As filed with the Securities and Exchange Commission on October 15, 1999
Registration No. 33-14943/811-7881
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 7 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 9 |X|
(Check appropriate box or boxes.)
Brazos Mutual Funds
-------------------
(Exact Name of Registrant as Specified in Charter)
5949 Sherry Lane, Suite 1560
Dallas, Texas 75225
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(Address of Principal Executive Offices) (Zip Code)
with a copy of communications to:
Audrey C. Talley, Esquire
Drinker Biddle & Reath LLP
18th and Cherry Streets
Philadelphia, PA 19103-6996
Registrant's Telephone Number, including Area Code (214) 365-5200
Dan L. Hockenbrough, 5949 Sherry Lane, Suite 1560, 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)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on pursuant to paragraph (a)(1)
|X| 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>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell nor is it a means to solicit an offer to buy these securities in any
state where the offer or sale is not permitted.
BRAZOS MUTUAL FUNDS
(CLASS Y SHARES)
PROSPECTUS
DECEMBER 31, 1999
INVESTMENT OBJECTIVE
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BRAZOS MICRO CAP GROWTH PORTFOLIO Micro Capitalization
Growth
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BRAZOS SMALL CAP GROWTH PORTFOLIO Small Capitalization
Growth
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BRAZOS MID CAP GROWTH PORTFOLIO Mid Capitalization
Growth
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BRAZOS REAL ESTATE SECURITIES PORTFOLIO Real Estate
Growth and Income
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BRAZOS GROWTH PORTFOLIO
Growth
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OF THIS PROSPECTUS. IT IS A CRIME FOR
ANYONE TO TELL YOU OTHERWISE.
Transfer Agent:
State Street Bank and Trust Company 1776 Heritage Drive, North Quincy, MA 02171
Telephone: 1-800-426-9157 Website: www.brazosfund.com
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<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVE
INVESTMENT POLICIES
INVESTMENT SUITABILITY
RISK CONSIDERATIONS
PAST PERFORMANCE
INVESTOR EXPENSES
Brazos Micro Cap Growth Portfolio..........................3
Brazos Small Cap Growth Portfolio..........................3
Brazos Mid Cap Growth Portfolio............................3
Brazos Real Estate Securities Portfolio....................7
Brazos Growth Portfolio....................................10
Risk Elements................................................................11
Information About the Adviser................................................14
Information for First Time Mutual Fund Investors.............................17
Valuation of Fund Shares.....................................................17
Dividends, Capital Gains Distributions and Taxes.............................18
Purchase of Shares...........................................................18
Redemption of Shares.........................................................21
Retirement Plans.............................................................23
Year 2000 Disclosure.........................................................24
Financial Highlights.........................................................25
For More Information.........................................................27
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<PAGE>
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BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
BRAZOS MID CAP GROWTH PORTFOLIO
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SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Brazos Micro Cap Growth Portfolio
("Micro Cap"), the Brazos Small Cap Growth Portfolio ("Small Cap") and the
Brazos Mid Cap Growth Portfolio ("Mid Cap") are to provide maximum capital
appreciation, consistent with reasonable risk to principal.
INVESTMENT POLICIES AND STRATEGIES
The majority of equity securities (65%) in each Portfolio will have
market capitalizations as follows:
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MARKET CAPITALIZATION SIZE
(AT TIME OF PURCHASE)
----------------------------------------------------------------
----------------------------------------------------------------
Micro Cap $600 million1 or lower
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Small Cap $1.8 billion or lower,2 or a
capitalization of companies represented
in the Russell 2000 Index at the time
of the Portfolio's investment.
----------------------------------------------------------------
Mid Cap $235 million to $12.9 billion, or within the
range of the S&P MidCap 400 Index.3
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1 The $600 million target will fluctuate based on the smallest 10%
of domestic securities in the Wilshire 5000 Index.
2 This target will fluctuate with changes in market conditions and
the composition of the Russell 2000 Index.
3 This range will fluctuate with changes in market conditions and
the composition of the S&P MidCap 400 Index.
The Portfolios seek to achieve their objectives by investing primarily
in micro, small and mid capitalization companies, respectively. For each of the
Portfolios, the remaining securities acquired may have market capitalizations
that exceed the target capitalization. Micro Cap generally seeks investment in
securities of companies with growth rates of 25%, average annual revenues under
$500 million, and low debt levels. Small Cap generally seeks investment in
securities of companies with growth rates above 20%, average annual revenues
below $1 billion, above average return on equity, and low debt levels. Mid Cap
generally seeks investment in securities of companies JMIC expects to grow at a
faster rate than the average company.
The types of equity securities that can be purchased include common
stocks and securities convertible into common stocks. Convertible securities
include convertible preferred stock, convertible bonds, and American Depository
Receipts (ADRs). Investments in securities of foreign companies are expected to
be less than 5% of each portfolio and would typically be made using ADRs. Most
ADRs are traded on a U.S. stock exchange. Market conditions may
-3-
<PAGE>
lead to higher levels (up to 100%) of temporary investments such as money market
instruments or U.S. Treasury Bills. Temporary investments are expected to be 5%
to 10% of each portfolio under normal circumstances.
The investment process involves consistent communications with senior
management, suppliers, competitors and customers in an attempt to understand the
dynamics within each company's business. The Fund then selects companies with
strong growth in revenue, earnings and cash flow, predictable operating models,
seasoned management, and unique products or services. JMIC believes that smaller
companies have greater potential to deliver above average growth rates that may
not yet have been recognized by investors.
JMIC may sell securities when the value of a security or a group of
securities within a certain sector violates diversification objectives. A high
rate of portfolio turnover involves greater transaction expenses and possible
adverse tax consequences to the Portfolios' shareholders.
To manage fluctuations in the value of the Portfolios' investments,
JMIC invests across 10-12 sectors with no sector representing more than 25% of
the value of each Portfolio.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Micro Cap, Small Cap and Mid Cap may be appropriate for investors who:
o are seeking long-term capital growth
o do not need current income
o are willing to hold an investment over a long period of time
in anticipation of returns that equity securities can provide
and
o are able to tolerate fluctuations in principal value of their
investment.
Investment in the Portfolios involves investment risks, including
possible loss of principal. The value of the Portfolios' investments could be
influenced by changes in the stock market as a whole, by changes in a certain
industry, or by changes in certain stocks. The Portfolios' investments in
instruments such as options and futures may be sensitive to interest rate
changes or values due to their structure or contract terms. The value of each
security at the time of acquisition is not expected to exceed 4% of the value of
investments in either the Micro Cap, Small Cap or Mid Cap Portfolios.
Small companies may have certain risks that their larger counterparts
may not. Small companies may have limited product lines, financial resources,
and management teams. Additionally, the trading volume of small company
securities may make it more difficult to sell. JMIC seeks to reduce this risk by
limiting the Portfolios' holdings of a certain stock to an amount less than or
equal to the number of shares traded on the market by all traders during the
last 7 business days. A more in-depth discussion of the types of risks an equity
fund could be subject to is on pages 11-13.
-4-
<PAGE>
PERFORMANCE BAR CHART
The bar charts below show the annual returns since inception for the
Small Cap and Micro Cap Portfolios. These bar charts assume reinvestment of
dividends and distributions. As with all mutual funds, the past is not a
prediction of the future.
(CHART)
Best Quarter: Q2 1997 25.00%
Worst Quarter: Q3 1998 -19.49%
(CHART)
Best Quarter: Q1 1998 27.70%
Worst Quarter: Q3 1998 -16.26%
PAST PERFORMANCE
The table below shows the past performance of both the Small Cap and
Micro Cap Portfolios to that of the Russell 2000 Index, a widely recognized
unmanaged index of small stock performance. There is no past performance table
for the Mid Cap Growth Portfolio, as it has yet to commence operations. A mutual
fund's comparison of its performance to an objective index may be viewed by an
investor as a relative measure of performance. Similar to the bar charts above,
this table assumes reinvestment of dividends and distributions. As with all
mutual funds, the past is not a prediction of the future.
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SINCE
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98 1 YEAR INCEPTION1
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BRAZOS SMALL CAP GROWTH PORTFOLIO
(after expenses) 13.6% 32.4%
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BRAZOS MICRO CAP GROWTH PORTFOLIO
(after expenses) 32.8% 32.8%
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RUSSELL 2000 INDEX (before expenses) -2.5% 19.2%
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1 The commencement of operations for the Small Cap Growth Portfolio and the
Micro Cap Growth Portfolio was 12/31/96 and 12/31/97, respectively.
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<PAGE>
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in each of the
Portfolios are shown below.
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ANNUAL FUND OPERATING EXPENSES2
(EXPENSES THAT ARE DEDUCTED FROM
PORTFOLIO ASSETS) MICRO CAP SMALL CAP MID CAP
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Management fees 1.20% .90% .90%
Other Expenses .70% .31% .45%
---- ---- ----
Total operating expenses3 1.90% 1.21% 1.35%
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2 JMIC currently reimburses fund expenses to the extent total operating
expenses exceed 1.60% for Micro Cap, 1.35% for Small Cap, and 1.35% for Mid
Cap. This cap on expenses is expected to continue until further notice. After
expense reimbursements and/or fee waivers, if any, the expenses you should
expect to pay as an investor in each of the Portfolios are shown below.
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ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM
PORTFOLIO ASSETS) MICRO CAP SMALL CAP MID CAP
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Management fees .90% .90% .90%
Other Expenses .70% .31% .45%
---- ---- -----
Total operating expenses3 1.60% 1.21% 1.35%
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3 The Portfolios have no sales, redemption, exchange, or account fees with the
exception of a $12.00 fee for each redemption made by wire. Additionally,
some institutions may charge a fee if you buy through them.
The example below shows what a shareholder could pay in expenses over
time and is intended to help you compare the cost of investing in the Portfolios
with the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolios' actual return and expenses will be different.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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MICRO CAP $193 $597 $1,026 $2,222
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SMALL CAP $123 $384 $ 665 $1,466
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MID CAP $___ $____
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<PAGE>
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BRAZOS REAL ESTATE SECURITIES PORTFOLIO
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SUMMARY OF INVESTMENT OBJECTIVE
The investment objective of the Brazos Real Estate Securities Portfolio
("Real Estate" or the "Portfolio") is to invest in real estate securities that
provide a balance of income and appreciation (with reasonable risk to
principal).
INVESTMENT POLICIES AND STRATEGIES
The Portfolio seeks to achieve its objective by investing at least 65%
of its total assets in equity securities of companies principally engaged in the
real estate industry. A company is considered "principally engaged in the real
estate industry" if at least 50% of its assets, gross income, or net profits are
attributable to ownership, construction, management or sale of various real
estate. The types of equity securities that can be purchased include common
stocks and securities convertible into common stocks. Convertible securities
include convertible preferred stock, convertible bonds, and American Depository
Receipts (ADRs). Investments in securities of foreign companies are expected to
be less than 5% of the portfolio and would typically be made using ADRs traded
on a U.S. stock exchange. Market conditions may lead to higher levels (up to
100%) of temporary investments such as money market instruments or U.S. Treasury
Bills. Temporary investments are expected to be 5% to 10% of the portfolio under
normal circumstances.
Real Estate generally seeks securities of companies with strong cash
flow, management, dividend yield, dividend growth potential, and financial
strength. The list of potential investments is further filtered through the use
of fundamental security analysis and valuation methods.
JMIC may sell securities when the value of a security or a group of
securities within a certain sector violates diversification objectives. A high
rate of portfolio turnover involves greater transaction expenses and possible
adverse tax consequences to the Portfolio's shareholders.
JMIC seeks to manage risk by investing across 10-12 property sectors,
such as hotel, office, apartment, retail and industrial sectors. No sector will
represent more than 25% of the value of the Portfolio. The risk is also managed
by investing in companies that provide geographic diversification.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Real Estate may be appropriate for investors who:
o are seeking long-term capital growth
o prefer some current income
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
-7-
<PAGE>
o are able to tolerate fluctuations in the principal value of
their investment.
Investment in the Portfolio involves investment risks, including
possible loss of principal. The value of the Portfolio may significantly
increase or decrease over a short period of time. The value could be influenced
by changes in the stock market as a whole, by changes in a certain industry, or
by changes in certain stocks. The Portfolio's investments in instruments such as
options and futures may be sensitive to interest rate changes or values due to
their structure or contract terms. The value of each security at the time of
acquisition is not expected to exceed 4% of the value of the Portfolio.
The Portfolio is subject to risks, such as market forces, that may
impact the values of its underlying real estate assets, and management's skill
in managing those assets. The trading volume of small company real estate
securities may make it more difficult to sell. JMIC seeks to reduce this risk by
limiting the Portfolio's holdings of a certain stock to an amount less than or
equal to the number of shares traded on the market by all traders during the
last 7 business days. A more in depth discussion of the types of risks an equity
fund could be subject to is on pages 11-13.
PERFORMANCE BAR CHART
The bar chart below shows the Portfolio's annual returns since
inception. This bar chart assumes reinvestment of dividends and distributions.
As with all mutual funds, the past is not a prediction of the future.
(CHART)
Best Quarter: Q3 1997 12.16%
Worst Quarter: Q3 1998 -13.52%
PAST PERFORMANCE
The table below shows the Portfolio's past performance to that of the
NAREIT Equity Index*, a widely recognized unmanaged index of publicly traded
real estate securities. Similar to the bar chart above, this table assumes
reinvestment of dividends and distributions. As with all mutual funds, the past
is not a prediction of the future.
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SINCE
INCEPTION
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98 1 YEAR (12/31/96)
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BRAZOS REAL ESTATE SECURITIES PORTFOLIO -17.4% 3.3%
(after expenses)
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NAREIT EQUITY INDEX (before expenses) -17.5% -0.8%
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* Effective 12/31/98, JMIC no longer uses the Wilshire REIT Index as an
additional benchmark index for the Real Estate Securities Portfolio. JMIC
believes that given the recent improvements in the calculation methodology
of the NAREIT Equity Index, the NAREIT Equity Index will now be recognized
as the most appropriate benchmark for the Real Estate Securities Portfolio.
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the fund are
shown below.
-8-
<PAGE>
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SHAREHOLDER FEES REAL ESTATE SECURITIES
(FEE PAID DIRECTLY FROM YOUR INVESTMENT) PORTFOLIO
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Redemption Fee1 1.00%
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1 Shares of the Portfolio that are held 90 days or more may be redeemed
without cost. This fee is intended to encourage long-term investment in the
Portfolio, to avoid transaction and other expenses caused by early
redemption, and to facilitate portfolio management.
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ANNUAL FUND OPERATING EXPENSES2 REAL ESTATE SECURITIES
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) PORTFOLIO
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Management fees .90%
Other expenses .41%
----
Total operating expenses3 1.31%
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2 JMIC currently reimburses fund expenses to the extent total operating
expenses exceed 1.25%. This cap on expenses is expected to continue until
further notice. After reimbursements and/or fee waivers, if any, the
expenses you should expect to pay as an investor in the fund are shown
below.
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ANNUAL FUND OPERATING EXPENSES REAL ESTATE SECURITIES
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) PORTFOLIO
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Management fees .84%
Other expenses .41%
----
Total operating expenses3 1.25%
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3 The Portfolio has no other sales, exchange, or account fees with the
exception of a $12.00 fee for each redemption made by wire. Additionally,
some institutions may charge a fee if you buy through them.
The example below shows what a shareholder could pay in expenses over
time and is intended to help you compare the cost of investing in the Portfolio
with the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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REAL ESTATE SECURITIES
PORTFOLIO $133 $415 $718 $1,579
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<PAGE>
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BRAZOS GROWTH PORTFOLIO
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SUMMARY OF INVESTMENT OBJECTIVE
The investment objective of the Brazos Growth Portfolio ("Growth") is
to provide maximum capital growth.
INVESTMENT POLICIES AND STRATEGIES
The Portfolio seeks to achieve its objective by investing primarily in
equity securities. Growth generally seeks securities of companies with growth
rates above 20%, above average return on equity, and low debt levels.
The types of equity securities that can be purchased include common
stocks and securities convertible into common stocks. Convertible securities
include convertible preferred stock, convertible bonds, and American Depository
Receipts (ADRs). Investments in securities of foreign companies are expected to
be less than 5% of the portfolio and would typically be made using ADRs. Most
ADRs are traded on a U.S. stock exchange. Market conditions may lead to higher
levels (up to 100%) of temporary investments such as money market instruments or
U.S. Treasury Bills. Temporary investments are expected to be 5% to 10% of the
portfolio under normal circumstances.
Securities are selected based on the company's potential for strong
growth in revenue, earnings and cash flow, strong management, and leading
products or services. The possible investments are further filtered through the
use of fundamental security analysis and valuation methods.
JMIC may sell securities when the value of a security or a group of
securities within a certain sector violates diversification objectives. Annual
portfolio turnover may exceed 100% due to this policy. A high rate of portfolio
turnover involves greater transaction expenses and possible adverse tax
consequences to the Portfolio's shareholders.
To reduce any fluctuation in the value of the Portfolio's investments,
JMIC invests across 10-12 sectors with no sector representing more than 25% of
the value of the Portfolio.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Growth may be appropriate for investors who:
o are seeking long-term capital growth
o are willing to hold an investment over a long period of time
in anticipation of returns that equity securities can provide
and
o are able to tolerate fluctuations in principal value of their
investment.
Investment in the Portfolio involves investment risks, including
possible loss of principal. The value of the Portfolio may advance or decline
significantly over a short period of time. The value could be influenced by
changes in the stock market as a whole, by changes in a certain
-10-
<PAGE>
industry, or by changes in certain stocks. The Portfolio's investments in
instruments such as options and futures may be sensitive to interest rate
changes or values due to their structure or contract terms. The value of each
security is expected to be less than 4% of the value of the Portfolio over the
holding period of each security. A more in depth discussion of the types of
risks an equity fund could be subject to is on pages 11-13.
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the fund are
shown below, and are based on estimated amounts for the current fiscal
year.
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ANNUAL FUND OPERATING EXPENSES1
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) GROWTH
- -------------------------------------------------------------------------------
Management fees .90%
Other expenses .45%
---
Total operating expenses2 1.35%
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1 JMIC currently reimburses fund expenses to the extent total operating
expenses exceed 1.35% for Growth. This cap on expenses is expected to
continue until further notice. After expense reimbursements and/or fee
waivers, the expenses you should expect to pay as an investor in the
fund are shown below.
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ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) GROWTH
- -------------------------------------------------------------------------------
Management fees .90%
Other expenses .45%
---
Total operating expenses2 1.35%
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2 The Portfolio has no sales, redemption, exchange, or account fees with
the exception of a $12.00 fee for each redemption made by wire.
Additionally, some institutions may charge a fee if you buy through
them.
The example below shows what a shareholder could pay in expenses over
time and is intended to help the investor compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. It uses the same
hypothetical conditions other mutual funds use in their prospectuses: $10,000
initial investment for the time periods indicated, 5% annual total return,
expenses (without fee waiver) remain unchanged. The figures shown would be the
same whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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GROWTH $137 $428 $739 $1,624
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A mutual fund's comparison of its performance to an objective index may
be viewed by an investor as a relative measure of performance. A performance bar
chart would give some indication of the risks of an investment in the Portfolio
by comparing the Portfolio's performance with a broad measure of market
performance. There is no past performance table or performance bar chart for the
Growth Portfolio, as Growth is less than one year old.
RISK ELEMENTS
In seeking to achieve its investment objective, each Portfolio will
rely on different strategies to seek rewards and returns. The objective of the
Micro Cap Growth Portfolio is to provide maximum capital appreciation,
consistent with reasonable risk to principal by investing primarily in
microcapitalization companies. The objective of the Small Cap Growth Portfolio
is to provide maximum capital appreciation, consistent with reasonable risk to
principal by investing primarily in small capitalization companies. The
objective of the Real Estate Securities
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<PAGE>
Portfolio is to provide a balance of income and appreciation (with reasonable
risk to principal) by investing primarily in equity securities of companies
which are principally engaged in the real estate industry. The objective of the
Growth Portfolio is to provide maximum capital growth by investing primarily in
equity securities. The objective of the Mid Cap Growth Portfolio is to provide
maximum capital appreciation, consistent with reasonable risk to principal by
investing primarily in midcapitalization companies.
This table identifies the main elements that make up the Portfolios'
overall risk and reward characteristics described under the Risk Considerations
section for each Portfolio presented in this prospectus. It also outlines the
Portfolios' policies toward various securities, including those that are
designed to help each Portfolio manage risk. The following policies are not
fundamental and the Trustees may change such policies without shareholder
approval.
<TABLE>
<CAPTION>
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STRATEGIES TO SEEK REWARD POTENTIAL REWARDS POTENTIAL RISKS
- -------------------------------------------------------------------------------------------------------------
MARKET CONDITIONS
<S> <C> <C>
^ Under normal circumstances
each portfolio plans to remain ^ Stocks and bonds have ^ A portfolio's share price and
fully invested. generally outperformed more performance will fluctuate in
stable investments (such as response to stock and bond
^ A portfolio seeks to limit risk short-term bonds and cash market movements.
through diversification in a equivalents) over the long
large number of stocks. term.
- -------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
^ JMIC focuses on bottom-up ^ A portfolio could outperform ^ A portfolio could
research, fundamental security its benchmark due to its underperform its benchmark
analysis and valuation methods asset allocation and due to these same choices.
to enhance returns. securities choices.
- -------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
^ Each portfolio anticipates a ^ A portfolio could realize ^ Increasing trading would
portfolio turnover rate of gains in a short period of raise the portfolios'
approximately 150%. time. brokerage and related costs.
^ Each portfolio generally avoids ^ A portfolio could protect ^ Increased short-term capital
short-term trading, except to against losses if a stock is gains distributions would
take advantage of attractive or overvalued and its value raise shareholders' income
unexpected opportunities or to later falls. tax liability.
meet demands generated by
shareholder activity.
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<PAGE>
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REAL ESTATE INVESTMENT TRUSTS (REITS)
^ JMIC invests in companies that ^ Favorable market ^ The value of a REIT is
provide geographic diversification conditions could generate affected by changes in the
to limit risk. gains or reduce losses. value of the properties owned
by the REIT or securing
^ These investments may mortgage loans held by the
offer more attractive yields REIT.
or potential growth than
other securities. ^ A portfolio could lose money
because of decline in the value
of real estate, risks related
to general and local economic
conditions, overbuilding and
increased competition.
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SMALL CAP AND MICRO CAP STOCKS
^ JMIC focuses on companies with ^ Securities of companies with ^ The Small Cap Growth and
with potential for strong small and micro Micro Cap Growth Portfolios
growth in revenue, earnings capitalizations may have could lose money because of
and cash flow; strong greater potential than large the potentially higher risks of
management; leading products cap companies to deliver small companies and price
or services; and potential for above-average growth rates volatility than investments
improvement. that may not have yet been in general equity markets.
recognized by investors.
^ 35% of the Small Cap Growth and ^ The Micro Cap Growth
the Micro Cap Growth Portfolios Portfolio may be unable to
may be invested in securities sell some of its securities
of larger capitalization and may be forced to hold
companies. them if the securities are
thinly traded.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
The following table indicates the maximum percentage, including
temporary investments, each Portfolio may make:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MICRO CAP SMALL CAP MID CAP REAL ESTATE
GROWTH GROWTH GROWTH SECURITIES GROWTH
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ADR's, EDR's and GDR's........ 5% 5% 5% 5% 5%
Asset-backed securities....... -- -- -- -- --
Bank obligations.............. 10% 10% 10% 10% 10%
Foreign currency transactions. -- -- -- -- --
Foreign securities............ 5% 5% 5% 5% 5%
Futures contracts............. 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b)
Illiquid securities........... 15% 15% 15% 15% 15%
Investment companies.......... 10% 10% 10% 10% 10%
Lending of securities......... 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Mortgage-backed securities.... -- -- -- -- --
Options transactions.......... 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b)
Repurchase agreements......... -- -- -- -- 0%
Reverse repurchase agreements. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
U.S. Government obligations... 100% 100% 100% 100% 100%
Warrants...................... 5% 5% 5% 5% 5%
When-issued securities........ 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
TEMPORARY INVESTMENTS
Cash.......................... 100% 100% 100% 100% 100%
Short-term obligations........ 100% 100% 100% 100% 100%
INVESTMENT RESTRICTIONS
Securities of any one issuer.. 5% 5% 5% 5% 5%
Outstanding voting securities
of any one issuer.......... 10% 10% 10% 10% 10%
Securities of issuers in any
One industry............... 25% 25% 25% 25%(c) 25%
- ----------------------------------- -------------- ------------------ ---------------- ------------------ -------------------
</TABLE>
Percentages are of total assets (except for Illiquid Securities which are shown
as a percentage of net assets).
(a) Portfolio may not purchase futures contracts or options where premiums and
margin deposits exceed 5% of total assets.
(b) Portfolio may not enter into futures contracts or options where its
obligations would exceed 20% of total assets.
(c) Portfolio may purchase more than 25% of its assets in real estate
securities.
INFORMATION ABOUT THE ADVISER
Brazos Mutual Funds (the "Company") was created in December 1996 in
response to demand to provide a means of investing with John McStay Investment
Counsel, a limited partnership, 5949 Sherry Lane, Suite 1600, Dallas, Texas,
75225, at a lower minimum account size. John McStay Investment Counsel began
managing large accounts for pension plans, endowments, foundations and
municipalities in 1983. The senior management has worked together for
approximately 20 years.
On June 30, 1999, John McStay Investment Counsel reorganized as a
Delaware limited liability company ("JMIC" or the "Adviser") and completed the
sale of an 80% managing membership interest in JMIC to American International
Group, Inc. ("AIG") resulting in JMIC becoming a majority owned indirect
subsidiary of AIG and minority owned by the employees of JMIC. In connection
therewith, on June 25, 1999, shareholders of each Portfolio of the Company
approved new investment advisory and management agreements with JMIC and also
approved changing the fundamental investment restrictions relating to the
ability to engage in borrowing and lending transactions with respect to each
Portfolio. The new agreements are identical to the prior agreements in all
respects except for their effective dates, termination dates and language
describing the existing authorization of the Company's Board of Trustees
permitting affiliate transactions. Although the investment advisory fee waivers
will no longer be in place, the fees will not exceed the expense caps currently
in place for each Portfolio due to a
-14-
<PAGE>
voluntary expense reimbursement by JMIC or its affiliates. In connection with
the reorganization of JMIC, the Board of Trustees of the Company also approved
the following new service providers for the Company, effective June 25, 1999:
Custodian, State Street Bank and Trust Company; and Administrator, SunAmerica
Asset Management Corp. (an AIG affiliate).
JMIC's mission is to capture excess returns while managing risk. JMIC
seeks to accomplish this objective by:
o investing in smaller companies
o investing in rapidly growing companies
o investing in companies with highly predictable revenue and
profit streams
o investing in companies positioned to accelerate profit
growth above general expectations
o constructing diversified portfolios to moderate risk
JMIC has employed a bottom-up process in researching companies. JMIC
visits virtually every company prior to investing. Bottom-up research often
includes interviews with senior management, as well as the companies'
competitors and suppliers. The list of potential investments is further filtered
by the use of traditional fundamental security analysis and valuation methods.
JMIC manages each portfolio using a team approach. By using a team
approach, the Company avoids the risk of changes in portfolio management style
that may be encountered when a lead manager approach is utilized. The team
approach creates portfolio management stability, which provides confidence that
the process is repeatable, and has been used for the last twenty-five years.
JMIC has had minimal (one) professional turnover during the last fifteen years
of management.
For the fiscal year ended November 30, 1998, JMIC received a fee,
calculated daily and payable monthly, at the following annual rates (as a
percentage of each Portfolio's average daily net assets): 0.90% for the Small
Cap Growth Portfolio and 0.84% for the Real Estate Securities Portfolio. The
Micro Cap Growth, Growth and the Mid Cap Growth Portfolios pay the Adviser a
fee, calculated daily and payable monthly, of 1.20%, 0.90% and 0.90%,
respectively, of each Portfolio's average daily net assets.
ADVISER'S HISTORICAL PERFORMANCE
Set forth below are performance data provided by the Adviser pertaining
to the composite of all separately managed accounts of the Adviser that are
managed with substantially similar (although not necessarily identical)
objectives, policies and strategies as those of the Small Cap Growth Portfolio,
the Real Estate Securities Portfolio, and the Mid Cap Growth Portfolio. The
investment returns of the Small Cap Growth, Real Estate Securities and Mid Cap
Growth Portfolios may differ from those of the separately managed accounts
because such separately managed accounts may have fees and expenses that differ
from those of the Small Cap Growth, Real Estate Securities and Mid Cap Growth
Portfolios. Further, the separately managed accounts are not subject to
investment limitations, diversification requirements and other restrictions
imposed by the Investment Company Act of 1940 and Internal Revenue Code; such
conditions, if applicable, may have lowered the returns for the separately
managed accounts. The Adviser's separately managed account performance results
set forth below under "Institutional Equity
-15-
<PAGE>
Results" are not intended to predict or suggest the return of the Real Estate
Securities Portfolio, the Small Cap Growth Portfolio or the Mid Cap Growth
Portfolio, but rather to provide the shareholder with information about the
historical investment performance of the Portfolios' Adviser. The Indexes used
in the comparisons below are unmanaged indices which assume reinvestment of
dividends on securities in the index and are generally considered representative
of securities similar to those invested in by the Adviser for the purpose of the
composite performance numbers set forth below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ADVISER'S
ADVISER'S ADVISER'S INSTITUTIONAL
INSTITUTIONAL INSTITUTIONAL REAL ESTATE NAREIT
SMALL CAP RUSSELL MID CAP S & P MIDCAP EQUITY EQUITY
EQUITY ACCOUNTS 2000 INDEX COMPOSITE 400 INDEX ACCOUNTS INDEX
(AFTER (BEFORE EQUITY (BEFORE (AFTER (BEFORE
EXPENSES)1 EXPENSES) ACCOUNTS EXPENSES) EXPENSES) EXPENSES)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALENDAR YEARS:
1987 25.6% -8.8% -- -- -- --
1988 24.5% 24.9% -- -- -- --
1989 31.9% 16.2% 32.5% 35.6% -- --
1990 -4.0% -19.5% -3.5% -5.1% -- --
1991 68.9% 46.1% 67.1% 50.1% -- --
1992 8.7% 18.4% 6.5% 11.9% -- --
1993 15.3% 18.9% 16.5% 14.0% -- --
1994 -0.1% -1.8% -4.9% -3.6% 14.6% 3.2%
1995 30.1% 28.4% 31.2% 30.9% 20.5% 15.3%
1996 32.9% 16.5% 23.3% 19.2% 42.1% 35.3%
1997 23.4% 22.4% 30.1% 32.3% 26.5% 20.3%
1998 10.4% -2.5% 15.3% 19.1% -15.6% -17.5%
AVERAGE ANNUAL
TOTAL RETURNS
AS OF 12/31/98:
Cumulative 886.3% 284.2% 511.8% 483.7% 109.5% 59.8%
Annualized 21.0% 11.9% 19.9% 19.3% 15.9% 9.8%
3 Year 21.9% 11.6% 22.8% 23.4% 14.9% 10.3%
5 Year 18.7% 11.9% 18.2% 18.9% 15.9% 9.8%
10 Year 20.2% 12.9% 19.9% 19.3% -- --
Five-Year Mean -- -- -- -- 17.6% 11.3%
Twelve-Year Mean 22.3% 13.3% -- -- -- --
Value of $1 invested
During 12 years
(1/1/87 - 12/31/98) $9.86 $3.84 -- -- $2.10 $1.59
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The Adviser's Institutional Equity Accounts represents the composite of all
separately managed accounts of the Adviser that are managed with
substantially similar (although not identical) objectives, policies and
strategies as those of Brazos Small Cap Growth Portfolio, those of the Brazos
Real Estate Securities Portfolio, and those of the Brazos Mid Cap Growth
Portfolio, respectively. The separately managed accounts are subject to
different expenses and governmental regulations than the Portfolios.
2 The annualized return of the Adviser's Institutional Equity Accounts is
calculated from monthly data, allowing for compounding. The formula used is
in accordance with the methods set forth by the Association for Investment
Management Research ("AIMR"), The Bank Administration Institute, and the
Investment Counsel Association of America. Market value of the account was
the sum of the account's total assets, including cash, cash equivalents,
short term investments, and securities valued at current market prices.
3 The cumulative return means that $1 invested in the Small Cap Equity
composite account on January 1, 1987 had grown to $9.86 by December 31, 1998,
that $1 invested in the Real Estate Equity composite account on January 1,
1994 had grown to $2.10 by December 31, 1998 and that $1 invested in the Mid
Cap Equity composite account on January 1, 1989 had grown to $6.11 by
December 31, 1998.
4 The twelve-year arithmetic mean is the arithmetic average of the Small Cap
Equity composite accounts' annual returns listed, and the five-year mean is
the arithmetic average of the Real Estate Equity composite accounts' annual
returns for the years listed.
5 The S&P MidCap 400, Russell 2000 and the NAREIT Equity Index are unmanaged
indices which assume reinvestment of dividends on securities in the index and
are generally considered representative of securities similar to those
invested in by the Adviser for the purpose of the composite performance
numbers set forth above. The S&P MidCap 400 Index is an unmanaged
capitalization-weighted index that measures the performance of the mid-range
of the U.S. stock market. The Russell 2000 is composed of the 2000 smallest
stocks in the Russell 3000, a market value weighted index of the 3,000
largest U.S. publicly traded companies. The NAREIT Equity Index is a
compilation of market-weighted securities data collected from all
tax-qualified equity real estate investment trusts listed on the New York and
American Stock Exchanges and the NASDAQ. The comparative indices are not
adjusted to reflect expenses or other fees reflected in the performance of a
mutual fund as required by the SEC.
-16-
<PAGE>
6 The Adviser's average annual management fee over the twelve-year period
(1987-1998) for the Small Cap Equity composite accounts was 1% or 100 basis
points. On January 1, 1987, the Adviser began managing the separate accounts
using objectives, policies and strategies substantially similar to those of
the BRAZOS Small Cap Growth Portfolio. During the period, fees on the
Adviser's individual accounts ranged from 1% to 11/2% (100 basis points to
150 basis points). The Adviser's average annual management fee over the
five-year period (1994-1998) for the Real Estate Equity composite accounts
was .85% or 85 basis points. During the period, fees on the Adviser's
individual accounts ranged from .80% to 1% (80 basis points to 100 basis
points). The Adviser's average annual management fee over the nine-year
period (1989-1998) for the Mid Cap Equity composite accounts was ___% or ___
basis points. During the period, fees on the Adviser's individual accounts
ranged from ___% to ___% (___basis points to ___ basis points). Net returns
to investors vary depending on the management fee.
7 Small Cap Equity composite accounts ("Composite") performance data is AIMR
compliant from 1/1/93 forward. Prior to that time, the only difference in the
calculation is that all portfolios were equally weighted without regard to
dollar value in determining Composite performance. The Composite includes
every account managed in JMIC's small capitalization style, consistent with
AIMR guidelines. This equal weighting method follows the standards
promulgated by the Investment Management Consultants' Association which
predates standards established by AIMR. In 1990, the Composite results
reflected portfolios ranging in number from 3 to 8 and in size from $3
million to $30 million, with a median size of $13 million. In 1991, the
Composite reflected portfolios ranging in number from 8 to 18 and in size
from $1 million to $46 million, with a median size of $15 million. In 1992,
the Composite reflected portfolios ranging in number from 20 to 27 and in
size from $4 million to $50 million, with a median size of $17 million. And,
from 1987 through 1989, the Composite consisted of only one portfolio which
for many years served as the model for all accounts managed in this style.
INFORMATION FOR FIRST TIME MUTUAL FUND INVESTORS
The Federal Deposit Insurance Corporation, the Federal Reserve Board or
any other agency does not federally insure Mutual Fund shares.
Investments in Mutual Fund shares involve risks, including possible
loss of principal.
VALUATION OF FUND SHARES
The net asset value of each Portfolio is determined by dividing the sum
of the total market value of a Portfolio's investments and other assets, less
any liabilities, by the total number of shares outstanding. Net asset value per
share for each Portfolio is determined as of the close of the New York Stock
Exchange ("NYSE") on each day that the NYSE is open for business.
Each Portfolio uses the last quoted trading price as the market value
for equity securities. For listed securities, each Portfolio uses the price
quoted by the exchange on which the security is primarily traded. Unlisted
securities and listed securities which have not been traded on the valuation
date or for which market quotations are not readily available are valued at the
average between the last price asked and the last price bid. For valuation
purposes, quotations of foreign securities in a foreign currency are converted
to U.S. Dollar equivalents based upon the latest available bid price of such
currencies against U.S. Dollars quoted by any major bank or by any broker.
Bonds and other fixed income securities are valued according to the
broadest and most representative market which will ordinarily be the
over-the-counter market. Net asset value includes interest on fixed income
securities, which is accrued daily. Bonds and other fixed income securities may
be valued on the basis of prices provided by a pricing service when such prices
are believed to reflect the fair value market value of such securities.
Securities purchased with remaining maturities of 60 days or less are valued at
amortized cost when the Board of Trustees (the "Trustees") determines that
amortized cost reflects fair value.
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good faith
at fair value using methods determined by the Trustees.
-17-
<PAGE>
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Portfolio will distribute annually to shareholders substantially
all of its net investment income and any net realized long-term capital gains. A
Portfolio's dividends and capital gains distributions will be reinvested
automatically in additional shares unless the Company is notified in writing
that the shareholder elects to receive distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
FEDERAL TAXES
Each Portfolio intends to make distributions that may be taxed either
as ordinary income or as a capital gain. Because the Micro Cap, Small Cap,
Growth and the Mid Cap Portfolios seek capital appreciation as opposed to
current income, the Company anticipates that most of these distributions will be
taxed as capital gains. Distributions from the Real Estate Portfolio are likely
to represent both capital appreciation and income, and thus are likely to
constitute both capital gain and ordinary income. All distributions, whether in
the form of cash payment to the shareholder or as reinvested in additional
shares of a Portfolio, may be subject to Federal income tax. A redemption of
shares in a Portfolio would be considered to be a taxable event under Federal
Law. Any exchange of shares in a Portfolio for shares of another Portfolio would
be treated as a sale of the Portfolio's shares and any gain on the transaction
may be subject to Federal taxation.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on
distributions and redemptions. Shareholders should consult with their tax
advisers regarding the tax status of distributions in their state and locality.
PURCHASE OF SHARES
Shares of the Portfolios may be purchased without sales commission, at
the net asset value per share next determined after an order, including payment
in the manner described herein, is received by the Fund (see "Valuation of
Shares"). The Fund reserves the right to reject your purchase order and to
suspend the offering of shares of the Fund. All purchases must be in U.S.
dollars. Cash will not be accepted. There is a $25.00 fee for all checks
returned due to insufficient funds.
Effective September 15, 1999, initial investments in the shares of the
Portfolios offered in this Prospectus must be at least $1,000,000, and
subsequent minimum investments must be at least $1,000, except for the Brazos
Micro Cap Growth Portfolio, which has an initial investment of $50,000. Shares
may be purchased and subsequent investments may be made without being subject to
the minimum or subsequent investment limitations at the discretion of the
officers of the Trust.
-18-
<PAGE>
Shares may be purchased and subsequent investments may be made by
principals, officers, associates and employees of the Company and its
affiliates, their families and their business or personal associates, either
directly or through their individual retirement accounts, and by any JMIC
pension or profit-sharing plan, without being subject to the minimum or
subsequent investment limitations.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PURCHASING SHARES: OPENING AN ACCOUNT: ADDING TO AN ACCOUNT:
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
By check ^ Make out a check for the ^ Make out a check for the
investment amount, payable to investment amount payable to
"Brazos Mutual Funds." "Brazos Mutual Funds."
^ Mail the check and your ^ Fill out the detachable
completed Account Registration investment slip from an account
Form to the address indicated statement. If no slip is
in "-Mailing Addresses" below available, include a note
specifying the Portfolio name,
your account number, and the name(s)
in which the account is registered.
- ----------------------------------------------------------------------------------------------------------------
^ Call 1-800-426-9157 to ^ Call 1-800-426-9157 to
By exchange request an exchange. request an exchange.
- ----------------------------------------------------------------------------------------------------------------
By wire ^ Mail your completed Account ^ Instruct your bank to wire
Registration Form to the the amount of your investment
address indicated in "-Mailing to:
Addresses" below. State Street Bank and Trust Company
^ Obtain your account number Boston, MA
by calling 1-800-426-9157. ABA #0110-00028
DDA #99029712
Attn: Name of Portfolio
FBO: Shareholder Name/Account
Number
^ Instruct your bank to wire ^ Specify the Portfolio name,
the amount of your investment the new account number, and the
to: State Street Bank and Trust names in which the account is
Company registered. Your bank may charge
Boston, MA a fee to wire funds.
ABA #0110-00028
DDA #99029712
Attn: Name of Portfolio
FBO: Shareholder Name/
Account Number
^ Specify the Portfolio name,
the new account number, and the
names in which the account is
registered. Your bank may
charge a fee to wire funds.
-19-
<PAGE>
- ----------------------------------------------------------------------------------------------------------------
By telephone ^ See "By wire" and "By ^ Verify that your bank or
exchange" credit union is a member of the
Automated Clearing House
(ACH) system.
^ Complete the applicable
section on the Account
Registration Form.
^ Call 1-800-426-9157 to verify
that these features are in place
on your account.
^ Tell the Fund representative the
Portfolio name, your account number,
the name(s) in which the account is
registered and the amount of
your investment.
- ----------------------------------------------------------------------------------------------------------------
MAILING ADDRESSES
^ For initial investments and overnight ^ For subsequent investments:
or express mail: NON-RETIREMENT ACCOUNTS:
Brazos Mutual Funds Brazos Mutual Funds
Mutual Fund Operations, 3rd Floor c/o NFDS
The SunAmerica Center P.O. Box 219373
733 Third Avenue Kansas City, MO 64121-9373
New York, NY 10017-3204
RETIREMENT ACCOUNTS:
Brazos Mutual Funds
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
</TABLE>
OTHER COMPANIES THROUGH WHICH YOU CAN PURCHASE BRAZOS MUTUAL FUNDS
- -------------------------------------------------------------------------------
FIDELITY INVESTMENTS, INC. CHARLES SCHWAB AND CO. JACK WHITE AND CO.
- -------------------------------------------------------------------------------
National Financial Services
One World Financial Center
200 Liberty Street
New York, NY 10281
1-800-544-6666
101 Montgomery Street
San Francisco, CA 94104
1-800-435-8000
National Financial Services
One World Financial Center
200 Liberty Street
New York, NY 10281
1-800-544-6666
AUTOMATIC INVESTMENT PLAN
Shareholders may also purchase additional Portfolio shares through an
Automatic Investment Plan. Under the Plan, SunAmerica Fund Services, Inc., at
regular intervals, will automatically debit a shareholder's bank checking
account in an amount of $50 or more (subsequent to the minimum initial
investment), as specified by the shareholder. A shareholder may elect to invest
the specified amount monthly, bimonthly, quarterly, semiannually or annually.
The purchase of Portfolio shares will be effected at their offering price at 4
p.m., Eastern time, on the date of the month designated by the shareholder. For
an Application for the Automatic Investment Plan, check the appropriate box of
the Application at the end of this
-20-
<PAGE>
Prospectus, or call 1-800-426-9157. This service may not be provided for Service
Agent clients who are provided similar services by those organizations.
OTHER PURCHASE INFORMATION
Investments received by 4 p.m. ET (the close of the NYSE) will be
invested at the price calculated after the NYSE closes that day. Orders received
after 4 p.m. ET will receive the price calculated on the next business day.
DISTRIBUTOR
SunAmerica Capital Services Inc. ("SACS"), The SunAmerica Center, 733
Third Avenue, New York, NY 10017-3204, serves as Distributor for shares of the
Portfolios. SACS will receive no compensation for distribution of shares of the
Portfolios, except for reimbursement by the Adviser of out-of-pocket expenses.
EXCHANGE PRIVILEGE
Shares of each Portfolio may be exchanged for shares of any other
Portfolio included in the Brazos Mutual Funds. Exchange requests should be made
by writing to the Fund c/o SunAmerica Fund Services, Inc., Mutual Fund
Operations, The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204 or
calling 1-800-426-9157.
Any exchange will be based on the net asset value of the shares
involved. There is no charge of any kind for an exchange. Before making an
exchange into a Portfolio, a shareholder should read the Portfolio's Prospectus
(contact SunAmerica Fund Services, Inc. at 1-800-426-9157 for additional copies
of the Prospectus). Exchanges can only be made with Portfolios that are
qualified for sale in a shareholder's state of residence. Exchange requests may
be made either by mail or telephone. Telephone exchanges will be accepted only
if the certificates for the shares to be exchanged have not been issued to the
shareholder and if the registration of the two accounts will be identical.
Requests for exchanges with other Portfolios received prior to 4 p.m. (ET) will
be processed as of the close of business on the same day. Requests received
after that time will be processed on the next business day. The Board of
Trustees may limit frequency and amount of exchanges permitted. For additional
information regarding telephoned instructions, see "REDEMPTION OF SHARES BY
TELEPHONE" below. An exchange into another Portfolio of the Fund is a sale of
shares and may result in capital gain or loss for income tax purposes. The Fund
may modify or terminate the exchange privilege at any time.
REDEMPTION OF SHARES
Any redemption may be more or less than the purchase price of your
shares depending on the market value of the investment securities held by your
Portfolio(s).
Shares of the Brazos Micro Cap Growth, Small Cap Growth, Growth and Mid
Cap Growth Portfolios may be redeemed by mail or telephone, at any time, without
cost, at their net asset value as next determined after receipt of the
redemption request. Shareholders are charged a $12.00 fee for redemptions by
wire. Otherwise, there is no charge for redemptions.
Shares of the Brazos Real Estate Securities Portfolio may be redeemed
by mail or telephone, at any time, at the net asset value as next determined
after receipt of the redemption request. Shares held 90 days or more may be
redeemed without cost except for a $12.00 fee charged to shareholders for wire
redemptions. Shares held less than 90 days will be subject to a
-21-
<PAGE>
1% redemption fee which is retained by the Fund for the benefit of the remaining
shareholders and is intended to encourage long-term investment in the Brazos
Real Estate Securities Portfolio, to avoid transaction and other expenses
incurred by early redemption and to facilitate portfolio management.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
REDEEMING SHARES: DESIGNED FOR: TO SELL SOME OR ALL OF YOUR SHARES:
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
By letter ^ Accounts of any type. ^ Write a letter of instruction indicating the
Portfolio name, your account number, the
names in which the account is registered,
and the dollar value or number of shares you
wish to sell.
^ Sales of any type.
^ Include all signatures and any additional
documents that may be required (see next page).
^ Mail the materials to:
Brazos Mutual Funds
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
^ A check will be mailed to the name(s)
and address in which the accountis registered,
or otherwise according to your letter of instruction.
- --------------------------------------------------------------------------------------------------------------------------
By telephone ^ Most accounts. ^ For automated service 24 hours a day
using your touch-tone phone, dial
1-800-654-4760.
^ Sales of up to $100,000. ^ To place an order or to speak to a
representative from Brazos Mutual Funds,
call 1-800-426-9157 between 8:30 a.m. and
7:00 p.m.(Eastern time) on most business days.
^ Requests by letter to ^ Fill out the "Telephone Redemption"
By wire sell any amounts section of your new account application.
(accounts of any type).
^ To verify redemption privilege is in
place on an account, or to request the forms
to add it to an existing account, call
1-800-426-9157.
^ Requests by phone to ^ Amounts of $1,000 or more will be wired
sell up to $100,000 on the next business day. A $12 fee will be
(accounts with telephone deducted from your account.
redemption privileges).
By exchange ^ Accounts of any type. ^ Review the current prospectus for the
portfolio into which you are exchanging.
^ Sales of any amount. ^ Call 1-800-426-9157 to request an exchange.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
SIGNATURE GUARANTEES
Signature guarantees are required for the following redemptions:
o redemptions where the proceeds are to be sent to someone other than
the registered shareholder(s);
o redemptions where the proceeds are to be sent to someplace other
than the registered address;
o share transfer requests; or
o redemption requests that exceed $100,000.
The purpose of signature guarantees is to verify the identity of the
party who has authorized a redemption.
OTHER REDEMPTION INFORMATION
Normally, each Portfolio will make a payment for all shares redeemed
under proper procedures within one business day of and no more than seven
business days after receipt of the request. The Company may suspend the right of
redemption or postpone the date, as permitted by the SEC, including under
emergency circumstances and at times when the NYSE is closed.
If the Trustees determine that it would be detrimental to the best
interests of remaining shareholders of the Portfolios to make payment wholly or
partly in cash, the Portfolios may pay redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities so received in payment of
redemptions.
RETIREMENT PLANS
Shares of the Portfolios are available for use in certain types of
tax-deferred retirement plans such as:
o IRAs (including educational and Roth IRAs),
o employer-sponsored defined contribution plans (including 401(k)
plans), and
o tax-sheltered custodial accounts described in Section 403(b)(7) of
the Internal Revenue Code.
Qualified investors benefit from the tax-free compounding of income
dividends and capital gains distributions. Application forms and brochures
describing investments in the Portfolios for retirement plans can be obtained by
calling the Brazos Mutual Funds at 1-800-426-9157.
-23-
<PAGE>
YEAR 2000 DISCLOSURE
The "Year 2000" issue stems from the inability of computers and
software programs to correctly process dates in the next century. This could
result in major system or process failures or the generation of erroneous data,
which would lead to disruptions in the Portfolios' business operations.
The Portfolios have no application systems of their own and are
entirely dependent on their service providers' systems and software programs.
The Adviser has sought assurances from the Portfolios' service providers
(including their administrator, transfer agent and custodian) that they are
taking all necessary steps to ensure that their systems and software programs
will accurately reflect the Year 2000. The capability of the service providers'
systems to recognize the Year 2000 could have a negative impact on the Adviser's
provision of investment advisory services, including the handling of securities
trades, pricing and account services. At this time, however, no assurance can be
given that the Portfolios' service providers, including the Adviser, have
anticipated every step necessary to avoid any adverse effect on the Portfolios
attributable to the Year 2000 issue or that the Year 2000 issue will not have an
adverse effect on companies whose securities are held by the Portfolios or on
global markets or economies generally.
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<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows selected financial information for shares
outstanding of each of the Portfolios throughout the periods indicated. The
total return in the table represents the rate that an investor would have earned
on an investment in the Portfolio specified (assuming reinvestment of all
dividends and distributions). The information for the periods through November
30, 1998 has been audited by PricewaterhouseCoopers LLP, whose report along with
the Portfolios' financial statements, is included in the Annual Report, which
is available free of charge. The information provided for the period ended May
31, 1999 has not been audited. The Growth Portfolio's fiscal year is December 1
through November 30 (however, the Growth Portfolio commenced operations on
December 31, 1998, indicated by the financial information shown below).
<TABLE>
<CAPTION>
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SMALL CAP GROWTH REAL ESTATE SECURITIES
---------------------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
SIX-MONTH FOR THE YEAR DECEMBER 31, SIX-MONTH FOR THE YEAR DECEMBER 31,
PERIOD ENDED ENDED 1996* THROUGH PERIOD ENDED ENDED 1996* THROUGH
MAY 31, 1999 NOVEMBER 30, NOVEMBER 30, MAY 31, 1999 NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 1998 1997 (UNAUDITED) 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD......... $14.07 $13.49 $10.00 $9.21 $11.24 $10.00
INCOME FROM OPERATIONS:
Net investment income (loss)1. (0.05) (0.11)1 (0.03) 0.26 0.441 0.35
Net realized and unrealized
Gains (losses) on
Investments................ (2.23) 0.79 4.69 0.38 (1.90) 2.05
TOTAL FROM INVESTMENT
OPERATIONS................. (2.18) 0.68 4.66 0.64 (1.46) 2.40
Distributions from:
Net investment income...... - - - (0.21) (0.43) (0.23)
Net realized gains......... - (0.10) (1.17) 0.00 (0.14) (0.93)
Total distributions........... - (0.10) (1.17) (0.21) (0.57) (1.16)
Net asset value,
end of period.............
$16.25 $14.07 $13.49 $9.64 $9.21 $11.24
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TOTAL RETURN.................. 15.49%*** 5.06% 47.08%*** 7.19%*** (13.64)% 24.39%***
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(000 omitted).............. $507,743 $313,207 $80,898 $129,798 $84,789 $53,308
Ratios (to average net assets):
Expenses2.................. 1.10%** 1.21% 1.35%** 1.21%** 1.25% 1.25%**
Net investment income (loss),
Including effects of waivers (0.76)%** (0.75)% (0.68)%** 6.13%** 4.19% 4.61%**
Portfolio turnover rate....... 42% 104% 148% 53% 157% 185%
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<CAPTION>
FOR THE FOR THE PERIOD FOR THE PERIOD
SIX-MONTH DECEMBER 31, DECEMBER 31,
PERIOD ENDED 1997* THROUGH 1998* THROUGH
MAY 31, 1999 NOVEMBER 30, MAY 31,1999
(UNAUDITED) 1998 (UNAUDITED)
--------------------------------------------------------------------------------
<S> <C> <C> <C> >
NET ASSET VALUE,
BEGINNING OF PERIOD......... $12.03 $10.00 $10.00
INCOME FROM OPERATIONS:
Net investment income (loss)1. (0.06) (0.05)1 (0.02)
Net realized and unrealized
Gains (losses) on
Investments................ 3.59 2.08 3.30
TOTAL FROM INVESTMENT
OPERATIONS................. 3.53 2.03 3.28
Distributions from:
Net investment income...... - - -
Net realized gains......... - - -
Total distributions........... - - -
Net asset value,
end of period.............
$15.56 $12.03 $13.28
--------------------------------------------------------------------------------
TOTAL RETURN.................. 29.34%*** 20.30%*** 32.80%***
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(000 omitted).............. $77,654 $47,774 $10,433
Ratios (to average net assets):
Expenses2.................. 1.52%** 1.60%** 1.35%**
Net investment income (loss),
Including effects of waivers (1.03)%** (0.46)%** (0.45)%**
Portfolio turnover rate....... 73% 121% 106%
- --------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
*** Not annualized
1 Net investment income (loss) per share represents net investment income
(loss) divided by the average shares outstanding throughout the period.
2 The Adviser has voluntarily agreed to waive a portion of its advisory fees and
assume expenses otherwise payable by the Portfolios (if necessary) in order to
keep the annual expense ratios from exceeding 1.35%, 1.25%, 1.60% and 1.35% of
the average daily net assets of the Small Cap Growth, Real Estate Securities,
Micro Cap Growth and Growth Portfolios, respectively. In addition, the prior
Administrator, Accounting Agent and Transfer Agent waived a portion of their
fees in the Small Cap Growth and the Real Estate Securities Portfolios for the
period ended November 30, 1997 and the Micro Cap Growth Portfolio for the period
ended November 30, 1998. Without the waiver of expenses, the annualized ratio of
expenses to average net assets would have been 1.80% and 1.83% for the Small Cap
Growth and Real Estate Securities Portfolios, respectively, for the period ended
November 30, 1997. For the year ended November 30, 1998, the ratio of expenses
to average net assets would have been 1.31% and 1.90% (annualized) for the Real
Estate Securities and Micro Cap Growth Portfolios, respectively. There was no
waiver of expenses for the Small Cap Growth Portfolio for the year ended
November 30, 1998. For the period ended May 31, 1999, the Administrator,
Accounting Agent and Transfer Agent waived a portion of their fees in the Growth
Portfolio; without the waiver of expenses, the ratio of expenses to average net
assets would have been 3.07% (annualized) for the Growth Portfolio.
-25-
<PAGE>
[ THIS PAGE INTENTIONALLY LEFT BLANK ]
-26-
<PAGE>
FOR MORE INFORMATION
You may obtain the following and other information on these
Portfolios free of charge:
ANNUAL AND SEMI-ANNUAL REPORT TO SHAREHOLDERS
PROVIDES THE PORTFOLIOS' MOST RECENT FINANCIAL REPORTS AND PORTFOLIO LISTINGS.
THE ANNUAL REPORT CONTAINS A DISCUSSION OF THE MARKET CONDITIONS AND
INVESTMENT STRATEGIES THAT AFFECTED THE PORTFOLIOS' PERFORMANCE
DURING THE LAST FISCAL YEAR.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED DECEMBER 31, 1999
PROVIDES ADDITIONAL DETAILS ABOUT THE PORTFOLIOS' POLICIES
AND MANAGEMENT.
Telephone:
1-800-426-9157
Mail:
The Brazos Mutual Funds
c/o SunAmerica Fund Services, Inc.
Mutual Fund Operations
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Internet:
http://www.brazosfund.com
SEC:
Text only versions of Fund documents can be viewed online or
downloaded from: HTTP://WWW.SEC.GOV
You may review and obtain copies of Fund information at the SEC Public Reference
Room in Washington, D.C. (1-800-SEC-0330). Copies of the information may be
obtained for a fee by writing the Public Reference Section, Washington, D.C.
20549-6009.
Investment Company Act of 1940 File No. 811-7881
-27-
<PAGE>
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
BRAZOS MUTUAL FUNDS
(CLASS Y SHARES)
BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
BRAZOS REAL ESTATE SECURITIES PORTFOLIO
BRAZOS GROWTH PORTFOLIO
BRAZOS MID CAP GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1999
This Statement is not a Prospectus but should be read in conjunction with the
Prospectus of the Brazos Mutual Funds (the "Company") for the Class Y Shares of
the BRAZOS Micro Cap Growth, BRAZOS Small Cap Growth, BRAZOS Real Estate
Securities, BRAZOS Growth and the BRAZOS Mid Cap Growth Portfolios dated
December 31, 1999. To obtain the Prospectus, please call the Company at
1-800-426-9157.
TABLE OF CONTENTS
PAGE
ABOUT THE BRAZOS MUTUAL FUNDS................................................2
INVESTMENT OBJECTIVES AND POLICIES...........................................2
INVESTMENT LIMITATIONS......................................................10
MANAGEMENT OF THE FUND......................................................11
INVESTMENT ADVISER AND OTHER SERVICES.......................................19
PURCHASE OF SHARES..........................................................24
REDEMPTION OF SHARES........................................................25
OTHER SHAREHOLDER SERVICES..................................................26
PORTFOLIO TRANSACTIONS......................................................28
DESCRIPTION OF SHARES AND VOTING RIGHTS.....................................29
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES............................30
PERFORMANCE CALCULATIONS....................................................32
FINANCIAL STATEMENTS........................................................37
APPENDIX.................................................................. A-1
<PAGE>
ABOUT THE BRAZOS MUTUAL FUNDS
The Company was organized as a Delaware business trust on October 28, 1996. The
Company's principal office is located at 5949 Sherry Lane, Suite 1600, Dallas,
Texas 75225; however, all investor correspondence should be directed to the
Brazos Mutual Funds, c/o SunAmerica Fund Services, Inc. ("SAFS"), The SunAmerica
Center, 733 Third Avenue, New York, NY 10017-3204. The Company is comprised of
five different Portfolios. These include the BRAZOS Micro Cap Growth, BRAZOS
Small Cap Growth, BRAZOS Real Estate Securities, BRAZOS Growth and BRAZOS Mid
Cap Growth Portfolios (each a "Portfolio" or collectively the "Portfolios").
Brazos Mutual Funds is a diversified, open-end, management investment company.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment policies of the Portfolios as
set forth in the Prospectus:
SHORT-TERM INVESTMENTS
Occasionally, a Portfolio may invest a portion of its assets in the following
money market instruments, consistent with its investment policies.
(1) Time deposits, certificates of deposit (including marketable
variable rate certificates of deposit) and bankers'
acceptances issued by a commercial bank or savings and loan
association.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time (not longer than seven days) at a stated interest
rate. Time deposits maturing from two business days through seven calendar days
will not exceed 10% of the total assets of a Portfolio under most circumstances.
Certificates of deposit are negotiable short-term obligations issued by
commercial banks or savings and loan associations collateralized by funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction.
A Portfolio will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in other
currencies, (ii) in the case of U.S. banks, it is a member of the Federal
Deposit Insurance Corporation, and (iii) in the case of foreign branches of U.S.
banks, the security is, in the opinion of the Adviser, of an investment quality
comparable to other debt securities which may be purchased by the Portfolios;
(2) Commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2
by Moody's or, if not rated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by Moody's
or by S&P;
(3) Short-term corporate obligations rated A or better by Moody's
or by S&P;
2
<PAGE>
(4) U.S. Government obligations including bills, notes, bonds and
other debt securities issued by the U.S. Treasury. These are
direct obligations of the U.S. Treasury, supported by the full
faith and credit pledge of the U.S. Government and differ
mainly in interest rates, maturities and dates of issue;
(5) U.S. Government agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies;
and
(6) Repurchase agreements collateralized by securities listed
above.
REPURCHASE AGREEMENTS
Each Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities. In addition, each Portfolio may invest in repurchase
agreements collateralized by certificates of deposit, and certain bankers'
acceptances and other securities outlined above under "Short-Term Investments."
In a repurchase agreement, a Portfolio buys a security and simultaneously
commits to sell that security back at an agreed upon price plus an agreed upon
market rate of interest. Under a repurchase agreement, the seller will be
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price if such securities mature in one year or less, or
102% of the repurchase price if such securities mature in more than one year.
The use of repurchase agreements involves certain risks. While the Company's
management acknowledges these risks, it is expected that they can be controlled
through stringent security selection criteria and careful monitoring procedures.
WHEN-ISSUED, FORWARD DELIVERY AND DELAYED SETTLEMENT SECURITIES
Each Portfolio may purchase and sell securities on a "when-issued," "delayed
settlement" or "forward delivery" basis. "When-issued" or "forward delivery"
refers to securities whose terms and indenture are available, and for which a
market exists, but which are not available for immediate delivery. When-issued
and forward delivery transactions may be expected to occur a month or more
before delivery is due. Delayed settlement is a term used to describe settlement
of a securities transaction in the secondary market which will occur sometime in
the future. No payment or delivery is made by a Portfolio until it receives
payment or delivery from the other party to any of the above transactions. A
Portfolio will maintain a separate account of cash, U.S. Government securities,
other high grade debt obligations or other liquid securities at least equal to
the value of purchase commitments until payment is made. Such segregated
securities will either mature or, if necessary, be sold on or before the
settlement date. Typically, no income accrues on securities purchased on a
delayed delivery basis prior to the time delivery is made, although a Portfolio
may earn income on securities it has deposited in a segregated account.
Each Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
When a Portfolio engages in when-issued or forward delivery transactions, it
does so to acquire securities consistent with its investment objective and
policies and not for the purpose of investment leverage.
PORTFOLIO TURNOVER
It is expected that the annual portfolio turnover rate for the Portfolios will
not exceed 200%. In addition to Portfolio trading costs, higher rates (100% or
more) of portfolio turnover may result in the realization of capital gains, a
portion of which may be short-term or mid-term gains. See "DIVIDENDS, CAPITAL
3
<PAGE>
GAINS DISTRIBUTIONS AND TAXES" for information on taxation. The Portfolios will
not normally engage in short-term trading, but each reserves the right to do so.
The tables set forth in the "Financial Highlights" section of the Prospectus
present the historical turnover rates for the BRAZOS Real Estate Securities
Portfolio, BRAZOS Small Cap Growth Portfolio, BRAZOS Micro Cap Growth Portfolio
and BRAZOS Growth Portfolio.
INVESTMENT COMPANIES
Each Portfolio reserves the right to invest up to 10% of its total assets,
calculated at the time of investment, in securities of other open-end or
closed-end investment companies. No more than 5% of an investing Portfolio's
total assets may be invested in securities of any one investment company nor may
it acquire more than 3% of the voting securities of any investment company. A
Portfolio will indirectly bear its proportionate share of any management fees
paid by an investment company in which it invests in addition to its advisory
fee.
RESTRICTED SECURITIES
Each Portfolio may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under the
supervision of the Company's Board of Trustees, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided that
a dealer or institutional trading market in such securities exists, these
restricted securities are not treated as illiquid securities for purposes of a
Portfolio's investment limitations. A Portfolio will invest no more than 15% of
its net assets in illiquid securities. The prices realized from the sales of
these securities could be less than those originally paid by a Portfolio or less
than what would be considered the fair value of such securities.
FOREIGN INVESTMENTS
Each Portfolio may invest in common stocks of companies listed on foreign stock
exchanges, and may also invest in stocks traded in the over-the-counter market.
Common stocks for this purpose also include securities having common stock
characteristics such as rights and warrants to purchase common stocks.
Additionally, each Portfolio may also invest in foreign equity securities in the
form of American Depository Receipts (ADRs) and other similar global
instruments. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying foreign
securities. Most ADRs are traded on a U.S. stock exchange. Issuers of
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation between
such information and the market value of the unsponsored ADR.
Investing in foreign companies may involve additional risks and considerations
which are not typically associated with investing in U.S. companies. Since
stocks of foreign companies are normally denominated in foreign currencies, the
Portfolios may be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations, and may incur costs in connection with
conversions between various currencies. Some countries may withhold portions of
dividends and interest at the source. Under the Internal Revenue Code, foreign
exchange gains and losses are treated as ordinary gain or loss.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, comparable information may not be readily available about
certain foreign companies. Securities of some non-U.S. companies may be less
liquid and more volatile than securities of comparable U.S. companies. In
addition, in certain
4
<PAGE>
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending investment securities,
a Portfolio attempts to increase its income through the receipt of interest on
the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the Portfolio's accounts. A
Portfolio may lend its investment securities to qualified brokers, dealers,
domestic and foreign banks or other financial institutions, so long as the
terms, the structure and the aggregate amount of such loans are not inconsistent
with the Investment Company Act of 1940, as amended, (the "1940 Act") or the
rules and regulations or interpretations of the Securities and Exchange
Commission (the "Commission") thereunder, which currently require that (a) the
borrower pledge and maintain with a Portfolio collateral consisting of cash, an
irrevocable letter of credit issued by a domestic U.S. bank or securities issued
or guaranteed by the United States Government having a value at all times not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by a Portfolio at any time, and (d) a Portfolio receives
reasonable interest on the loan (which may include a Portfolio investing any
cash collateral in interest bearing short-term investments). All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities so long as such fees are set forth in a written contract and approved
by the investment company's Board of Trustees. A Portfolio will continue to
retain any voting rights with respect to the loaned securities. If a material
event occurs affecting an investment on a loan, the loan must be called and the
securities voted.
HEDGING STRATEGIES
Each Portfolio may engage in various portfolio strategies to hedge against
adverse movements in the equity markets. Each Portfolio may write (i.e., sell)
covered call options on their portfolio securities, purchase put and call
options on securities and engage in transactions in related options on futures.
Each of these portfolio strategies is described below:
A) FUTURES CONTRACTS
Each Portfolio may enter into futures contracts. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by trading an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in
5
<PAGE>
an identical contract to terminate the position. Brokerage commissions are
incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each Portfolio
expects to earn interest income on their margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade and use futures
contracts with the expectation of realizing profits from a fluctuation in
interest rates.
Regulations of the CFTC applicable to the Company require that all of its
futures transactions constitute bona fide straddles positions or that the
Company's commodity futures and option positions be for other purposes, to the
extent that the aggregate initial margins and premiums required to establish
such non-hedging positions do not exceed five percent of the liquidation value
of a Portfolio. A Portfolio will only sell futures contracts to protect
securities it owns against price declines or purchase contracts to protect
against an increase in the price of securities it intends to purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contract purchases will be "completed," that is, equivalent
amounts of related securities will have been purchased or will be purchased by
the Portfolios on the settlement date of the futures contracts.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A Portfolio will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of its total assets. In addition, a
Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would
exceed 20% of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
A Portfolio will minimize the risk that it will be unable to close out a futures
position by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market. However,
there can be no assurance that a liquid secondary market will exist for a
6
<PAGE>
particular futures contract at any given time. Thus, it may not be possible to
close a futures position. In the event of adverse price movements, a Portfolio
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if a Portfolio has insufficient cash, it
may have to sell securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, a Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close futures positions also could have an adverse impact on a
Portfolio's ability to effectively hedge.
The risk of loss in trading futures contracts in some strategies can be
substantial due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in excess of the amount
invested in the contract. However, because the futures strategies of a Portfolio
is engaged in only for hedging purposes, the Adviser does not believe that a
Portfolio is subject to the risks of loss frequently associated with futures
transactions. A Portfolio would presumably have sustained comparable losses if,
instead of futures contracts, they had invested in the underlying financial
instrument and sold them after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying the futures
contracts have different maturities than the portfolio securities being hedged.
It is also possible that a Portfolio could lose money on futures contracts and
also experience a decline in value of portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom a Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and, therefore, does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Futures contracts may be traded on foreign exchanges. Such transactions are
subject to the risks of governmental actions affecting trading in or the prices
of the securities. The value of such positions also could be adversely affected
by (i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lesser trading
volume.
The investment by a Portfolio in futures contracts and options on futures
contracts is subject to many complex and special tax rules. The treatment by a
Portfolio of certain futures and forward contracts is generally governed by
Section 1256 of the Internal Revenue Code of 1986, as amended (the "Code").
7
<PAGE>
These "Section 1256" positions generally include listed options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Portfolio will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Portfolio's fiscal year, and all
gain or loss associated with fiscal year transactions and marked-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within a Portfolio. The
acceleration of income on Section 1256 positions may require a Portfolio to
accrue taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, a Portfolio
may be required to dispose of portfolio securities that they otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of a Portfolio's shares. In these ways, any or all of these rules may affect
both the amount, character and timing of income distributed to shareholders by
the Portfolios.
B) OPTIONS
Each Portfolio may purchase and sell put and call options on securities and
futures contracts for hedging purposes. Investments in options involve some of
the same considerations that are involved in connection with investments in
futures contracts (e.g., the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying security or contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract on which it is based or the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract or securities.
WRITING COVERED CALL OPTIONS
The principal reason for writing call options is to attempt to realize, through
the receipt of premiums, a greater return than would be realized on securities
alone. By writing covered call options, a Portfolio gives up the opportunity,
while the option is in effect, to profit from any price increase in the
underlying security above the option exercise price. In addition, a Portfolio's
ability to sell the underlying security will be limited while the option is in
effect unless it effects a closing purchase transaction. A closing purchase
transaction cancels out the Portfolio's position as the writer of an option by
means of an offsetting purchase of an identical option prior to the expiration
of the option that it has written. Covered call options serve as a partial hedge
against the price of the underlying security declining. Each Portfolio writes
only covered options, which means that so long as a Portfolio is obligated as
the writer of the option it will, in a segregated account with its custodian,
maintain cash, U.S. government securities, other high grade liquid debt
securities or other liquid securities denominated in U.S. dollars with a value
equal to or greater than the exercise price of the underlying securities.
PURCHASING OPTIONS
The amount of any appreciation in the value of the underlying security subject
to a put will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. Prior to its expiration, a put option
may be sold in a closing sale transaction and profit or loss from a sale will
depend on whether the amount received is more or less than the premium paid for
the put option plus the related transaction costs. A closing sale transaction
cancels out a Portfolio's position as purchaser of an
8
<PAGE>
option by means of an offsetting sale of an identical option prior to the
expiration of the option that it has purchased. In certain circumstances, a
Portfolio may purchase call options on securities held in their investment
portfolios on which they have written call options or on securities which they
intend to purchase.
C) SHORT SALES
Each Portfolio may seek to hedge investments or realize additional gains through
short sales. A Portfolio may make short sales, which are transactions in which a
Portfolio sells a security it does not own, in anticipation of a decline in the
market value of the security. To complete such a transaction, a Portfolio must
borrow the security to make delivery to the buyer. A Portfolio then is obligated
to replace the security borrowed by purchasing it at the market price at or
prior to the time of replacement. The price at such time may be more or less
than the price at which the security was sold. Until the security is replaced, a
Portfolio is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, a Portfolio also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out. A
Portfolio also will incur transaction costs in effecting short sales.
A Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which a
Portfolio replaces the borrowed security. A Portfolio will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased by the amount of the premium,
dividends, interest, or expenses a Portfolio may be required to pay in
connection with a short sale.
No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the Portfolio's net equity. Each Portfolio similarly will limit its
short sales of the securities of any single issuer if the market value of the
securities that have been sold short would exceed two percent (2%) of the value
of a Portfolio's net equity or if such securities would constitute more than two
percent (2%) of any class of the issuer's securities.
Whenever a Portfolio engages in short sales, its custodian segregates an amount
of cash or U.S. Government securities or other high-grade liquid debt securities
equal to the difference between (a) the market value of the securities sold
short at the time they were sold short and (b) any cash or U.S. Government
securities required to be deposited with the broker in connection with the short
sale (not including the proceeds from the short sale). The segregated assets are
marked-to-market daily, provided that at no time will the amount deposited in it
plus the amount deposited with the broker be less than the market value of the
securities at the time they were sold short.
In addition, a Portfolio may make short sales "against the box," i.e. when a
security identical to one owned by a Portfolio is borrowed and sold short. If a
Portfolio enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required to
hold such securities while the short sale is outstanding. A Portfolio will incur
transaction costs, in connection with opening, maintaining, and closing short
sales against the box. A short sale may result in the recognition of gain with
respect to a security for Federal income tax purposes under certain rules which
treat certain short sales of the same or substantially identical positions with
respect to such a security as a constructive sale at the time a short position
is entered into by a Portfolio. See, "DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND
TAXES."
9
<PAGE>
COMPANIES WITH LIMITED OPERATING HISTORIES
The BRAZOS Real Estate Securities Portfolio may invest in securities of
companies which have limited operating histories and may not yet be profitable.
The investments in such companies offer opportunities for capital gains, but
entail significant risks including, but not limited to, the volatility of the
stock price and the viability of the firm's operations. The Company will not
invest in companies which together with predecessors have operating histories of
less than three years if immediately thereafter and as a result of such
investment the value of the Portfolio's holdings of such securities (other than
securities of companies principally engaged in the real estate industry) exceeds
20% of the value of the Portfolio's total assets. Although not an investment
policy of the Company, it is anticipated that under normal circumstances,
approximately 10% to 15% of the companies principally engaged in the real estate
industry in which the Portfolio invests will have operating histories of less
than three years.
Except as specified above and as described under "INVESTMENT LIMITATIONS" below,
the foregoing investment policies are not fundamental and the Trustees may
change such policies without an affirmative vote of a majority of the
outstanding voting securities of a Portfolio, as defined in the 1940 Act.
INVESTMENT LIMITATIONS
The following limitations supplement those set forth in the Prospectus. Whenever
an investment limitation sets forth a percentage limitation on investment or
utilization of assets, such limitation shall be determined immediately after and
as a result of a Portfolio's acquisition of such security or other asset.
Accordingly, any later increase or decrease resulting from a change in values,
net assets or other circumstances will not be considered when determining
whether the investment complies with a Portfolio's investment limitations.
Investment limitations (1) through (9) described below are fundamental policies
and cannot be changed without approval by a "majority of the outstanding shares"
(as defined in the 1940 Act) of a Portfolio. A Portfolio will not:
(1) with respect to 75% of its assets, invest more than 5% of its
total assets at the time of purchase in the securities of any
single issuer (other than obligations issued or guaranteed as
to principal and interest by the government of the U.S. or any
agency or instrumentality thereof);
(2) with respect to 75% of its assets, purchase more than 10%
of any class of the outstanding voting securities of any
issuer;
(3) borrow money, except as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of
33 1/3% of the Portfolio's gross assets valued at the lower of
market or cost, and the Portfolio may not purchase additional
securities when borrowings exceed 5% of total gross assets;
(4) pledge, mortgage or hypothecate any of its assets to an
extent greater than 33% of its total assets at fair market
value;
(5) invest in physical commodities or contracts on physical
commodities;
(6) purchase or sell real estate or real estate limited
partnerships, although it may purchase and sell securities of
companies which deal in real estate and may purchase and sell
securities which are secured by interests in real estate;
additionally, the BRAZOS Real
10
<PAGE>
Estate Securities Portfolio may purchase and sell
mortgage-related securities and liquidate real estate
acquired as a result of default on a mortgage and may invest
in marketable securities issued by companies such as real
estate investment trusts which deal in real estate or
interests therein and participation interests in pools of
real estate mortgage loans;
(7) make loans except (i) by purchasing debt securities in
accordance with its investment objectives; (ii) by lending its
portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or
interpretations of the Commission thereunder; and (iii) as
otherwise permitted by exemptive order of the Commission;
(8) underwrite the securities of other issuers;
(9) issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit a
Portfolio from (i) making any permitted borrowings, mortgages
or pledges, or (ii) entering into options, futures or
repurchase transactions;
(10) invest in futures and/or options on futures unless (i) not
more than 5% of the Portfolio's assets are required as deposit
to secure obligations under such futures and/or options on
futures contracts, provided, however, that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing such 5%; and
(ii) not more than 20% of a Portfolio's assets are invested in
futures and options;
(11) purchase on margin except as specified in (10) above;
(12) invest more than an aggregate of 15% of the net assets of a
Portfolio, determined at the time of investment, in securities
subject to legal or contractual restrictions on resale or
securities for which there are no readily available markets.
In addition, the BRAZOS Micro Cap Growth, BRAZOS Small Cap Growth, BRAZOS Growth
and the BRAZOS Mid Cap Growth Portfolios have adopted a fundamental policy that
each will not acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of each Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or instruments issued by U.S. banks when each Portfolio
adopts a temporary defensive position. The Brazos Real Estate Securities
Portfolio has adopted a fundamental policy that its investments will be
concentrated in the real estate industry, which means that it will invest more
than 25% of its assets in that industry.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Officers of the Company manage its day-to-day operations and are responsible
to the Company's Board of Trustees. The Trustees set broad policies for the
Company and elect its Officers. The following is a list of the Trustees and
Officers of the Company and a brief statement of their present positions and
principal occupations during the past five years:
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
GEORGE W. GAU Trustee of the Company, Professor of Finance, George S. Watson Centennial
8009 Long Canyon Dr. Professor in Real Estate, College and Graduate School of Business, University
Austin, TX 78730 of Texas at Austin since 1988; J. Ludwig Mosle Centennial Memorial Professor
Age 51 in Investments and Money Management, since 1996; and Chairman of the Board
and Chief Executive Officer, The MBA Investment Fund, L.L.C., a $10 million
fund that is the first private investment company to be managed by students,
since 1994.
*DAN L. HOCKENBROUGH Trustee, President, Treasurer and Chief Financial Officer of the Company;
5949 Sherry Lane, Suite 1600 Since August 1996, Business Manager of John McStay Investment Counsel.
Dallas, Texas 75225 Formerly, Chief Financial Officer of Waugh Enterprises, Inc. from November
Age 39 1995 until August 1996; and Assistant Controller of Hicks, Muse, Tate & Furst
Incorporated from December 1992 to November 1995.
JOHN H. MASSEY Trustee of the Company; Private Investor and a Director of The Paragon Group,
4004 Windsor Avenue Inc., Chancellor Broadcasting, Inc., Bank of the Southwest, Columbine JDS
Dallas, Texas 75205 Systems, Inc. and FSW Holdings, Inc. Until 1996, Chairman of the Board and
Age 59 Chief Executive Officer of Life Partners Group, Inc.
DAVID M. REICHERT Trustee of the Company; Private Investor; formerly Senior Vice President of
7415 Stonecrest Drive Moffet Capital Management, an investment counseling firm, from January 1995
Dallas, Texas 75240 until June 1996 and Senior Vice President and Portfolio Manager of American
Age 59 Capital Asset Management, a mutual fund management company, from April 1989
to July 1994.
*TRICIA A. HUNDLEY Vice President, Secretary and Compliance Officer of the Company; Partner of
5949 Sherry Lane, Suite 1600 John McStay Investment Counsel since 1987.
Dallas, Texas 75225
Age 48
*LOREN J. SOETENGA Vice President of the Company, Principal of John McStay Investment Counsel.
5949 Sherry Lane, Suite 1600 Formerly, Partner of Chronos Management, Inc. until 1996.
Dallas, Texas 75225
Age 31
*PETER C. SUTTON Vice President and Assistant Treasurer of the Company; Senior Vice President,
The SunAmerica Center SunAmerica Asset Management Corp. ("SAAMCo"), since April 1997; Treasurer,
733 Third Avenue SunAmerica Equity Funds, SunAmerica Income Funds, SunAmerica Money Market
New York, NY 10017 Fund and Anchor Series Trust, since February 1996; Vice President and
Age 34 Assistant Treasurer of SunAmerica Series Trust and Anchor Pathway Fund, since
1994; Vice President, Seasons Series Trust, since 1997; formerly, Vice
President, SAAMCo. from 1994 to 1997; Controller, SunAmerica Mutual Funds and
Anchor Series Trust from March 1993 to February 1996.
*ROBERT M. ZAKEM Vice President and Assistant Treasurer of the Company; Senior Vice President
The SunAmerica Center and General Counsel, SAAMCo, since April 1993; Executive Vice President,
733 Third Avenue General Counsel and Director, SunAmerica Capital Services, Inc.
New York, NY 10017 since August 1993, Vice President, General Counsel and Assistant Secretary,
Age 41 SAF, since January 1994; Vice President, SunAmerica Series Trust, Anchor
12
<PAGE>
Pathway Fund and Seasons Series Trust; Secretary and Chief Compliance Officer,
Anchor Series Trust, SunAmerica Equity Funds, SunAmerica Income Funds and
SunAmerica Money Market Fund, since 1993; Secretary and Chief Compliance
Officer, Style Select Series, Inc., since 1996; Secretary, SunAmerica
Strategic Investment Series, Inc., since 1998.
* This person is deemed to be an "interested person" of the Company as that term is defined in the 1940 Act.
</TABLE>
REMUNERATION OF TRUSTEES AND OFFICERS
The Company pays each Trustee, who is not also an officer or affiliated person,
a $1,000 quarterly retainer fee per Portfolio which currently amounts to $5,000
per quarter. In addition, each unaffiliated Trustee receives a fee of $1,250 per
regular meeting and a fee of $1,250 per special meeting, and reimbursement for
travel and other expenses incurred while attending Board meetings. The fees are
aggregated for all the Trustees and allocated proportionately among the
Portfolios of the Company.
Trustees who are also officers or affiliated persons receive no remuneration for
their service as Trustees. The Company's officers and employees are paid by
either the Adviser or the Administrator and receive no compensation from the
Company. The following table shows aggregate compensation paid to each of the
Company's Trustees for the fiscal period ended November 30, 1999.
13
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Benefits Upon from Registrant and
From Registrant Accrued as Part of Retirement Company Complex Paid
Company Expenses to Trustees
====================================================================================================================
<S> <C> <C> <C> <C>
George W. Gau - -0- -0- -
Trustee
Dan L. Hockenbrough -0- -0- -0- -0-
Trustee
John H. Massey - -0- -0- -
Trustee
David M. Reichert - -0- -0- -
Trustee
PRINCIPAL HOLDERS OF SECURITIES
Upon the commencement of the offering of the Class Y shares, of the Mid Cap Growth Portfolio, the Adviser
will be the sole shareholder of such Class and will be deemed a controlling person of such Class.
As of September 30, 1999, the Trustees and officers of the Trust owned in the aggregate less than 1% of the
total outstanding shares of each Class of each Portfolio.
As of September 30, 1999, the following persons or organizations held of record 5% or more of the shares of each
Portfolio:
</TABLE>
MICRO CAP GROWTH PORTFOLIO CLASS Y PERCENTAGE
---------------------------------- ----------
Charles Schwab & Co., Inc. 14.0%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creek Drive South
Denver, CO 80246
National Financial Services 8.0%
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
National Investor Services Corporation 6.0%
Mutual Funds
55 Water Street FL32
New York, NY 10041-3299
14
<PAGE>
REAL ESTATE SECURITIES PORTFOLIO CLASS Y PERCENTAGE
---------------------------------------- ----------
Suntrust Bank Atlanta Custodian 8.0%
FBO University of Georgia Foundation
U/A/D 3/19/97
P.O. Box 105870
Atlanta, GA 30348-5870
Wachovia Bank N.A. 7.0%
Successor Trustee
U/A USAA Savings & Investment Plan
301 N. Main Street
P.O. Box 3073
Winston Salem, NC 27150-0001
Clarian Health Partners Inc. 7.0%
ATTN: Rick Vorheis
1515 N. Senate Ave. FL 1
Indianapolis, IN 46202-2212
Texas Tech University 6.0%
PO Box 41098
Lubbock, TX 79409-1098
Charles Schwab & Co., Inc. 6.0%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creek Drive South
Denver, CO 80246
The Lemelson Foundation 5.0%
PMB #363 930 Tahoe Blvd. #802
Incline Village, NV 89451
California Province of the Society of Jesus 5.0%
Attn: Reverend Robert St. Clair
P.O. Box 519
Los Gatos, CA 95031-0519
University of Nebraska Foundation 5.0%
Daniel H. Mortin VP & Treasurer
PO Box 82555
Lincoln, NE 68501-2555
15
<PAGE>
SMALL CAP GROWTH PORTFOLIO CLASS Y PERCENTAGES
---------------------------------- -----------
Charles Schwab & Co., Inc. 12.0%
Suite 700 Team P - Mutual Fund Operations
4500 Cherry Creek Drive South
Denver, CO 80246
GROWTH PORTFOLIO CLASS Y PERCENTAGES
---------------------------------- -----------
US Trust Company 16.0%
FBO Community Foundation
Silicon Valley
4380 SW Macadam Ave. Ste. 450
Portland, OR 97201-6407
R.D. and Joan Dale Hubbard Foundation Inc. 13.0%
73-405 El Paseo #32D
Palm Desert, CA 92260
R.D. Hubbard 8.0%
73-405 El Paseo #32D
Palm Desert, CA 92260
Thomas J. Musick 8.0%
5949 Sherry Lane Ste. 1600
Dallas, TX 75225-8012
John McStay and Ellen McStay 6.0%
JT Ten
5949 Sherry Lane Ste. 1600
Dallas, TX 75225-8012
Pershing 5.0%
Division of Donaldson, Lufkin and Jenrette
1 Pershing Plaza
Jersey City, NJ 07399-0001
REAL ESTATE SECURITIES PORTFOLIO CLASS A PERCENTAGE
---------------------------------------- ----------
Sun America Asset Management Corp. 99.0%
ATTN: Manpratap Shiwnath
733 Third Avenue 4th Floor
New York, NY 10017-3204
16
<PAGE>
SMALL CAP GROWTH PORTFOLIO CLASS A PERCENTAGES
---------------------------------- -----------
Sun America Asset Management Corp. 96.0%
ATTN: Manpratap Shiwnath
733 Third Avenue 4th Floor
New York, NY 10017-3204
REAL ESTATE SECURITIES PORTFOLIO CLASS B PERCENTAGE
---------------------------------- -----------
Sun America Asset Management Corp. 99.0%
ATTN: Frank Curran
733 Third Avenue 4th Floor
New York, NY 10017-3204
SMALL CAP GROWTH PORTFOLIO CLASS B PERCENTAGES
---------------------------------- -----------
Sun America Asset Management Corp. 86.0%
ATTN: Frank Curran
733 Third Avenue 4th Floor
New York, NY 10017-3204
Donaldson Lufkin & Jenrette 13.0%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
REAL ESTATE SECURITIES PORTFOLIO CLASS II PERCENTAGE
----------------------------------------- -----------
Sun America Asset Management Corp. 99.0%
ATTN: Frank Curran
733 Third Avenue 4th Floor
New York, NY 10017-3204
SMALL CAP GROWTH PORTFOLIO CLASS II PERCENTAGES
----------------------------------- -----------
Sun America Asset Management Corp. 92.0%
ATTN: Frank Curran
733 Third Avenue 4th Floor
New York, NY 10017-3204
17
<PAGE>
Resources Trust UA 5.0%
USHA Pharmacy Inc. PSP
FBO Vinod F Shah
2 Dupont Ct.
Dix Hills, NY 11746-6259
18
<PAGE>
INVESTMENT ADVISER AND OTHER SERVICES
John McStay Investment Counsel ( "JMIC" or the "Adviser") which was formed as a
limited partnership in 1983, is located at 5949 Sherry Lane, Suite 1600, Dallas,
Texas 75225. On June 30, 1999, JMIC reorganized as a Delaware limited liability
company and completed the sale of an 80% managing membership interest in JMIC to
American International Group, Inc. ("AIG") resulting in JMIC becoming a majority
owned indirect subsidiary of AIG and minority owned by the employees of JMIC. In
connection therewith, on June 25, 1999, shareholders of each Portfolio of the
Company approved new investment advisory and management agreements with JMIC and
also approved changing the fundamental investment restrictions relating to the
ability to engage in borrowing and lending transactions with respect to each
Portfolio. Although the investment advisory fee waivers will no longer be in
place, the fees will not exceed the expense caps currently in place for each
Portfolio due to a voluntary expense reimbursement by JMIC or its affiliates.
As a result of the reorganization described above, arrangements for the
administration, distribution, transfer agency and shareholder servicing, and
custody and fund accounting of the Portfolios of the Company have been changed
as follows:
(i) SunAmerica Asset Management Corp. ("SAAMCo" or the
"Administrator") will act as Administrator of each Portfolio of the
Company pursuant to the Administration Agreement between SAAMCo and
the Company;
(ii) SunAmerica Capital Services, Inc. ("SACS" or the "Distributor")
acts as Distributor for each Portfolio of the Company pursuant to the
Distribution Agreement between SACS and the Company;
(iii) SAFS will provide transfer agency and shareholder services with
respect to each Portfolio of the Company pursuant to the Service
Agreement between SAFS and the Company; and
(iv) State Street Bank and Trust Company ("State Street") will serve as
custodian and fund accountant of the Portfolios and as transfer agent,
together with its affiliate, National Financial Data Services ("NFDS"),
pursuant to the Custodian Contract and the Transfer Agency Agreement,
each between the Company and State Street.
SAAMCo, SACS and SAFS are all affiliates of each other, of JMIC, and of AIG.
Under the Administration Agreement, SAAMCo will provide certain administrative
services similar to those previously provided by Firstar Mutual Fund Services,
LLC ("Firstar"). For its services, SAAMCo will receive fees that are identical
to those fees which were paid to Firstar. SAAMCo is located at The SunAmerica
Center, 733 Third Avenue, New York, NY 10017. Under the Distribution Agreement,
SACS will provide services similar to those provided by Rafferty Capital
Markets, Inc. ("Rafferty"). Like Rafferty, SACS will receive no compensation for
the distribution of shares of the Portfolios, except for reimbursement by the
Adviser of out-of-pocket expenses. SACS is located at The SunAmerica Center, 733
Third Avenue, New York, NY 10017. Under the Service Agreement, SAFS will assist
State Street and NFDS in connection with certain services previously provided by
Firstar. For its services, SAFS will receive a fee, which represents the full
cost of providing shareholder and transfer agency services, at the same cost
basis previously charged by Firstar. SAFS will pay a fee to State Street and
NFDS (other than out-of-pocket charges of the Transfer Agent which are paid by
the Company). SAFS is located at The SunAmerica Center, 733 Third Avenue, New
York, NY 10017. Under the Custodian
19
<PAGE>
Contract and the Transfer Agency Agreement, State Street, 1776 Heritage Drive,
North Quincy, MA 02171, will provide custodial and fund accounting services
similar to those previously provided by Firstar Bank Milwaukee, N.A. and
Firstar, respectively. Transfer agent functions previously provided by Firstar
will be performed for State Street by NFDS, P.O. Box 219373, Kansas City, MO
64121-9373.
The Adviser provides investment management services to institutions and
individuals and currently has approximately $4.5 billion in assets under
management. John D. McStay may be deemed to control the Adviser as a result of
ownership of a majority interest in John McStay & Associates ("JMA"), the
general partner of the Adviser. JMA owns a majority interest in the Adviser.
The Adviser may compensate its affiliated companies for referring investors to
the Portfolios. The Adviser, or any of its affiliates, may, at its own expense,
compensate a Service Agent or other person for marketing, shareholder servicing,
record-keeping and/or other services performed with respect to the Company or a
Portfolio. Payments made for any of these purposes may be made from the paying
entity's revenues, its profits or any other source available to it. When such
service arrangements are in effect, they are made generally available to all
qualified service providers.
ADVISORY FEES
As compensation for services rendered by the Adviser under the Investment
Advisory Agreement, the Portfolios pay the Adviser an annual fee in monthly
installments, calculated by applying the following annual percentage rates to
the Portfolios' average daily net assets for the month:
BRAZOS Micro Cap Growth Portfolio................................ 1.20%
BRAZOS Real Estate Securities Portfolio.......................... 0.90%
BRAZOS Small Cap Growth Portfolio................................ 0.90%
BRAZOS Portfolio................................................. 0.90%
BRAZOS Mid Cap Growth Portfolio.................................. 0.90%
For the semi-annual period ended May 31, 1999, the Portfolios paid the Adviser
fees and the Adviser waived fees and/or reimbursed expenses of the Portfolios as
follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio $ 375,275 $ 0
BRAZOS Real Estate Securities Portfolio $ 477,518 $ 0
BRAZOS Small Cap Growth Portfolio $1,905,910 $ 0
BRAZOS Growth Portfolio* $ 28,161 $28,161
* The Growth Portfolio commenced operations on 12/31/98.
For the fiscal year ended November 30, 1998, the portfolios paid the Adviser
fees and/or reimbursed expenses of the Portfolios as follows:
20
<PAGE>
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio* $ 326,266 $76,089
BRAZOS Real Estate Securities Portfolio $ 712,269 $47,708
BRAZOS Small Cap Growth Portfolio $1,578,588 $ 0
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
For the fiscal year ended November 30, 1997, the Portfolios paid the Adviser
fees and the Adviser waived fees and/or reimbursed expenses of the Portfolios as
follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $237,702 $139,015
BRAZOS Small Cap Growth Portfolio $239,078 $107,342
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
DISTRIBUTOR
SACS acts as Distributor for each Portfolio of the Company. SACS receives no
compensation for distribution of shares of the Portfolios, except for
reimbursement by the Adviser of out-of-pocket expenses.
ADMINISTRATION FEES
As of August 1, 1999, SAAMCo serves as Administrator to the Company and also
provides accounting services to the Company.
The Administrator supplies office facilities, non-investment related statistical
and research data, stationery and office supplies, executive and administrative
services, internal auditing and regulatory compliance services. The
Administrator also assists in the preparation of reports to shareholders,
prepares proxy statements, updates prospectuses and makes filings with the
Securities and Exchange Commission and state securities authorities. The
Administrator performs certain budgeting and financial reporting and compliance
monitoring activities. For the services provided, the Administrator receives an
annual fee from the Company equal to the greater of: (1) a minimum annual fee of
$35,000 for the first Portfolio, $25,000 for the next three Portfolios, and
$20,000 for any additional Portfolios; or (2) an asset-based fee for each
Portfolio, equal to a percentage of the average daily net assets of such
Portfolio, according to the following schedule:
0.07% on the first $200 million;
0.06% on the next $500 million;
0.04% on the balance.
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The Administrator's fee shall be payable monthly, as soon as practicable after
the last day of each month, based on the Portfolio's average daily net assets as
determined at the close of business on each business day throughout the month.
Prior to SAAMCo serving as Administrator, Firstar served as Administrator,
Accounting Agent, Transfer Agent and Dividend Paying Agent; prior to Firstar
serving in such capacities, PFPC provided similar services to the Company; prior
to PFPC serving in such capacities, Rodney Square provided similar services to
the Company.
For the semi-annual period ended May 31, 1999, the Company paid Firstar
administration fees and Firstar waived fees and/or reimbursed expenses of the
Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio $ 21,327 $ 0
BRAZOS Real Estate Securities Portfolio $ 37,745 $ 0
BRAZOS Small Cap Growth Portfolio $139,457 $ 0
BRAZOS Growth Portfolio* $ 10,570 $3,125
* The Growth Portfolio commenced operations on 12/31/98.
For the semi-annual period ended May 31, 1999, the Company paid Firstar
accounting services fees and Firstar waived fees and/or reimbursed expenses of
the Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio $13,579 $ 0
BRAZOS Real Estate Securities Portfolio $16,305 $ 0
BRAZOS Small Cap Growth Portfolio $30,002 $ 0
BRAZOS Growth Portfolio* $ 9,888 $2,750
* The Growth Portfolio commenced operations on 12/31/98.
For the fiscal year ended November 30, 1998, the Company paid Firstar and PFPC
administration fees and PFPC waived fees and/or reimbursed expenses of the
portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio* $ 25,335 $2,124
BRAZOS Real Estate Securities Portfolio $ 74,824 $ 0
BRAZOS Small Cap Growth Portfolio $156,579 $ 0
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<PAGE>
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
For the fiscal year ended November 10, 1998, the Company paid Firstar and PFPC
accounting services fees and PFPC waived fees and/or reimbursed expenses of the
Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio* $38,100 $ 5,486
BRAZOS Real Estate Securities Portfolio $50,231 $ 0
BRAZOS Small Cap Growth Portfolio $67,191 $ 0
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
For the fiscal year ended November 30, 1997, the Company paid Rodney Square
administration fees and Rodney Square waived fees and/or reimbursed expenses of
the Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $41,826 $4,051
BRAZOS Small Cap Growth Portfolio $42,986 $4,051
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
For the fiscal year ended November 30, 1997, the Company paid Rodney Square
accounting services fees and Rodney Square waived fees and/or reimbursed
expenses of the Portfolios as follows:
Fees paid
PORTFOLIO (BEFORE WAIVERS) WAIVERS
- --------- ---------------- -------
BRAZOS Micro Cap Growth Portfolio* $ 0 $ 0
BRAZOS Real Estate Securities Portfolio $41,352 $5,610
BRAZOS Small Cap Growth Portfolio $41,808 $5,610
* The Micro Cap Growth Portfolio commenced operations on 12/31/97.
CUSTODIAN
State Street serves as the Custodian for the Portfolios. As Custodian, State
Street has agreed to (a) maintain a separate account or accounts in the name of
the Company, (b) hold and transfer portfolio securities on account of the
Company, (c) accept receipts and make disbursements of money on behalf of the
Company, (d) collect and receive all income and other payments and distributions
on account of the Company's portfolio securities, and (e) make periodic reports
to the Company's Trustees concerning the
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Company's operations. State Street is authorized to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Company, provided
that State Street remains responsible for the performance of all its duties
under the Custodian Agreement and holds the Company harmless from the negligent
acts and omissions of any sub-custodian. For its services to the Company under
the Custodian Agreement, State Street receives a fee in addition to transaction
charges and out-of-pocket expenses.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, is the independent accountant for the Company.
PURCHASE OF SHARES
Shares of the Portfolios may be purchased without sales commission at the net
asset value per share next determined after an order is received in proper form
by the Company. Effective September 15, 1999, initial investments in the shares
of the Portfolios must be at least $1,000,000, and subsequent minimum
investments must be at least $1,000, except for the Brazos Micro Cap Growth
Portfolio, which has an initial investment of $50,000. Shares may be purchased
and subsequent investments may be made without being subject to the minimum or
subsequent investment limitations at the discretion of the officers of the
Company.
Shares may be purchased and subsequent investments may be made by principals,
officers, associates and employees of the Company and its affiliates, their
families and their business or personal associates, either directly or through
their individual retirement accounts, and by any JMIC pension or profit-sharing
plan, without being subject to the minimum or subsequent investment limitations.
Payment does not need to be converted into Federal Funds (moneys credited to the
Company's Custodian Bank by a Federal Reserve Bank) before the Company will
accept it for investment. Specify the Portfolio in which the funds should be
invested in on the Account Registration Form. An order received in proper form
prior to the 4:00 p.m. close of the New York Stock Exchange (the "NYSE") will be
executed at the price computed on the date of receipt; and an order received not
in proper form or after the 4:00 p.m. close of the NYSE will be executed at the
price computed on the next day the NYSE is open after proper receipt. The NYSE
will be closed on the following days: New Year's Day; Martin Luther King, Jr.'s
Birthday; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor
Day; Thanksgiving Day and Christmas Day.
The Portfolios reserve the right in their sole discretion (1) to suspend the
offering of their shares, (2) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Company, and (3) to
reduce or waive the minimum for initial and subsequent investment for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolios' shares.
Shares of the Portfolios may be purchased by customers of broker-dealers or
other financial intermediaries ("Service Agents") which deal with the Company on
behalf of their customers. Service Agents may impose additional or different
conditions on the purchase or redemption of shares of the Portfolios and may
charge transaction or other account fees. Each Service Agent is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different purchase and redemption conditions.
Shareholders who are customers of Service Agents should
24
<PAGE>
consult their Service Agent for information regarding these fees and conditions.
Amounts paid to Service Agents may include transaction fees and/or service fees
paid by the Company from the Company assets attributable to the Service Agent,
and which would not be imposed if shares of the Portfolios were purchased
directly from the Company or the Distributor. The Service Agents may provide
shareholder services to their customers that are not available to a shareholder
dealing directly with the Company. A salesperson and any other person entitled
to receive compensation for selling or servicing shares of the Portfolios may
receive different compensation with respect to one particular class of shares
over another in the Company.
Service Agents, or if applicable, their designees, that have entered into
agreements with the Company or its agent, may enter confirmed purchase or
redemption orders on behalf of clients and customers, with payment to follow no
later than the Portfolios' pricing on the following business day. If payment is
not received by the Company's Transfer Agent by such time, the Service Agent
could be held liable for resulting fees or losses. A Portfolio may be deemed to
have received a purchase or redemption order when a Service Agent, or, if
applicable, its authorized designee, accepts the order. Orders received by the
Company in proper form will be priced at each Portfolio's net asset value next
computed after they are accepted by the Service Agent or its authorized
designee. Service Agents are responsible to their customers and the Company for
timely transmission of all subscription and redemption requests, investment
information, documentation and money.
REDEMPTION OF SHARES
The Portfolios may suspend redemption privileges or postpone the date of payment
(1) during any period that the Exchange is closed or trading on the Exchange is
restricted as determined by the Commission, (2) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for the Portfolios to dispose of securities
owned by it or to fairly determine the value of its assets, and (3) for such
other periods as the Commission may permit. The Company has made an election
with the Commission to pay in cash all redemptions requested by any shareholder
of record limited in amount during any 90-day period to the lesser of $250,000
or 1% of the net assets of the Company at the beginning of such period. Such
commitment is irrevocable without the prior approval of the Commission.
Redemptions in excess of the above limits may be paid, in whole or in part, in
investment securities or in cash as the Board of Trustees may deem advisable;
however, payment will be made wholly in cash unless the Board of Trustees
believe that economic or market conditions exist which would make such a
practice detrimental to the best interests of the Company. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "Valuation of Fund Shares," and a redeeming shareholder
would normally incur brokerage expenses if those securities were converted to
cash.
Any redemption may be more or less than the shareholder's initial cost depending
on the market value of the securities held by a Portfolio.
BRAZOS MICRO CAP GROWTH, BRAZOS SMALL CAP GROWTH, BRAZOS GROWTH AND BRAZOS MID
CAP GROWTH PORTFOLIOS. No charge is made by these Portfolios for redemptions.
BRAZOS REAL ESTATE SECURITIES PORTFOLIO. No charge is made by the BRAZOS Real
Estate Securities Portfolio for redemptions if shares are held for at least 90
days. Shares held for less than 90 days will be subject to a 1% redemption fee
which is retained by the Company for the benefit of the remaining shareholders
and is intended to encourage long-term investment in the BRAZOS Real Estate
Securities Portfolio, to avoid transaction and other expenses caused by early
redemption and to facilitate portfolio management.
25
<PAGE>
The Company and the Company's Transfer Agent will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine, and they may
be liable for any losses if they fail to do so. These procedures include
requiring the investor to provide certain personal identification at the time an
account is opened, as well as prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
of such transaction requests. The Company or Transfer Agent may be liable for
any losses due to unauthorized or fraudulent telephone instructions if the
Company or Transfer Agent does not employ the procedures described above.
Neither the Company nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
it reasonably believes to be genuine.
SIGNATURE GUARANTEES
To protect your account from fraud, the Company and SAAMCo require signature
guarantees for certain redemptions. Signature guarantees are required for (1)
redemptions where the proceeds are to be sent to someone other than the
registered shareowner(s) or the registered address, (2) share transfer requests;
or (3) redemption requests that exceed $100,000. The purpose of signature
guarantees is to verify the identity of the party who has authorized a
redemption.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. A complete definition of an eligible guarantor institution is
available from the Administrator. Broker-dealers guaranteeing signatures must be
a member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program.
The signature guarantee must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Company are also
being redeemed, on the letter or stock power.
OTHER SHAREHOLDER SERVICES
The following supplements the "Purchase of Shares" and "Redemption of Shares"
information set forth in the Prospectus:
IN-KIND PURCHASES
If accepted by the Company, shares of a Portfolio may be purchased in exchange
for securities which are eligible for acquisition by the Portfolio, as described
in the Prospectus. Securities to be exchanged which are accepted by the Company
will be valued as set forth under "VALUATION OF SHARES" at the time of the next
determination of net asset value after such acceptance. Shares issued by a
Portfolio in exchange for securities will be issued at net asset value
determined as of the same time. All dividends, interest, subscription, or other
rights pertaining to such securities shall become the property of that Portfolio
and must be delivered to the Company by the investor upon receipt from the
issuer. Securities acquired through an in-kind purchase will be acquired for
investment and not for immediate resale.
26
<PAGE>
The Company will not accept securities in exchange for shares of a Portfolio
unless:
o at the time of the exchange, such securities are eligible to
be included in that Portfolio and current market quotations
are readily available for such securities;
o the investor represents and agrees that all securities offered
to be exchanged are not subject to any restrictions upon their
sale by that Portfolio under the Securities Act of 1933, or
otherwise; and
o the value of any such securities (except U.S. Government
securities) being exchanged together with other securities of
the same issuer owned by that Portfolio will not exceed 5% of
the net assets of that Portfolio immediately after the
transaction.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for Federal income tax purposes depending upon the cost of securities or
local currency exchanged. Investors interested in such exchanges should contact
the Adviser.
EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged for shares of any other Portfolio
included within the Brazos Mutual Funds. Exchange requests should be made by
calling 1-800-426-9157 or by writing to Brazos Mutual Funds, c/o SAFS, The
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. The exchange
privilege is only available with respect to Portfolios that are registered for
sale in the shareholder's state of residence.
Any such exchange will be based on the respective net asset values of the shares
involved. There is no sales commission or charge of any kind. Before making an
exchange into a Portfolio, a shareholder should read the Prospectus and consider
the investment objectives of the Portfolio to be purchased. You may obtain a
Prospectus for the Portfolio(s) you are interested in by calling the Company at
1-800-426-9157. Investor correspondence should be directed to the Brazos Mutual
Funds, c/o SAFS, The SunAmerica Center, 733 Third Avenue, New York, NY
10017-3204.
Exchange requests may be made either by mail or telephone. Telephone exchanges
will be accepted only if the certificates for the shares to be exchanged are
held by the Company for the account of the shareholder and the registration of
the two accounts will be identical. Requests for exchanges received prior to
4:00 p.m. (Eastern Time) will be processed as of the close of business on the
same day. Requests received after 4:00 p.m. will be processed on the next
business day. Neither the Company nor the Administrator will be responsible for
the authenticity of the exchange instructions received by telephone. Exchanges
may also be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Trustees to assure that such exchanges
do not disadvantage the Company and its shareholders.
For Federal income tax purposes an exchange between Portfolios is a taxable
event, and, accordingly, a capital gain or loss may be realized. In a revenue
ruling relating to circumstances similar to the Company's, an exchange between a
series of Funds was also deemed to be a taxable event. It is likely, therefore,
that a capital gain or loss would be realized on an exchange between Portfolios;
you may want to consult your tax adviser for further information in this regard.
The exchange privilege may be modified or terminated at any time.
27
<PAGE>
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolios to another person by making a
written request to the Company. The request should clearly identify the account
and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares." As in the case of redemptions, the written request must be received
in good order before any transfer can be made.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolios and directs the Adviser to use its best efforts to obtain the
best execution with respect to all transactions for the Portfolios. The Adviser
may, however, consistent with the interests of the Portfolios, select brokers on
the basis of the research, statistical and pricing services they provide to the
Portfolios. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by the
Adviser under the Investment Advisory Agreement. A commission paid to such
brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that such commissions are
paid in compliance with the Securities Exchange Act of 1934, as amended, and
that the Adviser determines in good faith that such commission is reasonable in
terms either of the transaction or the overall responsibility of the Adviser to
the Portfolios and the Adviser's other clients.
It is not the Company's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through broker-dealer firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolios or who act as agents in the purchase of shares of
the Portfolios for their clients.
Some securities considered for investment by the Portfolios may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Portfolios and one or
more of these other clients served by the Adviser is considered at or about the
same time, transactions in such securities will be allocated among the
Portfolios and clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Company's Board of Trustees.
For the semi-annual period ended May 31, 1999, the Portfolios paid brokerage
commissions as follows:
PORTFOLIO BROKERAGE COMMISSION
- --------- --------------------
BRAZOS Micro Cap Growth Portfolio $ 71,600
BRAZOS Real Estate Securities Portfolio $456,746
BRAZOS Small Cap Growth Portfolio $318,280
BRAZOS Growth Portfolio $ 16,911
For the fiscal year ended November 30, 1998, the Portfolios paid brokerage
commissions as follows:
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<PAGE>
PORTFOLIO BROKERAGE COMMISSION
- --------- --------------------
BRAZOS Micro Cap Growth Portfolio $ 566,035
BRAZOS Real Estate Securities Portfolio $ 851,896
BRAZOS Small Cap Growth Portfolio $1,999,496
For the fiscal year ended November 30, 1997, the Portfolios paid brokerage
commissions as follows:
PORTFOLIO BROKERAGE COMMISSION
- --------- --------------------
BRAZOS Micro Cap Growth Portfolio $ 0
BRAZOS Real Estate Securities Portfolio $316,900
BRAZOS Small Cap Growth Portfolio $132,283
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the Portfolios. The Agreement directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution for all
transactions of the Portfolios. The Adviser may buy and sell securities for the
account of a portfolio through the Adviser's affiliated broker-dealer. In such
instances, the affiliated broker-dealer will complete transactions pursuant to
procedures designed to ensure that charges for the transactions do not exceed
usual and customary levels obtainable from other, unaffiliated broker-dealers.
Such transactions and the procedures are supervised by the Company's Board of
Trustees. It is understood that the affiliated broker-dealer will not be
utilized in situations where, in the Adviser's judgment, the brokerage services
of another security firm would be in the best interest of a Portfolio. If
consistent with the interests of the Portfolios, the Adviser may select brokers
on the basis of research, statistical and pricing services these brokers provide
to the Portfolios. Information and research received from such brokers will be
in addition to, and not in lieu of, the services required to be performed by the
Adviser under the Investment Advisory Agreement. Such brokers may be paid a
higher commission than that which another qualified broker would have charged
for effecting the same transaction, provided that such commissions are paid in
compliance with the Securities Exchange Act of 1934, as amended, and that the
Adviser determines in good faith that the commission is reasonable in terms
either of the transaction or the overall responsibility of the Adviser to the
Portfolios and the Adviser's other clients.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company's Agreement and Declaration of Trust permits the Company to issue an
unlimited number of shares of beneficial interest, without par value. The
Trustees have the power to designate one or more series ("Portfolios") or
classes of shares of beneficial interest without further action by shareholders.
On each matter submitted to a vote of the shareholders, each holder of a share
shall be entitled to one vote for each whole share and a fractional vote for
each fractional share standing in his or her name on the books of the Company.
In the event of liquidation of the Company, the holders of the shares of each
Portfolio or any class thereof that has been established and designated shall be
entitled to receive, when and as declared by the Trustees, the excess of the
assets belonging to that Portfolio, or in the case of a class, belonging to that
Portfolio and allocable to that class, over the liabilities belonging to that
Portfolio or class. The assets so distributable to the holders of shares of any
particular Portfolio or class thereof shall be distributed to the holders in
proportion to the number of shares of that Portfolio or class thereof held by
them and recorded
29
<PAGE>
on the books of the Company. The liquidation of any Portfolio or class thereof
may be authorized at any time by vote of a majority of the Trustees then in
office.
Shareholders have no pre-emptive or other rights to subscribe to any additional
shares or other securities issued by the Company or any Portfolio, except as the
Trustees in their sole discretion shall have determined by resolution.
The shares of each Portfolio are fully paid and nonassessable, have no
preference as to conversion, exchange, dividends, retirement or other features
and have no pre-emptive rights. They have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees. A shareholder is entitled to one vote
for each full share held (and a fractional vote for each fractional share held),
then standing in his name on the books of the Company.
Annual meetings will not be held except as required by the 1940 Act and other
applicable laws. The Company has undertaken that its Trustees will call a
meeting of shareholders if such a meeting is requested in writing by the holders
of not less than 10% of the outstanding shares of the Company. The Company will
assist shareholder communications in such matters.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
The Company's policy is to distribute at least annually, substantially all of a
Portfolio's net investment income, if any, together with any net realized
capital gains in the amount and at the times that will avoid both income
(including capital gains) taxes incurred and the imposition of the Federal
excise tax on undistributed income and capital gains. The Company may distribute
a Portfolio's net investment income at interim periods. The amounts of any
income dividends or capital gains distributions cannot be predicted. The
Portfolios may distribute net investment income and other capital gains during
interim periods when the Company's management determines that it is in the best
interests of a Portfolio and its shareholders to do so. It is not anticipated
that distributions of net investment income and other capital gains will be made
more frequently than quarterly. It is possible, however, as a result of this
policy that total distributions in a year could exceed the total of a
Portfolio's current year net investment income and capital gains. If this should
occur, a portion of the distributions received by shareholders of such Portfolio
could be a nontaxable "return of capital" for federal income tax purposes and
thereby reduce the shareholder's cost basis in shares of the Portfolio. In
general, a shareholder's total cost basis in the Company will reflect the cost
of the shareholder's original investment plus the amount of any reinvestment.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of a Portfolio by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividend and capital gains distributions are automatically received
in additional shares of the respective Portfolio of the Company at net asset
value (as of the business day following the record date). This will remain in
effect until the Company is notified by the shareholder in writing at least
three days prior to the record date that either the Income Option (income
dividends in cash and capital gains distributions in additional shares at net
asset value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected. An account statement is sent to
shareholders whenever an income dividend or capital gains distribution is paid.
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<PAGE>
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Each Portfolio of the Company will be treated as a separate entity (and hence as
a separate "regulated investment company") for Federal tax purposes. Any net
capital gains recognized by a Portfolio will be distributed to its investors
without need to offset (for Federal income tax purposes) such gains against any
net capital losses of another Portfolio.
Each Portfolio may engage in certain transactions, such as short sales, and may
invest in certain instruments, such as futures contracts, which may result in
constructive sales of appreciated positions in securities for Federal income tax
purposes. A constructive sale generally occurs when a Portfolio has entered into
a short sale of the same or substantially identical securities or if it enters
into a futures or forward contract to deliver the same or substantially
identical securities and in certain other circumstances. If a constructive sale
occurs, a Portfolio will recognize either ordinary income or capital gain
depending on the length of time which it held the security which was
constructively sold.
Dividends paid by the Portfolios from net investment income and short-term
capital gains, either in cash or reinvested in shares, will be taxable to
shareholders as ordinary income. Dividends paid from the Portfolios will
generally qualify in part for the 70% dividends-received deductions for
corporations, but the portion of the dividends so qualified depends on the
aggregate qualifying dividend income received by the Portfolios from domestic
(U.S.) sources.
Distributions paid by the Portfolios from long-term capital gains, either in
cash or additional shares of a Portfolio, are taxable to shareholders subject to
income tax as long-term capital gains regardless of the length of time the
shareholder has owned shares in a Portfolio. Also, for those shareholders
subject to tax, if purchases of shares in a Portfolio are made shortly before
the record date for a capital gains distribution or a dividend, a portion of the
investment will be returned as a taxable distribution. Shareholders are notified
annually by the Company as to the Federal Income tax status of dividends and
distributions paid by the Portfolios. Dividends and distributions may also be
subject to state and local taxes. Dividends declared in October, November, or
December to shareholders of record in such month and paid in January of the
following year will be deemed to have been paid by a Portfolio and received by
the shareholders on December 31.
Redemptions of shares in the Portfolios are taxable events for Federal income
tax purposes.
The Portfolios are required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this withholding
requirement by certifying on the account registration form your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
In order for a Portfolio to continue to qualify for Federal income tax treatment
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"), at least 90% of a Portfolio's gross income for a taxable
year must be derived from certain qualifying income, i.e., dividends, interest,
income derived from loans of securities and gains from the sale or other
disposition of stock, securities or foreign currencies, or other related income,
including gains from options, futures and forward contracts, derived with
respect to its business investing in stock, securities or currencies.
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Any net gain realized from the closing out of futures contracts will, therefore,
generally be qualifying income for purposes of the 90% requirement.
Except for transactions a Portfolio has identified as hedging transactions, a
Portfolio is required for Federal income tax purposes to recognize as income for
the taxable year its net unrealized gains and losses on forward currency and
futures contracts as of the end of the taxable year as well as those actually
realized during the year. In most cases, any such gain or loss recognized with
respect to a regulated futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss without regard to
the holding period of the contract. Recognized gain or loss attributable to a
foreign currency forward contract is treated as 100% ordinary income.
Furthermore, foreign currency futures contracts which are intended to hedge
against a change in the value of securities held by a Portfolio may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
A Portfolio may be subject to foreign withholding taxes on income or gains
recognized with respect to its investment in certain foreign securities. If a
Portfolio purchases shares in certain foreign investment entities, called
"passive foreign investment companies," a Portfolio may be subject to U.S.
Federal income tax and a related interest charge on a portion of any "excess
distribution" or gain from the disposition of such shares, even if such income
is distributed as a taxable dividend by a Portfolio to its shareholders. If more
than 50% of the total assets of a Portfolio are invested in securities of
foreign corporations, a Portfolio may elect to pass-through to its shareholders
their pro rata share of foreign income taxes paid by a Portfolio. If this
election is made, shareholders will be required to include in their gross income
their pro rata share of the foreign taxes paid by a Portfolio. However,
shareholders will be entitled to deduct (as an itemized deduction in the case of
individuals) their share of such foreign taxes in computing their taxable income
or to claim a credit for such taxes against their U.S. Federal income tax,
subject to certain limitation under the Code. Finally, a Portfolio may recognize
gain or loss on transactions in foreign currencies as a by-product of its
investment in foreign securities.
A Portfolio will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes (including unrealized gains
at the end of a Portfolio's taxable year) on futures transactions. Such
distribution will be combined with distributions of capital gains realized on a
Portfolio's other investments, and shareholders will be advised on the nature of
the payment.
PERFORMANCE CALCULATIONS
PERFORMANCE
The Portfolios may from time to time quote various performance figures to
illustrate past performance. Performance quotations by investment companies are
subject to rules adopted by the Commission, which require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Company be accompanied
by certain standardized performance information computed as required by the
Commission. Current yield and average annual compounded total return quotations
used by the Company are based on the standardized methods of computing
performance mandated by the Commission. An explanation of those and other
methods used to compute or express performance follows.
YIELD
Current yield reflects the income per share earned by a Portfolio's investment.
The current yield of a Portfolio is determined by dividing the net investment
income per share earned during a 30-day base
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period by the maximum offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include any fees charged
to all shareholders during the base period.
This figure is obtained using the following formula:
Yield = 2 [( a-b + 1)6-1]
---
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
income distributions
d = the maximum offering price per share on the last day of
the period.
TOTAL RETURN
The average annual total return of a Portfolio is determined by finding the
average annual compounded rates of return over 1, 5 and 10 year periods that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each 1, 5 and 10 year period and the deduction of all applicable
Company expenses on an annual basis.
These figures will be calculated according to the following formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5
or 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof).
33
<PAGE>
Total returns for the Portfolios for the period ended May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Inception Year-to-Date Inception to
DATE 5/31/99 5/31/99
---- ------- -------
<S> <C> <C> <C>
BRAZOS Real Estate Securities Portfolio 12/31/96 7.9% 6.0%
BRAZOS Small Cap Growth Portfolio 12/31/96 1.7% 27.1%
BRAZOS Micro Cap Growth Portfolio 12/31/97 17.2% 36.6%
BRAZOS Growth Portfolio 12/31/98 32.8% 32.8%
COMPARISONS
</TABLE>
To help investors better evaluate how an investment in a Portfolio might satisfy
their investment objective, advertisements regarding the Company may discuss
various measures of Company performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications, indices and averages may be used:
(1) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company stocks
and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(2) Standard & Poor's 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(3) Standard & Poor's MidCap 400 Index - an unmanaged index measuring
the performance of non-S&P 500 stocks in the mid-range sector of
the U.S. stock market.
(4) The New York Stock Exchange composite or component indices
unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
(5) Wilshire 5000 Equity Index or its component indices represents the
return on the market value of all common equity securities for
which daily pricing is available. Comparisons of performance assume
reinvestment of dividends.
(6) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income
Fund Performance Analysis - measure total return and average
current yield for the mutual fund industry. Rank individual mutual
fund performance over specified time periods, assuming reinvestment
of all distributions, exclusive of any applicable sales charges.
(7) Morgan Stanley Capital International EAFE Index and World Index -
respectively, arithmetic, market value-weighted averages of the
performance of over 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East, and over 1,400
securities listed on the stock exchanges of these continents,
including North America.
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<PAGE>
(8) Goldman Sachs 100 Convertible Bond Index - currently includes 67
bonds and 33 preferred stocks. The original list of names was
generated by screening for convertible issues of 100 million or
greater in market capitalization. The index is priced monthly.
(9) Salomon Brothers GNMA Index - includes pools of mortgages
originated by private lenders and guaranteed by the mortgage pools
of the Government National Mortgage Association.
(10) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or AAA.
It is a value-weighted, total return index, including approximately
800 issues with maturities of 12 years or greater.
(11) Salomon Brothers Broad Investment Grade Bond - is a
market-weighted index that contains approximately 4,700
individually priced investment grade corporate bonds rated BBB or
better, U.S. Treasury/agency issues and mortgage pass through
securities.
(12) Lehman Brothers Long-Term Treasury Bond - is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities
of 10 years or greater.
(13) NASDAQ Industrial Index - is composed of more than 3,000
industrial issues. It is a value-weighted index calculated on price
change only and does not include income.
(14) Value Line - composed of over 1,600 stocks in the Value Line
Investment Survey.
(15) Russell 2000 - composed of the 2,000 smallest stocks in the
Russell 3000, a market value-weighted index of the 3,000 largest
U.S. publicly-traded companies.
(16) Russell 2000 Growth - measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher
forecasted growth values.
(17) Russell 2000 Value - measures the performance of those Russell
2000 companies with lower price-to-book ratios and lower forecasted
growth values.
(18) Russell 2500 - composed of the 2,500 smallest stocks in the
Russell 3000, a market value-weighted index of the 3,000 largest
U.S. publicly-traded companies.
(19) Composite Indices - 60% Standard & Poor's 500 Stock Index, 30%
Lehman Brothers Long-Term Treasury Bond and 10% U.S. Treasury
Bills; 70% Standard & Poor's 500 Stock Index and 30% NASDAQ
Industrial Index; 35% Standard & Poor's 500 Stock Index and 65%
Salomon Brothers High Grade Bond Index; all stocks on the NASDAQ
system exclusive of those traded on an exchange, and 65% Standard &
Poor's 500 Stock Index and 35% Salomon Brothers High Grade Bond
Index.
(20) CDA Mutual Fund Report published by CDA Investment Technologies,
Inc. - analyzes price, current yield, risk, total return and
average rate of return (average compounded growth rate) over
specified time periods for the mutual fund industry.
(21) Mutual Fund Source Book published by Morningstar, Inc. - analyzes
price, yield, risk and total return for equity funds.
(22) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest,
Financial Times, Global Investor, Wall
35
<PAGE>
Street Journal and Weisenberger Investment Companies Service -
publications that rate fund performance over specified time
periods.
(23) Consumer Price Index (or Cost of Living Index), published by the
U.S. Bureau of Labor Statistics - a statistical measure of change
over time in the price of goods and services in major expenditure
groups.
(24) Stocks, Bonds, Bills and Inflation, published by Ibbotson
Associates - historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
U.S. Treasury bills and inflation.
(25) Savings and Loan Historical Interest Rates - as published by the
U.S. Savings & Loan League Fact Book.
(26) Lehman Brothers Government/Corporate Index - a combination of the
Government and Corporate Bond Indices. The Government Index
includes public obligations of the U.S. Treasury, issues of
Government agencies, and corporate debt backed by the U.S.
Government. The Corporate Bond Index includes fixed-rate
nonconvertible corporate debt. Also included are Yankee Bonds and
nonconvertible debt issued by or guaranteed by foreign or
international governments and agencies. All issues are investment
grade (BBB) or higher, with maturities of at least one year and an
outstanding par value of at least $100 million for U.S. Government
issues and $25 million for others. Any security downgraded during
the month is held in the index until month-end and then removed.
All returns are market value weighted inclusive of accrued income.
(27) Lehman Brothers Intermediate Government/Corporate Index - an
unmanaged index composed of a combination of the Government and
Corporate Bond Indices. All issues are investment grade (BBB) or
higher, with maturities of one to ten years and an outstanding par
value of at least $100 million for U.S. Government issues and $25
million for others. The Government Index includes public
obligations of the U.S. Treasury, issues of Government agencies,
and corporate debt backed by the U.S. Government. The Corporate
Bond Index includes fixed-rate nonconvertible corporate debt. Also
included are Yankee Bonds and nonconvertible debt issued by or
guaranteed by foreign or international governments and agencies.
Any security downgraded during the month is held in the index until
month-end and then removed. All returns are market value weighted
inclusive of accrued income.
(28) Historical data supplied by the research departments of First
Boston Corporation; the J.P. Morgan companies; WP Brothers; Merrill
Lynch, Pierce, Fenner & Smith; Lehman Brothers, Inc.; and Bloomberg
L.P.
(29) NAREIT Equity Index - a compilation of market-weighted securities
data collected from all tax-qualified equity real estate investment
trusts listed on the New York and American Stock Exchanges and the
NASDAQ. The index tracks performance, as well as REIT assets, by
property type and geographic region.
(30) Wilshire Real Estate Securities Index, published by Wilshire
Associates - a market capitalization-weighted index of publicly
traded real estate securities, such as real estate investment
trusts, real estate operating companies and partnerships.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in
36
<PAGE>
a Portfolio, that the averages are generally unmanaged, and that the items
included in the calculations of such averages may not be identical to the
formula used by a Portfolio to calculate its performance. In addition, there can
be no assurance that a Portfolio will continue this performance as compared to
such other averages.
CODE OF ETHICS
The Company has adopted a Code of Ethics which restricts, to a certain extent,
personal transactions by access persons of the Company and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The unaudited Financial Statements for the BRAZOS Micro Cap Growth Portfolio,
BRAZOS Small Cap Growth Portfolio, BRAZOS Real Estate Securities Portfolio and
BRAZOS Growth Portfolio, financial highlights and notes to the Financial
Statements dated May 31, 1999, were filed with the SEC on July 27, 1999. They
and the audited Financial Statements for the portfolios dated November 30, 1998
are incorporated herein by reference and can be obtained free of charge by
calling the Brazos Mutual Funds at 1-800-426-9157.
37
<PAGE>
APPENDIX
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and Poor's for commercial
paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
A-2
<PAGE>
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
A-4
<PAGE>
"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB", but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected
A-5
<PAGE>
by a large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa." The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
A-6
<PAGE>
"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity
A-7
<PAGE>
for timely payment of financial commitments is considered adequate, but adverse
changes in circumstances and in economic conditions are more likely to impair
this capacity.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is
a real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to denote relative standing within
these major rating categories.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
A-8
<PAGE>
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned by
Thomson Financial BankWatch to non-investment grade long-term debt. Such issues
are regarded as having speculative characteristics regarding the likelihood of
timely repayment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's note rating reflects the liquidity
factors and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
A-9
<PAGE>
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
PART C
FORM N-1A
OTHER INFORMATION
Item 23. Exhibits
(a) (1) Certificate of Trust filed October 24, 1996 is
incorporated by reference to Exhibit (1)(a) to the
Registration Statement on Form N-1A, filed October 13, 1996
("Form N-1A")
(2) Agreement and Declaration of Trust filed October 28, 1996 is
incorporated by reference to Exhibit (b)(1)(b) to
Pre-Effective Amendment No. 1 to the Registration Statement,
filed December 2, 1997 ("Pre-Effective Amendment No. 1").
(3) Amendment to Agreement and Declaration of Trust filed May
13, 1999 is incorporated by reference to Exhibit (a)(3) to
Post-Effective Amendment No. 6 to the Registration
Statement, filed June 1, 1999 ("Post-Effective Amendment No.
6").
(b) (1) Bylaws adopted November 25, 1996 is incorporated by
reference to Exhibit (b)(2) to Pre-Effective Amendment No.
1.
(2) Amended Bylaws dated November 14, 1997 is incorporated by
reference to Exhibit (b)(2) to Post-Effective Amendment No.
3 ("Post-Effective Amendment No. 3").
(c) Not Applicable
(d) (1) Investment Advisory Agreement between Registrant and
John McStay Investment Counsel dated November 25, 1996 with
respect to the BRAZOS Small Cap Growth Portfolio and BRAZOS
Real Estate Securities Portfolio is incorporated by
reference to Exhibit (b)(5) to Pre-Effective Amendment No.
1.
(2) Investment Advisory Agreement between Registrant and John
McStay Investment Counsel dated November 17, 1997 with
respect to the BRAZOS Micro Cap Growth Portfolio is
incorporated by reference to Exhibit (5)(b) to
Post-Effective Amendment No. 2 ("Post-Effective Amendment
No.
2").
(3) Investment Advisory Contract between Registrant and John
McStay Investment Counsel dated December 31, 1998 with
respect to the BRAZOS Growth Portfolio is incorporated by
reference to Exhibit (d)(3) to Post-Effective Amendment No.
4 ("Post-Effective Amendment No. 4").
(4) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Small Cap Growth Portfolio is incorporated by
reference to Exhibit (d)(4) to Post-Effective Amendment No.
6.
(5) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Real Estate Securities
<PAGE>
Portfolio is incorporated by reference to Exhibit (d)(5) to
Post-Effective Amendment No. 6.
(6) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Micro Cap Growth Portfolio is incorporated by
reference to Exhibit (d)(6) to Post-Effective Amendment No.
6.
(7) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Growth Portfolio is incorporated by reference to
Exhibit (d)(7) to Post-Effective Amendment No. 6.
(8) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Mid Cap Growth Portfolio.
(e) (1) Underwriting Contract and Selected Dealer Agreement
between Registrant and Rafferty Capital Markets dated
October 1, 1998 with respect to BRAZOS MicroCap Growth
Portfolio, BRAZOS Small Cap Growth Portfolio, BRAZOS Real
Estate Securities Portfolio and the Brazos Growth Portfolio
is incorporated by reference to Exhibit (e)(1) to
Post-Effective Amendment No. 4.
(2) Form of Distribution Agreement dated June 25, 1999 between
Registrant and SunAmerica Capital Services, Inc. for Class
A, B and II Shares is incorporated by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 6.
(3) Form of Selling Agreement between Registrant and SunAmerica
Capital Services, Inc. is incorporated by reference to
Exhibit (e)(2) to Post-Effective Amendment No. 6.
(4) Form of Distribution Agreement between the Registrant and
SunAmerica Capital Services, Inc. with respect to the Class
Y shares of the BRAZOS Mico Cap Growth, Small Cap Growth,
Mid Cap Growth, Growth and Real Estate Securities
Portfolios.
(f) Not Applicable
(g) (1) Custodian Agreement between Registrant and Firstar
Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (g) to Post-Effective
Amendment No. 4.
(2) Form of Custodian Contract between Registrant and State
Street Bank and Trust Company is incorporated by reference
to Exhibit (g)(2) to Post-Effective Amendment No. 6.
(h) (1) Administration Agreement between Registrant and Firstar
Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(1) to
Post-Effective Amendment No. 4.
C-2
<PAGE>
(2) Transfer Agency Agreement between Registrant and Firstar
Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(2) to
Post-Effective Amendment No. 4.
(3) Fund Accounting Services Agreement between Registrant and
Firstar Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(3) to
Post-Effective Amendment No. 4.
(4) Fulfillment Servicing Agreement between Registrant and
Firstar Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(4) to
Post-Effective Amendment No. 4.
(5) Form of Transfer Agency Agreement between Registrant and
State Street Bank and Trust Company is incorporated by
reference Exhibit (h)(5) to Post-Effective Amendment No. 6.
(6) Form of Administration Agreement between Registrant and
SunAmerica Asset Management Corporation is incorporated by
reference to Exhibit (h)(6) to Post-Effective Amendment No.
6.
(7) Form of Service Agreement between Registrant and SunAmerica
Fund Services, Inc. is incorporated by reference to Exhibit
(h)(7) to Post-Effective Amendment No. 6.
(i) Opinion of Drinker Biddle & Reath LLP is incorporated by reference
to Exhibit (i) to Post-Effective Amendment No. 6.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of PricewaterhouseCoopers LLP.
(k) Not Applicable
(l) Subscription Agreement between Registrant and John McStay
Investment Counsel dated December 11, 1999 is incorporated by
reference to Exhibit (b)(13) to Pre-Effective Amendment No. 2
("Pre-Effective Amendment No. 2").
(m) (1) Form of Distribution Plan for Class A Shares is
incorporated by reference to Exhibit (m)(1) to
Post-Effective Amendment No. 6.
(2) Form of Distribution Plan for Class B Shares is incorporated
by reference to Exhibit (m)(2) to Post-Effective Amendment
No. 6.
(3) Form of Distribution Plan for Class II Shares is
incorporated by reference to Exhibit (m)(3) to
Post-Effective Amendment No. 6.
(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 is incorporated by reference to
Exhibit (n) to Post-Effective Amendment No. 4.
(o) (1) Form of Plan Pursuant to Rule 18f-3 for Operation of
Multi-Series System is incorporated by reference to Exhibit
(o) to Post-Effective Amendment No. 6.
Item 24. Persons Controlled by or Under Common Control with Registrant
C-3
<PAGE>
Registrant is not controlled by or under common control with any
person.
Item 25. Indemnification
Reference is made to Article VII of Registrant's Agreement and
Declaration of Trust, which is incorporated herein by reference.
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, office 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.
Item 26. Business and Other Connections of Investment Adviser
Reference is made to the caption "Information about the Adviser"
in the Prospectuses constituting Part A of this Registration
Statement and "Investment Adviser and Other Services" in Part B of
this Registration Statement. The information required by this Item
26 with respect to each director, officer, or partner of the
investment adviser of the Registrant is incorporated by reference
to the Form ADV filed by the investment adviser listed below with
the Securities and Exchange Commission pursuant to the Investment
Advisers Act of 1940, as amended, on the date and under the File
number indicated:
John McStay Investment Counsel 3-31-96 SEC File No. 801-20244
Item 27. Principal Underwriters
(a) Investment Companies for which SunAmerica Capital Services,
Inc. also acts as principal underwriter:
SunAmerica Income Funds
SunAmerica Equity Funds
SunAmerica Money Market Funds
SunAmerica Style Select Series, Inc.
(b) Reference is made to the caption "Distributor" in the
Prospectuses constituting Part A of this Registration
Statement. The information required by this Item 27 with
respect to each director of the underwriter is incorporated by
reference to the Form BD filed by the Underwriter with the
Commission pursuant to the Securities Exchange Act of 1934, as
amended under the File Number indicated:
C-4
<PAGE>
SunAmerica Capital Services, Inc. NASD File No. 13158
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, Dallas, TX 75225; the Registrant's Adviser, John McStay
Investment Counsel, 5949 Sherry Lane, Dallas, TX 75225; the
Registrant's Transfer Agent and Custodian Bank, State Street Bank
and Trust Company, 1776 Heritage Drive, North Quincy, MA 02171;
and the Registrant's Administrator, SunAmerica Asset Management
Corp., 733 Third Avenue, 3rd Floor, New York, NY 10017-3204.
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-5
<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. 7 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 15th day of October, 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. 7 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 October 15, 1999
/s/ DAN L. HOCKENBROUGH *
- ------------------------
Dan L. Hockenbrough Trustee, Chief Executive October 15, 1999
And Financial Officer
/s/ JOHN H. MASSEY *
- ------------------------
John H. Massey Trustee October 15, 1999
/s/ DAVID M. REICHERT *
- ------------------------
David M. Reichert Trustee October 15, 1999
* Pursuant to authority granted in a Power of Attorney filed with Post-Effective
Amendment No. 7
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/ George Gau
---------------
Name: George Gau
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/ John Massey
-------------
Name: John Massey
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/ David Reichert
------------------
Name: David Reichert
Title: Trustee
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. ITEM
- ----------- ----
(d) (8) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Mid Cap Growth Portfolio.
(e) (4) Form of Distribution Agreement between the Registrant and SunAmerica
Capital Services, Inc. with respect to the Class Y Shares of the
BRAZOS Small Cap Growth, BRAZOS Micro Cap Growth, BRAZOS Real Estate
Securities, BRAZOS Growth and BRAZOS Mid Cap Growth Portfolio.
(i) (1) Opinion and Consent of Counsel
(j) (1) Consent of Independent Accounts
Exhibit (d)(8)
INVESTMENT ADVISORY AGREEMENT
BRAZOS MUTUAL FUNDS
BRAZOS MID CAP GROWTH PORTFOLIO
AGREEMENT made this __ day of October, 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 with respect to the Brazos Mid Cap Growth Portfolio (the
"Portfolio") of 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 the 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 difficulty 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 the Adviser's overall responsibility with
respect to the 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
-2-
<PAGE>
for the 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 rate to the Portfolio's average daily net assets for
the month:
BRAZOS Mid Cap 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 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.
-3-
<PAGE>
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, as amended
("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 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 Liability Company and Limited Liability Company 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 in full force and effect for two years from
the date hereof, and 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
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<PAGE>
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 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 obtained in conformity with the
requirements of the 1940 Act.
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.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of this __ day of October, 1999.
JOHN McSTAY INVESTMENT COUNSEL, L.L.C. BRAZOS MUTUAL FUNDS
By___________________________ By___________________________
John D. McStay, President Dan L. Hockenbrough, President
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Exhibit (e)(4)
DISTRIBUTION AGREEMENT
between
SUNAMERICA CAPITAL SERVICES, INC.
and
BRAZOS MUTUAL FUNDS
THIS AGREEMENT is made as of October __, 1999, between Brazos Mutual
Funds (the "Trust"), a Delaware business trust, and SunAmerica Capital Services,
Inc. ("SACS"), a Delaware corporation.
WHEREAS the Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company,
and has registered one or more distinct series of shares of beneficial interest
for sale to the public under the Securities Act of 1933, as amended (the "1933
Act"), and has qualified its shares for sale to the public under various state
securities laws; and
WHEREAS the Trust desires to retain SACS as principal underwriter in
connection with the offering and sale of the Class Y Shares (the "Shares") of
each series listed on Schedule A (as amended from time to time) to this
Agreement; and
WHEREAS this Agreement has been approved by a vote of the Trust's Board
of Trustees (the "Board") and its disinterested trustees in conformity with
Section 15(c) under the 1940 Act; and
WHEREAS SACS is willing to act as principal underwriter for the
Trust on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints SACS as its agent to be the
principal underwriter so as to hold itself out as available to receive and
accept orders for the purchase and redemption of the Shares on behalf of the
Trust, subject to the terms and for the period set forth in this Agreement. SACS
hereby accepts such appointment and agrees to act hereunder. The Trust
understands that any solicitation activities conducted on behalf of the Trust
will be conducted primarily, if not exclusively, by employees of the Trust's
sponsor.
2. SERVICES AND DUTIES OF SACS.
(a) SACS agrees to sell the Shares on a best efforts basis from time
to time during the term of this Agreement as agent for the Trust and upon the
terms described in the Registration Statement. As used in this Agreement, the
term "Registration Statement" shall mean the currently effective registration
statement of the Trust, and any supplements thereto, under the 1933 Act and the
1940 Act.
<PAGE>
(b) SACS will hold itself available to receive purchase and
redemption orders satisfactory to SACS for the Shares and will accept such
orders on behalf of the Trust. Such purchase orders shall be deemed effective at
the time and in the manner set forth in the Registration Statement.
(c) SACS, with the operational assistance of the Trust's transfer
agent, shall make the Shares available through the National Securities Clearing
Corporation's Fund/Serv System.
(d) SACS shall provide to investors and potential investors only
such information regarding the Trust as the Trust shall provide or approve. SACS
shall assist in the production of advertising and sales literature; review and
file all proposed advertisements and sales literature with appropriate
regulators; and consult with the Trust regarding any comments provided by
regulators with respect to such materials.
(e) The offering price of the Shares shall be the price determined
in accordance with, and in the manner set forth in, the most current Prospectus.
The Trust shall make available to SACS a statement of each computation of net
asset value and the details of entering into such computation.
(f) SACS at its sole discretion may repurchase Shares offered for
sale by the shareholders. Repurchase of Shares by SACS shall be at the price
determined in accordance with, and in the manner set forth in, the most current
Prospectus. At the end of each business day, SACS shall notify, by any
appropriate means, the Trust and its transfer agent of the orders for repurchase
of Shares received by SACS since the last such report, the amount to be paid for
such Shares, and the identity of the shareholders offering Shares for
repurchase. The Trust reserves the right to suspend such repurchase right upon
written notice to SACS. SACS further agrees to act as agent for the Trust to
receive and transmit promptly to the Trust's transfer agent shareholder requests
for redemption of Shares.
(g) SACS shall not be obligated to sell any certain number of
Shares.
(h) SACS, with the assistance of the Trust sponsor, shall prepare
reports for the Board regarding its activities under this Agreement as from time
to time shall be reasonably requested by the Board.
(i) SACS may enter into selling agreements with selected dealers and
others for the sale of Shares, and will act only on its own behalf as principal
in entering into such selling agreements.
(j) The rights granted to SACS shall be non-exclusive in that the
Trust reserves the right to sell its Shares to investors on applications
received and accepted by the Trust. Further, the Trust reserves the right to
issue Shares in connection with (i) the merger or consolidation, or acquisition
by the Trust through purchase or otherwise, with any other investment company,
trust or personal holding company, and (ii) a pro rata distribution directly
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<PAGE>
to the holders of Shares in the nature of a stock dividend or split-up.
(k) If and whenever the determination of net asset value is
suspended and until such suspension is terminated, no further orders for Shares
shall be processed by SACS except such unconditional orders placed with SACS
before it had knowledge of the suspension. In addition, the Trust reserves the
right to suspend sales and SACS's authority to process orders for Shares on
behalf of the Trust if, in the judgement of the Trust, it is in the best
interests of the Trust to do so. Suspension will continue for such period as may
be determined by the Trust. In addition, SACS reserves the right to reject any
purchase order.
3. DUTIES OF THE TRUST.
(a) The Trust shall keep SACS fully informed of its affairs and
shall provide to SACS from time to time copies of all information, financial
statements, and other papers that SACS may reasonably request for use in
connection with the distribution of Shares, including, without limitation,
certified copies of any financial statements prepared for the Trust by its
independent public accountant and such reasonable number of copies of the most
current Prospectus, Statement of Additional Information ("SAI"), and annual and
interim reports as SACS may request, and the Trust shall fully cooperate in the
efforts of SACS to sell and arrange for the sale of Shares.
(b) The Trust shall maintain a currently effective Registration
Statement on Form N-1A with the Securities and Exchange Commission (the "SEC"),
maintain qualification with applicable states and file such reports and other
documents as may be required under applicable federal and state laws. The Trust
shall notify SACS in writing of the states in which the Shares may be sold and
shall notify SACS in writing of any changes to such information.
(c) The Trust shall not use any advertisements or other sales
materials that have not been (i) submitted to SACS for its review and approval,
and (ii) filed with the appropriate regulators.
(d) The Trust represents and warrants that its Registration
Statement and any advertisements and sales literature (excluding statements
relating to SACS and the services it provides that are based upon written
information furnished by SACS expressly for inclusion therein) of the Trust,
that have been approved by the Trust, shall not contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that all
statements or information furnished to SACS, pursuant to Section 3(a) hereof,
shall be true and correct in all material respects.
4. OTHER BROKER DEALERS. SACS in its discretion may enter into
agreements to sell Shares to such registered and qualified retail dealers, as
reasonably requested by the Trust. In making agreements with such dealers, SACS
shall act only as principal and not as agent for the Trust. The form of any such
dealer agreement shall be mutually agreed upon and approved by the Trust and
SACS.
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<PAGE>
5. WITHDRAWAL OF OFFERING. The Trust reserves the right at any time
to withdraw all offerings of any or all Shares by written notice to SACS at its
principal office. No Shares shall be offered by either SACS or the Trust under
any provisions of this Agreement and no orders for the purchase or sale of
Shares hereunder shall be accepted by the Trust if and so long as effectiveness
of the Registration Statement then in effect or any necessary amendments thereto
shall be suspended under any of the provisions of the 1933 Act, or if and so
long as a current prospectus as required by Section 5(b)(2) of the 1933 Act is
not on file with the SEC.
6. SERVICES NOT EXCLUSIVE. The services furnished by SACS hereunder are
not to be deemed exclusive and SACS shall be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby.
7. EXPENSES OF THE TRUST.
(a) The Trust shall pay all fees and expenses:
(i) in connection with the preparation, setting in type and
filing of any Registration Statement, Prospectus and SAI
under the 1933 Act, and any amendments thereto, for the
issue of its Shares;
(ii) in connection with the registration and qualification of
Shares for sale in the various states or other jurisdictions
in which the Board shall determine it advisable to qualify
such Shares for sale (including registering the Trust or
series as a broker or dealer or any officer of the Trust as
agent or salesperson in any state);
(iii) of preparing, setting in type, printing and mailing any
report or other communication to shareholders of the Trust
in their capacity as such; and
(iv) of preparing, setting in type, printing and mailing
Prospectuses, SAIs, and any supplements thereto, sent to
existing shareholders.
(b) SACS shall pay expenses of:
(i) printing and distributing Prospectuses, SAIs, and reports
prepared for its use in connection with the offering of the
Shares for sale to the public;
(ii) any other literature used in connection with such
offering; and
(iii) advertising in connection with such offering.
(c) In addition to the services described above, SACS will provide
services including, without limitation, assistance in the production of
marketing and advertising materials
-4-
<PAGE>
for the sale of the Shares and their review for compliance with applicable
regulatory requirements and making any required filings with regulatory
authorities; and entering into dealer agreements with broker-dealers to sell the
Shares.
8. COMPENSATION. In connection with the services to be provided by SACS
under this Agreement, SACS shall receive fees from the Trust's investment
adviser and reimbursement of expenses, including all expenses incurred pursuant
to Section 7(b) hereof. Notwithstanding anything to the contrary, amounts owed
by the Trust to SACS shall only be paid out of the assets and property of the
particular series involved.
9. SHARE CERTIFICATES. The Trust shall not issue certificates
representing Shares unless requested to do so by a shareholder. If such request
is transmitted through SACS, the Trust will cause certificates evidencing the
Shares owned to be issued in such names and denominations as SACS shall from
time to time direct.
10. STATUS OF SACS. SACS is an independent contractor and shall be
agent of the Trust only with respect to the sale and redemption of Shares.
11. INDEMNIFICATION.
(a) The Trust agrees to indemnify, defend, and hold SACS, its
officers and directors, and any person who controls SACS within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities, and expenses (including the cost of investigating
or defending such claims, demands, or liabilities and any reasonable counsel
fees incurred in connection therewith) that SACS, its officers, directors, or
any such controlling person may incur under the 1933 Act, or under common law or
otherwise, arising out of or based upon any (i) alleged untrue statement of a
material fact contained in the Registration Statement, Prospectus, SAI or sales
literature, (ii) alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (except for
information furnished by SACS as stated in Section 11(d) of this Agreement), or
(iii) failure by the Trust to comply with the terms of the Agreement; provided,
that in no event shall anything contained herein be so construed as to protect
SACS against any liability to the Trust or its shareholders to which SACS would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations under this Agreement.
(b) The Trust shall not be liable to SACS under this Agreement
with respect to any claim made against SACS or any person indemnified unless
SACS or other such person shall have notified the Trust in writing of the claim
within a reasonable time after the summons or other first written notification
giving information of the nature of the claim shall have been served upon SACS
or such other person (or after SACS or the person shall have received notice of
service on any designated agent). However, failure to notify the Trust of any
claim shall not relieve the Trust from any liability that it may have to SACS or
any person against whom such action is brought otherwise than on account of this
Agreement.
(c) The Trust shall be entitled to participate at its own
expense in the defense
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<PAGE>
or, if it so elects, to assume the defense of any suit brought to enforce any
claims subject to this Agreement. If the Trust elects to assume the defense of
any such claims, the defense shall be conducted by counsel chosen by the Trust
and satisfactory to indemnified defendants in the suit whose approval shall not
be unreasonably withheld. In the event that the Trust elects to assume the
defense of any suit and retain counsel, the indemnified defendants shall bear
the fees and expenses of any additional counsel retained by them. If the Trust
does not elect to assume the defense of a suit, it will reimburse the
indemnified defendants for the reasonable fees and expenses of any counsel
retained by the indemnified defendants. The Trust agrees to promptly notify SACS
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of its
Shares.
(d) SACS agrees to indemnify, defend, and hold the Trust, its
officers and trustees, and any person who controls the Trust within the meaning
of Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities, and expenses (including the cost of investigating
or defending against such claims, demands, or liabilities and any reasonable
counsel fees incurred in connection therewith) that the Trust, its trustees or
officers, or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, resulting from SACS's willful misfeasance, bad faith or
gross negligence in the performance of its obligations and duties under this
Agreement, or arising out of or based upon any alleged untrue statement of a
material fact contained in information furnished in writing by SACS to the Trust
for use in the Registration Statement, Prospectus, SAI, or sales literature
arising out of or based upon any alleged omission to state a material fact in
connection with such information required to be stated therein or necessary to
make such information not misleading.
(e) SACS shall be entitled to participate, at its own expense,
in the defense or, if it so elects, to assume the defense of any suit brought to
enforce the claim, but if SACS elects to assume the defense, the defense shall
be conducted by counsel chosen by SACS and satisfactory to the indemnified
defendants whose approval shall not be unreasonably withheld. In the event that
SACS elects to assume the defense of any suit and retain counsel, the defendants
in the suit shall bear the fees and expenses of any additional counsel retained
by them. If SACS does not elect to assume the defense of any suit, it will
reimburse the indemnified defendants in the suit for the reasonable fees and
expenses of any counsel retained by them. SACS agrees to notify the Trust
promptly of the commencement of any litigation or proceedings against it in
connection with the issue and sale of any of the Shares.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective on the date first
written above or such later date as indicated in Schedule A and, unless sooner
terminated as provided herein, will continue in effect for two years from the
above written date. Thereafter, if not terminated, this Agreement shall continue
in effect for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a vote of a majority of the Board
who are neither interested persons (as defined in the 1940 Act) of the Trust
(the "Independent trustees") or SACS, cast in person at a meeting called for the
purpose of voting on such approval, and (ii) by the Board or by vote of a
majority of the outstanding voting securities of the Trust.
-6-
<PAGE>
(b) Notwithstanding the foregoing, this Agreement may be
terminated in its entirety at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent trustees, or by vote
of a majority of the outstanding voting securities of the Trust on sixty days'
written notice to SACS or by SACS at any time, without the payment of any
penalty, on sixty days' written notice to the Trust. This Agreement will
automatically terminate in the event of its assignment (as defined in the 1940
Act).
13. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge, or termination is sought. This Agreement may be amended with the
approval of the Board or of a majority of the outstanding voting securities of
the Trust; provided, that in either case, such amendment also shall be approved
by a majority of the Independent trustees.
14. LIMITATION OF LIABILITY. SACS is hereby expressly put on notice of
the limitation of shareholder liability as set forth in the Trust Instrument of
the Trust and agrees that obligations assumed by the Trust pursuant to this
Agreement shall be limited in all cases to the Trust and its assets, and if the
liability relates to one or more series, the obligations hereunder shall be
limited to the respective assets of such series. SACS further agrees that it
shall not seek satisfaction of any obligation from the shareholders or any
individual shareholder of a series of the Trust, nor from the Trustees or any
individual Trustee of the Trust.
15. NOTICE. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient upon receipt in writing at the
other party's principal offices.
16. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision 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. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person," and "assignment" shall have the same meaning as such terms
have in the 1940 Act.
17. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of New York and the 1940 Act. To the extent that the
applicable laws of the State of New York conflict with the applicable provisions
of the 1940 Act, the latter shall control.
18. YEAR 2000 COMPLIANT. At the present time, SACS does not offer,
provide or propose to offer or provide any computer system product or service to
the Trust under the Agreement. Any such product or services are to be provided
to the Trust by the Trust's transfer agent/custodian or other third party
vendors to be selected by the Trust.
19. PROPRIETARY AND CONFIDENTIAL INFORMATION. SACS agrees on behalf of
itself and
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<PAGE>
its directors, officers, and employees to treat confidentially and as
proprietary information of the Trust all records and other information relative
to the Trust and prior, present, or potential shareholders of the Trust (and
clients of said shareholders), and not to use such records and information for
any purpose other than the performance of its responsibilities and duties
hereunder, 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 SACS 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.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
ATTEST: BRAZOS MUTUAL FUNDS
________________________ By: __________________________
ATTEST: SUNAMERICA CAPITAL SERVICES, INC.
________________________ By: __________________________
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<PAGE>
SCHEDULE A
to the
DISTRIBUTION AGREEMENT
BRAZOS MUTUAL FUNDS
and
SUNAMERICA CAPITAL SERVICES, INC.
Pursuant to Section 1 of the Distribution Agreement between Brazos
Mutual Funds (the "Trust") and SunAmerica Capital Services, Inc. ("SACS"), the
Trust hereby appoints SACS as its agent to be the principal underwriter of the
Trust with respect to its following series:
Brazos Small Cap Growth Portfolio
Brazos Micro Cap Growth Portfolio
Brazos Real Estate Securities Portfolio
Brazos Growth Portfolio
Brazos Mid Cap Growth Portfolio
Dated: October ___, 1999
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Exhibit (i)
DRINKER BIDDLE & REATH LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Direct Dial (215) 988-2719
October 15, 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. 7 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.
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<PAGE>
We consent to the filing of this opinion with Post-Effective Amendment
No. 7 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
EXHIBIT (j)(1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 7 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 30, 1998, relating to the financial
statements and financial highlights appearing in the November 30, 1998 Annual
Report to Shareholders of the Brazos Mutual Funds which is also incorporated by
reference into the Registration Statement. We also consent to the reference to
us under the heading "Financial Highlights" in the Prospectus and to the
reference to us under the heading "Financial Statements" in the Statement of
Additional Information.
/s/ PriceWaterhouseCoopers LLP
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1177 Avenue of the Americas
New York, NY
October 11, 1999
