<PAGE>
As filed with the Securities and Exchange Commission on May 31, 1996
File No. 2-67052
File No. 811-3023
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 35
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 35
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FORUM FUNDS
(Formerly Forum Funds, Inc.)
(Exact Name of Registrant as Specified in its Charter)
Two Portland Square, Portland, Maine 04101
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code: 207-879-1900
-------------------------------------------------------------
David I. Goldstein, Esq.
Forum Financial Services, Inc.
Two Portland Square, Portland, Maine 04101
(Name and Address of Agent for Service)
Copies of Communications to:
Anthony C.J. Nuland, Esq.
Seward & Kissel
1200 G Street, N.W.
Washington, D.C. 20005
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It is proposed that this filing will become effective:
immediately upon filing pursuant to Rule 485, paragraph (b)
---
on [ ] pursuant to Rule 485, paragraph (b)
---
60 days after filing pursuant to Rule 485, paragraph (a)(i)
---
X on August 1, 1996 pursuant to Rule 485, paragraph (a)(i)
---
75 days after filing pursuant to Rule 485, paragraph (a)(ii)
---
on [ ] pursuant to Rule 485, paragraph (a)(ii)
---
this post-effective amendment designates a new effective date for a
--- previously filed post-effective amendment
Registrant has registered an indefinite number of shares of beneficial interest
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. Accordingly, no fee is payable herewith. Registrant filed
a Rule 24f-2 notice for its most recent fiscal year ended March 31, 1996, on
May 29, 1996.
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(c))
PART A
(Prospectuses offering Shares of Investors Bond Fund, TaxSaver Bond Fund, Maine
Municipal Bond Fund, New Hampshire Bond Fund, Payson Value Fund and Payson
Balanced Fund)
FORM N-1A LOCATION IN PROSPECTUS
ITEM NO. (CAPTION)
- --------- ----------------------
Item 1. Cover Page: Cover Page
Item 2. Synopsis: Prospectus Summary
Item 3. Condensed Financial
Information: Not Applicable
Item 4. General Description
of Registrant: Prospectus Summary; Investment
Objective and Policies; Other
Information
Item 5. Management of the Fund: Prospectus Summary; Management
Item 6. Capital Stock and
Other Securities Investment Objective and
Policies; Dividends and Tax
Matters; Other Information - The
Trust and its Shares
Item 7. Purchase of Securities
Being Offered: Purchases and Redemptions of
Shares; Other Information -
Determination of Net Asset Value;
Management
Item 8. Redemption or Repurchase
of Shares: Purchases and Redemptions of
Shares
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
PART B
(SAIs offering Shares of Investors Bond Fund, TaxSaver Bond Fund, Maine
Municipal Bond Fund, New Hampshire Bond Fund, Payson Value Fund and Payson
Balanced Fund)
LOCATION IN STATEMENT
FORM N-1A OF ADDITIONAL INFORMATION
ITEM NO. (CAPTION)
- --------- -------------------------
Item 10. Cover Page: Cover Page
Item 11. Table of Contents: Cover Page
Item 12. General Information and History: Management; Other Information
Item 13. Investment Objectives and
Policies: Investment Policies; Investment
Limitations
Item 14. Management of the Registrant: Management
Item 15. Control Persons and
Principal Holders of
Securities: Other Information
Item 16. Investment Advisory
and Other Services: Management; Other Information -
Custodian, Counsel, Auditors
Item 17. Brokerage Allocation
and Other Practices: Portfolio Transactions
Item 18. Capital Stock and
Other Securities: Determination of Net Asset Value
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered: Determination of Net Asset Value;
Additional Purchase and
Redemption Information
Item 20. Tax Status: Taxation
Item 21. Underwriters: Management
Item 22. Calculation of
Performance Data: Performance Data
Item 23. Financial Statements: Not Applicable
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(c))
PART A
(All other Prospectuses)
Not Applicable in this Filing
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(c))
PART B
(All other SAIs)
Not Applicable in this Filing
<PAGE>
FORUM FUNDS
INVESTORS BOND FUND
TAXSAVER BOND FUND
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
Forum Financial Corp.
P.O. Box 446
Portland, Maine 04112
(207) 879-0001
PROSPECTUS
August 1, 1996
This Prospectus offers shares of Investors Bond Fund and TaxSaver Bond Fund (the
"Funds"), each a non-diversified series of Forum Funds (the "Trust"), an open-
end, management investment company.
INVESTORS BOND FUND seeks to provide as high a level of
current income as is consistent with capital preservation
and prudent investment risk. The Fund invests primarily in a
portfolio of investment grade debt securities.
TAXSAVER BOND FUND seeks to provide shareholders with a high
level of current income exempt from Federal income tax. The
Fund invests principally in investment grade debt
obligations issued by the states, territories and
possessions of the United States and their political
subdivisions, agencies and instrumentalities.
Shares of the Funds are offered to investors at a price equal to the next
determined net asset value plus a maximum sales charge of 3.75% of the total
public offering price (3.90% of the net amount invested).
This Prospectus sets forth concisely the information concerning the Trust and
the Funds that a prospective investor should know before investing. The Trust
has filed with the Securities and Exchange Commission ("SEC") a Statement of
Additional Information dated August 1, 1996, as may be amended from time to time
(the "SAI"), which contains more detailed information about the Trust and the
Funds and which is incorporated into this Prospectus by reference. The SAI is
available without charge by contacting the Trust at the address listed above.
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 SECURITIES
AND EXCHANGE 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
HIGHLIGHTS OF THE FUND
Investment Objectives
INVESTORS BOND FUND. The investment objective of the Fund is to provide as high
a level of current income as is consistent with capital preservation and prudent
investment risk. The Fund invests primarily in a portfolio of investment grade
debt securities.
TAXSAVER BOND FUND. The investment objective of the Fund is to provide
shareholders with a high level of current income exempt from Federal income tax.
The Fund invests principally in investment grade debt obligations issued by the
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities. See the "Investment Objectives and
Policies" sections.
FUND MANAGEMENT
The executive offices of the Funds' investment adviser, Forum Advisors, Inc.
(the "Adviser"), are located at Two Portland Square, Portland, Maine 04101. The
manager of the Trust and distributor of its shares is Forum Financial Services,
Inc. ("Forum"). Forum Financial Corp. (the "Transfer Agent"), Two Portland
Square, Portland, Maine 04101, serves as the Trust's transfer agent, dividend
disbursing agent and shareholder servicing agent. See "Management."
PURCHASES AND REDEMPTIONS
Shares of the Funds are offered at the next-determined net asset value per share
plus any applicable sales charge. The minimum initial investment is $5,000
($2,000 for IRAs; $2,500 for exchanges) and the minimum subsequent investment is
$500. Shares may be redeemed without charge. See "Purchases and Redemptions of
Shares."
EXCHANGE PROGRAM
Shareholders of the Funds may exchange their shares without charge for the
shares of certain other funds. See "Purchases and Redemptions of Shares -
Exchanges."
DIVIDENDS
Dividends of net investment income are declared daily and paid monthly by each
Fund and are reinvested in Fund shares unless a shareholder elects to have them
paid in cash. It is anticipated that substantially all of the dividends paid by
TaxSaver Bond Fund will be exempt from Federal income taxes, including the
Federal alternative minimum tax. See "Dividends and Tax Matters."
CERTAIN INVESTMENT CONSIDERATIONS AND RISK FACTORS
There can be no assurance that any Fund will achieve its investment objective,
and a Fund's net asset value and total return will fluctuate based upon changes
in the value of its portfolio securities. Normally, the value of a Fund's
investments varies inversely with changes in interest rates. Upon redemption, an
investment in a Fund may be worth more or less than its original value. The
Funds' investments are subject to "credit risk" relating to the financial
condition of the issuers of the securities that each Fund holds.
All investments made by the Funds entail some risk. The Funds' investments in
non-investment grade debt securities and investment techniques, however, entail
certain additional risks, such as the potential use of leverage by a Fund
through borrowings, securities lending, swap transactions and other investment
techniques. See "Additional Investment Policies." Similarly, a Fund's use of
mortgage- and asset-backed securities entails certain risks. See "Investment
Objective and Policies - Investors Bond Fund - Mortgage-Backed Securities" and
"- Asset-Backed Securities." The Funds are non-diversified and, therefore, have
greater freedom to concentrate their investments than if they were diversified
funds. See "Certain Risk Factors."
EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in understanding the
various expenses that an investor in a Fund will bear directly or indirectly.
2
<PAGE>
Investors TaxSaver
Bond Bond
Fund Fund
---- ----
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of public offering price) 3.75% 3.75%
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES (1)
(as a percentage of average net
assets after expense reimbursements)
Management Fees (2) ____% ____%
12b-1 Fees None None
Other Expenses ____% ____%
Total Fund Operating Expenses ____% ____%
(1) The amounts of expenses are based on amounts incurred by each Fund during
the Fund's most recent fiscal year ending March 31, 1996. Absent expense
reimbursements and fee waivers, the expenses of Investors Bond Fund and TaxSaver
Bond Fund, respectively, would have been: Management Fees, ____% and ____%;
Other Expenses, ____% and ____%; and Total Fund Operating Expenses, ____% and
____%. For a further description of the various expenses incurred in the
operation of the Fund, see "Management."
(2) Includes the Adviser's investment advisory fee and Forum's management fee.
EXAMPLE
Following is a hypothetical example that indicates the dollar amount of expenses
that an investor in the Fund would pay assuming a $1,000 investment in the Fund,
a 5% annual return, the reinvestment of all dividends and distributions and
redemption at the end of each period:
1 Year 3 Years 5 Years 10 Years
Investors Bond Fund $ $ $ $
TaxSaver Bond Fund $ $ $ $
The example is based on the expenses listed in the table. The five percent
annual return is not predictive of and does not represent the Funds' 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.
2. FINANCIAL HIGHLIGHTS
The following information represents selected data for a single share
outstanding of Investors Bond Fund. This information has been audited in
connection with an audit of the Fund's financial statements by [ ],
independent auditors. The financial statements and independent auditors' report
thereon are incorporated by reference into the SAI. Further information about
the Fund's performance is contained in the Fund's annual report to shareholders,
which may be obtained from the Trust without charge.
3
<PAGE>
<TABLE>
<CAPTION>
INVESTORS BOND FUND
Year Ended March 31
1996 1995 1994 1993 1992 1991 1990(1)
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning Net Asset Value per Share $10.00 $10.38 $10.71 $10.43 $10.09 $ 9.82 $10.00
Net Investment Income 0.74 0.82 0.81 0.82 0.83 0.84 0.42
Net Realized and Unrealized Investment
Gain (Loss) on Securities 0.21 (0.38) (0.30) 0.53 0.44 0.27 (0.14)
Dividends from Net Investment Income (0.74) (0.82) (0.81) (0.82) (0.83) (0.84) (0.42)
Distributions from Net Realized Gains -- (0.03) (0.25) (0.10) -- (0.04)
------ ------ ------ ------ ------ ------ ------
Ending Net Asset Value per Share $10.21 $10.00 $10.38 $10.71 $10.43 $10.09 $ 9.82
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Ratios to Average Net Assets:
Expenses (2) 0.43 0.75% 0.75% 0.75% 0.70% 0.64% 0.41%(3)
Net Investment Income 7.29% 8.19% 7.49% 7.71% 7.93% 8.44% 8.51%(3)
Total Return 9.84% 4.55% 4.70% 13.53% 12.91% 11.76% 5.79%(3)
Portfolio Turnover Rate 42.89% 48.17% 41.41% 193.21% 221.39% 73.32% 93.08%
Net Assets at the End of
Period (000's Omitted) $25,676 $25,890 $26,083 $26,832 $24,336 $19,132 $19,400
(1) The Fund commenced operations on October 2, 1989.
(2) 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:
Expenses 1.36% 1.33% 1.31% 1.40% 1.51% 1.68% 1.52%(3)
(3) Annualized.
</TABLE>
The following information represents selected data for a single share
outstanding of TaxSaver Bond Fund. This information has been audited in
connection with an audit of the Fund's financial statements by [ ],
independent auditors. The financial statements and independent auditors' report
thereon are incorporated by reference into the SAI. Further information about
the Fund's performance is contained in the Fund's annual report to shareholders,
which may be obtained from the Trust without charge.
<TABLE>
<CAPTION>
TAXSAVER BOND FUND
Year Ended March 31
1996 1995 1994 1993 1992 1991 1990(1)
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning Net Asset Value per Share $10.39 $10.35 $10.63 $10.26 $10.10 $ 9.97 $10.00
Net Investment Income 0.57 0.57 0.57 0.63 0.68 0.67 0.33
Net Realized and Unrealized Investment
Gain (Loss) on Securities 0.18 0.04 (0.01) 0.49 0.20 0.13 (0.03)
Dividends from Net Investment Income (0.57) (0.57) (0.57) (0.63) (0.68) (0.67) (0.33)
Distributions from Net Realized Gains -- -- (0.27) (0.12) -- (0.04) --
------ ------ ------ ------ ------ ------ ------
Ending Net Asset Value per Share $10.57 $10.39 $10.35 $10.63 $10.26 $10.10 $ 9.97
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Ratios to Average Net Assets:
Expenses (2) 0.60% 0.60% 0.60% 0.60% 0.55% 0.49% 0.22%(3)
Net Investment Income 5.35% 5.62% 5.27% 5.98% 6.64% 6.69% 6.54%(3)
Total Return 7.36% 6.18% 5.24% 11.28% 8.95% 8.29% 6.16%(3)
Portfolio Turnover Rate 61.61% 63.85% 141.80% 240.36% 104.29% 54.62% 13.25%
Net Assets at the End of
Period (000's Omitted) $17,915 $16,018 $16,518 $16,580 $11,207 $9,998 $9,546
(1) The Fund commenced operations on October 2, 1989.
(2) 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:
Expenses 1.48% 1.45% 1.50% 1.56% 1.66% 1.86% 1.66%(3)
(3) Annualized.
</TABLE>
4
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
Shareholders of each Fund have approved a new investment policy that permits the
Fund to seek to achieve its investment objective by converting to a Core and
Gateway structure. The Fund, upon future action by the Board of Trustees and
notice to shareholders, may convert to this structure, in which the Fund would
hold as its only investment securities the shares of another investment company
having substantially the same investment objective and policies as the Fund. The
Board of Trustees will not authorize conversion to a Core and Gateway structure
if it would materially increase costs to a Fund's shareholders.
INVESTORS BOND FUND
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of current
income as is consistent with capital preservation and prudent investment risk.
Capital preservation means seeking to control the risk of default and the risk
of capital losses in a period of falling prices for debt securities. There can
be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
The Fund seeks to attain its investment objective by investing primarily in a
portfolio consisting of investment grade debt securities. Under normal
circumstances, the Fund intends to invest at least 65% of its assets in debt
securities, U.S. Government Securities, and mortgage-backed and asset-backed
securities.
The securities in which the Fund invests will include debt securities which are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization ("NRSRO") such as Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") (See SAI -
"Description of Securities Ratings"), obligations issued or guaranteed as to
principal and interest by the United States Government or by any of its agencies
or instrumentalities ("U.S. Government Securities") and mortgage-backed and
asset backed securities rated in one of the two highest rating categories by a
NRSRO.
The Fund may also invest in commercial paper and other money market instruments
rated in one of the two highest rating categories by a NRSRO and banker's
acceptances or negotiable certificates of deposit issued by the commercial banks
doing business in the United States that have, at the time of investment, total
assets in excess of one billion dollars and that are insured by the Federal
Deposit Insurance Corporation.
The Fund may from time to time lend securities from its portfolio to brokers,
dealers and other financial institutions. Securities loans must be continuously
secured by cash or U.S. Government Securities with a market value, determined
daily, at least equal to the value of the Fund's securities loaned, including
accrued interest. The Fund receives interest in respect of securities loans from
the borrower or from investing cash collateral. The Fund may pay fees to arrange
the loans. The Fund will, as a fundamental policy, limit securities lending to
not more than 10% of the value of its total assets.
The Fund will invest, as a fundamental policy, at least 90% of the value of its
total assets at the time of investment in the above types of securities or in
repurchase agreements covering those securities.
The Fund may also invest up to 10% of the value of its total assets at the time
of investment in:
(1) debt securities which are rated in the fifth highest rating category by
an NRSRO (for example, BB by S&P). Bonds rated BB 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. 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.
5
<PAGE>
(2) preferred stock which is rated in one of the five highest rating
categories by a NRSRO (for example, ba or above by Moody's). An issue rated ba
is considered to have speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
(3) options and futures contracts.
Securities in the four highest rating categories are generally considered to be
investment grade, although Moody's indicates that securities rated Baa have
speculative characteristics. Debt securities and preferred stock rated in the
fifth highest rating category by Moody's and by S&P are not considered to be
investment grade, are high risk and have predominantly speculative
characteristics. See "Certain Risk Factors." The Fund may purchase unrated
securities which the Adviser believes to be of comparable quality to the rated
securities in which the Fund may invest. Unrated securities may not be as
actively traded as rated securities. An unrated security will be considered for
investment by the Fund when the Adviser believes that the financial condition of
the issuer of the obligation and the protection afforded by the terms of the
obligation itself limit the risk to the Fund to a degree comparable to that of
rated securities in which the Fund may invest.
During its last fiscal year, the Fund had __% of its average annual assets in
securities rated by Moody's or S&P and __% of its average annual assets in
unrated investments, including cash and cash equivalents. For that year the Fund
had the following percentages of its average annual net assets invested in rated
securities: Aaa/AAA-___%, Aa/AA-___%, A/A-____%, Baa/BBB-____%, Ba/BB-____% and
B/B-___%. Securities with different ratings from Moody's and S&P were assigned
the higher rating. This information reflects the average month end composition
of the assets for the Fund's last fiscal year and is not necessarily
representative of the Fund as of the end of last year, the current fiscal year
or any other time.
In general, the longer the maturity of a security, the higher the rate of
interest it pays. However, a longer average maturity is generally associated
with a higher level of volatility in the market value of a security. The average
maturity of the Fund's portfolio will vary depending on anticipated market
conditions. It is anticipated that the Fund will invest in debt obligations with
maturities ranging from short-term (including overnight) to 30 years, and that
the Fund's portfolio of securities will have an average weighted maturity of
between five and 20 years.
CORPORATE DEBT SECURITIES. In selecting corporate debt securities for the Fund,
the Adviser reviews and monitors the creditworthiness of each issuer and issue.
Interest rate trends and specific developments which may affect individual
issuers will also be analyzed. In addition to the debt securities of domestic
corporations, the Fund may invest in debt securities registered and sold in the
United States by foreign issuers (Yankee Bonds) and those sold outside the
United States by foreign or U.S. issuers (Eurobonds). The Fund restricts its
purchases of these securities to issues denominated and payable in United States
dollars. All obligations of non-U.S. issuers purchased by the Fund will be
issued or guaranteed by a sovereign government, by a supranational agency whose
members are sovereign governments, or by a U.S. issuer in whose debt securities
the Fund could invest.
U.S. GOVERNMENT SECURITIES. The U.S. Government Securities in which the Fund may
invest include direct obligations of the U.S. Treasury (such as Treasury bills
and notes) and other securities backed by the full faith and credit of the U.S.
Government, such as those issued by the Government National Mortgage Association
("GNMA"). The Fund may also invest in U.S. Government Securities that have
lesser degrees of government backing. For instance, the Fund may purchase
obligations of the of the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC") (which are supported by the
right of the issuer to borrow from the Treasury under certain circumstances) and
obligations of the Student Loan Marketing Association and the Federal Home Loan
Banks (which are supported only by the credit of the agency or instrumentality).
There is no guarantee that the U.S. Government will support securities not
backed by its full faith and credit and, accordingly, these securities may
involve more risk than other U.S. Government Securities.
MORTGAGE-BACKED SECURITIES. The Adviser anticipates that up to 50% of the value
of the Fund's total assets may be invested in mortgage-backed securities.
Mortgage-backed securities represent an interest in a pool of mortgages
originated by lenders such as commercial banks, savings associations and
mortgage bankers and brokers. Mortgage-backed securities may be issued by
governmental or government-related entities or by non-governmental entities such
as special purpose trusts created by banks, savings associations, private
mortgage insurance companies or mortgage bankers.
6
<PAGE>
Interests in mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or on specified call dates. In
contrast, mortgage-backed securities provide monthly payments which consist of
interest and, in most cases, principal. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of the
securities or a mortgage loan servicer. Additional payments to holders of these
securities are caused by prepayments resulting from the sale or foreclosure of
the underlying property or refinancing of the underlying loans.
UNDERLYING MORTGAGES. Pools of mortgages consist of whole mortgage loans or
participations in mortgage loans. The majority of these loans are made to
purchasers of 1-4 family homes, but may be made to purchasers of mobile homes or
other real estate interests. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Fund may purchase
pools of variable rate mortgages, growing equity mortgages, graduated payment
mortgages and other types. Mortgage servicers impose qualification standards for
local lending institutions which originate mortgages for the pools as well as
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, many mortgages included in pools are insured through
private mortgage insurance companies.
LIQUIDITY AND MARKETABILITY. The market for mortgage-backed securities has
expanded considerably in recent years. The size of the primary issuance market
and active participation in the secondary market by securities dealers and many
types of investors make government and government-related pass-through pools
highly liquid. The recently introduced private conventional pools of mortgages
(pooled by commercial banks, savings and loan institutions and others, with no
relationship with government and government-related entities) have also achieved
broad market acceptance and consequently an active secondary market has emerged.
However, the market for conventional pools is smaller and less liquid than the
market for government and government-related mortgage pools.
AVERAGE LIFE AND PREPAYMENTS. The average life of a pass-through pool varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's terms may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. Prepayments with respect to securities
during times of declining interest rates will tend to lower the return of the
Fund and may even result in losses to the Fund if the securities were acquired
at a premium. The occurrence of mortgage prepayments is affected by various
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of fixed-
rate 30-year mortgages, common industry practice is to assume that prepayments
will result in a 12-year average life. Pools of mortgages with other maturities
or different characteristics will have varying assumptions for average life. The
assumed average life of pools of mortgages having terms of less than 30 years is
less than 12 years, but typically not less than 5 years.
YIELD CALCULATIONS. Yields on pass-through securities are typically quoted by
investment dealers based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgages. Conversely, in periods of rising rates, the rate of
prepayment tends to decrease, thereby lengthening the actual average life of the
pool. Actual prepayment experience may cause the yield to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the yield of
the Fund.
GOVERNMENT AND GOVERNMENT-RELATED GUARANTORS. The principal government guarantor
of mortgage-backed securities is the Government National Mortgage Association
("GNMA"), a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages.
The Federal National Mortgage Association ("FNMA") is a government-sponsored
corporation owned entirely by private stockholders that is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller-servicers. The Federal Home
Loan Mortgage
7
<PAGE>
Corporation ("FHLMC") is a corporate instrumentality of the United States
Government that was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is owned
by the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("PCs") which represent interests in mortgages from FHLMC's national portfolio.
FNMA and FHLMC each guarantee the payment of principal and interest on the
securities they issue. These securities, however, are not backed by the full
faith and credit of the United States Government.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. Mortgage-backed securities offered
by private issuers include pass-through securities comprised of pools of
conventional mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and which are
collateralized by mortgage loans; and collateralized mortgage obligations.
Mortgage-backed securities issued by non-governmental issuers may offer a higher
rate of interest than securities issued by government issuers because of the
absence of direct or indirect government guarantees of payment. Many non-
governmental issuers or servicers of mortgage-backed securities, however,
guarantee timely payment of interest and principal on such securities. Timely
payment of interest and principal may also be supported by various forms of
insurance, including individual loan, title, pool and hazard policies. There can
be no assurance that the private issuers or insurers will be able to meet their
obligations under the relevant guarantees and insurance policies.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage-backed
securities ("ARMs") are securities that have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or market
interest rate. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because of the
resetting of interest rates, adjustable rate securities are less likely than
non-adjustable rate securities of comparable quality and maturity to increase
significantly in value when market interest rates fall. Also, most adjustable
rate securities (or the underlying mortgages) are subject to caps or floors.
"Caps" limit the maximum amount by which the interest rate paid by the borrower
may change at each reset date or over the life of the loan and, accordingly,
fluctuation in interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
securities.
ARMs may have less risk of a decline in value during periods of rapidly rising
rates, but they may also have less potential for capital appreciation than other
debt securities of comparable maturities due to the periodic adjustment of the
interest rate on the underlying mortgages and due to the likelihood of increased
prepayments of mortgages as interest rates decline. Furthermore, during periods
of declining interest rates, income to the Fund will decrease as the coupon rate
resets to reflect the decline in interest rates. During periods of rising
interest rates, changes in the coupon rates of the mortgages underlying the
Fund's ARMs may lag behind changes in market interest rates. This may result in
a slightly lower net value until the interest rate resets to market rates. Thus,
investors could suffer some principal loss if they sold Fund Shares before the
interest rates on the underlying mortgages were adjusted to reflect current
market rates.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are debt obligations that are collateralized by mortgages or mortgage
pass-through securities issued by GNMA, FHLMC or FNMA or by pools of
conventional mortgages ("Mortgage Assets"). CMOs may be privately issued or U.S.
Government Securities. Payments of principal and interest on the Mortgage Assets
are passed through to the holders of the CMOs on the same schedule as they are
received, although, certain classes (often referred to as tranches) of CMOs have
priority over other classes with respect to the receipt of payments. Multi-class
mortgage pass-through securities are interests in trusts that hold Mortgage
Assets and that have multiple classes similar to those of CMOs. Unless the
context indicates otherwise, references to CMOs include multi-class mortgage
pass-through securities. Payments of principal of and interest on the underlying
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide funds to pay debt service on the CMOs or to make scheduled distributions
on the multi-class mortgage pass-through securities. Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. Planned amortization class
mortgage-based securities ("PAC Bonds") are a form of parallel pay CMO. PAC
Bonds are designed to provide relatively predictable payments of principal
provided that, among other things, the actual prepayment experience on the
underlying mortgage loans falls within a contemplated range. If the actual
prepayment experience on the underlying
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mortgage loans is at a rate faster or slower than the contemplated range, or if
deviations from other assumptions occur, principal payments on a PAC Bond may be
greater or smaller than predicted. The magnitude of the contemplated range
varies from one PAC Bond to another; a narrower range increases the risk that
prepayments will be greater or smaller than contemplated. CMOs may have
complicated structures and generally involve more risks than simpler forms of
mortgage-backed securities.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a Z-tranche). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increases the face amount of the security at a
compounded rate, but is not paid to the bond holder. After all previous tranches
are retired, accrual bond holders start receiving cash payments that include
both principal and continuing interest. The market value of accrual bonds can
fluctuate widely and their average life depends on the other aspects of the CMO
offering. Interest on accrual bonds is taxable when accrued even though the
holders receive no accrual payment. The Fund distributes all of its net
investment income, and may have to sell portfolio securities to distribute
imputed income, which may occur at a time when the Adviser would not have chosen
to sell such securities and which may result in a taxable gain or loss. The
Adviser's analyses of particular CMO issues and estimates of future economic
indicators (such as interest rates) become more important to the performance of
the Fund as the securities become more complicated.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities are
classes of mortgage-backed securities that receive different proportions of the
interest and principal distributions from the underlying Mortgage Assets. They
may be may be privately issued or U.S. Government Securities. In the most
extreme case, one class will be entitled to receive all or a portion of the
interest but none of the principal from the Mortgage Assets (the interest-only
or "IO" class) and one class will be entitled to receive all or a portion of the
principal, but none of the interest (the "PO" class).
ASSET-BACKED SECURITIES. The Adviser anticipates that up to 15% of the value of
the Fund's total assets may be invested in asset-backed securities. Asset-backed
securities represent direct or indirect participations in, or are secured by and
payable from, assets other than mortgage-backed assets such as motor vehicle
installment sales contracts, installment loan contracts, leases of various types
of real and personal property and receivables from revolving credit (credit
card) agreements. Asset-backed securities, including adjustable rate asset-
backed securities, have yield characteristics similar to those of mortgage-
backed securities and, accordingly, are subject to many of the same risks.
Assets are securitized through the use of trusts and special purpose
corporations that issue securities that are often backed by a pool of assets
representing the obligations of a number of different parties. Payments of
principal and interest may be guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution. Asset-
backed securities do not always have the benefit of a security interest in
collateral comparable to the security interests associated with mortgage-backed
securities. As a result, the risk that recovery on repossessed collateral might
be unavailable or inadequate to support payments on asset-backed securities is
greater for asset-backed securities than for mortgage-backed securities. In
addition, because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of an interest rate or economic cycle has not been
tested.
TAXSAVER BOND FUND
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide shareholders with a high
level of current income exempt from Federal income tax. Although the Fund will
attempt to invest 100% of its assets in municipal securities the interest on
which is exempt from all Federal income tax, including the Federal alternative
minimum tax ("AMT"), the Fund reserves the right to invest up to 20% of the
value of its net assets in securities on which the interest income is subject to
Federal income taxation. In addition, the Fund may assume a temporary defensive
position and invest without limit in cash and cash equivalents that may be
taxable. There can be no assurance that the Fund will achieve its investment
objective.
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INVESTMENT POLICIES
The Fund pursues its objective by investing principally in investment grade debt
obligations issued by the states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities. These
securities are generally known as "municipal securities" and include municipal
bonds, notes and leases. It is anticipated that under normal circumstances
substantially all of the Fund's total assets will be invested in municipal
securities the interest income from which is exempt from Federal income taxes,
including the Federal AMT.
In general, the longer the maturity of a municipal security, the higher the rate
of interest it pays. However, a longer average maturity is generally associated
with a higher level of volatility in the market value of a municipal security.
The average maturity of the Fund's portfolio will vary depending on anticipated
market conditions. It is anticipated, however, that the average weighted
maturity of all municipal securities in the Fund's portfolio will normally range
between five and 15 years.
Some municipal securities are related in such a way that an economic, business
or political development affecting one municipal security would have a similar
effect on another municipal security. For example, the repayment of different
obligations may depend on similar types of projects. While the Fund may invest
more than 25% of its total assets in private activity bonds, ("PABs") under
normal circumstances no single type of revenue bond (for example, electric
revenue bonds or housing revenue bonds) will constitute more than 25% of the
Fund's total assets. In addition, under normal circumstances no more than 25% of
the Fund's total assets may be invested in issuer's located in any one state,
territory or possession.
Under current Federal tax law, interest on certain municipal securities issued
after August 7, 1986 to finance "private activities" will be a "tax preference
item" for purposes of the Federal AMT applicable to certain individuals and
corporations. The interest on these securities generally is fully tax-exempt for
regular Federal income tax purposes. The Fund may from time to time purchase
certain municipal securities the interest on which constitutes a "tax preference
item" for purposes of the Federal AMT.
LENDING OF PORTFOLIO SECURITIES. The Fund may from time to time lend securities
from its portfolio to brokers, dealers and other financial institutions.
Securities loans must be continuously secured by cash or U.S. Government
Securities with a market value, determined daily, at least equal to the value of
the Fund's securities loaned, including accrued interest. The Fund receives
interest in respect of securities loans from the borrower or from investing cash
collateral. The Fund may pay fees to arrange the loans. The Fund will, as a
fundamental policy, limit securities lending to not more than 10% of the value
of its total assets.
CREDIT MATTERS. Normally, at least 65% of the Fund's total assets will be
invested in municipal bonds rated at the time of purchase within the four
highest grades assigned by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Service, Inc. ("Moody's") (Aaa,
Aa, A and Baa) or Standard & Poor's Corporation ("S&P") (AAA, AA, A and BBB) or
which are unrated and determined by the Adviser to be of comparable quality.
Securities in these ratings generally are considered to be investment grade
securities, although Moody's indicates that municipal securities rated Baa have
speculative characteristics. Unrated securities may not be as actively traded as
rated securities. A further description of the ratings used by Moody's, S&P and
other NRSROs is included in the SAI.
The tax-free yields sought by the Fund are generally obtainable from securities
rated within the four highest rating categories by NRSROs. The Fund may,
however, invest up to 25% of its total assets in municipal bonds rated in the
fifth highest rating category by any NRSRO or which are unrated and determined
by the Adviser to be of comparable quality. These securities are not considered
to be investment grade and have speculative or predominantly speculative
characteristics. See "Certain Risk Factors." The Fund only will invest in
municipal notes and other short-term municipal obligations in the two highest
rating categories assigned by an NRSRO or which are unrated and determined by
the Adviser to be of comparable quality. The Fund may retain securities whose
rating has been lowered below the lowest permissible rating category (or that
are unrated and determined by the Advisor to be of comparable quality) only if
the Adviser determines that retaining the security is in the best interests of
the Fund.
A non-rated municipal security will be considered for investment by the Fund
when the Adviser believes that the financial condition of the issuer of such
obligation and the protection afforded by the terms of the obligation limit the
risk to the Fund to a degree comparable to that of rated securities in which the
Fund may invest. During its last
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fiscal year, the Fund had __% of its average annual assets in municipal
securities rated by Moody's or S&P and __% of its average annual assets in
unrated investments, including cash and cash equivalents. For that year the Fund
had the following percentages of its average annual net assets invested in rated
securities: Aaa/AAA-____%, Aa/AA-___%, A/A-____% and Baa/BBB-____%. 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 end of last year, the current fiscal year or any other time.
MUNICIPAL BONDS. Municipal bonds, which are intended to meet longer term capital
needs, can be classified as either "general obligation" or "revenue" bonds.
General obligation bonds are secured by a municipality's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are generally payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other tax, but not from general tax revenues. Municipal
bonds also include PABs, which are bonds issued by or on behalf of public
authorities to finance various privately operated facilities. PABs are in most
cases revenue bonds and generally do not have the pledge of the full faith,
credit and taxing power of the municipality issuer. The payment of the principal
and interest on these bonds is dependent solely on the ability of an initial or
subsequent user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property financed by
the bond as security for payment. The Fund will acquire only PABs whose interest
payments, in the opinion of the issuer's counsel, are exempt from Federal income
taxation (other than the AMT).
MUNICIPAL NOTES AND LEASES. Municipal notes, which may be either "general
obligation" or "revenue" securities, are intended to fulfill short-term capital
needs and generally have original maturities of 397 days or less. They include
tax anticipation notes, revenue anticipation notes, bond anticipation notes,
construction loan notes and tax-exempt commercial paper. Municipal leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government issuer) are a
means for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of long-term
debt. Municipal leases frequently have special risks not normally associated
with general obligation or revenue bonds or notes as described in the SAI.
PARTICIPATION INTERESTS. The Fund may purchase participation interests in
municipal securities (which may be fixed, floating or variable rate securities)
that are owned by banks or other financial institutions. Participation interests
carry a demand feature backed by a letter of credit or guarantee of the bank or
institution permitting the holder to tender them back to the bank or other
institution. The Fund will only purchase participation interests from Federal
Deposit Insurance Corporation insured banks having total assets of more than one
billion dollars or from other financial institutions whose long-term debt
securities are rated within the four highest rating categories by an NRSRO or
which are unrated and determined by the Adviser to be of comparable quality.
Prior to purchasing any participation interest, the Fund will obtain appropriate
assurances from counsel retained by the Trust that the interest earned by the
Fund from the obligations in which it holds participation interests is exempt
from Federal income tax.
STAND-BY COMMITMENTS. The Fund may purchase municipal securities together with
the right to resell them to the seller at an agreed upon price or yield within
specified periods prior to their maturity dates. These rights to resell are
commonly known as "stand-by commitments." The aggregate price which the Fund
pays for securities with a stand-by commitment may be higher than the price
which otherwise would be paid. The primary purpose of this practice is to permit
the Fund to be as fully invested as practicable in municipal securities while
preserving the necessary flexibility and liquidity to meet unanticipated
redemptions. The Fund will enter into stand-by commitments only with banks or
municipal securities dealers that in the opinion of the Adviser present minimal
credit risks. The value of a stand-by commitment is dependent on the ability of
the writer to meet its repurchase obligation.
4. CERTAIN RISK FACTORS
DIVERSIFICATION MATTERS. The Funds are non-diversified, which means that they
have greater latitude than a diversified fund with respect to the investment of
its assets in the securities of a relatively few municipal issuers. As non-
diversified portfolios, the Funds may present greater risks than a diversified
fund. The Funds' diversification requirements provide that, as of the last day
of each fiscal quarter, with respect to 50% of its assets, a Fund may not own
the securities of a single issuer, other than a U.S. Government security, with a
value of more than 5% of the
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Fund's total assets. Except for U.S. Government securities, no more than 25% of
the total assets of a Fund may be invested in securities of any one issuer.
These limitations do not apply to securities of an issuer payable solely from
the proceeds of escrowed U.S. Government securities. A Fund will be subject to a
greater risk of loss if an issuer in which the Fund invests a substantial amount
of its assets is unable to make interest or principal payments or if the market
value of securities declines.
NON-INVESTMENT GRADE DEBT SECURITIES. The Funds may invest in non-investment
grade, high risk securities (securities rated lower than the fourth highest
rating category by an NRSRO), which provide poor protection for payment of
principal and interest. These lower rated securities (often referred to as "junk
bonds") 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. These risks may be magnified in the case of unrated junk bonds. In
addition, the market prices of lower rated securities may fluctuate more than
the market prices of higher quality securities and may decline significantly in
periods of general economic difficulty or rising interest rates. Further
information concerning these investments is contained in the SAI.
5. ADDITIONAL INVESTMENT POLICIES
All investment policies of a Fund that are designated as fundamental, and each
Fund's investment objective, may not be changed without approval of the holders
of a majority of that Fund's outstanding voting securities. A majority of a
Fund's outstanding voting securities means the lesser of 67% of the shares of
that Fund present or represented at a shareholders meeting at which the holders
of more than 50% of the shares are present or represented, or more than 50% of
the outstanding shares of the Fund. Except as otherwise indicated, investment
policies of the Funds are not fundamental and may be changed by the Board of
Directors of the Trust (the "Board") without shareholder approval. A further
description of the Funds' investment policies is contained in the SAI.
The Funds may borrow money for temporary or emergency purposes (including the
meeting of redemption requests), but not in excess of 33 1/3% of the value of a
Fund's total assets. Borrowing for purposes other than meeting redemption
requests will not exceed 10% of the value of a Fund's total assets. The Funds
may not invest more than 15% of their net assets in illiquid securities,
including repurchase agreements not entitling the Fund to the payment of
principal within seven days. Although they have no current intention, each Fund
may in the future seek to hedge against a decline in the value of securities
they own 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. In order to avoid maintaining idle cash, the Funds may invest up to
10% of their total assets in money market mutual funds that, in the case of
TaxSaver Bond Fund, invest in municipal securities exempt from Federal income
taxes.
TECHNIQUES INVOLVING LEVERAGE
Utilization of leveraging involves special risks and may involve speculative
investment techniques. The Funds may borrow for other than temporary or
emergency purposes, lend their securities, enter reverse repurchase agreements,
and purchase securities on a when issued or forward commitment basis. Each of
these transactions involve the use of "leverage" when cash made available to a
Fund through the investment technique is used to make additional portfolio
investments. In addition, the use of swap and related agreements may involve
leverage. The Funds use these investment techniques only when the Adviser to a
Fund believes that the leveraging and the returns available to the Fund from
investing the cash will provide shareholders a potentially higher return.
Leverage exists when a Fund achieves the right to a return on a capital base
that exceeds the Fund's investment. Leverage creates the risk of magnified
capital losses which occur when losses affect an asset base, enlarged by
borrowings or the creation of liabilities, that exceeds the equity base of the
Fund.
The risks of leverage include a higher volatility of the net asset value of the
Fund's shares and the relatively greater effect on the net asset value of the
shares caused by favorable or adverse market movements or changes in the cost of
cash obtained by leveraging and the yield obtained from investing the cash. So
long as a Fund is able to realize a net return on its investment portfolio that
is higher than interest expense incurred, if any, leverage will result in higher
current net investment income being realized by the Fund than if the Fund were
not leveraged. On the other hand, interest rates change from time to time as
does their relationship to each other depending upon such factors as supply and
demand, monetary and tax policies and investor expectations. Changes in such
factors could cause the relationship between the cost of leveraging and the
yield to change so that rates involved in the leveraging
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arrangement may substantially increase relative to the yield on the obligations
in which the proceeds of the leveraging have been invested. To the extent that
the interest expense involved in leveraging approaches the net return on the
Fund's investment portfolio, the benefit of leveraging will be reduced, and, if
the interest expense on borrowings were to exceed the net return to
shareholders, the Fund's use of leverage would result in a lower rate of return
than if the Fund were not leveraged. Similarly, the effect of leverage in a
declining market could be a greater decrease in net asset value per share than
if the Fund were not leveraged. In an extreme case, if the Fund's current
investment income were not sufficient to meet the interest expense of
leveraging, it could be necessary for the Fund to liquidate certain of its
investments at an inappropriate time. The use of leverage may be considered
speculative.
SEGREGATED ACCOUNT. In order to limit the risks involved in various transactions
involving leverage, the Trust's custodian will set aside and maintain in a
segregated account cash, U.S. Government Securities and other liquid, high-grade
debt securities in accordance with SEC guidelines. The accounts value, which is
marked to market daily, will be at least equal to the Fund's commitments under
these transactions. The Fund's commitments may include (i) the Fund's
obligations to repurchase securities under a reverse repurchase agreement,
settle when-issued and forward commitment transactions and make payments under a
cap or floor (see "Swap Agreements") and (ii) the greater of the market value of
securities sold short or the value of the securities at the time of the short
sale (reduced by any margin deposit). The net amount of the excess, if any, of a
Fund's obligations over its entitlements with respect to each interest rate swap
will be calculated on a daily basis and an amount at least equal to the accrued
excess will be maintained in the segregated account. If the Fund enters into an
interest rate swap on other than a net basis, the Fund will maintain the full
amount accrued on a daily basis of the Fund's obligations with respect to the
swap in their segregated account. The use of a segregated account in connection
with leveraged transactions may result in a Fund's portfolio being 100 percent
leveraged.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. Each 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, a Fund might suffer a loss. 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 a 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. When a Fund lends a security
it receives interest from the borrower or from investing cash collateral. The
Trust 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. The Funds may pay fees to arrange
securities loans.
DEBT SECURITIES. The market value of debt securities (including municipal
securities) depends on, among other things, conditions in the market for the
security and the fixed income markets generally, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. The
market value of the interest-bearing debt securities held by the Funds will be
affected by changes in interest rates. There is normally an inverse relationship
between the market value of securities sensitive to prevailing interest rates
and actual changes in interest rates. In other words, a decline in interest
rates produces an increase in market value, while an increase in interest rates
produces a decrease in market value. Moreover, the longer the remaining maturity
of a security, the greater will be the effect of interest rate changes on the
market value of that security. Changes in the ability of an issuer to make
payments of interest and principal and in the market's perception of an issuer's
creditworthiness will also affect the market value of the debt securities of
that issuer. Obligations of issuers of debt securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors. The possibility exists, therefore, that, as a result of
litigation or other conditions, the ability of any issuer to pay, when due, the
principal of and interest on its debt securities may be materially impaired.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase
securities offered on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When these transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but
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delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within two months after the transaction. The Funds
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. 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.
During the period between a commitment and settlement, no payment is made for
the securities purchased and, thus, no interest accrues to the purchaser from
the transaction. However, at the time a Fund makes a commitment to purchase
securities in this manner, the Fund immediately assumes the risk of ownership,
including price fluctuation. Failure by the other party to deliver or pay for a
security purchased or sold by the Fund may result in a loss or a missed
opportunity to make an alternative investment. Any significant commitment of a
Fund's assets committed to the purchase of securities on a when-issued or
forward commitment basis may increase the volatility of its net asset value.
The use of when-issued transactions and forward commitments may enable a Fund to
hedge against anticipated changes in interest rates and prices. If the Adviser
were to forecast incorrectly the direction of interest rate movements, however,
the Fund might be required to complete these transactions at prices inferior to
the current market values. No when-issued or forward commitments will be made by
a Fund if, as a result, more than 15% of the value of the Fund's total assets
would be committed to such transactions.
RATING MATTERS. The Funds will invest in securities rated in the categories
specified by their investment policies. The Funds also may purchase unrated
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. Each Fund may retain a security whose
rating has been lowered below the Fund's lowest permissible rating category (or
that are unrated and determined by the Adviser to be of comparable quality to
securities whose rating has been lowered below the Fund's lowest permissible
rating category) if the Adviser determines that retaining the security is in the
best interests of the Fund.
The Fund's investments are subject to "credit risk" relating to the financial
condition of the issuers of the securities that the Funds hold. A further
description of the rating categories of certain NRSROs is contained in the SAI.
VARIABLE AND FLOATING RATE SECURITIES. The securities in which the Funds invest
may have variable or floating rates of interest. These securities pay interest
at rates that are adjusted periodically according to a specified formula,
usually with reference to some interest rate index or market interest rate (the
"underlying index"). The interest paid on these securities is a function
primarily of the underlying index upon which the interest rate adjustments are
based. Such adjustments minimize changes in the market value of the obligation
and, accordingly, enhance the ability of a Fund to maintain a stable net asset
value. Similar to fixed rate debt instruments, variable and floating rate
instruments are subject to changes in value based on changes in market interest
rates or changes in the issuer's creditworthiness. The rate of interest on
securities purchased by a Fund may be tied to various rates of interest or
index.
There may not be an active secondary market for certain floating or variable
rate instruments, which could make it difficult for a Fund to dispose of an
instrument during periods that the Fund is not entitled to exercise any demand
rights it may have. The Fund could, for this or other reasons, suffer a loss
with respect to an instrument. The Adviser monitors the liquidity of the Funds'
investment in variable and floating rate instruments, but there can be no
guarantee that an active secondary market will exist.
SWAP AGREEMENTS
To manage its exposure to different types of investments, a Fund may enter into
interest rate, currency and mortgage (or other asset) swap agreements and may
purchase and sell interest rate "caps," "floors" and "collars." In a typical
interest rate swap agreement, one party agrees to make regular payments equal to
a floating interest rate on a specified amount (the "notional principal amount")
in return for payments equal to a fixed interest rate on the same amount for a
specified period. If a swap agreement provides for payment in different
currencies, the parties may also agree to exchange the notional principal
amount. Mortgage swap agreements are similar to interest rate swap agreements,
except that the notional principal amount is tied to a reference pool of
mortgages. In a cap or floor, one party agrees, usually in return for a fee, to
make payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
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interest rate exceeds an agreed upon level; the purchaser of an interest rate
floor has the right to receive payments to the extent a specified interest rate
falls below an agreed upon level. A collar entitles the purchaser to receive
payments to the extent a specified interest rate falls outside an agreed upon
range.
Swap agreements may involve leverage and may be highly volatile; depending on
how they are used, they may have a considerable impact on the Fund's
performance. See "Techniques Involving Leverage." Swap agreements involve risks
depending upon the counterparties creditworthiness and ability to perform as
well as the Fund's ability to terminate its swap agreements or reduce its
exposure through offsetting transactions. 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 expected to be earned from the transaction justifies
the attendant risks.
TEMPORARY DEFENSIVE POSITION. When business or financial conditions warrant, for
example, when issues of sufficient quality and liquidity are not available, a
Fund may assume a temporary defensive position and invest all or part of its
assets in cash or prime quality cash equivalents, including (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, (iii) commercial paper, (iv) repurchase agreements covering any
of the securities in which the Fund may invest directly and (v) to the extent
permitted by the Investment Trust Act of 1940, money market mutual funds. During
periods when and to the extent that a Fund has assumed a temporary defensive
position, it will not be pursuing its investment objective.
PORTFOLIO TURNOVER. The frequency of portfolio transactions of each Fund (the
portfolio turnover rate) will vary from year to year depending on market
conditions. From time to time the Funds may engage in active short-term trading
to benefit from yield disparities among different issues of debt securities, to
seek short-term profits during periods of fluctuating interest rates, or for
other reasons. This type of trading will increase the Funds' portfolio turnover
rate and transaction costs and may increase the Funds' short-term capital gain,
which is taxable as ordinary income. The Adviser weighs the anticipated benefits
of short-term investments against these consequences. The Funds' portfolio
turnover rate is reported under "Financial Highlights."
6. MANAGEMENT
The business of the Trust is managed under the direction of the Board of
Directors. The Board formulates the general policies of the Funds and meets
periodically to review the results of the Funds, monitor investment activities
and practices and discuss other matters affecting the Fund and the Trust.
MANAGER AND DISTRIBUTOR
Subject to the supervision of the Board, Forum supervises the overall management
of the Funds. Forum, the Adviser and the Transfer Agent are members of the Forum
Financial Group of companies and together provide a full range of services to
the investment company and financial services industry. As of the date hereof
Forum acted as manager and distributor of registered investment companies and
collective trust funds with assets of approximately $15.5 billion. Forum, whose
address is Two Portland Square, Portland, Maine 04101, 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, the Adviser
and the Transfer Agent were controlled by John Y. Keffer, President and Chairman
of the Trust.
Under its management agreement with the Trust, Forum supervises all aspects of
the Funds' operations, including the receipt of services for which the Trust is
obligated to pay, provides the Trust with general office facilities and
provides, at the Trust's expense, the services of persons necessary to perform
such supervisory, administrative and clerical functions as are needed to
effectively operate 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 and its
affiliates. For these services and facilities, Forum receives with respect to
each Fund a management fee at an annual rate of 0.30% of each Fund's average
daily net assets.
Forum also acts as the distributor of shares of the Funds and pursuant to a
distribution agreement with the Trust Forum receives, and may reallow to certain
financial institutions, the sales charge paid by the purchasers of the Funds'
shares. See "Purchases and Redemptions of Shares - Sales Charges."
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ADVISER
Forum Advisors, Inc. serves as the investment adviser of each Fund. Subject to
the general supervision of the Board, the Adviser makes investment decisions for
the Funds. For its services, the Adviser receives an advisory fee at an annual
rate of 0.40% of each Fund's average daily net assets. The Adviser was
incorporated under the laws of Delaware in 1987 and is registered under the
Investment Advisers Act of 1940.
Les C. Berthy, Managing Director of the Adviser since 1989, is primarily
responsible for the day-to-day management of the Funds' portfolios and has been
since the Funds' inception. Prior to his association with the Adviser, Mr.
Berthy was Managing Director and Co-Chief Executive Officer of Irwin Union
Capital Corp., an affiliate of Irwin Union Bank & Trust Co.
SHAREHOLDER SERVICING
Shareholder inquiries and communications concerning the Fund may be directed to
the Transfer Agent. The Transfer Agent acts as the Funds' transfer agent and
dividend disbursing agent. The Transfer Agent maintains an account for each
shareholder of the Funds (unless such accounts are maintained by sub-transfer
agents or processing agents) and performs other transfer agency and shareholder
related functions. For its services, the Transfer Agent receives a fee at an
annual rate of 0.25% of each Fund's average daily net assets.
The Transfer Agent is authorized to subcontract any or all of its functions to
one or more qualified sub-transfer agents or processing agents, which may be
processing organizations (as described under "Purchases and Redemptions of
Shares - Purchases and Redemptions through Financial Institutions"), Forum or
affiliates of Forum, who agree to comply with the terms of the Transfer Agency
Agreement. The Transfer Agent may pay those agents for their services, but no
such payment will increase the Transfer Agent's compensation from the Trust. In
addition, the Transfer Agent performs portfolio accounting services for the
Funds, including determination of the Funds' net asset value per share, pursuant
to a separate agreement with the Trust.
EXPENSES OF THE TRUST
Each Fund's expenses comprise Trust expenses attributable to a Fund, which are
charged to the Fund, and expenses 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. Subject to the obligations of the
Adviser to reimburse the Trust for excess expenses of the Funds, the Trust pays
for all of its expenses. The Adviser, Forum and the Transfer Agent, in their
sole discretion, may waive all or any portion of their respective fees, which
are accrued daily and paid monthly. Any such waiver, which could be discontinued
at any time, would have the effect of increasing a Fund's performance for the
period during which the waiver was in effect and would not be recouped at a
later date.
7. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL INFORMATION
Investments in a Fund may be made either by an investor directly or through
certain brokers or financial institutions of which the investor is a customer.
All transactions in Fund shares are effected through the Transfer Agent, which
accepts orders for purchases and redemptions from shareholders of record and new
investors. Shareholders of record will receive from the Trust periodic
statements listing all account activity during the statement period. The Trust
reserves the right in the future to modify, limit or terminate any shareholder
privilege upon appropriate notice to shareholders and may charge a fee for
certain shareholder services, although no such fees are currently contemplated.
PURCHASES. Fund Shares are sold at a price equal to their net asset value plus
any applicable sales charge on all weekdays except customary national business
holidays and Good Friday ("Fund Business Day"). Fund shares are issued
immediately following the next determination of net asset value made after an
order for the shares in proper form is accepted by the Transfer Agent. Each
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 investor's funds are converted to funds on deposit at a
Federal Reserve Bank ("Federal Funds"), which for purchase orders by check is
the second Fund Business Day after receipt of the check and acceptance of the
order. Payment in the form of a bank wire will be treated as a Federal Funds
payment received at the time the wire is received.
The Funds reserve the right to reject any subscription for the purchase of their
shares. Stock certificates are issued only to shareholders of record upon their
written request and no certificates are issued for fractional shares.
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REDEMPTIONS. Fund shares may be redeemed without charge at their net asset value
on any Fund Business Day. There is no minimum period of investment and no
restriction on the frequency of redemptions. Fund shares are redeemed as of the
next determination of the Fund's net asset value 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 receive dividends declared after the day on which the redemption
becomes effective.
Normally, redemption proceeds are paid immediately following, but in no event
later than seven days following, acceptance of a redemption order. Proceeds of
redemption requests (and exchanges), however, will not be paid 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 through wire
transfers. Unless otherwise indicated, redemption proceeds normally are paid by
check mailed to the shareholder's record address. The right of redemption may
not be suspended nor the payment dates postponed except when the New York Stock
Exchange is closed (or when trading thereon is restricted) for any reason other
than its customary weekend or holiday closings or under any emergency or other
circumstance as determined by the SEC.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partially in portfolio securities if the Board determines that payment
in cash would be detrimental to the best interests of the Fund. The Trust will
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.
The Trust employs reasonable procedures to ensure that telephone orders are
genuine (which include recording certain transactions and the use of shareholder
security codes) and, if it does not, may be liable for any losses due to
unauthorized or fraudulent telephone instructions. Shareholders should verify
the accuracy of telephone instructions immediately upon receipt of confirmation
statements. During times of drastic economic or market changes, telephone
redemption and exchange privileges may be difficult to implement. In the event
that a shareholder is unable to reach the Transfer Agent by telephone, requests
may be mailed or hand-delivered to the Transfer Agent.
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 $1,000. The
Trust will not redeem accounts that fall below that amount solely as a result of
a reduction in net asset value.
PURCHASE AND REDEMPTION PROCEDURES
The following purchase and redemption procedures and shareholder services apply
to investors who invest in the Funds directly. These investors may obtain the
account application necessary to open an account by writing the Transfer Agent
at the address on the cover page of this prospectus. For those shareholder
services not referenced on the account application and to change information on
a shareholder's account (such as addresses), investors or existing shareholders
should request an optional services form from the Transfer Agent.
INITIAL PURCHASE OF SHARES
There is a $5,000 minimum for initial investments in either Fund ($2,000 for
individual retirement accounts).
BY MAIL. Investors may send a check made payable to the Trust along with a
completed account application to the Fund at the address on the cover page of
this Prospectus. 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.
BY BANK WIRE. To make an initial investment in either Fund using the wire system
for transmittal of money among banks, an investor should first telephone the
Trust at (207) 879-0001 to obtain an account number. The investor should then
instruct a member commercial bank to wire the investor's money immediately to:
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First National Bank of Boston
Boston, Massachusetts
ABA# 011000390
For Credit To: Forum Financial Corp.
Account #: 541-54171
Re: [Name of Fund]
Account #:
Account Name:
The investor should then promptly complete and mail the account application. Any
investor planning to wire funds should instruct a bank early in the day so the
wire transfer can be accomplished the same day.
SUBSEQUENT PURCHASES OF SHARES
There is a $500 minimum for subsequent purchases. Subsequent purchases may be
made by mailing a check or by sending a bank wire as indicated above.
Shareholders using the wire system for purchase should first telephone the Trust
at (207) 879-0001 to notify it of the wire transfer. All payments should clearly
indicate the shareholder's name and account number.
Shareholders may purchase Fund shares at regular, preselected intervals by
authorizing the automatic transfer of funds from a designated bank account
maintained with a United States banking institution which is an Automated
Clearing House member. Under the program, existing shareholders may authorize
amounts of $250 or more to be debited from their bank account and invested in a
Fund monthly or quarterly. Shareholders may terminate their automatic
investments or change the amount to be invested at any time by written
notification to the Transfer Agent.
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.
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 written requests for redemption must be
signed by the shareholder with signature guaranteed and all certificates
submitted for redemption must be endorsed by the shareholder with signature
guaranteed.
BY TELEPHONE. A shareholder that has elected telephone redemption privileges may
make a telephone redemption request by calling the Transfer Agent at (207) 879-
0001 and providing the shareholder's account number, the exact name in which the
shareholder's shares are registered and the shareholder's social security or
taxpayer identification number. 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.
BY BANK WIRE. For redemptions of more than $5,000, a shareholder that has
elected wire redemption privileges may request a Fund to transmit the redemption
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 the telephone redemption privilege.
Redemption proceeds are transmitted by wire on the day after the redemption
request in proper form is received by the Transfer Agent.
AUTOMATIC REDEMPTIONS. Shareholders may redeem Fund shares at regular,
preselected intervals by authorizing the automatic redemption of shares from
their Fund account. Redemption proceeds will be sent either by check or by
automatic transfer to a designated bank account maintained with a United States
banking institution which is an Automated Clearing House member. Under this
program, shareholders may authorize the redemption of shares in amounts of $250
or more from their account monthly, twice a month or quarterly. Shareholders may
terminate their automatic redemptions or change the amount to be redeemed at any
time by written notification to the Transfer Agent.
SIGNATURE GUARANTEES. 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
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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, the signature of each person required to sign for the
account must be guaranteed.
EXCHANGES
Fund shareholders are entitled to exchange their shares for shares of the other
Fund, any other fund of the Trust or any other fund that participates in the
exchange program (currently, Sound Shore Fund, Inc.) and whose shares are
eligible for sale in the shareholder's state of residence. Exchanges may only be
made between accounts registered in the same name. The minimum amount to open an
account in a Fund through an exchange from another fund is $2,500. A completed
account application must be submitted to open a new account in a Fund through an
exchange if the shareholder requests any shareholder privilege not associated
with the existing account. Exchanges are subject to the fees charged by, and the
restrictions listed in the prospectus for, the fund into which a shareholder is
exchanging, including minimum investment requirements. The Funds do not charge
for the exchange privilege and there is currently no limit on the number of
exchanges a shareholder may make.
The Trust (and Federal tax law) treats an exchange as a redemption of the shares
owned and the purchase of the shares of the fund being acquired. Redemptions and
purchases are effected at the respective net asset values of the two funds as
next determined following receipt of proper instructions and all necessary
supporting documents by the fund whose shares are being exchanged.
If a shareholder exchanges into a fund that imposes a sales charge, that
shareholder is required to pay the difference between that fund's sales charge
and any sales charge the shareholder has previously paid in connection with the
shares being exchanged. For example, if a shareholder paid a 2% sales charge in
connection with the purchase of the shares of a fund and then exchanged those
shares into another fund with a 3% sales charge, that shareholder would pay an
additional 1% sales charge on the exchange. Shares acquired through the
reinvestment of dividends and distributions are deemed to have been acquired
with a sales charge rate equal to that paid on the shares on which the dividend
or distribution was paid. The exchange privilege may be modified materially or
terminated by the Trust at any time upon 60 days' notice to shareholders.
BY MAIL. Exchanges may be accomplished by written instructions to the Transfer
Agent accompanied by any stock certificate that may have been issued to the
shareholder. All written requests for exchanges must be signed by the
shareholder (a signature guarantee is not required) and all certificates
submitted for exchange must be endorsed by the shareholder with signature
guaranteed.
BY TELEPHONE. Exchanges may be accomplished by telephone by any shareholder that
has elected telephone exchange privileges by calling the Transfer Agent at (207)
879-0001 and providing the shareholder's account number, the exact name in which
the shareholder's shares are registered and the shareholder's social security or
taxpayer identification number.
INDIVIDUAL RETIREMENT ACCOUNTS
Investors Bond 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 an IRA is $2,000 and the minimum subsequent investment is $500.
Individuals may make tax-deductible IRA contributions of up to a maximum of
$2,000 annually. However, this 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.
PURCHASES AND REDEMPTIONS THROUGH FINANCIAL INSTITUTIONS
Shares may be purchased and redeemed through certain broker-dealers, banks,
trust companies and their affiliates, and other financial institutions,
including affiliates of the Transfer Agent ("Processing Organizations").
Processing Organizations may receive as a dealer's reallowance a portion of the
sales charge paid by their customers who purchase Fund shares. In addition,
Processing Organizations may charge their customers a fee for their services and
are responsible for promptly transmitting purchase, redemption and other
requests to the Fund. The Trust is not responsible for the failure of any
institution to promptly forward these requests.
Investors who purchase shares through a Processing Organization may be charged a
fee if they effect transactions in Fund Shares through a broker or agent and
will be subject to the procedures of their Processing Organization, which
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may include limitations, investment minimums, cutoff times and restrictions in
addition to, or different from, those applicable to shareholders who invest in
the Fund directly. These investors should acquaint themselves with their
Processing Organization's procedures and should read this Prospectus in
conjunction with any materials and information provided by their Processing
Organization. Customers who purchase Fund shares through a Processing
Organization may or may not be the shareholder of record and, subject to their
Processing Organization's and the Fund's procedures, may have Fund shares
transferred into their name. Under their arrangements with the Trust, broker-
dealer Processing Organizations are not generally required to deliver payment
for purchase orders until several business days after a purchase order has been
received by a Fund. Certain other Processing Organizations may also enter
purchase orders with payment to follow.
Certain shareholder services may not be available to shareholders who have
purchased shares through a Processing Organization. These shareholders should
contact their Processing Organization for further information. The Trust may
confirm purchases and redemptions of a Processing Organization's customers
directly to the Processing Organization, which in turn will provide its
customers with such confirmations and periodic statements as may be required by
law or agreed to between the Processing Organization and its customers. The
Trust is not responsible for the failure of any Processing Organization to carry
out its obligations to its customer. Certain states permit shares of the Fund to
be purchased and redeemed only through registered broker-dealers, including the
Fund's distributor.
SALES CHARGES
The public offering price for shares of a Fund is the sum of the net asset value
of the shares being purchased plus any applicable sales charge. No sales charge
is assessed on the reinvestment of dividends or other distributions. The sales
charge is assessed as follows (net asset value percentages are rounded to the
nearest one-hundredth percent):
SALES CHARGE
----------------------------------------
AS % OF
PUBLIC NET
OFFERING ASSET DEALERS'
AMOUNT OF PURCHASE PRICE VALUE* REALLOWANCE
----------------------------------------
less than $100,000 3.75% 3.90% 3.25%
$100,000 but less
than $200,000 3.25 3.36 2.85
$200,000 but less
than $400,000 2.50 2.56 2.20
$400,000 but less
than $600,000 2.00 2.04 1.75
$600,000 but less
than $800,000 1.50 1.52 1.25
$800,000 but less
than $1,000,000 1.00 1.01 0.75
$1,000,000
and up 0.50 0.50 0.40
*Rounded to the nearest one-hundredth percent.
Forum's commission is the sales charge shown above less any applicable discount
reallowed to selected brokers and dealers (including banks and bank affiliates
purchasing shares as principal or agent). Normally, Forum will reallow discounts
to selected brokers and dealers in the amounts indicated in the table above.
From time to time, however, Forum may elect to reallow the entire sales charge
to selected brokers or dealers for all sales with respect to which orders are
placed with Forum during a particular period. The dealers' reallowance may be
changed from time to time.
No sales charge will be assessed on purchases made for investment purposes by:
(a) any bank, trust company, savings association or similar institution with
whom Forum has entered into a share purchase agreement acting on behalf of the
institution's fiduciary customer accounts or any account maintained by its trust
department (including a pension, profit sharing or other employee benefit trust
created pursuant to a qualified retirement plan); (b) any registered investment
adviser with whom Forum has entered into a share purchase agreement and which is
acting on behalf of its fiduciary customer accounts; (c) directors and officers
of the Trust; directors, officers and full-time employees of the Adviser, Forum,
any of their affiliates or any organization with which Forum has entered into a
selected dealer or processing agent agreement; the spouse, sibling, direct
ancestor or direct descendent (collectively,
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"relatives") of any such person; any trust or individual retirement account or
self-employed retirement plan for the benefit of any such person or relative; or
the estate of any such person or relative; (d) any person who has, within the
preceding 90 days, redeemed Fund shares (but only on purchases in amounts not
exceeding the redeemed amounts) and completes a reinstatement form upon
investment; (e) persons who exchange into a Fund from a mutual fund other than a
fund of the Trust that participates in the Trust's exchange program, see
"Purchases and Redemptions of Shares - Exchange Program;" and (f) employee
benefit plans qualified under Section 401 of the Internal Revenue Code of 1986.
The Trust may require appropriate documentation from an investor concerning that
investor's eligibility to purchase Fund shares without a sales charge. Any
shares so purchased may not be resold except to the Fund.
REDUCED SALES CHARGES
For an investor to qualify for one of the following types of reduced sales
charges, the investor must notify the Transfer Agent at the time of purchase.
Reduced sales charges may be modified or terminated at any time and are subject
to confirmation of an investor's holdings.
RIGHTS OF ACCUMULATION. An investor's purchase of additional shares of a Fund
may qualify for rights of accumulation ("ROA") wherein the applicable sales
charge will be based on the total of the investor's current purchase and the net
asset value (at the end of the previous Fund Business Day) of shares of that
Fund held by the investor. For example, if an investor owned shares of a Fund
worth $400,000 at the then current net asset value and purchased shares of the
Fund worth an additional $50,000, the sales charge for the $50,000 purchase
would be at the 2% rate applicable to a single $450,000 purchase, rather than at
the 3.75% rate. To qualify for ROA on a purchase, the investor must inform the
Transfer Agent and supply sufficient information to verify that each purchase
qualifies for the privilege or discount.
LETTER OF INTENT. Investors may also obtain reduced sales charges based on
cumulative purchases by means of a written Letter of Intent ("LOI"), which
expresses the investor's intention to invest $100,000 or more within a period of
13 months in shares of a Fund. Each purchase of shares under a LOI will be made
at the public offering price applicable at the time of the purchase to a single
transaction of the dollar amount indicated in the LOI.
An LOI is not a binding obligation upon the investor to purchase the full amount
indicated. Shares purchased with the first 5% of the amount indicated in the LOI
will be held subject to a registered pledge (while remaining registered in the
name of the investor) to secure payment of the higher sales charge applicable to
the shares actually purchased if the full amount indicated is not purchased
within 13 months. Pledged shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. When the full amount indicated has been
purchased, the shares will be released from pledge. Share certificates are not
issued for shares purchased under an LOI. Investors wishing to enter into an LOI
can obtain a form of LOI from their broker or financial institution or by
contacting the Transfer Agent.
8. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of each Fund's net investment income are declared daily and paid
monthly. Dividends of net capital gain, if any, realized by a Fund are
distributed annually.
Shareholders may choose either to have all dividends reinvested in additional
shares of the Fund that paid the dividend or received in cash. In addition,
shareholders may have dividends of net capital gain reinvested in shares of each
of the Funds 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 Funds.
All dividends will be reinvested at the Fund's net asset value as of the payment
date of the dividend. All dividends are reinvested unless another option is
selected. All dividends not reinvested will be paid to the shareholder in cash.
Cash payments may be paid more than seven days following the date on which
dividends would otherwise be reinvested.
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TAXES
Each 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. As such,
the Funds will not be liable for Federal income taxes on the net investment
income and net capital gain distributed to their shareholders. Because the Funds
intend to distribute all of their net investment income and net capital gain
each year, the Funds should avoid all Federal income and excise taxes.
INVESTORS BOND FUND. Dividends paid by the Fund out of its net investment income
(including any realized net short-term capital gain) are taxable to shareholders
as ordinary income.
TAXSAVER BOND FUND. Shareholders of the Fund generally will not be subject to
Federal income tax on dividends paid by the Fund out of tax-exempt interest
income earned by the Fund ("exempt-interest dividends"), assuming certain
requirements are met. Substantially all of the dividends paid by the Fund are
anticipated to be exempt-interest dividends. Any dividends paid by the Fund out
of its taxable net investment income (including any realized net short-term
capital gain) are taxable to shareholders as ordinary income.
Persons who are "substantial users" or "related persons" thereof of facilities
financed by private activity bonds held by the Fund may be subject to Federal
income tax on their pro rata share of the interest income from these bonds and
should consult their tax advisors before purchasing shares of the Fund. Under
current Federal tax law, interest on certain private activity bonds is treated
as an item of tax preference for purposes of the Federal AMT imposed on
individuals and corporations. In addition, interest on all tax-exempt
obligations is included in the "adjusted current earnings" of corporations for
Federal AMT purposes.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund generally is not deductible for Federal income tax purposes.
The exemption for Federal income tax purposes of dividends derived from interest
on municipal securities does not necessarily result in an exemption under the
income or other tax laws of any state or local taxing authority. Shareholders of
the Fund may be exempt from state and local taxes on exempt interest dividends
derived from obligations of the state and/or municipalities of the state in
which they reside. Shareholders may, however, be subject to tax on income
derived from the municipal securities of jurisdictions other than those in which
they reside. Shareholders are advised to consult with their tax advisors
concerning the application of state and local taxes to investments in the Fund
which may differ from the Federal income tax consequences described above.
If Fund shares are sold at a loss after being held for six months or less, the
loss will be disallowed to the extent of any exempt-interest dividends received
on those shares.
Shortly after the close of each year, a statement is sent to each shareholder of
the Fund advising the shareholder of the portion of total dividends paid into
the shareholder's account that is exempt from Federal income tax and that is
derived from the municipal securities of each state and from other sources.
These portions are determined for the entire year and on a monthly basis and,
thus, are an annual or monthly average, rather than a day-by-day determination
for each shareholder.
GENERAL. Distributions by the Funds of realized net long-term capital gain, if
any, are taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder may have held shares in the Fund. If Fund shares
are sold at a loss after being held for six months or less, the loss will be
treated as long-term capital loss to the extent of any long-term capital gain
distribution received on those shares.
Any capital gain distribution received by a shareholder reduces the net asset
value of the shareholder's shares by the amount of the distribution. To the
extent that capital gain was accrued by a Fund before the shareholder purchased
the shares, the distribution would be in effect a return of capital to the
shareholder. Capital gain distributions, including those that operate as a
return of capital, however, are taxable to the shareholder receiving them.
The Funds may be required by Federal law to withhold 31% of reportable payments
(which may include taxable dividends, capital gain distributions and redemption
proceeds) paid to individuals and certain other non-corporate shareholders.
Withholding is not required if a shareholder certifies that the shareholder's
social security or tax identification number provided to the Funds is correct
and that the shareholder is not subject to backup withholding.
Reports containing appropriate information with respect to the Federal income
tax status of dividends and distributions paid during the year by the Funds will
be mailed to shareholders shortly after the close of each year.
22
<PAGE>
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows approximate equivalent taxable and tax-free yields at
various approximate marginal Federal tax bracket rates. For example, an investor
in the 31% tax bracket for 1995 whose investments earn a 5% tax-free yield would
have to earn a 7.25% taxable yield to receive the same benefit.
1995 FEDERAL TAXABLE VS. TAX-FREE YIELDS
A Tax-Free Yield of
-------------------------------------------------------
Federal 5.0% 5.5% 6.0% 6.5% 7.0% 7.5%
Tax Bracket equals a taxable yield of approximately
----------- -------------------------------------------------------
39.6% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42%
36.0% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72%
31.07% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87%
28.0% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42%
15.0% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82%
The yields listed are for illustration only and are not necessarily
representative of TaxSaver Bond Fund's yield. Although the Fund primarily
invests in securities the interest from which is exempt from Federal income
taxes, some of the Fund's investments may generate taxable income. An investor's
tax bracket will depend upon the investor's taxable income. The figures set
forth above do not reflect the Federal alternative minimum taxes or any state or
local income taxes.
The foregoing is only a summary of some of the important Federal and state tax
considerations generally affecting the Funds and their shareholders. There may
be other Federal, state or local tax considerations applicable to a particular
investor. Prospective investors are urged to consult their tax advisors.
9. OTHER INFORMATION
PERFORMANCE INFORMATION
Each Funds' performance may be quoted in advertising in terms of yield or total
return. Both types are based on historical results and are not intended to
indicate future performance. A Fund's yield is a way of showing the rate of
income earned by the Fund as a percentage of the Fund's share price. Yield is
calculated by dividing the net investment income of the Fund for the stated
period by the average number of shares entitled to receive dividends and
expressing the result as an annualized percentage rate based on the Fund's share
price at the end of the period. TaxSaver Bond Fund may also quote tax equivalent
yields, which show the taxable yields a shareholder would have to earn to equal
the Fund's tax-free yields after taxes. A tax equivalent yield is calculated by
dividing the Fund's tax-free yield by one minus a stated Federal, state or
combined Federal and state tax rate. Total return refers to the average annual
compounded rates of return over some representative period that would equate an
initial amount invested at the beginning of a stated period to the ending
redeemable value of the investment, after giving effect to the reinvestment of
all dividends and distributions and deductions of expenses during the period.
Each of the Funds also may advertise its total return over different periods of
time on a before-tax, after-tax or taxable-equivalent basis or by means of
aggregate, average, year by year, or other types of total return figures.
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.
The Funds' advertisements may reference ratings and rankings among similar funds
by independent evaluators such as Morningstar, Lipper Analytical Services, Inc.
or IBC/Donoghue, Inc. In addition, the performance of the Funds may be compared
to recognized indices of market performance. The comparative material found in a
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.
BANKING LAW MATTERS
Banking laws and regulations generally permit a bank or bank affiliate to
purchase shares of an investment company as agent for and upon the order of a
customer and in the view of Forum would permit a bank or bank affiliate to
23
<PAGE>
serve as a Processing Organization or perform sub-transfer agent or similar
services for the Trust and its shareholders. If a bank or bank affiliate were
prohibited from performing all or a part of the foregoing services, its
shareholder customers would be permitted to remain shareholders of the Trust and
alternative means for continuing to service them would be sought. It is not
expected that shareholders would suffer adverse financial consequences as a
result of any changes in bank or bank affiliate service arrangements.
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the each 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 portfolio securities and other assets
less its liabilities) by the number of that Fund's shares outstanding at the
time the determination is made. Securities owned by a Fund for which market
quotations are readily available are valued at current market value, or, in
their absence, at fair value as determined by the Board.
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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
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.
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.
24
<PAGE>
FORUM FUNDS
MAINE MUNICIPAL BOND FUND
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
Forum Financial Corp.
P.O. Box 446
Portland, Maine 04112
(207) 879-0001
PROSPECTUS
August 1, 1996
This Prospectus offers shares of Maine Municipal Bond Fund (the "Fund"), a non-
diversified series of Forum Funds, Inc. (the "Trust"), an open-end, management
investment company.
MAINE MUNICIPAL BOND FUND seeks to provide shareholders with
a high level of current income exempt from both Federal and
Maine state income taxes (other than the alternative minimum
tax), without assuming undue risk. The Fund invests
principally in investment grade Maine municipal securities.
Shares of the Fund are offered to investors at a price equal to the next
determined net asset value plus a maximum sales charge of 3.75% of the total
public offering price (3.90% of the net amount invested).
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor should know before investing. The Trust
has filed with the Securities and Exchange Commission a Statement of Additional
Information dated August 1, 1996, as may be amended from time to time (the
"SAI"), which contains more detailed information about the Trust and the Fund
and which is incorporated into this Prospectus by reference. The SAI is
available without charge by contacting the Trust at the address listed above.
Investors should read this Prospectus and retain it for future reference.
Shares of the Fund are offered only to
residents of the State of Maine.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE 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
HIGHLIGHTS OF THE FUND
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with a high
level of current income exempt from both Federal and Maine state income taxes
(other than the alternative minimum tax), without assuming undue risk. The Fund
invests principally in investment grade Maine municipal securities. It is
anticipated that the average weighted maturity of all municipal securities in
the Fund will normally range between five and 15 years. See "Investment
Objectives and Policies."
FUND MANAGEMENT
The executive offices of the Fund's investment adviser, Forum Advisors, Inc.
(the "Adviser"), are located at Two Portland Square, Portland, Maine 04101. The
manager of the Trust and distributor of its shares is Forum Financial Services,
Inc. ("Forum"). Forum Financial Corp. (the "Transfer Agent"), Two Portland
Square, Portland, Maine 04101, serves as the Trust's transfer agent, dividend
disbursing agent and shareholder servicing agent. See "Management."
PURCHASES AND REDEMPTIONS
Shares of the Fund are offered at the next-determined net asset value per share
plus any applicable sales charge. The minimum initial investment is $5,000 and
the minimum subsequent investment is $500. Shares may be redeemed without
charge. See "Purchases and Redemptions of Shares."
EXCHANGE PROGRAM
Shareholders of the Fund may exchange their shares without charge for the shares
of certain other funds of the Trust. See "Purchases and Redemptions of Shares -
Exchanges."
DIVIDENDS
Dividends of net investment income are declared daily and paid monthly by the
Fund and are reinvested in Fund shares unless a shareholder elects to have them
paid in cash. It is anticipated that substantially all of the dividends paid by
the Fund will be exempt from Federal income tax and from Maine personal income
tax. See "Dividends and Tax Matters."
CERTAIN RISK FACTORS
There can be no assurance that the Fund will achieve its investment objective.
The Fund's net asset value will fluctuate as the value of the Fund's portfolio
securities changes and will tend to vary inversely with movements in interest
rates. The Fund is non-diversified and, therefore, has greater freedom to
concentrate its investments than if it were a diversified fund. The Fund
invests principally in the securities of Maine municipal issuers, which entails
more risk than if the Fund were to invest in issuers with greater geographic
diversity. See "Investment Objective and Policies - Certain Risk Factors."
EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in understanding the
various expenses that an investor in the Fund will bear directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of public offering price)..............3.75%
Exchange Fee...............................................None
ANNUAL FUND OPERATING EXPENSES (1)
(as a percentage of average net assets after estimated expense reimbursements)
Management Fees (2)........................................____%
12b-1 Fees.................................................None
Other Expenses.............................................____%
Total Fund Operating Expenses..............................____%
(1) The amounts of expenses are based on amounts incurred during the Fund's most
recent fiscal year ended March 31, 1996. Absent actual expense reimbursements
and fee waivers, the expenses of the Fund would have been: Management Fees,
____%; Other Expenses, ____%; and Total Fund Operating Expenses, ____%. For a
further description of the various expenses incurred in the operation of the
Fund, see "Management."
(2) Includes the Adviser's investment advisory fee and Forum's management fee.
<PAGE>
EXAMPLE
Following is a hypothetical example that indicates the dollar amount of expenses
that an investor in the Fund would pay assuming a $1,000 investment in the Fund,
a 5% annual return, the reinvestment of all dividends and distributions and
redemption at the end of each period:
1 Year 3 Years 5 Years 10 Years
$ $ $ $
The example is based on the expenses listed in the table. The five percent
annual return is not predictive 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.
2. FINANCIAL HIGHLIGHTS
The following information represents selected data for a single share
outstanding of the Fund. This information has been audited in connection with
an audit of the Fund's financial statements by [ ], independent auditors.
The financial statements and independent auditors' report thereon are
incorporated by reference into the SAI. Further information about the Fund's
performance is contained in the Fund's annual report to shareholders, which may
be obtained from the Trust without charge.
<TABLE>
<CAPTION>
Year Ended March 31
1996 1995 1994 1993 1992(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Beginning Net Asset Value per Share $10.47 $10.37 $10.55 $9.98 $10.00
Net Investment Income 0.51 0.52 0.52 0.58 0.19
Net Realized and Unrealized Investment
Gain (Loss) on Securities 0.25 0.11 (0.16) 0.57 (0.02)
Dividends from Net Investment Income (0.51) (0.52) (0.52) (0.58) (0.19)
Distributions from Net Realized Gains -- (0.01) (0.02) -- --
------ ------ ------ ------ ------
Ending Net Asset Value per Share $10.72 $10.47 $10.37 $10.55 $9.98
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratios to Average Net Assets:
Expenses (2) 0.60% 0.50% 0.50% 0.40% 0.46%(3)
Net Investment Income 4.73% 5.08% 4.81% 5.25% 5.65%(3)
Total Return 7.34% 6.31% 3.42% 11.80% 5.27%(3)
Portfolio Turnover Rate 34.07% 31.55% 13.47% 7.82% 15.24%
Net Assets at the End of
Period (000's Omitted) $26,044 $25,525 $26,310 $16,518 $1,968
(1) The Fund commenced operations on December 5, 1991.
(2) 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:
Expenses 1.48% 1.40% 1.44% 1.98% 6.83%(3)
(3) Annualized.
</TABLE>
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
Shareholders of the Fund have approved a new investment policy that permits the
Fund to seek to achieve its investment objective by converting to a Core and
Gateway structure. The Fund, upon future action by the Board of Trustees and
notice to shareholders, may convert to this structure, in which the Fund would
hold as its only investment securities the shares of another investment company
having substantially the same investment objective and policies as the Fund. The
Board of Trustees will not authorize conversion to a Core and Gateway structure
if it would materially increase costs to a Fund's shareholders.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide shareholders with a high
level of current income exempt from both Federal and Maine state income taxes
(other than the alternative minimum tax), without assuming undue risk. Except
during periods when the Fund assumes a temporary defensive position, the Fund
will invest at least 80% of its total assets in securities the interest on which
is exempt from Federal and Maine income tax. There can be no assurance that the
Fund will achieve its investment objective.
INVESTMENT POLICIES
The Fund pursues its objective by investing principally in investment grade debt
obligations issued by the state of Maine and its political subdivisions, duly
constituted authorities and corporations. These securities are generally known
as "municipal securities" and include municipal bonds, notes and leases. It is
anticipated that under normal circumstances substantially all of the Fund's
assets will be invested in municipal securities the interest income from which
is exempt from Federal income taxes and Maine state personal income taxes
(except when received by a shareholder in a taxable year for which the
shareholder will be subject, for Federal or Maine income tax purposes, to the
alternative minimum tax ("AMT")).
GENERAL. The market value of the municipal securities held by the Fund will be
affected by changes in interest rates. There is normally an inverse
relationship between the market value of securities sensitive to prevailing
interest rates and actual changes in interest rates. In other words, a decline
in interest rates produces an increase in market value, while an increase in
interest rates produces a decrease in market value. Moreover, the longer the
remaining maturity of a security, the greater will be the effect of interest
rate changes on the market value of that security. Changes in the ability of an
issuer to make payments of interest and principal and in the market's perception
of an issuer's creditworthiness will also affect the market value of the debt
securities of that issuer. Obligations of issuers of municipal securities are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors. The possibility exists, therefore, that, as a
result of litigation or other conditions, the ability of any issuer to pay, when
due, the principal of and interest on its debt securities may be materially
impaired.
The yields of municipal securities depend on, among other things, conditions in
the municipal securities market and fixed income markets generally, the size of
a particular offering, the maturity of the obligation, and the rating of the
issue. Maine municipal securities may have yields slightly less than the
municipal obligations of issuers located in other states because of the Maine
state tax exemption on Maine issues.
In general, the longer the maturity of a municipal security, the higher the rate
of interest it pays. However, a longer average maturity is generally associated
with a higher level of volatility in the market value of a municipal security.
The average maturity of the Fund's portfolio will vary depending on anticipated
market conditions. It is anticipated, however, that the average weighted
maturity of all municipal securities in the Fund will normally range between
five and 15 years.
Municipal securities also include securities issued by Puerto Rico, other United
States territories or possessions and their subdivisions, authorities and
corporations the income from which is not subject to Federal or Maine State
income tax. No more than 25% of the Fund's total assets may be invested in
issuers located in any territory or possession of the United States.
Under current Federal tax law, a distinction is drawn between municipal
securities issued after August 7, 1986 to finance certain "private activities"
and other municipal securities. Private activity securities include securities
issued to finance such projects as certain solid waste disposal facilities,
student loan programs, and water and sewage projects. Interest income from
certain of these securities is subject to the Federal AMT and similar treatment
may apply for Maine AMT purposes. See "Dividends and Tax Matters." Because
interest income on securities subject to the Federal AMT is taxable to certain
investors, it is expected, although there can be no guarantee, that these
municipal securities generally will provide somewhat higher yields than other
municipal securities of comparable quality and maturity that are not subject to
the AMT.
<PAGE>
CREDIT MATTERS. Normally, at least 80% of the Fund's total assets will be
invested in municipal bonds rated at the time of purchase within the four
highest rating categories assigned by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Service, Inc. ("Moody's") (Aaa,
Aa, A and Baa), Standard & Poor's Corporation ("S&P") (AAA, AA, A and BBB) or
Fitch Investors Services, Inc. ("Fitch") (AAA, AA, A and BBB) or which are
unrated and determined by the Adviser to be of comparable quality. Securities
in these ratings are generally considered to be investment grade securities,
although Moody's indicates that municipal securities rated Baa have speculative
characteristics. Unrated securities may not be as actively traded as rated
securities. A further description of the ratings used by Moody's, S&P and Fitch
is included in the SAI. The Fund may invest up to 20% of its total assets in
municipal bonds rated in the fifth or sixth highest rating category by an NRSRO
or which are unrated and determined by the Adviser to be of comparable quality.
These securities are not considered to be investment grade and have speculative
or predominantly speculative characteristics. The Fund only invests in
municipal notes and other short-term municipal obligations in the two highest
rating categories assigned by an NRSRO or which are unrated and determined by
the Adviser to be of comparable quality. The Fund may retain securities whose
rating has been lowered below the lowest permissible rating category (or that
are unrated and determined by the Advisor to be of comparable quality) only if
the Adviser determines that retaining the security is in the best interests of
the Fund.
A non-rated municipal security will be considered for investment by the Fund
when the Adviser believes that the financial condition of the issuer of the
obligation and the protection afforded by the terms of the obligation limit the
risk to the Fund to a degree comparable to that of rated securities in which the
Fund may invest. During its last fiscal year, the Fund had __% of its average
annual assets in municipal securities rated by Moody's or S&P and __% of its
average annual assets in unrated investments, including cash and short-term cash
equivalents which are often unrated. During that year ended March 31, 1996, the
Fund had the following percentages of its average annual net assets invested in
rated securities: Aaa/AAA-____%, Aa/AA-____%, A/A-____%, Baa/BBB-___%. For this
purpose, securities with different ratings from Moody's and S&P were assigned
the higher rating. This information reflects the average month end composition
of the Fund's assets for the Fund's last fiscal year and is not necessarily
representative of the Fund as of the end of last year, the current fiscal year
or any other time.
MUNICIPAL BONDS. Municipal bonds, which are intended to meet longer term
capital needs, can be classified as either "general obligation" or "revenue"
bonds. General obligation bonds are secured by a municipality's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are generally payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other tax, but not from general tax revenues. Municipal
bonds also include private activity bonds ("PABs"), which are bonds issued by or
on behalf of public authorities to finance various privately operated
facilities. PABs are in most cases revenue bonds. The payment of the principal
and interest on these bonds is dependent solely on the ability of an initial or
subsequent user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property financed by
the bond as security for payment. The Fund will acquire only PABs whose
interest payments, in the opinion of the issuer's counsel, are exempt from
Federal and Maine state income taxation (other than the AMT).
MUNICIPAL NOTES AND LEASES. Municipal notes, which may be either "general
obligation" or "revenue" securities, are intended to fulfill short-term capital
needs and generally have original maturities of 397 days or less. They include
tax anticipation notes, revenue anticipation notes, bond anticipation notes,
construction loan notes and tax-exempt commercial paper. Municipal leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government issuer) are a
means for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of long-term
debt. Municipal leases frequently have special risks not normally associated
with general obligation or revenue bonds or notes as described in the SAI.
VARIABLE AND FLOATING RATE SECURITIES. The securities in which the Fund invests
may have variable or floating rates of interest. These securities pay interest
at rates that are adjusted periodically according to a specified formula,
usually with reference to some interest rate index or market interest rate (the
"underlying index"). The interest paid on these securities is a function
primarily of the underlying index upon which the interest rate adjustments are
based. Such adjustments minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Fund to maintain a stable net asset
value. Similar to fixed rate debt instruments, variable and floating rate
instruments are subject to changes in value based on changes in market interest
rates or changes in the issuer's creditworthiness. The rate of interest on
securities purchased by the Fund may be tied to various rates of interest or
index.
There may not be an active secondary market for certain floating or variable
rate instruments, which could make it difficult for the Fund to dispose of an
instrument during periods that the Fund is not entitled to exercise any demand
rights it may have. The Fund could, for this or other reasons, suffer a loss
with respect to an instrument. The Adviser
<PAGE>
monitors the liquidity of the Fund's investment in variable and floating rate
instruments, but there can be no guarantee that an active secondary market will
exist.
PARTICIPATION INTERESTS. The Fund may purchase participation interests in
municipal securities that are owned by banks or other financial institutions.
Participation interests carry a demand feature backed by a letter of credit or
guarantee of the bank or institution permitting the holder to tender them back
to the bank or other institution. The Fund will only purchase participation
interests from Federal Deposit Insurance Corporation insured banks having total
assets of more than one billion dollars or from other financial institutions
whose long-term debt securities are rated within the four highest rating
categories of an NRSRO or which are unrated and determined by the Adviser to be
of comparable quality. Prior to purchasing any participation interest, the Fund
will obtain appropriate assurances from counsel retained by the Trust that the
interest earned by the Fund from the obligations in which it holds participation
interests is exempt from Federal income tax.
STAND-BY COMMITMENTS. The Fund may purchase municipal securities together with
the right to resell them to the seller at an agreed upon price or yield within
specified periods prior to their maturity dates. These rights to resell are
commonly known as "stand-by commitments." The aggregate price which the Fund
pays for securities with a stand-by commitment may be higher than the price
which otherwise would be paid. The primary purpose of this practice is to
permit the Fund to be as fully invested as practicable in municipal securities
while preserving the necessary flexibility and liquidity to meet unanticipated
redemptions. The Fund will enter into stand-by commitments only with banks or
municipal securities dealers that in the opinion of the Adviser present minimal
credit risks. The value of a stand-by commitment is dependent on the ability of
the writer to meet its repurchase obligation.
CERTAIN RISK FACTORS
GEOGRAPHIC CONCENTRATION. Because the Fund invests principally in Maine
municipal securities, the Fund is more susceptible to factors adversely
affecting issuers of those municipal securities than would be a comparable
municipal securities portfolio having a lesser degree of geographic
concentration. These risks arise from the financial condition of the state of
Maine and its political subdivisions. To the extent state or local governmental
entities are unable to meet their financial obligations, the income derived by
the Fund, its ability to preserve or realize appreciation of its portfolio
assets or its liquidity could be impaired.
To the extent the Fund's investments are primarily concentrated in issuers
located in Maine, the value of the Fund's shares may be especially affected by
factors pertaining to Maine's economy and other factors specifically affecting
the ability of issuers in Maine to meet their obligations. As a result, the
value of the Fund's assets may fluctuate more widely than the value of shares of
a portfolio investing in securities relating to a number of different states.
The ability of state, county or local governments and quasi-governmental
agencies to meet their obligations will depend primarily on the availability of
tax and other revenues to those governments and on their fiscal conditions
generally. The amounts of tax and other revenues available to governmental
issuers may be affected from time to time by economic, political and demographic
conditions within the state. In addition, constitutional or statutory
restrictions may limit a government's power to raise revenues or increase taxes.
The availability of Federal, state and local aid to governmental issuers may
also affect their ability to meet obligations. Payments of principal of and
interest on private activity securities will depend on the economic condition of
the facility or specific revenue source from whose revenues the payments will be
made, which in turn could be affected by economic, political or demographic
conditions in the state.
DIVERSIFICATION MATTERS. The Fund is non-diversified, which means that it has
greater latitude than a diversified fund with respect to the investment of its
assets in the securities of a relatively few municipal issuers. As a non-
diversified portfolio, the Fund may present greater risks than a diversified
fund. The Fund's diversification requirements provide that, as of the last day
of each fiscal quarter, with respect to 50% of its assets, the Fund may not own
the securities of a single issuer, other than a U.S. Government security, with a
value of more than 5% of the Fund's total assets. Except for U.S. Government
securities, no more than 25% of the total assets of the Fund may be invested in
securities of any one issuer. These limitations do not apply to securities of
an issuer payable solely from the proceeds of escrowed U.S. Government
securities. The Fund will be subject to a greater risk of loss if an issuer in
which the Fund invests a substantial amount of its assets is unable to make
interest or principal payments or if the market value of securities declines.
INFORMATION CONCERNING THE STATE OF MAINE. In 1991, citing declines in key
financial indicators and continued softness in the Maine economy, S&P lowered
its credit rating for Maine general obligations from AAA to AA+, and at the same
time lowered its credit rating on bonds issued by the Maine Municipal Bond Bank
and the Maine Court Facilities Authority, and on State of Maine Certificates of
Participation for highway equipment from AA to A+. In August 1993, citing the
"effects of protracted economic slowdown and the expectation that Maine's
economy will not soon return to the pattern of robust growth evident in the mid-
1980s," Moody's lowered its credit rating for Maine
<PAGE>
general obligations from Aa1 to Aa. At the same time, Moody's lowered from Aa1
to Aa the ratings assigned to state-guaranteed bonds of the Maine School
Building Authority and the Finance Authority of Maine, and confirmed at A1 the
ratings assigned to the bonds of the Maine Court Facilities Authority and State
of Maine Certificates of Participation. There can be no assurance that Maine
general obligations or the securities of any Maine political subdivision,
authority or corporation owned by the Fund will be rated in any category or will
not be downgraded by an NRSRO. Further information concerning the State of
Maine is contained in the SAI.
ADDITIONAL INVESTMENT POLICIES
All investment policies of the Fund that are designated as fundamental, and the
Fund's investment objective, 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 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 more than 50% of
the outstanding shares of the Fund. Except as otherwise indicated, investment
policies of the Fund are not fundamental and may be changed by the Board of
Directors of the Trust (the "Board") without shareholder approval. A further
description of the Fund's investment policies is contained in the SAI.
The Fund may borrow money for temporary or emergency purposes (including the
meeting of redemption requests), but not in excess of 33 1/3% of the value of
the Fund's total assets. Borrowing for purposes other than meeting redemption
requests may not exceed 10% of the value of the Fund's total assets. 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. The Fund may hold cash pending investment and may invest up to 10%
of its total assets in money market mutual funds that invest in municipal
securities exempt from Federal income taxes. In the future, the Fund may enter
repurchase agreements, which 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, and may lend its securities to other persons.
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 these transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within three months after the
transaction. 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. 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.
During the period between a commitment and settlement, no payment is made for
the securities purchased and, thus, no interest accrues to the purchaser from
the transaction. However, at the time the Fund makes a commitment to purchase
securities in this manner, the Fund immediately assumes the risk of ownership,
including price fluctuation. Failure by the other party to deliver or pay for a
security purchased or sold by the Fund may result in a loss or a missed
opportunity to make an alternative investment. Any significant commitment of
the Fund's assets committed to the purchase of securities on a when-issued or
forward commitment basis may increase the volatility of its net asset value.
The use of when-issued transactions and forward commitments may enable 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,
however, the Fund might be required to complete these transactions at prices
inferior to the current market values. No when-issued or forward commitments
will be made by the Fund if, as a result, more than 15% of the value of the
Fund's total assets would be committed to such transactions.
The Fund's use of when-issued securities and forward commitments entails 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. 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.
TEMPORARY DEFENSIVE POSITION. The Fund may invest up to 20% of its net assets
in cash or cash equivalents. In addition, when business or financial conditions
warrant, for example, when issues of sufficient quality and liquidity are not
available, the Fund may assume a temporary defensive position and invest all or
part of its assets in cash or prime quality cash equivalents, including (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, (iii) commercial paper, (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (v) to the extent permitted by the Investment Company Act of 1940, money
market mutual funds. During periods when
<PAGE>
and to the extent that the Fund has assumed a temporary defensive position, it
will not be pursuing its investment objective.
PORTFOLIO TURNOVER. The frequency of portfolio transactions of the Fund (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 benefit from yield disparities among different issues of debt securities, to
seek short-term profits during periods of fluctuating interest rates, or for
other reasons. This type of trading will increase the Fund's portfolio turnover
rate and transaction costs and may increase the Fund's capital gains, which are
not tax-exempt when distributed to shareholders. The Adviser weighs the
anticipated benefits of short-term investments against these consequences. The
Fund's portfolio turnover rate is reported under "Financial Highlights."
4. MANAGEMENT
The business of the Trust is managed under the direction of the Board of
Directors. The Board formulates the general policies of the Fund and meets
periodically to review the results of the Fund, monitor investment activities
and practices and discuss other matters affecting the Fund and the Trust.
MANAGER AND DISTRIBUTOR
Subject to the Supervision of the Board, Forum supervises the overall management
of the Fund. Forum, the Adviser and the Transfer Agent are members of the Forum
Financial Group of companies and together provide a full range of services to
the investment company and financial services industry. As of the date hereof
Forum acted as manager and distributor of registered investment companies and
collective trust funds with assets of approximately $15.5 billion. Forum, whose
address is Two Portland Square, Portland, Maine 04101, 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, the Adviser
and the Transfer Agent were controlled by John Y. Keffer, President and Chairman
of the Trust.
Under its management agreement with the Trust, Forum supervises all aspects of
the Fund's operations, including the receipt of services for which the Trust is
obligated to pay, provides the Trust with general office facilities and
provides, at the Trust's expense, the services of persons necessary to perform
such supervisory, administrative and clerical functions as are needed to
effectively operate 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 and its
affiliates. For these services and facilities, Forum receives with respect to
the Fund a management fee at an annual rate of 0.30% of the Fund's average daily
net assets.
Forum also acts as the distributor of shares of the Fund and pursuant to a
distribution agreement with the Trust Forum receives, and may reallow to certain
financial institutions, the sales charge paid by the purchasers of the Fund's
shares. See "Purchases and Redemptions of Shares - Sales Charges."
ADVISER
Forum Advisors, Inc. serves as the investment adviser of the Fund. Subject to
the general supervision of the Board, the Adviser makes investment decisions for
the Fund. For its services, the Adviser receives an advisory fee at an annual
rate of 0.40% of the Fund's average daily net assets. The Adviser was
incorporated under the laws of Delaware in 1987 and is registered under the
Investment Advisers Act of 1940.
Leslie C. Berthy, Managing Director of the Adviser since 1989, is primarily
responsible for the day-to-day management of the Fund's portfolios and has been
since the Fund's inception. Prior to his association with the Adviser, Mr.
Berthy was Managing Director and Co-Chief Executive Officer of Irwin Union
Capital Corp., an affiliate of Irwin Union Bank & Trust Co.
SHAREHOLDER SERVICING
Shareholder inquiries and communications concerning the Fund may be directed to
the Transfer Agent. The Transfer Agent acts as the Fund's transfer agent and
dividend disbursing agent. The Transfer Agent maintains an account for each
shareholder of the Fund (unless such accounts are maintained by sub-transfer
agents or processing agents) and performs other transfer agency and shareholder
related functions. For its services, the Transfer Agent receives a fee at an
annual rate of 0.25% of the Fund's average daily net assets.
The Transfer Agent is authorized to subcontract any or all of its functions to
one or more qualified sub-transfer agents or processing agents, which may be
processing organizations (as described under "Purchases and Redemptions of
Shares - Purchases and Redemptions Through Financial Institutions"), Forum or
affiliates of Forum, who agree to comply with the terms of the Transfer Agency
Agreement. The Transfer Agent may pay those agents for their services, but no
such payment will increase the Transfer Agent's compensation from the Trust. In
addition, the Transfer Agent
<PAGE>
performs portfolio accounting services for the Fund, including determination of
the Fund's net asset value per share, pursuant to a separate agreement with the
Trust.
EXPENSES OF THE TRUST
The Fund's expenses comprise Trust expenses attributable to the Fund, which are
charged to the Fund, and expenses 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. Subject to the obligation of the
Adviser to reimburse the Trust for certain excess expenses of the Fund, the
Trust pays for all of its expenses. The Adviser, Forum and the Transfer Agent,
in their sole discretion, may waive all or any portion of their respective fees,
which are accrued daily and paid monthly. Any such waiver, which could be
discontinued at any time, would have the effect of increasing the Fund's
performance for the period during which the waiver was in effect and would not
be recouped at a later date.
5. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL INFORMATION
Investments in the Fund may be made either by an investor directly or through
certain brokers and financial institutions of which the investor is a customer.
All transactions in Fund shares are effected through the Transfer Agent, which
accepts orders for purchases and redemptions from shareholders of record and new
investors. Shareholders of record will receive from the Trust periodic
statements listing all account activity during the statement period. The Trust
reserves the right in the future to modify, limit or terminate any shareholder
privilege upon appropriate notice to shareholders and to charge a fee for
certain shareholder services, although no such fees are currently contemplated.
PURCHASES. Fund shares are sold at a price equal to their net asset value plus
any applicable sales charge on all weekdays except customary national business
holidays and Good Friday ("Fund Business Day"). Fund shares are issued
immediately following the next determination of net asset value made after an
order for the shares 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 investor's funds are converted to funds on deposit at a
Federal Reserve Bank ("Federal Funds"), which for purchase orders by check is
the second Fund Business Day after receipt of the check and acceptance of the
order. Payment in the form of a bank wire will be treated as a Federal Funds
payment received at the time the wire is received.
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. Fund shares may be redeemed without charge at their net asset
value on any Fund Business Day. There is no minimum period of investment and no
restriction on the frequency of redemptions. Fund shares are redeemed as of the
next determination of the Fund's net asset value 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 receive dividends declared after the day on which the redemption
becomes effective.
Normally, redemption proceeds are paid immediately following, but in no event
later than seven days following, acceptance of a redemption order. Proceeds of
redemption requests (and exchanges), however, will not be paid 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 through wire
transfers. Unless otherwise indicated, redemption proceeds normally are paid by
check mailed to the shareholder's record address. The right of redemption may
not be suspended nor the payment dates postponed except when the New York Stock
Exchange is closed (or when trading thereon is restricted) for any reason other
than its customary weekend or holiday closings or under any emergency or other
circumstance as determined by the Securities and Exchange Commission.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partially in portfolio securities if the Board determines that
payment in cash would be detrimental to the best interests of the Fund. The
Trust will 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.
The Trust employs reasonable procedures to insure that telephone orders are
genuine (which include recording certain transactions and the use of shareholder
security codes) and, if it does not, may be liable for any losses due to
unauthorized or fraudulent telephone instructions. Shareholders should verify
the accuracy of telephone instructions immediately upon receipt of confirmation
statements. During times of drastic economic or market changes, telephone
redemption and exchange privileges may be difficult to implement. In the event
that a shareholder is unable to reach the Transfer Agent by telephone, requests
may be mailed or hand-delivered to the Transfer Agent.
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 $1,000. The
Trust will not redeem accounts that fall below that amount solely as a result of
a reduction in net asset value.
<PAGE>
PURCHASE AND REDEMPTION PROCEDURES
The following purchase and redemption procedures and shareholder services apply
to investors who invest in the Fund directly. These investors may obtain the
account application necessary to open an account by writing the Transfer Agent
at the address on the cover page of this prospectus. For those shareholder
services not referenced on the account application and to change information on
a shareholder's account (such as addresses), investors or existing shareholders
should request an optional services form from the Transfer Agent.
INITIAL PURCHASE OF SHARES
There is a $5,000 minimum for initial investments in the Fund.
BY MAIL. Investors may send a check made payable to the Trust along with a
completed account application to the Fund at the address on the cover page of
this Prospectus. 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.
BY BANK WIRE. To make an initial investment in the Fund using the wire system
for transmittal of money among banks, an investor should first telephone the
Trust at (207) 879-0001 to obtain an account number. The investor should then
instruct a member commercial bank to wire the investor's money immediately to:
First National Bank of Boston
Boston, Massachusetts
ABA# 011000390
For Credit To: Forum Financial Corp.
Account #: 541-54171
Re: Maine Municipal Bond Fund
Account #:
Account Name:
The investor should then promptly complete and mail the account application.
Any investor planning to wire funds should instruct a bank early in the day so
the wire transfer can be accomplished the same day.
SUBSEQUENT PURCHASES OF SHARES
There is a $500 minimum for subsequent purchases. Subsequent purchases may be
made by mailing a check or by sending a bank wire as indicated above.
Shareholders using the wire system for purchase should first telephone the Trust
at (207) 879-0001 to notify it of the wire transfer. All payments should
clearly indicate the shareholder's name and account number.
Shareholders may purchase Fund shares at regular, preselected intervals by
authorizing the automatic transfer of funds from a designated bank account
maintained with a United States banking institution which is an Automated
Clearing House member. Under the program, existing shareholders may authorize
amounts of $250 or more to be debited from their bank account and invested in
the Fund monthly or quarterly. Shareholders may terminate their automatic
investments or change the amount to be invested at any time by written
notification to the Transfer Agent.
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.
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 written requests for redemption must be
signed by the shareholder with signature guaranteed and all certificates
submitted for redemption must be endorsed by the shareholder with signature
guaranteed.
BY TELEPHONE. A shareholder that has elected telephone redemption privileges
may make a telephone redemption request by calling the Transfer Agent at (207)
879-0001 and providing the shareholder's account number, the exact name in which
the shareholder's shares are registered and the shareholder's social security or
taxpayer identification number. 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.
<PAGE>
BY BANK WIRE. For redemptions of more than $5,000, a shareholder that has
elected wire redemption privileges may request the Fund to transmit the
redemption 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 the telephone redemption
privilege. Redemption proceeds are transmitted by wire on the day after the
redemption request in proper form is received by the Transfer Agent.
AUTOMATIC REDEMPTIONS. Shareholders may redeem Fund shares at regular,
preselected intervals by authorizing the automatic redemption of shares from
their Fund account. Redemption proceeds will be sent either by check or by
automatic transfer to a designated bank account maintained with a United States
banking institution which is an Automated Clearing House member. Under this
program, shareholders may authorize the redemption of shares in amounts of $250
or more from their account monthly or quarterly. Shareholders may terminate
their automatic redemptions or change the amount to be redeemed at any time by
written notification to the Transfer Agent.
SIGNATURE GUARANTEES. 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, the signature of each person required to sign for the
account must be guaranteed.
EXCHANGES
Fund shareholders are entitled to exchange their shares for shares of any other
fund of the Trust or any other fund that participates in the exchange program
and whose shares are eligible for sale in the shareholder's state of residence.
Exchanges may only be made between accounts registered in the same name. A
completed account application must be submitted to open a new account in the
Fund through an exchange if the shareholder requests any shareholder privilege
not associated with the existing account. Exchanges are subject to the fees
charged by, and the restrictions listed in the prospectus for, the fund into
which a shareholder is exchanging, including minimum investment requirements.
The Fund does not charge for exchanges and there is currently no limit on the
number of exchanges a shareholder may make.
The Trust (and Federal tax law) treats an exchange as a redemption of the shares
owned and the purchase of the shares of the fund being acquired. Redemptions
and purchases are effected at the respective net asset values of the two funds
as next determined following receipt of proper instructions and all necessary
supporting documents by the fund whose shares are being exchanged.
If a shareholder exchanges into a fund that imposes a sales charge, that
shareholder is required to pay the difference between that fund's sales charge
and any sales charge the shareholder has previously paid in connection with the
shares being exchanged. For example, if a shareholder paid a 2% sales charge in
connection with the purchase of the shares of a fund and then exchanged those
shares into another fund with a 3% sales charge, that shareholder would pay an
additional 1% sales charge on the exchange. Shares acquired through the
reinvestment of dividends and distributions are deemed to have been acquired
with a sales charge rate equal to that paid on the shares on which the dividend
or distribution was paid. The exchange privilege may be modified materially or
terminated by the Trust at any time upon 60 days' notice to shareholders.
BY MAIL. Exchanges may be accomplished by written instructions to the Transfer
Agent accompanied by any stock certificate that may have been issued to the
shareholder. All written requests for exchanges must be signed by the
shareholder (a signature guarantee is not required) and all certificates
submitted for exchange must be endorsed by the shareholder with signature
guaranteed.
BY TELEPHONE. Exchanges may be accomplished by telephone by any shareholder
that has elected telephone exchange privileges by calling the Transfer Agent at
(207) 879-0001 and providing the shareholder's account number, the exact name in
which the shareholder's shares are registered and the shareholder's social
security or taxpayer identification number.
PURCHASES AND REDEMPTIONS THROUGH FINANCIAL INSTITUTIONS
Shares may be purchased and redeemed through certain broker-dealers, banks,
trust companies and their affiliates, and other financial institutions,
including affiliates of the Transfer Agent ("Processing Organizations").
Processing Organizations may receive as a dealer's reallowance a portion of the
sales charge paid by their customers who purchase Fund shares. In addition,
Processing Organizations may charge their customers a fee for their services and
are
<PAGE>
responsible for promptly transmitting purchase, redemption and other requests to
the Fund. The Trust is not responsible for the failure of any institution to
promptly forward these requests.
Investors who purchase shares through a Processing Organization may be charged a
fee if they effect transactions in Fund Shares through a broker or agent and
will be subject to the procedures of their Processing Organization, which may
include limitations, investment minimums, cutoff times and restrictions in
addition to, or different from, those applicable to shareholders who invest in
the Fund directly. These investors should acquaint themselves with their
Processing Organization's procedures and should read this Prospectus in
conjunction with any materials and information provided by their Processing
Organization. Customers who purchase Fund shares through a Processing
Organization may or may not be the shareholder of record and, subject to their
Processing Organization's and the Fund's procedures, may have Fund shares
transferred into their name. Under their arrangements with the Trust, broker-
dealer Processing Organizations are not generally required to deliver payment
for purchase orders until several business days after a purchase order has been
received by a Fund. Certain other Processing Organizations may also enter
purchase orders with payment to follow.
Certain shareholder services may not be available to shareholders who have
purchased shares through a Processing Organization. These shareholders should
contact their Processing Organization for further information. The Trust may
confirm purchases and redemptions of a Processing Organization's customers
directly to the Processing Organization, which in turn will provide its
customers with such confirmations and periodic statements as may be required by
law or agreed to between the Processing Organization and its customers. The
Trust is not responsible for the failure of any Processing Organization to carry
out its obligations to its customer. Certain states permit shares of the Fund to
be purchased and redeemed only through registered broker-dealers, including the
Fund's distributor.
SALES CHARGES
The public offering price for shares of the Fund is the sum of the net asset
value of the shares being purchased plus any applicable sales charge. No sales
charge is assessed on the reinvestment of dividends or other distributions. The
sales charge is assessed as follows (net asset value percentages are rounded to
the nearest one-hundredth percent):
SALES CHARGE
AS % OF
PUBLIC NET
OFFERING ASSET DEALERS'
AMOUNT OF PURCHASE PRICE VALUE* REALLOWANCE
less than $100,000 3.75% 3.90% 3.25%
$100,000 but less
than $200,000 3.25 3.36 2.85
$200,000 but less
than $400,000 2.50 2.56 2.20
$400,000 but less
than $600,000 2.00 2.04 1.75
$600,000 but less
than $800,000 1.50 1.52 1.25
$800,000 but less
than $1,000,000 1.00 1.01 0.75
$1,000,000
and up 0.50 0.50 0.40
*Rounded to the nearest one-hundredth percent.
Forum's commission is the sales charge shown above less any applicable discount
reallowed to selected brokers and dealers (including banks and bank affiliates
purchasing shares as principal or agent). Normally, Forum will reallow
discounts to selected brokers and dealers in the amounts indicated in the table
above. From time to time, however, Forum may elect to reallow the entire sales
charge to selected brokers or dealers for all sales with respect to which orders
are placed with Forum during a particular period. The dealers' reallowance may
be changed from time to time.
No sales charge will be assessed on purchases made for investment purposes by:
(a) any bank, trust company, savings association or similar institution with
whom Forum has entered into a share purchase agreement acting on behalf of the
institution's fiduciary customer accounts or any account maintained by its trust
department; (b) any registered investment adviser with whom Forum has entered
into a share purchase agreement and which is acting on behalf of its fiduciary
customer accounts; (c) directors and officers of the Trust; directors, officers
and full-time employees of the Adviser, Forum, any of their affiliates or any
organization with which Forum has entered into a selected dealer or
<PAGE>
processing agent agreement; the spouse, sibling, direct ancestor or direct
descendent (collectively, "relatives") of any such person; any trust for the
benefit of any such person or relative; or the estate of any such person or
relative; and (d) any person who has, within the preceding 90 days, redeemed
Fund shares (but only on purchases in amounts not exceeding the redeemed
amounts) and completes a reinstatement form upon investment. Any shares so
purchased may not be resold except to the Fund.
REDUCED SALES CHARGES
For an investor to qualify for one of the following types of reduced sales
charges, the investor must notify the Transfer Agent at the time of purchase.
Reduced sales charges may be modified or terminated at any time and are subject
to confirmation of an investor's holdings.
RIGHTS OF ACCUMULATION. An investor's purchase of additional shares of the Fund
may qualify for rights of accumulation ("ROA") wherein the applicable sales
charge will be based on the total of the investor's current purchase and the net
asset value (at the end of the previous Fund Business Day) of all Fund shares
held by the investor. For example, if an investor owned shares of the Fund
worth $400,000 at the then current net asset value and purchased shares of the
Fund worth an additional $50,000, the sales charge for the $50,000 purchase
would be at the 2% rate applicable to a single $450,000 purchase, rather than at
the 3.75% rate. To qualify for ROA on a purchase, the investor must inform the
Transfer Agent and supply sufficient information to verify that each purchase
qualifies for the privilege or discount.
LETTER OF INTENT. Investors may also obtain reduced sales charges based on
cumulative purchases by means of a written Letter of Intent ("LOI"), which
expresses the investor's intention to invest $100,000 or more within a period of
13 months in shares of the Fund. Each purchase of shares under a LOI will be
made at the public offering price applicable at the time of the purchase to a
single transaction of the dollar amount indicated in the LOI.
An LOI is not a binding obligation upon the investor to purchase the full amount
indicated. Shares purchased with the first 5% of the amount indicated in the
LOI will be held subject to a registered pledge (while remaining registered in
the name of the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased within 13 months. Pledged shares will be involuntarily redeemed to
pay the additional sales charge, if necessary. When the full amount indicated
has been purchased, the shares will be released from pledge. Share certificates
are not issued for shares purchased under an LOI. Investors wishing to enter
into an LOI can obtain a form of LOI from their broker or financial institution
or by contacting the Transfer Agent.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared daily and paid
monthly. Dividends of net capital gain, if any, realized by the Fund are
distributed annually.
Shareholders may have all dividends reinvested in additional shares of the Fund
or received in cash. In addition, shareholders may 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.
All dividends will be reinvested at the Fund's net asset value as of the payment
date of 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 paid 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. As
such, the Fund will not be liable for Federal income taxes on the net investment
income and net capital gain distributed to its shareholders. Because the Fund
intends to distribute all of its net investment income and net capital gain each
year, the Fund should avoid all Federal income and excise taxes.
DIVIDENDS OF TAX-EXEMPT INTEREST AND RELATED MATTERS. Shareholders generally
will not be subject to Federal income tax on dividends paid by the Fund out of
tax-exempt interest income earned by the Fund ("exempt-interest dividends"),
assuming certain requirements are met by the Fund. Substantially all of the
dividends paid by the Fund are anticipated to be exempt from Federal income
taxes and from Maine personal income tax. However, exempt-interest dividends
paid by the Fund to shareholders that are financial institutions are subject to
the Maine franchise tax.
Persons who are "substantial users" or "related persons" thereof of facilities
financed by private activity bonds held by the Fund may be subject to Federal
income tax on their pro rata share of the interest income from these bonds and
should consult their tax advisors before purchasing shares of the Fund. Under
current Federal tax law, interest on
<PAGE>
certain private activity bonds is treated as an item of tax preference for
purposes of the Federal AMT imposed on individuals and corporations. In
addition, interest on all tax-exempt obligations is included in the "adjusted
current earnings" of corporations for Federal AMT purposes. The Maine AMT is
based in part on Federal AMT income.
OTHER DIVIDENDS AND DISTRIBUTIONS. Dividends paid by the Fund out of its
taxable net investment income (including any realized net short-term capital
gain) are taxable to shareholders as ordinary income. Distributions by the Fund
of realized net long-term capital gain, if any, are taxable to shareholders as
long-term capital gain, regardless of the length of time the shareholder may
have held shares in the Fund. If Fund shares are sold at a loss after being
held for six months or less, the loss will be disallowed to the extent of any
exempt-interest dividends received on those shares and will be treated as long-
term capital loss to the extent of any long-term capital gain distribution
received on those shares.
Any capital gain distribution received by a shareholder reduces the net asset
value of the shareholder's shares by the amount of the distribution. To the
extent that capital gain was accrued by the Fund before the shareholder
purchased the shares, the distribution would be in effect a return of capital to
the shareholder. Capital gain distributions, including those that operate as a
return of capital, however, are taxable to the shareholder receiving them.
OTHER TAX MATTERS. Interest on indebtedness incurred by shareholders to
purchase or carry shares of the Fund generally is not deductible for Federal
income tax purposes.
The Fund may be required by Federal law to withhold 31% of reportable payments
(which may include taxable dividends, capital gain distributions and redemption
proceeds) paid to individuals and certain other non-corporate shareholders.
Withholding is not required if a shareholder certifies that the shareholder's
social security or tax identification number provided to the Fund is correct and
that the shareholder is not subject to backup withholding.
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. This includes a
statement advising each shareholder of the portion of total dividends paid into
the shareholder's account that is exempt from Federal income tax and that is
derived from Maine municipal securities and from other sources. These portions
are determined for the entire year and on a monthly basis and, thus, are an
annual or monthly average, rather than a day-by-day determination for each
shareholder.
TAX-FREE INCOME VS. TAXABLE INCOME
The table below shows approximate equivalent taxable and tax-free yields at
various approximate combined marginal Federal and Maine tax bracket rates. For
example, an investor in the __% combined tax bracket for 1996 whose investments
earn a 5% tax-free yield would have to earn a ____% taxable yield to receive the
same benefit from a non-tax-exempt investment.
1996 COMBINED FEDERAL AND MAINE
TAXABLE VS. TAX-FREE YIELDS
Combined
Marginal A Tax-Free Yield of
Federal and ---------------------------------------------
Maine 4.0% 4.5% 5.0% 5.5% 6.0%
Tax Bracket equals a taxable yield of approximately
- ------------------------------------------------------------------
45% 7.24% 8.14% 9.05% 9.95% 10.86%
37% 6.34% 7.13% 7.92% 8.71% 9.50%
33% 5.97% 6.72% 7.47% 8.21% 8.96%
19% 4.93% 5.54% 6.16% 6.78% 7.39%
The yields listed are for illustration only and are not necessarily
representative of the Fund's yield. Although the Fund primarily invests in
securities the interest from which is exempt from both Federal and Maine state
income taxes, some of the Fund's investments may generate taxable income. An
investor's tax bracket will depend upon the investor's taxable income. The
figures set forth above do not reflect the Federal or Maine alternative minimum
taxes or any state or local income taxes other than Maine state personal income
taxes.
The foregoing is only a summary of some of the important Federal and Maine tax
considerations generally affecting the Fund and its shareholders. There may be
other Federal, state or local tax considerations applicable to a particular
investor. Prospective investors are urged to consult their tax advisors.
7. OTHER INFORMATION
<PAGE>
PERFORMANCE INFORMATION
The Fund's performance may be quoted in advertising in terms of yield or total
return. Both types are based on historical results and are not intended to
indicate future performance. The Fund's yield is a way of showing the rate of
income earned by the Fund as a percentage of the Fund's share price. Yield is
calculated by dividing the net investment income of the Fund for the stated
period by the average number of shares entitled to receive dividends and
expressing the result as an annualized percentage rate based on the Fund's share
price at the end of the period. The Fund may also quote tax equivalent yields,
which show the taxable yields a shareholder would have to earn to equal the
Fund's tax-free yields after taxes. A tax equivalent yield is calculated by
dividing the Fund's tax-free yield by one minus a stated Federal, state or
combined Federal and state tax rate. Total return refers to the average annual
compounded rates of return over some representative period that would equate an
initial amount invested at the beginning of a stated period to the ending
redeemable value of the investment, after giving effect to the reinvestment of
all dividends and distributions and deductions of expenses during the period.
The Fund also may advertise its total return over different periods of time on a
before-tax or after-tax basis or by means of aggregate, average, year by year,
or other types of total return figures. 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.
The Fund's advertisements may reference ratings and rankings among similar funds
by independent evaluators such as Morningstar, Lipper Analytical Services, Inc.
or IBC/Donoghue, Inc. 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.
BANKING LAW MATTERS
Banking laws and regulations generally permit a bank or bank affiliate to
purchase shares of an investment company as agent for and upon the order of a
customer and in the view of Forum would permit a bank or bank affiliate to serve
as a Processing Organization or perform sub-transfer agent or similar services
for the Trust and its shareholders. If a bank or bank affiliate were prohibited
from performing all or a part of the foregoing services, its shareholder
customers would be permitted to remain shareholders of the Trust and alternative
means for continuing to service them would be sought. It is not expected that
shareholders would suffer adverse financial consequences as a result of any
changes in bank or bank affiliate service arrangements.
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 portfolio securities and other assets less its
liabilities) by the number of the Fund's 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.
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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
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
<PAGE>
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.
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.
<PAGE>
FORUM FUNDS
NEW HAMPSHIRE BOND FUND
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
FORUM FINANCIAL CORP.
P.O. BOX 446
PORTLAND, MAINE 04112
(207) 879-0001
PROSPECTUS
August 1, 1996
This Prospectus offers shares of New Hampshire Bond Fund (the "Fund"), a non-
diversified series of Forum Funds (the "Trust"), an open-end, management
investment company.
NEW HAMPSHIRE BOND FUND seeks to provide shareholders with a
high level of current income exempt from both Federal income
taxes (other than the alternative minimum tax) and New
Hampshire state interest and dividends taxes. The Fund
invests principally in investment grade New Hampshire
municipal securities.
Shares of the Fund are offered to investors at a price equal to the next-
determined net asset value plus a maximum sales charge of 3.75% of the total
public offering price (3.90% of the net amount invested).
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor should know before investing. The Trust
has filed with the Securities and Exchange Commission a Statement of Additional
Information dated August 1, 1996, as may be amended from time to time (the
"SAI"), which contains more detailed information about the Trust and the Fund
and which is incorporated into this Prospectus by reference. The SAI is
available without charge by contacting the Trust at the address listed above.
Investors should read this Prospectus and retain it for future reference.
Shares of the Fund are offered only to
residents of the State of New Hampshire.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE 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
HIGHLIGHTS OF THE FUND
FUND OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with a high
level of current income exempt from both Federal income taxes (other than the
alternative minimum tax) and New Hampshire state interest and dividends taxes.
The Fund invests principally in investment grade New Hampshire municipal
securities. It is anticipated that the average weighted maturity of all
municipal securities in the Fund will normally range between five and 15 years.
See "Investment Objectives and Policies."
FUND MANAGEMENT
The executive offices of the Fund's investment adviser, Forum Advisors, Inc.
(the "Adviser"), are located at Two Portland Square, Portland, Maine 04101. The
manager of the Trust and distributor of its shares is Forum Financial Services,
Inc. ("Forum"). Forum Financial Corp. (the "Transfer Agent"), Two Portland
Square, Portland, Maine 04101, serves as the Trust's transfer agent, dividend
disbursing agent and shareholder servicing agent. See "Management."
PURCHASES AND REDEMPTIONS
Shares of the Fund are offered at the next-determined net asset value per share
plus any applicable sales charge. The minimum initial investment is $5,000 and
the minimum subsequent investment is $500. Shares may be redeemed without
charge. See "Purchases and Redemptions of Shares."
EXCHANGE PROGRAM
Shareholders of the Fund may exchange their shares without charge for the shares
of certain other funds of the Trust. See "Purchases and Redemptions of Shares -
Exchanges."
DIVIDENDS
Dividends of net investment income are declared daily and paid monthly by the
Fund and are reinvested in Fund shares unless a shareholder elects to have them
paid in cash. It is anticipated that all of the dividends paid by the Fund will
be exempt from Federal income tax and from New Hampshire state interest and
dividends taxes. See "Dividends and Tax Matters."
CERTAIN RISK FACTORS
There can be no assurance that the Fund will achieve its investment objective.
The Fund's net asset value will fluctuate as the value of the Fund's portfolio
securities changes and will tend to vary inversely with movements in interest
rates. The Fund is non-diversified and, therefore, has greater freedom to
concentrate its investments than if it were diversified. The Fund invests
principally in the securities of New Hampshire municipal issuers, which entails
more risk than if the Fund were to invest in issuers with greater geographic
diversity. See "Investment Objective and Policies - Certain Risk Factors."
EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in understanding the
various expenses that an investor in the Fund will bear directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of public offering price). . . . . . . . . 3.75%
Exchange Fee . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES (1)
(as a percentage of average net assets after
estimated expense reimbursements)
Management Fees (2). . . . . . . . . . . . . . . . . . . . . ____%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . ____%
Total Fund Operating Expenses. . . . . . . . . . . . . . . . ____%
(1) The amounts of expenses are based on amounts incurred by the Fund for the
Fund's most recent fiscal year ending March 31, 1996. Absent expense
reimbursements and fee waivers, the expenses of the Fund would have
<PAGE>
been: Management Fees, ____%; Other Expenses, ____; and Total Fund Operating
Expenses, ____%. For a further description of the various expenses incurred in
the operation of the Fund, see "Management."
(2) Includes the Adviser's investment advisory fee and Forum's management fee.
EXAMPLE
Following is a hypothetical example that indicates the dollar amount of expenses
that an investor in the Fund would pay assuming a $1,000 investment in the Fund,
a 5% annual return, the reinvestment of all dividends and distributions and
redemption at the end of each period:
1 Year 3 Years 5 Years 10 Years
$ $ $ $
The example is based on the expenses listed in the table. The five percent
annual return is not predictive 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.
2. FINANCIAL HIGHLIGHTS
The following information represents selected data for a single share
outstanding of the Fund. This information has been audited in connection with
an audit of the Fund's financial statements by [ ], independent auditors. The
financial statements and independent auditors' report thereon are incorporated
by reference into the SAI. Further information about the Fund's performance is
contained in the Fund's annual report to shareholders, which may be obtained
from the Trust without charge.
Year Ended March 31
---------------------------------
1996 1995 1994 1993(1)
---- ---- ---- -------
Beginning Net Asset Value per Share $10.08 $9.96 $10.01 $10.00
Net Investment Income 0.48 0.49 0.51 0.12
Net Realized and Unrealized Investment
Gain (Loss) on Securities 0.25 0.12 (0.03) 0.01
Dividends from Net Investment Income (0.48) (0.49) (0.51) (0.12)
Distributions from Net Realized Gains -- -- (0.02) --
------ ------ ----- ------
Ending Net Asset Value per Share $10.33 $10.08 $9.96 $10.01
------ ------ ----- ------
------ ------ ----- ------
Ratios to Average Net Assets:
Expenses (2) 0.60% 0.46% 0.34% 0.50%(3)
Net Investment Income 4.65% 4.95% 4.68% 4.96%(3)
Total Return 7.36% 6.32% 4.75% 5.55%(3)
Portfolio Turnover Rate 34.31% 37.59% 9.60% --
Net Assets at the End of
Period (000's Omitted) $6,903 $5,276 $3,555 $442
(1) The Fund commenced operations on December 31, 1992.
(2) 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:
Expenses 2.26% 2.19% 4.33% 30.85%(3)
(3) Annualized.
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
Shareholders of the Fund have approved a new investment policy that permits the
Fund to seek to achieve its investment objective by converting to a Core and
Gateway structure. The Fund, upon future action by the Board of Trustees and
notice to shareholders, may convert to this structure, in which the Fund would
hold as its only investment securities the shares of another investment company
having substantially the same investment objective and policies as the Fund. The
Board of Trustees will not authorize conversion to a Core and Gateway structure
if it would materially increase costs to a Fund's shareholders.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide shareholders with a high
level of current income exempt from both Federal income taxes (other than the
alternative minimum tax) and New Hampshire state interest and dividends taxes.
The Fund anticipates that all of its income will be exempt from New Hampshire
state interest and dividends taxes and that a substantial portion of its income
will be exempt from New Hampshire state business profits taxes. There can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
The Fund pursues its objective by investing principally in investment grade debt
obligations issued by the state of New Hampshire and its political subdivisions,
duly constituted authorities and corporations. These securities are generally
known as "municipal securities" and include municipal bonds, notes and leases.
It is anticipated that under normal circumstances substantially all of the
Fund's assets will be invested in municipal securities the interest on which is
exempt from New Hampshire state interest and dividends taxes and Federal income
taxes except when received by a shareholder in a taxable year for which he will
be subject to the Federal alternative minimum tax ("AMT"). The Fund may also
invest in United States government instruments the interest on which is exempt
from New Hampshire state interest and dividends taxes.
GENERAL. The market value of the municipal securities held by the Fund will be
affected by changes in interest rates. There is normally an inverse
relationship between the market value of securities sensitive to prevailing
interest rates and actual changes in interest rates. In other words, a decline
in interest rates produces an increase in market value, while an increase in
interest rates produces a decrease in market value. Moreover, the longer the
remaining maturity of a security, the greater will be the effect of interest
rate changes on the market value of that security. Changes in the ability of an
issuer to make payments of interest and principal and in the market's perception
of an issuer's creditworthiness will also affect the market value of the debt
securities of that issuer. Obligations of issuers of municipal securities are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors. The possibility exists, therefore, that, as a
result of litigation or other conditions, the ability of any issuer to pay, when
due, the principal of and interest on its debt securities may be materially
impaired.
The yields of municipal securities depend on, among other things, conditions in
the municipal securities markets and fixed income markets generally, the size of
a particular offering, the maturity of the obligation, and the rating of the
issue. New Hampshire municipal securities may have yields slightly less than
the municipal obligations of issuers located in other states because of the New
Hampshire state interest and dividends tax exemption.
In general, the longer the maturity of a municipal security, the higher the rate
of interest it pays. However, a longer average maturity is generally associated
with a higher level of volatility in the market value of a municipal security.
The average maturity of the Fund's portfolio will vary depending on anticipated
market conditions. It is anticipated, however, that the average weighted
maturity of all municipal securities in the Fund will normally range between
five and 15 years.
Municipal securities also include securities issued by Puerto Rico, other United
States territories or possessions and their subdivisions, authorities and
corporations the income from which is not subject to Federal income tax or New
Hampshire state interest and dividends taxes. The Fund may invest up to 25% of
its total assets in these securities.
Under current Federal tax law, a distinction is drawn between municipal
securities issued after August 7, 1986 to finance certain "private activities"
and other municipal securities. Private activity securities include securities
issued to finance such projects as certain solid waste disposal facilities,
student loan programs, and water and sewage projects. Interest income from
certain of these securities is subject to the AMT. See "Dividends and Tax
Matters." Because interest income on securities subject to the AMT is taxable
to certain investors, it is expected,
<PAGE>
although there can be no guarantee, that these municipal securities generally
will provide somewhat higher yields than other municipal securities of
comparable quality and maturity that are not subject to the AMT.
CREDIT MATTERS. Normally, at least 80% of the Fund's total assets will be
invested in municipal bonds rated at the time of purchase within the four
highest rating categories assigned by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Service, Inc. ("Moody's") (Aaa,
Aa, A and Baa), Standard & Poor's Corporation ("S&P") (AAA, AA, A and BBB) or
Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A and BBB) or which are
unrated and determined by the Adviser to be of comparable quality. Securities
in these ratings are generally considered to be investment grade securities,
although Moody's indicates that municipal securities rated Baa have speculative
characteristics. Unrated securities may not be as actively traded as rated
securities. A further description of the ratings used by Moody's, S&P and Fitch
is included in the SAI. The Fund may invest up to 20% of its total assets in
municipal bonds rated in the fifth or sixth highest rating category by an NRSRO
or which are unrated and determined by the Adviser to be of comparable quality.
These securities are not considered to be investment grade and have speculative
or predominantly speculative characteristics. The Fund only invests in
municipal notes and other short-term municipal obligations in the two highest
rating categories assigned by an NRSRO or which are unrated and determined by
the Adviser to be of comparable quality. The Fund may retain securities whose
rating has been lowered below the lowest permissible rating category (or that
are unrated and determined by the Advisor to be of comparable quality) only if
the Adviser determines that retaining the security is in the best interests of
the Fund.
A non-rated municipal security will be considered for investment by the Fund
when the Adviser believes that the financial condition of the issuer of the
obligation and the protection afforded by the terms of the obligation itself
limit the risk to the Fund to a degree comparable to that of rated securities in
which the Fund may invest. During its last fiscal year, the Fund had __% of its
average annual assets in securities rated by Moody's or S&P and __% of its
average annual assets in unrated investments, including cash and cash
equivalents. For that year the Fund had the following percentages of its
average annual net assets invested in rated securities: Aaa/AAA-____%, Aa/AA-
____%, A/A-____%, Baa/BBB-____%. For this purpose, securities with different
ratings from Moody's and S&P were assigned the higher rating. This information
reflects the average month end composition of the Fund's assets for the Fund's
last fiscal year and is not necessarily representative of the Fund as of the end
of last year, the current fiscal year or any other time.
MUNICIPAL BONDS. Municipal bonds, which are intended to meet longer term
capital needs, can be classified as either "general obligation" or "revenue"
bonds. General obligation bonds are secured by a municipality's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are generally payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other tax, but not from general tax revenues. Municipal
bonds also include private activity bonds ("PABs"), which are bonds issued by or
on behalf of public authorities to finance various privately operated
facilities. PABs are in most cases revenue bonds. The payment of the principal
and interest on these bonds is dependent solely on the ability of an initial or
subsequent user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property financed by
the bond as security for payment. The Fund will acquire only PABs whose
interest payments, in the opinion of the issuer's counsel, are exempt from
Federal income tax (other than the AMT) and New Hampshire state interest and
dividends taxation.
MUNICIPAL NOTES AND LEASES. Municipal notes, which may be either "general
obligation" or "revenue" securities, are intended to fulfill short-term capital
needs and generally have original maturities of 397 days or less. They include
tax anticipation notes, revenue anticipation notes, bond anticipation notes,
construction loan notes and tax-exempt commercial paper. Municipal leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government lessee) are a
means for governmental issuers to acquire property and equipment without meeting
constitutional or statutory requirements for issuance of long-term debt.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds or notes as described in the SAI.
VARIABLE AND FLOATING RATE SECURITIES. The securities in which the Fund invests
may have variable or floating rates of interest. These securities pay interest
at rates that are adjusted periodically according to a specified formula,
usually with reference to some interest rate index or market interest rate (the
"underlying index"). The interest paid on these securities is a function
primarily of the underlying index upon which the interest rate adjustments are
based. Such adjustments minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Fund to maintain a stable net asset
value. Similar to fixed rate debt instruments, variable and floating rate
instruments are subject to changes in value based on changes in market interest
rates or changes in the issuer's
<PAGE>
creditworthiness. The rate of interest on securities purchased by a Fund may be
tied to various rates of interest or index.
There may not be an active secondary market for certain floating or variable
rate instruments, which could make it difficult for the Fund to dispose of an
instrument during periods that the Fund is not entitled to exercise any demand
rights it may have. The Fund could, for this or other reasons, suffer a loss
with respect to an instrument. The Adviser monitors the liquidity of the Fund's
investment in variable and floating rate instruments, but there can be no
guarantee that an active secondary market will exist.
PARTICIPATION INTERESTS. The Fund may purchase participation interests in
municipal securities that are owned by banks or other financial institutions.
Participation interests carry a demand feature backed by a letter of credit or
guarantee of the bank or other institution permitting the holder to tender them
back to the bank or institution. The Fund will only purchase participation
interests from Federal Deposit Insurance Corporation ("FDIC") insured banks
having total assets of more than one billion dollars or from other financial
institutions whose long-term debt securities are rated within the two highest
rating categories of an NRSRO (or are unrated and determined by the Adviser to
be of comparable quality). Prior to purchasing any participation interest, the
Fund will obtain appropriate assurances from counsel retained by the Trust that
the interest earned by the Fund from the obligations in which it holds
participation interests is exempt from Federal income and New Hampshire state
interest and dividends taxes.
STAND-BY COMMITMENTS. The Fund may purchase municipal securities together with
the right to resell them to the seller at an agreed-upon price or yield within
specified periods prior to their maturity dates. These rights to resell are
commonly known as "stand-by commitments." The aggregate price which the Fund
pays for securities with a stand-by commitment may be higher than the price
which otherwise would be paid. The primary purpose of this practice is to
permit the Fund to be as fully invested as practicable in municipal securities
while preserving the necessary flexibility and liquidity to meet unanticipated
redemptions. The Fund will enter into stand-by commitments only with banks or
municipal securities dealers that in the opinion of the Adviser present minimal
credit risks. The value of a stand-by commitment is dependent on the ability of
the writer to meet its repurchase obligation.
CERTAIN RISK FACTORS
GEOGRAPHIC CONCENTRATION. Because the Fund invests principally in New Hampshire
municipal securities, the Fund is more susceptible to factors adversely
affecting issuers of those municipal securities than would be a comparable
municipal securities portfolio having a lesser degree of geographic
concentration. These risks arise from the financial condition of the state of
New Hampshire and its political subdivisions. To the extent state or local
governmental entities are unable to meet their financial obligations, the income
derived by the Fund, its ability to preserve or realize appreciation of its
portfolio assets or its liquidity could be impaired.
To the extent the Fund's investments are primarily concentrated in issuers
located in New Hampshire, the value of the Fund's shares may be especially
affected by factors pertaining to New Hampshire's economy and other factors
specifically affecting the ability of issuers in New Hampshire to meet their
obligations. As a result, the value of the Fund's assets may fluctuate more
widely than the value of shares of a portfolio investing in securities relating
to a number of different states. The ability of state, county or local
governments and quasi-governmental agencies to meet their obligations will
depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. The amounts of tax and
other revenues available to governmental issuers may be affected from time to
time by economic, political and demographic conditions within their state. In
addition, constitutional or statutory restrictions may limit a government's
power to raise revenues or increase taxes. The availability of Federal, state
and local aid to governmental issuers may also affect their ability to meet
obligations. Payments of principal of and interest on private activity
securities will depend on the economic condition of the facility or specific
revenue source from whose revenues the payments will be made, which in turn
could be affected by economic, political or demographic conditions in the state.
DIVERSIFICATION MATTERS. The Fund is non-diversified, which means that it has
greater latitude than a diversified fund with respect to the investment of its
assets in the securities of a relatively few municipal issuers. As a non-
diversified portfolio, the Fund may present greater risks than a diversified
fund. The Fund's diversification requirements provide that, as of the last day
of each fiscal quarter, with respect to 50% of its assets, the Fund may not own
the securities of a single issuer, other than a U.S. Government security, with a
value of more than 5% of the Fund's total assets. Except for U.S. Government
securities, no more than 25% of the total assets of the Fund may be invested in
securities of any one issuer. These limitations do not apply to securities of
an issuer payable solely from the proceeds of escrowed U.S. Government
securities. The Fund will be subject to a greater risk of loss if an issuer
<PAGE>
in which the Fund invests a substantial amount of its assets is unable to make
interest or principal payments or if the market value of securities declines.
INFORMATION CONCERNING THE STATE OF NEW HAMPSHIRE. The major NRSROs have rated
recent New Hampshire general obligation or State-guaranteed bond issues as
follows: Moody's - Aa (revised from Aa1 in November 1991); S&P - AA (stable);
Fitch - AA (revised from AA+ in November 1991). Moody's rating revision cited
economic weakness translating into financial difficulties exacerbated by
economic sensitivity of State government revenues, offset by expenditure and
debt policies which remain conservative. Fitch noted similar issues regarding
State government revenues, but noted that the State had acted consistently to
combat adverse trends and the State's debt position continues to be excellent.
A recent bond issue by the New Hampshire Municipal Bond Bank without State
guarantee has been separately rated A1 by Moody's (stable) and A by S&P
(stable). Bond ratings of individual municipalities in New Hampshire vary in
accordance with rating agencies' estimates of the issuer's relative financial
strength and ability to support debt service. There can be no assurance that
New Hampshire general obligations or the securities of any New Hampshire
political subdivision, authority or corporation owned by the Fund will be rated
in any category or will not be downgraded by an NRSRO. Further information
concerning the State of New Hampshire is contained in the SAI.
ADDITIONAL INVESTMENT POLICIES
The Fund's investment objective and certain investment limitations described in
the SAI 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 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 more than 50% of the total outstanding
shares of the Fund. Except as otherwise indicated, investment policies of the
Fund are not fundamental and may be changed by the Board of Directors of the
Trust (the "Board") without shareholder approval. A further description of the
Fund's investment policies is contained in the SAI.
The Fund may borrow money for temporary or emergency purposes (including the
meeting of redemption requests), but not in excess of 33 1/3% of the value of
the Fund's total assets. Borrowing for purposes other than meeting redemption
requests will not exceed 10% of the value of the Fund's total assets. The Fund
may not invest more than 15% of its net assets in illiquid securities.
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 these transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within three months after the
transaction. 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. 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.
During the period between a commitment and settlement, no payment is made for
the securities purchased and, thus, no interest accrues to the purchaser from
the transaction. However, at the time the Fund makes a commitment to purchase
securities in this manner, the Fund immediately assumes the risk of ownership,
including price fluctuation. Failure by the other party to deliver or pay for a
security purchased or sold by the Fund may result in a loss or a missed
opportunity to make an alternative investment. Any significant commitment of
the Fund's assets committed to the purchase of securities on a when-issued or
forward commitment basis may increase the volatility of its net asset value.
The use of when-issued transactions and forward commitments may enable 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,
however, the Fund might be required to complete these transactions at prices
inferior to the current market values. No when-issued or forward commitments
will be made by the Fund if, as a result, more than 15% of the value of the
Fund's total assets would be committed to such transactions.
The Fund's use of when-issued securities and forward commitments entails 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. 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.
<PAGE>
TEMPORARY DEFENSIVE POSITION. When business or financial conditions warrant,
for example, when issues of sufficient quality and liquidity are not available,
the Fund may assume a temporary defensive position and invest without limit in
cash and short-term U.S. Government securities. During periods when and to the
extent that the Fund has assumed a temporary defensive position, it will not be
pursuing its investment objective and shareholders may be subject to Federal and
New Hampshire tax on a portion of their income dividends received from the Fund.
PORTFOLIO TURNOVER. The frequency of portfolio transactions of the Fund (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 benefit from yield disparities among different issues of debt securities, to
seek short-term profits during periods of fluctuating interest rates, or for
other reasons. This type of trading will increase the Fund's portfolio turnover
rate and transaction costs and may increase the Fund's capital gains, which are
not Federally tax-exempt when distributed to shareholders. The Adviser
weighs the anticipated benefits of short-term investments against these
consequences. The Fund's portfolio turnover rate is reported under "Financial
Highlights."
4. MANAGEMENT
The business of the Trust is managed under the direction of the Board of
Directors. The Board formulates the general policies of the Fund and meets
periodically to review the results of the Fund, monitor investment activities
and practices and discuss other matters affecting the Fund and the Trust.
MANAGER AND DISTRIBUTOR
Subject to the Supervision of the Board, Forum supervises the overall management
of the Fund. Forum, the Adviser and the Transfer Agent are members of the Forum
Financial Group of companies and together provide a full range of services to
the investment company and financial services industry. As of the date of this
Prospectus Forum acted as manager and distributor of registered investment
companies and collective trust funds with assets of approximately $15.5 billion.
Forum, whose address is Two Portland Square, Portland, Maine 04101, 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, the Adviser and the Transfer Agent were controlled by John Y. Keffer,
President and Chairman of the Trust.
Under its management agreement with the Trust, Forum supervises all aspects of
the Fund's operations, including the receipt of services for which the Trust is
obligated to pay, provides the Trust with general office facilities and
provides, at the Trust's expense, the services of persons necessary to perform
such supervisory, administrative and clerical functions as are needed to
effectively operate 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 and its
affiliates. For these services and facilities, Forum receives with respect to
the Fund a management fee at an annual rate of 0.30% of the Fund's average daily
net assets.
Forum also acts as the distributor of shares of the Fund and pursuant to a
distribution agreement with the Trust Forum receives, and may reallow to certain
financial institutions, the sales charge paid by the purchasers of the Fund's
shares. See "Purchases and Redemptions of Shares - Sales Charges."
ADVISER
Forum Advisors, Inc. serves as the investment adviser of the Fund. Subject to
the general supervision of the Board, the Adviser makes investment decisions for
the Fund. For its services, the Adviser receives an advisory fee at an annual
rate of 0.40% of the Fund's average daily net assets. The Adviser was
incorporated under the laws of Delaware in 1987 and is registered under the
Investment Advisers Act of 1940.
Leslie C. Berthy, Managing Director of the Adviser since 1989, is primarily
responsible for the day-to-day management of the Fund's portfolios and has been
since the Fund's inception. Prior to his association with the Adviser, Mr.
Berthy was Managing Director and Co-Chief Executive Officer of Irwin Union
Capital Corp., an affiliate of Irwin Union Bank & Trust Co.
SHAREHOLDER SERVICING
Shareholder inquiries and communications concerning the Fund may be directed to
the Transfer Agent. The Transfer Agent acts as the Fund's transfer agent and
dividend disbursing agent. The Transfer Agent maintains an account for each
shareholder of the Fund (unless such accounts are maintained by sub-transfer
agents or processing agents) and performs other transfer agency and shareholder
related functions. For these services, the Transfer Agent receives a fee
computed and paid monthly at an annual rate of 0.25% of the Fund's average daily
net assets.
<PAGE>
The Transfer Agent is authorized to subcontract any or all of its functions to
one or more qualified sub-transfer agents or processing agents, which may be
processing organizations (as described under "Purchases and Redemptions of
Shares - Purchases and Redemptions Through Financial Institutions") Forum or
affiliates of Forum, who agree to comply with the terms of the Transfer Agency
Agreement. The Transfer Agent may pay those agents for their services, but no
such payment will increase the Transfer Agent's compensation from the Trust. In
addition, the Transfer Agent performs portfolio accounting services for the
Fund, including determination of the Fund's net asset value per share, pursuant
to a separate agreement with the Trust.
EXPENSES OF THE TRUST
The Fund's expenses comprise Trust expenses attributable to the Fund which are
charged to the Fund, and expenses 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. Subject to the obligation of the
Adviser to reimburse the Trust for the excess expenses of the Fund, the Trust
pays for all of its expenses. The Adviser, Forum and the Transfer Agent, in
their sole discretion, may waive all or any portion of their respective fees,
which are accrued daily and paid monthly. Any such waiver, which could be
discontinued at any time, would have the effect of increasing the Fund's
performance for the period during which the waiver was in effect and would not
be recouped at a later date.
5. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL INFORMATION
Investments in the Fund may be made either by an investor directly or through
certain brokers and financial institutions of which the investor is a customer.
All transactions in Fund shares are effected through the Transfer Agent, which
accepts orders for purchases and redemptions from shareholders of record and new
investors. Shareholders of record will receive from the Trust periodic
statements listing all account activity during the statement period. The Trust
reserves the right in the future to modify, limit or terminate any shareholder
privilege upon appropriate notice to shareholders and to charge a fee for
certain shareholder services, although no such fees are currently contemplated.
PURCHASES. Fund shares are sold at a price equal to their net asset value plus
any applicable sales charge on all weekdays except customary national business
holidays and Good Friday ("Fund Business Day"). Fund shares are issued
immediately following the next determination of net asset value made after an
order for the shares 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 investor's funds are converted to funds on deposit at a
Federal Reserve Bank ("Federal Funds"), which for purchase orders by check is
the second Fund Business Day after receipt of the check and acceptance of the
order. Payment in the form of a bank wire will be treated as a Federal Funds
payment received at the time the wire is received.
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. Fund shares may be redeemed without charge at their net asset
value on any Fund Business Day. There is no minimum period of investment and no
restriction on the frequency of redemptions. Fund shares are redeemed as of the
next determination of the Fund's net asset value 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 receive dividends declared after the day on which the redemption
becomes effective.
Normally, redemption proceeds are paid immediately following, but in no event
later than seven days following, acceptance of a redemption order. Proceeds of
redemption requests (and exchanges), however, will not be paid 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 through wire
transfers. Unless otherwise indicated, redemption proceeds normally are paid by
check mailed to the shareholder's record address. The right of redemption may
not be suspended nor the payment dates postponed except when the New York Stock
Exchange is closed (or when trading thereon is restricted) for any reason other
than its customary weekend or holiday closings or under any emergency or other
circumstance as determined by the Securities and Exchange Commission.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partially in portfolio securities if the Board determines that
payment in cash would be detrimental to the best interests of the Fund. The
Trust will 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.
<PAGE>
The Trust employs reasonable procedures to insure that telephone orders are
genuine (which include recording certain transactions and the use of shareholder
security codes) and, if it does not, may be liable for any losses due to
unauthorized or fraudulent telephone instructions. Shareholders should verify
the accuracy of telephone instructions immediately upon receipt of confirmation
statements. During times of drastic economic or market changes, telephone
redemption and exchange privileges may be difficult to implement. In the event
that a shareholder is unable to reach the Transfer Agent by telephone, requests
may be mailed or hand-delivered to the Transfer Agent.
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 $1,000. The
Trust will not redeem accounts that fall below that amount solely as a result of
a reduction in net asset value.
PURCHASE AND REDEMPTION PROCEDURES
The following purchase and redemption procedures and shareholder services apply
to investors who invest in the Fund directly. These investors may obtain the
account application necessary to open an account by writing the Transfer Agent
at the address on the cover page of this prospectus. For those shareholder
services not referenced on the account application and to change information on
a shareholder's account (such as addresses), investors or existing shareholders
should request an optional services form from the Transfer Agent.
INITIAL PURCHASE OF SHARES
There is a $5,000 minimum for initial investments in the Fund.
BY MAIL. Investors may send a check made payable to the Trust along with a
completed account application to the Fund at the address on the cover page of
this Prospectus. 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.
BY BANK WIRE. To make an initial investment in the Fund using the wire system
for transmittal of money among banks, an investor should first telephone the
Trust at (207) 879-0001 to obtain an account number. The investor should then
instruct a member commercial bank to wire the investor's money immediately to:
First National Bank of Boston
Boston, Massachusetts
ABA# 011000390
For Credit To: Forum Financial Corp.
Account #: 541-54171
Re: New Hampshire Bond Fund
Account #:
Account Name:
The investor should then promptly complete and mail the account application.
Any investor planning to wire funds should instruct a bank early in the day so
the wire transfer can be accomplished the same day.
SUBSEQUENT PURCHASES OF SHARES
There is a $500 minimum for subsequent purchases. Subsequent purchases may be
made by mailing a check or by sending a bank wire as indicated above.
Shareholders using the wire system for purchase should first telephone the Trust
at (207) 879-0001 to notify it of the wire transfer. All payments should
clearly indicate the shareholder's name and account number.
Shareholders may purchase Fund shares at regular, preselected intervals by
authorizing the automatic transfer of funds from a designated bank account
maintained with a United States banking institution which is an Automated
Clearing House member. Under the program, existing shareholders may authorize
amounts of $250 or more to be debited from their bank account and invested in
the Fund monthly or quarterly. Shareholders may terminate their automatic
investments or change the amount to be invested at any time by written
notification to the Transfer Agent.
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.
<PAGE>
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 written requests for redemption must be
signed by the shareholder with signature guaranteed and all certificates
submitted for redemption must be endorsed by the shareholder with signature
guaranteed.
BY TELEPHONE. A shareholder that has elected telephone redemption privileges
may make a telephone redemption request by calling the Transfer Agent at (207)
879-0001 and providing the shareholder's account number, the exact name in which
the shareholder's shares are registered and the shareholder's social security or
taxpayer identification number. 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.
BY BANK WIRE. For redemptions of more than $5,000, a shareholder that has
elected wire redemption privileges may request the Fund to transmit the
redemption 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 the telephone redemption
privilege. Redemption proceeds are transmitted by wire on the day after the
redemption request in proper form is received by the Transfer Agent.
AUTOMATIC REDEMPTIONS. Shareholders may redeem Fund shares at regular,
preselected intervals by authorizing the automatic redemption of shares from
their Fund account. Redemption proceeds will be sent either by check or by
automatic transfer to a designated bank account maintained with a United States
banking institution which is an Automated Clearing House member. Under this
program, shareholders may authorize the redemption of shares in amounts of $250
or more from their account monthly or quarterly. Shareholders may terminate
their automatic redemptions or change the amount to be redeemed at any time by
written notification to the Transfer Agent.
SIGNATURE GUARANTEES. 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, the signature of each person required to sign for the
account must be guaranteed.
EXCHANGES
Fund shareholders are entitled to exchange their shares for shares of any other
fund of the Trust or any other fund that participates in the exchange program
and whose shares are eligible for sale in the shareholder's state of residence.
Exchanges may only be made between accounts registered in the same name. A
completed account application must be submitted to open a new account in the
Fund through an exchange if the shareholder requests any shareholder privilege
not associated with the existing account. Exchanges are subject to the fees
charged by, and the restrictions listed in the prospectus for, the fund into
which a shareholder is exchanging, including minimum investment requirements.
The Fund does not charge for exchanges and there is currently no limit on the
number of exchanges a shareholder may make.
The Trust (and Federal tax law) treats an exchange as a redemption of the shares
owned and the purchase of the shares of the fund being acquired. Redemptions
and purchases are effected at the respective net asset values of the two funds
as next determined following receipt of proper instructions and all necessary
supporting documents by the fund whose shares are being exchanged.
If a shareholder exchanges into a fund that imposes a sales charge, that
shareholder is required to pay the difference between that fund's sales charge
and any sales charge the shareholder has previously paid in connection with the
shares being exchanged. For example, if a shareholder paid a 2% sales charge in
connection with the purchase of the shares of a fund and then exchanged those
shares into another fund with a 3% sales charge, that shareholder would pay an
additional 1% sales charge on the exchange. Shares acquired through the
reinvestment of dividends and distributions are deemed to have been acquired
with a sales charge rate equal to that paid on the shares on which the dividend
or distribution was paid. The exchange privilege may be modified materially or
terminated by the Trust at any time upon 60 days' notice to shareholders.
BY MAIL. Exchanges may be accomplished by written instructions to the Transfer
Agent accompanied by any stock certificate that may have been issued to the
shareholder. All written requests for exchanges must be signed by the
shareholder (a signature guarantee is not required) and all certificates
submitted for exchange must be endorsed by the shareholder with signature
guaranteed.
<PAGE>
BY TELEPHONE. Exchanges may be accomplished by telephone by any shareholder
that has elected telephone exchange privileges by calling the Transfer Agent at
(207) 879-0001 and providing the shareholder's account number, the exact name in
which the shareholder's shares are registered and the shareholder's social
security or taxpayer identification number.
PURCHASES AND REDEMPTIONS THROUGH FINANCIAL INSTITUTIONS
Shares may be purchased and redeemed through certain broker-dealers, banks,
trust companies and their affiliates, and other financial institutions,
including affiliates of the Transfer Agent ("Processing Organizations").
Processing Organizations may receive as a dealer's reallowance a portion of the
sales charge paid by their customers who purchase Fund shares. In addition,
Processing Organizations may charge their customers a fee for their services and
are responsible for promptly transmitting purchase, redemption and other
requests to the Fund. The Trust is not responsible for the failure of any
institution to promptly forward these requests.
Investors who purchase shares through a Processing Organization may be charged a
fee if they effect transactions in Fund Shares through a broker or agent and
will be subject to the procedures of their Processing Organization, which may
include limitations, investment minimums, cutoff times and restrictions in
addition to, or different from, those applicable to shareholders who invest in
the Fund directly. These investors should acquaint themselves with their
Processing Organization's procedures and should read this Prospectus in
conjunction with any materials and information provided by their Processing
Organization. Customers who purchase Fund shares through a Processing
Organization may or may not be the shareholder of record and, subject to their
Processing Organization's and the Fund's procedures, may have Fund shares
transferred into their name. Under their arrangements with the Trust, broker-
dealer Processing Organizations are not generally required to deliver payment
for purchase orders until several business days after a purchase order has been
received by a Fund. Certain other Processing Organizations may also enter
purchase orders with payment to follow.
Certain shareholder services may not be available to shareholders who have
purchased shares through a Processing Organization. These shareholders should
contact their Processing Organization for further information. The Trust may
confirm purchases and redemptions of a Processing Organization's customers
directly to the Processing Organization, which in turn will provide its
customers with such confirmations and periodic statements as may be required by
law or agreed to between the Processing Organization and its customers. The
Trust is not responsible for the failure of any Processing Organization to carry
out its obligations to its customer. Certain states permit shares of the Fund to
be purchased and redeemed only through registered broker-dealers, including the
Fund's distributor.
SALES CHARGES
The public offering price for shares of the Fund is the sum of the net asset
value of the shares being purchased plus any applicable sales charge. No sales
charge is assessed on the reinvestment of dividends or other distributions. The
sales charge is assessed as follows (net asset value percentages are rounded to
the nearest one-hundredth percent):
SALES CHARGE
----------------------------------------
AS % OF
PUBLIC NET
OFFERING ASSET DEALERS'
AMOUNT OF PURCHASE PRICE VALUE* REALLOWANCE
----------------------------------------
less than $100,000 3.75% 3.90% 3.25%
$100,000 but less
than $200,000 3.25 3.36 2.85
$200,000 but less
than $400,000 2.50 2.56 2.20
$400,000 but less
than $600,000 2.00 2.04 1.75
$600,000 but less
than $800,000 1.50 1.52 1.25
$800,000 but less
than $1,000,000 1.00 1.01 0.75
$1,000,000
and up 0.50 0.50 0.40
*Rounded to the nearest one-hundredth percent.
<PAGE>
Forum's commission is the sales charge shown above less any applicable discount
reallowed to selected brokers and dealers (including banks and bank affiliates
purchasing shares as principal or agent). Normally, Forum will reallow
discounts to selected brokers and dealers in the amounts indicated in the table
above. From time to time, however, Forum may elect to reallow the entire sales
charge to selected brokers or dealers for all sales with respect to which orders
are placed with Forum during a particular period. The dealers' reallowance may
be changed from time to time.
No sales charge will be assessed on purchases made for investment purposes by:
(a) any bank, trust company, savings association or similar institution with
whom Forum has entered into a share purchase agreement acting on behalf of the
institution's fiduciary customer accounts or any account maintained by its trust
department; (b) any registered investment adviser with whom Forum has entered
into a share purchase agreement and which is acting on behalf of its fiduciary
customer accounts; (c) directors and officers of the Trust; directors, officers
and full-time employees of the Adviser, Forum, any of their affiliates or any
organization with which Forum has entered into a selected dealer or processing
agent agreement; the spouse, sibling, direct ancestor or direct descendent
(collectively, "relatives") of any such person; any trust for the benefit of any
such person or relative; or the estate of any such person or relative; and (d)
any person who has, within the preceding 90 days, redeemed Fund shares (but only
on purchases in amounts not exceeding the redeemed amounts) and completes a
reinstatement form upon investment. Any shares so purchased may not be resold
except to the Fund.
REDUCED SALES CHARGES
For an investor to qualify for one of the following types of reduced sales
charges, the investor must notify the Transfer Agent at the time of purchase.
Reduced sales charges may be modified or terminated at any time and are subject
to confirmation of an investor's holdings.
RIGHTS OF ACCUMULATION. An investor's purchase of additional shares of the Fund
may qualify for rights of accumulation ("ROA") wherein the applicable sales
charge will be based on the total of the investor's current purchase and the net
asset value (at the end of the previous Fund Business Day) of all Fund shares
held by the investor. For example, if an investor owned shares of the Fund
worth $400,000 at the then current net asset value and purchased shares of the
Fund worth an additional $50,000, the sales charge for the $50,000 purchase
would be at the 2% rate applicable to a single $450,000 purchase, rather than at
the 3.75% rate. To qualify for ROA on a purchase, the investor must inform the
Transfer Agent and supply sufficient information to verify that each purchase
qualifies for the privilege or discount.
LETTER OF INTENT. Investors may also obtain reduced sales charges based on
cumulative purchases by means of a written Letter of Intent ("LOI"), which
expresses the investor's intention to invest $100,000 or more within a period of
13 months in shares of the Fund. Each purchase of shares under a LOI will be
made at the public offering price applicable at the time of the purchase to a
single transaction of the dollar amount indicated in the LOI.
An LOI is not a binding obligation upon the investor to purchase the full amount
indicated. Shares purchased with the first 5% of the amount indicated in the
LOI will be held subject to a registered pledge (while remaining registered in
the name of the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased within 13 months. Pledged shares will be involuntarily redeemed to
pay the additional sales charge, if necessary. When the full amount indicated
has been purchased, the shares will be released from pledge. Share certificates
are not issued for shares purchased under an LOI. Investors wishing to enter
into an LOI can obtain a form of LOI from their broker or financial institution
or by contacting the Transfer Agent.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared daily and paid
monthly. Dividends of net capital gain, if any, realized by the Fund are
distributed annually.
Shareholders may have all dividends reinvested in additional shares of the Fund
or received in cash. In addition, shareholders may 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.
All dividends will be reinvested at the Fund's net asset value as of the payment
date of 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 paid more than seven days following the date on which dividends would
otherwise be reinvested.
<PAGE>
TAXES
FEDERAL 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. As such, the Fund will not be liable for Federal income taxes on the net
investment income and net capital gain distributed to its shareholders. Because
the Fund intends to distribute all of its net investment income and net capital
gain each year, the Fund should avoid all Federal income and excise taxes.
Shareholders generally will not be subject to Federal income tax on dividends
paid by the Fund out of tax-exempt interest income earned by the Fund ("exempt-
interest dividends"), assuming certain requirements are met by the Fund.
Substantially all of the dividends paid by the Fund are anticipated to be exempt
from Federal income taxes.
Persons who are "substantial users" or "related persons" thereof of facilities
financed by private activity bonds held by the Fund may be subject to Federal
income tax on their pro rata share of the interest income from these bonds and
should consult their tax advisors before purchasing shares of the Fund. Under
current Federal tax law, interest on certain private activity bonds is treated
as an item of tax preference for purposes of the Federal AMT imposed on
individuals and corporations. In addition, interest on all tax-exempt
obligations is included in the "adjusted current earnings" of corporations for
Federal AMT purposes.
Dividends paid by the Fund out of its taxable net investment income (including
any realized net short-term capital gain) are taxable to shareholders as
ordinary income for Federal tax purposes. Distributions by the Fund of realized
net long-term capital gain, if any, are taxable to shareholders as long-term
capital gain, regardless of the length of time the shareholder may have held
shares in the Fund. If Fund shares are sold at a loss after being held for six
months or less, the loss will be disallowed to the extent of any exempt-interest
dividends received on those shares and will be treated as long-term capital loss
to the extent of any long-term capital gain distribution received on those
shares.
Any capital gain distribution received by a shareholder reduces the net asset
value of the shareholder's shares by the amount of the distribution. To the
extent that capital gain was accrued by the Fund before the shareholder
purchased shares, the distribution would be in effect a return of capital to the
shareholder. For Federal income tax purposes, however, capital gain
distributions, including those that operate as a return of capital, are taxable
to the shareholder receiving them.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund generally is not deductible for Federal income tax purposes.
NEW HAMPSHIRE TAXES. Substantially all of the dividends paid by the Fund are
anticipated to be exempt from New Hampshire interest and dividends taxes. The
New Hampshire interest and dividends tax applies to that portion of a dividend
paid out of the Fund's taxable ordinary income (but not short-term capital
gain). In addition, it is anticipated that a substantial amount of the
dividends paid by the Fund will be exempt from New Hampshire business profits
taxes.
Shareholders who are individuals, resident in New Hampshire, will not be subject
to the New Hampshire interest and dividends or business profits tax on dividends
paid by the Fund, provided the Fund invests solely in New Hampshire tax-exempt
municipal securities or United States government obligations. If the Fund
invests in any other form of investment, then the entire amount of all of the
Fund's dividends (other than capital gain distributions) will be subject to the
interest and dividends tax.
Shareholders who are partnerships, associations or trusts, the beneficial
interest in which is not represented by transferable shares, and fiduciaries
deriving their appointment from a New Hampshire court, will generally be subject
to the same interest and dividends tax rules as shareholders who are individuals
resident in New Hampshire. Special interest and dividends tax rules will apply
to dividends received by trusts, estates, partnerships, and "S" corporations and
their beneficiaries or owners, if the entity or some of its beneficiaries or
owners are not resident in the state of New Hampshire. Shareholders to whom
these rules might apply should consult a tax advisor knowledgeable in the field
of New Hampshire state taxation.
Shareholders who are partnerships, associations or trusts the beneficial
interest in which is represented by transferable shares, are not subject to the
New Hampshire interest and dividends tax. If, however, such an organization is
engaged in business activity within the state, then it will be subject to the
New Hampshire business profits tax on all income earned by it in New Hampshire.
Taxable business profits for this purpose will include all dividends paid by the
Fund to the business organization, except that portion of a dividend that is
attributable to interest on Fund investments in notes, bonds, or other
securities of the United States. Thus, dividends representing
<PAGE>
income earned by the Fund on its investment in New Hampshire municipal
securities, and short- and long-term capital gains, will be fully taxable under
the New Hampshire business profits tax.
OTHER TAX MATTERS. The Fund may be required by Federal law to withhold 31% of
reportable payments (which may include taxable dividends, capital gain
distributions and redemption proceeds) paid to individuals and certain other
non-corporate shareholders. Withholding is not required if a shareholder
certifies that the shareholder's social security or tax identification number
provided to the Fund is correct and that the shareholder is not subject to
backup withholding.
Reports containing appropriate information with respect to the Federal and New
Hampshire 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. This
includes a statement advising each shareholder of the portion of total dividends
paid into the shareholder's account that is exempt from Federal income tax and
that is derived from New Hampshire municipal securities and from other sources.
These portions are determined for the entire year and on a monthly basis and,
thus, are an annual or monthly average, rather than a day-by-day determination
for each shareholder.
TAX-FREE INCOME VS. TAXABLE INCOME
The table below shows approximate equivalent taxable and tax-free yields at
various approximate combined marginal Federal income tax and New Hampshire
interest and dividends tax bracket rates. For example, an individual investor
in the 32% combined tax bracket for 1995 whose investments earn a 5% tax-free
yield would have to earn a 7.31% taxable yield to receive the same benefit.
1996 COMBINED FEDERAL AND NEW HAMPSHIRE
TAXABLE VS. TAX-FREE YIELDS
Combined
Marginal
Federal and A Tax-Free Yield of
New ---------------------------------------------
Hampshire 4.0% 4.5% 5.0% 5.5% 6.0%
Tax Bracket equals a taxable yield of approximately
----------- ---------------------------------------------
40% 6.58% 7.40% 8.22% 9.05% 9.87%
34% 6.10% 6.86% 7.63% 8.39% 9.15%
32% 5.85% 6.58% 7.31% 8.04% 8.77%
19% 4.95% 5.57% 6.19% 6.81% 7.43%
The yields listed are for illustration only and are not necessarily
representative of the Fund's yield. Although the Fund primarily invests in
securities the interest from which is exempt from both Federal and New Hampshire
state taxes, some of the Fund's investments may generate Federal taxable income
or capital gain. An investor's tax bracket will depend upon the investor's
taxable income. The figures set forth above do not reflect the Federal
alternative minimum taxes or any state or local income taxes other than New
Hampshire interest and dividends taxes.
The foregoing is only a summary of some of the important Federal and New
Hampshire tax considerations generally affecting the Fund and its shareholders.
There may be other Federal, state or local tax considerations applicable to a
particular investor. Prospective investors are urged to consult their tax
advisors.
7. OTHER INFORMATION
PERFORMANCE INFORMATION
The Fund's performance may be quoted in advertising in terms of yield or total
return. Both types are based on historical results and are not intended to
indicate future performance. The Fund's yield is a way of showing the rate of
income earned by the Fund as a percentage of the Fund's share price. Yield is
calculated by dividing the net investment income of the Fund for the stated
period by the average number of shares entitled to receive dividends and
expressing the result as an annualized percentage rate based on the Fund's share
price at the end of the period. The Fund may also quote tax equivalent yields,
which show the taxable yields a shareholder would have to earn to equal the
Fund's tax-free yields after taxes. A tax equivalent yield is calculated by
dividing the Fund's tax-free yield by one minus a stated Federal, state or
combined Federal and state tax rate. Total return refers to the average
<PAGE>
annual compounded rates of return over some representative period that would
equate an initial amount invested at the beginning of a stated period to the
ending redeemable value of the investment, after giving effect to the
reinvestment of all dividends and distributions and deductions of expenses
during the period. The Fund also may advertise its total return over different
periods of time on a before-tax or after-tax basis or by means of aggregate,
average, year by year, or other types of total return figures. 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.
The Fund's advertisements may reference ratings and rankings among similar funds
by independent evaluators such as Morningstar, Lipper Analytical Services, Inc.
or IBC/Donoghue, Inc. 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.
BANKING LAW MATTERS
Banking laws and regulations generally permit a bank or bank affiliate to
purchase shares of an investment company as agent for and upon the order of a
customer and in the view of Forum would permit a bank or bank affiliate to serve
as a Processing Organization or perform sub-transfer agent or similar services
for the Trust and its shareholders. If a bank or bank affiliate were prohibited
from performing all or a part of the foregoing services, its shareholder
customers would be permitted to remain shareholders of the Trust and alternative
means for continuing to service them would be sought. It is not expected that
shareholders would suffer adverse financial consequences as a result of any
changes in bank or bank affiliate service arrangements.
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 portfolio securities and other assets less its
liabilities) by the number of the Fund's 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.
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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
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.
<PAGE>
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.
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.
<PAGE>
FORUM FUNDS
PAYSON VALUE FUND
PAYSON BALANCED FUND
INVESTMENT ADVISOR: ACCOUNT INFORMATION AND
H.M. Payson & Co. SHAREHOLDER SERVICING:
One Portland Square Forum Financial Corp.
P.O. Box 31 P.O. Box 446
Portland, Maine 04112 Portland, Maine 04112
(207) 772-3761 (207) 879-0009
(800) 456-6710
PROSPECTUS
August 1, 1996
This Prospectus offers shares of Payson Value Fund and Payson Balanced Fund (the
"Funds"). The Funds are diversified portfolios of Forum Funds (the "Trust")
which is an open-end, management investment company.
PAYSON VALUE FUND. The investment objective of Payson Value Fund is to seek high
total returns (capital appreciation and current income) by investing in a
diversified portfolio of common stock and securities convertible into common
stock which appear to be undervalued in the marketplace.
PAYSON BALANCED FUND. The investment objective of Payson Balanced Fund is to
seek a combination of high current income and capital appreciation by investing
in common stock and securities convertible into common stock, which appear to be
undervalued, and in high grade senior debt securities, including U.S.
Government, government agency and corporate obligations.
Shares of the Funds are offered to investors at a price equal to the next
determined net asset value plus a maximum sales charge of 3.75% of the total
public offering price (3.90% of the net amount invested).
This Prospectus sets forth concisely the information concerning the Trust and
the Funds that a prospective investor should know before investing. The Trust
has filed with the Securities and Exchange Commission ("SEC") a Statement of
Additional Information dated August 1, 1996, as may from time to time be amended
(the "SAI"), which contains more detailed information about the Trust and the
Funds and which is incorporated into this Prospectus by reference. The SAI is
available without charge by contacting the Trust at the address listed above.
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 SECURITIES
AND EXCHANGE 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
HIGHLIGHTS OF THE FUNDS
INVESTMENT ADVISOR
H.M. Payson & Co. (the "Advisor"), founded in 1854, serves as each Fund's
investment advisor. See "Management - Investment Advisor."
FUND MANAGEMENT
The manager of the Trust and distributor of its shares is Forum Financial
Services, Inc. ("Forum"). Forum supervises the overall administrative activities
of the Trust. Forum Financial Corp. (the "Transfer Agent"), Two Portland Square,
Portland, Maine 04101, serves as the Trust's transfer agent, dividend disbursing
agent and shareholder servicing agent. See "Management."
PURCHASES AND REDEMPTIONS
Shares of the Funds are offered at the next-determined net asset value per share
plus any applicable sales charge. The minimum initial investment is $5,000
($2,000 for IRAs) and the minimum subsequent investment is $500. Shares may be
redeemed without charge. See "Purchases and Redemptions of Shares."
EXCHANGE PROGRAM
Shareholders of the Funds may exchange their shares without charge for the
shares of certain other funds of the Trust. See "Purchases and Redemptions of
Shares - Exchanges."
DIVIDENDS
Dividends of net investment income are declared and paid quarterly by each Fund
and are reinvested in Fund shares unless a shareholder elects to have them paid
in cash. Net capital gain, if any, is distributed annually. See "Dividends and
Tax Matters."
CERTAIN RISK FACTORS
There can be no assurance that either Fund will achieve its investment objective
and the net asset value of each Fund will fluctuate based upon changes in the
value of its portfolio securities. Investments in equity securities may change
in value rapidly and to a great degree. Accordingly, the Funds' net asset values
may change similarly. The foreign securities in which the Funds may invest
entail certain risks not associated with domestic investments. Investments in
lower rated debt securities (including convertible securities) may entail
certain risks. See the "Investment Objective and Policies" sections and
"Additional Investment Policies."
EXPENSES OF INVESTING IN THE FUNDS
The purpose of the following table is to assist investors in understanding the
various expenses that an investor in a Fund will bear directly or indirectly.
Payson Payson
Value Balanced
Fund Fund
---- ----
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of public offering price) 3.75% 3.75%
Exchange Fee None None
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees ____% ____%
12b-1 Fees None None
Other Expenses
(after expense reimbursements) ____% ____%
Total Fund Operating Expenses ____% ____%
The amounts of expenses are based on amounts incurred by each Fund during the
Fund's most recent fiscal year ending March 31, 1996. Absent expense
reimbursements, including fee waivers, the expenses of Payson Value Fund and
Payson Balanced Fund, respectively, would have been: Advisory Fees, ____% and
____%; Other Expenses, ____% and ____%; and Total Fund Operating Expenses, ____%
and ____%. For a further description of the various expenses incurred in the
operation of the Fund, see "Management."
EXAMPLE
Following is a hypothetical example that indicates the dollar amount of expenses
that an investor in the Fund would pay assuming a $1,000 investment in the Fund,
a 5% annual return, the reinvestment of all dividends and distributions and
redemption at the end of each period:
1 Year 3 Years 5 Years 10 Years
Payson Value Fund $ $ $ $
Payson Balanced Fund $ $ $ $
The example is based on the expenses listed in the table. The five percent
annual return is not predictive of and does not represent the Funds' 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.
<PAGE>
2. FINANCIAL HIGHLIGHTS
The following information represents selected data for a single share
outstanding of each Fund. This information has been audited in connection with
an audit of the Funds' financial statements by [ ], independent auditors. The
financial statements and independent auditors' report thereon are incorporated
by reference into the SAI. Further information about a Fund's performance is
contained in the Fund's annual report to shareholders, which may be obtained
from the Trust without charge.
<TABLE>
<CAPTION>
Payson Value Fund Payson Balanced Fund
Year Ended March 31 Year Ended March 31
1996 1995 1994 1993(1) 1996 1995 1994 1993 1992(1)
---- ---- ---- ------- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Net Asset
Value per Share $12.71 $12.11 $11.01 $10.00 $11.90 $11.71 $11.40 $10.21 $10.00
Net Investment Income 0.21 0.18 0.13 0.08 0.43 0.44 0.34 0.31 0.10
Net Realized and Unrealized
Investment Gain on Securities 3.29 0.60 1.12 1.02 2.12 0.24 0.46 1.20 0.21
Dividends from Net
Investment Income (0.21) (0.18) (0.15) (0.09) (0.43) (0.44) (0.35) (0.31) (0.10)
Distributions from Net
Realized Gains (0.01) -- -- -- (0.32) (0.05) (0.14) (0.01) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Ending Net Asset Value
per Share $15.99 $12.71 $12.11 $11.01 $13.70 $11.90 $11.71 $11.40 $10.21
------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------
Ratios to Average Net Assets:
Expenses (2) 1.45% 1.46% 1.45% 1.44%(3) 1.15% 1.15% 1.15% 1.15% 1.13%(3)
Net Investment Income 1.47% 1.59% 1.38% 1.63%(3) 3.25% 3.91% 4.37% 3.27% 3.46%(3)
Total Return 27.77% 6.52% 11.38% 17.05%(3) 21.70% 6.00% 6.99% 15.12% 9.15%(3)
Portfolio Turnover Rate 53.06% 27.20% 32.15% 23.95% 61.77% 50.06% 80.13% 30.77% 1.53%
Average brokerage
commission rate (4) $0.0993 -- -- -- $0.0973 -- -- --
Net Assets at the End of
Period (000's Omitted) $10,319 $7,960 $5,060 $2,145 $17,455 $13,872 $11,355 $5,396 $2,667
(1) Payson Value Fund commenced operations on July 31, 1992 and Payson Balanced Fund commenced operations on November 25, 1991.
(2) 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:
Expenses 2.16% 2.25% 3.04% 5.53%(3) 1.70% 1.72% 1.95% 2.60% 4.88%(3)
(3) Annualized.
(4) Amount represents the average commission per share, paid to brokers, on the purchase and sale of portfolio securities.
</TABLE>
<PAGE>
3. INVESTMENT OBJECTIVES AND POLICIES
Shareholders of each Fund have approved a new investment policy that permits the
Fund to seek to achieve its investment objective by converting to a Core and
Gateway structure. The Fund, upon future action by the Board of Trustees and
notice to shareholders, may convert to this structure, in which the Fund would
hold as its only investment securities the shares of another investment company
having substantially the same investment objective and policies as the Fund. The
Board of Trustees will not authorize conversion to a Core and Gateway structure
if it would materially increase costs to a Fund's shareholders.
PAYSON VALUE FUND
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek high total return (capital
appreciation and current income) by investing in a diversified portfolio of
common stock and securities convertible into common stock which appear to be
undervalued in the marketplace. Except to the degree that is necessary to
provide liquidity, and during periods when the Fund assumes a temporary
defensive position, the Fund will have all of its assets invested in common
stock and securities convertible into common stock. There can be no assurance
that the Fund will achieve its investment objective.
INVESTMENT POLICIES
The Fund intends to invest principally in securities which, in the Advisor's
opinion, are undervalued relative to the stock market as a whole. This opinion
will be based upon a number of valuation measures, including but not limited to
an analysis of price/earnings ratios, price/book ratios, dividend yields and
measures of current profitability. The Advisor will also consider both the near-
term and long-term fundamental prospects of the companies identified. The Fund
invests primarily in large and medium capitalization stocks that are widely held
by the public.
The Fund will invest in common stock and convertible securities, including
convertible debt and convertible preferred stock, that are rated in one of the
four highest rating categories by a nationally recognized statistical rating
organization ("NRSRO") or which are unrated by any NRSRO and are judged by the
Advisor to be of comparable quality. Unrated securities may not be as actively
traded as rated securities. A further description of Moody's Investors Service,
Inc., Standard & Poor's Corporation and other NRSRO ratings is included in the
SAI.
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.
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.
CERTAIN RISK FACTORS. The value of the equity securities in which the Fund
invests may change rapidly and to a great degree depending upon many factors,
including the market's perception of the value of the securities. Accordingly,
the net asset value of the Fund may change similarly. Investors in the Fund
should be willing to accept the risks of the stock market and should consider an
investment in the Fund only as a part of their overall investment portfolio.
<PAGE>
PAYSON BALANCED FUND
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a combination of high current
income and capital appreciation by investing in common stock and securities
convertible into common stock, which appear to be undervalued, and in high grade
senior debt securities, including U.S. Government, government agency and
corporate obligations. The Fund will seek to achieve its investment objective
while reducing volatility through the allocation of its assets among the
available types of securities based upon the Advisor's opinion of the risk in
each. There can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES
Under normal circumstances the Fund will invest in common stock and securities
convertible into common stock in a manner similar to that of Payson Value Fund
and in investment grade debt securities which the Advisor identifies as
providing high levels of income with safety and appreciation potential. For a
description of the investment policies and risk considerations of the Fund's
equity investments, see "Investment Objectives and Policies - Payson Value
Fund." The debt securities in which the Fund intends to invest include U.S.
Government, government agency, and corporate obligations.
The Fund will not purchase a security if as a result of the purchase less than
25% of its total assets would be in fixed-income senior securities (including
debt securities, preferred stocks, and convertible debt securities and
convertible preferred stocks to the extent their value is attributable to their
fixed-income characteristics). This investment policy may be changed by the
Board of Directors of the Trust, but only with 60 days' prior shareholder
notice. Subject to this restriction, the percentage of the Fund's assets
invested in each type of security at any time will be in accordance with the
judgment of the Advisor.
The Fund may invest in the following types of fixed income securities:
(1) Debt securities which are rated in one of the three highest rating
categories by a nationally recognized statistical rating organization ("NRSRO")
or which are unrated by any NRSRO and judged by the Advisor to be of comparable
quality;
(2) Obligations issued or guaranteed as to principal and interest by the
United States Government or by any of its agencies or instrumentalities ("U.S.
Government Securities");
(3) Mortgage-backed securities which are U.S. Government Securities or
are otherwise rated in one of the two highest rating categories by an NRSRO or
which are unrated by any NRSRO and judged by the Advisor to be of comparable
quality;
(4) Commercial paper and other money market instruments rated in one of
the two highest short-term rating categories by an NRSRO or which are unrated by
any NRSRO and judged by the Advisor to be of comparable quality;
(5) Banker's acceptances or negotiable certificates of deposit issued by
the commercial banks doing business in the United States that have, at the time
of investment, total assets in excess of one billion dollars and that are
insured by the Federal Deposit Insurance Corporation; and
(6) Convertible securities rated in one of the four highest rating
categories by an NRSRO or which are unrated by any NRSRO and judged by the
Advisor to be of comparable quality. For a description of convertible
securities, see "Payson Value Fund Investment Objective and Policies."
It is currently anticipated that the Fund will invest in debt obligations with
maturities ranging from short-term (including overnight) to thirty years, and
that the Fund's portfolio of debt securities will have an average dollar-
weighted maturity of between five and 15 years.
DEBT SECURITIES CONSIDERATIONS AND RISKS. The market value of debt securities
depends upon, among other things, conditions in the market for the security and
the fixed income markets generally, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. The market value of the
interest-bearing debt securities held by the Fund will be affected by changes in
interest rates. There is normally an inverse relationship between the market
value of securities sensitive to prevailing interest rates and actual changes in
interest rates. In other words, a decline in interest rates produces an increase
in market value, while an increase in interest rates produces a decrease
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in market value. Moreover, the longer the remaining maturity of a security, the
greater will be the effect of interest rate changes on the market value of that
security. Changes in the ability of an issuer to make payments of interest and
principal and in the market's perception of an issuer's creditworthiness will
also affect the market value of the debt securities of that issuer. Obligations
of issuers of debt securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors. The
possibility exists, therefore, that, as a result of litigation or other
conditions, the ability of any issuer to pay, when due, the principal of and
interest on its debt securities may be materially impaired.
Securities in the permissible rating categories are generally considered to be
investment grade securities, although Moody's Investors Service, Inc.
("Moody's") indicates that securities rated Baa have speculative
characteristics. A further description of the ratings used by Moody's, Standard
& Poor's Corporation and other NRSROs is contained in the SAI. Unrated
securities may not be as actively traded as rated securities. A non-rated
security will be considered for investment by the Fund when the Adviser believes
that the financial condition of the issuer of such obligation and the protection
afforded by the terms of the obligation limit the risk to the Fund to a degree
comparable to that of rated securities in which the Fund may invest. The Fund
may retain securities whose rating has been lowered below the lowest permissible
rating category (or that are unrated and determined by the Advisor to be of
comparable quality) only if the Advisor determines that retaining the security
is in the best interests of the Fund.
U.S. GOVERNMENT SECURITIES. The U.S. Government Securities in which the Fund may
invest include direct obligations of the U.S. Treasury (such as Treasury bills
and notes) and other securities backed by the full faith and credit of the U.S.
Government, such as those issued by the Federal Housing Administration and
Government National Mortgage Association ("GNMA"). The Fund may also invest in
U.S. Government Securities that have lesser degrees of government backing. For
instance, the Fund may invest in obligations of the Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") (which
are supported by the right of the issuer to borrow from the Treasury under
certain circumstances) and obligations of the Student Loan Marketing Association
and the Federal Home Loan Banks (which are supported only by the credit of the
agency or instrumentality). There is no guarantee that the U.S. Government will
support securities not backed by its full faith and credit and, accordingly,
these securities may involve more risk than other U.S. Government Securities.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an interest in
a pool of mortgages originated by lenders such as commercial banks, savings
associations and mortgage bankers and brokers. Mortgage-backed securities may be
issued by governmental or government-related entities or by non-governmental
entities such as special purpose trusts created by banks, savings associations,
private mortgage insurance companies or mortgage bankers.
Interests in mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or on specified call dates. In
contrast, mortgage-backed securities provide monthly payments which consist of
interest and, in most cases, principal. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of the
securities or a mortgage loan servicer. Additional payments to holders of these
securities are caused by prepayments resulting from the sale or foreclosure of
the underlying property or refinancing of the underlying loans.
UNDERLYING MORTGAGES. Pools of mortgages consist of whole mortgage loans or
participations in mortgage loans. The majority of these loans are made to
purchasers of 1-4 family homes, but may be made to purchasers of mobile homes or
other real estate interests. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Fund may purchase
pools of variable rate mortgages, growing equity mortgages, graduated payment
mortgages and other types. Mortgage servicers impose qualification standards for
local lending institutions which originate mortgages for the pools as well as
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, many mortgages included in pools are insured through
private mortgage insurance companies.
LIQUIDITY AND MARKETABILITY. The market for mortgage-backed securities has
expanded considerably in recent years. The size of the primary issuance market
and active participation in the secondary market by securities dealers and many
types of investors make government and government-related pass-through pools
highly liquid. The recently introduced private conventional pools of mortgages
(pooled by commercial banks, savings and loan institutions and others, with no
relationship with government and government-related entities) have also achieved
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broad market acceptance and consequently an active secondary market has emerged.
However, the market for conventional pools is smaller and less liquid than the
market for government and government-related mortgage pools.
AVERAGE LIFE AND PREPAYMENTS. The average life of a pass-through pool varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's terms may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. Prepayments with respect to securities
during times of declining interest rates will tend to lower the return of the
Fund and may even result in losses to the Fund if the securities were acquired
at a premium. The occurrence of mortgage prepayments is affected by various
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of fixed-
rate 30-year mortgages, common industry practice is to assume that prepayments
will result in a 12-year average life. Pools of mortgages with other maturities
or different characteristics will have varying assumptions for average life. The
assumed average life of pools of mortgages having terms of less than 30 years is
less than 12 years, but typically not less than 5 years.
YIELD CALCULATIONS. Yields on pass-through securities are typically quoted by
investment dealers based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgages. Conversely, in periods of rising rates, the rate of
prepayment tends to decrease, thereby lengthening the actual average life of the
pool. Actual prepayment experience may cause the yield to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the yield of
the Fund.
GOVERNMENT AND GOVERNMENT-RELATED GUARANTORS. The principal government guarantor
of mortgage-backed securities is the Government National Mortgage Association
("GNMA"), a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages.
The Federal National Mortgage Association ("FNMA") is a government-sponsored
corporation owned entirely by private stockholders that is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller-servicers. The Federal Home
Loan Mortgage Corporation ("FHLMC") is a corporate instrumentality of the United
States Government that was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues Participation
Certificates ("PCs") which represent interests in mortgages from FHLMC's
national portfolio. FNMA and FHLMC each guarantee the payment of principal and
interest on the securities they issue. These securities, however, are not backed
by the full faith and credit of the United States Government.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. Mortgage-backed securities offered
by private issuers include pass-through securities comprised of pools of
conventional mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and which are
collateralized by mortgage loans; and collateralized mortgage obligations.
Mortgage-backed securities issued by non-governmental issuers may offer a higher
rate of interest than securities issued by government issuers because of the
absence of direct or indirect government guarantees of payment. Many non-
governmental issuers or servicers of mortgage-backed securities, however,
guarantee timely payment of interest and principal on such securities. Timely
payment of interest and principal may also be supported by various forms of
insurance, including individual loan, title, pool and hazard policies. There can
be no assurance that the private issuers or insurers will be able to meet their
obligations under the relevant guarantees and insurance policies.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage-backed
securities ("ARMs") are securities that have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or market
interest rate. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest
<PAGE>
rates or changes in the issuer's creditworthiness. Because of the resetting of
interest rates, adjustable rate securities are less likely than non-adjustable
rate securities of comparable quality and maturity to increase significantly in
value when market interest rates fall. Also, most adjustable rate securities (or
the underlying mortgages) are subject to caps or floors. "Caps" limit the
maximum amount by which the interest rate paid by the borrower may change at
each reset date or over the life of the loan and, accordingly, fluctuation in
interest rates above these levels could cause such mortgage securities to "cap
out" and to behave more like long-term, fixed-rate debt securities.
ARMs may have less risk of a decline in value during periods of rapidly rising
rates, but they may also have less potential for capital appreciation than other
debt securities of comparable maturities due to the periodic adjustment of the
interest rate on the underlying mortgages and due to the likelihood of increased
prepayments of mortgages as interest rates decline. Furthermore, during periods
of declining interest rates, income to the Fund will decrease as the coupon rate
resets to reflect the decline in interest rates. During periods of rising
interest rates, changes in the coupon rates of the mortgages underlying the
Fund's ARMs may lag behind changes in market interest rates. This may result in
a slightly lower net value until the interest rate resets to market rates. Thus,
investors could suffer some principal loss if they sold Fund Shares before the
interest rates on the underlying mortgages were adjusted to reflect current
market rates.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are debt obligations that are collateralized by mortgages or mortgage
pass-through securities issued by GNMA, FHLMC or FNMA or by pools of
conventional mortgages ("Mortgage Assets"). CMOs may be privately issued or U.S.
Government Securities. Payments of principal and interest on the Mortgage Assets
are passed through to the holders of the CMOs on the same schedule as they are
received, although, certain classes (often referred to as tranches) of CMOs have
priority over other classes with respect to the receipt of payments. Multi-class
mortgage pass-through securities are interests in trusts that hold Mortgage
Assets and that have multiple classes similar to those of CMOs. Unless the
context indicates otherwise, references to CMOs include multi-class mortgage
pass-through securities. Payments of principal of and interest on the underlying
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide funds to pay debt service on the CMOs or to make scheduled distributions
on the multi-class mortgage pass-through securities. Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. Planned amortization class
mortgage-based securities ("PAC Bonds") are a form of parallel pay CMO. PAC
Bonds are designed to provide relatively predictable payments of principal
provided that, among other things, the actual prepayment experience on the
underlying mortgage loans falls within a contemplated range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the contemplated range, or if deviations from other assumptions
occur, principal payments on a PAC Bond may be greater or smaller than
predicted. The magnitude of the contemplated range varies from one PAC Bond to
another; a narrower range increases the risk that prepayments will be greater or
smaller than contemplated. CMOs may have complicated structures and generally
involve more risks than simpler forms of mortgage-backed securities.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a Z-tranche). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increases the face amount of the security at a
compounded rate, but is not paid to the bond holder. After all previous tranches
are retired, accrual bond holders start receiving cash payments that include
both principal and continuing interest. The market value of accrual bonds can
fluctuate widely and their average life depends on the other aspects of the CMO
offering. Interest on accrual bonds is taxable when accrued even though the
holders receive no accrual payment. The Fund distributes all of its net
investment income, and may have to sell portfolio securities to distribute
imputed income, which may occur at a time when the Adviser would not have chosen
to sell such securities and which may result in a taxable gain or loss. The
Adviser's analyses of particular CMO issues and estimates of future economic
indicators (such as interest rates) become more important to the performance of
the Fund as the securities become more complicated.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities are
classes of mortgage-backed securities that receive different proportions of the
interest and principal distributions from the underlying Mortgage Assets. They
may be may be privately issued or U.S. Government Securities. In the most
extreme case, one class
<PAGE>
will be entitled to receive all or a portion of the interest but none of the
principal from the Mortgage Assets (the interest-only or "IO" class) and one
class will be entitled to receive all or a portion of the principal, but none of
the interest (the "PO" class).
VARIABLE AND FLOATING RATE SECURITIES. The securities in which the Fund invests
may have variable or floating rates of interest. These securities pay interest
at rates that are adjusted periodically according to a specified formula,
usually with reference to some interest rate index or market interest rate (the
"underlying index"). The interest paid on these securities is a function
primarily of the underlying index upon which the interest rate adjustments are
based. Such adjustments minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Fund to maintain a stable net asset
value. Similar to fixed rate debt instruments, variable and floating rate
instruments are subject to changes in value based on changes in market interest
rates or changes in the issuer's creditworthiness. The rate of interest on
securities purchased by the Fund may be tied to various rates of interest or
index.
There may not be an active secondary market for certain floating or variable
rate instruments, which could make it difficult for the Fund to dispose of an
instrument during periods that the Fund is not entitled to exercise any demand
rights it may have. The Fund could, for this or other reasons, suffer a loss
with respect to an instrument. The Advisor monitors the liquidity of the Fund's
investment in variable and floating rate instruments, but there can be no
guarantee that an active secondary market will exist.
5. ADDITIONAL INVESTMENT POLICIES
All investment policies of a Fund that are designated as fundamental and each
Fund's investment objective may not be changed without approval of the holders
of a majority of that Fund's outstanding voting securities. A majority of a
Fund's outstanding voting securities means the lesser of 67% of the shares of
that Fund present or represented at a shareholders meeting at which the holders
of more than 50% of the shares are present or represented, or more than 50% of
the outstanding shares of the Fund. Except as otherwise indicated, investment
policies of the Funds are not fundamental and may be changed by the Board of
Directors of the Trust (the "Board") without shareholder approval. A further
description of the Funds' investment policies is contained in the SAI.
The Funds may borrow money for temporary or emergency purposes (including the
meeting of redemption requests), but not in excess of 33 1/3% of the value of a
Fund's total assets. Borrowing for purposes other than meeting redemption
requests may not exceed 10% of the value of a Fund's total assets. The Funds may
not invest more than 15% of their net assets in illiquid securities, including
repurchase agreements maturing in more than seven days, and, with respect to 75%
of their total assets, may not invest more than 5% of their assets in the
securities of a single issuer. In order to avoid maintaining idle cash, the
Funds may invest up to 10% of their total assets in money market mutual funds.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. Each 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, a Fund might suffer a loss. The
Advisor 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 a 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. When a Fund lends a security
it receives interest from the borrower or from investing cash collateral. The
Trust 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. The Funds may pay fees to arrange
securities loans and each Fund will, as a fundamental policy, limit securities
lending to not more than 10% of the value of its total assets.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase
securities offered on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When these transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but
<PAGE>
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within two months after the transaction. The Funds
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. 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.
During the period between a commitment and settlement, no payment is made for
the securities purchased and, thus, no interest accrues to the purchaser from
the transaction. However, at the time a Fund makes a commitment to purchase
securities in this manner, the Fund immediately assumes the risk of ownership,
including price fluctuation. Failure by the other party to deliver or pay for a
security purchased or sold by the Fund may result in a loss or a missed
opportunity to make an alternative investment. Any significant commitment of a
Fund's assets committed to the purchase of securities on a when-issued or
forward commitment basis may increase the volatility of its net asset value.
The use of when-issued transactions and forward commitments may enable a Fund to
hedge against anticipated changes in interest rates and prices. If the Adviser
were to forecast incorrectly the direction of interest rate movements, however,
the Fund might be required to complete these transactions at prices inferior to
the current market values. No when-issued or forward commitments will be made by
a Fund if, as a result, more than 15% of the value of the Fund's total assets
would be committed to such transactions.
FOREIGN SECURITIES. The Funds may invest up to 20% of their assets in securities
of foreign issuers and in American Depository Receipts ("ADRs"). In addition to
the debt securities of domestic corporations, Payson Balanced Fund may invest in
debt securities registered and sold in the United States by foreign issuers
(Yankee Bonds) and debt securities sold outside the United States by foreign or
U.S. issuers (Euro-bonds). The Funds intend to restrict their purchases of debt
securities to issues denominated and payable in United States dollars.
Investments in foreign companies 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, 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 their
permitted investments in foreign securities, the Funds do not limit the amount
of their assets that may be invested in one country or, in the case of Payson
Value Fund, denominated in one currency.
The Funds 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.
TEMPORARY DEFENSIVE POSITION. When business or financial conditions warrant,
such as, for example, when issues of sufficient quality and liquidity are not
available or the Advisor believes the equity markets are overvalued, a Fund may
assume a temporary defensive position and invest all or part of its assets in
cash or prime quality cash equivalents, including (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, (iii) commercial paper, (iv) repurchase agreements covering any of the
securities in which the Fund may invest directly and (v) to the extent permitted
by the Investment Company Act of 1940, money market mutual funds. During periods
when and to the extent that the Fund has assumed a temporary defensive position,
it may not be pursuing its investment objective.
PORTFOLIO TRANSACTIONS. The frequency of portfolio transactions of the Funds
(the portfolio turnover rate) will vary from year to year depending on market
conditions. Higher rates of turnover will result in higher brokerage costs for
the Funds. The Adviser weighs the anticipated benefits of short-term investments
against these consequences. The Funds' portfolio turnover rate is reported under
"Financial Highlights."
<PAGE>
The Funds have no obligation to deal with any specific broker or dealer in the
execution of portfolio transactions. Consistent with their policy of obtaining
the best net results, the Funds may conduct brokerage transactions through the
Advisor or its affiliates. The Board has adopted policies, as required by law,
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.
6. MANAGEMENT
The business of the Trust is managed under the direction of the Board of
Directors. The Board formulates the general policies of the Funds and meets
periodically to review the results of the Funds, monitor investment activities
and practices and discuss other matters affecting the Funds and the Trust.
INVESTMENT ADVISOR
Since the inception of each Fund, H.M. Payson & Co. has served as the Fund's
investment advisor pursuant to an Investment Advisory Agreement with the Trust.
Subject to the general supervision of the Board, the Advisor makes investment
decisions for the Funds. For its services under the Investment Advisory
Agreement, the Advisor receives, with respect to Payson Value Fund, an advisory
fee at an annual rate of 0.80% of that Fund's average daily net assets and, with
respect to Payson Balanced Fund, an advisory fee at an annual rate of 0.60% of
that Fund's average daily net assets. The advisory fee paid by Payson Value Fund
is higher than that paid by most investment companies of all types to their
advisers, but the Trust believes that the fee is appropriate for an equity fund.
The Advisor was founded in Portland, Maine in 1854 and was incorporated in Maine
in 1987, making it one of the oldest investment firms in the United States
operating under its original name. The Advisor is a registered broker-dealer and
investment adviser and is a member of the National Association of Securities
Dealers, Inc. The Advisor provides investment management services through an
investment advisory division and a trust division. As of June 30, 1996, the
Advisor had in excess of $___ million in assets under management. The Advisor's
clients include pension plans, endowment funds and institutional and individual
accounts.
Since July 10, 1995, John C. Knox, Director and Senior Research Analyst of the
Advisor, has been primarily responsible for the day-to-day management of Payson
Value Fund's portfolio. Since April 1, 1993, Peter E. Robbins, a Managing
Director and Director of Research of the Advisor, has been primarily responsible
for the day-to-day management of Payson Balanced Fund's portfolio. Mr. Knox is a
Chartered Financial Analyst and has been associated with the Advisor since 1981.
Mr. Robbins is a Chartered Financial Analyst and has been associated with the
Advisor since 1982, except for the period from January 1988 to October 1990.
During that period Mr. Robbins was president of Mariner Capital Group, a real
estate development and non-financial asset management business.
MANAGER AND DISTRIBUTOR
Subject to the supervision of the Board, Forum supervises the overall management
of the Funds and acts as distributor of the Funds' shares. Forum and the
Transfer Agent are members of the Forum Financial Group of companies and
together provide a full range of services to the investment company and
financial services industry. As of the date hereof, Forum acted as manager and
distributor of registered investment companies and collective trust funds with
assets of approximately $15.5 billion. Forum, whose address is Two Portland
Square, Portland, Maine 04101, 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 and the Transfer Agent were controlled
by John Y. Keffer, President and Chairman of the Trust.
Under its management and distribution agreement with the Trust, Forum supervises
all aspects of the Funds' operations, including the Trust's receipt of services
for which the Trust is obligated to pay, provides the Trust with general office
facilities and provides, at the Trust's expense, the services of persons
necessary to perform such supervisory, administrative and clerical functions as
are needed to effectively operate the Trust. Those persons, as well as certain
employees and Directors of the Trust, may be directors, officers or employees of
(and persons providing services to the Trust may include) Forum and its
affiliates. In addition, under its agreement Forum acts as distributor of the
Funds' shares. Forum acts as the agent of the Trust in connection with the
offering of shares of the Funds. For these services and facilities, Forum
receives with respect to each Fund a fee at an annual rate of 0.20% of each
Fund's average daily net assets.
<PAGE>
SHAREHOLDER SERVICING
Shareholder inquiries and communications concerning the Funds may be directed to
the Transfer Agent. The Transfer Agent acts as the Funds' transfer agent and
dividend disbursing agent. The Transfer Agent maintains an account for each
shareholder of the Funds (unless such accounts are maintained by sub-transfer
agents or processing agents) and performs other transfer agency and shareholder
related functions. For its services, the Transfer Agent receives a fee at an
annual rate of 0.25% of each Fund's average daily net assets.
The Transfer Agent is authorized to subcontract any or all of its functions to
one or more qualified sub-transfer agents or processing agents, which may be
processing organizations (as described under "Purchases and Redemptions of
Shares - Purchases and Redemptions Through Financial Institutions"), Forum or
affiliates of Forum, who agree to comply with the terms of the Transfer Agency
Agreement. The Transfer Agent may pay those agents for their services, but no
such payment will increase the Transfer Agent's compensation from the Trust. In
addition, the Transfer Agent performs portfolio accounting services for the
Fund, including determination of the Fund's net asset value per share, pursuant
to a separate agreement with the Trust.
EXPENSES OF THE TRUST
A Fund's expenses comprise Trust expenses attributable to a Fund, which are
charged to the Fund, and expenses 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. Subject to Forum's obligations to
reimburse the Trust for excess expenses of the Fund, the Trust pays for all of
its expenses. The Advisor, Forum and the Transfer Agent, in their sole
discretion, may waive all or any portion of their respective fees, which are
accrued daily and paid monthly. Any such waiver, which could be discontinued at
any time, would have the effect of increasing a Fund's performance for the
period during which the waiver was in effect and would not be recouped at a
later date.
7. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL INFORMATION
Investments in the Funds may be made either by an investor directly or through
certain brokers and financial institutions of which the investor is a customer.
All transactions in Fund shares are effected through the Transfer Agent, which
accepts orders for purchases and redemptions from shareholders of record and new
investors. Shareholders of record will receive from the Trust periodic
statements listing all account activity during the statement period. The Trust
reserves the right in the future to modify, limit or terminate any shareholder
privilege upon appropriate notice to shareholders and charge a fee for certain
shareholder services, although no such fees are currently contemplated.
PURCHASES. Fund shares are sold at a price equal to their net asset value plus
any applicable sales charge on all weekdays except customary national business
holidays and Good Friday ("Fund Business Day"). Fund shares are issued
immediately following the next determination of net asset value made after an
order for the shares in proper form is accepted by the Transfer Agent. Each
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 investor's funds are converted to funds on deposit at a
Federal Reserve Bank ("Federal Funds"), which for purchase orders by check is
the second Fund Business Day after receipt of the check and acceptance of the
order. Payment in the form of a bank wire will be treated as a Federal Funds
payment received at the time the wire is received.
The Funds reserve the right to reject any subscription for the purchase of their
shares. Stock certificates are issued only to shareholders of record upon their
written request and no certificates are issued for fractional shares.
REDEMPTIONS. Fund shares may be redeemed without charge at their net asset value
on any Fund Business Day. There is no minimum period of investment and no
restriction on the frequency of redemptions. Fund shares are redeemed as of the
next determination of the Fund's net asset value 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 receive dividends declared after the day on which the redemption
becomes effective.
Normally, redemption proceeds are paid immediately following, but in no event
later than seven days following, acceptance of a redemption order. Proceeds of
redemption requests (and exchanges), however, will not be paid unless any check
used for investment has been cleared by the shareholder's bank, which may take
up to 15 calendar
<PAGE>
days. This delay may be avoided by investing through wire transfers. Unless
otherwise indicated, redemption proceeds normally are paid by check mailed to
the shareholder's record address. The right of redemption may not be suspended
nor the payment dates postponed except when the New York Stock Exchange is
closed (or when trading thereon is restricted) for any reason other than its
customary weekend or holiday closings or under any emergency or other
circumstance as determined by the Securities and Exchange Commission.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partially in portfolio securities if the Board determines that payment
in cash would be detrimental to the best interests of the Fund. The Trust will
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.
The Trust employs reasonable procedures to insure that telephone orders are
genuine (which include recording certain transactions and the use of shareholder
security codes) and, if it does not, may be liable for any losses due to
unauthorized or fraudulent telephone instructions. 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 and exchange privileges may be difficult to implement. In the event
that a shareholder is unable to reach the Transfer Agent by telephone, requests
may be mailed or hand-delivered to the Transfer Agent.
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 $1,000. The
Trust will not redeem accounts that fall below that amount solely as a result of
a reduction in net asset value.
PURCHASE AND REDEMPTION PROCEDURES
The following purchase and redemption procedures and shareholder services apply
to investors who invest in the Funds directly. These investors may obtain the
account application necessary to open an account by writing the Transfer Agent
at the address on the cover page of this prospectus. For those shareholder
services not referenced on the account application and to change information on
a shareholder's account (such as addresses), investors or existing shareholders
should request an optional services form from the Transfer Agent.
INITIAL PURCHASE OF SHARES
There is a $5,000 minimum for initial investments in either Fund ($2,000 for
individual retirement accounts).
BY MAIL. Investors may send a check made payable to the Trust along with a
completed account application to the Funds at the address listed above. 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.
BY BANK WIRE. To make an initial investment in either Fund using the wire system
for transmittal of money among banks, an investor should first telephone the
Trust at (207) 879-0009 to obtain an account number. The investor should then
instruct a member commercial bank to wire the investor's money immediately to:
First National Bank of Boston
Boston, Massachusetts
ABA# 011000390
For Credit To: Forum Financial Corp.
Account #: 541-54171
Re: (Name of Fund)
Account #:
Account Name:
The investor should then promptly complete and mail the account application. Any
investor planning to wire funds should instruct a bank early in the day so the
wire transfer can be accomplished the same day
SUBSEQUENT PURCHASES OF SHARES
There is a $500 minimum for subsequent purchases. Subsequent purchases may be
made by mailing a check or by sending a bank wire as indicated above.
Shareholders using the wire system for purchase should first telephone the
<PAGE>
Trust at (207) 879-0009 to notify it of the wire transfer. All payments
should clearly indicate the shareholder's name and account number.
Shareholders may purchase Fund shares at regular, preselected intervals by
authorizing the automatic transfer of funds from a designated bank account
maintained with a United States banking institution which is an Automated
Clearing House member. Under the program, existing shareholders may authorize
amounts of $250 or more to be debited from their bank account and invested in a
Fund monthly or quarterly. Shareholders wishing to participate in this program
may obtain the applicable forms from the Transfer Agent. Shareholders may
terminate their automatic investments or change the amount to be invested at any
time by written notification to the Transfer Agent.
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.
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 written requests for redemption must be
signed by the shareholder with signature guaranteed and all certificates
submitted for redemption must be endorsed by the shareholder with signature
guaranteed.
BY TELEPHONE. A shareholder that has elected telephone redemption privileges may
make a telephone redemption request by calling the Transfer Agent at (207) 879-
0009 and providing the shareholder's account number, the exact name in which the
shareholder's shares are registered and the shareholder's social security or
taxpayer identification number. 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.
BY BANK WIRE. For redemptions of more than $5,000, a shareholder that has
elected wire redemption privileges may request a Fund to transmit the redemption
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 the telephone redemption privilege.
Redemption proceeds are transmitted by wire on the day after the redemption
request in proper form is received by the Transfer Agent.
AUTOMATIC REDEMPTIONS. Shareholders may redeem Fund shares at regular,
preselected intervals by authorizing the automatic redemption of shares from
their Fund account. Redemption proceeds will be sent either by check or by
automatic transfer to a designated bank account maintained with a United States
banking institution which is an Automated Clearing House member. Under this
program, shareholders may authorize the redemption of shares in amounts of $250
or more from their account monthly or quarterly. Shareholders may terminate
their automatic redemptions or change the amount to be redeemed at any time by
written notification to the Transfer Agent.
SIGNATURE GUARANTEES. 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, the signature of each person required to sign for the
account must be guaranteed.
EXCHANGES
Fund shareholders are entitled to exchange their shares for shares of the other
Fund, any other fund of the Trust or any other fund that participates in the
exchange program and whose shares are eligible for sale in the shareholder's
state of residence. Exchanges may only be made between accounts registered in
the same name. A completed account application must be submitted to open a new
account in a Fund through an exchange if the shareholder requests any
shareholder privilege not associated with the existing account. Exchanges are
subject to the fees charged by, and the restrictions listed in the prospectus
for, the fund into which a shareholder is exchanging,
<PAGE>
including minimum investment requirements. The Funds do not charge for
exchanges, and there is currently no limit on the number of exchanges a
shareholder may make.
The Trust (and Federal tax law) treats an exchange as a redemption of the shares
owned and the purchase of the shares of the fund being acquired. Redemptions and
purchases are effected at the respective net asset values of the two funds as
next determined following receipt of proper instructions and all necessary
supporting documents by the fund whose shares are being exchanged.
If a shareholder exchanges into a fund that imposes a sales charge, that
shareholder is required to pay the difference between that fund's sales charge
and any sales charge the shareholder has previously paid in connection with the
shares being exchanged. For example, if a shareholder paid a 2% sales charge in
connection with the purchase of the shares of a fund and then exchanged those
shares into another fund with a 3% sales charge, that shareholder would pay an
additional 1% sales charge on the exchange. Shares acquired through the
reinvestment of dividends and distributions are deemed to have been acquired
with a sales charge rate equal to that paid on the shares on which the dividend
or distribution was paid. The exchange privilege may be modified materially or
terminated by the Trust at any time upon 60 days' notice to shareholders.
BY MAIL. Exchanges may be accomplished by written instructions to the Transfer
Agent accompanied by any stock certificate that may have been issued to the
shareholder. All written requests for exchanges must be signed by the
shareholder (a signature guarantee is not required) and all certificates
submitted for exchange must be endorsed by the shareholder with signature
guaranteed.
EXCHANGE BY TELEPHONE. Exchanges may be accomplished by telephone by any
shareholder that has elected telephone exchange privileges by calling the
Transfer Agent at (207) 879-0009 and providing the shareholder's account number,
the exact name in which the shareholder's shares are registered and the
shareholder's social security or taxpayer identification number.
RETIREMENT PROGRAMS
INDIVIDUAL RETIREMENT ACCOUNTS. Each of the Funds may be a suitable investment
vehicle for part or all of the assets held in individual retirement accounts
("IRAs"). The minimum initial investment for an IRA is $2,000, and the minimum
subsequent investment is $500. Individuals may make tax-deductible IRA
contributions of up to a maximum of $2,000 annually. However, this 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.
EMPLOYEE BENEFIT PLANS. The Funds may be a suitable investment vehicle for part
or all of the assets held in various employee benefit plans, including 401(k)
plans, 403(b) plans and SARSEPs.
PURCHASES AND REDEMPTIONS THROUGH FINANCIAL INSTITUTIONS
Shares may be purchased and redeemed through certain broker-dealers, banks,
trust companies and their affiliates, and other financial institutions,
including affiliates of the Transfer Agent ("Processing Organizations").
Processing Organizations may receive as a dealer's reallowance a portion of the
sales charge paid by their customers who purchase Fund shares. In addition,
Processing Organizations may charge their customers a fee for their services and
are responsible for promptly transmitting purchase, redemption and other
requests to the Fund. The Trust is not responsible for the failure of any
institution to promptly forward these requests.
Investors who purchase shares through a Processing Organization may be charged a
fee if they effect transactions in Fund Shares through a broker or agent and
will be subject to the procedures of their Processing Organization, which may
include limitations, investment minimums, cutoff times and restrictions in
addition to, or different from, those applicable to shareholders who invest in
the Fund directly. These investors should acquaint themselves with their
Processing Organization's procedures and should read this Prospectus in
conjunction with any materials and information provided by their Processing
Organization. Customers who purchase Fund shares through a Processing
Organization may or may not be the shareholder of record and, subject to their
Processing Organization's and the Fund's procedures, may have Fund shares
transferred into their name. Under their arrangements with the Trust, broker-
dealer Processing Organizations are not generally required to deliver payment
for purchase orders until several business days after a purchase order has been
received by a Fund. Certain other Processing Organizations may also enter
purchase orders with payment to follow.
<PAGE>
Certain shareholder services may not be available to shareholders who have
purchased shares through a Processing Organization. These shareholders should
contact their Processing Organization for further information. The Trust may
confirm purchases and redemptions of a Processing Organization's customers
directly to the Processing Organization, which in turn will provide its
customers with such confirmations and periodic statements as may be required by
law or agreed to between the Processing Organization and its customers. The
Trust is not responsible for the failure of any Processing Organization to carry
out its obligations to its customer. Certain states permit shares of the Fund to
be purchased and redeemed only through registered broker-dealers, including the
Fund's distributor.
SALES CHARGES
The public offering price for shares of a Fund is the sum of the net asset value
of the shares being purchased plus any applicable sales charge. No sales charge
is assessed on the reinvestment of dividends or other distributions. The sales
charge is assessed as follows (net asset value percentages are rounded to the
nearest one-hundredth percent):
SALES CHARGE
----------------------------------------
AS % OF
PUBLIC NET
OFFERING ASSET DEALERS'
AMOUNT OF PURCHASE PRICE VALUE* REALLOWANCE
----------------------------------------
less than $100,000 3.75% 3.90% 3.25%
$100,000 but less
than $200,000 3.25 3.36 2.85
$200,000 but less
than $400,000 2.50 2.56 2.20
$400,000 but less
than $600,000 2.00 2.04 1.75
$600,000 but less
than $800,000 1.50 1.52 1.25
$800,000 but less
than $1,000,000 1.00 1.01 0.75
$1,000,000
and up 0.50 0.50 0.40
*Rounded to the nearest one-hundredth percent.
Forum's commission is the sales charge shown above less any applicable discount
reallowed to selected brokers and dealers (including banks and bank affiliates
purchasing shares as principal or agent). Normally, Forum will reallow discounts
to selected brokers and dealers in the amounts indicated in the table above.
From time to time, however, Forum may elect to reallow the entire sales charge
to selected brokers or dealers for all sales with respect to which orders are
placed with Forum during a particular period. The dealers' reallowance may be
changed from time to time.
No sales charge will be assessed on purchases made for investment purposes by:
(a) any bank, trust company, savings association or similar institution with
whom Forum has entered into a share purchase agreement acting on behalf of the
institution's fiduciary customer accounts or any account maintained by its trust
department (including a pension, profit sharing or other employee benefit trust
created pursuant to a qualified retirement plan); (b) any registered investment
adviser with whom Forum has entered into a share purchase agreement and which is
acting on behalf of its fiduciary customer accounts; (c) any registered
investment adviser which is acting on behalf of its fiduciary customer accounts
and for which it provides additional investment advisory services; (d) directors
and officers of the Trust; directors, officers and full-time employees of the
Adviser, Forum, any of their affiliates or any organization with which Forum has
entered into a selected dealer or processing agent agreement; the spouse,
sibling, direct ancestor or direct descendent (collectively, "relatives") of any
such person; any trust or individual retirement account or self-employed
retirement plan for the benefit of any such person or relative; or the estate of
any such person or relative; (e) any person who has, within the preceding 90
days, redeemed Fund shares (but only on purchases in amounts not exceeding the
redeemed amounts) and completes a reinstatement form upon
<PAGE>
investment; (f) persons who exchange into a Fund from a mutual fund other than a
fund of the Trust that participates in the Trust's exchange program, see
"Purchases and Redemptions of Shares - Exchange Program;" and (g) employee
benefit plans qualified under Section 401 of the Internal Revenue Code of 1986.
The Trust may require appropriate documentation from an investor concerning that
investor's eligibility to purchase Fund shares without a sales charge. Any
shares so purchased may not be resold except to the Fund.
REDUCED SALES CHARGES
For an investor to qualify for one of the following types of reduced sales
charges, the investor must notify the Transfer Agent at the time of purchase.
Reduced sales charges may be modified or terminated at any time and are subject
to confirmation of an investor's holdings.
RIGHTS OF ACCUMULATION. An investor's purchase of additional shares of a Fund
may qualify for rights of accumulation ("ROA") wherein the applicable sales
charge will be based on the total of the investor's current purchase and the net
asset value (at the end of the previous Fund Business Day) of shares of that
Fund held by the investor. For example, if an investor owned shares of a Fund
worth $400,000 at the then current net asset value and purchased shares of the
Fund worth an additional $50,000, the sales charge for the $50,000 purchase
would be at the 2% rate applicable to a single $450,000 purchase, rather than at
the 3.75% rate. To qualify for ROA on a purchase, the investor must inform the
Transfer Agent and supply sufficient information to verify that each purchase
qualifies for the privilege or discount.
LETTER OF INTENT. Investors may also obtain reduced sales charges based on
cumulative purchases by means of a written Letter of Intent ("LOI"), which
expresses the investor's intention to invest $100,000 or more within a period of
13 months in shares of a Fund. Each purchase of shares under a LOI will be made
at the public offering price applicable at the time of the purchase to a single
transaction of the dollar amount indicated in the LOI.
An LOI is not a binding obligation upon the investor to purchase the full amount
indicated. Shares purchased with the first 5% of the amount indicated in the LOI
will be held subject to a registered pledge (while remaining registered in the
name of the investor) to secure payment of the higher sales charge applicable to
the shares actually purchased if the full amount indicated is not purchased
within 13 months. Pledged shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. When the full amount indicated has been
purchased, the shares will be released from pledge. Share certificates are not
issued for shares purchased under an LOI. Investors wishing to enter into an LOI
can obtain a form of LOI from their broker or financial institution or by
contacting the Transfer Agent.
8. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of each Fund's net investment income are declared and paid quarterly.
Dividends of net capital gain, if any, realized by the Funds are distributed
annually.
Shareholders may have all dividends reinvested in additional shares of the Fund
that paid the dividend or received in cash. In addition, shareholders may 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.
All dividends will be reinvested at the Fund's net asset value as of the payment
date of 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 paid more than seven days following the date on which dividends would
otherwise be reinvested.
TAXES
Each 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. As such,
the Funds will not be liable for Federal income taxes on the net investment
income and net capital gain distributed to their shareholders. Because the Funds
intend to distribute all of their net investment income and net capital gain
each year, the Funds should avoid all Federal income and excise taxes.
<PAGE>
Dividends paid by the Funds out of their net investment income (including any
realized net short-term capital gain) are taxable to shareholders as ordinary
income. Distributions by the Funds of realized net long-term capital gain are
taxable to shareholders as long-term capital gain, regardless of the length of
time the shareholder may have held shares in the Fund. If Fund shares are sold
at a loss after being held for six months or less, the loss will be treated as
long-term capital loss to the extent of any long-term capital gain distribution
received on those shares.
Any dividend or distribution received by a shareholder reduces the net asset
value of the shareholder's shares by the amount of the dividend or distribution.
To the extent that the income or gain comprising a dividend or distribution were
accrued by a Fund before the shareholder purchased the shares, the dividend or
distribution would be in effect a return of capital to the shareholder. All
dividends and distributions, including those that operate as a return of
capital, however, are taxable as described above to the shareholder receiving
them regardless of the length of time he may have held shares prior to the
dividend or distribution.
It is expected that a portion of each Fund's dividends to shareholders will
qualify for the dividends received deduction for corporations.
The Funds may be required by Federal law to withhold 31% of reportable payments
(which may include dividends, capital gain distributions and redemption
proceeds) paid to individuals and certain other non-corporate shareholders.
Withholding is not required if a shareholder certifies that the shareholder's
social security or tax identification number provided to the Fund is correct and
that the shareholder is not subject to backup withholding.
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.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Funds and their shareholders. There may
be other Federal, state or local tax considerations applicable to a particular
investor. Prospective investors are urged to consult their tax advisors.
9. OTHER INFORMATION
PERFORMANCE INFORMATION
Each Fund's performance may be quoted in advertising in terms of yield or total
return. Both types are based on historical results and are not intended to
indicate future performance. A Fund's yield is a way of showing the rate of
income earned by the Fund as a percentage of the Fund's share price. Yield is
calculated by dividing the net investment income of the Fund for the stated
period by the average number of shares entitled to receive dividends and
expressing the result as an annualized percentage rate based on the Fund's share
price at the end of the period. Total return refers to the average annual
compounded rates of return over some representative period that would equate an
initial amount invested at the beginning of a stated period to the ending
redeemable value of the investment, after giving effect to the reinvestment of
all dividends and distributions and deductions of expenses during the period. A
Fund also may advertise its total return over different periods of time or by
means of aggregate, average, year by year, or other types of total return
figures. Because average annual returns tend to smooth out variations in each
Fund's returns, shareholders should recognize that they are not the same as
actual year-by-year results.
Each Fund's advertisements may reference ratings and rankings among similar
funds by independent evaluators such as Morningstar, Lipper Analytical Services,
Inc. or IBC/Donoghue, Inc. In addition, the performance of the Funds may be
compared to recognized indices of market performance. The comparative material
found in a 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.
BANKING LAW MATTERS
Banking laws and regulations generally permit a bank or bank affiliate to
purchase shares of an investment company as agent for and upon the order of a
customer and in the view of Forum would permit a bank or bank affiliate to serve
as a Processing Organization or perform sub-transfer agent or similar services
for the Trust and its shareholders. If a bank or bank affiliate were prohibited
from performing all or a part of the foregoing services, its shareholder
customers would be permitted to remain shareholders of the Trust and alternative
means for continuing
<PAGE>
to service them would be sought. It is not expected that shareholders would
suffer adverse financial consequences as a result of any changes in bank or bank
affiliate service arrangements.
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the each 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 portfolio securities and other assets
less its liabilities) by the number of that Fund's shares outstanding at the
time the determination is made. Securities owned by a Fund for which market
quotations are readily available are valued at current market value, or, in
their absence, at fair value as determined by the Board.
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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
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.
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.
<PAGE>
INVESTORS BOND FUND
TAXSAVER BOND FUND
- --------------------------------------------------------------------------------
Account Information and
Shareholder Servicing: Distributor:
Forum Financial Corp. Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1996
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus offering shares
of the Investors Bond Fund and TaxSaver Bond Fund (collectively the "Funds" and
individually a "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 the Trust's Distributor at the address listed above.
TABLE OF CONTENTS
Page
----
1. Investment Policies . . . . . . . . . . . . . . . . . .
2. Investment Limitations. . . . . . . . . . . . . . . . .
3. Performance Data. . . . . . . . . . . . . . . . . . . .
4. Management. . . . . . . . . . . . . . . . . . . . . . .
5. Determination of Net Asset Value. . . . . . . . . . . .
6. Portfolio Transactions. . . . . . . . . . . . . . . . .
7. Additional Purchase and
Redemption Information. . . . . . . . . . . . . . . . .
8. Taxation. . . . . . . . . . . . . . . . . . . . . . . .
9. Other Information . . . . . . . . . . . . . . . . . . .
Appendix A - Description of Securities Ratings
Appendix B - Description of Municipal Securities
Appendix C - Hedging Strategies
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
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and other nationally recognized statistical rating organizations
("NRSROs") 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 various types of bonds and other securities by several
NRSROs is included in Appendix A to this Statement of Additional Information.
The Funds may use these ratings to determine whether to purchase, sell or hold a
security. However, 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. If an issue of securities ceases to be
rated or if its rating is reduced after it is purchased by a Fund, the
investment adviser of the Fund will determine 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. An issuer's current financial condition may be better or worse than a
rating indicates.
Each Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by the
investment adviser to be of comparable quality) if the investment adviser
determines that retaining such security is in the best interests of the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and
settlement, no payment is made for the securities purchased by the purchaser
and, thus, no interest accrues to the purchaser from the transaction. At the
time a Fund makes the commitment to purchase securities on a when-issued or
delayed 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 Funds to
hedge against anticipated changes in interest rates and prices. For instance,
in periods of rising interest rates and falling bond prices, a Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the investment adviser to a Fund were
to forecast incorrectly the direction of interest rate movements, the Fund might
be required to complete such when-issued or forward commitment 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 Funds enter into when-issued and forward commitment
transactions only with the intention of actually receiving or delivering the
securities, as the case may be. If a Fund, 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. When-issued securities may include bonds purchased on a "when, as
and if issued" basis under which the issuance of the securities depends upon the
occurrence of a subsequent event. Any significant commitment of a Fund's assets
to the purchase of securities on a "when, as and if issued" basis may increase
the volatility of its net asset value.
Each Fund will establish and maintain with its custodian a separate account with
cash, U.S. Government Securities (as defined in the Prospectus) and other liquid
high-grade debt securities in an amount at least equal to its commitments to
purchase securities on a when-issued or delayed delivery basis.
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ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Trust's Board of Directors ("Board") has the ultimate responsibility for
determining whether specific securities are liquid or illiquid. The Board has
delegated the function of making day-to-day determinations of liquidity to the
investment adviser of each Fund, pursuant to guidelines approved by the Board.
The investment adviser takes into account a number of factors in reaching
liquidity decisions, including but not limited to: (1) the frequency of trades
and quotations for the security; (2) the number of dealers willing to purchase
or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the transfer.
The investment adviser monitors the liquidity of the securities in each Fund's
portfolio and reports periodically on such decisions to the Board.
FUTURES CONTRACTS AND OPTIONS
Each Fund may in the future seek to hedge against a decline in the value of
securities it owns 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 TaxSaver Bond Fund may buy or sell municipal bond
index futures contracts and both Funds may buy or sell futures contracts on
Treasury bills, Treasury bonds and other financial instruments. The Funds may
write covered options and buy options on the futures contracts in which they may
invest.
If the adviser anticipates that interest rates will rise, a Fund may sell
futures contracts as a hedge against a decrease in the value of the Fund's
portfolio securities. Conversely, if the adviser anticipates a decline in
interest rates, a Fund may purchase futures contracts to protect itself against
an increase in the price of the debt securities that the Fund might wish to
purchase.
In addition, each Fund may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government Securities or other liquid, high-grade debt securities in
a segregated account with a value at all times sufficient to cover the Fund's
obligation under the option.
The Funds' use of options and futures contracts would subject the Funds to
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: (1) dependence on the adviser's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2) imperfect correlation between movements in the
prices of options, futures contracts or related options and movements in the
price of the securities hedged or used for cover; (3) the fact that skills and
techniques needed to trade these instruments are different from those needed to
select the other securities in which the Funds invest; (4) lack of assurance
that a liquid secondary market will exist for any particular instrument at any
particular time; and (5) the possible need to defer closing out of certain
options, futures contracts and related options to avoid adverse tax
consequences. Other risks include the inability of the Fund, as the writer of
covered call options, to benefit from the appreciation of the underlying
securities above the exercise price and the possible loss of the entire premium
paid for options purchased by the Fund. In addition, options and futures
contracts do not pay interest, but may produce taxable capital gains.
Each Fund will not hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, each Fund
will not buy futures contracts or write put options whose underlying value
exceeds 10% 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. A
Fund will not enter into futures contracts and options thereon if
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<PAGE>
immediately thereafter more than 5% of the value of the Fund's total assets
would be invested in these options or committed to margin on futures contracts.
A Fund will only invest in futures and options contracts after providing notice
to its shareholders, filing a notice of eligibility (if required) and otherwise
complying with the requirements of the Commodity Futures Trading Commission
("CFTC"). The CFTC's rules provide that the Funds are permitted to purchase
futures or options contracts subject to CFTC jurisdiction only (1) for bona fide
hedging purposes within the meaning of the rules of the CFTC; provided, however,
that in the alternative with respect to each long position in a futures or
options contract entered into by a Fund, the underlying commodity value of such
contract at all times does not exceed the sum of cash, short-term United States
debt obligations or other United States dollar denominated short-term money
market instruments set aside for this purpose by the Fund, cash proceeds from
existing Fund investments due in 30 days and accrued profit on the contract held
with a futures commissions merchant; and (2) subject to certain limitations.
REPURCHASE AGREEMENTS
The Funds may seek additional income by entering into repurchase agreements.
Repurchase agreements are transactions in which a 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. The Trust's custodian
maintains possession of the underlying collateral, which is maintained at not
less than 100% of the repurchase price, and which consists of the types of
securities in which the Fund may invest directly.
LENDING OF PORTFOLIO SECURITIES
The Funds may from time to time lend securities from its portfolio to brokers,
dealers and other financial institutions. Securities loans must be continuously
secured by cash or U.S. Government Securities with a market value, determined
daily, at least equal to the value of the Fund's securities loaned, including
accrued interest. A Fund receives interest in respect of securities loans from
the borrower or from investing cash collateral. The Funds may pay fees to
arrange the loans. Each Fund will, as a fundamental policy, limit securities
lending to not more than 10% of the value of its total assets.
TEMPORARY DEFENSIVE POSITION
When a Fund assumes a temporary defensive position it may invest in (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 have, at the time of investment, total assets
in excess of one billion dollars and that are insured by the Federal Deposit
Insurance Corporation, (iii) commercial paper of prime quality rated Prime-2 or
higher by Moody's or A-2 or higher by S&P or, if not rated, determined by the
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.
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. Under normal circumstances, each Fund
intends to invest less than 5% of the value of its net assets in the securities
of other investment companies. In addition to the Fund's expenses (including
the various fees), as a shareholder in another investment company, a Fund would
bear its pro rata portion of the other investment company's expenses (including
fees).
INVESTORS BOND FUND
MORTGAGE-RELATED SECURITIES. As described in the Investors Bond Fund
Prospectus, that Fund may invest in mortgage-related securities, including
Collateralized Mortgage Obligations ("CMOs"). CMOs are typically structured
with a number of classes or series that have different maturities and are
generally retired in sequence.
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Each class of bonds receives periodic interest payments according to the coupon
rate on the bonds. However, all monthly principal payments and any prepayments
from the collateral pool are paid first to the "Class 1" bondholders. The
principal payments are such that the Class 1 bonds will be completely repaid no
later than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds until
that class of bonds has been fully repaid. Although full payoff of each class
of bonds is contractually required by a certain date, any or all classes of
bonds may be paid off sooner than expected because of an acceleration in
prepayments of the obligations comprising the collateral pool.
ASSET-BACKED SECURITIES. The Investors Bond Fund may invest in asset-backed
securities, which have structural characteristics similar to mortgage-backed
securities but have underlying assets that are not mortgage loans or interests
in mortgage loans. Asset-backed securities are securities that represent direct
or indirect participations in, or are secured by and payable from, assets such
as motor vehicle installment sales contracts, installment loan contracts, leases
of various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts and special purpose corporations.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution.
Asset-backed securities present certain risks that are not presented by
mortgage-related debt securities or other securities in which the Investors Bond
Fund may invest. Primarily, these securities do not always have the benefit of
a security interest in comparable collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and Federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Because asset-backed
securities are relatively new, the market experience in these securities is
limited and the market's ability to sustain liquidity through all phases of the
market cycle has not been tested.
TAXSAVER BOND FUND
MUNICIPAL SECURITIES. The term "municipal securities," as used in the
Prospectus and this Statement of Additional Information with respect to the
TaxSaver Bond Fund, means obligations of the type described in Appendix B issued
by or on behalf of states, territories, and possessions of the United States and
their political subdivisions, agencies and instrumentalities, the interest on
which is exempt from Federal income tax. The municipal securities in which the
TaxSaver Bond Fund will invest are limited to those obligations which at the
time of purchase: (i) are backed by the full faith and credit of the United
States; (ii) are municipal notes rated in the two highest rating categories by
an NRSRO, or, if not rated, are of comparable quality as determined by the
Fund's investment adviser; (iii) are municipal bonds rated in the six highest
rating categories by an NRSRO or, if not rated, are of comparable quality as
determined by the Fund's investment adviser; or (iv) are other types of
municipal securities, provided that such obligations are of comparable quality,
as determined by the Fund's investment adviser, to instruments in which the Fund
may invest.
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities, are intended to fulfill short-term capital needs and
generally have original maturities of 397 days or less. They include tax
anticipation notes, revenue anticipation notes, bond anticipation notes,
construction loan notes and tax-exempt commercial paper.
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<PAGE>
MUNICIPAL LEASES. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds or notes. Lease and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. To reduce this risk, the Fund will
only purchase municipal leases subject to a non-appropriation clause when the
payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit or guarantee of a bank or other entity that has
long term outstanding debt securities rated in one of the top two rating
categories by an NRSRO.
VARIABLE AND FLOATING RATE OBLIGATIONS. The interest rates payable on certain
municipal securities, including municipal leases, in which the Fund may invest
are not fixed and may fluctuate based upon changes in market rates. These
securities are referred to as variable rate or floating rate obligations. Other
features of these obligations may include the right whereby the Fund may demand
prepayment of the principal amount of the obligation prior to its stated
maturity and the right of the issuer to prepay the principal amount prior to
maturity. The main benefit of a variable or floating rate municipal security is
that the interest rate adjustment minimizes changes in the market value of the
obligation. As a result, the purchase of these municipal securities enhances
the ability of the Fund to sell an obligation prior to maturity at a price
approximating the full principal amount of the obligation. The payment of
principal and interest by issuers of certain municipal securities purchased by
the Fund may be guaranteed by letters of credit or other credit facilities
offered by banks or other financial institutions. Such guarantees will be
considered in determining whether a municipal security meets the Fund's
investment quality requirements. The investment adviser will monitor the
pricing, quality and liquidity of variable rate and floating rate demand
obligations held by the Fund on the basis of published financial information,
rating agency reports and other research services to which the Fund or the
investment adviser of the Fund may subscribe.
PARTICIPATION INTERESTS. The Fund may purchase participation interests in
municipal bonds, including private activity bonds and floating and variable rate
securities that are owned by banks or other financial institutions. A
participation interest gives the Fund an undivided interest in a municipal
security owned by a bank or other financial institution. These instruments
carry a demand feature permitting the holder to tender them back to the bank or
other institution and are generally backed by an irrevocable letter of credit or
guarantee of the bank or institution. The Fund can exercise the right, on not
more than thirty days' notice, to sell such an instrument back to the bank or
institution from which it purchased the instrument and draw on the letter of
credit for all or any part of the principal amount of the Fund's participation
interest in the instrument, plus accrued interest. Generally, the Fund will do
so only (i) as required to provide liquidity to the Fund, (ii) to maintain a
high quality investment portfolio, or (iii) upon a default under the terms of
the demand instrument. Banks and other financial institutions retain portions
of the interest paid on such participation interests as their fees for servicing
such instruments and the issuance of related letters of credit, guarantees and
repurchase commitments. Exposure to credit losses arising from the possible
financial difficulties of borrowers might affect the bank's or other
institution's ability to meet its obligations under its letter of credit or
other guarantee.
The Fund will not purchase participation interests unless it is advised by
counsel or receives a ruling of the Internal Revenue Service that interest
earned by the Fund from the obligations in which it holds participation
interests is exempt from Federal income tax. The Internal Revenue Service has
announced that it ordinarily will not issue advance rulings on certain of the
Federal income tax consequences applicable to securities, or participation
interests therein, subject to a put. The investment adviser will monitor the
pricing, quality and liquidity of participation interests held by the Fund on
the basis of published financial information, rating agency reports and other
research services to which the Fund or the investment adviser of the Fund may
subscribe.
STAND-BY COMMITMENTS. The Fund acquires stand-by commitments solely to
facilitate portfolio liquidity and does not exercise its rights thereunder for
trading purposes. Since the value of a stand-by commitment is dependent on the
ability of the stand-by commitment writer to meet its obligation to repurchase,
the Fund's policy is to enter into
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stand-by commitment transactions only with municipal securities dealers which in
the opinion of the investment adviser present minimal credit risks.
The acquisition of a stand-by commitment does not affect the valuation or
maturity of the underlying municipal securities which continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund are valued at zero in determining net asset value. When the Fund pays
directly or indirectly for a stand-by commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Stand-by commitments do not affect the average weighted maturity of the Fund's
portfolio of securities.
GENERAL
Yields on municipal securities are dependent on a variety of factors, including
the general conditions of the money market and of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally subject to greater
price movements than obligations with shorter maturities. An increase in
interest rates will generally reduce the market value of portfolio investments,
and a decline in interest rates will generally increase the value of portfolio
investments.
There can be no assurance that the Fund's objective will be achieved. The
achievement of the Fund's investment objective is dependent in part on the
continuing ability of the issuers of municipal securities in which the Fund
invests to meet their obligations for the payment of principal and interest when
due. Municipal securities historically have not been subject to registration
with the Securities and Exchange Commission, although there have been proposals
which would require registration in the future.
The obligations of municipal securities issuers may become subject to laws
enacted in the future by Congress, state legislatures, or referenda extending
the time for payment of principal and/or interest, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. There is also the possibility that, as a result of litigation or
other conditions, the ability of any issuer to pay, when due, the principal of
and interest on its municipal securities may be materially affected.
2. INVESTMENT LIMITATIONS
Each 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. Each Fund may not:
(1) Borrow money, except for temporary or emergency purposes (including
the meeting of redemption requests) and except for entering into
reverse repurchase agreements, and provided that borrowings do not
exceed 33 1/3% of the Fund's total assets (computed immediately after
the borrowing).
(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 50% 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.
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(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 commercial paper or 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.
(7) Purchase or sell physical commodities or contracts relating to
physical commodities, provided that currencies and currency-related
contracts will not be deemed to be physical commodities.
(8) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940 ("1940 Act") and except that the Fund
may borrow money subject to investment limitations specified in the
Fund's Prospectus.
(9) Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
Each Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. Each Fund may not:
(a) 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.
(b) 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.
(c) Purchase securities on margin, or make short sales of securities,
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.
(d) 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.
(e) Invest in or hold securities of any issuer if officers and directors
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.
(f) Purchase securities for investment while any borrowing equaling 10%
or more of the Fund's total assets is outstanding or borrow for
purposes other than meeting redemptions in an amount exceeding 10% of
the value of the Fund's total assets.
(g) 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
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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.
(h) Purchase securities having voting rights except securities of other
investment companies.
(i) Purchase or sell real property leases (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which
invest in real estate.)
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets 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 purchases and redemptions of shares will not be considered a
violation of the limitation.
For purposes of limitation number 3 listed in the TaxSaver Bond Fund's
Prospectus, which relates to the diversification of the Fund's assets, the
District of Columbia, each state, each political subdivision, agency,
instrumentality and authority thereof, and each multi-state agency of which a
state is a member is deemed to be a separate "issuer." When the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from the government creating the subdivision and the security is
backed only by the assets and revenues of the subdivision, such subdivision
would be deemed to be the sole issuer. Similarly, in the case of private
activity bonds, if the bond is backed only by the assets and revenues of the
nongovernmental user, then such nongovernmental user would be deemed to be the
sole issuer. However, if in either case, the creating government or some other
agency guarantees a security, that guarantee would be considered a separate
security and would be treated as an issue of such government or other agency.
No more than 25% of a Fund's total assets may be invested in the securities of
one issuer. However, this limitation does not apply to securities of an issuer
payable solely from the proceeds of U.S. Government Securities.
3. PERFORMANCE DATA
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
indicate future returns. The Funds' net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Standardized SEC yield and total return information as of June [ ], 1996 is
outlined in the following tables:
30 Day
Annualized
30 Day Tax Total Total Total Return
Annualized Equivalent Return Return Since
Yield Yield 1 Year 5 Year Inception
----- ----- ------ ------ ---------
INVESTORS
BOND FUND % % % % %
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30 Day
Annualized
30 Day Tax Total Total Total Return
Annualized Equivalent Return Return Since
Yield Yield 1 Year 5 Year Inception
----- ----- ------ ------ ---------
TAXSAVER
BOND FUND % % % % %
Tax-equivalent yield is based on a Federal income tax rate of 39.6%.
The Funds commenced operations on October 2, 1989.
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 Municipal Bond Buyers Indices, the Salomon
Brothers Bond Index, the Shearson Lehman Bond Index, the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, 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 (for instance, its "Stocks, Bonds, Bills and Inflation Yearbook").
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.
For example, the Funds may advertise the historical advantages, based on assumed
investments made on particular dates, in long term corporate bonds or in the S&P
500 Composite Stock Index against U.S. Treasury bills, as published by the
companies listed above.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30 days or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced
with respect to bonds purchased at a premium over their par value by subtracting
a portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
The tax equivalent yield for the TaxSaver Bond Fund is the rate an investor
would have to earn from a fully taxable investment in order to equal the Fund's
yield after taxes. Tax equivalent yields are calculated by dividing the Fund's
yield by one minus the stated Federal or combined Federal and state tax rate.
(If only a portion of the Fund's yield is tax-exempt, only that portion is
adjusted in the calculation.)
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's shares. Also, Processing Organizations may charge
their customers direct fees in
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connection with an investment in a Fund, which will have the effect of reducing
the Fund's net yield to those shareholders. The yields of each Fund are not
fixed or guaranteed, and an investment in a Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare shares of
a Fund with investment alternatives which, like money market instruments or bank
accounts, may provide a fixed rate of interest. Also, it may not be appropriate
to compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return.
The other definitions are the same as in
average annual total return above.
4. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
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John Y. Keffer,* Chairman and President (age 53)
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.
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 34)
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.
Dana A. Lukens, Assistant Secretary (age 34)
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since August 1995. Prior thereto, Mr. Lukens was associated
with the law firm of Testa, Hurwitz & Thibeault. Mr. Lukens 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.
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M. Paige Turney, Assistant Secretary (age 26).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Miles 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.
John Y. Keffer is an interested person of the Trust as that term is defined in
the 1940 Act.
ADVISER
The Funds' investment adviser, Forum Advisors, Inc. (the "Adviser") furnishes at
its own expense all services, facilities and personnel necessary in connection
with managing each Fund's investments and effecting portfolio transactions for
the respective Fund, each pursuant to an Investment Advisory Agreement with the
Trust. Each such Investment Advisory Agreement provides for an initial term of
two years from its effective date with respect to a Fund and for its continuance
in effect for successive twelve-month periods thereafter, provided the agreement
is specifically approved at least annually by the Board or by vote of the
shareholders of the Fund, and in either case by a majority of the directors who
are not parties to the Investment Advisory Agreement or interested persons of
any such party.
Each Investment 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, or by the
respective Adviser on not more than 60 days' nor less than 30 days' written
notice, and will automatically terminate in the event of its assignment. Each
Investment Advisory Agreement also provides that, with respect to a Fund, the
Adviser shall not be liable for any error of judgment or mistake of law or for
any act or omission in the performance of its duties to the Fund, except for
willful misfeasance, bad faith or gross negligence in the performance of the
Adviser's duties or by reason of reckless disregard of its obligations and
duties under the Investment Advisory Agreement. Each Investment Advisory
Agreement provides that the Adviser may render services to others.
Prior to August 1, 1991, for services under its Investment Advisory Agreement,
the Adviser received, with respect to the Investors Bond Fund, an advisory fee
at an annual rate of 0.55% of the average daily net assets for the first $300
million of the Fund's net assets, 0.51% of the average daily net assets for the
next $400 million of the Fund's net assets, and 0.47% of the average daily net
assets of the Fund's remaining net assets. Prior to August 1, 1991, with
respect to the TaxSaver Bond Fund, the Adviser received an advisory fee at an
annual rate of 0.50% of the average daily net assets for the first $300 million
of the Fund's net assets, 0.46% of the average daily net assets of the next $400
million of the Fund's net assets and 0.42% of the average daily net assets of
the Fund's remaining net assets. Upon approval by the Funds' shareholders, the
advisory fee was reduced to 0.40% of the average daily net assets for each of
the Investors Bond Fund and the TaxSaver Bond Fund. Such fees are accrued daily
and paid monthly. Fees payable under the Advisory Agreement with respect to the
each Fund are outlined in the following tables:
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $100,098 $9,407 $90,691
1994 $111,913 $34,865 $77,048
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TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $65,238 $59,238 $6,000
1994 $69,755 $69,755 $0
In addition to receiving its advisory fee from the Funds, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in the Funds. 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 each 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
a Fund's shares are qualified for sale. The Trust may elect not to qualify its
shares for sale in every state. The manager and distributor believe that
currently the most restrictive expense ratio limitation imposed by any state is
2-1/2% of the first $30 million of each Fund's average net assets, 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 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 or the manager and
distributor monthly.
Subject to the above obligations to reimburse the Trust for its excess expenses,
the Trust has confirmed its obligation to pay all its other expenses, including:
interest charges, taxes, brokerage fees and commissions; certain insurance
premiums; fees, interest charges and expenses of the custodian, transfer agent
and dividend disbursing agent; telecommunications expenses; auditing, legal and
compliance expenses; costs of forming the corporation and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information, account application forms and shareholder reports and
delivering them to existing and prospective shareholders; costs of maintaining
books of original entry for portfolio and fund accounting and other required
books and accounts and of calculating the net asset value of shares of the
Trust; costs of reproduction, stationery and supplies; compensation of
directors, officers and employees of the Trust and costs of other personnel
performing services for the Trust who are not officers of the Adviser, the
manager and distributor or their respective affiliates; costs of corporate
meetings; Securities and Exchange Commission registration fees and related
expenses; state securities laws registration fees and related expenses; and fees
payable to the Adviser under the Investment Advisory Agreements.
MANAGER AND DISTRIBUTOR
Forum Financial Services, Inc. (the "Manager") was incorporated under the laws
of the State of Delaware on February 7, 1986 and 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 and custodian and arranging for maintenance of
books and records of the Trust), provides the Trust with general office
facilities and serves as distributor of shares of the Funds pursuant to a
management agreement between the Manager and the Trust (the "Management
Agreement"). The Management Agreement provided, with respect to each Fund, for
an initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or, with respect to a Fund,
by the shareholders of that Fund, and in either case by a majority of the
directors who are not parties to the Management Agreement or interested persons
of any such party and do not have any direct or indirect financial interest in
the Distribution Plan or in any agreement related to the Distribution Plan.
14
<PAGE>
The Management Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to a Fund by vote of that Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Management Agreement also provides that the Manager 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 the Manager's
duties or by reason of reckless disregard of its obligations and duties under
the Management Agreement.
Forum also acts as distributor of each Fund's shares pursuant to a distribution
services agreement (the "Distribution Services Agreement") and, pursuant
thereto, receives, and may reallow to certain financial institutions, the sales
charge paid by the purchasers of each Fund's shares. The aggregate sales
charges payable to Forum with respect to each Fund are outlined in the following
tables:
INVESTORS BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1996
1995 $1,705 $243 $1,463
1994 $7,704 $968 $0
TAXSAVER BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1996
1995 $7,701 $1,012 $6,689
1994 $5,939 $721 $0
For its services under the Management Agreement, the manager receives with
respect to each Fund a fee at an annual rate of 0.30% of the average daily net
assets of each Fund. Fees payable under the Management Agreement with respect
to each Fund are outlined in the following tables:
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $75,074 $75,074 $0
1994 $83,934 $58,722 $25,212
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $48,928 $48,928 $0
1994 $52,316 $44,565 $7,751
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The Manager provides persons satisfactory to the Board 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) the Manager, its affiliates or certain
affiliates of the Adviser.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent of the Trust
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"). The
Transfer Agency Agreement provided, with respect to each Fund, for an initial
term of two years from its effective date and for its continuance in effect for
successive twelve-month periods thereafter, provided that the agreement is
specifically approved at least annually by the Board or, with respect to a Fund,
by a vote of the shareholders of that Fund, and in either case by a majority of
the directors who are not parties to the Transfer Agency Agreement or interested
persons of any such party at a meeting called for the purpose of voting on the
Transfer Agency Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are:
(1) answering customer inquiries regarding account status and history, the
manner in which purchases and redemptions of shares of the Funds may be effected
and certain other matters pertaining to the Funds; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, assisting in processing purchase and redemption
transactions and receiving wired funds; (4) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (5) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to its shareholders; (8) arranging for the receipt, tabulation and transmission
to the Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request. For these services, the Transfer
Agent receives with respect to each Fund a fee computed and paid monthly at the
annual rate of 0.25% of the Fund's average daily net assets.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Funds with
respect to assets invested in the Funds. The Transfer Agent or any sub-transfer
agent or other processing agent may elect to credit against the fees payable to
it by its clients or customers all or a portion of any fee received from the
Trust or from the Transfer Agent with respect to assets of those customers or
clients invested in the Fund. The Transfer Agent, the Manager or sub-transfer
agents or processing agents retained by the Transfer Agent may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub-transfer
agents or processing agents, may also be affiliated persons of the Transfer
Agent or the Manager.
For its services under the Transfer Agent Agreement, Forum receives with respect
to its transfer agency services a fee at an annual rate of 0.25% of the average
daily net assets of each Fund. Fees payable under the Transfer Agent Agreement
with respect to each Fund are outlined in the following tables:
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $62,562 $49,813 $12,749
1994 $74,145 $64,394 $9,751
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TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $40,794 $28,091 $12,703
1994 $47,796 $40,156 $7,640
Pursuant to a Fund Accounting Agreement, the Transfer Agent also provides each
Fund with portfolio accounting, including the calculation of the Fund's net
asset value. For these services, the Transfer Agent receives with respect to a
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.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation for acting as custodian, investment manager, nominee,
agent or fiduciary for its customers or clients who are shareholders of the Fund
with respect to assets invested in the Fund.
5. DETERMINATION OF NET ASSET VALUE
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.
Purchases and redemptions are effected at the time of the next determination of
net asset value following the receipt of any purchase or redemption order.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Funds usually are principal
transactions. Portfolio securities for these Funds are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. There usually are no brokerage commissions paid for such purchases.
Purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and asked prices.
The Funds may effect purchases and sales through brokers who charge commissions.
Allocations of transactions to brokers and dealers and the frequency of
transactions are determined by the Adviser in its best judgment and in a manner
deemed to be in the best interest of shareholders of the Funds 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 Funds. For
the fiscal years ended March 31, 1996, 1995, and 1994, the Funds did not pay any
brokerage commissions.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Adviser take 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 a 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.
In addition, the Adviser may give consideration to research services furnished
by brokers to the Adviser for its use and may cause a 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 Funds, and the Adviser's fee is not reduced by reason of
the Adviser's receipt of the research services.
Investment decisions for each 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, a Fund and other
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<PAGE>
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 a Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for a Fund and for other investment companies and
accounts managed by 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.
No portfolio transactions are executed with the Adviser, the Manager or any of
their affiliates.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor.
Set forth below is an example of the method of computing the offering price of
each Fund's shares. The example assumes a purchase of shares of beneficial
interest aggregating less than $100,000 subject to the schedule of sales charges
set forth in the Prospectuses at a price based on the net asset value per share
of each Fund on March 31, 1996.
Investors TaxSaver
Bond Bond
Fund Fund
---- ----
Net Asset Value Per Share $ 10.21 $ 10.57
Sales Charge, 3.75% of offering
price (3.90% of net asset value
per share) $ 0.40 $ 0.41
Offering to Public $ 10.61 $ 10.98
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a portfolio 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.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which a Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
The Funds may wire proceeds of redemptions to shareholders that have elected
wire redemption privileges only if the wired amount is greater than $5,000. In
addition, the Funds will only wire redemption proceeds to financial institutions
located in the United States.
By use of telephone redemption and exchange privileges, the shareholder
authorizes the Transfer Agent to act upon the instruction of any person
representing himself either to be, or to have the authority to act on behalf of,
the investor and believed by the Transfer Agent to be genuine. The records of
the Transfer Agent of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund account in the name of
the shareholder.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other fund of the Trust or shares of certain other
portfolios of investment companies which retain the Manager or its affiliates as
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<PAGE>
investment adviser or distributor and which participate in the Trust's exchange
privilege program ("Participating Fund"). For Federal income tax purposes,
exchange transactions are treated as sales on which a purchaser will realize a
capital gain or loss depending on whether the value of the shares redeemed is
more or less than his basis in such shares at the time of the transaction.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered without a
sales charge. Shares of any Participating Fund purchased with a sales charge
may be redeemed and the proceeds used to purchase, without a sales charge,
shares of any other Participating Fund otherwise sold with the same sales
charge. If the Participating Fund purchased in the exchange transaction imposes
a higher sales charge than was paid originally on the exchanged shares, the
shareholder will be responsible for the difference between the two sales
charges. Shares acquired through the reinvestment of dividends and
distributions are deemed to have been acquired with a sales charge rate equal to
that paid on the shares on which the dividend or distribution was paid.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Investors Bond Fund offers an individual retirement plan (the "IRA") for
individuals who wish to use shares of the Funds as a medium for funding
individual retirement savings. Under the IRA, distributions of net investment
income and capital gain will be automatically reinvested in the IRA established
for the investor. The Fund's custodian furnishes custodial services to the IRAs
for a service fee. Shareholders wishing to use the Fund's IRA should contact
the Transfer Agent for further details and information.
8. TAXATION
Qualification as a regulated investment company under the Internal Revenue Code
of 1986 does not involve governmental supervision of management or investment
practices or policies. Investors should consult their own counsel for a
complete understanding of the requirements the Funds must meet to qualify for
such treatment. The information set forth in the Prospectus and the following
discussion relate solely to Federal income taxes on dividends and distributions
by a Fund and assume that each Fund qualifies as a regulated investment company.
Investors should consult their own counsel for further details and for the
application of state and local tax laws to the investor's particular situation.
The Funds expect to derive substantially all of their gross income (exclusive of
capital gain) from sources other than dividends. Accordingly, it is expected
that most of the Funds' dividends or distributions will not qualify for the
dividends-received deduction for corporations.
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
capital gain or loss. A Fund can elect to exempt its section 1256 contracts
which are part of a "mixed straddle" from the application of section 1256.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if
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a Fund exercises an option, or if an option that a Fund has written is
exercised, gain or loss on the option will not be separately recognized but the
premium received or paid will be included in the calculation of gain or loss
upon disposition of the property underlying the option.
9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, The First National Bank of Boston, 100
Federal Street, Boston, Massachusetts 02106, acts as the custodian of each
Fund's assets. The custodian's responsibilities include safeguarding and
controlling the Funds' cash and securities, determining income and collecting
interest on Fund investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004.
AUDITORS
[ ], Two World Financial Center, New York, New York 10281-1414, independent
auditors, act 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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
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 June __, 1996, the officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned or owned of record more than 5% of either Fund.
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.
20
<PAGE>
INVESTORS BOND FUND
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
- ----------- -------------
TAXSAVER BOND FUND
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
- ----------- -------------
The Manager provides persons satisfactory to the Board 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) the Manager, its affiliates or certain
affiliates of the Adviser.
FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended March 31, 1996 (which
include a statement of assets and liabilities, a statement of operations, a
statement of changes in net assets, notes to financial statements, financial
highlights, a statement of investments and the auditors' report thereon) are
included in the Annual Report to Shareholders of the Trust delivered along with
this SAI and are incorporated herein by reference.
21
<PAGE>
INVESTORS BOND FUND
TAXSAVER BOND FUND
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE AND MUNICIPAL BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
<PAGE>
STANDARD AND 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.
Bonds rated C typically are subordinated to senior debt which as assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
-A2-
<PAGE>
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
-A3-
<PAGE>
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
-A4-
<PAGE>
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
3. SHORT TERM MUNICIPAL LOANS
MOODY'S INVESTORS SERVICE, INC.
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the MIG-1/VMIG-1 group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and, although not
distinctly or predominantly speculative, there is specific risk.
STANDARD AND POOR'S CORPORATION
SP-1. Very strong or strong capacity to pay principal and interest. Those
issues which are determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
SP-3. Speculative capacity to pay principal and interest.
4. OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
-A5-
<PAGE>
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 rating.
F-3. Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
-A6-
<PAGE>
INVESTORS BOND FUND
TAXSAVER BOND FUND
APPENDIX B - DESCRIPTION OF MUNICIPAL SECURITIES
1. MUNICIPAL BONDS
Municipal Bonds which meet longer term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
GENERAL OBLIGATION BONDS are issued by such entities as states, counties,
cities, towns, and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
basic security behind General Obligation Bonds is the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of special assessments.
REVENUE BONDS in recent years have come to include an increasingly wide variety
of types of municipal obligations. As with other kinds of municipal
obligations, the issuers of revenue bonds may consist of virtually any form of
state or local governmental entity, including states, state agencies, cities,
counties, authorities of various kinds, such as public housing or redevelopment
authorities, and special districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues or net revenues derived
from a particular facility, group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source. Revenue bonds are issued
to finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these bonds provide
additional security in the form of a debt service reserve fund to be used to
make principal and interest payments. Various forms of credit enhancement, such
as a bank letter of credit or municipal bond insurance, may also be employed in
revenue bond issues. Housing authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. Some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund.
In recent years, revenue bonds have been issued in large volumes for projects
that are privately owned and operated as described below.
PRIVATE ACTIVITY BONDS are considered municipal bonds if the interest paid
thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing and health. These bonds are
also used to finance public facilities such as airports, mass transit systems
and ports. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property as security for such
payment.
While, at one time, the pertinent provisions of the Internal Revenue Code (the
"Code") permitted private activity bonds to bear tax-exempt interest in
connection with virtually any type of commercial or industrial project (subject
to various restrictions as to authorized costs, size limitations, state per
capita volume restrictions, and other matters), the types of qualifying projects
under the Code have become increasingly limited, particularly since the
enactment of the Tax Reform Act of 1986. Under current provisions of the Code,
tax-exempt financing remains available, under prescribed conditions, for owner-
occupied housing, certain privately owned and operated rental multi-family
housing facilities, nonprofit hospital and nursing home projects, certain
manufacturing or industrial projects, and solid waste disposal projects, among
others, and for the refunding (that is, the tax-exempt refinancing) of various
kinds of other private commercial projects originally financed with tax-exempt
bonds. In future years, the types of projects qualifying under the Code for
tax-exempt financing are expected to become increasingly limited.
<PAGE>
Because of terminology formerly used in the Code, virtually any form of private
activity bond may still be referred to as an "industrial development bond," but
more and more frequently revenue bonds have become classified according to the
particular type of facility being financed, such as hospital revenue bonds,
nursing home revenue bonds, multifamily housing revenues bonds, single family
housing revenue bonds, industrial development revenue bonds and solid waste
resource recovery revenue bonds.
Tax-exempt bonds are also categorized according to whether the interest is or is
not includible in the calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of acquiring or carrying the bonds
are or are not deductible in part by banks and other financial institutions, and
according to other criteria relevant for Federal income tax purposes. Due to
the increasing complexity of Code and related requirements governing the
issuance of tax-exempt bonds, industry practice has uniformly required, as a
condition to the issuance of such bonds, but particularly for revenue bonds, an
opinion of nationally recognized bond counsel as to the tax-exempt status of
interest on the bonds.
2. MUNICIPAL NOTES
Municipal Notes generally are used to provide for short-term capital needs and
usually have maturities of one year or less. They include the following:
TAX ANTICIPATION NOTES are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business taxes, and are payable
from these specific future taxes.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other types
of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
BOND ANTICIPATION NOTES are issued to provide interim financing until long-term
financing can be arranged. In most cases, the long-term bonds then provide the
money for the repayment of the Notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing. After
successful completion and acceptance, many projects receive permanent financing
through the Federal Housing Administration under the Federal National Mortgage
Association or the Government National Mortgage Association.
TAX-EXEMPT COMMERCIAL PAPER is a short-term obligation with a stated maturity
of 365 days or less. It is issued by agencies of state and local governments to
finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing.
3. MUNICIPAL LEASES
Municipal Leases, which may take the form of a lease or an installment purchase
or conditional sale contract, are issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities such as fire
and sanitation vehicles, telecommunications equipment and other capital assets.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the government issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The debt-
issuance limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of "non-
appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce this risk, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by an unconditional irrevocable letter
of credit or guarantee of a bank or other entity that meets the criteria
described in the Prospectus.
-B2-
<PAGE>
INVESTORS BOND FUND
TAXSAVER BOND FUND
APPENDIX C - HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser to each Fund may engage in certain
options and futures strategies to attempt to hedge a Fund's portfolio. The
instruments in which the Fund may invest include (i) options on securities and
stock indexes, (ii) stock index and interest rate 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 Commodity Futures Trading Commission ("CFTC").
The various hedging and income strategies referred to herein and in each Fund's
Prospectus are intended to illustrate the type of strategies that are available
to, and may be used by, the Adviser in managing a Fund's portfolio. Depending
on prevailing market conditions, use of these strategies may enable the Adviser
to reduce investment risks to which a Fund may be subject. No assurance can be
given, however, that any strategies will succeed.
The Funds will not use leverage in their hedging strategies. In the case of
transactions entered into as a hedge, a Fund will hold securities or other
options or futures positions whose values are expected to offset ("cover") its
obligations thereunder. A Fund will not enter into a hedging strategy that
exposes 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, short-term debt securities with a value sufficient at all times to cover
its potential obligations. Each Fund will comply with guidelines established by
the SEC with respect to coverage and, if the guidelines so require, 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.
Securities, options or futures positions used for cover and assets 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.
OPTIONS STRATEGIES. The Funds may purchase put and call options written by
others and write (sell) put and call options covering specified securities or
stock index-related amounts. A put option (sometimes called a "standby
commitment") gives the buyer of such option, upon payment of a premium, the
right to deliver a specified amount of a security or specified amount of cash
(on stock-index options) 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
specified amount of cash (on stock-index options) 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. A Fund may buy or sell
both exchange-traded and over-the-counter ("OTC") options. A Fund will purchase
or write an option only if that option is traded on a recognized U.S. options
exchange or if the Adviser believes that a liquid secondary market for the
option exists. When a Fund purchases an OTC option, it relies on the dealer
from which it has purchased the OTC option to make or take delivery of the
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 are currently treated as illiquid securities.
A 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
<PAGE>
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 Funds may similarly purchase put options in order to hedge
against a decline in market value of securities held in its portfolio. The put
enables a 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.
A Fund may write covered call options when the Adviser 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.
A Fund may purchase and write put and call options on stock indexes in much the
same manner as the equity and debt 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.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The Funds may effectively
terminate their right or obligation under an option contract by entering into a
closing transaction. For instance, if a Fund wished to terminate its potential
obligation to sell securities under a call option it had written, a call option
of the same series (an identical call option) would be purchased by the Fund.
Closing transactions essentially permit the Funds 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 as a hedging strategy depends upon the
Adviser's ability to forecast the direction of price fluctuations in the
underlying securities 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 a Fund is
exercised or unless a closing transaction is effected with respect to that
position, a loss will be realized in the amount of the premium paid.
(3) A position in an exchange listed option may be closed out only on an
exchange which provides a market for identical options. Most exchange listed
options relate to equity securities. Exchange markets for options on debt
securities 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 debt
securities) only by negotiating directly with the other party to the option
contract or in a secondary market for the option if such market exists. There
is no assurance that a liquid secondary market will exist for any particular
option at any specific time. If it is not possible to effect a closing
transaction, a Fund would have to exercise the option which it purchased in
order to realize any profit. The inability to effect a closing transaction on
an option written by a Fund may result in material losses to that Fund.
(4) The Funds' activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
FUTURES STRATEGIES. Several futures contracts on broad-based stock indexes
currently are traded; these include the Standard & Poor's 500 Stock Index on the
Chicago Mercantile Exchange, the New York Stock
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<PAGE>
Exchange Composite Stock Index on the New York Futures Exchange and the Major
Market Index on the Chicago Board of Trade. In addition, several interest rate
futures contracts currently are traded; these include various futures contracts
on Treasury bonds, notes and bills on the Chicago Board of Trade as well as a 30
Interest Rate contract also traded on the Chicago Board of Trade.
Futures contracts on a municipal bond index are traded on the Chicago Board of
Trade. This index assigns relative values, which fluctuate in accordance with
current market conditions, to the municipal bonds comprising the index. Options
on various of these futures contracts are also traded.
A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash or securities 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. For interest rate
futures contracts, delivery is of the underlying debt securities.
A 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 Funds 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. A 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 Funds may write covered call options on
stock index future contracts as a partial hedge against a decline in the prices
of stocks held in the Funds' portfolio. This is analogous to writing covered
call options on securities.
A Fund may use interest rate futures contracts and options thereon to hedge its
portfolio against changes in the general level of interest rates. A Fund may
purchase an interest rate futures contract when it intends to purchase debt
securities but has not yet done so. This strategy may minimize the effect of
all or part of an increase in the market price of the debt security which the
Fund intended to purchase in the future. A Fund may sell an interest rate
futures contract in order to continue to receive the income from a debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates.
A Fund may purchase a call option on an interest rate futures contract to hedge
against a market advance in debt securities which the Fund planned to acquire at
a future date. The purchase of a call option on an interest rate futures
contracts is analogous to the purchase of a call option on an individual debt
security which can be used as a temporary substitute for a position in the
security itself. A Fund may also write covered call options on interest rate
futures contracts as a partial hedge against a decline in the price of debt
securities held in the Fund's portfolio or purchase put options on interest rate
futures contracts in order to hedge against a decline in the value of debt
securities held in the Fund's portfolio.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING. The
following relate to each Fund's use of futures contracts and options on futures
contracts and, to the extent in the future they were to be permitted, foreign
currency and other options traded on a commodities exchange (collectively,
"futures contracts and related options").
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<PAGE>
No price is paid upon entering into futures contracts. Instead, upon entering
into a futures contract, a Fund would be 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, a process known as "marking to the
market." When writing a call option 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 related options 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 providing a secondary market for the futures
contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Futures or options contract prices could move to the daily
limit for several consecutive trading days with little or no trading and thereby
prevent prompt liquidation of positions. In such event, it may not be possible
for a Fund to close a position, and in the event of adverse price movements, a
Fund would have to make daily cash payments of variation margin (except in the
case of purchased options). In addition:
(1) Successful use by a 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 interest rate 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 due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities which cause 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. Activities of large traders in
both the futures and securities markets involving arbitrage and other investment
strategies may result in temporary price distortions.
(3) Although the Funds intend to purchase or sell futures only on exchanges or
boards of trade where there appears to be an active secondary market, 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 futures position, and in the event of adverse price movements, the Funds 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
Funds will not trade options on futures contracts unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with options 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
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<PAGE>
initial margin and are subject to additional margin calls which could be
substantial in the event of adverse price movements.
(6) Each 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.
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<PAGE>
MAINE MUNICIPAL BOND FUND
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Account Information and
Shareholder Servicing: Distributor:
Forum Financial Corp. Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1996
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus offering shares
of the Maine Municipal Bond 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 the Trust's Distributor at the address listed
above.
TABLE OF CONTENTS
Page
----
1. Investment Policies . . . . . . . . . . . . . . . . . .
2. Investment Limitations. . . . . . . . . . . . . . . . .
3. Performance Data. . . . . . . . . . . . . . . . . . . .
4. Management. . . . . . . . . . . . . . . . . . . . . . .
5. Determination of Net Asset Value. . . . . . . . . . . .
6. Portfolio Transactions. . . . . . . . . . . . . . . . .
7. Additional Purchase and
Redemption Information . . . . . . . . . . . . . . .
8. Taxation. . . . . . . . . . . . . . . . . . . . . . . .
9. Other Information . . . . . . . . . . . . . . . . . . .
Appendix A - Description of Securities Ratings
Appendix B - Description of Municipal Securities
Appendix C - Hedging Strategies
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
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and other nationally recognized statistical rating organizations
("NRSROs") 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 municipal bonds and other municipal securities by several
NRSROs is included in Appendix A to this Statement of Additional Information.
The Fund may use these ratings to determine whether to purchase, sell or hold a
security. However, 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. If an issue of securities ceases to be
rated or if its rating is reduced after it has been purchased by the Fund, Forum
Advisors, Inc. (the "Adviser") will determine 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. An issuer's current financial condition may be better or worse than a
rating indicates.
The Fund may retain a security whose rating has been lowered below the lowest
permissible rating category (or that is 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 non-rated security is considered to be
of comparable quality to a rated security when the Adviser believes that the
financial condition of the issuer of the obligation and the protection afforded
by the terms of the obligation itself limit the risk to the Fund to a degree
comparable to that of the rated security.
MUNICIPAL SECURITIES
The term "municipal securities," as used in the Prospectus and this Statement of
Additional Information, means obligations of the type described in Appendix B
issued by or on behalf of states, territories, and possessions of the United
States and their political subdivisions, agencies and instrumentalities, the
interest on which is exempt from Federal and Maine state income tax imposed on
individuals. The municipal securities in which the Fund will invest are limited
to those obligations which at the time of purchase: (i) are backed by the full
faith and credit of the United States; (ii) are municipal notes rated in the
four highest rating categories by an NRSRO, or, if not rated, are of comparable
quality as determined by the Adviser; (iii) are municipal bonds rated in the six
highest rating categories by an NRSRO or, if not rated, are of comparable
quality as determined by Adviser; or (iv) are other types of municipal
securities, provided that such obligations are of comparable quality as
determined by the Adviser to instruments in which the Fund may invest.
MUNICIPAL LEASES
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds or notes. Municipal leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased assets to pass eventually to the government lessee) are sometimes viewed
as a means for governmental issuers to acquire property and equipment without
meeting constitutional or statutory requirements for issuance of long-term debt.
The debt-issuance limitations of the constitution and statutes of the State of
Maine are inapplicable because of the inclusion in such leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. If no such appropriations are made, leased property is
ordinarily returned to, and disposed of by, a trustee in order to pay off all or
a portion of the liabilities under the lease. To reduce this risk, the Fund
will only purchase municipal leases subject to a non-appropriation clause when
the payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit or guarantee of a bank or other entity that has
long term outstanding debt securities rated in one of the top two rating
categories by an NRSRO.
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<PAGE>
VARIABLE AND FLOATING RATE OBLIGATIONS
The interest rates payable on certain municipal securities, including municipal
leases, in which the Fund may invest are not fixed and may fluctuate based upon
changes in market rates. These securities are referred to as variable rate or
floating rate obligations. Other features of these obligations may include the
right whereby the Fund may demand prepayment of the principal amount of the
obligation prior to its stated maturity and the right of the issuer to prepay
the principal amount prior to maturity. The main benefit of a variable or
floating rate municipal security is that the interest rate adjustment minimizes
changes in the market value of the obligation. As a result, the purchase of
these municipal securities enhances the ability of the Fund to sell an
obligation prior to maturity at a price approximating the full principal amount
of the obligation. The payment of principal and interest by issuers of certain
municipal securities purchased by the Fund may be guaranteed by letters of
credit or other credit facilities offered by banks or other financial
institutions. Such guarantees will be considered in determining whether a
municipal security meets the Fund's investment quality requirements. The
Adviser will monitor the pricing, quality and liquidity of variable rate and
floating rate demand obligations held by the Fund on the basis of published
financial information, rating agency reports and other research services to
which the Fund or Adviser may subscribe.
PARTICIPATION INTERESTS
The Fund may purchase participation interests in municipal bonds, including
private activity bonds and floating and variable rate securities that are owned
by banks or other financial institutions. A participation interest gives the
Fund an undivided interest in a municipal security owned by a bank or other
financial institution. These instruments carry a demand feature permitting the
holder to tender them back to the bank or other institution and are generally
backed by an irrevocable letter of credit or guarantee of the bank or
institution. The Fund can exercise the right, on not more than thirty days'
notice, to sell such an instrument back to the bank or institution from which it
purchased the instrument and draw on the letter of credit for all or any part of
the principal amount of the Fund's participation interest in the instrument,
plus accrued interest. Generally, the Fund will do so only (i) as required to
provide liquidity to the Fund, (ii) to maintain a high quality investment
portfolio, or (iii) upon a default under the terms of the demand instrument.
Banks and other financial institutions retain portions of the interest paid on
such participation interests as their fees for servicing such instruments and
the issuance of related letters of credit, guarantees and repurchase
commitments. Exposure to credit losses arising from the possible financial
difficulties of borrowers might affect the bank's or other institution's ability
to meet its obligations under its letter of credit or other guarantee.
The Fund will not purchase participation interests unless it is advised by
counsel or receives a ruling of the Internal Revenue Service that interest
earned by the Fund from the obligations in which it holds participation
interests is exempt from Federal income tax. The Internal Revenue Service has
announced that it ordinarily will not issue advance rulings on certain of the
Federal income tax consequences applicable to securities, or participation
interests therein, subject to a put. The Adviser will monitor the pricing,
quality and liquidity of participation interests held by the Fund on the basis
of published financial information, rating agency reports and other research
services to which the Fund or the Adviser may subscribe.
STAND-BY COMMITMENTS
The Fund acquires stand-by commitments solely to facilitate portfolio liquidity
and does not exercise its rights thereunder for trading purposes. Since the
value of a stand-by commitment is dependent on the ability of the stand-by
commitment writer to meet its obligation to repurchase, the Fund's policy is to
enter into stand-by commitment transactions only with municipal securities
dealers which in the opinion of the Adviser present minimal credit risks.
The acquisition of a stand-by commitment does not affect the valuation or
maturity of the underlying municipal securities. Stand-by commitments acquired
by the Fund are valued at zero in determining net asset value. When the Fund
pays directly or indirectly for a stand-by commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Stand-by commitments do not affect the average weighted maturity of the Fund's
portfolio of securities.
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<PAGE>
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, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and
settlement, no payment is made for the securities purchased by the purchaser
and, thus, no interest accrues to the purchaser from the transaction. At the
time 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,
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 commitment 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 enter into when-issued and forward commitment
transactions only with the intention of actually receiving or delivering the
securities, as the case may be. If 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. 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 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
commitment transactions will be entered into by the Fund if, as a result, more
than 15% of the value of the Fund's total assets would be committed to such
transactions.
The Fund will maintain with its custodian a separate account with cash, U.S.
Government securities or other liquid, high-grade debt securities with a value
at all times sufficient to cover such commitments.
REPURCHASE AGREEMENTS
The Fund may seek additional income by entering into repurchase agreements.
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. The Trust's custodian
maintains possession of the underlying collateral, which is maintained at not
less than 100% of the repurchase price, and which consists of the types of
securities in which the Fund may invest directly.
LENDING OF PORTFOLIO SECURITIES
The Fund may from time to time lend securities from its portfolio to brokers,
dealers and other financial institutions. Securities loans must be continuously
secured by cash or U.S. Government Securities with a market value, determined
daily, at least equal to the value of the Fund's securities loaned, including
accrued interest. The Fund receives interest in respect of securities loans
from the borrower or from investing cash collateral. The Fund may pay fees to
arrange the loans. The Fund will not lend portfolio securities in excess of
33 1/3% of the value of the Fund's total assets.
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<PAGE>
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options,
repurchase agreements maturing in more than seven days and municipal leases
other than those the Adviser has determined are liquid pursuant to guidelines
established by the Trust's Board of Directors (the "Board").
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to the Adviser, pursuant to
guidelines approved by the Board. The Adviser takes into account a number of
factors in reaching liquidity decisions, including but not limited to: (1) the
frequency of trades and quotations for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) the willingness of dealers to undertake to make a market in the
security; and (4) the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer. The Adviser monitors the liquidity of the securities
in the Fund's portfolio and reports periodically on such decisions to the Board.
TEMPORARY DEFENSIVE POSITION
When the Fund assumes a temporary defensive position it may invest in (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 have, at the time of investment, total assets
in excess of one billion dollars and that are insured by the Federal Deposit
Insurance Corporation, (iii) commercial paper of prime quality rated Prime-2 or
higher by Moody's or A-2 or higher by S&P or, if not rated, determined by the
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.
The Fund may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. Under normal circumstances, the Fund intends
to invest less than 5% of the value of its net assets in the securities of other
investment companies. 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).
GENERAL
Yields on municipal securities are dependent on a variety of factors, including
the general conditions of the money market and of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally subject to greater
price movements than obligations with shorter maturities. An increase in
interest rates will generally reduce the market value of portfolio investments,
and a decline in interest rates will generally increase the value of portfolio
investments.
There can be no assurance that the Fund's investment objective will be achieved.
The achievement of the Fund's objective is dependent in part on the continuing
ability of the issuers of municipal securities in which the Fund invests to meet
their obligations for the payment of principal and interest when due. Municipal
securities historically have not been subject to registration with the
Securities and Exchange Commission, although there have been proposals which
would require registration in the future.
The obligations of municipal securities issuers may become subject to laws
enacted in the future by Congress, state legislatures, or referenda extending
the time for payment of principal and/or interest, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. There is also the
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<PAGE>
possibility that, as a result of litigation or other conditions, the ability of
any issuer to pay, when due, the principal of and interest on its municipal
securities may be materially affected.
CERTAIN INFORMATION CONCERNING THE STATE OF MAINE
Material in this section has been compiled from numerous sources including "The
Maine Economy: Year-End Review and Outlook, 1994," the most recent "State of
Maine Economic Reports" through the "Spring 1995" issue prepared and published
quarterly by the Economics Division of the Maine State Planning Office, and the
Maine State Planning Office Spring 1995 Forecast dated June 7, 1995. In
addition, certain information was obtained from Official Statements of the State
of Maine published in connection with the issuance of $20,000,000 Certificates
of Participation dated February 15, 1995, $61,350,000 general obligation bonds
dated May 1, 1995, and $182,000,000 State of Maine General Obligation Tax
Anticipation Notes dated July 20, 1995. Other information concerning Maine
budgetary matters was obtained from official legislative documents, the Office
of Fiscal and Program Review of the Maine Legislature, and the Bureau of the
Budget and the Bureau of Employee Relations of the Maine Department of
Administrative and Financial Services. The most recent information concerning
credit ratings on debt issued by or on behalf of the State of Maine and its
subordinate agencies was obtained from credit reports for the State of Maine
published by S&P on January 24, 1995, April 28, 1995, and July 7, 1995, and by
Moody's on January 23, 1995, February 1, 1995, April 27, 1995, May 4, 1995, July
10, 1995, and July 12, 1995.
Although the information derived from the above sources is believed to be
accurate, none of the information obtained from these sources has been
independently verified. While the following summarizes the most current
information available from the above sources, it does not reflect economic
conditions or developments which may have occurred or trends which may have
materialized since the dates indicated.
The State of Maine, which includes nearly one-half of the total land area of the
six New England states, currently has a population of 1,240,000. The structure
of the Maine economy is quite similar to that of the nation as a whole, except
that Maine has proportionately more activity in manufacturing and tourism, and
less activity in finance and services.
During the 1980's, Maine's economy surpassed national averages in virtually all
significant measures of economic growth. During this ten-year period, Maine
real economic growth was 40% as measured by the Maine Economic Growth Index, a
broad-based measure of economic growth which is corrected for inflation. This
economic growth compares to national real economic growth during the 1980's of
26% and 29%, measured by the United States Economic Growth Index and real Gross
National Product respectively. During this time period, resident employment in
Maine increased by 21%, while resident employment nationally increased by 19%.
Inflation-adjusted retail sales in Maine during this period increased by 72%, as
opposed to a 32% increase in such retail sales nationally. During the 1980's,
per capita personal income in Maine rose from 44th in the nation in 1979, to
26th in the nation in 1989, from 81% to 92% of the national average of per
capita personal income. During the 1980's, Maine's economy also became
significantly more diversified.
Since the fourth quarter of 1989, however, the Maine economy has not performed
as well as earlier. For example, the Maine economy sustained only 0.8% real
growth in 1989, and experienced real growth of -1.1% in 1990 and -2.6% in 1991.
Data show that the Maine economy began a sustained decline during the fourth
quarter of 1989. The second quarter of 1991 saw the seventh consecutive
quarterly decline in the Maine Economic Growth Index, and the third and fourth
quarters of 1991 showed barely positive economic growth of 0.9% and 0.2%
respectively. Economic recovery in Maine has also been hindered recently by
losses in defense related jobs, with the State losing since 1990 approximately
20% of its defense dependent employment which peaked at 63,000 jobs in 1989.
Since 1991, however, the Maine economy has experienced a modest recovery. This
recovery continued through the end of calendar year 1994, and it appears to be
accelerating slightly from previous years. For example, Maine real economic
growth, as measured by the Maine Economic Growth Index ("EGI"), expanded at a
2.6% annual rate during 1994. While this is a significant improvement over the
1993 Maine EGI growth rate of 1.1%, it still lags behind the 1994 national
growth rate of 4.0%, as measured by Gross Domestic Product ("GDP"). According
to revised year-end economic data published by the Economics Division of the
Maine State Planning Office, almost all
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Maine economic indicators showed improvement during 1994, and the improvement
among various broad sectors of the Maine economy accelerated slightly. For
example, Maine consumer retail sales increased 6.7% in 1994, as opposed to a
5.3% increase in 1995. Maine auto transportation sales increased 12.8% in 1994
on top of a 12.4% increase in 1993. Maine building supply sales increased 9.0%
in 1994, as opposed to a 4.8% increase in 1993. Maine construction contract
awards increased 10.0% in 1994, as opposed to a 15.9% decline in 1993. Maine
payroll employment increased 2.3% in 1994, as opposed to a 1.4% increase in
1993. The Maine unemployment rate decreased by .7% in 1994 as opposed to a .9%
increase in 1993. The only broadly-reported Maine economic indicator for 1994
that did not outperform 1993 was unit sales of residential homes, with such
sales experiencing only an 8.0% increase in 1994, as opposed to an 11.4%
increase in 1993. The consumer retail sales data (including among other items
taxable retail sales related to the auto transportation and tourist industries)
are particularly significant for State of Maine credit purposes. Since roughly
one-third of Maine State government general fund revenues are derived from a 6%
retail sales tax, the strong performance of taxable retail sales in Maine in
1993 and 1994 has made it easier for Maine State government to improve its
fiscal condition.
The fiscal policies of the State of Maine are very conservative, and the State
is required by its Constitution to operate on a balanced budget. The Maine
Constitution does this by prohibiting the issuance of any debt by or on behalf
of the State which exceeds $2,000,000 "except to suppress insurrection, to repel
invasion, or for purposes of war, and except for temporary loans to be paid out
of money raised by taxation during the fiscal year in which they are made." The
Maine Constitution also prohibits the issuance of debt by or on behalf of the
State to fund "current expenditures". The Maine Constitution allows the
issuance of long-term debt when two-thirds of both houses of the Legislature
pass a law authorizing the issuance of such debt, and when the voters of the
State ratify and enact such a law at a general or special statewide election.
Amendments to the Maine Constitution have also been adopted to permit the
Legislature to authorize the issuance of bonds: (i) to insure payment on up to
$6,000,000 of revenue bonds of the Maine School Building Authority; (ii) to
guarantee payment on up to $4,000,000 of student loans; (iii) to insure payment
on up to $1,000,000 of mortgage loans for Indian housing; (iv) to insure payment
on up to $4,000,000 of mortgage loans or small business loans to Maine veterans;
and (v) to insure payments on up to $90,000,000 of mortgage loans for
industrial, manufacturing, fishing, agricultural, and recreational enterprises.
The Maine Constitution provides that if the Legislature fails to appropriate
sufficient funds to pay principal and interest on these bonds, the State
Treasurer is required to set aside sufficient funds from the first General Fund
revenues received thereafter by the State to make such payments.
As of May 31, 1995, there were outstanding $516,355,000 general obligation bonds
of the State and $31,900,000 bond anticipation notes of the State. On June 30,
1995, $175,000,000 outstanding tax anticipation notes of the State matured, and
on July 20, 1995, the State issued $182,000,000 tax anticipation notes to mature
on June 28, 1996. Various other Maine governmental agencies and quasi-municipal
corporations, including but not limited to the Maine Municipal Bond Bank, the
Maine Court Facilities Authority, the Maine Health and Higher Educational
Facilities Authority and the Maine Veterans' Homes, issue debt for Maine
governmental purposes, but this debt does not pledge the credit of the State.
The strength of Maine's economy during the 1980's enable the State to accumulate
relatively large unappropriated surpluses of general fund revenues. During the
economic contraction of 1989 through 1992, however, Maine State government
repeatedly reduced its expenditures in order to comply with the requirement of
the Maine Constitution that State government operate on a balanced budget. For
example, on December 23, 1991, the Legislature enacted revisions to the fiscal
year 1992 budget reducing General Fund expenditures by $53,815,843 and approving
a fiscal year 1992 budget of $1,490,717,628. The reductions made by the
December 23, 1991 budget revision included reductions in general purpose aid to
local schools and in State employee health insurance expenses, elimination of
the State Office of Comprehensive Land Use Planning, reduction of payments to
the University of Maine System and the Maine Technical College System, and
reduction of payments to municipalities under a State revenue sharing program.
On April 1, 1992, the Governor also signed into law revisions in the fiscal year
1993 budget reducing General Fund expenditures by $108,243,732 and approving a
fiscal year 1993 budget of $1,562,941,722. The reductions made by the April 1,
1992 budget revision included broad reductions in many State programs and the
freezing of wage increases for many State employees and employees at State
higher educational institutions. In addition, the State continued a program
which requires most State employees to take a number of days of unpaid leave
during each fiscal year, depending on job classification.
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Because of the improvement of the Maine economy beginning in 1992, however, the
Governor signed into law on June 30, 1993 a State government budget for fiscal
years 1994 and 1995 in the amount of $3,208,476,191 that stabilized reductions
in State services and provided for slight increases in come State programs such
as educational and job training programs. As part of this budget, a temporary
increase from 5% to 6% in the State's retail sales tax was continued, but both a
5% and 10% surcharge on the Maine State Income Tax and a 10% surcharge on the
Maine Corporate Income Tax were eliminated. On March 9, 1994 and April 15, 1995
respectively, the Governor signed into law supplemental appropriations
legislation for Maine State government for fiscal years 1994 and 1995. Such
legislation authorized on a net basis the appropriation and expenditure of an
additional $12,796,430 for State government activities during fiscal years 1994
and 1995. It is expected that such increases in expenditures will be funded by
greater than originally projected receipts of State tax revenues.
During the first six months of 1995, this trend of stabilizing Maine State
government finances has continued. On February 17, 1995, the Governor signed
into law a Supplemental Appropriations Budget which had the net effect of
slightly increasing State general fund expenditures for fiscal year 1995 by
$6,515,892. On May 15, 1995, the Governor signed into law a second Supplemental
Appropriations Budget for fiscal year 1995 which had the net effect of slightly
increasing State general fund expenditures by an additional $6,391,784. As part
of this Budget law, the Governor also received authority to establish a
"Productivity Realization Task Force: directed to identify over $45,000,000 in
reductions to State expenditures in fiscal years 1996 and 1997. On June 29,
1995, the Governor signed into law a Biennial Operating Budget authorizing
general fund expenditures in fiscal years 1996 and 1997 of $1,713,573,026 and
$1,785,543,156 respectively. As part of this Biennial Operating Budget, the
Legislature enacted a so-called State income tax cap, beginning in fiscal year
1998, which caps the amount of State income tax revenue which the State can
spend at $676,230,000, the amount of such revenue expected to be received by the
State during fiscal year 1998. Additional income tax revenue received once the
cap becomes effective would be deposited in a reserve fund and used to pay
income tax refunds to taxpayers. As part of this arrangement, income tax rates
also would be reduced by up to 20% to eliminate the collection of income tax
revenue above the amount of the cap. The Legislature is expected to review the
income tax cap plan periodically, and it is empowered to use excess income tax
revenue collected for unanticipated State liabilities. On June 30, 1995, the
Governor signed into law a Supplemental Appropriations Budget for fiscal years
1996 through 1997 totaling an additional $3,363,218 in general fund
expenditures. As part of these budget acts signed into law during the first six
months of 1995, the State also eliminated, as unneeded, several non-recurring
accounting practices, special taxes, and personnel policies such as deferred
State payments, and State employee unpaid leave days, designed to achieve a
balanced budget at the end of each fiscal year. There can be no assurance,
however, that the budget acts cited above for fiscal years 1996 and 1997 will
not be amended from time to time in order to comply with the balanced budget
requirement of the Maine Constitution.
Because of Maine's conservative debt policies and its Constitutional requirement
that State government operate under a balanced budget, Maine general obligation
bonds had been rated AAA by S&P and Aa1 by Moody's for many years.
On June 6, 1991, however, S&P lowered its credit rating for Maine general
obligation bonds from AAA to AA+, and at the same time lowered its credit rating
on bonds issued by the Maine Municipal Bond Bank and the Maine Court Facilities
Authority, and on State of Maine Certificates of Participation for highway
equipment, from AA to A+. In taking this action, S&P said, "The rating action
is a result of declines in key financial indicators, and continued softness in
the state economy. The new rating continue to reflect the low debt burden of
the state, an economic base that has gained greater income levels and diversity
over the 1980's, and a legislative history of dealing effectively with financial
difficulties." These ratings have remained unchanged since June 6, 1991.
Because of recent improvements in the State of Maine economy, S&P views the
State's financial outlook as "stable", stating in its most recent July 7, 1995
credit report: "The outlook reflects . . . stable tax collections, despite the
slow economic recovery and the diminished likelihood of the need to adjust
expenditures because of inadequate revenue receipts."
On August 24, 1993, citing the "effects of protracted economic slowdown and the
expectation that Maine's economy will not soon return to the pattern of robust
growth evident in the mid-1980's," Moody's lowered the State
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of Maine's general obligation bond rating from Aa1 to Aa. At the same time,
Moody's lowered from Aa1 to Aa the rating assigned to state-guaranteed bonds of
the Maine School Building Authority and the Finance Authority of Maine, and
confirmed at A1 the ratings assigned to the bonds of the Maine Court Facilities
Authority and State of Maine Certificates of Participation. These ratings have
remained unchanged since August 24, 1993. In its most recent credit report for
the State of Maine, dated July 12, 1995, Moody's said: "Reasonable revenue
estimates and spending restraint embodied in the fiscal 1996 budget are also
noted, reflecting an economy which, while emerging from recession, is not
robust."
2. 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 for temporary or emergency purposes (including
the meeting of redemption requests) and except for entering into
reverse repurchase agreements, and provided that borrowings do not
exceed 33 1/3% of the Fund's total assets (computed immediately after
the borrowing).
(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. For this purpose, consumer finance companies, industrial
finance companies, and gas, electric, water and telephone utility
companies are each considered to be separate industries.
(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 50% 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 commercial paper or 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.
(7) Purchase or sell physical commodities or contracts relating to
physical commodities, provided that currencies and currency-related
contracts will not be deemed to be physical commodities.
(8) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940 ("1940 Act") and except that the Fund
may borrow money subject to investment limitations specified in the
Fund's Prospectus.
(9) Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
(10) Purchase securities having voting rights except securities of other
investment companies.
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The Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. The Fund may not:
(a) 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.
(b) 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.
(c) Purchase securities on margin, or make short sales of securities,
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.
(d) 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.
(e) Invest in or hold securities of any issuer if officers and directors
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.
(f) Purchase securities for investment while any borrowing equaling 10%
or more of the Fund's total assets is outstanding or borrow for
purposes other than meeting redemptions in an amount exceeding 10% of
the value of the Fund's total assets.
(g) 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.
(h) Invest in oil, gas or other mineral exploration or development
programs, or leases, provided that the Fund may invest in securities
issued by companies engaged in such activities.
(i) Purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which
invest in real estate.)
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets 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 purchases and redemptions of shares will not be considered a
violation of the limitation.
For purposes of limitation number 4 listed in the Fund's Prospectus, which
relates to the diversification of the Fund's assets, the District of Columbia,
each state, each political subdivision, agency, instrumentality and authority
thereof, and each multi-state agency of which a state is a member is deemed to
be a separate "issuer." When the
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assets and revenues of an agency, authority, instrumentality or other political
subdivision are separate from the government creating the subdivision and the
security is backed only by the assets and revenues of the subdivision, such
subdivision would be deemed to be the sole issuer. Similarly, in the case of
industrial development bonds and private activity bonds, if the bond is backed
only by the assets and revenues of the nongovernmental user, the nongovernmental
user would be deemed to be the sole issuer. However, if in either case the
creating government or some other agency guarantees a security, that guarantee
would be considered a separate security and would be treated as an issue of such
government or other agency.
No more than 25% of the Fund's total assets may be invested in the securities of
one issuer. However, this limitation does not apply to securities of an issuer
payable solely from the proceeds of U.S. Government Securities.
3. 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.
Standardized SEC yield and total return information as of March 31, 1996 is
outlined in the following table:
30 Day Annualized 30 Day Annualized Total Return Total Return Since
Yield Tax Equivalent Yield 1 Year Inception
- ----- -------------------- ------ ---------
% % % %
Tax equivalent yield is based on a combined Federal and Maine state income tax
rate of 49.5% (Federal 39.6% and State of Maine 9.9%).
The Fund commenced operations on December 5, 1991.
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., CDC/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 Municipal Bond Buyers Indices, the Salomon
Brothers Bond Index, the Shearson Lehman Bond Index, the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. 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.
YIELD CALCULATIONS
Standard SEC yields for the Fund used in advertising are computed by dividing
the Fund's interest income for a given 30 days or one-month period, net of
expenses, by the average number of shares entitled to receive distributions
during the period, dividing this figure by the Fund's net asset value per share
at the end of the period and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. In general, interest
income is reduced with respect to bonds purchased at a premium over their par
value by subtracting a portion of the premium from income on a daily basis, and
is increased with respect to bonds purchased at a discount by adding a portion
of the discount to daily income. Capital gain and loss generally are excluded
from these calculations.
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Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for the Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
The tax equivalent yield for the Fund is the rate an investor would have to earn
from a fully taxable investment in order to equal the Fund's yield after taxes.
Tax equivalent yields are calculated by dividing the Fund's yield by one minus
the stated Federal or combined Federal and state tax rate. (If only a portion
of the Fund's yield is tax-exempt, only that portion is adjusted in the
calculation.)
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield for any
given period is not an indication or representation by the Fund of future yields
or rates of return on the Fund's shares. Also, Processing Organizations may
charge their customers direct fees in connection with an investment in the Fund,
which will have the effect of reducing the Fund's net yield to those
shareholders. The yields of the Fund are not fixed or guaranteed, and an
investment in the Fund is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of the Fund with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to
compare the Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
TOTAL RETURN CALCULATIONS
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. 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 a given period
according to the following formula:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, 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 gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Period total return is calculated according to the following formula:
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PT = (ERV/P-1)
Where:
P = a hypothetical initial payment of $1,000;
PT = period total return;
ERV = ending redeemable value.
4. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 53)
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.
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.
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David I. Goldstein, Secretary (age 34)
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.
Dana A. Lukens, Assistant Secretary (age 34)
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since August 1995. Prior thereto, Mr. Lukens was associated
with the law firm of Testa, Hurwitz & Thibeault. Mr. Lukens 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 26).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Miles 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.
John Y. Keffer is an interested person of the Trust as that term is defined in
the 1940 Act.
ADVISER
The Fund's investment adviser, Forum Advisors, Inc., 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, pursuant to an investment advisory agreement between the Adviser and the
Trust (the "Advisory Agreement"). The Advisory Agreement provides for an
initial term of one year from its effective date with respect to the Fund and
for its continuance in effect for successive twelve-month periods thereafter,
provided the agreement is specifically approved at least annually by the Board
or by vote of the shareholders, and in either case by a majority of the
directors who are not parties to the Advisory Agreement or interested persons of
any such party.
The Advisory Agreement is terminable without penalty by the Trust on 60 days'
written notice when authorized either by vote of the Fund's shareholders or by a
vote of a majority of the Board, or by the Adviser on not more than 60 days' nor
less than 30 days' written notice, and will automatically terminate in the event
of its assignment. The Advisory Agreement also provides that the Adviser shall
not be liable for any error of judgment or mistake of law or for any act or
omission in the performance of its duties to the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of the Adviser's
duties or by reason of reckless disregard of its obligations and duties under
the Advisory Agreement. The Advisory Agreement provides that the Adviser may
render services to others.
For its services under the Investment Advisory Agreement, Forum receives with
respect to the Fund a fee at an annual rate of 0.40% of the average daily net
assets of the Fund. Fees payable under the Advisory Agreement with respect to
the Fund are outlined in the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $105,063 $91,930 $13,133
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1994 $92,788 $85,563 $7,225
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 (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. The Adviser 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 assets, 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 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 to reimburse the Trust for its excess expenses,
the Trust has confirmed its obligation to pay all its other expenses, including:
interest charges, taxes, brokerage fees and commissions; certain insurance
premiums; fees, interest charges and expenses of the custodian, transfer agent
and dividend disbursing agent; telecommunications expenses; auditing, legal and
compliance expenses; costs of forming the corporation and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information, account application forms and shareholder reports and
delivering them to existing and prospective shareholders; costs of maintaining
books of original entry for portfolio and fund accounting and other required
books and accounts and of calculating the net asset value of shares of the
Trust; costs of reproduction, stationery and supplies; compensation of
directors, officers and employees of the Trust and costs of other personnel
performing services for the Trust who are not officers of an Adviser, the
manager and distributor or their respective affiliates; costs of corporate
meetings; Securities and Exchange Commission registration fees and related
expenses; state securities laws registration fees and related expenses; and fees
payable to the Advisers under the Investment Advisory Agreements.
MANAGER AND DISTRIBUTOR
Forum Financial Services, Inc. ("Forum") was incorporated under the laws of the
State of Delaware on February 7, 1986, and 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 and custodian and arranging for maintenance of books and records
of the Trust) pursuant to a management agreement with the Trust (the "Management
Agreement"). The Management Agreement provides for an initial term of one year
from its effective date with respect to the Fund and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or by the shareholders and,
in either case, by a majority of the directors who are not parties to the
Management Agreement or interested persons of any such party and do not have any
direct or indirect financial interest in the Management Agreement.
The Management Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Management 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 Forum's duties or by reason
of reckless disregard of its obligations and duties under the Management
Agreement.
Forum also acts as distributor of the Fund's shares pursuant to a distribution
services agreement (the "Distribution Services Agreement") and, pursuant
thereto, receives, and may reallow to certain financial institutions, the sales
charge paid by the purchasers of the Fund's shares. The aggregate sales charges
payable to Forum with respect to the Fund are outlined in the following table:
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FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1996
1995 $133,896 $17,656 $116,239
1994 $476,541 $61,740 $414,800
For its services under the Management Agreement, Forum receives with respect to
the Fund a fee at an annual rate of 0.30% of the average daily net assets of the
Fund. Fees payable under the Management Agreement with respect to the Fund are
outlined in the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $78,797 $78,797 $0
1994 $69,591 $53,083 $16,508
Forum provides persons satisfactory to the Board 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, its affiliates or certain affiliates
of the Advisers.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent of the Trust
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"). The
Transfer Agency Agreement provides for an initial term of one year from its
effective date with respect to the Fund and for its continuance in effect for
successive twelve-month periods thereafter, provided that the agreement is
specifically approved at least annually by the Board or by a vote of the
shareholders, and in either case by a majority of the directors who are not
parties to the Transfer Agency Agreement or interested persons of any such party
at a meeting called for the purpose of voting on the Transfer Agency Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are:
(1) answering customer inquiries regarding account status and history, the
manner in which purchases and redemptions of shares of the Fund may be effected
and certain other matters pertaining to the Fund; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, assisting in processing purchase and redemption
transactions and receiving wired funds; (4) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (5) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to its shareholders; (8) arranging for the receipt, tabulation and transmission
to the Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Fund with
respect to assets invested in the Fund. The Transfer Agent or any sub-transfer
agent or other processing agent may elect to credit against the fees payable to
it by its clients or customers all or a portion of any fee received from the
Trust or from the Transfer Agent with respect to assets of those customers or
clients invested in the Fund. The Transfer Agent, Forum or sub-transfer agents
or processing agents retained by the Transfer Agent may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub-transfer
agents or processing agents, may also be affiliated persons of the Transfer
Agent or Forum.
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For its services under the Transfer Agent Agreement, Forum receives with respect
to its transfer agency services a fee at an annual rate of 0.25% of the average
daily net assets of the Fund. Fees payable under the Transfer Agent Agreement
with respect to the Fund are outlined in the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $78,797 $78,797 $0
1994 $69,591 $53,083 $16,508
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 an annual fee
ranging from $36,000 to $60,000 depending upon the amount and type of the Fund's
portfolio transactions and positions. Fees payable under the Transfer Agent
Agreement with respect to fund accounting services for the Fund are outlined in
the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $78,797 $78,797 $0
1994 $69,591 $53,083 $16,508
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation for acting as custodian, investment manager, nominee,
agent or fiduciary for its customers or clients who are shareholders of the Fund
with respect to assets invested in the Fund.
5. DETERMINATION OF NET ASSET VALUE
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.
Purchases and redemptions are effected at the time of the next determination of
net asset value following the receipt of any purchase or redemption order.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Fund usually are principal
transactions. Portfolio securities for the Fund are normally purchased directly
from the issuer or from an underwriter or market maker for the securities.
There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and asked prices.
The Fund may effect purchases and sales through brokers who charge commissions.
Allocations of transactions to brokers and dealers and the frequency of
transactions are determined by the 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. For the
fiscal years ended March 31, 1996, 1995, 1994, the Fund paid no brokerage
commissions.
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
-17-
<PAGE>
(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.
In addition, the Adviser may give consideration to research services furnished
by brokers or dealers 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.
No portfolio transactions are executed with the Adviser, Forum or any of their
affiliates.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Fund are sold on a continuous basis by the distributor.
Set forth below is an example of the method of computing the offering price of
the Fund's shares. The example assumes a purchase of shares of common stock
aggregating less than $100,000 subject to the schedule of sales charges set
forth in the Prospectus at a price based on the net asset value per share of
$10.72 on March 31, 1996.
Net Asset Value Per Share. . . . . . . . . . . . . . . $ 10.72
Sales Charge, 3.75% of offering price
(3.90% of net asset value per share) . . . . . . . . . $ 0.42
Offering to Public . . . . . . . . . . . . . . . . . . $ 11.14
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse 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.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which a Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
The Fund may wire proceeds of redemptions to shareholders that have elected wire
redemption privileges only if the wired amount is greater than $5,000. In
addition, the Fund will only wire redemption proceeds to financial institutions
located in the United States.
By use of telephone redemption and exchange privileges, the shareholder
authorizes the Transfer Agent to act upon the instruction of any person
representing himself either to be, or to have the authority to act on behalf of,
the investor and believed by the Transfer Agent to be genuine. The records of
the Transfer Agent of such instructions
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are binding. Proceeds of an exchange transaction may be invested in another
Participating Fund account in the name of the shareholder.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Fund to exchange their shares
for shares of any other fund of the Trust or shares of certain other portfolios
of investment companies which retain Forum or its affiliates as investment
adviser or distributor and which participate in the Trust's exchange privilege
program ("Participating Fund"). For Federal income tax purposes, exchange
transactions are treated as sales on which a purchaser will realize a capital
gain or loss depending on whether the value of the shares redeemed is more or
less than his basis in such shares at the time of the transaction.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase without a
sales charge shares of any other Participating Fund that are offered without a
sales charge. Shares of any Participating Fund purchased with a sales charge
may be redeemed and the proceeds used to purchase, without a sales charge,
shares of any other Participating Fund otherwise sold with the same sales
charge. If the Participating Fund purchased in the exchange transaction imposes
a higher sales charge than was paid originally on the exchanged shares, the
shareholder will be responsible for the difference between the two sales
charges. Shares acquired through the reinvestment of dividends and
distributions are deemed to have been acquired with a sales charge rate equal to
that paid on the shares on which the dividend or distribution was paid.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
8. TAXATION
Qualification as a regulated investment company under the Internal Revenue Code
of 1986 does not involve governmental supervision of management or investment
practices or policies. Investors should consult their own counsel for a
complete understanding of the requirements the Fund must meet to qualify for
such treatment. The following discussion relates 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 the
investor's particular situation.
The Fund expects to derive substantially all of its gross income (exclusive of
capital gain) from sources other than dividends. Accordingly, it is expected
that none of the Fund's dividends or distributions will qualify for the
dividends-received deduction for corporations.
9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, The First National Bank of Boston, 100
Federal Street, Boston, Massachusetts 02106, acts as the custodian of the
Fund's assets. The custodian's responsibilities include safeguarding and
controlling the Fund's cash and securities, determining income and collecting
interest on Fund investments.
COUNSEL
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Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004.
AUDITORS
[ ], Two World Financial Center, New York, New York 10281-1414, independent
auditors, act 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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
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 June __, 1996, the officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned or owned of record more than 5% of either Fund.
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.
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
- ----------- -------------
FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended March 31, 1996 (which
include a statement of assets and liabilities, a statement of operations, a
statement of changes in net assets, notes to financial statements, financial
highlights, a statement of investments and the auditors' report thereon) are
included in the Annual Report to Shareholders of the Trust delivered along with
this SAI and are incorporated herein by reference.
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MAINE MUNICIPAL BOND FUND
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE AND MUNICIPAL BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
STANDARD AND POOR'S CORPORATION ("S&P")
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
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<PAGE>
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.
Bonds rated CC typically are subordinated to senior debt which as assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
-A2-
<PAGE>
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. SHORT TERM MUNICIPAL LOANS
MOODY'S INVESTORS SERVICE, INC.
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the MIG-1/VMIG-1 group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and, although not
distinctly or predominantly speculative, there is specific risk.
STANDARD AND POOR'S CORPORATION
SP-1. Very strong or strong capacity to pay principal and interest. Those
issues which are determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
-A3-
<PAGE>
SP-2. Satisfactory capacity to pay principal and interest.
SP-3. Speculative capacity to pay principal and interest.
3. OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
--- Leading market positions in well-established industries.
--- High rates of return on funds employed.
--- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
--- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 rating.
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F-3. Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
-A5-
<PAGE>
MAINE MUNICIPAL BOND FUND
APPENDIX B - DESCRIPTION OF MUNICIPAL SECURITIES
1. MUNICIPAL BONDS
Municipal Bonds which meet longer term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
General Obligation Bonds are issued by such entities as states, counties,
cities, towns, and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
basic security behind General Obligation Bonds is the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds in recent years have come to include an increasingly wide variety
of types of municipal obligations. As with other kinds of municipal
obligations, the issuers of revenue bonds may consist of virtually any form of
state or local governmental entity, including states, state agencies, cities,
counties, authorities of various kinds, such as public housing or redevelopment
authorities, and special districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues or net revenues derived
from a particular facility, group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source. Revenue bonds are issued
to finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these bonds provide
additional security in the form of a debt service reserve fund to be used to
make principal and interest payments. Various forms of credit enhancement, such
as a bank letter of credit or municipal bond insurance, may also be employed in
revenue bond issues. Housing authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. Some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund.
In recent years, revenue bonds have been issued in large volumes for projects
that are privately owned and operated as described below.
Private Activity Bonds are considered municipal bonds if the interest paid
thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing and health. These bonds are
also used to finance public facilities such as airports, mass transit systems
and ports. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property as security for such
payment.
While, at one time, the pertinent provisions of the Internal Revenue Code (the
"Code") permitted private activity bonds to bear tax-exempt interest in
connection with virtually any type of commercial or industrial project (subject
to various restrictions as to authorized costs, size limitations, state per
capita volume restrictions, and other matters), the types of qualifying projects
under the Code have become increasingly limited, particularly since the
enactment of the Tax Reform Act of 1986. Under current provisions of the Code,
tax-exempt financing remains available, under prescribed conditions, for owner-
occupied housing, certain privately owned and operated rental multi-family
housing facilities, nonprofit hospital and nursing home projects, certain
manufacturing or industrial projects, and solid waste disposal projects, among
others, and for the refunding (that is, the tax-exempt refinancing) of various
kinds of other private commercial projects originally financed with tax-exempt
bonds. In future years, the types of projects qualifying under the Code for
tax-exempt financing are expected to become increasingly limited.
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<PAGE>
Because of terminology formerly used in the Code, virtually any form of private
activity bond may still be referred to as an "industrial development bond," but
more and more frequently revenue bonds have become classified according to the
particular type of facility being financed, such as hospital revenue bonds,
nursing home revenue bonds, multifamily housing revenues bonds, single family
housing revenue bonds, industrial development revenue bonds and solid waste
resource recovery revenue bonds.
Tax-exempt bonds are also categorized according to whether the interest is or is
not includible in the calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of acquiring or carrying the bonds
are or are not deductible in part by banks and other financial institutions, and
according to other criteria relevant for Federal income tax purposes. Due to
the increasing complexity of Code and related requirements governing the
issuance of tax-exempt bonds, industry practice has uniformly required, as a
condition to the issuance of such bonds, but particularly for revenue bonds, an
opinion of nationally recognized bond counsel as to the tax-exempt status of
interest on the bonds.
2. MUNICIPAL NOTES
Municipal Notes generally are used to provide for short-term capital needs and
usually have maturities of one year or less. They include the following:
Tax Anticipation Notes are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business taxes, and are payable
from these specific future taxes.
Revenue Anticipation Notes are issued in expectation of receipt of other types
of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
Bond Anticipation Notes are issued to provide interim financing until long-term
financing can be arranged. In most cases, the long-term bonds then provide the
money for the repayment of the Notes.
Construction Loan Notes are sold to provide construction financing. After
successful completion and acceptance, many projects receive permanent financing
through the Federal Housing Administration under the Federal National Mortgage
Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper is a short-term obligation with a stated maturity
of 365 days or less. It is issued by agencies of state and local governments to
finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing.
3. MUNICIPAL LEASES
Municipal Leases, which may take the form of a lease or an installment purchase
or conditional sale contract, are issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities such as fire
and sanitation vehicles, telecommunications equipment and other capital assets.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the government issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The debt-
issuance limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of "non-
appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce this risk, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by an unconditional irrevocable letter
of credit or guarantee of a bank or other entity that meets the criteria
described in the Prospectus.
-B2-
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MAINE MUNICIPAL BOND FUND
APPENDIX C - HEDGING STRATEGIES
1. BOND INDEX FUTURES
Futures contracts on a municipal bond index (the "Index") are traded on the
Chicago Board of Trade. Maine Municipal Bond Fund may seek to hedge itself
against changes in interest rates by purchasing and selling futures contracts on
the Index or any municipal bond index hereafter approved for trading by the
Commodity Futures Trading Commission. The Index assigns numerical values to the
municipal securities comprising the Index and, based on those values, fluctuates
in accordance with market movements of the municipal bonds comprising the Index.
The purchaser or seller of a futures contract on the Index agrees to take or
make delivery of an amount of cash equal to the difference between a specified
dollar multiple of the value of the Index on the expiration date of the
contract, "current contract value," and the price at which the contract was
originally purchased or sold. No physical delivery of the municipal bonds
underlying the Index is made.
BOND INDEX FUTURES CHARACTERISTICS. Unlike the purchase or sale of a specific
security by the Fund, no price is paid or received by the Fund upon the purchase
or sale of an index futures contract. Initially, the Fund will be required to
deposit with the broker through which such transaction is effected or in a
segregated account with the Fund's custodian an amount of cash or U.S. Treasury
bills equal to a specified dollar amount per contract as of the date thereof.
This amount is known as initial margin. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds to finance
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker will be made on a daily basis as the price of the underlying index
fluctuates, a process known as "marking to the market." For example, when the
Fund has purchased an index futures contract and the price of the futures
contract has risen in response to a rise in the Index, that position will have
increased in value and the Fund will receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Fund has
purchased an index futures contract and the price of the futures contract has
declined in response to a decrease in the Index, the position would be less
valuable and the Fund would be required to make a variation margin payment to
the broker. At any time prior to expiration of the futures contract, the
Adviser may elect to close the position by taking an opposite position which
will operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund, and the Fund realizes a loss or gain.
RISKS OF TRANSACTIONS IN INDEX FUTURES. There are several risks in connection
with the use of index futures by the Fund as a hedging device. One risk arises
because of the imperfect correlation between movements in the price of the index
futures and the hedge. The price of the index futures may move more than or
less than the price of the securities being hedged. If the price of the index
futures moves less than the price of the securities which are the subject of the
hedge, the hedge will not be fully effective but, if the price of the securities
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the index future. If the price of the future
moves more than the price of the underlying securities, the Fund will experience
either a loss or gain on the future which will not be completely offset by
movements in the price of the securities which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of securities
being hedged and movements in the price of the index futures, the Fund may buy
or sell index futures of a greater contract value than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the Index, or if otherwise deemed to be appropriate by the Adviser.
Conversely, the Fund may buy or sell fewer index futures if the volatility over
a particular time period of the prices of the securities being hedged is less
than the volatility over
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<PAGE>
such time period of the Index, or it is otherwise deemed to be appropriate by
the Adviser. It is also possible that, where the Fund has sold index futures to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held in the Fund may decline. If this occurred, the
Fund would lose money on the future and also experience a decline in the value
of its portfolio securities. However, over time the value of a diversified
portfolio should tend to move in the same direction as the Index, although there
may be deviations arising from differences between the composition of the Fund's
portfolios and the securities comprising the Index.
When index futures are purchased to hedge against possible increases in the
price of municipal bonds before the Fund is able to invest its cash (or cash
equivalents) in municipal bonds in an orderly fashion, it is possible that the
market may decline instead. If the Fund then determines not to invest in
municipal bonds at that time because of concern as to possible further market
decline or for other reasons, the Fund will realize a loss on the index futures
that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the portion of
the portfolio being hedged, the price of index futures may not correlate
perfectly with movement in the Index due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the Index and the index futures markets. Secondly, from
the point of view of speculators, deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the index futures market may also
cause temporary price distortions. Due to the possibility of price distortion
in the index futures market, and because of the imperfect correlation between
the movements in the Index and movements in the price of index futures, a
correct forecast of general market trends by the Adviser may still not result in
a successful hedging transaction over a short time frame.
Positions in futures on the Index may be closed out only on the Chicago Board of
Trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell index futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close an index futures investment position, and in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event index futures have
been used to hedge portfolio securities, such securities will not be sold until
the futures contract can be terminated. In such circumstances, an increase in
the price of the securities, if any, may partially or completely offset losses
on the index futures. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures markets and thus provide an offset on index futures.
Successful use of index futures by the Fund is also subject to the Adviser's
ability to predict correctly movements in the direction of the municipal bond
markets. For example, if the Fund has hedged against the possibility of a
decline in the municipal bond market and bond prices increase instead, the Fund
will lose part or all of the benefit of the increased value of the portfolio
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market. The Fund
may have to sell portfolio securities at a time when it may be disadvantageous
to do so.
2. OTHER FUTURES CONTRACTS AND OPTIONS ON FUTURES
The Fund may invest in certain other financial futures contracts ("futures
contracts") and options thereon. The Fund may sell a futures contract or a call
option thereon or purchase a futures contract or a put option thereon as a hedge
against a decrease in the value of the Fund's securities. A futures contract
sale creates an obligation by the Fund, as seller, to deliver the specific type
of instrument called for in the contract at a specified future time for a
specified price. A futures contract purchase creates an obligation by the Fund,
as purchaser, to take delivery of the specific type of financial instrument at a
specified future time at a specified price. The Fund is required to maintain
margin deposits with brokerage firms through which it effects futures contracts
as described under "Bond Index Futures Characteristics."
-C2-
<PAGE>
Although the terms of futures contracts specify actual delivery or receipt of
securities, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the securities. Closing out of
a futures contract is effected by entering into an offsetting purchase or sale
transaction. An offsetting transaction for a futures contract sale is effected
by entering into a futures contract purchase for the same aggregate amount of
the specific type of financial instrument and same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the purchase price
of the offsetting transaction exceeds the sale price, the Fund pays the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the Fund realizes a
gain, and if the offsetting sale price is less than the purchase price, the Fund
realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a security
on a set date, an option on a futures contract entitles its holder to decide on
or before a future date whether to enter into such a contract. If the holder
decides not to enter into the contract, the premium paid for the option is lost.
Since the value of the option is fixed at the point of sale, the holder is not
required to make daily payments of cash to reflect the change in the value of
the underlying contract as would be the case for a purchaser or seller of a
futures contract. The value of the option does change and is reflected in the
net asset value of the Fund.
Currently, futures contracts can be purchased on certain debt securities issued
by the U.S. Treasury, the Standard & Poor's 500 Stock Index, certificates of the
Government National Mortgage Association and bank certificates of deposit. The
Fund may invest in futures contracts covering these types of financial
instruments as well as in new types of such contracts that become available in
the future.
Financial futures contracts are traded in an auction environment on the floors
of several exchanges -- principally, the Chicago Board of Trade, the Chicago
Mercantile Exchange and the New York Futures Exchange. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership which is also
responsible for handling daily account of deposit or withdrawals of margin.
Investing in futures contracts involves the risks of imperfect correlations,
secondary market illiquidity and the Adviser's incorrect predictions of market
movements, as described under "Bond Index Futures Characteristics."
Put and call options on financial futures have characteristics similar to those
of other options. For a further description of options, see "Put and Call
Options" below.
In addition to the risks associated with investing in options on securities,
there are particular risks associated with investing in options on futures. In
particular, the ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop.
The Fund may not enter into futures contracts or related options thereon if
immediately thereafter (i) the amount committed to margin plus the amount paid
for option premiums exceeds 5% of the value of the Fund's total assets or (ii)
the sum of the current contract values of open futures contracts purchased and
sold by the Fund would exceed 30% of the value of the Fund's total assets. In
instances involving the purchase of futures contracts by the Fund, an amount
equal to the market value of the futures contract will be deposited in a
segregated account of cash and cash equivalents to collateralize the position
and thereby insure that the use of such futures contract is unleveraged.
3. PUT AND CALL OPTIONS
The Fund may purchase put and call options written by others and write put and
call options covering the types of securities in which the Fund may invest. A
put option (sometimes called a "standby commitment") gives the buyer of such
option, upon payment of a premium, the right to deliver a specified amount of a
security to the writer of the option on or before a fixed date at a
predetermined price. A call option (sometimes called a "reverse standby
-C3-
<PAGE>
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 on or
before a fixed date, at a predetermined price. The Fund will not purchase any
option if, immediately thereafter, the aggregate cost of all outstanding options
purchased by the Fund would exceed 5% of the value of its total assets; a Fund
will not write any option (other than options on futures contracts) if,
immediately thereafter, the aggregate value of its portfolio securities subject
to outstanding options would exceed 30% of its total assets.
When the Fund writes a put option it maintains in a segregated account cash or
U.S. Government securities in an amount adequate to purchase the underlying
security should the put be exercised. When the Fund writes a call option it
must own at all times during the option period either the underlying securities
or an offsetting call option on the same securities. If a put option written by
the Fund were exercised, the Fund would be obligated to purchase the underlying
security at the exercise price. If a call option written by the Fund were
exercised, the Fund would be obligated to sell the underlying security at the
exercise price.
The risk involved in writing a put option is that there could be a decrease in
the market value of the underlying security caused by rising interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold to the Fund at a higher price than its
current market value. The risk involved in writing a call option is that there
could be an increase in the market value of the underlying security caused by
declining interest rates or other factors. If this occurred, the option could
be exercised and the underlying security would then be sold by the Fund at a
lower price than its current market value. These risks could be reduced by
entering into a closing transaction as described below. The Fund retains the
premium received from writing a put or call option whether or not the option is
exercised.
The Fund may dispose of an option which it has purchased by entering into a
"closing sale transaction" with the writer of the option. A closing sale
transaction terminates the obligation of the writer of the option and does not
result in the ownership of an option. The Fund realizes a profit or loss from a
closing sale transaction if the premium received from the transaction is more
than or less than the cost of the option.
The Fund may terminate its obligation to the holder of an option written by the
Fund through a "closing purchase transaction." The Fund may not, however,
effect a closing purchase transaction with respect to such an option after it
has been notified of the exercise of such option. The Fund realizes a profit or
loss from a closing purchase transaction if the cost of the transaction is more
or less than the premium received by the Fund from writing the option.
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NEW HAMPSHIRE BOND FUND
- --------------------------------------------------------------------------------
Account Information and
Shareholder Servicing: Distributor:
Forum Financial Corp. Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1996
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus offering shares
of the New Hampshire Bond 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 the Trust's Distributor or Shareholder Servicing at
the addresses listed above.
TABLE OF CONTENTS
Page
----
1. Investment Policies . . . . . . . . . . . . . . . . . .
2. Investment Limitations. . . . . . . . . . . . . . . . .
3. Performance Data. . . . . . . . . . . . . . . . . . . .
4. Management. . . . . . . . . . . . . . . . . . . . . . .
5. Determination of Net Asset Value. . . . . . . . . . . .
6. Portfolio Transactions. . . . . . . . . . . . . . . . .
7. Additional Purchase and
Redemption Information. . . . . . . . . . . . . . . . .
8. Taxation. . . . . . . . . . . . . . . . . . . . . . . .
9. Other Information . . . . . . . . . . . . . . . . . . .
Appendix A - Description of Securities Ratings
Appendix B - Description of Municipal Securities
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
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and other nationally recognized statistical rating organizations
("NRSROs") 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 municipal bonds and other municipal securities by several
NRSROs is included in Appendix A to this Statement of Additional Information.
The Fund may use these ratings to determine whether to purchase, sell or hold a
security. However, 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. If an issue of securities ceases to be
rated or if its rating is reduced after it has been purchased by the Fund, Forum
Advisors, Inc. (the "Adviser") will determine 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. An issuer's current financial condition may be better or worse than a
rating indicates.
The Fund may retain a security whose rating has been lowered below the lowest
permissible rating category (or that is 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 non-rated security is considered to be
of comparable quality to a rated security when the Adviser believes that the
financial condition of the issuer of the obligation and the protection afforded
by the terms of the obligation itself limit the risk to the Fund to a degree
comparable to that of the rated security.
MUNICIPAL SECURITIES
The term "municipal securities," as used in the Prospectus and this Statement of
Additional Information, means obligations of the type described in Appendix B
issued by or on behalf of New Hampshire, territories and possessions of the
United States and their political subdivisions, agencies and instrumentalities,
the interest from which is exempt from Federal income tax and New Hampshire
state income and dividends taxes. The municipal securities in which the Fund
will invest are limited to those obligations which at the time of purchase: (i)
are backed by the full faith and credit of the United States Government; (ii)
are municipal notes rated in the four highest rating categories by an NRSRO, or,
if not rated, are of comparable quality as determined by the Adviser; (iii) are
municipal bonds rated in the six highest rating categories by an NRSRO or, if
not rated, are of comparable quality as determined by the Adviser; or (iv) are
other types of municipal securities, provided that such obligations are of
comparable quality as determined by the Adviser to instruments in which the Fund
may invest.
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<PAGE>
MUNICIPAL LEASES
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds or notes. Municipal leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased assets to pass eventually to the government lessee) are sometimes viewed
as a means for governmental issuers to acquire property and equipment without
meeting constitutional or statutory requirements for issuance of long-term debt.
However, in New Hampshire the State agency that supervises raising of revenue by
local units of government takes the position that municipal leases are subject
to statutory requirements for issuance of long-term debt unless they contain
"non-appropriations" clauses providing that the governmental unit's obligation
to make future payments under the lease or contract is contingent upon annual
appropriation by the legislative body of the governmental unit. Also, the New
Hampshire State Attorney General will ordinarily not approve any form of lease
contracted by State government in the absence of such a "non-appropriations"
clause. Accordingly, the Fund will purchase municipal leases that do not
contain "non-appropriations" clauses only if such leases have been authorized in
accordance with statutory requirements for issuance of long-term debt. The Fund
will purchase municipal leases containing "non-appropriations" clauses only if
the payment of principal and accrued interest is backed by an unconditional,
irrevocable letter of credit or guarantee of a bank or other entity that has
long-term outstanding debt securities rated in one of the top two rating
categories by an NRSRO (or are unrated and determined by the Adviser to be of
comparable quality).
TEMPORARY DEFENSIVE POSITION
As a temporary defensive position the Fund may invest without limit in cash, the
types of financial institution obligations in which the Fund is permitted to
invest (as described in the Prospectus) and short-term debt instruments 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"). The
U.S. Government Securities in which the Fund may invest include (i) direct
obligations of the U.S. Treasury (such as Treasury bills and notes) and
obligations issued or guaranteed by U.S. government agencies and
instrumentalities backed by the full faith and credit of the U.S. Government,
such as those guaranteed by the Federal Housing Administration and issued by the
Government National Mortgage Association and (ii) securities supported primarily
or solely by the creditworthiness of the issuer, such as securities of the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Tennessee Valley Authority. There is no guarantee that the
U.S. Government will support securities not backed by its full faith and credit.
Accordingly, these securities may involve more risk than U.S. Government
Securities backed by the U.S. Government's full faith and credit.
VARIABLE AND FLOATING RATE OBLIGATIONS
The interest rates payable on certain municipal securities, including municipal
leases, in which the Fund may invest are not fixed and may fluctuate based upon
changes in market rates. These securities are referred to as variable rate or
floating rate obligations. Other features of these obligations may include the
right whereby the Fund may demand prepayment of the principal amount of the
obligation prior to its stated maturity and the right of the issuer to prepay
the principal amount prior to maturity. The main benefit of a variable or
floating rate municipal security is that the interest rate adjustment minimizes
changes in the market value of the obligation. As a result, the purchase of
these municipal securities enhances the ability of the Fund to sell an
obligation prior to maturity at a price approximating the full principal amount
of the obligation. The payment of principal and interest by issuers of certain
municipal securities purchased by the Fund may be guaranteed by letters of
credit or other credit facilities offered by banks or other financial
institutions. Such guarantees will be considered in determining whether a
municipal security meets the Fund's investment quality requirements. The
Adviser will monitor the pricing, quality and liquidity of variable rate and
floating rate demand obligations held by the Fund on the basis of published
financial information, rating agency reports and other research services to
which the Fund or Adviser may subscribe.
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PARTICIPATION INTERESTS
The Fund may purchase participation interests in municipal bonds, including
private activity bonds and floating and variable rate securities that are owned
by banks or other financial institutions. A participation interest gives the
Fund an undivided interest in a municipal security owned by a bank or other
financial institution. These instruments carry a demand feature permitting the
holder to tender them back to the bank or other institution and are generally
backed by an irrevocable letter of credit or guarantee of the bank or
institution. The Fund can exercise the right, on not more than thirty days'
notice, to sell such an instrument back to the bank or institution from which it
purchased the instrument and draw on the letter of credit for all or any part of
the principal amount of the Fund's participation interest in the instrument,
plus accrued interest. Generally, the Fund will do so only (i) as required to
provide liquidity to the Fund, (ii) to maintain a high quality investment
portfolio, or (iii) upon a default under the terms of the demand instrument.
Banks and other financial institutions retain portions of the interest paid on
such participation interests as their fees for servicing such instruments and
the issuance of related letters of credit, guarantees and repurchase
commitments. Exposure to credit losses arising from the possible financial
difficulties of borrowers might affect the bank's or other institution's ability
to meet its obligations under its letter of credit or other guarantee.
The Fund will not purchase participation interests unless it is advised by
counsel or receives a ruling of the Internal Revenue Service or appropriate New
Hampshire regulatory agency that interest earned by the Fund from the
obligations in which it holds participation interests is exempt from Federal
income tax and New Hampshire interest and dividends taxes. The Internal Revenue
Service has announced that it ordinarily will not issue advance rulings on
certain of the Federal income tax consequences applicable to securities, or
participation interests therein, subject to a put. The Adviser will monitor the
pricing, quality and liquidity of participation interests held by the Fund on
the basis of published financial information, rating agency reports and other
research services to which the Fund or the Adviser may subscribe.
STAND-BY COMMITMENTS
The Fund acquires stand-by commitments solely to facilitate portfolio liquidity
and does not exercise its rights thereunder for trading purposes. Since the
value of a stand-by commitment is dependent on the ability of the stand-by
commitment writer to meet its obligation to repurchase, the Fund's policy is to
enter into stand-by commitment transactions only with municipal securities
dealers which in the opinion of the Adviser present minimal credit risks.
The acquisition of a stand-by commitment does not affect the valuation or
maturity of the underlying municipal securities. Stand-by commitments acquired
by the Fund are valued at zero in determining net asset value. When the Fund
pays directly or indirectly for a stand-by commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Stand-by commitments do not affect the average weighted maturity of the Fund's
portfolio of securities.
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, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and
settlement, no payment is made for the securities purchased by the purchaser
and, thus, no interest accrues to the purchaser from the transaction. At the
time 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
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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 commitment 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 commitment
transactions 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. 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 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
commitment transactions will be entered into by the Fund if, as a result, more
than 15% of the value of the Fund's total assets would be committed to such
transactions.
The Fund will establish and maintain with its custodian a separate account with
cash, U.S. Government Securities and other liquid high-grade debt securities in
an amount at least equal to its commitments to purchase securities on a when-
issued or delayed delivery basis.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, repurchase agreements maturing in more than seven
days and municipal leases other than those the Adviser has determined are liquid
pursuant to guidelines established by the Trust's Board of Directors (the
"Board").
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to the Adviser, pursuant to
guidelines approved by the Board. The Adviser takes into account a number of
factors in reaching liquidity decisions, including but not limited to: (1) the
frequency of trades and quotations for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) the willingness of dealers to undertake to make a market in the
security; and (4) the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer. The Adviser monitors the liquidity of the securities
in the Fund's portfolio and reports periodically on such decisions to the Board.
GENERAL
Yields on municipal securities are dependent on a variety of factors, including
the general conditions of the money market and of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally subject to greater
price movements than obligations with shorter maturities. An increase in
interest rates will generally reduce the market value of portfolio investments,
and a decline in interest rates will generally increase the value of portfolio
investments.
There can be no assurance that the Fund's investment objective will be achieved.
The achievement of the Fund's objective is dependent in part on the continuing
ability of the issuers of municipal securities in which the Fund invests to meet
their obligations for the payment of principal and interest when due. Municipal
securities historically have not been subject to registration with the
Securities and Exchange Commission, although there have been proposals which
would require registration in the future.
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The obligations of municipal securities issuers may become subject to laws
enacted in the future by Congress, state legislatures, or referenda extending
the time for payment of principal and/or interest, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. There is also the possibility that, as a result of litigation or
other conditions, the ability of any issuer to pay, when due, the principal of
and interest on its municipal securities may be materially affected.
CERTAIN INFORMATION CONCERNING THE STATE OF NEW HAMPSHIRE
Material in this section has been abstracted from the State of New Hampshire
Official Statement dated November 30,1994, which is compiled by the Treasurer of
the State of New Hampshire and which is provided to prospective purchasers of
debt securities offered by the State. While information in the Official
Statement is believed to be accurate, none of that information has been
independently verified. Also, it does not reflect economic conditions or
developments that may have occurred or trends that may have materialized since
the date of the Official Statement. Additionally, economic and fiscal
conditions in individual municipalities within the State may vary from general
economic and fiscal conditions.
New Hampshire is located in the New England Region and is bordered by the states
of Maine, Massachusetts, and Vermont and the Province of Quebec, Canada. New
Hampshire's geographic area is 9,304 square miles and its April 1993 population
was 1,125,000, representing a slight increase from 1992 levels. New Hampshire's
population had increased by more than 20% in the 1980-1990 period.
New Hampshire's per capita personal income increased by 115% from 1980 through
1990. In 1991 it continued to grow faster than the New England region as a
whole and in 1992 and 1993 it grew at a slightly lower rate than the region.
New Hampshire's per capita personal income in 1993 was 106.7% of the national
level, ranking 10th in the United States.
In 1993, New Hampshire's largest employment sector was the service sector (27.3%
of employment in 1993), followed by retail and wholesale trade (25.6% of
employment in 1993). Manufacturing was the third largest sector (19.4% of
employment in 1993). Non-agricultural employment levels have remained fairly
stable. but The unemployment rate declined to 6.6% in 1993, less than the
national average, and preliminary data for the first nine months of 1994 show
New Hampshire's unemployment rate at 3.9%, compared to a national average of
5.9%.
After a significant growth in residential building activity in the period 1980-
86 (data based on residential building permits), New Hampshire's residential
building activity declined beginning in 1987, and declined below 1980 levels in
1990 and 1991 and 1992. In 1993, residential building activity surpassed 1990
levels. Reflecting the State and regional economic downturn in real estate, in
October 1991 State and Federal banking officials closed the subsidiary banks of
five of the State's largest bank holding companies. The subsidiary banking
assets of three of those companies were sold to First New Hampshire Bank, a
subsidiary of the Bank of Ireland. The subsidiary banking assets of the two
remaining holding companies were sold to an investor group which opened a new
banking , acquired in 1994 by Shawmut National Corporation. All depositors of
the closed banks were protected to the full amounts of their deposits.
Significant real estate assets of the closed banks continue to be disposed of,
which may affect real estate values for some time. In 1993, the state's
financial institutions reported a general return to profitability.
New Hampshire finances the operations of state government through specialized
taxes, user charges and revenues received from the State liquor sales and
distribution system. There is no general tax on sales or earned income. The
two highest revenue-producing taxes have been the Business Profits Tax and the
Rooms and Meals Tax until 1992, when Medicaid Enhancement Revenues became the
single largest revenue source. In 1992, State and local taxes amounted to
$98.10 per $1,000 of personal income, which was the fourth lowest in the United
States. However, because local property taxes are the principal source of
funding for municipal operations and primary and secondary education, New
Hampshire was highest among all states in local property tax collections per
$1,000 of personal income.
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New Hampshire State government's budget is enacted to cover a biennial period
through a series of legislative bills that establish appropriations and
estimated revenues for each sub-unit of State government, along with
supplemental and special legislation. By statute, the budget process is
initiated by the Governor, who is required to submit operating and capital
budget proposals to the Legislature by February 15 in each odd-numbered year.
While the Governor is required to state the means through which all expenditures
will be financed, there is no constitutional or statutory requirement that the
Governor propose or the Legislature adopt a budget without resorting to
borrowing. There is no line item veto.
State government funds include the General Fund, four special purpose funds and
three enterprise funds, as well as certain "fiduciary" funds. All obligations
of the State are paid from the State Treasury, and must be authorized by a
warrant signed by the Governor and approved by the Executive Council, except for
payments of debt obligations, which are paid by the State Treasurer under
statutory authority.
By statute, at the close of each fiscal year, any General Fund operating surplus
up to 5% of General Fund unrestricted revenue must be deposited in a Revenue
Stabilization Reserve Account ("Rainy Day Fund"). With approval of the
Legislative Fiscal Committee, the Governor and the Executive Council, the Rainy
Day Fund is available to defray operating deficits in ensuing years if there is
a shortfall in forecast revenue. By statute, the Rainy Day Fund may not be used
for any other purpose except by special appropriation approved by two-thirds of
each Legislative chamber and the Governor. At the end of the 1990 fiscal year,
$28.5 Million was transferred from the Rainy Day Fund to the General Fund as
partial offset to an operating deficit., As of June 30, 1993 there was a
balance of $20.0 million in the rainy Day Fund, resulting from transfer of a
portion of the fiscal year-end 1993 General Fund surplus.
The Department of Administrative Services is responsible for maintenance of
State government's accounting system, annual reports and general budget
oversight. Expenditures are controlled against appropriations through an
integrated accounting system which compares the amount of an appropriation to
expenditures and encumbrances previously charged against that appropriation
before creating an expenditure. By law, with certain exceptions unexpended and
unencumbered balances of appropriations lapse to surplus in the applicable fund
at the end of each fiscal year, along with unappropriated revenues in excess of
legislative estimates. Legislative financial controls involve the Office of
Legislative Budget Assistant ("LBA") which acts under supervision of the
Legislative Fiscal Committee and Joint Legislative Capital Budget Overview
Committee. LBA conducts overall post-audit and review of the budgetary process.
State government financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") and are independently audited annually.
Starting in fiscal year 1988, growth in State General Fund revenues declined and
in fiscal 1990 declined below fiscal 1989 levels, reflecting the regional and
national recession. In 1991, the Legislature enacted increases in rates of
various special taxes and fees, acceleration of Business Profits Tax collections
and a Medicaid Enhancement Tax assessed on New Hampshire hospitals which
generated major new matching revenues from the Federal Medicaid program.
Excluding revenues from the Medicaid Enhancement Tax, revenues in fiscal 1991
were 5.4% above 1990 levels. Net revenues from the Medicaid Enhancement Tax are
not expected to be permanent. At the end of fiscal 1991, the annual deficit in
the General Fund was $13.8 million, with a cumulative deficit of $24.5 million.
On a GAAP basis, a General Fund surplus of approximately $18.6 million was
recorded at fiscal year-end 1992, due primarily to receipt of revenues from
Federal counterpart funds to the Medicaid Enhancement Tax. At fiscal year-end
1993, the General Fund surplus was $31.5 million, primarily reflecting improved
revenues.
There is no constitutional limit on the State's power to issue obligations or
incur indebtedness, and no constitutional requirement for referendum to
authorize incurrence of indebtedness by the State. Authorization and issuance
of debt is governed entirely by statute. New Hampshire pursues a debt
management program designed to minimize use of short-term debt for operating
purposes and to coordinate issuance of tax-exempt securities by the State and
its agencies.
State-guaranteed bonded indebtedness is authorized not only for general purposes
of State government, but also for the New Hampshire Turnpike System, University
System of New Hampshire, water supply and pollution control, water resources
acquisition and construction, School Building Authority, Pease Development
Authority, Business
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Finance Authority, Municipal Bond Bank and cleanup of municipal Super Fund sites
and landfills. In addition, the Housing Finance Authority and Higher Education
and Health Facilities Authority are authorized to issue bonds that do not
constitute debts or obligations of the State.
Procedure for incurrence of bonded indebtedness by individual municipalities is
governed by State statutes, which prescribe actions that must be pursued by
municipalities in incurring bonded indebtedness and limitations on the amount of
such indebtedness. In general, incurrence of bonded indebtedness by a
municipality must be for a statutorily authorized purpose and requires a two-
thirds majority vote of the municipality's legislative body.
On December 30, 1993, the New Hampshire Supreme Court reinstated and remanded
for trial a lawsuit challenging the constitutionality of the State's system of
financing public schools primarily through local property taxes. The Court
ruled that the New Hampshire Constitution imposes an enforceable duty on the
State to provide an "adequate" education to every educable child and to
guarantee adequate funding. However, the Court did not determine the adequacy
of the State's current education programs or current funding levels, leaving
those matters to the Legislative and Executive branches to determine in the
first instance. The potential impact, if any, of this litigation on the State's
finances cannot presently be determined.
2. INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment limitations that
cannot be changed without the affirmative vote of a majority of the Fund's
outstanding voting securities. The Fund may not:
(1) With respect to 50% of its assets, purchase a security other than a
U.S. Government Security of any one issuer if, as a result, more than
5% of the Fund's total assets would be invested in the securities of
that issuer or the Fund would own more than 10% of the outstanding
voting securities of that issuer.
(2) 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 having their principal business activities in
the same industry, provided there is no limit on investments in U.S.
Government Securities, municipal securities or in the securities of
domestic financial institutions (not including their foreign
branches). For this purpose, consumer finance companies, industrial
finance companies, and gas, electric, water and telephone utility
companies are each considered to be separate industries.
(3) Underwrite securities of other issuers, except to the extent that the
Fund may be considered to be acting as an underwriter in connection
with the disposition of portfolio securities.
(4) Purchase or sell real estate or any interest therein, except that the
Fund may invest in debt obligations secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein.
(5) Invest in commodities or in commodity contracts, except that, to the
extent the Fund is otherwise permitted, the Fund may enter into
financial futures contracts and options on those futures contracts and
may invest in currencies and currency-related contracts.
(6) Borrow money, except for temporary or emergency purposes (including
the meeting of redemption requests) and except for entering into
reverse repurchase agreements, provided that borrowings do not exceed
33 1/3% of the Fund's net assets.
(7) Issue senior securities except as appropriate to evidence indebtedness
that the Fund is permitted to incur, and provided that the Fund may
issue shares of additional series or classes that the Board may
establish.
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<PAGE>
(8) Make loans except for loans of portfolio securities, through the use
of repurchase agreements, and through the purchase of debt securities
that are otherwise permitted investments.
The Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. The Fund may not:
(a) Purchase securities for investment while any borrowing equaling 10% or
more of the Fund's total assets is outstanding; and if at any time the
Fund's borrowings exceed the Fund's investment limitations due to a
decline in net assets, such borrowings will be promptly (within three
days) reduced to the extent necessary to comply with the limitations.
(b) Purchase securities that have voting rights, except the Fund may
invest in securities of other investment companies to the extent
permitted by the Investment Company Act of 1940 (the "1940 Act").
(c) Purchase securities on margin, or make short sales of securities,
except for the use of short-term credit necessary for the clearance of
purchases and sales of portfolio securities.
(d) 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.
(e) Invest in or hold securities of any issuer other than the Fund if, to
the Fund's knowledge, those directors and officers 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.
(f) Invest in oil, gas or other mineral exploration or development
programs, or leases, provided that the Fund may invest in securities
issued by companies engaged in such activities.
(g) 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 or (ii)
10% of the Fund's total assets would be invested in 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.
(h) Purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which
invest in real estate.)
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets 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 purchases and redemptions of shares will not be considered a
violation of the limitation.
For purposes of limitation number (1) listed above, the District of Columbia,
each state, each political subdivision, agency, instrumentality and authority
thereof, and each multi-state agency of which a state is a member is deemed
to be a separate "issuer." When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
the government creating the subdivision and the security is backed only by
the assets and revenues of hte subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of industrial development bonds
and private activity bonds, if the bond is backed only by the assets and
revenues of
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the
nongovernmental user, the nongovernmental user would be deemed to be the sole
issuer. However, if in either case, the creating government or some other
agency guarantees a security, that guarantee would be considered a separate
security and would be treated as an issue of such government or other agency.
No more than 25% of the Fund's total assets may be invested in the securities of
one issuer. However, this limitation does not apply to securities of an issuer
payable solely from the proceeds of U.S. Government Securities.
3. 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.
Standardized SEC yield and total return information as of March 31, 1996 is
outlined in the following table:
30 Day Annualized 30 Day Annualized Total Return Total Return Since
Yield Tax Equivalent Yield 1 Year Inception
- ----- -------------------- ------ ---------
% % % %
Tax equivalent yield is based on a combined Federal and New Hampshire state
income tax rate of 39.6% and New Hampshire state interest and dividend tax rate
of 5% was 8.67%.
The Fund commenced operations on December 31, 1992.
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., CDC/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 Municipal Bond Buyers Indices, the Salomon
Brothers Bond Index, the Shearson Lehman Bond Index, the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Fund may also 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.
YIELD CALCULATIONS
Yields for the Fund used in advertising are computed by dividing the Fund's
interest income for a given 30 days or one month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced
with respect to bonds purchased at a premium over their par value by subtracting
a portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for the Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
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The tax equivalent yield for the Fund is the rate an investor would have to earn
from a fully taxable investment in order to equal the Fund's yield after taxes.
Tax equivalent yields are calculated by dividing the Fund's yield by one minus
the stated Federal or combined Federal and state tax rate. (If only a portion
of the Fund's yield is tax-exempt, only that portion is adjusted in the
calculation.)
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield for any
given period is not an indication or representation by the Fund of future yields
or rates of return on the Fund's shares. Also, Processing Organizations (as
defined in the Prospectus) may charge their customers direct fees in connection
with an investment in the Fund, which will have the effect of reducing the
Fund's net yield to those shareholders. The yields of the Fund are not fixed or
guaranteed, and an investment in the Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare shares of
the Fund with investment alternatives which, like money market instruments or
bank accounts, may provide a fixed rate of interest. Also, it may not be
appropriate to compare the Fund's yield information directly to similar
information regarding investment alternatives which are insured or guaranteed.
TOTAL RETURN CALCULATIONS
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. 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 a given period
according to the following formula:
n
P(1+T) = ERV, where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value (ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period).
In addition to average annual returns, 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 gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1), where:
P = a hypothetical initial payment of $1,000;
PT = period total return;
ERV = ending redeemable value.
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4. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 53)
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.
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 34)
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.
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Dana A. Lukens, Assistant Secretary (age 34)
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since August 1995. Prior thereto, Mr. Lukens was associated
with the law firm of Testa, Hurwitz & Thibeault. Mr. Lukens 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 26).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Miles 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.
John Y. Keffer is an interested person of the Trust as that term is defined in
the 1940 Act.
ADVISER
The Fund's investment adviser, Forum Advisors, Inc., 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 pursuant to an investment advisory agreement with the Trust (the
"Investment Advisory Agreement"). The Investment Advisory Agreement provides
for an initial term of one year from its effective date with respect to the Fund
and for its continuance in effect for successive twelve-month periods
thereafter, provided the agreement is specifically approved at least annually by
the Board or by vote of the shareholders and, in either case, by a majority of
the directors who are not parties to the Investment Advisory Agreement or
interested persons of any such party.
The Investment Advisory Agreement is terminable without penalty by the Trust
with respect to the Fund on 60 days' written notice when authorized either by a
vote of its shareholders or by a vote of a majority of the Board, or by the
Adviser on not more than 60 days' nor less than 30 days' written notice, and
will automatically terminate in the event of its assignment. The Investment
Advisory Agreement also provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
performance of its duties to the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of the Adviser's duties or by reason of
reckless disregard of its obligations and duties under the Investment Advisory
Agreement. The Advisory Agreement provides that the Adviser may render services
to others.
For its services under the Investment Advisory Agreement, Forum receives with
respect to the Fund a fee at an annual rate of 0.40% of the average daily net
assets of the Fund. Fees payable under the Advisory Agreement with respect to
the Fund are outlined in the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1996
1995 $17,826 $17,826 $0
1994 $7,395 $7,395 $0
The Investment 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
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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 (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. The Adviser 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 assets, 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 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 to reimburse the Trust for its excess expenses,
the Trust has confirmed its obligation to pay all its other expenses, including:
interest charges, taxes, brokerage fees and commissions; certain insurance
premiums; fees, interest charges and expenses of the custodian, transfer agent
and dividend disbursing agent; telecommunications expenses; auditing, legal and
compliance expenses; costs of forming the corporation and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information, account application forms and shareholder reports and
delivering them to existing and prospective shareholders; costs of maintaining
books of original entry for portfolio and fund accounting and other required
books and accounts and of calculating the net asset value of shares of the
Trust; costs of reproduction, stationery and supplies; compensation of
directors, officers and employees of the Trust and costs of other personnel
performing services for the Trust who are not officers of an Adviser, the
manager and distributor or their respective affiliates; costs of corporate
meetings; Securities and Exchange Commission registration fees and related
expenses; state securities laws registration fees and related expenses; and fees
payable to the Adviser under the Investment Advisory Agreements.
MANAGER AND DISTRIBUTOR
Forum Financial Services, Inc. ("Forum") was incorporated under the laws of the
State of Delaware on February 7, 1986, and 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 and custodian and arranging for maintenance of books and records
of the Trust) pursuant to a management agreement with the Trust (the "Management
Agreement"). The Management Agreement provides for an initial term of one year
from its effective date with respect to the Fund and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or by the shareholders and,
in either case, by a majority of the directors who are not parties to the
Management Agreement or interested persons of any such party and do not have any
direct or indirect financial interest in the Management Agreement.
The Management Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Management 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 Forum's duties or by reason
of reckless disregard of its obligations and duties under the Management
Agreement.
Forum also acts as distributor of the Fund's shares pursuant to a distribution
services agreement (the "Distribution Services Agreement") and, pursuant
thereto, receives, and may reallow to certain financial institutions, the sales
charge paid by the purchasers of the Fund's shares. The aggregate sales charges
payable to Forum with respect to the Fund are outlined in the following table:
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FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
-------- ------------ --------------- ----------------
1996
1995 $33,166 $4,429 $28,737
1994 $147,210 $19,206 $128,004
For its services under the Management Agreement, Forum receives with respect to
the Fund a fee at an annual rate of 0.30% of the average daily net assets of the
Fund. Fees payable under the Management Agreement with respect to the Fund are
outlined in the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1996
1995 $13,369 $13,369 $0
1994 $5,546 $5,546 $0
Forum provides persons satisfactory to the Board 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 and its affiliates.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent of the Trust
pursuant to a transfer agency agreement with the Trust (the "Transfer Agency
Agreement"). The Transfer Agency Agreement provides for an initial term of one
year from its effective date with respect to the Fund and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or by a vote of the
shareholders and, in either case, by a majority of the directors who are not
parties to the Transfer Agency Agreement or interested persons of any such
party, at a meeting called for the purpose of voting on the Transfer Agency
Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are:
(1) answering customer inquiries regarding account status and history, the
manner in which purchases and redemptions of shares of the Fund may be effected
and certain other matters pertaining to the Fund; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, assisting in processing purchase and redemption
transactions and receiving wired funds; (4) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (5) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to its shareholders; (8) arranging for the receipt, tabulation and transmission
to the Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Fund with
respect to assets invested in the Fund. The Transfer Agent or any sub-transfer
agent or other processing agent may elect to credit against the fees payable to
it by its clients or customers all or a portion of any fee received from the
Trust or from the Transfer Agent with respect to assets of those customers or
clients invested in the Fund. The Transfer Agent, Forum or sub-transfer agents
or processing agents retained by the Transfer Agent may be
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<PAGE>
Processing Organizations (as defined in the Prospectus) and, in the case of sub-
transfer agents or processing agents, may also be affiliated persons of the
Transfer Agent or Forum.
For its services under the Transfer Agent Agreement, Forum receives with respect
to its transfer agency services a fee at an annual rate of 0.25% of the average
daily net assets of the Fund. Fees payable under the Transfer Agent Agreement
with respect to the Fund are outlined in the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1996
1995 $11,414 $8,715 $2,699
1994 $11,731 $4,622 $7,109
Pursuant to a Fund Accounting Agreement with the Trust, 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.
5. DETERMINATION OF NET ASSET VALUE
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.
Purchases and redemptions are effected at the time of the next determination of
net asset value following the receipt of any purchase or redemption order.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Fund usually are principal
transactions. Portfolio securities for the Fund are normally purchased directly
from the issuer or from an underwriter or market maker for the securities.
There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and asked prices. For the
fiscal year ended March 31, 19965, the Fund paid no brokerage commissions.
The Fund may effect purchases and sales through brokers who charge commissions.
Allocations of transactions to brokers and dealers and the frequency of
transactions are determined by the 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.
In addition, the Adviser may give consideration to research services furnished
by brokers or dealers 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.
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<PAGE>
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.
No portfolio transactions are executed with the Adviser, Forum or any of their
affiliates.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Fund are sold on a continuous basis by Forum, as the distributor
of the Trust.
Set forth below is an example of the method of computing the offering price of
the Fund's shares. The example assumes a purchase of shares of common stock
aggregating less than $100,000 subject to the schedule of sales charges set
forth in the Prospectus at a price based on the net asset value per share of
$10.33 on March 31, 1996.
Net Asset Value Per Share $. . . . . . . . . . . . . $ 10.33
Sales Charge, 3.75% of offering price
(3.90% of net asset value per share). . . . . . . . . . $ 0.40
Offering to Public. . . . . . . . . . . . . . . . . . . $ 10.73
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse 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.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which the Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
The Fund may wire proceeds of redemptions to shareholders that have elected wire
redemption privileges only if the wired amount is greater than $5,000. In
addition, the Fund will only wire redemption proceeds to financial institutions
located in the United States.
By use of telephone redemption and exchange privileges, the shareholder
authorizes the Transfer Agent to act upon the instruction of any person
representing himself either to be, or to have the authority to act on behalf of,
the investor and believed by the Transfer Agent to be genuine. The records of
the Transfer Agent of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund account in the name of
the shareholder.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Fund to exchange their shares
for shares of any other fund of the Trust or shares of certain other portfolios
of investment companies which retain Forum or its affiliates as investment
adviser or distributor and which participate in the Trust's exchange privilege
program ("Participating Fund"). For Federal income tax purposes, exchange
transactions are treated as sales on which a purchaser will realize a capital
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gain or loss depending on whether the value of the shares redeemed is more or
less than his basis in such shares at the time of the transaction.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered without a
sales charge. Shares of any Participating Fund purchased with a sales charge
may be redeemed and the proceeds used to purchase, without a sales charge,
shares of any other Participating Fund otherwise sold with the same sales
charge. If the Participating Fund purchased in the exchange transaction imposes
a higher sales charge than was paid originally on the exchanged shares, the
shareholder will be responsible for the difference between the two sales
charges. Shares acquired through the reinvestment of dividends and
distributions are deemed to have been acquired with a sales charge rate equal to
that paid on the shares on which the dividend or distribution was paid.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
8. TAXATION
Qualification as a regulated investment company under the Internal Revenue Code
of 1986 does not involve governmental supervision of management or investment
practices or policies. Investors should consult their own counsel for a
complete understanding of the requirements the Fund must meet to qualify for
such treatment. Investors should consult their own counsel for further details
and for the application of state and local tax laws to the investor's particular
situation.
The Fund expects to derive substantially all of its gross income (exclusive of
capital gain) from sources other than dividends. Accordingly, it is expected
that none of the Fund's dividends or distributions will qualify for the
dividends-received deduction for corporations.
9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement with the Trust, The First National Bank of
Boston, 100 Federal Street, Boston, Massachusetts 02106, acts as the custodian
of the Fund's assets. The custodian's responsibilities include safeguarding and
controlling the Fund's cash and securities, determining income and collecting
interest on Fund investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004.
AUDITORS
[ ], Two World Financial Center, New York, New York 10281-1414, independent
auditors, act as auditors for the Trust.
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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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
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 June __, 1996, the officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned or owned of record more than 5% of either Fund.
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.
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
- ----------- -------------
FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended March 31, 1996 (which
include a statement of assets and liabilities, a statement of operations, a
statement of changes in net assets, notes to financial statements, financial
highlights, a statement of investments and the auditors' report thereon) are
included in the Annual Report to Shareholders of the Trust delivered along with
this SAI and are incorporated herein by reference.
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APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE AND MUNICIPAL BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
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 or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, or B groups which Moody's believes possess
the strongest investment attributes are designated by the symbols Aa1, A1, Baa1,
Ba1, and B1.
STANDARD AND POOR'S CORPORATION ("S&P")
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.
<PAGE>
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.
Bonds rated CC typically are subordinated to senior debt which is assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. 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 be made
during such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
-A2-
<PAGE>
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. SHORT TERM MUNICIPAL LOANS
MOODY'S INVESTORS SERVICE, INC.
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the MIG-1/VMIG-1 group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
STANDARD AND POOR'S CORPORATION
SP-1. Very strong or strong capacity to pay principal and interest. Those
issues which are determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
-A3-
<PAGE>
SP-3. Speculative capacity to pay principal and interest.
3. OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 rating.
F-3. Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
-A4-
<PAGE>
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
-A5-
<PAGE>
NEW HAMPSHIRE BOND FUND
APPENDIX B - DESCRIPTION OF MUNICIPAL SECURITIES
1. MUNICIPAL BONDS
Municipal Bonds which meet longer term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
General Obligation Bonds are issued by such entities as states, counties,
cities, towns, and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
basic security behind General Obligation Bonds is the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds in recent years have come to include an increasingly wide variety
of types of municipal obligations. As with other kinds of municipal
obligations, the issuers of revenue bonds may consist of virtually any form of
state or local governmental entity, including states, state agencies, cities,
counties, authorities of various kinds, such as public housing or redevelopment
authorities, and special districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues or net revenues derived
from a particular facility, group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source. Revenue bonds are issued
to finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these bonds provide
additional security in the form of a debt service reserve fund to be used to
make principal and interest payments. Various forms of credit enhancement, such
as a bank letter of credit or municipal bond insurance, may also be employed in
revenue bond issues. Housing authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. Some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund.
In recent years, revenue bonds have been issued in large volumes for projects
that are privately owned and operated as described below.
Private Activity Bonds are considered municipal bonds if the interest paid
thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing and health. These bonds are
also used to finance public facilities such as airports, mass transit systems
and ports. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property as security for such
payment.
While, at one time, the pertinent provisions of the Internal Revenue Code (the
"Code") permitted private activity bonds to bear tax-exempt interest in
connection with virtually any type of commercial or industrial project (subject
to various restrictions as to authorized costs, size limitations, state per
capita volume restrictions, and other matters), the types of qualifying projects
under the Code have become increasingly limited, particularly since the
enactment of the Tax Reform Act of 1986. Under current provisions of the Code,
tax-exempt financing remains available, under prescribed conditions, for owner-
occupied housing, certain privately owned and operated rental multi-family
housing facilities, nonprofit hospital and nursing home projects, certain
manufacturing or industrial projects, and solid waste disposal projects, among
others, and for the refunding (that is, the tax-exempt refinancing) of various
kinds of other private commercial projects originally financed with tax-exempt
bonds. In future years, the types of projects qualifying under the Code for
tax-exempt financing are expected to become increasingly limited.
<PAGE>
Because of terminology formerly used in the Code, virtually any form of private
activity bond may still be referred to as an "industrial development bond," but
more and more frequently revenue bonds have become classified according to the
particular type of facility being financed, such as hospital revenue bonds,
nursing home revenue bonds, multifamily housing revenues bonds, single family
housing revenue bonds, industrial development revenue bonds and solid waste
resource recovery revenue bonds.
Tax-exempt bonds are also categorized according to whether the interest is or is
not includible in the calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of acquiring or carrying the bonds
are or are not deductible in part by banks and other financial institutions, and
according to other criteria relevant for Federal income tax purposes. Due to
the increasing complexity of Code and related requirements governing the
issuance of tax-exempt bonds, industry practice has uniformly required, as a
condition to the issuance of such bonds, but particularly for revenue bonds, an
opinion of nationally recognized bond counsel as to the tax-exempt status of
interest on the bonds.
2. MUNICIPAL NOTES
Municipal Notes generally are used to provide for short-term capital needs and
usually have maturities of one year or less. They include the following:
Tax Anticipation Notes are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business taxes, and are payable
from these specific future taxes.
Revenue Anticipation Notes are issued in expectation of receipt of other types
of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
Bond Anticipation Notes are issued to provide interim financing until long-term
financing can be arranged. In most cases, the long-term bonds then provide the
money for the repayment of the Notes.
Construction Loan Notes are sold to provide construction financing. After
successful completion and acceptance, many projects receive permanent financing
through the Federal Housing Administration under the Federal National Mortgage
Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper is a short-term obligation with a stated maturity
of 365 days or less. It is issued by agencies of state and local governments to
finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing.
3. MUNICIPAL LEASES
Municipal Leases, which may take the form of a lease or an installment purchase
or conditional sale contract, are issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities such as fire
and sanitation vehicles, telecommunications equipment and other capital assets.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the government issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The debt-
issuance limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of "non-
appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce this risk, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by an unconditional irrevocable letter
of credit or guarantee of a bank or other entity that meets the criteria
described in the Prospectus.
-B2-
<PAGE>
PAYSON VALUE FUND
PAYSON BALANCED FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
H.M. Payson & Co. Shareholder Servicing:
One Portland Square Forum Financial Corp.
P.O. Box 31 P.O. Box 446
Portland, Maine 04112 Portland, Maine 04112
207-772-3761 207-879-0009
800-456-6710
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1996
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus offering shares
of Payson Value Fund and Payson Balanced Fund (collectively the "Funds" and
individually a "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 the Trust's Distributor, Forum Financial Services, Inc., Two Portland
Square, Portland, Maine 04101.
TABLE OF CONTENTS
Page
----
1. Investment Policies . . . . . . . . . . . . . . . . . .
2. Investment Limitations. . . . . . . . . . . . . . . . .
3. Performance Data. . . . . . . . . . . . . . . . . . . .
4. Management. . . . . . . . . . . . . . . . . . . . . . .
5. Determination of Net Asset Value. . . . . . . . . . . .
6. Portfolio Transactions. . . . . . . . . . . . . . . . .
7. Additional Purchase and
Redemption Information . . . . . . . . . . . . . . .
8. Taxation. . . . . . . . . . . . . . . . . . . . . . . .
9. Other Information . . . . . . . . . . . . . . . . . . .
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.
-A1-
<PAGE>
1. INVESTMENT POLICIES
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and other nationally recognized statistical rating organizations
("NRSROs") 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 bonds and other securities by several NRSROs is included
in Appendix A to this Statement of Additional Information. The Funds may use
these ratings to determine whether to purchase, sell or hold a security.
However, 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. If an issue of securities ceases to be rated or
if its rating is reduced after it has been purchased by a Fund, H.M. Payson &
Co. (the "Advisor"), the Funds' investment advisor will determine 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. An issuer's current financial condition may be
better or worse than a rating indicates.
Each Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by the Advisor
to be of comparable quality) if the Advisor determines that retaining such
security is in the best interests of the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and
settlement, no payment is made for the securities purchased by the purchaser
and, thus, no interest accrues to the purchaser from the transaction. At the
time a Fund makes the commitment to purchase securities on a when-issued or
delayed 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 Funds to
hedge against anticipated changes in interest rates and prices. For instance,
in periods of rising interest rates and falling bond prices, a Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Advisor were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward commitment 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 Funds enter into when-issued and forward commitment
transactions only with the intention of actually receiving or delivering the
securities, as the case may be. If a Fund, 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. When-issued securities may include bonds purchased on a "when, as
and if issued" basis under which the issuance of the securities depends upon the
occurrence of a subsequent event. Any significant commitment of a Fund's assets
to the purchase of securities on a "when, as and if issued" basis may increase
the volatility of its net asset value.
Each Fund will establish and maintain with its custodian a separate account with
cash, U.S. Government Securities (as defined in the Prospectus) and other liquid
high-grade debt securities in an amount at least equal to its commitments to
purchase securities on a when-issued or delayed delivery basis.
-A2-
<PAGE>
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Trust's Board of Directors ("Board") has the ultimate responsibility for
determining whether specific securities are liquid or illiquid. The Board has
delegated the function of making day-to-day determinations of liquidity to the
Advisor, pursuant to guidelines approved by the Board. The Advisor takes into
account a number of factors in reaching liquidity decisions, including but not
limited to: (1) the frequency of trades and quotations for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of the transfer. The Advisor monitors the liquidity of the
securities in each Fund's portfolio and reports periodically on such decisions
to the Board.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities 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 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.
-A3-
<PAGE>
TEMPORARY DEFENSIVE POSITION.
When a Fund assumes a temporary defensive position it may invest in (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 have, at the time of investment, total assets
in excess of one billion dollars and that are insured by the Federal Deposit
Insurance Corporation, (iii) commercial paper of prime quality rated Prime-2 or
higher by Moody's or A-2 or higher by S&P or, if not rated, determined by the
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.
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. Under normal circumstances, each Fund
intends to invest less than 5% of the value of its net assets in the securities
of other investment companies. In addition to the Fund's expenses (including
the various fees), as a shareholder in another investment company, a Fund would
bear its pro rata portion of the other investment company's expenses (including
fees).
FUTURES CONTRACTS AND OPTIONS
Each Fund may in the future seek to hedge against a decline in the value of
securities it owns 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. Payson Value Fund may buy or sell stock index futures
contracts, such as contracts on the S&P 500 stock index, and Payson Balanced
Fund may buy and sell bond index futures contracts. In addition, both Funds may
buy or sell futures contracts on Treasury bills, Treasury bonds and other
financial instruments. The Funds may write covered options and buy options on
the futures contracts in which they may invest.
In addition, the Funds may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government Securities or other liquid, high-grade debt securities in
a segregated account with a value at all times sufficient to cover the Fund's
obligation under the option.
The Funds' use of options and futures contracts would subject the Funds to
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: (1) dependence on the Advisor's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2) imperfect correlation between movements in the
prices of options, futures contracts or related options and movements in the
price of the securities hedged or used for cover; (3) the fact that skills and
techniques needed to trade these instruments are different from those needed to
select the other securities in which the Funds invest; (4) lack of assurance
that a liquid secondary market will exist for any particular instrument at any
particular time; and (5) the possible need to defer closing out of certain
options, futures contracts and related options to avoid adverse tax
consequences. Other risks include the inability of the Fund, as the writer of
covered call options, to benefit from the appreciation of the underlying
securities above the exercise price and the possible loss of the entire premium
paid for options purchased by the Fund.
Each Fund will not hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, each Fund
will not buy futures contracts or write put options whose underlying value
exceeds 10% 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. A
Fund will not enter into futures contracts and options thereon if immediately
thereafter more than 5% of the value of the Fund's total assets would be
invested in these options or committed to margin on futures contracts.
A Fund will only invest in futures and options contracts after providing notice
to its shareholders and filing a notice of eligibility (if required) and
otherwise complying with the requirements of the Commodity Futures Trading
Commission ("CFTC"). The CFTC's rules provide that the Funds are permitted to
purchase such futures or options
-A4-
<PAGE>
contracts only (1) for bona fide hedging purposes within the meaning of the
rules of the CFTC; provided, however, that in the alternative with respect to
each long position in a futures or options contract entered into by a Fund, the
underlying commodity value of such contract at all times does not exceed the sum
of cash, short-term United States debt obligations or other United States dollar
denominated short-term money market instruments set aside for this purpose by
the Fund, accrued profit on the contract held with a futures commission merchant
and cash proceeds from existing Fund investments due in 30 days; and (2) subject
to certain limitations.
2. INVESTMENT LIMITATIONS
The Funds have adopted the following fundamental investment limitations which
are in addition to those contained in the Funds' Prospectus and which may not be
changed without shareholder approval. Each Fund may not:
(1) Borrow money, except for temporary or emergency purposes (including
the meeting of redemption requests) and except for entering into
reverse repurchase agreements, and provided that borrowings do not
exceed 33 1/3% of the Fund's total assets (computed immediately after
the borrowing).
(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 commercial paper or 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.
(7) Purchase or sell physical commodities or contracts relating to
physical commodities, provided that currencies and currency-related
contracts will not be deemed to be physical commodities.
(8) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940 ("1940 Act") and except that the Fund
may borrow money subject to investment limitations specified in the
Fund's Prospectus.
(9) Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
Each Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. Each Fund may not:
-A5-
<PAGE>
(a) 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.
(b) 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.
(c) Purchase securities on margin, or make short sales of securities,
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.
(d) 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.
(e) Invest in or hold securities of any issuer if officers and directors
of the Trust or the Advisor, 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.
(f) Purchase securities for investment while any borrowing equaling 10% or
more of the Fund's total assets is outstanding or borrow for purposes
other than meeting redemptions in an amount exceeding 10% of the value
of the Fund's total assets.
(g) 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.
(h) Invest in oil, gas or other mineral exploration or development
programs, or leases, provided that the Fund may invest in securities
issued by companies engaged in such activities.
(i) Purchase or sell real property (including limited partnership
interests but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which
invest in real estate.)
(j) Invest in warrants if (i) more than 5% of the value of the Fund's net
assets will be invested in warrants (valued at the lower of cost or
market) or (ii) more than 2% of the value of the Fund's net assets
would be invested in warrants which are not listed on the New York
Stock Exchange or the American Stock Exchange. For purpose of this
limitation, warrants acquired by the Fund in units or attached to
securities are deemed to have no value.
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets 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 purchases and redemptions of shares will not be considered a
violation of the limitation.
-A6-
<PAGE>
3. PERFORMANCE DATA
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
indicate future returns. A Fund's net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Total returns for the year ended March 31, 1996 and average annual total returns
for the periods from commencement of operations to through March 31, 1996 are as
follows.
Total Return Since
Total Return 1 Year Inception
------------------- ---------
PAYSON VALUE FUND
% %
Total Return Since
Total Return 1 Year Inception
------------------- ---------
PAYSON BALANCED FUND
% %
Payson Value Fund commenced operations on July 31, 1992. Payson Balanced Fund
commenced operations on November 25, 1991.
In performance advertising the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDC/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). In addition, a Fund may compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Salomon Brothers Bond Index, the Shearson
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. A Fund may refer in such
materials to mutual fund performance rankings and other data published by Fund
Tracking Companies. Performance advertising may also refer to discussions of a
Fund and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30-day or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced
with respect to bonds purchased at a premium over their par value by subtracting
a portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
Income calculated for the purpose of determining a Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's shares. Also, Processing Organizations may charge
their customers direct fees in
-A7-
<PAGE>
connection with an investment in a Fund, which will have the effect of reducing
the Fund's net yield to those shareholders. The yields of each Fund are not
fixed or guaranteed, and an investment in a Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare shares of
a Fund with investment alternatives which, like money market instruments or bank
accounts, may provide a fixed rate of interest. Also, it may not be appropriate
to compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return.
The other definitions are the same as in
average annual total return above.
-A8-
<PAGE>
4. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 53)
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.
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 34)
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.
Dana A. Lukens, Assistant Secretary (age 34)
-A9-
<PAGE>
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since August 1995. Prior thereto, Mr. Lukens was associated
with the law firm of Testa, Hurwitz & Thibeault. Mr. Lukens 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 26).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Miles 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.
John Y. Keffer is an interested person of the Trust as that term is defined in
the 1940 Act.
ADVISOR
The Advisor furnishes at its own expense all services, facilities and personnel
necessary in connection with managing each Fund's investments and effecting
portfolio transactions for each Fund, pursuant to an investment advisory
agreement between the Advisor and the Trust (the "Advisory Agreement"). The
Advisory Agreement provides, with respect to each Fund, for an initial term of
two years from its effective date and for its continuance in effect for
successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or, with respect to either
Fund, by vote of the shareholders of that Fund, and in either case by a majority
of the directors who are not parties to the Advisory Agreement or interested
persons of any such party.
The Advisory Agreement is terminable without penalty by the Trust with respect
to a Fund on 60 days' written notice when authorized either by vote of the
Fund's shareholders or by a vote of a majority of the Board, or by the Advisor
on not more than 60 days' nor less than 30 days' written notice, and will
automatically terminate in the event of its assignment. The Advisory Agreement
also provides that, with respect to each Fund, the Advisor shall not be liable
for any error of judgment or mistake of law or for any act or omission in the
performance of its duties to the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of the Advisor's duties or by reason of
reckless disregard of its obligations and duties under the Advisory Agreement.
In addition, under the Advisory Agreement, if the Advisor ceases to act as a
Fund's investment advisor, or in the event the Advisor so requests in writing,
the Trust will change a Fund's name so as not to include the word "Payson." The
Advisory Agreement provides that the Advisor may render services to others.
For its services under the Investment Advisory Agreement, H.M. Payson & Co.
receives with respect to each Fund a fee at an annual rate of 0.80% and 0.60% of
the average daily net assets of Payson Value Fund and Payson Balanced Fund,
respectively. Fees payable under the Advisory Agreement with respect to each
Fund are outlined in the following tables:
PAYSON VALUE FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $51,285 $0 $51,285
1994 $27,628 $1,434 $26,194
PAYSON BALANCED FUND
FISCAL YEAR ENDED
-A10-
<PAGE>
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $75,058 $0 $75,058
1994 $50,158 $2,662 $47,496
In addition to receiving its advisory fee from the Funds, the Advisor may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in a Fund. In some instances the Advisor may elect to
credit against any investment management fee received from a client who is also
a shareholder in a Fund an amount equal to all or a portion of the fees received
by the Advisor or any affiliate of the Advisor from a Fund with respect to the
client's assets invested in that Fund.
MANAGER AND DISTRIBUTOR
Forum Financial Services, Inc. ("Forum") was incorporated under the laws of the
State of Delaware on February 7, 1986 and 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 and custodian and arranging for maintenance of books and records
of the Trust), provides the Trust with general office facilities and serves as
distributor of shares of the Funds pursuant to a management and distribution
agreement between Forum and the Trust (the "Management and Distribution
Agreement"). The Management and Distribution Agreement provided, with respect
to each Fund, for an initial term of one year from its effective date and for
its continuance in effect for successive twelve-month periods thereafter,
provided the agreement is specifically approved at least annually by the Board
or, with respect to either Fund, by the shareholders of that Fund, and in either
case by a majority of the directors who are not parties to the Management and
Distribution Agreement or interested persons of any such party and do not have
any direct or indirect financial interest in the Distribution Plan or in any
agreement related to the Distribution Plan. (See "Management -- Distribution
Plan.")
The Management and Distribution Agreement terminates automatically if it is
assigned and may be terminated without penalty with respect to either Fund by
vote of that Fund's shareholders or by either party on not more than 60 days'
nor less than 30 days' written notice. The Management and Distribution
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 Forum's duties or by reason of reckless disregard of its
obligations and duties under the Management and Distribution Agreement.
For its services under the Management Agreement, Forum receives with respect to
each Fund a fee at an annual rate of 0.20% of the average daily net assets of
the Fund. Fees payable under the Management Agreement with respect to each Fund
are outlined in the following tables:
PAYSON VALUE FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $12,821 $12,821 $0
1994 $6,907 $6,907 $0
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
-A11-
<PAGE>
1996
1995 $25,019 $25,019 $0
1994 $16,719 $16,719 $0
Forum has agreed to reimburse the Trust for certain of the Funds' 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 Funds'
shares are qualified for sale. Forum believes that currently the most
restrictive expense ratio limitation imposed by any state is 2-1/2% of the first
$30 million of each Funds' average net assets, 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 purpose of this obligation to reimburse expenses, the Funds'
annual expenses are estimated and accrued daily, and any appropriate estimated
payments will be made by Forum monthly.
Subject to the obligations of Forum to reimburse the Trust for its excess
expenses as described in the Prospectus, the Trust has confirmed its obligation
to pay all of its other expenses, including: interest charges, taxes, brokerage
fees and commissions; certain insurance premiums; fees, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent;
telecommunications expenses; auditing, legal and compliance expenses; costs of
forming the corporation and maintaining corporate existence; costs of preparing
and printing the Trust's prospectuses, statements of additional information,
account application forms and shareholder reports and delivering them to
existing and prospective shareholders; costs of maintaining books of original
entry for portfolio and fund accounting and other required books and accounts
and of calculating the net asset value of shares of the Trust; costs of
reproduction, stationery and supplies; compensation of directors, officers and
employees of the Trust and costs of other personnel performing services for the
Trust who are not officers of the Advisor, Forum or their respective affiliates;
costs of corporate meetings; Securities and Exchange Commission registration
fees and related expenses; state securities laws registration fees and related
expenses; fees payable to the Advisor under the Advisory Agreement and to Forum
under the Management and Distribution Agreement and all other fees and expenses
paid by the Trust under the Distribution Plan.
Pursuant to the Management and Distribution Agreement, Forum receives, and may
reallow to certain financial institutions, the sales charge paid by the
purchasers of each Fund's shares.
Forum provides persons satisfactory to the Board 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, its affiliates or affiliates of the
Advisor.
DISTRIBUTION PLAN
In accordance with Rule 12b-1 under the 1940 Act, the Trust adopted a
distribution plan (the "Plan") which provides that all written agreements
relating to the Plan must be in a form satisfactory to the Board. In addition,
the Plan requires the Trust, the Advisor and Forum to prepare, at least
quarterly, written reports setting forth all amounts expended for distribution
purposes by the Trust, the Advisor and Forum pursuant to the Plan and
identifying the distribution activities for which those expenditures were made.
The Plan provides that it will remain in effect for one year from the date of
its adoption and thereafter shall continue in effect provided it is approved at
least annually by the shareholders or by the Board, 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 or, with respect to either Fund, by the Fund's shareholders.
During the fiscal year ended March 31, 1996, neither Fund paid any distribution
related expenses pursuant to the Distribution Plan.
-A12-
<PAGE>
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent of the Trust
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"). The
Transfer Agency Agreement provided, with respect to each Fund, for an initial
term of one year from its effective date and for its continuance in effect for
successive twelve-month periods thereafter, provided that the agreement is
specifically approved at least annually by the Board or, with respect to either
Fund, by a vote of the shareholders of that Fund, and in either case by a
majority of the directors who are not parties to the Transfer Agency Agreement
or interested persons of any such party at a meeting called for the purpose of
voting on the Transfer Agency Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are:
(1) answering customer inquiries regarding account status and history, the
manner in which purchases and redemptions of shares of the Funds may be effected
and certain other matters pertaining to the Funds; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, assisting in processing purchase and redemption
transactions and receiving wired funds; (4) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (5) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to its shareholders; (8) arranging for the receipt, tabulation and transmission
to the Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Funds with
respect to assets invested in the Funds. The Transfer Agent or any sub-transfer
agent or other processing agent may elect to credit against the fees payable to
it by its clients or customers all or a portion of any fee received from the
Trust or from the Transfer Agent with respect to assets of those customers or
clients invested in the Funds. The Transfer Agent, Forum or sub-transfer agents
or processing agents retained by the Transfer Agent may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub-transfer
agents or processing agents, may also be affiliated persons of the Transfer
Agent or Forum.
For its services under the Transfer Agent Agreement, Forum receives with respect
to its transfer agency services a fee at an annual rate of 0.25% of the average
daily net assets of each Fund. Fees payable under the Transfer Agent Agreement
with respect to each Fund are outlined in the following tables:
PAYSON VALUE FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $16,027 $3,820 $12,207
1994 $8,634 $8,634 $0
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1996
1995 $31,274 $19,059 $12,215
1994 $20,899 $20,899 $0
-A13-
<PAGE>
Pursuant to a Fund Accounting Agreement, the Transfer Agent also provides the
Funds with portfolio accounting, including the calculation of the Funds' net
asset value. For these services, the Transfer Agent receives with respect to
each 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.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation for acting as custodian, investment manager, nominee,
agent or fiduciary for its customers or clients who are shareholders of the Fund
with respect to assets invested in the Fund.
5. DETERMINATION OF NET ASSET VALUE
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.
Purchases and redemptions are effected at the time of the next determination of
net asset value following the receipt of any purchase or redemption order.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of debt securities for Payson Balanced Fund usually are
principal transactions. Portfolio Securities for that Fund are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for such
purchases. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
asked prices.
Payson Value Fund will, and Payson Balanced Fund may, effect purchases and sales
through brokers who charge commissions. Allocations of transactions to brokers
and dealers and the frequency of transactions are determined by the Advisor 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. For the fiscal years ended March 31, 1996, 1995,
and 1994, the aggregate brokerage commissions paid by Payson Value Fund were
$______, $15,276, and $8,809, respectively. For the fiscal years ended March
31, 1996, 1995, and 1994, the aggregate brokerage commissions paid by Payson
Balanced Fund were $______, $27,143, and $22,915, respectively.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Advisor 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 Advisor may also take into account
payments made by brokers effecting transactions for a 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.
In addition, the Advisor may give consideration to research services furnished
by brokers to the Advisor for its use and may cause a 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 Advisor in connection with services to
clients other than the Funds, and the Advisor's fee is not reduced by reason of
the Advisor's receipt of the research services.
Investment decisions for the Funds will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Advisor or its affiliates. If, however, a Fund and other investment
companies or accounts managed by the Advisor are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by a Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for a Fund and for other investment companies and accounts managed
by the Advisor occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
-A14-
<PAGE>
In the future the Funds, consistent with the policy of obtaining best net
results, may conduct brokerage transactions through the Advisor's affiliates,
affiliates of those persons or Forum. If a Fund anticipates conducting
brokerage transactions through these persons, the Board will adopt procedures in
conformity with applicable rules under the 1940 Act to ensure that all brokerage
commissions paid to these persons are reasonable and fair.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor.
Set forth below is an example of the method of computing the offering price of
each Fund's shares. The example assumes a purchase of shares of beneficial
interest aggregating less than $100,000 subject to the schedule of sales charges
set forth in the Prospectuses at a price based on the net asset value per share
of each Fund on March 31, 1996.
Payson Payson
Value Balanced
Fund Fund
---- ----
Net Asset Value Per Share $ 15.99 $ 13.70
Sales Charge, 3.75% of offering
price (3.90% of net asset value
per share) $ 0.62 $ 0.53
Offering to Public $ 16.61 $ 14.23
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to a Fund's shares as provided in the
Prospectus.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which a Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other fund of the Trust or shares of certain other
portfolios of investment companies which retain Forum or its affiliates as
investment adviser or, distributor and which participate in the Trust's exchange
privilege program ("Participating Fund"). For Federal income tax purposes,
exchange transactions are treated as sales on which a purchaser will realize a
capital gain or loss depending on whether the value of the shares redeemed is
more or less than his basis in such shares at the time of the transaction.
By use of the exchange privilege, the shareholder authorizes the Transfer Agent
to act upon the instruction of any person representing himself to either be, or
to have the authority to act on behalf of, the investor and believed by the
Transfer Agent to be genuine. The records of the Transfer Agent of such
instructions are binding. Proceeds of an exchange transaction may be invested
in another Participating Fund in the name of the shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of
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<PAGE>
any Participating Fund may be redeemed and the proceeds used to purchase,
without a sales charge, shares of any other Participating Fund that are offered
without a sales charge. Shares of any Participating Fund purchased with a sales
charge may be redeemed and the proceeds used to purchase, without a sales
charge, shares of any other Participating Fund otherwise sold with the same
sales charge. If the Participating Fund purchased in the exchange transaction
imposes a higher sales charge than was paid originally on the exchanged shares,
the shareholder will be responsible for the difference between the two sales
charges. Shares acquired through the reinvestment of dividends and
distributions are deemed to have been acquired with a sales charge rate equal to
that paid on the shares on which the dividend or distribution was paid.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
PAYROLL PURCHASE PROGRAM
Shares of the Funds may be purchased by employees of employers participating in
the Payroll Purchase Program ("PPP"). Employers wishing to participate must
arrange payroll deduction or other bulk transmission of investments to the
Funds. An employer may not participate unless, at all times, at least five of
the employer's employees are participating in this program.
Once an employer chooses to participate in PPP through a payroll deduction or
other bulk purchase plan, subsequent investments will be automatic and will
continue until such time as the investor notifies the applicable Fund and his
employer to discontinue further investments. Due to the varying procedures to
prepare, process and forward the transmission to the Fund, there may be a delay
between the time of the deduction and the time the money reaches the Fund. An
investment in the Fund will be made at the applicable offering price determined
on the day that both the check and the payroll deduction data are received in
required form by the Transfer Agent.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Funds offer an individual retirement plan (the "IRA") for individuals who
wish to use shares of the Funds as a medium for funding individual retirement
savings. Under the IRA, distributions of net investment income and capital gain
will be automatically reinvested in the IRA established for the investor. The
Funds' custodian furnishes custodial services to the IRAs for a service fee.
Shareholders wishing to use a Fund's IRA should contact the Transfer Agent for
further details and information.
8. TAXATION
Qualification as a regulated investment company under the Internal Revenue Code
of 1986 does not involve governmental supervision of management or investment
practices or policies. Investors should consult their own counsel for a
complete understanding of the requirements the Funds must meet to qualify for
such treatment. The information set forth in the Prospectus and the following
discussion relate solely to Federal income taxes on dividends and distributions
by a Fund and assume that each Fund qualifies as a regulated investment company.
Investors should consult their own counsel for further details and for the
application of state and local tax laws to the investor's particular situation.
Payson Value Fund expects to derive a substantial amount of its gross income
(exclusive of capital gain) from dividends. Accordingly, that portion of that
Fund's dividends so derived will qualify for the dividends-received deduction
for corporations. Payson Balanced Fund expects to derive substantially all of
its gross income (exclusive of capital gain) from sources other than dividends.
Accordingly, it is expected that most of that Fund's dividends or distributions
will not qualify for the dividends-received deduction for corporations.
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<PAGE>
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
capital gain or loss. A Fund can elect to exempt its section 1256 contracts
which are part of a "mixed straddle" from the application of section 1256.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if a
Fund exercises an option, or if an option that a Fund has written is exercised,
gain or loss on the option will not be separately recognized but the premium
received or paid will be included in the calculation of gain or loss upon
disposition of the property underlying the option.
9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, The First National Bank of Boston, 100
Federal Street, Boston, MA 02106, acts as the custodian of the Funds' assets.
The custodian's responsibilities include safeguarding and controlling the Funds'
cash and securities, determining income and collecting interest on Fund
investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004
AUDITORS
[ ], Two World Financial Center, New York, New York 10281-1414, independent
auditors, act 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. 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 11 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
have available certain procedures for the removal of Trustees. There are no
conversion or
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<PAGE>
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 June __, 1996, the officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned or owned of record more than 5% of either Fund.
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.
PAYSON VALUE FUND
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
- ----------- -------------
PAYSON BALANCED FUND
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
- ----------- -------------
FINANCIAL STATEMENTS
The financial statements of Payson Balanced Fund for the year ended March 31,
1996, which are included in the Annual Report to Shareholders of the Trust and
delivered along with this Statement of Additional Information, are incorporated
herein by reference.
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<PAGE>
PAYSON VALUE FUND
PAYSON BALANCED FUND
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
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<PAGE>
STANDARD AND 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 repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated CC typically are debt subordinated to senior debt which is assigned
an actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
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<PAGE>
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
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<PAGE>
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
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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 CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
3. SHORT-TERM DEBT (COMMERCIAL PAPER)
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2, both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
--- Leading market positions in well-established industries.
--- High rates of return on funds employed.
--- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
--- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
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<PAGE>
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
F-3. Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D.. Issues assigned this rating are in actual or imminent payment default.
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<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
Not applicable to this filing.
Financial Highlights.
Not applicable to this filing.
(b) Exhibits:
NOTE: * INDICATES THAT THE EXHIBIT IS INCORPORATED HEREIN BY REFERENCE. ALL
REFERENCES TO A POST-EFFECTIVE AMENDMENT ("PEA") OR PRE-EFFECTIVE AMENDMENT
("PreEA") ARE TO PEAS AND PreEAS TO REGISTRANT'S REGISTRATION STATEMENT ON FORM
N-1A, FILE NO. 2-67052.
(1) Copy of the Trust Instrument of the Registrant dated August 29,
1995 (filed as Exhibit 1 to PEA No. 34).
(2)* Copy of By-Laws of the Registrant (filed as Exhibit 2 to PEA No.
30)
(3) None.
(4) (a) Sections 2.04 and 2.06 of Registrant's Trust Instrument
provide as follows:
"SECTION 2.04 TRANSFER OF SHARES. Except as
otherwise provided by the Trustees, Shares shall be
transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly
authorized in writing, upon delivery to the Trustees or
the Trust's transfer agent of a duly executed instrument
of transfer and such evidence of the genuineness of such
execution and authorization and of such other matters as
may be required by the Trustees. Upon such delivery the
transfer shall be recorded on the register of the Trust.
Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor the
Trust, nor any transfer agent or registrar nor any
officer, employee or agent of the Trust shall be affected
by any notice of the proposed transfer.
"SECTION 2.06 ESTABLISHMENT OF SERIES. The
Trust created hereby shall consist of one or more Series
and separate and distinct records shall
<PAGE>
be maintained by the Trust for each Series and the assets
associated with any such Series shall be held and
accounted for separately from the assets of the Trust or
any other Series. The Trustees shall have full power and
authority, in their sole discretion, and without
obtaining any prior authorization or vote of the
Shareholders of any Series of the Trust, to establish and
designate and to change in any manner any such Series of
Shares or any classes of initial or additional Series and
to fix such preferences, voting powers, rights and
privileges of such Series or classes thereof as the
Trustees may from time to time determine, to divide or
combine the Shares or any Series or classes thereof into
a greater or lesser number, to classify or reclassify any
issued Shares or any Series or classes thereof into one
or more Series or classes of Shares, and to take such
other action with respect to the Shares as the Trustees
may deem desirable. The establishment and designation of
any Series shall be effective upon the adoption of a
resolution by a majority of the Trustees setting forth
such establishment and designation and the relative
rights and preferences of the Shares of such Series. A
Series may issue any number of Shares and need not issue
shares. At any time that there are no Shares outstanding
of any particular Series previously established and
designated, the Trustees may by a majority vote abolish
that Series and the establishment and designation
thereof.
"All references to Shares in this Trust
Instrument shall be deemed to be Shares of any or all
Series, or classes thereof, as the context may require.
All provisions herein relating to the Trust shall apply
equally to each Series of the Trust, and each class
thereof, except as the context otherwise requires.
"Each Share of a Series of the Trust shall
represent an equal beneficial interest in the net assets
of such Series. Each holder of Shares of a Series shall
be entitled to receive his pro rata share of all
distributions made with respect to such Series. Upon
redemption of his Shares, such Shareholder shall be paid
solely out of the funds and property of such Series of
the Trust."
(5) (a) Form of Investment Advisory Agreement between Registrant
and Westwood Ventures, Ltd. (filed as Exhibit 5(a) to PEA
No. 34).
(b) Form of Investment Subadvisory Agreement between Westwood
Ventures, Ltd. and Forum Advisors, Inc. relating to the
Sportsfund (filed as Exhibit 5(b) to PEA No. 34).
(6) (a)* Form of Management and Distribution Agreement between
Registrant and Forum Financial Services, Inc. (filed as
Exhibit 6(a) to PEA No. 33).
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<PAGE>
(b)* Form of Distribution Services Agreement between
Registrant and Forum Financial Services, Inc. (filed as
Exhibit 6(b) to PEA No. 33).).
(c)* Form of Selected Dealer Agreement between Forum Financial
Services, Inc. and securities brokers (filed as Exhibit
6(c) to PEA 21).
(d)* Form of Bank Affiliated Selected Dealer Agreement between
Forum Financial Services, Inc. and bank affiliates filed
as Exhibit 6(d) of PEA 21).
(7) None.
(8) (a)* Form of Transfer Agency Agreement between Registrant and
Forum Financial Corp. (filed as Exhibit 8(a) to PEA No.
33).
(b)* Form of Custodian Agreement between Registrant and the
First National Bank of Boston (filed as Exhibit 8(b) to
PEA No. 33).
(9) (a)* Form of Management Agreement between Registrant and Forum
Financial Services, Inc. (filed as Exhibit 9(a) to PEA
No. 33).
(10)* Opinion of Seward & Kissel dated January 5, 1996 (filed as
Exhibit 10 of PEA No. 33).
(11) Not applicable to this filing.
(12) None.
(13)* Investment Representation letter of Reich & Tang, Inc. as
original purchaser of shares of registrant (filed as Exhibit 13
to Registration Statement).
(14)* Form of Disclosure Statement and Custodial Account Agreement
applicable to individual retirement accounts (filed as Exhibit 14
of PEA No. 21).
(15) (a)* Form of Rule 12b-1 Plan adopted by the Registrant (filed
as Exhibit 15 of PEA No. 16).
(b)* Rule 12b-1 Plan adopted by the Registrant with respect to
the Payson Value Fund and the Payson Balanced Fund (filed
as Exhibit 8(c) of PEA No. 20).
(18) Copy of Multiclass (Rule 18f-3) Plan adopted by Registrant (to be
filed by subsequent post-effective amendment prior to the
effective date of this Post-Effective Amendment No. 35).
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<PAGE>
(27) Financial Data Schedules
Other Exhibits:
Powers of Attorney (filed as Other Exhibits to PEA No. 34).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF JUNE [ ], 1996
Title of Class Number of Holders
-------------- -----------------
Investors Stock Fund
Investors Bond Fund
TaxSaver Bond Fund
Daily Assets Cash Fund
Daily Assets Treasury Fund
Daily Assets Government Fund
Daily Assets TaxSaver Fund
Payson Value Fund
Payson Balanced Fund
Maine Municipal Bond Fund
New Hampshire Bond Fund
Sportsfund
Core Portfolio Plus
ITEM 27. INDEMNIFICATION.
In accordance with Section 3803 of the Delaware Business Trust Act,
SECTION 5.2 of the Registrant's Trust Instrument provides as follows:
"5.2. INDEMNIFICATION.
"(a) Subject to the exceptions and limitations contained in
Section (b) below:
"(i) Every Person who is, or has been, a Trustee or
officer of the Trust (hereinafter referred to as a "Covered
Person") shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a
party or otherwise by virtue of being or having been a Trustee or
officer and against amounts paid or incurred by him in the
settlement thereof;
-4-
<PAGE>
"(ii) The words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal or other, including appeals), actual
or threatened while in office or thereafter, and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
"(b) No indemnification shall be provided hereunder to a
Covered Person:
"(i) Who shall have been adjudicated by a court or
body before which the proceeding was brought (A) to be liable to
the Trust or its Holders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of the Covered Person's office or (B) not
to have acted in good faith in the reasonable belief that Covered
Person's action was in the best interest of the Trust; or
"(ii) In the event of a settlement, unless there has
been a determination that such Trustee or officer did not engage
in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the Trustee's
or officer's office,
"(A) By the court or other body approving the
settlement;
"(B) By at least a majority of those Trustees
who are neither Interested Persons of the Trust nor are
parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type
inquiry); or
"(C) By written opinion of independent legal
counsel based upon a review of readily available facts
(as opposed to a full trial-type inquiry);
provided, however, that any Holder may, by appropriate legal
proceedings, challenge any such determination by the Trustees or
by independent counsel.
"(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be severable,
shall not be exclusive of or affect any other rights to which any Covered
Person may now or hereafter be entitled, shall continue as to a person
who has ceased to be a Covered Person and shall inure to the benefit of
the heirs, executors and administrators of such a person. Nothing
contained herein shall affect any rights to indemnification to which
Trust personnel, other than Covered Persons, and other persons may be
entitled by contract or otherwise under law.
"(d) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section 5.2 may be paid by
the Trust or Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the Trust or Series if it is
ultimately determined that
-5-
<PAGE>
he is not entitled to indemnification under this Section 5.2; provided,
however, that either (a) such Covered Person shall have provided
appropriate security for such undertaking, (b) the Trust is insured
against losses arising out of any such advance payments or (c) either a
majority of the Trustees who are neither Interested Persons of the Trust
nor parties to the matter, or independent legal counsel in a written
opinion, shall have determined, based upon a review of readily available
facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found
entitled to indemnification under this Section 5.2.
"(e) Conditional advancing of indemnification monies under
this Section 5.2 for actions based upon the 1940 Act may be made only on
the following conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a defense to
the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written
promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds that amount which it is ultimately determined that
he is entitled to receive from the Trust by reason of indemnification;
and (iii) (a) such promise must be secured by a surety bond, other
suitable insurance or an equivalent form of security which assures that
any repayments may be obtained by the Trust without delay or litigation,
which bond, insurance or other form of security must be provided by the
recipient of the advance, or (b) a majority of a quorum of the Trust's
disinterested, non-party Trustees, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be
found entitled to indemnification.
"(f) In case any Holder or former Holder of any Series shall
be held to be personally liable solely by reason of the Holder or former
Holder being or having been a Holder of that Series and not because of
the Holder or former Holder acts or omissions or for some other reason,
the Holder or former Holder (or the Holder or former Holder's heirs,
executors, administrators or other legal representatives, or, in the case
of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the
applicable Series to be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust, on behalf of
the affected Series, shall, upon request by the Holder, assume the
defense of any claim made against the Holder for any act or obligation of
the Series and satisfy any judgment thereon from the assets of the
Series."
Paragraph 4 of each Investment Advisory Agreement provides in substance as
follows:
"4. We shall expect of you, and you will give us the benefit of, your
best judgment and efforts in rendering these services to us, and we
agree as an inducement to your undertaking these services that you shall
not be liable hereunder for any mistake of judgment or in any event
whatsoever, except for lack of good faith, provided that nothing herein
shall be deemed to protect, or purport to protect, you against any
liability to us or and to our security holders to which you would
otherwise be subject by reason of willful
-6-
<PAGE>
misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your
obligations and duties hereunder."
Paragraphs 3(f) and (g) and paragraph 5 of the Management and Distribution
Agreement provide as follows:
"(f) We agree to indemnify, defend and hold you, your several officers
and directors, and any person who controls you within the meaning of
Section 15 of the Securities Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which you, your officers
and directors or any such controlling person may incur, under the
Securities Act, or under common law or otherwise, arising out of or based
upon any alleged untrue statement of a material fact contained in our
Registration Statement or Prospectus in effect from time to time under
the Securities Act or arising out of or based upon any alleged omission
to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading;
provided, however, that in no event shall anything contained in this
paragraph 3(f) be so construed as to protect you against any liability to
us or our security holders to which you would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the
performance of your duties, or by reason of your reckless disregard of
your obligations and duties under this paragraph. Our agreement to
indemnify you, your officers and directors and any such controlling
person as aforesaid is expressly conditioned upon our being notified of
any action brought against you, your officers and directors or any such
controlling person, such notification to be given by letter or by
telegram addressed to us at our principal office in New York, New York,
and sent to us by the person against whom such action is brought within
ten days after the summons or other first legal process shall have been
served. The failure so to notify us of any such action shall not relieve
us from any liability which we may have to the person against whom such
action is brought by reason of any such alleged untrue statement or
omission otherwise than on account of our indemnity agreement contained
in this paragraph 3(f). We will be entitled to assume the defense of any
suit brought to enforce any such claim, and to retain counsel of good
standing chosen by us and approved by you. In the event we do elect to
assume the defense of any such suit and retain counsel of good standing
approved by you, the defendant or defendants in such suit shall bear the
fees and expenses of any additional counsel retained by any of them; but
in case we do not elect to assume the defense of any such suit, or in
case you do not approve of counsel chosen by us, we will reimburse you or
the controlling person or persons named as defendant or defendants in
such suit, for the fees and expenses of any counsel retained by you or
them. Our indemnification agreement contained in this paragraph 3(f) and
our representations and warranties in this agreement shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of you, your officers and directors or any
controlling person and shall survive the sale of any shares of our common
stock made pursuant to subscriptions obtained by you. This agreement of
indemnity will inure exclusively to your benefit, to the benefit of your
successors and assigns, and to the benefit of your officers and directors
and any
-7-
<PAGE>
controlling persons and their successors and assigns. We agree promptly
to notify you of the commencement of any litigation or proceeding against
us in connection with the issue and sale of any shares of our common
stock.
"(g) You agree to indemnify, defend and hold us, our several officers
and directors, and person who controls us within the meaning of Section
15 of the Securities Act, free and harmless from and against any and all
claims, demands, liabilities, and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which we, our
officers or directors, or any such controlling person may incur under the
Act or under common law or otherwise, but only to the extent that such
liability, or expense incurred by us, our officers or directors or such
controlling person resulting from such claims or demands shall arise out
of or be based upon any alleged untrue statement of a material fact
contained in information furnished in writing by you in your capacity as
distributor to us for use in our Registration Statement or Prospectus in
effect from time to time under the Act, or shall arise out of or be based
upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. Your
agreement to indemnify us, our officers and directors, and any such
controlling person as aforesaid is expressly conditioned upon your being
notified of any action brought against us, our officers or directors or
any such controlling person, such notification to be given by letter or
telegram addressed to you at your principal office in New York, New York,
and sent to you by the person against whom such action is brought, within
ten days after the summons or other first legal process shall have been
served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is
based solely upon such alleged misstatement or omission on your part, and
in any other event you and we, our officers or directors or such
controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action. The failure so
to notify you of any such action shall not relieve you from any liability
which you may have to us, to our officers or directors, or to such
controlling person by reason of any such untrue statement or omission on
your part otherwise than on account of your indemnity agreement contained
in this paragraph 3(g).
"5 We shall expect of you, and you will give us the benefit of, your
best judgment and efforts in rendering these services to us, and we agree
as an inducement to your undertaking these services that you shall not be
liable hereunder for any mistake of judgment or in any event whatsoever,
except for lack of good faith, provided that nothing herein shall be
deemed to protect, or purport to protect, you against any liability to us
or to our security holders to which you would otherwise be subject by
reason or willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder."
Section 9(a) of the Distribution Services Agreement provides:
-8-
<PAGE>
"The Company agrees to indemnify, defend and hold the Underwriter, and
any person who controls the Underwriter within the meaning of Section 15
of the Securities Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Underwriter or
any such controlling person may incur, under the Securities Act or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Company's Registration
Statement or the Prospectus or Statement of Additional Information in
effect from time to time under the Securities Act and relating to the
Fund or arising out of or based upon any alleged omission to state a
material fact required to be stated in any thereof or necessary to make
the statements in any thereof not misleading; provided, however, that in
no event shall anything herein contained be so construed as to protect
the Underwriter against any liability to the Company or its security
holders to which the Underwriter would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of
its duties, or by reason of the Underwriter's reckless disregard of its
obligations and duties under this agreement. The Company's agreement to
indemnify the Underwriter and any controlling person as aforesaid is
expressly conditioned upon the Company's being notified of the
commencement of any action brought against the Underwriter or any such
controlling person, such notification to be given by letter or by
telegram addressed to the Company at its principal office in New York,
New York, and sent to the Company by the person against whom such action
is brought within ten days after the summons or other first legal process
shall have been served. The Company will be entitled to assume the
defense of any suit brought to enforce any such claim, and to retain
counsel of good standing chosen by the Company and approved by the
Underwriter. In the event the Company elects to assume the defense of
any such suit and retain counsel of good standing approved by the
Underwriter, the defendants in the suit shall bear the fees and expenses
of any additional counsel retained by any of them; but in case the
Company does not elect to assume the defense of the suit or in case the
Underwriter does not approve of counsel chosen by the Company, the
Company will reimburse the Underwriter or the controlling person or
persons named defendant or defendants in the suit for the fees and
expenses of any counsel retained by the Underwriter or such person. The
indemnification agreement contained in this Section 9 shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of the Underwriter or any controlling person and
shall survive the sale of the Fund's shares made pursuant to
subscriptions obtained by the Underwriter. This agreement of indemnity
will inure exclusively to the benefit of the Underwriter, to the benefit
of its successors and assigns, and to the benefit of any controlling
persons and their successors and assigns. The Company agrees promptly to
notify the Underwriter of the Underwriter of the commencement of any
litigation or proceeding against the Company in connection with the issue
and sale of any of shares of the Fund. The failure to do so notify the
Company of the commencement of any such action shall not relieve the
Company from any liability which it may have to the person against whom
the action is brought by reason of any alleged untrue statement or
omission otherwise than on account of the indemnity agreement contained
in this Section 9."
-9-
<PAGE>
In so far as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS.
Forum Advisors, Inc.
The descriptions of Forum Advisors, Inc. under the caption "Management-
Adviser" in the Prospectus and Statement of Additional Information
relating to the Investors Bond Fund, the TaxSaver Bond Fund, the Daily
Assets Cash Fund, the Daily Assets Government Fund, the Daily Assets
Treasury Fund , the Daily Assets TaxSaver Fund, the Maine Municipal Bond
Fund, the Maine Tax-Free Money Fund, the New Hampshire Bond Fund and the
Sportsfund, constituting certain of Parts A and B, respectively, of the
Registration Statement are incorporated by reference herein.
The following are the directors and officers of Forum Advisors, Inc., Two
Portland Square, Portland, Maine 04101, including their business
connections which are of a substantial nature.
John Y. Keffer, President and Secretary.
Chairman and President of the Registrant; President and Secretary
of Forum Financial Services, Inc. and of Forum Financial Corp.
Mr. Keffer is a director and/or officer of various registered
investment companies for which Forum Financial Services, Inc.
Serves as manager, administrator and/or distributor.
David R. Keffer, Vice President and Treasurer.
Vice President, Assistant Secretary and Assistant Treasurer of
the Registrant; Vice President and Treasurer of Forum Financial
Services, Inc. and of Forum Financial Corp. Mr. Keffer is an
officer of various registered investment companies for which
Forum Financial Services, Inc. Serves as manager, administrator
and/or distributor.
-10-
<PAGE>
H.M. Payson & Co.
The descriptions of H.M. Payson & Co. under the caption "Management -
Adviser" in the Prospectus and Statement of Additional Information, with
respect to the Payson Value Fund and the Payson Balanced Fund,
constituting certain of Parts A and B, respectively, of this Registration
Statement are incorporated by reference herein.
The following are the directors and principal executive officers of H.M.
Payson & Co., including their business connections which are of a
substantial nature. The address of H.M. Payson & Co. is One Portland
Square, Portland, Maine 04101.
Adrian L. Asherman, Managing Director.
Managing Director of H.M. Payson & Co. since 1955, General
Partner from 1964 to 1987 and Managing Director since 1987. His
address is One Portland Square, Portland, Maine 04101.
John C. Downing, Managing Director.
Portfolio Manger of H.M. Payson since 1983 and Managing Director
since 1992. Mr. Downing has been associated with H.M. Payson
since 1983. His address is One Portland Square, Portland, Maine
04101.
William A. Macleod, Managing Director.
Portfolio Manager of H.M. Payson & Co. since 1984 and Managing
Director since 1989. His address is One Portland Square,
Portland, Maine 04101.
Thomas M. Pierce, Managing Director.
Managing Director of H.M. Payson & Co. since 1975, General
Partner from 1981 to 1987 and Managing Director since 1987. His
address is One Portland Square, Portland, Maine 04101.
Peter E. Robbins, Managing Director.
Portfolio Manager of H.M. Payson & Co. since 1992, except for the
period from January 1988 to October 1990. During that period,
Mr. Robbins was president of Mariner Capital Group, a real estate
development and non-financial asset management business. General
Partner of H.M. Payson & Co. from 1986 to 1987, and Managing
Director from 1987 to 1988, and since 1993.
-11-
<PAGE>
John H. Walker, Managing Director and President.
Portfolio Manager of H.M. Payson & Co. since 1967, General
Partner from 1974 to 1987, and Managing Director since 1987. His
address is One Portland Square, Portland, Maine 04101.
ITEM 29. PRINCIPAL UNDERWRITER.
(a) Forum Financial Services, Inc., Registrant's underwriter, serves
as underwriter to Avalon Capital, Inc., Core Trust (Delaware),
The CRM Funds, The Cutler Trust, Monarch Funds, Norwest Advantage
Funds, Norwest Select Funds, Sound Shore Fund, Inc., Stone Bridge
Funds, Inc. and Trans Adviser Funds, Inc.
(b) John Y. Keffer, President and Secretary of Forum Financial
Services, Inc., is the Chairman and President of the Registrant.
David R. Keffer, Vice President and Treasurer of Forum Financial
Services, Inc., is the Vice President, Assistant Treasurer and
Assistant Secretary of the Registrant. Their business address is
Two Portland Square, Portland, Maine 04101.
(c) Not Applicable.
ITEM 30. LOCATION OF BOOKS AND RECORDS.
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder are maintained at the offices of Forum Financial Services, Inc. and
Forum Financial Corp., Two Portland Square, Portland, Maine 04101. The records
required to be maintained under Rule 31a-1(b)(1) with respect to journals of
receipts and deliveries of securities and receipts and disbursements of cash are
maintained at the offices of the Registrants custodians, The First National Bank
of Boston, 100 Federal Street, Boston, Massachusetts 02106 and Imperial Trust
Company, 201 N. Figueroa Street, Suite 610, Los Angeles, California 90012. The
records required to be maintained under Rule 31a-1(b)(5), (6) and (9) are
maintained at the offices of the Registrant's adviser or subadviser, as listed
in Item 28 hereof.
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
(i) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to
shareholders relating to the portfolio or class thereof to which the
prospectus relates upon request and without charge.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Portland and the State of Maine on the 30th day
of May, 1996.
FORUM FUNDS
By: /s/ John Y. Keffer
-------------------------
John Y. Keffer, President
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 30th day of May, 1996.
SignaturesTitle
(a) Principal Executive Officer
/s/ John Y. Keffer President
--------------------------- and Chairman
John Y. Keffer
(b) Principal Financial and Accounting Officer
/s/ Michael D. Martins Treasurer
---------------------------
Michael D. Martins
(c) A majority of the Trustees
/s/ John Y. Keffer Trustee
---------------------------
John Y. Keffer
James C. Cheng* Trustee
J. Michael Parish* Trustee
Costas Azariadis* Trustee
By: /s/ John Y. Keffer
-------------------
John Y. Keffer
Attorney in Fact*
<PAGE>
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT PAGE NUMBER
- ------- -----------
(27) Financial Data Schedules
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM FORUM DAILY ASSETS TREASURY FUND DATED
3/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 120
<NAME> DAILY ASSETS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 43,296,823
<INVESTMENTS-AT-VALUE> 43,296,823
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,296,823
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 193,894
<TOTAL-LIABILITIES> 193,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,095,716
<SHARES-COMMON-STOCK> 43,095,716
<SHARES-COMMON-PRIOR> 37,980,607
<ACCUMULATED-NII-CURRENT> 19,454
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,241)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 43,102,929
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,932,064
<OTHER-INCOME> 223,902
<EXPENSES-NET> 189,889
<NET-INVESTMENT-INCOME> 1,966,077
<REALIZED-GAINS-CURRENT> (12,241)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,953,836
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,967,071
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 83,226,136
<NUMBER-OF-SHARES-REDEEMED> 76,495,529
<SHARES-REINVESTED> 56,702
<NET-CHANGE-IN-ASSETS> 6,774,074
<ACCUMULATED-NII-PRIOR> 1,320,747
<ACCUMULATED-GAINS-PRIOR> 21,288
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 69,466
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 388,318
<AVERAGE-NET-ASSETS> 39,218,726
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION
EXTRACTED FROM FORUM INVESTORS BOND FUND DATED 3/31/96
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
REPORT.
</LEGEND>
<SERIES>
<NUMBER> 030
<NAME> INVESTORS BOND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 24,651,674
<INVESTMENTS-AT-VALUE> 24,762,995
<RECEIVABLES> 283,508
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,811,503
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 135,525
<TOTAL-LIABILITIES> 135,525
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,512,304
<SHARES-COMMON-STOCK> 2,515,659
<SHARES-COMMON-PRIOR> 2,680,506
<ACCUMULATED-NII-CURRENT> 16,544
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 35,809
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 111,321
<NET-ASSETS> 25,675,978
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,074,764
<OTHER-INCOME> 0
<EXPENSES-NET> 114,963
<NET-INVESTMENT-INCOME> 1,959,801
<REALIZED-GAINS-CURRENT> 42,127
<APPREC-INCREASE-CURRENT> 497,162
<NET-CHANGE-FROM-OPS> 2,499,090
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,951,033
<DISTRIBUTIONS-OF-GAINS> 11,430
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,032,553
<NUMBER-OF-SHARES-REDEEMED> 6,166,901
<SHARES-REINVESTED> 383,315
<NET-CHANGE-IN-ASSETS> (214,406)
<ACCUMULATED-NII-PRIOR> 2,050,655
<ACCUMULATED-GAINS-PRIOR> 45,903
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 107,061
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 365,217
<AVERAGE-NET-ASSETS> 26,765,259
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .74
<PER-SHARE-GAIN-APPREC> .21
<PER-SHARE-DIVIDEND> .74
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.21
<EXPENSE-RATIO> .43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM FORUM TAXSAVER BOND FUND DATED 3/31/96
AND IS QUALIFIED IN ITS ENIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 050
<NAME> TAXSAVER
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 17,123,631
<INVESTMENTS-AT-VALUE> 17,656,582
<RECEIVABLES> 330,463
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,987,045
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 72,240
<TOTAL-LIABILITIES> 72,240
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,295,866
<SHARES-COMMON-STOCK> 1,694,675
<SHARES-COMMON-PRIOR> 1,660,025
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 85,988
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 532,951
<NET-ASSETS> 17,914,805
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,035,594
<OTHER-INCOME> 0
<EXPENSES-NET> 104,598
<NET-INVESTMENT-INCOME> 930,996
<REALIZED-GAINS-CURRENT> 179,731
<APPREC-INCREASE-CURRENT> 112,851
<NET-CHANGE-FROM-OPS> 1,223,578
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 931,523
<DISTRIBUTIONS-OF-GAINS> 7,448
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,393,277
<NUMBER-OF-SHARES-REDEEMED> 1,030,322
<SHARES-REINVESTED> 249,343
<NET-CHANGE-IN-ASSETS> 1,896,905
<ACCUMULATED-NII-PRIOR> 916,723
<ACCUMULATED-GAINS-PRIOR> (78,499)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 69,544
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 257,237
<AVERAGE-NET-ASSETS> 17,386,030
<PER-SHARE-NAV-BEGIN> 10.39
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .18
<PER-SHARE-DIVIDEND> .57
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.57
<EXPENSE-RATIO> .60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM FORUM MAINE MUNICIPAL BOND FUND DATED
3/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 080
<NAME> MAINE BOND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 25,151,855
<INVESTMENTS-AT-VALUE> 25,637,065
<RECEIVABLES> 496,776
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,133,841
<PAYABLE-FOR-SECURITIES> 31,492
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,482
<TOTAL-LIABILITIES> 89,974
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,626,976
<SHARES-COMMON-STOCK> 2,429,370
<SHARES-COMMON-PRIOR> 2,399,654
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (68,319)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 485,210
<NET-ASSETS> 26,043,867
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,399,481
<OTHER-INCOME> 0
<EXPENSES-NET> 157,243
<NET-INVESTMENT-INCOME> 1,242,238
<REALIZED-GAINS-CURRENT> 71,276
<APPREC-INCREASE-CURRENT> 539,077
<NET-CHANGE-FROM-OPS> 1,852,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,242,937
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,875,719
<NUMBER-OF-SHARES-REDEEMED> 4,739,315
<SHARES-REINVESTED> 773,165
<NET-CHANGE-IN-ASSETS> 519,223
<ACCUMULATED-NII-PRIOR> 1,334,004
<ACCUMULATED-GAINS-PRIOR> (139,597)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 105,104
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 387,764
<AVERAGE-NET-ASSETS> 26,276,092
<PER-SHARE-NAV-BEGIN> 10.47
<PER-SHARE-NII> .51
<PER-SHARE-GAIN-APPREC> .25
<PER-SHARE-DIVIDEND> .51
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> .60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM FORUM NEW HAMPSHIRE BOND FUND DATED 3/31/96
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 130
<NAME> NEW HAMPSHIRE BOND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 6,766,647
<INVESTMENTS-AT-VALUE> 6,805,703
<RECEIVABLES> 136,222
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,941,925
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38,477
<TOTAL-LIABILITIES> 38,477
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,885,448
<SHARES-COMMON-STOCK> 668,354
<SHARES-COMMON-PRIOR> 554,400
<ACCUMULATED-NII-CURRENT> 489
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,545)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 39,056
<NET-ASSETS> 6,903,448
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 313,078
<OTHER-INCOME> 0
<EXPENSES-NET> 35,728
<NET-INVESTMENT-INCOME> 277,350
<REALIZED-GAINS-CURRENT> 36,867
<APPREC-INCREASE-CURRENT> 76,453
<NET-CHANGE-FROM-OPS> 390,670
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 277,495
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,976,778
<NUMBER-OF-SHARES-REDEEMED> 659,492
<SHARES-REINVESTED> 197,211
<NET-CHANGE-IN-ASSETS> 1,627,672
<ACCUMULATED-NII-PRIOR> 220,607
<ACCUMULATED-GAINS-PRIOR> (58,412)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 23,870
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 134,586
<AVERAGE-NET-ASSETS> 5,967,455
<PER-SHARE-NAV-BEGIN> 10.08
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .25
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.33
<EXPENSE-RATIO> .60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL SUMMARY INFORMATION
EXTRACTED FROM PAYSON VALUE FUND DATED 3/31/96 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 100
<NAME> PAYSON VALUE
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 8,315,183
<INVESTMENTS-AT-VALUE> 10,282,048
<RECEIVABLES> 65,585
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,347,633
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,154
<TOTAL-LIABILITIES> 28,154
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,507,825
<SHARES-COMMON-STOCK> 645,218
<SHARES-COMMON-PRIOR> 615,318
<ACCUMULATED-NII-CURRENT> 1,815
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 842,974
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,966,865
<NET-ASSETS> 10,319,479
<DIVIDEND-INCOME> 221,616
<INTEREST-INCOME> 39,951
<OTHER-INCOME> 0
<EXPENSES-NET> 130,164
<NET-INVESTMENT-INCOME> 131,403
<REALIZED-GAINS-CURRENT> 903,175
<APPREC-INCREASE-CURRENT> 1,186,194
<NET-CHANGE-FROM-OPS> 2,220,772
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 135,212
<DISTRIBUTIONS-OF-GAINS> 7,338
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,441,076
<NUMBER-OF-SHARES-REDEEMED> 2,260,146
<SHARES-REINVESTED> 100,673
<NET-CHANGE-IN-ASSETS> 2,359,825
<ACCUMULATED-NII-PRIOR> 102,117
<ACCUMULATED-GAINS-PRIOR> 96,089
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 71,662
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 193,185
<AVERAGE-NET-ASSETS> 8,957,749
<PER-SHARE-NAV-BEGIN> 12.71
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 3.29
<PER-SHARE-DIVIDEND> .21
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.99
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM PAYSON BALANCED FUND DATED 3/31/96
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 070
<NAME> PAYSON BALANCED
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 15,961,662
<INVESTMENTS-AT-VALUE> 17,444,849
<RECEIVABLES> 111,257
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,556,106
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100,629
<TOTAL-LIABILITIES> 100,629
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,666,213
<SHARES-COMMON-STOCK> 1,274,061
<SHARES-COMMON-PRIOR> 1,215,297
<ACCUMULATED-NII-CURRENT> 189
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,035,888
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,753,187
<NET-ASSETS> 17,455,477
<DIVIDEND-INCOME> 284,779
<INTEREST-INCOME> 416,675
<OTHER-INCOME> 0
<EXPENSES-NET> 183,680
<NET-INVESTMENT-INCOME> 517,774
<REALIZED-GAINS-CURRENT> 1,250,859
<APPREC-INCREASE-CURRENT> 1,319,794
<NET-CHANGE-FROM-OPS> 3,088,427
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 528,066
<DISTRIBUTIONS-OF-GAINS> 384,324
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,431,994
<NUMBER-OF-SHARES-REDEEMED> 1,624,872
<SHARES-REINVESTED> 600,277
<NET-CHANGE-IN-ASSETS> 3,583,436
<ACCUMULATED-NII-PRIOR> 489,040
<ACCUMULATED-GAINS-PRIOR> 169,116
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 95,588
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 270,945
<AVERAGE-NET-ASSETS> 15,931,443
<PER-SHARE-NAV-BEGIN> 11.90
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> 2.12
<PER-SHARE-DIVIDEND> .42
<PER-SHARE-DISTRIBUTIONS> .32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.70
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
