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SPORTSFUND-SM-
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Account Information and
Investment Advisers: Shareholder Servicing: Distributor:
Westwood Ventures, Ltd. Forum Financial Corp. Forum Financial Services, Inc.
450 Seventh Avenue, Suite 3304 P.O. Box 446 Two Portland Square
New York, New York 10123 Portland, Maine 04112 Portland, Maine 04101
(888) 82-SPORT (207) 879-1900
[email protected]
Forum Advisors, Inc.
Two Portland Square
Portland, Maine 04101
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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 Sportsfund (the "Fund") and should be read only in conjunction with the
Prospectus dated August 1, 1996, 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
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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
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1. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning the Fund's investments, investment techniques and
strategies and the risks associated therewith. The Fund may not make any
investment or employ any investment technique or strategy not referenced in the
Prospectus.
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 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 is purchased by the 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.
The 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.
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ILLIQUID AND RESTRICTED SECURITIES. The Fund may not invest more than 15% of
its net assets in illiquid securities. Illiquid securities are securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
include, among other things, repurchase agreements not entitling the holder to
payment within seven days and "restricted securities," other than those
determined to be liquid pursuant to guidelines established by the Trust's
Board of Trustees ("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 investment adviser of the 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 the Fund's portfolio and reports periodically on such decisions to the
Board. Limitations on resale may have an adverse effect on the marketability of
restricted securities, and the Fund might also have to register restricted
securities in order to dispose of them, resulting in expense and delay. The
Fund might not be able to dispose of illiquid or restricted securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions. There can be no assurance that a liquid market will exist for any
security at any particular time.
A domestic institutional market has developed for certain securities that are
not registered under the Securities Act of 1933 (the "1933 Act"). Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on the issuer's ability to honor a demand for
repayment of the unregistered security. A security's contractual or legal
restrictions on resale to the general public or to certain institutions may not
be indicative of the liquidity of the security. If such securities are eligible
for purchase by institutional buyers in accordance with Rule 144A under the 1933
Act, the Advisers may determine that such securities are not illiquid securities
under guidelines adopted by the Board. If there is a lack of trading interest
in a particular Rule 144A security, the Fund's holdings of that security may be
illiquid.
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 investment adviser to the 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 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
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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 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.
The 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.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Although no securities investment is without some risk, investment
in convertible securities generally entails less risk than in the issuer's
common stock. However, the extent to which such risk is 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
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security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
FUTURES CONTRACTS AND OPTIONS
The 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 Fund may buy or sell futures contracts
on Treasury bills, Treasury bonds and other financial instruments. The Fund may
write covered options and buy options on the futures contracts in which it may
invest.
If the adviser anticipates that interest rates will rise, the 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, the 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, the 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 securities in a segregated
account with a value at all times sufficient to cover the Fund's obligation
under the option.
The Fund's use of options and futures contracts would subject the Fund 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 Fund invests; (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.
The Fund will not hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, the Fund
will not buy futures contracts or write put options whose underlying value
exceeds 5% of the Fund's total assets and will not purchase call options if
the value of purchased call options would exceed 5% of the Fund's total
assets. The Fund 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.
The 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 Fund will not enter
into any futures contract or option on a futures contract if, as a result, the
aggregate initial margin and premiums required to establish such positions
would exceed 5% of the Fund's net assets.
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REPURCHASE AGREEMENTS
The Fund may seek additional income by entering into repurchase agreements.
Under the terms of a repurchase agreement, a Fund purchases securities from
registered broker-dealers, banks or their affiliates subject to the seller's
agreement to repurchase such securities at a mutually agreed-upon date and
price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates, which may be
more or less than the rate on the underlying portfolio securities. The seller
under a repurchase agreement is required to maintain the value of collateral
held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer
a loss to the extent that the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price under the agreement,
or to the extent that the disposition of such securities by the Fund were
delayed pending court action. Additionally, there is no controlling legal
precedent confirming that a fund would be entitled, as against a claim by
such seller or its receiver or trustee in bankruptcy, to retain the
underlying securities, although the Fund's believe that, under the regular
procedures normally in effect for custody of a Fund's securities subject to
repurchase agreements, and under Federal laws, a court of competent
jurisdiction would rule in favor of the Fund if presented with the question.
Securities subject to repurchase agreements will be held by the Fund's
custodian or another qualified custodian or in the Federal Reserve book-entry
system. Repurchase agreements are considered to be loans by a Fund for
certain purposes under the 1940 act.
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 the fundamental policy, limit securities
lending to not more than 10% of the value of its total assets.
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.
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(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.
In addition, the Fund has adopted a fundamental investment policy which provides
that notwithstanding any other investment policy or restriction (whether or not
fundamental), the Fund may seek to achieve its investment objective by holding,
as its only investment securities, the securities of another investment company
having substantially the same investment objective and policies as the Fund.
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
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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
5% or more of the Fund's total assets is outstanding or borrow
for purposes other than meeting redemptions in an amount
exceeding 5% 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) 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.
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
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
In performance advertising the Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). The Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Salomon Brothers bond indices, the Lehman
bond indices, 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 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 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.
For example, the Fund 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.
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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. 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.
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
The Fund may advertise total return. Total returns quoted in advertising
reflect all aspects of the Fund's return, including the effect of reinvesting
dividends and capital gain distributions and any change in the Fund's net asset
value per share over the period. Average annual returns are calculated by
determining the growth or decline in value of a hypothetical historical
investment in the Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. 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
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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.
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.
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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.
Don L. Evans, Assistant Secretary (age 47)
Assistant Counsel, Forum Financial Services, Inc., with which he has
been associated since August 1995. Prior thereto, Mr. Evans was
associated with the law firm of Bisk & Lutz and prior thereto the law
firm of Weiner & Strother. Mr. Evans is also Assistant Secretary of
various registered investment companies for which Forum Financial
Services, Inc. serves as manager, administrator and/or distributor. His
address is Two Portland Square, Portland, Maine.
M. Paige Turney, Assistant Secretary (age 27).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1995. Ms. 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.
TRUSTEE COMPENSATION. Each Trustee of the Trust (other than John Y. Keffer, who
is an interested person of the Trust) is paid $1,000 for each Board meeting
attended (whether in person or by electronic communication) plus $100 per active
portfolio of the Trust and is paid $1,000 for each committee meeting attended on
a date when a Board meeting is not held. As of August 1, 1996, there were
eight active portfolios of the Trust. To the extent a meeting relates to only
certain portfolios of the Trust, Trustees are paid the $100 fee only with
respect to those portfolios. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. No officer of the
Trust is compensated by the Trust.
The following table provides an estimate of the aggregate compensation to be
paid to each Trustee. The Trust has not adopted any form of retirement plan
covering Trustees or officers. Information presented is estimated for the
fiscal year ending March 31, 1997.
<TABLE>
<CAPTION>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Mr. Keffer $4,000 None None $4,000
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
COMBINED TABLE FOR CORE
Each of the Trustees of the Trust is also a Trustee of Core Trust. Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested person of Core
Trust) is paid $1,000 for each Core Trust Board meeting attended
B-11
<PAGE>
(whether in person or by electronic communication) plus $100 per active
portfolio of Core Trust and is paid $1,000 for each committee meeting attended
on a date when a Core Trust Board meeting is not held. As of August 1, 1996,
there were four active portfolios of Core Trust. To the extent a meeting relates
to only certain portfolios of Core Trust, trustees are paid the $100 fee only
with respect to those portfolios. Core Trust trustees are also reimbursed for
travel and related expenses incurred in attending meetings of the Core Trust
Board.
ADVISER
The Fund's investment adviser, Westwood Ventures, Ltd. ("Westwood") (the
"Adviser") furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the Fund's investments and effecting
portfolio transactions for the Fund, pursuant to an Investment Advisory
Agreement with the Trust. Westwood is currently controlled by its two
principal sponsors, Gary Miller, its president and Adam Zalta, its Executive
Vice President. The Investment Advisory Agreement provides for an initial term
of two years 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 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.
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
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, with respect to the Fund, the Adviser
shall not be liable for any error of judgment or mistake of law or for any act
or omission in the performance of its duties to the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of the Adviser's
duties or by reason of reckless disregard of its obligations and duties under
the Investment Advisory Agreement. The Investment Advisory Agreement provides
that the Adviser may render services to others.
For services under its Investment Advisory Agreement, the Adviser receives an
advisory fee at an annual rate of 1.25% of the Fund's average daily net assets.
Such fees are accrued daily and paid monthly.
In addition to receiving its advisory fee from the Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in the Fund. In some instances the Adviser may elect
to credit against any investment management fee received from a client who is
also a shareholder in the Fund an amount equal to all or a portion of the fees
received by the Adviser or any affiliate of the Adviser from the Fund with
respect to the client's assets invested in the Fund.
The Adviser has agreed to reimburse the Trust for certain of the Fund's
operating expenses which in any year exceed the limits prescribed by any state
in which the fund's shares are qualified for sale. The Trust may elect not to
qualify its shares for sale in every state.
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 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 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
B-12
<PAGE>
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.
SUBADVISER
To assist it in carrying out its obligations to the Fund, Westwood has entered
into an investment subadvisory agreement among the Trust, Westwood and Forum
Advisors, Inc. ("Forum Advisors," or collectively with Westwood, the
"Advisers.") Forum Advisors is registered with the SEC as an investment adviser
and, in addition to the Fund, provides investment advice to five other bond and
money market mutual funds. Pursuant to its sub-advisory agreement, Forum
Advisors will assist Westwood in performing research and economic analysis
for the Fund. With respect to that portion, if any, of the Fund's portfolio
that Westwood believes should be invested using Forum Advisors as investment
subadviser, Forum Advisors administers the Fund's investment program on a
day-to-day basis and implements investment decisions for the Fund. Currently,
Forum Advisors manages the entire portfolio of the Fund and has since the Fund's
inception. Westwood's supervision of the performance of Forum Advisors
includes daily communication between the firms regarding all portfolio
management decisions, review and input on portfolio composition and approval
of all purchases and sales of securities. Westwood also has responsibility
for the Fund's adherence to the stated investment objective and policies.
Westwood pays Forum Advisors a fee for its services that does not increase
the advisory fee paid by the fund.
MANAGER AND DISTRIBUTOR
Forum Administrative Services, Inc. (the "Manager") was incorporated under the
laws of the State of Delaware on December 29, 1995 and supervises the overall
management of the Fund (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 Fund), provides the Fund with general office facilities
and serves as distributor of shares of the Fund pursuant to a management
agreement between the Manager and the Fund (the "Management Agreement"). The
Management Agreement provides, 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 the 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.
The Management Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to the 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 Fund, 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 Financial Services, Inc. ("FFSI") (the "Distributor"), an affiliate of
Forum Administrative Services, 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.
FFSI distributes shares of the Fund continuously on a "best efforts" basis under
which it is required to take and pay for only such shares as may be sold.
Under the Distribution Services Agreement, the Trust has agreed to indemnify,
defend and hold FFSI, and any person who controls FFSI within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which FFSI or any such
controlling person may incur, under the 1933 Act, or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Trust's Registration Statement or the Fund's
Prospectus or Statement of Additional Information in effect from time to time
under the 1933 Act or arising out of or based upon any alleged omission to
state a material fact required to be stated in any one thereof or necessary
to make the statements in any one thereof not misleading. FFSI is not,
however, protected against any liability to the Trust or its shareholders to
which FFSI would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
FFSI's reckless disregard of its obligations and duties under the
Distribution Services Agreement.
The Distribution Services Agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by the
shareholders and, in either case, by a majority of the Trustees who are not
parties to the Distribution Services Agreement or interested persons of any
such party and, with respect to each class of a Fund for which there is an
effective plan of distribution adopted pursuant to Rule 12b-1, who do not
have any direct or indirect financial interest in any distribution plan of
the Fund or in any agreement related to the distribution plan cast in person
at a meeting called for the purpose of voting on such approval. If the
continuation of the Distribution Services Agreement is not approved, FFSI may
continue to render to the Fund the services described in the Distribution
Services Agreement in the manner and to the extent permitted by the 1940 Act
and the rules and regulations thereunder.
The Distribution Services Agreement terminates automatically if assigned. The
Distribution Services Agreement may be terminated at any time without the
payment of any penalty (i) by the Board or by a vote of the Fund's
shareholders or (ii) by FFSI on 60 days' written notice to the Trust.
The Manager provides persons satisfactory to the Board to serve as officers of
the Fund. Those officers, as well as certain other employees and Directors of
the Fund, may be directors, officers or employees of (and persons providing
services to the Fund may include) the Manager, its affiliates or certain
affiliates of the Adviser.
B-13
<PAGE>
For its services under the Management Agreement, the manager receives a fee at
the annual rate of 0.15% of the first $50 million of the Fund's average
daily net assets, 0.10% of the next $50 million of the Fund's average daily
net assets and 0.05% of the remaining average daily net assets of the Fund.
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 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, by a vote of the shareholders of the 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 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 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 defined in the Prospectus) or its affiliates. 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.
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, 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 Agency Agreement, Forum receives, with
respect to each Series: (i) a fee at an annual rate of 0.25 percent of the
average daily net assets of the Series and (ii) a fee of $12,000 per year; such
amounts to be computed and paid monthly in arrears by the Fund; and (iii) Annual
Shareholder Account Fees of $18.00 per shareholder account; such fees to be
computed as of the last business day of the prior month.
Pursuant to the 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.
B-14
<PAGE>
5. DETERMINATION OF NET ASSET VALUE
Securities owned by the Fund for which market quotations are readily
available are valued at current market price. The Fund values its securities
as follows. A security listed or traded on an exchange is valued at its last
sale price (prior to the time as of which assets are valued) on the exchange
where it is principally traded. Lacking any such sales on the day of
valuation, the security is valued at the mean of the last bid and asked
prices. All other securities for which over-the-counter market quotations are
readily available generally are valued at the mean of the current bid and
asked prices. When market quotations are not readily available, securities
are valued at fair value as determined in good faith by the Board. Debt
securities may be valued on the basis of valuations furnished by pricing
services which utilize electronic data processing techniques to determine
valuations for normal institutional-size trading units of debt securities,
without regard to sale or bid prices, when such valuations are believed to
more accurately reflect the fair market value of such securities. All assets
and liabilities of the Fund denominated in foreign currencies are converted
into United States dollars at the mean of the bid and asked prices of such
currencies against the United States dollar last quoted by a major bank.
Under procedures adopted by the Board, a net asset value for the Fund later
determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at a net asset value determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original net asset value and the recalculated net
asset value divided by the recalculated net asset value is 0.005 (1/2 of 1%)
or less or shareholder transactions are otherwise insubstantially affected,
further action is not required.
The Fund 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, 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
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 Advisers 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 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 and investment
analysis 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 is of the types
described in Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended, and is designed to augment the Adviser's own internal research and
investment strategy capabilities. The Adviser may use the research and analysis
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, the Manager or any of
their affiliates.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by the distributor.
Set forth below is a hypothetical 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 $50,000 subject to the schedule
of sales charges set forth in the Prospectus at a hypothetical price of
$10.00 per share of the Fund.
B-15
<PAGE>
Net Asset Value Per Share $10.00
Sales Charge, 4.0% of offering
price (4.17% of net asset value
per share) $0.42
Offering to Public $10.42
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 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 the Manager 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 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.
B-16
<PAGE>
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Fund offers an individual retirement plan (the "IRA") for individuals who
wish to use shares of the Fund 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 the fund and assume 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 most of the Fund's 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
the 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 the Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
capital gain or loss. The 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 the 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
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 the
Fund will be treated as short-term capital gain or loss. In general, if the
Fund exercises an option, or if an option that the Fund has written is
exercised, gain or loss on the option will not be separately recognized but the
premium received or paid will be included in the calculation of gain or loss
upon disposition of the property underlying the option.
Any option, futures contract, or other position entered into or held by the
Fund in conjunction with any other position held by the Fund may constitute a
"straddle" for Federal income tax purposes. A straddle of which at least one,
but not all, the positions are section 1256 contracts may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that (i) loss realized
on disposition of one position of a straddle not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (ii) the Fund's holding period in straddle positions be suspended
while the straddle exists (possibly resulting in any gain being treated as
short-term capital gain rather than long-term capital gain); (iii) losses
recognized with respect to certain straddle positions which are part of a
mixed straddle and which are non-section 1256 positions be treated as 60
percent long-term and 40 percent short-term capital loss; (iv) losses
recognized with respect to certain straddle positions which would otherwise
constitute short-term capital losses be treated as long-term capital losses;
and (v) the deduction of interest and carrying charges attributable to
certain straddle positions may be deferred. Various elections are available
to the Fund which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the straddle rules
described above do not apply to any straddles held by the Fund if all of the
offsetting positions consist of section 1256 contracts.
Each Fund shareholder should include in the shareholder's report of gross
income in his Federal income tax return cash dividends received by the
shareholder from the Fund.
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
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by Seward & Kissel, One Battery Park Plaza, New
York, New York 10004.
AUDITORS
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1438 independent auditors, act as auditors for the Trust.
B-17
<PAGE>
THE TRUST AND ITS SHARES
The Trust was organized in Delaware on August 29, 1995; the Trust's succeeded to
the assets and liabilities of Forum Funds, Inc. on January 5, 1996. Forum
Funds, Inc. was incorporated on March 24, 1980 and assumed the name of Forum
Funds, Inc. on March 16, 1987. The Board has the authority to issue an
unlimited number of shares of beneficial interest of separate series with no par
value per share and to create separate classes of shares within each series.
Currently the authorized shares of the Trust are divided into 15 separate
series.
The Trust is a business trust organized under Delaware law. Delaware law
provides that shareholders shall be entitled to the same limitations of personal
liability extended to stockholders of private corporations for profit. The
securities regulators of some states, however, have indicated that they and the
courts in their state may decline to apply Delaware law on this point.
The Trust Instrument contains an express disclaimer of shareholder liability for
the debts, liabilities, obligations, and expenses of the Trust and requires that
a disclaimer be given in each contract entered into or executed by the Trust or
the Trustees. The Trust Instrument provides for indemnification out of each
series' property of any shareholder or former shareholder held personally liable
for the obligations of the series. The Trust Instrument also provides that each
series shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which Delaware law does not
apply, no contractual limitation of liability was in effect and the portfolio is
unable to meet its obligations. Forum believes that, in view of the above,
there is no risk of personal liability to shareholders.
The Trust Instrument further provides that the Trustees shall not be liable to
any person other than the Trust or its shareholders; moreover, the Trustees
shall not be liable for any conduct whatsoever, provided that a Trustee is not
protected against any liability to which he would otherwise by subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Each series capital consists of shares of beneficial interest. Shares are fully
paid and nonassessable, except as set forth above with respect to Trustee and
shareholder liability. Shareholders representing 10% or more of the Trust or a
series may, as set forth in the Trust Instrument, call meetings of the Trust or
series for any purpose related to the Trust or series, as the case may be,
including, in the case of a meeting of the entire Trust, the purpose of voting
on removal of one or more Trustees. The Trust or any series may be terminated
upon the sale of its assets to, or merger with, another open-end management
investment company or series thereof, or upon liquidation and distribution of
its assets. Generally such terminations must be approved by the vote of the
holders of a majority of the outstanding shares of the Trust or the series;
however, the Trustees may, without prior shareholder approval, change the form
of organization of the Trust by merger, consolidation or incorporation. If not
so terminated or reorganized, the Trust and its series will continue
indefinitely. Under the Trust Instrument, the Trustees may, without shareholder
vote, cause the Trust to merge or consolidate into one or more trusts,
partnerships or corporations or cause the Trust to merge or consolidate into one
or more trusts, partnerships or corporations or cause the Trust to be
incorporated under Delaware law, so long as the surviving entity is an open-end
management investment company that will succeed to or assume the Trust's
registration statement.
As of July 8, 1996, the officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of the Fund. Shareholders owning 25% or
more of the shares of the Fund or of the Trust as a whole may be deemed to be
controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. Certain of these shareholders may hold their shares of record only and
have no beneficial interest, including the right to vote, in the shares.
B-18
<PAGE>
FINANCIAL STATEMENTS
The fiscal year end of the Fund is March 31. Financial statements for the Fund's
semi-annual period and fiscal year will be distributed to shareholders of
record. The Board in the future may change the fiscal year end of the Fund.
B-19
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE ("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.
B-20
<PAGE>
STANDARD AND POOR'S ("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.
B-21
<PAGE>
FITCH INVESTORS SERVICE L.P. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the 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.
B-22
<PAGE>
PREFERRED STOCK
MOODY'S INVESTORS SERVICE
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
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
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.
B-23
<PAGE>
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
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
S&P's two highest commercial paper ratings are A-1 and A-2. 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 A-2 are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
B-24
<PAGE>
FITCH INVESTORS SERVICE
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.
B-25
