STATEMENT OF ADDITIONAL INFORMATION:
MEMORIAL FUNDS
GOVERNMENT BOND FUND
CORPORATE BOND FUND
GROWTH EQUITY FUND
VALUE EQUITY FUND
Fund Information:
Forum Shareholder Services, LLC
P.O. Box 446
Two Portland Square
Portland, Maine 04101 Account Information and
(888) 263-5593 Shareholder Services:
Forum Shareholder Services, LLC.
P.O. Box 446
Investment Adviser: Portland, Maine 04112
Forum Investment Advisors, LLC (888)263-5593
Two Portland Square
Portland, ME 04101
STATEMENT OF ADDITIONAL INFORMATION
March 15, 1998
As amended April 21, 1999
This Statement of Additional Information ("SAI") supplements the Prospectus
dated March 15, 1998, offering shares of the Government Bond Fund, Corporate
Bond Fund, Growth Equity Fund and Value Equity Fund (each a "Fund" and
collectively the "Funds"). The Funds are each diversified portfolios of Memorial
Funds (the "Trust"), a registered open-end, management investment company. This
SAI should be read only in conjunction with the Prospectus, which you may obtain
without charge by contacting the Trust's Distributor, Forum Financial Services,
Inc., Two Portland Square, Portland, Maine 04101.
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TABLE OF CONTENTS
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Page Page
1. Investment Policies.....................3 6. Portfolio Transactions.................................17
2. Investment Limitations..................9 7. Additional Purchase and Redemption Information.........18
3. Performance Data.......................11 8. Taxation...............................................19
4. Management.............................12 9. Other Information......................................20
5. Determination of Net Asset Value.......17 10. Financial Statements...................................21
Appendix A - Description of Securities Ratings .......A-1
Statements of Assets and Liabilities
Notes to Statements of Assets and Liabilities
Independent Auditors Report
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY AN INVESTOR WITHOUT CHARGE.
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As used in this SAI, the following terms shall have the following meanings:
"Adviser" shall mean Forum Investment Advisors, LLC. "Advisers" shall
mean the Adviser and each of the investment subadvisers that provide
investment advice and portfolio management for one or more of the Funds
pursuant to an investment subadvisory agreement with the Adviser.
"Board" shall mean the Board of Trustees of the Trust.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Custodian" shall mean Investors Bank & Trust Company, or its
successor, acting in its capacity as custodian of a Fund.
"Equity Funds" shall mean the Growth Equity Fund and the Value Equity
Fund.
"FAdS" shall mean Forum Administrative Services, LLC, the Trust's
administrator.
"Fitch" shall mean Fitch IBCA, Inc.
"Fixed Income Funds" shall mean the Government Bond Fund and the
Corporate Bond Fund.
"FSS" shall mean Forum Shareholder Services, LLC, the Trust's transfer
and dividend disbursing agent.
"FFSI" shall mean Forum Financial Services, Inc., the distributor of
the Trust's shares.
"Forum" shall mean the Adviser.
"Fund" shall mean each of the separate portfolios of the Trust
identified on the cover page of this Statement of Additional
Information.
"Moody's" shall mean Moody's Investors Service, Inc.
"NRSRO" shall mean a nationally recognized statistical rating
organization.
"Processing Organization" shall have the meaning set forth in the
prospectus of the Funds.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's Rating Group.
"Sub-adviser" shall mean each of the investment advisers that provide
investment advice and portfolio management for the Funds pursuant to
investment subadvisory agreements with Adviser.
"Transfer Agent" shall mean FSS.
"Trust" shall mean Memorial Funds, an open-end management investment
company registered under the 1940 Act.
"U.S. Government Securities" shall mean obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
"1933 Act" shall mean the Securities Act of 1933, as amended.
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"1940 Act" shall mean the Investment Company Act of 1940, as amended.
1. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning each Fund's investments, investment techniques and
strategies and the risks associated therewith. No Fund may make any investment
or employ any investment technique or strategy unless otherwise permitted in a
Prospectus relating to that Fund or this SAI. For example, while the SAI
describes "when-issued" transactions below, only those Funds whose investment
policies, as described in the Prospectus or this SAI, allow the Fund to invest
in when-issued transactions may do so.
SECURITY RATINGS INFORMATION
Moody's, S&P and other NRSROs are private services that rate the credit quality
of debt obligations. A description of the range of ratings assigned to various
types of bonds and other securities by several NRSROs is included in Appendix A
to this SAI. The Funds may use these ratings to determine whether to purchase,
sell or hold a security. These ratings are general and are not absolute
standards of quality, however. Consequently, securities with the same maturity,
interest rate and rating may have different market prices. To the extent that
the ratings given by a NRSRO may change as a result of changes in such
organizations or their rating systems, the Sub-adviser will attempt to
substitute comparable ratings. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
ratings. An issuer's current financial condition may be better or worse than a
rating indicates.
A Fund may purchase unrated securities if its Sub-adviser determines the
security to be of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not trade as actively as rated securities. A
Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by its
Sub-adviser to be of comparable quality to securities whose rating has been
lowered below the lowest permissible rating category) if the Sub-adviser
determines that retaining such security is in the best interests of the Fund.
To limit credit risks, the Funds generally may only invest in securities that
are investment grade (rated in the top four long-term investment grades by an
NRSRO or in the top two short-term investment grades by an NRSRO.) Accordingly,
the lowest permissible long-term investment grades for corporate bonds,
including convertible bonds, are Baa in the case of Moody's and BBB in the case
of S&P and Fitch; the lowest permissible long-term investment grades for
preferred stock are baa in the case of Moody's and BBB in the case of S&P and
Fitch; and the lowest permissible short-term investment grades for short-term
debt, including commercial paper, are Prime-2 (P-2) in the case of Moody's, A-2
in the case of S&P and F-2 in the case of Fitch. All these ratings are generally
considered to be investment grade ratings, although Moody's indicates that
securities with long-term ratings of Baa have speculative characteristics.
Corporate Bond Fund may invest up to 5% of its assets in securities rated below
investment grade. Non-investment grade securities (commonly known as "junk
bonds") are predominantly speculative with respect to the capacity to pay
interest and repay principal and generally involve a greater volatility of price
than securities in higher-rated categories.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fixed Income Fund may purchase securities offered on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
interest accrues to the purchaser from the transaction. At the time a Fund makes
the commitment to purchase securities on a when-issued or delayed
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delivery basis, the Fund will record the transaction as a purchase and
thereafter reflect the value each day of such securities in determining its net
asset value.
The use of when-issued transactions and forward commitments enables the Fixed
Income Funds to hedge against anticipated changes in interest rates and prices.
For instance, in periods of rising interest rates and falling bond prices, a
Fund might sell securities which it owned on a forward commitment basis to limit
its exposure to falling prices. In periods of falling interest rates and rising
bond prices, a Fund might sell a security and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. However, if the Fund's Sub-adviser
forecasts incorrectly the direction of interest rate movements, the Fund might
be required to complete such when-issued or forward commitment transactions at
prices lower than the current market values.
The Funds enter into when-issued and forward commitment transactions only with
the intention of actually receiving or delivering the securities, as the case
may be. If a Fund subsequently chooses to dispose of its right to acquire a
when-issued security or its right to deliver or receive against a forward
commitment before the settlement date, it can incur a gain or loss. When-issued
securities may include bonds purchased on a "when, as and if issued" basis under
which the issuance of the securities depends upon the occurrence of a subsequent
event. Any significant commitment of a Fund's assets to the purchase of
securities on a "when, as and if issued" basis may increase the volatility of
its net asset value.
Each Fund will establish and maintain with its custodian a separate account with
cash, U.S. Government Securities and other liquid high-grade debt securities in
an amount at least equal to its commitments to purchase securities on a
when-issued or delayed delivery basis.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Board is ultimately responsible for determining whether specific securities
are liquid or illiquid. The Board has delegated the function of making
day-to-day determinations of liquidity to the Advisers, pursuant to guidelines
approved by the Board. The Advisers take into account a number of factors in
reaching liquidity decisions, including but not limited to: (1) the frequency of
trades and quotations for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the transfer.
The Adviser and the Sub-adviser for each Fund monitor the liquidity of the
securities in that Fund's portfolio and reports periodically on such decisions
to the Board.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities are similar to corresponding nonconvertible securities to
the extent that they ordinarily provide a stable stream of income with generally
higher yields than those of common stocks of the same or similar issuers.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to comparable nonconvertible securities.
Although no securities investment is without some risk, investment in
convertible securities generally entails less risk than in the issuer's common
stock. However, the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed
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income security. Convertible securities have unique investment characteristics
in that they generally (1) have higher yields than common stocks, but lower
yields than comparable non-convertible securities, (2) are less subject to
fluctuation in value than the underlying stocks since they have fixed income
characteristics and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may affect the convertible
security's investment value. The conversion value of a convertible security is
determined by the market price of the underlying common stock. If the conversion
value is low relative to the investment value, the price of the convertible
security is governed principally by its investment value and generally the
conversion value decreases as the convertible security approaches maturity. To
the extent the market price of the underlying common stock approaches or exceeds
the conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. In addition, a convertible security
generally will sell at a premium over its conversion value determined by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by a Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
TEMPORARY DEFENSIVE POSITION
When a Fund assumes a temporary defensive position it may invest without limit
in (1) short-term U.S. Government Securities, (2) certificates of deposit,
bankers' acceptances and interest-bearing savings deposits of commercial banks
doing business in the United States that have, at the time of investment, total
assets in excess of one billion dollars and that are insured by the Federal
Deposit Insurance Corporation, (3) commercial paper of prime quality rated
Prime-2 or higher by Moody's or A-2 or higher by S&P or, if not rated,
determined by the Fund's Subadviser to be of comparable quality, (4) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (5) money market mutual funds.
OTHER INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. In addition to the Fund's expenses (including
the various fees), as a shareholder in another investment company, a Fund would
bear its pro rata portion of the other investment company's expenses (including
fees).
FUTURES CONTRACTS AND OPTIONS
Each Fund may seek to hedge against a decline in the value of securities it owns
or an increase in the price of securities that it plans to purchase through the
writing and purchase of exchange-traded and over-the-counter options and the
purchase and sale of futures contracts and options on those futures contracts.
The Equity Funds may buy or sell stock index futures contracts, such as
contracts on the S&P 500 stock index. The Fixed Income Funds may buy and sell
bond index futures contracts. In addition, all of the Funds may buy or sell
futures contracts on Treasury bills, Treasury bonds and other financial
instruments. The Funds may write covered options and buy options on the futures
contracts in which they may invest.
In addition, the Funds may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government
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Securities or other liquid, high-grade debt securities in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option.
The Funds' use of options and futures contracts would subject the Funds to
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: (1) dependence on the Sub-adviser's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2) imperfect correlation between movements in the
prices of options, futures contracts or related options and movements in the
price of the securities hedged or used for cover; (3) the fact that skills and
techniques needed to trade these instruments are different from those needed to
select the other securities in which the Funds invest; (4) lack of assurance
that a liquid secondary market will exist for any particular instrument at any
particular time; and (5) the possible need to defer closing out of certain
options, futures contracts and related options to avoid adverse tax
consequences. Other risks include the inability of the Fund, as the writer of
covered call options, to benefit from the appreciation of the underlying
securities above the exercise price and the possible loss of the entire premium
paid for options purchased by the Fund.
The Funds have no current intention of investing in futures contracts and
options thereon for purposes other than hedging. No Fund may purchase any call
or put option on a futures contract if the premiums associated with all such
options held by the Fund would exceed 5% of the Fund's total assets as of the
date the option is purchased. No Fund may sell a put option if the exercise
value of all put options written by the Fund would exceed 50% of the Fund's
total assets or sell a call option if the exercise value of all call options
written by the Fund would exceed the value of the Fund's assets. In addition,
the current market value of all open futures positions held by a Fund will not
exceed 50% of its total assets.
A Fund will only invest in futures and options contracts after providing notice
to its shareholders and filing a notice of eligibility (if required) and
otherwise complying with the requirements of the Commodity Futures Trading
Commission ("CFTC"). The CFTC's rules provide that the Funds are permitted to
purchase such futures or options contracts only (1) for bona fide hedging
purposes within the meaning of the rules of the CFTC; provided, however, that in
the alternative with respect to each long position in a futures or options
contract entered into by a Fund, the underlying commodity value of such contract
at all times does not exceed the sum of cash, short-term United States debt
obligations or other United States dollar denominated short-term money market
instruments set aside for this purpose by the Fund, accrued profit on the
contract held with a futures commission merchant and cash proceeds from existing
Fund investments due in 30 days; and (2) subject to certain limitations.
HEDGING AND OPTIONS STRATEGIES
Each Fund may purchase or sell (write) put and call options on securities to
seek to hedge against a decline in the value of securities owned by it or an
increase in the price of securities which it plans to purchase through the
writing and purchase of exchange-traded and over-the-counter options on
individual securities or securities or financial indices and through the
purchase and sale of financial futures contracts and related options. These
investment techniques involve risks that are different in certain respects from
the investment risks associated with the other investments of a Fund. Use of
these instruments is subject to regulation by the SEC, the several options and
futures exchanges upon which options and futures are traded or the CFTC.
No assurance can be given, however, that any hedging or option income strategy
will succeed in achieving its intended result.
Except as otherwise noted in the Prospectus or herein, the Funds will not use
leverage in their options and hedging strategies. In the case of transactions
entered into as a hedge, a Fund will hold securities, currencies or other
options or futures positions whose values are expected to offset ("cover") its
obligations thereunder. A Fund will not enter into a hedging strategy that
exposes it to an obligation to another party unless it owns either (1) an
offsetting ("covered") position or (2) cash, U.S. Government Securities or other
liquid securities (or other assets as may be permitted by the SEC) with a value
sufficient at all times to cover its potential obligations. When required by
applicable regulatory guidelines, the Funds will set aside cash, U.S. Government
Securities or other liquid securities (or other assets as may be permitted by
the SEC) in a segregated account with its custodian in the prescribed
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amount. Any assets used for cover or held in a segregated account cannot be sold
or closed out while the hedging or option income strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of a Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
OPTIONS STRATEGIES
A Fund may purchase put and call options written by others and sell put and call
options covering specified individual securities, securities or financial
indices or currencies. A put option (sometimes called a "standby commitment")
gives the buyer of the option, upon payment of a premium, the right to deliver a
specified amount of currency to the writer of the option on or before a fixed
date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of
currency on or before a fixed date, at a predetermined price. The predetermined
prices may be higher or lower than the market value of the underlying currency.
A Fund may buy or sell both exchange-traded and over-the-counter ("OTC")
options. A Fund will purchase or write an option only if that option is traded
on a recognized U.S. options exchange or if the sub-adviser believes that a
liquid secondary market for the option exists. When a Fund purchases an OTC
option, it relies on the dealer from which it has purchased the OTC option to
make or take delivery of the currency underlying the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as the loss of the expected benefit of the transaction. OTC options and the
securities underlying these options currently are treated as illiquid securities
by the Funds.
When a Fund sells an option, it receives a premium from the purchaser. When a
Fund purchases an option, it pays a premium to the seller. The amount of premium
received or paid by the Fund is based upon certain factors, including the market
price of the underlying securities, index or currency, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying assets, the option period, supply and demand and interest rates.
The Funds may purchase options on securities that the Fund's Sub-adviser intends
to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. If the price of the
underlying security declines, use of this strategy limits the potential loss to
the Fund to the premium paid for the options; conversely, if the market price of
the underlying security increases above the exercise price and the Fund either
sells or exercises the option, any profit eventually realized will be reduced by
the premium paid. A Fund may similarly purchase put options in order to hedge
against a decline in market value of securities held in its portfolio. The put
enables the Fund to sell the underlying security at the predetermined exercise
price; thus the potential for loss to the Fund is limited to the option premium
paid. If the market price of the underlying security is lower than the exercise
price of the put, any profit the Fund realizes on the sale of the security would
be reduced by the premium paid for the put option less any amount for which the
put may be sold.
A Sub-adviser may write call options when it believes that the market value of
the underlying security will not rise to a value greater than the exercise price
plus the premium received. Call options may also be written to provide limited
protection against a decrease in the market price of a security, in an amount
equal to the call premium received less any transaction costs.
Certain Funds may purchase and write put and call options on fixed income or
equity security indexes in much the same manner as the options discussed above,
except that index options may serve as a hedge against overall fluctuations in
the fixed income or equity securities markets (or market sectors) or as a means
of participating in an anticipated price increase in those markets. The
effectiveness of hedging techniques using index options will depend on the
extent to which price movements in the index selected correlate with price
movements of the securities which are being hedged. Index options are settled
exclusively in cash.
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SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
A Fund may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Fund
wished to terminate its potential obligation to sell securities or currencies
under a call option it had written, it would purchase a call option of the same
type. Closing transactions essentially permit the Fund to realize profits or
limit losses on its options positions prior to the exercise or expiration of the
option. In addition:
(1) The successful use of options depends upon the Sub-adviser's
ability to forecast the direction of price fluctuations in the
underlying securities or currency markets, or in the case of an index
option, fluctuations in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine months.
Options that expire unexercised have no value. Unless an option
purchased by a Fund is exercised or unless a closing transaction is
effected with respect to that position, a loss will be realized in the
amount of the premium paid.
(3) A position in an exchange-listed option may be closed out only on
an exchange that provides a market for identical options. Most
exchange-listed options relate to equity securities. Closing
transactions may be effected with respect to options traded in the
over-the-counter markets only by negotiating directly with the other
party to the option contract or in a secondary market for the option if
such market exists. There is no assurance that a liquid secondary
market will exist for any particular option at any specific time. If it
is not possible to effect a closing transaction, a Fund would have to
exercise the option which it purchased in order to realize any profit.
The inability to effect a closing transaction on an option written by a
Fund may result in material losses to the Fund.
(4) A Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
(5) When a Fund enters into an over-the-counter contract with a
counterparty, the Fund will assume the risk that the counterparty will
fail to perform its obligations in which case the Fund could be worse
off than if the contract had not been entered into.
FUTURES STRATEGIES
A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash, an underlying debt
security or the currency as called for in the contract at a specified future
date and at a specified price. For futures contracts with respect to an index,
delivery is of an amount of cash equal to a specified dollar amount times the
difference between the index value at the time of the contract and the close of
trading of the contract.
A Fund may sell interest rate futures contracts in order to continue to receive
the income from a fixed income security, while endeavoring to avoid part of or
all of a decline in the market value of that security which would accompany an
increase in interest rates.
A Fund may purchase index futures contracts for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transactions costs, or to
seek higher investment returns when a futures contract is priced more
attractively than securities in the index.
A Fund may purchase call options on a futures contract as a means of obtaining
temporary exposure to market appreciation at limited risk. This strategy is
analogous to the purchase of a call option on an individual security, in that it
can be used as a temporary substitute for a position in the security itself.
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SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
A Fund pays no price when it enters into a futures contract; rather, it deposits
(typically with its custodian in a segregated account in the name of the futures
broker) an amount of cash or U.S. Government Securities generally equal to 5% or
less of the contract value. This amount is known as initial margin. Subsequent
payments, called variation margin, to and from the broker, are made on a daily
basis as the value of the futures position varies. When writing a call on a
futures contract, variation margin must be deposited in accordance with
applicable exchange rules. The initial margin in futures transactions is in the
nature of a performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination of the contract, assuming all contractual
obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for a Fund to close a position,
and in the event of adverse price movements, it would have to make daily cash
payments of variation margin. In addition:
(1) Successful use by a Fund of futures contracts and related options
will depend upon the Sub-adviser's ability to predict movements in the
direction of the overall securities and currency markets, which
requires different skills and techniques than predicting changes in the
prices of individual securities. Moreover, futures contracts relate not
to the current level of the underlying instrument but to the
anticipated levels at some point in the future; thus, for example,
trading of stock index futures may not reflect the trading of the
securities which are used to formulate an index or even actual
fluctuations in the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged currencies due to price distortions
in the futures market or otherwise. There may be several reasons
unrelated to the value of the underlying currencies which causes this
situation to occur. As a result, a correct forecast of general market
trends may still not result in successful hedging through the use of
futures contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may
not be possible to close a position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash
payments of variation margin.
(4) Like other options, options on futures contracts have a limited
life. A Fund will not trade options on futures contracts on any
exchange or board of trade unless and until, in the Adviser's opinion,
the market for such options has developed sufficiently that the risks
in connection with options on futures transactions are not greater than
the risks in connection with futures transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that
is at risk. Sellers of options on futures contracts, however, must post
an initial margin and are subject to additional margin calls which
could be substantial in the event of adverse price movements.
(6) A Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
9
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COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
A Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. A Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section, a Fund will not enter into any
futures contract or option on a futures contract if, as a result, the aggregate
initial margins and premiums required to establish such positions would exceed
5% of the Fund's net assets.
2. INVESTMENT LIMITATIONS
For purposes of all investment policies of the Fund, (1) the term "1940 Act"
includes the rules thereunder, SEC interpretations and any exemptive order upon
which the Fund may rely and (2) the term Code includes the rules thereunder, IRS
interpretations and any private letter ruling or similar authority upon which
the Fund may rely.
Except as required by the 1940 Act or the Code, if a Fund satisfies a percentage
restriction on an investment or investment technique when the investment is
made, a later change in percentage resulting from a change in the market values
of a Fund's assets or purchases and redemptions of shares will not be considered
a violation of the limitation.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund has adopted the following fundamental investment limitations that
cannot be changed without the affirmative vote of the lesser of (1) more than
50% of the outstanding shares of a Fund or (2) 67% of the shares of a Fund
present or represented at a shareholders meeting at which the holders of more
than 50% of the outstanding shares of a Fund are present or represented. No Fund
may:
(1) Purchase the securities of issuers (other than U.S. Government
Securities) conducting their business activity in the same industry
if, immediately after such purchase, the value of a Fund's
investments in such industry would comprise 25% or more of the value
of its total assets.
(2) Purchase a security if, as a result (a) more than 5% of a Fund's
total assets would be invested in the securities of a single issuer,
or (b) a Fund would own more than 10% of the outstanding voting
securities of a single issuer. This limitation applies only with
respect to 75% of a Fund's total assets and does not apply to U.S.
Government Securities.
(3) Act as an underwriter of securities of other issuers, except to
the extent that, in connection with the disposition of portfolio
securities, a Fund may be deemed to be an underwriter for purpose of
the Securities Act of 1933.
(4) Purchase or sell real estate or any interest therein, except that
a Fund may invest in securities issued or guaranteed by corporate or
governmental entities secured by real estate or interests therein,
such as mortgage pass-throughs and collateralized mortgage
obligations, or issued by companies that invest in real estate or
interests therein.
(5) Purchase or sell physical commodities or contracts, options or
options on contracts to purchase or sell physical commodities.
(6) Make loans to other persons except for the purchase of debt
securities that are otherwise permitted investments or loans of
portfolio securities through the use of repurchase agreements.
(7) Issue senior securities except pursuant to Section 18 of the
Investment Company Act and except that a Fund may borrow money
subject to its investment limitation on borrowing.
OTHER INVESTMENT LIMITATIONS
Each Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. No Fund may:
(1) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted to be incurred by a Fund. The deposit in
escrow of securities in connection with the writing of put and call
options, collateralized loans of securities and collateral
arrangements with respect to margin for futures contracts are not
deemed to be pledges or hypothecations for this purpose.
(2) Make short sales of securities except short sales against the
box.
(3) Purchase securities on margin except for the use of short-term
credit necessary for the clearance of purchases and sales of
portfolio securities, but a Fund may make margin deposits in
connection with permitted transactions in options.
(4) Purchase a security if, as a result, more than 15% of its net
assets would be invested in illiquid securities.
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(5) Purchase portfolio securities if its outstanding borrowings
exceed 5% of the value of its total assets or borrow for purposes
other than meeting redemptions in an amount exceeding 5% of the value
of its total assets at the time the borrowing is made.
(6) Invest more than 5% of its net assets in securities (other than
fully-collateralized debt obligations) issued by companies that have
conducted continuous operations for less than three years, including
the operations of predecessors, unless guaranteed as to principal and
interest by an issuer in whose securities a Fund could invest.
(7) Invest in or hold securities of any issuer if officers and
Trustees of the Trust or the Adviser, individually owning
beneficially more than 1/2 of 1% of the securities of the issuer, in
the aggregate own more than 5% of the issuer's securities.
(8) Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
3. PERFORMANCE DATA
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
predict future returns. A Fund's net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
In performance advertising the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDC/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). In addition, a Fund may compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Salomon Brothers Bond Index, the Shearson
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. A Fund may refer in such materials
to mutual fund performance rankings and other data published by Fund Tracking
Companies. Performance advertising may also refer to discussions of a Fund and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30-day or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced with
respect to bonds purchased at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
Income calculated for the purpose of determining a Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's shares. Also, Processing Organizations may charge
their customers direct fees in connection with an investment in a Fund, which
will have the effect of reducing the Fund's net yield to those shareholders. The
yields of each Fund are not fixed or guaranteed, and an investment in a Fund is
not insured or guaranteed. Accordingly, yield information may not necessarily be
used to compare shares of a Fund with
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investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to compare
a Fund's yield information directly to similar information regarding investment
alternatives which are insured or guaranteed.
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return. The other definitions
are the same as in average annual total return above.
4. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
TRUSTEES:
John Y. Keffer* (56), Trustee, has been President and Director of
Forum Financial Services, Inc. for more than five years. His address
is Two Portland Square, Portland, Maine 04101.
Christopher W. Hamm* (31), Chairman of the Board of Trustees, has been
the President of the Memorial Group, Inc. since 1998. Prior thereto,
he was an Executive Director of CIBC Oppenheimer from 1996 to 1998.
Prior to that, Mr. Hamm was a Vice President of Paine Webber from 1993
to 1996. His address is 5847 San Felipe, Suite 4545, Houston, Texas
77002.
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<PAGE>
Jay Brammer (40), Trustee, has been Executive Vice President of
Gibraltar Properties, Inc., a real estate holding company, since 1995.
Mr. Brammer was Executive Vice President of Gibraltar Masoleum Corp.
from 1980 to 1995. His address is 9000 Keystone Crossing, Ste. 1000,
Indianapolis, Indiana 46240.
J.B. Goodwin (48), Trustee, has been President of JBGoodwin Company, a
comprehensive real estate and mortgage holding company, for more than
five years. His address is 3933 Steck Avenue, B-101, Austin, Texas
78759.
Robert Stillwell (61), Trustee, has been an attorney with the law firm
of Baker & Botts for more than five years. His address is 3000 One
Shell Plaza, Houston, Texas 77002.
OFFICERS:
CHRISTOPHER W. HAMM (31), President, has been the President of the
Memorial Group, Inc. since 1998. Prior thereto, he was an Executive
Director of CIBC Oppenheimer from 1996 to 1998. Prior to that, Mr.
Hamm was a Vice President of Paine Webber from 1993 to 1996. His
address is 5847 San Felipe, Suite 4545, Houston, Texas 77002.
SARA M. MORRIS (35), Treasurer, is a Managing Director, Forum
Administrative Services, LLC (and its predecessors in interest) with
which she has been associated since 1994. Prior thereto, from 1991 to
1994, Ms. Morris was Controller of Wright Express Corporation (a
national credit card company) and for six years prior thereto was
employed at Deloitte & Touche LLP as an accountant. Ms. Morris is also
an officer of various registered investment companies for which Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine
04101.
THOMAS G. SHEEHAN (44), Vice President, is a Managing Director and
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1993. Prior thereto, Mr. Sheehan was Special Counsel
to the Division of Investment Management of the SEC. Mr. Sheehan is
also an officer of various registered investment companies for which
Forum Administrative Services, LLC or Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
D. BLAINE RIGGLE (32), Secretary, is an Assistant Counsel, Forum
Financial Services, Inc., with which he has been associated since
1998. Prior thereto, Mr. Riggle was Associate Counsel for Wright
Express Corporation from 1997 to 1998 and for three years thereto was
an associate with the law firm of Friedman, Babcock & Gaythwaite in
Portland, Maine. Mr. Riggle also is an officer of various registered
investment companies for which Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
STEPHEN J. BARRETT (31), Assistant Secretary, is a Manager of Client
Services, Forum Financial Services, Inc., with which he has been
associated since September 1996. Prior to joining Forum, Mr. Barrett
spent two and a half years at Fidelity Investments where he served as
a Senior Product Manager. Prior to that, he was a Securities Analyst
for two and a half years with Bingham, Dana & Gould in Boston,
Massachusetts. Mr. Barrett also is an officer of various registered
investment companies for which Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
MARCELLA A. COTE (51), Assistant Secretary, is a Fund Administrator,
Forum Financial Services, Inc., with which she has been associated
since 1998. Prior thereto, from 1997 to 1998, Ms. Cote was a budget
analyst for the Maine Automated Child Welfare Information System, a
federally funded project of the Maine Department of Human Services.
From 1991 to 1997, Ms. Cote acted as staff to the Maine
Inter-departmental Committee on Transition. Ms. Cote is also an
officer of various registered investment
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<PAGE>
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine
04101.
DAWN TAYLOR (34), Assistant Treasurer, is a Tax Manager, Forum
Financial Services, Inc., with which she has been associated since
1994. Prior thereto, from 1986-1994, Ms. Taylor was a Tax Consultant
for The New England Mutual Life Insurance Company, Boston,
Massachusetts. Ms. Taylor is also an officer of various registered
investment companies for which Forum Administrative Services, LLC or
Forum Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine
04101.
Each Trustee of the Trust (other than John Y. Keffer and Christopher W. Hamm,
who are interested persons of the Trust) is paid $5,000 annually and $500 for
each Board meeting attended and is paid $500 for each committee meeting attended
on a date when a Board meeting is not held. Trustees are also reimbursed for
travel and related expenses incurred in attending meetings of the Board. No
officer of the Trust is compensated by the Trust. The Trust has not adopted any
form of retirement plan covering Trustees or officers.
The following table provides the estimated aggregate compensation paid to each
Trustee. Estimates are presented for the fiscal year ended December 31, 1998.
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
ACCRUED PENSION ANNUAL BENEFITS UPON
AGGREGATE BENEFITS RETIREMENT
TRUSTEE COMPENSATION TOTAL
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
John Y. Keffer* $0 $0 $0 $0
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
Christopher W. Hamm* $0 $0 $0 $0
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
Jay Brammer $7,000 $0 $0 $7,000
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
J.B. Goodwin $7,000 $0 $0 $7,000
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
Robert Stillwell $7,000 $0 $0 $7,000
- ---------------------------- ---------------------- ------------------------ ----------------------- -----------------
</TABLE>
ADVISERS
Forum Investment Advisors, LLC ("Adviser"), Two Portland Square, Portland, Maine
04101, serves as investment adviser to the Funds pursuant to an investment
advisory agreement with the Trust (the "Advisory Agreement"). Subject to the
general control of the Board, the Adviser is responsible for among other things,
developing a continuing investment program for each Fund in accordance with its
investment objective and reviewing the investment strategies and policies of
each Fund and overseeing the performance of the investment subadvisers
responsible for the day-to-day management of each Fund's portfolio. The Adviser
was incorporated under the laws of Delaware in 1987 and is registered under the
Investment Advisers Act of 1940.
For its services, the Adviser receives the following advisory fees with respect
to each Fund:
Advisory Fee
(as a percentage of average daily net assets)
Government Bond Fund 0.23
Corporate Bond Fund 0.23
Growth Equity Fund 0.35
Value Equity Fund 0.35
To assist it in carrying out its responsibility, the Adviser has retained the
following Subadvisers to render advisory services and make daily investment
decisions for each Fund pursuant to an investment subadvisory agreements with
the Adviser (the "Subadvisory Agreements").
Government Bond Fund -- The Northern Trust Company
Corporate Bond Fund -- Conseco Capital Management, Inc.
P
Growth Equity Fund -- Davis Hamilton Jackson & Associates, L.P.
Value Equity Fund -- Beutel, Goodman Capital Management
The amount of the fees paid by Forum to each Subadviser may vary from time to
time as a result of periodic negotiations with the Subadviser regarding such
matters as the nature and extent of the services (other than investment
selection and order placement activities) provided by the Subadviser to the
Fund, the increased cost and complexity of providing services to the Fund, the
investment record of the Subadviser in managing the Fund and the nature and
magnitude of the expenses incurred by the Subadviser in managing the Fund's
assets and by the Adviser in overseeing and administering management of the
Fund. However, the contractual fee payable to Forum by each Fund for investment
advisory services that is set forth in the Prospectus will not vary as a result
of those negotiations.
The Advisers furnish at their own expense all services, facilities and personnel
necessary to perform their duties under the Advisory or Subadvisory Agreements.
The Advisory and Subadvisory Agreements provide, with respect to each Fund, for
an initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or, with respect to each
Fund, by vote of the shareholders of that Fund, and in either case by a majority
of the directors who are not parties to the Advisory Agreement or interested
persons of any such party.
The Advisory and Subadvisory Agreements are terminable without penalty by the
Trust and by the Adviser, respectively, with respect to a Fund on 30 days'
written notice when authorized either by vote of the Fund's shareholders or by a
vote of a majority of the Board, or by the Adviser and the Subadviser,
respectively, on not less than 90 days' written notice, and will automatically
terminate in the event of its assignment. The Agreements also provide that, with
respect to each Fund, the Adviser shall not be liable for any error of judgment
or mistake of law or for any act or omission in the performance of its duties to
the Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of the Adviser's duties or by reason of reckless disregard of its
obligations and duties under the Agreements. The Advisory and Subadvisory
Agreements provide that the Advisers may render services to others.
ADMINISTRATOR
Forum Administrative Services, LLC ("FAdS") acts as administrator to the Trust
pursuant to an Administration Agreement with the Trust. As administrator, FAdS
provides management and administrative services necessary to the operation of
the Trust (which include, among other responsibilities, negotiation of contracts
and fees with, and monitoring of performance and billing of, the transfer agent
and custodian and arranging for maintenance of books and records of the Trust),
and provides the Trust with general office facilities. The Administration
Agreement will remain in effect for a period of twelve months with respect to
each Fund and thereafter is automatically renewed each year for an additional
term of one year, provided that continuance is specifically approved at least
annually (1) by the Board or, with respect to a Fund, by a vote of a majority of
the outstanding voting securities of the Fund and (2) by a vote of a majority of
Trustees of the Trust who are not parties of the Administration Agreement or
interested persons of any such party.
The Administration Agreement terminates automatically if it is assigned and may
be terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party on not more than 60 days' written notice. The
Administration Agreement also provides that FAdS shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Trust, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the Administration
Agreement.
At the request of the Board, FAdS provides persons satisfactory to the Board to
serve as officers of the Trust. Those officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
FAdS, the Adviser, the Subadvisers or their affiliates.
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<PAGE>
From time to time marketing materials may include a description of the Trust's
"manager of managers" structure which include the selection of an investment
consultant and sub-advisers and the criteria for their selection in terms of
asset size, investment expertise, reputation and staffing. Marketing materials
may include references to FAdS, a leading third party administrator, including
its expertise, staffing and assets under administration and distribution.
Marketing materials may explain that the Trust may be used as an investment
vehicle in many circumstances, including a cemetery merchandise trust, funeral
industry pre-need trusts, corporate retirement plans, IRAs, and other
association-related trusts.
DISTRIBUTOR
Forum Financial Services, Inc. ("FFSI"), an affiliate of FAdS, is the Trust's
distributor and acts as the agent of the Trust in connection with the offering
of shares of the Fund pursuant to a Distribution Agreement. The Distribution
Agreement will continue in effect for twelve months and will continue in effect
thereafter only if its continuance is specifically approved at least annually by
the Board or by vote of the shareholders entitled to vote thereon, and in either
case, by a majority of the Trustees who (1) are not parties to the Distribution
Agreement, (2) are not interested persons of any such party or of the Trust and
(3) with respect to any class for which the Trust has adopted a distribution
plan, have no direct or indirect financial interest in the operation of that
distribution plan or in the Distribution Agreement, at a meeting called for the
purpose of voting on the Distribution Agreement. All subscriptions for shares
obtained by FFSI are directed to the Trust for acceptance and are not binding on
the Trust until accepted by it. The Trust has adopted a distribution plan
pursuant to Rule 12b-1 under the 1940 Act (the "Plan") that authorizes the
payment to FFSI under the Distribution Services Agreement of a distribution
services fee, which may not exceed an annual rate of 0.25% of the average daily
net assets of each Fund attributable to Trust shares. FFSI has entered into an
agreement under the Plan whereby Memorial Group, Inc., a corporation of which
Christopher W. Hamm, the Chairman of the Board of Trustees and President of the
Trust, is the sole shareholder receives 0.25% for performing certain
distribution activities.
The Distribution Agreement provides that FFSI shall not be liable for any error
of judgment or mistake of law or in any event whatsoever, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under the
Distribution Agreement.
The Distribution Agreement is terminable with respect to the Fund without
penalty by the Trust on 60 days' written notice when authorized either by vote
of the Fund's shareholders or by a vote of a majority of the Board, or by FFSI
on 60 days' written notice. The Distribution Agreement will automatically
terminate in the event of its assignment.
FFSI may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read the Prospectus and this SAI in
conjunction with any materials and information provided by their institution.
The financial institution and not its customers will be the shareholder of
record, although customers may have the right to vote shares depending upon
their arrangement with the institution.
TRANSFER AGENT
Forum Shareholder Services, LLC ("FSS") acts as transfer agent of the Trust
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"). The
Transfer Agency Agreement provides, with respect to each
15
<PAGE>
Fund, for an initial term of one year from its effective date and for its
continuance in effect for successive twelve-month periods thereafter, provided
that the agreement is specifically approved at least annually by the Board or,
with respect to a Fund, by a vote of the shareholders of that Fund, and in
either case by a majority of the directors who are not parties to the Transfer
Agency Agreement or interested persons of any such party at a meeting called for
the purpose of voting on the Transfer Agency Agreement.
Among the responsibilities of FSS as agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Funds may be effected and certain
other matters pertaining to the Funds; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing periodic statements and confirmations of purchases and
redemptions; (7) arranging for the transmission of proxy statements, annual
reports, prospectuses and other communications from the Trust to its
shareholders; (8) arranging for the receipt, tabulation and transmission to the
Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
FSS or any sub-transfer agent or processing agent may also act and receive
compensation as custodian, investment manager, nominee, agent or fiduciary for
its customers or clients who are shareholders of the Funds with respect to
assets invested in the Funds. FSS or any sub-transfer agent or other processing
agent may elect to credit against the fees payable to it by its clients or
customers all or a portion of any fee received from the Trust or from FSS with
respect to assets of those customers or clients invested in the Funds. FSS, FFSI
or sub-transfer agents or processing agents retained by FSS may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub- transfer
agents or processing agents, may also be affiliated persons of FSS or FFSI.
For its services under the Transfer Agency Agreement, FSS receives, with respect
to each Series: a fee of $24,000 per year; such amounts to be computed and paid
monthly in arrears by the Fund; and (iii) Annual Shareholder Account Fees of
$25.00 for a retail and $125.00 for an institutional shareholder account; such
fees to be computed as of the last business day of the prior month.
FUND ACCOUNTANT
Pursuant to a Fund Accounting Agreement, Forum Accounting Services, LLC,
("FAcS") prepares and maintains books and records of each Fund on behalf of the
Trust as required under the 1940 Act, calculates the net asset value per share
of each Fund and dividends and capital gain distributions and prepares periodic
reports to shareholders and the Securities and Exchange Commission. For its
services, FAcS receives from the Trust with respect to each Fund a fee of
$36,000 per year plus surcharges of $6,000 to $24,000 for specified asset
levels. FAcS is paid additional surcharges of $12,000 per year for each of the
following: a portfolio with more than a specified number of securities positions
and/or international positions; investments in derivative instruments;
percentages of assets invested in asset backed securities; and, a monthly
portfolio turnover rate of 10% or greater.
5. DETERMINATION OF NET ASSET VALUE
The Trust does not determine the Funds' net asset value on any day that the New
York Stock Exchange ("NYSE") is closed. The NYSE is normally closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Veterans' Day,
Thanksgiving and Christmas. The Trust determines the net asset value per share
of each Fund as of the close of trading on the NYSE (normally 4:00 p.m., Eastern
time) on each Fund Business Day by dividing the value of the Fund's net assets
(in other words, the value of its portfolio securities and other assets less its
liabilities) by the number of that Fund's shares outstanding at the time the
determination is made. Securities owned by a Fund for which market quotations
are readily available are valued at current market value, or, in their absence,
at fair value as determined by th
16
<PAGE>
Board. Purchases and redemptions are effected at the time of the next
determination of net asset value following the receipt in proper form of any
purchase or redemption order.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of debt securities for the Fixed Income Funds usually are
principal transactions. Portfolio securities for these Funds are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for such
purchases. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
asked prices.
The Equity Funds will, and the Fixed Income Funds may, effect purchases and
sales through brokers who charge commissions. Allocations of transactions to
brokers and dealers and the frequency of transactions are determined by the
Fund's Sub-adviser in its best judgment and in a manner deemed to be in the best
interest of shareholders of the Fund rather than by any formula. The primary
consideration is prompt execution of orders in an effective manner and at the
most favorable price available to the Fund.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Sub-adviser takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker. The Sub-advisor may also take into account
payments made by brokers effecting transactions for a Fund (1) to the Fund or
(2) to other persons on behalf of the Fund for services provided to it for which
it would be obligated to pay.
In addition, a Sub-adviser may give consideration to research and investment
analysis services furnished by brokers or dealers to the Sub-adviser for its use
and may cause the Fund to pay these brokers a higher amount of commission than
may be charged by other brokers. Such research and analysis is of the types
described in Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended, and is designed to augment the Sub-adviser's own internal research and
investment strategy capabilities. The Sub-adviser may use the research and
analysis in connection with services to clients other than the Fund, and the
Sub-adviser's fee is not reduced by reason of the Sub-adviser's receipt of the
research services.
Investment decisions for the Funds will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Sub-advisers or their affiliates. If, however, a Fund and other
investment companies or accounts managed by one of the Sub-advisers are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Fund or the size of the position obtainable for the Fund. In
addition, when purchases or sales of the same security for a Fund and for other
investment companies and accounts managed by one of the Sub-advisers occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
In the future the Funds, consistent with the policy of obtaining best net
results, may conduct brokerage transactions through affiliates of those persons
or Forum. The Board has adopted procedures in conformity with applicable rules
under the 1940 Act to ensure that all brokerage commissions paid to these
persons are reasonable and fair.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor on a best
efforts basis.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge
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relating to transactions effected for the benefit of a shareholder which is
applicable to a Fund's shares as provided in the Prospectus.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which a Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of the same class of any other Fund of the Trust or a
designated class of shares of Daily Assets Government Fund, a money market fund
of Forum Funds ("Participating Fund"). For Federal income tax purposes, exchange
transactions are treated as sales on which a purchaser will realize a capital
gain or loss depending on whether the value of the shares redeemed is more or
less than his basis in such shares at the time of the transaction.
By use of the exchange privilege, the shareholder authorizes FSS to act upon the
instruction of any person representing himself to either be, or to have the
authority to act on behalf of, the investor and believed by FSS to be genuine.
The records of FSS of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund in the name of the
shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction. Shares of any Participating Fund
may be redeemed and the proceeds used to purchase, without a sales charge,
shares of any other Participating Fund. The terms of the exchange privilege are
subject to change, and the privilege may be terminated by the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Trust offers an individual retirement plan ("IRA") for individuals who wish
to use Trust shares of the Funds as a medium for funding individual retirement
savings. Under the IRA, distributions of net investment income and capital gain
will be automatically reinvested in the IRA established for the investor. The
Funds' custodian furnishes custodial services to the IRAs for a service fee.
Shareholders wishing to use a Fund's IRA should contact FSS for further details
and information.
8. TAXATION
Each Fund intends, for each taxable year, to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Qualification as a regulated investment company under the Internal Revenue Code
of 1986 does not involve governmental supervision of management or investment
practices or policies. Investors should consult their own counsel for a complete
understanding of the requirements the Funds must meet to qualify for such
treatment. The information set forth in the Prospectus and the following
discussion relate solely to Federal income taxes on dividends and distributions
by a Fund and assume that each Fund qualifies as a regulated investment company.
Investors should consult their own counsel for further details and for the
application of state and local tax laws to the investor's particular situation.
The Equity Funds expect to derive a substantial amount of their gross income
(exclusive of capital gain) from dividends. Accordingly, that portion of the
Equity Funds' dividends so derived will qualify for the dividends-received
deduction for corporations to the extent attributable to certain qualifying
dividends received by the Fund from domestic corporations. The Fixed Income
Funds expect to derive substantially all of their gross income (exclusive of
capital gain) from sources other than dividends. Accordingly, it is expected
that only a small portion, if any, of the Fixed Income Funds' dividends or
distributions will qualify for the dividends-received deduction for
corporations. Capital gain distributions are not eligible for the dividends
received deduction for corporations.
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Under the Code, gains or losses from the disposition of (1) foreign currencies,
(2) debt securities denominated in a foreign currency, (3) certain options on
foreign currencies or (4) certain forward contracts denominated in a foreign
currency, that are attributed to fluctuations in the value of the foreign
currency between the date of acquisition of the asset and the date of its
disposition are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, increase or
decrease the amount of a Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than affecting the
amount of the Fund's net capital gain. Because section 988 losses reduce the
amount of ordinary dividends a Fund will be allowed to distribute for a taxable
year, such losses may result in all or a portion of prior dividend distributions
for such year being recharacterized as non-taxable return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her shares. To the extent that such distributions exceed such
shareholders' basis, each distribution will be treated as a gain from the sale
of shares. Under certain conditions, a Fund may elect to except from Section 988
any foreign currency gain or loss realized by a Fund on any regulated forward
contract, option or futures contract which would be "marked to market" under
Section 1256 of the Code if held on the last day of taxable year, as described
immediately below.
Certain listed options, regulated futures contracts and foreign exchange
contracts are considered "section 1256 contracts" for Federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each taxable year
will be "marked to market" and treated for Federal income tax purposes as though
sold for fair market value on the last business day of such taxable year. Gain
or loss realized by a Fund on section 1256 contracts generally will be
considered 60% long-term and 40% short-term capital gain or loss. A Fund can
elect to exempt its section 1256 contracts which are part of a "mixed straddle"
from the application of section 1256.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if a Fund
exercises an option, or if an option that a Fund has written is exercised, gain
or loss on the option will not be separately recognized but the premium received
or paid will be included in the calculation of gain or loss upon disposition of
the property underlying the option.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by such Fund may constitute a
"straddle" for Federal income tax purposes. A straddle of which at least one,
but not all, the positions are section 1256 contracts may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that (1) loss realized on
disposition of one position of a straddle not be recognized to the extent that a
Fund has unrealized gains with respect to the other position in such straddle;
(2) a Fund's holding period in straddle positions be suspended while the
straddle exists (possibly resulting in gain being treated as short-term capital
gain rather than long-term capital gain); (3) losses recognized with respect to
certain straddle positions which are part of a mixed straddle and which are
non-section 1256 positions be treated as 60% long-term and 40% short-term
capital loss; (4) losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be treated as long-
term capital losses; and (5) the deduction of interest and carrying charges
attributable to certain straddle positions may be deferred. Various elections
are available to a Fund which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the straddle rules
described above do not apply to any straddles held by a Fund all of the
offsetting positions of which consist of section 1256 contracts.
A Fund's investment in zero coupon securities will be subject to special
provisions of the Code which may cause the Fund to recognize income without
receiving cash necessary to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding federal income
and excise taxes. In order to satisfy those distribution requirements the Fund
may be forced to sell other portfolio securities.
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9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, Investors Bank & Trust Company acts as the
custodian of the Funds' assets. The custodian's responsibilities include
safeguarding and controlling the Funds' cash and securities, determining income
and collecting interest on Fund investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP act as independent auditors for the Funds.
THE TRUST AND ITS SHARES
The Trust was organized on November 26, 1997, as a Delaware business trust. The
Trust has an unlimited number of authorized shares of beneficial interest. The
Board may, without shareholder approval, divide the authorized shares into an
unlimited number of separate portfolios or series (such as the Funds) and may
divide portfolios or series into two or more classes of shares (such as Trust
and Institutional Shares). Currently the authorized shares of the Trust are
divided into 4 separate series.
Each share of each Fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
and Trustees have available certain procedures for the removal of Trustees.
There are no conversion or preemptive rights in connection with shares of the
Trust. All shares when issued in accordance with the terms of the offering will
be fully paid and nonassessable. Shares are redeemable at net asset value, at
the option of the shareholders, subject to any contingent deferred sales charge
that may apply. A shareholder in a portfolio is entitled to the shareholder's
pro rata share of all dividends and distributions arising from that portfolio's
assets and, upon redeeming shares, will receive the portion of the portfolio's
net assets represented by the redeemed shares.
The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states. As a
result, to the extent that the Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject the Trust shareholders to liability. To guard against
this risk, the Trust Instrument of the Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which (1) a court refuses
to apply Delaware law, (2) no contractual limitation of liability is in effect,
and (3) the Trust itself is unable to meet its obligations. In light of Delaware
law, the nature of the Trust's business, and the nature of its assets, the Board
believes that the risk of personal liability to a Trust shareholder is extremely
remote.
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From time to time, certain shareholders may own a large percentage of the shares
of a Fund. Accordingly, those shareholders may be able to greatly affect (if not
determine) the outcome of a shareholder vote. As noted, certain of these
shareholders are known to the Trust to hold their shares of record only and have
no beneficial interest, including the right to vote, in the shares.
SHAREHOLDINGS
As of March 13, 1998, Memorial Group, Inc., a Delaware corporation, owns 100% of
the shares of each fund as listed below. Trustee and President Christopher W.
Hamm owns 100% of the shares of Memorial Group, Inc. As of the same date, no
other officers or Trustees of the Trust owned any of the outstanding shares of
the Funds. Shareholders owning 25% or more of the shares of a Fund or of the
Trust as a whole may be deemed to be controlling persons. By reason of their
substantial holdings of shares, these persons may be able to require the Trust
to hold a shareholder meeting to vote on certain issues and may be able to
determine the outcome of any shareholder vote. As noted, certain of these
shareholders are known to the Trust to hold their shares of record only and have
no beneficial interest, including the right to vote, in the shares.
FUND SHAREHOLDER INTEREST
- ---- ----------- --------
Government Bond Fund Memorial Group, Inc. 100%
Corporate Bond Fund Memorial Group, Inc. 100%
Growth Equity Fund Memorial Group, Inc. 100%
Value Equity Fund Memorial Group, Inc. 100%
10. FINANCIAL STATEMENTS
Because the Funds had not commenced operations as of the date of this SAI,
financial statements for these Funds are not yet available.
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MEMORIAL FUNDS
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A 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 some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment 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.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
A-1
<PAGE>
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated CC typically are debt subordinated to senior debt which is assigned
an actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
A-2
<PAGE>
AAA and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
A-3
<PAGE>
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
A-4
<PAGE>
3. SHORT-TERM DEBT (COMMERCIAL PAPER)
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2, both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 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.
--- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 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.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
F-3. Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
A-5
<PAGE>
THE MEMORIAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 11, 1998
<TABLE>
<S> <C> <C>
GOVERNMENT CORPORATE
BOND FUND BOND FUND
-------------------- -------------------
ASSETS
Cash $25,000 $25,000
Deferred organization expense 30,000 30,000
-------------------- -------------------
Total assets $55,000 $55,000
LIABILITIES
Accrued organization expenses 30,000 30,000
-------------------- -------------------
NET ASSETS $25,000 $25,000
-------------------- -------------------
Shares Outstanding (no par value, shares authorized
is unlimited) 2,500 2,500
-------------------- -------------------
Net Asset Value, offering and redemption price
per share ($25,000/2,500 shares outstanding per fund) $10.00 $10.00
-------------------- -------------------
</TABLE>
<TABLE>
<S><C> <C>
GROWTH EQUITY VALUE EQUITY
FUND FUND
----------------------- -----------------
$25,000 $25,000
30,000 30,000
----------------------- -----------------
$55,000 $55,000
30,000 30,000
----------------------- -----------------
$25,000 $25,000
----------------------- -----------------
2,500 2,500
----------------------- -----------------
$10.00 $10.00
----------------------- -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
MARCH 11, 1998
Note 1 - Significant Accounting Policies:
(A) General: The Memorial Funds (the "Trust") is an open end management
investment company registered under the Investment Company Act of 1940, as
amended. The Company was established as a Delaware business trust organized
pursuant to a Declaration of Trust dated November 25, 1997. The Government Bond
Fund, Corporate Bond Fund, Growth Equity Fund and Value Equity Fund (each a
"Fund") are each separate, diversified series of the Trust. Each Fund presently
offers two classes of shares, Trust shares and Institutional shares. Shares of
each class have identical interests in the portfolio of the Fund and have the
same rights. As of March 11, 1998, the Funds had no operations other than
organizational matters and the issuance and sale of initial shares to Memorial
Group, Inc., on March 11, 1998.
(B) Organizational Expenses: Costs incurred by the Funds in connection with
their organization and the initial offering of their shares have been deferred
and will be amortized on a straight-line basis from the date upon which the
Funds will commence their investment activities, over a period of five years. If
any of the initial shares of a Fund are redeemed during the amortization period,
the redemption proceeds will be reduced by any unamortized organization expenses
in the same proportion as the number of shares being redeemed bears to the
number of initial shares outstanding at the time of such redemption.
(C) Federal Taxes: Each Fund intends to qualify for treatment as a regulated
investment company under the Internal Revenue Code and distribute all its
taxable income. In addition, by distributing in each calendar year substantially
all its net investment income, capital gains and certain other amounts, if any,
the Funds will not be subject to Federal excise tax. Therefore, no Federal
income or excise tax provision will be required.
Note 2 - Investment Adviser
Forum Investment Advisors, LLC (the "Adviser"), serves as the investment adviser
for each Fund. For their services, the Adviser is paid by the Government Bond
Fund and Corporate Bond Fund a fee at an annual rate of 0.35% of each Fund's
average daily net assets. The Growth Equity Fund and Value Equity Fund are
charged a fee at an annual rate of 0.45% of each Fund's average daily net
assets.
The Adviser has retained the following sub-advisers to render advisory services
and make daily investment decisions for each Fund:
The Government Bond Fund is managed by The Northern Trust Company.
The Corporate Bond Fund is managed by Conseco Capital Management, Inc.
The Growth Equity Fund is managed by Davis, Hamilton, Jackson &
Associates, L.P.
The Value Equity Fund is managed by Beutel, Goodman Capital Management
The sub-advisers are compensated by the Adviser.
Note 3 - Administrative, Accounting, Distribution and Shareholder Servicing Fees
Forum Administrative Services, LLC ("FAdS") is the administrator of the Funds,
and is responsible for the supervision of the overall management of the Funds.
For these services, FAdS receives a fee at an annual rate of 0.15% of each
Fund's average daily net assets under $150 million, and 0.10% of the average
daily net assets in excess of $150 million, subject to an annual minimum fee of
$30,000 for each Fund.
Forum Financial Services, Inc. ("FFSI") acts as distributor of each Fund's
shares. The Funds have adopted a distribution plan in accordance with Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Plan"). Under the
provisions of the Plan, each Fund may reimburse FFSI up to an annual rate of
0.25% of each Fund's Trust shares average daily net assets.
Forum Accounting Services, LLC provides portfolio accounting services to each
Fund.
Forum Shareholder Services, LLC acts as each Fund's transfer agent and dividend
disbursing agent.
<PAGE>
Independent Auditors' Report
The Board of Trustees and Shareholder
Memorial Funds:
We have audited the accompanying statements of assets and liabilities of
Government Bond Fund, Corporate Bond Fund, Growth Equity Fund, and Value Equity
Fund, portfolios of Memorial Funds (the Company) as of March 11, 1998. These
statements of assets and liabilities are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements of
assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of assets and liabilities are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of assets and
liabilities. Our procedures included confirmation of cash in bank by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of Government
Bond Fund, Corporate Bond Fund, Growth Equity Fund, and Value Equity Fund as of
March 11, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 11, 1998
