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AUSTIN GLOBAL EQUITY FUND
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Two Portland Square
Portland, Maine 04101
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
Forum Financial Corp.
Two Portland Square
Portland, Maine 04112
(207) 879-0001
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PROSPECTUS NOVEMBER 25, 1996
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This Prospectus offers shares of the Austin Global Equity Fund (the "Fund"),
which is a diversified portfolio of Forum Funds (the "Trust"), an open-end,
management investment company. The investment objective of the Fund is to seek
capital appreciation by investing primarily in a portfolio of common stock and
securities convertible into common stock. Shares of the Fund are offered to
investors without any sales charge, but the Fund may bear certain of its
distribution expenses.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor should know before investing. The Trust has
filed with the Securities and Exchange Commission a Statement of Additional
Information dated November 25, 1996, which contains more detailed information
about the Fund and the Trust and which is hereby incorporated into this
Prospectus by reference. An investor may obtain a copy of the Statement of
Additional Information without charge by contacting Shareholder Servicing at the
address or phone number listed above.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
1. Prospectus Summary..................... 2 5. Purchases and Redemptions of Shares.... 9
2. Financial Highlights................... 3 6. Dividends and Tax Matters.............. 12
3. Investment Objective and Policies...... 4 7. Other Information...................... 13
4. Management............................. 8 8. Appendix............................... 15
</TABLE>
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Investors should read this Prospectus and retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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1. PROSPECTUS SUMMARY
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks capital appreciation by investing primarily in a portfolio
of common stock and securities convertible into common stock. The Fund invests
primarily in issuers based in the United States, Europe, Japan and the Pacific
Basin. See "Investment Objective and Policies."
MANAGEMENT
Austin Investment Management, Inc. (the "Adviser") is the Fund's investment
adviser and makes investment decisions for the Fund. Forum distributes the
Fund's shares and administers the Fund. See "Management." The Fund may bear
certain expenses in connection with the sale of its shares. See "Management -
Distribution."
PURCHASES AND REDEMPTIONS
Shares of the Fund are offered at the next-determined net asset value
without a sales charge to investors who plan to invest a minimum of $10,000 in
the Fund. Shares of the Fund may be redeemed from the Fund without charge at
their next-determined net asset value. See "Purchases and Redemptions of
Shares."
DIVIDENDS
Dividends representing the net investment income of the Fund are declared
and paid at least annually. Net capital gains realized by the Fund, if any, also
will be distributed annually. Dividends and distributions are reinvested in
additional shares of the Fund unless a shareholder elects to have them paid in
cash. See "Dividends and Tax Matters."
CERTAIN RISK FACTORS
There can be no assurance that the Fund will achieve its investment
objective, and the Fund's net asset value will fluctuate based upon changes in
the value of its portfolio securities. The foreign securities and related
transactions in which the Fund may invest entail certain risks not associated
with investment in domestic securities. See "Foreign Securities." In addition,
the hedging strategies in which the Fund may engage entail additional risks. See
"Hedging Strategies." The Fund is not intended to provide a complete or balanced
investment program for all investors.
EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. There are no transaction expenses associated with purchases or
redemptions of Fund shares.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
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<S> <C>
Advisory Fees (after fee waivers)......... 0.75%
12b-1 Fees................................ 0.00%
Other Expenses (after expense
reimbursements)......................... 1.75%
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Total Fund Operating Expenses............. 2.50%
</TABLE>
The amounts of expenses are based on actual amounts incurred during the
Fund's most recent fiscal year ended June 30, 1996. Absent certain expense
reimbursements and fee waivers during the most recent fiscal year, the
Investment Advisory Fees, Other Expenses, and Total Operating Expenses of the
Fund would have been 1.50%, 1.75% and 3.25%, respectively. Expense
reimbursements and fee waivers are voluntary and may be reduced or eliminated at
any time. For a further description of the various costs and expenses incurred
in the Fund's operation, see "Management."
EXAMPLE
The following is a hypothetical example that indicates the dollar amount of
expenses an investor would pay assuming a $1,000 investment, a 5% annual return,
reinvestment of all dividends and distributions and full redemption at the end
of each period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C>
$ 25 $ 78 $ 133 $ 284
</TABLE>
The example is based on the expenses listed in the "Annual Fund Operating
Expenses" table above. The 5% annual return is not a prediction of and does not
represent the Fund's projected returns; rather, it is required by government
regulation. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RETURN. ACTUAL EXPENSES AND RETURN MAY BE GREATER OR LESS
THAN INDICATED.
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2. FINANCIAL HIGHLIGHTS
The following represents selected data for a single share outstanding of
the Fund for the period indicated. The information for the periods ending June
30, 1996, 1995 and 1994 was audited in connection with an audit of the Trust's
financial statements by Deloitte & Touche LLP, independent auditors. The
financial statements and auditors' report thereon are contained in the Annual
Report which is incorporated by reference into the Statement of Additional
Information. Further information about the Fund's performance is contained in
the Annual Report, which may be obtained without charge.
<TABLE>
<CAPTION>
Period Ended
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June 30 June 30 June 30
1996 1995 1994(a)
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<S> <C> <C> <C>
Beginning Net Asset Value per Share $ 11.60 $ 9.80 $10.00
Net Investment Income (Loss) (0.12) 0.04(c) (0.03)
Net Realized and Unrealized Investment Gain (Loss)
on Investments 1.98 1.76 (0.17)
Distributions from Net Realized Gains (0.27) -- --
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Ending Net Asset Value per Share $ 13.19 $11.60 $ 9.80
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Ratios to Average Net Assets:
Expenses(b) 2.50% 2.50% 2.36%(d)
Net Investment Income (0.98%) 0.41% (0.83%)(d)
Total Return 16.21% 18.37% (3.57%)(d)
Portfolio Turnover Rate 93.55% 35.31% 2.49%
Average Commission Rate Paid on Portfolio
Investment Transaction $0.0542(e) -- --
Net Assets at the End of Period (000's Omitted) $10,326 $8,474 $7,646
</TABLE>
(a) For the period December 8, 1993 (commencement of operations)
through June 30, 1994.
(b) During the period, various fees and expenses were waived and
reimbursed, respectively. Had such waiver and reimbursement
not occurred, the ratio of expenses to average net assets
would have been:
Expenses 3.25 % 3.19 % 4.18 %(d)
(c) Calculated using weighted average number of shares
outstanding.
(d) Annualized.
(e) Amount represents the average commission per share paid to
brokers on the purchase or sale of equity securities.
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3. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek capital appreciation by
investing primarily in a portfolio of common stock and securities convertible
into common stock. There can be, of course, no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing primarily
in the securities of issuers based in the United States, Europe, Japan and the
Pacific Basin, but it is anticipated that the Fund will generally invest more of
its assets in United States issuers than the issuers of any other country.
During periods of normal market conditions the Fund will have at least 65% of
its total assets invested in securities issued by companies based in three or
more countries and will have at least 65% of its total assets invested in common
stock and securities convertible into common stock. The securities in which the
Fund invests may be traded on securities exchanges or in the over-the-counter
markets.
The Fund intends to invest principally in companies that, in the view of
the Adviser, possess above average growth potential or attractive valuations. In
addition, the Adviser seeks to invest in companies which, in the Adviser's
opinion, are improving but whose improvement has not been fully recognized by
the investment community. In making these investments, the Adviser analyses
various characteristics of the issuers, which may vary from company to company.
The Fund may purchase the shares of small companies whose stock is less actively
traded and which have greater appreciation potential and a correspondingly
higher level of price volatility than larger companies whose shares are actively
traded. Consequently, the Adviser anticipates that the Fund's portfolio will
exhibit a high degree of price fluctuation or volatility when compared to the
market averages. In seeking these investments, the Adviser relies primarily on
analysis of individual companies and analysis of industries and economic trends.
The Fund intends to invest up to 25% of assets in equity securities of
companies in the telecommunications industry. Investments in such companies may
be expected to benefit from global economic growth, scientific developments and
advances in technologies, such as frequency spectrum utilization, satellite
systems, fiber optics, electronic communication, software and others. The Fund
may invest in the securities of issuers in any industry, but the Adviser
emphasizes investments in those industries for which the Adviser believes the
economic cycle is improving. The Fund will not, however, invest more than 25% of
its total assets in any one industry.
CONVERTIBLE SECURITIES. The Fund may invest up to 35% of its assets in
convertible securities, including convertible debt and convertible preferred
stock. Convertible securities are fixed income securities which may be converted
at a stated price within a specific amount of time into a specified number of
shares of common stock. These securities are usually senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities.
In general, the value of a convertible security is the higher of its
investment value (its value as a fixed income security) and its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the value of a convertible security
generally increases when interest rates decline and generally decreases when
interest rates rise. The value of convertible securities, however, are also
influenced by the value of the underlying common stock.
The Fund will invest only in convertible debt that is rated B or higher by
Moody's Investors Service, Inc. ("Moody's") or by Standard & Poor's Corporation
("S&P") and in preferred stock that is rated b or higher by Moody's or B or
higher by S&P. Under normal circumstances, the Fund will not invest 10% or more
of its assets in securities rated below BBB or bbb. The Fund may purchase
unrated convertible securities if the Adviser determines the security to be of
comparable quality to a rated security that the Fund may purchase. Unrated
securities may not be as actively traded as rated securities. Securities in the
lowest permissible rating categories are characterized by Moody's as generally
lacking characteristics
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of the desirable investment and by S&P as being predominantly speculative. The
Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by the Adviser
to be of comparable quality) if the Adviser determines that retaining such
security is in the best interests of the Fund. A further description of the
various rating categories is included in the Statement of Additional
Information.
FOREIGN SECURITIES. The Fund's investments in foreign securities involve
certain risks, such as exchange rate fluctuations, political or economic
instability of the issuer or the country of issue and the possible imposition of
exchange controls, withholding taxes on dividends or interest payments,
confiscatory taxes or expropriation. Foreign securities may also be subject to
greater fluctuations in price than securities of domestic corporations
denominated in U.S. dollars. Foreign securities and their markets may not be as
liquid as domestic securities and their markets, and foreign brokerage
commissions and custody fees are generally higher than those in the United
States.
In addition, issuers of securities in foreign jurisdictions generally are
not subject to the same degree of regulation as are U.S. issuers with respect to
such matters as insider trading rules, restrictions on market manipulation,
shareholder proxy requirements and timely disclosure of information. Less
information may be publicly available about a foreign company than about a
domestic company, and foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Securities registration, custody and
settlements may in some instances be subject to delays and legal and
administrative uncertainties. To the extent that the Fund invests a portion of
its assets in a particular region of the world, an investment in the Fund will
be subject to certain risks since the economies and markets in a region tend to
be interrelated and may be adversely affected by political, economic and other
events in a similar manner. With respect to its permitted investments in foreign
securities, currently the Fund limits the amount of its total assets that may be
invested in one country or denominated in one currency (other than the U.S.
dollar) to 25%.
The Fund may invest in sponsored and unsponsored American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. Unsponsored ADRs may be created without the participation of the foreign
issuer. Holders of these ADRs generally bear all the costs of the ADR facility,
whereas foreign issuers typically bear certain costs in a sponsored ADR. The
bank or trust company depository of an unsponsored ADR may be under no
obligation to distribute shareholder communications received from the foreign
issuer or to pass through voting rights.
The Fund's investments that are denominated in foreign currencies will be
adversely affected by reductions in the value of those currencies relative to
the U.S. dollar. These changes will affect the Fund's net assets, distributions
and income. The Fund may utilize foreign currency forward contracts in order to
hedge against uncertainty in the level of future foreign exchange rates. The
Fund will not enter into these contracts for speculative purposes. These
contracts involve an obligation to purchase or sell a specific currency at a
specified future date, usually less than one year from the date of the contract,
at a specified price. The Fund may enter into foreign currency forward contracts
to manage currency risks and to facilitate transactions in foreign securities.
These contracts involve a risk of loss if the Adviser fails to predict currency
values correctly and also involve similar risks to those described under
"Hedging Strategies." The Fund may also buy and sell foreign currency options,
foreign currency futures contracts and options on those futures contracts. See
"Hedging Strategies."
ADDITIONAL INVESTMENT POLICIES
The Fund's investment objective and certain investment limitations that are
deemed to be fundamental, as described in the Statement of Additional
Information, may not be changed without approval of the holders of a majority of
the Fund's outstanding voting securities. A majority of the Fund's outstanding
voting securities means the lesser of 67% of the
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shares of the Fund present or represented at a meeting at which the holders of
more than 50% of the outstanding shares of the Fund are present or represented
or more than 50% of the outstanding shares of the Fund. Except as otherwise
indicated, investment policies of the Fund are not deemed to be fundamental and
may be changed by the Board of Trustees of the Trust (the "Board") without
shareholder approval. A further description of the Fund's investment policies is
contained in the Statement of Additional Information.
BORROWING. As a fundamental policy, the Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets. As a nonfundamental policy, the Fund may borrow money
for temporary or emergency purposes in an amount not exceeding 5% of the value
of its total assets at the time when the loan is made; provided that any such
temporary or emergency borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.
ILLIQUID SECURITIES. The Fund may not invest more than 15% of its net
assets in illiquid securities, including repurchase agreements not entitling the
Fund to the payment of principal within seven days. Illiquid securities are
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.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. The Fund may
seek additional income by entering into repurchase agreements or by lending
securities from its portfolio to brokers, dealers and other financial
institutions. These investments may entail certain risks not associated with
direct investments in securities. For instance, in the event that bankruptcy or
similar proceedings were commenced against a counterparty in these transactions
or a counterparty defaulted on its obligations, the Fund might suffer a loss.
Failure by the other party to deliver a security purchased by the Fund may
result in a missed opportunity to make an alternative investment. The Adviser
monitors the creditworthiness of counterparties to these transactions and
intends to enter into these transactions only when it believes the
counterparties present minimal credit risks and the income to be earned from the
transaction justifies the attendant risks. Repurchase agreements are
transactions in which the Fund purchases a security and simultaneously commits
to resell that security to the seller at an agreed-upon price on an agreed-upon
future date, normally one to seven days later. The resale price reflects a
market rate of interest that is not related to the coupon rate or maturity of
the purchased security. Securities loans must be continuously secured by cash or
securities issued or guaranteed as to principal and interest by the United
States Government or by any of its agencies and instrumentalities ("U.S.
Government Securities") with a market value, determined daily, at least equal to
the value of the Fund's securities loaned. When the Fund lends a security it
receives interest from the borrower or from investing cash collateral. The
Trust's custodian maintains possession of the purchased securities and any
underlying collateral in these transactions, the total market value of which on
a continuous basis is at least equal to the repurchase price or value of
securities loaned, plus accrued interest and which consists of the types of
securities in which the Fund may invest directly. The Fund may pay fees to
arrange securities loans. The Fund will not lend portfolio securities in excess
of 33 1/3% of the value of the Fund's total assets.
DIVERSIFICATION AND CONCENTRATION. The Fund is diversified. As a
fundamental policy, with respect to 75% of its assets, the Fund may not purchase
a security (other than a U.S. Government Security), if, as a result, (i) more
than 5% of the Fund's total assets would be invested in the securities of a
single issuer or (ii) the Fund would own more than 10% of the outstanding voting
securities of any single issuer. As a fundamental policy, the Fund may not
purchase securities, if, immediately after the purchase, more than 25% of the
value of the Fund's total assets would be invested in the securities of issuers
conducting their principal business activities in the same industry. This limit
does not apply to investments in U.S. Government Securities, foreign government
securities or repurchase agreements covering U.S. Government Securities.
6
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WARRANTS. The Fund may invest in warrants, which are options to purchase
an equity security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. Warrants are
usually issued by the issuer of the security to which they relate. While
warrants may be traded, there is often no secondary market for them and the
prices of warrants do not necessarily correlate with the prices of the
underlying securities. Holders of warrants have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer. The Fund
will limit its purchases of warrants to not more than 5% of the value of its
total assets.
HEDGING STRATEGIES. The Fund may in the future 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 and the purchase and sale of
futures contracts and options on those futures contracts. The Fund may write
(sell) covered put and call options and may buy put and call options on equity
securities, foreign currencies and stock indices, such as the Standard & Poor's
500 Stock Index. In addition, the Fund may buy or sell stock index and foreign
currency futures contracts and may write covered options and buy options on
those contracts. Definitions of these instruments may be found in the Appendix
to this Prospectus. 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 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 Fund will not hedge more than 25% of its total assets by selling
futures contracts, buying put options and writing call options. In addition, the
Fund will not buy futures contracts or write put options whose underlying value
exceeds 25% of the Fund's total assets and will not purchase call options if the
value of purchased call options would exceed 5% of the Fund's total assets.
The Fund's use of options and futures contracts would subject the Fund to
certain investment risks and transaction costs to which it might not otherwise
be subject. These risks include: (1) dependence on the Adviser's ability to
predict movements in the prices of individual securities or currencies and
fluctuations in the general securities or currency markets; (2) imperfect
correlation between movements in the prices of options, futures contracts or
related options and movements in the price of the securities or currencies
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 Fund invests; (4) lack of assurance that a liquid
secondary market will exist for any particular instrument at any particular
time; (5) the possible need to defer closing out of certain options, futures
contracts and related options to avoid adverse tax consequences; and (6) the
potential for unlimited loss when investing in futures contracts. 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.
TEMPORARY DEFENSIVE POSITION. When the Adviser believes that business or
financial conditions warrant, the Fund may assume a temporary defensive
position. For temporary defensive purposes, the Fund may invest without limit in
cash or in investment grade cash equivalents, including (i) short-term U.S.
Government Securities, (ii) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of commercial banks, (iii) prime quality
commercial paper, and (iv) repurchase agreements covering any of the securities
in which the Fund may invest directly, and, subject to the limits of the
Investment Company Act of 1940 (the "Investment Company Act"), in money market
mutual funds. During periods when and to the extent that the Fund has assumed a
temporary defensive position, it will not be pursuing its investment objective.
PORTFOLIO TRANSACTIONS. From time to time the Fund may engage in active
short-term trading to take advantage of price movements affecting individual
issues, groups of issues or markets. This will increase
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the Fund's rate of turnover and will result in higher total brokerage costs for
the Fund. The Adviser anticipates that the annual turnover in the Fund could be
in excess of 50% in future years (but is not expected to equal or exceed 100%).
An annual turnover rate of 100% would occur, for example, if all of the
securities in the Fund were replaced once in a period of one year.
The Fund has no obligation to deal with any specific broker or dealer in
the execution of portfolio transactions. Consistent with its policy of obtaining
the best net results, the Fund may conduct brokerage transactions through
certain affiliates of the Adviser. The Board has adopted policies to ensure that
these transactions are reasonable and fair and that the commissions charged are
comparable to those charged by non-affiliated qualified broker-dealers.
4. MANAGEMENT
The business of the Trust is managed under the direction of the Board of
Trustees. The Board formulates the general policies of the Fund and generally
meets quarterly to review the results of the Fund, monitor investment activities
and practices and discuss other matters affecting the Fund and the Trust.
INVESTMENT ADVISER
Pursuant to an investment advisory agreement with the Trust, Austin
Investment Management, Inc. serves as investment adviser of the Fund. Subject to
the general control of the Board, the Adviser makes investment decisions for the
Fund. For its services, the Adviser receives an advisory fee that is accrued
daily and paid monthly at an annual rate of 1.5% of the average daily net assets
of the Fund.
The Adviser, which is located at 375 Park Avenue, New York, New York 10152,
is a registered investment adviser and provides investment management services
to pension plans, endowment funds, institutional and individual accounts. As of
the date of this Prospectus, the Adviser had approximately $130 million of
assets under management and was controlled by Peter Vlachos, president and chief
portfolio manager of the Adviser since its organization in 1989.
Mr. Vlachos has been portfolio manager of the Fund since the Fund's
inception and, as such, is responsible for the day-to-day management of the
Fund's portfolio. Prior to his establishment of the Adviser, Mr. Vlachos was a
portfolio manager at Neuberger & Berman, Inc. Prior thereto, Mr. Vlachos held
various positions at Dreyfus Corp., including president and vice president of
two investment companies managed by Dreyfus with over $2 billion in combined
assets for which he was portfolio manager.
ADMINISTRATION
On behalf of the Fund, the Trust has entered into an Administration and
Distribution Agreement with Forum Financial Services, Inc. ("Forum"). As
provided in this agreement, Forum is responsible for the supervision of the
overall management of the Trust (including the Trust's receipt of services which
the Trust is obligated to pay for), providing the Trust with general office
facilities and providing persons satisfactory to the Board of Trustees to serve
as officers of the Trust. For these services, Forum receives a fee computed and
paid monthly at an annual rate of 0.25% of the average daily net assets of the
Fund. Forum, in its sole discretion, may waive all or any portion of its fees.
Forum, which is located at Two Portland Square, Portland, Maine 04101, was
incorporated under the laws of the State of Delaware on February 7, 1986 and as
of the date of this Prospectus provided management and administrative services
to registered investment companies and collective investment funds with assets
of approximately $18 billion. Forum is a registered broker-dealer and investment
adviser and is a member of the National Association of Securities Dealers, Inc.
As of the date of this Prospectus, Forum was controlled by John Y. Keffer,
President and Chairman of the Trust.
DISTRIBUTION
Pursuant to the Administration and Distribution Agreement, Forum acts as
the distributor of the Fund's shares. Under a distribution plan (the "Plan")
adopted by the Board, the Fund may reimburse Forum for the distribution expenses
incurred by Forum on behalf of the Fund. These expenses may
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include the cost of advertising and promotional materials, providing prospective
shareholders with the Fund's prospectus, statement of additional information and
shareholder reports, reimbursing the Adviser for its distribution expenses and
compensating others who may provide assistance in distributing shares of the
Fund. These expenses may include costs of Forum's offices such as rent,
communications equipment, employee salaries and overhead costs. The Fund will
not reimburse Forum for any distribution expenses in any fiscal year of the Fund
in excess of 0.25% of the Fund's average daily net assets. During the period in
which the Plan and the related Administration and Distribution Agreement are in
effect, the Board will from time to time determine the amount of distribution
expense reimbursement to be paid. It is anticipated that no distribution fees
will be approved by the Board for the Fund's current fiscal year. Unreimbursed
expenses of the Distributor incurred during a fiscal year of the Trust may not
be reimbursed by the Trust in future years or after the termination of the Plan
or the Administration and Distribution Agreement.
TRANSFER AGENT
The Trust has entered into a Transfer Agency Agreement with Forum Financial
Corp. (the "Transfer Agent") pursuant to which the Transfer Agent acts as the
Fund's transfer agent and dividend disbursing agent. The Transfer Agent
maintains for each shareholder of record, an account (unless such accounts are
maintained by sub-transfer agents) to which all shares purchased are credited,
together with any distributions that are reinvested in additional shares. The
Transfer Agent also performs other transfer agency functions and acts as
dividend disbursing agent for the Trust. In addition, the Transfer Agent
performs portfolio accounting services for the Fund, including determination of
the Fund's net asset value.
EXPENSES OF THE TRUST
The Fund's expenses comprise Trust expenses attributable to the Fund, which
are charged to the Fund, and those not attributable to a particular fund of the
Trust, which are allocated among the Fund and all other funds of the Trust in
proportion to their average net assets. The Adviser, Forum and the Transfer
Agent may each elect to waive (or continue to waive) all or a portion of their
fees, which are accrued daily and paid monthly. Fee waivers are voluntary and
may be reduced or eliminated at any time. The Trust is responsible for all of
its expenses, including: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer agent; fees of pricing, interest, dividend,
credit and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information and shareholder reports and delivering them to
existing shareholders; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; compensation of the Trust's directors;
compensation of the Trust's officers and employees who are not employees of the
Adviser, Forum or their respective affiliates and costs of other personnel
performing services for the Trust; costs of corporate meetings; Securities and
Exchange Commission registration fees and related expenses; state securities
laws registration fees and related expenses; the fees payable under the Advisory
Agreement, the Administration and Distribution Agreement; and any fees and
expenses payable pursuant to the Plan. The Adviser has agreed to reimburse the
Trust for certain of the Fund's operating expenses which in any year exceed the
limits prescribed by any state in which the Fund's shares are qualified for
sale.
5. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL
PURCHASES. Shares of the Fund may be purchased without a sales charge at
their net asset value on any weekday except customary national business holidays
and Good Friday ("Fund Business Day"). See "Other Information - Determination of
Net Asset Value."
Shares of the Fund are issued at a price equal to the net asset value per
share next determined after
9
<PAGE>
an order in proper form is accepted by the Transfer Agent. The Fund's net asset
value is calculated at 4:00 p.m., Eastern time on each Fund Business Day. Fund
shares become entitled to receive dividends on the next Fund Business Day after
the acceptance of an order.
The Fund reserves the right to reject any subscription for the purchase of
its shares. Stock certificates are issued only to shareholders of record upon
their written request, and no certificates are issued for fractional shares.
REDEMPTIONS. There is no redemption charge, no minimum period of
investment, and no restriction on frequency of redemptions. The date of payment
of redemption proceeds may not be postponed for more than seven days after
shares are tendered to the Transfer Agent for redemption by a shareholder of
record. The right of redemption may not be suspended except in accordance with
the Investment Company Act.
Redemptions are effected at a price equal to the net asset value per share
next determined following acceptance by the Transfer Agent of the redemption
order in proper form (and any supporting documentation which the Transfer Agent
may require). Shares redeemed are not entitled to participate in dividends
declared after the day on which a redemption becomes effective.
Redemption requests will not be effected unless any check used for
investment has been cleared by the shareholder's bank, which may take up to 15
calendar days. This delay may be avoided by investing in the Fund through wire
transfers. Normally redemption proceeds are paid immediately following any
redemption, but in no event later than seven days after redemption, by check
mailed to the shareholder of record at his record address. Shareholders that
wish to redeem shares by Telephone or by Bank Wire must elect these options by
properly completing the appropriate sections of their account application.
PURCHASE AND REDEMPTION PROCEDURES
Investors may obtain the account application necessary to open an account
by writing the Transfer Agent at one of the addresses listed on the cover page
to this prospectus.
There is a $10,000 minimum for initial investments in the Fund and a $2,500
minimum for subsequent purchases, except for individual retirement accounts (See
"Purchases and redemptions of Shares - Individual Retirement Accounts").
Shareholders will receive from the Trust periodic statements listing account
activity during the statement period.
The Fund sells and redeems its shares on a continuing basis at the net
asset value of the shares next determined following the receipt by the Transfer
Agent of a purchase or redemption order in proper form including, in the case of
purchases, Federal Funds. An investor's funds will not be accepted or invested
by the Fund during the period before the Fund's receipt of Federal Funds.
INITIAL PURCHASE OF SHARES
MAIL. Investors may send a check made payable to the Trust along with a
completed account application to the Transfer Agent at:
Austin Global Equity Fund
P.O. Box 446
Portland, Maine 04112
Checks are accepted at full value subject to collection. If a check does
not clear, the purchase order will be canceled and the investor will be liable
for any losses or fees incurred by the Trust, the Transfer Agent or Forum.
BANK WIRE. To make an initial investment in the Fund using the fed wire
system for transmittal of money among banks, an investor should first telephone
the Transfer Agent at (207) 879-0001 to obtain an account number for an initial
investment. The
10
<PAGE>
investor should then instruct a member commercial bank to wire his money
immediately to:
The First National Bank of Boston
Boston, Massachusetts
ABA # 011000390
For Credit to: Forum Financial Corp.
Account # 541-54171
Austin Global Equity Fund
(Investor's Name)
(Investor's Account Number)
The investor should then promptly complete and mail the account
application.
Any investor planning to wire funds should instruct his bank early in the
day so the wire transfer can be accomplished the same day. There may be a charge
by the investor's bank for transmitting the money by bank wire, and there also
may be a charge for use of Federal Funds. The Trust does not charge investors
for the receipt of wire transfers.
THROUGH BROKERS AND OTHER FINANCIAL INSTITUTIONS. Shares may be purchased
and redeemed through brokers and other financial institutions that have entered
into sales agreements with Forum. These institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to the Trust. The Trust is not responsible for the
failure of any institution to promptly forward these requests or otherwise carry
out its obligations to its customers.
Investors who purchase shares will be subject to the procedures of their
institution, which may include charges, limitations, investment minimums, cutoff
times and restrictions in addition to, or different from, those applicable to
shareholders who invest in the Fund directly. Certain shareholder services may
not be available to shareholders who have purchased through a broker-dealer or
other institution. These investors should acquaint themselves with their
institution's procedures and should read this Prospectus in conjunction with any
materials and information provided by their institution. Customers who purchase
Fund shares in this manner may or may not be the shareholder of record and,
subject to their institution's and the Fund's procedures, may have Fund shares
transferred into their name. There is typically a one to five day settlement
period for purchases and redemptions through broker-dealers.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases may be made by mailing a check, by sending a bank wire
or through a broker as indicated above. Shareholders using the wire system for
subsequent purchases should first telephone the Transfer Agent at (207) 879-8909
to notify it of the wire transfer. All payments should clearly indicate the
shareholder's name and account number.
REDEMPTION OF SHARES
Shareholders that wish to redeem shares by telephone or receive redemption
proceeds by bank wire must elect these options by properly completing the
appropriate sections of their account application. These privileges may not be
available until several weeks after a shareholder's application is received.
Shares for which certificates have been issued may not be redeemed by telephone.
REDEMPTION BY MAIL. Shareholders may make a redemption in any amount by
sending a written request to the Transfer Agent accompanied by any stock
certificate that may have been issued to the shareholder. All certificates
submitted for redemption must be endorsed by the shareholder with signature
guaranteed and all written requests for redemption must be signed by the
shareholder with signature guaranteed.
TELEPHONE REDEMPTION. A shareholder that has elected telephone redemption
privileges may make a telephone redemption request by calling the Transfer Agent
at (207) 879-8909. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, the Trust and the Transfer Agent will employ reasonable
procedures to confirm that such instructions are genuine. Shareholders must
provide the Transfer Agent with the shareholder's account number, the exact name
in which the shares are registered and some additional form of identification
such as a password. The Trust or the Transfer Agent may employ other procedures
such as recording certain transactions. If such procedures are followed, neither
the Transfer Agent nor the Trust will be liable for any losses due to
unauthorized or fraudulent redemption requests. Shareholders
11
<PAGE>
should verify the accuracy of telephone instructions immediately upon receipt of
confirmation statements.
During times of drastic economic or market changes, the telephone
redemption privilege may be difficult to implement. In the event a shareholder
is unable to reach the Transfer Agent by telephone, requests may be mailed or
hand-delivered to the Transfer Agent. In response to the telephone redemption
instruction, the Fund will mail a check to the shareholder's record address or,
if the shareholder has elected wire redemption privileges, wire the proceeds.
Shares for which certificates have been issued may not be redeemed by telephone.
BANK WIRE REDEMPTION. With respect to any redemption of more than $10,000,
a shareholder may request the Fund to transmit the proceeds by Federal Funds
wire to a bank account designated in writing. To request bank wire redemptions
by telephone, the shareholder must have elected to be able to redeem shares by
telephone.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any
written redemption request and for any endorsement on a stock certificate. In
addition, a signature guarantee also is required for instructions to change a
shareholder's record name or address, designated bank account for wire
redemptions or automatic investment or redemption, dividend election, telephone
redemption or exchange option election or any other option election in
connection with the shareholder's account. Signature guarantees may be provided
by any eligible institution, including a bank, a broker, a dealer, a national
securities exchange, a credit union, or a savings association that is authorized
to guarantee signatures, acceptable to the Transfer Agent. Whenever a signature
guarantee is required, each person required to sign for the account must have
his signature guaranteed.
The Transfer Agent will deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost all distributions on the account will be reinvested in
additional shares of the Fund. In addition, the amount of any outstanding
(unpaid for six months or more) checks for distributions that have been returned
to the Transfer Agent will be reinvested and the checks will be canceled.
Due to the cost to the Trust of maintaining smaller accounts, the Trust
reserves the right to redeem, upon not less than 60 days' written notice, all
shares in any Fund account with an aggregate net asset value of less than
$10,000. The Fund will not redeem accounts that fall below this amount solely as
a result of a reduction in net asset value.
INDIVIDUAL RETIREMENT ACCOUNTS
The Fund may be a suitable investment vehicle for part or all of the assets
held in individual retirement accounts ("IRAs"). The minimum initial investment
for investors opening an IRA or investing through their own IRA is $2,000, and
the minimum subsequent investment is $1,000. Individuals may make tax-deductible
IRA contributions of up to a maximum of $2,000 annually. However, the deduction
will be reduced if the individual or, in the case of a married individual filing
jointly, either the individual or the individual's spouse is an active
participant in an employer-sponsored retirement plan and has adjusted gross
income above certain levels.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared and paid
annually. Net capital gains realized by the Fund, if any, also will be
distributed annually.
Shareholders may choose either to have all dividends reinvested in
additional shares of the Fund or received in cash or to have dividends of net
capital gain reinvested in additional shares of the Fund and dividends of net
investment income paid in cash. All dividends are treated in the same manner for
Federal income tax purposes whether received in cash or reinvested in shares of
the Fund.
Income dividends will be reinvested at the Fund's net asset value as of the
last day of the period with respect to which the dividends are paid. Capital
gain dividends will be reinvested at the net asset
12
<PAGE>
value of the Fund on the payment date for the dividend. All dividends are
reinvested unless another option is selected. All dividends not reinvested will
be paid to the shareholder in cash and may be made more than seven days
following the date on which dividends would otherwise be reinvested.
TAXES
TAXATION OF THE FUND. The Fund intends to continue to qualify for each
fiscal year to be taxed as a "regulated investment company" under the Internal
Revenue Code of 1986 (the "Code"). As such, the Fund will not be liable for
Federal income and excise taxes on the net investment income and capital gains
distributed to its shareholders in accordance with the applicable provisions of
the Code. The Fund intends to distribute all of its net income and net capital
gains each year. Accordingly, the Fund should thereby avoid all Federal income
and excise taxes.
SHAREHOLDER TAX MATTERS. Dividends paid by the Fund out of its net
investment income (including realized net short term capital gains) are taxable
to the shareholders of the Fund as ordinary income. Distributions of net
long-term capital gain, if any, realized by the Fund are taxable to the
shareholders as long-term capital gain, regardless of the length of time the
shareholder may have held his shares in the Fund at the time of distribution. A
portion of the Fund's dividends may qualify for the dividends received deduction
available to corporations.
If a shareholder holds shares for six months or less and during that period
receives a distribution taxable to the shareholder as a long-term capital gain,
any loss realized on the sale of the shareholder's shares during that six-month
period would be deemed a long-term loss to the extent of the distribution.
Any dividend or distribution received by a shareholder on shares of the
Fund will have the effect of reducing the net asset value of the shareholder's
shares by the amount of the dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of shares by a shareholder,
although in effect a return of capital to that particular shareholder, would be
taxable to the shareholder as described above.
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income or other taxes. Under certain
circumstances, shareholders will be notified of their share of these taxes and
will be required to include that amount as income. In that event, the
shareholder may be entitled to claim a credit or deduction for those taxes.
GENERAL. The Fund is required by Federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions and
redemptions) paid to a non-corporate shareholder unless such shareholder
certifies in writing that the social security or tax identification number
provided is correct and that the shareholder is not subject to backup
withholding for prior underreporting to the Internal Revenue Service.
Reports containing appropriate information with respect to the Federal
income tax status of dividends and distributions paid during the year by the
Fund will be mailed to shareholders shortly after the close of each year.
7. OTHER INFORMATION
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00
p.m., Eastern time, on each Fund Business Day by dividing the value of the
Fund's net assets (I.E., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the number of shares outstanding at the time the determination
is made. Securities owned by the Fund for which market quotations are readily
available are valued at current market value, or, in their absence, at fair
value as determined by the Board. Purchases and redemptions will be effected at
the time of determination of net asset value next following the receipt of any
purchase or redemption order as described under "Purchases and Redemptions of
Shares."
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and
assumed the name of
13
<PAGE>
Forum Funds, Inc. on March 16, 1987. On January 5, 1996, Forum Funds, Inc. was
reorganized 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 Fund) and may in the future divide portfolios
or series into two or more classes of shares (such as Investor and Institutional
Shares). Currently the authorized shares of the Trust are divided into 15
separate series. Prior to November 25, 1996, the Fund was a separate portfolio
named Austin Global Equity Fund of Stone Bridge Funds, Inc., a Maryland
corporation.
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
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.
From time to time, certain shareholders may own a large percentage of the
shares of the Fund. Accordingly, those shareholders may be able to greatly
affect (if not determine) the outcome of a shareholder vote.
PERFORMANCE INFORMATION
The Fund's performance may be quoted in advertising in terms of yield or
total return. Both types of performance are based on the Fund's historical
results and are not intended to indicate future performance. The Fund's yield is
a way of showing the rate of income the Fund earns on its investments as a
percentage of the Fund's share price. To calculate yield, the Fund takes the
interest income it earned from its portfolio of investments for a 30 day period
(net of expenses), divides it by the average number of shares entitled to
receive dividends, and expresses the result as an annualized percentage rate
based on the Fund's share price at the beginning of the 30 day period. The
Fund's total return shows its overall change in value, including changes in
share price and assuming all the Fund's distributions are reinvested. A
cumulative total return reflects the Fund's performance over a stated period of
time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Fund's performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in the Fund's returns, shareholders
should recognize that they are not the same as actual year-by-year results. To
illustrate the components of overall performance, the Fund may separate its
cumulative and average annual returns into income results and capital gain or
loss.
The Fund's advertisements may refer to ratings and rankings among similar
funds by independent evaluators such as Morningstar, Lipper Analytical Services,
Inc. or CDA/Wiesenberger. In addition, the performance of the Fund may be
compared to recognized indices of market performance. The comparative material
found in the Fund's advertisements, sales literature or reports to shareholders
may contain performance ratings. These are not to be considered representative
or indicative of future performance.
14
<PAGE>
APPENDIX
OPTIONS ON EQUITY SECURITIES (sometimes referred to as stock options) - A
call option is a short-term contract pursuant to which the purchaser of the call
option, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. A put option
gives its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying
security, upon exercise at the exercise price during the option period.
OPTIONS ON STOCK INDEXES - A stock index assigns relative values to the
stock included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional stock options except that exercises of stock
index options are effected with cash payments and do not involve delivery of
securities. Thus, upon exercise of a stock index options, the purchaser will
realize and the writer will pay an amount based on the differences between the
exercise price and the closing price of the stock index.
FOREIGN CURRENCY OPTIONS - A foreign currency option operates in the same
manner as an option on securities. Options on foreign currencies are primarily
traded in the over-the-counter market.
STOCK INDEX FUTURES CONTRACTS - A stock index futures contract is a
bilateral agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of trading of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the stocks comprising the index is made. Generally contracts are closed out
prior to the expiration date of the contract.
FOREIGN CURRENCY FUTURES CONTRACTS - A foreign currency futures contract is
a bilateral agreement pursuant to which two parties agree to take or make
delivery of a quantity of a foreign currency called for in a contract at a
specified future time and at a specific price. Although these contracts call for
delivery of or acceptance of the foreign currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery.
OPTIONS ON FUTURES CONTRACTS - Options on futures contracts are similar to
stock options except that an option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND THE
FUND'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE
OFFERING OF THE FUND'S SHARES, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO
WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
15
<PAGE>
AUSTIN GLOBAL
EQUITY FUND
PROSPECTUS
NOVEMBER 25, 1996
AUSTIN
Investment Management, Inc.
Registered Investment Advisors
------------------------------------
<PAGE>
OAK HALL-REGISTERED TRADEMARK- EQUITY FUND
------------------------------------------------
Two Portland Square
Portland, Maine 04101
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
Forum Financial Corp.
Two Portland Square
Portland, Maine 04101
(207) 879-0001
- --------------------------------------------------------------------------------
PROSPECTUS NOVEMBER 25, 1996
- --------------------------------------------------------------------------------
This Prospectus offers shares of the Oak Hall-Registered Trademark- Equity Fund
(the "Fund"), which is a diversified portfolio of Forum Funds (the "Trust"), an
open-end, management investment company. The investment objective of the Fund is
to seek capital appreciation by investing primarily in a portfolio of common
stock and securities convertible into common stock. Shares of the Fund are
offered to investors without any sales charge, but the Fund may bear certain of
its distribution expenses.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor should know before investing. The Trust has
filed with the Securities and Exchange Commission a Statement of Additional
Information dated November 25, 1996, which contains more detailed information
about the Fund and the Trust and which is hereby incorporated into this
Prospectus by reference. An investor may obtain a copy of the Statement of
Additional Information without charge by contacting Shareholder Servicing at the
address or phone number listed above.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
1. Prospectus Summary..................... 2 5. Purchases and Redemptions of Shares.... 10
2. Financial Highlights................... 3 6. Dividends and Tax Matters.............. 12
3. Investment Objective and Policies...... 4 7. Other Information...................... 13
4. Management............................. 8 8. Appendix............................... 15
</TABLE>
- --------------------------------------------------------------------------------
Investors should read this Prospectus and retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
1. PROSPECTUS SUMMARY
SUMMARY OF THE FUND
INVESTMENT OBJECTIVE AND POLICIES. The Fund seeks capital appreciation by
investing primarily in a portfolio of common stock and securities convertible
into common stock. The Fund also may invest up to 30% of its assets in the
securities of foreign companies and may use certain investment techniques, all
of which may entail special risks. See "Investment Objective, Policies and
Limitations."
MANAGEMENT. Oak Hall-Registered Trademark- Capital Advisors, L.P. (the
"Adviser") is the Fund's investment adviser and makes investment decisions for
the Fund. Forum Financial Services, Inc., distributes the Fund's shares and
administers the Fund. See "Management." The Fund bears certain expenses in
connection with the sale of its shares. See "Management - Distribution."
PURCHASES AND REDEMPTIONS. Shares of the Fund are offered at the
next-determined net asset value without a sales charge to investors who plan to
invest a minimum of $10,000 in the Fund. Shares of the Fund may be redeemed from
the Fund at their next-determined net asset value on any Fund Business Day. See
"Purchases and Redemptions of Shares."
DIVIDENDS. Dividends representing the net investment income of the Fund
are declared and paid at least annually. Net capital gains realized by the Fund,
if any, also will be distributed annually. Dividends and distributions are
reinvested in additional shares of the Fund unless a shareholder elects to have
them paid in cash. See "Dividends and Tax Matters."
CERTAIN RISK FACTORS. There can be no assurance that the Fund will achieve
its investment objective and the Fund's net asset value will fluctuate based
upon changes in the value of its portfolio securities. Certain investments and
investment techniques of the Fund may entail additional risks or have
speculative characteristics. These include investments in small companies whose
securities are not actively traded, investments in debt securities rated below
investment grade, and investments in securities of foreign issuers. See
"Investment Objective, Policies and Limitations." The Fund is not intended to
provide a complete or balanced investment program for all investors.
EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. There are no transaction charges associated with purchases and
redemptions.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C>
Advisory Fees (after fee waivers)......... 0.31%
12b-1 Fees................................ 0.00%
Other Expenses (after expense
reimbursements)......................... 1.69%
---------
Total Fund Operating Expenses............. 2.00%
</TABLE>
The amounts of expenses are based on actual amounts incurred during the
Fund's most recent fiscal year ended June 30, 1996. Absent certain expense
reimbursements and fee waivers, during the most recent fiscal year, the
Investment Advisory Fees, Other Expenses, and Total Operating Expenses of the
Fund would have been 0.75%, 1.69%, and 2.44%, respectively. Expense
reimbursements and fee waivers are voluntary and may be reduced or eliminated at
any time. For a further description of the various costs and expenses incurred
in the Fund's operation, see "Management."
EXAMPLE
The following is a hypothetical example that indicates the dollar amount of
expenses an investor would pay assuming a $1,000 investment, a 5% annual return,
reinvestment of all dividends and distributions and full redemption at the end
of each period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 20 $ 63 $ 108 $ 223
</TABLE>
The example is based on the expenses listed in the "Annual Fund Operating
Expenses" table above. The 5% annual return is not a prediction of and does not
represent the Fund's projected returns; rather it is required by government
regulation. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RETURN. ACTUAL EXPENSES AND RETURN MAY BE GREATER OR LESS
THAN THOSE INDICATED.
2
<PAGE>
2. FINANCIAL HIGHLIGHTS
The following represents selected data for a single share outstanding of
the Fund for the period indicated. The information for the periods ending June
30, 1996, 1995 and 1994 was audited in connection with an audit of the Trust's
financial statements by Deloitte & Touche, independent auditors. The financial
statements and auditors' report thereon are contained in the Annual Report which
is incorporated by reference into the Statement of Additional Information. The
information for the period ending June 30, 1993 was audited by other independent
auditors. Further information about the Fund's performance is contained in the
Annual Report, which may be obtained without charge.
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------------------
1996 1995 1994 1993(a)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Beginning Net Asset Value per Share $ 11.33 $ 12.55 $ 14.30 $ 10.00
Net Investment Income (Loss) (0.32)(c) (0.03) (0.09) --
Net Realized and Unrealized Investment Gain (Loss)
on Investments 2.60 (0.10) (0.52) 4.31
Distributions from Net Realized Gains -- (1.09) (1.14) (0.01)
--------- --------- --------- ---------
Ending Net Asset Value per Share $ 13.61 $ 11.33 $ 12.55 $ 14.30
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratios to Average Net Assets:
Expenses(b) 2.00% 2.00% 2.01% 1.23%(d)
Net Investment Loss (1.14%) (0.23%)(c) (0.96%) (0.07%)(d)
Total Return 20.12% (1.07%) (5.14%) 45.12%(d)
Portfolio Turnover Rate 157.01% 115.33% 168.61% 187.94%
Average Commission Rate $ 0.0601(e) -- -- --
Net Assets at the End of Period (000's Omitted) $ 12,257 $ 16,339 $ 35,470 $ 12,581
</TABLE>
(a) For the period July 13, 1992 (commencement of operations)
through June 30, 1993.
(b) During the periods, various fees and expenses were waived and
reimbursed, respectively. Had these waivers and reimbursements
not occurred, the ratio of expenses to average net assets
would have been:
<TABLE>
<S> <C> <C> <C> <C>
Expenses 2.44% 2.00% 2.17% 5.91%(d)
</TABLE>
(c) Calculated using the weighted average shares outstanding.
(d) Annualized.
(e) Amount represents the average commission per share paid to
brokers on the purchase or sale of equity securities.
3
<PAGE>
3. INVESTMENT OBJECTIVE, POLICIES, AND LIMITATIONS
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation by
investing primarily in a portfolio of common stock and securities convertible
into common stock. Except during periods when the Fund assumes a temporary
defensive position, the Fund will have at least 65% of its total assets invested
in common stock and securities convertible into common stock. There can be, of
course, no assurance that the Fund will achieve its investment objective.
The Fund intends to invest principally in companies that, in the view of
the Adviser, possess above average growth potential or attractive valuations.
The Adviser seeks to identify and invest in companies it believes have a minimum
of downside risk and whose stock is selling at a discount from previous peak
prices. In addition, the Adviser seeks to invest in companies whose fundamental
attributes, in the Adviser's opinion, are improving but whose improvement has
not been fully recognized by the investment community. Consequently, the Adviser
anticipates that the Fund's portfolio will exhibit a high degree of volatility
or price fluctuation when compared to the market averages. In seeking these
investments, the Adviser relies primarily on a company by company analysis
(rather than on broader analysis of industry or economic trends). The Fund may
invest in the securities of issuers in any industry, but the Adviser emphasizes
investments in those industries for which the Adviser believes the economic
cycle is improving. The Fund may purchase the shares of small companies whose
stock is less actively traded and which have greater appreciation potential and
a correspondingly higher level of risk than larger companies whose shares are
actively traded. The securities in which the Fund invests may be traded on
securities exchanges or in the over-the-counter markets.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities,
including convertible debt and convertible preferred stock. The Fund will invest
only in convertible debt that is rated B or higher by Moody's Investors Service,
Inc. ("Moody's") or by Standard & Poor's Corporation ("S&P") and in preferred
stock that is rated b or higher by Moody's or B or higher by S&P. The Fund may
purchase unrated convertible securities if the Adviser determines the security
to be of comparable quality to a rated security that the Fund may purchase.
Unrated securities may not be as actively traded as rated securities. Securities
in the lowest permissible rating categories are characterized by Moody's as
generally lacking characteristics of a desirable investment and by S&P as being
predominantly speculative. In addition, securities in these categories may
involve the same type of risks as the "Debt Securities" described below,
although to a lesser degree. The Fund may retain securities whose rating has
been lowered below the lowest permissible rating category (or that are unrated
and determined by the Adviser to be of comparable quality) if the Adviser
determines that retaining such security is in the best interests of the Fund. A
further description of the various rating categories is included in the
Statement of Additional Information.
DEBT SECURITIES. The Fund may invest up to 25% of the value of its total
assets in heavily discounted non-investment grade, high risk, corporate debt
securities (commonly referred to as "junk bonds") rated in any category by
Moody's or S&P, or unrated, as an alternative to investing in equity securities.
In these instances, investment selection is based upon the independent research
activity of the Adviser and ratings of generally recognized bond rating
agencies, such as Moody's or S&P. Bonds rated in Moody's lowest rating category,
C, are characterized as having extremely poor prospects of ever attaining any
real investment standing. Bonds rated in S&P's lowest rating category, D, are
characterized as being in default. Non-investment grade, high risk securities
provide poor protection for payment of principal and interest but have greater
potential for capital appreciation than do higher quality securities. These
lower rated securities involve greater risk of default or price changes due to
changes in the issuer's creditworthiness than do higher quality securities. The
market for these securities may be thinner and less active than that for higher
quality securities, which may affect the price at which the lower rated
securities can be sold. In addition, the market prices of lower rated securities
may fluctuate more than the market prices of higher quality securities and may
4
<PAGE>
decline significantly in periods of general economic difficulty or rising
interest rates.
During its most recent fiscal year ended June 30, 1996, the Fund had 2.18%
of its average annual assets in debt securities rated by Moody's or S&P and
0.07% of its average annual assets in unrated investments, including cash and
short-term cash equivalents which are typically unrated. During that year, the
Fund had 2.18% of its debt securities rated CCC. For this purpose, securities
with different ratings from Moody's and S&P were assigned the higher rating.
This information reflects the average composition of the Fund's assets for the
Fund's last fiscal year and is not necessarily representative of the Fund as of
the current fiscal year or any other time.
A further description of the various rating categories is included in the
Statement of Additional Information.
ADDITIONAL INVESTMENT POLICIES
FOREIGN SECURITIES. The Fund may invest up to 30% of the value of its
total assets in securities of foreign issuers, in American Depository Receipts
("ADRs") and in securities denominated in foreign currencies (collectively,
"foreign securities"). Investments in foreign securities involve certain risks,
such as exchange rate fluctuations, political or economic instability of the
issuer or the country of issue and the possible imposition of exchange controls,
withholding taxes on dividends or interest payments, confiscatory taxes or
expropriation. Securities registration, custody and settlements of foreign
securities may in some instances be subject to delays and legal and
administrative uncertainties. Foreign securities may also be subject to greater
fluctuations in price than securities of domestic corporations denominated in
U.S. dollars. Foreign securities and their markets may not be as liquid as
domestic securities and their markets, and foreign brokerage commissions and
custody fees are generally higher than those in the United States. In addition,
less information may be publicly available about a foreign company than about a
domestic company, and foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. With respect to its permitted investments in
foreign securities, currently the Fund limits the amount of its assets that may
be invested in one country or denominated in one currency (other than the U.S.
dollar) to 25%. The Fund may invest in sponsored and unsponsored ADRs, which are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. Unsponsored ADRs may be
created without the participation of the foreign issuer. Holders of these ADRs
generally bear all the costs of the ADR facility, whereas foreign issuers
typically bear certain costs in a sponsored ADR. The bank or trust company
depository of an unsponsored ADR may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
voting rights.
The Fund may utilize foreign currency forward contracts in order to hedge
against uncertainty in the level of future foreign exchange rates. The Fund will
not enter into these contracts for speculative purposes. These contracts involve
an obligation to purchase or sell a specific currency at a specified future
date, usually less than one year from the date of the contract, at a specified
price. The Fund may enter into foreign currency forward contracts to manage
currency risks and to facilitate transactions in foreign securities. These
contracts involve a risk of loss if the Adviser fails to predict currency values
correctly and also involve similar risks to those described under "Hedging
Strategies." The Fund may also buy and sell foreign currency options and other
derivatives, foreign currency futures contracts and options on those futures
contracts. See "Hedging Strategies."
WARRANTS. The Fund may invest in warrants, which are options to purchase
an equity security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. Warrants are
usually issued by the issuer of the security to which they relate. While
warrants may be traded, there is often no secondary market for them and the
prices of warrants do not necessarily correlate with the prices of the
underlying securities. Holders of warrants have no voting rights, receive no
dividends and have no rights with respect to the assets of the
5
<PAGE>
issuer. The Fund will limit its purchases of warrants to not more than 5% of the
value of its total assets.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. The Fund may
seek additional income by entering into repurchase agreements or by lending
portfolio securities (principally brokers-dealers, except the Adviser's
affiliates, or to institutional investors). These investments may entail certain
risks not associated with direct investments in securities. For instance, in the
event that bankruptcy or similar proceedings were commenced against a
counterparty in these transactions or a counterparty defaulted on its
obligations, the Fund might suffer a loss. Failure by the other party to deliver
a security purchased by the Fund may result in a missed opportunity to make an
alternative investment. The Adviser monitors the creditworthiness of
counterparties to these transactions and intends to enter into these
transactions only when it believes the counterparties present minimal credit
risks and the income to be earned from the transaction justifies the attendant
risks.
Repurchase agreements are transactions in which the Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed-upon price on an agreed-upon future date, normally one to seven days
later. The resale price reflects a market rate of interest that is not related
to the coupon rate or maturity of the purchased security. Securities loans must
be continuously secured by cash or securities issued or guaranteed as to
principal and interest by the United States Government or by any of its agencies
and instrumentalities ("U.S. Government Securities") with a market value,
determined daily, at least equal to the value of the Fund's securities loaned.
When the Fund lends a security it receives interest from the borrower or from
investing cash collateral. The Trust's custodian maintains possession of the
purchased securities and any underlying collateral in these transactions, the
total market value of which on a continuous basis is at least equal to the
repurchase price or value of securities loaned, plus accrued interest and which
consists of the types of securities in which the Fund may invest directly. The
Fund will limit securities lending to not more than 10% of the value of its
total assets
HEDGING STRATEGIES. The Fund may in the future 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 and the purchase and sale of
futures contracts and options on those futures contracts. The Fund may write
(sell) covered put and call options and may buy put and call options on equity
securities, foreign currencies and stock indices, such as the Standard & Poor's
500 Stock Index. In addition, the Fund may buy or sell stock index and foreign
currency futures contracts and may write covered options and buy options on
those contracts. Definitions of these instruments may be found in the Appendix
to this Prospectus. 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 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. A further
description of these investment techniques, including the limitations on their
use, is contained in the Statement of Additional Information.
The Fund's use of options and futures contracts would subject the Fund to
certain investment risks and transactions cost to which it might not otherwise
be subject. These risks include: (1) dependence on the Adviser's ability to
predict movements in the prices of individual securities or currencies and
fluctuations in the general securities or currency markets; (2) imperfect
correlation between movements in the prices of options, futures contracts or
related options and movements in the price of the securities or currencies
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 Fund invests; (4) lack of assurance that a liquid
secondary market will exist for any particular instrument at any particular
time; (5) the possible need to defer closing out of certain options, futures
contracts and related options to avoid adverse tax consequences and (6) the
potential for unlimited loss when investing in futures contracts. 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
6
<PAGE>
the exercise price and the possible loss of the entire premium paid for options
purchased by the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The 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 or yield is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. The use of when-issued
transactions and forward commitments enables the Fund to hedge against
anticipated changes in interest rates and prices. If the Adviser were to
forecast incorrectly the direction of interest rate movements, the Fund might be
required to complete its when-issued or forward commitment transactions at
prices below current market values. In other words, the Fund may have paid more
for the securities than the securities are worth on the date the Fund fulfills
its commitment.
TEMPORARY DEFENSIVE POSITION. When the Adviser believes that business or
financial conditions warrant, the Fund may assume a temporary defensive
position. For temporary defensive purposes, the Fund may invest without limit in
cash or in investment grade cash equivalents, including (i) short-term
obligations issued or guaranteed by the United States Government, its agencies
or instrumentalities ("U.S. Government Securities"), (ii) prime quality
certificates of deposit, bankers' acceptances and interest-bearing savings
deposits of commercial banks doing business in the United States, (iii) prime
quality commercial paper, and (iv) repurchase agreements covering any of the
securities in which the Fund may invest directly, and, subject to the limits of
the Investment Company Act of 1940 (the "Investment Company Act,") money market
mutual funds. During periods when and to the extent that the Fund has assumed a
temporary defensive position, it will not be pursuing its investment objective.
GENERAL
PORTFOLIO TRANSACTIONS. The frequency of portfolio transactions (the
portfolio turnover rate) will vary from year to year depending on market
conditions. From time to time the Fund may engage in active short-term trading
to take advantage of price movements affecting individual issues, groups of
issues or markets. This will increase the Fund's rate of turnover and will
result in higher total brokerage costs for the Fund. An annual turnover rate of
100% would occur, for example, if all of the securities in the Fund were
replaced once in a period of one year. The Adviser weighs the anticipated
benefits of short-term investments against these consequences.
The Fund has no obligation to deal with any specific broker or dealer in
the execution of portfolio transactions. Consistent with its policy of obtaining
the best net results, the Fund may conduct brokerage transactions through
certain affiliates of the Adviser. The Board of Trustees of the Trust has
adopted policies, as required by the Investment Company Act, to ensure that
these transactions are reasonable and fair and that the commissions charged are
comparable to those charged by non-affiliated qualified broker-dealers.
CHANGES IN INVESTMENT OBJECTIVE AND POLICIES. The investment objective of
the Fund is a fundamental policy of the Fund and, along with any other policies
of the Fund that are deemed to be fundamental, may not be changed without
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. A majority of the Fund's
outstanding voting securities means the lesser of 67% of the shares of the Fund
present or represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Fund are present or represented or more than 50% of
the outstanding shares of the Fund. Except as otherwise indicated, investment
policies of the Fund are not deemed to be fundamental and may be changed by the
Board of Trustees without shareholder approval. A further description of the
Fund's investment policies is contained in the Statement of Additional
Information.
INVESTMENT LIMITATIONS. The Fund has adopted the following investment
limitations which, except for (5), are fundamental policies of the Fund.
Additional fundamental and nonfundamental limitations are listed in the
Statement of Additional Information. The Fund may not:
(1) Borrow money, except the Fund may enter into commitments to purchase
securities in
7
<PAGE>
accordance with its investment program, including delayed-delivery and
when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3% of the Fund's total
assets.
(2) Make loans to other persons except for loans of portfolio securities,
through the use of repurchase agreements, and through the purchase of debt
securities that are otherwise permitted investments.
(3) 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 investments in such industry would
comprise 25% or more of the value of the Fund's total assets.
(4) Purchase a security if, as a result (a) more than 5% of the Fund's
total assets would be invested in the securities of a single issuer, or (b) the
Fund would own more than 10% of the outstanding voting securities of a single
issuer. This limitation applies only with respect to 75% of the Fund's total
assets and does not apply to U.S. Government Securities.
(5) Invest more than 15% of its net assets in securities that are not
readily marketable, including repurchase agreements maturing in more than seven
days.
If a percentage restriction on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from a change in the market values of the Fund's assets or
redemptions of Fund shares will not be considered a violation of the limitation.
4. MANAGEMENT
The business of the Trust is managed under the direction of the Board of
Trustees. The Board formulates the general policies of the Fund and generally
meets quarterly to review the results of the Fund, monitor investment practices
and discuss other matters affecting the Fund and the Trust.
INVESTMENT ADVISER
Oak Hall-Registered Trademark- Capital Advisors, L.P. is the investment
adviser of the Fund pursuant to an Investment Advisory Agreement with the Trust.
Subject to the general control of the Board of Directors, the Adviser makes
investment decisions for the Fund. For its services under the Advisory
Agreement, the Adviser receives an advisory fee at an annual rate of 0.75% of
the average daily net assets of the Fund. The Adviser's fees are accrued daily
and paid monthly. The Adviser, in its sole discretion, may waive all or any
portion of its advisory fee. Any waiver would have the effect of increasing the
Fund's yield for the period during which the waiver was in effect and would not
be recouped by the Adviser at a later date.
John C. Hathaway, President and Chief Investment Officer of the Adviser,
has been the Fund's portfolio manager since inception of the Fund. Prior to his
association with the Adviser in May of 1989, Mr. Hathaway was a principal at
Hudson Capital Advisors. Mr. Hathaway has approximately 20 years experience in
the investment management business.
The Adviser, which is located at 24th Floor, 122 East 42nd Street, New
York, New York 10168, is a registered investment adviser and provides investment
management services to pension plans, endowment funds, institutional and
individual accounts. As of the date of this Prospectus, the Adviser had
approximately $127 million of assets under management. The Adviser was
incorporated under the laws of the State of New York in 1984 and is a wholly
owned subsidiary of American Securities Holding Corporation ("ASHC"). ASHC is
wholly owned by a trust, the beneficiaries of which are members of the William
Rosenwald family.
ADMINISTRATION
On behalf of the Fund, the Trust has entered into an Administration and
Distribution Agreement with Forum Financial Services, Inc. ("Forum"). As
provided in this agreement, Forum is responsible for the supervision of the
overall management of the Trust (including the Trust's receipt of services which
the Trust is obligated to pay for), providing the Trust with general office
facilities and providing persons satisfactory to the Board of Trustees to serve
as
8
<PAGE>
officers of the Trust. For these services, Forum receives a fee computed and
paid monthly at an annual rate of 0.25% of the average daily net assets of the
Fund. Like the Adviser, Forum, in its sole discretion, may waive all or any
portion of its fees. Forum, which is located at Two Portland Square, Portland,
Maine 04101, was incorporated under the laws of the State of Delaware on
February 7, 1986 and as of the date hereof provided management and
administrative services to registered investment companies and collective
investment funds with assets of approximately $18 billion. Forum is a registered
broker-dealer and investment adviser and is a member of the National Association
of Securities Dealers, Inc. As of the date of this Prospectus, Forum is
controlled by John Y. Keffer, President and Chairman of the Trust.
DISTRIBUTION
Pursuant to the Administration and Distribution Agreement, Forum acts as
the distributor of the Fund's shares. Under a distribution plan (the "Plan")
adopted by the Board of Directors, the Fund may reimburse Forum for the
distribution expenses incurred by Forum on behalf of the Fund. These expenses
may include the cost of advertising and promotional materials, providing
prospective shareholders with the Fund's prospectus, statement of additional
information and shareholder reports, reimbursing the Adviser for its
distribution expenses and compensating others who may provide assistance in
distributing shares of the Fund. These expenses may include costs of Forum's
offices such as rent, communications equipment, employee salaries and overhead
costs. The Fund will not reimburse Forum for any expenses in any fiscal year of
the Fund in excess of 0.20% of the Fund's average daily net assets. During the
period in which the Plan and the related Administration and Distribution
Agreement are in effect, the Board of Directors will from time to time determine
the amount of distribution expense reimbursement to be paid. Unreimbursed
expenses of the Distributor incurred during a fiscal year of the Trust may not
be reimbursed by the Trust in future years or after the termination of the Plan
or the Administration and Distribution Agreement.
TRANSFER AGENT
The Trust has entered into a Transfer Agency Agreement with Forum Financial
Corp. (the "Transfer Agent") pursuant to which the Transfer Agent acts as the
Fund's transfer agent and dividend disbursing agent. The Transfer Agent
maintains for each shareholder of record, an account (unless such accounts are
maintained by sub-transfer agents) to which all shares purchased are credited,
together with any distributions that are reinvested in additional shares. The
Transfer Agent also performs other transfer agency functions and acts as
dividend disbursing agent for the Trust. In addition, the Transfer Agent
performs portfolio accounting services for the Fund, including determination of
the Fund's net asset value.
EXPENSES OF THE TRUST
The Adviser has agreed to reimburse the Trust for certain of the Fund's
operating expenses (exclusive of interest, taxes, brokerage, fees and
organization expenses, all to the extent permitted by applicable state law or
regulation) which in any year exceed the limits prescribed by any state in which
the Fund's shares are qualified for sale. The Trust may elect not to qualify its
shares for sale in every state. For the purpose of this obligation to reimburse
expenses, the Fund's annual expenses are estimated and accrued daily, and any
appropriate estimated payments will be made by the Adviser monthly. Subject to
the above obligations, the Trust has confirmed its obligation to pay all the
Trust's other expenses. The Adviser, Forum and the Transfer Agent may each elect
to waive (or continue to waive) all or a portion of their fees, which are
accrued daily and paid monthly. Fee waivers are voluntary and may be reduced or
eliminated at any time. The Fund's expenses comprise Trust expenses attributable
to the fund, which are charged to the Fund, and those not attributable to a
particular Fund of the Trust which are allocated among the Fund and all other
funds of the Trust in proportion to their average net assets.
9
<PAGE>
5. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL
PURCHASES. Fund shares may be purchased without a sales charge at their
net asset value on any weekday except customary national business holidays and
Good Friday ("Fund Business Day"). See "Other Information -- Determination of
Net Asset Value."
Fund shares are issued at a price equal to the net asset value per share
next determined after an order in proper form, accompanied by funds on deposit
at a Federal Reserve Bank ("Federal Funds"), is received by the Transfer Agent.
An investor's funds will not be accepted or invested by the Fund during the
period before the Fund's receipt of Federal Funds. The Fund's net asset value is
calculated at 4:00 p.m., Eastern time on each Fund Business Day. Fund shares
become entitled to receive dividends on the day after the shares are issued to
an investor.
The Fund reserves the right to reject any subscription for the purchase of
its shares and may, in the Adviser's discretion, accept portfolio securities in
lieu of cash as payment for Fund shares. Stock certificates are issued only to
shareholders of record upon their written request, and no certificates are
issued for fractional shares.
REDEMPTIONS. There is no redemption charge, no minimum period of
investment, and no restriction on frequency of redemptions. The date of payment
of redemption proceeds may not be postponed for more than seven days after
shares are tendered to the Transfer Agent for redemption by a shareholder of
record. The right of redemption may not be suspended except in accordance with
the Investment Company Act.
Redemptions are effected at a price equal to the net asset value per share
next determined following acceptance by the Transfer Agent of the redemption
order in proper form (and any supporting documentation which the Transfer Agent
may require). Shares redeemed are not entitled to participate in dividends
declared after the day on which a redemption becomes effective.
PURCHASE AND REDEMPTION PROCEDURES
Investors may obtain the account application necessary to open an account
by writing the Transfer Agent at the following address:
Oak Hall-Registered Trademark- Equity Fund
P.O. Box 446
Portland, Maine 04112
There is a $10,000 minimum for initial investments in the Fund and a $5,000
minimum for subsequent purchases, except for individual retirement accounts (See
"Individual Retirement Accounts"). Shareholders will receive from the Trust
periodic statements listing account activity during the statement period.
The Fund sells and redeems its shares on a continuing basis at their net
asset value next determined following the receipt by the Transfer Agent of a
purchase or redemption order in proper form including, in the case of purchases,
Federal Funds. An investor's funds will not be accepted or invested by the Fund
during the period before the Fund's receipt of Federal Funds.
INITIAL PURCHASE OF SHARES
MAIL. Investors may send a check made payable to the Trust along with a
completed account application to the Transfer Agent at the following address:
Oak Hall-Registered Trademark- Equity Fund
P.O. Box 446
Portland, Maine 04112
Checks are accepted at full value subject to collection. Payment by a check
drawn on any member of the Federal Reserve System can normally be converted into
Federal Funds within two business days after receipt of the check. Checks drawn
on some non-member banks may take longer.
BANK WIRE. To make an initial investment in the Fund using the fedwire
system for transmittal of money among banks, an investor should first telephone
the Transfer Agent at 207-879-0001 to obtain an account number for an initial
investment. The
10
<PAGE>
investor should then instruct a member commercial bank to wire his money
immediately to:
The First National Bank of Boston
Boston, Massachusetts
ABA # 011000390
For Credit to: Forum Financial Corp.
Account # 541-54171
Oak Hall Equity Fund
(Investor's Name)
(Investor's Account Number)
The investor should then promptly complete and mail the account
application.
Any investor planning to wire funds should instruct his bank early in the
day so the wire transfer can be accomplished the same day. There may be a charge
by the investor's bank for transmitting the money by bank wire, and there also
may be a charge for use of Federal Funds. The Trust does not charge investors
for the receipt of wire transfers. Payment in the form of a bank wire received
prior to 4:00 p.m., Eastern time on a Fund Business Day will be treated as a
Federal Funds payment received before that time.
THROUGH BROKERS AND OTHER FINANCIAL INSTITUTIONS. Shares may be purchased
and redeemed through brokers and other financial institutions that have entered
into sales agreements with Forum. These institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to the Trust. The Trust is not responsible for the
failure of any institution to promptly forward these requests or otherwise carry
out its obligations to its customers.
Investors who purchase shares will be subject to the procedures of their
institution, which may include charges, limitations, investment minimums, cutoff
times and restrictions in addition to, or different from, those applicable to
shareholders who invest in the Fund directly. Certain shareholder services may
not be available to shareholders who have purchased through a broker-dealer or
other institution. These investors should acquaint themselves with their
institution's procedures and should read this Prospectus in conjunction with any
materials and information provided by their institution. Customers who purchase
Fund shares in this manner may or may not be the shareholder of record and,
subject to their institution's and the Fund's procedures, may have Fund shares
transferred into their name. There is typically a one to five day settlement
period for purchases and redemptions through broker-dealers.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases may be made by mailing a check or by sending a bank
wire as indicated above. Shareholders using the wire system for subsequent
purchases should first telephone the Transfer Agent at 207-879-0001 to notify it
of the wire transfer. All payments should clearly indicate the shareholder's
name and account number.
REDEMPTION OF SHARES
Redemption requests will not be effected unless any check used for
investment has been cleared by the shareholder's bank, which may take up to 15
calendar days. This delay may be avoided by investing in the Fund through wire
transfers. Normally redemption proceeds are paid immediately following any
redemption, but in no event later than seven days after redemption, by check
mailed to the shareholder of record at his record address. Shareholders that
wish to redeem shares by Telephone or by Bank Wire must elect these options by
properly completing the appropriate sections of their account application. These
privileges may not be available until several weeks after a shareholder's
application is received. Shares for which certificates have been issued may not
be redeemed by telephone. These privileges may be modified or terminated by the
Trust at any time. Due to the cost to the Trust of maintaining smaller accounts,
the Trust reserves the right to redeem, upon not less than 60 days' written
notice, all shares in any Fund account with an aggregate net asset value of less
than $10,000 ($2,000 for IRAs). The Fund will not redeem accounts that fall
below these amounts solely as a result of a reduction in net asset value.
REDEMPTION BY MAIL. Shareholders may make a redemption in any amount by
sending a written request to the Transfer Agent accompanied by any stock
certificate that may have been issued to the
11
<PAGE>
shareholder. All certificates submitted for redemption must be endorsed by the
shareholder with signature guaranteed and all written requests for redemption
must be signed by the shareholder with signature guaranteed.
When a signature guarantee is called for, including any instruction to
change the record name or address, the designated bank account, the dividend
election, or the telephone redemption option election on an account, the
shareholder should have "Signature Guaranteed" stamped under his signature and
signed by a commercial bank or trust company, a broker, dealer or securities
exchange, a credit union or a savings association that is authorized to
guarantee signatures.
TELEPHONE REDEMPTION. A shareholder that has elected telephone redemption
privileges may make a telephone redemption request by calling the Transfer Agent
at 207-879-0001. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, the Trust and the Transfer Agent will employ reasonable
procedures to confirm that such instructions are genuine. Shareholders must
provide the Transfer Agent with the shareholder's account number, the exact name
in which the shares are registered and some additional form of identification
such as a password. The Trust or the Transfer Agent may employ other procedures
such as recording certain transactions. If such procedures are followed, neither
the Transfer Agent nor the Trust will be liable for any losses due to
unauthorized or fraudulent redemption requests. Shareholders should verify the
accuracy of telephone instructions immediately upon receipt of confirmation
statements.
During times of drastic economic or market changes, the telephone
redemption privilege may be difficult to implement. In the event a shareholder
is unable to reach the Transfer Agent by telephone requests may be mailed or
hand-delivered to the Transfer Agent. In response to the telephone redemption
instruction, the Fund will mail a check to the shareholder's record address or,
if the shareholder has elected wire redemption privileges, wire the proceeds.
Shares for which certificates have been issued may not be redeemed by telephone.
BANK WIRE REDEMPTION. With respect to any redemption of more than $10,000,
a shareholder that has elected wire redemption privileges may request the Fund
to transmit the proceeds by Federal Funds wire to a bank account designated on
the shareholder's account application. To request bank wire redemptions by
telephone, the shareholder also must have elected to be able to redeem shares by
telephone.
OTHER REDEMPTION MATTERS. The Transfer Agent will deem a shareholder's
account "lost" if correspondence to the shareholder's address of record is
returned for six months, unless the Transfer Agent determines the shareholder's
new address. When an account is deemed lost all distributions on the account
will be reinvested in additional shares of the Fund. In addition, the amount of
any outstanding (unpaid for six months or more) checks for distributions that
have been returned to the Transfer Agent will be reinvested and the checks will
be canceled.
INDIVIDUAL RETIREMENT ACCOUNTS
The Fund may be a suitable investment vehicle for part or all of the assets
held in individual retirement accounts ("IRAs"). The minimum initial investment
for investors opening an IRA or investing through their own IRA is $2,000, and
the minimum subsequent investment is $250. Individuals may make tax-deductible
IRA contributions of up to a maximum of $2,000 annually. However, the deduction
will be reduced if the individual or, in the case of a married individual filing
jointly, either the individual or the individual's spouse is an active
participant in an employer-sponsored retirement plan and has adjusted gross
income above certain levels.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared and paid
annually. Net capital gains realized by the Fund, if any, also will be
distributed annually. Shareholders may choose either to have all dividends
reinvested in additional shares of the Fund or received in cash or to have
dividends of net capital gain reinvested in additional shares of the Fund and
dividends of net investment income paid in cash. All
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<PAGE>
dividends are treated in the same manner for Federal income tax purposes whether
received in cash or reinvested in shares of the Fund. All dividends are
reinvested unless another option is selected. Income dividends will be
reinvested at the Fund's net asset value as of the last day of the period with
respect to which the dividends are paid and capital gains dividends will be
reinvested at the net asset value of the Fund on the payment date for the
dividend. Cash payments may be made more than seven days following the date on
which dividends would otherwise be reinvested.
TAXES
The Fund intends to continue to qualify for each fiscal year to be taxed as
a "regulated investment company" under the Internal Revenue Code of 1986 (the
"Code"). As such, the Fund will not be liable for Federal income and excise
taxes on the net investment income and capital gains distributed to its
shareholders in accordance with the applicable provisions of the Code. The Fund
intends to distribute all of its net income and net capital gains each year.
Accordingly, the Fund should thereby avoid all Federal income and excise taxes.
Dividends paid by the Fund out of its net investment income (including
realized net short term capital gains) are taxable to the shareholders of the
Fund as ordinary income notwithstanding that such dividends are reinvested in
additional shares of the Fund. Distributions of net long-term capital gains, if
any, realized by the Fund are taxable to the shareholders as long-term capital
gains, regardless of the length of time the shareholder may have held his shares
in the Fund at the time of distribution. A portion of the Fund's dividends may
qualify for the dividends received deduction available to corporations.
If a shareholder holds shares for six months or less and during that period
receives a distribution taxable to him as a long-term capital gain, any loss
realized on the sale of his shares during that six-month period would be a
long-term loss to the extent of the distribution. Distributions to shareholders
will be treated in the same manner for Federal income tax purposes whether
received in cash or reinvested in additional shares of the Fund.
Any dividend or distribution received by a shareholder on shares of the
Fund will have the effect of reducing the net asset value of his shares by the
amount of the dividend or distribution. Furthermore, a dividend or distribution
made shortly after the purchase of shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to him as
described above.
The Fund is required by Federal law to withhold 31% of reportable payments
(which may include dividends, capital gains distributions and redemptions) paid
to a non-corporate shareholder unless such shareholder certifies in writing that
the social security or tax identification number provided is correct and that
the shareholder is not subject to backup withholding for prior underreporting to
the Internal Revenue Service.
Reports containing appropriate information with respect to the Federal
income tax status of dividends and distributions paid during the year by the
Fund will be mailed to shareholders shortly after the close of each year.
7. OTHER INFORMATION
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00
P.M., Eastern time, on each Fund Business Day by dividing the value of the
Fund's net assets (I.E., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the number of shares outstanding at the time the determination
is made. Securities owned by the Fund for which market quotations are readily
available are valued at current market value, or, in their absence, at fair
value as determined by the Board of Directors. Purchases and redemptions will be
effected at the time of determination of net asset value next following the
receipt of any purchase or redemption order as described under "Purchases and
Redemptions of Shares."
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and
assumed the name of Forum Funds, Inc. on March 16, 1987. On January 5,
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1996, Forum Funds, Inc. was reorganized as a Delaware business trust under the
name Forum Funds. 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 Fund) and may in the future divide portfolios or series into two or
more classes of shares (such as Investor and Institutional Shares). Currently
the authorized shares of the Trust are divided into 15 separate series. Prior to
November 25, 1996, the Fund was a separate portfolio named Oak Hall-Registered
Trademark- Equity Fund of Stone Bridge Funds, Inc., a Maryland corporation.
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
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.
From time to time, certain shareholders may own a large percentage of the
shares of the Fund. Accordingly, those shareholders may be able to greatly
affect (if not determine) the outcome of a shareholder vote.
PERFORMANCE INFORMATION
The Fund's performance may be quoted in advertising in terms of yield or
total return. Both types of performance are based on the Fund's historical
results and are not intended to indicate future performance. The Fund's yield is
a way of showing the rate of income the Fund earns on its investments as a
percentage of the Fund's share price. To calculate yield, the Fund takes the
interest income it earned from its portfolio of investments for a 30 day period
(net of expenses), divides it by the average number of shares entitled to
receive dividends, and expresses the result as an annualized percentage rate
based on the Fund's share price at the beginning of the 30 day period. The
Fund's total return shows its overall change in value, including changes in
share price and assuming all the Fund's distributions are reinvested. A
cumulative total return reflects the Fund's performance over a stated period of
time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Fund's performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in the Fund's returns, shareholders
should recognize that they are not the same as actual year-by-year results. To
illustrate the components of overall performance, the Fund may separate its
cumulative and average annual returns into income results and capital gain or
loss.
The Fund's advertisements may refer to ratings and rankings among similar
funds by independent evaluators such as Morningstar, Lipper Analytical Services,
Inc. or CDA/Weisenberger. In addition, the performance of the Fund may be
compared to recognized indices or market performance. The comparative material
found in the Fund's advertisements, sales literature or reports to shareholders
may contain performance ratings. These are not to be considered representative
or indicative of future performance.
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APPENDIX
OPTIONS ON EQUITY SECURITIES (sometimes referred to as stock options) - A
call option is a short-term contract pursuant to which the purchaser of the call
option, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. A put option
gives its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying
security, upon exercise at the exercise price during the option period.
OPTIONS ON STOCK INDEXES - A stock index assigns relative values to the
stock included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional stock options except that exercises of stock
index options are effected with cash payments and do not involve delivery of
securities. Thus, upon exercise of a stock index options, the purchaser will
realize and the writer will pay an amount based on the differences between the
exercise price and the closing price of the stock index.
FOREIGN CURRENCY OPTIONS - A foreign currency option operates in the same
manner as an option on securities. Options on foreign currencies are primarily
traded in the over-the-counter market.
STOCK INDEX FUTURES CONTRACTS - A stock index futures contract is a
bilateral agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of trading of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the stocks comprising the index is made. Generally contracts are closed out
prior to the expiration date of the contract.
FOREIGN CURRENCY FUTURES CONTRACTS - A foreign currency futures contract is
a bilateral agreement pursuant to which two parties agree to take or make
delivery of a quantity of a foreign currency called for in a contract at a
specified future time and at a specific price. Although these contracts call for
delivery of or acceptance of the foreign currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery.
OPTIONS ON FUTURES CONTRACTS - Options on futures contracts are similar to
stock options except that an option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND THE
FUND'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE
OFFERING OF THE FUND'S SHARES, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO
WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
15
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OAK HALL-REGISTERED TRADEMARK-EQUITY FUND
PROSPECTUS
NOVEMBER 25, 1996
[LOGO]
<PAGE>
AUSTIN GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
Austin Investment Management, Inc. Shareholder Servicing:
375 Park Avenue Forum Financial Corp.
New York, New York 10152 Two Portland Square
(212) 888-9292 Portland, Maine 04101
207-879-0001
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
November 25, 1996
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus offering shares
of the Austin Global Equity Fund (the "Fund") and should be read only in
conjunction with the Prospectus, a copy of which may be obtained by without
charge by contacting shareholder servicing at the address listed above.
TABLE OF CONTENTS
Page
----
1. Investment Policies
and Limitations . . . . . . . . . . . . . . 2
2. Performance Data. . . . . . . . . . . . . . . 13
3. Management. . . . . . . . . . . . . . . . . . 14
4. Determination of Net Asset Value. . . . . . . 17
5. Portfolio Transactions. . . . . . . . . . . . 18
6. Custodian . . . . . . . . . . . . . . . . . . 19
7. Additional Purchase and
Redemption Information. . . . . . . . . . . 19
8. Tax Matters . . . . . . . . . . . . . . . . . 20
9. Other Matters . . . . . . . . . . . . . . . . 21
Appendix A - Description of Securities Ratings
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.
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1. INVESTMENT POLICIES AND LIMITATIONS
The Fund's investment adviser, Austin Investment Management, Inc. (the
"Adviser"), in determining the composition of the Fund's portfolio, seeks to
distribute investments among various countries, including the United States, and
among various geographic regions. In making investment decisions, the Adviser
considers many factors, including: prospects for economic growth among the
various countries; relative amounts of capital invested in foreign countries;
expected levels of inflation; government policies influencing business
conditions; outlooks for future currency relationships; and the range of
investment opportunities available.
INVESTMENT IN FOREIGN SECURITIES
The Fund invests primarily in issuers based in the United States, Europe, Japan
and the Pacific Basin. The European and Pacific Basin countries in which
issuers will be based are primarily those of Western Europe, such as the United
Kingdom, Germany, France, Italy and the Scandinavian countries, and South Korea,
Australia and New Zealand.
Foreign securities are generally purchased in over-the-counter markets or on
stock exchanges located in the countries in which the respective principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign securities markets are generally not as
developed or efficient as those in the United States, and securities of
foreign companies may be less liquid and more volatile than securities of
comparable United States companies. Fixed commissions on foreign stock
exchanges are generally higher than negotiated commissions on United States
exchanges, although the Fund will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of stock exchanges, brokers and listed companies
than in the United States. Issuers of securities in foreign jurisdictions
generally are not subject to the same degree of regulation as are U.S.
issuers with respect to such matters as insider trading rules, restrictions
on market manipulation, shareholder proxy requirements, and timely disclosure
of information. Foreign countries may possibly place limitations on the
removal of funds or other assets of the Fund, and diplomatic developments
could affect United States investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the
United States' economy in such respects as growth of gross national product,
rate of inflation, capital reinvestment, self-sufficiency of natural
resources and balance of payments position.
The dividends and interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction for U.S.
federal income tax purposes for the shareholder's proportionate share of foreign
taxes paid by the Fund. (See "Tax Matters.")
Although the Fund values its assets daily in terms of U.S. dollars, it will not
normally convert its holdings of foreign currencies into U.S. dollars on a daily
basis. It will do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (commonly
known as the "spread") between the price at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Investors should understand that the expense ratio of the Fund can be expected
to be higher than that of other investment companies investing solely in
domestic securities due to, among other things, the greater cost of maintaining
the custody of foreign securities and higher transaction charges, such as stamp
duties and turnover taxes that may be associated with the purchase and sale of
portfolio securities.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P") are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to corporate bonds, including convertible securities by Moody's
and S&P is included in
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<PAGE>
Appendix A to this Statement of Additional Information. The Fund may use these
ratings in determining whether to purchase, sell or hold a security. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. Subsequent to its purchase by the
Fund, an issue of securities may cease to be rated or its rating may be reduced.
The Adviser will consider such an event in determining whether the Fund should
continue to hold the obligation. 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 in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates.
COMMON STOCK AND PREFERRED STOCK
Common stockholders are the owners of the company issuing the stock and,
accordingly, vote on various corporate governance matters such as mergers.
They are not creditors of the company, but rather, upon liquidation of the
company are entitled to their pro rata share of the company's assets after
creditors (including fixed income security holders) and, if applicable,
preferred stockholders are paid. Preferrred stock is a class of stock having
a preference over common stock as to dividends and, in the alternative, as
to the recovery of investment. A preferred stockholder is a shareholder in
the company and not a creditor of the company as is a holder of the company's
fixed income securities. Dividends paid to common and preferred stockholders
are distributions of the earnings of the company and not interest payments,
which are expenses of the company. Equity securities owned by the Fund may
be traded in the over-the-counter market or on a regional securities exchange
and may not be traded every day or in the volume typical of securities
trading on a national securities exchange. As a result, disposition by the
Fund of a portfolio security to meet redemptions by shareholders or otherwise
may require the Fund to sell these securities at a discount from market
prices, to sell during periods when disposition is not desirable, or to make
small sales over a lengthy period of time. The market of all securities,
including equity securities, is based upon the market's perception of value
and not necessarily the book value of an issuer or other objective measure
of a company's worth.
CONVERTIBLE SECURITIES
The Fund 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 have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. 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 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 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 have an effect on 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 the 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.
WARRANTS
The Fund may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. To the
extent that the market value of the security that may be purchased upon exercise
of the warrant rises above the exercise price, the value of the warrant will
tend to rise. To the extent that the exercise price equals or exceeds the
market value of such security, the warrants will have little or no market value.
If a warrant is not exercised within the specified time period, it will become
worthless and the Fund will lose the purchase price paid for the warrant and the
right to purchase the underlying security.
3
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve currencies of foreign
countries. In addition, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs. Accordingly,
the value of the assets of the Fund as measured in United States dollars may be
affected by changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with conversions between
various currencies. The Fund may conduct foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into foreign currency forward
contracts ("forward contracts") to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one
year) from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers and involve the risk that the other party to the contract may
fail to deliver currency when due, which could result in losses to the Fund. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Foreign exchange dealers realize a profit
based on the difference between the price at which they buy and sell various
currencies.
The Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, the Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a short-
term hedging strategy is highly uncertain. Forward contracts involve the risk
of inaccurate predictions of currency price movements, which may cause the Fund
to incur losses on these contracts and transaction costs. The Adviser does not
intend to enter into forward contracts on a regular or continuous basis, and
will not do so if, as a result, the Fund will have more than 25% of the value of
its total assets committed to such contracts or the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency.
At or before the settlement of a forward currency contract, the Fund may either
make delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
the currency through the conversion of assets of the Fund into the currency. The
Fund may close out a forward contract obligating it to purchase a foreign
currency by selling an offsetting contract. If the Fund engages in an
offsetting transaction, the Fund will incur a gain or a loss to the extent that
there has been a change in forward contract prices. Additionally, although
forward contracts may tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential
gain which might result should the value of such currency increase.
4
<PAGE>
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market. The interbank market in foreign currencies is a global,
around-the-clock market.
When required by applicable regulatory guidelines, the Fund will set aside cash,
U.S. Government Securities (as defined in the Prospectus) or other liquid, high-
grade debt securities in a segregated account with its custodian in the
prescribed amount.
HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser may engage in certain options and
futures strategies to attempt to hedge the Fund's portfolio. The instruments in
which the Fund may invest include (i) options on securities, stock indexes and
foreign currencies, (ii) stock index and foreign currency futures contracts
("futures contracts"), and (iii) options on futures contracts. Use of these
instruments is subject to regulation by the Securities and Exchange Commission
("SEC"), the several options and futures exchanges upon which options and
futures are traded, and the Commodities Futures Trading Commission ("CFTC").
The various strategies referred to herein and in the Fund's Prospectus are
intended to illustrate the type of strategies that are available to, and may be
used by, the Adviser in managing the Fund's portfolio. No assurance can be
given, however, that any strategies will succeed.
The Fund will not use leverage in its hedging strategies. In the case of
transactions entered into as a hedge, the Fund will hold securities, currencies
or other options or futures positions whose values are expected to offset
("cover") its obligations thereunder. The Fund will not enter into a hedging
strategy that exposes the Fund 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, high-grade debt securities with a value sufficient
at all times to cover its potential obligations. When required by applicable
regulatory guidelines, the Fund will set aside cash, U.S. Government Securities
or other liquid, high-grade debt securities in a segregated account with its
custodian in the prescribed amount. Any assets used for cover or held in a
segregated account cannot be sold or closed out while the hedging 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.
The Fund is subject to the following restrictions in its use of options and
futures contracts. The Fund will not (i) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged through the use of options or futures contracts,
(ii) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets, or (iii) purchase call
options if, as a result, the current value of options premiums for options
purchased would exceed 5% of the Fund's total assets.
OPTIONS STRATEGIES
The Fund may purchase put and call options written by others and write (sell)
put and call options covering specified securities, stock index-related amounts
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 a security or 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 a
security or 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 or security. The Fund may buy or sell both exchange-traded
and over-the-counter ("OTC") options. The Fund will purchase or write an option
only if that option is traded on a recognized U.S. options exchange or if the
Adviser believes that a liquid secondary market for the option exists. When the
Fund purchases an OTC option, it
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relies on the dealer from which it has purchased the OTC option to make or take
delivery of the securities or 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.
The Fund may purchase call options on equity securities that the 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. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; 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. The 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.
The Fund may write covered call options. The 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. The Fund may write covered put options only to
effect closing transactions.
The Fund may purchase and write put and call options on stock indexes in much
the same manner as the equity security options discussed above, except that
stock index options may serve as a hedge against overall fluctuations in the
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 stock index options will depend on the extent to which price
movements in the stock index selected correlate with price movements of the
securities which are being hedged. Stock index options are settled exclusively
in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
The Fund may take positions in options on foreign currencies in order to hedge
against the risk of foreign exchange fluctuation on foreign securities the Fund
holds in its portfolio or which it intends to purchase. Options on foreign
currencies are affected by the factors discussed in "Options Strategies" above
and "Foreign Currency Forward Transactions" which influence foreign exchange
sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring
in the interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, the Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
The 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
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under a call option it had written, a call option of the same type would be
purchased by the Fund. 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 Adviser's ability to
forecast the direction of price fluctuations in the underlying securities or
currency markets, or in the case of a stock 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 the 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 which provides a market for identical options. Most exchange-listed
options relate to equity securities. Exchange markets for options on foreign
currencies are relatively new and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the over-the-counter markets (currently the primary markets for options on
foreign currencies) 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, the 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 the Fund may result in material losses to
the Fund.
(4) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
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, securities or currencies
as called for in the contract at a specified future date and at a specified
price. For stock index futures contracts, delivery is of an amount of cash
equal to a specified dollar amount times the difference between the stock index
value at the time of the contract and the close of trading of the contract.
The Fund may sell stock index futures contracts in anticipation of a general
market or market sector decline that may adversely affect the market values of
the Fund's securities. To the extent that the Fund's portfolio correlates with
a given stock index, the sale of futures contracts on that index could reduce
the risks associated with a market decline and thus provide an alternative to
the liquidation of securities positions. The Fund may purchase a stock index
futures contract if a significant market or market sector advance is
anticipated. These purchases would serve as a temporary substitute for the
purchase of individual stocks, which stocks may then be purchased in the future.
The Fund may purchase call options on a stock index future 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 stock,
in that it can be used as a temporary substitute for a position in the stock
itself. The Fund may purchase a call option on a stock index future to hedge
against a market advance in stocks which the Fund planned to acquire at a future
date. The Fund may also purchase put options on stock index futures contracts.
These purchases are analogous to the purchase of protective puts on individual
stocks, where a level of protection is sought below which no additional economic
loss would be incurred by the Fund. The Fund may write covered call options on
stock index futures contracts as a partial hedge against a decline in the prices
of stocks held in the Fund's portfolio. This is analogous to writing covered
call options on securities.
The Fund may sell foreign currency futures contracts to hedge against possible
variations in the exchange rate of the foreign currency in relation to the U.S.
dollar. In addition, the Fund may sell foreign currency futures contracts when
the Adviser anticipates a general weakening of foreign currency exchange rates
that could adversely affect the
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market values of the Fund's foreign securities holdings. The Fund may purchase
a foreign currency futures contract to hedge against an anticipated foreign
exchange rate increase pending completion of anticipated transactions. Such a
purchase would serve as a temporary measure to protect the Fund against such
increase. The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. The
Fund may write call options on foreign currency futures contracts as a partial
hedge against the effects of declining foreign exchange rates on the value of
foreign securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
No price is paid upon entering into futures contracts, rather, the Fund is
required to deposit 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,
would be 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. For example, futures contracts on broad-based stock
indexes can currently be entered into with respect to the Standard & Poor's 500
Stock Index on the Chicago Mercantile Exchange, the New York Stock Exchange
Composite Stock Index on the New York Futures Exchange, the Value Line Composite
Stock Index on the Kansas City Board of Trade and the Major Market Index of the
Chicago Board of Trade.
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 the Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
(1) Successful use by the Fund of futures contracts and related options
will depend upon the 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 securities or currencies due to price
distortions in the futures market or otherwise. There may be several reasons
unrelated to the value of the underlying securities or 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.
The 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
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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) The 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.
(7) Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the buying and selling of futures generally. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
foreign currencies described above. In addition, settlement of foreign currency
futures contracts must occur within the country issuing that currency. Thus,
the Fund must accept or make delivery of the underlying foreign currency in
accordance with any U.S. or foreign restrictions or regulations regarding the
maintenance of foreign banking arrangements by U.S. residents, and the Fund may
be required to pay any fees, taxes or charges associated with such delivery
which are assessed in the issuing country.
COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
The Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. The 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 the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however that in addition,
with respect to positions in commodity futures and option contracts not for bona
fide hedging purposes the Fund represents that the aggregate initial margin and
premiums required to establish these positions (subject to certain exclusions)
will not exceed 5% of the liquidation value of the Fund's assets after taking
into account unrealized profits and losses on any such contract the Fund has
entered into.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
Counterparties to a Money Market Fund's reverse repurchase agreements must be a
primary dealer that reports to the Federal Reserve Bank of New York ("primary
dealers") or one of the largest 100 commercial banks in the United States.
Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
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WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase or sell portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased by a Fund with payment and delivery to take place in
the future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time it enters into the transaction. In those cases,
the purchase price and the interest rate payable on the securities are fixed on
the transaction date and delivery and payment may take place a month or more
after the date of the transaction. When the Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of the security, although delivery and
payment occur at a later date. To facilitate such acquisitions, the Fund will
maintain with its custodian a separate account with portfolio securities in an
amount at least equal to such commitments.
At the time a Fund makes the commitment to purchase securities on a when-issued
or delayed 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 value of the fixed income securities to be delivered in
the future will fluctuate as interest rates and the credit of the underlying
issuer vary. On delivery dates for such transactions, the Fund will meet its
obligations from maturities, sales of the securities held in the separate
account or from other available sources of cash. The Fund generally has the
ability to close out a purchase obligation on or before the settlement date,
rather than purchase the security. If the Fund chooses to dispose of the right
to acquire a when-issued security prior to its acquisition, it could, as with
the disposition of any other portfolio obligation, realize a gain or loss due to
market fluctuation.
To the extent the Fund engages in when-issued or delayed delivery transactions,
it will do so for the purpose of acquiring securities consistent with the Fund's
investment objectives and policies and not for the purpose of investment
leverage or to speculate in interest rate changes. The Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Fund reserves
the right to dispose of the right to acquire these securities before the
settlement date if deemed advisable.
The use of when-issued transactions and forward commitments enables the Fund to
hedge against anticipated changes in interest rates and prices. For instance,
in periods of rising interest rates and falling bond prices, the 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,
the 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 Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices inferior to the
current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund enters into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities, as
the case may be. If the Fund, however, chooses to dispose of the right to
acquire a when-issued security prior to its acquisition or to dispose of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss. The Fund will establish and maintain with its custodian a separate
account with cash, U.S. Government Securities or other liquid, high-grade debt
securities in an amount at least equal to such commitments. No when-issued or
forward commitments will be made by the Fund if, as a result, more than 10% of
the value of the Fund's total assets would be committed to such transactions.
INVESTMENT COMPANY SECURITIES
In connection with managing its cash positions, the Fund may invest in the
securities of other investment companies that are money market funds within
the limits proscribed by the Investment Company Act of 1940 ("1940 Act").
The Fund may invest up to 10% of the value of its net assets in the
securities of money market funds. In addition to the Fund's expenses
(including the various fees), as a shareholder in another investment company,
the Fund would bear its pro rata portion of the other investment company's
expenses (including fees).
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TEMPORARY DEFENSIVE POSITION
The cash or cash equivalents in which the Fund may invest include (i) short-term
U.S. Government Securities, (ii) certificates of deposit, bankers' acceptances
and interest-bearing savings deposits of commercial banks doing business in the
United States that are members of the Federal Deposit Insurance Corporation and
whose short term ratings are rated in one of the two highest rating categories
by S&P or Moody's or, if not rated by those agencies, determined by the Adviser
to be of comparable quality, (iii) commercial paper of prime quality rated A-2
or higher by S&P or Prime-2 or higher by Moody's or, if not rated by those
agencies, determined by the Adviser to be of comparable quality, and (iv)
repurchase agreements covering any of the securities in which the Fund may
invest directly.
FUNDAMENTAL POLICIES
Those policies of the Fund which are deemed to be fundamental may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. A majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act, means the lesser of: (i) 67% of the
shares of the Fund present or represented at a shareholders meeting at which the
holders of more than 50% of the shares are present or represented or (ii) more
than 50% of the outstanding shares of the Fund.
INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment limitations which are
in addition to those contained in the Fund's Prospectus and which may not be
changed without shareholder approval. The Fund may not:
(1) Borrow money, except that the Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets.
(2) Purchase securities, other than U.S. Government Securities, if,
immediately after each purchase, more than 25% of the Fund's total assets taken
at market value would be invested in securities of issuers conducting their
principal business activity in the same industry.
(3) Purchase securities, other than U.S. Government Securities, of any one
issuer, if (a) more than 5% of the Fund's total assets taken at market value
would at the time of purchase be invested in the securities of that issuer, or
(b) such purchase would at the time of purchase cause the Fund to hold more than
10% of the outstanding voting securities of that issuer. Up to 75% of the
Fund's total assets may be invested without regard to this limitation.
(4) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for purposes of the Securities Act of
1933.
(5) Make loans to other persons except for loans of portfolio securities
and except through the use of repurchase agreements and through the purchase of
debt securities which are otherwise permissible investments.
(6) Purchase or sell real estate or any interest therein, except that the
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.
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(7) Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a Fund
from purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).
(8) Issue senior securities, except that (a) the Fund may engage in
transactions that may result in the issuance of senior securities to the extent
permitted under applicable regulations and interpretations of the 1940 Act or an
exemptive order; (b) the Fund may acquire securities to the extent otherwise
permitted by its investment policies, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth above, the Fund may borrow money as authorized by the
1940 Act.
The Fund has adopted the following nonfundamental investment limitations that
may be changed by the Trust's Board of Trustees (the "Board of Trustees")
without shareholder approval. The Fund:
(a) May borrow money for temporary or emergency purposes in an amount not
exceeding 5% of the value of its total assets at the time when the loan is made;
provided that any such temporary or emergency borrowings representing more than
5% of the Fund's total assets must be repaid before the Fund may make additional
investments.
(b) May not pledge, mortgage or hypothecate its assets, except to secure
permitted indebtedness. 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.
(c) May not invest in securities of another registered investment company,
except in connection with a merger, consolidation, acquisition or
reorganization; and except that the Fund may invest in money market funds and
privately-issued mortgage related securities to the extent permitted by the 1940
Act.
(d) May not purchase securities on margin, or make short sales of
securities (except short sales against the box), except for the use of short-
term credit necessary for the clearance of purchases and sales of portfolio
securities, but the Fund may make margin deposits in connection with permitted
transactions in options, futures contracts and options on futures contracts.
(e) May not invest 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 the
Fund could invest, if as a result, more than 5% of the value of the Fund's total
assets would be so invested.
(f) May not invest in or hold securities of any issuer if to the Fund's
knowledge officers and Trustees of the Trust or the Fund's investment 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.
(g) May not purchase securities for investment while any borrowing
equaling 5% or more of the Fund's total assets is outstanding or borrow money,
except for temporary or emergency purposes (including the meeting of redemption
requests), in an amount exceeding 5% of the value of the Fund's total assets.
(h) May not acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15% of the Fund's net
assets (taken at current value) would be invested in repurchase agreements not
entitling the holder to payment of principal within seven days and in securities
which are not readily marketable, including securities that are illiquid by
virtue of restrictions on the sale of such securities to the public without
registration under the Securities Act of 1933 ("Restricted Securities") or (ii)
10% of the Fund's total assets would be invested in Restricted Securities.
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(i) May not invest in interests in oil or gas or interests in other
mineral exploration or development programs.
Except as required by the 1940 Act, whenever an amended or restated investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the acquisition of such security or other asset. Any subsequent
change in values, assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
or limitations.
2. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied by the Fund in advertising is historical and is not intended to
indicate future returns. The Fund's net asset value, yield and total return
will 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.
The Fund's total return for the fiscal year ended June 30, 1996 was 16.22%.
For the period beginning December 8, 1993 (the commencement of public
operations) to June 30, 1996, the Fund's average annual total return was
12.35%.
In performance advertising each Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). Each Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Salomon Brothers Bond Index, the
Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Funds may refer to general market performances over past time periods such as
those published by Ibbotson Associates. In addition, the Funds 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 the Funds and comparative mutual fund data and ratings reported in
independent periodicals, such as newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in advertising
reflect all aspects of the 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 the 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. For example, a
cumulative return of 100% over ten years would produce an average annual return
of 7.18%, which is the steady annual rate that would equal 100% growth on a
compounded basis in ten years. 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 Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
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P(1+T)n = 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 total returns, the 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 gains 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.
3. 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.
John Y. Keffer,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Financial Corp. (a registered transfer agent) and
Forum Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Trustee and/or 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.
Costas Azariadis, Trustee (age 52)
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee (age 53)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
J. Michael Parish, Trustee (age 52)
Partner at the law firm of Winthrop Stimson Putnam & Roberts since 1989.
Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby & MacRae, a law
firm of which he was a member from 1974 to 1989. His address is 40 Wall
Street, New York, New York 10005.
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Mark D. Kaplan, Vice President, Assistant Treasurer and Assistant Secretary
(age 40)
Managing Director at Forum Financial Services, Inc. since September 1995.
Prior thereto, Mr. Kaplan was Managing Director and Director of Research at
H.M. Payson & Co. His address is Two Portland Square, Portland, Maine
04101.
Michael D. Martins, Treasurer (age 30)
Director of Fund Accounting at Forum Financial Corp. since June 1995. Prior
thereto, he served as a manager in the New York City office of Deloitte &
Touche LLP, where he was employed for over five years. His address is Two
Portland Square, Portland, Maine 04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also Secretary or Assistant
Secretary 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.
Don L. Evans, Assistant Secretary (age 47)
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since August 1995. Prior thereto, Mr. Evans was associated with
the law firm of Bisk & Lutz and prior thereto the law firm of Weiner &
Strother. Mr. Evans is also Assistant Secretary 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.
M. Paige Turney, Assistant Secretary (age 27).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Turney was employed from 1992 as a Senior Fund
Accountant with First Data Corporation in Boston, Massachusetts. Prior
thereto she was a student at Montana State University Her address is Two
Portland Square, Portland, Maine 04101.
THE INVESTMENT ADVISER
The Fund's investment adviser, Austin Investment Management, Inc. (the
"Adviser") furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the Fund's investments and effecting
portfolio transactions for the Fund. The Advisory Agreement will remain in
effect for a period of twelve months from the date of its effectiveness and will
continue in effect thereafter only if its continuance is specifically approved
at least annually by the Board of Trustees or by vote of the shareholders, and
in either case by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party, at a meeting called
for the purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable without penalty by the Trust with respect
to the Fund on 60 days' written notice when authorized either by vote of its
shareholders or by a vote of a majority of the Board of Trustees, or by the
Adviser on 60 days' written notice to the Trust, and will automatically
terminate in the event of its assignment. The Advisory Agreement also provides
that, with respect to the 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
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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 Advisory
Agreement.
The Advisory Agreement provides that the Adviser may render services to others.
In addition to receiving its advisory fee from the Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in the Fund. In some instances the Adviser may elect
to credit against any investment management fee received from a client who is
also a shareholder in the Fund an amount equal to all or a portion of the fees
received by the Adviser or any affiliate of the Adviser from the Fund with
respect to the client's assets invested in the Fund.
The Adviser has agreed to reimburse the Trust for certain of the Fund's
operating expenses which in any year exceed the limits prescribed by any
state in which the Fund's shares are qualified for sale. The Trust may elect
not to qualify its shares for sale in every state. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated
and accrued daily, and any appropriate estimated payments will be made by the
Adviser monthly. Subject to the obligations of the Adviser to reimburse the
Trust for its excess expenses, the Trust has, under the Advisory Agreement,
confirmed its obligation to pay all its other expenses. The Fund believes
that currently the most restrictive expense ratio limitation imposed by any
state is 2-1/2% of the first $30 million of the Fund's average net asset, 2%
of the next $70 million of its average net assets and 1-1/2% of its average
net assets in excess of $100 million. For the fiscal years ended June 30,
1996, 1995 and 1994, the fees payable to the Adviser were $142,592, $123,067
and $39,923, respectively; of which $71,023, $56,735 and $39,923,
respectively, were waived by the Adviser.
ADMINISTRATION AND DISTRIBUTION
Forum Financial Services, Inc. ("Forum") supervises the overall management of
the Trust (which includes, among other responsibilities, negotiation of
contracts and fees with, and monitoring of performance and billing of, the
transfer agent, fund accountant and custodian and arranging for maintenance of
books and records of the Trust) pursuant to an Administration and Distribution
Agreement. Forum also provides persons satisfactory to the Board of Directors
to serve as officers of the Trust. Those officers, as well as certain other
employees and Directors of the Trust, may be directors, officers or employees of
(and persons providing services to the Trust may include) Forum, the Adviser or
their respective non-banking affiliates. In addition, under the Agreement,
Forum is directly responsible for managing the Trust's regulatory and legal
compliance and overseeing the preparation of its registration statement.
The Administration and Distribution Agreement will remain in effect for a period
of twelve months from the date of its effectiveness and will continue in effect
thereafter only if its continuance is specifically approved at least annually by
the Board of Trustees or by the shareholders and, in either case, by a majority
of the Trustees who are not parties to the agreement or interested persons of
any such party and do not have any direct or indirect financial interest in the
agreement.
The Administration and Distribution 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 to the agreement on 60 days'
written notice to the Trust. The agreement also provides that Forum 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
agreement.
Forum also acts as distributor of the Fund's shares pursuant to the
Administration and Distribution Agreement. In accordance with Rule 12b-1
adopted by the Securities and Exchange Commission, the Trust has adopted a
distribution plan ("Plan"), which provides that all written agreements relating
to the Plan must be in a form satisfactory to the Board of Trustees. In
addition, the Plan requires the Trust and Forum to prepare, at least quarterly,
written reports setting forth all amounts expended for distribution purposes by
Forum pursuant to the Plan and identifying the distribution activities for which
those expenditures were made. Under the Plan, the Fund may reimburse Forum
for the distribution expenses incurred by Forum on behalf of the Fund. The
Fund may not reimburse Forum for any distribution expenses in any fiscal
year of the Fund in excess of 0.20% of the average daily net assets of the
Fund.
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The Plan provides that it will remain in effect for one year from the date of
its adoption and thereafter may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Trustees,
including a majority of directors who are not interested persons of the Trust
and who have no direct or indirect interest in the operation of the Plan or in
any agreement related to the Plan. The Plan further provides that it may not be
amended to increase materially the costs which may be borne by the Trust for
distribution pursuant to the Plan without shareholder approval and that other
material amendments of the Plan must be approved by the Trustees in the manner
described in the preceding sentence. The Plan may be terminated at any time by
a vote of the Board of Trustees or, with respect to the Fund, by the Fund's
shareholders.
Until May 31, 1994, Stone Bridge Trust Company ("SBTC"), as administrator,
and Forum, as sub-administrator, supervised the overall management of the
Fund, which at that time was a separate series of Stone Bridge Funds, Inc.
(the "Company"), including the administrative duties described above,
pursuant to a Co-Administration Agreement and a Distribution and
Administration Agreement, respectively. Effective June 1, 1994, the Company
entered into an Administration and Distribution Agreement with Forum under
which Forum continued to provide the administration and distribution services
it provided since the Fund's inception and assumed the administrative
responsibilities formerly performed by SBTC. Effective November 25, 1996,
administration and distribution services are provided to the Fund pursuant to
the Administration and Distribution Agreement between Forum and the Trust.
For the fiscal year ending June 30, 1994, the administration fees under the
previous Co-Administration Agreement were $3,049, all of which were waived by
SBTC. Also for that year, the fees under the previous Distribution and
Administration Agreements were $3,605, all of which were waived by Forum. For
the fiscal years ending June 30, 1996 and 1995, the fees under the previous
Administration and Distribution Agreement were $23,765 and $23,558,
respectively.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent and dividend
disbursing agent of the Trust pursuant to a Transfer Agency Agreement. For its
services, the Transfer Agent receives with respect to the Fund an annual fee of
$12,000 plus $25 per shareholder account. Pursuant to a Fund Accounting
Agreement, the Transfer Agent also provides the Fund with portfolio accounting,
including the calculation of the Fund's net asset value. For these services,
the Transfer Agent receives with respect to the Fund an annual fee ranging from
$36,000 to $60,000 depending upon the amount and type of the Fund's portfolio
transactions and positions.
Both the Transfer Agency Agreement and Fund Accounting Agreement were approved
by the Board of Trustees, including a majority of the Trustees who are not
parties to the respective agreements or interested persons of any such party, at
a meeting called for the purpose of voting on the respective agreement. Each of
these agreements will remain in effect for a period of one year and will
continue in effect thereafter only if its continuance is specifically approved
at least annually by the Board of Trustees or by a vote of the shareholders and
in either case by a majority of the Trustees who are not parties to the
respective agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the respective agreement.
4. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00 P.M.,
Eastern time, on Fund Business Days (as defined in the Prospectus), by dividing
the value of the Fund's net assets (i.e., the value of its securities and other
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assets less its liabilities, including expenses payable or accrued) by the
number of shares outstanding at the time the determination is made. The Trust
does not determine net asset value 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.
Securities listed or traded on United States or foreign securities exchanges are
valued at the last quoted sales prices on such exchanges prior to the time when
assets are valued. Securities listed or traded on certain foreign exchanges
whose operations are similar to the United States over-the-counter market are
valued at the price within the limits of the latest available current bid and
asked prices deemed best to reflect market value. Listed securities that are
not traded on a particular day, and securities regularly traded in the over-the-
counter market, are valued at the price within the limits of the latest
available current bid and asked prices deemed best to reflect market value. In
instances where market quotations are not readily available, the security is
valued in a manner intended to reflect its fair value. All other securities and
assets are valued in a manner determined to reflect their fair value. For
purposes of determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
United States dollars at the mean of the bid and asked prices of such currencies
against the United States dollar last quoted by any major bank.
Trading in securities on European and Far Eastern securities exchanges and over-
the-counter markets is normally completed well before the close of business of
each Fund Business Day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place
in Japanese markets on certain Saturdays and in various foreign markets on days
which are not Fund Business Days in New York and on which the Fund's net asset
value is not calculated. Calculation of the net asset value per share of the
Fund does not take place contemporaneously with the determination of the prices
of the majority of the portfolio securities used in such calculation. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of the New York Stock Exchange, Inc. will
not be reflected in the Fund's calculation of net asset value unless the it is
deemed that the particular event would materially affect net asset value, in
which case an adjustment will be made.
5. PORTFOLIO TRANSACTIONS
The Fund generally will 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 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.
Transactions on stock exchanges involve the payment of brokerage commissions. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on foreign stock exchanges these commissions are generally
fixed. In the case of securities traded in the foreign and domestic over-the-
counter markets, there is generally no stated commission, but the price usually
includes an undisclosed commission or markup. In underwritten offerings, the
price includes a disclosed fixed commission or discount. Where transactions are
executed in the over-the-counter market, the Fund will seek to deal with the
primary market makers; but when necessary in order to obtain best execution, it
will utilize the services of others. In all cases the Fund will attempt to
negotiate best execution.
The 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 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 Adviser may also take into account
payments made by brokers effecting transactions for the Fund (i) to the Fund or
(ii) to other persons on behalf of the Fund for services provided to it for
which it would be obligated to pay.
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In addition, the Adviser may give consideration to research services furnished
by brokers to the 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 may be used by the Adviser in connection with
services to clients other than the Fund, and the Adviser's fee is not reduced by
reason of the Adviser's receipt of the research services.
Investment decisions for the Fund will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Adviser 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 the Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for the Fund and for other investment companies and accounts
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
The Fund contemplates that, consistent with the policy of obtaining best net
results, brokerage transactions may be conducted through the Adviser's
affiliates, affiliates of those persons or Forum. The Advisory Agreement
authorizes the Adviser to so execute trades. The Board of Trustees has adopted
procedures in conformity with applicable rules under the Investment Company Act
to ensure that all brokerage commissions paid to these persons are reasonable
and fair. For the fiscal years ended June 30, 1996, 1995 and 1994 the aggregate
brokerage commissions incurred by the Fund were $22,929, $20,667 and $2,287, of
which 0.0% ($0.00) was paid in each year to American Securities Corporation, an
affiliate of the Adviser. During those periods, approximately 0.0% of the total
dollar amount of transactions by the Fund involving the payment of commissions
were effected through American Securities Corporation.
The frequency of portfolio transactions of the Fund (the portfolio turnover
rate) will vary from year to year depending on many factors. From time to
time the Fund may engage in active short-term trading to take advantage of
price movements affecting individual issues, groups of issues or markets.
This will increase the Fund's rate of turnover and will result in higher
total brokerage costs for the Fund and a possible increase in short-term
capital gains or losses. Tax rules applicable to short-term trading may
affect the timing of the Fund's portfolio transactions or its ability to
realize short-term trading profits or establish short-term positions.
6. CUSTODIAN
Pursuant to a Custodian Agreement (the "Custodian Agreement"), The First
National Bank of Boston, P.O. Box 1959, Boston, Massachusetts, 02105, acts as
the custodian of the Funds' assets. The custodian's responsibilities include
safeguarding and controlling the Fund's cash and securities, determining income
and collecting interest on Fund investments. The Fund's custodian employs
foreign subcustodians to provide custody of the Fund's foreign assets in
accordance with applicable regulations. The custodian is paid a fee at an
annual rate of 0.02% of the first $100 million of the average daily net assets
of the Fund, 0.015% on the next $100 million of the average daily net assets of
the Fund and .001% of the average daily net assets over $200 million, and
certain transaction fees.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by the distributor at net
asset value without any sales charge. As of June 30, 1996, the Fund's net asset
value per share was $13.19.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partly in portfolio securities if the Board of Trustees
determines economic conditions exist which would make payment in cash
detrimental to the best interests of the Fund. If payment for shares redeemed
is made wholly or partly in portfolio securities, brokerage costs may be
incurred by the shareholder in converting the securities to cash. The Trust has
filed an election with the Securities and Exchange Commission pursuant to which
the Fund may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily to reimburse
the 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 relating to transactions effected for the benefit of a shareholder which
is applicable to the Fund's shares as provided in the Prospectus from time to
time.
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Shareholders' rights of redemption may not be suspended, except (i) for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, (ii) for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by the Fund of its securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(iii) for such other period as the Securities and Exchange Commission may by
order permit for the protection of the shareholders of the Fund.
8. TAX MATTERS
FOREIGN INCOME TAXES
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. The United States
has entered into tax treaties with many foreign countries which entitle the Fund
to a reduced rate of such taxes or exemption from taxes on such income. It is
impossible to know the effective rate of foreign tax in advance since the amount
of the Fund's assets to be invested within various countries cannot be
determined.
U.S. FEDERAL INCOME TAXES
Income received by the Fund from sources within various foreign countries may be
subject to foreign income tax. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of the stock or
securities of foreign corporations, the Fund may elect to "pass through" to the
Fund's shareholders the amount of foreign income taxes paid by the Fund.
Pursuant to that election, shareholders would be required: (i) to include in
gross income, even though not actually received, their respective pro-rata share
of foreign taxes paid by the Fund; and (ii) either to deduct their pro-rata
share of foreign taxes in computing their taxable income, or to use it as a
foreign tax credit against federal income taxes (but not both). No deduction
for foreign taxes could be claimed by a shareholder who does not itemize
deductions.
The Fund may or may not meet the requirements of the Code to "pass through" to
its shareholders foreign income taxes paid. Each shareholder will be notified
after the close of each taxable year of the Fund whether the foreign taxes paid
by the Fund will "pass through" for that year, and, if so, the amount of each
shareholder's pro-rata share (by country) of (i) the foreign taxes paid, and
(ii) the Fund's gross income from foreign sources. Shareholders who are not
liable for Federal income taxes, such as retirement plans qualified under
Section 401 of the Code, will not be affected by any "pass through" of foreign
taxes.
The Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended. Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements the
Fund must meet to qualify for such treatment.
The use of certain hedging strategies such as writing and purchasing options,
futures contracts and options on futures contracts and entering into foreign
currency forward contracts and other foreign instruments, involves complex rules
that will determine for income tax purposes the character and timing of
recognition of income received by the Fund in connection therewith.
Dividends out of net ordinary income and distributions of net short-term capital
gain are eligible, in the case of corporate shareholders, for the dividends-
received deduction, subject to proportionate reduction of the amount eligible
for deduction if the aggregate qualifying dividends received by the Fund from
domestic corporations in any year are less than 100% of its gross income
(excluding long-term capital gain from securities transactions). A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in the Fund more
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than 45 days. Furthermore, provisions of the tax law disallow the dividends-
received deduction to the extent a corporation's investment in shares of the
Fund is financed with indebtedness.
9. OTHER MATTERS
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by Seward & Kissel, One Battery Park Plaza, New
York, New York 10004
Deloitte & Touche, Two World Financial Center, New York, New York, 10281,
independent auditors, have been selected as auditors for the Trust.
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and
assumed the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996,
Forum Funds, Inc. was reorganized as a Delaware business trust under the name
Forum Funds. 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 Fund) and may in the future divide portfolios or series into two
or more classes of shares (such as Investor and Institutional Shares).
Currently the authorized shares of the Trust are divided into 15 separate
series. Prior to November 25, 1996, the Fund was a separate portfolio named
Austin Global Equity Fund of Stone Bridge Funds, Inc., a Maryland corporation.
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
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.
As of October 2, 1996, the officers and Trustees of the Trust owned as a
group less than 1% of the outstanding shares of the Fund. Also as of that
date, the following persons owned of record 5% or more of the outstanding
shares of the Fund: Bear Stearns Securities Corp., One Metrotech Center,
Brooklyn, New York 11201-3859 - 93.32%. 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.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal year ended June 30,
1996 (which are included in the Annual Report to Shareholders), which are
delivered along with this Statement of Additional Information, are incorporated
herein by reference.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(a) 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 sometime 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 of or 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.
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(b) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
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 payments. 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.
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 'C' 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. 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. The 'D' rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
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.
PREFERRED STOCK
(a) MOODY'S
Moody's rates preferred stock issues as follows:
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<PAGE>
An issue which is rated aaa is a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment among
preferred stock issues.
An issue which is rated "aa" is 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 which is rated "a" is 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 which is rated "baa" is a medium-grade preferred stock, neither highly
protected nor poorly secured. Earnings and asset protection appear adequate at
present but may be questionable over any great length of time.
An issue which is rated "ba" has 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.
(b) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues 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 if 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.
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<PAGE>
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 "B" may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
25
<PAGE>
OAK HALL EQUITY FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
Oak Hall Capital Advisors, L.P. Shareholder Servicing:
122 East 42nd Street Forum Financial Corp.
New York, New York 10005 Two Portland Square
(212) 622-1996 Portland, Maine 04101
800-625-4255
207-879-0001
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
November 25, 1996
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus offering shares
of the Oak Hall Equity Fund (the "Fund") and should be read only in conjunction
with the Prospectus, a copy of which may be obtained by an investor without
charge by contacting shareholder servicing at the address listed above.
TABLE OF CONTENTS
PAGE
----
1. Investment Policies
and Limitations . . . . . . . . . . . . . . . . 2
2. Performance Data. . . . . . . . . . . . . . . . . 12
3. Management. . . . . . . . . . . . . . . . . . . . 13
4. Determination of Net Asset Value. . . . . . . . . 17
5. Portfolio Transactions. . . . . . . . . . . . . . 17
6. Custodian . . . . . . . . . . . . . . . . . . . . 18
7. Additional Purchase and
Redemption Information. . . . . . . . . . . . . 18
8. Taxation . . . . . . . . . . . . . . . . . . . . 19
9. Other Matters . . . . . . . . . . . . . . . . . . 19
Appendix A - Description of Securities Ratings
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.
<PAGE>
1. INVESTMENT POLICIES AND LIMITATIONS
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P") are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to corporate bonds, including convertible securities by Moody's
and S&P is included in Appendix A to this Statement of Additional Information.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced. Oak Hall Capital Advisors, L.P. (the "Adviser") will
consider such an event in determining whether the Fund should continue to hold
the obligation. 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 in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
LOWER RATED DEBT SECURITIES
The Fund may invest up to 25% of its total assets in heavily discounted
non-investment grade, high risk, corporate debt securities (commonly referred to
as junk bonds). While the market for these high yield debt securities has been
in existence for many years and has weathered previous economic downturns, the
market in recent years has experienced a dramatic increase in the large-scale
use of these securities to fund highly leveraged corporate acquisitions and
restructurings. Accordingly, past experience may not provide an accurate
indication of future performance of the high yield bond market, especially
during periods of economic recession.
The market for lower rated debt securities may be thinner and less active than
that for higher quality securities, which can adversely affect the price at
which these securities can be sold. If market quotations are not available,
these lower rated securities will be valued in accordance with procedures
established by the Trust's Board of Trustees, including the use of outside
pricing services. Judgment plays a greater role in valuing high yield corporate
debt securities than is the case for securities for which more external sources
for quotations last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing services
used by the Fund to value its portfolio securities, and the Fund's ability to
dispose of these lower-rated securities.
The market prices of lower rated securities may fluctuate more than the prices
of higher rated securities and may decline significantly in periods of general
economic difficulty which may follow periods of rising interest rates. During
an economic downturn or a prolonged period of rising interest rates, the ability
of issuers of lower quality debt to service their payment obligations, meet
projected goals, or obtain additional financing may be impaired.
COMMON STOCK AND PREFERRED STOCK
Common stockholders are the owners of the company issuing the stock and,
accordingly, vote on various corporate governance matters such as mergers.
They are not creditors of the company, but rather, upon liquidation of the
company are entitled to their pro rata share of the company's assets after
creditors (including fixed income security holders) and, if applicable,
preferred stockholders are paid. Preferrred stock is a class of stock having
a preference over common stock as to dividends and, in the alternative, as
to the recovery of investment. A preferred stockholder is a shareholder in
the company and not a creditor of the company as is a holder of the company's
fixed income securities. Dividends paid to common and preferred stockholders
are distributions of the earnings of the company and not interest payments,
which are expenses of the company. Equity securities owned by the Fund may
be traded in the over-the-counter market or on a regional securities exchange
and may not be traded every day or in the volume typical of securities
trading on a national securities exchange. As a result, disposition by the
Fund of a portfolio security to meet redemptions by shareholders or otherwise
may require the Fund to sell these securities at a discount from market
prices, to sell during periods when dispositon is not desirable, or to make many
small sales over a lengthy period of time. The market of all securities,
including equity securities, is based upon the market's perception of value
and not necessarily the book value of an issuer or other objective measure
of a company's worth.
CONVERTIBLE SECURITIES
The Fund 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 have characteristics similar to nonconvertible debt
securities in 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
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<PAGE>
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed 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 have an effect on 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.
Convertible securities which are rated b by Moody's generally lack
characteristics of the desirable investment. Convertible securities which are
rated B by S&P 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.
WARRANTS
The Fund may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. To the
extent that the market value of the security that may be purchased upon exercise
of the warrant rises above the exercise price, the value of the warrant will
tend to rise. To the extent that the exercise price equals or exceeds the
market value of such security, the warrants will have little or no market value.
If a warrant is not exercised within the specified time period, it will become
worthless and the Fund will lose the purchase price paid for the warrant and the
right to purchase the underlying security. The Fund may not invest more than 2%
of its net assets in warrants not traded on the American or New York Stock
Exchange.
TEMPORARY DEFENSIVE POSITION
When the Adviser believes that business or financial conditions warrant, the
Fund may assume a temporary defensive position. For temporary defensive
purposes, the Fund may invest in cash or in investment grade cash equivalents,
including (i) short-term obligations of the U.S. Government and its agencies or
instrumentalities, (ii) 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 (or the equivalent in other currencies) and that are members
of the Federal Deposit Insurance Corporation, (iii) commercial paper of prime
quality rated A-2 or higher by S&P or Prime-2 or higher by Moody's or, if not
rated, determined by the Adviser to be of comparable quality, (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (v) money market mutual funds.
3
<PAGE>
INVESTMENT IN FOREIGN SECURITIES
The Fund invests primarily in issuers based in the United States, Europe, Japan
and the Pacific Basin. The European and Pacific Basin countries in which
issuers will be based are primarily those of Western Europe, such as the United
Kingdom, Germany, France, Italy and the Scandinavian countries, and South Korea,
Australia and New Zealand.
Foreign securities are generally purchased in over-the-counter markets or on
stock exchanges located in the countries in which the respective principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign securities markets are generally not as
developed or efficient as those in the United States, and securities of
foreign companies may be less liquid and more volatile than securities of
comparable United States companies. Fixed commissions on foreign stock
exchanges are generally higher than negotiated commissions on United States
exchanges, although the Fund will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of stock exchanges, brokers and listed companies
than in the United States. Issuers of securities in foreign jurisdictions
generally are not subject to the same degree of regulation as are U.S.
issuers with respect to such matters as insider trading rules, restrictions
on market manipulation, shareholder proxy requirements, and timely disclosure
of information. Foreign countries may possibly place limitations on the
removal of funds or other assets of the Fund, and diplomatic developments
could affect United States investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the
United States' economy in such respects as growth of gross national product,
rate of inflation, capital reinvestment, self-sufficiency of natural
resources and balance of payments position.
The dividends and interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction for U.S.
federal income tax purposes for the shareholder's proportionate share of foreign
taxes paid by the Fund. (See "Tax Matters.")
Although the Fund values its assets daily in terms of U.S. dollars, it will not
normally convert its holdings of foreign currencies into U.S. dollars on a daily
basis. It will do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (commonly
known as the "spread") between the price at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Investors should understand that the expense ratio of the Fund can be expected
to be higher than that of other investment companies investing solely in
domestic securities due to, among other things, the greater cost of maintaining
the custody of foreign securities and higher transaction charges, such as stamp
duties and turnover taxes that may be associated with the purchase and sale of
portfolio securities.
FOREIGN CURRENCY FORWARD CONTRACTS
Investments in foreign companies will usually involve currencies of foreign
countries. In addition, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs. Accordingly,
the value of the assets of the Fund as measured in United States dollars may be
affected by changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with conversions between
various currencies. The Fund may conduct foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into foreign currency forward
contracts ("forward contracts") to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one
year) from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers and involve the risk that the other party to the contract may
fail to deliver currency when due, which could result in losses to the Fund. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Foreign exchange dealers realize a profit
based on the difference between the price at which they buy and sell various
currencies.
The Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, the Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Forward contracts involve the
risk of inaccurate predictions of currency price movements, which may cause the
Fund to incur losses on these contracts and transaction costs. The Adviser does
not intend to enter into forward contracts on a regular or continuous basis, and
will not do so if, as a result, the Fund will have more than 25% of the value of
its total assets committed to such contracts or the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency.
At or before the settlement of a forward currency contract, the Fund may either
make delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
the currency through the conversion of assets of the Fund into the currency.
The Fund may close out a forward contract obligating it to purchase a foreign
currency by selling an offsetting contract. If the Fund engages in an
offsetting transaction, the Fund will incur a gain or a loss to the extent that
there has been a change in forward contract prices. Additionally, although
forward contracts may tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential
gain which might result should the value of such currency increase.
4
<PAGE>
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market. The interbank market in foreign currencies is a global,
around-the-clock market.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated in a longer term investment decision made with regard to
overall diversification strategies. When required by applicable regulatory
guidelines, the Fund will set aside cash, U.S. Government securities or other
liquid, high-grade debt securities in a segregated account with its custodian in
the prescribed amount.
HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser may engage in certain options and
futures strategies to attempt to hedge the Fund's portfolio. The instruments in
which the Fund may invest include (i) options on securities, stock indexes and
foreign currencies, (ii) stock index and foreign currency futures contracts
("futures contracts"), and (iii) options on futures contracts. Use of these
instruments is subject to regulation by the Securities and Exchange Commission
("SEC"), the several options and futures exchanges upon which options and
futures are traded, and the Commodities Futures Trading Commission ("CFTC").
The various strategies referred to herein and in the Fund's Prospectus are
intended to illustrate the type of strategies that are available to, and may be
used by, the Adviser in managing the Fund's portfolio. No assurance can be
given, however, that any strategies will succeed.
The Fund will not use leverage in its hedging strategies. In the case of
transactions entered into as a hedge, the Fund will hold securities, currencies
or other options or futures positions whose values are expected to offset
("cover") its obligations thereunder. The Fund will not enter into a hedging
strategy that exposes the Fund 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, high-grade debt securities with a value sufficient
at all times to cover its potential obligations. When required by applicable
regulatory guidelines, the Fund will set aside cash, U.S. Government securities
or other liquid, high-grade debt securities in a segregated account with its
custodian in the prescribed amount. Any assets used for cover or held in a
segregated account cannot be sold or closed out while the hedging 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.
The Fund is subject to the following restrictions in its use of options and
futures contracts. The Fund will not (i) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged through the use of options or futures contracts,
(ii) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets, or (iii) purchase call
options if, as a result, the current value of options premiums for options
purchased would exceed 5% of the Fund's total assets.
OPTIONS STRATEGIES. The Fund may purchase put and call options written by
others and write (sell) put and call options covering specified securities,
stock index-related amounts 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 a security or 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 a security or 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 or security. The Fund may buy or sell
both exchange-traded and over-the-counter ("OTC") options. The Fund will
purchase or write an option only if that option is traded on a recognized U.S.
options exchange or if the Adviser believes that a liquid secondary market for
the option exists. When the 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
5
<PAGE>
securities or 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.
The Fund may purchase call options on equity securities that the 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. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; 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. The 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 higher 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.
The Fund may write covered call options. The 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. The Fund may write covered put options only to
effect closing transactions.
The Fund may purchase and write put and call options on stock indexes in much
the same manner as the equity security options discussed above, except that
stock index options may serve as a hedge against overall fluctuations in the
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 stock index options will depend on the extent to which price
movements in the stock index selected correlate with price movements of the
securities which are being hedged. Stock index options are settled exclusively
in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS. The Fund may take positions in
options on foreign currencies in order to hedge against the risk of foreign
exchange fluctuation on foreign securities the Fund holds in its portfolio or
which it intends to purchase. Options on foreign currencies are affected by the
factors discussed in "Foreign Currency Forward Transactions" which influence
foreign exchange sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and have no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring
in the interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, the Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The 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, a call option of the same type would be purchased by the Fund. 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:
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(1) The successful use of options depends upon the Adviser's ability to
forecast the direction of price fluctuations in the underlying securities or
currency markets, or in the case of a stock 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 the 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 which provides a market for identical options. Most exchange listed
options relate to equity securities. Exchange markets for options on foreign
currencies are relatively new and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the over-the-counter markets (currently the primary markets for options on
foreign currencies) 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, the 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 the Fund may result in material losses to
the Fund.
(4) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
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,
securities or currencies as called for in the contract at a specified future
date and at a specified price. For stock index futures contracts, delivery is
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the time of the contract and the close of
trading of the contract.
The Fund may sell stock index futures contracts in anticipation of a general
market or market sector decline that may adversely affect the market values of
the Fund's securities. To the extent that the Fund's portfolio correlates with
a given stock index, the sale of futures contracts on that index could reduce
the risks associated with a market decline and thus provide an alternative to
the liquidation of securities positions. The Fund may purchase a stock index
futures contract if a significant market or market sector advance is
anticipated. These purchases would serve as a temporary substitute for the
purchase of individual stocks, which stocks may then be purchased in the future.
The Fund may purchase call options on a stock index future 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 stock,
in that it can be used as a temporary substitute for a position in the stock
itself. The Fund may purchase a call option on a stock index future to hedge
against a market advance in stocks which the Fund planned to acquire at a future
date. The Fund may also purchase put options on stock index futures contracts.
These purchases are analogous to the purchase of protective puts on individual
stocks, where a level of protection is sought below which no additional economic
loss would be incurred by the Fund. The Fund may write covered call options on
stock index futures contracts as a partial hedge against a decline in the prices
of stocks held in the Fund's portfolio. This is analogous to writing covered
call options on securities.
The Fund may sell foreign currency futures contracts to hedge against possible
variations in the exchange rate of the foreign currency in relation to the U.S.
dollar. In addition, the Fund may sell foreign currency futures contracts when
the Adviser anticipates a general weakening of foreign currency exchange rates
that could adversely affect the market values of the Fund's foreign securities
holdings. The Fund may purchase a foreign currency futures contract to hedge
against an anticipated foreign exchange rate increase pending completion of
anticipated transactions. Such a purchase would serve as a temporary measure to
protect the Fund against such increase. The Fund may also purchase call or put
options on foreign currency futures contracts to obtain a fixed foreign exchange
rate at limited risk. The Fund may write call options on foreign currency
futures contracts as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
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SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING. No
price is paid upon entering into futures contracts, rather, the Fund is required
to deposit 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, would be 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. For example, futures contracts on broad-based stock
indexes can currently be entered into with respect to the Standard & Poor's 500
Stock Index on the Chicago Mercantile Exchange, the New York Stock Exchange
Composite Stock Index on the New York Futures Exchange, the Value Line Composite
Stock Index on the Kansas City Board of Trade and the Major Market Index of the
Chicago Board of Trade.
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 the Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
(1) Successful use by the Fund of futures contracts and related options
will depend upon the 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 securities or currencies due to price
distortions in the futures market or otherwise. There may be several reasons
unrelated to the value of the underlying securities or 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 future
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.
The 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.
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(6) The 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.
(7) Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the buying and selling of futures generally. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
foreign currencies described above. In addition, settlement of foreign currency
futures contracts must occur within the country issuing that currency. Thus,
the Fund must accept or make delivery of the underlying foreign currency in
accordance with any U.S. or foreign restrictions or regulations regarding the
maintenance of foreign banking arrangements by U.S. residents, and the Fund may
be required to pay any fees, taxes or charges associated with such delivery
which are assessed in the issuing country.
COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
The Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. The 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 the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however that in addition,
with respect to positions in commodity futures and option contracts not for bona
fide hedging purposes the Fund represents that the aggregate initial margin and
premiums required to establish these positions (subject to certain exclusions)
will not exceed 5% of the liquidation value of the Fund's assets after taking
into account unrealized profits and losses on any such contract the Fund has
entered into.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
Counterparties to a Money Market Fund's reverse repurchase agreements must be a
primary dealer that reports to the Federal Reserve Bank of New York ("primary
dealers") or one of the largest 100 commercial banks in the United States.
Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase or sell portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased by a Fund with payment and delivery to take place in
the future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time it enters into the transaction. In those cases,
the purchase price and the interest rate payable on the securities are fixed on
the transaction date and delivery and payment may take place a month or more
after the date of the transaction. When the Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of the security, although delivery and
payment occur at a later date. To
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facilitate such acquisitions, the Fund will maintain with its custodian a
separate account with portfolio securities in an amount at least equal to such
commitments.
At the time a Fund makes the commitment to purchase securities on a when-issued
or delayed 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 value of the fixed income securities to be delivered in
the future will fluctuate as interest rates and the credit of the underlying
issuer vary. On delivery dates for such transactions, the Fund will meet its
obligations from maturities, sales of the securities held in the separate
account or from other available sources of cash. The Fund generally has the
ability to close out a purchase obligation on or before the settlement date,
rather than purchase the security. If the Fund chooses to dispose of the right
to acquire a when-issued security prior to its acquisition, it could, as with
the disposition of any other portfolio obligation, realize a gain or loss due to
market fluctuation.
To the extent the Fund engages in when-issued or delayed delivery
transactions, it will do so for the purpose of acquiring securities
consistent with the Fund's investment objectives and policies and not for the
purpose of investment leverage or to speculate in interest rate changes. The
Fund will only make commitments to purchase securities on a when-issued or
delayed delivery basis with the intention of actually acquiring the
securities, but the Fund reserves the right to dispose of the right to
acquire these securities before the settlement date if deemed advisable. At
the time the Fund makes the commitment to purchase securities on a
when-issued or delayed 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 Fund to
hedge against anticipated changes in interest rates and prices. For instance,
in periods of rising interest rates and falling bond prices, the 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 Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices inferior to the
current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund enters into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities, as
the case may be. If the Fund, however, chooses to dispose of the right to
acquire a when-issued security prior to its acquisition or to dispose of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss. The Fund will establish and maintain with its custodian a separate
account with cash, U.S. Government securities or other liquid, high-grade debt
securities in an amount at least equal to such commitments. 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, such as approval of a proposed financing by appropriate municipal
authorities. Any significant commitment of the Fund's assets committed to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value. No when-issued or forward commitments will
be made by the Fund if, as a result, more than 10% of the value of the Fund's
total assets would be committed to such transactions.
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INVESTMENT LIMITATIONS
The Fund has adopted the following additional investment limitations which are
fundamental policies of the Fund and may not be changed without shareholder
approval. The Fund may not:
(1) May not pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted to be incurred by the 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) Borrow money, except that the Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase
agreements, provided that the total amount of any such borrowing does not
exceed 33 1/3% of the Fund's total assets.
(3) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities,
the 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 the
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 unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities).
(6) Issue senior securities except that (a) the Fund may engage in
transactions that may result in the issuance of senior securities to the
extent permitted under applicable regulations and interpretations of the
1940 Act or an exemptive order; (b) the Fund may acquire securities to the
extent otherwise permitted by its investment policies, the acquisition of
which may result in the issuance of a senior security, to the extent
permitted under applicable regulations or interpretations of the 1940 Act;
and (c) subject to the restrictions set forth above, the Fund may borrow
money as authorized by the 1940 Act.
The Fund has adopted the following nonfundamental investment limitations that
may be changed by the Trust's Board of Trustees (the "Board of Trustees")
without shareholder approval. The Fund:
(a) May borrow money for temporary or emergency purposes in an amount not
exceeding 5% of the value of its total assets at the time when the loan is
made; provided that any such temporary or emergency borrowings representing
more than 5% of the Fund's total assets must be repaid before the Fund may
make additional investments.
(b) May not purchase securities on margin, except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities, but the Fund may make margin deposits in connection
with permitted transactions in options, futures and options on futures.
(c) May invest in securities of another registered investment company to
the extent permitted by the Investment Company Act of 1940 ("Investment
Company Act").
(d) May not invest in interests in oil or gas or interests in other mineral
exploration or development programs.
(e) May not invest in or hold securities of any issuer if officers and
directors 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.
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(f) May not invest 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
the Fund could invest, if as a result, more than 5% of the value of the
fund's total assets would be so invested.
(g) May not invest more than 15% of its net assets in securities that are
not readily marketable, including repurchase agreements maturing in more
than seven days.
Except as required by the 1940 Act, whenever an amended or restated investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the acquisition of such security or other asset. Any subsequent
change in values, assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
or limitations. If the Fund were to invest in money market funds as described
in limitation (c), it would indirectly incur its proportionate share of the
advisory and other expenses of the money market fund.
FUNDAMENTAL POLICIES
Those policies of the Fund which are deemed to be fundamental may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. A majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act means the lesser of: (i) 67% of the shares
of the Fund present or represented at a shareholders meeting at which the
holders of more than 50% of the shares are present or represented or (ii) more
than 50% of the outstanding shares of the Fund.
2. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied by the Fund in advertising is historical and is not intended to
indicate future returns. The Fund's net asset value, yield and total return
will 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.
The Fund's total return for the fiscal year ended June 30, 1996 was 20.12%. For
the period beginning July 13, 1992 (the commencement of public operations) to
June 30, 1996, the Fund's average annual total return was 12.74%.
In performance advertising the Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). The Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Salomon Brothers Bond Index, the
Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Fund may refer to general market performances over past time periods such as
those published by Ibbotson Associates. In addition, the 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
the Fund and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in advertising
reflect all aspects of the Fund's return, including the effect of reinvesting
dividends and capital gain distributions, and any change in the Fund's net asset
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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 the 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. For example, a
cumulative return of 100% over ten years would produce an average annual return
of 7.18%, which is the steady annual rate that would equal 100% growth on a
compounded basis in ten years. 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 Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV; where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; 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 total returns, the 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 gains 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.
3. 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.
John Y. Keffer,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Financial Corp. (a registered transfer agent) and
Forum Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Trustee and/or 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.
Costas Azariadis, Trustee (age 52)
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
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James C. Cheng, Trustee (age 53)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
J. Michael Parish, Trustee (age 52)
Partner at the law firm of Winthrop Stimson Putnam & Roberts since 1989.
Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby & MacRae, a law
firm of which he was a member from 1974 to 1989. His address is 40 Wall
Street, New York, New York 10005.
Mark D. Kaplan, Vice President, Assistant Treasurer and Assistant Secretary (age
40)
Managing Director at Forum Financial Services, Inc. since September 1995.
Prior thereto, Mr. Kaplan was Managing Director and Director of Research at
H.M. Payson & Co. His address is Two Portland Square, Portland, Maine
04101.
Michael D. Martins, Treasurer (age 30)
Director of Fund Accounting at Forum Financial Corp. since June 1995.
Prior thereto, he served as a manager in the New York City office of
Deloitte & Touche LLP, where he was employed for over five years. His
address is Two Portland Square, Portland, Maine 04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also Secretary or Assistant
Secretary 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.
Don L. Evans, Assistant Secretary (age 47)
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since August 1995. Prior thereto, Mr. Evans was associated with
the law firm of Bisk & Lutz and prior thereto the law firm of Weiner &
Strother. Mr. Evans is also Assistant Secretary 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.
M. Paige Turney, Assistant Secretary (age 27).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Turney was employed from 1992 as a Senior Fund
Accountant with First Data Corporation in Boston, Massachusetts. Prior
thereto she was a student at Montana State University Her address is Two
Portland Square, Portland, Maine 04101.
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THE INVESTMENT ADVISER
The Fund's investment adviser, Oak Hall Capital Advisors, L.P. (the "Adviser")
furnishes at its own expense all services, facilities and personnel necessary in
connection with managing the Fund's investments and effecting portfolio
transactions for the Fund. The Advisory Agreement will remain in effect for a
period of twelve months from the date of its effectiveness and will continue in
effect thereafter only if its continuance is specifically approved at least
annually by the Board of Trustees or by vote of the shareholders, and in either
case by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable without penalty by the Trust with respect
to the Fund on 60 days' written notice when authorized either by vote of its
shareholders or by a vote of a majority of the Board of Trustees, or by the
Adviser on 60 days' written notice to the Trust, and will automatically
terminate in the event of its assignment. The Advisory Agreement also provides
that, with respect to the 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 its duties or by reason of reckless disregard
of its obligations and duties under the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to others.
In addition to receiving its advisory fee from the Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in the Fund. In some instances the Adviser may elect
to credit against any investment management fee received from a client who is
also a shareholder in the Fund an amount equal to all or a portion of the fees
received by the Adviser or any affiliate of the Adviser from the Fund with
respect to the client's assets invested in the Fund.
The following table shows the dollar amount of fees payable by the Fund to
Oak Hall Capital Advisors, L.P., the amount of fee that was waived by the
Adviser, if any, and the actual fee received by the Adviser. The data is for
the past three fiscal years.
Advisory Fee Advisory Fee Advisory Fee
Payable Waived Retained
------- ------ --------
Year Ended June 30, 1996 $110,257 $64,502 $45,755
Year Ended June 30, 1995 194,367 0 194,367
Year Ended June 30, 1994 198,598 29,624 168,974
ADMINISTRATION AND DISTRIBUTION
Forum Financial Services, Inc. ("Forum") supervises the overall management of
the Trust (which includes, among other responsibilities, negotiation of
contracts and fees with, and monitoring of performance and billing of, the
transfer agent, fund accountant and custodian and arranging for maintenance of
books and records of the Trust) pursuant to an Administration and Distribution
Agreement. Forum also provides persons satisfactory to the Board of Trustees
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
(and persons providing services to the Trust may include) Forum or the Adviser.
In addition, under the Administration and Distribution Agreement, Forum is
directly responsible for managing the Trust's regulatory and legal compliance
and overseeing the preparation of its registration statement.
The Administration and Distribution Agreement will remain in effect for a period
of twelve months from the date of its effectiveness and will continue in effect
thereafter only if its continuance is specifically approved at least annually by
the Board of Trustees or by the shareholders and, in either case, by a majority
of the Trustees who are not parties to the agreement or interested persons of
any such party and do not have any direct or indirect financial interest in the
agreement.
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The Administration and Distribution 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 Forum on 60 days' written notice to the Trust.
The agreement also provides that Forum 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 agreement.
Prior to November 1, 1993, WSC Investment Services, Inc. served as the Fund's
administrator and Forum served as sub-administrator. At that time and until
November 25, 1996, the Fund was a separate portfolio Stone Bridge Funds,
Inc., a Maryland Corporation (the "Company"). From November 1, 1993 until May
31, 1994, Stone Bridge Trust Company ("SBTC") served as the Fund's
administrator, and Forum continued to serve as sub-administrator. Effective
June 1, 1994, the Company entered into an Administration and Distribution
Agreement with Forum under which Forum continued to provide the
administration and distribution services it had provided since the Fund's
inception and assumed the administrative responsibilities formerly performed
by Stone Bridge Trust Company and WSC before that. Effective November 25,
1996 administration and distribution services are provided to the Fund under
the Administration and Distribution Agreement with the Trust.
Under the Co-Administration Agreement with SBTC in effect until May 31, 1994,
the fees for the fiscal year ending June 30, 1994, were $3,049, all of which was
waived by SBTC. Under the previous Distribution and Administration Agreements,
and the current Administration and Distribution Agreement, with Forum, the fees
for the fiscal years ending June 30, 1996, 1995 and 1994, respectively, were
$39,040, $75,871 and $3,604. The fees for the fiscal year ended June 30, 1994
were waived by Forum.
Forum also acts as distributor of the Fund's shares pursuant to the Distribution
and Sub-Administration Agreement. In accordance with Rule 12b-1 adopted by the
Securities and Exchange Commission, the Trust has adopted a distribution plan
("Plan"), which provides that all written agreements relating to the Plan must
be in a form satisfactory to the Board of Directors. In addition, the Plan
requires the Trust and Forum to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by Forum pursuant
to the Plan and identifying the distribution activities for which those
expenditures were made. Under the Plan, the Fund may reimburse Forum for the
distribution expenses incurred by Foum on behalf of the Fund. The Fund may
not reimburse Forum for any distribution expenses in any fiscal year of the
Fund in excess of 0.25% of the average daily net assets of the Fund.
The Plan provides that it will remain in effect for one year from the date of
its adoption and thereafter may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Trust
and who have no direct or indirect interest in the operation of the Plan or in
any agreement related to the Plan. The Plan further provides that it may not be
amended to increase materially the costs which may be borne by the Trust for
distribution pursuant to the Plan without shareholder approval and that other
material amendments of the Plan must be approved by the directors in the manner
described in the preceding sentence. The Plan may be terminated at any time by
a vote of the Board of Directors or, with respect to the Fund, by the Fund's
shareholders.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent and dividend
disbursing agent of the Trust pursuant to a Transfer Agency Agreement. For its
services, the Transfer Agent receives with respect to the Fund an annual fee of
$12,000 plus $25 per shareholder account. Pursuant to a Fund Accounting
Agreement, the Transfer Agent also provides the Fund with portfolio accounting,
including the calculation of the Fund's net asset value. For these services,
the Transfer Agent receives with respect to the Fund an annual fee ranging from
$36,000 to $60,000 depending upon the amount and type of the Fund's portfolio
transactions and positions.
Both the Transfer Agency Agreement and Fund Accounting Agreement were approved
by the Board of Directors, including a majority of the Directors who are not
parties to the respective agreements or interested persons of any such party, at
a meeting called for the purpose of voting on the respective agreement. Each of
these agreements will remain in effect for a period of one year and will
continue in effect thereafter only if its continuance is specifically approved
at least annually by the Board of Directors or by a vote of the shareholders and
in either case by a majority of the Directors who are not parties to the
respective agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the respective agreement.
As of the date of this SAI, Forum and the Transfer Agent were controlled by
John Y. Keffer.
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EXPENSES
Subject to the obligations of the Adviser to reimburse the Trust for its excess
expenses as described in the Prospectus, the Trust has, under the Advisory
Agreement, confirmed its obligation to pay all its other expenses. The Fund
believes that currently the most restrictive expense ratio limitation imposed by
any state is 2-1/2% of the first $30 million of the Fund's average net asset, 2%
of the next $70 million of its average net assets and 1-1/2% of its average net
assets in excess of $100 million.
The Trust's expenses include: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer agent; fees of pricing, interest, dividend,
credit and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information and shareholder reports and delivering them to
existing shareholders; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; compensation of the Trust's directors;
compensation of the Trust's officers and employees who are not employees of the
Adviser, SBTC, Forum or their respective affiliates and costs of other personnel
performing services for the Trust; costs of corporate meetings; Securities and
Exchange Commission registration fees and related expenses; state securities
laws registration fees and related expenses; the fees payable under the Advisory
Agreement, the Administration Agreement and the Distribution and
Sub-Administration Agreement; and any fees and expenses payable pursuant to the
Plan.
4. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00 P.M.,
Eastern time, on Fund Business Days (as defined in the Prospectus), by dividing
the value of the Fund's net assets (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued) by the
number of shares outstanding at the time the determination is made. The Trust
does not determine net asset value 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.
5. PORTFOLIO TRANSACTIONS
The Fund generally will 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 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.
The 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 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 Adviser may also take into account
payments made by brokers effecting transactions for the Fund (i) to the Fund or
(ii) to other persons on behalf of the Fund for services provided to it for
which it would be obligated to pay.
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In addition, the Adviser may give consideration to research services furnished
by brokers to the 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 may be used by the Adviser in connection with
services to clients other than the Fund, and the Adviser's fee is not reduced by
reason of the Adviser's receipt of the research services.
Investment decisions for the Fund will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Adviser 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 the Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for the Fund and for other investment companies and accounts
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
The Fund contemplates that, consistent with the policy of obtaining best net
results, brokerage transactions may be conducted through the Adviser's
affiliates, affiliates of those persons or Forum. The Advisory Agreement
authorizes the Adviser to so execute trades. The Board of Directors has adopted
procedures in conformity with applicable rules under the Investment Company Act
to ensure that all brokerage commissions paid to these persons are reasonable
and fair. For the Trust's fiscal years ended June 30, 1996, 1995 and 1994 the
aggregate brokerage commissions incurred by the Fund were $198,598, $450,930 and
$405,443, respectively, of which 5.1%, 11.37% and 10.64% ($10,095, $51,250 and
$43,141), respectively, was paid to American Securities Corporation, an
affiliate of the Adviser. During those periods, approximately 4.67%, 5.66% and
16.59% respectively, of the total dollar amount of transactions by the Fund
involving the payment of commissions were effected through American Securities
Corporation.
The frequency of portfolio transactions of the Fund (the portfolio turnover
rate) will vary from year to year depending on many factors. From time to
time the Fund may engage in active short-term trading to take advantage of
price movements affecting individual issues, groups of issues or markets.
This will increase the Fund's rate of turnover and will result in higher
total brokerage costs for the Fund and a possible increase in short-term
capital gains or losses. Tax rules applicable to short-term trading may
affect the timing of the Fund's portfolio transactions or its ability to
realize short-term trading profits or establish short-term positions.
6. CUSTODIAN
Pursuant to a Custodian Agreement (the "Custodian Agreement"), The First
National Bank of Boston, P.O. Box 1959, Boston, Massachusetts, 02105, acts as
the custodian of the Funds' assets. The custodian's responsibilities include
safeguarding and controlling the Fund's cash and securities, determining income
and collecting interest on Fund investments. The Fund's custodian employs
foreign subcustodians to provide custody of the Fund's foreign assets in
accordance with applicable regulations. The custodian is paid a fee at an
annual rate of 0.02% of the first $100 million of the average daily net assets
of the Fund, 0.015% on the next $100 million of the average daily net assets of
the Fund and .001% of the average daily net assets over $200 million, and
certain transaction fees.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by the distributor at net
asset value without any sales charge. As of June 30, 1996, the Fund's net asset
value was $13.61.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partly in portfolio securities if the Board of Directors
determines economic conditions exist which would make payment in cash
detrimental to the best interests of the Fund. If payment for shares redeemed
is made wholly or partly in portfolio securities, brokerage costs may be
incurred by the shareholder in converting the securities to cash. The Trust has
filed an election with the Securities and Exchange Commission pursuant to which
the Fund may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily to reimburse
the 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 relating to
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transactions effected for the benefit of a shareholder which is applicable to
the Fund's shares as provided in the Prospectus from time to time.
Shareholders' rights of redemption may not be suspended, except (i) for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, (ii) for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by the Fund of its securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(iii) for such other period as the Securities and Exchange Commission may by
order permit for the protection of the shareholders of the Fund.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, the Fund may accept portfolio securities that meet the investment
objective and policies of the Fund as payment for Fund shares. The Fund will
only accept securities that (i) are not restricted as to transfer either by law
or liquidity of market and (ii) have a value which is readily ascertainable (and
not established only by valuation procedures).
8. TAXATION
The Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended. Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements the
Fund 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 the Fund and assumes that the 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 his or
her particular situation.
A portion of the Fund's net investment income may be eligible for the dividends
received deduction allowed to corporations.
For Federal income tax purposes, when put and call options which the Fund has
purchased expire unexercised, the premiums paid by the Fund give rise to short
or long-term capital losses at the time of expiration (depending on the length
of the exercise period of the put or call). When put and call options written
by the Fund expire unexercised, the premiums received by the Fund give rise to
short-term capital gains at the time of expiration. When the Fund exercises a
call, the purchase price of the security purchased is increased by the amount of
the premium paid by the Fund. When the Fund exercises a put, the proceeds from
the sale of the related security are decreased by the premium paid. When a put
or call written by the Fund is exercised, the purchase price (selling price in
the case of a call) of the security is decreased (increased in the case of a
call) for tax purposes by the premium received. There may be short or long term
gains and losses associated with closing purchase or sale transactions.
In addition, the use of certain hedging strategies such as writing and
purchasing options, futures contracts and options on futures contracts and
entering into foreign currency forward contracts and other foreign instruments,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of income received in connection therewith.
9. OTHER MATTERS
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of stock of the Trust
are passed upon by Seward & Kissel, One Battery Park Plaza, New York, New York
10004.
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Deloitte & Touche, Two World Financial Center, New York, New York, 10281,
independent auditors, have been selected as auditors for the Trust.
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and assumed
the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996, Forum
Funds, Inc. was reorganized as a Delaware business trust under the name Forum
Funds. 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 Fund) and may in the future divide portfolios or series into two or
more classes of shares (such as Investor and Institutional Shares). Currently
the authorized shares of the Trust are divided into 15 separate series. Prior
to November 25, 1996, the Fund was a separate portfolio named Oak Hall Equity
Fund of Stone Bridge Funds, Inc., a Maryland corporation.
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 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 distribution's 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.
As of October 2, 1996, the officers and Trustees of the Trust owned as a group
less than 1% of the outstanding shares of the Fund. Also as of that date, the
following persons owned of record 5% or more of the outstanding shares of the
Fund: Andrea Straus, 2737 Stevens St. Madison, Wisconsin, 53705, 8.02%, and
Mary Ann Wolf, 55 Central Park West, New York, New York, 10023, 5.61%. 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.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal year ended June 30,
1996 (which are included in the Annual Report to Shareholders), which are
delivered along with this Statement of Additional Information, are incorporated
herein by reference.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(a) 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 sometime 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 of or 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.
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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.
(b) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
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 payments. 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.
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. 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. The 'D' rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
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.
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PREFERRED STOCK
(a) MOODY'S
Moody's rates preferred stock issues as follows:
An issue which is rated aaa is a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment among
preferred stock issues.
An issue which is rated "aa" is 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 which is rated "a" is 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 which is rated "baa" is a medium-grade preferred stock, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue which is rated "ba" has 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.
(b) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues 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 if normally exhibits adequate
protection parameters, adverse economic conditions or changing
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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 "B" may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
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