THE AVATAR ADVANTAGE
BALANCED FUND
Annual Report
For the year ended
December 31, 1999
<PAGE>
February 2000
Dear Shareholder,
We are pleased to report on the progress of THE AVATAR ADVANTAGE BALANCED FUND
for the year ended December 31, 1999. For the year, Avatar's asset allocation
philosophy - participating in market gains during market upswings while
protecting those gains against loss during market downturns - helped the Fund
realize a total return of 11.82% (not including the sales charge). The fully
invested S&P 500 Index returned 21.03% for the year while the Lehman Brothers
Govt./Corp. Bond Index lost 2.15% for the same period. For the second half of
the year, Avatar maintained a significant equity position. Our exposure ranged
between 45% and 65% invested in equities, 30% to 40% in bonds and the remainder
in cash.
1999 -- THE SECOND SIX MONTHS IN REVIEW
For a year that began with a presidential impeachment trial, a war in Kosovo and
political characters of all stripes jockeying to succeed Bill Clinton, the last
half of the year was positively dull. The only questions that seemed to occupy
the public were the extent of Y2K problems and which city would have the best
millenium celebration. Even the question of Fed Chairman Alan Greenspan's
reappointment was settled before year-end.
The last half of the year saw the Fund begin with a cautious exposure to
equities. This reflected the firm's moderately negative research, caused
primarily by the rising interest rate environment witnessed in late summer. As
the quarter progressed, however, rates eased somewhat and market momentum
improved. Due to these and other positive factors shown by our models, we
increased the Fund's allocation in equities in steps to a 65% position by
mid-November. As a result, the Fund caught the strong year-end rally in stocks.
The technology sector component of the S&P 500 increased an amazing 35% in the
last quarter of 1999 alone. We took advantage of this strength by over-weighting
that sector in the Fund. Exposure within technology was balanced across many of
the faster growing areas including fiber optics, data storage, semiconductors
and telecommunication equipment. Basic industries also performed well, helped by
higher commodity prices and global GDP growth. The healthcare, consumer staples
and utilities sectors were de-emphasized during this period, as was the energy
sector. It was a completely different story on the bond side. While the stock
market enjoyed its run-up, bond rates began to climb, too, reflecting concern
that continued rapid growth in the economy would lead to a boost in interest
rates by the Federal Reserve. Overall, 1999 turned out to be the worst year for
bonds since 1994.
2
<PAGE>
2000 MARKET OUTLOOK
Corporate earnings for the last quarter appear to be poised to surpass analysts'
expectations and will come in at the low double-digit range. The strong growth
in corporate profits and the generally favorable positive flows of funds into
the equity market have added impetus to a favorably developing economic
backdrop. In a resounding manner, consumers have given a collective "thumbs up"
to the U.S. economy. Holiday spending was well ahead of last year and consumer
confidence surveys continue to reach upward. We expect, as a consequence, that
prospective GDP growth will extend the current business cycle into the longest
expansion in economic history. More importantly, this is all happening with only
a modest up-tick in inflation and new signs of a slowdown in the housing sector.
While long-term interest rates have marched higher with all of this good news,
surprisingly it has not adversely impacted the stock market. If inflation fails
to accelerate sharply in the months ahead, a good case can be made that
potential negative scenarios have already been priced into the level of both
long and short term interest rates, helping to restrain the Federal Reserve from
instituting a harsh new round of monetary tightening.
We continue to be concerned about the narrow stock market leadership. Broadening
of the market would be a welcome and healthy development. We begin the new
millenium in a neutral weight in our equity exposure. We expect continued
volatility as the country's political forces share center stage with its
economic forces to shape the coming year. Growth expectations for the remainder
of the year have been revised upward. On the bond side, we believe that the
surplus which will result in a reduction in the amount of sales by the Treasury
will increase bond prices while lowering yields. This improvement, we believe,
will have a positive impact on both the stock and bond markets.
Our models show that the U.S. economy should continue to percolate at a good,
sustainable level that will not set off inflation or recession fears. While the
technology sector has emerged as the current market leader, we continue to hope
for a broadening of the equity markets and a sense of normalcy in the bond
markets. Our goal at Avatar is to evaluate current investment risk and alter the
portfolio mix to reflect the current environment. We achieved this in the past
year under very difficult circumstances.
/s/ Charles White
Charles White
Portfolio Manager
3
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
Comparison of the change in value of a $10,000 investment in
The Avatar Advantage Balanced Fund versus the Blended 60%
S&P 500 Stock Index / 40% Lehman Gov't Corporate Index.
Blended 60%
The Avatar S&P 500 Stock Index/
Advantage 40% Lehman Gov't
Quarter Balanced Fund Corporate Index
------- ------------- ---------------
13-Jan-98 $10,000 $10,000
31-Mar-98 $11,080 $10,871
30-Jun-98 $11,300 $11,176
30-Sep-98 $11,050 $10,642
31-Dec-98 $12,311 $12,010
31-Mar-99 $12,383 $10,249
30-Jun-99 $12,661 $10,636
30-Sep-99 $12,259 $10,257
31-Dec-99 $13,146 $11,140
Average Annual Total Return(1)
1 year......................... 6.79%
Since inception (1/13/98)...... 14.94%
- ----------
(1) Average Annual Total Return represents the average change in account value
over the periods indicated and includes sales charges.
The Blended Index consists of the S&P 500 Stock Index (60%) and the Lehman
Corporate Bond Index (40%). The S&P 500 Stock Index is a broad market
capitalization-weighted index of 500 stocks designed to represent the broad
domestic economy. The Lehman Corporate Bond Index includes all publicly issued,
fixed-rate, non-convertible investment grade domestic corporate debt issues and
also includes Yankee Bonds.
The Blended Index initial value is as of December 31, 1997.
The percentage weights which have been applied to the indices are intended to
replicate the long-term asset allocation of the Fund.
Performance figures of the Fund and indexes referenced represent past
performance and are not indicative of future performance of the Fund or the
indexes. Share value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than the original investment. Indexes do not incur
expenses and are not available for investment.
The Fund is distributed by First Fund Distributors, Inc., Phoenix, AZ. Member
NASD.
4
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 61.46% Market Value
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE EQUIPMENT: 0.75%
200 United Technologies Corporation..................... $ 13,000
-----------
AUTOMOBILES: 0.62%
200 Ford Motor Company.................................. 10,688
-----------
BANKS: 1.74%
400 Citigroup Inc....................................... 22,225
100 The Chase Manhattan Bank............................ 7,769
-----------
29,994
-----------
BANKS - REGIONAL: 1.07%
200 Northern Trust Corporation.......................... 10,600
200 UnionBanCal Corporation............................. 7,888
-----------
18,488
-----------
BEVERAGE - ALCOHOL: 0.82%
200 Anheuser-Busch Companies, Inc....................... 14,175
-----------
BIOTECHNOLOGY: 0.98%
200 Biogen Inc. *....................................... 16,900
-----------
BROADCASTING - TELEVISION, RADIO: 0.37%
100 CBS Corporation *................................... 6,394
-----------
BUILDING MATERIALS CHAINS: 1.79%
450 The Home Depot, Inc................................. 30,853
-----------
CABLE TELEVISION: 0.44%
100 Cablevision Systems Corporation *................... 7,550
-----------
CHEMICALS: 0.76%
200 E. I. du Pont de Nemours and Company................ 13,175
-----------
COMPUTER - SOFTWARE: 3.08%
300 Microsoft Corporation *............................. 35,025
400 Xilinx, Inc. *..................................... 18,188
-----------
53,213
-----------
See Notes to Financial Statements.
5
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
COMPUTER SERVICES: 2.77%
200 America Online, Inc. *.............................. $ 15,087
300 EMC Corporation *................................... 32,775
-----------
47,862
-----------
COMPUTERS - HARDWARE: 2.41%
300 Dell Computer Corporation* ......................... 15,300
100 International Business Machines
Corporation....................................... 10,800
200 Sun Microsystems, Inc.* ............................ 15,488
-----------
41,588
-----------
COMPUTERS - PERIPHERALS: 0.52%
100 Lexmark International Group, Inc.,
Class A* ......................................... 9,050
-----------
COMPUTERS - SOFTWARE AND SERVICES: 0.49%
100 Electronic Arts Inc. *.............................. 8,400
-----------
COSMETICS AND TOILETRIES: 0.75%
200 Colgate-Palmolive Company........................... 13,000
-----------
DIVERSIFIED MANUFACTURING: 1.79%
200 General Electric Company............................ 30,950
-----------
ELECTRIC COMPANIES: 0.46%
300 Edison International................................ 7,856
-----------
ELECTRICAL EQUIPMENT: 1.00%
300 Honeywell International, Inc.* ..................... 17,306
-----------
ELECTRONIC COMPONENTS - SEMICONDUCTORS: 2.42%
200 Applied Materials, Inc.* ........................... 25,337
200 Intel Corporation .................................. 16,462
-----------
41,799
-----------
ELECTRONICS: 3.74%
400 JDS Uniphase Corporation* .......................... 64,525
-----------
See Notes to Financial Statements.
6
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
ENTERTAINMENT: 0.84%
200 Time Warner, Inc.................................... $ 14,488
-----------
FINANCE - MORTGAGE LOANS: 1.09%
300 Fannie Mae.......................................... 18,731
-----------
FINANCIAL - DIVERSIFIED: 0.83%
100 Morgan Stanley Dean Witter & Co..................... 14,275
-----------
FINANCIAL SERVICES: 0.96%
100 American Express Company............................ 16,625
-----------
FOODS: 0.83%
400 General Mills, Inc. ................................ 14,300
-----------
HEALTHCARE - MEDICAL PRODUCTS: 0.42%
200 Medtronic, Inc...................................... 7,287
-----------
INSURANCE: 1.34%
213 American International Group, Inc................... 23,031
-----------
INSURANCE BROKERS: 0.56%
100 Marsh & McLennan Companies, Inc..................... 9,569
-----------
MANUFACTURING - DIVERSIFIED: 0.75%
100 Corning Incorporated................................ 12,894
-----------
MEDICAL - DRUGS: 2.54%
300 Bristol-Myers Squibb Company........................ 19,256
300 Warner-Lambert Company.............................. 24,581
-----------
43,837
-----------
METALS - ALUMINUM: 0.96%
200 Alcoa Inc........................................... 16,600
-----------
NETWORKING PRODUCTS: 1.86%
300 Cisco Systems, Inc.* ............................... 32,137
-----------
See Notes to Financial Statements.
7
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
OIL - INTEGRATED: 0.65%
200 Schlumberger Limited................................ $ 11,250
-----------
OIL & GAS - DRILLING & EQUIPMENT: 0.08%
39 Transocean Sedco Forex, Inc.* ...................... 1,307
-----------
PAPER & FOREST PRODUCTS: 1.30%
300 Georgia-Pacific Corporation......................... 15,225
100 Weyerhaeuser Company................................ 7,181
-----------
22,406
-----------
PETROLEUM-PRODUCING: 0.64%
300 Apache Corporation.................................. 11,081
-----------
PETROLEUM PRODUCTS: 2.13%
400 Enron Corp.......................................... 17,750
100 Exxon Mobil Corporation ............................ 8,056
200 Texaco Inc.......................................... 10,863
-----------
36,669
-----------
RETAIL - COMPUTERS & ELECTRONICS: 0.57%
200 Tandy Corporation................................... 9,837
-----------
RETAIL - DEPARTMENT STORES: 0.43%
100 Dayton Hudson Corporation........................... 7,344
-----------
RETAIL - GENERAL MERCHANDISE: 0.53%
100 Costco Companies, Inc.* ............................ 9,125
-----------
RETAIL - SPECIALTY: 0.17%
100 Linens `n Things, Inc.* ............................ 2,962
-----------
SERVICES - ADVERTISING / MARKETING: 1.16%
200 Omnicom Group Inc. ................................. 20,000
-----------
See Notes to Financial Statements.
8
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT: 8.00%
365 Lucent Technologies Inc............................. $ 27,307
100 Nokia Corporation, ADR, Class A..................... 19,000
100 Nortel Networks Corporation......................... 10,100
400 QUALCOMM Incorporated* ............................. 70,500
200 Scientific-Atlanta, Inc............................. 11,125
-----------
138,032
-----------
TELECOMMUNICATIONS SERVICES: 1.10%
200 GTE Corporation..................................... 14,113
100 Metromedia Fiber Network, Inc.* .................... 4,794
-----------
18,907
-----------
TELEPHONE SERVICES: 2.01%
400 BellSouth Corporation............................... 18,725
300 MCI WorldCom Incorporated* ......................... 15,919
-----------
34,644
-----------
TRANSPORTATION - RAIL: 0.51%
200 Union Pacific Corporation* ......................... 8,725
-----------
UTILITIES: 0.43%
100 The AES Corporation* ............................... 7,475
-----------
Total Common Stocks
(cost $741,506)................................... 1,060,304
-----------
Principal Amount FEDERAL AGENCY OBLIGATIONS: 18.91%
- --------------------------------------------------------------------------------
$225,000 Federal Home Loan Mortgage Corporation,
5.75%, 7/15/2003.................................. 217,865
50,000 Freddie Mac Discount Note, 5.35%,
1/13/2000......................................... 49,911
60,000 Fannie Mae, 6.09%, 8/13/2003 ....................... 58,448
-----------
Total Federal Agency Obligations
(cost $335,491)................................... 326,224
-----------
Principal Amount U.S. GOVERNMENT OBLIGATIONS: 17.80%
- --------------------------------------------------------------------------------
230,000 U.S. Treasury Bond, 12.00%, 8/15/2013
(cost $335,032)................................... 307,050
-----------
See Notes to Financial Statements.
9
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED
- --------------------------------------------------------------------------------
Principal Amount SHORT-TERM INVESTMENTS: 1.86% Market Value
- --------------------------------------------------------------------------------
$32,077 Firstar Stellar Treasury Fund
(cost $32,077)................................. $ 32,077
-----------
Total Investments in Securities
(cost $1,444,106+): 100.03%.................... 1,725,655
Liabilities in excess of
Other Assets: (0.03)%.......................... (514)
-----------
TOTAL NET ASSETS: 100.00% ....................... $ 1,725,141
===========
* Non-income producing securities.
+ At December 31, 1999, the cost of securities for Federal tax
purposes is $1,444,620. Gross unrealized appreciation and depreciation
of securities is as follows:
Gross unrealized appreciation.................... $ 339,112
Gross unrealized depreciation.................... (58,077)
-----------
Net unrealized appreciation...................... $ 281,035
===========
See Notes to Financial Statements.
10
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value
(identified cost $1,444,106) ............................. $ 1,725,655
Receivables:
Due from Advisor (Note 3) ............................... 5,717
Dividends and interest .................................. 18,397
Deferred organization costs ................................ 7,582
Prepaid expenses ........................................... 596
-----------
Total assets ......................................... 1,757,947
-----------
LIABILITIES
Payables:
Distribution fees (Note 4) .............................. 347
Accrued expenses ........................................... 32,459
-----------
Total liabilities .................................... 32,806
-----------
NET ASSETS .................................................... $ 1,725,141
===========
NET ASSET VALUE AND REDEMPTION* PRICE PER SHARE
($1,725,141 / 139,046 shares outstanding; unlimited
number of shares (par value $.01) authorized) .............. $ 12.41
===========
OFFERING PRICE PER SHARE ($12.41/.9550) ....................... $ 12.99
===========
COMPONENTS OF NET ASSETS
Paid-in capital ............................................ $ 1,449,194
Distributions in excess of net realized gains .............. (5,602)
Net unrealized appreciation on investments ................. 281,549
-----------
Net assets .............................................. $ 1,725,141
===========
* Redemption of shares held less than 1 year are subject to a 1% redemption fee
payable to the Fund.
See Notes to Financial Statements.
11
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends ................................................ $ 8,578
Interest ................................................. 40,515
---------
Total income .......................................... 49,093
---------
Expenses
Administration fees (Note 3) ............................. 30,000
Audit fees ............................................... 19,600
Fund Accounting fees ..................................... 16,002
Transfer agent fees ...................................... 13,001
Advisory fees (Note 3) ................................... 11,764
Legal fees ............................................... 6,600
Custody fees ............................................. 5,531
Distribution fees (Note 4) ............................... 3,921
Trustees' fees ........................................... 2,835
Amortization of deferred organization costs .............. 2,500
Insurance ................................................ 941
Registration fees ........................................ 876
Miscellaneous ............................................ 863
---------
Total expenses ........................................ 114,434
Less: Advisory fee waiver and
absorption (Note 3) ................................. (92,474)
---------
Net expenses .......................................... 21,960
---------
NET INVESTMENT INCOME .............................. 27,133
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from security transactions ................ 81,571
Net change in unrealized appreciation on investments ........ 73,561
---------
Net realized and unrealized gain on investments .......... 155,132
---------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS .................................. $ 182,265
=========
See Notes to Financial Statements.
12
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Year Ended January 13, 1998*
December 31, through
1999 December 31, 1998
------------ -----------------
NET INCREASE/(DECREASE) IN ASSETS
FROM OPERATIONS
Net investment income ................... $ 27,133 $ 23,957
Net realized gain from security
transactions ........................... 81,571 23,650
Net change in unrealized
appreciation on investments ............ 73,561 207,988
----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ........................ 182,265 255,595
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ................... (27,583) (23,503)
Net realized gain on security
transactions ........................... (86,640) (19,605)
In excess of net realized gains ......... (5,602) --
----------- -----------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS ..... (119,825) (43,108)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived
from net change in outstanding
shares (a) ............................. 119,793 1,330,421
----------- -----------
TOTAL INCREASE IN NET ASSETS ............ 182,233 1,542,908
----------- -----------
NET ASSETS
Beginning of period ........................ 1,542,908 --
----------- -----------
END OF PERIOD (including undistributed
net investment income of $0 and $454,
respectively) ............................. $ 1,725,141 $ 1,542,908
=========== ===========
(a) A summary of capital shares transactions is as follows:
Year January 13, 1998*
Ended through
December 31, 1999 December 31, 1998
---------------------- -----------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold ................. 167 $ 2,000 125,350 $1,287,313
Shares issued in reinvestment
of distributions .......... 9,911 119,825 3,785 43,108
Shares redeemed ............. (167) (2,032) -- --
------ --------- ------- ----------
Net increase ................ 9,911 $ 119,793 129,135 $1,330,421
====== ========= ======= ==========
* Commencement of operations.
See Notes to Financial Statements.
13
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
FINANCIAL HIGHLIGHTS - FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
Year Ended January 13, 1998*
December 31, through
1999 December 31, 1998
------------ -----------------
Net asset value, beginning of period.......... $11.95 $10.00
------ ------
Income from investment operations:
Net investment income...................... 0.21 0.19
Net realized and unrealized gain on
investments............................. 1.17 2.11
------ ------
Total from investment operations.............. 1.38 2.30
------ ------
Less distributions:
From net investment income................. (0.21) (0.19)
From net realized gains.................... (0.67) (0.16)
In excess of net realized gains............ (0.04) -
------ ------
Total distributions........................... (0.92) (0.35)
------ ------
Net asset value, end of period................ $12.41 $11.95
====== ======
Total return.................................. 11.82% 23.11%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands)......... $1,725 $1,543
Ratio of expenses to average net assets:
Before expense reimbursement............... 7.28% 8.59%+
After expense reimbursement................ 1.40% 1.40%+
Ratio of net investment income to average
net assets:
After expense reimbursement................ 1.73% 1.89%+
Portfolio turnover rate....................... 101.53% 95.00%
* Commencement of operations.
** Not Annualized.
+ Annualized.
See Notes to Financial Statements.
14
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The Avatar Advantage Balanced Fund (the "Fund") is a series of shares of
beneficial interest of Advisors Series Trust (the "Trust"), which is registered
under the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund began operations on January 13, 1998. The Fund's
objective is to seek long-term capital appreciation and to preserve profits
during market downturns by investing in a mix of stocks, bonds and money market
securities.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund. These policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION: The Fund's investments are carried at fair value.
Securities that are primarily traded on a national securities exchange
shall be valued at the last sale price on the exchange on which they
are primarily traded on the day of valuation or, if there has been no
sale on such day, at the mean between the bid and asked prices.
Securities primarily traded in the NASDAQ National Market System for
which market quotations are readily available shall be valued at the
last sale price on the day of valuation, or if there has been no sale
on such day, at the mean between the bid and asked prices.
Over-the-counter ("OTC") securities which are not traded in the NASDAQ
National Market System shall be valued at the most recent trade price.
Securities for which market quotations are not readily available, if
any, are valued following procedures approved by the Board of
Trustees. Short-term investments are valued at amortized cost, which
approximates market value.
B. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required.
C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security
transactions are accounted for on the trade date. Dividend income and
distributions to shareholders, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
15
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Distributions which exceed net realized gains for financial reporting
purposes but not for tax purposes are reported as distributions in
excess of net realized gains and are primarily due to differing
treatments for wash sales and losses realized subsequent to October 31
on sale of securities. Realized gains and losses on securities sold
are determined on the basis of identified cost. Discounts and premiums
on securities purchased are amortized over the life of the respective
securities.
D. DEFERRED ORGANIZATION COSTS: The Fund has incurred expenses of $12,500
in connection with its organization. These costs have been deferred
and are being amortized on a straight-line basis over a period of
sixty months from the date the Fund commenced investment operations.
E. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net
assets during the reporting period. Actual results could differ from
those estimates.
NOTE 3 - INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
For the period ended December 31, 1999, Avatar Investors Associates Corp.
(the "Advisor") provided the Fund with investment management services under an
Investment Advisory Agreement. The Advisor furnished all investment advice,
office space, facilities, and provides most of the personnel needed by the Fund.
As compensation for its services, the Advisor is entitled to a monthly fee at
the annual rate of 0.75% based upon the average daily net assets of the Fund.
For the year ended December 31, 1999, the Fund incurred $11,764 in advisory
fees.
The Fund is responsible for its own operating expenses. The Advisor has
agreed to reduce fees payable to it by the Fund and to pay Fund operating
expenses to the extent necessary to limit the Fund's aggregate annual operating
expenses to 1.40% of average net assets (the "expense cap"). Any such reductions
made by the Advisor in its fees or payment of expenses which are the Fund's
obligation are subject to reimbursement by the Fund to the Advisor, if so
requested by the Advisor, in subsequent fiscal years if the aggregate amount
actually paid by the Fund toward the operating expenses for such fiscal year
(taking into account the reimbursement) does not exceed the applicable
16
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
limitation on Fund expenses. The Advisor is permitted to be reimbursed only for
fee reductions and expense payments made in the previous three fiscal years, but
is permitted to look back five years and four years, respectively, during the
initial six years and seventh year of the Fund's operations. Any such
reimbursement is also contingent upon Board of Trustees review and approval at
the time the reimbursement is made. Such reimbursement may not be paid prior to
the Fund's payment of current ordinary operating expenses. For the year ended
December 31, 1999, the Advisor reduced its fees and absorbed Fund expenses in
the amount of $92,474 which includes fees due to the Advisor as Distribution
Coordinator; no amounts were reimbursed to the Advisor. Cumulative expenses
subject to recapture pursuant to the aforementioned conditions amounted to
$183,774 for the Fund at December 31, 1999.
Investment Company Administration, LLC (the "Administrator") acts as the
Fund's Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Fund; prepares reports and materials to be supplied to the Trustees;
monitors the activities of the Fund's custodian, transfer agent and accountants;
coordinates the preparation and payment of the Fund's expenses and reviews the
Fund's expense accruals. For its services, the Administrator receives a monthly
fee at the following annual rate:
Fund asset level Fee rate
- ---------------- --------
Less than $15 million $30,000
$15 million to less than $50 million 0.20% of average daily net assets
$50 million to less than $100 million 0.15% of average daily net assets
$100 million to less than $150 million 0.10% of average daily net assets
More than $150 million 0.05% of average daily net assets
First Fund Distributors, Inc. (the "Distributor") acts as the Fund's
principal underwriter in a continuous public offering of the Fund's shares. The
Distributor is an affiliate of the Administrator.
Certain officers of the Fund are also officers and/or directors of the
Administrator and the Distributor.
NOTE 4 - DISTRIBUTION COSTS
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 (the
"Plan"). The Plan permits the Fund to pay for distribution and related expenses
at an annual rate of up to 0.25% of the Fund's average daily net assets
annually. The expenses covered by the Plan may include the cost of preparing and
distributing prospectuses and other sales material, advertising and public
relations expenses, payments to financial intermediaries and compensation of
17
<PAGE>
THE AVATAR ADVANTAGE BALANCED FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
personnel involved in selling shares of the Fund. Payments made pursuant to the
Plan will represent compensation for distribution and service activities, not
reimbursements for specific expenses incurred. Pursuant to a distribution
coordination agreement adopted under the Plan, distribution fees are paid to the
Advisor as "Distribution Coordinator". During the year ended December 31, 1999,
the Fund paid the Distribution Coordinator in the amount of $3,921.
NOTE 5 - PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1999, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, were
$1,444,162 and $1,460,060, respectively.
18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS
THE AVATAR ADVANTAGE BALANCED FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Avatar Advantage Balanced Fund,
series of Advisors Series Trust (the "Fund") at December 31, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian, provides a reasonable basis for the opinion
expressed above. The financial statements for the period from January 13, 1998
(commencement of operations) to December 31, 1998, including the financial
highlights for the period then ended, were audited by other independent
accountants whose report dated January 29, 1999 expressed an unqualified opinion
on those financial statements.
PricewaterhouseCoopers LLP
New York, New York
February 4, 2000
19
<PAGE>
CHANGE IN INDEPENDENT ACCOUNTANT
- --------------------------------------------------------------------------------
On August 27, 1999, McGladrey & Pullen, LLP ("McGladrey") resigned as
independent auditors of the Fund pursuant to an agreement by
PricewaterhouseCoopers LLP ("PwC") to acquire McGladrey's investment company
practice. The McGladrey partners and professionals serving the Fund at the time
of the acquisition joined PwC.
The reports of McGladrey on the financial statements of the Fund during the
prior fiscal year contained no adverse opinion or disclaimer of opinion, and
were not qualified or modified as to uncertainly, audit scope or accounting
principles.
In connection with its audit for the period from January 13, 1998 (commencement
of operations) through December 31, 1998 and through August 27, 1999, there were
no disagreements with McGladrey on any matter of accounting principle or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of McGladrey would have
caused it to make reference to the subject matter of disagreement in connection
with its report.
On September 10, 1999, the Fund, with the approval of its Board of Trustees and
its Audit Committee, engaged PwC as its independent auditors.
20
<PAGE>
ADVISOR
Avatar Investors Associates Corp.
900 Third Avenue
New York, New York 10022
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261-E
Phoenix, Arizona 85018
CUSTODIAN
Firstar Bank, N.A.
425 Walnut Street, M/L 6118
Cincinnati, Ohio 45202
TRANSFER AGENT
American Data Services, Inc.
150 Motor Parkway, Suite 109
Hauppauge, New York 11788
888-263-6452
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, California 94104
AUDITORS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
This report is intended for shareholders of the Fund and may not be used as
sales literature unless preceded or accompanied by a current prospectus.
Past performance results shown in this report should not be considered a
representation of future performance. Share price and returns will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Statements and other information herein are dated and are subject to change.
