) based on a percentage
of average daily net assets, as follows:
CLASS DISTRIBUTION FEE SERVICE FEE
A 0.10% 0.25%
B 0.75% 0.25%
II 0.75% 0.25%
Because 12b-1 fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
OPENING AN ACCOUNT
1. Read this prospectus carefully.
2. Determine how much you want to invest. The minimum initial investments for
the Funds are as follows:
. non-retirement account: $500
. retirement account: $250
. dollar cost averaging: $500 to open; you must invest at least $25 a
month
The minimum subsequent investments for the Funds are as follows:
. non-retirement account: $100
. retirement account: $25
-13-
<PAGE>
3. Complete the appropriate parts of the Account Application, carefully
following the instructions. If you have questions, please contact your
broker or financial advisor or call Shareholder/Dealer Services at 1-800-
858-8850.
4. Complete the appropriate parts of the Supplemental Account Application. By
applying for additional investor services now, you can avoid the delay and
inconvenience of having to submit an additional application if you want to
add services later.
5. Make your initial investment using the chart on the next page. You can
initiate any purchase, exchange or sale of shares through your broker or
financial advisor.
-14-
<PAGE>
BUYING SHARES
<TABLE>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
BY CHECK
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
. Make out a check for the investment amount
. Make out a check for the investment payable to the specific Fund or SunAmerica
amount, payable to the specific Fund or Funds.
SunAmerica Funds. . Include the stub from your Fund statement or a
. Deliver the check and your completed note specifying the Fund name, your share
Account Application (and Supplemental class, your account number and the name(s) in
Account Application, if applicable) to which the account is registered.
your broker or financial advisor, or . Indicate the Fund and account number in the
mail them to: memo section of your check.
. Deliver the check and your note to your broker
SunAmerica Fund Services, Inc. or financial advisor, or mail them to:
Mutual Fund Operations, 3rd Floor
The SunAmerica Center NON-RETIREMENT ACCOUNTS:
733 Third Avenue SunAmerica Fund Services, Inc.
New York, New York 10017-3204. C/o NFDS
P.O. Box 419373
Kansas City, Missouri 64141-6373
RETIREMENT ACCOUNTS:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
BY WIRE
- ----------------------------------------------------------------------------------------------------------------------
. Deliver your completed application to . Instruct your bank to wire the amount of your
your broker or financial advisor or fax investment to:
it to SunAmerica Fund Services, Inc. at
212-551-5585. State Street Bank & Trust Company
Boston, MA
. Obtain your account number by referring ABA #0110-00028
to your statement or by calling your DDA # 99029712
broker or financial advisor or
Shareholder/Dealer Services at Specify the Fund name, your share class, your
1-800-858-8850, ext. 5125. Fund number, account number and the name(s) in
which the account is registered. Your bank
. Instruct your bank to wire the amount of may charge a fee to wire funds.
your investment to:
State Street Bank & Trust Company
Boston, MA
ABA #0110-00028
DDA # 99029712
Specify the Fund name, your choice of share
class, your new Fund number and account
number and the name(s) in which the account
is registered. Your bank may charge a fee
to wire funds.
</TABLE>
To open or add to an account using dollar cost averaging, see "Additional
Investor Services."
-15-
<PAGE>
SELLING SHARES
<TABLE>
<S> <C>
HOW REQUIREMENTS
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
- -------------------------------------------------------------------------------------------------------------
. Accounts of any type. . Call your broker or financial advisor to
. Sales of any amount. place your order to sell shares.
BY MAIL
- -------------------------------------------------------------------------------------------------------------
. Accounts of any type. . Write a letter of instruction indicating the Fund
. Sales of any amount. name, your share class, your account number, the
name(s) in which the account is registered and the
dollar value or number of shares you wish to sell.
. Include all signatures and any additional document that
may be required (see next page).
. A check will normally be mailed on the next business
day to the name(s) and address in which the account
is registered, or otherwise according to your letter
of instructions.
. Mail the materials to:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York
10017-3204
BY PHONE
- -------------------------------------------------------------------------------------------------------------
. Most accounts. . Call Shareholder/Dealer Services at 1-800-858-
. Sales of less than $100,000. 8850 between 8:30 a.m. and 7:00 p.m. (Eastern
time) on most business days. State the Fund name,
the name of the person requesting the redemption,
your share class, your account number, the name(s)
in which the account is registered and the dollar
value or number of shares you wish to sell.
. A check will be mailed to the name(s) and
address in which the account is registered, or
to a different address indicated in a written
authorization previously provided to the Fund
by the shareholder(s) on the account.
BY WIRE
- -------------------------------------------------------------------------------------------------------------
. Request by mail to sell any amount . Proceeds will normally be wired on the next
(accounts of any type). business day. A $15 fee will be deducted from your
. Request by phone to sell less than account
$100,000.
</TABLE>
To sell shares through a systematic withdrawal plan, see "Additional Investor
Services."
-16-
<PAGE>
SELLING SHARES IN WRITING. In certain circumstances, you will need to make your
request to sell shares in writing. Corporations, executors, administrators,
trustees or guardians may need to include additional items with a request to
sell shares. You may also need to include a signature guarantee, which protects
you against fraudulent orders. You will need a signature guarantee if:
. your address of record has changed within the past 30 days
. you are selling more than $100,000 worth of shares
. you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
. a broker or securities dealer
. a federal savings, cooperative or other type of bank
. a savings and loan or other thrift institution
. a credit union
. a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for each Fund and
class is determined each business day at the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m., Eastern time) by dividing the net
assets of each class by the number of its shares outstanding. Investments for
which market quotations are readily available are valued at their price as of
the close of regular trading on the New York Stock Exchange for the day. All
other securities and assets are valued at fair value following procedures
approved by the Trustees.
BUY AND SELL PRICES. When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable CDSCs.
EXECUTION OF REQUESTS. Each Fund is open on those days when the New York Stock
Exchange is open for regular trading. Buy and sell requests are executed at the
next NAV to be calculated after your request is received in proper form by the
Trust. If your order is received by the Trust or the Distributor before a
Fund's close of business (generally 4:00 p.m., Eastern time), you will receive
that day's closing price. If your order is received after that time, you will
receive the next business day's closing price. If you place your order through
a broker or financial advisor, you should make sure the order is transmitted to
the Trust before its close of business. The Trust and the Distributor reserve
the right to reject any order to buy shares.
During periods of extreme volatility or market crisis, a Fund may temporarily
suspend the processing of sell requests, or may postpone payment of proceeds for
up to three business days or longer, as allowed by federal securities laws.
Each Fund may invest to a small extent in securities that are primarily listed
on foreign exchanges that trade on weekends or other days when the Fund does not
price its shares. As a result, the value of a Fund's shares may change on days
when you will not be able to purchase or redeem your shares.
-17-
<PAGE>
If the Trust determines that it would be detrimental to the best interests of
the remaining shareholders of the Trust to make payment of redemption proceeds
wholly or partly in cash, the Trust may pay the redemption price by a
distribution in kind of securities from the Trust in lieu of cash. However, the
Trust has made an election that requires it to pay a certain portion of
redemption proceeds in cash.
TELEPHONE TRANSACTIONS. For your protection, telephone requests are recorded in
order to verify their accuracy. In addition, Shareholder/Dealer Services will
take measures to verify the identity of the caller, such as asking for name,
account number, social security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, the Trust is responsible
for any losses that may occur to any account due to an unauthorized telephone
call. Also for your protection, telephone transactions are not permitted on
accounts whose names or addresses have changed within the past 30 days. At
times of peak activity, it may be difficult to place requests by phone. During
these times, consider sending your request in writing.
EXCHANGES. You may exchange shares of a Fund for shares of the same class of
any other SunAmerica Mutual Fund. Before making an exchange, you should review
a copy of the prospectus of the fund into which you would like to exchange. All
exchanges are subject to applicable minimum investment requirements. A
Systematic Exchange Program is described under "Additional Investor Services."
If you exchange shares that were purchased subject to a CDSC, the CDSC will
continue to apply following the exchange. In determining the CDSC applicable to
shares being sold after an exchange, we will take into account the length of
time you held those shares prior to the exchange.
To protect the interests of other shareholders, we may cancel the exchange
privileges of any investors that, in the opinion of the Fund, are using market
timing strategies or making excessive exchanges. A Fund may change or cancel
its exchange privilege at any time, upon 60 days' written notice to its
shareholders. A Fund may also refuse any exchange order.
CERTIFICATED SHARES. Most shares are electronically recorded. If you wish to
have certificates for your shares, please call Shareholder/Dealer Services at
1-800-858-8850 for further information. You may sell or exchange certificated
shares only by returning the certificates to the Funds, along with a letter of
instruction and a signature guarantee. The Funds do not issue certificates for
fractional shares.
MULTI-PARTY CHECKS. The Trust may agree to accept a "multi-party check" in
payment for Fund shares. This is a check made payable to the investor by
another party and then endorsed over to the Trust by the investor. If you use a
multi-party check to purchase shares, you may experience processing delays. In
addition, the Trust is not responsible for verifying the authenticity of any
endorsement and assumes no liability for any losses resulting from a fraudulent
endorsement.
ADDITIONAL INVESTOR SERVICES
To select one or more of these additional services, complete the relevant
part(s) of the Supplemental Account Application. To add a service to an
existing account, contact your broker or financial advisor, or call
Shareholder/Dealer Services at 1-800-858-8850.
DOLLAR COST AVERAGING lets you make regular investments from your bank account
to the SunAmerica Mutual Funds of your choice. You determine the frequency and
amount of your investments, and you can terminate your participation at any
time.
-18-
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN may be used for routine bill payment or periodic
withdrawals from your account. To use:
. Make sure you have at least $5,000 worth of shares in your account.
. Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same Fund is
not advantageous to you, because of sales charges).
. Specify the payee(s) and amount(s). The payee may be yourself or any other
party, and there is no limit to the number of payees you may have, as long as
they are all on the same payment schedule. Each withdrawal must be at least
$50.
. Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
. Make sure your dividends and capital gains are being reinvested.
You cannot elect the systematic withdrawal plan if you have requested
certificates for your shares.
SYSTEMATIC EXCHANGE PROGRAM may be used to exchange shares of a Fund
periodically for the same class of shares of one or more other SunAmerica Mutual
Funds. To use:
. Specify the SunAmerica Mutual Fund(s) from which you would like money
withdrawn and into which you would like money invested.
. Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
. Specify the amount(s). Each exchange must be worth at least $25.
. Accounts must be registered identically; otherwise a signature guarantee will
be required.
ASSET PROTECTION PLAN (OPTIONAL) Anchor National Life Insurance Company offers
an Asset Protection Plan to certain investors in the Funds. The benefits of
this optional coverage payable at death will be related to the amounts paid to
purchase Fund shares and to the value of the Fund shares held for the benefit of
the insured persons. However, to the extent the purchased shares are redeemed
prior to death, coverage with respect to these shares will terminate.
Purchasers of the Asset Protection Plan are required to authorize periodic
redemptions of Fund shares to pay the premiums for this coverage. These
redemptions will not be subject to CDSCs but will have the same tax consequences
as any other Fund redemptions.
The Asset Protection Plan will be available to eligible persons who enroll for
the coverage within a limited time period after shares in any Fund are initially
purchased or transferred. In addition, coverage cannot be made available unless
Anchor National knows for whose benefit shares are purchased. For instance,
coverage cannot be made available for shares registered in the name of your
broker unless the broker provides Anchor National with information regarding the
beneficial owners of the shares. In addition, coverage is available only to
shares purchased on behalf of natural persons between 21 and 75 years of age;
coverage is not available with respect to shares purchased for a retirement
account. Other restrictions on the coverage apply. This coverage may not be
available in all states and may be subject to additional restrictions or
limitations. Purchasers of shares should also make themselves familiar with the
impact on the Asset Protection Plan coverage of purchasing additional shares,
reinvestment of dividends and capital gains distributions and redemptions.
Anchor National is a SunAmerica company.
Please call 1-800-858-8850 for more information, including the cost of the Asset
Protection Plan option.
-19-
<PAGE>
RETIREMENT PLANS. SunAmerica Mutual Funds offer a range of qualified retirement
plans, including IRAs, Roth IRAs, Simple IRAs, SARSEPs, 401(k) plans, 403(b)
plans and other pension and profit-sharing plans. Using these plans, you can
invest in any SunAmerica Mutual Fund with a low minimum investment of $250 or,
for some group plans, no minimum investment at all. To find out more, call
Shareholder/Dealer Services at 1-800-858-8850.
TAX, DIVIDEND AND ACCOUNT POLICIES
ACCOUNT STATEMENTS. In general, you will receive account statements as follows:
. after every transaction that affects your account balance (except a dividend
reinvestment or automatic purchase from your bank account)
. after any changes of name or address of the registered owner(s)
. in all other circumstances, quarterly or annually, depending upon the Fund
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS. The Funds generally distribute most or all of their net earnings in
the form of dividends. Income dividends and capital gains distributions, if
any, are paid annually by the Funds.
DIVIDEND REINVESTMENTS. Your dividends and distributions, if any, will be
automatically reinvested in additional shares of the same Fund and share class
on which they were paid. Alternatively, dividends and distributions may be
reinvested in any other SunAmerica Mutual Fund or paid in cash (if more than
$10). You will need to complete the relevant part of the Account Application to
elect one of these other options. For existing accounts, contact your broker or
financial advisor or call Shareholder/Dealer Services at 1-800-858-8850 to
change dividend and distribution payment options.
TAXABILITY OF DIVIDENDS. Each Fund intends to continue to qualify for the
special tax treatment afforded regulated investment companies. As long as each
Fund so qualifies, the Fund will not be subject to federal income tax on the
earnings that it distributes to shareholders.
However, dividends you receive from a Fund, whether reinvested or taken as cash,
are generally considered taxable to you. Distributions of a Fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction from a portion of certain dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the
sale price of the shares you sell or exchange, you may have a gain or a loss on
the transaction. You are responsible for any tax liabilities generated by your
transactions. If you hold Class B shares, you will not have a taxable event
when they convert into Class A shares.
OTHER TAX CONSIDERATIONS. If you are neither a lawful permanent resident nor a
citizen of the U.S. or if you are a foreign entity, ordinary income dividends
paid to you (which include distributions of net short-term capital gains) will
generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate
applies.
By law, each Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
-20-
<PAGE>
This section summarizes some of the consequences under current federal tax law
of an investment in a Fund. It is not a substitute for professional tax advice.
Consult your tax advisor about the potential tax consequences of an investment
in a Fund under all applicable laws.
SMALL ACCOUNTS. If you draw down an account so that its total value is less
than $500 ($250 for retirement plan accounts), you may be asked to purchase more
shares within 60 days. If you do not take action, the Trust may close out your
account and mail you the proceeds. Alternatively, you may be charged a $2.00
monthly charge to maintain your account. Your account will not be closed if its
drop in value is due to Fund performance or the effects of sales charges.
-21-
<PAGE>
MORE INFORMATION ABOUT THE FUNDS
[side column]
FUND INVESTMENT STRATEGIES. Each Fund has its own investment goal and a
strategy for pursuing it. The chart summarizes information about each Fund's
investment approach. Following this chart is a glossary that further describes
the investment and risk terminology used in the chart. Please review the
glossary in conjunction with this chart.
[end side column]
<TABLE>
<CAPTION>
BRAZOS SMALL CAP BRAZOS REAL ESTATE
GROWTH SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
What is the Fund's investment To provide maximum capital To provide a balance of income and
objective? appreciation, consistent with appreciation (with reasonable risk to
reasonable risk to principal, by principal) by investing primarily in
investing primarily in small equity securities of companies which
capitalization companies are principally engaged in the real
estate industry
- ----------------------------------------------------------------------------------------------------------------------
What are the Fund's principal Growth Growth and income
investment strategies?
- ----------------------------------------------------------------------------------------------------------------------
What are the Fund's principal . active trading of stocks of small . active trading of stocks of
investment techniques? companies that offer the potential companies principally engaged in the
for capital appreciation real estate industry that offer the
potential for capital appreciation
and current income
- ----------------------------------------------------------------------------------------------------------------------
Where are the Fund's principal . stocks of small companies (at least . stocks of companies principally
investments (under normal market 65% of total assets) engaged in the real estate industry
conditions)? (at least 65% of total assets)
- ----------------------------------------------------------------------------------------------------------------------
What are the Fund's principal risks? . stock market volatility . stock market volatility
. securities selection . securities selection
. small market capitalization . small market capitalization
. volatility of real estate markets
and real estate investment trusts
- ----------------------------------------------------------------------------------------------------------------------
What other investment strategies
can the Fund use?
. Fixed income securities Yes Yes
. Small company stocks See principal investments above Yes
. Short-term investments Yes* Yes*
. Defensive investments Yes Yes
. Foreign securities Yes (up to 5%) Yes (up to 5%)
. Illiquid securities Yes (up to 15%) Yes (up to 15%)
. Securities lending Yes (up to 33 1/3%) Yes (up to 33 1/3%)
. Borrowing for temporary or
emergency purposes Yes (up to 33 1/3%) Yes (up to 33 1/3%)
. Options and futures Yes** Yes**
. Special situations Yes Yes
. ADR's, EDR's and GDR's Yes (up to 5%) Yes (up to 5%)
. Bank obligations Yes (up to 10%) Yes (up to 10%)
</TABLE>
-22-
<PAGE>
<TABLE>
BRAZOS SMALL CAP BRAZOS REAL ESTATE
GROWTH SECURITIES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
. Investment companies Yes (up to 10%) Yes (up to 10%)
. Real estate investment trusts and See principal investments above
securities of companies
principally engaged in the real
estate industry No Yes (at least 25%)
. Repurchase agreements Yes (up to 10%) Yes (up to 10%)
. Reverse repurchase agreements Yes (up to 33 1/3%) Yes (up to 33 1/3%)
. U.S. Government obligations Yes (up to 100%) Yes (up to 100%)
. Warrants Yes (up to 5%) Yes (up to 5%)
. When-issued securities Yes (up to 33 1/3%) Yes (up to 33 1/3%)
- -------------------------------------------------------------------------------------------------------------------
What other potential risks can . foreign exposure . foreign exposure
affect a Fund? . interest rate fluctuations . interest rate fluctuations
. credit quality . credit quality
. small market capitalization . illiquidity
. illiquidity . derivatives
. derivatives . hedging
. hedging . volatility of real estate markets and
real estate investment trusts
</TABLE>
* Under normal circumstances, shorter term investments are expected to be 5% to
10% of each Fund, however, market conditions may lead to higher levels (up to
100%).
** The Funds may not purchase futures contracts or options where premiums and
margin deposits exceed 5% of total assets or where the Funds' obligations would
exceed 20% of the total assets.
<TABLE>
<CAPTION>
GROWTH
- ----------------------------------------------------------------------------
<S> <C>
What is the Fund's investment To provide maximum capital growth by
objective? investing primarily in equity
securities
- ----------------------------------------------------------------------------
What are the Fund's principal Growth
investment strategies?
- ----------------------------------------------------------------------------
What are the Fund's principal . active trading of stocks that offer
investment techniques? the potential for capital appreciation
- ----------------------------------------------------------------------------
Where are the Fund's principal . stocks
investments (under normal market
conditions)?
- ----------------------------------------------------------------------------
What are the Fund's principal risks? . stock market volatility
. securities selection
- ----------------------------------------------------------------------------
What other investment strategies
can the Fund use?
. Fixed income securities Yes
. Small company stocks No
. Short-term investments Yes *
. Defensive investments Yes
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
GROWTH
- ----------------------------------------------------------------------------
<S> <C>
. Foreign securities Yes (up to 5%)
. Illiquid securities Yes (up to 15%)
. Securities lending Yes (up to 33 1/3%)
. Borrowing for temporary or Yes (up to 33 1/3%)
emergency purposes
. Options and futures Yes**
. Special situations Yes
. ADR's, EDR's and GDR's Yes (up to 5%)
. Bank obligations Yes (up to 10%)
. Investment companies Yes (up to 10%)
. Real estate investment trusts and No
securities of companies
principally engaged in the real
estate industry
. Repurchase agreements Yes (up to 10%)
. Reverse repurchase agreements Yes (up to 33 1/3%)
. U.S. Government obligations Yes (up to 100%)
. Warrants Yes (up to 5%)
. When-issued securities Yes (up to 33 1/3%)
- ----------------------------------------------------------------------------
What other potential risks can . foreign exposure
affect a Fund? . interest rate fluctuations
. credit quality
. illiquidity
. derivatives
. hedging
</TABLE>
* Under normal circumstances, shorter term investments are expected to be 5% to
10% of each Fund, however, market conditions may lead to higher levels (up to
100%).
** The Funds may not purchase futures contracts or options where premiums and
margin deposits exceed 5% of total assets or where the Funds' obligations would
exceed 20% of the total assets.
-24-
<PAGE>
MORE INFORMATION ABOUT THE FUNDS
- --------------------------------------------------------------------------------
[side column]
The two best-known debt rating agencies are Standard & Poor's Rating Services, a
Division of the McGraw-Hill Companies, Inc. and Moody's Investors Service, Inc.
"Investment grade" refers to any security rated "BBB" or above by Standard &
Poor's or "Baa" or above by Moody's.
[end side column]
GLOSSARY
- --------------------------------------------------------------------------------
INVESTMENT TERMINOLOGY
CAPITAL APPRECIATION is growth of the value of an investment.
CONSERVATION OF PRINCIPAL means investing in a manner that tries to protect the
value of an investment against market movements and other economic events.
ACTIVE TRADING means that a Fund may engage in frequent trading of portfolio
securities to achieve its investment goal. In addition, because a Fund may sell
a security without regard to how long it has held the security, active trading
may have tax consequences for certain shareholders, involving a possible
increase in short-term capital gains or losses. Active trading may result in
high portfolio turnover and correspondingly greater brokerage commissions and
other transaction costs, which will be borne directly by a Fund. During periods
of increased market volatility, active trading may be more pronounced.
SMALL COMPANIES have market capitalizations of $1.2 billion or less.
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 real estate assets.
FIXED INCOME SECURITIES provide consistent interest or dividend payments. They
include corporate bonds, notes, debentures, preferred stocks, convertible
securities, U.S. government securities and mortgage-backed and asset-backed
securities. The issuer of a senior fixed income security is obligated to make
payments on this security ahead of other payments to security holders.
SHORT-TERM INVESTMENTS include money market securities such as short-term U.S.
government obligations, repurchase agreements, commercial paper, bankers'
acceptances and certificates of deposit. These securities provide a Fund with
sufficient liquidity to meet redemptions and cover expenses.
DEFENSIVE INVESTMENTS include high quality fixed income securities and money
market instruments. A Fund will make temporary defensive investments in
response to adverse market, economic, political or other conditions. When a
Fund takes a defensive position, it may miss out on investment opportunities
that could have resulted from investing in accordance with its principal
investment strategy. As a result, a Fund may not achieve its investment goal.
FOREIGN SECURITIES are issued by companies located outside of the United States.
Foreign securities include American Depositary Receipts (ADRs) or other similar
securities that convert into foreign securities, such as European Depository
Receipts (EDRs) and Global Depository Receipts (GDRs).
ILLIQUID SECURITIES are subject to legal or contractual restrictions that may
make them difficult to sell. A security that cannot easily be sold within seven
days will generally be considered illiquid. Certain restricted securities (such
as Rule 144A securities) are not generally considered illiquid because of their
established trading market.
-25-
<PAGE>
SECURITIES LENDING involves a loan of securities by a Fund in exchange for cash
or collateral. The Fund earns interest on the loan while retaining ownership of
the security.
A Fund may BORROW for temporary or emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the next asset value of Fund
shares and in the yield on a Fund's portfolio. Borrowing will cost a Fund
interest expense and other fees. The cost of borrowing may reduce a Fund's
return. If a Fund borrows through REVERSE REPURCHASE AGREEMENTS there will be
additional risks, including that the interest income earned by a Fund (from the
investment of the proceeds) may be less than the interest expense of the
transaction, that the market value of the securities sold by a Fund may decline
below the price the Fund is obligated to pay to repurchase the securities, and
that the securities may not be returned to the Fund.
A DERIVATIVE instrument is a contract, such as an option or a future, whose
value is based on the performance of an underlying asset.
OPTIONS AND FUTURES are contracts involving the right to receive or obligation
to deliver assets or money depending on the performance of one or more
underlying assets or a market or economic index.
A SPECIAL SITUATION arises when, in the opinion of the Adviser, the securities
of a particular issuer will be recognized and appreciated in value due to a
specific development with respect to that issuer. Developments creating a
special situation might include, among others, a new product or process, a
technological breakthrough, a management change or other extraordinary corporate
event, or differences in market supply of and demand for the security.
Investments in special situations may carry an additional risk of loss in the
event that the anticipated development does not occur or does not attract the
expected attention.
BANK OBLIGATIONS include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions.
Each Fund may invest in securities of other open-end or closed-end INVESTMENT
COMPANIES. A Fund 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.
REAL ESTATE INVESTMENT TRUSTS ("REITS") pool investors' funds for investment
primarily in commercial real estate properties or in real estate related loans.
In a REPURCHASE AGREEMENT, a Fund 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.
WHEN-ISSUED 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 transactions may be expected to occur a month or more before
delivery is due. No payment or delivery is made by a Fund until it receives
payment or delivery from the other party. A Fund 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 Fund may earn income on securities it has deposited
in a segregated account.
WARRANTS are options to purchase equity securities at a specific price valid for
a specific period of time. The purchase of warrants involves the risk that the
Fund could lose the purchase value of the warrant if the right to subscribe to
additional shares is not exercised prior to the warrant's expiration. Also, the
purchase of warrants involves the risk that the effective price paid for the
warrant added to the subscription price of the related security may exceed the
value of the subscribed security.
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<PAGE>
RISK TERMINOLOGY
MARKET VOLATILITY: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Fund's portfolio.
SECURITIES SELECTION: A strategy used by a Fund, or securities selected by the
Adviser, may fail to produce the intended return.
SMALL MARKET CAPITALIZATION: Companies with smaller market capitalizations ($1.2
billion or less) tend to be at early stages of development with limited product
lines, market access for products, financial resources, access to new capital,
or depth in management. It may be difficult to obtain reliable information and
financial data about these companies. Consequently, the securities of smaller
companies may not be as readily marketable and may be subject to more abrupt or
erratic market movements.
VOLATILITY OF REAL ESTATE MARKETS AND REAL ESTATE INVESTMENT TRUSTS ("REITS"):
The value of a REIT is affected by changes in the value of the properties owned
by the REIT or securing mortgage loans held by the REIT. A Fund could lose money
because of declines in the value of real estate, risks related to general and
local economic conditions, overbuilding and increased competition.
FOREIGN EXPOSURE: Investors in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as the U.S.
government. Foreign investments will also be affected by local political or
economic developments and governmental actions. Consequently, foreign securities
may be less liquid, more volatile and more difficult to price than U.S.
securities.
INTEREST RATE FLUCTUATIONS: Volatility of the bond market is due principally to
changes in interest rates. As interest rates rise, bond prices typically fall;
and as interest rates fall, bond prices typically rise. Longer-term and lower
coupon bonds tend to be more sensitive to changes in interest rates.
CREDIT QUALITY: The creditworthiness of the issuer is always a factor in
analyzing fixed income securities. An issuer with a lower credit rating will be
more likely than a higher rated issuer to default or otherwise become unable to
honor its financial obligations.
ILLIQUIDITY: Certain securities may be difficult or impossible to sell at the
time and the price that the seller would like.
DERIVATIVES: Derivatives are subject to general risks relating to heightened
sensitivity to market volatility, interest rate fluctuations, illiquidity and
creditworthiness of the counterparty to the derivatives transactions.
HEDGING: Hedging is a strategy in which the Adviser uses a derivative security
to reduce certain risk characteristics of an underlying security or portfolio of
securities. While hedging strategies can be very useful and inexpensive ways of
reducing risk, they are sometimes ineffective due to unexpected changes in the
market. Moreover, while hedging can reduce or eliminate losses, it can also
reduce or eliminate gains.
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<PAGE>
FUND MANAGEMENT
- -------------------------------------------------------------------------------
ADVISER. John McStay Investment Counsel, LLC ("JMIC" or the "Adviser"), 5949
Sherry Lane, Suite 1600, Dallas, Texas 75225, is responsible for the portfolio
management of each of the Funds. JMIC is a majority-owned subsidiary of American
International Group, Inc. ("AIG"). AIG is a holding company which through its
subsidiaries is primarily engaged in a broad range of insurance, insurance-
related and financial services activities in the United States and abroad.
JMIC's predecessor, John McStay Investment Counsel, L.P., managed each Fund from
its inception. JMIC manages each Fund 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) investment professional turnover during the last
fifteen years of management.
For the fiscal year ended November 30, 1998, each Fund paid the predecessor to
the Adviser, John McStay Investment Counsel, L.P., a fee equal to the following
percentage of average daily net assets:
Fund Fee
---- ---
Brazos Small Cap Growth 0.90%
Brazos Real Estate Securities 0.90%
Brazos Growth 0.90%
DISTRIBUTOR. SunAmerica Capital Services, Inc. distributes each Fund's shares
offered herein. The Distributor, a SunAmerica company and an indirect wholly
owned subsidiary of AIG, receives the initial and deferred sales charges, all or
a portion of which may be re-allowed to other broker-dealers. In addition, the
Distributor receives fees under each Fund's 12 b-1 plans.
The Distributor, at its expense, may from time to time provide additional
compensation to broker-dealers (including in some instances, affiliates of the
Distributor) in connection with sales of shares of a Fund. This compensation
may include (i) full re-allowance of the front-end sales charge on Class A
shares; (ii) additional compensation with respect to the sale of Class A, Class
B or Class II shares; or (iii) financial assistance to broker-dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more of the
Funds, and/or other broker-dealer sponsored special events. In some instances,
this compensation will be made available only to certain broker-dealers whose
representatives have sold a significant number of shares of the Fund.
Compensation may also include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
for meetings or seminars of a business nature. In addition, the following types
of non-cash compensation may be offered through sales contests: (i) travel
mileage on major air carriers; (ii) tickets for entertainment events (such as
concerts or sporting events); or (iii) merchandise (such as clothing, trophies,
clocks, pens or other electronic equipment). Broker-dealers may not use sales
of the Fund's shares to qualify for this compensation to the extent receipt of
such compensation may be prohibited by applicable law or the rules of any self-
regulatory agency, such as the National Association of Securities Dealers.
Dealers who receive bonuses or other incentives may be deemed to be underwriters
under the Securities Act of 1933.
Certain laws and regulations limit the ability of banks and other depository
institutions to underwrite and distribute securities. However, in the opinion of
the Distributor based upon the advice of counsel, these laws and regulations do
not prohibit such depository institutions from providing other services to
investment companies of the type contemplated by the Funds' 12b-1 plans. Banks
and other financial services firms may be subject to various state laws
regarding these services, and may be required to register as dealers pursuant to
state law.
ADMINISTRATOR. SunAmerica Asset Management Corp. provides administrative
services to each Fund. The Administrator, a SunAmerica company and an indirect
wholly owned subsidiary of AIG, is paid a monthly fee by each Fund for its
services.
SHAREHOLDER SERVICING AGENT. SunAmerica Fund Services, Inc. assists the Funds'
transfer agent in providing shareholder services. The Shareholder Servicing
Agent, a SunAmerica company and an indirect wholly owned subsidiary of AIG, is
paid a monthly fee by each of Class A, B and II of a Fund for its services at
the annual rate of 0.22% of average daily net assets. This fee represents the
full cost of providing shareholder and transfer agency services to the Trust.
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<PAGE>
The Distributor, Administrator and Shareholder Servicing Agent are located in
The SunAmerica Center, 733 Third Avenue, New York, New York 10017.
YEAR 2000. Many computer and computer-based systems cannot distinguish the year
2000 from the year 1900 because of the way they encode and calculate dates
(commonly known as the "Year 2000 Issue"). The Year 2000 Issue could
potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing and account services. We recognize
the importance of the Year 2000 Issue and are taking appropriate steps necessary
in preparation for the year 2000. The Trust's management fully anticipates that
their systems will be adapted in time for the year 2000, and to further this
goal they have coordinated a plan to repair, adapt or replace their systems as
necessary. They have also obtained representations from their outside service
providers that they are doing the same. The Trust's management completed their
plan significantly by the end of the 1998 calendar year and expects to perform
appropriate systems testing during the 1999 calendar year. If the problem has
not been fully addressed, however, the Trust could be negatively impacted. The
Year 2000 Issue could also have a negative impact on the companies in which the
Trust invests, which could hurt the Trust's investment returns.
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<PAGE>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
The following documents contain more information about the Funds and are
available free of charge upon request:
ANNUAL AND SEMI-ANNUAL REPORTS. Contain financial statements, performance
data and information on portfolio holdings. The reports also contain a
written analysis of market conditions and investment strategies that
significantly affected a Fund's performance during the applicable period.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional information
about the Funds' policies, investment restrictions and business structure.
This prospectus incorporates the SAI by reference.
You may obtain copies of these documents or ask questions about the Funds by
contacting:
SunAmerica Fund Services, Inc.
Mutual Fund Operations
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
1-800-858-8850
or
by calling your broker or financial advisor.
Information about the Funds (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission, Washington,
D.C. Call (800) SEC-0330 for information on the operation of the Public
Reference Room. Information about the Funds is also available on the Securities
and Exchange Commission's web-site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by writing the Public Reference
Section of the Securities and Exchange Commission, Washington, D.C. 20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with any different information.
BRAZOS
MUTUAL FUNDS
DISTRIBUTOR: SunAmerica Capital Services, Inc.
INVESTMENT COMPANY ACT
File No. 811-7881
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<PAGE>
BRAZOS MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED ____________, 1999
Suite 1600 General Marketing and
5949 Sherry Lane Shareholder Information
Dallas, TX 75225 (800) 858-8850
Brazos Mutual Funds (the "Trust") is a mutual fund consisting of multiple
investment funds. This Statement of Additional Information relates to
the: Brazos Small Cap Growth Fund, Brazos Real Estate Securities Fund and
Brazos Growth Fund. Each Fund has distinct investment objectives and
strategies.
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Trust's Prospectus dated ____________, 1999. To
obtain a Prospectus free of charge, please call the Trust at (800) 858-8850.
The Trust's Prospectus for Class A, Class B and Class II Shares of each Fund is
incorporated by reference into this Statement of Additional Information.
Capitalized terms used herein but not defined have the meanings assigned to them
in the Prospectus.
TABLE OF CONTENTS
PAGE
----
History of the Funds........................................................B-__
Investment Objectives and Policies..........................................B-__
Investment Restrictions.....................................................B-__
Trustees and Officers.......................................................B-__
Adviser, Personal Trading, Distributor and
Administrator...............................................................B-__
Portfolio Transactions and Brokerage........................................B-__
Additional Information Regarding Purchase of Shares.........................B-__
Additional Information Regarding Redemption of Shares.......................B-__
Exchange Privilege..........................................................B-__
Determination of Net Asset Value............................................B-__
Performance Data............................................................B-__
Dividends, Distributions and Taxes..........................................B-__
Retirement Plans............................................................B-__
Description of Shares.......................................................B-__
Additional Information......................................................B-__
Financial Statements........................................................B-__
Appendix..............................................................Appendix-1
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust, the Adviser or the Distributor. This Statement of
Additional Information and the Prospectus do not constitute an offer to sell or
a
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solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction in which such an offer to sell or solicitation of an offer to buy
may not lawfully be made.
This Statement of Additional Information relates to the Class A, B and
II shares of three different investment funds (each, a "Fund," and collectively,
the "Funds") of Brazos Mutual Funds, a Delaware business trust, which is
registered as an open-end investment company under the Investment Company Act of
1940, as amended (the " 1940 Act"). The three Funds are: Brazos Small Cap
Growth Fund, Brazos Real Estate Securities Fund and Brazos Growth Fund.
HISTORY OF THE FUNDS
The Trust was organized as a Delaware business trust on October 28,
1996. The Trust's principal office is located at The SunAmerica Center, 733
Third Avenue, New York, NY 10017-3204. Brazos Mutual Funds is a diversified
open-end management investment company.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Funds are
described in the respective Prospectus. Certain types of securities in which
the Funds may invest and certain investment practices that the Funds may employ,
are described under "More Information About the Funds -- Fund Investment
Strategies" in the Prospectus and are discussed more fully below. Unless
otherwise specified, each Fund may invest in the following securities. The
stated percentage limitations are applied to an investment at the time of
purchase unless indicated otherwise.
ILLIQUID AND RESTRICTED SECURITIES. No more than 15% of the value of a Fund's
net assets, determined as of the date of purchase, may be invested in illiquid
securities including repurchase agreements that have a maturity of longer than
seven days, interest-rate swaps, currency swaps, caps, floors and collars, or
other securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), securities that are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual Funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them, resulting in additional
expense and delay. There will generally be a lapse of time between a mutual
fund's decision to sell an unregistered security and the registration of such
security promoting sale. Adverse market conditions could impede a public
offering of such securities. When purchasing unregistered securities, each of
the Funds
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will generally seek to obtain the right of registration at the expense of the
issuer (except in the case of Rule 144A securities, discussed below).
In recent years, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
For example, restricted securities that the Board of Trustees, or the
Adviser pursuant to guidelines established by the Board of Trustees, has
determined to be marketable, such as securities eligible for resale under Rule
144A promulgated under the Securities Act, or certain private placements of
commercial paper issued in reliance on an exemption from such Act pursuant to
Section 4(2) thereof, may be deemed to be liquid for purposes of this
restriction. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
(as defined in Rule 144A) become for a time uninterested in purchasing these
restricted securities. In addition, a repurchase agreement that by its terms
can be liquidated before its nominal fixed-term on seven days or less notice is
regarded as a liquid instrument. The Adviser will monitor the liquidity of such
restricted securities subject to the supervision of the Trustees. In reaching
liquidity decisions the Adviser will consider, inter alia, pursuant to
guidelines and procedures established by the Trustees, the following factors:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades (i.
e., the time needed to dispose of the security, the method of soliciting offers
and the mechanics of the transfer). Subject to the applicable limitation on
illiquid securities investments, a fund may acquire securities issued by the
U.S. government, its agencies or instrumentalities in a private placement.
Commercial paper issues in which a Fund's net assets may be invested
include securities issued by major corporations without registration under the
Securities Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof, and commercial paper issued in reliance on the so-
called private placement exemption from registration afforded by Section 4(2) of
the Securities Act ("Section 4(2) paper"). Section 4(2) paper is restricted as
to disposition under the federal securities laws in that any resale must
similarly be made in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors through or with the assistance of
investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper issued by a company that files reports under the
Securities Exchange Act of 1934, as amended, is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. A Fund's 15%
limitation on investments in illiquid securities includes Section 4(2) paper
other than Section 4(2) paper that the Adviser has determined to be liquid
pursuant to guidelines established by the Trustees. The Trustees have delegated
to the Adviser the function of making day to-day determinations of liquidity
with respect to Section 4(2) paper, pursuant to guidelines approved by the
Trustees that require the
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Adviser to take into account the same factors described above for other
restricted securities and require the Adviser to perform the same monitoring and
reporting functions.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements only
involving securities in which it could otherwise invest and with selected banks
and securities dealers whose financial condition is monitored by the Adviser,
subject to the guidance of the Trustees. In such agreements, the seller agrees
to repurchase the security at a mutually agreed-upon time and price. The period
of maturity is usually quite short, either overnight or a few days, although it
may extend over a number of months. The repurchase price is in excess of the
purchase price by an amount that reflects an agreed-upon rate of return
effective for the period of time a Fund's money is invested in the security.
Whenever a Fund enters into a repurchase agreement, it obtains collateral having
a value equal to the repurchase price, including accrued interest, or 101% of
the repurchase price if such securities mature in more than one year. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Fund will require additional collateral. If the
seller under the repurchase agreement defaults, the Fund may incur a loss if the
value of the collateral securing the repurchase agreement has declined and may
incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, realization of the collateral by the Fund may be delayed or
limited. The Trustees have established guidelines to be used by the Adviser in
connection with transactions in repurchase agreements and will regularly monitor
each Fund's use of repurchase agreements. A Fund will not invest in repurchase
agreements maturing in more than seven days if the aggregate of such investments
along with other illiquid securities exceeds 15% of the value of its net assets.
However, there is no limit on the amount of a Fund's net assets that may be
subject to repurchase agreements having a maturity of seven days or less for
temporary defensive purposes.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund sells a security and
agrees to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. The Fund then invests
the proceeds from the transaction in another obligation in which the Fund is
authorized to invest. The Fund's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. A Fund will
enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is expected to be greater than the interest expense
of the transaction and the proceeds are invested for a period no longer than the
term of the agreement. In order to minimize any risk involved, the Fund will
segregate cash or liquid securities in an amount at least equal in value to its
purchase obligations under these agreements (including accrued interest). In
the event that the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or its trustee or receiver
may receive an extension of time to determine whether to enforce the Fund's
repurchase obligation, and the Fund's use of proceeds of the agreement may
effectively be restricted pending such decision. Reverse repurchase agreements
are considered to be borrowings and are subject to the percentage limitations on
borrowings. See "Investment Restrictions."
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FIXED INCOME SECURITIES. Each Fund may invest, subject to the percentage and
credit quality limitations stated herein and in the Prospectus, in debt
securities, mainly obligations issued by governments and money market
instruments, without regard to the maturities of such securities.
Fixed income securities are broadly characterized as those that provide for
periodic payments to the holder of the security at a stated rate. Most fixed
income securities, such as bonds, represent indebtedness of the issuer and
provide for repayment of principal at a stated time in the future. Others do
not provide for repayment of a principal amount, although they may represent a
priority over common stockholders in the event of the issuer's liquidation.
Many fixed income securities are subject to scheduled retirement, or may be
retired or "called" by the issuer prior to their maturity dates. The interest
rate on certain fixed income securities, known as "variable rate obligations,"
is determined by reference to or is a percentage of an objective standard, such
as a banks prime rate, the 90-day Treasury bill rate, or the rate of return on
commercial paper or bank certificates of deposit, and is periodically adjusted.
Certain variable rate obligations may have a demand feature entitling the holder
to resell the securities at a predetermined amount. The interest rate on
certain fixed income securities, called "floating rate instruments," changes
whenever there is a change in a designated base rate.
The market values of fixed income securities tend to vary inversely with
the level of interest rates -- when interest rates rise, their values will tend
to decline; when interest rates decline, their values generally will tend to
rise. The potential for capital appreciation with respect to variable rate
obligations or floating rate instruments will be less than with respect to
fixed-rate obligations. Long-term instruments are generally more sensitive to
these changes than short-term instruments. The market value of fixed income
securities and therefore their yield are also affected by the perceived ability
of the issuer to make timely payments of principal and interest.
"Investment grade" is a designation applied to intermediate and long-term
corporate debt securities rated within the highest four rating categories
assigned by Standard & Poor's (AAA, AA, A or BBB) or by Moody's (Aaa, Aa, A or
Baa), or, if unrated, considered by the Adviser to be of comparable quality.
The ability of the issuer of an investment grade debt security to pay interest
and to repay principal is considered to vary from extremely strong (for the
highest ratings) through adequate (for the lowest ratings given above), although
the lower-rated investment grade securities may be viewed as having speculative
elements as well.
Those debt securities rated "BBB" or "Baa," while considered to be
"investment grade," may have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. As a consequence of the foregoing, the opportunities for income and gain
may be limited. While the Funds have no stated policy with respect to the
disposition of securities whose ratings fall below investment grade, each
occurrence is examined by the Adviser to determine the appropriate course of
action.
SHORT-TERM AND TEMPORARY DEFENSIVE INSTRUMENTS. In addition to their primary
investments, each Fund, except as described below, may also invest 5% to 10%
under normal circumstances of its total assets in money market instruments for
liquidity purposes (to meet redemptions and
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<PAGE>
expenses). For temporary defensive purposes, each Fund, except as described
below, may invest up to 100% of its total assets in fixed income securities,
including money market instruments rated in one of the two highest categories by
a nationally recognized statistical rating organization (or determined by the
Adviser to be of equivalent quality). A description of securities ratings is
contained in the Appendix to this Statement of Additional Information.
Subject to the limitations described above and below, the following is a
description of the types of money market and fixed income securities in which
the Funds may invest:
U.S. Government Securities: See the section entitled "U.S. Government
Securities" below.
Commercial Paper: Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by entities in order to finance
their current operations. A Fund's commercial paper investments may include
variable amount master demand notes and floating rate or variable rate notes.
Variable amount master demand notes and variable amount floating rate notes are
obligations that permit the investment of fluctuating amounts by a Fund at
varying rates of interest pursuant to direct arrangements between a Fund, as
lender, and the borrower. Master demand notes permit daily fluctuations in the
interest rates while the interest rate under variable amount floating rate notes
fluctuates on a weekly basis. These notes permit daily changes in the amounts
borrowed. A Fund has the right to increase the amount under these notes at any
time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may repay up to the full amount of the note without
penalty. Because these types of notes are direct lending arrangements between
the lender and the borrower, it is not generally contemplated that such
instruments will be traded, and there is no secondary market for these notes.
Master demand notes are redeemable (and, thus, immediately repayable by the
borrower) at face value, plus accrued interest, at any time. Variable amount
floating rate notes are subject to next-day redemption 14 days after the initial
investment therein. With both types of notes, therefore, a Fund's right to
redeem depends on the ability of the borrower to pay principal and interest on
demand. In connection with both types of note arrangements, a Fund considers
earning power, cash flow and other liquidity ratios of the issuer. These notes,
as such, are not typically rated by credit rating agencies. Unless they are so
rated, a Fund may invest in them only if at the time of an investment the issuer
has an outstanding issue of unsecured debt rated in one of the two highest
categories by a nationally recognized statistical rating Organization. The
Funds will generally purchase commercial paper only of companies of medium to
large capitalizations (i.e., $1 billion or more).
Certificates of Deposit and Bankers' Acceptances: Certificates of deposit
are receipts issued by a bank in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of the receipt on
the date specified on the certificate. The certificate usually can be traded in
the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by another bank that, in effect,
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unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most maturities are six months or less.
Corporate Obligations: Corporate debt obligations (including master demand
notes). For a further description of variable amount master demand notes, see
the section entitled "Commercial Paper" above.
Repurchase Agreements: See the section entitled "Repurchase Agreements"
above.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Treasury securities,
including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances. For these securities, the payment of principal
and interest is unconditionally guaranteed by the U.S. government. They are of
the highest possible credit quality. These securities are subject to variations
in market value due to fluctuations in interest rates, but if held to maturity,
are guaranteed by the U.S. government to be paid in full.
Such a Fund may also invest in securities issued by agencies of the U.S.
government or instrumentalities of the U.S. government. These obligations,
including those guaranteed by federal agencies or instrumentalities, may or may
not be backed by the "full faith and credit" of the United States. Obligations
of the Farmer's Home Administration ("FMHA") and the Export-Import Bank are
backed by the full faith and credit of the United States.
Such a Fund may also invest in securities issued by U.S. government
instrumentalities and certain federal agencies that are neither direct
obligations of, nor are they guaranteed by, the U.S. Treasury. However, they
involve federal sponsorship in one way or another. For example, some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; and others are
supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, the Federal Land Banks, Central Bank for Cooperatives, and Federal
Intermediate Credit Banks. In the case of securities not backed by the full
faith and credit of the United States, a Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may not
be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments.
INVESTMENT IN SMALL, UNSEASONED COMPANIES. As described in the Prospectus, the
Brazos Small Cap Growth Fund will invest, and Brazos Real Estate Securities Fund
may invest, in the securities of small companies having market capitalizations
under $1.2 billion. These securities may have a limited trading market, which
may adversely affect their disposition and can result in their being priced
lower than might otherwise be the case. It may be difficult to obtain reliable
information and financial data on such companies and the securities of these
small companies may not be readily marketable, making it difficult to dispose of
shares when desirable. A risk of
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investing in smaller, emerging companies is that they often are at an earlier
stage of development and therefore have limited product lines, market access for
such products, financial resources and depth in management as compared to
larger, more established companies, and their securities may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. In addition, certain smaller
issuers may face difficulties in obtaining the capital necessary to continue in
operation and may go into bankruptcy, which could result in a complete loss of
an investment. Smaller companies also may be less significant factors within
their industries and may have difficulty withstanding competition from larger
companies. If other investment-companies and investors who invest in such
issuers trade the same securities when a Fund attempts to dispose of its
holdings, the Fund may receive lower prices than might otherwise be obtained.
While smaller companies may be subject to these additional risks, they may also
realize more substantial growth than larger, more established companies. The
Brazos Real Estate Securities Fund may invest in securities of companies which
have limited operating histories and may not yet be profitable. The Funds 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 Brazos Real Estate Securities Fund's holdings
of such securities (other than securities of companies principally engaged in
the real estate industry) exceeds 20% of the value of the Fund's total assets.
Although not an investment policy of the Funds, it is anticipated that under
normal circumstances, approximately 10% to 15% of the companies principally
engaged in the real estate industry in which the Brazos Real Estate Securities
Fund invests will have operating histories of less than three years.
Companies with market capitalization of $1 billion to $5 billion ("Mid-Cap
Companies") may also suffer more significant losses as well as realize more
substantial growth than larger, more established issuers. Thus, investments in
such companies tend to be more volatile and somewhat speculative. The Brazos
Real Estate Securities Fund and the Brazos Growth Fund may invest in the
securities of Mid-Cap Companies.
WARRANTS AND RIGHTS. Each Fund may invest in warrants, which give the holder of
the warrant a right to purchase a given number of shares of a particular issue
at a specified price until expiration (generally two or more years). Such
investments generally can provide a greater potential for profit or loss than
investments of equivalent amounts in the underlying common stock. The prices of
warrants do not necessarily move with the prices of the underlying securities.
If the holder does not sell the warrant, he risks the loss of his entire
investment if the market price of the underlying stock does not, before the
expiration date, exceed the exercise price of the warrant plus the cost thereof.
Investment in warrants is a speculative activity. War-rants pay no dividends
and confer no rights (other than the right to purchase the underlying stock)
with respect to the assets of the issuer. Rights represent a preemptive right
of stockholders to purchase additional shares of a stock at the time of a new
issuance before the stock is offered to the general public, allowing the
stockholder to retain the same ownership percentage after the new stock
offering.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase or sell
such securities on a "when-issued" or "delayed delivery" basis. Although a Fund
will enter into such transactions for the purpose of acquiring securities for
its portfolio or for delivery pursuant to
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options contracts it has entered into, the Fund may dispose of a commitment
prior to settlement. "When-issued" or "delayed 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 such transactions are negotiated,
the price (which is generally expressed in yield terms) is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. During the period between commitment by a Fund and settlement
(generally within two months but not to exceed 120 days), no payment is made for
the securities purchased by the purchaser, and no interest accrues to the
purchaser from the transaction. Such securities are subject to market
fluctuation, and the value at delivery may be less than the purchase price. A
Fund will maintain a segregated account with its custodian, consisting 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. With respect to securities sold on a delayed-delivery basis, a Fund will
either segregate the securities sold or liquid assets of a comparable value.
A Fund will engage in when-issued transactions in order to secure what is
considered to be an advantageous price and yield at the time of entering into
the obligation. When a Fund engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in a Fund losing the
opportunity to obtain a price and yield considered to be advantageous. If a
Fund chooses to (i) dispose of the right to acquire a when-issued security prior
to its acquisition or (ii) dispose of its right to deliver or receive against a
forward commitment, it may incur a gain or loss. (At the time a Fund makes a
commitment to purchase or sell a security on a when-issued or forward commitment
basis, it records the transaction and reflects the value of the security
purchased, or if a sale, the proceeds to be received in determining its net
asset value.)
To the extent a Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Fund enters into such transactions only with the
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and forward commitments may be sold prior to the
settlement date. In addition, changes in interest rates in a direction other
than that expected by the Adviser before settlement will affect the value of
such securities and may cause a loss to a Fund.
When-issued transactions and forward commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and failing prices, a Fund might sell securities in its
portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Fund might sell portfolio securities and purchase the same or similar
securities on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields.
FOREIGN SECURITIES. Investments in foreign securities offer potential benefits
not available from investments solely in securities of domestic issuers by
offering the opportunity to invest in foreign issuers that appear to offer
growth potential, or in foreign countries with economic policies or business
cycles different from those of the U.S., or to reduce fluctuations in portfolio
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value by taking advantage of foreign stock markets that do not move in a manner
parallel to U.S. markets. Although foreign securities are generally not
expected to constitute a significant portion of any Fund's investment portfolio,
each Fund is authorized to invest in foreign securities. A Fund may purchase
securities issued by issuers in any country.
Each Fund may invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts (EDRs), Global
Depository Receipts (GDRS) or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are securities, typically issued by a U.S. financial
institution, that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depository. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository that
has an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Holders of
unsponsored ADRs generally bear all the costs associated with establishing the
unsponsored ADR. The depository of an unsponsored ADR is under no obligation to
distribute shareholder communications received from the underlying issuer or to
pass through to the holders of the unsponsored ADR voting rights with respect to
the deposited securities or pool of securities. A Fund may invest in either
type of ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depository receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a
certificate that settles at the Fund's custodian in five days. The Fund may
also execute trades on the U.S. markets using existing ADRs. A foreign issuer
of the security underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly the
information available to a U.S. investor will be limited to the information the
foreign issuer is required to disclose in its own country and the market value
of an ADR may not reflect undisclosed material information concerning the issuer
of the underlying security. For purposes of a Fund's investment policies, the
Fund's investments in these types of securities will be deemed to be investments
in the underlying securities. Generally ADRs, in registered form, are dollar
denominated securities designed for use in the U.S. securities markets, which
represent and may be converted into the underlying foreign security. EDRs, in
bearer form, are designed for use in the European securities markets.
Each Fund also may invest in securities denominated in European Currency
Units (ECUs). An ECU is a "basket" consisting of specified amounts of
currencies of certain of the twelve member states of the European Community. In
addition, the Funds may invest in securities denominated in other currency
"baskets."
Investments in foreign securities, including securities of emerging market
countries, present special additional investment risks and considerations not
typically associated with investments in domestic securities, including
reduction of income by foreign taxes; fluctuation in value of foreign portfolio
investments due to changes in currency rates and control regulations (i.e.,
currency blockage); transaction charges for currency exchange; lack of public
information about foreign issuers; lack of uniform accounting, auditing and
financial reporting standards
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comparable to those applicable to domestic issuers; less volume on foreign
exchanges than on U.S. exchanges; greater volatility and less liquidity on
foreign markets than in the U.S.; less regulation of foreign issuers, stock
exchanges and brokers than the U.S.; greater difficulties in commencing
lawsuits; higher brokerage commission rates and custodian fees than the U.S.;
increased possibilities in some countries of expropriation, confiscatory
taxation, political, financial or social instability or adverse diplomatic
developments; the imposition of foreign taxes on investment income derived from
such countries and differences (which may be favorable or unfavorable) between
the U.S. economy and foreign economies. An emerging market country is one that
the World Bank, the International Finance Corporation or the United Nations or
its authorities has determined to have a low or middle income economy.
Historical experience indicates that the markets of emerging market countries
have been more volatile than more developed markets; however, such markets can
provide higher rates of return to investors. The performance of investments in
securities denominated in a foreign currency ("non-dollar securities") will
depend on, among other things, the strength of the foreign currency against the
dollar and the interest rate environment in the country issuing the foreign
currency. Absent other events that could otherwise affect the value of non-
dollar securities (such as a change in the political climate or an issuer's
credit quality), appreciation in the value of the foreign currency generally can
be expected to increase the value of a Fund's non-dollar securities in terms of
U.S. dollars. A rise in foreign interest rates or decline in the value of
foreign currencies relative to the U.S. dollar generally can be expected to
depress the value of the Fund's non-dollar securities. Currencies are evaluated
on the basis of fundamental economic criteria (e.g., relative inflation levels
and trends, growth rate forecasts, balance of payments status and economic
policies) as well as technical and political data. Effective January 1, 1999,
several European countries irrevocably fixed their existing national currencies
to a new single European currency unit, the "euro." Certain European investments
may be subject to additional risks as a result of this conversion. These risks
include adverse tax and accounting consequences, as well as difficulty in
processing transactions. The Adviser is aware of such potential problems and is
coordinating efforts to prevent or alleviate their adverse impact on the Funds.
There can be no assurance that a Fund will not suffer any adverse consequences
as a result of the euro conversion.
Because the Funds may invest in securities that are primarily listed on
foreign exchanges that trade on weekends or other days when the Trust does not
price its shares, the value of these Fund's shares may change on days when a
shareholder will not be able to purchase or redeem shares.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Fund may lend portfolio securities in amounts up to 33 1/3%
of total assets to brokers, dealers and other financial institutions, provided
that such loans are callable at any time by the Fund and are at all times
secured by cash or equivalent collateral. In lending its portfolio securities, a
Fund receives income while retaining the securities' potential for capital
appreciation. The advantage of such loans is that a Fund continues to receive
the interest and dividends on the loaned securities while at the same time
earning interest on the collateral, which will be invested in short-term debt
securities, including repurchase agreements. A loan may be terminated by the
borrower on one business day's notice or by a Fund at any time. If the borrower
fails to maintain the requisite amount of collateral, the loan automatically
terminates, and the Fund could use the collateral to replace the securities
while holding the borrower liable for any excess of
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replacement cost over collateral. As with any extensions of credit, there are
risks of delay in recovery and in some cases even loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will be made only to firms deemed by the
Adviser to be creditworthy. On termination of the loan, the borrower is required
to return the securities to a Fund; and any gain or loss in the market price of
the loaned security during the loan would inure to the Fund. Each Fund will pay
reasonable finders', administrative and custodial fees in connection with a loan
of its securities or may share the interest earned on collateral with the
borrower.
Since voting or consent rights that accompany loaned securities pass to the
borrower, each Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
that are the subject of the loan.
DERIVATIVES STRATEGIES. Each Fund may write (i.e., sell) call options ("calls")
on securities traded on U.S. and foreign securities exchanges and over-the-
counter markets to enhance income through the receipt of premiums from expired
calls and any net profits from closing purchase transactions. All such calls
written by a Fund must be "covered" while the call is outstanding (i.e., the
Fund must own the securities subject to the call or other securities acceptable
for applicable escrow requirements). If a call written by the Fund is
exercised, the Fund forgoes any profit from any increase in the market price
above the call price of the underlying investment on which the call was written.
Each Fund also may write put options ("puts"), which give the holder of the
option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option that
increases the Fund's return. The Funds write only covered put options, which
means that so long as a Fund is obligated as the writer of the option it will,
through its custodian, have deposited and maintained cash or liquid securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities.
HEDGING STRATEGIES. For hedging purposes as a temporary defensive
maneuver, each Fund, except as described below, may also use interest rate
futures contracts, foreign currency futures contracts, and stock and bond index
futures contracts (together, "Futures"); forward contracts on foreign currencies
("Forward Contracts"); and call and put options on equity and debt securities,
Futures, stock and bond indices and foreign currencies (all the foregoing
referred to as "Hedging Instruments"). All puts and calls on securities,
interest rate Futures or stock and bond index Futures or options on such Futures
purchased or sold by the Fund will be listed on a national securities or
commodities exchange or on U.S. over-the-counter markets. Hedging Instruments
may be used to attempt to: (i) protect against possible declines in the market
value of a Fund's portfolio resulting from downward trends in the equity and
debt securities markets (generally due to a rise in interest rates); (ii)
protect a Fund's unrealized gains in the value of its equity and debt securities
that have appreciated; (iii) facilitate selling securities for investment
reasons; (iv) establish a position in the equity and debt securities markets as
a temporary substitute for purchasing particular equity and debt securities; or
(v) reduce the risk of adverse currency fluctuations.
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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.
A Fund's strategy of hedging with Futures and options on Futures will be
incidental to its activities in the underlying cash market. When hedging to
attempt to protect against declines in the market value of a Fund's portfolio,
to permit a Fund to retain unrealized gains in the value of portfolio securities
that have appreciated, or to facilitate selling securities for investment
reasons, a Fund could: (i) sell Futures; (ii) purchase puts on such Futures or
securities; or (iii) write calls on securities held by it or on Futures. When
hedging to attempt to protect against the possibility that portfolio securities
are not fully included in a rise in value of the debt securities market, a Fund
could: (i) purchase Futures, or (ii) purchase calls on such Futures or on
securities. When hedging to protect against declines in the dollar value of a
foreign currency-denominated security, a Fund could: (i) purchase puts on that
foreign currency and on foreign currency Futures; (ii) write calls on that
currency or on such Futures; or (iii) enter into Forward Contracts at a lower
rate than the spot ("cash") rate. Additional information about the Hedging
Instruments the Funds may use is provided below.
OPTIONS
OPTIONS ON SECURITIES. As noted above, each Fund may write and purchase
call and put options (including yield curve options) on futures contracts,
equity and debt securities.
When a Fund writes a call on a security it receives a premium and agrees to
sell the underlying security to a purchaser of a corresponding call on the same
security during the call period (usually not more than 9 months) at a fixed
price (which may differ from the market price of the underlying security),
regardless of market price changes during the call period. In such instance,
the Fund retains the risk of loss should the price of the underlying security
increase during the call period, which may be offset to some extent by the
premium.
To terminate its obligation on a call it has written, a Fund may purchase a
corresponding call in a "closing purchase transaction." A profit or loss will be
realized, depending upon whether the net of the amount of the option transaction
costs and the premium received on the call written was more or less than the
price of the call subsequently purchased. A profit may also be realized if the
call expires unexercised, because a Fund retains the underlying security and the
premium received. If a Fund could not effect a closing purchase transaction due
to lack of a market, it would hold the callable securities until the call
expired or was exercised.
When a Fund purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period at a fixed exercise price. A Fund benefits only if the call is
sold at a profit or if, during the call period, the market price of the
underlying investment is above the sum of the call price plus the transaction
costs and the premium paid and
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the call is exercised. If the call is not exercised or sold (whether or not at a
profit), it will become worthless at its expiration date and a Fund will lose
its premium payment and the right to purchase the underlying investment.
A put option on securities gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying investment at the exercise price
during the option period. Writing a put covered by segregated liquid assets
equal to the exercise price of the put has the same economic effect to a Fund as
writing a covered call. The premium a Fund receives from writing a put option
represents a profit as long as the price of the underlying investment remains
above the exercise price. However, a Fund has also assumed the obligation
during the option period to buy the underlying investment from the buyer of the
put at the exercise price, even though the value of the investment may fall
below the exercise price. If the put expires unexercised, a Fund (as the writer
of the put) realizes a gain in the amount of the premium. If the put is
exercised, a Fund must fulfill its obligation to purchase the underlying
investment at the exercise price, which will usually exceed the market value of
the investment at that time. In that case, a Fund may incur a loss, equal to
the sum of the sale price of the underlying investment and the premium received
minus the sum of the exercise price and any transaction costs incurred.
A Fund may effect a closing purchase transaction to realize a profit on an
outstanding put option it has written or to prevent an underlying security from
being put. Furthermore, effecting such a closing purchase transaction will
permit a Fund to write another put option to the extent that the exercise price
thereof is secured by the deposited assets, or to utilize the proceeds from the
sale of such assets for other investments by the Fund. A Fund will realize a
profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from writing the option.
When a Fund purchases a put, it pays a premium and has the right to sell
the underlying investment to a seller of a corresponding put on the same
investment during the put period at a fixed exercise price. Buying a put on an
investment a Fund owns enables the Fund to protect itself during the put period
against a decline in the value of the underlying investment below the exercise
price by selling such underlying investment at the exercise price to a seller of
a corresponding put. If the market price of the underlying investment is equal
to or above the exercise price and as a result the put is not exercised or
resold, the put will become worthless at its expiration date, and the Fund will
lose its premium payment and the right to sell the underlying investment
pursuant to the put. The put may, however, be sold prior to expiration (whether
or not at a profit).
Buying a put on an investment a Fund does not own permits the Fund either
to resell the put or buy the underlying investment and sell it at the exercise
price. The resale price of the put will vary inversely with the price of the
underlying investment. If the market price of the underlying investment is
above the exercise price and as a result the put is not exercised, the put will
become worthless on its expiration date. In the event of a decline in the stock
market, a Fund could exercise or sell the put at a profit to attempt to offset
some or all of its loss on its portfolio securities.
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When writing put options on securities, to secure its obligation to pay for
the underlying security, a Fund will deposit in escrow liquid assets with a
value equal to or greater than the exercise price of the underlying securities.
A Fund therefore forgoes the opportunity of investing the segregated assets or
writing calls against those assets. As long as the obligation of a Fund as the
put writer continues, it may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring a Fund to take delivery of the
underlying security against payment of the exercise price. A Fund has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the termination of
its obligation as the writer of the put. This obligation terminates upon
expiration of the put, or such earlier time at which a Fund effects a closing
purchase transaction by purchasing a put of the same series as that previously
sold. Once a Fund has been assigned an exercise notice, it is thereafter not
allowed to effect a closing purchase transaction.
OPTIONS ON FOREIGN CURRENCIES. Each Fund may write and purchase puts and
calls on foreign currencies. A call written on a foreign currency by a Fund is
"covered" if the Fund owns the underlying foreign currency covered by the call
or has an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by the Fund) upon conversion or exchange of other foreign
currency held in its portfolio. A put option is "covered" if the Fund
segregates cash or liquid securities with a value at least equal to the exercise
price of the put option. A call written by a Fund on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security that the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, a
Fund collateralizes the option by segregating cash or liquid securities in an
amount not less than the value of the underlying foreign currency in U.S.
dollars marked-to-market daily. As with other kinds of option transactions, the
writing of an option on currency will constitute only a partial hedge, up to the
amount of the premium received. A Fund could be required to purchase or sell
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate movements
adverse to a Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs.
OPTIONS ON SECURITIES INDICES. As noted above, each Fund may write and
purchase call and put options on securities indices. Puts and calls on broadly-
based securities indices are similar to puts and calls on securities except that
all settlements are in cash and gain or loss depends on changes in the index in
question (and thus on price movements in the securities market generally) rather
than on price movements in individual securities or Futures. When a Fund buys a
call on a securities index; it pays a premium. During the call period, upon
exercise of a call by a Fund, a seller of a corresponding call on the same
investment will pay the Fund an amount of cash to settle the call if the closing
level of the securities index upon which the call is based is greater than the
exercise price of the call. That cash payment is equal to the difference
between the closing price of the index and the exercise price of the call times
a specified multiple (the "multiplier") which determines the total dollar value
for each point of difference. When a Fund buys a put on a securities index, it
pays a premium and has the right during the put period to require a seller of a
corresponding put, upon the Fund's exercise of its put, to deliver to the
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Fund an amount of cash to settle the put if the closing level of the securities
index upon which the put is based is less than the exercise price of the put.
That cash payment is determined by the multiplier, in the same manner as
described above as to calls.
FUTURES AND OPTIONS ON FUTURES
FUTURES. Upon entering into a Futures transaction, a Fund will be required
to deposit an initial margin payment with the futures commission merchant (the
"futures broker"). The initial margin will be deposited with the Fund's
custodian in an account registered in the futures broker's name; however, the
futures broker can gain access to that account only under specified conditions.
As the Future is marked-to-market to reflect changes in its market value,
subsequent margin payments, called variation margin, will be paid to or by the
futures broker on a daily basis. Prior to expiration of the Future, if a Fund
elects to close out its position by taking an opposite position, a final
determination of variation margin is made, additional cash is required to be
paid by or released to the Fund, and any loss or gain is realized for tax
purposes. All Futures transactions are effected through a clearinghouse
associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold for hedging purposes
to attempt to protect against the effects of interest rate changes on a Fund's
current or intended investments in fixed income securities. For example, if a
Fund owned long-term bonds and interest rates were expected to increase, that
Fund might sell interest rate futures contracts. Such a sale would have much
the same effect as selling some of the long-term bonds in that Fund's portfolio.
However, since the Futures market is more liquid than the cash market, the use
of interest rate futures contracts as a hedging technique allows a Fund to hedge
its interest rate risk without having to sell its portfolio securities. If
interest rates did increase, the value of the debt securities in the portfolio
would decline, but the value of that Fund's interest rate futures contracts
would be expected to increase at approximately the same rate, thereby keeping
the net asset value of that Fund from declining as much as it otherwise would
have. On the other hand, if interest rates were expected to decline, interest
rate futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of long-
term bonds, a Fund could protect itself against the effects of the anticipated
rise in the value of long-term bonds without actually buying them until the
necessary cash became available or the market had stabilized. At that time, the
interest rate futures contracts could be liquidated and that Fund's cash
reserves could then be used to buy long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect a Fund's current or intended investments
from broad fluctuations in stock or bond prices. For example, a Fund may sell
stock or bond index futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. If such decline occurs, the
loss in value of portfolio securities may be offset, in whole or part, by gains
on the Futures position. When a Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock or
bond index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Fund
intends to
B-16
<PAGE>
purchase. As such purchases are made, the corresponding positions in stock or
bond index futures contracts will be closed out.
As noted above, each Fund may purchase and sell foreign currency futures
contracts for hedging to attempt to protect its current or intended investments
from fluctuations in currency exchange rates. Such fluctuations could reduce
the dollar value of portfolio securities denominated in foreign currencies, or
increase the cost of foreign-denominated securities to be acquired, even if the
value of such securities in the currencies in which they are denominated remains
constant. A Fund may sell futures contracts on a foreign currency, for example,
when it holds securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. In the event such
decline occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the Futures
contracts. However, if the value of the foreign currency increases relative to
the dollar, the Fund's loss on the foreign currency futures contract may or may
not be offset by an increase in the value of the securities since a decline in
the price of the security stated in terms of the foreign currency may be greater
than the increase in value as a result of the change in exchange rates.
Conversely, a Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing Futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. When a Fund purchases futures contracts under such
circumstances, however, and the price of securities to be acquired instead
declines as a result of appreciation of the dollar, the Fund will sustain losses
on its futures position, which could reduce or eliminate the benefits of the
reduced cost of portfolio securities to be acquired.
OPTIONS ON FUTURES. As noted above, certain Funds may purchase and write
options on interest rate futures contracts, stock and bond index futures
contracts and foreign currency futures contracts. (Unless otherwise specified,
options on interest rate futures contracts, options on stock and bond index
futures contracts and options on foreign currency futures contracts are
collectively referred to as "Options on Futures.")
The writing of a call option on a Futures contract constitutes a partial
hedge against declining prices of the securities in a Fund's portfolio. If the
Futures price at expiration of the option is below the exercise price, the Fund
will retain the full amount of the option premium, which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a Futures contract constitutes a
partial hedge against increasing prices of the securities or other instruments
required to be delivered under the terms of the Futures contract. If the
Futures price at expiration of the put option is higher than the exercise price,
a Fund will retain the full amount of the option premium, which provides a
partial hedge against any increase in the price of securities the Fund intends
to purchase. If a put or call option a Fund has written is exercised, the Fund
will incur a loss that will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its Options on Futures
positions, a Fund's losses from exercised Options on Futures may to some extent
be reduced or increased by changes in the value of portfolio securities.
B-17
<PAGE>
The Fund may purchase Options on Futures for hedging purposes, instead of
purchasing or selling the underlying Futures contract. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, a Fund
could, in lieu of selling a Futures contract, purchase put options thereon. In
the event that such decrease occurs, it may be offset, in whole or part, by a
profit on the option. If the market decline does not occur, the Fund will
suffer a loss equal to the price of the put. Where it is projected that the
value of securities to be acquired by a Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, a Fund could
purchase call Options on Futures, rather than purchasing the underlying Futures
contract. If the market advances, the increased cost of securities to be
purchased may be offset by a profit on the call. However, if the market
declines, the Fund will suffer a loss equal to the price of the call, but the
securities that the Fund intends to purchase may be less expensive.
FORWARD CONTRACTS
Each Fund may engage in Forward Contracts. A Forward Contract involves
bilateral obligations of one party to purchase, and another party to sell, a
specific currency at a future date (which may be any fixed number of days from
the date of the contract agreed upon by the parties), at a price set at the time
the contract is entered into. These contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. No price is paid or received upon the purchase or
sale of a Forward Contract.
A Fund may use Forward Contracts to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities a Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. In addition,
although Forward Contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies increase. A Fund will not
speculate with Forward Contracts or foreign currency exchange rates.
A Fund may enter into Forward Contracts with respect to specific
transactions. For example, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Fund
anticipates receipt of dividend payments in a foreign currency, the Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment by entering into a Forward Contract, for a fixed
amount of U.S. dollars per unit of foreign currency, for the purchase or sale of
the amount of foreign currency involved in the underlying transaction. A Fund
will thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.
A Fund may also use Forward Contracts to lock in the U.S. dollar value of
portfolio positions ("position hedge"). In a position hedge, for example, when
a Fund believes that foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a Forward
B-18
<PAGE>
Contract to sell an amount of that foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in (or affected by
fluctuations in, in the case of ADRs) such foreign currency, or when a Fund
believes that the U.S. dollar may suffer a substantial decline against a foreign
currency, it may enter into a Forward Contract to buy that foreign currency for
a fixed dollar amount. In this situation a Fund may, in the alternative, enter
into a Forward Contract to sell a different foreign currency for a fixed U.S.
dollar amount where the Fund believes that the U.S. dollar value of the currency
to be sold pursuant to the forward contract will fall whenever there is a
decline in the U.S. dollar value of the currency in which portfolio securities
of the Fund are denominated ("cross-hedged"). The Funds may also hedge
investments denominated in a foreign currency by entering into forward currency
contracts with respect to a foreign currency that is expected to correlate to
the currency in which the investments are denominated ("proxy hedging").
A Fund will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Fund is not able to
cover its forward currency positions with underlying portfolio securities, the
Fund will segregate cash or liquid securities having a value equal to the
aggregate amount of the Fund's commitments under Forward Contracts entered into
with respect to position hedges and cross-hedges. If the value of the
segregated securities declines, additional cash or securities will be segregated
on a daily basis so that the value of the segregated assets will equal the
amount of the Fund's commitments with respect to such contracts. As an
alternative to segregating assets, a Fund may purchase a call option permitting
the Fund to purchase the amount of foreign currency being hedged by a forward
sale contract at a price no higher than the Forward Contract price or the Fund
may purchase a put option permitting the Fund to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the Forward Contract price. Unanticipated changes in currency prices may
result in poorer overall performance for a Fund than if it had not entered into
such contracts.
The precise matching of the Forward Contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency a Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency a Fund is obligated to deliver. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Forward Contracts involve the risk that anticipated currency movements will not
be accurately predicted, causing a Fund to sustain losses on these contracts and
transactions costs.
At or before the maturity of a Forward Contract requiring a Fund to sell a
currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the
B-19
<PAGE>
currency or retain the security and offset its contractual obligation to deliver
the currency by purchasing a second contract pursuant to which the Fund will
obtain, on the same maturity date, the same amount of the currency that it is
obligated to deliver. Similarly, a Fund may close out a Forward Contract
requiring it to purchase a specified currency by entering into a second contract
entitling it to sell the same amount of the same currency on the maturity date
of the first contract. A Fund would realize a gain or loss as a result of
entering into such an offsetting Forward Contract under either circumstance to
the extent the exchange rate or rates between the currencies involved moved
between the execution dates of the first contract and offsetting contract.
The cost to a Fund of engaging in Forward Contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Fund must evaluate the credit
and performance risk of each particular counterparty under a Forward Contract.
Although a Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. A Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Foreign exchange
dealers do not charge a fee for conversion, but they do seek to realize a profit
based on the difference between the prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE
The Fund's custodian, or a securities depository acting for the custodian,
will act as the Fund's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC"), as to the securities on which the Fund has written
options or as to other acceptable escrow securities, so that no margin will be
required for such transaction. OCC will release the securities on the
expiration of the option or upon a Fund's entering into a closing transaction.
An option position may be closed out only on a market that provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. A Fund's option
activities may affect its turnover rate and brokerage commissions. The exercise
by a Fund of puts on securities will cause the sale of related investments,
increasing portfolio turnover. Although such exercise is within a Fund's
control, holding a put might cause the Fund to sell the related investments for
reasons that would not exist in the absence of the put. A Fund will pay a
brokerage commission each time it buys a put or call, sells a call, or buys or
sells an underlying investment in connection with the exercise of a put or call.
Such commissions may be higher than those that would apply to direct purchases
or sales of such underlying investments. Premiums paid for options are small in
relation to the market value of the related investments, and consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in options could result in a Fund's net asset value being more sensitive
to changes in the value of the underlying investments.
B-20
<PAGE>
In the future, each Fund may employ Hedging Instruments and strategies that
are not presently contemplated but which may be developed, to the extent such
investment methods are consistent with a Fund's investment objectives, legally
permissible and adequately disclosed.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS
Each Fund must operate within certain restrictions as to its long and short
positions in Futures and options thereon under a rule (the "CFTC Rule") adopted
by the Commodity Futures Trading Commission (the "CFTC") under the Commodity
Exchange Act (the "CEA"), which excludes the Fund from registration with the
CFTC as a "commodity pool operator" (as defined in the CEA) if it complies with
the CFTC Rule. In particular, the Fund may (i) purchase and sell Futures and
options thereon for bona fide hedging purposes, as defined under CFTC
regulations, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) enter into non-hedging transactions,
provided, that the Fund may not enter into such non-hedging transactions if,
immediately thereafter, the sum of the amount of initial margin deposits on the
Fund's existing Futures positions and option premiums would exceed 5% of the
fair value of its portfolio, after taking into account unrealized profits and
unrealized losses on any such transactions. Each Fund intends to engage in
Futures transactions and options thereon only for hedging purposes. Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
Transactions in options by a Fund are subject to limitations established by
each of the exchanges governing the maximum number of options that may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
exchanges or brokers. Thus, the number of options a Fund may write or hold may
be affected by options written or held by other entities, including other
investment companies having the same or an affiliated investment adviser.
Position limits also apply to Futures. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain other
sanctions. Due to requirements under the 1940 Act, when a Fund purchases a
Future, the Fund will segregate cash or liquid securities in an amount equal to
the market value of the securities underlying such Future, less the margin
deposit applicable to it.
POSSIBLE RISK FACTORS IN HEDGING
Participation in the options or Futures markets and in currency exchange
transactions involves investment risks and transaction costs to which a Fund
would not be subject absent the use of these strategies. If the Adviser's
predictions of movements in the direction of the securities, foreign currency
and interest rate markets are inaccurate, the adverse consequences to a Fund may
leave the Fund in a worse position than if such strategies were not used.
In addition to the risks discussed above, there is also a risk in using
short hedging by selling Futures to attempt to protect against decline in value
of a Fund's portfolio securities (due to an increase in interest rates) that the
prices of such Futures will correlate imperfectly with the behavior of the cash
(i.e., market value) prices of the Fund's securities. The ordinary spreads
between prices in the cash and Futures markets are subject to distortions due to
differences in the
B-21
<PAGE>
natures of those markets. First, all participants in the Futures markets are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close Futures contracts
through offsetting transactions that could distort the normal relationship
between the cash and Futures markets. Second, the liquidity of the Futures
markets depend on participants entering into offsetting transactions rather than
making or taking delivery. To the extent participants decide to make or take
delivery, liquidity in the Futures markets could be reduced, thus producing
distortion. Third, from the point-of-view of speculators, the deposit
requirements in the Futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
Futures markets may cause temporary price distortions.
If a Fund uses Hedging Instruments to establish a position in the debt
securities markets as a temporary substitute for the purchase of individual debt
securities (long hedging) by buying Futures and/or calls on such Futures or on
debt securities, it is possible that the market may decline; if the Adviser then
determines not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Fund will realize a
loss on the Hedging Instruments that is not offset by a reduction in the price
of the debt securities purchased.
SHORT SALES. Each Fund may seek to hedge investments or realize additional
gains through short sales. A Fund may make short sales, which are transactions
in which a Fund 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 Fund
must borrow the security to make delivery to the buyer. A Fund 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 Fund is required to repay the lender any dividends or interest that
accrue during the period of the loan. To borrow the security, a Fund 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 Fund also will incur transaction costs in effecting short sales.
A Fund 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
Fund replaces the borrowed security. A Fund 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 Fund 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 Fund's net assets. Each Fund 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 Fund's net equity or if such securities would constitute more than two
percent (2%) of any class of the issuer's securities.
Whenever a Fund 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)
B-22
<PAGE>
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.
Each Fund may make "short sales against the box." A short sale is effected
by selling a security that the Fund does not own. A short sale is against the
box to the extent that the Fund contemporaneously owns, or has the right to
obtain without payment, securities identical to those sold short. A Fund may
not enter into a short sale against the box, if, as a result, more than 25% of
its total assets would be subject to such short sales. A Fund generally will
recognize any gain (but not loss) for federal income tax purposes at the time
that it makes a short sale against the box.
PORTFOLIO TURNOVER. It is expected that the annual portfolio turnover rate for
the Funds will not exceed 200%. In addition to Fund trading costs, higher rates
(100% or more) of portfolio turnover may result in the realization of capital
gains, a portion of which may be short-term or mid-term gains. See "DIVIDENDS,
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
Fund and Brazos Small Cap Growth Fund.
INVESTMENT COMPANIES. Each Fund 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 Fund'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
Fund 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.
FUTURE DEVELOPMENTS. Each Fund may invest in securities and other instruments
that do not presently exist but may be developed in the future, provided that
each such investment is consistent with the Fund's investment objectives,
policies and restrictions and is otherwise legally permissible under federal and
state laws. Each Fund's Prospectus and Statement of Additional Information will
be amended or supplemented as appropriate to discuss any such new investments.
INVESTMENT RESTRICTIONS
Each Fund is subject to a number of investment restrictions that are
fundamental policies and may not be changed without the approval of the holders
of a majority of that Fund's outstanding voting securities (as defined in the
1940 Act). Unless otherwise indicated, all percentage limitations apply to each
Fund on an individual basis, and apply only at the time the investment is made;
any subsequent change in any applicable percentage resulting from fluctuations
in value will not be deemed an investment contrary to these restrictions.
Under the following fundamental restrictions, no Fund may:
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<PAGE>
(1) with respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the government of the U.S. or any agency or
instrumentality thereof);
(2) with respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer;
(3) borrow, [except from banks and] as a temporary measure for
extraordinary or emergency purposes and then, in no event, in excess
of 331/3 % of the Fund's gross assets valued at the lower of market or
cost, and the Fund may not purchase additional securities when
borrowings exceed 5% of total gross assets; or
(4) pledge, mortgage or hypothecate any of its assets to an extent greater
than 33-1/3% of its total assets at fair market value;
(5) invest in physical commodities or contracts on physical commodities;
(6) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal
in real estate and may purchase and sell securities which are secured
by interests in real estate; additionally, the Brazos Real Estate
Securities Portfolio may purchase and sell mortgage-related securities
and liquidate real estate acquired as a result of default on a
mortgage and may invest in marketable securities issued by companies
such as real estate investment trusts which deal in real estate or
interests therein and participation interests in pools of real estate
mortgage loans;
(7) make loans except (i) by purchasing debt securities in accordance with
its investment objectives; (ii) by lending its portfolio securities to
banks, brokers, dealers and other financial institutions so long as
such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the Commission thereunder; [and
(iii) as otherwise permitted by exemptive order of the Commission];
(8) underwrite the securities of other issuers;
(9) issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into options, futures or repurchase transactions;
(10) invest in futures and/or options on futures unless (i) not more than
5% of the Portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts,
provided, however, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be excluded in
computing such 5%; and (ii) not more than 20% of a Portfolio's assets
are invested in futures and options;
B-24
<PAGE>
(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, Brazos Small Cap Growth and the Brazos Growth Funds 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 Fund'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
Fund adopts a temporary defensive position. The Brazos Real Estate Securities
Fund 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.
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of the Trust,
their ages, business addresses, and principal occupations during the past five
years. An asterisk indicates those Trustees who are interested persons of the
Trust within the meaning of the 1940 Act.
<TABLE>
<CAPTION>
Position with Principal Occupations
-------------
Name, Age, Address the Trust During Past 5 Years
- ------------------ --------- -------------------
<S> <C> <C>
George W. Gau, 51 Trustee Trustee of the Trust; Professor of
8009 Long Canyon Drive Finance, George S. Watson Centennial
Austin, Texas 78730 Professor in Real Estate, College and
Graduate School of Business, University
of Texas at Austin since 1988; J.
Ludwig Mosle Centennial Memorial
Professor in Investments and Money
Management, since 1996; and Chairman of
the Board and Chief Executive Officer,
The MBA Investment Fund, L.L.C., a $10
million fund that is the first private
investment company to be managed by
students, since 1994.
</TABLE>
B-25
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occpations
-------------
Name, Age Address the Trust During Past 5 Years
- ------------------ --------- -------------------
<S> <C> <C>
*Dan L. Hockenbrough, 39 5949 Trustee, President, Since August 1996, Business Manager of
Sherry Lane, Suite 1600 Treasurer and Chief John McStay Investment Counsel, LLC
Dallas, Texas 75225 Financial Officer (formerly John McStay Investment Counsel,
L.P.) Formerly, Chief Financial Officer
of Waugh Enterprises, Inc from November
1995 until August 1996; Assistant Controller
of Hicks, Muse, Tate & Furst Incorporated
from December 1992 to November 1995; and
Sr.. Associate at Coopers & Lybrand prior
to December 1992.
John H. Massey, 59 Trustee Trustee of the Trust; private investor
4004 Windsor Avenue and corporate director: The Paragon
Dallas, Texas 75205 Group, Inc., Chancellor Media
Corporation Inc., The Sunrise
Television Group, Inc., Bank of the
Southwest, Columbine JDS Systems, Inc.,
FSW Holdings, Inc., National Health
Insurance Corporation, Inc., and
Central Texas Bankshares Holdings, Inc.
Until August 1996, Chairman of the
Board and Chief Executive Officer of
Life Partners Group, Inc.
David M. Reichert, 59 Trustee Private Investor; formerly Senior Vice
7415 Stonecrest Drive President of Moffet Capital Management,
Dallas, Texas 75240 an investment counseling firm, from
January 1995 until June 1996 and Senior
Vice President and Portfolio Manager of
American Capital Asset Management, a
mutual fund management company, from
April 1989 to July 1994.
*Tricia A. Hundley, 48 Vice President, Partner of John McStay Investment
5949 Sherry Lane, Suite 1560 Secretary and Counsel, LLC (formerly John McStay
Dallas, Texas 75225 Compliance Officer Investment Counsel, L.P.) since 1987.
*Loren J. Soetenga, 31 Vice President Principal of John McStay Investment
5949 Sherry Lane, Suite 1560 Counsel, LLC (formerly John McStay
Dallas, Texas 75225 Investment Counsel, L.P.) Formerly,
Partner of Chronos Management, Inc.
until 1996.
</TABLE>
B-26
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupatn
-------------
Name, Age, Address the Trust During deal
- ------------------ --------- -----------
<S> <C> <C>
*Peter C. Sutton, 34 Vice President and Senior Vice President, SunAmerica Asset
The SunAmerica Center Assistant Treasurer Management Corp., since April 1997,
733 Third Avenue Treasurer, SAMF and AST, since February
New York, NY 10017-3204 1996; Vice President and Assistant
Treasurer of SAST and APF since 1994;
Vice President, Seasons Series Trust,
since April 1997; formerly, Vice
President, SunAmerica Asset Management
Corp., from 1994 to 1997; Controller,
SAMF and AST, from March 1993 to
February 1996; Assistant Controller,
SAMF and AST, from 1990 to 1993.
*Robert M. Zakem, 41 Vice President and Senior Vice President and General
The SunAmerica Center Assistant Secretary Counsel, SunAmerica Asset Management
733 Third Avenue Corp., since April 1993; Executive Vice
New York, NY 10017-3204 President, General Counsel and
Director, SACS, since August 1993; Vice
President, General Counsel and
Assistant Secretary, SAFS, since
January 1994; Vice President,
SunAmerica Series Trust, Anchor Pathway
and Seasons Series Trust; Assistant
Secretary, SunAmerica Series Trust and
Anchor Pathway Fund, since September
1993; Assistant Secretary, Seasons
Series Trust, since April 1997;
formerly, Vice President and Associate
General Counsel, SunAmerica Asset
Management Corp., from March 1992 to
April 1993.
</TABLE>
The Trustees of the Trust are responsible for the overall supervision of
the operation of the Trust and each Fund and perform various duties imposed on
trustees of investment companies by the 1940 Act and under the Trust's Agreement
and Declaration of Trust. Officers of the Trust are also officers of some or
all of the other investment companies managed, administered or advised by John
McStay Investment Counsel, L.L.C. (the "Adviser"), or its affiliates.
The Trust pays each Trustee, who is not also an officer or affiliated
person, a $500 quarterly retainer fee per active Fund which currently amounts to
$2,000 per quarter. In addition, each unaffiliated Trustee receives a $500
meeting fee which is aggregated for all the Trustees and allocated
proportionately among the Funds of the Trust, and reimbursement for travel and
other expenses incurred while attending Board meetings. Trustees who are also
officers or affiliated persons receive no remuneration for their service as
Trustees. The Trust's officers and employees are paid by either the Adviser or
the Administrator (as defined below) and receive no compensation from
B-27
<PAGE>
the Trust. The following table shows aggregate compensation paid to each of the
Trustees for the fiscal period ended November 30, 1998.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Benefits Upon from Registrant and
From Registrant Accrued as Part of Retirement Company Complex
Company Expenses Paid
to Trustees
===================================================================================================================
<S> <C> <C> <C> <C>
George W. Gau* -0- -0- -0- -0-
Trustee
Dan L. Hockenbrough -0- -0- -0- -0-
Trustee
John H. Massey $8,000 -0- -0- $8,000
Trustee`
David M. Reichert $8,000 -0- -0- $8,000
Trusteer=
</TABLE>
*Since Mr. Gau joined the Board of Trustees in May of 1999, he was not
compensated during the fiscal year ended November 30, 1998 for his services to
the Trust.
PRINCIPAL HOLDERS OF SECURITIES. As of ________ , 1999, the following persons
or organizations held of record 5% or more of the shares of each Fund:
[to be completed]
ADVISER, PERSONAL TRADING,
DISTRIBUTOR AND ADMINISTRATOR
THE ADVISER. John McStay Investment Counsel, L.L.C. (the "Adviser"), which was
organized as a Delaware limited liability corporation in 1999, is located at
5949 Sherry Lane, Suite 1600, Dallas, Texas 75225 and acts as adviser to each of
the Funds pursuant to Investment Advisory Agreements dated _______, 1999 (the
"Advisory Agreements") with the Trust, on behalf of each Fund. The Adviser is
the successor entity to John McStay Investment Counsel L.P. (the "Prior
Adviser"), which managed each Fund from its inception through _______, 1999,
pursuant to invesment advisory agreements (the "Prior Advisory Agreements"). The
Adviser is an indirect majority-owned subsidiary of American International
Group, Inc. ("AIG"), the leading U.S.-based international insurance
organization. AIG, a Delaware corporation, is a holding company that through its
subsidiaries is primarily engaged in a broad range of insurance and insurance
related activities and financial services in the United States and abroad.
B-28
<PAGE>
Under the Advisory Agreement, the Adviser manages the investment of the
assets of each Fund and obtains and evaluates economic, statistical and
financial information to formulate and implement investment policies for each
Fund. Any investment program undertaken by the Adviser will at all times be
subject to the policies and control of the Trustees.
Except to the extent otherwise specified in the Advisory Agreement, each
Fund pays, or causes to be paid, all other expenses of the Trust and each of the
Funds, including, without limitation, brokerage commissions and all other costs
of the Trust's operation.
As compensation for services rendered by the Adviser under the Investment
Advisory Agreements, the Funds pay the Adviser an annual fee in monthly
installments, calculated by applying the following annual percentage rates to
the Funds' average daily net assets for the month:
BRAZOS Real Estate Securities Fund...................................... 0.90%
BRAZOS Small Cap Growth Fund............................................ 0.90%
BRAZOS Growth Fund...................................................... 0.90%
The following table sets forth the total advisory fees incurred by each
Fund pursuant to the Prior Advisory Agreements or waived by the Prior Adviser
for the fiscal year ended November 30, 1998.
For the fiscal year ended November 30, 1998 the Funds paid the Prior
Adviser fees and the Prior Adviser waived fees and/or reimbursed expenses of the
Funds as follows:
<TABLE>
<CAPTION>
Fees paid
Fund (Before Waivers) Waivers
- ---- --------------- -------
<S> <C> <C>
Brazos Real Estate Securities Fund $ 712,269 $47,708
Brazos Small Cap Growth Fund $1,578,588 $ 0
Brazos Growth Fund* $ 0 $ 0
</TABLE>
*The Brazos Growth Fund commenced operations on 12/31/98.
For the fiscal year ended November 30, 1997 the Funds paid the Prior Adviser
fees and the Prior Adviser waived fees and/or reimbursed expenses of the Funds
as follows:
<TABLE>
<CAPTION>
Fees paid
Fund (Before Waivers) Waivers
- ---- -------------- -------
<S> <C> <C>
Brazos Real Estate Securities Fund $237,702 $139,015
Brazos Small Cap Growth Fund $239,078 $107,342
</TABLE>
The Advisory Agreement continues in effect with respect to each Fund after
an initial two-year term from year to year provided that such continuance is
approved annually by vote of a majority of the Trustees including a majority of
the disinterested Trustees or by the holders of a majority of the respective
Fund's outstanding voting securities. The Advisory Agreement may
B-29
<PAGE>
be terminated with respect to a Fund at any time, without penalty, on 60 days'
written notice by the Trustees, by the holders of a majority of the respective
Fund's outstanding voting securities or by the Adviser. The Advisory Agreement
automatically terminates with respect to each Fund in the event of its
assignment (as defined in the 1940 Act and the rules thereunder).
Under the terms of the Advisory Agreement, the Adviser is not liable to
the Funds, or their shareholders, for any act or omission by it or for any
losses sustained by the Funds or their shareholders, except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
PERSONAL TRADING. The Trust and the Adviser have adopted a written Code of
Ethics, which prescribes general rules of conduct and sets forth guidelines with
respect to personal securities trading by "Access Persons" thereof. An Access
Person as defined in the Code of Ethics is an individual who is a trustee,
officer, general partner or advisory person of the Trust. The guidelines on
personal securities trading include: (i) securities being considered for
purchase or sale, or purchased or sold, by any Investment Company advised by the
Adviser, (ii) Initial Public Offerings, (iii) private placements, (iv) blackout
periods, (v) short-term trading profits, (vi) gifts, and (vii) services as a
director. These guidelines are substantially similar to those contained in the
Report of the Advisory Group on Personal Investing issued by the Investment
Company Institute's Advisory Panel. The Adviser reports to the Board of
Trustees on a quarterly basis, as to whether there were any violations of the
Code of Ethics by Access Persons of the Trust or the Adviser during the quarter.
THE DISTRIBUTOR. The Trust, on behalf of the Class A, B and II shares of each
Fund, has entered into a distribution agreement (the "Distribution Agreement")
with SunAmerica Capital Services, Inc. ("SACS" or the "Distributor"), a
registered broker-dealer and an indirect wholly-owned subsidiary of AIG, to act
as the principal underwriter in connection with the continuous offering of each
class of shares of each Fund. The address of the Distributor is The SunAmerica
Center, 733 Third Avenue, New York, NY 10017-3204. The Distribution Agreement
provides that the Distributor has the exclusive right to distribute shares of
the Funds through its registered representatives and authorized broker-dealers.
The Distribution Agreement also provides that the Distributor will pay the
promotional expenses, including the incremental cost of printing Prospectuses,
annual reports and other periodic reports respecting each Fund, for distribution
to persons who are not shareholders of such Fund and the costs of preparing and
distributing any other supplemental sales literature. However, certain
promotional expenses may be borne by the Funds (see "Distribution Plans" below).
Continuance of the Distribution Agreement with respect to each Fund is
subject to annual approval by vote of the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust. The Trust and the
Distributor each has the right to terminate the Distribution Agreement with
respect to a Fund on 60 days' written notice, without penalty. The Distribution
Agreement will terminate automatically in the event of its assignment as defined
in the 1940 Act and the rules thereunder.
The Distributor may, from time to time, pay additional commissions or
promotional incentives to brokers, dealers or other financial services firms
that sell shares of the Funds. In
B-30
<PAGE>
some instances, such additional commissions, fees or other incentives may be
offered only to certain firms, including Royal Alliance Associates, Inc.,
SunAmerica Securities, Inc., Keogler Morgan & Company, Financial Service
Corporation and Advantage Capital Corporation, affiliates of the Distributor,
that sell or are expected to sell during specified time periods certain minimum
amounts of shares of the Funds, or of other funds underwritten by the
Distributor. In addition, the terms and conditions of any given promotional
incentive may differ from firm to firm. Such differences will, nevertheless, be
fair and equitable, and based on such factors as size, geographic location, or
other reasonable determinants, and will in no way affect the amount paid to any
investor.
DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an investment company
directly or indirectly to pay expenses associated with the distribution of its
shares in accordance with a plan adopted by the investment company's board of
directors. Pursuant to such rule, the Funds have adopted Distribution Plans for
Class A, Class B and Class II shares (hereinafter referred to as the "Class A
Plan," the "Class B Plan" and the "Class II Plan" and collectively as the
"Distribution Plans").
The sales charge and distribution fees of a particular class will not be
used to subsidize the sale of shares of any other class. Reference is made to
"Shareholder Account Information" in the Prospectus for certain information with
respect to the Distribution Plans.
Under the Class A Plan, the Distributor may receive payments from a Fund at
an annual rate of up to 0.10% of average daily net assets of a Fund's Class A
shares to compensate the Distributor and certain securities firms for providing
sales and promotional activities for distributing that class of shares. Under
the Class B and Class II Plans, the Distributor may receive payments from a Fund
at the annual rate of up to 0.75% of the average daily net assets of such Fund's
Class B or Class II shares to compensate the Distributor and certain securities
firms for providing sales and promotional activities for distributing that class
of shares. The distribution costs for which the Distributor may be reimbursed
out of such distribution fees include fees paid to broker-dealers that have sold
Fund shares, commissions and other expenses such as sales literature, prospectus
printing and distribution and compensation to wholesalers.
The Distribution Plans provide that each class of shares of each Fund may
also pay the Distributor an account maintenance and service fee of up to 0.25%
of the aggregate average daily net assets of such class of shares for payments
to broker-dealers for providing continuing account maintenance. In this regard,
some payments are used to compensate broker-dealers with trail commissions or
account maintenance and service fees in an amount up to 0.25% per year of the
assets maintained in a Fund by their customers.
It is possible that in any given year the amount paid to the Distributor
under any of the Distribution Plans will exceed the Distributor's distribution
costs as described above.
Continuance of the Distribution Plans with respect to each Fund is subject
to annual approval by vote of the Trustees, including a majority of the
disinterested Trustees. A Distribution Plan may not be amended to increase
materially the amount authorized to be spent thereunder with respect to a class
of shares of a Fund, without approval of the shareholders of the
B-31
<PAGE>
affected class of shares of the Fund. In addition, all material amendments to
the Distribution Plans must be approved by the Trustees in the manner described
above. A Distribution Plan may be terminated at any time with respect to a Fund
without payment of any penalty by vote of a majority of the disinterested or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the affected class of shares of the Fund. So long as the Distribution
Plans are in effect, the election and nomination of the Independent Trustees of
the Trust shall be committed to the discretion of the disinterested Trustees. In
the Trustees' quarterly review of the Distribution Plans, they will consider the
continued appropriateness of, and the level of, compensation provided in the
Distribution Plans. In their consideration of the Distribution Plans with
respect to a Fund, the Trustees must consider all factors they deem relevant,
including information as to the benefits of the Fund and the shareholders of the
relevant class of the Fund.
THE ADMINISTRATOR. The Trust has entered into a Service Agreement, under the
terms of which SunAmerica Fund Services, Inc. ("SAFS"), an indirect wholly-owned
subsidiary of AIG, acts as a servicing agent assisting State Street Bank and
Trust Company ("State Street") in connection with certain services offered to
the shareholders of each of the Funds. Under the terms of the Service
Agreement, SAFS may receive reimbursement of its costs in providing such
shareholder services. SAFS is located at The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204.
Pursuant to the Service Agreement, as compensation for services rendered,
SAFS receives a fee from each Fund, computed and payable monthly based upon an
annual rate of 0.22% of average daily net assets. This fee represents the full
cost of providing shareholder and transfer agency services to the Trust. From
this fee, SAFS pays a fee to State Street, and its affiliate, National Financial
Data Services ("NFDS" and with State Street, the "Transfer Agent") (other than
out-of-pocket charges of the Transfer Agent which are paid by the Trust). For
further information regarding the Transfer Agent, see the section entitled
"Additional Information" below.
The Service Agreement dated _______, 1999 continues in effect from year to
year provided that such continuance is approved annually by vote of a majority
of the Trustees including a majority of the disinterested Trustees.
For the fiscal year ended November 30, 1998 the Trust paid its previous
administrators Firstar Mutual Fund Services, LLC ("Firstar") and PFPC, Inc.
("PFPC")* administration fees and Firstar or PFPC waived fees and/or reimbursed
expenses of the Funds as follows:
<TABLE>
<CAPTION>
Fees paid
Fund (Before Waivers) Waivers
---- ---------------- -----------
<S> <C> <C>
Brazos Real Estate Securities Fund $ 74,824 $ 0
Brazos Small Cap Growth Fund $156,579 $ 0
</TABLE>
* The Company entered into an agreement with Firstar to provide services that
were provided by PFPC up until September 30, 1998.
B-32
<PAGE>
For the fiscal year ended November 30, 1998 the Company paid its previous
accounting service agents, Firstar and PFPC* accounting services fees and
Firstar or PFPC waived fees and/or reimbursed expenses of the Funds as follows:
B-33
<PAGE>
<TABLE>
<CAPTION>
Fees paid
Fund (Before Waivers) Waivers
---- ---------------- -----------
<S> <C> <C>
Brazos Real Estate Securities Fund $50,231 $ 0
Brazos Small Cap Growth Fund $67,191 $ 0
</TABLE>
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 Funds as follows:
<TABLE>
<CAPTION>
Fees paid
Fund (Before Waivers) Waivers
---- ---------------- -----------
<S> <C> <C>
Brazos Real Estate Securities Fund $41,826 $4,051
Brazos Small Cap Growth Fund $42,986 $4,051
</TABLE>
For the fiscal year ended November 30, 1997 the Company paid Rodney Square
Management Corporation* ("Rodney Square") accounting services fees and Rodney
Square waived fees and/or reimbursed expenses of the Funds as follows:
<TABLE>
<CAPTION>
Fees paid
Fund (Before Waivers) Waivers
---- ---------------- -----------
<S> <C> <C>
Brazos Real Estate Securities Fund $41,352 $5,610
Brazos Small Cap Growth Fund $41,808 $5,610
</TABLE>
* PFPC entered into an agreement with Rodney Square to provide services that
were provided by Rodney Square up until January 5, 1998.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As discussed in the Prospectus, the Adviser is responsible for decisions to
buy and sell securities for each Fund, selection of broker-dealers and
negotiation of commission rates. Purchases and sales of securities on a
securities exchange are effected through broker-dealers who charge a negotiated
commission for their services. Orders may be directed to any broker-dealer
including, to the extent and in the manner permitted by applicable law, an
affiliated brokerage subsidiary of the Adviser.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission (although the price of the security usually includes a profit to the
dealer). In underwritten offerings, securities are purchased at a fixed price
that includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
B-34
<PAGE>
The Adviser's primary consideration in effecting a security transaction is
to obtain the best net price and the most favorable execution of the order.
However, the Adviser may select broker-dealers that provide it with research
services -- analyses and reports concerning issuers, industries, securities,
economic factors and trends -- and may cause a Fund to pay such broker-dealers
commissions that exceed those that other broker-dealers may have charged, if in
its view the commissions are reasonable in relation to the value of the
brokerage and/or research services provided by the broker-dealer. Certain
research services furnished by brokers may be useful to the Adviser with clients
other than the Trust and may not be used in connection with the Trust. No
specific value can be determined for research services furnished without cost to
the Adviser by a broker. The Adviser is of the opinion that because the
material must be analyzed and reviewed by its staff, its receipt does not tend
to reduce expenses, but may be beneficial in supplementing the Adviser's
research and analysis. Therefore, it may tend to benefit the Funds by improving
the quality of the Adviser's investment advice. The investment advisory fees
paid by the Funds are not reduced because the Adviser receives such services.
When making purchases of underwritten issues with fixed underwriting fees, the
Adviser may designate the use of broker-dealers who have agreed to provide the
Adviser with certain statistical, research and other information.
Subject to applicable law and regulations, consideration may also be given
to the willingness of particular brokers to sell shares of a Fund as a factor in
the selection of brokers for transactions effected on behalf of a Fund, subject
to the requirement of best price and execution.
The Adviser may effect portfolio transactions through an affiliated broker-
dealer, acting as an agent and not as principal, in accordance with Rule 17e-I
under the 1940 Act and other applicable securities laws.
Although the objectives of other accounts or investment companies that the
Adviser manages may differ from those of the Funds, it is possible that, at
times, identical securities will be acceptable for purchase by one or more of
the Funds and one or more other accounts or investment companies that the
Adviser manages. However, the position of each account or company in the
securities of the same issue may vary with the length of the time that each
account or company may choose to hold its investment in those securities. The
timing and amount of purchase by each account and company will also be
determined by its cash position. If the purchase or sale of a security is
consistent with the investment policies of one or more of the Funds and one or
more of these other accounts or companies is considered at or about the same
time, transactions in such securities will be allocated in a manner deemed
equitable by the Adviser. The Adviser may combine such transactions, in
accordance with applicable laws and regulations, where the size of the
transaction would enable it to negotiate a better price or reduced commission.
However, simultaneous transactions could adversely affect the ability of a Fund
to obtain or dispose of the full amount of a security that it seeks to purchase
or sell, or the price at which such security can be purchased or sold.
B-35
<PAGE>
For the fiscal year ended November 30, 1998, the Funds paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Amount Paid Percentage Paid
Brokerage to Affiliated to Affiliated
Fund Commissions Broker-Dealers Broker-Dealers
- ---- ----------- -------------- --------------
<S> <C> <C> <C>
Brazos Real Estate Securities Fund $ 851,896 $ 11,340 1.3%
Brazos Small Cap Growth Fund $ 1,999,496 $182,588 9.1%
</TABLE>
For the fiscal year ended November 30, 1997, the Funds paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Amount Paid Percentage Paid
Brokerage to Affiliated to Affiliated
Fund Commissions Broker-Dealers Broker-Dealers
- ---- ----------- -------------- --------------
<S> <C> <C> <C>
Brazos Real Estate Securities Fund $ 316,900
Brazos Small Cap Growth Fund $ 132,283
</TABLE>
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Upon making an investment in shares of a Fund, an open account will be
established under which shares of such Fund and additional shares acquired
through reinvestment of dividends and distributions will be held for each
shareholder's account by the Transfer Agent. Shareholders will not be issued
certificates for their shares unless they specifically so request in writing but
no certificate is issued for fractional shares. Shareholders receive regular
statements from the Transfer Agent that report each transaction affecting their
accounts. Further information may be obtained by calling Shareholder/Dealer
Services at (800) 858-8850.
Shareholders who have met the Fund's minimum initial investment may elect
to have periodic purchases made through a dollar cost averaging program. At the
shareholder's election, such purchases may be made from their bank checking or
savings account on a monthly, quarterly, semiannual or annual basis. Purchases
can be made via electronic funds transfer through the Automated Clearing House
or by physical draft check. Purchases made via physical draft check require an
authorization card to be filed with the shareholder's bank.
Shares of each of the Funds are sold at the respective net asset value next
determined after receipt of a purchase order, plus a sales charge, which, at the
election of the investor, may be imposed (i) at the time of purchase (Class A
shares), (ii) on a deferred basis (Class B and certain Class A shares), or (iii)
may contain certain elements of a sales charge that is imposed at the time of
purchase and that is deferred (Class II shares).
WAIVER OF CDSC. As discussed under "Shareholder Account Information" in the
respective Prospectus, CDSCs may be waived on redemptions of Class B and Class
II shares under certain circumstances. The conditions set forth below are
applicable with respect to the following situations with the proper
documentation:
DEATH. CDSCs may be waived on redemptions within one year following the
death (i) of the sole shareholder on an individual account, (ii) of a joint
tenant where the surviving joint
B-36
<PAGE>
tenant is the deceased's spouse, or (iii) of the beneficiary of a Uniform Gifts
to Minors Act, Uniform Transfers to Minors Act or other custodial account. The
CDSC waiver is also applicable in the case where the shareholder account is
registered as community property. If, upon the occurrence of one of the
foregoing, the account is transferred to an account registered in the name of
the deceased's estate, the CDSC will be waived on any redemption from the estate
account occurring within one year of the death. If the Class B or Class II
shares are not redeemed within one year of the death, they will remain Class B
or Class II shares, as applicable, and be subject to the applicable CDSC, when
redeemed.
DISABILITY. CDSCs may be waived on redemptions occurring within one year
after the sole shareholder on an individual account or a joint tenant on a
spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of
the Code). To be eligible for such waiver, (i) the disability must arise after
the purchase of shares and (ii) the disabled shareholder must have been under
age 65 at the time of the initial determination of disability. If the account
is transferred to a new registration and then a redemption is requested, the
applicable CDSC will be charged.
PURCHASES THROUGH THE DISTRIBUTOR. An investor may purchase shares of a Fund
through dealers that have entered into selected dealer agreements with the
Distributor. An investor's dealer who has entered into a distribution
arrangement with the Distributor is expected to forward purchase orders and
payment promptly to the Fund. Orders received by the Distributor before the
Fund's close of business will be executed at the offering price determined at
the close of regular trading on the New York Stock Exchange ("NYSE") that day.
Orders received by the Distributor after the Fund's close of business will be
executed at the offering price determined after the close of regular trading of
the NYSE on the next trading day. The Distributor reserves the right to cancel
any purchase order for which payment has not been received by the fifth business
day following the investment. A Fund will not be responsible for delays caused
by dealers.
PURCHASE BY CHECK. Checks should be made payable to the specific Fund or to
"SunAmerica Funds." If the payment is for a retirement plan account for which
the Adviser serves as fiduciary, please note on the check that payment is for
such an account. In the case of a new account, purchase orders by check must be
submitted directly by mail to SunAmerica Fund Services, Inc., Mutual Fund
Operations, The SunAmerica Center, 733 Third Avenue, New York, New York 10017-
3204, together with payment for the purchase price of such shares and a
completed New Account Application. Payment for subsequent purchases should be
mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box 419373, Kansas
City, Missouri 64141-6373 and the shareholder's Fund account number should
appear on the check. For fiduciary retirement plan accounts, both initial and
subsequent purchases should be mailed to SunAmerica Fund Services, Inc., Mutual
Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204. Certified checks are not necessary but checks are accepted subject
to collection at full face value in United States funds and must be drawn on a
bank located in the United States. Upon receipt of the completed New Account
Application and payment check, the Transfer Agent will purchase full and
fractional shares of the applicable Fund at the net asset value next computed
after the check is received, plus the applicable sales charge. Subsequent
purchases of shares of each Fund may be purchased directly through the Transfer
Agent. SAFS
B-37
<PAGE>
reserves the right to reject any check made payable other than in the manner
indicated above. Under certain circumstances, the Fund will accept a multi-party
check (e.g., a check made payable to the shareholder by another party and then
endorsed by the shareholder to the Fund in payment for the purchase of shares);
however, the processing of such a check may be subject to a delay. The Fund does
not verify the authenticity of the endorsement of such multi-party check, and
acceptance of the check by the Fund should not be considered verification
thereof. Neither the Fund nor its affiliates will be held liable for any losses
incurred as a result of a fraudulent endorsement. There are restrictions on the
redemption of shares purchased by check for which funds are being collected.
PURCHASE THROUGH SAFS. SAFS will effect a purchase order on behalf of a
customer who has an investment account upon confirmation of a verified credit
balance at least equal to the amount of the purchase order (subject to the
minimum $500 investment requirement for wire orders). If such order is received
at or prior to the Fund's close of business, the purchase of shares of a Fund
will be effected on that day. If the order is received after the Fund's close
of business, the order will be effected on the next business day.
PURCHASE BY FEDERAL FUNDS WIRE. An investor may make purchases by having his or
her bank wire federal funds to the Transfer Agent. Federal funds purchase
orders will be accepted only on a day on which the Trust and the Transfer Agent
are open for business. In order to insure prompt receipt of a federal funds
wire, it is important that these steps be followed:
. You must have an existing SunAmerica Fund Account before wiring funds.
To establish an account, complete the New Account Application and send
it via facsimile to SunAmerica Fund Services, Inc. at: (212) 551-5585.
. Call SunAmerica Fund Services' Shareholder/Dealer Services, toll free
at (800) 858-8850, extension 5125 to obtain your new account number.
. Instruct the bank to wire the specified amount to the Transfer Agent:
State Street Bank and Trust Company, Boston, MA, ABA# ________; DDA#
________, SunAmerica [name of Fund, Class __] (include shareholder
name and account number).
WAIVER OF SALES CHARGES WITH RESPECT TO CERTAIN PURCHASES OF CLASS A SHARES. To
the extent that sales are made for personal investment purposes, the sales
charge is waived as to Class A shares purchased by current or retired officers,
directors, and other full-time employees of the Adviser and its affiliates, as
well as members of the selling group and family members of the foregoing. In
addition, the sales charge is waived with respect to shares purchased by certain
qualified retirement plans or employee benefit plans (other than IRAs), which
are sponsored or administered by the Adviser or an affiliate thereof. Such
plans may include certain employee benefit plans qualified under Sections 401 or
457 of the Code, or employee benefit plans created pursuant to Section 403(b) of
the Code and sponsored by nonprofit organizations defined under Section
501(c)(3) of the Code (collectively, the "Plans"). A Plan will qualify for
purchases at net asset value provided that (a) the initial amount invested in
one or more of the Portfolios (or in
B-38
<PAGE>
combination with the shares of other SunAmerica Mutual Funds) is at least
$1,000,000, (b) the sponsor signs a $1,000,000 Letter of Intent, (c) such shares
are purchased by an employer-sponsored plan with at least 100 eligible
employees, or (d) the purchases are by trustees or other fiduciaries for certain
employer-sponsored plans, the trustee, fiduciary or administrator that has an
agreement with the Distributor with respect to such purchases and all such
transactions for the plan are executed through a single omnibus account.
Further, the sales charge is waived with respect to shares purchased by "wrap
accounts" for the benefit of clients of broker-dealers, financial institutions
or financial planners or registered investment advisers adhering to the
following standards established by the Distributor: (i) the broker-dealer,
financial institution or financial planner charges its client(s) an advisory fee
based on the assets under management on an annual basis, and (ii) such broker-
dealer, financial institution or financial planner does not advertise that
shares of the Funds may be purchased by clients at net asset value. Shares
purchased under this waiver may not be resold except to the Fund. Shares are
offered at net asset value to the foregoing persons because of anticipated
economies in sales effort and sales related expenses. Reductions in sales
charges apply to purchases or shares by a "single person" including an
individual; members of a family unit comprising husband, wife and minor
children; or a trustee or other fiduciary purchasing for a single fiduciary
account. Complete details concerning how an investor may purchase shares at
reduced sales charges may be obtained by contacting the Distributor.
REDUCED SALES CHARGES (CLASS A SHARES ONLY). As discussed under "Shareholder
Account Information" in the Prospectus, investors in Class A shares of a Fund
may be entitled to reduced sales charges pursuant to the following special
purchase plans made available by the Trust.
COMBINED PURCHASE PRIVILEGE. The following persons may qualify for the
sales charge reductions or eliminations by combining purchases of Fund shares
into a single transaction:
i. an individual, or a "company" as defined in Section 2(a)(8) of
the 1940 Act (which includes corporations that are corporate
affiliates of each other);
ii. an individual, his or her spouse and their minor children,
purchasing for his, her or their own account;
iii. a trustee or other fiduciary purchasing for a single trust estate
or single fiduciary account (including a pension, profit-sharing,
or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Code);
iv. tax-exempt organizations qualifying under Section 501(c)(3) of
the Code (not including 403(b) plans);
v. employee benefit plans of a single employer or of affiliated
employers, other than 403(b) plans; and
vi. group purchases as described, below.
A combined purchase currently may also include shares of other funds in
SAMF (other than money market funds) purchased at the same time through a single
investment dealer, if the dealer places the order for such shares directly with
the Distributor.
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RIGHTS OF ACCUMULATION. A purchaser of Fund shares may qualify for a
reduced sales charge by combining a current purchase (or combined purchases as
described above) with shares previously purchased and still owned; provided the
cumulative value of such shares (valued at cost or current net asset value,
whichever is higher), amounts to $50,000 or more. In determining the shares
previously purchased, the calculation will include, in addition to other Class A
shares of the particular Fund that were previously purchased, shares of the
other classes of the same Fund, as well as shares of any class of any other Fund
or of any of the other Funds advised by the Adviser, as long as such shares were
sold with a sales charge or acquired in exchange for shares purchased with such
a sales charge.
The shareholder's dealer, if any, or the shareholder, must notify the
Distributor at the time an order is placed of the applicability of the reduced
charge under the Right of Accumulation. Such notification must be in writing by
the dealer or shareholder when such an order is placed by mail. The reduced
sales charge will not be granted if: (a) such information is not furnished at
the time of the order; or (b) a review of the Distributor's or the Transfer
Agent's records fails to confirm the investor's represented holdings.
LETTER OF INTENT. A reduction of sales charges is also available to an
investor who, pursuant to a written Letter of Intent set forth in the New
Account Application in the Prospectus, establishes a total investment goal in
Class A shares of one or more Funds to be achieved through any number of
investments over a thirteen-month period, of $50,000 or more. Each investment
in such Funds made during the period will be subject to a reduced sales charge
applicable to the goal amount. The initial purchase must be at least 5% of the
stated investment goal and shares totaling 5% of the dollar amount of the Letter
of Intent will be held in escrow by the Transfer Agent, in the name of the
investor. Shares of any class of shares of any Fund, or of other funds advised
by the Adviser, that impose a sales charge at the time of purchase, which the
investor intends to purchase or has previously purchased during a 30-day period
prior to the date of execution of the Letter of Intent and still owns, may also
be included in determining the applicable reduction; provided, the dealer or
shareholder notifies the Distributor of such prior purchase(s).
The Letter of Intent does not obligate the investor to purchase, nor the
Trust to sell, the indicated amounts of the investment goal. In the event the
investment goal is not achieved within the thirteen-month period, the investor
is required to pay the difference between the sales charge otherwise applicable
to the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
is authorized by the Letter of Intent to liquidate a sufficient number of
escrowed shares to obtain such difference. If the goal is exceeded and
purchases pass the next sales charge break-point, the sales charge on the entire
amount of the purchase that results in passing that break-point, and on
subsequent purchases, will be subject to a further reduced sales charge in the
same manner as set forth above under "Rights of Accumulation," but there will be
no retroactive reduction of sales charges on previous purchases. At any time
while a Letter of Intent is in effect, a shareholder may, by written notice to
the Distributor, increase the amount of the stated goal. In that event, shares
of the applicable Funds purchased during the previous 90-day period and still
owned by the shareholder will be included in determining the applicable sales
charge. The 5% escrow and the minimum purchase requirement will be applicable
to the new stated goal. Investors electing
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to purchase shares of one or more of the Funds pursuant to this purchase plan
should carefully read such Letter of Intent.
REDUCED SALES CHARGE FOR GROUP PURCHASES. Members of qualified groups may
purchase Class A shares of the Funds under the combined purchase privilege as
described above.
To receive a rate based on combined purchases, group members must purchase
Class A shares of a Fund through a single investment dealer designated by the
group. The designated dealer must transmit each member's initial purchase to
the Distributor, together with payment and completed New Account Application.
After the initial purchase, a member may send funds for the purchase of Class A
shares directly to the Transfer Agent. Purchases of a Fund's shares are made at
the public offering price based on the net asset value next determined after the
Distributor or the Transfer Agent receives payment for the Class A shares. The
minimum investment requirements described above apply to purchases by any group
member.
Qualified groups include the employees of a corporation or a sole
proprietorship, members and employees of a partnership or association, or other
organized groups of persons (the members of which may include other qualified
groups) provided that: (i) the group has at least 25 members of which at least
ten members participate in the initial purchase; (ii) the group has been in
existence for at least six months; (iii) the group has some purpose in addition
to the purchase of investment company shares at a reduced sales charge; (iv) the
group's sole organizational nexus or connection is not that the members are
credit card customers of a bank or broker-dealer, clients of an investment
adviser or security holders of a company; (v) the group agrees to provide to its
designated investment dealer at least annually access to the group's membership
by means of written communication or direct presentation to the membership at a
meeting; (vi) the group or its investment dealer will provide annual
certification, in form satisfactory to the Transfer Agent, that the group then
has at least 25 members and that at least ten members participated in group
purchases during the immediately preceding 12 calendar months; and (vii) the
group or its investment dealer will provide periodic certification, in form
satisfactory to the Transfer Agent, as to the eligibility of the purchasing
members of the group.
Members of a qualified group include: (i) any group that meets the
requirements stated above and which is a constituent member of a qualified
group; (ii) any individual purchasing for his or her own account who is carried
on the records of the group or on the records of any constituent member of the
group as being a good standing employee, partner, member or person of like
status of the group or constituent member; or (iii) any fiduciary purchasing
shares for the account of a member of a qualified group or a member's
beneficiary. For example, a qualified group could consist of a trade
association, which would have as its members individuals, sole proprietors,
partnerships and corporations. The members of the group would then consist of
the individuals, the sole proprietors and their employees, the members of the
partnership and their employees, and the corporations and their employees, as
well as the trustees of employee benefit trusts acquiring a Fund's shares for
the benefit of any of the foregoing.
Interested groups should contact their investment dealer or the
Distributor. The Trust reserves the right to revise the terms of or to suspend
or discontinue group sales with respect to shares of the Funds at any time.
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<PAGE>
NET ASSET VALUE TRANSFER PROGRAM. Investors may purchase Class A shares of
a Fund at net asset value to the extent that the investment represents the
proceeds from a redemption of a non-SunAmerica mutual fund in which the investor
either (a) paid a front-end sales load or (b) was subject to, or paid a CDSC on
the redemption proceeds. Nevertheless, the Distributor will pay a commission to
any dealer who initiates or is responsible for such an investment, in the amount
of .50% of the amount invested, subject, however, to forfeiture in the event of
a redemption during the first year from the date of purchase. In addition, it
is essential that a NAV Transfer Program Form accompany the New Account
Application to indicate that the investment is intended to participate in the
Net Asset Value Transfer Program (formerly, Exchange Program for Investment
Company Shares). This program may be revised or terminated without notice by
the Distributor. For current information, contact Shareholder/Dealer Services
at (800) 858-8850.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to "Shareholder Account Information" in each Prospectus
for certain information as to the redemption of Fund shares.
If the Trustees determine that it would be detrimental to the best
interests of the remaining shareholders of a Fund to make payment wholly or
partly in cash, the Trust, having filed with the SEC a notification of election
pursuant to Rule 18f- 1 on behalf of each of the Funds, may pay the redemption
price in whole, or in part, by a distribution in kind of securities from a Fund
in lieu of cash. In conformity with applicable rules of the SEC, the Funds are
committed to pay in cash all requests for redemption, by any shareholder of
record, limited in amount with respect to each shareholder during any 90-day
period to the lesser of (i) $250,000, or (ii) 1% of the net asset value of the
applicable Fund at the beginning of such period. If shares are redeemed in
kind, the redeeming shareholder would incur brokerage costs in converting the
assets into cash. The method of valuing portfolio securities is described below
in the section entitled "Determination of Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined.
The Distributor is authorized, as agent for the Funds, to offer to
repurchase shares that are presented by telephone to the Distributor by
investment dealers. Orders received by dealers must be at least $500. The
repurchase price is the net asset value per share of the applicable class of
shares of a Fund next-determined after the repurchase order is received, less
any applicable CDSC. Repurchase orders received by the Distributor after the
Fund's close of business will be priced based on the next business day's close.
Dealers may charge for their services in connection with the repurchase, but
neither the Funds nor the Distributor imposes any such charge. The offer to
repurchase may be suspended at any time.
EXCHANGE PRIVILEGE
Shareholders in any of the Funds may exchange their shares for the same
class of shares of any other Fund or other SunAmerica Mutual Funds that offer
such class at the respective net asset value per share. Before making an
exchange, a shareholder should obtain and review the prospectus of the fund
whose shares are being acquired. All exchanges are subject to applicable
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<PAGE>
minimum initial or subsequent investment requirements. Notwithstanding the
foregoing, shareholders may elect to make periodic exchanges on a monthly,
quarterly, semi-annual and annual basis through the Systematic Exchange Program.
Through this program, the minimum exchange amount is $25 and there is no fee for
exchanges made. All exchanges can be effected only if the shares to be acquired
are qualified for sale in the state in which the shareholder resides. 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. Further information about
the exchange privilege may be obtained by calling Shareholder/Dealer Services at
(800) 858-8850.
If a shareholder acquires Class A shares through an exchange from another
SunAmerica Mutual Fund where the original purchase of such fund's Class A shares
was not subject to an initial sales charge because the purchase was in excess of
$1 million, such shareholder will remain subject to the 1% CDSC, if any,
applicable to such redemptions. In such event, the period for which the
original shares were held prior to the exchange will be "tacked" with the
holding period of the shares acquired in the exchange for purposes of
determining whether the 1% CDSC is applicable upon a redemption of any of such
shares.
A shareholder who acquires Class B or Class II shares through an exchange
from another SunAmerica Mutual Fund will retain liability for any deferred sales
charge outstanding on the date of the exchange. In such event, the period for
which the original shares were held prior to the exchange will be "tacked" with
the holding period of the shares acquired in the exchange for purposes of
determining what, if any, CDSC is applicable upon a redemption of any of such
shares and the timing of conversion of Class B shares to Class A.
Because excessive trading (including short-term "market timing" trading)
can hurt a Fund's performance, each Fund may refuse any exchange sell order (1)
if it appears to be a market timing transaction involving a significant portion
of a Fund's assets or (2) from any shareholder account if previous use of the
exchange privilege is considered excessive. Accounts under common ownership or
control, including, but not limited to, those with the same taxpayer
identification number and those administered so as to redeem or purchase shares
based upon certain predetermined market indications, will be considered one
account for this purpose.
In addition, a Fund reserves the right to refuse any exchange purchase
order if, in the judgment of the Adviser, the Fund would be unable to invest
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. A shareholder's purchase exchange
may be restricted or refused if the Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincide with a "market timing" strategy may be
disruptive to the Fund and may therefore be refused.
DETERMINATION OF NET ASSET VALUE
The Trust is open for business on any day the NYSE is open for regular
trading. Shares are valued each day as of the close of regular trading on the
NYSE (generally 4:00 p.m., Eastern time). Each Fund calculates the net asset
value of each class of its shares separately by dividing
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the total value of each class's net assets by the shares outstanding of such
class. Investments for which market quotations are readily available are valued
at their price as of the close of regular trading on the New York Stock Exchange
for the day. All other securities and assets are valued at fair value following
procedures approved by the Trustees.
Stocks are stated at value based upon closing sales prices reported on
recognized securities exchanges or, for listed securities having no sales
reported and for unlisted securities, upon last reported bid prices. Non-
convertible bonds, debentures, other long-term debt securities and short-term
securities with original or remaining maturities in excess of 60 days, are
normally valued at prices obtained for the day of valuation from a bond pricing
service of a major dealer in bonds, when such prices are available; however, in
circumstances in which the Adviser deems it appropriate to do so, an over-the-
counter quotation may be used.
A Fund's liabilities, including proper accruals of expense items, are
deducted from total assets.
PERFORMANCE DATA
Each Fund may, with respect to each class thereof, advertise performance
data that reflects various measures of total return. An explanation of the data
presented and the methods of computation that will be used are as follows.
A Fund's performance may be compared to the historical returns of various
investments, performance indices of those investments or economic indicators,
including, but not limited to, stocks, bonds, certificates of deposit, money
market funds and U.S. Treasury Bills. Certain of these alternative investments
may offer fixed rates of return and guaranteed principal and may be insured.
Average annual total return is determined separately for Class A, Class B
and Class II shares in accordance with a formula specified by the SEC. Average
annual total return is computed by finding the average annual compounded rates
of return for the 1-, 5-, and 10-year periods or for the lesser included periods
of effectiveness. The formula used is as follows:
P(1 + T)/n/ = ERV
P = a hypothetical initial purchase 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).
The above formula assumes that:
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<PAGE>
a. The maximum sales load (i.e., either the front-end sales load in the
case of the Class A shares or Class II shares or the deferred sales
load that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of the Class
B or Class II shares) is deducted from the initial $1,000 purchase
payment;
b. All dividends and distributions are reinvested at net asset value; and
c. Complete redemption occurs at the end of the 1-, 5-, or 10- year
periods or fractional portion thereof with all nonrecurring charges
deducted accordingly.
Total returns for the Funds, exclusive of sales loads and 12b-1 fees, as of
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Inception Year-to-Date Inception to
Date 12/31/98 12/31/98
---- -------- --------
<S> <C> <C> <C>
Brazos Real Estate Securities Fund 12/31/96 -17.4% 6.7%
Brazos Small Cap Growth Fund 12/31/96 13.6% 75.5%
</TABLE>
COMPARISONS
Each Fund may compare its total return or yield to similar measures as
calculated by various publications, services, indices, or averages. Such
comparisons are made to assist in evaluating an investment in a Fund. The
following references 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
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<PAGE>
fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
(7) Morgan Stanley Capital International EAFE Index and World Index -
respectively, arithmetic, market value-weighted averages of the
performance of over 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East, and over 1,400
securities listed on the stock exchanges of these continents,
including North America.
(8) Goldman Sachs 100 Convertible Bond Index - currently includes 67 bonds
and 33 preferred. The original list of names was generated by
screening for convertible issues of 100 million or greater in market
capitalization. The index is priced monthly.
(9) Salomon Brothers GNMA Index - includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the
Government National Mortgage Association.
(10) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It
is a value-weighted, total return index, including approximately 800
issues with maturities of 12 years or greater.
(11) Salomon Brothers Broad Investment Grade Bond - is a market-weighted
index that contains approximately 4,700 individually priced investment
grade corporate bonds rated BBB or better, U.S. Treasury/agency issues
and mortgage pass through securities.
(12) Lehman Brothers Long-Term Treasury Bond - is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of
10 years or greater.
(13) NASDAQ Industrial Index - is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only
and does not include income.
(14) Value Line - composed of over 1,600 stocks in the Value Line
Investment Survey.
(15) Russell 2000 - composed of the 2,000 smallest stocks in the Russell
3000, a market value-weighted index of the 3,000 largest U.S.
publicly-traded companies.
(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.
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<PAGE>
(20) CDA Mutual Fund Report published by CDA Investment Technologies, Inc.
- analyzes price, current yield, risk, total return and average rate
of return (average compounded growth rate) over specified time periods
for the mutual fund industry.
(21) Mutual Fund Source Book published by Morningstar, Inc. - analyzes
price, yield, risk and total return for equity funds.
(22) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial
Times, Global Investor, Wall Street Journal and Weisenberger
Investment Companies Service - publications that rate fund performance
over specified time periods.
(23) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change over time
in the price of goods and services in major expenditure groups.
(24) Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates -
historical measure of yield, price and total return for common and
small company stock, long-term government bonds, U.S. Treasury bills
and inflation.
(25) Savings and Loan Historical Interest Rates - as published by the U.S.
Savings & Loan League Fact Book.
(26) Lehman Brothers Government/Corporate Index - a combination of the
Government and Corporate Bond Indices. The Government Index includes
public obligations of the U.S. Treasury, issues of Government
agencies, and corporate debt backed by the U.S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate
debt. Also included are Yankee Bonds and nonconvertible debt issued by
or guaranteed by foreign or international governments and agencies.
All issues are investment grade (BBB) or higher, with maturities of at
least one year and an outstanding par value of at least $100 million
for U.S. Government issues and $25 million for others. Any security
downgraded during the month is held in the index until month-end and
then removed. All returns are market value weighted inclusive of
accrued income.
(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
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<PAGE>
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 a Fund's 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 Fund to calculate its figures.
Specifically, a Fund may compare its performance to that of certain indices that
include securities with government guarantees. However, a Fund's shares do not
contain any such guarantees. In addition, there can be no assurance that a Fund
will continue its performance as compared to such other standards.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. Dividends from net investment income, if any, and
the excess of net realized long-term capital gains over net capital losses
("capital gain distributions"), if any, will be distributed to the registered
holders at least annually. With respect to capital gain distributions, each
Fund's policy is to offset any prior year capital loss carry forward against any
realized capital gains, and accordingly, no distribution of capital gains will
be made until gains have been realized in excess of any such loss carry forward.
DIVIDENDS AND DISTRIBUTIONS will be paid in additional Fund shares of the
same class based on the net asset value of the applicable class of shares at the
Fund's close of business on the dividend date or, unless the shareholder
notifies the Fund at least five business days prior to the payment date to
receive such distributions in excess of $10 in cash.
TAXES. Each Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as
each Fund so qualifies, each Fund (but not its shareholders) will not be subject
to federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to shareholders. Each Fund intends to
distribute substantially all of such income.
In order to be qualified as a RIC, each Fund generally must, among other
things, (a) derive at least 90% of its gross income from dividends, interest,
proceeds from loans of stock or securities and certain other related income; and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) 50%
of the market value of each Fund's assets is represented by cash, government
securities, securities of other RICs and other securities limited, in respect of
any one issuer, to an amount no greater than 5% of each Fund's assets and not
greater than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its assets is invested in the securities of
any one issuer (other than government securities or the securities of other
regulated investment companies).
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As a RIC, each Fund will not be subject to U.S. Federal income tax on its
income and capital gains that it distributes provided that it distributes to
shareholders at least 90% of its investment company taxable income for the
taxable year. Each Fund intends to distribute sufficient income to meet this
qualification requirement.
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, each Fund must distribute during each calendar
year (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses for the 12-month period ending on October
31 of the calendar year, and (3) all ordinary income and net capital gains for
the previous years that were not distributed during such years. To avoid
application of the excise tax, each Fund intends to make distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the calendar year if declared by each Fund
in October, November or December of such year, payable to shareholders of record
on a date in such month and paid by each Fund during January of the following
year. Any such distributions paid during January of the following year will be
taxable to shareholders as of such December 31, rather than the date on which
the distributions are received.
Dividends paid by each Fund from its ordinary income and distributions of
each Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income, whether or not reinvested. The portion of such dividends
received from each Fund that will be eligible for the dividends received
deduction for corporations will be determined on the basis of the amount of each
Fund's gross income, exclusive of capital gains from the sales of stock or
securities, which is derived as dividends from domestic corporations, other than
certain tax-exempt corporations and certain real estate investment trusts, and
will be designated as such in a written notice to shareholders mailed not later
than 60 days after the end of each fiscal year.
Any net capital gains (i. e., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 20% with respect to assets held for more than 12 months. The
maximum capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
be treated as short-term capital gain, taxable at the same rates as ordinary
income if the shares were held for not more than 12 months and capital gain
taxable at the maximum rate of 20% if such shares were held for more than 12
months. In the case of a corporation, any such capital gain will be treated as
long-term capital gain, taxable at the same rates as ordinary income, if such
shares were held for more than 12 months. Any such loss will be treated as
long-term capital loss if such shares were held for more than 12 months. A loss
recognized on the sale
B-49
<PAGE>
or exchange of shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any long-term capital gains distribution
with respect to such shares.
Generally, any loss realized on a sale or exchange of shares of a Fund will
be disallowed if other shares of such Fund are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Under certain circumstances (such as the exercise of an exchange
privilege), the tax effect of sales load charges imposed on the purchase of
shares in a regulated investment company is deferred if the shareholder does not
hold the shares for at least 90 days.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which a Fund will be subject, since the amount of that Fund's
assets to be invested in various countries is not known. It is not anticipated
that any Fund will qualify to pass through to its shareholders the ability to
claim as a foreign tax credit their respective shares of foreign taxes paid by
such Fund.
Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time a Fund accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time such Fund actually collects such receivables or pays such liabilities
are treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts, sale of currencies or dispositions
of debt securities denominated in a foreign currency attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition generally also are
treated as ordinary gain or loss. These gains, referred to under the Code as
"Section 988" gains or losses, increase or decrease the amount of each Funds
investment company taxable income available to be distributed to its
shareholders as ordinary income.
The Code includes special rules applicable to the listed non-equity
options, regulated futures contracts, and options on futures contracts that a
Fund may write, purchase or sell. Such options and contracts are classified as
Section 1256 contracts under the Code. The character of gain or loss resulting
from the sale, disposition, closing out, expiration or other termination of
Section 1256 contracts, except forward foreign currency exchange contracts, is
generally treated as long-term capital gain or loss to the extent of 60% thereof
and short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or
loss"). Such contracts, when held by a Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for Federal income tax purposes ("marked-to-market"). Over-
the-counter options are not classified as Section 1256 contracts and are not
subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by a Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. When call
options written, or put options purchased, by a Fund are exercised, the gain or
loss realized on the sale of the underlying securities may be either short-term
or long-term, depending
B-50
<PAGE>
on the holding period of the securities. In determining the amount of gain or
loss, the sales proceeds are reduced by the premium paid for the puts or
increased by the premium received for calls.
A substantial portion of each Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle consisting
of a listed option, futures contract, or option on a futures contract and of
U.S. Government securities would constitute a "mixed straddle" under the Code.
The Code generally provides with respect to straddles (i) "loss deferral" rules
which may postpone recognition for tax purposes of losses from certain closing
purchase transactions or other dispositions of a position in the straddle to the
extent of unrealized gains in the offsetting position, (ii) "wash sale" rules
which may postpone recognition for tax purposes of losses where a position is
sold and a new offsetting position is acquired within a prescribed period, (iii)
"short sale" rules which may terminate the holding period of securities owned by
a Fund when offsetting positions are established and which may convert certain
losses from short-term to long-term, and (iv) "conversion transaction" rules
which recharacterize capital gains as ordinary income. The Code provides that
certain elections may be made for mixed straddles that can alter the character
of the capital gain or loss recognized upon disposition of positions which form
part of a straddle. Certain other elections also are provided in the Code; no
determination has been reached to make any of these elections.
Code Section 1259 requires the recognition of gain (but not loss) if a Fund
makes a constructive sale" of an appreciated financial position (e.g., stock).
A Fund generally will be considered to make a constructive sale of an
appreciated financial position if it sells the same or substantially identical
property short, enters into a futures or forward contract to deliver the same or
identical property short, or enters into other similar transactions.
The Growth and Income Fund may purchase debt securities (such as zero-
coupon or pay-in-kind securities) that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as earned by a
Fund and therefore is subject to the distribution requirements of the Code.
Because the original issue discount earned by the Fund in a taxable year may not
be represented by cash income, the Fund may have to dispose of other securities
and use the proceeds to make distributions to shareholders.
A Fund may be required to backup withhold U.S. Federal income tax at the
rate of 31% of all taxable distributions payable to shareholders who fail to
provide their correct taxpayer identification number or fail to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against a shareholder's U.S. Federal
income tax liability.
Ordinary income dividends paid by a Fund to shareholders who are non-
resident aliens or foreign entities generally will be subject to a 30% United
States withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
B-51
<PAGE>
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations currently in effect.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes. In addition, foreign investors
should consult with their own tax advisors regarding the particular tax
consequences to them of an investment in each Fund. Qualification as a
regulated investment company under the Code for tax purposes does not entail
government supervision of management and investment policies.
RETIREMENT PLANS
Shares of each Fund are eligible to be purchased in conjunction with
various types of qualified retirement plans. The summary below is only a brief
description of the Federal income tax laws for each plan and does not purport to
be complete. Further information or an application to invest in shares of a
Fund by establishing any of the retirement plans described below may be obtained
by calling Retirement Plans at (800) 858-8850. However, it is recommended that
a shareholder considering any retirement plan consult a tax adviser before
participating.
PENSION AND PROFIT-SHARING PLANS. Sections 401(a) and 401(k) of the Code permit
business employers and certain associations to establish pension and profit
sharing plans for employees. Shares of a Fund may be purchased by those who
would have been covered under the rules governing old H. R. 10 (Keogh) Plans, as
well as by corporate plans. Each business retirement plan provides tax
advantages for owners and participants. Contributions made by the employer are
tax-deductible, and participants do not pay taxes on contributions or earnings
until withdrawn.
TAX-SHELTERED CUSTODIAL ACCOUNTS. Section 403(b)(7) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code, to purchase
shares of a Fund and, subject to certain limitations, exclude the amount of
purchase payments from gross income for tax purposes.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA). Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program, including
Simplified Employee Pension Plans, commonly referred to as SEP-IRA. These IRAs
are subject to limitations with respect to the amount that may be contributed,
the eligibility of individuals, and the time in which distributions would be
allowed to commence. In addition, certain distributions from some other types
of retirement plans may be placed on a tax-deferred basis in an IRA.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION. This plan was introduced by a
provision of the Tax Reform Act of 1986 as a unique way for small employers to
provide the benefit of retirement planning for their employees. Contributions
are deducted from the employee's paycheck before tax deductions and are
deposited into an IRA by the employer. These contributions are not included in
the employee's income and therefore are not reported or deducted on his or her
tax return.
B-52
<PAGE>
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES ("SIMPLE IRA"). This plan was
introduced by a provision of the Small Business Job Protection Act of 1996 to
provide small employers with a simplified tax-favored retirement plan.
Contributions are deducted from the employee's paycheck before taxes and are
deposited into a SIMPLE IRA by the employer, who must make either matching
contributions or non-elective contributions. Contributions are tax-deductible
for the employer and participants do not pay taxes on contributions on earnings
until they are withdrawn.
ROTH IRA. This plan, introduced by Section 302 of the Taxpayer Relief Act of
1997, generally permits individuals with adjusted gross income of up to $95,000,
and married couples with joint adjusted gross income of up to $150,000, to
contribute to a "Roth IRA." Contributions are not tax-deductible, but
distribution of assets (contributions and earnings) held in the account for at
least five years may be distributed tax-free under certain qualifying
conditions.
EDUCATION IRA. Established by the Taxpayer Relief Act of 1997, under Section
530 of the Code, this plan permits individuals to contribute to an IRA on behalf
of any child under the age of 18. Contributions are not tax-deductible but
distributions are tax-free if used for qualified educational expenses.
DESCRIPTION OF SHARES
Ownership of the Trust is represented by transferable shares of beneficial
interest. The Agreement and Declaration of Trust of the Trust (the "Declaration
of Trust") permits the Trustees to issue an unlimited number of full and
fractional shares, $.00l par value, and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests of the Trust.
Currently, four series of shares of the Trust have been authorized pursuant
to the Declaration of Trust: the Brazos Micro Cap Growth Fund, the Brazos Small
Cap Growth Fund, the Brazos Real Estate Securities Fund and the Brazos Growth
Fund. The Brazos Small Cap Growth Fund, Brazos Real Estate Securities Fund and
Brazos Growth Fund have been divided into four classes of shares, Class A, Class
B, Class II and Class Y shares. The Trustees may authorize the creation of
additional series and classes of shares so as to be able to offer to investors
additional investment portfolios within the Trust that would operate
independently from the Trust's present portfolios, or to distinguish among
shareholders, as may be necessary, to comply with future regulations or other
unforeseen circumstances. Each series of the Trust's shares represents the
interests of the shareholders of that series in a particular portfolio of Trust
assets. In addition, the Trustees may authorize the creation of additional
classes of shares in the future, which may have fee structures different from
those of existing classes and/or may be offered only to certain qualified
investors.
Shareholders are entitled to a full vote for each full share held. The
Trustees have terms of unlimited duration (subject to certain removal
procedures) and have the power to alter the number of Trustees, and appoint
their own successors, provided that at all times at least a majority of the
Trustees have been elected by shareholders. The voting rights of shareholders
are not cumulative, so that holders of more than 50% of the shares voting can,
if they choose, elect
B-53
<PAGE>
all Trustees being elected, while the holders of the remaining shares would be
unable to elect any Trustees. Although the Trust need not hold annual meetings
of shareholders, the Trustees may call special meetings of shareholders for
action by shareholder vote as may be required by the 1940 Act or the Declaration
of Trust. Also, a shareholders meeting for the purpose of electing or removing
trustees must be called, if so requested by the holders of record of 10% or more
of the outstanding shares of the Trust. In addition, the Trustees may be removed
by the action of the holders of record of two-thirds or more of the outstanding
shares. All series of shares will vote with respect to certain matters, such as
election of Trustees. When all series of shares are not affected by a matter to
be voted upon, such as approval of investment advisory agreements or changes in
a Fund's policies, only shareholders of the series affected by the matter may be
entitled to vote.
All classes of shares of a given Fund are identical in all respects, except
that (i) each class may bear differing amounts of certain class-specific
expenses, (ii) Class A shares are subject to an initial sales charge, a
distribution fee and an ongoing account maintenance and service fee, (iii) Class
B shares are subject to a CDSC, a distribution fee and an ongoing account
maintenance and service fee, (iv) Class II shares are subject to an initial
sales charge, a CDSC, a distribution fee and an ongoing account maintenance and
service fee; (v) Class B shares convert automatically to Class A shares on the
first business day of the month seven years after the purchase of such Class B
shares, (vi) each of Class A, B, and II has voting rights on matters that
pertain to the Rule 12b-1 plan adopted with respect to such class, except that
under certain circumstances, the holders of Class B shares may be entitled to
vote on material changes to the Class A Rule 12b-1 plan, (vii) Class Y shares
are sold without a sales charge or Rule 12b-1 distribution fee and have a
minimum initial investment requirement of $1,000,000 or over, and (viii) each
class of shares will be exchangeable only into the same class of shares of any
of the other Funds or other SunAmerica Mutual Funds that offers that class
except that Class II shares will be exchangeable into Class C shares of the
other SunAmerica Mutual Funds that do not offer Class II. All shares of the
Trust issued and outstanding and all shares offered by each Prospectus when
issued are fully paid and non-assessable. Shares have no preemptive or other
subscription rights and are freely transferable on the books of the Trust. In
addition, shares have no conversion rights, except as described above.
The Declaration of Trust provides that no Trustee of the Trust is liable to
the Trust or to a shareholder, nor is any Trustee liable to any third persons in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties. It also provides that all third persons shall look
solely to the Trust's property for satisfaction of claims arising in connection
with the affairs of the Trust. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Trust.
The Trust shall continue, without limitation of time, subject to the provisions
in the Declaration of Trust concerning termination by action of the
shareholders.
Under Delaware law, shareholders of a trust, such as the Trust, in certain
circumstances may be held personally liable as partners for the obligations of
the trust. However, the Declaration of Trust, pursuant to which the Trust was
organized, contains an express disclaimer of shareholder liability for acts or
obligations of the Trust. The Declaration of Trust also
B-54
<PAGE>
provides for indemnification out of the Trust's property for any shareholder
held personally liable for any Trust obligation. Thus the risk of a shareholder
being personally liable as a partner for obligations of the Trust, is limited to
the unlikely circumstance in which the Trust itself would be unable to meet its
obligations.
ADDITIONAL INFORMATION
COMPUTATION OF OFFERING PRICE PER SHARE
---------------------------------------
The following is the offering price calculation for each Class of shares of
the Funds, based on the value of each Fund's net assets as of ____________,
1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Brazos Small Cap Growth Fund Brazos Real Estate Securities Fund
---------------------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Class A Class B Class II Class A Class B Class II
------- ------- -------- ------- -------- --------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets
- --------------------------------------------------------------------------------------------------------------
Number of Shares
Outstanding
- --------------------------------------------------------------------------------------------------------------
Net Asset Value
Per Share (net
assets divided
by number of
shares)
- --------------------------------------------------------------------------------------------------------------
Sales Charge for
Class A Shares:
5.75% of
offering price
(6.10% of net
asset value per
share)
- --------------------------------------------------------------------------------------------------------------
for Class II
Shares: 1.00%
of offering
price (1.01%
of net asset
value per
share)
- --------------------------------------------------------------------------------------------------------------
Offering Price
- --------------------------------------------------------------------------------------------------------------
</TABLE>
B-55
<PAGE>
<TABLE>
<CAPTION>
Brazos Growth Fund
------------------
- --------------------------------------------------------------------------------
Class A Class B Class II
------- ------- --------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Assets
- --------------------------------------------------------------------------------
Number of Shares Outstanding
- --------------------------------------------------------------------------------
Net Asset Value Per Share
(net assets divided by
number of shares)
- --------------------------------------------------------------------------------
Sales Charge for Class A
Shares: 5.75% of offering
price (6.10% of net asset
value per share)
- --------------------------------------------------------------------------------
for Class II Shares: 1.00%
of offering price (1.01%
of net asset value per
share)
- --------------------------------------------------------------------------------
Offering Price
- --------------------------------------------------------------------------------
</TABLE>
REPORTS TO SHAREHOLDERS. The Trust sends audited annual and unaudited
semi-annual reports to shareholders of each of the Funds. In addition, the
Transfer Agent sends a statement to each shareholder having an account
directly with the Trust to confirm transactions in the account.
CUSTODIAN AND TRANSFER AGENCY. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, MA 02171, serves as custodian and as Transfer
Agent for the Funds and in those capacities maintains certain financial and
accounting books and records pursuant to agreements with the Trust.
Transfer agent functions are performed for State Street, by National
Financial Data Services, P.O. Box 419572, Kansas City, MO 64141-6572, an
affiliate of State Street.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. PricewaterhouseCoopers LLP,
1177 Avenue of the Americas, New York, NY 10036, has been selected to serve
as the Trust's independent accountants and in that capacity examines the
annual financial statements of the Trust. The firm of Drinker Biddle &
Reath LLP, 1345 Chestnut Street, Philadelphia PA 19107, has been selected
as legal counsel to the Trust.
FINANCIAL STATEMENTS
Set forth following this Statement of Additional Information are the
financial statements of Brazos Mutual Funds with respect to Registrant's fiscal
year ended November 30, 1998.
B-56
<PAGE>
APPENDIX
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
AAA Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected 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 rated Aa 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 that make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds rated A possess many favorable investment attributes and are
considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the
future.
BAA Bonds rated Baa 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 Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds rated B generally lack characteristics of desirable investments.
Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds rated Caa are of poor standing. Such issues may be in default,
or there may be present elements of danger with respect to principal
or interest.
Appendix-1
<PAGE>
CA Bonds rated Ca represent obligations that are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings.
C Bonds rated C are the lowest-rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of the generic rating
category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition "
commercial paper" or is exempt from registration under the Securities Act.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidences by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while
Appendix-2
<PAGE>
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks that may be inherent in certain areas; (93) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by management of
obligations that may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
Appendix-3
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation: (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and
C the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposure to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions that
could lead to inadequate capacity to meet timely interest and
principal payment. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default and
is dependent upon favorable business, financial and economic
conditions to meet timely
Appendix-4
<PAGE>
payments of interest and repayments of principal. In the event of
adverse business, financial or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
Plus (+) or minus (-): The ratings of AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within these
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the credit
Appendix-5
<PAGE>
worthiness of the obligor but do not take into account currency exchange and
related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of not more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest.
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues
designated "A-1" that are determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effect of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
Appendix-6
<PAGE>
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Appendix-7
<PAGE>
PART C
FORM N-1A
OTHER INFORMATION
Item 23. Exhibits
(a) (1) Certificate of Trust/1/
(2) Agreement and Declaration of Trust/2/
(3) Amendment to Agreement and Declaration of Trust
dated May 13, 1999
(b) Bylaws/2/
Amended Bylaws/6/
(c) Not Applicable
(d) (1) Investment Advisory Contract re: BRAZOS Small Cap
Growth Portfolio and BRAZOS Real Estate Securities
Portfolio/2/
(2) Investment Advisory Contract re: BRAZOS Micro Cap
Growth Portfolio/5/
(3) Investment Advisory Contract re: BRAZOS Growth
Portfolio/7/
(4) Form of Investment Advisory Contract dated June 25
1999 between the Registrant and John McStay
Investment Counsel, L.L.C. re: BRAZOS Small Cap
Growth Portfolio
(5) Form of Investment Advisory Contract dated June 25
1999 between the Registrant and John McStay
Investment Counsel, L.L.C. re: BRAZOS Real Estate
Securities Portfolio
(6) Form of Investment Advisory Contract dated June 25
1999 between the Registrant and John McStay
Investment Counsel, L.L.C. re: BRAZOS Micro Cap
Growth Portfolio
(7) Form of Investment Advisory Contract dated June 25
1999 between the Registrant and John McStay
Investment Counsel, L.L.C. re: BRAZOS Growth
Portfolio
(e) (1) Underwriting Contract and Selected Dealer
Agreement/7/
(2) Form of Distribution Agreement dated June 25, 1999
between the Registrant and SunAmerica Capital
Services, Inc. for Class A, B and II Shares
(3) Form of Selling Agreement between the Registrant
and SunAmerica Capital Services, Inc.
(f) Not Applicable
(g) (1) Custodian Agreement/7/
(2) Form of Custodian Contract between the Registrant
and State Street Bank and Trust Company
(h) (1) Administration Agreement/7/
(2) Transfer Agency Agreement/7/
(3) Accounting Services Agreement/7/
(4) Fulfillment Agreement/7/
(5) Form of Transfer Agency and Service Agreement
between the Registrant and State Street Bank and
Trust Company
<PAGE>
(6) Form of Administration Agreement dated June 25,
1999 between the Registrant and SunAmerica Asset
Management Corp.
(7) Form of Service Agreement dated June 25, 1999
between the Registrant and SunAmerica Fund
Services, Inc.
(i) Opinion and Consent of Counsel
(j) Consent of Independent Accountant
(k) Not Applicable
(l) Subscription Agreement/3/
(m) (1) Form of Distribution Plan dated June 25, 1999 for
the Class A Shares
(2) Form of Distribution Plan dated June 25, 1999 for
the Class B Shares
(2) Form of Distribution Plan dated June 25, 1999 for
the Class II Shares
(n) Financial Data Schedules as of November 30, 1998, re:
BRAZOS Real Estate Securities Portfolio, BRAZOS Small
Cap Growth Portfolio and BRAZOS Micro Cap Growth
Portfolio./8/
(o) Plan Pursuant to Rule 18f-3 for Operation of Multi-
Series System dated June 25, 1999
/1/ Previously filed with the Registration Statement on Form N-1A on
October 28, 1996 and incorporated herein by reference.
/2/ Previously filed with Pre-Effective Amendment No. 1 to the
Registration Statement on December 2, 1996 and incorporated herein by reference.
/3/ Previously filed with Pre-Effective Amendment No. 2 to the
Registration Statement on December 17, 1996 and incorporated herein by
reference.
/4/ Previously filed with Post-Effective Amendment No. 1 to the
Registration Statement on June 27, 1997 and incorporated herein by reference.
/5/ Previously filed with Post-Effective Amendment No. 2 to the
Registration Statement on October 15, 1997 and incorporated herein by reference.
/6/ Previously filed with Post-Effective Amendment No. 3 to the
Registration Statement on February 17, 1998 and incorporated herein by
reference.
/7/ Previously filed with Post-Effective Amendment No. 4 to the
Registration Statement on October 13, 1998.
/8/ Previously filed with Post-Effective Amendment No. 4 to the
Registration Statement on February 12, 1999.
Item 24. Persons Controlled by or Under Common Control with Registrant
Registrant is not controlled by or under common control with any
person.
Item 25. Indemnification
C-2
<PAGE>
Reference is made to Article VII of the Registrant's amended Agreement
and Declaration of Trust, which is filed as Exhibit (a)(3) hereto.
Registrant hereby also makes the undertaking consistent with Rule 484
under the Securities Act of 1933, as amended.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Indemnification of the Registrant and its investment adviser against
certain losses with respect to the Brazos Small Cap Growth, Brazos
Real Estate Securities, Brazos Micro Cap Growth, and Brazos Growth
Portfolios is provided for in Section 7 of the Forms of Investment
Advisory Agreement with John McStay Investment Counsel, L.L.C., each
of which is filed as Exhibits (d)(4), (d)(5), (d)(6) and (d)(7),
respectively, hereto.
Indemnification of the Registrant, its distributor and each person, if
any, who controls the distributor against certain losses is provided
for in Section 5 of the Form of Distribution Agreement, filed as
Exhibit (e)(2) hereto. Indemnification of the Registrant, its
distributor and the distributor's sales representatives against
certain losses is provided for in Section 6 of the Form of Selling
Agreement, filed as Exhibit (e)(3) hereto.
Indemnification of the Registrant, its custodian and transfer agent
against certain losses is provided for, respectively, in Section 3.9
of the Form of Custodian Contract, and Section 6 of the Form of Data
Access Services Addendum to Custodian Agreement, both of which are
filed as Exhibit (g)(2) hereto, and Section 6 of the Form of Transfer
Agency and Service Agreement, filed as Exhibit (h)(5) hereto.
Indemnification of the Registrant, its administrator and its
directors, officers, employees and agents against certain losses is
provided for in Article 5 of the Form of Administration Agreement
filed as Exhibit (h)(6) hereto. Section 13 of the Form of Service
Agreement filed as Exhibit (h)(7) hereto provides for the
indemnification of the Registrant and its shareholder servicing agent
against certain losses and against failure to comply with the terms of
the Agreement.
C-3
<PAGE>
The Registrant has obtained from a major insurance carrier a
directors' and officers' liability policy covering certain types of
errors and omissions.
Item 26. Business and Other Connections of Investment Adviser
John McStay Investment Counsel, L.L.C., investment adviser to the
Brazos Growth, Micro Cap Growth, Small Cap Growth, Real Estate
Securities, and Growth Portfolios, is a registered investment adviser
under the Investment Advisers Act of 1940.
To Registrant's knowledge, none of the directors or senior executive
officers of, John McStay Investment Counsel, L.L.C., except those set
forth below, is, or has been at any time during Registrant's past two
fiscal years, engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain directors and
officers of John McStay Investment Counsel, L.L.C. also hold various
positions with, and engage in business for, their respective
affiliates. Set forth below are the names and principal businesses of
the directors and certain of the senior executive officers of John
McStay Investment Counsel, L.L.C. who are or have been engaged in any
other business, profession, vocation or employment of a substantial
nature.
<TABLE>
<CAPTION>
Position with
John McStay Investment Other Business Type of
Name Counsel, L.L.C. Connections Business
- ---- --------------- ----------- --------
<S> <C> <C> <C>
Peter Harbeck Director Director and President, Investment
SunAmerica Asset Management
Management Corp.;
Director, SunAmerica
Capital Inc.; Director
and President, SunAmerica
Fund Services, Inc.;
President, Anchor Series
Trust and AST
Win Neuger Director Senior Vice President, Insurance and
and Chief Investment Financial services
Officer, American
International Group, Inc.
and Chief Executive
Officer and Director, AIG
Global Investment Group,
</TABLE>
C-4
<PAGE>
Inc.
Item 27. Principal Underwriters
(a) The principal underwriter of the Registrant's Class A, B and II shares,
SunAmerica Capital Services, Inc., also acts as principal underwriter for:
SunAmerica Equity Funds
SunAmerica Income Funds
SunAmerica Money Market Funds, Inc.
SunAmerica Strategic Investment Services, Inc.
Style Select Series, Inc.
The principal underwriter for the Registrant's Class Y shares, Rafferty
Capital Markets, Inc. ("Rafferty"), serves as principal underwriter of the
shares of the Badgley Funds, Home State Funds, Potomac Funds, Texas Capital
Value Funds, Golf Associated Fund, Bremer Funds and the Kirr, Marbach
Funds.
(b) The following persons are the officers and directors of SunAmerica Capital
Services, Inc., the principal underwriter of Registrant's Class A, B and II
shares:
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and Offices with
Business Address Underwriter. Registrant
---------------- ----------- ----------
<S> <C> <C>
Peter A. Harbeck Director None
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
J. Steven Neamtz President and Director None
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Robert M. Zakem Executive Vice President, Vice President and Assistant
The SunAmerica Center General Counsel, Assistant Secretary
733 Third Avenue Secretary and Director
New York, NY 10017-3204
Susan L. Harris Secretary None
SunAmerica, Inc.
1 SunAmerica Center
Los Angeles, CA 90067-6022
Debbie Potash-Turner Controller None
The SunAmerica Center
733 Third Avenue
</TABLE>
C-5
<PAGE>
New York, NY 10017-3204
The following persons are the officers of Rafferty Capital Markets, Inc., the
principal underwriter of Registrant's Class Y shares:
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and Offices with
Business Address Rafferty Capital Markets, Inc. Registrant
---------------- ------------------------------ ----------
<S> <C> <C>
Thomas A. Mulrooney President None
Stephen P. Sprague Secretary and None
Chief Financial Officer
</TABLE>
(c) None (for either principal underwriter).
Item 28. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder will be maintained in the physical possession
of the Registrant, Brazos Mutual Funds, 5949 Sherry Lane, Suite 1600,
Dallas, TX 75225; the Registrant's Adviser, John McStay Investment
Counsel, LLC, 5949 Sherry Lane, Dallas, TX 75225; the Registrant's
Transfer and Administrative Agents, State Street Bank and Trust
Company, 225 Franklin Street, Boston, MA 02110, and SunAmerica Asset
Management Corp., The SunAmerica Center, 733 Third Avenue, New York,
NY 10017; and the Registrant's Custodian Bank, State Street Bank and
Trust Company, 225 Franklin Street, Boston, MA 02110.
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of the removal of a Trustee or
Trustees when requested in writing to do so by the holders of at least
10% of the Registrant's outstanding shares and in connection with such
meeting to comply with the provisions of Section 16(c) of the
Investment Company Act of 1940, as amended, relating to shareholder
communications.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to whom a
prospectus is delivered.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(a) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment No. 6 to the Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of
Dallas, and State of Texas on the 1st day of June, 1999.
/s/ Brazos Mutual Funds
-----------------------
Registrant
By: /s/ Dan L. Hockenbrough *
-------------------------
Dan L. Hockenbrough
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 6 to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
/s/ George Gau*
- -------------------------
George Gau Trustee June 1, 1999
/s/ Dan L. Hockenbrough *
- -------------------------
Dan L. Hockenbrough Trustee, Chief Executive June 1, 1999
And Financial Officer
/s/ John H. Massey *
- -------------------------
John H. Massey Trustee June 1, 1999
/s/ David M. Reichert *
- -------------------------
David M. Reichert Trustee June 1, 1999
* Pursuant to authority granted in a Power of Attorney filed with Post-Effective
Amendment No. 6
By: /s/ Audrey C. Talley
- ------------------------
Audrey C. Talley
Attorney-in-Fact
<PAGE>
POWER OF ATTORNEY
The undersigned hereby appoints each of Audrey Talley and Daniel
Hockenbrough as attorney-in-fact and agent, each individually in all capacities,
to execute, and to file any of the documents referred to below relating to the
registration of Brazos Mutual Funds (the "Fund") as an investment company under
the Investment Company Act of 1940, as amended, (the "Act") and the Fund's
Registration Statement on Form N-1A under the Act and under the Securities Act
of 1933, including any and all amendments thereto, covering the registration of
the Fund as an investment company and the sale of shares of the series of the
Fund, including all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority, including applications for
exemptive order rulings. The undersigned grants to said attorney full authority
to do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes, as he could do if personally present, thereby
ratifying all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
The undersigned hereby executes this Power of Attorney as of this 13th day
of May, 1999.
/s/ David Reichert
------------------
Name: David Reichert
Title: Trustee
<PAGE>
POWER OF ATTORNEY
The undersigned hereby appoints each of Audrey Talley and Daniel
Hockenbrough as attorney-in-fact and agent, each individually in all capacities,
to execute, and to file any of the documents referred to below relating to the
registration of Brazos Mutual Funds (the "Fund") as an investment company under
the Investment Company Act of 1940, as amended, (the "Act") and the Fund's
Registration Statement on Form N-1A under the Act and under the Securities Act
of 1933, including any and all amendments thereto, covering the registration of
the Fund as an investment company and the sale of shares of the series of the
Fund, including all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority, including applications for
exemptive order rulings. The undersigned grants to said attorney full authority
to do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes, as he could do if personally present, thereby
ratifying all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
The undersigned hereby executes this Power of Attorney as of this 13th day
of May, 1999.
/s/ John Massey
---------------
Name: John Massey
Title: Trustee
<PAGE>
POWER OF ATTORNEY
The undersigned hereby appoints Audrey Talley as attorney-in-fact and
agent, individually in all capacities, to execute, and to file any of the
documents referred to below relating to the registration of Brazos Mutual Funds
(the "Fund") as an investment company under the Investment Company Act of 1940,
as amended, (the "Act") and the Fund's Registration Statement on Form N-1A under
the Act and under the Securities Act of 1933, including any and all amendments
thereto, covering the registration of the Fund as an investment company and the
sale of shares of the series of the Fund, including all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, including applications for exemptive order rulings. The undersigned
grants to said attorney full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes, as she could
do if personally present, thereby ratifying all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
The undersigned hereby executes this Power of Attorney as of this 13th day
of May, 1999.
/s/ Daniel Hockenbrough
-----------------------
Name: Daniel Hockenbrough
Title: Chief Financial Officer
<PAGE>
POWER OF ATTORNEY
The undersigned hereby appoints each of Audrey Talley and Daniel
Hockenbrough as attorney-in-fact and agent, each individually in all capacities,
to execute, and to file any of the documents referred to below relating to the
registration of Brazos Mutual Funds (the "Fund") as an investment company under
the Investment Company Act of 1940, as amended, (the "Act") and the Fund's
Registration Statement on Form N-1A under the Act and under the Securities Act
of 1933, including any and all amendments thereto, covering the registration of
the Fund as an investment company and the sale of shares of the series of the
Fund, including all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority, including applications for
exemptive order rulings. The undersigned grants to said attorney full authority
to do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes, as he could do if personally present, thereby
ratifying all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
The undersigned hereby executes this Power of Attorney as of this 13th day
of May, 1999.
/s/ George Gau
--------------
Name: George Gau
Title: Trustee
<PAGE>
EXHIBIT INDEX
Exhibit No. Item
- ----------- ----
(a) (3) Amendment to Agreement and Declaration of Trust dated May
13, 1999
(d) (4) Form of Investment Advisory Contract dated June 25 1999
between the Registrant and John McStay Investment Counsel,
L.L.C. re: BRAZOS Small Cap Growth Portfolio
(5) Form of Investment Advisory Contract dated June 25 1999
between the Registrant and John McStay Investment Counsel,
L.L.C. re: BRAZOS Real Estate Securities Portfolio
(6) Form of Investment Advisory Contract dated June 25 1999
between the Registrant and John McStay Investment Counsel,
L.L.C. re: BRAZOS Micro Cap Growth Portfolio
(7) Form of Investment Advisory Contract dated June 25 1999
between the Registrant and John McStay Investment Counsel,
L.L.C. re: BRAZOS Growth Portfolio
(e) (2) Form of Distribution Agreement dated June 25, 1999 between
the Registrant and SunAmerica Capital Services, Inc. for
Class A, B and II Shares
(3) Form of Selling Agreement between the Registrant and
SunAmerica Capital Services, Inc.
(g) (2) Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company
(h) (5) Form of Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company
(6) Form of Administration Agreement dated June 25, 1999 between
the Registrant and SunAmerica Asset Management Corp.
(7) Form of Service Agreement dated June 25, 1999 between the
Registrant and SunAmerica Fund Services, Inc.
(i) (1) Opinion and Consent of Counsel
(j) (1) Consent of Independent Accountant
<PAGE>
(m) (1) Form of Distribution Plan dated June 25, 1999 for the Class
A Shares
(2) Form of Distribution Plan dated June 25, 1999 for the Class
B Shares
(3) Form of Distribution Plan dated June 25, 1999 for the Class
II Shares
(o) (1) Plan Pursuant to Rule 18f-3 for Operation of Multi-Series
System dated June 25, 1999
-2-
<PAGE>
EXHIBIT (A)(3)
Effective as of
May 13, 1999
AGREEMENT AND DECLARATION OF TRUST
==================================
of
BRAZOS MUTUAL FUNDS
a Delaware Business Trust
Principal Place of Business:
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
ARTICLE I. NAME AND DEFINITIONS...................................... 1
Section 1. Name.................................................... 1
Section 2. Definitions............................................. 1
(a) The "Trust.............................................. 1
(b) The "Trust Property..................................... 1
(c) "Trustees............................................... 1
(d) "Shares................................................. 1
(e) "Shareholder............................................ 2
(f) "Person................................................. 2
(g) The "1940 Act........................................... 2
(h) The terms "Commission" and "Principal Underwriter....... 2
(i) "Declaration of Trust................................... 2
(j) "By-Laws................................................ 2
(k) The term "Interested Person............................. 2
(l) "Investment Manager..................................... 2
(m) "Series................................................. 2
ARTICLE II. PURPOSE OF TRUST.......................................... 2
ARTICLE III. SHARES.................................................... 2
Section 1. Division of Beneficial Interest......................... 2
Section 2. Ownership of Shares..................................... 3
Section 3. Investments in the Trust................................ 3
Section 4. Status of Shares and Limitation of Personal Liability... 3
Section 5. Power of Board of Trustees to Change Provisions
Relating to Shares...................................... 4
Section 6. Establishment and Designation of Shares................. 4
(a) Assets Held with Respect to a Particular Series......... 4
(b) Liabilities Held with Respect to a Particular Series.... 5
(c) Dividends, Distributions, Redemptions, and Repurchases.. 5
(d) Voting.................................................. 5
(e) Equality................................................ 6
(f) Fractions............................................... 6
(g) Exchange Privilege...................................... 6
(h) Combination of Series................................... 6
(i) Elimination of Series................................... 6
(j) Conversion Rights....................................... 6
ARTICLE IV. THE BOARD OF TRUSTEES..................................... 6
Section 1. Number, Election and Tenure............................. 6
Section 2. Effect of Death, Resignation, etc. of a Trustee......... 7
Section 3. Powers.................................................. 7
Section 4. Payment of Expenses by the Trust........................ 10
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
Section 5. Ownership of Assets of the Trust........................ 10
Section 6. Service Contracts....................................... 10
ARTICLE V. SHAREHOLDERS' VOTING POWERS AND MEETINGS.................. 11
Section 1. Voting Powers........................................... 11
Section 2. Voting Power and Meetings............................... 12
Section 3. Quorum and Required Vote................................ 12
Section 4. Action by Written Consent............................... 12
Section 5. Record Dates............................................ 12
ARTICLE VI. NET ASSET VALUE, DISTRIBUTIONS, AND REDEMPTIONS........... 13
Section 1. Determination of Net Asset Value, Net Income, and
Distributions........................................... 13
Section 2. Redemptions and Repurchases............................. 13
Section 3. Redemptions at the Option of the Trust.................. 13
Section 4. Transfer of Shares...................................... 14
ARTICLE VII. COMPENSATION AND LIMITATION OF LIABILITY.................. 14
Section 1. Compensation of Trustees................................ 14
Section 2. Indemnification and Limitation of Liability............. 14
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety.................................................. 14
Section 4. Insurance............................................... 15
ARTICLE VIII.MISCELLANEOUS............................................. 15
Section 1. Liability of Third Persons Dealing with Trustees........ 15
Section 2. Termination of Trust or Series.......................... 15
Section 3. Merger and Consolidation................................ 15
Section 4. Amendments.............................................. 16
Section 5. Filing of Copies, References, Headings.................. 16
Section 6. Applicable Law.......................................... 16
Section 7. Provisions in Conflict with Law or Regulations.......... 16
Section 8. Business Trust Only..................................... 17
Section 9. Use of the Name "JMIC\.................................. 17
</TABLE>
(ii)
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
==================================
OF
BRAZOS MUTUAL FUNDS
WHEREAS, this AGREEMENT AND DECLARATION OF TRUST is made and entered
into as of the date set forth below by the Trustees named hereunder for the
purpose of forming a Delaware business trust in accordance with the provisions
hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that a Certificate of Trust
be filed with the Office of the Secretary of State of the State of Delaware and
do hereby declare that the Trustees will hold IN TRUST all cash, securities and
other assets which the Trust now possesses or may hereafter acquire from time to
time in any manner and manage and dispose of the same upon the following terms
and conditions for the pro rata benefit of the holders of Shares in this Trust.
ARTICLE I.
Name and Definitions
Section 1. Name. This trust shall be known as "BRAZOS MUTUAL FUNDS" and
---------- ----
the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required
---------- -----------
by the context or specifically provided:
(a) The "Trust" refers to the Delaware business trust established by this
Agreement and Declaration of Trust, as amended from time to time;
(b) The "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust;
(c) "Trustees" refers to the persons who have signed this Agreement and
Declaration of Trust, so long as they continue in office in accordance with the
terms hereof, and all other persons who may from time to time be duly elected or
appointed to serve on the Board of Trustees in accordance with the provisions
hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in their capacity as trustees hereunder;
(d) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;
<PAGE>
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations, partnerships,
trusts, foundations, plans, associations, joint ventures, estates and other
entities, whether or not legal entities, and governments and agencies and
political subdivisions thereof, whether domestic or foreign;
(g) The "1940 Act" refers to the Investment Company Act of 1940 and the
Rules and Regulations thereunder, all as amended from time to time. References
herein to specific sections of the 1940 Act shall be deemed to include such
Rules and Regulations as are applicable to such sections as determined by the
Trustees or their designees;
(h) The terms "Commission" and "Principal Underwriter" shall have the
respective meanings given them in Section 2(a)(7) and Section (2)(a)(29) of the
1940 Act;
(i) "Declaration of Trust" shall mean this Agreement and Declaration of
Trust, as amended or restated from time to time;
(j) "By-Laws" shall mean the By-Laws of the Trust as amended from time to
time;
(k) The term "Interested Person" has the meaning given it in Section
2(a)(19) of the 1940 Act;
(l) "Investment Manager" or "Manager" means a party furnishing services to
the Trust pursuant to any contract described in Article IV, Section 7(a) hereof;
(m) "Series" refers to each Series of Shares established and designated
under or in accordance with the provisions of Article III.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business
of a management investment company registered under the 1940 Act through one or
more Series investing primarily in securities.
ARTICLE III.
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in
---------- -------------------------------
the Trust shall at all times be divided into an unlimited number of Shares, with
a par value of $.001 per Share. The Trustees may authorize the division of
Shares into separate Series and the division of Series into
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<PAGE>
separate classes of Shares. The different Series shall be established and
designated, and the variations in the relative rights and preferences as between
the different Series shall be fixed and determined, by the Trustees. If only one
Series shall be established, the Shares shall have the rights and preferences
provided for herein and in Article III, Section 6 hereof to the extent relevant
and not otherwise provided for herein.
Subject to the provisions of Section 6 of this Article III, each Share
shall have voting rights as provided in Article V hereof, and holders of the
Shares of any Series shall be entitled to receive dividends, when, if and as
declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Share shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions of the Trust or
otherwise. All dividends and distributions shall be made ratably among all
Shareholders of a Series (or class) from the assets held with respect to such
Series according to the number of Shares of such Series (or class) held of
record by such Shareholders on the record date for any dividend or distribution
or on the date of termination of the Trust, as the case may be. Shareholders
shall have no preemptive or other right to subscribe to any additional Shares or
other securities issued by the Trust or any Series. The Trustees may from time
to time divide or combine the Shares of a Series into a greater or lesser number
of Shares of such Series without thereby materially changing the proportionate
beneficial interest of such Shares in the assets held with respect to that
Series or materially affecting the rights of Shares of any other Series.
Section 2. Ownership of Shares. The ownership of Shares shall be
---------- -------------------
recorded on the books of the Trust or a transfer or similar agent for the Trust,
which books shall be maintained separately for the Shares of each Series. No
certificates evidencing the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the transfer of Shares of each
Series (or class) and similar matters. The record books of the Trust as kept by
the Trust or any transfer or similar agent, as the case may be, shall be
conclusive as to the identity of the Shareholders of each Series and as to the
number of Shares of each Series held from time to time by each Shareholder.
Section 3. Investments in the Trust. Investments may be accepted by the
---------- ------------------------
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize. Each investment
shall be credited to the Shareholder's account in the form of full and
fractional Shares of the Trust, in such Series (or class) as the purchaser shall
select, at the net asset value per Share next determined for such Series (or
class) after receipt of the investment; provided, however, that the Trustees
may, in their sole discretion, impose a sales charge or reimbursement fee upon
investments in the Trust.
Section 4. Status of Shares and Limitation of Personal Liability. Shares
---------- -----------------------------------------------------
shall be deemed to be personal property giving only the rights provided in this
instrument and the By-Laws of the Trust. Every Shareholder by virtue of having
become a Shareholder shall be held to have expressly assented and agreed to the
terms hereof. The death of a Shareholder during the existence of the Trust shall
not operate to terminate the Trust, nor entitle the representative of any
deceased Shareholder to an accounting or to take any action in court or
elsewhere against the
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<PAGE>
Trust or the Trustees, but shall entitle such representative only to the
rights of said deceased Shareholder under this Declaration of Trust. Ownership
of Shares shall not entitle a Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders as partners or joint venturers. Neither the Trust nor the Trustees,
nor any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholder, or to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time agree to pay.
Section 5. Power of Board of Trustees to Change Provisions Relating to
---------- -----------------------------------------------------------
Shares. Notwithstanding any other provision of this Declaration of Trust to the
- ------
contrary, and without limiting the power of the Board of Trustees to amend the
Declaration of Trust as provided elsewhere herein, the Board of Trustees shall
have the power to amend this Declaration of Trust, at any time and from time to
time, in such manner as the Board of Trustees may determine in their sole
discretion, without the need for Shareholder action, so as to add to, delete,
replace or otherwise modify any provisions relating to the Shares contained in
this Declaration of Trust, provided that before adopting any such amendment
without Shareholder approval the Board of Trustees shall determine that it is
consistent with the fair and equitable treatment of all Shareholders and that
Shareholder approval is not required by the 1940 Act or other applicable law. If
Shares have been issued, Shareholder approval shall be required to adopt any
amendments to this Declaration of Trust which would adversely affect to a
material degree the rights and preferences of the Shares of any Series (or
class) or to increase or decrease the par value of the Shares of any Series (or
class).
Section 6. Establishment and Designation of Shares. The establishment and
---------- ---------------------------------------
designation of any Series (or class) of Shares shall be effective upon the
adoption by a majority of the Trustees, of a resolution which sets forth such
establishment and designation and the relative rights and preferences of such
Series (or class). Each such resolution shall be incorporated herein by
reference upon adoption.
Shares of each Series (or class) established pursuant to this Section 6,
unless otherwise provided in the resolution establishing such Series, shall have
the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All consideration
-----------------------------------------------
received by the Trust for the issue or sale of Shares of a Series, including
dividends and distributions paid by, and reinvested in, such Series, together
with all assets in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof from whatever source derived,
including, without limitation, any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject only
to the rights of creditors, and shall be so recorded upon the books of account
of the Trust. Such consideration, assets, income, earnings, profits and proceeds
thereof, from whatever source derived, including, without limitation, any
proceeds derived from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any reinvestment
-4-
<PAGE>
of such proceeds, in whatever form the same may be, are herein referred to as
"assets held with respect to" that Series. In the event that there are any
assets, income, earnings, profits and proceeds thereof, funds or payments which
are not readily identifiable as assets held with respect to any particular
Series (collectively "General Assets"), the Trustees shall allocate such General
Assets to, between or among any one or more of the Series in such manner and on
such basis as the Trustees, in their sole discretion, deem fair and equitable,
and any General Asset so allocated to a particular Series shall be held with
respect to that Series. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Series for all purposes in absence of
manifest error.
(b) Liabilities Held with Respect to a Particular Series. The assets of
----------------------------------------------------
the Trust held with respect to each Series shall be charged with the liabilities
of the Trust with respect to such Series and all expenses, costs, charges and
reserves attributable to such Series, and any general liabilities of the Trust
which are not readily identifiable as being held in respect of a Series shall be
allocated and charged by the Trustees to and among any one or more Series in
such manner and on such basis as the Trustees in their sole discretion deem fair
and equitable. The liabilities, expenses, costs, charges, and reserves so
charged to a Series are herein referred to as "liabilities held with respect to"
that Series. Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the holders of all
Series for all purposes in absence of manifest error. All Persons who have
extended credit which has been allocated to a particular Series, or who have a
claim or contract which has been allocated to a Series, shall look exclusively
to the assets held with respect to such Series for payment of such credit,
claim, or contract. In the absence of an express agreement so limiting the
claims of such creditors, claimants and contracting parties, each creditor,
claimant and contracting party shall be deemed nevertheless to have agreed to
such limitation unless an express provision to the contrary has been
incorporated in the written contract or other document establishing the
contractual relationship.
(c) Dividends, Distributions, Redemptions, and Repurchases. No dividend
------------------------------------------------------
or distribution including, without limitation, any distribution paid upon
termination of the Trust or of any Series (or class) with respect to, or any
redemption or repurchase of, the Shares of any Series (or class) shall be
effected by the Trust other than from the assets held with respect to such
Series, nor shall any Shareholder of any Series otherwise have any right or
claim against the assets held with respect to any other Series except to the
extent that such Shareholder has such a right or claim hereunder as a
Shareholder of such other Series. The Trustees shall have full discretion to
determine which items shall be treated as income and which items as capital; and
each such determination and allocation shall be conclusive and binding upon the
Shareholders in absence of manifest error.
(d) Voting. All Shares of the Trust entitled to vote on a matter shall
------
vote without differentiation between the separate Series on a one-vote-per-Share
basis; provided however, if a matter to be voted on affects only the interests
of not all Series (or class of a Series), then only the Shareholders of such
affected Series (or class) shall be entitled to vote on the matter.
-5-
<PAGE>
(e) Equality. All the Shares of each Series shall represent an equal
--------
proportionate undivided interest in the assets held with respect to such Series
(subject to the liabilities of such Series and such rights and preferences as
may have been established and designated with respect to classes of Shares
within such Series), and each Share of a Series shall be equal to each other
Share of such Series.
(f) Fractions. Any fractional Share of a Series shall have
---------
proportionately all the rights and obligations of a whole share of such Series,
including rights with respect to voting, receipt of dividends and distributions
and redemption of Shares.
(g) Exchange Privilege. The Trustees shall have the authority to
------------------
provide that the holders of Shares of any Series shall have the right to
exchange such Shares for Shares of one or more other Series in accordance with
such requirements and procedures as may be established by the Trustees.
(h) Combination of Series. The Trustees shall have the authority,
---------------------
without the approval of the Shareholders of any Series unless otherwise required
by applicable law, to combine the assets and liabilities held with respect to
any two or more Series into assets and liabilities held with respect to a single
Series.
(i) Elimination of Series. At any time that there are no Shares
---------------------
outstanding of a Series (or class), the Trustees may abolish such Series (or
class).
(j) Conversion Rights. The Trustees shall have the authority to provide
-----------------
from time to time that the holders of Shares of any Series or Class shall have
the right to convert or exchange said Shares for or into Shares of one or more
other Series or Classes in accordance with such requirements and procedures as
may be established from time to time by the Trustees.
ARTICLE IV.
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees
---------- ---------------------------
constituting the Board of Trustees shall be fixed from time to time by a written
instrument signed, or by resolution approved at a duly constituted meeting, by a
majority of the Board of Trustees, provided, however, that the number of
Trustees shall in no event be less than one (1) nor more than fifteen (15).
Subject to the requirements of Section 16(a) of the 1940 Act, the Board of
Trustees, by action of a majority of the then Trustees at a duly constituted
meeting, may fill vacancies in the Board of Trustees and remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he or she dies, resigns, is declared bankrupt or incompetent by a
court of competent jurisdiction, or is removed. Any Trustee may resign at any
time by written instrument signed by him and delivered to any officer of the
Trust or to a meeting of the Trustees. Such resignation shall be effective upon
receipt unless specified to be effective at some other time. Except to the
extent expressly provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any compensation
-6-
<PAGE>
for any period following his or her resignation or removal, or any right to
damages or other payment on account of such removal. Any Trustee may be removed
at any meeting of Shareholders by a vote of two-thirds of the outstanding Shares
of the Trust. A meeting of Shareholders for the purpose of electing or removing
one or more Trustees may be called (i) by the Trustees upon their own vote, or
(ii) upon the demand of Shareholders owning 10% or more of the Shares of the
Trust in the aggregate.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
---------- -----------------------------------------------
declination, resignation, retirement, removal, or incapacity of one or more
Trustees, or all of them, shall not operate to annul the Trust or to revoke any
existing agency created pursuant to the terms of this Declaration of Trust.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is
filled as provided in Article IV, Section 1, the Trustees in office, regardless
of their number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by this Declaration of Trust.
Section 3. Powers. Subject to the provisions of this Declaration of
---------- ------
Trust, the business of the Trust shall be managed by the Board of Trustees, and
such Board shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in transactions of all kinds on
behalf of the Trust. Trustees, in all instances, shall act as principals and are
and shall be free from the control of the Shareholders. The Trustees shall have
full power and authority to do any and all acts and to make and execute any and
all contracts, documents and instruments that they may consider desirable,
necessary or appropriate in connection with the administration of the Trust.
Without limiting the foregoing, the Trustees may: adopt, amend and repeal By-
Laws not inconsistent with this Declaration of Trust providing for the
regulation and management of the affairs of the Trust; elect and remove such
officers and appoint and terminate such agents as they consider appropriate;
appoint from their own number and establish and terminate one or more committees
consisting of two or more Trustees who may exercise the powers and authority of
the Board of Trustees to the extent that the Trustees determine; employ one or
more custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities or with a Federal Reserve
Bank, retain a transfer agent or a shareholder servicing agent, or both; provide
for the issuance and distribution of Shares by the Trust directly or through one
or more Principal Underwriters or otherwise; redeem, repurchase and transfer
Shares pursuant to applicable law; set record dates for the determination of
Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series;
establish from time to time, in accordance with the provisions of Article III,
Section 6 hereof, any Series of Shares, each such Series to operate as a
separate and distinct investment medium and with separately defined investment
objectives and policies and distinct investment purpose; and in general delegate
such authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian, transfer or shareholder servicing agent, Investment Manager or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees and unless otherwise specified herein or required
by the 1940 Act or other
-7-
<PAGE>
applicable law, any action by the Board of Trustees shall be deemed effective if
approved or taken by a majority of the Trustees then in office or a majority of
any duly constituted committee of Trustees. Any action required or permitted to
be taken at any meeting of the Board of Trustees, or any committee thereof, may
be taken without a meeting if all members of the Board of Trustees or committee
(as the case may be) consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of the Board of Trustees, or
committee, except as otherwise provided in the 1940 Act.
Without limiting the foregoing, the Trust shall have power and authority:
(a) To invest and reinvest cash and cash items, to hold cash uninvested,
and to subscribe for, invest in, reinvest in, purchase or otherwise acquire,
own, hold, pledge, sell, assign, transfer, exchange, distribute, write options
on, lend or otherwise deal in or dispose of contracts for the future acquisition
or delivery of all types of securities, futures contracts and options thereon,
and forward currency contracts of every nature and kind, including, without
limitation, all types of bonds, debentures, stocks, preferred stocks, negotiable
or non-negotiable instruments, obligations, evidences of indebtedness,
certificates of deposit or indebtedness, commercial paper, repurchase
agreements, bankers' acceptances, and other securities of any kind, issued,
created, guaranteed, or sponsored by any and all Persons. including, without
limitation, states, territories, and possessions of the United States and the
District of Columbia and any political subdivision, agency, or instrumentality
thereof, any foreign government or any political subdivision of the U.S.
Government or any foreign government, or any international instrumentality or
organization, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, futures contracts and options thereon, and forward currency
contracts, to change the investments of the assets of the Trust; and to exercise
any and all rights, powers, and privileges of ownership or interest in respect
of any and all such investments of every kind and description, including,
without limitation, the right to consent and otherwise act with respect thereto,
with power to designate one or more Persons, to exercise any of said rights,
powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or
write options with respect to or otherwise deal in any property rights relating
to any or all of the assets of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and right of subscription or otherwise which in any
manner arise out of ownership of securities;
-8-
<PAGE>
(e) To hold any security or property in a form not indicating that it is
trust property, whether in bearer, unregistered or other negotiable form, or in
its own name or in the name of a custodian or subcustodian or a nominee or
nominees or otherwise or to authorize the custodian or a subcustodian or a
nominee or nominees to deposit the same in a securities depository, subject in
each case to the applicable provisions of the 1940 Act;
(f) To consent to, or participate in, any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To litigate, compromise, arbitrate, settle or otherwise adjust claims
in favor of or against the Trust or a Series, or any matter in controversy,
including but not limited to claims for taxes,
(i) To enter into joint ventures, general or limited partnerships and any
other combinations or associations;
(j) To borrow funds or other property in the name of the Trust or Series
exclusively for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other obligations
of any Person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such insurance
as the Trustees may deem necessary, desirable or appropriate for the conduct of
the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, Investment Manager, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, Investment Manager, Principal, Underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability; and
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<PAGE>
(m) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.
The Trust shall not be limited to investing in obligations maturing before
the possible termination of the Trust or one or more of its Series. The Trust
shall not in any way be bound or limited by any present or future law or custom
in regard to investment by fiduciaries. The Trust shall not be required to
obtain any court order to deal with any assets of the Trust or take any other
action hereunder.
Section 4. Payment of Expenses by the Trust. Subject to the provisions of
---------- --------------------------------
Article III, Section 6(b), the Trustees are authorized to pay or cause to be
paid out of the principal or income of the Trust or Series, or partly out of the
principal and partly out of income, and to charge or allocate the same to,
between or among such one or more of the Series that may be established or
designated pursuant to Article III, Section 6, all expenses, fees, charges,
taxes and liabilities incurred or arising in connection with the Trust or
Series, or in connection with the management thereof, including, but not limited
to, the Trustees' compensation and such expenses and charges for the services of
the Trust's officers, employees, Investment Manager, Principal Underwriter,
auditors, counsel, custodian, transfer agent, Shareholder servicing agent, and
such other agents or independent contractors and such other expenses and charges
as the Trustees may deem necessary or proper to incur.
Section 5. Ownership of Assets of the Trust. Title to all of the assets of
---------- --------------------------------
the Trust shall at all times be considered as vested in the Trust, except that
the Trustees shall have power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. Upon the resignation, incompetency, bankruptcy, removal,
or death of a Trustee he or she shall automatically cease to have any such title
in any of the Trust Property, and the title of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered. The Trustees may determine that the Trust or the
Trustees, acting for and on behalf of the Trust, shall be deemed to hold
beneficial ownership of any income earned on the securities owned by the Trust,
whether domestic or foreign.
Section 6. Service Contracts.
---------- -----------------
(a) The Trustees may, at any time and from time to time, contract for
exclusive or nonexclusive advisory, management and/or administrative services
for the Trust or for any Series with any Person; and any such contract may
contain such other terms as the Trustees may determine, including without
limitation, authority for the Investment Manager to determine from time to time
without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held
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<PAGE>
uninvested and to make changes in the Trust's investments, and such other
responsibilities as may specifically be delegated to such Person.
(b) The Trustees may also, at any time and from time to time, contract
with any Persons, appointing such Persons exclusive or nonexclusive distributor
or Principal Underwriter for the Shares of one or more of the Series or other
securities to be issued by the Trust. Every such contract may contain such other
terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to time, to
contract with any Persons, appointing such Person(s) to serve as custodian(s),
transfer agent and/or shareholder servicing agent for the Trust or one or more
of its Series. Every such contract shall comply with such terms as may be
required by the Trustees.
(d) The Trustees are further empowered, at any time and from time to time,
to contract with any Persons to provide such other services to the Trust or one
or more of the Series, as the Trustees determine to be in the best interests of
the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, Manager,
adviser, Principal Underwriter, distributor, or affiliate or agent of or
for any Person with which an advisory, management or administration
contract, or Principal Underwriter's or distributor's contract, or
transfer, shareholder servicing or other type of service contract may be
made, or that
(ii) any Person with which an advisory, management or administration
contract or Principal Underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may be made also
has an advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer, shareholder servicing
or other service contract, or has other business or interests with any
other Person,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
applicable requirements of the 1940 Act.
ARTICLE V.
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of Article III,
---------- -------------
Sections 5 and 6(d), the Shareholders shall have right to vote only (i) for the
election or removal of Trustees as provided in Article IV, Section 1, and (ii)
with respect to such additional matters relating to the Trust as may be required
by the applicable provisions of the 1940 Act, including Section 16(a)
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<PAGE>
thereof, and (iii) on such other matters as the Trustees may consider necessary
or desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger.
Section 2. Voting Power and Meetings. Meetings of the Shareholders may be
---------- -------------------------
called by the Trustees for the purposes described in Section 1 of this Article
V. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or
caused to be given by the Trustees by delivering personally or mailing such
notice not more than ninety (90), nor less than ten (10) days before such
meeting, postage prepaid, stating the time and place of the meeting, to each
Shareholder at the Shareholder's address as it appears on the records of the
Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust, a written waiver thereof, executed before or
after the meeting by such Shareholder or his or her attorney thereunto
authorized and filed with the records of the meeting, or actual attendance at
the meeting of Shareholders in person or by proxy, shall be deemed equivalent to
such notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is
---------- -----------------------
required by the applicable provisions of the 1940 Act, the presence in person or
by proxy of a majority of the Shares entitled to vote on a matter shall
constitute a quorum at a Shareholders' meeting. Any meeting of Shareholders may
be adjourned from time to time by a majority of the votes properly cast upon the
question of adjourning a meeting to another date and time, whether or not a
quorum is present, and the meeting may be held as adjourned within a reasonable
time after the date set for the original meeting without further notice. Subject
to the provisions of Article III, Section 6(d) and the applicable provisions of
the 1940 Act, when a quorum is present at any meeting, a majority of the Shares
voted shall decide any questions except only a plurality vote shall be necessary
to elect Trustees.
Section 4. Action by Written Consent. Any action taken by Shareholders may
---------- -------------------------
be taken without a meeting if all the holders of Shares entitled to vote on the
matter are provided with not less than 7 days written notice thereof and written
consent to the action is filed with the records of the meetings of Shareholders
by the holders of the number of shares that would be required to approve the
matter as provided in Article V, Section 3. Such consent shall be treated for
all purposes as a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the Shareholders
---------- ------------
who are entitled to vote or act at any meeting or any adjournment thereof, the
Trustees may fix a time, which shall be not more than ninety (90) nor less than
ten (10) days before the date of any meeting of Shareholders, as the record date
for determining the Shareholders having the right to notice of and to vote at
such meeting and any adjournment thereof, and in such case only Shareholders of
record on such record date shall have such right, notwithstanding any transfer
of shares on the books of the Trust after the record date. For the purpose of
determining the
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<PAGE>
Shareholders who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may fix a date, which shall be before the date for
the payment of such dividend or distribution, as the record date for determining
the Shareholders having the right to receive such dividend or distribution.
Nothing in this Section shall be construed as precluding the Trustees from
setting different record dates for different Series.
ARTICLE VI.
Net Asset Value, Distributions, and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and
---------- -------------------------------------------------
Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their
- -------------
absolute discretion, may prescribe and shall set forth in the By-laws or in a
duly adopted resolution of the Trustees such bases and time for determining the
per Share net asset value of the Shares of any Series and the declaration and
payment of dividends and distributions on the Shares of any Series, as they may
deem necessary or desirable.
Section 2. Redemptions and Repurchases. The Trust shall purchase such
---------- ---------------------------
Shares as are offered by any Shareholder for redemption, upon receipt by the
Trust or a Person designated by the Trust that the Trust redeem such Shares or
in accordance with such procedures for redemption as the Trustees may from time
to time authorize; and the Trust will pay therefor the net asset value thereof,
in accordance with the By-Laws and the applicable provisions of the 1940 Act.
Payment for said Shares shall be made by the Trust to the Shareholder within
seven days after the date on which the request for redemption is received in
proper form. The obligation set forth in this Section 2 is subject to the
provision that in the event that any time the New York Stock Exchange (the
"Exchange") is closed for other than weekends or holidays, or if permitted by
the Rules of the Commission during periods when trading on the Exchange is
restricted or during any emergency which makes it impracticable for the Trust to
dispose of the investments of the applicable Series or to determine fairly the
value of the net assets held with respect to such Series or during any other
period permitted by order of the Commission for the protection of investors,
such obligations may be suspended or postponed by the Trustees.
The redemption price may in any case or cases be paid in cash or wholly or
partly in kind in accordance with Rule 18f-1 under the 1940 Act if the Trustees
determine that such payment is advisable in the interest of the remaining
Shareholders of the Series of which the Shares are being redeemed. Subject to
the foregoing, the selection and quantity of securities or other property so
paid or delivered as all or part of the redemption price shall be determined by
or under authority of the Trustees. In no case shall the Trust be liable for any
delay of any corporation or other Person in transferring securities selected for
delivery as all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have
---------- --------------------------------------
the right, at its option, upon 60 days notice to the affected Shareholder at any
time to redeem Shares of any Shareholder at the net asset value thereof as
described in Section 1 of this Article VI: (i) if at such time such Shareholder
owns Shares of any Series having an aggregate net asset value of less
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<PAGE>
than a minimum value determined from time to time by the Trustees; or (ii) to
the extent that such Shareholder owns Shares of a Series equal to or in excess
of a maximum percentage of the outstanding Shares of such Series determined from
time to time by the Trustees; or (iii) to the extent that such Shareholder owns
Shares equal to or in excess of a maximum percentage, determined from time to
time by the Trustees, of the outstanding Shares of the Trust.
Section 4. Transfer of Shares. The Trust shall transfer shares held of
---------- ------------------
record by any Person to any other Person upon receipt by the Trust or a Person
designated by the Trust of a written request therefore in such form and pursuant
to such procedures as may be approved by the Trustees.
ARTICLE VII.
Compensation and Limitation of Liability
Section 1. Compensation of Trustees. The Trustees as such shall be
---------- ------------------------
entitled to reasonable compensation from the Trust, and they may fix the amount
of such compensation from time to time. Nothing herein shall in any way prevent
the employment of any Trustee to provide advisory, management, legal,
accounting, investment banking or other services to the Trust and to be
specially compensated for such services by the Trust.
Section 2. Indemnification and Limitation of Liability. The Trustees shall
---------- -------------------------------------------
not be responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, Manager or Principal Underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee,
and, subject to the provisions of the Bylaws, the Trust out of its assets may
indemnify and hold harmless each and every Trustee and officer of the Trust from
and against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to such Trustee's performance of his or her
duties as a Trustee or officer of the Trust; provided that nothing herein
contained shall indemnify, hold harmless or protect any Trustee or officer from
or against any liability to the Trust or any Shareholder to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
---------- -------------------------------------------------------------
The exercise by the Trustees of their powers hereunder shall be binding upon
everyone interested in or dealing with the Trust. A Trustee shall be liable to
the Trust and to any Shareholder solely for his or her own willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the
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<PAGE>
meaning and operation of this Declaration of Trust, and shall be under no
liability for any act or omission in accordance with such advice nor for failing
to follow such advice. The Trustees shall not be required to give any bond as
such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to the
---------- ---------
fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee or officer in connection with any claim, action, suit or
proceeding in which he or she becomes involved by virtue of his or her capacity
or former capacity with the Trust, whether or not the Trust would have the power
to indemnify him or her against such liability under the provisions of this
Article.
ARTICLE VIII.
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No Person
---------- ------------------------------------------------
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 2. Termination of Trust or Series. Unless terminated as provided
---------- ------------------------------
herein, the Trust shall continue without limitation of time. The Trust may be
terminated at any time by the Trustees upon 60 days prior written notice to the
Shareholders. Any Series may be terminated at any time by the Trustees upon 60
days prior written notice to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may be), after
paying or otherwise providing for all charges, taxes, expenses and liabilities
held, severally, with respect to each Series (or the applicable Series, as the
case may be), whether due or accrued or anticipated as may be determined by the
Trustees, the Trust shall, in accordance with such procedures as the Trustees
consider appropriate, reduce the remaining assets held, severally, with respect
to each Series (or the applicable Series, as the case may be), to distributable
form in cash or shares or other securities, and any combination thereof, and
distribute the proceeds held with respect to each Series (or the applicable
Series, as the case may be), to the Shareholders of that Series, as a Series,
ratably according to the number of Shares of that Series held by the several
Shareholders on the date of termination.
Section 3. Merger and Consolidation. The Trustees may cause (i) the Trust
---------- ------------------------
or one or more of its Series to the extent consistent with applicable law to be
merged into or consolidated with another Trust, series or Person, (ii) the
Shares of the Trust or any Series to be converted into beneficial interests in
another business trust (or series thereof), (iii) the Shares to be exchanged for
assets or property under or pursuant to any state or federal statute to the
extent permitted by law or (iv) a sale of assets of the Trust or one or more of
its Series. Such merger or consolidation, Share conversion, Share exchange or
sale of assets must be authorized by vote as provided in Article V, Section 3
herein; provided that in all respects not governed by statute or applicable law,
the Trustees shall have power to prescribe the procedure necessary or
appropriate
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<PAGE>
to accomplish a sale of assets, Share exchange, merger or consolidation
including the power to create one or more separate business trusts to which all
or any part of the assets, liabilities, profits or losses of the Trust may be
transferred and to provide for the conversion of Shares of the Trust or any
Series into beneficial interests in such separate business trust or trusts (or
series thereof).
Section 4. Amendments. This Declaration of Trust may be restated and/or
---------- ----------
amended at any time by an instrument in writing signed by a majority of the
Trustees then holding office. Any such restatement and/or amendment hereto
shall be effective immediately upon execution and approval. The Certificate of
Trust of the Trust may be restated and/or amended by a similar procedure, and
any such restatement and/or amendment shall be effective immediately upon filing
with the Office of the Secretary of State of the State of Delaware or upon such
future date as may be stated therein.
Section 5. Filing of Copies, References, Headings. The original or a copy
---------- --------------------------------------
of this instrument and of each restatement and/or amendment hereto shall be kept
at the office of the Trust where it may be inspected by any Shareholder. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such restatements and/or amendments have been made and as
to any matters in connection with the Trust hereunder; and, with the same effect
as if it were the original, may rely on a copy certified by an officer of the
Trust to be a copy of this instrument or of any such restatements and/or
amendments. In this instrument and in any such restatements and/or amendment,
references to this instrument, and all expressions like "herein," "hereof" and
"hereunder," shall be deemed to refer to this instrument as amended or affected
by any such restatements and/or amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. Whenever the
singular number is used herein, the same shall include the plural; and the
neuter, masculine and feminine genders shall include each other, as applicable.
This instrument may be executed in any number of counterparts each of which
shall be deemed an original.
Section 6. Applicable Law. This Agreement and Declaration of Trust is
---------- --------------
created under and is to be governed by and construed and administered according
to the laws of the State of Delaware and the Delaware Business Trust Act, as
amended from time to time (the "Act"). The Trust shall be a Delaware business
trust pursuant to such Act, and without limiting the provisions hereof, the
Trust may exercise all powers which are ordinarily exercised by such a business
trust.
Section 7. Provisions in Conflict with Law or Regulations.
---------- ----------------------------------------------
(a) The provisions of the Declaration of Trust are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of the Declaration of Trust; provided, however, that such determination
shall not affect any of the remaining provisions of the Declaration of Trust or
render invalid or improper any action taken or omitted prior to such
determination.
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<PAGE>
(b) If any provision of the Declaration of Trust shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the Trustees to
---------- -------------------
create a business trust pursuant to the Act, and thereby to create only the
relationship of trustee and beneficial owners within the meaning of such Act
between the Trustees and each Shareholder. It is not the intention of the
Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, joint venture, or any form of legal
relationship other than a business trust pursuant to such Act. Nothing in this
Declaration of Trust shall be construed to make the Shareholders, either by
themselves or with the Trustees, partners or members of a joint stock
association.
Section 9. Use of the Name "JMIC". The name "JMIC" and all rights to the
---------- ----------------------
use of the name "JMIC" belong to John McStay Investment Counsel, LLC (the
"Advisor"), the Manager of the Trust. The Advisor has consented to the use by
the Trust of the identifying words "JMIC" and has granted to the Trust a non-
exclusive license to use the name "JMIC" as part of the name of any Series of
Shares. In the event the Advisor or an affiliate of the Advisor is not appointed
as Manager or ceases to be the Manager of the Trust or of any Series using such
names, the non-exclusive license granted herein may be revoked by the Advisor
and the Trust promptly shall cease using the name "JMIC" as part of the name of
any Series of Shares, upon receipt of the written request therefore by the
Advisor or any successor to its interests in such name.
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<PAGE>
IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into this
Declaration of Trust as of the 13th day of May, 1999.
/s/ George W. Gau
------------------
George W. Gau
Department of Finance
University of Texas at Austin
Austin, TX 78712
/s/ Daniel L. Hockenbrough
--------------------------
Daniel L. Hockenbrough
5949 Sherry Lane
Suite 1560
Dallas, Texas 75225
/s/ John H. Massey
------------------
John H. Massey
4004 Windsor Avenue
Dallas, Texas 75205
/s/ David M. Reichert
---------------------
David M. Reichert
7415 Stonecrest Drive
Dallas, Texas 75240
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS
5949 Sherry Lane, Suite 1600 Dallas, Texas 75225
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EXHIBIT (D)(4)
[FORM OF]
INVESTMENT ADVISORY AGREEMENT
-----------------------------
BRAZOS MUTUAL FUNDS
BRAZOS SMALL CAP GROWTH PORTFOLIO
AGREEMENT made this __ day of June, 1999 by and between Brazos Mutual Funds, a
Delaware business trust (the "Trust") and John McStay Investment Counsel,
L.L.C., a Delaware Limited Liability Company (the "Adviser").
1. DUTIES OF ADVISER. The Trust hereby appoints the Adviser to act as
investment adviser to the Trust for the period and on such terms as set forth in
this Agreement. The Trust employs the Adviser to manage the investment and
reinvestment of the assets of its portfolios of securities, to continuously
review, supervise and administer the investment program of the portfolios, to
determine in its discretion the securities to be purchased or sold and the
portion of the Trust's assets to be held uninvested, to provide the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Trust's officers and Board of
Trustees concerning the Adviser's discharge of the foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to the
control of the officers and the Board of Trustees of the Trust, and in
compliance with the objectives, policies and limitations set forth in the
Trust's prospectus and applicable laws and regulations. The Adviser accepts
such employment and agrees to render the services and to provide, at its
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<PAGE>
own expense, the office space, furnishings and equipment and the personnel
required by it to perform the services on the terms and for the compensation
provided herein.
2. PORTFOLIO TRANSACTIONS. The Adviser is responsible for decisions to
buy or sell securities and other investments for the assets of a Portfolio,
broker-dealers and futures commission merchants' selection, and negotiation of
brokerage commission and futures commission merchants' rates. As a general
matter, in executing Portfolio transactions, the Adviser may employ or deal with
such broker-dealers or futures commission merchants as may, in the Adviser's
best judgment, provide prompt and reliable execution of the transactions at
favorable prices and reasonable commission rates. In selecting such broker-
dealers or futures commission merchants, the Adviser shall consider all relevant
factors including price (including the applicable brokerage commission, dealer
spread or futures commission merchant rate), the size of the order, the nature
of the market for the security or other investment, the timing of the
transaction, the reputation, experience and financial stability of the broker-
dealer or futures commission merchant involved, the quality of the service, the
difficult of execution, the execution capabilities and operational facilities of
the firm involved, and, in the case of securities, the firm's risk in
positioning a block of securities. Subject to such policies as the Trustees may
determine and consistent with Section 28(e) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Adviser's having caused a Portfolio to pay a member of
an exchange, broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another member of an exchange,
broker or dealer would have charged for effecting that transaction, if the
Adviser determines in good faith that such amount of commission was
-2-
<PAGE>
reasonable in relation to the value of the brokerage and research services
provided by such member of an exchange, broker or dealer viewed in terms of
either that particular transaction or the Adviser's overall responsibility with
respect to such Portfolio and to other clients as to which the Adviser exercises
investment discretion. In accordance with Section 11(a) of the 1934 Act and Rule
11a2-2(T) thereunder, and subject to any other applicable laws and regulations
including Section 17(e) of the Act and Rule 17e-1 thereunder, the Adviser may
engage its affiliates or any other subadviser to the Trust and its respective
affiliates, as broker-dealers or futures commission merchants to effect
Portfolio transactions in securities and other investments for a Portfolio. The
Adviser will promptly communicate to the officers and the Trustees of the Trust
such information relating to Portfolio transactions as they may reasonably
request. To the extent consistent with applicable law, the Adviser may aggregate
purchase or sell orders for the Portfolio with contemporaneous purchase or sell
orders of other clients of the Adviser or its affiliated persons. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Adviser in the manner the
Adviser determines to be equitable and consistent with its and its affiliates'
fiduciary obligations to the Portfolio and to such other clients. The Adviser
hereby acknowledges that such aggregation of orders may not result in more
favorable pricing or lower brokerage commissions in all instances.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Section 1 of this Agreement, the Trust shall pay to the
Adviser in monthly installments, an advisory fee calculated by applying the
following annual percentage rates to the Trust's average daily net assets for
the month:
BRAZOS Small Cap Growth Portfolio 0.90%
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<PAGE>
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is in effect subject to a pro rata adjustment based
on the number of days elapsed in the current fiscal month as a percentage of the
total number of days in such month.
4. OTHER SERVICES. At the request of the Trust, the Adviser in its
discretion may make available to the Trust office facilities, equipment,
personnel and other services. Such office facilities, equipment, personnel and
services shall be provided for or rendered by the Adviser and billed to the
Trust at the Adviser's cost.
5. REPORTS. The Trust and the Adviser agree to furnish to each other
current prospectuses, proxy statements, reports to shareholders, certified
copies of their financial statements, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others so long as its services to the Trust are not impaired thereby.
7. LIABILITY OF ADVISER.
In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940 ("1940
Act"), the Adviser shall not be subject to any liability whatsoever to the
Trust, or to any shareholder of the Trust, for any error or judgment, mistake of
law or any other act or omission in the course of, or connected with,
-4-
<PAGE>
rendering services hereunder including, without limitation, for any losses that
may be sustained in connection with the purchase, holding, redemption or sale of
any security on behalf of the Trust.
8. PERMISSIBLE INTERESTS. Subject to and in accordance with the
Certificate of Trust and Agreement and Declaration of Trust of the Trust and the
Certificate of Limited Partnership and Partnership Agreement of the Adviser,
Trustees, officers, agents and shareholders of the Trust are or may be
interested in the Adviser (or any successor thereof) as Trustees, officers,
agents, shareholders or otherwise; Trustees, officers, agents and shareholders
of the Adviser are or may be interested in the Trust as Trustees, officers,
agents, shareholders or otherwise; and the Adviser (or any successor) is or may
be interested in the Trust as a shareholder or otherwise; and the effect of any
such interrelationships shall be governed by said organizational documents and
the provisions of the 1940 Act.
9. DURATION AND TERMINATION. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of June __, 2000 or the date
of the first annual or special meeting of the shareholders of the Trust, if any,
and, if approved by a majority of the outstanding voting securities of the
Trust, thereafter shall continue for periods of one year so long as such
continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Board of Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or (c) by vote of a majority of the
outstanding voting securities of the Trust; provided however, that if the
-------- -------
shareholders of the Trust fail to approve the Agreement as provided herein, the
Adviser may continue to serve in such capacity in the manner and to the extent
permitted by the 1940 Act and rules thereunder. This
-5-
<PAGE>
Agreement may be terminated by the Trust at any time, without the payment of any
penalty, by vote of a majority of the entire Board of Trustees of the Trust or
by vote of a majority of the outstanding voting securities of the Trust on 60
days' written notice to the Adviser. This Agreement may be terminated by the
Adviser at any time, without the payment of any penalty, upon 90 days' written
notice to the Trust. This agreement will automatically and immediately terminate
in the event of its assignment. Any notice under this Agreement shall be given
in writing, addressed and delivered or mailed postpaid, to the other party at
the principal office of such party.
As used in this Section 9, the terms "assignment," "interested persons,",
and "a vote of a majority of the outstanding voting securities" shall have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the 1940 Act.
10. AMENDMENT OF AGREEMENT. This Agreement may be amended by mutual
consent, but the consent of the Trust must be approved (a) by vote of a majority
of those members of the Board of Trustees of the Trust who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Trust.
11. SEVERABILITY. If any provisions of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of this __ day of June, 1999.
JOHN McSTAY INVESTMENT COUNSEL, L.L.C. BRAZOS MUTUAL FUNDS
By__________________________________ By__________________________
John D. McStay, President ___________________, President
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<PAGE>
EXHIBIT (D)(5)
[FORM OF]
INVESTMENT ADVISORY AGREEMENT
-----------------------------
BRAZOS MUTUAL FUNDS
BRAZOS REAL ESTATE SECURITIES PORTFOLIO
AGREEMENT made this __ day of June, 1999 by and between Brazos Mutual Funds, a
Delaware business trust (the "Trust") and John McStay Investment Counsel,
L.L.C., a Delaware Limited Liability Company (the "Adviser").
1. DUTIES OF ADVISER. The Trust hereby appoints the Adviser to act as
investment adviser to the Trust for the period and on such terms as set forth in
this Agreement. The Trust employs the Adviser to manage the investment and
reinvestment of the assets of its portfolios of securities, to continuously
review, supervise and administer the investment program of the portfolios, to
determine in its discretion the securities to be purchased or sold and the
portion of the Trust's assets to be held uninvested, to provide the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Trust's officers and Board of
Trustees concerning the Adviser's discharge of the foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to the
control of the officers and the Board of Trustees of the Trust, and in
compliance with the objectives, policies and limitations set forth in the
Trust's prospectus and applicable laws and regulations. The Adviser accepts
such employment and agrees to render the services and to provide, at its own
expense, the office space, furnishings and equipment and the personnel required
by it to perform the services on the terms and for the compensation provided
herein.
-1-
<PAGE>
2. PORTFOLIO TRANSACTIONS. The Adviser is responsible for decisions to
buy or sell securities and other investments for the assets of a Portfolio,
broker-dealers and futures commission merchants' selection, and negotiation of
brokerage commission and futures commission merchants' rates. As a general
matter, in executing Portfolio transactions, the Adviser may employ or deal with
such broker-dealers or futures commission merchants as may, in the Adviser's
best judgment, provide prompt and reliable execution of the transactions at
favorable prices and reasonable commission rates. In selecting such broker-
dealers or futures commission merchants, the Adviser shall consider all relevant
factors including price (including the applicable brokerage commission, dealer
spread or futures commission merchant rate), the size of the order, the nature
of the market for the security or other investment, the timing of the
transaction, the reputation, experience and financial stability of the broker-
dealer or futures commission merchant involved, the quality of the service, the
difficult of execution, the execution capabilities and operational facilities of
the firm involved, and, in the case of securities, the firm's risk in
positioning a block of securities. Subject to such policies as the Trustees may
determine and consistent with Section 28(e) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Adviser's having caused a Portfolio to pay a member of
an exchange, broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another member of an exchange,
broker or dealer would have charged for effecting that transaction, if the
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
member of an exchange, broker or dealer viewed in terms of either that
particular transaction or
-2-
<PAGE>
the Adviser's overall responsibility with respect to such Portfolio and to other
clients as to which the Adviser exercises investment discretion. In accordance
with Section 11(a) of the 1934 Act and Rule 11a2-2(T) thereunder, and subject to
any other applicable laws and regulations including Section 17(e) of the Act and
Rule 17e-1 thereunder, the Adviser may engage its affiliates or any other
subadviser to the Trust and its respective affiliates, as broker-dealers or
futures commission merchants to effect Portfolio transactions in securities and
other investments for a Portfolio. The Adviser will promptly communicate to the
officers and the Trustees of the Trust such information relating to Portfolio
transactions as they may reasonably request. To the extent consistent with
applicable law, the Adviser may aggregate purchase or sell orders for the
Portfolio with contemporaneous purchase or sell orders of other clients of the
Adviser or its affiliated persons. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Adviser in the manner the Adviser determines to be equitable and
consistent with its and its affiliates' fiduciary obligations to the Portfolio
and to such other clients. The Adviser hereby acknowledges that such aggregation
of orders may not result in more favorable pricing or lower brokerage
commissions in all instances.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Section 1 of this Agreement, the Trust shall pay to the
Adviser in monthly installments, an advisory fee calculated by applying the
following annual percentage rates to the Trust's average daily net assets for
the month:
BRAZOS Real Estate Securities Portfolio 0.90%
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is
-3-
<PAGE>
in effect subject to a pro rata adjustment based on the number of days elapsed
in the current fiscal month as a percentage of the total number of days in such
month.
4. OTHER SERVICES. At the request of the Trust, the Adviser in its
discretion may make available to the Trust office facilities, equipment,
personnel and other services. Such office facilities, equipment, personnel and
services shall be provided for or rendered by the Adviser and billed to the
Trust at the Adviser's cost.
5. REPORTS. The Trust and the Adviser agree to furnish to each other
current prospectuses, proxy statements, reports to shareholders, certified
copies of their financial statements, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others so long as its services to the Trust are not impaired thereby.
7. LIABILITY OF ADVISER. In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940 ("1940
Act"), the Adviser shall not be subject to any liability whatsoever to the
Trust, or to any shareholder of the Trust, for any error or judgment, mistake of
law or any other act or omission in the course of, or connected with, rendering
services hereunder including, without limitation, for any losses that may be
sustained
-4-
<PAGE>
in connection with the purchase, holding, redemption or sale of any security on
behalf of the Trust.
8. PERMISSIBLE INTERESTS. Subject to and in accordance with the
Certificate of Trust and Agreement and Declaration of Trust of the Trust and the
Certificate of Limited Partnership and Partnership Agreement of the Adviser,
Trustees, officers, agents and shareholders of the Trust are or may be
interested in the Adviser (or any successor thereof) as Trustees, officers,
agents, shareholders or otherwise; Trustees, officers, agents and shareholders
of the Adviser are or may be interested in the Trust as Trustees, officers,
agents, shareholders or otherwise; and the Adviser (or any successor) is or may
be interested in the Trust as a shareholder or otherwise; and the effect of any
such interrelationships shall be governed by said organizational documents and
the provisions of the 1940 Act.
9. DURATION AND TERMINATION. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of June __, 2000 or the date
of the first annual or special meeting of the shareholders of the Trust, if any,
and, if approved by a majority of the outstanding voting securities of the
Trust, thereafter shall continue for periods of one year so long as such
continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Board of Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or (c) by vote of a majority of the
outstanding voting securities of the Trust; provided however, that if the
-------- -------
shareholders of the Trust fail to approve the Agreement as provided herein, the
Adviser may continue to serve in such capacity in the manner and to the extent
permitted by the 1940 Act and rules thereunder. This Agreement may be
terminated by the Trust at any time, without the payment of any penalty, by
-5-
<PAGE>
vote of a majority of the entire Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Trust on 60 days' written
notice to the Adviser. This Agreement may be terminated by the Adviser at any
time, without the payment of any penalty, upon 90 days' written notice to the
Trust. This agreement will automatically and immediately terminate in the event
of its assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered or mailed postpaid, to the other party at the principal
office of such party.
As used in this Section 9, the terms "assignment," "interested persons,"
and "a vote of a majority of the outstanding voting securities" shall have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the 1940 Act.
10. AMENDMENT OF AGREEMENT. This Agreement may be amended by mutual
consent, but the consent of the Trust must be approved (a) by vote of a majority
of those members of the Board of Trustees of the Trust who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Trust.
11. SEVERABILITY. If any provisions of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of this __ day of June, 1999.
JOHN McSTAY INVESTMENT COUNSEL, L.L.C. BRAZOS MUTUAL FUNDS
By__________________________________ By_______________________________
John D. McStay, President ___________________ , President
-7-
<PAGE>
Exhibit (D)(6)
[FORM OF]
INVESTMENT ADVISORY AGREEMENT
-----------------------------
BRAZOS MUTUAL FUNDS
BRAZOS MICRO CAP GROWTH PORTFOLIO
AGREEMENT made this __ day of June, 1999 by and between Brazos Mutual Funds, a
Delaware business trust (the "Trust") and John McStay Investment Counsel,
L.L.C., a Delaware Limited Liability Company (the "Adviser").
1. DUTIES OF ADVISER. The Trust hereby appoints the Adviser to act as
investment adviser to the Trust for the period and on such terms as set forth in
this Agreement. The Trust employs the Adviser to manage the investment and
reinvestment of the assets of its portfolios of securities, to continuously
review, supervise and administer the investment program of the portfolios, to
determine in its discretion the securities to be purchased or sold and the
portion of the Trust's assets to be held uninvested, to provide the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Trust's officers and Board of
Trustees concerning the Adviser's discharge of the foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to the
control of the officers and the Board of Trustees of the Trust, and in
compliance with the objectives, policies and limitations set forth in the
Trust's prospectus and applicable laws and regulations. The Adviser accepts
such employment and agrees to render the services and to provide, at its own
expense, the office space, furnishings and equipment and the personnel required
by it to perform the services on the terms and for the compensation provided
herein.
<PAGE>
2. PORTFOLIO TRANSACTIONS. The Adviser is responsible for decisions to
buy or sell securities and other investments for the assets of a Portfolio,
broker-dealers and futures commission merchants' selection, and negotiation of
brokerage commission and futures commission merchants' rates. As a general
matter, in executing Portfolio transactions, the Adviser may employ or deal with
such broker-dealers or futures commission merchants as may, in the Adviser's
best judgment, provide prompt and reliable execution of the transactions at
favorable prices and reasonable commission rates. In selecting such broker-
dealers or futures commission merchants, the Adviser shall consider all relevant
factors including price (including the applicable brokerage commission, dealer
spread or futures commission merchant rate), the size of the order, the nature
of the market for the security or other investment, the timing of the
transaction, the reputation, experience and financial stability of the broker-
dealer or futures commission merchant involved, the quality of the service, the
difficult of execution, the execution capabilities and operational facilities of
the firm involved, and, in the case of securities, the firm's risk in
positioning a block of securities. Subject to such policies as the Trustees may
determine and consistent with Section 28(e) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Adviser's having caused a Portfolio to pay a member of
an exchange, broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another member of an exchange,
broker or dealer would have charged for effecting that transaction, if the
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
member of an exchange, broker or dealer viewed in terms of either that
particular transaction or
-2-
<PAGE>
the Adviser's overall responsibility with respect to such Portfolio and to other
clients as to which the Adviser exercises investment discretion. In accordance
with Section 11(a) of the 1934 Act and Rule 11a2-2(T) thereunder, and subject to
any other applicable laws and regulations including Section 17(e) of the Act and
Rule 17e-1 thereunder, the Adviser may engage its affiliates or any other
subadviser to the Trust and its respective affiliates, as broker-dealers or
futures commission merchants to effect Portfolio transactions in securities and
other investments for a Portfolio. The Adviser will promptly communicate to the
officers and the Trustees of the Trust such information relating to Portfolio
transactions as they may reasonably request. To the extent consistent with
applicable law, the Adviser may aggregate purchase or sell orders for the
Portfolio with contemporaneous purchase or sell orders of other clients of the
Adviser or its affiliated persons. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Adviser in the manner the Adviser determines to be equitable and
consistent with its and its affiliates' fiduciary obligations to the Portfolio
and to such other clients. The Adviser hereby acknowledges that such aggregation
of orders may not result in more favorable pricing or lower brokerage
commissions in all instances.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Section 1 of this Agreement, the Trust shall pay to the
Adviser in monthly installments, an advisory fee calculated by applying the
following annual percentage rates to the Trust's average daily net assets for
the month:
BRAZOS Micro Cap Growth Portfolio 1.20%
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is
-3-
<PAGE>
in effect subject to a pro rata adjustment based on the number of days elapsed
in the current fiscal month as a percentage of the total number of days in such
month.
4. OTHER SERVICES. At the request of the Trust, the Adviser in its
discretion may make available to the Trust office facilities, equipment,
personnel and other services. Such office facilities, equipment, personnel and
services shall be provided for or rendered by the Adviser and billed to the
Trust at the Adviser's cost.
5. REPORTS. The Trust and the Adviser agree to furnish to each other
current prospectuses, proxy statements, reports to shareholders, certified
copies of their financial statements, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others so long as its services to the Trust are not impaired thereby.
7. LIABILITY OF ADVISER. In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940 ("1940
Act"), the Adviser shall not be subject to any liability whatsoever to the
Trust, or to any shareholder of the Trust, for any error or judgment, mistake of
law or any other act or omission in the course of, or connected with, rendering
services hereunder including, without limitation, for any losses that may be
sustained
-4-
<PAGE>
in connection with the purchase, holding, redemption or sale of any security on
behalf of the Trust.
8. PERMISSIBLE INTERESTS. Subject to and in accordance with the
Certificate of Trust and Agreement and Declaration of Trust of the Trust and the
Certificate of Limited Partnership and Partnership Agreement of the Adviser,
Trustees, officers, agents and shareholders of the Trust are or may be
interested in the Adviser (or any successor thereof) as Trustees, officers,
agents, shareholders or otherwise; Trustees, officers, agents and shareholders
of the Adviser are or may be interested in the Trust as Trustees, officers,
agents, shareholders or otherwise; and the Adviser (or any successor) is or may
be interested in the Trust as a shareholder or otherwise; and the effect of any
such interrelationships shall be governed by said organizational documents and
the provisions of the 1940 Act.
9. DURATION AND TERMINATION. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of June __, 2000 or the date
of the first annual or special meeting of the shareholders of the Trust, if any,
and, if approved by a majority of the outstanding voting securities of the
Trust, thereafter shall continue for periods of one year so long as such
continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Board of Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or (c) by vote of a majority of the
outstanding voting securities of the Trust; provided however, that if the
-------- -------
shareholders of the Trust fail to approve the Agreement as provided herein, the
Adviser may continue to serve in such capacity in the manner and to the extent
permitted by the 1940 Act and rules thereunder. This Agreement may be
terminated by the Trust at any time, without the payment of any penalty, by
-5-
<PAGE>
vote of a majority of the entire Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Trust on 60 days' written
notice to the Adviser. This Agreement may be terminated by the Adviser at any
time, without the payment of any penalty, upon 90 days' written notice to the
Trust. This agreement will automatically and immediately terminate in the event
of its assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered or mailed postpaid, to the other party at the principal
office of such party.
As used in this Section 9, the terms "assignment," "interested
persons,", and "a vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and
Section 2(a)(42) of the 1940 Act.
10. AMENDMENT OF AGREEMENT. This Agreement may be amended by mutual
consent, but the consent of the Trust must be approved (a) by vote of a majority
of those members of the Board of Trustees of the Trust who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Trust.
11. SEVERABILITY. If any provisions of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of this __ day of June, 1999.
JOHN McSTAY INVESTMENT COUNSEL, L.L.C. BRAZOS MUTUAL FUNDS
By_____________________________ By______________________________________
John D. McStay, President _________________________, President
-7-
<PAGE>
EXHIBIT (D)(7)
[FORM OF]
INVESTMENT ADVISORY AGREEMENT
-----------------------------
BRAZOS MUTUAL FUNDS
BRAZOS GROWTH PORTFOLIO
AGREEMENT made this __ day of June, 1999 by and between Brazos Mutual Funds, a
Delaware business trust (the "Trust") and John McStay Investment Counsel,
L.L.C., a Delaware Limited Liability Company (the "Adviser").
1. DUTIES OF ADVISER. The Trust hereby appoints the Adviser to act as
investment adviser to the Trust for the period and on such terms as set forth in
this Agreement. The Trust employs the Adviser to manage the investment and
reinvestment of the assets of its portfolios of securities, to continuously
review, supervise and administer the investment program of the portfolios, to
determine in its discretion the securities to be purchased or sold and the
portion of the Trust's assets to be held uninvested, to provide the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Trust's officers and Board of
Trustees concerning the Adviser's discharge of the foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to the
control of the officers and the Board of Trustees of the Trust, and in
compliance with the objectives, policies and limitations set forth in the
Trust's prospectus and applicable laws and regulations. The Adviser accepts
such employment and agrees to render the services and to provide, at its own
expense, the office space, furnishings and equipment and the personnel required
by it to perform the services on the terms and for the compensation provided
herein.
<PAGE>
2. PORTFOLIO TRANSACTIONS. The Adviser is responsible for decisions to
buy or sell securities and other investments for the assets of a Portfolio,
broker-dealers and futures commission merchants' selection, and negotiation of
brokerage commission and futures commission merchants' rates. As a general
matter, in executing Portfolio transactions, the Adviser may employ or deal with
such broker-dealers or futures commission merchants as may, in the Adviser's
best judgment, provide prompt and reliable execution of the transactions at
favorable prices and reasonable commission rates. In selecting such broker-
dealers or futures commission merchants, the Adviser shall consider all relevant
factors including price (including the applicable brokerage commission, dealer
spread or futures commission merchant rate), the size of the order, the nature
of the market for the security or other investment, the timing of the
transaction, the reputation, experience and financial stability of the broker-
dealer or futures commission merchant involved, the quality of the service, the
difficult of execution, the execution capabilities and operational facilities of
the firm involved, and, in the case of securities, the firm's risk in
positioning a block of securities. Subject to such policies as the Trustees may
determine and consistent with Section 28(e) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Adviser's having caused a Portfolio to pay a member of
an exchange, broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another member of an exchange,
broker or dealer would have charged for effecting that transaction, if the
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
member of an exchange, broker or dealer viewed in terms of either that
particular transaction or
-2-
<PAGE>
the Adviser's overall responsibility with respect to such Portfolio and to other
clients as to which the Adviser exercises investment discretion. In accordance
with Section 11(a) of the 1934 Act and Rule 11a2-2(T) thereunder, and subject to
any other applicable laws and regulations including Section 17(e) of the Act and
Rule 17e-1 thereunder, the Adviser may engage its affiliates or any other
subadviser to the Trust and its respective affiliates, as broker-dealers or
futures commission merchants to effect Portfolio transactions in securities and
other investments for a Portfolio. The Adviser will promptly communicate to the
officers and the Trustees of the Trust such information relating to Portfolio
transactions as they may reasonably request. To the extent consistent with
applicable law, the Adviser may aggregate purchase or sell orders for the
Portfolio with contemporaneous purchase or sell orders of other clients of the
Adviser or its affiliated persons. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Adviser in the manner the Adviser determines to be equitable and
consistent with its and its affiliates' fiduciary obligations to the Portfolio
and to such other clients. The Adviser hereby acknowledges that such aggregation
of orders may not result in more favorable pricing or lower brokerage
commissions in all instances.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Section 1 of this Agreement, the Trust shall pay to the
Adviser in monthly installments, an advisory fee calculated by applying the
following annual percentage rates to the Trust's average daily net assets for
the month:
BRAZOS Growth Portfolio 0.90%
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is
-3-
<PAGE>
in effect subject to a pro rata adjustment based on the number of days elapsed
in the current fiscal month as a percentage of the total number of days in such
month.
4. OTHER SERVICES. At the request of the Trust, the Adviser in its
discretion may make available to the Trust office facilities, equipment,
personnel and other services. Such office facilities, equipment, personnel and
services shall be provided for or rendered by the Adviser and billed to the
Trust at the Adviser's cost.
5. REPORTS. The Trust and the Adviser agree to furnish to each other
current prospectuses, proxy statements, reports to shareholders, certified
copies of their financial statements, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others so long as its services to the Trust are not impaired thereby.
7. LIABILITY OF ADVISER. In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940 ("1940
Act"), the Adviser shall not be subject to any liability whatsoever to the
Trust, or to any shareholder of the Trust, for any error or judgment, mistake of
law or any other act or omission in the course of, or connected with, rendering
services hereunder including, without limitation, for any losses that may be
sustained
-4-
<PAGE>
in connection with the purchase, holding, redemption or sale of any security on
behalf of the Trust.
8. PERMISSIBLE INTERESTS. Subject to and in accordance with the
Certificate of Trust and Agreement and Declaration of Trust of the Trust and the
Certificate of Limited Partnership and Partnership Agreement of the Adviser,
Trustees, officers, agents and shareholders of the Trust are or may be
interested in the Adviser (or any successor thereof) as Trustees, officers,
agents, shareholders or otherwise; Trustees, officers, agents and shareholders
of the Adviser are or may be interested in the Trust as Trustees, officers,
agents, shareholders or otherwise; and the Adviser (or any successor) is or may
be interested in the Trust as a shareholder or otherwise; and the effect of any
such interrelationships shall be governed by said organizational documents and
the provisions of the 1940 Act.
9. DURATION AND TERMINATION. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of June __, 2000 or the date
of the first annual or special meeting of the shareholders of the Trust, if any,
and, if approved by a majority of the outstanding voting securities of the
Trust, thereafter shall continue for periods of one year so long as such
continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Board of Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or (c) by vote of a majority of the
outstanding voting securities of the Trust; provided however, that if the
-------- -------
shareholders of the Trust fail to approve the Agreement as provided herein, the
Adviser may continue to serve in such capacity in the manner and to the extent
permitted by the 1940 Act and rules thereunder. This Agreement may be
terminated by the Trust at any time, without the payment of any penalty, by
-5-
<PAGE>
vote of a majority of the entire Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Trust on 60 days' written
notice to the Adviser. This Agreement may be terminated by the Adviser at any
time, without the payment of any penalty, upon 90 days' written notice to the
Trust. This agreement will automatically and immediately terminate in the event
of its assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered or mailed postpaid, to the other party at the principal
office of such party.
As used in this Section 9, the terms "assignment," "interested
persons,", and "a vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and
Section 2(a)(42) of the 1940 Act.
10. AMENDMENT OF AGREEMENT. This Agreement may be amended by mutual
consent, but the consent of the Trust must be approved (a) by vote of a majority
of those members of the Board of Trustees of the Trust who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Trust.
11. SEVERABILITY. If any provisions of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of this ____ day of June, 1999.
JOHN McSTAY INVESTMENT COUNSEL, L.L.C. BRAZOS MUTUAL FUNDS
By_____________________________ By__________________________________
John D. McStay, President ____________________________,President
-7-
<PAGE>
EXHIBIT (E)(2)
[Form of]
BRAZOS MUTUAL FUNDS
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT is dated as of June __, 1999 by and
between BRAZOS MUTUAL FUNDS, a Delaware business trust (the "Trust") and
SUNAMERICA CAPITAL SERVICES, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered as such under the Investment Company Act of
1940, as amended (the "Act"); and
WHEREAS, the Trust is authorized to issue shares of common stock, par value
$.001 per share (the "Shares"), in separately designated series representing
separate funds with their own investment objectives, policies and restrictions
(the "Portfolios") and has registered the Shares of the Portfolios under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement on Form N-1A (the "Registration Statement"), including a
prospectus (the "Prospectus") and a statement of additional information (the
"Statement of Additional Information"); and
WHEREAS, the Trust has adopted a Plan of Distribution pursuant to Rule
12b-1 under the Investment Company Act on behalf of each Fund (the "Distribution
Plans") and may enter into related agreements providing for the distribution of
the Shares of the Portfolios; and
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
WHEREAS, the Trust wishes to engage the services of the Distributor as
distributor of the Shares of the Portfolios and the Distributor is willing to
serve in that capacity;
NOW, THEREFORE, it is hereby agreed between the parties
hereto as follows:
1. EXCLUSIVE DISTRIBUTOR. The Portfolios hereby agree that the
---------------------
Distributor shall for the period of this Agreement be exclusive agent for
distribution within the United States and its territories of the Class A, Class
B and Class II shares of the Trust and any additional classes of shares of the
Trust agreed to by the Distributor and the Trust and listed on an addendum to
this Agreement, and the Distributor agrees to use its best efforts during such
period to effect such distribution of the Shares; provided, however, that
-------- -------
nothing herein shall prevent a
<PAGE>
Fund, if it so elects, from selling or otherwise distributing its Shares
directly to any persons other than dealers. In connection therewith, it is
contemplated that the Distributor will enter into agreements with selected
securities dealers. The Portfolios understand that the Distributor also acts as
agent for distribution of shares of capital stock or beneficial interest, as the
case may be, of other open-end investment companies which have entered into
management and advisory agreements with the Portfolios' current investment
adviser and its affiliated companies.
2. SALE OF THE SHARES. The Distributor is authorized as agent for the
------------------
Portfolios and not as principal, to sell the Shares to other purchasers on such
terms as may be provided in the then current Prospectus of the Portfolios;
provided, however, that no sales shall be confirmed by the Distributor at any
- -------- -------
time when, according to advice received by the Distributor from the Trust, the
officers of the Trust have for any reason sufficient to them temporarily or
permanently suspended or discontinued the sale and issuance of such Trust's
Shares. Each sale shall be effected by the Distributor only at the applicable
price, plus the applicable sales charge, if any, determined by the Trust in the
manner prescribed in its then current Prospectus. The Distributor shall,
insofar as they concern it, comply with all applicable laws, rules and
regulations including, without limiting the generality of the foregoing, all
rules or regulations made or adopted pursuant to Section 22 of the Act by the
Securities and Exchange Commission or any securities association registered
under the Exchange Act.
The Portfolios agree, as long as the Shares may legally be issued, to
fill all orders confirmed by the Distributor in accordance with the provisions
of this Agreement.
3. EXPENSES; COMPENSATION. The Distributor agrees promptly to pay or
----------------------
reimburse the Portfolios for all expenses (except expenses incurred by the
Portfolios in connection with the preparation, printing and distribution of any
prospectus or report or other communication to shareholders, to the extent that
such expenses are incurred to effect compliance with the Federal or state laws
or to enable such distribution to shareholders) (a) of printing and distributing
copies of any prospectus and of preparing, printing and distributing any other
material used by the Distributor in connection with offering the Shares for
sale, and (b) of advertising in connection with such offering. The Portfolios
agree to pay all expenses in connection with the registration of the Shares
under the Securities Act, all fees and related expenses which may be incurred in
connection with the qualification of the Shares for sale in such states (as well
as the District of Columbia, Puerto Rico and other territories) as the
Distributor may designate, and all expenses in connection with maintaining
facilities for the issue and transfer of the Shares, of supplying information,
prices and other data to be furnished by it hereunder and through its agents of
all data processing and related services related to the share distribution
activity contemplated hereby.
As compensation for its services hereunder, the Portfolios agree to
pay to the Distributor all amounts received as sales charges as described in the
Portfolios' most current Prospectus. Out of such sales charges, the Distributor
may allow such concessions or reallowances to dealers as it may from time to
time determine.
-2-
<PAGE>
The Trust agrees to execute such documents and to furnish such
information as may be reasonably necessary, in the discretion of the Board of
Trustees ("Trustees") of the Trust, in connection with the qualification of the
Shares for sale in such states (as well as the District of Columbia, Puerto Rico
and other territories) as the Distributor may designate. The Distributor also
agrees to pay all fees and related expenses connected with its own qualification
as a broker or dealer under Federal or state laws and, except as otherwise
specifically provided in this Agreement or agreed to by the Trust, all other
expenses incurred by the Distributor in connection with the sale of the Shares
as contemplated in this Agreement (including the expenses of qualifying the
Trust as a dealer or broker under the laws of such states as may be designated
by the Distributor, if deemed necessary or advisable by the Trust).
4. PROSPECTUS AND OTHER INFORMATION. The Trust represents and warrants to
--------------------------------
and agrees with the Distributor that:
(a) The Registration Statement, including the Prospectus and
Statement of Additional Information, relating to the Shares has been filed
under both the Act and the Securities Act and has become effective.
(b) At all times during the term of this Agreement, except when the
officers of the Trust have suspended or discontinued the sale and issuance of
the Shares of a Fund as contemplated by Section 2 hereof, the Registration
Statement, Prospectus and Statement of Additional Information will conform in
all material respects to the requirements of the Act and the rules and
regulations of the Securities and Exchange Commission, and none of such
documents will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, except that the foregoing does not apply to
any statements or omissions in any of such documents based upon written
information furnished to the Trust by the Distributor specifically for use
therein.
(c) The Trust agrees to prepare and furnish to the Distributor from
time to time, a copy of the Prospectus, and authorizes the Distributor to use
such Prospectus, in the form furnished to the Distributor from time to time, in
connection with the sale of the Shares. The Trust also agrees to furnish the
Distributor from time to time, for use in connection with the sale of such
Shares, such information (including the Statement of Additional Information)
with respect to the Portfolios and the Shares as the Distributor may reasonably
request.
5. INDEMNIFICATION.
---------------
(a) The Trust will indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor within the meaning of the Act
against any losses, claims, damages or liabilities to which the Distributor or
such controlling person may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, Prospectus or
Statement of Additional Information or any other written sales material prepared
by the Trust or the Portfolios which is utilized by the Distributor in
connection with the sale of Shares of the Fund or arise out
-3-
<PAGE>
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or (in the case of the Registration
Statement, Prospectus and Statement of Additional Information) necessary to make
the statement therein not misleading or (in the case of such other sales
material) necessary to make the statements therein not misleading in the light
of the circumstances under which they were made; and will reimburse the
Distributor and each such controlling person for any legal or other expenses
reasonably incurred by the Distributor or such controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Trust or the Portfolios will not be
-------- -------
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such Registration Statement,
Prospectus or Statement of Additional Information in conformity with written
information furnished to the Trust by the Distributor specifically for use
therein; and provided, further, that nothing herein shall be so construed as to
-------- -------
protect the Distributor against any liability to the Trust or the Portfolios, or
the security holders of the Portfolios to which the Distributor would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence, in
the performance of its duties, or by reason of the reckless disregard by the
Distributor of its obligations and duties under this Agreement. This indemnity
provision will be in addition to any liability which the Trust may otherwise
have.
(b) The Distributor will indemnify and hold harmless the Trust, each
of its Trustees and officers and each person, if any, who controls the Trust
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Trust or any such Trustee, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, Prospectus or Statement of
Additional Information or any sales material not prepared by the Trust or the
Portfolios which is utilized in connection with the sale of the Shares or arise
out of or are based upon the omissions or the alleged omission to state therein
a material fact required to be stated therein or (in the case of the
Registration Statement, Prospectus and Statement) necessary to make the
statements therein not misleading or (in the case of such other sales material)
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, in the case of the Registration
Statement, Prospectus and Statement of Additional Information to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in conformity with written information
furnished to the Trust by the Distributor specifically for use therein; and the
Distributor will reimburse any legal or other expenses reasonably incurred by
the Trust or any such Trustee, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action.
This indemnity provision will be in addition to any liability which the
Distributor may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from liability
which it may have to any indemnified party otherwise than under this Section. In
-4-
<PAGE>
case any such action is brought against any indemnified party, and it notifies
the indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish, to
assume the defense thereof, with counsel satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
6. TERM OF AGREEMENT. This Agreement shall continue in full force and
-----------------
effect for two years from the date hereof, and shall continue in full force and
effect from year to year thereafter if such continuance is approved in the
manner required by the Act, and the Distributor has not have notified the Trust
in writing at least 60 days prior to the anniversary date of the previous
continuance that it does not desire such continuance. This Agreement may be
terminated at any time, without payment of penalty by the Trust on 60 days'
written notice to the Distributor by vote of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Trust (as defined
by the Act). This Agreement shall automatically terminate in the event of its
assignment (as defined by the Act).
7. MISCELLANEOUS. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York. Anything herein to the
contrary notwithstanding, this Agreement shall not be construed to require or to
impose any duty upon either of the parties to do anything in violation of any
applicable laws or regulations.
IN WITNESS WHEREOF, the Trust and the Distributor have caused this
Agreement to be executed by their duly authorized officers as of the date above
written.
BRAZOS MUTUAL FUNDS
By: ________________________________
President
SUNAMERICA CAPITAL SERVICES, INC.
By: ________________________________
Robert M. Zakem
Execitive Vice President
-5-
<PAGE>
EXHIBIT (E)(3)
[Form of]
SunAmerica
Capital Services
Name of Firm______________________________
City______________ State_______ Zip Code_____
RE: SELLING AGREEMENT
Gentlemen:
We are the national distributor and principal underwriter of the shares of
mutual funds sponsored, managed and/or advised by SunAmerica Asset Management
Corp. (hereinafter referred to individually as a "Fund," or collectively as the
"Funds"). The Funds and each individual investment series thereof are set forth
on Schedule A, which may be amended from time to time. We invite you to
participate in making available to your customers shares of the Funds on the
following terms:
1a NON-BANK PARTICIPANTS ONLY. You represent and warrant that you are a
member of the National Association of Securities Dealer, Inc. (the "NASD"). You
agree to abide by the Rules of Fair Practice, the Constitution and By-Laws of
the NASD and to all other rules and regulations that are now or may become
applicable to transactions thereunder.
b. BANK PARTICIPANTS ONLY. You represent and warrant to us that (i)(a)
you are a "Bank" as such term is defined in Section 3(a)(6) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or (b) you are a "bank
holding company" as such term is defined in the Bank Holding Act of 1956, as
amended (the "Act"); (ii) you are duly organized and an existing "bank" or "bank
holding company" in good standing under the laws of jurisdiction in which you
were organized; (iii) all authorization (if any) required for your lawful
execution of this Agreement and your performance hereunder have been obtained;
and (iv) upon execution and delivery by you, and assuming due and valid
execution and delivery by us, this Agreement will constitute a valid and binding
agreement, enforceable against you in accordance with its terms. In the event
you are a "bank holding company" as such term is defined in the Act, you shall
attach as an exhibit, and which will be made a part of this Agreement, which
sets forth the names and addresses of the "banks" on whose behalf you are
authorizes to execute this Agreement. You agree to give written notice to us
promptly in the event you shall cease to be a "bank" as such term is defined in
Section 3(a)(6) of the Exchange Act or a "bank holding company" as such term is
defined in the Act. In such event, this Agreement shall be automatically
terminated upon such written notice. You also agree to abide by all of the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
applicable to the sale of investment company shares to your customers.
<PAGE>
We recognize that you may be subject to the provisions of the Glass-
Steagall Act and other laws governing, among other things, the conduct of
activities by federally charted and supervised banks and affiliated
organizations. Because you will be the only one having a direct relationship
with the customer, you will comply and are complying with all laws and
regulations, including those of the applicable regulatory authorities and any
federal or state regulatory body having jurisdiction over you or your customers,
to the extent applicable to securities purchases hereunder for the account of
your customer.
2.a Orders for shares received from you and accepted by a Fund will be
priced at its next-determined net asset value, plus the applicable sales charge,
if any, at the time of such acceptance as established pursuant to the then-
current prospectus of the Fund. You hereby agree that, in the vent you receive
customer purchase or redemption orders for a fund after the time of day that
such fund prices its shares, you will have adequate internal controls designed
to prevent such orders from being aggregated with orders received before such
time. If you designate another entity to receive customer purchase and
redemption orders, you hereby agree to ensure that such designee has adopted and
implemented its own adequate internal controls. Procedures relating to the
handling of orders, including the Policies and Procedures With Respect to Sales
of SunAmerica Mutual Funds Under the Multiple Pricing Structure, as may be
amended from time to time, set forth in Schedule B hereto, shall be subject to
instructions which we shall forward from time to time to all firms (the
"Participant") through which we make available shares of the Funds. All orders
are subject to acceptance by the applicable Fund, which reserves the right in
its sole discretion to reject any order in whole or in part.
b. We will confirm transactions for each of your customers, it being
understood in all cases that (a) you are acting as the agent for the customer,
(b) the transactions are without recourse against you by the customer except to
the extent that (i) your failure to transmit orders in a timely fashion results
in a loss to your customer, or (ii) in the event you do not receive a
confirmation of the transaction within ten (10) business days following the
order date, your failure to inquire as to the status of the transaction during
such time period results in a loss to your customer, (c) as between you and the
customer, the customer shall have beneficial ownership of the Fund shares; (d)
each transaction in initiated solely upon the order of the customer, and (e)
each transaction is for the account of the customer and not for your account.
3. As a Participant, you agree to purchase shares of the Funds only
through us or from your customers. Purchases through us shall be made only for
the purpose of covering purchase orders already received from your customers or
for your own bona fide investment.
4. You agree to sell shares of the Funds only (a) to your customers at
the net asset value plus applicable sales charge, if any, then in effect as
established by the then-current prospectus of the applicable Fund or (b) to us
as agent for the Fund or the Fund itself at the redemption price as described in
the prospectus.
5. We reserve the right in our discretion, and without notice to you, to
suspend sales or withdraw the offering of shares entirely, or to modify or
cancel this Agreement. All sales shall be subject to the terms and provisions
set forth in the Funds' then-current prospectuses.
-2-
<PAGE>
6. No person is authorized to make any representations concerning a Fund
or its shares except those contained in its prospectus and any other information
(including any applicable "Statement of Additional Information") as may be
approved by a Fund as information supplemental to its prospectus. In purchasing
shares through us, you shall rely solely on the representations contained in the
then-effective Prospectus and supplemental information above-mentioned. You
agree to hold us harmless and indemnify the Funds and us in the event that you,
or any of your sales representatives, should violate any law, rule or
regulation, or any provisions of this Agreement, which may result in liability
to the Funds or us. Additional copies of any prospectus and/or supplement
information (including any applicable "Statement of Additional Information")
will be supplied by us to you in reasonable quantities upon request.
7. You shall have no authority whatever to act as agent of the Funds or
us, or any other Participant, and nothing in this Agreement shall constitute you
or the Funds as the agent of the other. In all transactions in these shares
between you and us, we are acting as agent for the Funds and not as principal.
8. All communications to us shall be sent to SunAmerica Capital Services,
Inc., The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. Any
notice to you shall be duly given if mailed or telegraphed to you at your
address set forth below, unless you give us written instructions otherwise. It
is your responsibility to provide us with updated information concerning where
written communications should be sent.
9. This Agreement may be terminated without penalty upon written notice
by either party at any time, and shall automatically terminate upon its
assignment, or upon any event that terminates a Fund's Distribution Agreement
with us. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York. The indemnification provision in Section 6
hereof shall survive any termination of this Agreement hereunder.
10. NON-BANK PARTICIPANT ONLY. By accepting this Agreement, you
represent that you are (i) registered as a broker-dealer under the Securities
Exchange Act of 1934; (ii) are qualified to act as a dealer in the states or
other jurisdictions where you transact business; and (iii) are a member in good
standing of the NASD. You agree that you will maintain such registration,
qualifications, and membership in full force and effect throughout the terms of
this Agreement. You further agree to comply with all applicable federal laws,
the laws of the states or other jurisdictions concerned, and the rules and
regulations promulgated thereunder, and with the Constitution, By-Laws and Rules
of Fair Practice, of the NASD and that you will not offer of sell the shares of
the Funds in any state or jurisdiction where they may not lawfully be offered or
sold, or where you are not registered as a broker-dealer.
11.a SERVICE FEES. We expect you to provide administration and marketing
services in the promotion of the Funds' shares, including services and
assistance to your customers who own Fund shares. For such services, you will
be entitled to compensation as set forth on Schedule A, as may be amended from
time to time, and in the Funds' current prospectuses. You hereby agree to waive
payment of such compensation until such time that we are in receipt of the
commissions or concessions due for such Fund shares. Our liability for payment
of such compensation is
-3-
<PAGE>
limited solely to the proceeds of such concessions receivable. No commissions or
concession shall be payable with respect to shares purchased through
reinvestment of dividends or distributions, or that had been acquired through
one or more exchange transactions which had been the subject of payments under
this paragraph. In addition, no commission or concession shall be payable with
respect to Shares that had been subject to a waiver of the sales charge except
as set forth in the Funds' current prospectuses.
b. CONTINGENT DEFERRED SALES CHARGE ("CDSC"). For purchases of Class B
and Class II shares (or for certain purchases of Class A shares), we advance
commissions with the presumption that assets will remain in the Fund(s) long
enough for expenses to be recouped. In the event of a redemption of shares
purchases before the holding period expires, a CDSC is deducted from the
redemption proceeds as described in the Funds' prospectuses.
c. CDSC WAIVERS. An exemptive order issued by the Securities and Exchange
Commission provides for a waiver of the CDSC on the following redemptions: (a)
CDSC Shares (Class B, Class II shares and certain Class A shares) requested to
be redeemed within one year of the death or initial determination of disability,
as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the
"Code"), of a shareholder, (b) Class B shares representing taxable distributions
made by qualified retirement plans or retirement accounts (not including
rollovers) for which SunAmerica Asset Management Corp. serves as fiduciary;
provided that, the plan participant or account holder has attained the age of 59
1/2 at the time the redemption is made; (c) Class B and Class II shares being
redeemed up to the limit specified in the Funds' prospectuses made pursuant to
any systematic withdrawal plan established by the Funds. The CDSC waiver, with
respect to (a) above (i.e.; death or disability), is only applicable in cases
where the shareholder account is registered (i) in the name of an individual
person, (ii) as a joint tenancy with rights of survivorship, (iii) as community
property, or (iv) in the name of a minor under the Uniform Gift or Uniform
Transfer to Minors Acts. Notwithstanding the foregoing, we reserve the right to
terminate any or all of these waiver provisions in the future.
d. COMMISSION RECLAIMS. With respect to shares redeemed on which the
CDSC is waived pursuant to (b) above (i.e.; taxable distributions from the
qualified retirement plans as described therein), 100% of the commission
advanced to the selling Broker/Dealer in respect of such shares is subject to
reclaim in the event the redemption occurs within the first year from the date
of purchase, and 50% of the commission advanced if the redemption occurs in the
second year from the date of purchase. With respect to Class A shares purchased
at net asset value (which were part of a purchase of $1 million or more, and
which were subject to a CDSC if redeemed within one year of purchase), 50% of
the commission advanced is subject to reclaim if the redemption occurs during
the second year from the date of purchase. For all other purchases of Class A
shares at net asset value, the entire commission advanced is subject to reclaim
for any redemption occurring within the first two years from the date of
purchase. The foregoing reclamations will be subtracted from dealer concession
payments payable according to Schedule A and, if sufficient dealer concession
payments are not available to offset these reclamations, you will reimburse us
for these amounts.
12. This Agreement shall become effective upon receipt by us or a signed
copy hereof, and shall continue in effect until and unless terminated (i)
pursuant to Section 9, above,
-4-
<PAGE>
or (ii) on account of your violation of any representation contained herein.
This Agreement shall supersede all prior Selling Agreements with you relating to
the shares of the Funds. This Agreement may be amended in writing signed by each
of the parties hereto, except that we may amend Schedule A in our sole
discretion upon notice to you. Any such amendment shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors.
SunAmerica Capital Services, Inc.
By:__________________________________
Name:________________________________
Date: _____________________ Title:_______________________________
The undersigned accepts your invitation to make available to its customers
the shares of the Funds and agrees to abide by the foregoing terms and
conditions. The undersigned acknowledges receipt of prospectuses of the Funds in
connection with this offering.
____________________________ ______________________________________
Firm Name Authorized Signatory
____________________________ ______________________________________
Address Print Name
____________________________ ______________________________________
Title of Signatory
____________________________ ______________________________________
Telephone Number Date
____________________________
Fax Number
Rev. 12/98
-5-
<PAGE>
[Form of]
SCHEDULE A
SUNAMERICA MUTUAL FUNDS
SunAmerica Income Funds
- -----------------------
COMPENSATION (concession to selling dealer is based on amount of purchase)
- ------------
A SHARES
<TABLE>
<CAPTION>
Purchase Amount Dealer Concession
--------------- -----------------
<S> <C>
$ 0 to $ 99,999 4.00%
$ 100,000 to $ 249,999 3.00%
$ 250,000 to $ 499,999 2.25%
$ 500,000 to $ 999,999 1.35%
$ 1,000,000 or more 1.00%
Up to .25% Service Fee, paid quarterly, effective immediately
</TABLE>
B SHARES - 4.00% (no breakpoints)
Up to .25% Service Fee, paid quarterly, beginning the 13th month following
purchase
II SHARES - 2.00% (no breakpoints)
For all Funds except High Income, up to .25% Service Fee and .50% trail
commission (total .75%), paid quarterly, beginning the 13th month following
purchase. With respect to High Income, up to .25% Service Fee and .75% trail
commission (total 1.00%), paid quarterly, beginning the 13th month following
purchase.
- --------------------------------------------------------------------------------
SunAmerica Equity Funds
- -----------------------
COMPENSATION (concession to selling dealer is based on amount of purchase)
- ------------
A SHARES
<TABLE>
<CAPTION>
Purchase Amount Dealer Concession
--------------- -----------------
<S> <C>
$ 0 to $ 49,999 5.00%
$ 50,000 to $ 99,999 4.00%
$ 100,000 to $ 249,999 3.00%
$ 250,000 to $ 499,999 2.25%
$ 500,000 to $ 999,999 1.35%
$ 1,000,000 or more 1.00%
Up to .25% Service Fee, paid quarterly, effective immediately
</TABLE>
B SHARES - 4.00% (no breakpoints)
Up to .25% Service Fee, paid quarterly, beginning the 13th month following
purchase
<PAGE>
II SHARES - 2.00% (no breakpoints)
Up to .25% Service Fee and .75% trail commission (total 1.00%), paid
quarterly, beginning the 13th month following purchase
SunAmerica Money Market Funds, Inc.
- -----------------------------------
COMPENSATION
- ------------
A SHARES
Up to .15% Service Fee, paid quarterly, effective immediately
B SHARES - 4.00% (no breakpoints)
Up to .15% Service Fee, paid quarterly, beginning the 13th month following
purchase
II SHARES - 2.00% (no breakpoints)
Up to .25% Service Fee and .25% trail commission (total .50%), paid
quarterly, beginning the 13th month following purchase
STYLE SELECT SERIES
STYLE SELECT SERIES, INC.
- -------------------------
COMPENSATION (concession to selling dealer is based on amount of purchase)
- -------------
A SHARES
<TABLE>
<CAPTION>
Purchase Amount Dealer Concession
--------------- -----------------
<S> <C>
$ 0 to $ 49,999 5.00%
$ 50,000 to $ 99,999 4.00%
$ 100,000 to $ 249,999 3.00%
$ 250,000 to $ 499,999 2.25%
$ 500,000 to $ 999,999 1.35%
$ 1,000,000 or more 1.00%
Up to .25% Service Fee, paid quarterly, effective immediately
</TABLE>
B SHARES - 4.00% (no breakpoints)
Up to .25% Services Fee, paid quarterly, beginning the 13/th/ month
following purchase
II SHARES - 2.00% (no breakpoints)
Up to .25% Services Fee and .74% trail commission (total 1.00%), paid
quarterly, beingnning the 13/th/ month following purchase
-2-
<PAGE>
[Form of]
SCHEDULE B
POLICIES AND PROCEDURES WITH RESPECT TO
SALES OF SUNAMERCIA MUTUAL FUNDS AND
STYLE SELECT SERIES, INC.
As certain portfolio of SunAmerica Mutual Funds and Style Select Series,
Inc. (the "Multiple Pricing Funds") offer shares subject to a front-end sales
load ("Class A Shares"), shares subject to a deferred sales charge ("Class B
Shares") and shares subject to both a front-end sales load and deferred sales
charges ("Class II Shares"), it is important for investors not only to choose a
mutual fund that best suits their investment objectives, but also to choose the
sales financing method which best suits their particular needs. To assist your
clients in these decisions and to ensure proper supervision of mutual fund
purchase recommendations, we are instituting the following policies:
(1) Any purchase of SunAmerica Mutual Fund for less than $100,000, may be
either Class A, Class B or Class II Shares.
(2) Any purchase of a SunAmerica Mutual Fund, for either Class A, Class B
or Class II Shares, in the amount of $100,000 or more, but less than $1 million,
must be reviewed and approved for appropriateness by the Broker/Dealer (who must
maintain a written record of this review) in light of the relevant facts and
circumstances pertaining to your client, including, but not limited to:
(a) the specific purchase order dollar amount;
(b) the length of time the client expects to hold his or her shares;
and
<PAGE>
(c) any other relevant circumstances, such as the availability of
purchases under letters of intent or pursuant to rights of
accumulation.
(3) A purchase of any SunAmerica Mutual Fund for $1 million or more should
be of Class A Shares.
(4) Generally, initial purchases of the SunAmerica Money Market Fund must
be of Class A Shares. Class B or Class II shares of such Fund are only available
to those investors exchanging from Class B or Class II shares of another
SunAmerica Mutual Fund, or those investors making an initial purchase who intend
to exchange into the Class B or Class II shares of another SunAmerica Mutual
Fund.
General Guidelines
------------------
There are instances where one financing method may be more advantageous to
an investor than the other. For example, investors who may take advantage of
breakpoints and those qualifying for a discount from the maximum sales load on
Class A Shares, may determine that the purchase of Class A Shares with the
payment of a reduced front-end sales charge is preferable to payment of the
ongoing distribution fee imposed upon Class B Shares for the first seven years.
On the other hand, investors whose orders would not take advantage of
breakpoints to qualify for a discount may wish to defer the sales load and have
all of their funds invested in Class B Shares initially. After a holding period
of seven years, the Class B Shares convert to Class A Shares, and ongoing
charges are thereafter equal.
A National Association of Securities Dealers, Inc. rule specifically
prohibits "breakpoint sales" of front-end load shares. A "breakpoint sale" is a
sale to an investor of an amount of front-end load (Class A) shares just below
the amount which would be subject to the next breakpoint on the fund's sales
charge schedule. Because the deferred sales charge on Class B
-2-
<PAGE>
shares is gradually reduced to 0% over the six-year period in which the shares
are held, a redemption of Class B shares just before an "anniversary date" is in
some ways analogous to a breakpoint sale. An investor might wish to redeem just
before an anniversary date for tax or other reasons, and an investor who chose
to wait would continue to be at market risk. Nevertheless, you should inform
your clients intending to redeem Class B shares near an anniversary date that,
if the redemption were delayed, the deferred sales charge might be reduced.
Responsibilities of the Broker/Dealer
-------------------------------------
You must ensure that all employees receiving investor inquiries about the
purchase of shares of Multiple Pricing Funds have advised the investor of the
available financing methods offered by the mutual funds, and the impact of
choosing one method over another. In certain instances, it may be appropriate to
discuss the purchase directly with the investor. The foregoing guidelines, as
well as the examples cited above, should assist you in reviewing purchase orders
less than, equal to, or greater than $100,000.
Effectiveness
-------------
This policy is effective as of October 1, 1993 with respect to any other
for shares of all Multiple Pricing Funds.
Questions relating to this policy should be directed to SunAmerica Capital
Services, Inc., The SunAmerica Center, 733 Third Avenue, New York, NY 10017-
3204.
-3-
<PAGE>
Exhibit (G)(2)
[Form of]
CUSTODIAN CONTRACT
Between
BRAZOS MUTUAL FUNDS
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held by It ...................... 1
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States ............................................. 2
2.1 Holding Securities.................................................... 2
2.2 Delivery of Securities................................................ 2
2.3 Registration of Securities............................................ 4
2.4 Bank Accounts......................................................... 4
2.5 Availability of Federal Funds......................................... 5
2.6 Collection of Income.................................................. 5
2.7 Payment of Fund Monies................................................ 5
2.8 Liability for Payment in Advance of Receipt of Securities Purchased... 6
2.9 Appointment of Agents................................................. 6
2.10 Deposit of Fund Assets in U.S. Securities System...................... 7
2.11 Fund Assets Held in the Custodian's Direct Paper System............... 8
2.12 Segregated Account.................................................... 9
2.13 Ownership Certificates for Tax Purposes............................... 9
2.14 Proxies............................................................... 9
2.15 Communications Relating to Portfolio Securities....................... 9
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States ....................................................... 10
3.1 Appointment of Foreign Sub-Custodians................................. 10
3.2 Assets to be Held..................................................... 10
3.3 Foreign Securities Systems............................................ 10
3.4 Holding Securities.................................................... 10
3.5 Agreements with Foreign Banking Institutions.......................... 11
3.6 Access of Independent Accountants of the Fund......................... 11
3.7 Reports by Custodian.................................................. 11
3.8 Transactions in Foreign Custody Account............................... 11
3.9 Liability of Foreign Sub-Custodians................................... 12
3.10 Liability of Custodian................................................ 12
3.11 Reimbursement for Advances............................................ 12
3.12 Monitoring Responsibilities........................................... 13
3.13 Branches of U.S. Banks................................................ 13
3.14 Tax Law............................................................... 13
4. Payments for Sales or Repurchases or Redemption of Shares of the Fund ...... 13
5. Proper Instructions ........................................................ 14
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6. Actions Permitted without Express Authority ............................... 14
7. Evidence of Authority ..................................................... 15
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income ............................................ 15
9. Records ................................................................... 15
10. Opinion of Fund's Independent Accountants.................................. 16
11. Reports to Fund by Independent Public Accountants.......................... 16
12. Compensation of Custodian.................................................. 16
13. Responsibility of Custodian................................................ 16
14. Effective Period, Termination and Amendment................................ 17
15. Successor Custodian........................................................ 18
16. Interpretive and Additional Provisions..................................... 19
17. Additional Funds........................................................... 19
18. Massachusetts Law to Apply................................................. 19
19. Prior Contracts............................................................ 19
20. Shareholder Communications Election........................................ 19
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between Brazos Mutual Funds, a business trust organized and
existing under the laws of the State of Delaware, having its principal place of
business at 5949 Sherry Lane, Suite 1600, Dallas, Texas 75225 hereinafter called
the "Fund," and State Street Bank and Trust Company, a Massachusetts trust
company, having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian,"
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in four series, Brazos
Micro Cap Growth Portfolio, Brazos Small Cap Growth Portfolio, Brazos Real
Estate Securities Portfolio and Brazos Growth Portfolio (such series together
with all other series subsequently established by the Fund and made subject to
this Contract in accordance with paragraph 17, being herein referred to as the
"Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the
Custodian all securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Portfolio and not delivered
to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5), the
Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such sub-
custodian has to the Custodian. The Custodian may employ as sub-custodian for
the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities
<PAGE>
depositories designated in Schedule A hereto but only in accordance with the
provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
------------------------------------------------------------------------
Custodian in the United States
------------------------------
2.1 Holding Securities. The Custodian shall hold and physically segregate for
------------------
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies (each, a "U.S. Securities System") and (b)
commercial paper of an issuer for which State Street Bank and Trust Company
acts as issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian (the "Direct Paper
System") pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
----------------------
securities owned by a Portfolio held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only upon
receipt of Proper Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
--------
case, the new securities are to be delivered to the Custodian;
-2-
<PAGE>
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
--- ----
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
--- ----
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract
-3-
<PAGE>
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Portfolio of
the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
--------
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized in
------
writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent appointed pursuant
to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name," the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a Portfolio
may be deposited by it to its credit as Custodian in the Banking Department
of the Custodian or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however, that every such
--------
bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and
the funds to be deposited with each such bank or trust company shall on
-4-
<PAGE>
behalf of each applicable Portfolio be approved by vote of a majority of
the Board of Trustees of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawal by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund on
-----------------------------
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
--------------------
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2(10) shall be the responsibility of the Fund. The Custodian will
have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of
the income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund
----------------------
on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies
of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a custodian and
has been designated by the Custodian as its agent for this purpose)
registered in the name of the Portfolio or in the name of a nominee of
the Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a U.S.
Securities System, in accordance with the conditions set forth in
Section 2.10 hereof, (c) in the case of a purchase involving the
Direct Paper System, in accordance with the conditions set forth in
Section 2.11; (d) in the case of repurchase agreements entered into
between the Fund on behalf of the Portfolio and the Custodian, or
another bank, or a broker-dealer which is a
-5-
<PAGE>
member of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's account
at the Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from the
Portfolio or (e) for transfer to a time deposit account of the Fund in
any bank, whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined in
Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer agent
and legal fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
-------------------------------------------------------------------
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified
-6-
<PAGE>
under the Investment Company Act of 1940, as amended, to act as a
custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
--------
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
-------------------------------------------------
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "U.S. Securities System" in accordance with
applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an
account ("Account") of the Custodian in the U.S. Securities System
which shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities
System that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Portfolio. The
Custodian shall transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the U.S. Securities System
that payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Portfolio.
Copies of all advices from the U.S. Securities System of transfers of
securities for the account of the Portfolio shall identify the
Portfolio, be maintained for the Portfolio by the Custodian and be
provided to the Fund at its request. Upon request, the Custodian shall
furnish the Fund on behalf of the Portfolio confirmation of each
transfer to or from the account of the Portfolio in the form of a
written advice or notice and shall furnish to the Fund on behalf of
the Portfolio copies of daily transaction sheets reflecting each day's
transactions in the U.S. Securities System for the account of the
Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the U.S. Securities System;
-7-
<PAGE>
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the U.S.
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and
to the extent that the Portfolio has not been made whole for any such
loss or damage;
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
-------------------------------------------------------
may deposit and/or maintain securities owned by a Portfolio in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities sold
for the account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the U.S. Securities System for the account
of the Portfolio;
-8-
<PAGE>
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on behalf
of each such Portfolio, into which account or accounts may be transferred
cash and/or securities, including securities maintained in an account by
the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
--- ----
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
-------
held hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the
-----------------------------------------------
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise of
call and put options written by the Fund on behalf of the Portfolio and
the maturity of futures
-9-
<PAGE>
contracts purchased or sold by the Portfolio) received by the Custodian
from issuers of the securities being held for the Portfolio. With respect
to tender or exchange offers, the Custodian shall transmit promptly to the
Portfolio all written information received by the Custodian from issuers
of the securities whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Portfolio shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
--------------------------------------------------------------------------
of the United States
--------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
-------------------------------------
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt
of "Proper Instructions," as defined in Section 5 of this Contract,
together with a certified resolution of the Fund's Board of Trustees, the
Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the employment
of any one or more such sub-custodians for maintaining custody of the
Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
-----------------
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities," as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
--------------------------
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in a clearing agency which acts as a securities depository or
in a book-entry system for the central handling of securities located
outside the United States (each a "Foreign Securities System") only
through arrangements implemented by the foreign banking institutions
serving as sub-custodians pursuant to the terms hereof (Foreign Securities
Systems and U.S. Securities Systems are collectively referred to herein as
the "Securities Systems"). Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5
hereof.
3.4 Holding Securities. The Custodian may hold securities and other non-cash
------------------
property for all of its customers, including the Fund, with a foreign sub-
custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
-------- -------
records of the Custodian with respect to securities and other non-
-10-
<PAGE>
cash property of the Fund which are maintained in such account shall
identify by book-entry those securities and other non-cash property
belonging to the Fund and (ii) the Custodian shall require that securities
and other non-cash property so held by the foreign sub-custodian be held
separately from any assets of the foreign sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
--------------------------------------------
foreign banking institution shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution or
its creditors or agent, except a claim of payment for their safe custody
or administration; (b) beneficial ownership for the assets of each
Portfolio will be freely transferable without the payment of money or
value other than for custody or administration; (c) adequate records will
be maintained identifying the assets as belonging to each applicable
Portfolio; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted under
applicable law the independent public accountants for the Fund, will be
given access to the books and records of the foreign banking institution
relating to its actions under its agreement with the Custodian; and (e)
assets of the Portfolios held by the foreign sub-custodian will be subject
only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
---------------------------------------------
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such
foreign banking institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
--------------------
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notifications of
any transfers of securities to or from each custodial account maintained
by a foreign banking institution for the Custodian on behalf of each
applicable Portfolio indicating, as to securities acquired for a
Portfolio, the identity of the entity having physical possession of such
securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise provided
---------------------------------------
in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and
2.7 of this Contract shall apply, mutatis mutandis to the foreign
------- --------
securities of the Fund held outside the United States by foreign sub-
custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the
account of each applicable Portfolio may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation,
delivering securities to
-11-
<PAGE>
the purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or
dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as
set forth in Section 2.3 of this Contract, and the Fund agrees to hold
any such nominee harmless from any liability as a holder of record of
such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
-----------------------------------
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
----------------------
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
--------------------------
cash or securities for any purpose for the benefit of a Portfolio
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall be security
therefor and should the Fund fail to repay the Custodian promptly, the
-12-
<PAGE>
Custodian shall be entitled to utilize available cash and to dispose of
such Portfolio's assets to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall famish annually to the
---------------------------
Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign sub-
custodian or any material loss of the assets of the Fund or in the case of
any foreign sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign sub-
custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
----------------------
Contract, the provisions hereof shall not apply where the custody of the
Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a sub-
custodian shall be governed by paragraph I of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom shall
be maintained in an interest bearing account established for the Fund with
the Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for any
-------
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or
any state or political subdivision thereof. It shall be the responsibility
of the Fund to notify the Custodian of the obligations imposed on the Fund
or the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental
charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to
use reasonable efforts to assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
4. Payments for Sales or Repurchases or Redemption of Shares of the Fund
---------------------------------------------------------------------
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian
-13-
<PAGE>
will provide timely notification to the Fund on behalf of each such Portfolio
and the Transfer Agent of any receipt by it of payments for Shares of such
Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian shall honor checks
drawn on the Custodian by a holder of Shares, which checks have been asked by
the Fund to the holder of Shares, when presented to the Custodian in accordance
with such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
-------------------
Proper Instructions as used throughout this Contract means a writing signed
or initialed by one or more person or persons as the Board of Trustees shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of procedures approved by the Board of
Trustees, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.12.
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
--------
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
-14-
<PAGE>
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income
------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Fund to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio or, if directed in writing to do so
by the Fund on behalf of the Portfolio, shall itself keep such books of account
and/or compute such net asset value per share. If so directed, the Custodian
shall also calculate daily the net income of the Portfolio as described in the
Fund's currently effective prospectus related to such Portfolio and shall advise
the Fund and the Transfer Agent daily of the total amounts of such net income
and, if instructed in writing by an officer of the Fund to do so, shall advise
the Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and the
daily income of each Portfolio shall be made at the time or times described from
time to time in the Fund's currently effective prospectus related to such
Portfolio.
9. Records
-------
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-2 and
31a-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
-15-
<PAGE>
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-IA, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel (who may be counsel for the Fund)
on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption,
-16-
<PAGE>
suspension or restriction of trading on or the closure of any securities market,
power or other mechanical or technological failures or interruptions, computer
viruses or communications disruptions, acts of war or terrorism, riots,
revolutions, work stoppages, natural disasters or other similar events or acts;
(ii) efforts by the Fund or the Investment Advisor in their instructions to the
Custodian provided such instructions have been in accordance with this Contract;
(iii) the insolvency of or acts or omissions by a Securities System; (iv) any
delay or failure of any broker, agent or intermediary, central bank or other
commercially prevalent payment or clearing system to deliver to the Custodian's
sub-custodian or agent securities purchased or in the remittance or payment made
in connection with securities sold; (v) any delay or failure of any company,
corporation, or other body in charge of registering or transferring securities
in the name of the Custodian, the Fund, the Custodian's sub-custodians, nominees
or agents or any consequential losses arising out of such delay or failure to
transfer such securities including non-receipt of bonus, dividends and rights
and other accretions or benefits; (vi) delays or inability to perform its duties
due to any disorder in market infrastructure with respect to any particular
security or Securities System; and (vii) any provision of any present or future
law or regulation or order of the United States of America, or any state
thereof, or any other country, or political subdivision thereof or of any court
of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to sub-
custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
14. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than
-17-
<PAGE>
thirty (30) days after the date of such delivery or mailing; provided, however
--------
that the Custodian shall not with respect to a Portfolio act under Section 2.10
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Trustees of the Fund has approved the
initial use of a particular Securities System by such Portfolio, as required by
Rule 17f-4 under the Investment Company Act of 1940, as amended and that the
Custodian shall not with respect to a Portfolio act under Section 2.11 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees has approved the initial use of
the Direct Paper System by such Portfolio; provided further, however, that the
-------- -------
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
-------------------
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of Trustees
of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
-18-
<PAGE>
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
--------
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Declaration of Trust of the Fund. No
interpretive or additional provisions made as provided in the preceding sentence
shall be deemed to be an amendment of this Contract.
17. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to Brazos Micro Cap Growth Portfolio, Brazos Small Cap Growth
Portfolio, Brazos Real Estate Securities Portfolio and Brazos Growth Portfolio
with respect to which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the Custodian in writing,
and if the Custodian agrees in writing to provide such services, such series of
Shares shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
20. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to
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<PAGE>
provide the Fund's name, address, and share, position to requesting companies
whose securities the Fund owns. If the Fund tells the Custodian "no," the
Custodian will not provide this information to requesting companies. If the Fund
tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the __ day of _________, 1999.
ATTEST BRAZOS MUTUAL FUNDS
__________________________ By:_________________________
ATTEST STATE STREET BANK AND
TRUST COMPANY
_________________________ By:_________________________
Vice Chairman
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<PAGE>
[Form of]
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
----------------------------------------------------
AGREEMENT between Brazos Mutual Funds (the "Customer") and State Street
Bank and Trust Company ("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain assets of
the Customer pursuant to a certain Custodian Agreement (the "Custodian
Agreement") dated as of, 1999;
WHEREAS, State Street has developed and utilizes proprietary accounting and
other systems, including State Street's proprietary Multicurrency HORIZON/R/
Accounting System, in its role as custodian of the Customer, and maintains
certain Customer-related data ("Customer Data") in databases under the control
and ownership of State Street (the "Data Access Services"); and
WHEREAS, State Street makes available to the Customer certain Data Access
Services solely for the benefit of the Customer, and intends to provide
additional services, consistent with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
a. System. Subject to the terms and conditions of this Agreement, State
------
Street hereby agrees to provide the Customer with access to State Street's
Multicurrency HORIZON(R) Accounting System and the other information systems
(collectively, the "System") as described in Attachment A, on a remote basis for
the purpose of obtaining reports, solely on computer hardware, system software
and telecommunication links, as listed in Attachment B (the "Designated
Configuration") of the Customer, or certain third parties approved by State
Street that serve as investment advisors or investment managers (the "Investment
Advisor") or independent auditors (the "Independent Auditors") of the Customer
and solely with respect to the Customer or on any designated substitute or back-
up equipment configuration with State Street's written consent, such consent not
to be unreasonably withheld.
b. Data Access Services. State Street agrees to make available to the
--------------------
Customer the Data Access Services subject to the terms and conditions of this
Agreement and data access operating standards and procedures as may be issued by
State Street from time to time. The ability of the Customer to originate
electronic instructions to State Street on behalf of the
<PAGE>
Customer in order to (i) effect the transfer or movement of cash or securities
held under custody by State Street or (ii) transmit accounting or other
information (such transactions are referred to herein as "Client Originated
Electronic Financial Instructions"), and (iii) access data for the purpose of
reporting and analysis, shall be deemed to be Data Access Services for purposes
of this Agreement.
c. Additional Services. State Street may from time to time agree to make
-------------------
available to the Customer additional Systems that are not described in the
attachments to this Agreement. In the absence of any other written agreement
concerning such additional systems, the term "System" shall include, and this
Agreement shall govern, the Customer's access to and use of any additional
System made available by State Street and/or accessed by the Customer.
2. NO USE OF THIRD PARTY SYSTEMS-LEVEL SOFTWARE
State Street and the Customer acknowledge that in connection with the Data
Access Services provided under this Agreement, the Customer will have access,
through the Data Access Services, to Customer Data and to functions of State
Street's proprietary systems; provided, however that in no event will the
Customer have direct access to any third party systems-level software that
retrieves data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. Designated Equipment, Designated Location. The System and the Data
-----------------------------------------
Access Services shall be used and accessed solely on and through the Designated
Configuration at the offices of the Customer or the Investment Advisor or
Independent Auditor located in Dallas, Texas ("Designated Location").
b. Designated Configuration; Trained Personnel. State Street shall be
-------------------------------------------
responsible for supplying, installing and maintaining the Designated
Configuration at the Designated Location. State Street and the Customer agree
that each will engage or retain the services of trained personnel to enable both
parties to perform their respective obligations under this Agreement. State
Street agrees to use commercially reasonable efforts to maintain the System so
that it remains serviceable, provided, however, that State Street does not
guarantee or assure uninterrupted remote access use of the System.
c. Scope of Use. The Customer will use the System and the Data Access
------------
Services only for the processing of securities transactions, the keeping of
books of account for the Customer and accessing data for purposes of reporting
and analysis. The Customer shall not, and shall cause its employees and agents
not to (i) permit any third party to use the System or the Data Access Services,
(ii) sell, rent, license or otherwise use the System or the Data Access Services
in the operation of a service bureau or for any purpose other than as expressly
authorized under this Agreement, (iii) use the System or the Data Access
Services for any fund, trust or other investment vehicle without the prior
written consent of State Street, (iv) allow access to the System or the Data
Access Services through terminals or any other computer or telecommunications
facilities located outside the Designated Locations, (v) allow or cause any
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<PAGE>
information (other than portfolio holdings, valuations of portfolio holdings,
and other information reasonably necessary for the management or distribution of
the assets of the Customer) transmitted from State Street's databases, including
data from third party sources, available through use of the System or the Data
Access Services to be redistributed or retransmitted to another computer,
terminal or other device for other than use for or on behalf of the Customer or
(vi) modify the System in any way, including without limitation, developing any
software for or attaching any devices or computer programs to any equipment,
system, software or database which forms a part of or is resident on the
Designated Configuration.
d. Other Locations. Except in the event of an emergency or of a planned
---------------
System shutdown, the Customer's access to services performed by the System or to
Data Access Services at the Designated Location may be transferred to a
different location only upon the prior written consent of State Street. In the
event of an emergency or System shutdown, the Customer may use any back-up site
included in the Designated Configuration or any other back-up site agreed to by
State Street, which agreement will not be unreasonably withheld. The Customer
may secure from State Street the right to access the System or the Data Access
Services through computer and telecommunications facilities or devices complying
with the Designated Configuration at additional locations only upon the prior
written consent of State Street and on terms to be mutually agreed upon by the
parties.
e. Title. Title and all ownership and proprietary rights to the System,
-----
including any enhancements or modifications thereto, whether or not made by
State Street, are and shall remain with State Street.
f. No Modification. Without the prior written consent of State Street,
---------------
the Customer shall not modify, enhance or otherwise create derivative works
based upon the System, nor shall the Customer reverse engineer, decompile or
otherwise attempt to secure the source code for all or any part of the System.
g. Security Procedures. The Customer shall comply with data access
-------------------
operating standards and procedures and with user identification or other
password control requirements and other security procedures as may be issued
from time to time by State Street for use of the System on a remote basis and to
access the Data Access Services. The Customer shall have access only to the
Customer Data and authorized transactions agreed upon from time to time by State
Street and, upon notice from State Street, the Customer shall discontinue remote
use of the System and access to Data Access Services for any security reasons
cited by State Street; provided, that, in such event, State Street shall, for a
period not less than 180 days (or such other shorter period specified by the
Customer) after such discontinuance, assume responsibility to provide accounting
services under the terms of the Custodian Agreement.
h. Inspections. State Street shall have the right to inspect the use of
-----------
the System and the Data Access Services by the Customer and the Investment
Advisor to ensure compliance with this Agreement. The on-site inspections shall
be upon prior written notice to Customer and the Investment Advisor and at
reasonably convenient times and frequencies so as not to result in an
unreasonable disruption of the Customer's or the Investment Advisor's business.
-3-
<PAGE>
4. PROPRIETARY INFORMATION
a. Proprietary Information. The Customer acknowledges and State Street
------------------------
represents that the System and the databases, computer programs, screen formats,
report formats, interactive design techniques, documentation and other
information made available to the Customer by State Street as part of the Data
Access Services and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Customer shall be
deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Customer agrees that it will hold such
Proprietary Information in the strictest confidence and secure and protect it in
a manner consistent with its own procedures for the protection of its own
confidential information and to take appropriate action by instruction or
agreement with its employees who are permitted access to the Proprietary
Information to satisfy its obligations hereunder. The Customer further
acknowledges that State Street shall not be required to provide the Investment
Advisor or the Investment Auditor with access to the System unless it has first
received from the Investment Advisor and the Investment Auditor an undertaking
with respect to State Street's Proprietary Information in the form of Attachment
C and/or Attachment C-1 to this Agreement. The Customer shall use all
commercially reasonable efforts to assist State Street in identifying and
preventing any unauthorized use, copying or disclosure of the Proprietary
Information or any portions thereof or any of the logic, formats or designs
contained therein.
b. Cooperation. Without limitation of the foregoing, the Customer shall
-----------
advise State Street immediately in the event the Customer learns or has reason
to believe that any person to whom the Customer has given access to the
Proprietary Information, or any portion thereof, has violated or intends to
violate the terms of this Agreement, and the Customer will, at its expense, co-
operate with State Street in seeking injunctive or other equitable relief in the
name of the Customer or State Street against any such person.
c. Injunctive Relief. The Customer acknowledges that the disclosure of any
-----------------
Proprietary Information, or of any information which at law or equity ought to
remain confidential, will immediately give rise to continuing irreparable injury
to State Street inadequately compensable in damages at law. In addition, State
Street shall be entitled to obtain immediate injunctive relief against the
breach or threatened breach of any of the foregoing undertakings, in addition to
any other legal remedies which may be available.
d. Survival. The provisions of this Section 4 shall survive the
--------
termination of this Agreement.
5. LIMITATION ON LIABILITY
a. Limitation on Amount and Time for Bringing Action. The Customer
-------------------------------------------------
agrees any liability of State Street to the Customer or any third party arising
out of State Street's provision of Data Access Services or the System under this
Agreement shall be limited to the amount paid by the Customer for the preceding
24 months for such services. In no event shall State Street be liable to the
Customer or any other party for any special, indirect, punitive or consequential
damages even if advised of the possibility of such damages. No action,
regardless of form,
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<PAGE>
arising out of this Agreement may be brought by the Customer more than two years
after the Customer has knowledge that the cause of action has arisen.
b. Limited Warranties. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED,
------------------
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, ARE MADE BY STATE STREET. IN NO EVENT WILL
STATE STREET BE LIABLE TO THE CUSTOMER OR ANY OTHER PARTY FOR ANY CONSEQUENTIAL
OR INCIDENTAL DAMAGES WHICH MAY ARISE FROM THE CUSTOMER'S ACCESS TO THE SYSTEM
OR USE OF INFORMATION OBTAINED THEREBY.
c. Third-Party Data. Organizations from which State Street may obtain
----------------
certain data included in the System or the Data Access Services are solely
responsible for the contents of such data, and State Street shall have no
liability for claims arising out of the contents of such third-party data,
including, but not limited to, the accuracy thereof.
d. Regulatory Requirements. As between State Street and the Customer, the
-----------------------
Customer shall be solely responsible for the accuracy of any accounting
statements or reports produced using the Data Access Services and the System and
the conformity thereof with any requirements of law.
e. Force Majeure. Neither party shall be liable for any costs or
-------------
damages due to delay or nonperformance under this Agreement arising out of any
cause or event beyond such party's control, including without limitation,
cessation of services hereunder or any damages resulting therefrom to the other
party, or the Customer as a result of work stoppage, power or other mechanical
failure, computer virus, natural disaster, governmental action, or communication
disruption.
6. INDEMNIFICATION
The Customer agrees to indemnify and hold State Street harmless from any
loss, damage or expense including reasonable attorney's fees, (a "loss")
suffered by State Street arising from (i) the negligence or willful misconduct
in the use by the Customer of the Data Access Services or the System, including
any loss incurred by State Street resulting from a security breach at the
Designated Location or committed by the Customer's employees or agents or the
Investment Advisor or the Independent Auditor and (ii) any loss resulting from
incorrect Client Originated Electronic Financial Instructions. State Street
shall be entitled to rely on the validity and authenticity of Client Originated
Electronic Financial Instructions without undertaking any further inquiry as
long as such instruction is undertaken in conformity with security procedures
established by State Street from time to time.
7. FEES
Fees and charges for the use of the System and the Data Access Services and
related payment terms shall be as set forth in the Custody Fee Schedule in
effect from time to time
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<PAGE>
between the parties (the "Fee Schedule"). Any tariffs, duties or taxes imposed
or levied by any government or governmental agency by reason of the transactions
contemplated by this Agreement, including, without limitation, federal, state
and local taxes, use, value added and personal property taxes (other than
income, franchise or similar taxes which may be imposed or assessed against
State Street) shall be borne by the Customer. Any claimed exemption from such
tariffs, duties or taxes shall be supported by proper documentary evidence
delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at a designated
--------
State Street training facility or at the Designated Location, to the Customer's
personnel in connection with the use of the System on the Designated
Configuration. The Customer agrees that it will set aside, during regular
business hours or at other times agreed upon by both parties, sufficient time to
enable all operators of the System and the Data Access Services, designated by
the Customer, to receive the training offered by State Street pursuant to this
Agreement.
b. Installation and Conversion. State Street shall be responsible for the
---------------------------
technical installation and conversion ("Installation and Conversion") of the
Designated Configuration. The Customer shall have the following
responsibilities in connection with Installation and Conversion of the System:
(i) The Customer shall be solely responsible for the timely
acquisition and maintenance of the hardware and software that
attach to the Designated Configuration in order to use the Data
Access Services at the Designated Location.
(ii) State Street and the Customer each agree that they will assign
qualified personnel to actively participate during the
Installation and Conversion phase of the System implementation to
enable both parties to perform their respective obligations under
this Agreement.
9. SUPPORT
During the term of this Agreement, State Street agrees to provide the
support services set out in Attachment D to this Agreement.
10. TERM OF AGREEMENT
a. Term of Agreement. This Agreement shall become effective on the date
-----------------
of its execution by State Street and shall remain in full force and effect until
terminated as herein provided.
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<PAGE>
b. Termination of Agreement. Either party may terminate this Agreement
------------------------
(i) for any reason by giving the other party at least one-hundred and eighty
days' prior written notice in the case of notice of termination by State Street
to the Customer or thirty days' notice in the case of notice from the Customer
to State Street of termination; or (ii) immediately for failure of the other
party to comply with any material term and condition of the Agreement by giving
the other party written notice of termination. In the event the Customer shall
cease doing business, shall become subject to proceedings under the bankruptcy
laws (other than a petition for reorganization or similar proceeding) or shall
be adjudicated bankrupt, this Agreement and the rights granted hereunder shall,
at the option of State Street, immediately terminate with notice to the
Customer. This Agreement shall in any event terminate as to any Customer within
90 days after the termination of the Custodian Agreement applicable to such
Customer.
c. Termination of the Right to Use. Upon termination of this Agreement
-------------------------------
for any reason, any right to use the System and access to the Data Access
Services shall terminate and the Customer shall immediately cease use of the
System and the Data Access Services. Immediately upon termination of this
Agreement for any reason, the Customer shall return to State Street all copies
of documentation and other Proprietary Information in its possession; provided,
however, that in the event that either party terminates this Agreement or the
Custodian Agreement for any reason other than the Customer's breach, State
Street shall provide the Data Access Services for a period of time and at a
price to be agreed upon by the parties.
11. MISCELLANEOUS
a. Assignment Successors. This Agreement and the rights and obligations
---------------------
of the Customer and State Street hereunder shall not be assigned by either party
without the prior written consent of the other party, except that State Street
may assign this Agreement to a successor of all or a substantial portion of its
business, or to a party controlling, controlled by, or under common control with
State Street.
b. Survival. All provisions regarding indemnification, warranty,
--------
liability and limits thereon, and confidentiality and/or protection of
proprietary rights and trade secrets shall survive the termination of this
Agreement.
c. Entire Agreement. This Agreement and the attachments hereto
----------------
constitute the entire understanding of the parties hereto with respect to the
Data Access Services and the use of the System and supersedes any and all prior
or contemporaneous representations or agreements, whether oral or written,
between the parties as such may relate to the Data Access Services or the
System, and cannot be modified or altered except in a writing duly executed by
the parties. This Agreement is not intended to supersede or modify the duties
and liabilities of the parties hereto under the Custodian Agreement or any other
agreement between the parties hereto except to the extent that any such
agreement specifically refers to the Data Access Services or the System. No
single waiver or any right hereunder shall be deemed to be a continuing waiver.
-7-
<PAGE>
d. Severability. If any provision or provisions of this Agreement shall
------------
be held to be invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
E. Governing Law. This Agreement shall be interpreted and construed in
-------------
accordance with the internal laws of The Commonwealth of Massachusetts without
regard to the conflict of laws provisions thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective as of the date hereof.
STATE STREET BANK AND TRUST COMPANY
By:_______________________________________
Title:____________________________________
Date:_____________________________________
BRAZOS MUTUAL FUNDS
By:_______________________________________
Title:____________________________________
Date:_____________________________________
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<PAGE>
ATTACHMENT A
Multicurrency HORIZON(R) Accounting System
System Product Description
--------------------------
I. The Multicurrency HORIZON(R) Accounting System is designed to provide lot
level portfolio and general ledger accounting for SEC and ERISA type
requirements and includes the following services: 1) recording of general ledger
entries; 2) calculation of daily income and expense; 3) reconciliation of daily
activity with the trial balance, and 4) appropriate automated feeding mechanisms
to (i) domestic and international settlement systems, (ii) daily, weekly and
monthly evaluation services, (iii) portfolio performance and analytic services,
(iv) customer's internal computing systems and (v) various State Street provided
information services products.
II. GlobalQuest(R) GlobalQuest(R) is designed to provide customer access to
-----------
the following information maintained on The Multicurrency HORIZON(R) Accounting
System: 1) cash transactions and balances; 2) purchases and sales; 3) income
receivables; 4) tax refund receivables; 5) daily priced positions; 6) open
trades; 7) settlement status; 8) foreign exchange transactions; 9) trade
history; and 10) daily, weekly and monthly evaluation services.
III. HORIZON(R) Gateway. HORIZON(R) Gateway provides customers with the
------------------
ability to (i) generate reports using information maintained on the
Multicurrency HORIZON(R) Accounting System which may be viewed or printed at the
customer's location; (ii) extract and download data from the Multicurrency
HORIZON(R) Accounting System; and (iii) access previous day and historical data.
The following information which may be accessed for these purposes: 1) holdings;
2) holdings pricing; 3) transactions, 4) open trades; 5) income; 6) general
ledger and 7) cash.
IV. SaFiRe(SM). SaFiRe(SM) is designed to provide the customer with the
------
ability to prepare its own financial reports by permitting the customer to
access customer information maintained on the Multicurrency HORIZON(R)
Accounting System, to organize such information in a flexible reporting format
and to have such reports printed on the customer's desktop or by its printing
provider.
<PAGE>
ATTACHMENT B
Designated Configuration
<PAGE>
ATTACHMENT C
Undertaking
The undersigned understands that in the course of its employment as
Investment Advisor to Brazos Mutual Funds (the "Customer") it will have access
to State Street Bank and Trust Company's ("State Street") Multicurrency HORIZON
Accounting System and other information systems (collectively, the "System").
The undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation, and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
JOHN MCSTAY INVESTMENT COUNSEL
By: JOHN MCSTAY & ASSOCIATES,
its General Partner
BY:____________________________________
Title:_________________________________
Date:__________________________________
<PAGE>
ATTACHMENT C-1
Undertaking
The undersigned understands that in the course of its employment as
Independent Auditor to Brazos Mutual Funds (the "Customer") it will have access
to State Street Bank and Trust Company's ("State Street") Multicurrency HORIZON
Accounting System and other information systems (collectively, the " System").
The undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation, and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
Independent Auditor
By:________________________________
Title:_____________________________
Date:______________________________
<PAGE>
ATTACHMENT D
Support
During the term of this Agreement, State Street agrees to provide the
following on-going support services:
a. Telephone Support. The Customer Designated Persons may contact State
-----------------
Street's HORIZON(R) Help Desk and Customer Assistance Center between the hours
of 8 a.m. and 6 p.m. (Eastern time) on all business days for the purpose of
obtaining answers to questions about the use of the System, or to report
apparent problems with the System. From time to time, the Customer shall provide
to State Street a list of persons, not to exceed five in number, who shall be
permitted to contact State Street for assistance (such persons being referred to
as "the Customer Designated Persons").
b. Technical Support. State Street will provide technical support to
-----------------
assist the Customer in using the System and the Data Access Services. The total
amount of technical support provided by State Street shall not exceed 10
resource days per year. State Street shall provide such additional technical
support as is expressly set forth in the fee schedule in effect from time to
time between the parties (the "Fee Schedule"). Technical support, including
during installation and testing, is subject to the fees and other terms set
forth in the Fee Schedule.
c. Maintenance Support. State Street shall use commercially reasonable
-------------------
efforts to correct system functions that do not work according to the System
Product Description as set forth on Attachment A in priority order in the next
scheduled delivery release or otherwise as soon as is practicable.
d. System Enhancements. State Street will provide to the Customer any
-------------------
enhancements to the System developed by State Street and made a part of the
System; provided that, sixty (60) days prior to installing any such enhancement,
State Street shall notify the Customer and shall offer the Customer reasonable
training on the enhancement. Charges for system enhancements shall be as
provided in the Fee Schedule. State Street retains the right to charge for
related systems or products that may be developed and separately made available
for use other than through the System.
e. Custom Modifications. In the event the Customer desires custom
--------------------
modifications in connection with its use of the System, the Customer shall make
a written request to State Street providing specifications for the desired
modification. Any custom modifications may be under-taken by State Street in
its sole discretion in accordance with the Fee Schedule.
f. Limitation on Support. State Street shall have no obligation to
---------------------
support the Customer's use of the System: (1) for use on any computer equipment
or telecommunication facilities which does not conform to the Designated
Configuration or (ii) in the event the Customer has modified the System in
breach of this Agreement.
<PAGE>
EXHIBIT (H)(5)
[FORM OF]
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the __ day of __________, 1999, by and between BRAZOS
MUTUAL FUNDS, a business trust organized and existing under the laws of the
State of Delaware, having its principal place of business at 5949 Sherry Lane,
Suite 1600, Dallas, Texas 75225 (the "Fund"), and STATE STREET BANK AND TRUST
COMPANY, a Massachusetts trust company having its principal office and place of
business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in four series, Brazos
Micro Cap Growth Portfolio, Brazos Small Cap Growth Portfolio, Brazos Real
Estate Securities Portfolio and Brazos Growth Portfolio (such series together
with all other series subsequently established by the Fund and made subject to
this Contract in accordance with paragraph 17, being herein referred to as the
"Portfolio(s)");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank
as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities, and the
Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Terms of Appointment; Duties of the Bank
----------------------------------------
1.1 Subject to the terms and conditions set forth in this Agreement, the
Fund, on behalf of the Portfolios, hereby employs and appoints the Bank to act
as, and the Bank agrees to act as its transfer agent for the Fund's authorized
and issued shares of beneficial interest, ("Shares"), dividend disbursing agent,
custodian of certain retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of each
of the respective Portfolios of the Fund ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable Portfolio, including
without limitation any periodic investment plan or periodic withdrawal program.
1.2 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the Portfolios,
as applicable and the Bank, the Bank shall:
<PAGE>
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation thereof
to the Custodian of the Fund authorized pursuant to the
Declaration of Trust of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation thereof
to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and (iii)
above, the Bank shall execute transactions directly with
broker-dealers authorized by the Fund who shall thereby be
deemed to be acting on behalf of the Fund;
(v) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over
or cause to be paid over in the appropriate manner such monies
as instructed by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and distributions
declared by the Fund on behalf of the applicable Portfolio;
(viii) Issue replacement certificates for those certificates alleged
to have been lost, stolen or destroyed upon receipt by the
Bank of indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at its option,
may issue replacement certificates in place of mutilated stock
certificates upon presentation thereof and without such
indemnity;
(ix) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(x) Record the issuance of shares of the Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total number
of shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. The
Bank shall also provide the Fund on a regular basis with the
total number of shares which are authorized and issued and
outstanding and shall have no obligation, when recording the
issuance of shares, to monitor the issuance of such shares or
to take cognizance of any laws relating
-2-
<PAGE>
to the issue or sale of such shares, which functions shall be
the sole responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall:
(i) perform the customary services of a transfer agent, dividend
disbursing agent, custodian of certain retirement plans and, as
relevant, agent in connection with accumulation, open-account or
similar plans (including without limitation any periodic
investment plan or periodic withdrawal program), including but
not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, mailing Shareholder
reports and prospectuses to current Shareholders, withholding
taxes on U.S. resident and non-resident alien accounts,
preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to dividends and
distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of
account to Shareholders for all purchases and redemptions of
Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information and
(ii) provide a system which will enable the Fund to monitor the
total number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in writing
those transactions and assets to be treated as exempt from blue
sky reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of the Bank for the Fund's blue sky State
registration status is solely limited to the initial
establishment of transactions subject to blue sky compliance by
the Fund and the reporting of such transactions to the Fund as
provided above.
(d) Procedures as to who shall provide certain of these services in
Section I may be established from time to time by agreement
between the Fund on behalf of each Portfolio and the Bank per the
attached service responsibility schedule. The Bank may at times
perform only a portion of these services and the Fund or its
agent may perform these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of the Fund
(i.e., escheatment services) which may be agreed upon in writing
between the Fund and the Bank.
2. Fees and Expenses
-----------------
2.1 For the performance by the Bank pursuant to this Agreement, the Fund
agrees on behalf of each of the Portfolios to pay the Bank an annual maintenance
fee for each Shareholder account as set out in the initial fee schedule attached
hereto. Such fees and out-of-pocket
-3-
<PAGE>
expenses and advances identified under Section 2.2 below may be changed from
time to time subject to mutual written agreement between the Fund and the Bank.
2.2 In addition to the fee paid under Section 2.1 above, the Fund agrees
on behalf of each of the Portfolios to reimburse the Bank for out-of-pocket
expenses, including but not limited to confirmation production, postage, forms,
telephone, microfilm, microfiche, tabulating proxies, records storage, or
advances incurred by the Bank for the items set out in the fee schedule attached
hereto. In addition, any other expenses incurred by the Bank at the request or
with the consent of the Fund, will be reimbursed by the Fund on behalf of the
applicable Portfolio.
2.3 The Fund agrees on behalf of each of the Portfolios to pay all fees
and reimbursable expenses within five days following the receipt of the
respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all shareholder accounts shall be advanced to the
Bank by the Fund at least seven (7) days prior to the mailing date of such
materials.
3. Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Fund that:
3.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
3.2 It is duly qualified to carry on its business in the Commonwealth of
Massachusetts.
3.3 It is empowered under applicable laws and by its Charter and By-Laws
to enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
4. Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Bank that:
4.1 It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
4.2 It is empowered under applicable laws and by its Declaration of Trust
and By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
-4-
<PAGE>
4.4 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.5 A registration statement under the Securities Act of 1933, as amended
on behalf of each of the Portfolios is currently effective and will remain
effective, and appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of the Fund being offered for
sale.
5. Data Access and Proprietary Information
---------------------------------------
5.1 The Fund acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Bank as part of the Fund's ability to
access certain Fund-related data ("Customer Data") maintained by the Bank on
data bases under the control and ownership of the Bank ("Data Access Services")
constitute copyrighted, trade secret, or other proprietary information
(collectively, "Proprietary Information") of substantial value to the Bank or
other third party. In no event shall Proprietary Information be deemed Customer
Data. The Fund agrees to treat all Proprietary Information as proprietary to the
Bank and further agrees that it shall not divulge any Proprietary Information to
any person or organization except as may be provided hereunder. Without limiting
the foregoing, the Fund agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance with
the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the Proprietary
Information;
(c) to refrain from obtaining unauthorized access to any portion of
the Proprietary Information, and if such access is inadvertently
obtained, to inform in a timely manner of such fact and dispose
of such information in accordance with the Bank's instructions;
(d) to refrain from causing or allowing the data acquired hereunder
from being retransmitted to any other computer facility or other
location, except with the prior written consent of the Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
-5-
<PAGE>
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 5. The obligations of this Section shall
survive any earlier termination of this Agreement.
5.2 If the Fund notifies the Bank that any of the Data Access Services do
not operate in material compliance with the most recently issued user
documentation for such services, the Bank shall endeavor in a timely manner to
correct such failure. Organizations from which the Bank may obtain certain data
included in the Data Access Services are solely responsible for the contents of
such data and the Fund agrees to make no claim against the Bank arising out of
the contents of such third-party data, including, but not limited to, the
accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE
SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS
AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.3 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information, then in such event the Bank shall be entitled to rely on
the validity and authenticity of such instruction without undertaking any
further inquiry as long as such instruction is undertaken in conformity with
security procedures established by the Bank from time to time.
6. Indemnification
---------------
6.1 The Bank shall not be responsible for, and the Fund shall on behalf of
the applicable Portfolio indemnify and hold the Bank harmless from and against,
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors required
to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct.
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty
of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services
which (i) are received by the Bank or its agents or
subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf of
the Fund including but not limited to any previous transfer agent
or registrar.
-6-
<PAGE>
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund on
behalf of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws
or regulations of any state that such Shares be registered in
such state or in violation of any stop order or other
determination or ruling by any federal agency or any state with
respect to the offer or sale of such Shares in such state.
(f) The negotiation and processing by the Bank of checks not made
payable to the order of the Bank, the Fund, the Fund's management
company, transfer agent or distributor or the retirement account
custodian or trustee for a plan account investing in Shares,
which checks are tendered to the Bank for the purchase of Shares
(i.e., checks made payable to prospective or existing
Shareholders, such checks are commonly known as "third party
checks").
6.2 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund on behalf of the applicable Portfolio for any
action taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel. The Bank, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the Fund, and shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the Fund. The Bank, its
agents and subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or former registrar, or of a co-
transfer agent or co-registrar.
6.3 In order that the indemnification provisions contained in this Section
6 shall apply, upon the assertion of a claim for which the Fund may be required
to indemnify the Bank, the Bank shall promptly notify the Fund of such
assertion, and shall keep the Fund advised with respect to all developments
concerning such claim. The Fund shall have the option to participate with the
Bank in the defense of such claim or to defend against said claim in its own
name or in the name of the Bank. The Bank shall in no case confess any claim or
make any compromise in any case in which the Fund may be required to indemnify
the Bank except with the Fund's prior written consent.
-7-
<PAGE>
7. Standard of Care
----------------
The Bank shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall not be
liable for loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct or that of its employees.
8. Covenants of the Fund and the Bank
----------------------------------
8.1 The Fund shall on behalf of each of the Portfolios promptly furnish to
the Bank the following:
(a) A certified copy of the resolution of the Board of Trustees of
the Fund authorizing the appointment of the Bank and the
execution and delivery of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Fund and
all amendments thereto.
8.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
8.3 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.4 The Bank and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
8.5 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
9. Termination of Agreement
------------------------
9.1 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
-8-
<PAGE>
9.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund on behalf of the applicable Portfolio(s). Additionally, the Bank
reserves the right to charge for any other reasonable expenses associated with
such termination and/or a charge equivalent to the average of three (3) months'
fees.
10. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to the Brazos Micro Cap Growth Portfolio, Brazos Small Cap Growth
Portfolio, Brazos Real Estate Securities Portfolio and Brazos Growth Portfolio
with respect to which it desires to have the Bank render services as transfer
agent under the terms hereof, it shall so notify the Bank in writing, and if the
Bank agrees in writing to provide such services, such series of Shares shall
become a Portfolio hereunder.
11. Assignment
----------
11.1 Except as provided in Section 11.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
11.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
11.3 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(2)"), (ii) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(2) or (iii) a BFDS affiliate;
provided, however, that the Bank shall be as fully responsible to the Fund for
the acts and omissions of any subcontractor as it is for its own acts and
omissions.
12. Amendment
---------
This Agreement may be amended or modified by a written agreement executed
by both parties and authorized or approved by a resolution of the Board of
Trustees of the Fund.
13. Massachusetts Law to Apply
--------------------------
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
14. Force Majeure
-------------
In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not
-9-
<PAGE>
be liable for damages to the other for any damages resulting from such failure
to perform or otherwise from such causes.
15. Consequential Damages
---------------------
Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
16. Merger of Agreement
-------------------
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter hereof
whether oral or written.
17. Limitations of Liability of the Trustees and Shareholders
---------------------------------------------------------
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the State of Delaware, and notice is hereby given that this
instrument is executed on behalf of the Trustees of the Trust as Trustees and
not individually and that the obligations of this instrument are not binding
upon any of the Trustees or Shareholders individually but are binding only upon
the assets and property of the Fund.
18. Counterparts
------------
This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
BRAZOS MUTUAL FUNDS
BY: _________________________________
Title:
ATTEST:
____________________________
STATE STREET BANK AND TRUST COMPANY
BY: _________________________________
Vice Chairman
ATTEST:
____________________________
-10-
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
1. Receives orders for the purchase
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien accounts.
-11-
<PAGE>
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
16. Prepare and file U.S. Treasury
Department forms.
17. Prepare and mail account and
confirmation statements for
Shareholders.
18. Provide Shareholder account
information.
19. Blue sky reporting.
* Such services are more fully described in Sections 1.2(a), (b) and (c) of
the Agreement.
BRAZOS MUTUAL FUNDS
BY: __________________________________
ATTEST:
- -----------------------------
STATE STREET BANK AND TRUST COMPANY
By: _________________________________
Vice Chairman
ATTEST:
____________________________
-12-
<PAGE>
EXHIBIT (H)(6)
[FORM OF]
ADMINISTRATION AGREEMENT
BRAZOS MUTUAL FUNDS
THIS ADMINISTRATION AGREEMENT is made as of this __ day of June, 1999, by
and between Brazos Mutual Funds, a Delaware business trust (the "Trust"), and
SunAmerica Asset Management Corp. (the "Administrator"), a Delaware corporation.
WHEREAS, the Trust is an open-end diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"),
WHEREAS, the Trust is authorized to create separate series, each with its
own separate investment portfolio; and
WHEREAS, the Trust desires the Administrator to provide, and the
Administrator is willing to provide, administrative services to such portfolios
of the Trust as the Trust and the Administrator may agree on ("Portfolios") and
as listed on the schedules attached hereto ("Schedules") and made a part of this
Agreement, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Administrator hereby agree as follows:
ARTICLE 1. Retention of the Administrator. The Trust hereby retains the
------------------------------
Administrator to act as the administrator of the Portfolios and to furnish the
Portfolios with the administrative services as set forth in Article 2 below.
The Administrator hereby accepts such employment to perform the duties set forth
below.
ARTICLE 2 Administrative and Accounting Services. The Administrator shall
--------------------------------------
perform or supervise the performance by others of other administrative services
in connection with the operations of the Portfolios, and, on behalf of the
Trust, will investigate, assist in the selection of and conduct relations with
custodians, depositories, accountants, legal counsel, underwriters, brokers and
dealers, corporate fiduciaries, insurers, banks and persons in any other
capacity deemed to be necessary or desirable for the Portfolios' operations. All
services provided hereunder shall be in conformity with the Agreement and
Declaration of Trust, Bylaws, resolutions and other instructions of the Board of
Trustees and the current prospectuses and statement of additional information of
the Trust. The Administrator agrees to furnish the services set forth herein in
return for the compensation provided in Article 4 of this Agreement. The
Administrator shall provide the Trustees of the Trust with such reports
regarding investment performance and compliance with investment policies and
applicable laws, rules and regulations
<PAGE>
as they may reasonably request but shall have no responsibility for supervising
the performance by any investment adviser or sub-adviser of its
responsibilities, except with respect to the Portfolios' compliance with
investment objective and policies.
The Administrator or its appointed service provider shall provide the Trust
with administrative services, regulatory reporting, fund accounting and related
portfolio accounting services as set forth on Schedule II of this Agreement, all
necessary office space, equipment, personnel, compensation and facilities
(including facilities for Shareholders' and Trustees' meetings) for handling the
affairs of the Portfolios and such other services as the Trustees may, from time
to time, reasonably request and the Administrator shall, from time to time,
reasonably determine to be necessary to perform its obligations under this
Agreement. In addition, at the request of the Trust's Board of Trustees (the
"Trustees"), the Administrator shall make reports to the Trustees concerning the
performance of its obligations hereunder.
Without limiting the generality of the foregoing, the Administrator or its
appointed service provider shall:
(A) calculate contractual Trust expenses and control all disbursements for
the Trust, and as appropriate compute the Trust's yields, total
return, expense ratios, portfolio turnover rate and, if required,
portfolio average dollar-weighed maturity;
(B) assist Trust counsel with the preparation of prospectuses, statements
of additional information, registration statements, and proxy
materials;
(C) prepare such reports, applications and documents (including reports
regarding the sale and redemption of Shares as may be required in
order to comply with Federal and state securities law) as may be
necessary or desirable to register the Trust's shares with state
securities authorities, monitor sale of Trust shares for compliance
with state securities laws, and file with the appropriate state
securities authorities the registration statements and reports for the
Trust and the Trust's shares and all amendments thereto, as may be
necessary or convenient to register and keep effective the Trust and
the Trust's shares with state securities authorities to enable the
Trust to make a continuous offering of its shares;
(D) develop and prepare communications to shareholders, including the
annual report to shareholders, coordinate mailing prospectuses,
notices, proxy statements, proxies and other reports to Trust
shareholders, and supervise and facilitate the solicitation of proxies
solicited by the Trust for all shareholder meetings, including
tabulation process for shareholder meetings;
(E) coordinate with Trust counsel the preparation of, and administer
contracts on behalf of the Trust with, among others, the Trust's
investment adviser, distributor, custodian, and transfer agent;
(F) maintain the Trust's general ledger and prepare the Trust's financial
statements, including expense accruals and payments, determine the net
asset value of the
-2-
<PAGE>
Trust's assets and of the Trust's shares, and supervise the Trust's
transfer agent with respect to the payment of dividends and other
distributions to shareholders;
(G) calculate performance data of the Trust and its portfolios for
dissemination to information services covering the investment company
industry;
(H) coordinate and supervise the preparation and filing of the Trust's tax
returns;
(I) At the request of the Trustees, examine and review the operations and
performance of the various organizations providing services to the
Trust or any Portfolio of the Trust, and report to the Trustees;
(J) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and printing of the
Trust's semi-annual and annual reports to shareholders;
(K) provide internal legal and administrative services as requested by the
Trust from time to time;
(L) assist with the design, development, and operation of the Trust,
including new portfolio and class investment objectives, policies and
structure;
(M) provide individuals acceptable to the Trustees for nomination,
appointment, or election as officers of the Trust, who will be
responsible for the management of certain of the Trust's affairs as
determined by the Trustees;
(N) advise the Trust and its Trustees on matters concerning the Trust and
its affairs;
(O) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Trust in
accordance with the requirements of Rules 17g-1 and 17d-1(7) under the
1940 Act as bonds and policies are approved by the Trust's Board of
Trustees;
(P) monitor and advise the Trust and its Portfolios on their registered
investment company status under the Internal Revenue Code of 1986, as
amended;
(Q) perform all administrative services and functions of the Trust and
each Portfolio to the extent administrative services and functions are
not provided to the Trust or such Portfolio pursuant to the Trust's or
such Portfolio's investment advisory agreement, distribution
agreement, custodian agreement and transfer agent agreement;
(R) furnish advice and recommendations with respect to other aspects of
the business and affairs of the Portfolios as the Trust and the
Administrator shall determine desirable; and
-3-
<PAGE>
(S) prepare and file with the Securities and Exchange Commission (the
"SEC") the semi-annual report for the Trust on Form N-SAR and all
required notices pursuant to Rule 24f-2.
Also, the Administrator will perform other services for the Trust as agreed from
time to time, including, but not limited to mailing the annual reports of the
Portfolios and mailing notices of shareholders' meetings, proxies and proxy
statements, for all of which the Trust will pay the Administrator's out-of-
pocket expenses.
In compliance with the requirements of Rule 3la-3 under the 1940 Act, the
Administrator agrees that all records which it maintains for the Trust are the
property of the Trust and further agrees to surrender promptly to the Trust any
of such records upon the Trust's request.
ARTICLE 3. Allocation of Charges and Expenses.
----------------------------------
(A) The Administrator. The Administrator shall furnish at its own expense
-----------------
the executive, supervisory and clerical personnel necessary to perform its
obligations under this Agreement. The Administrator shall also provide the items
which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Trust as well as all Trustees of the
Trust who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator shall not be obligated to pay the
compensation of any employee of the Trust retained by the Trustees of the Trust
to perform services on behalf of the Trust.
(B) The Trust. The Trust assumes and shall pay or cause to be paid all
---------
other expenses of the Trust not otherwise allocated herein, including, without
limitation, organizational costs, taxes, expenses for legal and auditing
services, the expenses of preparing (including typesetting), printing and
mailing reports, prospectuses, statements of additional information, proxy
solicitation material and notices to existing Shareholders, all expenses
incurred in connection with issuing and redeeming Shares, the costs of pricing
services, the costs of custodial and transfer agency services, the cost of
initial and ongoing registration of the Shares under Federal and state
securities laws, fees and out-of-pocket expenses of Trustees who are not
affiliated persons of the Administrator or the investment adviser to the Trust
or any affiliated corporation of the Administrator or the investment adviser,
the costs of Trustees' meetings, insurance, interest, brokerage costs,
litigation and other extraordinary or nonrecurring expenses, and all fees and
charges of investment advisers and the distributor of the Trust.
ARTICLE 4. Compensation of the Administrator.
---------------------------------
(A) Administration Fee. For the services to be rendered, the facilities
------------------
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Trust shall pay to the Administrator the fees and out-of-pocket
expenses specified in the attached Schedule I.
If this Agreement becomes effective subsequent to the first day of a month
or terminates before the last day of a month, the Administrator's compensation
for that part of the month in which this Agreement is in effect shall be
prorated in a manner consistent with the calculation of
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<PAGE>
the fees as set forth above. Payment of the Administrator's compensation for the
preceding month shall be made promptly.
(B) Survival of Compensation Rates. All rights of compensation under this
------------------------------
Agreement for services performed as of the termination date shall survive the
termination of this Agreement.
ARTICLE 5. Limitation of Liability of the Administrator. The duties of
--------------------------------------------
the Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in carrying out its duties hereunder, except a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties,
or by reason of reckless disregard of its obligations and duties hereunder,
except as may otherwise be provided under provisions of applicable law which
cannot be waived or modified hereby. (As used in this Article 5, the term
"Administrator" shall include directors, officers, employees and other agents of
the Administrator as well as that corporation itself.)
So long as the Administrator, or its agents, acts in good faith and with
due diligence the Trust assumes full responsibility and shall indemnify the
Administrator and hold it harmless from and against any and all actions, suits
and claims, whether groundless or otherwise, and from and against any and all
losses, damages, costs, charges, reasonable counsel fees and disbursements,
payments, expenses and liabilities (including reasonable investigation expenses)
arising directly or indirectly from any action which the Administrator takes or
does not take (i) at the request, on the direction of or in reliance on the
advice of the Trust pursuant to this Agreement or (ii) upon oral or written
instructions. The indemnity provision set forth herein shall survive the
termination of this Agreement.
The Administrator may apply to the Trust at any time for instructions and
may consult counsel for the Trust or its own counsel and with accountants and
other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with the
written opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. Nor shall the Administrator be held to have
notice of any change of authority of any officers, employee or agent of the
Trust until receipt of written notice thereof from the Trust.
ARTICLE 6. Confidentiality. The Administrator agrees on behalf of itself
---------------
and its employees to treat confidentially all records and other information
relative to the Trust and its prior, present or potential Shareholders and
relative to the Adviser and its prior, present or potential customers, except,
after prior notification to and approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be withheld where the
Administrator may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
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<PAGE>
ARTICLE 7. Year 2000 Compliant. The Administrator warrants that all
-------------------
software code owned by or under the Administrator's control, used in the
performance of the Administrator's obligations under this contract, will be Year
2000 compliant. For purposes of this paragraph, "Year 2000 Compliant" means that
the software will continue to operate beyond December 31, 1999 without creating
any logical or mathematical inconsistencies concerning any date after December
31, 1999 and without decreasing the functionality of the system applicable to
dates prior to January 1, 2000 including, but not limited to, making changes to
[a] date and data century recognition; [b] calculations which accommodate same-
and multi-century formulas and date values; and [c] input/output of date values
which reflect century dates. All changes described in this paragraph will be
made at no additional cost to the Trust.
ARTICLE 8. Compliance With Governmental Rules and Regulations. The
--------------------------------------------------
Administrator undertakes to comply with all applicable requirements of the 1933
Act, the 1934 Act, the 1940 Act and any laws, rules and regulations of
governmental authorities having jurisdiction with respect to the duties to be
performed by the Administrator hereunder.
ARTICLE 9. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective on the date set forth above and shall remain in effect
for an initial term of two (2) years, unless sooner terminated as provided
herein. Thereafter, unless sooner terminated, this Agreement shall continue in
effect from year to year provided such continuance is specifically approved at
least annually by the Board of Trustees. This Agreement is terminable without
penalty, by the Board or by the Administrator, on not less than ninety (90)
days' written notice. This Agreement shall not be assigned by any of the parties
hereto without the prior consent in writing of the other party; provided,
however, that the Administrator may in its own discretion and without limitation
or prior consent of the Trust, whenever and on such terms and conditions as it
deems necessary or appropriate enter into subcontracts, agreements and
understandings with third parties; provided, that such subcontract, agreement or
understanding shall not discharge the Administrator from obligations hereunder
or delegation of duties to another third party. A change of control of either
party shall not constitute an assignment of this Agreement.
This Agreement shall not be assignable by the Administrator, without the
prior written consent of the Trust, except to an entity that is controlled by,
or under common control with, the Administrator.
Upon termination of this Agreement, the Administrator shall use its best
efforts to assist in the transfer of its responsibilities hereunder to any
successor administrator without additional compensation (it being understood
that they would be reimbursed for their reasonable out-of-pocket expenses).
ARTICLE 10. Amendments. This Agreement or any part hereof may be changed
----------
or waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
ARTICLE 11. Certain Records. The Administrator shall maintain customary
---------------
records in connection with its duties as specified in this Agreement. Any
records required to be maintained
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<PAGE>
and preserved pursuant to Rules 3la-1 and 3la-2 under the 1940 Act which are
prepared or maintained by the Administrator on behalf of the Trust shall be
prepared and maintained at the expense of the Administrator, but shall be the
property of the Trust and will be made available to or surrendered promptly to
the Trust on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Trust and follow the Trust's
instructions as to permitting or refusing such inspection; provided that the
Administrator may exhibit such records to any person in any case where it is
advised by its counsel that it may be held liable for failure to do so, unless
(in cases involving potential exposure only to civil liability) the Trust has
agreed to indemnify the Administrator against such liability.
ARTICLE 12. Definitions of Certain Terms. The terms "interested person"
----------------------------
and "affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 13. Notice. Any notice required or permitted to be given by either
------
party to the other shall be deemed sufficient if sent by registered or certified
mail, postage prepaid, addressed by the party giving notice to the other party
at the last address furnished by the other party to the party giving notice: if
to the Trust, at ______________________________________, with a copy to:
__________________________
__________________________
__________________________
__________________________;
and if to the Administrator at_________________________________.
ARTICLE 14. Governing Law. This Agreement shall be construed in accordance
-------------
with the laws of the State of New York and the applicable provisions of the 1940
Act. To the extent that the applicable laws of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the 1940 Act,
the latter shall control.
ARTICLE 15. Multiple Originals. This Agreement may be executed in two or
------------------
more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
ARTICLE 16. Limitation of Liability. The Administrator is hereby expressly
-----------------------
put on notice of the limitation of liability as set forth in Article III,
Section 6 of the Trust's Agreement and Declaration of Trust and agrees that the
obligations pursuant to this Agreement of a particular Portfolio and of the
Trust with respect to that Portfolio shall be limited solely to the assets of
that Portfolio, and the Administrator shall not seek satisfaction of any such
obligation from any other Portfolio, the shareholders of any Portfolio, the
Trustees, officers, employees or agents of the Trust, or any of them.
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<PAGE>
ARTICLE 17. Binding Agreement. This Agreement, and the rights and
-----------------
obligations of the parties and the Portfolios hereunder, shall be binding on,
and inure to the benefit of, the parties and the Portfolios and the respective
successors and assigns of each of them.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
BRAZOS MUTUAL FUNDS
By:_____________________________
Attest:_________________________
SUNAMERICA ASSET MANAGEMENT CORP.
By:_____________________________
Attest:_________________________
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<PAGE>
SCHEDULE I
FUND ADMINISTRATION AND COMPLIANCE
ANNUAL FEE SCHEDULE - DOMESTIC FUNDS
Separate Series of Brazos Mutual Funds
NAME OF SERIES
Small Cap Growth Portfolio
Micro Cap Growth Portfolio
Real Estate Securities Portfolio
Growth Portfolio
Annual fee based upon average net fund assets per class
7 basis points on the first $200 million
6 basis points on the next $500 million
4 basis points on the balance
Minimum annual fee: $35,000/first fund
$25,000/fund next three funds
$20,000/fund additional funds
Plus out-of-pocket expense reimbursements, including but not limited to:
Postage
Programming
Stationery
Proxies
Retention of records
Special reports
Federal and state regulatory filing fees
Certain insurance premiums
Expenses from board of trustees meetings
Auditing and legal expenses
Fees and out-of-pocket expense reimbursements are billed monthly
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<PAGE>
SCHEDULE II
ACCOUNTING SERVICES
The Administrator or appointed service provider will perform the following
accounting functions:
(i) Journalize each Portfolio's investment, capital share and income and
expense activities;
(ii) Receive duplicate investment buy/sell trade tickets and receivable
trades with the Trust's custodian;
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of each Portfolio with the
custodian, and prepare the beginning cash balance available for
investment purposes;
(vi) Update the cash availability throughout the day as required;
(vii) Post to and prepare each Portfolio's statement of Assets and
Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g., advisory and custody
fees);
(ix) Monitor the expense accruals and notify Trust management of any
proposed adjustments;
(x) Control all disbursements from each Portfolio and authorize such
disbursements upon Written Instruction;
(xi) Calculate capital gains and losses;
(xii) Determine each Portfolio's net income;
(xiii) Obtain security market quotes from independent pricing services
approved by the Trust, or if such quotes are unavailable, then
obtain such prices from the management of the Trust, and in either
case calculate the market value of each Portfolio's investments;
(xiv) Transit or mail a copy of the daily portfolio valuation to each
Portfolio's investment advisor;
(xv) Compute the net asset value of each Portfolio;
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<PAGE>
(xvi) As appropriate, compute the yields, total return, expense ratios,
portfolio turnover rate, and, if required, portfolio average dollar-
weighted maturity; and
(xvii) Prepare a monthly financial statement, which will include the
following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Change in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
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<PAGE>
EXHIBIT (H)(7)
[FORM OF]
BRAZOS MUTUAL FUNDS
SERVICE AGREEMENT
This AGREEMENT made as of this ____ day of June, 1999 by and between Brazos
Mutual Funds, a Delaware business trust having its principal place of business
at The SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204
(hereinafter called the "Trust") and SunAmerica Fund Services, Inc., a Delaware
corporation, having its principal place of business at The SunAmerica Center,
733 Third Avenue, New York, New York 10017-3204 (hereinafter called "Fund
Services").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Trust desires to appoint Fund Services as its agent in
connection with certain shareholder servicing activities, and Fund Services
desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Terms of Appointment: Duties of Fund Services
---------------------------------------------
A. Subject to the terms and conditions set forth in this Agreement, the
Trust hereby employs and appoints Fund Services to act, and Fund Services agrees
to act, as servicing agent to assist State Street Bank and Trust Company and its
affiliates, the Trust's transfer agent (the "Transfer Agent") for the authorized
and issued shares of common stock, $.001 par value of the Trust (the "Shares"),
in connection with certain services offered to the shareholders of the Trust
(the "Shareholders") as set out in the current prospectus of the Trust, as may
be amended from time to time, as on file with the Securities and Exchange
Commission.
B. Fund Services agrees that it will perform the following services:
(a) In accordance with procedures established from time to time
between the Trust, the Transfer Agent and Fund Services, Fund Services shall:
(i) receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor
to the custodian of the Trust authorized pursuant to the
Agreement and Declaration of Trust of the Trust (the
"Custodian"):
<PAGE>
(ii) pursuant to purchase orders, assist the Transfer Agent to issue
the appropriate number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) receive for acceptance, redemption requests and redemption
directions and deliver the appropriate documentation therefor to
the Custodian;
(iv) at the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over or
cause to be paid over in the appropriate manner such monies as
instructed by the redeeming Shareholders;
(v) assist the Transfer Agent to effect transfers of Shares by the
registered owners thereof upon receipt of appropriate
documentation;
(vi) assist the Transfer Agent to prepare and transmit payments for
dividends and distributions declared by the Trust; and
(vii) assist the Transfer Agent to maintain records of account for the
Trust and its Shareholders as to the foregoing.
2. Services with Respect to the Registration of Shares.
----------------------------------------------------
On each day on which an issuance or redemption of Shares occurs, Fund
Services shall assist the Transfer Agent to prepare for the Trust account
records opening, crediting, debiting and closing affected Shareholders' accounts
as necessary to reflect the issuances or redemptions occurring on that day. All
credits to Shareholders' accounts shall be for the price of the Shares at the
time of purchase, determined in accordance with the Trust's current prospectus.
3. Share Price for Purchase and Redemption
---------------------------------------
A. Fund Services shall assist the Transfer Agent to identify all share
transactions which involve purchase and redemption orders that are processed at
a time other than the time of the computation of net asset value per share next
computed after receipt of such orders, and shall compute the net effect upon the
Trust of such transactions so identified on a daily and cumulative basis.
B. Fund Services shall supply to the Trust monthly reports summarizing
the transactions identified pursuant to paragraph A. above, and the daily and
cumulative net effects of such transactions, and shall advise the Trust at the
end of each month of the net cumulative effect at such time.
4. Books and Records
-----------------
Fund Services shall prepare for the Trust and assist the Transfer Agent in
maintaining records showing for each Shareholder's account the following:
A. The name, address and tax identification number of such Shareholder;
B. The number of Shares held by such Shareholder;
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<PAGE>
C. Historical information including dividends paid and date and price for
all transactions;
D. Any stop or restraining order placed against such account;
E. Information with respect to the withholding of any portion of income
dividends or capital gains distributions;
F. Any dividend or distribution reinvestment election, withdrawal plan
application, and correspondence relating to the current maintenance of
the account;
G. The certificate numbers and denominations of any share certificates
issued to such Shareholder; and
H. Any additional information required by Fund Services to perform the
services contemplated by this Agreement.
Any such records required to be maintained by the Trust pursuant to Rule
3la-1 under the Investment Company Act of 1940, as amended (the "Act") or any
successor rule shall be preserved by the Transfer Agent or Fund Services for the
periods prescribed by Rule 31a-2 under the Act or any successor rule. Such
record retention shall be at the expense of the Trust. Fund Services may, at its
option at any time, turn over to the Trust and cease to retain records created
and maintained by Fund Services pursuant to this Agreement which are no longer
required by Fund Services to perform the services contemplated by this
Agreement. If not turned over to the Trust, such records shall be preserved by
Fund Services for six years from the year of creation, during the first two of
which years such records shall be in readily accessible form. At the conclusion
of such six-year period, such records shall either be turned over to the Trust
or destroyed in accordance with the Trust's authorization.
5. Information To Be Furnished To The Trust
----------------------------------------
Fund Services shall assist the Transfer Agent to furnish to the Trust
periodically as agreed upon between the Trust, Fund Services and the Transfer
Agent the following information:
A. Copies of the daily transaction register for each business day of the
Trust;
B. Copies of all dividend, distribution and reinvestment blotters;
C. Schedules of the quantities of Shares distributed in each state for
purposes of any state's laws or regulations as specified in
instructions given to Fund Services from time to time by the Trust or
its agents;
D. Reports on transactions described in Paragraph 3 of this Agreement.
E. Such other information, including Shareholder lists, and statistical
information as may be requested by the Trust from time to time.
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<PAGE>
6. Confirmations and Statements of Account
---------------------------------------
Fund Services shall assist the Transfer Agent to prepare and mail to each
Shareholder at his address as set forth on the transfer books of the Trust such
confirmations of the Trust for each purchase or sale of Shares by each
Shareholder and periodic statements of such Shareholder's account with the Trust
as may be specified from time to time by the Trust.
7. Correspondence
--------------
Fund Services shall respond to correspondence from Shareholders relating to
their accounts with the Trust and such other correspondence as may from time to
time be mutually agreed upon by the Trust, the Transfer Agent and Fund Services.
8. Proxies
-------
Fund Services shall assist the Transfer Agent to mail to Shareholders
notices of meetings, proxy statements, forms of proxy and other material
supplied to it by the Trust in connection with Shareholder meetings of the Trust
and shall receive, examine and tabulate returned proxies and certify such
tabulations to the Trust in such written form as the Trust may require.
9. Fees And Charges
----------------
A. For the services rendered by Fund Services as described above, subject
to the conditions described below, the Trust shall pay to Fund Services a fee
calculated and payable monthly based upon the annual rate stated in the fee
schedules attached hereto. Fund Services shall also be reimbursed for the cost
of forms used by it in communicating with Shareholders of the Trust or specially
prepared for use in connection with its services hereunder, as well as the cost
of postage, telephone and telegraph (or similar electronic media) used in
communicating with Shareholders of the Trust. It is agreed in this regard that
Fund Services, prior to ordering any form shall obtain the written consent of
the Trust. All forms for which Fund Services has received reimbursement from the
Trust shall be the property of the Trust. Such fees and out-of-pocket expenses
and advances described herein may be changed from time to time subject to mutual
written agreement between the Trust and Fund Services.
B. No fee shall be payable to Fund Services pursuant to this Agreement in
the event that the Board of Trustees of the Trust (the "Trustees") determines
that Fund Services did not provide the services required by this Agreement or
provided services which were inadequate as determined by the Trustees, in its
sole discretion.
10. Compliance With Government Rules And Regulations
------------------------------------------------
The Trust understands and agrees that it shall be solely responsible for
ensuring that each prospectus of the Trust complies with all applicable
provisions of, or regulations adopted pursuant to, the Securities Act of 1933,
as amended (the "Securities Act"), the Act, and any other
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<PAGE>
laws, rules and regulations of Federal, state or foreign governmental
authorities having jurisdiction in connection with the offering or sale of
Shares.
11. Representations and Warranties of Fund Services
-----------------------------------------------
Fund Services represents and warrants to the Trust that:
A. It is a corporation duly organized and existing and in good standing
under the laws of the State of Delaware.
B. It is empowered under applicable laws and by its charter and by-laws
to enter into and perform this Agreement.
C. All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
D. It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
12. Representations and Warranties of the Trust
-------------------------------------------
The Trust represents and warrants to Fund Services that:
A. It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware and the Delaware Business Trust
Act.
B. It is empowered under applicable laws and by its Agreement and
Declaration of Trust and By-Laws to enter into and perform this Agreement.
C. All proceedings required by said Agreement and Declaration of Trust
and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
D. It is an investment company registered under the Act.
E. A registration statement under the Securities Act is currently
effective and will remain effective, and appropriate state securities law
filings have been made and will continue to be made, with respect to all Shares
of the Trust being offered for sale; information to the contrary will result in
immediate notification to Fund Services.
13. Indemnification
---------------
A. Fund Services shall not be responsible for, and the Trust shall
indemnify and hold Fund Services harmless from and against, any and all losses,
damages, costs, charges, reasonable counsel fees, payments, expenses and
liability arising out of or attributable to:
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<PAGE>
(a) All actions of Fund Services or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Trust's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Trust's lack of good faith, negligence or
willful misconduct which arise out of the breach of any representation or
warranty of the Trust hereunder.
(c) The reliance on or use by Fund Services or its agents or
subcontractors of information, records and documents which (i) are received by
Fund Services or its agents or subcontractors and furnished to it by or on
behalf of the Trust, and (ii) have been prepared or maintained by the Trust.
(d) The reliance on, or the carrying out by Fund Services or its
agents or subcontractors of any instructions or requests of the Trust
representative.
(e) The offer or sale of Shares in violation of any requirement under
the Federal securities laws or regulations or the securities laws or regulations
of any state that such Shares be registered in such state or in violation of any
stop order or other determination or ruling by any Federal agency or any state
with respect to the offer or sale of such Shares in such state.
B. Fund Services shall indemnify and hold the Trust harmless from Fund
Services' refusal or failure to comply with the terms of this Agreement, or
which arise out of Fund Services' lack of good faith, negligence or willful
misconduct or which arise out of the breach of any representation or warranty of
Fund Services or its agents or subcontractors hereunder.
C. At any time Fund Services may apply to any officer of the Trust for
instructions, and may consult with outside legal counsel with respect to any
matter arising in connection with the services to be performed by Fund Services
under this Agreement, and Fund Services and its agents or subcontractors shall
not be liable and shall be indemnified by the Trust for any action taken or
omitted by it in reliance upon such instructions or upon the opinion of such
counsel. Fund Services, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of
the Trust, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data, records or
documents provided Fund Services or its agents or subcontractors by telephone,
in person, machine readable input, telex, CRT data entry or other similar means
authorized by the Trust, and shall not be held to have notice of any change of
authority of any person, until receipt of written notice thereof from the Trust.
Fund Services, its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signatures of the appropriate officer or
officers of the Trust, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
D. In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage
-6-
<PAGE>
reasonably beyond its control, or other causes reasonably beyond its control,
such party shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such causes.
E. Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
F. In order that the indemnification provisions contained in this
Paragraph 13 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
14. Further Actions
---------------
Each party agrees to perform such further acts and execute and deliver such
further documents as are necessary to effectuate the purposes hereof.
15. Amendment, Termination and Delegation of Obligations
----------------------------------------------------
Upon its approval by the Trustees and appropriate execution, this Agreement
shall remain in effect for two years and thereafter automatically for successive
one-year periods, provided that such continuance is specifically approved at
least annually by a vote of a majority of the Trustees and by a majority of the
members who are not parties to this Agreement or interested persons, as defined
in the Act, of any such party. The Trustees shall approve and renew this
Agreement upon determining that the fees provided by the fee schedule attached
hereto are fair and reasonable in light of the usual and customary charges made
by others for services of the same nature and quality. This Agreement may be
modified or amended from time to time by written agreement between the parties
hereto. This Agreement may be terminated at any time by one hundred twenty (120)
days' written notice given by one party to the other. Upon termination hereof,
the Trust shall pay to Fund Services such compensation as may be due as of the
date of such termination, and shall likewise reimburse Fund Services in
accordance herewith for its costs, expenses and disbursements.
16. Assignment
----------
A. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other party.
B. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
17. New York Law to Apply
---------------------
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<PAGE>
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
BRAZOS MUTUAL FUNDS
ATTEST:
_______________________________ By: _________________________________
SUNAMERICA FUND SERVICES, INC.
ATTEST:
_______________________________ By: _________________________________
Robert M. Zakem, Vice President
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<PAGE>
Annual Fee Schedule for Class Y Shares of Brazos Mutual Funds
Name of Series
Small Cap Growth Portfolio
Micro Cap Growth Portfolio
Real Estate Securities Portfolio
Growth Portfolio
Annual Fee
$14.00 per shareholder account - no-load fund
Minimum annual fees of $22,500 for the first fund, $10,000 for each
additional fund or class
Plus Out-of-Pocket Expenses, including but not limited to:
Telephone - toll-free lines Proxies
Postage Retention of records (with prior
approval)
Programming (with prior approval) Microfilm/fiche of records
Stationary/envelopes Special reports
Mailing ACH fees
Insurance NSCC charges
ACH Shareholder Services
$125.00 per month per fund group
$.50 per account setup and/or change
$.50 per item for AIP purchases
$.35 per item for EFT payments and purchases
$3.50 per correction, reversal, return item
Qualified Plan Fees (Billed to Investors)
Annual maintenance fee per account $12.50/acct. (Cap at $25.00 per
SSN)
Transfer to successor trustee $15.00/trans.
Distribution to participant $15.00/trans (Exclusive of SWP)
Refund of excess contribution $15.00/trans.
Additional Shareholder Fees (Billed to Investors)
Any outgoing wire transfer $12.00/wire
Telephone Exchange $ 5.00/exchange transaction
Return check fee $20.00/item
Stop payment $20.00/stop
(Liquidation, dividend, draft check)
Research fee $ 5.00/item
(For requested items of the second calendar year [or previous] to
the request) (Cap at $25.00)
-9-
<PAGE>
NSCC and DAZL
OUT-OF-POCKET CHARGES FOR CLASS Y SHARES OF BRAZOS MUTUAL FUNDS
NSCC INTERFACES
Setup
Fund/SERV, Networking ACATS, Exchanges $5,000 setup (one time)
Commissions $5,000 setup (one time)
Processing
Fund/SERV $ 50/month
Networking $250/month
CPU Access $ 40/month
Fund/SERV Transactions $ .35/trade
Networking - per item $.025/monthly dividend fund
Networking - per item $.015/non-mo. dividend fund
First Data $.10/next-day Fund/SERV trade
First Data $.15/same-day Fund/SERV trade
NSCC IMPLEMENTATION
8 to 10 weeks lead time (target availability 10/1/97)
DAZL (Direct Access Zip Link - Electronic mail interface to financial
advisor network)
Setup $5,000/fund group
Monthly Usage $1,000/month
Transmission $.015/price record
$.025/other record
Enhancement $125/hour
Fees and out-of-pocket expenses are billed to the fund monthly
-10-
<PAGE>
ANNUAL FEE SCHEDULE FOR CLASSES A,
B AND II OF BRAZOS MUTUAL FUNDS
NAME OF SERIES
Small Cap Growth Portfolio
Real Estate Securities Portfolio
Annual Fee: 22% of average daily net assets
-11-
<PAGE>
EXHIBIT (I)(1)
DRINKER BIDDLE & REATH LLP
PNB Building, Suite 1100
1345 Chestnut Street
Philadelphia, PA 19107-3496
Direct Dial (215) 988-2719
May 21, 1999
Brazos Mutual Funds
5949 Sherry Lane
Suite 1600
Dallas, Texas 75225
Re: Brazos Mutual Funds
-------------------
Gentlemen:
We have acted as counsel for Brazos Mutual Funds, a Delaware business trust
(the "Fund"), in connection with the registration by the Fund of its shares of
beneficial interests, without par value. The Agreement and Declaration of Trust
of the Fund authorizes the issuance of an indefinite number of shares of
beneficial interest, which are divided into multiple classes. The Board of
Trustees of the Fund (the "Board") has previously classified certain of the
shares of beneficial interest and has previously authorized the issuance of
shares of these series to the public. The shares of beneficial interest
designated into each such series are referred to herein as the "Current Series
Beneficial Interests"; the shares of Beneficial Interests that are not
designated into series are referred to herein as the "Future Beneficial
Interests"; and the Current Series Beneficial Interests and the Future
Beneficial Interests are referred to collectively herein as the "Beneficial
Interests." You have asked for our opinion on certain matters relating to the
Beneficial Interests.
We have reviewed the Fund's Agreement and Declaration of Trust and By-laws,
resolutions of the Board, certificates of public officials and of the Fund's
officers and such other legal and factual matters as we have deemed appropriate.
We have also reviewed the Fund's Registration Statement on Form N-1A under the
Securities Act of 1933 (the "Registration Statement"), as amended through Post-
Effective Amendment No. 6 thereto.
<PAGE>
This opinion is based exclusively on the laws of the Delaware Business
Trust Act and the federal law of the United States of America.
We have assumed the following for purposes of this opinion:
1. The shares of Current Series Beneficial Interests have been, and will
continue to be, issued in accordance with the Agreement and Declaration of Trust
and By-laws of the Fund and resolutions of the Board and shareholders relating
to the creation, authorization and issuance of the Current Series Beneficial
Interests.
2. Prior to the issuance of any shares of Future Beneficial Interests,
the Board (a) will duly authorize the issuance of such Future Beneficial
Interests, (b) will determine with respect to each class of such Future
Beneficial Interests the preferences, limitations and relative rights applicable
thereto and (c) if such Future Beneficial Interests are classified into separate
series, will duly take the action necessary to create such series and to
determine the number of shares of such series and the relative designations,
preferences, limitations and relative rights thereof ("Future Series
Designations").
3. With respect to the shares of Future Beneficial Interests, there will
be compliance with the terms, conditions and restrictions applicable to the
issuance of such shares that are set forth in (i) the Fund's Agreement and
Declaration of Trust and By-laws, each as amended as of the date of such
issuance, and (ii) the applicable Future Series Designations.
4. The Board will not change the number of shares of any series of
Beneficial Interests, or the preferences, limitations or relative rights of any
class or series of Beneficial Interests after any shares of such class or series
have been issued.
Based upon the foregoing, we are of the opinion that:
1. The Fund is authorized to issue an indefinite number of shares of
Beneficial Interests.
2. The Board is authorized (i) to create from time to time one or more
additional series of shares of Beneficial Interests and (ii) to determine, at
the time of creation of any such series, the number of shares of such series and
the designations, preferences, limitations and relative rights thereof.
3. All necessary action by the Fund to authorize the shares of Current
Series Beneficial Interests has been taken, and the Fund has the power to issue
the shares of Current Series Beneficial Interests.
4. The shares of Beneficial Interests will be, when issued in accordance
with, and sold for the consideration described in, the Registration Statement
(provided that (i) the price of such shares is not less than the par value
thereof and (ii) the number of shares of any class or series issued does not
exceed the authorized number of shares for such class or series as of the date
of issuance of the shares), validly issued, fully paid and non-assessable by the
Fund.
-2-
<PAGE>
We consent to the filing of this opinion with Post-Effective Amendment No.
6 to the Registration Statement to be filed by the Fund with the Securities and
Exchange Commission.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
DRINKER BIDDLE & REATH LLP
AT\HH
-3-
<PAGE>
Exhibit (j)(1)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of the
Brazos Mutual Funds
We consent to the inclusion by reference in Post-Effective Amendment No. 6 to
the Registration Statement of Brazos Mutual Funds on Form N-1A of our report
dated December 30, 1998, on our audits of the financial statements and financial
highlights of Brazos Small Cap Growth Portfolio and Brazos Real Estate
Securities Portfolio (two of the portfolios constituting the Brazos Mutual
Funds), which report is included in the Annual Report to Shareholders for the
year ended November 30, 1998, which is included in the Registration Statement.
We also consent to the references to our Firm under the captions "Financial
Highlights" in the Prospectus and "Independent Accountants and Legal Counsel" in
the Statement of Additional Information.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
May 28, 1999
<PAGE>
Exhibit (m)(1)
[FORM OF]
BRAZOS MUTUAL FUNDS
PLAN OF DISTRIBUTION PURSUANT
TO RULE 12b-1
(CLASS A SHARES)
PLAN OF DISTRIBUTION adopted as of the ____ day of June, 1999, by Brazos
Mutual Funds, a Delaware business trust (the "Trust"), on behalf of the Class A
shares of its four separately designated series, Small Cap Growth, Micro Cap
Growth, Real Estate Securities and Growth Portfolios and future designated
series listed on an addendum to this Plan of Distribution (each a "Portfolio,"
and collectively, the "Portfolios").
W I T N E S S E T H:
--------------------
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "Act"), as an open-end management investment company; and
WHEREAS, each Portfolio is a separately designated investment series of the
Trust with its own investment objective, policies and purposes offering four
separate classes of shares of common stock, par value $.001 per share, of the
Trust (the "Shares"); and
WHEREAS, the Trust has entered into a Distribution Agreement with
SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the
Distributor acts as the exclusive distributor and representative of the Trust in
the offer and sale of the Shares to the public; and
WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which each
Portfolio will pay an account maintenance fee and a distribution fee to the
Distributor with respect to Class A shares of each Portfolio; and
WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole,
and the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of this Plan or in any
agreement relating hereto (the "12b-1 Trustees"), having determined, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law and under Sections 36(a) and (b) of the Act, that there is a
reasonable likelihood that this Plan will benefit the Portfolios and their Class
A shareholders, have approved this Plan by votes cast in person at a meeting
called for the purpose of voting hereon and on any agreements related hereto;
<PAGE>
NOW THEREFORE, the Trust on behalf of each Portfolio hereby adopts this
Plan on the following terms:
1. Distribution Activities. Each Portfolio shall pay the Distributor a
-----------------------
distribution fee under the Plan at the end of each month at the annual rate of
0.10% of average daily net assets attributable to Class A shares of each
Portfolio to compensate the Distributor and certain securities firms
("Securities Firms") for providing sales and promotional activities and
services. Such activities and services will relate to the sale, promotion and
marketing of the Class A shares. Such expenditures may consist of sales
commissions to financial consultants for selling Class A shares, compensation,
sales incentives and payments to sales and marketing personnel, and the payment
of expenses incurred in its sales and promotional activities, including
advertising expenditures related to the Class A shares of each Portfolio and the
costs of preparing and distributing promotional materials with respect to such
Class A shares. Payment of the distribution fee described in this Section 1
shall be subject to any limitations set forth in applicable regulations of the
National Association of Securities Dealers, Inc. Nothing herein shall prohibit
the Distributor from collecting distribution fees in any given year, as provided
hereunder, in excess of expenditures made in such year for sales and promotional
activities with respect to the Portfolios.
2. Account Maintenance Activities. Each Portfolio shall pay the
------------------------------
Distributor an account maintenance fee under the Plan at the end of each month
at the annual rate of up to 0.25% of average daily net assets attributable to
Class A shares of each Portfolio to compensate the Distributor and Securities
Firms for account maintenance activities.
3. Payments to Other Parties. Each Portfolio hereby authorizes the
-------------------------
Distributor to enter into agreements with Securities Firms to provide
compensation to such Securities Firms for activities and services of the type
referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a
portion of its account maintenance fee or distribution fee to such Securities
Firms as compensation for the above-mentioned activities and services. Such
agreements shall provide that the Securities Firms shall deliver to the
Distributor such information as is reasonably necessary to permit the
Distributor to comply with the reporting requirements set forth in Section 5
hereof.
4. Related Agreements. All agreements with any person relating to
------------------
implementation of this Plan shall be in writing, and any agreement related to
this Plan shall provide:
(a) that such agreement may be terminated at any time, without
payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote
of a majority of the outstanding voting securities (as defined in the Act) of
Class A shares of each Portfolio, on not more than 60 days' written notice to
any other party to the agreement; and
(b) that such agreement shall terminate automatically in the event of
its assignment.
5. Quarterly Reports. The Treasurer of the Trust shall provide to the
-----------------
Trustees and the Trustees shall review, at least quarterly, a written report of
the amounts
-2-
<PAGE>
expended pursuant to this Plan with respect to Class A shares of each Portfolio
and any related agreement and the purposes for which such expenditures were
made.
6. Term and Termination. (a) This Plan shall become effective as of
--------------------
the date hereof, and, unless terminated as herein provided, shall continue from
year to year thereafter, so long as such continuance is specifically approved at
least annually by votes, cast in person at a meeting called for the purpose of
voting on such approval, of a majority of both the (i) the Trustees of the
Trust, and (ii) the 12b-1 Trustees.
(b) This Plan may be terminated at any time by vote of a majority of
the 12b-1 Trustees or by vote of a majority of the outstanding voting securities
(as defined in the Act) of Class A shares of each Portfolio.
7. Amendments. This Plan may not be amended to increase materially the
----------
maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment
is approved by a vote of a majority of the outstanding voting securities (as
defined in the Act) of Class A shares of each Portfolio, and no material
amendment to this Plan shall be made unless approved in the manner provided for
the annual renewal of this Plan in Section 6(a) hereof.
8. Selection and Nomination of Trustees. While this Plan is in effect,
------------------------------------
the selection and nomination of those Trustees of the Trust who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested Trustees.
9. Recordkeeping. The Trust shall preserve copies of this Plan and any
-------------
related agreement and all reports made pursuant to Section 5 hereof for a period
of not less than six years from the date of this Plan, any such related
agreement or such reports, as the case may be, the first two years in an easily
accessible place.
10. Definition of Certain Terms. For purposes of this Plan, the terms
---------------------------
"assignment," "interested person," "majority of the outstanding voting
securities," and "principal underwriter" shall have their respective meanings
defined in the Act and the rules and regulations thereunder, subject, however,
to such exemptions as may be granted to either the Trust or the principal
underwriter of the Shares by the Securities and Exchange Commission, or its
staff under the Act.
11. Separate Series. Pursuant to the provisions of the Agreement and
---------------
Declaration of Trust, each Portfolio is a separate series of the Trust, and all
debts, liabilities and expenses of Class A shares of the Portfolio shall be
enforceable only against the assets of Class A shares of each Portfolio and not
against the assets of any other series or class of shares or of the Trust as a
whole.
-3-
<PAGE>
IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the
day and year first written above.
BRAZOS MUTUAL FUNDS
By: _______________________________
President
-4-
<PAGE>
Exhibit (M)(2)
[FORM OF]
BRAZOS MUTUAL FUNDS
PLAN OF DISTRIBUTION PURSUANT
TO RULE 12b-I
(CLASS B SHARES)
PLAN OF DISTRIBUTION adopted as of the ____ day of June, 1999, by
Brazos Mutual Funds, a Delaware business trust (the "Trust"), on behalf of the
Class B shares of its four separately designated series, Small Cap Growth, Micro
Cap Growth, Real Estate Securities, and Growth Portfolios and future designated
series listed on an addendum to this Plan of Distribution (each a "Portfolio,"
and collectively, the "Portfolios").
WITNESSETH:
----------
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company; and
WHEREAS, each Portfolio is a separately designated investment series
of the Trust with its own investment objective, policies and purposes offering
four separate classes of shares of common stock, par value $.001 per share, of
the Trust (the "Shares"); and
WHEREAS, the Trust has entered into a Distribution Agreement with
SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the
Distributor acts as the exclusive distributor and representative of the Trust in
the offer and sale of the Shares to the public; and
WHEREAS, the Trust desires to adopt this Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which each Portfolio will pay an account maintenance fee and a distribution fee
to the Distributor with respect to Class B shares of each Portfolio; and
WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a
whole, and the Trustees who are not interested persons of the Trust and who have
no direct or indirect financial interest in the operation of this Plan or in any
agreement relating hereto (the "l2b-1 Trustees"), having determined, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law and under Sections 36(a) and (b) of the Act, that there is a
reasonable likelihood that this Plan will benefit the Portfolios and their Class
B shareholders, have approved this Plan by votes cast in person at a meeting
called for the purpose of voting hereon and on any agreements related hereto;
<PAGE>
NOW THEREFORE, the Trust on behalf of each Portfolio hereby adopts
this Plan on the following terms:
1. Distribution Activities. Each Portfolio shall pay the Distributor
-----------------------
a distribution fee under the Plan at the end of each month at the annual rate of
0.75% of average daily net assets attributable to Class B shares of each
Portfolio to compensate the Distributor and certain securities firms
("Securities Firms") for providing sales and promotional activities and
services. Such activities and services will relate to the sale, promotion and
marketing of the Class B shares. Such expenditures may consist of sales
commissions to financial consultants for selling Class B shares, compensation,
sales incentives and payments to sales and marketing personnel, and the payment
of expenses incurred in its sales and promotional activities, including
advertising expenditures related to the Class B shares of each Portfolio and the
costs of preparing and distributing promotional materials with respect to such
Class B shares. Payment of the distribution fee described in this Section 1
shall be subject to any limitations set forth in applicable regulations of the
National Association of Securities Dealers, Inc. Nothing herein shall prohibit
the Distributor from collecting distribution fees in any given year, as provided
hereunder, in excess of expenditures made in such year for sales and promotional
activities with respect to the Portfolios.
2. Account Maintenance Activities. Each Portfolio shall pay the
------------------------------
Distributor an account maintenance fee under the Plan at the end of each month
at the annual rate of up to 0.25% of average daily net assets attributable to
Class B shares of each Portfolio to compensate the Distributor and Securities
Firms for account maintenance activities.
3. Payments to Other Parties. Each Portfolio hereby authorizes the
-------------------------
Distributor to enter into agreements with Securities Firms to provide
compensation to such Securities Firms for activities and services of the type
referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a
portion of its account maintenance fee or distribution fee to such Securities
Firms as compensation for the above-mentioned activities and services. Such
agreements shall provide that the Securities Firms shall deliver to the
Distributor such information as is reasonably necessary to permit the
Distributor to comply with the reporting requirements set forth in Section 5
hereof.
4. Related Agreements. All agreements with any person relating to
------------------
implementation of this Plan shall be in writing, and any agreement related to
this Plan shall provide:
(a) that such agreement may be terminated at any time,
without payment of any penalty, by vote of a majority of the 12b-1 Trustees
or, by vote of a majority of the outstanding voting securities (as defined
in the Act) of Class B shares of each Portfolio, on not more than 60 days'
written notice to any other party to the agreement; and
(b) that such agreement shall terminate automatically in
the event of its assignment.
-2-
<PAGE>
5. Quarterly Reports. The Treasurer of the Trust shall provide to
-----------------
the Trustees and the Trustees shall review, at least quarterly, a written report
of the amounts expended pursuant to this Plan with respect to Class B shares of
each Portfolio and any related agreement and the purposes for which such
expenditures were made.
6. Term and Termination. (a) This Plan shall become effective as of
--------------------
the date hereof, and, unless terminated as herein provided, shall continue from
year to year thereafter, so long as such continuance is specifically approved at
least annually by votes, cast in person at a meeting called for the purpose of
voting on such approval, of a majority of both (i) the Trustees of the Trust,
and (ii) the 12b-1 Trustees.
(b) This Plan may be terminated at any time by vote of a
majority of the 12b-1 Trustees or by vote of a majority of the outstanding
voting securities (as defined in the Act) of Class B shares of each Portfolio.
7. Amendments. This Plan may not be amended to increase materially
----------
the maximum expenditures permitted by Sections 1 and 2 hereof unless such
amendment is approved by a vote of a majority of the outstanding voting
securities (as defined in the Act) of Class B shares of each Portfolio, and no
material amendment to this Plan shall be made unless approved in the manner
provided for the annual renewal of this Plan in Section 6(a) hereof.
8. Selection and Nomination of Trustees. While this Plan is in
------------------------------------
effect, the selection and nomination of those Trustees of the Trust who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested Trustees.
9. Recordkeeping. The Trust shall preserve copies of this Plan and
-------------
any related agreement and all reports made pursuant to Section 5 hereof for a
period of not less than six years from the date of this Plan, any such related
agreement or such reports, as the case may be, the first two years in an easily
accessible place.
10. Definition of Certain Terms. For purposes of this Plan, the terms
---------------------------
"assignment," "interested person," "majority of the outstanding voting
securities," and "principal underwriter" shall have their respective meanings
defined in the Act and the rules and regulations thereunder, subject, however,
to such exemptions as may be granted to either the Trust or the principal
underwriter of the Shares by the Securities and Exchange Commission, or its
staff under the Act.
11. Separate Series. Pursuant to the provisions of the Articles of
---------------
the Agreement and Declaration of Trust, each Portfolio is a separate series of
the Trust, and all debts, liabilities and expenses of Class B shares of each
Portfolio shall be enforceable only against the assets of Class B shares of that
Portfolio and not against the assets of any other series or class of shares or
of the Trust as a whole.
-3-
<PAGE>
IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as
of the day and year first written above.
BRAZOS MUTUAL FUNDS
By:__________________________
President
-4-
<PAGE>
Exhibit (M)(3)
[FORM OF]
BRAZOS MUTUAL FUNDS
PLAN OF DISTRIBUTION PURSUANT
TO RULE 12b-I
(CLASS II SHARES)
PLAN OF DISTRIBUTION adopted as of the ____ day of June, 1999, by
Brazos Mutual Funds, a Delaware business trust (the "Trust"), on behalf of the
Class B shares of its four separately designated series, Small Cap Growth, Micro
Cap Growth, Real Estate Securities, and Growth Portfolios and future designated
series listed on an addendum to this Plan of Distribution (each a "Portfolio,"
and collectively, the "Portfolios").
WITNESSETH:
----------
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company; and
WHEREAS, each Portfolio is a separately designated investment series
of the Trust with its own investment objective, policies and purposes offering
four separate classes of shares of common stock, par value $.001 per share, of
the Trust (the "Shares"); and
WHEREAS, the Trust has entered into a Distribution Agreement with
SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the
Distributor acts as the exclusive distributor and representative of the Trust in
the offer and sale of the Shares to the public; and
WHEREAS, the Trust desires to adopt this Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which each Portfolio will pay an account maintenance fee and a distribution fee
to the Distributor with respect to Class B shares of each Portfolio; and
WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a
whole, and the Trustees who are not interested persons of the Trust and who have
no direct or indirect financial interest in the operation of this Plan or in any
agreement relating hereto (the "l2b-1 Trustees"), having determined, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law and under Sections 36(a) and (b) of the Act, that there is a
reasonable likelihood that this Plan will benefit the Portfolios and their Class
B shareholders, have approved this Plan by votes cast in person at a meeting
called for the purpose of voting hereon and on any agreements related hereto;
NOW THEREFORE, the Trust on behalf of each Portfolio hereby adopts
this Plan on the following terms:
<PAGE>
1. Distribution Activities. Each Portfolio shall pay the Distributor a
-----------------------
distribution fee under the Plan at the end of each month at the annual rate of
0.75% of average daily net assets attributable to Class B shares of each
Portfolio to compensate the Distributor and certain securities firms
("Securities Firms") for providing sales and promotional activities and
services. Such activities and services will relate to the sale, promotion and
marketing of the Class B shares. Such expenditures may consist of sales
commissions to financial consultants for selling Class B shares, compensation,
sales incentives and payments to sales and marketing personnel, and the payment
of expenses incurred in its sales and promotional activities, including
advertising expenditures related to the Class B shares of each Portfolio and the
costs of preparing and distributing promotional materials with respect to such
Class B shares. Payment of the distribution fee described in this Section 1
shall be subject to any limitations set forth in applicable regulations of the
National Association of Securities Dealers, Inc. Nothing herein shall prohibit
the Distributor from collecting distribution fees in any given year, as provided
hereunder, in excess of expenditures made in such year for sales and promotional
activities with respect to the Portfolios.
2. Account Maintenance Activities. Each Portfolio shall pay the
------------------------------
Distributor an account maintenance fee under the Plan at the end of each month
at the annual rate of up to 0.25% of average daily net assets attributable to
Class B shares of each Portfolio to compensate the Distributor and Securities
Firms for account maintenance activities.
3. Payments to Other Parties. Each Portfolio hereby authorizes the
-------------------------
Distributor to enter into agreements with Securities Firms to provide
compensation to such Securities Firms for activities and services of the type
referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a
portion of its account maintenance fee or distribution fee to such Securities
Firms as compensation for the above-mentioned activities and services. Such
agreements shall provide that the Securities Firms shall deliver to the
Distributor such information as is reasonably necessary to permit the
Distributor to comply with the reporting requirements set forth in Section 5
hereof.
4. Related Agreements. All agreements with any person relating to
------------------
implementation of this Plan shall be in writing, and any agreement related to
this Plan shall provide:
(a) that such agreement may be terminated at any time, without
payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote
of a majority of the outstanding voting securities (as defined in the Act) of
Class B shares of each Portfolio, on not more than 60 days' written notice to
any other party to the agreement; and
(b) that such agreement shall terminate automatically in the event of
its assignment.
5. Quarterly Reports. The Treasurer of the Trust shall provide to the
-----------------
Trustees and the Trustees shall review, at least quarterly, a written report of
the amounts expended pursuant to this Plan with respect to Class B shares of
each Portfolio and any related agreement and the purposes for which such
expenditures were made.
-2-
<PAGE>
6. Term and Termination. (a) This Plan shall become effective as of the
--------------------
date hereof, and, unless terminated as herein provided, shall continue from year
to year thereafter, so long as such continuance is specifically approved at
least annually by votes, cast in person at a meeting called for the purpose of
voting on such approval, of a majority of both (i) the Trustees of the Trust,
and (ii) the 12b-1 Trustees.
(b) This Plan may be terminated at any time by vote of a majority of
the 12b-1 Trustees or by vote of a majority of the outstanding voting securities
(as defined in the Act) of Class B shares of each Portfolio.
7. Amendments. This Plan may not be amended to increase materially the
----------
maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment
is approved by a vote of a majority of the outstanding voting securities (as
defined in the Act) of Class B shares of each Portfolio, and no material
amendment to this Plan shall be made unless approved in the manner provided for
the annual renewal of this Plan in Section 6(a) hereof.
8. Selection and Nomination of Trustees. While this Plan is in effect,
------------------------------------
the selection and nomination of those Trustees of the Trust who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested Trustees.
9. Recordkeeping. The Trust shall preserve copies of this Plan and any
-------------
related agreement and all reports made pursuant to Section 5 hereof for a period
of not less than six years from the date of this Plan, any such related
agreement or such reports, as the case may be, the first two years in an easily
accessible place.
10. Definition of Certain Terms. For purposes of this Plan, the terms
---------------------------
"assignment," "interested person," "majority of the outstanding voting
securities," and "principal underwriter" shall have their respective meanings
defined in the Act and the rules and regulations thereunder, subject, however,
to such exemptions as may be granted to either the Trust or the principal
underwriter of the Shares by the Securities and Exchange Commission, or its
staff under the Act.
11. Separate Series. Pursuant to the provisions of the Articles of the
---------------
Agreement and Declaration of Trust, each Portfolio is a separate series of the
Trust, and all debts, liabilities and expenses of Class B shares of each
Portfolio shall be enforceable only against the assets of Class B shares of that
Portfolio and not against the assets of any other series or class of shares or
of the Trust as a whole.
-3-
<PAGE>
IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as
of the day and year first written above.
BRAZOS MUTUAL FUNDS
By:__________________________
President
-4-
<PAGE>
Exhibit (O)(1)
BRAZOS MUTUAL FUNDS
PLAN PURSUANT TO RULE 18F-3
Brazos Mutual Funds (the "Trust") hereby adopts this plan pursuant to Rule
18f-3 under the Investment Company Act of 1940, as amended (the "1940 Act"),
setting forth the separate arrangement and expense allocation of each class of
shares. Any material amendment to this plan is subject to prior approval of the
Board of Trustees, including a majority of the disinterested Trustees.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to an initial sales charge, a
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distribution fee pursuant to Rule 12b-1 under the 1940 Act
("Rule 12b-1 fee") payable at the annual rate of up to 0.10%
of the average daily net assets of the class, and an account
maintenance fee under the Rule 12b-1 Plan payable at the
annual rate of up to 0.25% of the average daily net assets
of the class. The initial sales charge is waived or reduced
for certain eligible investors. In certain cases, as
disclosed in the Prospectus and the Statement of Additional
Information from time to time, Class A shares may be subject
to a contingent deferred sales charge ("CDSC") imposed at
the time of redemption if the initial sales charge with
respect to such shares was waived.
CLASS B SHARES: Class B shares are not subject to an initial sales charge
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but are subject to a CDSC which will be imposed on certain
redemptions, a Rule 12b-1 fee payable at the annual rate of
up to 0.75% of the average daily net assets of the class,
and an account maintenance fee under the Rule 12b-1 Plan
payable at the annual rate of up to 0.25% of the average
daily net assets of the class. The CDSC is waived for
certain eligible investors. Class B shares automatically
convert to Class A shares one year after such time that no
CDSC would be payable upon a redemption.
CLASS II SHARES: Class II shares are subject to an initial sales charge and a
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CDSC which will be imposed on certain redemptions, a Rule
12b-1 fee payable at the annual rate of up to 0.75% of the
average annual net assets of the class, and an account
maintenance fee under the Rule 12b-1 Plan payable at the
annual rate of up to 0.25% of the average daily net assets
of the class. The CDSC is waived for certain eligible
investors.
<PAGE>
CLASS Y SHARES: Class Y shares are not subject to either an initial sales
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charge or CDSC, nor are they subject to any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class, will be allocated to each class on the
basis of the total value of each class of shares of each series of the
Trust (each a "Portfolio" and collectively, the "Portfolios").
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by each Portfolio to each class of
shares, to the extent paid, will be paid on the same day and at the same
time, and will be determined in the same manner and will be in the same
amount, except that the amount of the dividends and other distributions
declared and paid by a particular class may be different from that paid by
another class because of Rule 12b-1 fees and other expenses borne
exclusively by that class.
EXCHANGE PRIVILEGE
Each class of shares is generally exchangeable for the same class of shares
of any other Portfolio or other mutual fund in the same "group of
investment companies" as that term is defined in Rule 11a-3 under the 1940
Act (generally, the SunAmerica Mutual Funds) (subject to certain minimum
investment requirements) at the relative net asset value per share.
CONVERSION FEATURES
Class B shares will convert automatically to Class A shares one year after
such time that no CDSC would be payable upon a redemption. Conversions will
be effected at the relative net asset values of Class B and Class A shares,
without the imposition of any sales load, fee or charge. Class II and Class
Y shares will have no conversion rights.
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<PAGE>
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Trust
for the existence of any material conflicts among the interests of its
several classes. The Trustees, including a majority of the disinterested
Trustees, shall take such action as is reasonably necessary to eliminate
any such conflicts that may develop. John McStay Investment Counsel, the
Trust's investment manager and adviser, will be responsible for reporting
any potential or existing conflicts to the Trustees.
C. For purposes of expressing an opinion on the financial statements of the
Trust, the methodology and procedures for calculating the net asset value
and dividends/distributions of the classes and the proper allocation of
income and expenses among such classes will be examined annually by the
Trust's independent auditors who, in performing such examination, shall
consider the factors set forth in the relevant auditing standards adopted,
from time to time, by the American Institute of Certified Public
Accountants and Financial Accounting Standards Board.
Dated: June __, 1999
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