FORUM FUNDS
DAILY ASSETS TREASURY FUND
DAILY ASSETS GOVERNMENT FUND
DAILY ASSETS CASH FUND
PROSPECTUS
August 1, 1997
- --------------------------------------------------------------------------------
THIS PROSPECTUS OFFERS SHARES OF DAILY ASSETS TREASURY FUND, DAILY ASSETS
GOVERNMENT FUND AND DAILY ASSETS CASH FUND (EACH A "FUND"), WHICH ARE
DIVERSIFIED PORTFOLIOS OF FORUM FUNDS (THE "TRUST"), AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY. EACH FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO PROVIDE ITS
SHAREHOLDERS WITH HIGH CURRENT INCOME TO THE EXTENT CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND THE MAINTENANCE OF LIQUIDITY.
DAILY ASSETS TREASURY FUND invests primarily in obligations issued or
guaranteed by the United States Treasury or by certain agencies and
instrumentalities of the United States Government with a view toward
providing income that is generally considered exempt from state and
local income taxes.
DAILY ASSETS GOVERNMENT FUND invests primarily in obligations of the
U.S. Government, its agencies and instrumentalities, and in repurchase
agreements backed by these obligations.
DAILY ASSETS CASH FUND invests in a broad spectrum of high-quality
money market instruments.
EACH FUND CURRENTLY SEEKS TO ACHIEVE ITS OBJECTIVE BY INVESTING ALL OF ITS
INVESTABLE ASSETS IN A SEPARATE PORTFOLIO OF A REGISTERED, OPEN-END MANAGEMENT
INVESTMENT COMPANY WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE "PROSPECTUS
SUMMARY" AND "OTHER INFORMATION - FUND STRUCTURE."
Shares of the Funds are offered to investors at a price equal to the next
determined net asset value without any sales charge.
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, 1997, 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's transfer agent, Forum
Financial Corp.at P.O. Box 446, Portland, Maine 04112, (207) 879-0001 or (800)
94FORUM.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<TABLE>
TABLE OF CONTENTS
<S> <C> <C> <C> <C>
Page Page
1. Prospectus Summary......................................2 5. Purchases and Redemptions of Shares...................10
2. Financial Highlights....................................4 6. Dividends and Tax Matters.............................15
3. Investment Objective and Policies.......................5 7. Other Information.....................................16
4. Management..............................................9 Account Application
</TABLE>
FUND SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK OR ANY AFFILIATE OF A BANK AND ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER FEDERAL AGENCY.
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
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
THE FUNDS. Each Fund seeks to achieve its investment objective by
investing all of its investable assets in a separate series of Core Trust
(Delaware) ("Core Trust"), itself a registered open-end management investment
company. Daily Assets Treasury Fund, Daily Assets Government Fund and Daily
Assets Cash Fund invest in each of Treasury Portfolio, Government Cash Portfolio
and Cash Portfolio (each a "Portfolio" and collectively the "Portfolios"),
respectively. Accordingly, the investment experience of each Fund will
correspond directly with the investment experience of its corresponding
Portfolio. See "Other Information - Fund Structure."
MANAGEMENT. Forum Administrative Services, LLC ("FAS") supervises the
overall management of the Funds and Forum Financial Services, Inc. ("FFSI") is
the distributor of the Funds' shares. Forum Advisors, Inc. ("Forum Advisors") is
the investment adviser of Treasury Portfolio and provides professional
management of that Portfolio's investments. Linden Asset Management, Inc.
("Linden") is the investment adviser of Government Cash Portfolio and Cash
Portfolio and provides professional management of those Portfolios' investments.
Forum Advisors and Linden provide certain subadvisory assistance for the
Portfolios they do not directly advise. The Trust's transfer agent, dividend
disbursing agent and shareholder servicing agent (the "Transfer Agent") is Forum
Financial Corp. See "Management."
SHAREHOLDER SERVICING. The Trust has adopted a Shareholder Service Plan
relating to Shares of each Fund under which FAS is compensated for various
shareholder servicing activities. See "Management - Shareholder Servicing."
PURCHASES AND REDEMPTIONS. Shares of the Funds may be purchased and
redeemed Monday through Friday except on customary national business holidays,
Good Friday and other days that the Federal Reserve Bank of San Francisco is
closed ("Fund Business Days"). Shares of the Funds are offered without a sales
charge and may be redeemed without charge at the next determined net asset
value. The minimum initial investment is $10,000 ($2,000 for IRAs, $2,500 for
exchanges) and the minimum subsequent investment is $500. Shareholders may elect
to have redemptions of over $5,000 transferred by bank wire to a designated bank
account. See "Purchases and Redemptions of Shares."
EXCHANGE PROGRAM. Shareholders of a Fund may exchange their shares without
charge for shares of the other Funds and for the shares of certain other funds
of the Trust not offered by this Prospectus. 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. See "Dividends and Tax Matters."
RISK FACTORS. There can be no assurance that each Fund will achieve its
investment objective, nor can there be any assurance that each Fund will
maintain a stable net asset value of $1.00 per share. Although the Portfolios
invest in money market instruments, an investment in any Fund involves certain
risks, depending on the types of investments made and the types of investment
techniques employed. All investments by the Portfolios entail some risk. Certain
investments and investment techniques, however, entail additional risks, such as
investments in variable and floating rate securities, zero-coupon securities and
forward commitment securities. The use of leverage by a Portfolio through
borrowings and other investment techniques involves additional risks. For more
details about each Fund and its investments and risks, see "Investment Objective
and Policies." By investing solely in Treasury Portfolio, Government Cash
Portfolio and Cash Portfolio, Daily Assets Treasury Fund, Daily Assets
Government Fund and Daily Assets Cash Fund, respectively, may achieve certain
efficiencies and economies of scale. Nonetheless, these investments could also
have potential
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adverse effects on the applicable Fund. Investors in the Funds should consider
these risks, as described under "Other Information - Core Trust Structure."
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. The table reflects the combined expenses of each Fund and its
corresponding Portfolio. There are no transaction expenses associated with
purchases, redemptions or exchanges of Fund shares.
ANNUAL FUND OPERATING EXPENSES (1)
(as a percentage of average net assets, after applicable expense reimbursements)
<TABLE>
<S> <C> <C> <C> <C>
DAILY ASSETS DAILY ASSETS DAILY ASSETS
TREASURY FUND GOVERNMENT FUND CASH FUND
------------- --------------- -------------
Management Fees(after fee waivers)(2)......................... 0.09% 0.09% 0.07%
Rule 12b-1 Fees............................................... None None None
Other Expenses (after expense reimbursements)(3).............. 0.41% 0.46% 0.48%
----- ----- -----
Total Fund Operating Expenses (3)............................. 0.50% 0.55% 0.55%
</TABLE>
(1) For a further description of the various expenses incurred in the
operation of the Funds and the Portfolios, see "Management." The amount of
expenses for Daily Assets Treasury Fund is based on actual expenses incurred
during the Fund's most recent fiscal year ended March 31, 1997. The amount of
expenses for Daily Assets Government Fund and Daily Assets Cash Fund is based on
estimated annualized expenses for the Funds' first fiscal year of operations.
Each Fund's expenses include the Fund's pro rata portion of all expenses of its
corresponding Portfolio, which are borne indirectly by Fund shareholders.
(2) Management Fees include all administration fees and investment
advisory fees incurred by the Funds and the Portfolios; as long as its assets
are invested in a Portfolio, a Fund pays no investment advisory fees directly.
Absent waivers (estimated waivers in the case of Daily Assets Government Fund
and Daily Assets Cash Fund), Management Fees for each of Daily Assets Treasury
Fund, Daily Assets Government Fund and Daily Assets Cash Fund would be 0.25%,
0.25% and 0.25%, respectively. Fee waivers are voluntary and may be reduced or
eliminated at any time.
(3) Absent expense reimbursements (estimated reimbursements in the case
of Daily Assets Government Fund and Daily Assets Cash Fund) and fee waivers,
Other Expenses and Total Fund Operating Expenses would be 0.74% and 0.99%,
respectively, in the case of Daily Assets Treasury Fund, 0.78% and 1.02%,
respectively, in the case of Daily Assets Government Fund and 0.81% and 1.06%,
respectively, in the case of Daily Assets Cash Fund. Expense reimbursements and
fee waivers are voluntary and may be reduced or eliminated at any time.
EXAMPLE
Following is a hypothetical example that indicates the dollar amount of
expenses that an investor in a Fund would pay assuming (i) the investment of all
of the Fund's assets in the Portfolio, (ii) a $1,000 investment in the Fund,
(iii) a 5% annual return, (iv) the reinvestment of all dividends and
distributions and (v) redemption at the end of each period:
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Daily Assets Treasury Fund............................... $5 $16 $28 $63
Daily Assets Government Fund............................. $6 $18 N/A N/A
Daily Assets Cash Fund................................... $6 $18 N/A N/A
</TABLE>
The example is based on the expenses listed in the Annual Fund
Operating Expenses table, which assumes the continued waiver and reimbursement
of certain fees and expenses. 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.
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2. FINANCIAL HIGHLIGHTS
The following information represents selected data for a single share
outstanding of Daily Assets Treasury Fund and Daily Assets Cash Fund. The
information for Daily Assets Treasury Fund was audited by Deloitte & Touche LLP,
independent auditors. The financial statements for Daily Assets Treasury Fund
and independent auditors' report thereon for the fiscal year ended March 31,
1997 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. The information for Daily
Assets Cash Fund is unaudited. Daily Assets Cash Fund commenced operations on
October 1, 1996. The financial statements for the Fund for the period October 1,
1996 through February 28, 1997 are set forth in Appendix B to the SAI and may be
obtained from the Trust without charge. As of July 31, 1997, Daily Assets
Government Fund had not commenced operations.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DAILY ASSETS
DAILY ASSETS TREASURY FUND CASH FUND
Year Ended March 31, Period Ended
------------------------------------------------ -------------
1997 1996 1995 1994 1993(a) 2/28/97(A)(C)
---- ---- ---- ---- ------- -------------
Net Asset Value, Beginning of
Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
Investment Operations:
Net Investment Income 0.05 0.05 0.04 0.03 0.02 0.02
Net Realized and Unrealized Gain
(Loss) on Investments - - - - - -
----- ----- ----- ----- ----- -----
Total from Investment Operations 0.05 0.05 0.04 0.03 0.02 0.02
Distributions From:
Net Investment Income (0.05) (0.05) (0.04) (0.03) (0.02) (0.02)
Net Realized Gain on Investments - - - - - -
----- ----- ----- ----- ----- -----
Total Distributions (0.05) (0.05) (0.04) (0.03) (0.02) (0.02)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Total Return 4.80% 5.18% 4.45% 2.83% 3.13%(b) 5.11%(b)
Ratio/Supplementary Data:
Net Assets at End of Period
(000's omitted) $43,975 $43,103 $36,329 $26,505 $4,687 $7,572
Ratios to Average Net Assets:
Expenses Including
Reimbursement/Waiver 0.50% 0.50% 0.37% 0.33% 0.22%(b) 0.55%(b)
Expenses Excluding
Reimbursement/Waiver 0.99% 1.06% 1.10% 1.17% 2.43%(b) 1.21%(b)
Net Investment Income Including
Reimbursement/Waiver 4.70% 5.01% 4.45% 2.82% 2.92%(b) 4.91%(b)
</TABLE>
(a) Daily Assets Treasury Fund and Daily Assets Cash Fund commenced
operations on July 1, 1992 and October 1, 1996, respectively.
(b) Annualized.
(c) Unaudited.
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3. INVESTMENT OBJECTIVE AND POLICIES
Each Fund has a fundamental investment policy that allows it to invest
all of its investable assets in its corresponding Portfolio. All other
investment policies of each Fund and its corresponding Portfolio are
substantially identical. Therefore, although the following discusses the
investment policies of the Portfolios (and the responsibilities of Core Trust's
board of trustees (the "Core Trust Board")), it applies equally to the Funds
(and the Trust's board of trustees (the "Board")).
INVESTMENT OBJECTIVE
The investment objective of each Fund is to provide high current income
to the extent consistent with the preservation of capital and the maintenance of
liquidity. Each Fund currently seeks to achieve its investment objective by
investing all of its investable assets in its corresponding Portfolio, which has
the same investment objective. There can be no assurance that any Fund or
Portfolio will achieve its investment objective or maintain a stable net asset
value.
INVESTMENT POLICIES
Each Portfolio invests only in high quality, short-term money market
instruments that are determined by its investment adviser, pursuant to
procedures adopted by the Core Trust Board, to be eligible for purchase and to
present minimal credit risks. High quality instruments include those that (i)
are rated (or, if unrated, are issued by an issuer with comparable outstanding
short-term debt that is rated) in the highest rating category by two nationally
recognized statistical rating organizations ("NRSROs") or, if only one NRSRO has
issued a rating, by that NRSRO or (ii) are otherwise unrated and determined by
the investment adviser to be of comparable quality. A description of the rating
categories of certain NRSROs, such as Standard & Poor's and Moody's Investors
Service, Inc., is contained in the SAI.
Each Portfolio invests only in U.S. dollar-denominated instruments that
have a remaining maturity of 397 days or less (as calculated under Rule 2a-7
under the Investment Company Act of 1940 (the "1940 Act")) and maintains a
dollar-weighted average portfolio maturity of 90 days or less. Except to the
limited extent permitted by Rule 2a-7 and except for U.S. Government Securities,
each Portfolio will not invest more than 5% of its total assets in the
securities of any one issuer. As used herein, "U.S. Government Securities" means
obligations issued or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities.
A Portfolio's yield will tend to fluctuate inversely with prevailing
market interest rates. For instance, in periods of falling market interest
rates, yields will tend to be somewhat higher than those rates. Although each
Portfolio only invests in high quality money market instruments, an investment
in a Portfolio is subject to risk even if all securities in the Portfolio's
portfolio are paid in full at maturity. All money market instruments, including
U.S. Government Securities, can change in value when there is a change in
interest rates, the issuer's actual or perceived creditworthiness or the
issuer's ability to meet its obligations.
TREASURY PORTFOLIO
Treasury Portfolio seeks to attain its investment objective by
investing primarily in obligations issued or guaranteed as to principal and
interest by the United States Treasury ("U.S. Treasury Securities"). Under
normal market conditions, the Portfolio will invest at least 65% of its total
assets in U.S. Treasury Securities, such as Treasury bills and notes. The
Portfolio may also invest up to 35% of its total assets in other U.S. Government
Securities. The Portfolio invests with a view toward providing income that is
generally considered exempt from state and local income taxes. The Portfolio
will purchase a U.S. Government Security that is
5
<PAGE>
not backed by the full faith and credit of the U.S. Government only if that
security has a remaining maturity of thirteen months or less.
Among the U.S. Government Securities in which the Portfolio may invest
are obligations of the Farm Credit System, Farm Credit System Financial
Assistance Corporation, Federal Financing Bank, Federal Home Loan Banks, General
Services Administration, Student Loan Marketing Association, and Tennessee
Valley Authority. See "Investment Policies - Government Cash Portfolio." Income
on these obligations and the obligations of certain other agencies and
instrumentalities is generally not subject to state and local income taxes by
Federal law. In addition, the income received by Fund shareholders that is
attributable to these investments will also be exempt in most states from state
and local income taxes. Shareholders should determine through consultation with
their own tax advisers whether and to what extent dividends payable by the Fund
from interest received with respect to its investments will be considered to be
exempt from state and local income taxes in the shareholder's state.
Shareholders similarly should determine whether the capital gain and other
income, if any, payable by the Fund will be subject to state and local income
taxes in the shareholder's state. See "Dividend and Tax Matters."
U.S. GOVERNMENT ZERO COUPON SECURITIES. The Portfolio may invest in
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury under the Treasury's Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Zero coupon
securities are sold at original issue discount and pay no interest to holders
prior to maturity. Because of this, zero coupon securities may be subject to
greater fluctuation of market value than the other securities in which the
Portfolio may invest. See "Dividends and Tax Matters - Taxes."
GOVERNMENT CASH PORTFOLIO
Government Cash Portfolio seeks to attain its investment objective by
investing, under normal circumstances, at least 65% of its assets in U.S.
Government Securities and in repurchase agreements backed by U.S. Government
Securities. The U.S. Government Securities in which the Portfolio may invest
include securities issued by the U.S. Treasury and obligations issued or
guaranteed by U.S. Government agencies and instrumentalities that are backed by
the full faith and credit of the U.S. Government, such as those guaranteed by
the Small Business Administration. In addition, the U.S. Government Securities
in which the Portfolio may invest include securities supported primarily or
solely by the creditworthiness of the issuer, such as securities of the Federal
National Mortgage Association. There is no guarantee that the U.S. Government
will support securities not backed by its full faith and credit. Accordingly,
although these securities have historically involved little risk of loss of
principal if held to maturity, they may involve more risk than securities backed
by the U.S. Government's full faith and credit.
CASH PORTFOLIO
Cash Portfolio seeks to attain its investment objective by investing in
a broad spectrum of money market instruments. The Portfolio may invest in (i)
obligations of domestic financial institutions, (ii) U.S. Government Securities
(see "Investment Policies - Government Cash Portfolio") and (iii) corporate debt
obligations of domestic issuers.
Financial institution obligations include negotiable certificates of
deposit, bank notes, bankers' acceptances and time deposits of banks (including
savings banks and savings associations) and their foreign branches. The
Portfolio limits its investments in bank obligations to banks which at the time
of investment have total assets in excess of one billion dollars. Certificates
of deposit represent an institution's obligation to repay funds deposited with
it that earn a specified interest rate over a
6
<PAGE>
given period. Bank notes are debt obligations of a bank. Bankers' acceptances
are negotiable obligations of a bank to pay a draft which has been drawn by a
customer and are usually backed by goods in international trade. Time deposits
are non-negotiable deposits with a banking institution that earn a specified
interest rate over a given period. Certificates of deposit and fixed time
deposits, which are payable at the stated maturity date and bear a fixed rate of
interest, generally may be withdrawn on demand by the Portfolio but may be
subject to early withdrawal penalties which could reduce the Portfolio's yield.
Corporate debt obligations include commercial paper (short-term
promissory notes) issued by companies to finance their, or their affiliates',
current obligations. The Portfolio may also invest in commercial paper or other
corporate securities issued in "private placements" that are restricted as to
disposition under the Federal securities laws ("restricted securities"). Any
sale of these securities may not be made absent registration under the
Securities Act of 1933 or the availability of an appropriate exemption
therefrom. Some of these restricted securities, however, are eligible for resale
to institutional investors, and accordingly, a liquid market may exist for them.
Pursuant to guidelines adopted by the Core Trust Board, the investment adviser
will determine whether each such investment is liquid.
ADDITIONAL INVESTMENT POLICIES
Each Fund's and each Portfolio's investment objective and certain
investment limitations, as described in the SAI, are fundamental and therefore,
may not be changed without approval of the holders of a majority of the Fund's
or Portfolio's, as applicable, outstanding voting securities (as defined in the
1940 Act). Except as otherwise indicated herein or in the SAI, investment
policies of a Fund or a Portfolio may be changed by the applicable board of
trustees without shareholder approval. Each Portfolio 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 Portfolio's total assets.
Borrowing for purposes other than meeting redemption requests will not exceed 5%
of the value of the Portfolio's total assets. Each Portfolio is permitted to
hold cash in any amount pending investment in securities and may invest in other
investment companies that intend to comply with Rule 2a-7 and have substantially
similar investment objectives and policies. A further description of the Funds'
and the Portfolios' investment policies is contained in the SAI.
REPURCHASE AGREEMENTS. Each of Government Cash Portfolio and Cash
Portfolio may seek additional income by entering into repurchase agreements.
Repurchase agreements are transactions in which a Portfolio 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. Core Trust holds the
underlying collateral, which is maintained at not less than 100% of the
repurchase price. Repurchase agreements involve certain credit risks not
associated with direct investment in securities. Each Portfolio, however,
intends to enter into repurchase agreements only with sellers which its
investment adviser believes present minimal credit risks in accordance with
guidelines established by the Core Trust Board. In the event that a seller
defaulted on its repurchase obligation, however, a Portfolio might suffer a
loss.
LIQUIDITY. To ensure adequate liquidity, each Portfolio may not invest
more than 10% of its net assets in illiquid securities, including in the case of
Government Cash Portfolio and Cash Portfolio, repurchase agreements not
entitling the Portfolio to payment of principal within seven days. There may not
be an active secondary market for securities held by a Portfolio. Each
Portfolio's investment adviser monitors the liquidity of the Portfolio's
investments.
7
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WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. In order to assure
itself of being able to obtain securities at prices which it believes might not
be available at a future time, each Portfolio's investment adviser may purchase
securities on a when-issued or delayed delivery basis. When these transactions
are negotiated, the price or yield is fixed at the time the commitment is made,
but delivery and payment for the securities take place at a later date.
Securities so purchased are subject to market price fluctuation and no interest
on the securities accrues to a Portfolio until delivery and payment take place.
Accordingly, the value of the securities on the delivery date may be more or
less than the purchase price. Commitments for when-issued or delayed delivery
transactions will be entered into only when a Portfolio has the intention of
actually acquiring the securities, but the Portfolio may sell the securities
before the settlement date if deemed advisable. Failure by the other party to
deliver a security purchased by a Portfolio may result in a loss or missed
opportunity to make an alternative investment. The Trust's custodian will set
aside and maintain in a segregated account cash and certain liquid, high-grade
debt securities with a market value at all times equal to the amount of the
Fund's forward commitment obligations. As a result of entering into forward
commitments, the Funds are exposed to greater potential fluctuations in the
value of their assets and net asset values per share.
VARIABLE AND FLOATING RATE SECURITIES. The securities in which the
Portfolios 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 interest paid on these securities is a function primarily of
the index or market rate upon which the interest rate adjustments are based.
Those securities with ultimate maturities of greater than 397 days may be
purchased only pursuant to Rule 2a-7. Under that Rule, only those long-term
instruments that have demand features which comply with certain requirements and
certain U.S. Government Securities may be purchased. 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.
No Portfolio may purchase a variable or floating rate security whose
interest rate is adjusted based on a long-term interest rate or index, on more
than one interest rate or index, or on an interest rate or index that materially
lags behind short-term market rates (these prohibited securities are often
referred to as "derivative" securities). All variable and floating rate
securities purchased by a Portfolio will have an interest rate that is adjusted
based on a single short-term rate or index, such as the Prime Rate.
FINANCIAL INSTITUTION GUIDELINES. Government Cash Portfolio invests
only in instruments which, if held directly by a bank or bank holding company
organized under the laws of the United States or any state thereof, would be
assigned to a risk-weight category of no more than 20% under the current risk
based capital guidelines adopted by the Federal bank regulators. In addition the
Portfolio does not intend to hold in its portfolio any securities or instruments
that would be subject to restriction as to amount held by a National bank under
Title 12, Section 24 (Seventh) of the United States Code. See "Investments By
Financial Institutions" in the SAI. In addition, the Portfolio limits its
investments to those permissible for Federally chartered credit unions under
applicable provisions of the Federal Credit Union Act and the applicable rules
and regulations of the National Credit Union Administration. Government Cash
Portfolio limits its investments to investments that are legally permissible for
Federally chartered savings associations without limit as to percentage and to
investments that permit Fund shares to qualify as liquid assets and as
short-term liquid assets.
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4. MANAGEMENT
The business of the Trust is managed under the direction of the Board
and the business of Core Trust is managed under the direction the Core Trust
Board. 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. The
Core Trust Board performs similar functions for the Portfolios and Core Trust.
The SAI contains general background information about the trustees and officers
of the Trust and Core Trust.
ADMINISTRATOR
Subject to the supervision of the Board, FAS supervises the overall
management of the Trust. FAS, FFSI, Forum Advisors 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, FAS and FFSI acted as manager and distributor of
registered investment companies and collective trust funds with assets of
approximately $18 billion and FAS, FFSI, Forum Advisors and the Transfer Agent
were controlled by John Y. Keffer, President and Chairman of the Trust.
FAS 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 certain persons to serve as officers and
provides, at the Trust's expense, the services of persons necessary to perform
such supervisory, administrative and clerical functions as are needed to operate
the Trust effectively. Those officers, as well as certain employees and Trustees
of the Trust, may be directors, officers or employees of (and persons providing
services to the Trust may include) FAS and its affiliates. For these services
and facilities, FAS receives a fee at an annual rate of 0.10% of the daily net
assets of each Fund. FFSI serves as administrator of Core Trust and provides
administrative services for each Portfolio that are similar to those provided to
the Funds. For its administrative services to the Portfolios, FFSI receives a
fee at an annual rate of 0.10% of the daily net assets of Treasury Portfolio and
0.05% of the daily net assets of each of Government Cash Portfolio and Cash
Portfolio.
DISTRIBUTOR
FFSI acts as distributor of the Trust's shares pursuant to a
Distribution Agreement with the Trust. As distributor of each Fund, FFSI acts as
the agent of the Trust in connection with the offering of shares of the Funds.
FFSI receives no fee for distribution of Fund shares. FFSI is a registered
broker-dealer and investment adviser and is a member of the National Association
of Securities Dealers, Inc.
ADVISERS
Subject to the general supervision of the Core Trust Board, Forum
Advisors makes investment decisions for Treasury Portfolio and monitors that
Portfolio's investments and Linden makes investment decisions for Government
Cash Portfolio and Cash Portfolio and monitors those Portfolios' investments.
Forum Advisors, which is located at Two Portland Square, Portland, Maine 04101,
provides investment advisory services to five other mutual funds. Linden, which
is located at 812 N. Linden Drive, Beverly Hills, California 90210, is
controlled by Anthony R. Fischer, Jr., who is its sole stockholder, director,
and officer, and provides investment advisory services to one other portfolio of
Core Trust. Forum Advisors and Linden act also as investment sub-advisers to the
Portfolios that they do not manage on a daily basis and from time to time may
provide each other with assistance regarding the other's advisory
responsibilities. These services may include management of part of or all of the
Portfolios' investment portfolios.
For its services, Forum Advisors receives an advisory fee at an annual
rate of 0.05% of Treasury Portfolio's average daily net assets. For its
services, Linden receives from each of Government Cash Portfolio and Cash
Portfolio an advisory fee based
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upon the total average daily net assets of those Portfolios and the other
portfolio of Core Trust that Linden advises ("Total Portfolio Assets"). Linden's
fee is calculated at an annual rate on a cumulative basis as follows: 0.05% of
the first $200 million of Total Portfolio Assets, 0.03% of the next $300 million
of Total Portfolio Assets, and 0.02% of the remaining Total Portfolio Assets. A
Fund's expenses include the Fund's pro rata portion of the advisory fee paid by
the corresponding Portfolio. To the extent Forum Advisors or Linden has
delegated its responsibilities to the other, Forum Advisors or Linden pays its
advisory fee accrued for such period of time to the other. Currently, it is
anticipated that Linden will delegate responsibility for portfolio management
infrequently to Forum Advisors.
SHAREHOLDER SERVICING
Shareholder inquiries and communications concerning the Funds may be
directed to the Transfer Agent at the address and telephone numbers on the first
page of this Prospectus. The Transfer Agent maintains for each shareholder of
record, an account (unless such accounts are maintained by sub-transfer agents)
to which all shares purchased are credited, together with any distributions that
are reinvested in additional shares. The Transfer Agent also performs other
transfer agency functions and acts as dividend disbursing agent for the Trust.
For its services, the Transfer Agent is paid a transfer agent fee at an annual
rate of 0.25% of the average daily net assets of each Fund plus $12,000 per year
and certain account and additional class charges and is reimbursed for certain
expenses incurred on behalf of the Funds.
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 its affiliates, who agree to comply with the terms of the Transfer
Agent's agreement with the Trust. The Transfer Agent may pay those agents for
their services, but no such payment will increase the Transfer Agent's
compensation from the Trust. Forum Accounting Services, LLC performs portfolio
accounting services for the Fund, including determination of the Fund's net
asset value per share, pursuant to an agreement with the Trust and is paid a fee
for these services.
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 any obligations of
FAS or Forum Advisors to reimburse the Trust for excess expenses, the Trust pays
for all of its expenses. Each service provider in its sole discretion may elect
to waive (or continue to waive) all or any portion of its fees, which are
accrued daily and paid monthly, and may reimburse a Fund for certain expenses.
Any such waivers or reimbursements 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.
5. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL INFORMATION
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 next-determined after acceptance of an order, on each Fund Business Day.
Fund shares are issued immediately after an
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order for the shares in proper form, accompanied by funds on deposit at a
Federal Reserve Bank ("Federal Funds"), is accepted by the Transfer Agent. Daily
Assets Treasury Fund's net asset value is calculated at 12:00 p.m., Eastern
Time, and Daily Assets Government Fund's and Daily Assets Cash Fund's net asset
value is calculated at 2:00 p.m., Eastern Time. Fund shares become entitled to
receive dividends on the next Fund Business Day after the order is accepted.
Each Fund reserves the right to reject any subscription for the
purchase of Fund 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 on or after the day on which the
redemption becomes effective.
Normally, redemption proceeds are paid immediately, 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 to purchase the shares 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 for more than
seven days after the tender of the Shares to the Fund 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 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). If the Trust did not employ such procedures, it
could 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.
PURCHASE AND REDEMPTION PROCEDURES
Investors may open an account by completing the application at the back
of this Prospectus or by contacting the Transfer Agent at the address on the
first page of this Prospectus. For those shareholder services not referenced on
the account application
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and to change information regarding a shareholder's account (such as addresses),
investors should request an Optional Services Form from the Transfer Agent.
INITIAL PURCHASE OF SHARES
There is a $10,000 minimum for initial investments in each Fund ($2,000
for individual retirement accounts, $2,500 for exchanges).
BY MAIL. Investors may send a check made payable to the Trust along
with a completed account application to the address on the cover page of this
Prospectus. Checks are accepted at full value subject to collection. Payment by
a check drawn on any member of the Federal Reserve System can normally be
converted into Federal Funds within two business days after receipt of the
check. Checks drawn on some non-member banks may take longer.
BY BANK WIRE. To make an initial investment in a Fund using the wire
system for transmittal of money among banks, an investor should first telephone
the Trust at 800-94FORUM (800-943-6786) or (207) 879-0001 to obtain an account
number. The investor should then instruct a bank to wire the investor's money
immediately to:
BankBoston
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. There may be a
charge imposed by the bank for transmitting payment by wire, and there also may
be a charge for the use of Federal Funds.
THROUGH FINANCIAL INSTITUTIONS. Shares may be purchased and redeemed
through certain broker-dealers, banks or other financial institutions
("Processing Organizations"), including affiliates of the Transfer Agent.
Processing Organizations may charge their customers a fee for their services and
are responsible for promptly transmitting purchase, redemption and other
requests to a Fund. The Trust is not responsible for the failure of any
Processing Organization to promptly forward these requests.
Investors who purchase or redeem shares in this manner will be subject
to the procedures of their Processing Organization, which may include charges,
limitations, investment minimums, cutoff times and restrictions in addition to,
or different from, those applicable to shareholders who invest in a Fund
directly. These investors should acquaint themselves with their institution's
procedures and should read this Prospectus in conjunction with any materials and
information provided by their institution. Investors who purchase Fund shares
through a Processing Organization may or may not be the shareholder of record
and, subject to their institution's and the Fund's procedures, may have Fund
shares transferred into their name. Certain Processing Organizations may enter
purchase orders with payment to follow. Certain states permit shares to be
purchased and redeemed only through registered broker-dealers, including FFSI.
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.
SUBSEQUENT PURCHASES OF SHARES
There is a $500 minimum for subsequent purchases. Subsequent purchases
may be made by mailing a check, by sending a bank wire or through a financial
institution as indicated above. Shareholders using the wire system for purchase
should
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first telephone the Trust at 800-94FORUM (800-943-6786) or (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 who 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 who has elected telephone redemption
privileges may make a telephone redemption request by calling the Transfer Agent
at 800-94FORUM (800-943-6786) or (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 who
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 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.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any
written redemption request and for any endorsement on a stock certificate. 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
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institution acceptable to the Transfer Agent, including a bank, a broker, a
dealer, a national securities exchange, a credit union, or a savings association
that is authorized to guarantee signatures. Whenever a signature guarantee is
required, the signature of each person required to sign for the account must be
guaranteed.
The Transfer Agent will deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost all distributions on the account will be reinvested in
additional shares of the Fund. In addition, the amount of any outstanding
(unpaid for six months or more) checks for distributions that have been returned
to the Transfer Agent will be reinvested and the checks will be canceled.
EXCHANGES
Shareholders may exchange their shares for shares of any other fund of
the Trust or any other mutual fund managed by FAS that participates with the
Funds in the exchange program (currently, Sound Shore Fund, Inc.). 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 minimum amount required to open an account in a
Fund through an exchange from another fund is $2,500. The Funds do not charge
for exchanges, and there is currently no limit on the number of exchanges a
shareholder may make, but each Fund reserves the right to limit excessive
exchanges by any shareholder. See "Additional Purchase and Redemption
Information" in the SAI.
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 new account. Shareholders may only exchange into a fund
if that fund's shares may legally be sold in the shareholder's state of
residence.
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.
Accordingly, a shareholder may realize a capital gain or loss with respect to
the shares redeemed. 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 instruction 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 who has elected telephone exchange privileges by calling the
Transfer Agent at 800-94FORUM
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(800-943-6786) or (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
Each of Daily Assets Government Fund and Daily Assets Cash 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 IRAs 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 either the individual or the individual's spouse, is an active
participant in an employer-sponsored retirement plan and the individual (or in
certain cases, the married couple has adjusted gross income above certain
levels.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of each Fund's net investment income are declared daily and
paid monthly following the close of the last Fund Business Day of the month. Net
capital gain realized by a Fund, if any, will be distributed annually. Fund
shares become entitled to receive dividends on the day the shares are issued.
Shares redeemed are not entitled to receive dividends declared on or after the
day on which the redemption becomes effective.
Shareholders may choose to 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
TAX STATUS OF THE FUNDS. Each Fund intends to qualify or continue to
qualify to be taxed as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended. Accordingly, each Fund will not be liable for
Federal income taxes on the net investment income and capital gain distributed
to its shareholders. Because the Funds intend to distribute all of their net
investment income and net capital gain each year, the Funds should also avoid
Federal excise taxes.
Dividends paid by each Fund out of its net investment income (including
realized net short-term capital gain) are taxable to the shareholders of the
Fund as ordinary income. Distributions of net long-term capital gain, if any,
realized by a Fund are taxable to shareholders as long-term capital gain,
regardless of the length of time the Fund shares were held by the shareholder at
the time of distribution.
THE PORTFOLIOS. The Portfolios are not required to pay Federal income
taxes on their net investment income and capital gain, as they are treated as
partnerships for Federal income tax purposes. All interest, dividends and gains
and losses of a Portfolio are deemed to have been "passed through" to the
respective Fund in proportion to the Fund's holdings of the Portfolio,
regardless of whether such interest, dividends or gains have been distributed by
the Portfolio.
STATE AND LOCAL. Daily Assets Treasury Fund's investment policies are
structured to provide shareholders, to the extent permissible by Federal and
state law, with income that is exempt or excluded from income taxation at the
state and
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local level. Many states (by statute, judicial decision or administrative
action) do not tax dividends from a regulated investment company that are
attributable to interest on obligations of the U.S. Treasury and certain U.S.
Government agencies and instrumentalities if the interest on those obligations
would not be taxable to a shareholder that held the obligation directly. As a
result, substantially all dividends paid by this Fund to shareholders residing
in certain states will be exempt or excluded from state income taxes. A portion
of the dividends paid by Daily Assets Government Fund and Daily Assets Cash Fund
to shareholders may be exempt or excluded from state income taxes, but these
Funds are not managed to provide any specific amount of state tax-free income to
shareholders.
Shortly after the close of each year, a statement is sent to each
shareholder of the Funds advising the shareholder of the portions of total
dividends paid into the shareholder's account that is derived from each type of
obligation in which the Funds have invested. 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. Each 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 a Fund is correct and that the shareholder is not subject to backup
withholding.
Zero coupon securities are sold at original issue discount and pay no
interest to holders prior to maturity, but the Fund must include a portion of
the original issue discount of the security as income. Because Daily Assets
Treasury Fund distributes all of its net investment income, the Fund may have to
sell portfolio securities to distribute imputed income, which may occur at a
time when Forum Advisors would not have chosen to sell such securities and which
may result in a taxable gain or loss.
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.
The foregoing is only a summary of some of the important Federal and
state 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 performance of a Fund may be quoted in advertising in terms of
yield or total return. All performance information is based on historical
results, may vary, is not intended to indicate future performance and, unless
otherwise indicated, is net of all expenses. 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 a Fund for a seven
day 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 beginning of the seven day period. Performance information may in
part be based upon the performance of the Portfolio in which a Fund invests.
The Funds' advertisements may also 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
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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 rankings. This material is 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 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.
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of Daily Assets
Treasury Fund as of 12:00 p.m., Eastern Time, and of Daily Assets Government
Fund and Daily Assets Cash Fund as of 2:00 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.
In order to more easily maintain a stable net asset value per share,
each Portfolio's portfolio securities are valued at their amortized cost
(acquisition cost adjusted for amortization of premium or accretion of discount)
in accordance with Rule 2a-7 under the 1940 Act. The Portfolios will only value
their portfolio securities using this method if the Board and the Core Trust
Board believes that it fairly reflects the market-based net asset value per
share. If the market value of a Fund's portfolio deviates more than 1/2 of 1%
from the value determined on the basis of amortized cost, the Board will
consider whether any action should be initiated to prevent any material dilutive
effect on shareholders.
THE TRUST AND ITS SHARES
The Trust is registered with the SEC as an open-end management
investment company and was organized as a business trust under the laws of the
State of Delaware on August 29, 1995. On January 5, 1996 the Trust succeeded to
the assets and liabilities of Forum Funds, Inc. 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 classes of shares within each series.
There are currently fifteen series of the Trust.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
(and Trustees) have available certain procedures for the removal of Trustees.
There are no conversion or preemptive rights in connection with shares of the
Trust. All shares when issued in accordance with the terms of the offering will
be fully paid and nonassessable. Shares are redeemable at net asset
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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
shares of a Fund. Accordingly, those shareholders may be able to greatly affect
(if not determine) the outcome of any shareholder vote.
FUND STRUCTURE
CORE TRUST STRUCTURE. Each Fund invests all of its assets in its
corresponding Portfolio of Core Trust, a business trust organized under the laws
of the State of Delaware in September 1994 and registered under the 1940 Act as
an open-end management investment company. Accordingly, a Portfolio directly
acquires its own securities and its corresponding Fund acquires an indirect
interest in those securities. The assets of each Portfolio belong only to, and
the liabilities of the Portfolio are borne solely by, the Portfolio and no other
portfolio of Core Trust. Upon liquidation of a Portfolio, investors in the
Portfolio would be entitled to share pro rata in the net assets of the Portfolio
available for distribution to investors.
THE PORTFOLIOS. The investment objective and fundamental investment
policies of the Funds and the Portfolios can be changed only with shareholder
approval. See "Prospectus Summary," "Investment Objective and Policies," and
"Management" for a description of the Portfolios' investment objective,
policies, restrictions, management, and expenses. A Fund's investment in a
Portfolio is in the form of a non-transferable beneficial interest. As of the
date of this Prospectus, Daily Assets Treasury Fund is the only investor that
has invested all of its assets in Treasury Portfolio. There are other investors
in Government Cash Portfolio and Cash Portfolio in addition to Daily Assets
Government Fund and Daily Assets Cash Fund. See "Additional Information" below.
All investors in a Portfolio invest on the same terms and conditions as the
Funds and will pay a proportionate share of the Portfolio's expenses.
The Portfolios normally will not hold meetings of investors except as
required by the 1940 Act. Each investor in a Portfolio will be entitled to vote
in proportion to the relative value of its interest in the Portfolio. On most
issues subject to a vote of investors, as required by the 1940 Act and other
applicable law, a Fund will solicit proxies from shareholders of the Fund and
will vote its interest in a Portfolio in proportion to the votes cast by its
shareholders. There can be no assurance that any issue that receives a majority
of the votes cast by a Fund's shareholders will receive a majority of votes cast
by all investors in the Portfolio.
CONSIDERATIONS OF INVESTING IN A PORTFOLIO. A Fund's investment in a
Portfolio may be affected by the actions of other large investors in the
Portfolio, if any. If a large investor other than a Fund redeemed its interest
in a Portfolio, the Portfolio's remaining investors (including the Fund) might,
as a result, experience higher pro rata operating expenses, thereby producing
lower returns. A Fund may withdraw its entire investment from a Portfolio at any
time, if the Board determines that it is in the best interests of the Fund and
its shareholders to do so. The Fund might withdraw, for example, if other
investors in the Portfolio, by a vote of shareholders, changed the investment
objective or policies of the Portfolio in a manner not acceptable to the Board
or not permissible by the Fund. A withdrawal could result in a distribution in
kind of portfolio securities (as opposed to a cash distribution) by the
Portfolio. If the Fund decided to convert those securities to cash, it usually
would incur transaction costs. If the Fund withdrew its investment from the
Portfolio, the Board would consider what action might be taken, including the
management of the Fund's assets in accordance with its
18
<PAGE>
investment objective and policies by Forum Advisors or the investment of all of
the Fund's investable assets in another pooled investment entity having
substantially the same investment objective as the Fund. The inability of the
Fund to find a suitable replacement investment, in the event the Board decided
not to permit Forum Advisors to manage the Fund's assets, could have a
significant impact on shareholders of the Fund. Forum Advisors' experience in
managing funds that utilize its "Core and Gateway" structure began in 1994.
ADDITIONAL INFORMATION. Any other investment company that invests in a
Portfolio may have a different expense ratio and different sales charges,
including distribution fees, and each investment company's performance will be
affected by its expenses and sales charges. Therefore, Fund shareholders may
have different yields than shareholders in another investment company that
invests exclusively in the Portfolio. For more information on any other
investment companies that invest in a Portfolio, investors may contact Forum at
207-879-1900. If an investor invests in a Fund through a financial institution,
the investor also may contact their financial institution to obtain information
about any other investment company investing in a Portfolio.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE SAI AND THE
FUNDS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF THE FUNDS'
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.
19
<PAGE>
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<PAGE>
[Forum Funds Account Application]
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
FORUM FUNDS
INVESTORS BOND FUND
TAXSAVER BOND FUND
PROSPECTUS
August 1, 1997
- --------------------------------------------------------------------------------
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, 1997, 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's transfer agent, Forum
Financial Corp. at P.O. Box 446, Portland, Maine, 04112, (207) 879-0001 or (800)
94FORUM.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<TABLE>
TABLE OF CONTENTS
Page Page
<S> <C> <C> <C>
1. Prospectus Summary........................................2 5. Additional Investment Policies.....................15
2. Financial Highlights......................................4 6. Management.........................................19
3. Investment Objective and Policies.........................6 7. Purchases and Redemptions of Shares................20
Investors Bond Fund......................................6 8. Dividends and Tax Matters..........................27
TaxSaver Bond Fund.......................................12 9. Other Information..................................29
4. Certain Risk Factors.....................................14 Account Application
</TABLE>
FUND SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK OR ANY AFFILIATE OF A BANK AND ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER FEDERAL AGENCY.
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 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 Funds' investment adviser is Forum Advisors, Inc. (the "Adviser"). The
manager of the Trust is Forum Administrative Services, LLC ("FAS") and
distributor of its shares is Forum Financial Services, Inc. ("FFSI"). Forum
Financial Corp. (the "Transfer Agent") serves as the Trust's transfer agent,
dividend disbursing agent and shareholder servicing agent. Each of the Adviser,
FAS, FFSI and the Transfer Agent are located at Two Portland Square, Portland,
Maine 04101. 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."
2
<PAGE>
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.
<TABLE>
<S> <C> <C>
Investors Bond Fund TaxSaver Bond Fund
------------------- ------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a percentage of
public offering price) (1).................................... 3.75% 3.75%
Exchange Fee..................................................... None None
Annual Fund Operating Expenses (2) (as a percentage of average net assets
after applicable expense reimbursements and fee waivers)
Management Fees (after fee waivers) (3).......................... 0.40% 0.40%
12b-1 Fees....................................................... None None
Other Expenses (after expense reimbursements) (4)................ 0.30% 0.20%
Total Fund Operating Expenses (4)................................ 0.70% 0.60%
</TABLE>
(1) Certain shareholders may be eligible for reduced sales charges. See
"Purchases and Redemptions of Shares - Reduced Sales Charges."
(2) The amounts of expenses are based on amounts incurred by each Fund
during the Fund's most recent fiscal year ended March 31, 1997.
(3) Management Fees include all investment advisory fees and administration
fees incurred by the Funds. Absent waivers, "Management Fees" for each Fund
would be 0.70%. Fee waivers are voluntary and may be reduced or eliminated at
any time.
(4) Absent expense reimbursements and fee waivers, "Other Expenses" and
"Total Fund Operating Expenses" would be 0.75% and 1.45% respectively, in the
case of Investors Bond Fund and 0.83% and 1.53%, respectively, in the case of
TaxSaver Bond Fund. Expense reimbursements and fee waivers are voluntary and may
be reduced or eliminated at any time. 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 and payment of the
maximum initial sales charge:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Investors Bond Fund............. $44 $59 $75 $121
TaxSaver Bond Fund.............. $43 $56 $70 $110
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.
3
<PAGE>
2. FINANCIAL HIGHLIGHTS
The following information represents selected data for a single share
outstanding of each Fund. This information has been audited by Deloitte & Touche
LLP, independent auditors. The financial statements and independent auditors'
report thereon are incorporated by reference into the SAI. Further information
about the Funds' performance is contained in the Funds' annual report to
shareholders, which may be obtained from the Trust without charge.
<TABLE>
INVESTORS BOND FUND
Year Ended March 31,
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990(A)
---- ---- ---- ---- ---- ---- ---- -------
Net Asset Value, Beginning
of Period $10.21 $10.00 $10.38 $10.71 $10.43 $10.09 $9.82 $10.00
---------- --------- --------- ----------- ----------- ----------- --------- -----------
Investment Operations:
Net Investment Income 0.71 0.74 0.82 0.81 0.82 0.83 0.84 0.42
Net Realized and
Unrealized Gain ---------- --------- --------- ----------- ----------- ----------- --------- -----------
(Loss) on Investments - 0.21 (0.38) (0.30) 0.53 0.44 0.27 (0.14)
---------- -------- --------- --------- ----------- ----------- ----------- ---------
Total from Investment
Operations 0.71 0.95 0.44 0.51 1.35 1.27 1.11 0.28
---------- --------- --------- ----------- ----------- ----------- --------- -----------
Distributions From:
Net Investment Income (0.71) (0.74) (0.82) (0.81) (0.82) (0.83) (0.84) (0.42)
Net Realized Gain on
Investments (0.02) - - (0.03) (0.25) (0.10) - (0.04)
---------- --------- --------- ----------- ----------- ----------- --------- -----------
Total Distributions (0.73) (0.74) (0.82) (0.84) (1.07) (0.93) (0.84) (0.46)
---------- --------- --------- ----------- ----------- ----------- --------- -----------
Net Asset Value, End of
Period $10.19 $10.21 $10.00 $10.38 $10.71 $10.43 $10.09 $9.82
========== ========= ========= =========== =========== =========== ========= ===========
Total Return (b) 7.18% 9.84% 4.55% 4.70% 13.53% 12.91% 11.76% 5.79%(c)
Ratio/Supplementary Data:
Net Assets at End of Period
(000's omitted) $22,190 $25,676 $25,890 $26,083 $26,832 $24,336 $19,132 $19,400
Ratios to Average Net Assets:
Expenses Including
Reimbursement/Waiver 0.70% 0.43% 0.75% 0.75% 0.75% 0.70% 0.64% 0.41%(c)
Expenses Excluding
Reimbursement/Waiver 1.45% 1.36% 1.33% 1.31% 1.40% 1.51% 1.68% 1.52%(c)
Net Investment Income
Including
Reimbursement/Waiver 6.94% 7.29% 8.19% 7.49% 7.71% 7.93% 8.44% 8.51%(c)
Portfolio Turnover Rate 79.42% 42.89% 48.17% 41.41% 193.21% 221.39% 73.32% 93.08%
</TABLE>
(a) The Fund commenced operations on October 2, 1989.
(b) Total return calculations do not include sales charge.
(c) Annualized.
4
<PAGE>
<TABLE>
TAXSAVER BOND FUND
Year Ended March 31,
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990(A)
---- ---- ---- ---- ---- ---- ---- -------
Net Asset Value, Beginning
of Period $10.57 $10.39 $10.35 $10.63 $10.26 $10.10 $9.97 $10.00
---------- --------- --------- ----------- ----------- ----------- --------- -----------
Investment Operations:
Net Investment Income 0.56 0.57 0.57 0.57 0.63 0.68 0.67 0.33
Net Realized and
Unrealized Gain
(Loss) on Investments (0.03) 0.18 0.04 (0.01) 0.49 0.20 0.13 (0.03)
----------- --------- --------- ----------- ----------- ----------- --------- -----------
Total from Investment Operations 0.53 0.75 0.61 0.56 1.12 0.88 0.80 0.30
----------- -------- --------- ----------- ----------- ----------- --------- -----------
Distributions From:
Net Investment Income (0.56) (0.57) (0.57) (0.57) (0.63) (0.68) (0.67) (0.33)
Net Realized Gain on
Investments (0.05) - - (0.27) (0.12) (0.04) - -
---------- --------- --------- ----------- ----------- ----------- --------- -----------
Total Distributions (0.61) (0.57) (0.57) (0.84) (0.75) (0.72) (0.67) (0.33)
---------- --------- --------- ----------- ----------- ----------- --------- -----------
Net Asset Value, End of
Period $10.49 $10.57 $10.39 $10.35 $10.63 $10.26 $10.10 $9.97
========== ========= ========= =========== =========== =========== ========= ===========
Total Return (b) 5.15% 7.36% 6.18% 5.24% 11.28% 8.95% 8.29% 6.16%(c)
Ratio/Supplementary Data:
Net Assets at End of Period
(000's omitted) $17,757 $17,915 $16,018 $16,518 $16,580 $11,207 $9,998 $9,546
Ratios to Average Net Assets:
Expenses Including
Reimbursement/Waiver 0.60% 0.60% 0.60% 0.60% 0.60% 0.55% 0.49% 0.22%(c)
Expenses Excluding
Reimbursement/Waiver 1.53% 1.48% 1.45% 1.50% 1.56% 1.66% 1.86% 1.66%(c)
Net Investment Income
Including
Reimbursement/Waiver 5.28% 5.35% 5.62% 5.27% 5.98% 6.64% 6.69% 6.54%(c)
Portfolio Turnover Rate 34.19% 61.61% 63.85% 141.80% 240.36% 104.29% 54.62% 13.25%
</TABLE>
(a) The Fund commenced operations on October 2, 1989.
(b) Total return calculations do not include sales charge.
(c) Annualized.
5
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
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. By seeking capital preservation the Fund attempts to control the risk of
default and the risk of capital losses in periods 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, 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.
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 ("Moody's") or Standard & Poor's ("S&P") (See SAI -"Description of
Securities Ratings"), 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 also may invest in commercial paper and other money market
instruments rated in one of the two highest rating categories by an 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.
(2) preferred stock which is rated in one of the five highest rating
categories by an NRSRO (for example, ba or above by Moody's). An issue
6
<PAGE>
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 and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. 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, have predominantly
speculative characteristics and are commonly known as "Junk Bonds." 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 61.83% of its average annual
assets in securities rated by Moody's or S&P and 37.12% 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 - 14.16%, Aa/AA - 2.09%, A/A - 18.65%,
Baa/BBB - 17.66%, Ba/BB - 4.50% and B/B - 4.77%. 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.
As of June 30, 1997, $4,702,072 of the Fund's assets were invested in
Beverly Enterprises, Inc. and Citfed Bancorp, Inc., two issuers of unrated
securities that, at the time of investment, the Adviser believed to be of
quality comparable to the rated securities in which the Fund may invest. These
securities subsequently received a B rating from each of S&P and Moody's. The
securities remain in the Fund's portfolio because the Adviser believes that the
investment is and will continue to be in the best interests of the Fund.
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 AND FOREIGN 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.
7
<PAGE>
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.
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
8
<PAGE>
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.
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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
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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 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.
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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.
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 issuers 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
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statistical rating organization ("NRSRO") such as Moody's (Aaa, Aa, A and Baa)
or 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. Changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity by the issuer to make principal and interest payments with respect to
debt rated in that category than is the case with higher grade debt. 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 and are commonly known as "Junk Bonds." 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 Adviser
to be of comparable quality) only if the Adviser determines that retaining the
security is in the best interests of the Fund.
An unrated 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 fiscal year, the Fund had 79.08% of its
average annual assets in municipal securities rated by Moody's or S&P and 19.16%
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 - 25.32%, Aa/AA - 5.05%,
A/A - 14.12% and Baa/BBB - 34.59%. 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 of the issuer, 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
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"revenue" securities, are intended to fulfill the short-term capital needs of
the issuer 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. Each Fund is 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 issuers. As
non-diversified portfolios, the Funds may present greater risks than diversified
funds. 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 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
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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 Trustees 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, as a fundamental policy,
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 into 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
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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 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 liquid assets in accordance with SEC
guidelines. The account's 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
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the repurchase price or value of securities loaned, plus accrued interest. The
Funds may pay fees to arrange securities loans.
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 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 purchase securities on a when-issued or forward
commitment basis 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 dividends or 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.
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.
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
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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 indices.
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 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
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<PAGE>
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 Company 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.
CORE AND GATEWAY(R). Shareholders of each Fund have approved an
investment policy that permits the Fund to seek to achieve its investment
objective by converting to a Core and Gateway structure. The Funds upon future
action by the Board of Trustees and notice to shareholders, may convert to this
structure, in which each 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.
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 Trustees. 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.
ADMINISTRATOR
Subject to the supervision of the Board, FAS supervises the overall
management of the Funds. FAS, FFSI, 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, FAS and FFSI acted as manager and distributor of
registered investment companies and collective trust funds with assets of
approximately $18 billion and FAS, FFSI, the Adviser and the Transfer Agent were
controlled by John Y. Keffer, President and Chairman of the Trust.
Under its administration agreement with the Trust, FAS 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 Trustees of the Trust, may be directors, officers or employees of
(and persons providing services to the Trust may include) FAS and its
affiliates. For these services and facilities, FAS receives with respect to each
Fund a management fee at an annual rate of 0.30% of each Fund's average daily
net assets.
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<PAGE>
DISTRIBUTOR
FFSI acts as the distributor of shares of the Funds pursuant to a
Distribution Agreement with the Trust. FFSI 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." FFSI is a
registered broker-dealer and investment adviser and is a member of the National
Association of Securities Dealers, Inc.
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 each Fund may be
directed to the Transfer Agent. The Transfer Agent also acts as the Funds'
dividend disbursing agent. The Transfer Agent maintains for each shareholder of
record, an account (unless such accounts are maintained by sub-transfer agents)
to which all shares purchased are credited, together with any distributions that
are reinvested in additional shares and also performs other transfer agency
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. Pursuant to an agreement with
the Trust, Forum Accounting Services, LLC performs portfolio accounting services
for the Funds, including determination of the Funds' net asset value and
receives a fee for its services.
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"), FAS or affiliates of FAS, 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.
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, FAS 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
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<PAGE>
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 next-determined after acceptance of an order, plus any applicable sales
charge on all weekdays except days when the New York Stock Exchange is closed,
normally, New Year's Day, Dr. Martin Luther King Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas ("Fund Business Day") (see "Sales Charges" below). Fund shares are
issued immediately 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 Busines Day after the order is accepted.
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, 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 to purchase the shares 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 for more than
seven days after the tender of the shares to the Fund 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 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). If the Trust did not employ such procedures, it
could 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.
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<PAGE>
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 open an account by completing the application at the back of this Prospectus
or by contacting the Transfer Agent at the address on the first page of this
prospectus. For those shareholder services not referenced on the account
application and to change information regarding a shareholder's account (such as
addresses), investors 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 listed 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 800-94FORUM (800-943-6786) or (207) 879-0001 to obtain an
account number. The investor should then instruct a bank to wire the investor's
money immediately to:
BankBoston
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. There may be a
charge imposed by the bank for transmitting payment by wire, and there also may
be a charge for the use of Federal Funds.
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 800-94FORUM (800-943-6786) or (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.
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<PAGE>
REDEMPTION OF SHARES
Shareholders who 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 who has elected telephone redemption
privileges may make a telephone redemption request by calling the Transfer Agent
at 800-94FORUM (800-943-6786) or (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.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any
written redemption request and for any endorsement on a stock certificate. 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.
The Transfer Agent will deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost all distributions on the account will be reinvested in
additional shares of the Fund. In addition, the amount of any outstanding
(unpaid for six months or more) checks for distributions that have been returned
to the Transfer Agent will be reinvested and the checks will be canceled.
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<PAGE>
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):
<TABLE>
Sales Charge
as % of
-----------------------------
<S> <C> <C> <C>
Public
Offering Net 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
</TABLE>
FFSI'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, FFSI will reallow
discounts to selected brokers and dealers in the amounts indicated in the table
above. From time to time, however, FFSI may elect to reallow the entire sales
charge to selected brokers or dealers for all sales with respect to which orders
are placed with FFSI during a particular period. The dealers' reallowance may be
changed from time to time.
In addition, from time to time and at its own expense, FFSI may provide
compensation, including financial assistance, to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns or other dealer-sponsored special events.
Compensation may include: (i) the provision of travel arrangements and lodging,
(ii) tickets for entertainment events and (iii) merchandise.
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 FFSI 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 FFSI has entered into a share purchase
agreement and which is acting on behalf of its fiduciary customer accounts; (c)
any broker-dealer with whom FFSI has entered into a Selected Dealer Agreement
and a Fee-Based or Wrap Account Agreement and which is acting on behalf of its
fee-based program clients; (d) directors and officers of the Trust; directors,
officers and full-time employees of the Adviser, FFSI, any of their affiliates
or any organization with which FFSI 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 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 a reduced sales charge as described
below, the investor must notify
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<PAGE>
the Transfer Agent at the time of purchase. Programs for 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.
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, the
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
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<PAGE>
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 instruction 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 who has elected telephone exchange privileges by calling the
Transfer Agent at 800-94FORUM (800-943-6786) or (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 should not be considered as a complete investment
vehicle for 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 either the individual or the
individual's spouse is an active participant in an employer-sponsored retirement
plan and the individual (or, in certain cases, the married couple) 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
Processing Organization 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. Investors 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
26
<PAGE>
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.
8. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of each Fund's net investment income are declared daily and
paid monthly. Distributions 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.
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 amended. 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
27
<PAGE>
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.
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 1997 whose investments earn a 5% tax-free
yield would have to earn a 7.3% taxable yield to receive the same benefit.
1997 FEDERAL TAXABLE VS. TAX-FREE YIELDS
A Tax Free Yield of
-----------------------------------------------------------
4.0% 4.5% 5.0% 5.5%
Federal
Tax Bracket equals a taxable yield of approximately
----------- -----------------------------------------------------------
39.6% 6.6% 7.5% 8.3% 9.1%
36.0% 6.3% 7.0% 7.8% 8.6%
31.0% 5.8% 6.5% 7.3% 8.0%
28.0% 5.6% 6.3% 6.9% 7.6%
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
28
<PAGE>
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 Funds'
returns, shareholders should recognize that they are not the same as actual
year-by-year results. A Fund's advertised yield and total return may or may not
reflect the maximum sales load applicable to the Fund. A computation of yield or
total return that does not take into account the sales load paid by an investor
will be higher than a computation based on the public offering price of the
shares purchased that does take into account payment of a sales load.
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 FAS 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 each Fund as
of 4:00 p.m., Eastern time, on each Fund Business Day by dividing the
29
<PAGE>
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 15 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.
30
<PAGE>
FORUM FUNDS ACCOUNT APPLICATION
<PAGE>
FORUM FUNDS
MAINE MUNICIPAL BOND FUND
PROSPECTUS
August 1, 1997
- --------------------------------------------------------------------------------
This Prospectus offers shares of Maine Municipal Bond Fund (the "Fund"), a
non-diversified series of Forum Funds (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 2.50% of the total
public offering price (2.56% 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, 1997, 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's transfer agent, Forum
Financial Corp., at P.O. Box 446, Portland, Maine, 04112, (207) 879-0001 or
(800) 94FORUM.
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.
<TABLE>
TABLE OF CONTENTS
<S> <C> <C> <C>
Page Page
1. Prospectus Summary..........................2 5. Purchases and Redemptions of Shares.....11
2. Financial Highlights........................3 6. Dividends and Tax Matters...............17
3. Investment Objective and Policies...........4 7. Other Information.......................19
4. Management.................................10 Account.Application
</TABLE>
FUND SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK OR ANY AFFILIATE OF A BANK AND ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER FEDERAL AGENCY.
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 Fund's investment adviser is Forum Advisors, Inc. (the "Adviser"). The
manager of the Trust is Forum Administrative Services, LLC ("FAS") and
distributor of its shares is Forum Financial Services, Inc. ("FFSI"). Forum
Financial Corp. (the "Transfer Agent") serves as the Trust's transfer agent,
dividend disbursing agent and shareholder servicing agent. Each of the Adviser,
FAS, FFSI and the Transfer Agent are located at Two Portland Square, Portland,
Maine 04101. 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 in a limited number of issues 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) (1).............................2.50%
Exchange Fee............................................................... None
ANNUAL FUND OPERATING EXPENSES (2)
(as a percentage of average net assets after expense reimbursements and fee
waivers)
Management Fees (after fee waivers)...................................... 0.40%
12b-1 Fees............................................................... None
Other Expenses (after expense reimbursements)............................ 0.20%
-----
Total Fund Operating Expenses............................................ 0.60%
(1) Certain shareholders may be eligible for reduced sales charges. See
"Purchases and Redemptions of Shares - Reduced Sales Charges."
(2) The amounts of expenses are based on amounts incurred during the Fund's
most recent fiscal year ended March 31, 1997. Management Fees includes all
investment advisory fees and administration fees incurred by the Fund. Absent
fee waivers and expense reimbursements, Management Fees, Other Expenses and
Total Fund Operating Expenses would be 0.70%, 0.86% and 1.56%,
2
<PAGE>
respectively. Expense reimbursements and fee waivers are voluntary and may be
reduced or eliminated at any time. 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 (i) a $1,000 investment
in the Fund, (ii) a 5% annual return, (iii) the reinvestment of all dividends
and distributions and (iv) payment of the maximum initial sales charge and
redemption at the end of each period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$31 $44 $58 $98
The example is based on the expenses listed in the table and assumes
deduction of the maximum initial sales charge. 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 by Deloitte & Touche
LLP, 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>
MAINE MUNICIPAL BOND FUND
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992(a)
---- ---- ---- ---- ---- -------
Net Asset Value, Beginning of Period $10.72 $10.47 $10.37 $10.55 $9.98 $10.00
------ ------ ------ ------ ----- ------
Investment Operations:
Net Investment Income (Loss) 0.51 0.51 0.52 0.52 0.58 0.19
Net Realized and Unrealized Gain
(Loss) on Investments 0.01 0.25 0.11 (0.16) 0.57 (0.02)
----------- ----------- ---------- ----------- ---------- ----------
Total from Investment Operations 0.52 0.76 0.63 0.36 1.15 0.17
----------- ----------- ---------- ----------- ---------- ----------
Distributions From:
Net Investment Income (0.51) (0.51) (0.52) (0.52) (0.58) (0.19)
Net Realized Gain on Investments - - (0.01) (0.02) - -
----------- ----------- ---------- ---------- ----------- ----------
Total Distributions (0.51) (0.51) (0.53) (0.54) (0.58) (0.19)
----------- ----------- ---------- ---------- ----------- ----------
Net Asset Value, End of Period $10.73 $10.72 $10.47 $10.37 $10.55 $9.98
=========== =========== ========== ========== =========== ==========
Total Return(b) 4.98% 7.34% 6.31% 3.42% 11.80% 5.27%(c)
Ratio/Supplementary Data:
Net Assets at End of Period
(000's omitted) $25,827 $26,044 $25,525 $26,310 $16,518 $1,968
Ratios to Average Net Assets:
Expenses Including
Reimbursement/Waiver 0.60% 0.60% 0.50% 0.50% 0.40% 0.46%(c)
Expenses Excluding
Reimbursement/Waiver 1.56% 1.48% 1.40% 1.44% 1.98% 6.83%(c)
Net Investment Income (Loss)
Including Reimbursement/Waiver 4.77% 4.73% 5.08% 4.81% 5.25% 5.65%(c)
Portfolio Turnover Rate 21.18% 34.07% 31.55% 13.47% 7.82% 15.24%
(a) The Fund commenced operations on December 5, 1991.
(b) Total return calculations do not include sales charge.
(c) Annualized.
</TABLE>
3
<PAGE>
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
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. Normally, 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
4
<PAGE>
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. The Fund may invest up to 20% of its
net assets in cash or cash equivalents.
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, L.P. ("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. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity by the issuer to make principal and
interest payments with respect to debt rated in that category than is the case
with higher grade debt. 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 that are unrated and determined by the Adviser to be of comparable
quality. These securities are not considered to be investment grade, have
speculative or predominantly speculative characteristics and are commonly known
as "Junk Bonds." 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.
An unrated 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 89.06% of its average
annual assets in municipal securities rated by Moody's or S&P and 8.45% of its
average annual assets in unrated investments, including cash and short-term cash
equivalents which are often unrated. For that year, the Fund had the following
percentages of its average annual net assets invested in rated securities:
Aaa/AAA - 30.17%, Aa/AA - 22.18%, A/A - 23.78%, Baa/BBB - 12.39% and Ba/BB -
0.84%. 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 intended to meet longer term capital
needs of the issuer 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"),
5
<PAGE>
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 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
6
<PAGE>
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 small number of 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
7
<PAGE>
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 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. On May 13, 1997, Moody's "confirmed and refined from Aa to Aa3"
Maine's general obligation bond rating in accord with a new national rating
system published by Moody's on January 13, 1997. Since 1996, Maine general
obligation bonds also have been rated by Fitch. Fitch has assigned a rating of
AA to Maine general obligation bonds. 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.
CORE AND GATEWAY(R). 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.
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 Trustees 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, as a fundamental policy,
not in excess of 331*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 invest no 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. The Fund may enter into 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
8
<PAGE>
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 purchases securities on a when-issued or
forward commitment basis 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 dividend or 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. 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 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
9
<PAGE>
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 Trustees. 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.
ADMINISTRATOR
Subject to the Supervision of the Board, FAS supervises the overall
management of the Fund. FAS, FFSI, 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, FAS acted as manager of registered investment
companies and collective trust funds with assets of approximately $18 billion
and FFSI, FAS, the Adviser and the Transfer Agent were controlled by John Y.
Keffer, President and Chairman of the Trust.
Under its Administration Agreement with the Trust, FAS 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 Trustees of the Trust, may be directors, officers or employees of
(and persons providing services to the Trust may include) FAS and its
affiliates. For these services and facilities, FAS receives with respect to the
Fund a management fee at an annual rate of 0.30% of the Fund's average daily net
assets.
DISTRIBUTOR
FFSI acts as the distributor of shares of the Fund and pursuant to a
Distribution Agreement with the Trust, FFSI 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." FFSI is a
registered broker-dealer and investment adviser and is a member of the National
Association of Securities Dealers, Inc.
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 also acts as the Fund's
dividend disbursing agent. The Transfer Agent maintains for each shareholder of
record, an account (unless such accounts are maintained by sub-transfer agents)
to which all shares purchased are credited, together with any distributions that
are reinvested in additional shares and performs other transfer agency
functions. In addition, the Transfer Agent performs portfolio accounting
services for the Fund, including determination of the Fund's net asset value,
pursuant to a separate
10
<PAGE>
agreement with the Trust. 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"), FAS or affiliates of FAS, 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.
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, FAS 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 next-determined after acceptance of an order plus any applicable sales
charge, on all weekdays except days when the New York Stock Exchange is closed
("Fund Business Day") see "Sales Charge" below. Fund Business Day does not
include New Year's Day, Dr. Martin Luther King Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. Fund shares are issued 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 dividend on the next Fund Business Day after the order is accepted.
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.
11
<PAGE>
Normally, redemption proceeds are paid immediately, 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 to purchase the shares 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 for more than
seven days after the tender of shares to the Fund, 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). If the Trust did not employ such procedures it
could 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
open an account by completing the application at the back of this Prospectus or
by writing the Transfer Agent at the address on the first page of this
prospectus. For those shareholder services not referenced on the account
application and to change information regarding a shareholder's account (such as
addresses), investors 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 listed 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 invest-
ment in the Fund using the wire system for trans-
mittal of money among banks, an investor should first telephone the Trust at
800-94FORUM
12
<PAGE>
(800-943-6786) or (207) 879-0001 to obtain an account number. The investor
should then instruct a bank to wire the investor's money immediately to:
BankBoston
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. There may be a
charge imposed by the bank for transmitting payment by wire, and there also may
be a charge for the use of Federal funds.
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 800-94FORUM (800-943-6786) or (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 who has elected telephone redemption
privileges may make a telephone redemption request by calling the Transfer Agent
at 800-94FORUM (800-943-6786) or (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 who
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.
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<PAGE>
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.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any
written redemption request and for any endorsement on a stock certificate. 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.
The Transfer Agent will deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost all distributions on the account will be reinvested in
additional shares of the Fund. In addition, the amount of any outstanding
(unpaid for six months or more) checks for distributions that have been returned
to the Transfer Agent will be reinvested and the checks will be canceled.
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):
<TABLE>
Sales Charge
as % of
-----------------------------
<S> <C> <C> <C>
Public
Offering Net Asset Dealers'
AMOUNT OF PURCHASE Price Value Reallowance
- ------------------ ----- ----- -----------
less than $50,000 2.50% 2.56% 2.50%
50,000 but less than $100,000 2.25 2.30 2.25
$100,000 but less than $500,000 2.00 2.04 2.00
$500,000 but less than $1,000,000 1.50 1.52 1.50
$1,000,000 and up 0.50 0.50 0.40
</TABLE>
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, FFSI will reallow
discounts to selected brokers and dealers in the amounts indicated in the table
above. From time to time, however, FFSI may elect to reallow the entire sales
charge to selected brokers or dealers for all sales with respect to which orders
are placed with FFSI during a particular period. The dealers' reallowance may be
changed from time to time.
In addition, from time to time and at its own expense, Forum may
provide compensation, including financial assistance, to dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising campaigns or other dealer-sponsored special events.
Compensation may include: (i) the provision of travel arrangements and lodging,
(ii) tickets for entertainment events and (iii) merchandise.
No sales charge will be assessed on purchases made for investment
purposes by: (a) any bank,
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<PAGE>
trust company, savings association or similar institution with whom FFSI 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 FFSI has entered into a share
purchase agreement and which is acting on behalf of its fiduciary customer
accounts; (c) any broker-dealer with whom FFSI has entered into a Selected
Dealer Agreement and a Fee-Based or Wrap Account Agreement and which is acting
on behalf of its fee-based program clients; (d) directors and officers of the
Trust; directors, officers and full-time employees of the Adviser, FFSI, any of
their affiliates or any organization with which FFSI 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 (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 investment. Any shares so
purchased may not be resold except to the Fund.
REDUCED SALES CHARGES
For an investor to qualify for a reduced sales charge as described
below, the investor must notify the Transfer Agent at the time of purchase.
Programs for 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 2.50% 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.
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
15
<PAGE>
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 instruction 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 800-94FORUM (800-943-6786) or (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
Processing Organization 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. Investors who purchase Fund shares through a Processing
Organization may or may not be the
16
<PAGE>
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.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared daily and
paid monthly. Distributions 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 amended. 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 individual 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 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
17
<PAGE>
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 39.5% combined tax bracket for 1997 whose
investments earn a 5% tax-free yield would have to earn a 7.9% taxable yield to
receive the same benefit from a non-tax-exempt investment.
<TABLE>
1997 COMBINED FEDERAL AND MAINE
TAXABLE VS. TAX-FREE YIELDS
<S> <C> <C> <C> <C>
Combined A Tax Free Yield of
Marginal -------------------------------------------------------------
Federal and 4.0% 4.5% 5.0% 5.5%
Maine
Tax Bracket EQUALS A TAXABLE YIELD OF APPROXIMATELY
- ------------- -------------------------------------------------------------
48.1% 7.2% 8.1% 9.1% 10.0%
44.5% 6.8% 7.7% 8.5% 9.4%
39.5% 6.3% 7.1% 7.9% 8.7%
36.5% 6.1% 6.8% 7.6% 8.4%
</TABLE>
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
18
<PAGE>
do not reflect the Federal or Maine alternative minimum taxes or any state or
local income taxes other than Maine state individual 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
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. A Fund's advertised yield
and total return may or may not reflect the maximum sales load applicable to the
Fund. A computation of yield or total return that does not take into account the
sales load paid by an investor will be higher than a computation based on the
public offering price of shares purchased that does take into account payment of
a sales load.
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 FAS 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
19
<PAGE>
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 15 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.
20
<PAGE>
[FORUM FUNDS ACCOUNT APPLICATION]
<PAGE>
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<PAGE>
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<PAGE>
FORUM FUNDS
NEW HAMPSHIRE BOND FUND
PROSPECTUS
August 1, 1997
- --------------------------------------------------------------------------------
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 2.50% of the
total public offering price (2.56% 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, 1997, 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's transfer agent, Forum
Financial Corp. at P.O. Box 446, Portland, Maine, 04112, (207) 879-0001 or (800)
94FORUM.
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.
<TABLE>
TABLE OF CONTENTS
<S> <C> <C> <C>
Page Page
1. Prospectus Summary...................................2 5. Purchases and Redemptions of Shares.....11
2. Financial Highlights.................................3 6. Dividends and Tax Matters...............17
3. Investment Objective and Policies....................4 7. Other Information.......................19
4. Management...........................................9 Account Application
</TABLE>
FUND SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK OR ANY AFFILIATE OF A BANK AND ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER FEDERAL AGENCY.
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's portfolio will normally range between five
and 15 years. See "Investment Objectives and Policies."
FUND MANAGEMENT
The Fund's investment adviser is Forum Advisors, Inc. (the "Adviser"). The
manager of the Trust is Forum Administrative Services, LLC ("FAS") and
distributor of its shares is Forum Financial Services, Inc. ("FFSI"). Forum
Financial Corp. (the "Transfer Agent") serves as the Trust's transfer agent,
dividend disbursing agent and shareholder servicing agent. Each of the Adviser,
FAS, FFSI and the Transfer Agent are located at Two Portland Square, Portland,
Maine 04101. 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)(1)....................................2.50%
Exchange Fee................................................................None
ANNUAL FUND OPERATING EXPENSES (2)
(as a percentage of average net assets after applicable expense reimbursements
and fee waivers)
Management Fees (after fee waivers)........................................0.40%
12b-1 Fees..................................................................None
Other Expenses (after expense reimbursements)..............................0.20%
-----
Total Fund Operating Expenses..............................................0.60%
(1) Certain shareholders may be eligible for reduced sales charges. See
"Purchases and Redemptions of Shares - Reduced Sales Charges."
(2) The amounts of expenses are based on amounts incurred by the Fund
during its most recent fiscal year ending March 31, 1997. Management Fees
includes all investment advisory fees and administration fees incurred by the
Fund. Absent
2
<PAGE>
expense reimbursements and fee waivers, Management Fees, Other Expenses and
Total Fund Operating Expenses would be 0.70%, 1.52% and 2.22%, respectively.
Expense reimbursements and fee waivers are voluntary and may be reduced or
eliminated at any time. 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 (i) a $1,000 investment
in the Fund, (ii) a 5% annual return, (iii) the reinvestment of all dividends
and distribu- tions and (iv) payment of the maximum initial sales charge and
redemption at the end of each period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$31 $44 $58 $98
The example is based on the expenses listed in the Annual Fund
Operating Expenses table and assumes deduction of the maximum initial sales
charge. 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 by Deloitte & Touche
LLP, 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>
NEW HAMPSHIRE BOND FUND
Year Ended March 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993(a)
---- ---- ---- ---- -------
Net Asset Value, Beginning of Period $10.33 $10.08 $9.96 $10.01 $10.00
------ ------ ----- ------ --------
Investment Operations:
Net Investment Income (Loss) 0.48 0.48 0.49 0.51 0.12
Net Realized and Unrealized Gain (Loss)
on Investments (0.02) 0.25 0.12 (0.03) 0.01
-------------- ------------- ---------- ------------- ------------
Total from Investment Operations 0.46 0.73 0.61 0.48 0.13
-------------- ------------- ---------- ------------- ------------
Distributions From:
Net Investment Income (0.48) (0.48) (0.49) (0.51) (0.12)
Net Realized Gain on Investments - - - (0.02) -
-------------- ------------- ---------- ------------- -------------
Total Distributions (0.48) (0.48) (0.49) (0.53) (0.12)
-------------- ------------ --------- ------------ ------------
Net Asset Value, End of Period $10.31 $10.33 $10.08 $9.96 $10.01
========= ======== ======= ======= ========
Total Return (b) 4.56% 7.36% 6.32% 4.75% 5.55%(c)
Ratio/Supplementary Data:
Net Assets at End of Period (000's omitted) $8,691 $6,903 $5,276 $3,555 $442
Ratios to Average Net Assets:
Expenses Including Reimbursement/Waiver 0.60% 0.60% 0.46% 0.34% 0.50%(c)
Expenses Excluding Reimbursement/Waiver 2.22% 2.26% 2.19% 4.33% 30.85%(c)
Net Investment Income (Loss) Including
Reimbursement/Waiver 4.65% 4.65% 4.95% 4.68% 4.96%(c)
Portfolio Turnover Rate 53.46% 34.31% 37.59% 9.60% -
</TABLE>
(a) The Fund commenced operations on December 31, 1992.
(b) Total return calculations do not include sales charge.
(c) Annualized.
3
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
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.
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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, 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 ("Moody's") (Aaa, Aa, A
and Baa), Standard & Poor's ("S&P") (AAA, AA, A and BBB) or Fitch Investors
Service, L.P. ("Fitch") (AAA, AA, A and BBB) or which are unrated and determined
by the Adviser to be of comparable quality. Securities in those rating
categories are generally considered to be investment grade securities, although
Moody's indicates that municipal securities rated Baa have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity by the issuer to make principal and
interest payments with respect to debt rated in that category than is the case
with higher grade debt. 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 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 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 and are commonly known as "Junk
Bonds." 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.
An unrated 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 91.65% of
its average annual assets in securities rated by Moody's or S&P and 7.54% 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 - 43.73%, Aa/AA -
19.88%, A/A - 14.47%, Baa/BBB - 13.57%. 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
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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
as described in the SAI. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds or notes.
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 a Fund may be tied to various rates of
interest or indices.
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 investments 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
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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 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.
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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 - Aa2 (refined from Aa in June 1997); S&P - AA+
(stable) (revised from AA in November, 1995); Fitch - AA+ (revised from AA in
November 1995). S&P's rating revision cited sustained employment recovery,
improved financial position, low debt burden and high wealth indicators. Fitch
noted conservative debt and financial policies underpinning the State's credit
position, strengthened by economic buoyancy. 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.
CORE AND GATEWAY(R). Shareholders of the Fund have approved an
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.
ADDITIONAL INVESTMENT POLICIES
The Fund's investment objective and certain investment limitations
described in the SAI are fundamental and, therefore, 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 Trustees (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, as a fundamental policy,
not in excess of 331*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 purchases securities on a when-issued or forward
commitment basis 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
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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 dividends or 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. 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 Trustees. 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.
ADMINISTRATOR
Subject to the Supervision of the Board, FAS supervises the overall
management of the Fund. FAS, FFSI, the Adviser and the Transfer Agent are
members of the Forum Financial Group of companies and together provide a full
range of services to
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the investment company and financial services industry. As of the date of this
Prospectus, FAS acted as manager of registered investment companies and
collective trust funds with assets of approximately $18 billion, and FFSI, FAS,
the Adviser and the Transfer Agent were controlled by John Y. Keffer, President
and Chairman of the Trust.
Under its administration agreement with the Trust, FAS 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 Trustees of the Trust, may be directors, officers or employees of
(and persons providing services to the Trust may include) FAS and its
affiliates. For these services and facilities, FAS receives with respect to the
Fund a management fee at an annual rate of 0.30% of the Fund's average daily net
assets.
DISTRIBUTOR
FFSI acts as the distributor of shares of the Fund and pursuant to a
Distribution Agreement with the Trust, FFSI 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." FFSI is a
registered broker-dealer and investment adviser and is a member of the National
Association of Securities Dealers, Inc.
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.
Les C. Berthy, Managing Director of the Adviser since 1989, is
primarily responsible for the day-to-day management of the Fund's portfolio 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 also acts as the Fund's
dividend disbursing agent. The Transfer Agent maintains for each shareholder of
record, an account (unless such accounts are maintained by sub-transfer agents)
to which all shares purchased are credited, together with any distributions that
are reinvested in additional shares. The Transfer Agent also performs other
transfer agency functions and acts as dividend disbursing agent for the Trust.
In addition, the Transfer Agent performs portfolio accounting services for the
Fund, including determination of the Fund's net asset value, pursuant to a
separate agreement with the Trust. 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.
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") FAS or affiliates of FAS, 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.
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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, FAS 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 next-determined after acceptance of an order, plus any applicable sales
charge on all weekdays except days when the New York Stock Exchange is closed
("Fund Business Day"). Fund Business Day does not include New Year's Day, Dr.
Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. See "sales charges"
below. Fund shares are issued immediately 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
order is accepted.
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 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 to purchase the shares 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 for more than
seven days after the tender of the shares to the Fund except when the New York
Stock Exchange is closed (or
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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 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). If the Trust did not employ such procedures it
could 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
open an account by completing the application at the back of this Prospectus or
by writing the Transfer Agent at the address on the first page of this
prospectus. For those shareholder services not referenced on the account
application and to change information regarding a shareholder's account (such as
addresses), investors 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 listed 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 800-94FORUM (800-943-6786) to obtain an account number. The
investor should then instruct a bank to wire the investor's money immediately
to:
BankBoston
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. There may be a
charge imposed by
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the bank for transmitting payment by wire, and there may also be a charge for
the use of Federal funds.
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 800-94FORUM (800-943-6786) 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 800-94FORUM (800-943-6786) 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.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any
written redemption request and for any endorsement on a stock certificate. In
addition, a signature guarantee also is required for instructions to change a
shareholder's record name or address, designated bank account
13
<PAGE>
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.
The Transfer Agent will deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost all distributions on the account will be reinvested in
additional shares of the Fund. In addition, the amount of any outstanding
(unpaid for six months or more) checks for distributions that have been returned
to the Transfer Agent will be reinvested and the checks will be canceled.
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)
<TABLE>
Sales Charge
as % of
-----------------------------
<S> <C> <C> <C>
Public
Offering Net Asset Dealers'
AMOUNT OF PURCHASE Price Value Reallowance
- ------------------ ---- ----- -----------
less than $50,000 2.50% 2.56% 2.50%
$50,000 but less than $100,000 2.25 2.30 2.25
$100,000 but less than $500,000 2.00 2.04 2.00
$500,000 but less than $1,000,000 1.50 1.52 1.50
$1,000,000 and up 0.50 0.50 0.50
</TABLE>
FFSI'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, FFSI will reallow
discounts to selected brokers and dealers in the amounts indicated in the table
above. From time to time, however, FFSI may elect to reallow the entire sales
charge to selected brokers or dealers for all sales with respect to which orders
are placed with FFSI during a particular period. The dealers' reallowance may be
changed from time to time.
In addition, from time to time and at its own expense, FFSI may provide
compensation, including financial assistance, to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns or other dealer-sponsored special events.
Compensation may include: (i) the provision of travel arrangements and lodging,
(ii) tickets for entertainment events and (iii) merchandise.
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 FFSI 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 FFSI has entered into a share purchase agreement and which is acting on
behalf of its fiduciary customer accounts; (c) any broker-dealer with whom FFSI
has entered into a Selected Dealer Agreement and a Fee-Based or Wrap Account
Agreement and which is acting on behalf of its fee-based program clients; (d)
directors and officers of the Trust; directors, officers and full-time employees
of the Adviser, FFSI, any of their affiliates or any organization with which
FFSI 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 (e) any person
14
<PAGE>
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 a reduced sales charge, as described
below, the investor must notify the Transfer Agent at the time of purchase.
Programs for 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 2.50% 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.
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
15
<PAGE>
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 instruction 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
800-94FORUM (800-943-6786) 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
Processing Organization 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. Investors 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
16
<PAGE>
shares of the Fund to be purchased and redeemed only through registered
broker-dealers, including the Fund's distributor.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared daily and
paid monthly. Distributions 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
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 amended. 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 cer- tain 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.
17
<PAGE>
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, limited liability companies,
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, limited liability companies, 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, limited liability companies,
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 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.
18
<PAGE>
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 36% combined tax bracket for 1997 whose investments earn a 5%
tax-free yield would have to earn a 7.6% taxable yield to receive the same
benefit.
<TABLE>
1997 COMBINED FEDERAL AND NEW HAMPSHIRE
TAXABLE VS. TAX-FREE YIELDS
<S> <C> <C> <C> <C>
Combined A Tax Free Yield of
Marginal -------------------------------------------------------------
Federal and 4.0% 4.5% 5.0% 5.5%
New Hampshire
Tax Bracket equals a taxable yield of approximately
- --------------- -------------------------------------------------------------
44.6% 7.0% 7.9% 8.7% 9.6%
41% 6.6% 7.4% 8.2% 9.1%
36% 6.1% 6.9% 7.6% 8.4%
33% 5.9% 6.6% 7.3% 8.0%
</TABLE>
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 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. A Fund's advertised yield
and total return may or may not reflect the maximum sales load applicable to the
Fund. A computation of yield or total return that does not take into account the
sales load paid by an investor will be higher than a computation based on the
public offering price of shares purchased that does take into account payment of
a sales load.
19
<PAGE>
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 FAS 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 15 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
20
<PAGE>
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.
21
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
[FORUM FUNDS New Hampshire Bond Fund Account Application]
<PAGE>
FORUM FUNDS
PAYSON VALUE FUND
PAYSON BALANCED FUND
PROSPECTUS
August 1, 1997
- --------------------------------------------------------------------------------
This Prospectus offers shares of Payson Value Fund and Payson Balanced Fund (the
"Funds"). The Funds are diversifed 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 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.
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 4.0% of the total
public offering price (4.17% of the 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, 1997, 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's transfer agent at P.O. Box
446, Portland, Maine 04112, (207) 879-0001 or (800) 94FORUM.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<TABLE>
TABLE OF CONTENTS
Page Page
<S> <C> <C> <C>
1. Prospectus Summary.......................2 5. Management..............................13
2. Financial Highlights.....................3 6. Purchases and Redemptions of Shares.....15
3. Investment Objective and Policies 7. Dividends and Tax Matters...............21
Payson Value Fund........................4 8. Other Information.......................22
Payson Balanced Fund.....................5 Account Application
4. Additional Investment Policies..........10
</TABLE>
FUND SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK OR ANY AFFILIATE OF A BANK AND ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER FEDERAL AGENCY.
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 adviser. See "Management - Investment Advisor."
FUND MANAGEMENT
The manager of the Trust is Forum Administrative Services, LLC ("FAS") and
the distributor of its shares is Forum Financial Services, Inc. ("FFSI"). FAS
supervises the overall administrative activities of the Trust. Forum Financial
Corp. (the "Transfer Agent") serves as the Trust's transfer agent, dividend
disbursing agent and shareholder servicing agent. The address of each of FAS,
FFSI and the Transfer Agent is Two Portland Square, Portland, Maine 04101. 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 "Investment Objectives and Policies" and
"Additional Investment Policies" below.
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.
<TABLE>
<S> <C> <C> <C>
Payson Payson
Value Balanced
Fund Fund
----- -----
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of
public offering price) (1)..................................... 4.0% 4.0%
Exchange Fee...................................................... None None
Annual Fund Operating Expenses (2)
(as a percentage of average net assets
after applicable expense reimbursements and fee waivers)
Advisory Fees..................................................... 0.80% 0.60%
12b-1 Fees........................................................ None None
Other Expenses (after expense reimbursements) .................... 0.65% 0.55%
----- -----
Total Fund Operating Expenses..................................... 1.45% 1.15%
</TABLE>
(1) Certain shareholders may be eligible for reduced sales charges. See
"Purchases and Redemptions of Shares - Reduced Sales Charges".
(2) The amounts of expenses are based on amounts incurred by each Fund
during the Fund's most recent fiscal year ending March 31, 1997. Absent expense
reimbursements, Other Expenses and Total Fund Operating Expenses would be 1.27%
and 2.07%, respectively, in the case of Payson Value Fund and 1.07% and 1.67%,
respectively, in the case of Payson Balanced Fund. Expense reimbursements are
voluntary and may be reduced or eliminated at any time. For a further
description of the various expenses incurred in the operation of the Funds, see
"Management."
EXAMPLE
Following is a hypothetical example that indicates the dollar amount of
expenses that an investor in each Fund would pay assuming (i) a $1,000
2
<PAGE>
investment in the Fund, (ii) a 5% annual return, (iii) the reinvestment of all
dividends and distributions and (iv) payment of the maximum initial sales charge
and redemption at the end of each period:
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Payson Value Fund............................ $54 $84 $116 $207
Payson Balanced Fund......................... $51 $75 $101 $174
</TABLE>
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. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN INDICATED.
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 Deloitte & Touche LLP,
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>
Payson Value Fund
Year Ended March 31,
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993(a)
---- ---- ---- ---- ------
Net Asset Value, Beginning of Period $15.99 $12.71 $12.11 $11.01 $10.00
------ ------ ------ ------ -------
Investment Operations:
Net Investment Income 0.20 0.21 0.18 0.13 0.08
Net Realized and Unrealized Gain (Loss)
on Investments 1.81 3.29 0.60 1.12 1.02
-------------- ------------- ------------- ------------- ------------
Total from Investment Operations 2.01 3.50 0.78 1.25 1.10
-------- --------- -------- --------- --------
Distributions From:
Net Investment Income (0.20) (0.21) (0.18) (0.15) (0.09)
Net Realized Gain on Investments (1.70) (0.01) - - -
-------- --------- -------- --------- ---------
Total Distributions (1.90) (0.22) (0.18) (0.15) (0.09)
-------- --------- -------- --------- ---------
Net Asset Value, End of Period $16.10 $15.99 $12.71 $12.11 $11.01
======== ========= ======== ========= =========
Total Return (b) 13.01% 27.77% 6.52% 11.38% 17.05%(c)
Ratio/Supplementary Data:
Net Assets at End of Period (000's omitted) $13,109 $10,319 $7,960 $5,060 $2,145
Ratios to Average Net Assets:
Expenses Including Reimbursement/Waiver 1.45% 1.45% 1.46% 1.45% 1.44%(c)
Expenses Excluding Reimbursement/Waiver 2.07% 2.16% 2.25% 3.04% 5.53%(c)
Net Investment Income Including
Reimbursement/Waiver 1.30% 1.47% 1.59% 1.38% 1.63%(c)
Portfolio Turnover Rate 24.13% 53.06% 27.20% 32.15% 23.95%
Average Commission Rate (d) $0.0979 $0.0993 - - -
</TABLE>
<TABLE>
Payson Balanced Fund
Year Ended March 31,
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992(a)
---- ---- ---- ---- ------- -------
Net Asset Value, Beginning of Period $13.70 $11.90 $11.71 $11.40 $10.21 $10.00
------ ------ ------ ------ ------ --------
Investment Operations:
Net Investment Income 0.42 0.43 0.44 0.34 0.31 0.10
Net Realized and Unrealized Gain (Loss)
on Investments 0.84 2.12 0.24 0.46 1.20 0.21
------------- -------------- ------------- ------------- ------------ ------------
Total from Investment Operations 1.26 2.55 0.68 0.80 1.51 0.31
Distributions From:
Net Investment Income (0.42) (0.43) (0.44) (0.35) (0.31) (0.10)
Net Realized Gain on Investments (1.34) (0.32) (0.05) (0.14) (0.01) -
------------- -------------- ------------ ------------ ----------- -----------
Total Distributions (1.76) (0.75) (0.49) (0.49) (0.32) (0.10)
------------ ------------- ---------- ------------ ----------- -----------
Net Asset Value, End of Period $13.20 $13.70 $11.90 $11.71 $11.40 $10.21
Total Return (b) 9.42% 21.70% 6.00% 6.99% 15.12% 9.15%(c)
Ratio/Supplementary Data:
Net Assets at End of Period (000's omitted) $18,163 $17,455 $13,872 $11,355 $5,396 $2,667
Ratios to Average Net Assets:
Expenses Including Reimbursement/Waiver
1.15% 1.15% 1.15% 1.15% 1.15% 1.13%(c)
Expenses Excluding Reimbursement/Waiver 1.67% 1.70% 1.72% 1.95% 2.60% 4.88%(c)
Net Investment Income Including
Reimbursement/Waiver 3.07% 3.25% 3.91% 4.37% 3.27% 3.46%(c)
Portfolio Turnover Rate 52.93% 61.77% 50.06% 80.13% 30.77% 1.53%
Average Commission Rate (d) $0.0806 $0.0973 - - - -
</TABLE>
(a) Payson Value Fund commenced operations on July 31, 1992, and Payson
Balanced Fund commenced operations on November 25, 1991.
(b) Total return calculations do not include sales charge.
(c) Annualized.
(d) Amount represents the average commission per share paid to brokers on the
purchase and sale of equity securities.
3
<PAGE>
3. INVESTMENT OBJECTIVES AND POLICIES
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, Standard & Poor's 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
4
<PAGE>
the risks of the stock market and should consider an investment in the Fund only
as a part of their overall investment portfolio.
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 Trustees of the Trust (the "Board"), but only upon 60 days' notice
to shareholders. 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.
5
<PAGE>
For a description of convertible securities, see "Investment Objectives and
Policies _ Payson Value Fund."
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. Normally, 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.
Securities rated in one of the four highest rating categories of an
NRSRO are generally considered to be investment grade securities, although
securities rated in the fourth highest-rating category have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity by the issuer to make principal and
interest payments with respect to debt rated in that category than is the case
with higher rated debt. A further description of the ratings used by Moody's,
Standard & Poor's and other NRSROs is contained in the SAI. Unrated securities
may not be as actively traded as rated securities. An unrated security will be
considered for investment by the Fund when the Advisor 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
6
<PAGE>
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 or 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 mortgages of 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
that the market for government and government-related mortgage pools.
AVERAGE LIFE AND PREPAYMENTS. The average life of a pass-through pools
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
7
<PAGE>
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 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.
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 sell-servicers. 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 or the
resetting of interest rates, adjustable rate securities are less likely than
non-adjustable rate securities of comparable
8
<PAGE>
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 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
9
<PAGE>
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 Advisor would not have chosen
to sell such securities and which may result in a taxable gain or loss. The
Advisor'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).
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 and
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.
4. ADDITIONAL INVESTMENT POLICIES
All investment policies of a Fund that are designated as a 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 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, as a fundamental policy,
not in excess of 331*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 the Fund's total assets. The Funds may not
10
<PAGE>
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 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 purchase securities on a when-issued or forward
commitment basis 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 dividends or 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
Advisor 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
11
<PAGE>
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.
CORE AND GATEWAY(R). Shareholders of each Fund have approved an
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 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 will not authorize conversion to a Core and
Gateway structure if it would materially increase costs to a Fund's
shareholders.
PORTFOLIO TRANSACTIONS. The frequency of portfolio transactions of the
Funds (the portfolio
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<PAGE>
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 Advisor weighs the anticipated benefits of short-term investments against
these consequences. The Fund's portfolio turnover rate is reported under
"Financial Highlights." Tax rules applicable to short-term trading may affect
the timing of each Fund's transactions or its ability to realize short-term
trading profits or establish short-term positions.
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.
5. MANAGEMENT
The business of the Trust is managed under the direction of the Board
of Trustees. 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., One Portland
Square, Portland, Maine 04101 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 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,
1997, the Advisor had in excess of $831 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, a Managing 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.
ADMINISTRATOR
Subject to the supervision of the Board, FAS supervises the overall
management of the Funds. FAS, FFSI 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, FAS and FFSI acted
13
<PAGE>
as manager and distributor of registered investment companies and collective
trust funds with assets of approximately $18 billion, and FAS, FFSI and the
Transfer Agent were controlled by John Y. Keffer, President and Chairman of the
Trust.
Under its administration agreement with the Trust, FAS 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 Trustees of the Trust, may be directors, officers or employees of
(and persons providing services to the Trust may include) FAS and its
affiliates. For these services and facilities, FAS receives with respect to each
Fund a fee at an annual rate of 0.20% of each Fund's average daily net assets.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Trust, FFSI acts as
distributor of the Funds' shares and 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." FFSI acts as
the agent of the Trust in connection with the offering of shares of the Funds.
FFSI is a registered broker-dealer and investment adviser and is a member of the
National Association of Securities Dealers, Inc.
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 for each
shareholder of record, an account (unless such accounts are maintained by
sub-transfer agents) to which all shares purchased are credited, together with
any distributions that are reinvested in additional shares. The Transfer Agent
also performs other transfer agency functions and acts as dividend disbursing
agent for the Trust. For its services, the Transfer Agent receives a fee at an
annual rate of 0.25% of each Fund's average daily net assets. Pursuant to an
agreement with the Trust, Forum Accounting Services, LLC performs portfolio
accounting services for the Fund, including determination of the Fund's net
asset value and receives a fee for its services.
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"), FAS or affiliates of FAS, 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.
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 FAS's obligations to
reimburse the Trust for excess expenses of the Fund, the Trust pays for all of
its expenses. The Advisor, FAS 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.
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<PAGE>
6. 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 shareholder 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 next-determined after acceptance of an order plus any applicable sales
charge on all weekdays except days when the New York Stock Exchange is closed,
normally, New Year's Day, Dr. Martin Luther King Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas ("Fund Business Day") (see "Sales Charges" below). Fund shares are
issued immediately 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 order is accepted.
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 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 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). If the Trust did not employ such procedures it
could be liable for any losses due to unauthorized or fraudulent telephone
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<PAGE>
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 open an account by completing the application at the back of this Prospectus
or by contacting the Transfer Agent at the address on the first page of this
prospectus. For those shareholder services not referenced on the account
application and to change information regarding a shareholder's account (such as
addresses), investors 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 FFSI.
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 or 800-94FORUM (800-943-6786) to obtain an
account number. The investor should then instruct a bank to wire the investor's
money immediately to:
BankBoston
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. There may be a
charge imposed by the bank for transmitting payment by wire, and there also may
be a charge for the use of Federal funds.
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) 879-0009 or 800-94FORUM (800-943-6786) 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
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<PAGE>
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 or 800-94FORUM (800-943-6786) 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 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.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any
written redemption request and for any endorsement on a stock certificate. 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.
The Transfer Agent will deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost all distributions on the account will be
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<PAGE>
reinvested in additional shares of the Fund. In addition, the amount of any
outstanding (unpaid for six months or more) checks for distributions that have
been returned to the Transfer Agent will be reinvested and the checks will be
canceled.
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):
<TABLE>
Sales Charge
as % of
-----------------------------
<S> <C> <C> <C> <C>
Public
Offering Net Asset Dealers'
AMOUNT OF PURCHASE Price Value Reallowance
- ------------------ ----- ----- -----------
less than $100,000 4.00% 4.17% 3.50%
$100,000 but less than $200,000 3.50 3.63 3.10
$200,000 but less than $400,000 3.00 3.09 2.70
$400,000 but less than $600,000 2.50 2.56 2.25
$600,000 but less than $800,000 2.00 2.04 1.75
$800,000 but less than $1,000,000 1.50 1.52 1.30
$1,000,000 and up 0.50 0.50 0.40
</TABLE>
FFSI'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, FFSI will reallow
discounts to selected brokers and dealers in the amounts indicated in the table
above. From time to time, however, FFSI may elect to reallow the entire sales
charge to selected brokers or dealers for all sales with respect to which orders
are placed with FFSI during a particular period. The dealers' reallowance may be
changed from time to time.
In addition, from time to time and at its own expense, FFSI may provide
compensation, including financial assistance, to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns or other dealer-sponsored special events.
Compensation may include: (i) the provision of travel arrangements and lodging,
(ii) tickets for entertainment events and (iii) merchandise.
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 FFSI 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 FFSI 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) any broker-dealer with whom FFSI has entered into a Selected
Dealer Agreement and a Fee-Based or Wrap Account Agreement and which is acting
on behalf of its fee-based program clients; (e) directors and officers of the
Trust; directors, officers and full-time employees of the Advisor, FFSI, any of
their affiliates or any organization with which FFSI 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;
(f) 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; (g) 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
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<PAGE>
Shares _ Exchange Program;" and (h) employee benefit plans qualified under
Section 401 of the Internal Revenue Code of 1986, as amended. 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 a reduced sales charge as described
below, the investor must notify the Transfer Agent at the time of purchase.
Programs for 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 2.50% rate applicable to a single $450,000 purchase, rather than
at the 4.0% 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.
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, and the fund into which a shareholder is exchanging, 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
19
<PAGE>
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 who has elected telephone exchange privileges by calling the
Transfer Agent at (207) 879-0009 or 800-94FORUM (800-943-6786) 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. Neither of the Funds should be
considered as a complete investment vehicle for 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, either the individual or the individual's spouse is an active
participant in an employer-sponsored retirement plan and the individual (or, in
certain cases, the married couple) 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
Processing Organization 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
20
<PAGE>
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.
7. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of each Fund's net investment income are declared and paid
quarterly. Distributions 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 amended. 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.
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 on shares of the
Fund will have the effect of reducing the net asset value of the shareholder's
shares by the amount of the dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of shares by a
21
<PAGE>
shareholder, although in effect a return of capital to that particular
shareholder, would be taxable to the shareholder as described above.
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.
8. 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. A Fund's advertised yield and total return may or
may not reflect the maximum sales load applicable to the Fund. A computation of
yield or total return that does not take into account the sales load paid by an
investor will be higher than a computation based on the public offering price of
the shares purchased that does take into account payment of a sales load.
Each Fund's advertisements any 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 FAS 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
22
<PAGE>
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 15 separate series.
Each share of each fund of the Trust has equal dividend, distribution,
liquidation and voting rights, and fractional shares have those rights
proportionately, except that expenses related to the distribution of the shares
of each class (and certain other expenses such as transfer agency and
administration expenses) are borne solely by those shares and each class votes
separately with respect to the provisions of any Rule 12b-1 plan which pertain
to the class and other matters for which separate class voting is appropriate
under applicable law. Generally, shares will be voted in the aggregate without
reference to a particular portfolio or class, except if the matter affects only
one portfolio or class or voting by portfolio or class is required by law, in
which case shares will be voted separately by portfolio or class, as
appropriate. Delaware law does not require the Trust to hold annual meetings of
shareholders, and it is anticipated that shareholder meetings will be held only
when specifically required by Federal or state law. Shareholders (and Trustees)
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
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 SAI 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.
23
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<PAGE>
[FORUM FUNDS - Payson Value & Payson Balanced Funds ACCOUNT APPLICATION]
<PAGE>
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<PAGE>
AUSTIN GLOBAL
EQUITY FUND
Prospectus
August 1, 1997
AUSTIN
Investment Management, Inc.
Registered Investment Advisors
<PAGE>
AUSTIN GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
Two Portland Square
Portland, Maine 04101
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
Forum Financial Corp.
Two Portland Square
Portland, Maine 04112
(207) 879-0001
(800) 943-6786
- --------------------------------------------------------------------------------
PROSPECTUS August 1, 1997
- --------------------------------------------------------------------------------
This Prospectus offers shares of the Austin Global Equity Fund (the "Fund"),
which is a diversified portfolio of Forum Funds (the "Trust"), an open-end,
management investment company. The investment objective of the Fund is to seek
capital appreciation by investing primarily in a portfolio of common stock and
securities convertible into common stock. Shares of the Fund are offered to
investors without any sales charge, but the Fund may bear certain of its
distribution expenses.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor should know before investing. The Trust has
filed with the Securities and Exchange Commission a Statement of Additional
Information dated August 1, 1997, which contains more detailed information about
the Fund and the Trust and which is hereby incorporated into this Prospectus by
reference. An investor may obtain a copy of the Statement of Additional
Information without charge by contacting Shareholder Servicing at the address or
phone number listed above.
<TABLE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C> <C> <C>
1. Prospectus Summary........................2 5. Purchases and Redemptions of Shares........9
2. Financial Highlights......................3 6. Dividends and Tax Matters.................12
3. Investment Objective and Policies.........4 7. Other Information.........................13
4. Management................................8 8. Appendix..................................15
- --------------------------------------------------------------------------------
</TABLE>
Investors should read this Prospectus and retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
1. PROSPECTUS SUMMARY
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks capital appreciation by investing primarily in a portfolio
of common stock and securities convertible into common stock. The Fund invests
primarily in issuers based in the United States, Europe, Japan and the Pacific
Basin. See "Investment Objective and Policies."
MANAGEMENT
Austin Investment Management, Inc. (the "Adviser") is the Fund's investment
adviser and makes investment decisions for the Fund. Forum Financial Services,
Inc. ("FFSI") distributes the Fund's shares and Forum Administrative Services,
LLC ("FAS") administers the Fund. See "Management." The Fund may bear certain
expenses in connection with the sale of its shares. See "Management _
Distribution."
PURCHASES AND REDEMPTIONS
Shares of the Fund are offered at the next-determined net asset value
without a sales charge to investors who plan to invest a minimum of $10,000 in
the Fund. Shares of the Fund may be redeemed from the Fund without charge at
their next-determined net asset value. See "Purchases and Redemptions of
Shares."
DIVIDENDS
Dividends representing the net investment income of the Fund are declared
and paid at least annually. Net capital gains realized by the Fund, if any, also
will be distributed annually. Dividends and distributions are reinvested in
additional shares of the Fund unless a shareholder elects to have them paid in
cash. See "Dividends and Tax Matters."
CERTAIN RISK FACTORS
There can be no assurance that the Fund will achieve its investment
objective, and the Fund's net asset value will fluctuate based upon changes in
the value of its portfolio securities. The foreign securities and related
transactions in which the Fund may invest entail certain risks not associated
with investment in domestic securities. See "Foreign Securities." In addition,
the hedging strategies in which the Fund may engage entail additional risks. See
"Hedging Strategies." The Fund is not intended to provide a complete or balanced
investment program for all investors.
EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. There are no transaction or sales charges
associated with purchases or redemptions of Fund shares.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets after applicable fee waivers)
Advisory Fees (after fee waivers)..........................................0.62%
12b-1 Fees.................................................................0.02%
Other Expenses.............................................................1.86%
Total Fund Operating Expenses..............................................2.50%
The amounts of expenses are based on actual amounts incurred during the
Fund's most recent fiscal year ended March 31, 1997. Absent certain expense
reimbursements and fee waivers during the most recent fiscal year, the
Investment Advisory Fees and Total Fund Operating Expenses would have been 1.50%
and 3.38%, respectively. Expense reimbursements and fee waivers are voluntary
and may be reduced or eliminated at any time. For a further description of the
various costs and expenses incurred in the Fund's operation, see "Management."
EXAMPLE
The following is a hypothetical example that indicates the dollar
amount of expenses an investor would pay assuming a $1,000 investment, a 5%
annual return, reinvestment of all dividends and distributions and full
redemption at the end of each period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$25 $78 $133 $284
The example is based on the expenses listed in the "Annual Fund Operating
Expenses" table above. The 5% annual return is not a prediction of and does not
represent the Fund's projected returns; rather, it is required by government
regulation. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RETURN. ACTUAL EXPENSES AND RETURN MAY BE GREATER OR LESS
THAN INDICATED.
2
<PAGE>
2. FINANCIAL HIGHLIGHTS
The following represents selected data for a single share outstanding
of the Fund for the period indicated. The information for the periods ending
March 31, 1997 and June 30, 1996, 1995 and 1994 was audited in connection with
an audit of the Trust's financial statements by Deloitte & Touche LLP,
independent auditors. The financial statements and auditors' report thereon are
contained in the Annual Report which is incorporated by reference into the
Statement of Additional Information. Further information about the Fund's
performance is contained in the Annual Report, which may be obtained without
charge by contacting the Fund's transfer agent.
<TABLE>
AUSTIN GLOBAL EQUITY FUND
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine Months
Ended Year Ended Year Ended Period Ended
March 31, June 30 June 30, June 30,
1997 1996 1995 1994(a)
------ ------ ------ --------
Net Asset Value, Beginning of Period $13.19 $11.60 $9.80 $10.00
--------- ----------- ------------ ----------
Investment Operations:
Net Investment Income (Loss) (0.11) (0.12) 0.04(b) (0.03)
Net Realized and Unrealized Gain (Loss) on Investments
0.86 1.98 1.76 (0.17)
---------------- -------------- -------------- ---------------
Total from Investment Operations 0.75 1.86 1.80 (0.20)
Distributions From:
Net Realized Gain on Investments (1.10) (0.27) - -
---------------- -------------- -------------- ---------------
Net Asset Value, End of Period $12.84 $13.19 $11.60 $9.80
================ ============== ============== ===============
Total Return(b) 5.38%(c) 16.22% 18.37% (3.57%)
Ratio/Supplementary Data:
Net Assets at End of Period (000's omitted) $10,289 $10,326 $8,474 $7,646
Ratios to Average Net Assets:
Expenses Including Reimbursement/Waiver 2.50%(d) 2.50% 2.50% 2.36%(d)
Expenses Excluding Reimbursement/Waiver 3.38%(d) 3.25% 3.19% 4.18%(d)
Net Investment Income (Loss) Including
Reimbursement/Waiver (1.09%)(d) (0.98%) 0.41% (0.83%)(d)
Average Commission Rate(e) $0.0383 $0.0542 N/A N/A
Portfolio Turnover Rate 44.79% 93.55% 35.31% 2.49%
</TABLE>
(a) The Fund Commenced operations on December 8, 1993.
(b) Calculated using the weighted average shares outstanding.
(c) Not annualized.
(d) Annualized.
(e) Amount represents the average commission per share paid to brokers on the
purchase and sale of equity securities.
3
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek capital appreciation by
investing primarily in a portfolio of common stock and securities convertible
into common stock. There can be, of course, no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing
primarily in the securities of issuers based in the United States, Europe, Japan
and the Pacific Basin, but it is anticipated that the Fund will generally invest
more of its assets in United States issuers than in the issuers of any other
country. During periods of normal market conditions the Fund will have at least
65% of its total assets invested in securities issued by companies based in
three or more countries and will have at least 65% of its total assets invested
in common stock and securities convertible into common stock. The securities in
which the Fund invests may be traded on securities exchanges or in the
over-the-counter markets.
The Fund intends to invest principally in companies that, in the view
of the Adviser, possess above average growth potential or attractive valuations.
In addition, the Adviser seeks to invest in companies which, in the Adviser's
opinion, are improving but whose improvement has not been fully recognized by
the investment community. In making these investments, the Adviser analyses
various characteristics of the issuers, which may vary from company to company.
The Fund may purchase the shares of small companies whose stock is less actively
traded and which have greater appreciation potential and a correspondingly
higher level of price volatility than larger companies whose shares are actively
traded. Consequently, the Adviser anticipates that the Fund's portfolio will
exhibit a high degree of price fluctuation or volatility when compared to the
market averages. In seeking these investments, the Adviser relies primarily on
analysis of individual companies and analysis of industries and economic trends.
The Fund intends to invest up to 25% of assets in equity securities of
companies in the telecommunications industry. Investments in such companies may
be expected to benefit from global economic growth, scientific developments and
advances in technologies, such as frequency spectrum utilization, satellite
systems, fiber optics, electronic communication, software and others. The Fund
may invest in the securities of issuers in any industry, but the Adviser
emphasizes investments in those industries for which the Adviser believes the
economic cycle is improving. The Fund will not, however, invest more than 25% of
its total assets in any one industry.
CONVERTIBLE SECURITIES. The Fund may invest up to 35% of its assets in
convertible securities, including convertible debt and convertible preferred
stock. Convertible securities are fixed income securities which may be converted
at a stated price within a specific amount of time into a specified number of
shares of common stock. These securities are usually senior to common stock in a
corporation's capital structure, but usually are subordinated to non-
convertible debt securities.
In general, the value of a convertible security is the higher of its
investment value (its value as a fixed income security) and its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the value of a convertible security
generally increases when interest rates decline and generally decreases when
interest rates rise. The value of convertible securities, however, are also
influenced by the value of the underlying common stock.
The Fund will invest only in convertible debt that is rated B or higher
by Moody's Investors Service, Inc. ("Moody's") or by Standard & Poor's
Corporation ("S&P") and in preferred stock that is rated b or higher by Moody's
or B or higher by S&P. Under normal circumstances, the Fund will invest no more
than 10% of its assets in securities rated below BBB by S&P or bbb by Moody's.
The Fund may purchase unrated convertible securities if the Adviser determines
the security to be of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not be as actively traded as rated securities.
Securities in the lowest permissible rating categories are characterized by
Moody's as generally
4
<PAGE>
lacking characteristics of the desirable investment and by S&P as being
predominantly speculative. The Fund may retain securities whose rating has been
lowered below the lowest permissible rating category (or that are unrated and
determined by the Adviser to be of comparable quality) if the Adviser determines
that retaining such security is in the best interests of the Fund. A further
description of the various rating categories is included in the Statement of
Additional Information.
FOREIGN SECURITIES. The Fund's investments in foreign securities
involve certain risks, such as exchange rate fluctuations, political or economic
instability of the issuer or the country of issue and the possible imposition of
exchange controls, withholding taxes on dividends or interest payments,
confiscatory taxes or expropriation. Foreign securities may also be subject to
greater fluctuations in price than securities of domestic corporations
denominated in U.S. dollars. Foreign securities and their markets may not be as
liquid as domestic securities and their markets, and foreign brokerage
commissions and custody fees are generally higher than those in the United
States.
In addition, issuers of securities in foreign jurisdictions generally
are not subject to the same degree of regulation as are U.S. issuers with
respect to such matters as insider trading rules, restrictions on market
manipulation, shareholder proxy requirements and timely disclosure of
information. Less information may be publicly available about a foreign company
than about a domestic company, and foreign companies may not be subject to
uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic companies. Securities registration, custody and
settlements may in some instances be subject to delays and legal and
administrative uncertainties. To the extent that the Fund invests a portion of
its assets in a particular region of the world, an investment in the Fund will
be subject to certain risks since the economies and markets in a region tend to
be interrelated and may be adversely affected by political, economic and other
events in a similar manner. With respect to its permitted investments in foreign
securities, currently the Fund limits the amount of its total assets that may be
invested in one country or denominated in one currency (other than the U.S.
dollar) to 25%.
The Fund may invest in sponsored and unsponsored American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. Unsponsored ADRs may be created without the participation of the foreign
issuer. Holders of these ADRs generally bear all the costs of the ADR facility,
whereas foreign issuers typically bear certain costs in a sponsored ADR. The
bank or trust company depository of an unsponsored ADR may be under no
obligation to distribute shareholder communications received from the foreign
issuer or to pass through voting rights.
The Fund's investments that are denominated in foreign currencies will
be adversely affected by reductions in the value of those currencies relative to
the U.S. dollar. These changes will affect the Fund's net assets, distributions
and income. The Fund may utilize foreign currency forward contracts in order to
hedge against uncertainty in the level of future foreign exchange rates. The
Fund will not enter into these contracts for speculative purposes. These
contracts involve an obligation to purchase or sell a specific currency at a
specified future date, usually less than one year from the date of the contract,
at a specified price. The Fund may enter into foreign currency forward contracts
to manage currency risks and to facilitate transactions in foreign securities.
These contracts involve a risk of loss if the Adviser fails to predict currency
values correctly and also involve similar risks to those described under
"Hedging Strategies." The Fund may also buy and sell foreign currency options,
foreign currency futures contracts and options on those futures contracts.
See "Hedging Strategies."
ADDITIONAL INVESTMENT POLICIES
The Fund's investment objective and certain investment limitations that
are deemed to be fundamental, as described in the Statement of Additional
Information, may not be changed without approval of the holders of a majority of
the Fund's outstanding voting securities. A majority of the Fund's outstanding
voting securities means the lesser of 67% of the shares of the Fund present or
represented at a meeting at which the holders of more than 50% of the
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outstanding shares of the Fund are present or represented or more than 50% of
the outstanding shares of the Fund. Except as otherwise indicated, investment
policies of the Fund are not deemed to be fundamental and may be changed by the
Board of Trustees of the Trust (the "Board") without shareholder approval. A
further description of the Fund's investment policies is contained in the
Statement of Additional Information.
BORROWING. As a fundamental policy, the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets. As a nonfundamental policy, the Fund may borrow money
for temporary or emergency purposes in an amount not exceeding 5% of the value
of its total assets at the time when the loan is made; provided that any such
temporary or emergency borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.
ILLIQUID SECURITIES. The Fund may not invest more than 15% of its net
assets in illiquid securities, including repurchase agreements not entitling the
Fund to the payment of principal within seven days. Illiquid securities are
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. The Fund may
seek additional income by entering into repurchase agreements or by lending
securities from its portfolio to brokers, dealers and other financial
institutions. These investments may entail certain risks not associated with
direct investments in securities. For instance, in the event that bankruptcy or
similar proceedings were commenced against a counterparty in these transactions
or a counterparty defaulted on its obligations, the Fund might suffer a loss.
Failure by the other party to deliver a security purchased by the Fund may
result in a missed opportunity to make an alternative investment. The Adviser
monitors the creditworthiness of counterparties to these transactions and
intends to enter into these transactions only when it believes the
counterparties present minimal credit risks and the income to be earned from the
transaction justifies the attendant risks. Repurchase agreements are
transactions in which the Fund purchases a security and simultaneously commits
to resell that security to the seller at an agreed- upon price on an agreed-upon
future date, normally one to seven days later. The resale price reflects a
market rate of interest that is not related to the coupon rate or maturity of
the purchased security. Securities loans must be continuously secured by cash or
securities issued or guaranteed as to principal and interest by the United
States Government or by any of its agencies and instrumentalities ("U.S.
Government Securities") with a market value, determined daily, at least equal to
the value of the Fund's securities loaned. When the Fund lends a security, it
receives interest from the borrower or from investing cash collateral. The
Trust's custodian maintains possession of the purchased securities and any
underlying collateral in these transactions, the total market value of which on
a continuous basis is at least equal to the repurchase price or value of
securities loaned, plus accrued interest and which consists of the types of
securities in which the Fund may invest directly. The Fund may pay fees to
arrange securities loans. The Fund will not lend portfolio securities in excess
of 33 1/3% of the value of the Fund's total assets.
DIVERSIFICATION AND CONCENTRATION. The Fund is diversified. As a
fundamental policy, with respect to 75% of its assets, the Fund may not purchase
a security (other than a U.S. Government Security), if, as a result, (i) more
than 5% of the Fund's total assets would be invested in the securities of a
single issuer or (ii) the Fund would own more than 10% of the outstanding voting
securities of any single issuer. As a fundamental policy, the Fund may not
purchase securities, if, immediately after the purchase, more than 25% of the
value of the Fund's total assets would be invested in the securities of issuers
conducting their principal business activities in the same industry. This limit
does not apply to investments in U.S. Government Securities or repurchase
agreements covering U.S. Government Securities.
WARRANTS. The Fund may invest in warrants, which are options to
purchase an equity security at a specified price (usually representing a premium
over
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the applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. Warrants are
usually issued by the issuer of the security to which they relate. While
warrants may be traded, there is often no secondary market for them and the
prices of warrants do not necessarily correlate with the prices of the
underlying securities. Holders of warrants have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer. The Fund
will limit its purchases of warrants to not more than 5% of the value of its
total assets.
HEDGING STRATEGIES. The Fund may in the future seek to hedge against a
decline in the value of securities owned by it or an increase in the price of
securities which it plans to purchase through the writing and purchase of
exchange-traded and over-the-counter options and the purchase and sale of
futures contracts and options on those futures contracts. The Fund may write
(sell) covered put and call options and may buy put and call options on equity
securities, foreign currencies and stock indices, such as the Standard & Poor's
500 Stock Index. In addition, the Fund may buy or sell stock index and foreign
currency futures contracts and may write covered options and buy options on
those contracts. Definitions of these instruments may be found in the Appendix
to this Prospectus. An option is covered if, so long as the Fund is obligated
under the option, it owns an offsetting position in the underlying security,
currency or futures contract or maintains liquid assets in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option.
The Fund will not hedge more than 25% of its total assets by selling
futures contracts, buying put options and writing call options. In addition, the
Fund will not buy futures contracts or write put options whose underlying value
exceeds 25% of the Fund's total assets and will not purchase call options if the
value of purchased call options would exceed 5% of the Fund's total assets.
The Fund's use of options and futures contracts would subject the Fund
to certain investment risks and transaction costs to which it might not
otherwise be subject. These risks include: (1) dependence on the Adviser's
ability to predict movements in the prices of individual securities or
currencies and fluctuations in the general securities or currency markets; (2)
imperfect correlation between movements in the prices of options, futures
contracts or related options and movements in the price of the securities or
currencies hedged or used for cover; (3) the fact that skills and techniques
needed to trade these instruments are different from those needed to select the
other securities in which the Fund invests; (4) lack of assurance that a liquid
secondary market will exist for any particular instrument at any particular
time; (5) the possible need to defer closing out of certain options, futures
contracts and related options to avoid adverse tax consequences; and (6) the
potential for unlimited loss when investing in futures contracts. Other risks
include the inability of the Fund, as the writer of covered call options, to
benefit from the appreciation of the underlying securities above the exercise
price and the possible loss of the entire premium paid for options purchased by
the Fund.
TEMPORARY DEFENSIVE POSITION. When the Adviser believes that business
or financial conditions warrant, the Fund may assume a temporary defensive
position. For temporary defensive purposes, the Fund may invest without limit in
cash or in investment grade cash equivalents, including (i) short-term U.S.
Government Securities, (ii) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of commercial banks, (iii) prime quality
commercial paper, and (iv) repurchase agreements covering any of the securities
in which the Fund may invest directly, and, subject to the limits of the
Investment Company Act of 1940 (the "Investment Company Act"), in money market
mutual funds. During periods when and to the extent that the Fund has assumed a
temporary defensive position, it will not be pursuing its investment objective.
PORTFOLIO TRANSACTIONS. From time to time the Fund may engage in active
short- term trading to take advantage of price movements affecting individual
issues, groups of issues or markets. This will increase the Fund's rate of
turnover and will result in higher total brokerage costs for the Fund. The
Adviser anticipates that the annual turnover in the Fund could be in excess of
50% in future years (but is not expected to equal or exceed 100%). An annual
turnover rate of 100% would occur, for example, if all of
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the securities in the Fund were replaced once in a period of one year.
The Fund has no obligation to deal with any specific broker or dealer
in the execution of portfolio transactions. Consistent with its policy of
obtaining the best net results, the Fund may conduct brokerage transactions
through certain affiliates of the Adviser. The Board has adopted policies to
ensure that these transactions are reasonable and fair and that the commissions
charged are comparable to those charged by non-affiliated qualified
broker-dealers.
4. MANAGEMENT
The business of the Trust is managed under the direction of the Board
of Trustees. The Board formulates the general policies of the Fund and generally
meets quarterly to review the results of the Fund, monitor investment activities
and practices and discuss other matters affecting the Fund and the Trust.
INVESTMENT ADVISER
Pursuant to an investment advisory agreement with the Trust, Austin
Investment Management, Inc. serves as investment adviser of the Fund. Subject to
the general control of the Board, the Adviser makes investment decisions for the
Fund. For its services, the Adviser receives an advisory fee that is accrued
daily and paid monthly at an annual rate of 1.5% of the average daily net assets
of the Fund.
The Adviser, which is located at 375 Park Avenue, New York, New York
10152, is a registered investment adviser and provides investment management
services to pension plans, endowment funds, institutional and individual
accounts. As of the date of this Prospectus, the Adviser had approximately $152
million of assets under management and was controlled by Peter Vlachos,
president and chief portfolio manager of the Adviser since its organization in
1989.
Mr. Vlachos has been portfolio manager of the Fund since the Fund's
inception and, as such, is responsible for the day-to-day management of the
Fund's portfolio. Prior to his establishment of the Adviser, Mr. Vlachos was a
portfolio manager at Neuberger & Berman, Inc. Prior thereto, Mr. Vlachos held
various positions at Dreyfus Corp., including president and vice president of
two investment companies managed by Dreyfus with over $2 billion in combined
assets for which he was portfolio manager.
ADMINISTRATION
On behalf of the Fund, the Trust has entered into an Administration
Agreement with FAS. As provided in this agreement, FAS is responsible for the
supervision of the overall management of the Trust (including the Trust's
receipt of services which the Trust is obligated to pay for), providing the
Trust with general office facilities and providing persons satisfactory to the
Board of Trustees to serve as officers of the Trust. For these services, FAS
receives a fee computed and paid monthly at an annual rate of 0.25% of the
average daily net assets of the Fund. FAS, in its sole discretion, may waive all
or any portion of its fees.
FAS, which is located at Two Portland Square, Portland, Maine 04101,
was organized under the laws of the State of Delaware on December 29, 1995 and
as of the date of this Prospectus, FAS and FFSI provided management,
administrative and distribution services to registered investment companies and
collective investment funds with assets of approximately $18 billion.
DISTRIBUTION
Pursuant to a Distribution Agreement, FFSI acts as the distributor of
the Fund's shares. Under a distribution plan (the "Plan") adopted by the Board,
the Fund may reimburse FFSI for the distribution expenses incurred by FFSI on
behalf of the Fund. These expenses may include the cost of advertising and
promotional materials, providing prospective shareholders with the Fund's
prospectus, statement of additional information and shareholder reports,
reimbursing the Adviser for its distribution expenses and compensating others
who may provide assistance in distributing shares of the Fund. These expenses
may include costs of FFSI's offices such as rent, communications equipment,
employee salaries and overhead costs. The Fund will not reimburse FFSI for any
distribution expenses in any fiscal year of the Fund in excess of 0.25% of the
Fund's average daily net assets. During the period in which the Plan and
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the related Distribution Agreement are in effect, the Board will from time to
time determine the amount of distribution expense reimbursement to be paid. It
is anticipated that no distribution fees will be approved by the Board for the
Fund's current fiscal year. Unreimbursed expenses of the Distributor incurred
during a fiscal year of the Trust may not be reimbursed by the Trust in future
years or after the termination of the Plan or the Distribution Agreement.
FFSI is a registered broker-dealer and investment adviser and is a
member of the National Association of Securities Dealers, Inc.
TRANSFER AGENT
The Trust has entered into a Transfer Agency Agreement with Forum
Financial Corp. (the "Transfer Agent") pursuant to which the Transfer Agent acts
as the Fund's transfer agent and dividend disbursing agent. The Transfer Agent
maintains for each shareholder of record, an account (unless such accounts are
maintained by sub-transfer agents) to which all shares purchased are credited,
together with any distributions that are reinvested in additional shares. The
Transfer Agent also performs other transfer agency functions and acts as
dividend disbursing agent for the Trust. Forum Accounting Services, LLC ("FAcS")
performs portfolio accounting services for the Fund, including determination of
the Fund's net asset value. As of the date of this Prospectus each of FAS, FFSI,
the Transfer Agent and FAcS was controlled by John Y. Keffer, President and
Chairman of the Trust.
EXPENSES OF THE TRUST
The Fund's expenses comprise Trust expenses attributable to the Fund,
which are charged to the Fund, and those not attributable to a particular fund
of the Trust, which are allocated among the Fund and all other funds of the
Trust in proportion to their average net assets. The Adviser, FAS and the
Transfer Agent may each elect to waive (or continue to waive) all or a portion
of their fees, which are accrued daily and paid monthly. Fee waivers are
voluntary and may be reduced or eliminated at any time. The Trust is responsible
for all of its expenses, including: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer agent; fees of pricing, interest, dividend,
credit and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information and shareholder reports and delivering them to
existing shareholders; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; compensation of the Trust's directors;
compensation of the Trust's officers and employees who are not employees of the
Adviser, FAS or their respective affiliates and costs of other personnel
performing services for the Trust; costs of corporate meetings; Securities and
Exchange Commission registration fees and related expenses; state securities
laws registration fees and related expenses; the fees payable under the Advisory
Agreement and the Administration Agreement; and any fees and expenses payable
pursuant to the Plan. The Adviser has agreed to reimburse the Trust for certain
of the Fund's operating expenses which in any year exceed the limits prescribed
by any state in which the Fund's shares are qualified for sale.
5. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL
PURCHASES. Shares of the Fund may be purchased without a sales charge at
their net asset value on any weekday except days when the New York Stock
Exchange is closed, normally, New Year's Day, Martin Luther King Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas ("Fund Business Day"). See "Other Information _
Determination of Net Asset Value."
Shares of the Fund are issued at a price equal to the net asset value
per share next determined after an order in proper form is accepted by the
Transfer Agent. The Fund's net asset value is calculated at 4:00 p.m., Eastern
time on each Fund Business Day. Fund shares become entitled to receive dividends
on
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the next Fund Business Day after the acceptance of an order.
The Fund reserves the right to reject any subscription for the purchase
of its shares. Stock certificates are issued only to shareholders of record upon
their written request, and no certificates are issued for fractional shares.
REDEMPTIONS. There is no redemption charge, no minimum period of
investment, and no restriction on frequency of redemptions. The date of payment
of redemption proceeds may not be postponed for more than seven days after
shares are tendered to the Transfer Agent for redemption by a shareholder of
record. The right of redemption may not be suspended except in accordance with
the Investment Company Act.
Redemptions are effected at a price equal to the net asset value per
share next determined following acceptance by the Transfer Agent of the
redemption order in proper form (and any supporting documentation which the
Transfer Agent may require). Shares redeemed are not entitled to participate in
dividends declared after the day on which a redemption becomes effective.
Redemption requests will not be effected unless any check used for
investment has been cleared by the shareholder's bank, which may take up to 15
calendar days. This delay may be avoided by investing in the Fund through wire
transfers. Normally redemption proceeds are paid immediately following any
redemption, but in no event later than seven days after redemption, by check
mailed to the shareholder of record at his record address. Shareholders who wish
to redeem shares by telephone or by bank wire must elect these options by
properly completing the appropriate sections of their account application.
PURCHASE AND REDEMPTION PROCEDURES
Investors may obtain the account application necessary to open an
account by writing the Transfer Agent at one of the addresses listed on the
cover page to this prospectus.
There is a $10,000 minimum for initial investments in the Fund and a
$2,500 minimum for subsequent purchases, except for individual retirement
accounts (See "Purchases and Redemptions of Shares _ Individual Retirement
Accounts"). Shareholders will receive from the Trust periodic statements listing
account activity during the statement period.
The Fund sells and redeems its shares on a continuing basis at the net
asset value of the shares next determined following the receipt by the Transfer
Agent of a purchase or redemption order in proper form including, in the case of
purchases, Federal Funds. An investor's funds will not be accepted or invested
by the Fund during the period before the Fund's receipt of Federal Funds.
INITIAL PURCHASE OF SHARES
MAIL. Investors may send a check made pay- able to the Trust along with a
completed account application to the Transfer Agent at:
Austin Global Equity Fund
P.O. Box 446
Portland, Maine 04112
Checks are accepted at full value subject to collection. If a check
does not clear, the purchase order will be canceled and the investor will be
liable for any losses or fees incurred by the Trust, the Transfer Agent or FFSI.
BANK WIRE. To make an initial investment in the Fund using the fed wire
system for transmittal of money among banks, an investor should first telephone
the Transfer Agent at (207) 879-0001 to obtain an account number for an initial
investment. The investor should then instruct a member commercial bank to wire
his money immediately to:
BankBoston
Boston, Massachusetts
ABA # 011000390
For Credit to: Forum Financial Corp.
Account # 541-54171
Austin Global Equity Fund
(Investor's Name)
(Investor's Account Number)
The investor should then promptly complete and mail the account
application.
Any investor planning to wire funds should instruct his bank early in
the day so the wire transfer can be accomplished the same day. There may be a
charge by the investor's bank for transmitting the
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money by bank wire, and there also may be a charge for use of Federal Funds. The
Trust does not charge investors for the receipt of wire transfers.
THROUGH BROKERS AND OTHER FINANCIAL INSTITUTIONS. Shares may be
purchased and redeemed through brokers and other financial institutions that
have entered into sales agreements with FFSI. These institutions may charge
their customers a fee for their services and are responsible for promptly
transmitting purchase, redemption and other requests to the Trust. The Trust is
not responsible for the failure of any Processing Organization to promptly
forward these requests or otherwise carry out its obligations to its customers.
Investors who purchase shares will be subject to the procedures of
their institution, which may include charges, limitations, investment minimums,
cutoff times and restrictions in addition to, or different from, those
applicable to shareholders who invest in the Fund directly. Certain shareholder
services may not be available to shareholders who have purchased through a
broker-dealer or other institution. These investors should acquaint themselves
with their institution's procedures and should read this Prospectus in
conjunction with any materials and information provided by their institution.
Investors who purchase Fund shares in this manner may or may not be the
shareholder of record and, subject to their institution's and the Fund's
procedures, may have Fund shares transferred into their name. There is typically
a one to five day settlement period for purchases and redemptions through
broker-dealers.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases may be made by mailing a check, by sending a bank
wire or through a broker as indicated above. Shareholders using the wire system
for subsequent purchases should first telephone the Transfer Agent at (207)
879-0001 to notify it of the wire transfer. All payments should clearly indicate
the shareholder's name and account number.
REDEMPTION OF SHARES
Shareholders who wish to redeem shares by telephone or receive
redemption proceeds by bank wire must elect these options by properly completing
the appropriate sections of their account application. These privileges may not
be available until several weeks after a shareholder's application is received.
Shares for which certificates have been issued may not be redeemed by telephone.
REDEMPTION BY MAIL. Shareholders may make a redemption in any amount by
sending a written request to the Transfer Agent accompanied by any stock
certificate that may have been issued to the shareholder. All certificates
submitted for redemption must be endorsed by the shareholder with signature
guaranteed and all written requests for redemption must be signed by the
shareholder with signature guaranteed.
TELEPHONE REDEMPTION. A shareholder that has elected telephone
redemption privileges may make a telephone redemption request by calling the
Transfer Agent at (207) 879-0001. In an effort to prevent unauthorized or
fraudulent redemption requests by telephone, the Trust and the Transfer Agent
will employ reasonable procedures to confirm that such instructions are genuine.
Shareholders must provide the Transfer Agent with the shareholder's account
number, the exact name in which the shares are registered and some additional
form of identification such as a password. The Trust or the Transfer Agent may
employ other procedures such as recording certain transactions. If such
procedures are followed, neither the Transfer Agent nor the Trust will be liable
for any losses due to unauthorized or fraudulent redemption requests.
Shareholders should verify the accuracy of telephone instructions immediately
upon receipt of confirmation statements.
During times of drastic economic or market changes, the telephone
redemption privilege may be difficult to implement. In the event a shareholder
is unable to reach the Transfer Agent by telephone, requests may be mailed or
hand-delivered to the Transfer Agent. In response to the telephone redemption
instruction, the Fund will mail a check to the shareholder's record address or,
if the shareholder has elected wire redemption privileges, wire the proceeds.
Shares for which certificates have been issued may not be redeemed by telephone.
BANK WIRE REDEMPTION. With respect to any redemption of more than
$10,000, a shareholder may request the Fund to transmit the proceeds by Federal
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Funds wire to a bank account designated in writing. To request bank wire
redemptions by telephone, the shareholder must have elected to be able to redeem
shares by telephone.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any
written redemption request and for any endorsement on a stock certificate. A
signature guarantee also is required for instructions to change a shareholder's
record name or address, designated bank account for wire redemptions or
automatic investment or redemption, dividend election, telephone redemption or
exchange option election or any other option election in connection with the
shareholder's account. Signature guarantees may be provided by any eligible
institution, including a bank, a broker, a dealer, a national securities
exchange, a credit union, or a savings association that is authorized to
guarantee signatures, acceptable to the Transfer Agent. Whenever a signature
guarantee is required, each person required to sign for the account must have
his signature guaranteed.
The Transfer Agent will deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost all distributions on the account will be reinvested in
additional shares of the Fund. In addition, the amount of any outstanding
(unpaid for six months or more) checks for distributions that have been returned
to the Transfer Agent will be reinvested and the checks will be canceled.
Due to the cost to the Trust of maintaining smaller accounts, the Trust
reserves the right to redeem, upon not less than 60 days' written notice, all
shares in any Fund account with an aggregate net asset value of less than
$10,000. The Fund will not redeem accounts that fall below this amount solely as
a result of a reduction in net asset value.
INDIVIDUAL RETIREMENT ACCOUNTS
The Fund may be a suitable investment vehicle for part or all of the
assets held in individual retirement accounts ("IRAs"). The minimum initial
investment for investors opening an IRA or investing through their own IRA is
$2,000, and the minimum subsequent investment is $1,000. Individuals may make
tax-deductible IRA contributions of up to a maximum of $2,000 annually. However,
the deduction will be reduced if the individual or, in the case of a married
individual either the individual or the individual's spouse is an active
participant in an employer-sponsored retirement plan and the individual (or, in
certain cases, the married couple) has adjusted gross income above certain
levels.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared and paid
annually. Net capital gains realized by the Fund, if any, also will be
distributed annually.
Shareholders may choose either to have all dividends reinvested in
additional shares of the Fund or received in cash or to have dividends of net
capital gain reinvested in additional shares of the Fund and dividends of net
investment income paid in cash. All dividends are treated in the same manner for
Federal income tax purposes whether received in cash or reinvested in shares of
the Fund.
Income dividends will be reinvested at the Fund's net asset value as of
the last day of the period with respect to which the dividends are paid. Capital
gain dividends will be reinvested at the net asset value of the Fund on the
payment date for the dividend. All dividends are reinvested unless another
option is selected. All dividends not reinvested will be paid to the shareholder
in cash and may be made more than seven days following the date on which
dividends would otherwise be reinvested.
TAXES
TAXATION OF THE FUND. The Fund intends to continue to qualify for each
fiscal year to be taxed as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code"). As such, the Fund will not be
liable for Federal income and excise taxes on the net investment income and
capital gains distributed to its shareholders in accordance with the applicable
provisions of the Code. The Fund intends to distribute all of its net income and
net capital gains each year.
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Accordingly, the Fund should thereby avoid all Federal income and excise taxes.
SHAREHOLDER TAX MATTERS. Dividends paid by the Fund out of its net
investment income (including realized net short term capital gains) are taxable
to the shareholders of the Fund as ordinary income. Distributions of net
long-term capital gain, if any, realized by the Fund are taxable to the
shareholders as long-term capital gain, regardless of the length of time the
shareholder may have held his shares in the Fund at the time of distribution. A
portion of the Fund's dividends may qualify for the dividends received deduction
available to corporations.
If a shareholder holds shares for six months or less and during that
period receives a distribution taxable to the shareholder as a long-term capital
gain, any loss realized on the sale of the shareholder's shares during that
six-month period would be deemed a long-term loss to the extent of the
distribution.
Any dividend or distribution received by a shareholder on shares of the
Fund will have the effect of reducing the net asset value of the shareholder's
shares by the amount of the dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of shares by a shareholder,
although in effect a return of capital to that particular shareholder, would be
taxable to the shareholder as described above.
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income or other taxes. Under certain
circumstances, shareholders will be notified of their share of these taxes and
will be required to include that amount as income. In that event, the
shareholder may be entitled to claim a credit or deduction for those taxes.
GENERAL. The Fund is required by Federal law to withhold 31% of
reportable payments (which may include dividends, capital gains distributions
and redemptions) paid to a non-corporate shareholder unless such shareholder
certifies in writing that the social security or tax identification number
provided is correct and that the shareholder is not subject to backup
withholding for prior underreporting to the Internal Revenue Service.
Reports containing appropriate information with respect to the Federal
income tax status of dividends and distributions paid during the year by the
Fund will be mailed to shareholders shortly after the close of each year.
7. OTHER INFORMATION
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of
4:00 p.m., Eastern time, on each Fund Business Day by dividing the value of the
Fund's net assets (I.E., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the number of shares outstanding at the time the determination
is made. Securities owned by the Fund for which market quotations are readily
available are valued at current market value, or, in their absence, at fair
value as determined by the Board. Purchases and redemptions will be effected at
the time of determination of net asset value next following the receipt of any
purchase or redemption order as described under "Purchases and Redemptions of
Shares."
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and
assumed the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996,
Forum Funds, Inc. was reorganized as a Delaware business trust. The Trust has an
unlimited number of authorized shares of beneficial interest. The Board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate portfolios or series (such as the Fund) and may in the future
divide portfolios or series into two or more classes of shares (such as Investor
and Institutional Shares). Currently the authorized shares of the Trust are
divided into 15 separate series. Prior to November 25, 1996, the Fund was a
separate portfolio named Austin Global Equity Fund of Stone Bridge Funds, Inc.,
a Maryland corporation.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class
13
<PAGE>
(and certain other expenses such as transfer agency and administration expenses)
are borne solely by those shares and each class votes separately with respect to
the provisions of any Rule 12b-1 plan which pertain to the class and other
matters for which separate class voting is appropriate under applicable law.
Generally, shares will be voted in the aggregate without reference to a
particular portfolio or class, except if the matter affects only one portfolio
or class or voting by portfolio or class is required by law, in which case
shares will be voted separately by portfolio or class, as appropriate. Delaware
law does not require the Trust to hold annual meetings of shareholders, and it
is anticipated that shareholder meetings will be held only when specifically
required by Federal or state law. Shareholders have available certain procedures
for the removal of Trustees. There are no conversion or preemptive rights in
connection with shares of the Trust. All shares when issued in accordance with
the terms of the offering will be fully paid and nonassessable. Shares are
redeemable at net asset value, at the option of the shareholders, subject to any
contingent deferred sales charge that may apply. A shareholder in a portfolio is
entitled to the shareholder's pro rata share of all dividends and distributions
arising from that portfolio's assets and, upon redeeming shares, will receive
the portion of the portfolio's net assets represented by the redeemed shares.
From time to time, certain shareholders may own a large percentage of
the shares of the Fund. Accordingly, those shareholders may be able to greatly
affect (if not determine) the outcome of a shareholder vote.
PERFORMANCE INFORMATION
The Fund's performance may be quoted in advertising in terms of yield
or total return. Both types of performance are based on the Fund's historical
results and are not intended to indicate future performance. The Fund's yield is
a way of showing the rate of income the Fund earns on its investments as a
percentage of the Fund's share price. To calculate yield, the Fund takes the
interest income it earned from its portfolio of investments for a 30 day period
(net of expenses), divides it by the average number of shares entitled to
receive dividends, and expresses the result as an annualized percentage rate
based on the Fund's share price at the beginning of the 30 day period. The
Fund's total return shows its overall change in value, including changes in
share price and assuming all the Fund's distributions are reinvested. A
cumulative total return reflects the Fund's performance over a stated period of
time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Fund's performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in the Fund's returns, shareholders
should recognize that they are not the same as actual year-by-year results. To
illustrate the components of overall performance, the Fund may separate its
cumulative and average annual returns into income results and capital gain or
loss.
The Fund's advertisements may refer to ratings and rankings among
similar funds by independent evaluators such as Morningstar, Lipper Analytical
Services, Inc. or CDA/Wiesenberger. In addition, the performance of the Fund may
be compared to recognized indices of market performance. The comparative
material found in the Fund's advertisements, sales literature or reports to
shareholders may contain performance ratings. These are not to be considered
representative or indicative of future performance.
14
<PAGE>
APPENDIX
OPTIONS ON EQUITY SECURITIES (sometimes referred to as stock options) -
A call option is a short-term contract pursuant to which the purchaser of the
call option, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. A put option
gives its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying
security, upon exercise at the exercise price during the option period.
OPTIONS ON STOCK INDEXES - A stock index assigns relative values to the
stock included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional stock options except that exercises of stock
index options are effected with cash payments and do not involve delivery of
securities. Thus, upon exercise of a stock index options, the purchaser will
realize and the writer will pay an amount based on the differences between the
exercise price and the closing price of the stock index.
FOREIGN CURRENCY OPTIONS - A foreign currency option operates in the
same manner as an option on securities. Options on foreign currencies are
primarily traded in the over-the-counter market.
STOCK INDEX FUTURES CONTRACTS - A stock index futures contract is a
bilateral agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of trading of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the stocks comprising the index is made.
Generally contracts are closed out prior to the expiration date of the contract.
FOREIGN CURRENCY FUTURES CONTRACTS - A foreign currency futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of a quantity of a foreign currency called for in a contract at a
specified future time and at a specific price. Although these contracts call for
delivery of or acceptance of the foreign currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery.
OPTIONS ON FUTURES CONTRACTS - Options on futures contracts are similar
to stock options except that an option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
[Following paragraph is in a box]
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION AND THE FUND'S OFFICIAL SALES LITERATURE IN CONNECTION
WITH THE OFFERING OF THE FUND'S SHARES, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO
ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
15
<PAGE>
OAK HALL(R)
EQUITY FUND
Prospectus
August 1, 1997
[LOGO]
<PAGE>
OAK HALL(R) EQUITY FUND
- --------------------------------------------------------------------------------
Two Portland Square
Portland, Maine 04101
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
Forum Financial Corp.
Two Portland Square
Portland, Maine 04101
(207) 879-0001
(800) 625-4255
- --------------------------------------------------------------------------------
PROSPECTUS August 1, 1997
- --------------------------------------------------------------------------------
This Prospectus offers shares of the Oak Hall(R) Equity Fund (the "Fund"), which
is a diversified portfolio of Forum Funds (the "Trust"), an open-end, management
investment company. The investment objective of the Fund is to seek capital
appreciation by investing primarily in a portfolio of common stock and
securities convertible into common stock. Shares of the Fund are offered to
investors without any sales charge, but the Fund may bear certain of its
distribution expenses.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor should know before investing. The Trust has
filed with the Securities and Exchange Commission a Statement of Additional
Information dated August 1, 1997, which contains more detailed information about
the Fund and the Trust and which is hereby incorporated into this Prospectus by
reference. An investor may obtain a copy of the Statement of Additional
Information without charge by contacting Shareholder Servicing at the address or
phone number listed above.
- --------------------------------------------------------------------------------
<TABLE>
Table of Contents
<S> <C> <C> <C>
1. Prospectus Summary.......................2 5. Purchases and Redemptions of Shares......10
2. Financial Highlights.....................3 6. Dividends and Tax Matters................12
3. Investment Objective and Policies........4 7. Other Information........................13
4. Management...............................8 8. Appendix.................................15
</TABLE>
- --------------------------------------------------------------------------------
Investors should read this Prospectus and retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
1. PROSPECTUS SUMMARY
SUMMARY OF THE FUND
INVESTMENT OBJECTIVE AND POLICIES. The Fund seeks capital appreciation by
investing primarily in a portfolio of common stock and securities convertible
into common stock. The Fund also may invest up to 30% of its assets in the
securities of foreign companies and may use certain investment techniques, all
of which may entail special risks. See "Investment Objective, Policies and
Limitations."
MANAGEMENT. Oak Hall(R) Capital Advisors, L.P. (the "Adviser") is the
Fund's investment adviser and makes investment decisions for the Fund. Forum
Financial Services, Inc., ("FFSI") distributes the Fund's shares and Forum
Administrative Services, LLC ("FAS") administers the Fund. See "Management." The
Fund bears certain expenses in connection with the sale of its shares. See
"Management _ Distribution."
PURCHASES AND REDEMPTIONS. Shares of the Fund are offered at the next-
determined net asset value without a sales charge to investors who plan to
invest a minimum of $10,000 in the Fund. Shares of the Fund may be redeemed from
the Fund at their next-determined net asset value on any Fund Business Day. See
"Purchases and Redemptions of Shares."
DIVIDENDS. Dividends representing the net investment income of the Fund are
declared and paid at least annually. Net capital gains realized by the Fund, if
any, also will be distributed annually. Dividends and distributions are
reinvested in additional shares of the Fund unless a shareholder elects to have
them paid in cash. See "Dividends and Tax Matters."
CERTAIN RISK FACTORS. There can be no assurance that the Fund will
achieve its investment objective and the Fund's net asset value will fluctuate
based upon changes in the value of its portfolio securities. Certain investments
and investment techniques of the Fund may entail additional risks or have
speculative characteristics. These include investments in small companies whose
securities are not actively traded, investments in debt securities rated below
investment grade, and investments in securities of foreign issuers. See
"Investment Objective, Policies and Limitations." The Fund is not intended to
provide a complete or balanced investment program for all investors.
EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. There are no transaction or sales charges
associated with purchases and redemptions.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after fee waivers)..........................................0.00%
12b-1 Fees.................................................................0.02%
Other Expenses (after expense reimbursements)..............................1.98%
Total Fund Operating Expenses..............................................2.00%
The amounts of expenses are based on actual amounts incurred during the
Fund's most recent fiscal year ended March 31, 1997. Absent certain expense
reimbursements and fee waivers, during the most recent fiscal year, the
Investment Advisory Fees, Other Expenses, and Total Operating Expenses of the
Fund would be 0.75%, 2.16%, and 2.93%, respectively. Expense reimbursements and
fee waivers are voluntary and may be reduced or eliminated at any time. For a
further description of the various costs and expenses incurred in the Fund's
operation, see "Management."
EXAMPLE
The following is a hypothetical example that indicates the dollar
amount of expenses an investor would pay assuming a $1,000 investment, a 5%
annual return, reinvestment of all dividends and distributions and full
redemption at the end of each period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$20 $63 $108 $233
The example is based on the expenses listed in the "Annual Fund Operating
Expenses" table above. The 5% annual return is not a prediction of and does not
represent the Fund's projected returns; rather it is required by government
regulation. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RETURN. ACTUAL EXPENSES AND RETURN MAY BE GREATER OR LESS
THAN THOSE INDICATED.
2
<PAGE>
2. FINANCIAL HIGHLIGHTS
The following represents selected data for a single share outstanding
of the Fund for the periods indicated. The information for the periods ending
March 31, 1997 and June 30, 1996, 1995 and 1994 was audited in connection with
an audit of the Trust's financial statements by Deloitte & Touche, independent
auditors. The financial statements and auditors' report thereon are contained in
the Annual Report which is incorporated by reference into the Statement of
Additional Information. The information for the period ending June 30, 1993 was
audited by other independent auditors. Further information about the Fund's
performance is contained in the Annual Report, which may be obtained without
charge by contacting the Fund's transfer agent.
<TABLE>
OAK HALL EQUITY FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nine Months
Ended Year Ended Year Ended Year Ended Period Ended
March 31, June 30, June 30 June 30, June 30,
1997 1996 1995 1994 1993(a)
------------ ----------- ------------ --------- ------------
Net Asset Value, Beginning of Period $13.61 $11.33 $12.55 $14.30 $10.00
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income (Loss) (0.15) (0.32)(b) (0.03)(b) (0.09) -
Net Realized and Unrealized Gain
(Loss) on Investments 0.34 2.60 (0.10) (0.52) 4.31
--------------- ------------- ------------- -------------- ---------------
Total from Investment Operations 0.19 2.28 (0.13) (0.61) 4.31
Distributions From:
Net Realized Gain on Investments - - (1.09) (1. 14) (0.01)
-------------- ------------- ------------ ------------ --------------
Net Asset Value, End of Period $13.80 $13.61 $11.33 $12.55 $14.30
============== ============= ============= ============= ==============
Total Return 1.40%(c) 20.12% (1.07%) (5.14%) 45.12%(d)
Ratio/Supplementary Data:
Net Assets at End of Period
(000's omitted) $7,310 $12,257 $16,399 $35,470 $12,581
Ratios to Average Net Assets:
Expenses Including
Reimbursement/Waiver 2.00%(d) 2.00% 2.00% 2.01% 1.23%(d)
Expenses Excluding
Reimbursement/Waiver 2.93%(d) 2.44% -% 2.17% 5.91%(d)
Net Investment Income (Loss)
Including Reimbursement/Waiver (1.13%)(d) (1.14%) (.23%) (.96% (0.07%)(d)
Average Commission Rate (e) $0.0673 $0.0601 N/A N/A N/A
Portfolio Turnover Rate 95.05% 157.01% 115.3 % 168.61% 187.94%
</TABLE>
(a) The Fund commenced operations on July 13, 1992.
(b) Calculated using the weighted average shares outstanding.
(c) Not annualized.
(d) Annualized.
(e) Amount represents the average commission per share paid to brokers on the
purchase or sale of equity securities.
3
<PAGE>
3. INVESTMENT OBJECTIVE, POLICIES, AND LIMITATIONS
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation by
investing primarily in a portfolio of common stock and securities convertible
into common stock. Except during periods when the Fund assumes a temporary
defensive position, the Fund will have at least 65% of its total assets invested
in common stock and securities convertible into common stock. There can be, of
course, no assurance that the Fund will achieve its investment objective.
The Fund intends to invest principally in companies that, in the view
of the Adviser, possess above average growth potential or attractive valuations.
The Adviser seeks to identify and invest in companies it believes have a minimum
of downside risk and whose stock is selling at a discount from previous peak
prices. In addition, the Adviser seeks to invest in companies whose fundamental
attributes, in the Adviser's opinion, are improving but whose improvement has
not been fully recognized by the investment community. Consequently, the Adviser
anticipates that the Fund's portfolio will exhibit a high degree of volatility
or price fluctuation when compared to the market averages. In seeking these
investments, the Adviser relies primarily on a company by company analysis
(rather than on broader analysis of industry or economic trends). The Fund may
invest in the securities of issuers in any industry, but the Adviser emphasizes
investments in those industries for which the Adviser believes the economic
cycle is improving. The Fund may purchase the shares of small companies whose
stock is less actively traded and which have greater appreciation potential and
a correspondingly higher level of risk than larger companies whose shares are
actively traded. The securities in which the Fund invests may be traded on
securities exchanges or in the over-the-counter markets.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities,
including convertible debt and convertible preferred stock. The Fund will invest
only in convertible debt that is rated B or higher by Moody's Investors Service,
Inc. ("Moody's") or by Standard & Poor's Corporation ("S&P") and in preferred
stock that is rated b or higher by Moody's or B or higher by S&P. The Fund may
purchase unrated convertible securities if the Adviser determines the security
to be of comparable quality to a rated security that the Fund may purchase.
Unrated securities may not be as actively traded as rated securities. Securities
in the lowest permissible rating categories are characterized by Moody's as
generally lacking characteristics of a desirable investment and by S&P as being
predominantly speculative. In addition, securities in these categories may
involve the same type of risks as the "Debt Securities" described below,
although to a lesser degree. The Fund may retain securities whose rating has
been lowered below the lowest permissible rating category (or that are unrated
and determined by the Adviser to be of comparable quality) if the Adviser
determines that retaining such security is in the best interests of the Fund. A
further description of the various rating categories is included in the
Statement of Additional Information.
DEBT SECURITIES. The Fund may invest up to 25% of the value of its
total assets in heavily discounted non-investment grade, high risk, corporate
debt securities (commonly referred to as "junk bonds") rated in any category by
Moody's or S&P, or unrated, as an alternative to investing in equity securities.
In these instances, investment selection is based upon the independent research
activity of the Adviser and ratings of generally recognized bond rating
agencies, such as Moody's or S&P. Bonds rated in Moody's lowest rating category,
C, are characterized as having extremely poor prospects of ever attaining any
real investment standing. Bonds rated in S&P's lowest rating category, D, are
characterized as being in default. Non-investment grade, high risk securities
provide poor protection for payment of principal and interest but have greater
potential for capital appreciation than do higher quality securities. These
lower rated securities involve greater risk of default or price changes due to
changes in the issuer's creditworthiness than do higher quality securities. The
market for these securities may be thinner and less active than that for higher
quality securities, which may affect the price at which the lower rated
securities can be sold. In addition, the market prices of lower rated securities
may fluctuate more than the market prices of higher quality securities and may
decline significantly in periods of general economic
4
<PAGE>
difficulty or rising interest rates. For this purpose, securities with different
ratings from Moody's and S&P are assigned the higher rating.
A further description of the various rating categories is included in
the Statement of Additional Information.
ADDITIONAL INVESTMENT POLICIES
FOREIGN SECURITIES. The Fund may invest up to 30% of the value of its
total assets in securities of foreign issuers, in American Depository Receipts
("ADRs") and in securities denominated in foreign currencies (collectively,
"foreign securities"). Investments in foreign securities involve certain risks,
such as exchange rate fluctuations, political or economic instability of the
issuer or the country of issue and the possible imposition of exchange controls,
withholding taxes on dividends or interest payments, confiscatory taxes or
expropriation. Securities registration, custody and settlements of foreign
securities may in some instances be subject to delays and legal and
administrative uncertainties. Foreign securities may also be subject to greater
fluctuations in price than securities of domestic corporations denominated in
U.S. dollars. Foreign securities and their markets may not be as liquid as
domestic securities and their markets, and foreign brokerage commissions and
custody fees are generally higher than those in the United States. In addition,
less information may be publicly available about a foreign company than about a
domestic company, and foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. With respect to its permitted investments in
foreign securities, currently the Fund limits the amount of its assets that may
be invested in one country or denominated in one currency (other than the U.S.
dollar) to 25%. The Fund may invest in sponsored and unsponsored ADRs, which are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. Unsponsored ADRs may be
created without the participation of the foreign issuer. Holders of these ADRs
generally bear all the costs of the ADR facility, whereas foreign issuers
typically bear certain costs in a sponsored ADR. The bank or trust company
depository of an unsponsored ADR may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
voting rights.
The Fund may utilize foreign currency forward contracts in order to
hedge against uncertainty in the level of future foreign exchange rates. The
Fund will not enter into these contracts for speculative purposes. These
contracts involve an obligation to purchase or sell a specific currency at a
specified future date, usually less than one year from the date of the contract,
at a specified price. The Fund may enter into foreign currency forward contracts
to manage currency risks and to facilitate transactions in foreign securities.
These contracts involve a risk of loss if the Adviser fails to predict currency
values correctly and also involve similar risks to those described under
"Hedging Strategies." The Fund may also buy and sell foreign currency options
and other derivatives, foreign currency futures contracts and options on those
futures contracts. See "Hedging Strategies."
WARRANTS. The Fund may invest in warrants, which are options to
purchase an equity security at a specified price (usually representing a premium
over the applicable market value of the underlying equity security at the time
of the warrant's issuance) and usually during a specified period of time.
Warrants are usually issued by the issuer of the security to which they relate.
While warrants may be traded, there is often no secondary market for them and
the prices of warrants do not necessarily correlate with the prices of the
underlying securities. Holders of warrants have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer. The Fund
will limit its purchases of warrants to not more than 5% of the value of its
total assets.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. The Fund may
seek additional income by entering into repurchase agreements or by lending
portfolio securities (principally to broker-dealers, except the Adviser's
affiliates, or to institutional investors). These investments may entail certain
risks not associated with direct investments in securities. For instance, in the
event that bankruptcy or similar proceedings were commenced against a
counterparty in these transactions or a counterparty
5
<PAGE>
defaulted on its obligations, the Fund might suffer a loss. Failure by the other
party to deliver a security purchased by the Fund may result in a missed
opportunity to make an alternative investment. The Adviser monitors the
creditworthiness of counterparties to these transactions and intends to enter
into these transactions only when it believes the counterparties present minimal
credit risks and the income to be earned from the transaction justifies the
attendant risks.
Repurchase agreements are transactions in which the Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed- upon price on an agreed-upon future date, normally one to seven days
later. The resale price reflects a market rate of interest that is not related
to the coupon rate or maturity of the purchased security. Securities loans must
be continuously secured by cash or securities issued or guaranteed as to
principal and interest by the United States Government or by any of its agencies
and instrumentalities ("U.S. Government Securities") with a market value,
determined daily, at least equal to the value of the Fund's securities loaned.
When the Fund lends a security, it receives interest from the borrower or from
investing cash collateral. The Trust's custodian maintains possession of the
purchased securities and any underlying collateral in these transactions, the
total market value of which on a continuous basis is at least equal to the
repurchase price or value of securities loaned, plus accrued interest and which
consists of the types of securities in which the Fund may invest directly. The
Fund will limit securities lending to not more than 10% of the value of its
total assets.
HEDGING STRATEGIES. The Fund may in the future seek to hedge against a
decline in the value of securities owned by it or an increase in the price of
securities which it plans to purchase through the writing and purchase of
exchange-traded and over-the-counter options and the purchase and sale of
futures contracts and options on those futures contracts. The Fund may write
(sell) covered put and call options and may buy put and call options on equity
securities, foreign currencies and stock indices, such as the Standard & Poor's
500 Stock Index. In addition, the Fund may buy or sell stock index and foreign
currency futures contracts and may write covered options and buy options on
those contracts. Definitions of these instruments may be found in the Appendix
to this Prospectus. An option is covered if, so long as the Fund is obligated
under the option, it owns an offsetting position in the underlying security,
currency or futures contract or maintains liquid assets in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option. A further description of these investment techniques, including the
limitations on their use, is contained in the Statement of Additional
Information.
The Fund's use of options and futures contracts would subject the Fund
to certain investment risks and transactions cost to which it might not
otherwise be subject. These risks include: (1) dependence on the Adviser's
ability to predict movements in the prices of individual securities or
currencies and fluctuations in the general securities or currency markets; (2)
imperfect correlation between movements in the prices of options, futures
contracts or related options and movements in the price of the securities or
currencies hedged or used for cover; (3) the fact that skills and techniques
needed to trade these instruments are different from those needed to select the
other securities in which the Fund invests; (4) lack of assurance that a liquid
secondary market will exist for any particular instrument at any particular
time; (5) the possible need to defer closing out of certain options, futures
contracts and related options to avoid adverse tax consequences and (6) the
potential for unlimited loss when investing in futures contracts. Other risks
include the inability of the Fund, as the writer of covered call options, to
benefit from the appreciation of the underlying securities above the exercise
price and the possible loss of the entire premium paid for options purchased by
the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may purchase
securities offered on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When such transactions are negotiated, the
price or yield is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a
6
<PAGE>
later date. The purchase of securities on a when-issued or forward commitment
basis enables the Fund to hedge against anticipated changes in interest rates
and prices. If the Adviser were to forecast incorrectly the direction of
interest rate movements, the Fund might be required to complete its when-issued
or forward commitment transactions at prices below current market values. In
other words, the Fund may have paid more for the securities than the securities
are worth on the date the Fund fulfills its commitment.
TEMPORARY DEFENSIVE POSITION. When the Adviser believes that business
or financial conditions warrant, the Fund may assume a temporary defensive
position. For temporary defensive purposes, the Fund may invest without limit in
cash or in investment grade cash equivalents, including (i) short-term
obligations issued or guaranteed by the United States Government, its agencies
or instrumentalities ("U.S. Government Securities"), (ii) prime quality
certificates of deposit, bankers' acceptances and interest-bearing savings
deposits of commercial banks doing business in the United States, (iii) prime
quality commercial paper, and (iv) repurchase agreements covering any of the
securities in which the Fund may invest directly, and, subject to the limits of
the Investment Company Act of 1940 (the "Investment Company Act,") money market
mutual funds. During periods when and to the extent that the Fund has assumed a
temporary defensive position, it will not be pursuing its investment objective.
GENERAL
PORTFOLIO TRANSACTIONS. The frequency of portfolio transactions (the
portfolio turnover rate) will vary from year to year depending on market
conditions. From time to time the Fund may engage in active short-term trading
to take advantage of price movements affecting individual issues, groups of
issues or markets. This will increase the Fund's rate of turnover and will
result in higher total brokerage costs for the Fund. An annual turnover rate of
100% would occur, for example, if all of the securities in the Fund were
replaced once in a period of one year. The Adviser weighs the anticipated
benefits of short-term investments against these consequences.
The Fund has no obligation to deal with any specific broker or dealer
in the execution of portfolio transactions. Consistent with its policy of
obtaining the best net results, the Fund may conduct brokerage transactions
through certain affiliates of the Adviser. The Board of Trustees of the Trust
has adopted policies to ensure that these transactions are reasonable and fair
and that the commissions charged are comparable to those charged by
non-affiliated qualified broker-dealers.
CHANGES IN INVESTMENT OBJECTIVE AND POLICIES. The investment objective
of the Fund is a fundamental policy of the Fund and, along with any other
policies of the Fund that are deemed to be fundamental, may not be changed
without approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. A majority of the Fund's
outstanding voting securities means the lesser of 67% of the shares of the Fund
present or represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Fund are present or represented or more than 50% of
the outstanding shares of the Fund. Except as otherwise indicated, investment
policies of the Fund are not deemed to be fundamental and may be changed by the
Board of Trustees without shareholder approval. A further description of the
Fund's investment policies is contained in the Statement of Additional
Information.
INVESTMENT LIMITATIONS. The Fund has adopted the following investment
limitations which, except for (5), are fundamental policies of the Fund.
Additional fundamental and nonfundamental limitations are listed in the
Statement of Additional Information. The Fund may not:
(1) Borrow money, except the Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets.
(2) Make loans to other persons except for loans of portfolio
securities, through the use of repurchase agreements, and through the purchase
of
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debt securities that are otherwise permitted investments.
(3) Purchase the securities of issuers (other than U.S. Government
Securities) conducting their business activity in the same industry if,
immediately after such purchase, the value of investments in such industry would
comprise 25% or more of the value of the Fund's total assets.
(4) Purchase a security if, as a result (a) more than 5% of the Fund's
total assets would be invested in the securities of a single issuer, or (b) the
Fund would own more than 10% of the outstanding voting securities of a single
issuer. This limitation applies only with respect to 75% of the Fund's total
assets and does not apply to U.S. Government Securities.
(5) Invest more than 15% of its net assets in securities that are not
readily marketable, including repurchase agreements maturing in more than seven
days.
If a percentage restriction on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from a change in the market values of the Fund's assets
or redemptions of Fund shares will not be considered a violation of the
limitation.
4. MANAGEMENT
The business of the Trust is managed under the direction of the Board
of Trustees. The Board formulates the general policies of the Fund and generally
meets quarterly to review the results of the Fund, monitor investment practices
and discuss other matters affecting the Fund and the Trust.
INVESTMENT ADVISER
Oak Hall(R) Capital Advisors, L.P. is the investment adviser of the
Fund pursuant to an Investment Advisory Agreement with the Trust. Subject to the
general control of the Board of Trustees, the Adviser makes investment decisions
for the Fund. For its services under the Advisory Agreement, the Adviser
receives an advisory fee at an annual rate of 0.75% of the average daily net
assets of the Fund. The Adviser's fees are accrued daily and paid monthly. The
Adviser, in its sole discretion, may waive all or any portion of its advisory
fee. Any waiver would have the effect of increasing the Fund's yield for the
period during which the waiver was in effect and would not be recouped by the
Adviser at a later date.
Ed Cimilluca, President and Chief Investment Officer of the Adviser,
has been the Fund's portfolio manager since January 1, 1997. Prior to his
association with the Adviser, Mr. Cimilluca was Director of Research at J. & W.
Seligman and prior thereto was a Managing Director of Lehman Brothers, Inc. Mr.
Cimilluca has approximately 25 years in the investment management business. His
approach to investing is consistent with the Fund's emphasis on value investing
in out-of-favor sectors of the market.
The Adviser, which is located at 24th Floor, 122 East 42nd Street, New
York, New York 10168, is a registered investment adviser and provides investment
management services to pension plans, endowment funds, institutional and
individual accounts. As of the date of this Prospectus, the Adviser had
approximately $117 million of assets under management. The Adviser was
incorporated under the laws of the State of New York in 1984 and is a wholly
owned subsidiary of American Securities Holding Corporation ("ASHC"). ASHC is
wholly owned by a trust, the beneficiaries of which are members of the William
Rosenwald family.
ADMINISTRATION
On behalf of the Fund, the Trust has entered into an Administration
Agreement with FAS. As provided in this agreement, FAS is responsible for the
supervision of the overall management of the Trust (including the Trust's
receipt of services which the Trust is obligated to pay for), providing the
Trust with general office facilities and providing persons satisfactory to the
Board of Trustees to serve as officers of the Trust. For these services, FAS
receives a fee computed and paid monthly at an annual rate of 0.25% of the
average daily net assets of the Fund. Like the Adviser, FAS, in its sole
discretion, may waive all or any portion of its fees. FAS was organized under
the laws of the State of Delaware on December 29, 1995 and as of the date
hereof, FAS and FFSI provided management, administrative and
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distribution services to registered investment companies and collective
investment funds with assets of approximately $18 billion.
DISTRIBUTION
Pursuant to a Distribution Agreement, FFSI acts as the distributor of
the Fund's shares. Under a distribution plan (the "Plan") adopted by the Board
of Trustees, the Fund may reimburse FFSI for the distribution expenses incurred
by FFSI on behalf of the Fund. These expenses may include the cost of
advertising and promotional materials, providing prospective shareholders with
the Fund's prospectus, statement of additional information and shareholder
reports, reimbursing the Adviser for its distribution expenses and compensating
others who may provide assistance in distributing shares of the Fund. These
expenses may include costs of FFSI's offices such as rent, communications
equipment, employee salaries and overhead costs. The Fund will not reimburse
FFSI for any expenses in any fiscal year of the Fund in excess of 0.20% of the
Fund's average daily net assets. During the period in which the Plan and the
related Distribution Agreement are in effect, the Board of Trustees will from
time to time determine the amount of distribution expense reimbursement to be
paid. Unreimbursed expenses of FFSI incurred during a fiscal year of the Trust
may not be reimbursed by the Trust in future years or after the termination of
the Plan or the Distribution Agreement.
FFSI is a registered broker-dealer and investment adviser and is a
member of the National Association of Securities Dealers, Inc.
TRANSFER AGENT
The Trust has entered into a Transfer Agency Agreement with Forum
Financial Corp. (the "Transfer Agent") pursuant to which the Transfer Agent acts
as the Fund's transfer agent and dividend disbursing agent. The Transfer Agent
maintains for each shareholder of record, an account (unless such accounts are
maintained by sub-transfer agents) to which all shares purchased are credited,
together with any distributions that are reinvested in additional shares. The
Transfer Agent also performs other transfer agency functions and acts as
dividend disbursing agent for the Trust. Pursuant to an agreement with the
Trust, Forum Accounting Services, LLC ("FAcS") performs portfolio accounting
services for the Fund, including determination of the Fund's net asset value. As
of the date of this Prospectus, each of FAS, FFSI, the Transfer Agent and FAcS
was controlled by John Y. Keffer, President and Chairman of the Trust and each
was located at Two Portland Square, Portland, Maine 04101.
EXPENSES OF THE TRUST
The Adviser has agreed to reimburse the Trust for certain of the Fund's
operating expenses (exclusive of interest, taxes, brokerage, fees and
organization expenses, all to the extent permitted by applicable state law or
regulation) which in any year exceed the limits prescribed by any state in which
the Fund's shares are qualified for sale. The Trust may elect not to qualify its
shares for sale in every state. For the purpose of this obligation to reimburse
expenses, the Fund's annual expenses are estimated and accrued daily, and any
appropriate estimated payments will be made by the Adviser monthly. Subject to
the above obligations, the Trust has confirmed its obligation to pay all the
Trust's other expenses. The Adviser, FAS, the Transfer Agent and FAcS may each
elect to waive (or continue to waive) all or a portion of their fees, which are
accrued daily and paid monthly. Fee waivers are voluntary and may be reduced or
eliminated at any time. The Fund's expenses comprise Trust expenses attributable
to the Fund, which are charged to the Fund, and those not attributable to a
particular fund of the Trust which are allocated among the Fund and all other
funds of the Trust in proportion to their average net assets.
5. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL
PURCHASES. Fund shares may be purchased without a sales charge at their net
asset value next determined on any weekday except days when the New York Stock
Exchange is closed, normally, New Year's Day, Dr. Martin Luther King Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and
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Christmas ("Fund Business Day"). See "Other Information _ Determination of Net
Asset Value."
Fund shares are issued after an order in proper form, accompanied by
funds on deposit at a Federal Reserve Bank ("Federal Funds"), is received by the
Transfer Agent. An investor's funds will not be accepted or invested by the Fund
during the period before the Fund's receipt of Federal Funds. The Fund's net
asset value is calculated at 4:00 p.m., Eastern time on each Fund Business Day.
Fund shares become entitled to receive dividends on the day after the shares are
issued to an investor.
The Fund reserves the right to reject any subscription for the purchase
of its shares and may, in the Adviser's discretion, accept portfolio securities
in lieu of cash as payment for Fund shares. Stock certificates are issued only
to shareholders of record upon their written request, and no certificates are
issued for fractional shares.
REDEMPTIONS. There is no redemption charge, no minimum period of
investment, and no restriction on frequency of redemptions. The date of payment
of redemption proceeds may not be postponed for more than seven days after
shares are tendered to the Transfer Agent for redemption by a shareholder of
record. The right of redemption may not be suspended except in accordance with
the Investment Company Act.
Redemptions are effected at a price equal to the net asset value per
share next determined following acceptance by the Transfer Agent of the
redemption order in proper form (and any supporting documentation which the
Transfer Agent may require). Shares redeemed are not entitled to participate in
dividends declared after the day on which a redemption becomes effective.
PURCHASE AND REDEMPTION PROCEDURES
Investors may obtain the account application necessary to open an
account by writing the Transfer Agent at the following address:
Oak Hall(R) Equity Fund
P.O. Box 446
Portland, Maine 04112
There is a $10,000 minimum for initial investments in the Fund and a
$5,000 minimum for subsequent purchases, except for individual retirement
accounts (See "Individual Retirement Accounts"). Shareholders will receive from
the Trust periodic statements listing account activity during the statement
period.
The Fund sells and redeems its shares on a continuing basis at their
net asset value next determined following the receipt by the Transfer Agent of a
purchase or redemption order in proper form including, in the case of purchases,
Federal Funds. An investor's funds will not be accepted or invested by the Fund
during the period before the Fund's receipt of Federal Funds.
INITIAL PURCHASE OF SHARES
MAIL. Investors may send a check made pay-
able to the Trust along with a completed account application to the Transfer
Agent at the following address:
Oak Hall(R) Equity Fund
P.O. Box 446
Portland, Maine 04112
Checks are accepted at full value subject to collection. Payment by a
check drawn on any member of the Federal Reserve System can normally be
converted into Federal Funds within two business days after receipt of the
check. Checks drawn on some non-member banks may take longer.
BANK WIRE. To make an initial investment in the Fund using the fedwire
system for transmittal of money among banks, an investor should first telephone
the Transfer Agent at 207-879-0001 to obtain an account number for an initial
investment. The investor should then instruct a member commercial bank to wire
his money immediately to:
BankBoston
Boston, Massachusetts
ABA # 011000390
For Credit to: Forum Financial Corp.
Account # 541-54171
Oak Hall Equity Fund
(Investor's Name)
(Investor's Account Number)
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The investor should then promptly complete and mail the account
application.
Any investor planning to wire funds should instruct his bank early in
the day so the wire transfer can be accomplished the same day. There may be a
charge by the investor's bank for transmitting the money by bank wire, and there
also may be a charge for use of Federal Funds. The Trust does not charge
investors for the receipt of wire transfers. Payment in the form of a bank wire
received prior to 4:00 p.m., Eastern time on a Fund Business Day will be treated
as a Federal Funds payment received before that time.
THROUGH BROKERS AND OTHER FINANCIAL INSTITUTIONS. Shares may be
purchased and redeemed through brokers and other financial institutions that
have entered into sales agreements with Forum. These institutions may charge
their customers a fee for their services and are responsible for promptly
transmitting purchase, redemption and other requests to the Trust. The Trust is
not responsible for the failure of any institution to promptly forward these
requests or otherwise carry out its obligations to its customers.
Investors who purchase shares will be subject to the procedures of
their institution, which may include charges, limitations, investment minimums,
cutoff times and restrictions in addition to, or different from, those
applicable to shareholders who invest in the Fund directly. Certain shareholder
services may not be available to shareholders who have purchased through a
broker-dealer or other institution. These investors should acquaint themselves
with their institution's procedures and should read this Prospectus in
conjunction with any materials and information provided by their institution.
Customers who purchase Fund shares in this manner may or may not be the
shareholder of record and, subject to their institution's and the Fund's
procedures, may have Fund shares transferred into their name. There is typically
a one to five day settlement period for purchases and redemptions through
broker-dealers.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases may be made by mailing a check or by sending a
bank wire as indicated above. Shareholders using the wire system for subsequent
purchases should first telephone the Transfer Agent at 207-879-0001 to notify it
of the wire transfer. All payments should clearly indicate the shareholder's
name and account number.
REDEMPTION OF SHARES
Redemption requests will not be effected unless any check used for
investment has been cleared by the shareholder's bank, which may take up to 15
calendar days. This delay may be avoided by investing in the Fund through wire
transfers. Normally redemption proceeds are paid immediately following any
redemption, but in no event later than seven days after redemption, by check
mailed to the shareholder of record at his record address. Shareholders that
wish to redeem shares by Telephone or by Bank Wire must elect these options by
properly completing the appropriate sections of their account application. These
privileges may not be available until several weeks after a shareholder's
application is received. Shares for which certificates have been issued may not
be redeemed by telephone. These privileges may be modified or terminated by the
Trust at any time. Due to the cost to the Trust of maintaining smaller accounts,
the Trust reserves the right to redeem, upon not less than 60 days' written
notice, all shares in any Fund account with an aggregate net asset value of less
than $10,000 ($2,000 for IRAs). The Fund will not redeem accounts that fall
below these amounts solely as a result of a reduction in net asset value.
REDEMPTION BY MAIL. Shareholders may make a redemption in any amount by
sending a written request to the Transfer Agent accompanied by any stock
certificate that may have been issued to the shareholder. All certificates
submitted for redemption must be endorsed by the shareholder with signature
guaranteed and all written requests for redemption must be signed by the
shareholder with signature guaranteed.
When a signature guarantee is called for, including any instruction to
change the record name or address, the designated bank account, the dividend
election, or the telephone redemption option election on an account, the
shareholder should have
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"Signature Guaranteed" stamped under his signature and signed by a commercial
bank or trust company, a broker, dealer or securities exchange, a credit union
or a savings association that is authorized to guarantee signatures.
TELEPHONE REDEMPTION. A shareholder that has elected telephone
redemption privileges may make a telephone redemption request by calling the
Transfer Agent at 207-879-0001. In an effort to prevent unauthorized or
fraudulent redemption requests by telephone, the Trust and the Transfer Agent
will employ reasonable procedures to confirm that such instructions are genuine.
Shareholders must provide the Transfer Agent with the shareholder's account
number, the exact name in which the shares are registered and some additional
form of identification such as a password. The Trust or the Transfer Agent may
employ other procedures such as recording certain transactions. If such
procedures are followed, neither the Transfer Agent nor the Trust will be liable
for any losses due to unauthorized or fraudulent redemption requests.
Shareholders should verify the accuracy of telephone instructions immediately
upon receipt of confirmation statements.
During times of drastic economic or market changes, the telephone
redemption privilege may be difficult to implement. In the event a shareholder
is unable to reach the Transfer Agent by telephone requests may be mailed or
hand-delivered to the Transfer Agent. In response to the telephone redemption
instruction, the Fund will mail a check to the shareholder's record address or,
if the shareholder has elected wire redemption privileges, wire the proceeds.
Shares for which certificates have been issued may not be redeemed by telephone.
BANK WIRE REDEMPTION. With respect to any redemption of more than
$10,000, a shareholder who has elected wire redemption privileges may request
the Fund to transmit the proceeds by Federal Funds wire to a bank account
designated on the shareholder's account application. To request bank wire
redemptions by telephone, the shareholder also must have elected to be able to
redeem shares by telephone.
OTHER REDEMPTION MATTERS. The Transfer Agent will deem a shareholder's
account "lost" if correspondence to the shareholder's address of record is
returned for six months, unless the Transfer Agent determines the shareholder's
new address. When an account is deemed lost all distributions on the account
will be reinvested in additional shares of the Fund. In addition, the amount of
any outstanding (unpaid for six months or more) checks for distributions that
have been returned to the Transfer Agent will be reinvested and the checks will
be canceled.
INDIVIDUAL RETIREMENT ACCOUNTS
The Fund may be a suitable investment vehicle for part or all of the
assets held in individual retirement accounts ("IRAs"). The minimum initial
investment for investors opening an IRA or investing through their own IRA is
$2,000, and the minimum subsequent investment is $250. Individuals may make
tax-deductible IRA contributions of up to a maximum of $2,000 annually. However,
the deduction will be reduced if the individual or, in the case of a married
individual either the individual or the individual's spouse is an active
participant in an employer-sponsored retirement plan and the individual (or, in
certain cases, the married couple) has adjusted gross income above certain
levels.
6. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared and paid
annually. Net capital gains realized by the Fund, if any, also will be
distributed annually. Shareholders may choose either to have all dividends
reinvested in additional shares of the Fund or received in cash or to have
dividends of net capital gain reinvested in additional shares of the Fund and
dividends of net investment income paid in cash. All dividends are treated in
the same manner for Federal income tax purposes whether received in cash or
reinvested in shares of the Fund. All dividends are reinvested unless another
option is selected. Income dividends will be reinvested at the Fund's net asset
value as of the last day of the period with respect to which the dividends are
paid and capital gains dividends will be reinvested at the net asset value of
the Fund on the payment date for the dividend. Cash payments may be made more
than seven days following the date on which dividends would otherwise be
reinvested.
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TAXES
The Fund intends to continue to qualify for each fiscal year to be
taxed as a "regulated investment company" under the Internal Revenue Code of
1986 (the "Code"). As such, the Fund will not be liable for Federal income and
excise taxes on the net investment income and capital gains distributed to its
shareholders in accordance with the applicable provisions of the Code. The Fund
intends to distribute all of its net income and net capital gains each year.
Accordingly, the Fund should thereby avoid all Federal income and excise taxes.
Dividends paid by the Fund out of its net investment income (including
realized net short term capital gains) are taxable to the shareholders of the
Fund as ordinary income notwithstanding that such dividends are reinvested in
additional shares of the Fund. Distributions of net long-term capital gains, if
any, realized by the Fund are taxable to the shareholders as long-term capital
gains, regardless of the length of time the shareholder may have held his shares
in the Fund at the time of distribution. A portion of the Fund's dividends may
qualify for the dividends received deduction available to corporations.
If a shareholder holds shares for six months or less and during that
period receives a distribution taxable to him as a long-term capital gain, any
loss realized on the sale of his shares during that six-month period would be a
long- term loss to the extent of the distribution. Distributions to shareholders
will be treated in the same manner for Federal income tax purposes whether
received in cash or reinvested in additional shares of the Fund.
Any dividend or distribution received by a shareholder on shares of the
Fund will have the effect of reducing the net asset value of his shares by the
amount of the dividend or distribution. Furthermore, a dividend or distribution
made shortly after the purchase of shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to him as
described above.
The Fund is required by Federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions and
redemptions) paid to a non-corporate shareholder unless such shareholder
certifies in writing that the social security or tax identification number
provided is correct and that the shareholder is not subject to backup
withholding for prior underreporting to the Internal Revenue Service.
Reports containing appropriate information with respect to the Federal
income tax status of dividends and distributions paid during the year by the
Fund will be mailed to shareholders shortly after the close of each year.
7. OTHER INFORMATION
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of
4:00 P.M., Eastern time, on each Fund Business Day by dividing the value of the
Fund's net assets (I.E., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the number of shares outstanding at the time the determination
is made. Securities owned by the Fund for which market quotations are readily
available are valued at current market value, or, in their absence, at fair
value as determined by the Board of Trustees. Purchases and redemptions will be
effected at the time of determination of net asset value next following the
receipt of any purchase or redemption order as described under "Purchases and
Redemptions of Shares."
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and
assumed the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996,
Forum Funds, Inc. was reorganized as a Delaware business trust under the name
Forum Funds. The Trust has an unlimited number of authorized shares of
beneficial interest. The Board may, without shareholder approval, divide the
authorized shares into an unlimited number of separate portfolios or series
(such as the Fund) and may in the future divide portfolios or series into two or
more classes of shares (such as Investor and Institutional Shares). Currently
the authorized shares of the Trust are divided into 15 separate series. Prior to
November 25, 1996, the Fund was a separate portfolio named Oak Hall(R) Equity
Fund of Stone Bridge Funds, Inc., a Maryland corporation.
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Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
From time to time, certain shareholders may own a large percentage of
the shares of the Fund. Accordingly, those shareholders may be able to greatly
affect (if not determine) the outcome of a shareholder vote.
PERFORMANCE INFORMATION
The Fund's performance may be quoted in advertising in terms of yield
or total return. Both types of performance are based on the Fund's historical
results and are not intended to indicate future performance. The Fund's yield is
a way of showing the rate of income the Fund earns on its investments as a
percentage of the Fund's share price. To calculate yield, the Fund takes the
interest income it earned from its portfolio of investments for a 30 day period
(net of expenses), divides it by the average number of shares entitled to
receive dividends, and expresses the result as an annualized percentage rate
based on the Fund's share price at the beginning of the 30 day period. The
Fund's total return shows its overall change in value, including changes in
share price and assuming all the Fund's distributions are reinvested. A
cumulative total return reflects the Fund's performance over a stated period of
time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Fund's performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in the Fund's returns, shareholders
should recognize that they are not the same as actual year-by-year results. To
illustrate the components of overall performance, the Fund may separate its
cumulative and average annual returns into income results and capital gain or
loss.
The Fund's advertisements may refer to ratings and rankings among
similar funds by independent evaluators such as Morningstar, Lipper Analytical
Services, Inc. or CDA/Weisenberger. In addition, the performance of the Fund may
be compared to recognized indices or market performance. The comparative
material found in the Fund's advertisements, sales literature or reports to
shareholders may contain performance ratings. These are not to be considered
representative or indicative of future performance.
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APPENDIX
OPTIONS ON EQUITY SECURITIES (sometimes referred to as stock options) -
A call option is a short-term contract pursuant to which the purchaser of the
call option, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. A put option
gives its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying
security, upon exercise at the exercise price during the option period.
OPTIONS ON STOCK INDEXES - A stock index assigns relative values to the
stock included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional stock options except that exercises of stock
index options are effected with cash payments and do not involve delivery of
securities. Thus, upon exercise of a stock index options, the purchaser will
realize and the writer will pay an amount based on the differences between the
exercise price and the closing price of the stock index.
FOREIGN CURRENCY OPTIONS - A foreign currency option operates in the
same manner as an option on securities. Options on foreign currencies are
primarily traded in the over-the-counter market.
STOCK INDEX FUTURES CONTRACTS - A stock index futures contract is a
bilateral agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of trading of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the stocks comprising the index is made.
Generally contracts are closed out prior to the expiration date of the contract.
FOREIGN CURRENCY FUTURES CONTRACTS - A foreign currency futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of a quantity of a foreign currency called for in a contract at a
specified future time and at a specific price. Although these contracts call for
delivery of or acceptance of the foreign currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery.
OPTIONS ON FUTURES CONTRACTS - Options on futures contracts are similar
to stock options except that an option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
(The following paragraph is in a box.)
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.
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FORUM FUNDS
DAILY ASSETS TREASURY FUND
DAILY ASSETS GOVERNMENT FUND
DAILY ASSETS CASH 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, 1997
This Statement of Additional Information supplements the Prospectus dated August
1, 1997 offering shares of Daily Assets Treasury Fund, Daily Assets Government
Fund and Daily Assets Cash Fund, three portfolios of the Trust, and should be
read only in conjunction with that 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. General
2. Investment Policies
3. Investment Limitations
4. Investment by Financial Institutions
5. Performance Data
6. Management
7. Determination of Net Asset Value
8. Portfolio Transactions
9. Additional Purchase and
Redemption Information
10. Taxation
11. Other Information
12. Financial Statements
Appendix A - Description of Securities Ratings
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
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1. GENERAL
THE TRUST. The Trust is registered with the SEC as an open-end, management
investment company and was organized as a business trust under the laws of the
State of Delaware on August 29, 1995. On January 5, 1996 the Trust succeeded to
the assets and liabilities of Forum Funds, Inc. 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. The Trust currently
offers shares of fifteen series and has three series that have not commenced
operation as of the date of this SAI. The series of the Trust are as follows:
Investors Stock Fund
Investors Bond Fund
TaxSaver Bond Fund
Daily Assets Cash Fund
Daily Assets Treasury Fund
Daily Assets Government Fund
Daily Assets Tax Saver Fund
Payson Value Fund
Payson Balanced Fund
Maine Municipal Bond Fund
New Hampshire Bond Fund
Austin Global Equity Fund
Oak Hall Equity Fund
Quadra International Equity Fund
Quadra Limited Maturity Treasury Fund
Quadra Opportunistic Bond Fund
Quadra Value Equity Fund
Core Portfolio Plus
DEFINITIONS. As used in this Statement of Additional Information, the following
terms shall have the meanings listed:
"Adviser" means Forum Advisors as Linden, as applicable.
"Board" means the Board of Trustees of Forum Funds.
"Core Trust" means Core Trust (Delaware), a Delaware business trust.
"Core Trust Board" means the Board of Trustees of Core Trust (Delaware).
"FAS" means Forum Administrative Services, LLC
"FFC" means Forum Financial Corp.
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"FFSI" means Forum Financial Services, Inc.
"Forum Advisors" means Forum Advisors, Inc.
"Fund" means Daily Assets Treasury Fund, Daily Assets Government Fund or Daily
Assets Cash Fund.
"Fund Business Day" has the meaning ascribed thereto in the current Prospectus
of the Funds.
"Linden" means Linden Asset Management, Inc.
"NRSRO" means a nationally recognized statistical rating organization.
"Portfolio" means Treasury Portfolio, Government Cash Portfolio or Cash
Portfolio, each a portfolio of Core Trust.
"SAI" means this Statement of Additional Information.
"SEC" means the U.S. Securities and Exchange Commission.
"Subadviser" means Forum Advisors or Linden, as applicable, when acting as
investment subadviser to a Portfolio.
"Trust" means Forum Funds, a Delaware business trust.
"U.S. Government Securities" has the meaning ascribed thereto by the current
Prospectus of the Funds.
"1940 Act" means the Investment Company Act of 1940, as amended.
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2. INVESTMENT POLICIES
Each Fund currently seeks to achieve its investment objective by investing all
of its investable assets in its corresponding Portfolio of Core Trust. The
corresponding Portfolios of Daily Assets Treasury Fund, Daily Assets Government
Fund and Daily Assets Cash Fund, respectively, are Treasury Portfolio,
Government Cash Portfolio and Cash Portfolio. Following is information
pertaining to the investment policies of the Portfolios, which supplements the
investment policy information contained in the Funds' Prospectus.
Each Fund has a fundamental investment policy that allows it to invest all of
its investable assets in its corresponding Portfolio. All other investment
policies of each Fund and its corresponding Portfolio are identical. Therefore,
although this and the following sections provide supplemental information
regarding the investment policies of the Portfolios (and the responsibilities of
the Core Trust Board), they apply equally to the investment policies of the
Funds (and the responsibilities of the Board). Information with respect to Daily
Assets Treasury Fund for periods prior to December 5, 1995 (for instance,
investment advisory fees paid), the date that Fund began investing in Treasury
Portfolio, reflects information with respect to the Fund and the Fund's direct
investment in securities.
Debt 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.
Each Portfolio invests at least 95% of its total assets in securities in the
highest rating category (as determined pursuant to Rule 2a-7 under the 1940
Act).
Government Cash Portfolio and Cash Portfolio currently are prohibited from
purchasing any security issued by the Federal Home Loan Mortgage Corporation.
This does not prohibit the Portfolios from entering into repurchase agreements
collateralized with securities issued by the Federal Home Loan Mortgage
Corporation.
Except for U.S. Government Securities and to the limited extent otherwise
permitted by Rule 2a-7 under the 1940 Act, the Portfolios may not invest more
than five percent of their total assets in (i) the securities of any one issuer
or (ii) securities that are rated (or are issued by an issuer with comparable
outstanding short-term debt that is rated) in the second highest rating category
or are unrated and determined by an Adviser to be of comparable quality.
RATINGS AS INVESTMENT CRITERIA. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P") and other NRSROs are private services that
provide ratings of the credit quality of debt obligations. A description of the
higher quality ratings assigned to debt securities by several NRSROs is included
in Appendix A to this SAI. The Portfolios use these ratings in determining
whether to purchase, sell or hold a security. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices.
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Subsequent to its purchase by a Portfolio, an issue of securities may cease to
be rated or its rating may be reduced. A Portfolio's Adviser, and in certain
cases the Core Trust Board, will consider such an event in determining whether
the Portfolio should continue to hold the obligation. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to developments and events, so that
an issuer's current financial condition may be better or worse than the rating
indicates.
SMALL BUSINESS ADMINISTRATION SECURITIES. Each Portfolio (other than Treasury
Portfolio) may purchase securities issued by the Small Business Administration
("SBA"). SBA securities are variable rate securities that carry the full faith
and credit of the United States Government, and generally have an interest rate
that resets monthly or quarterly based on a spread to the Prime rate. SBA
securities generally have maturities at issue of up to 25 years. No Portfolio
may purchase an SBA security if, immediately after the purchase, (i) the
Portfolio would have more than 15% of its net assets invested in SBA securities
or (ii) either the unamortized premium or unaccreted discount on SBA securities
held by the Portfolio divided by the sum of the premium or discount securities'
par amount, respectively, would exceed 2.5% (0.025).
ADJUSTABLE RATE MORTGAGE BACKED SECURITIES
The Portfolios (other than Treasury Portfolio) may purchase adjustable rate
mortgage backed or other asset backed securities (such as SBA securities) that
are U.S. Government Securities. Treasury Cash Portfolio may purchase mortgage
backed or asset backed securities that are U.S. Treasury Securities. These types
of securities directly or indirectly represent a participation in, or are
secured by and payable from, adjustable rate mortgages or other loans which may
be secured by real estate or other assets. Unlike traditional debt instruments,
payments on these securities include both interest and a partial payment of
principal. Prepayments of the principal of underlying loans may shorten the
effective maturities of these securities. Some adjustable rate securities (or
the underlying loans) are subject to caps or floors that limit the maximum
change in interest rate during a specified period or over the life of the
security.
Adjustable rate mortgage backed securities ("MBSs") are securities that have
interest rates that are reset at periodic intervals, usually by reference to
some interest rate index or market interest rate. MBSs represent interests in
pools of mortgages made by lenders such as commercial banks, savings
associations, mortgage bankers and mortgage brokers and may be issued by
governmental or government-related entities or by non-governmental entities such
as commercial banks, savings associations, mortgage bankers and other secondary
market issuers.
MBSs differ from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates in that MBSs provide periodic payments which
consist of interest and, in most cases, principal. In effect, these payments are
a "pass-through" of the periodic payments and optional prepayments made by the
individual borrowers on their mortgage loans, net of any fees paid to the issuer
or guarantor of such securities. Additional payments to holders of MBSs are
caused by prepayments resulting from the sale of the underlying property or the
refinancing or foreclosure of the underlying
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mortgage loans. Such prepayments may significantly shorten the effective
maturities of MBSs, and occur more often during periods of declining interest
rates.
Although the rate adjustment feature of MBSs may act as a buffer to reduce sharp
changes in the value of MBSs, these securities are still subject to changes in
value based on changes in market interest rates or changes in the issuer's
creditworthiness. Because the interest rate is reset only periodically, changes
in the interest rate on MBSs may lag behind changes in prevailing market
interest rates. Also, some MBSs (or the underlying mortgages) are subject to
caps or floors that limit the maximum change in interest rate during a specified
period or over the life of the security.
During periods of declining interest rates, income to the Portfolios derived
from mortgages which are not prepaid will decrease as the coupon rate resets
along with the decline in interest rates in contrast to the income on fixed-rate
mortgages, which will remain constant. At times, some of the MBSs in which the
Portfolios will invest will have higher-than-market interest rates, and will
therefore be purchased at a premium above their par value. Unscheduled
prepayments, which are made at par, will cause the Portfolios to suffer a loss
equal to the unamortized premium, if any.
During periods of rising interest rates, changes in the coupon rates of the
mortgages underlying the Portfolios' investments may lag behind changes in
market interest rates. This may result in a slightly lower value until the
coupons reset to market rates. Many MBSs in the Portfolios' portfolios will have
"caps" that 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
fluctuation in interest rates above these levels could cause these securities to
"cap out" and to behave more like fixed-rate debt securities.
The Portfolios may purchase collateralized mortgage obligations ("CMOs"), which
are collateralized by MBSs or by pools of conventional mortgages. CMOs are
typically structured with a number of classes or series that have different
maturities and are generally retired in sequence. 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 pre-payments of the obligations
comprising the collateral pool.
Since the inception of the mortgage-related pass-through security in 1970, the
market for these securities has expanded considerably. 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.
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Governmental or private entities may create new types of MBSs in response to
changes in the market or changes in government regulation of such securities. As
new types of these securities are developed and offered to investors, the
Adviser may, consistent with the investment objective and policies of a
Portfolio, consider making investments in such new types of securities.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY SECURITIES. Each Portfolio may
purchase securities on a when-issued or delayed delivery basis. In those cases,
the purchase price and the interest rate payable on the securities are fixed on
the transaction date and delivery and payment may take place a month or more
after the date of the transaction. At the time a Portfolio makes the commitment
to purchase securities on a when-issued or delayed delivery basis, the Portfolio
will record the transactions as a purchase and thereafter reflect the value each
day of such securities in determining its net asset value. If a Portfolio
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. Failure of an issuer
to deliver the security may result in the Portfolio incurring a loss or missing
an opportunity to make an alternative investment. When a Portfolio agrees to
purchase a security on a when-issued or delayed delivery basis, its custodian
will set aside and maintain in a segregated account cash, U.S. Government
Securities or other liquid assets with a market value at all times at least
equal to the amount of its commitment.
ILLIQUID SECURITIES. Each Portfolio may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
repurchase agreements not entitling the holder to payment of principal within
seven days and securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market.
The Core Trust Board has ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Core Trust Board has delegated
the function of making day-to-day determinations of liquidity to the Advisers
and, with respect to certain types of restricted securities which may be deemed
to be liquid, has adopted guidelines to be followed by the Advisers. The
Advisers take into account a number of factors in reaching liquidity decisions,
including but not limited to (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; (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; (5) whether the security is
registered; and (6) if the security is not traded in the United States, whether
it can be freely traded in a liquid foreign securities market. The Advisers
monitor the liquidity of the securities in each Portfolio's portfolio and report
periodically to the Core Trust Board.
Certificates of deposit and other fixed time deposits that carry an early
withdrawal penalty or mature in greater than seven days are treated by the
Portfolio as illiquid securities if there is no readily available market for the
instrument.
LENDING OF PORTFOLIO SECURITIES AND SECURITIES LENDING. In order to obtain
additional income, the Portfolios may from time to time lend securities from
their portfolio to brokers, dealers and
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financial institutions. Securities loans must be callable at any time and must
be continuously secured by collateral from the borrower in the form of cash or
U.S. Government Securities. The Portfolios receive fees in respect of securities
loans from the borrower or interest from investing the cash collateral. The
Portfolios may pay fees to arrange the loans. As a fundamental policy, Treasury
Portfolio, and as a nonfundamental policy, Government Cash Portfolio and Cash
Portfolio, may not lend portfolio securities in an amount greater than 33 1/3%
of the value of their total assets.
In connection with entering into repurchase agreements and securities loans, the
Portfolios require continual maintenance by the Trust's custodian of the market
value of the underlying collateral in amounts equal to, or in excess of, the
repurchase price plus the transaction costs (including loss of interest) that
the Portfolios could expect to incur upon liquidation of the collateral if the
counterparty defaults. The Portfolios' use of securities lending 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, a Portfolio might suffer a loss. Failure by the other party to
deliver a security purchased by a Portfolio may result in a missed opportunity
to make an alternative investment. The Adviser monitors the creditworthiness of
counterparties to these transactions under the Core Trust Board's general
supervision and pursuant to specific Core Trust Board adopted procedures and
intend to enter into these transactions only when they believe the
counterparties present minimal credit risks and the income to be earned from the
transaction justifies the attendant risks.
VARIABLE AND FLOATING RATE SECURITIES. The yield of variable and floating rate
securities varies in relation to changes in specific money market rates, such as
the Prime Rate. A "variable" interest rate adjusts at predetermined intervals
(for example, daily, weekly or monthly), while a "floating" interest rate
adjusts whenever a specified benchmark rate (such as the bank prime lending
rate) changes. These changes are reflected in adjustments to the yields of the
variable and floating rate securities, and different securities may have
different adjustment rates. Accordingly, as interest rates increase or decrease,
the capital appreciation or depreciation may be less on these obligations than
for fixed rate obligations. To the extent that the Portfolios invest in
long-term variable or floating rate securities, the Adviser believes that the
Portfolios may be able to take advantage of the higher yield that is usually
paid on long-term securities.
Cash Portfolio also may purchase variable and floating rate master notes of
corporations, which are unsecured obligations redeemable upon notice that permit
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangement with the issuer of the instrument. These obligations include
master demand notes that permit investment of fluctuating amounts at varying
rates of interest pursuant to direct arrangement with the issuer of the
instrument. The issuer of these obligations often has the right, after a given
period, to prepay their outstanding principal amount of the obligations upon a
specified number of days' notice. These obligations generally are not traded,
nor generally is there an established secondary market for these obligations. To
the extent a demand note does not have a seven day or shorter demand feature and
there is no readily available market for the obligation, it is treated as an
illiquid security.
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No Portfolio may purchase a variable or floating rate security whose interest
rate is adjusted based on a long-term interest rate or index, on two interest
rates or indexes, on an interest rate or index that materially lags short-term
market rates. All variable and floating rate securities purchased by a Portfolio
have an interest rate that is adjusted based on a single short-term rate or
index, such as the Prime Rate.
INVESTMENT COMPANY SECURITIES. In connection with managing their cash positions,
the Portfolios may invest in the securities of other investment companies within
the limits proscribed by the 1940 Act. Under normal circumstances, each
Portfolio intends to invest less than 5% of the value of its net assets in the
securities of other investment companies. In addition to a Portfolio's expenses
(including the various fees), as a shareholder in another investment company, a
Portfolio would bear its pro rata portion of the other investment company's
expenses (including fees).
ZERO-COUPON SECURITIES. All zero-coupon securities in which the Portfolios
invest will have a maturity of less than 13 months.
3. INVESTMENT LIMITATIONS
Fundamental investment limitations of a Fund or of a Portfolio cannot be changed
without the affirmative vote of the lesser of (i) more than 50% of the
outstanding interests of the respective Fund or Portfolio or (ii) 67% of the
shares of the Fund or Portfolio present or represented at an interestholders
meeting at which the holders of more than 50% of the outstanding interests of
the Fund or Portfolio are present or represented.
Except as required by the 1940 Act, if a 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 a
Portfolio's assets, the change in status of a security or purchases and
redemptions of shares will not be considered a violation of the limitation.
Each Fund has adopted the same fundamental and nonfundamental investment
limitations as its corresponding Portfolio. In addition, the Portfolios and the
Funds have adopted a fundamental policy which provides that, notwithstanding any
other investment policy or restriction (whether fundamental), the Portfolio or
Fund, as applicable, may invest all of its assets in the securities of a single
pooled investment fund having substantially the same investment objectives,
policies and restrictions as the Fund or Portfolio, as applicable.
DAILY ASSETS TREASURY FUND/TREASURY PORTFOLIO. Treasury Portfolio has adopted
the following fundamental investment limitations which are in addition to those
contained in Daily Assets Treasury Fund's Prospectus and which may not be
changed without shareholder approval. The Portfolio may not:
(1) With respect to 75% of its assets, purchase securities, other than U.S.
Government Securities, of any one issuer if more than 5% of the value
of the Portfolio's total assets would at the time of purchase be
invested in any one issuer.
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(2) Purchase securities, other than U.S. Government Securities, if more
than 25% of the value of the Portfolio's total assets would be invested
in securities of issuers conducting their principal business activity
in the same industry, provided that consumer finance companies and
industrial finance companies are considered to be separate industries
and that there is no limit on the purchase of the securities of
domestic commercial banks.
(3) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, the Portfolio may be deemed to be an underwriter for
purposes of the Securities Act of 1933.
(4) Purchase or sell real estate or any interest therein, except that the
Portfolio 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) 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.
(6) Borrow money, except for temporary or emergency purposes (including the
meeting of redemption requests). Total borrowings may not exceed 33
1/3% of the Portfolio's total assets and borrowing for purposes other
than meeting redemptions may not exceed 5% of the value of each the
Portfolio's total assets. Outstanding borrowings in excess of 5% of the
value of the Portfolio's total assets must be repaid before any
subsequent investments are made by the Portfolio.
(7) Issue senior securities except pursuant to Section 18 of the 1940 Act
and except that the Portfolio may borrow money subject to investment
limitations specified in the Portfolio's Prospectus.
(8) Make loans, except that the Portfolio may (i) purchase debt securities
which are otherwise permissible investments, (ii) enter into repurchase
agreements and (iii) lend portfolio securities.
(a) Purchase securities having voting rights, except the Portfolio may
invest in securities of other investment companies to the extent
permitted by the 1940 Act.
(b) 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.
(c) 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 Portfolio could invest.
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(d) Invest in or hold securities of any issuer if officers and Trustees of
the Trust or the Adviser, individually owning beneficially more than
1/2 of 1% of the securities of the issuer, in the aggregate own more
than 5% of the issuer's securities.
(e) Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
(9) 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.)
(10) Pledge, mortgage or hypothecate its assets, except to secure permitted
indebtedness. Collateralized loans of securities are not deemed to be
pledges or hypothecations for this purpose.
(11) Write put and call options.
(12) Invest for the purpose of exercising control over any person.
(13) Purchase restricted securities.
DAILY ASSETS GOVERNMENT FUND, DAILY ASSETS CASH FUND/GOVERNMENT CASH PORTFOLIO,
CASH PORTFOLIO. Government Cash Portfolio and Cash Portfolio have adopted the
following fundamental investment limitations which are in addition to those
contained in the Prospectus offering Daily Assets Government Fund and Daily
Assets Cash Fund and which may not be changed without shareholder approval.
Neither Portfolio may:
(1) With respect to 75% of its assets, purchase a security other than a
U.S. Government Security if, as a result, more than 5% of the
Portfolio's total assets would be invested in the securities of a
single issuer.
(2) Purchase securities if, immediately after the purchase, more than 25%
of the value of the Portfolio's total assets would be invested in the
securities of issuers having their principal business activities in
the same industry; provided, however, that there is no limit on
investments in U.S. Government Securities.
(3) Underwrite securities of other issuers, except to the extent that the
Portfolio 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
Portfolio may invest in debt obligations secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein.
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(5) 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.
(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 value of the Portfolio's total assets.
(7) Issue senior securities except as appropriate to evidence indebtedness
that the Portfolio is permitted to incur, and provided that the
Portfolio may issue shares of additional series or classes that the
Trustees may establish.
(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.
(9) With respect to Government Cash Portfolio, purchase or hold any
security that (i) a Federally chartered savings association may not
invest in, sell, redeem, hold or otherwise deal pursuant to law or
regulation, without limit as to percentage of the association's assets
and (ii) pursuant to 12 C.F.R. Section 566.1 would cause shares of the
Portfolio not to be deemed to be short term liquid assets when owned by
Federally chartered savings associations.
For purposes of limitation (2): (i) loan participations are considered to be
issued by both the issuing bank and the underlying corporate borrower; (ii)
utility companies are divided according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry); and (iii) financial service companies will be classified according to
the end users of their services, for example, automobile finance, bank finance
and diversified finance will each be considered a separate industry.
Government Cash Portfolio and Cash Portfolio have adopted the following
nonfundamental investment limitations that may be changed by the Core Trust
Board without shareholder approval. Each Portfolio may not:
(a) With respect to 100% of its assets, purchase a security other than a
U.S. Government Security if, as a result, more than 5% of the
Portfolio's total assets would be invested in the securities of a
single issuer, unless the investment is permitted by Rule 2a-7 under
the 1940 Act.
(b) Purchase securities for investment while any borrowing equaling 5% or
more of the Portfolio's total assets is outstanding; and if at any time
the Portfolio's borrowings exceed the Portfolio's investment
limitations due to a decline in net assets, such borrowings will be
promptly (within three days) reduced to the extent necessary to
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comply with the limitations. Borrowing for purposes other than meeting
redemption requests will not exceed 5% of the value of the Portfolio's
total assets. (c) Purchase securities that have voting rights, except
the Portfolio may invest in securities of other investment companies
to the extent permitted by the 1940 Act.
(d) 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.
(e) 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 Portfolio could invest), if as a result, more than 5% of
the value of the Portfolio's total assets would be so invested.
(f) Invest in or hold securities of any issuer other than the Portfolio if,
to the Portfolio's knowledge, those Trustees and officers of the Trust
or the Portfolio's investment adviser, individually owning beneficially
more than 1/2 of 1% of the securities of the issuer, in the aggregate
own more than 5% of the issuer's securities.
(g) Invest in oil, gas or other mineral exploration or development
programs, or leases, or in real estate limited partnerships; provided
that the Portfolio may invest in securities issued by companies engaged
in such activities.
(h) Acquire securities or invest in repurchase agreements with respect to
any securities if, as a result, more than 10% of the Portfolio'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 that are illiquid by virtue of legal or
contractual restrictions on resale or the absence of a readily
available market.
4. INVESTMENTS BY FINANCIAL INSTITUTIONS
INVESTMENT BY SHAREHOLDERS THAT ARE BANKS - DAILY ASSETS GOVERNMENT FUND.
Government Cash Portfolio invests only in instruments which, if held directly by
a bank or bank holding company organized under the laws of the United States or
any state thereof, would be assigned to a risk-weight category of no more than
20% under the current risk based capital guidelines adopted by the Federal bank
regulators (the "Guidelines"). In the event that the Guidelines are revised, the
Portfolio's portfolio will be modified accordingly, including by disposing of
portfolio securities or other instruments that no longer qualify under the
Guidelines. In addition, the Portfolio does not intend to hold in its portfolio
any securities or instruments that would be subject to restriction as to amount
held by a National bank under Title 12, Section 24 (Seventh) of the United
States Code. If the Portfolio's portfolio includes any instruments that would be
subject to a restriction as to amount held by a National bank, investment in the
Portfolio may be limited.
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The Guidelines provide that shares of an investment fund are generally assigned
to the risk-weight category applicable to the highest risk-weighted security or
instrument that the fund is permitted to hold. Accordingly, Portfolio shares
should qualify for a 20% risk weighting under the Guidelines. The Guidelines
also provide that, in the case of an investment fund whose shares should qualify
for a risk weighting below 100% due to limitations on the assets which it is
permitted to hold, bank examiners may review the treatment of the shares to
ensure that they have been assigned an appropriate risk-weight. In this
connection, the Guidelines provide that, regardless of the composition of an
investment fund's assets, shares of a fund may be assigned to the 100%
risk-weight category if it is determined that the fund engages in activities
that appear to be speculative in nature or has any other characteristics that
are inconsistent with a lower risk weighting. The Adviser has no reason to
believe that such a determination would be made with respect to the Portfolio.
Their are various subjective criteria for making this determination and,
therefore, it is not possible to provide any assurance as to how Portfolio
shares will be evaluated by bank examiners.
Before acquiring Fund shares, prospective investors that are banks or bank
holding companies, particularly those that are organized under the laws of any
country other than the United States or of any state, territory or other
political subdivision of the United States, and prospective investors that are
U.S. branches and agencies of foreign banks or Edge Corporations, should consult
all applicable laws, regulations and policies, as well as appropriate regulatory
bodies, to confirm that an investment in Fund Shares is permissible and in
compliance with any applicable investment or other limits.
Fund Shares held by National banks are generally required to be revalued
periodically and reported at the lower of cost or market value. Such shares may
also be subject to special regulatory reporting, accounting and tax treatment.
In addition, a bank may be required to obtain specific approval from its board
of directors before acquiring Fund shares, and thereafter may be required to
review its investment in a Fund for the purpose of verifying compliance with
applicable Federal banking laws, regulations and policies.
National banks generally must review their holdings of shares of a Fund at least
quarterly to ensure compliance with established bank policies and legal
requirements. Upon request, the Portfolios will make available to the Funds
investors information relating to the size and composition of their portfolio
for the purpose of providing Fund shareholders with this information.
INVESTMENT BY SHAREHOLDERS THAT ARE CREDIT UNIONS - DAILY ASSETS GOVERNMENT
FUND. Government Cash Portfolio limits its investments to investments that are
legally permissible for Federally chartered credit unions under applicable
provisions of the Federal Credit Union Act (including 12 U.S.C. Section 1757(7),
(8) and (15)) and the applicable rules and regulations of the National Credit
Union Administration (including 12 C.F.R. Part 703, Investment and Deposit
Activities), as such statutes and rules and regulations may be amended. The
Portfolio limits its investments to U.S. Government Securities (including
Treasury STRIPS) and repurchase agreements fully collateralized by U.S.
Government Securities. Certain U.S. Government Securities owned by Government
Cash Portfolio may be mortgage or asset backed, but, except to
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reduce interest rate risk, no such security will be (i) a stripped mortgage
backed security ("SMBS"), (ii) a collateralized mortgage obligation ("CMO") or
real estate mortgage investment conduit ("REMIC") that meets any of the tests
outlined in 12 C.F.R. Section 703.5(g) or (iii) a residual interest in a CMO or
REMIC. In order to reduce interest rate risk, Government Cash Portfolio may
purchase a SMBS, CMO, REMIC or residual interest in a CMO or REMIC but only in
accordance with 12 C.F.R. Section 703.5(i). Government Cash Portfolio has no
current intention to make any such investment. The Portfolio also may invest in
reverse repurchase agreements in accordance with 12 C.F.R. 703.4(e) to the
extent otherwise permitted hereunder and in the Prospectus.
INVESTMENTS BY SHAREHOLDERS THAT ARE SAVINGS ASSOCIATIONS - GOVERNMENT CASH
PORTFOLIO. Government Cash Portfolio limits its investments to investments that
are legally permissible for Federally chartered savings associations without
limit as to percentage under applicable provisions of the Home Owners' Loan Act
(including 12 U.S.C. Section 1464) and the applicable rules and regulations of
the Office of Thrift Supervision, as such statutes and rules and regulations may
be amended. In addition, the Portfolio limits its investments to investments
that are permissible for an open-end investment company to hold and would permit
shares of the investment company to qualify as liquid assets under 12 C.F.R.
Section 566.1(g) and as short-term liquid assets under 12 C.F.R. Section
566.1(h). These policies may be amended only by approval of the Portfolio's or
Fund's shareholders, as applicable.
5. PERFORMANCE DATA
YIELD INFORMATION. Each Fund may provide current annualized and effective
annualized yield quotations for each class based on its daily dividends. These
quotations may from time to time be used in advertisements, shareholder reports
or other communications to shareholders. All performance information supplied by
a Fund is historical and is not intended to indicate future returns.
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. or CDA/Wiesenberger or
other companies which track the investment performance of investment companies
("Fund Tracking Companies"). The Funds may also compare any of their performance
information with the performance of recognized stock, bond and other indices.
The Funds 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 a Fund and comparative mutual fund data and ratings
reported in independent periodicals, such as newspapers and financial magazines.
Any current yield quotation of a class of a Fund which is used in such a manner
as to be subject to the provisions of Rule 482(d) under the Securities Act of
1933, as amended, shall consist of an annualized historical yield, carried at
least to the nearest hundredth of one percent, based on a specific
seven-calendar-day period and shall be calculated by dividing the net change
during the seven-day period in the value of an account having a balance of one
share at the beginning of the period by the value of the account at the
beginning of the period, and multiplying the quotient by
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365/7. For this purpose, the net change in account value would reflect the value
of additional shares purchased with dividends declared on the original share and
dividends declared on both the original share and any such additional shares,
but would not reflect any realized gains or losses from the sale of securities
or any unrealized appreciation or depreciation on portfolio securities. In
addition, any effective annualized yield quotation used by a Fund shall be
calculated by compounding the current yield quotation for such period by adding
1 to the product, raising the sum to a power equal to 365/7, and subtracting 1
from the result.
Although published yield information is useful to investors in reviewing a
class' performance, investors should be aware that each Fund's yield fluctuates
from day to day and that the class' 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, Participating Organizations (as that term is used in
the Prospectus) may charge their customers direct fees in connection with an
investment in a Fund, which will have the effect of reducing the class' net
yield to those shareholders. The yields of a class 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 directly
to compare a Fund's yield information to similar information of investment
alternatives which are insured or guaranteed.
Income calculated for the purpose of determining a class' 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 class may differ from the rate of
distribution the class paid over the same period or the rate of income reported
in the Fund's financial statements.
With respect to Daily Assets Treasury Fund for the seven day period ended March
31, 1997, and with respect to Daily Assets Cash Fund, for the seven day period
ended February 28, 1997, the annualized yields of the classes of the Funds that
were then operating were as follows:
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
Daily Assets Treasury Fund
Institutional Shares 4.90% 5.01%
Daily Assets Cash Fund
Institutional Shares 4.96% 4.95%
Daily Assets Government Fund was not operational as of March 31, 1997.
OTHER PERFORMANCE AND SALES LITERATURE MATTERS. Total returns quoted in sales
literature reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions. Average annual returns
generally 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
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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 such periods
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
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.
OTHER ADVERTISING MATTERS. The Funds may advertise other forms of performance.
For example, average annual and cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions over any time period.
Total returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to illustrate the
relationship of the se factors and their contributions to total return. Any
performance information may be presented numerically or in a table, graph or
similar illustration.
A Fund may also include various information in its advertisements. Information
included in the Fund's advertisements may include, but is not limited to: (i)
the Fund's (or the Fund's corresponding Portfolios) portfolio holdings and
portfolio allocation as of certain dates, such as portfolio diversification by
instrument type, by instrument or by maturity, (ii) descriptions of the
portfolio managers of the Fund or the Fund's corresponding Portfolio and the
portfolio management staff of Linden or Forum Advisors or summaries of the views
of the portfolio managers with respect to the financial markets, (iii) the
results of a hypothetical investment in a Fund over a given number of years,
including the amount that the investment would be at the end of the period, (iv)
the effects of earning Federally and, if applicable, state tax-exempt income
from the Fund or investing in a tax-deferred account, such as an individual
retirement account and (v) the net asset value, net assets or number of
shareholders of a Fund as of one or more dates.
In connection with its advertisements a Fund may provide "shareholders' letters"
which serve to provide shareholders or investors an introduction into the
Fund's, the Portfolio's, the Trust's, the Core Trust's or any of the Trust's or
the Core Trust's service providers' policies or business practices.
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6. MANAGEMENT
TRUSTEES AND OFFICERS OF THE TRUST. The trustees and officers of the Trust and
their principal occupations during the past five years are set forth below. Each
Trustee who is an "interested person" (as defined by the 1940 Act) of the Trust
is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), 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 Administrative Services, LLC serves as manager or
administrator and for which Forum Financial Services, Inc. serves as
distributor. His address is Two Portland Square, Portland, Maine
04101.
Costas Azariadis, Trustee (age 53)
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 54)
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 53)
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 (ag
41)
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.
Robert Campbell, Treasurer (age 36)
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Director of Fund Accounting, Forum Financial Corp., with which he has
been associated since April 1997. Prior thereto, Mr. Campbell was the
Vice President of Domestic Operations for State Street Fund Services in
Toronto, Ontario, and prior to that, Mr. Campbell served as Assistant
Vice President/Fund Manager of Mutual Fund, State Street Bank & Trust
in Boston, Massachusetts. Mr. Campbell is also treasurer of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart. Mr. Goldstein is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto, Mr. Berueffy was on the staff of
the U.S. Securities and Exchange Commission for seven years, first in
the appellate branch of the Office of the General Counsel, then as a
counsel to Commissioner Grundfest and finally as a senior special
counsel in the Division of Investment Management. Mr. Berueffy is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has
been associated since July 1996. Prior thereto, Ms. Tumlin was on the
staff of the U.S. Securities and Exchange Commission as an attorney in
the Division of Market Regulation and prior thereto Ms. Tumlin was an
associate with the law firm of Robinson Silverman Pearce Aronsohn &
Berman in New York, New York. Ms. Tumlin is also Assistant Secretary of
various registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1995. Ms. Turney was employed from 1992 as a
Senior Fund Accountant with
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First Data Corporation in Boston, Massachusetts. Prior thereto she was
a student at Montana State University. Ms. Turney is also Assistant
Secretary of various registered investment companies for which Forum
Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. Her address is Two
Portland Square, Portland, Maine 04101.
TRUSTEES AND OFFICERS OF CORE TRUST. The Trustees and officers of Core Trust and
their principal occupations during the past five years are set forth below. Each
of the Trustees of the Trust is also a Trustee of Core Trust and several
officers of the Trust serve as officers of Core Trust . Each Trustee who is an
"interested person" (as defined by the 1940 Act) of Core Trust is indicated by
an asterisk. Accordingly, for background information pertaining to the Trustees
and these officers, see "Trustees and Officers of the Trust" above.
John Y. Keffer,* Chairman and President.
Costas Azariadis, Trustee.
James C. Cheng, Trustee.
J. Michael Parish, Trustee.
Richard C. Butt, Treasurer
David I. Goldstein, Secretary
Renee A. Walker, Assistant Secretary (age 26).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1994. Prior thereto, Ms. Walker was an
administrator at Longwood Partners (the manager of a hedge fund
partnership) for a year. After graduating from college, from 1991 to
1993 Ms. Walker was a sales representative assistant at PaineWebber
Incorporated (a broker-dealer). Her address is Two Portland Square,
Portland, Maine 04101.
Sara M. Clark, Vice President, Assistant Secretary and Assistant Treasurer (age
33).
Managing Director, Forum Financial Services, Inc., with which she has
been associated since 1994. Prior thereto, from 1991 to 1994 Ms. Clark
was Controller of Wright Express Corporation (a national credit card
company) and for six years prior thereto was employed at Deloitte &
Touche LLP as an accountant. Ms. Clark is also an officer of various
registered investment companies for which Forum Financial Services,
Inc. serves as manager, administrator and/or distributor. Her address
is Two Portland Square, Portland, Maine 04101.
Thomas G. Sheehan, Vice President and Assistant Secretary (age 42)
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Counsel, Forum Financial Services, Inc. since October, 1993. Prior
thereto, Mr. Sheehan was a Special Counsel in the Division of
Investment Management of the U.S. Securities and Exchange Commission
in Washington, D.C. His 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) and is paid $1,000
for each committee meeting attended on a date when a Board meeting is not held.
As of March 31, 1997, in addition to the $1,000 for each Board meeting attended,
each Trustee is paid $100 per active portfolio 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 the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
- ------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
TRUSTEE COMPENSATION FOR CORE TRUST. 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 (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. 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. For the fiscal year ended March 31, 1997, each Core
Trust trustee received fees totalling $7,200. Of the total compensation, each
trustee of Core Trust received $393.44 with respect to Treasury Portfolio,
$1,608.30 with respect to Government Cash Portfolio and $571.05 with respect to
Cash Portfolio.
INVESTMENT ADVISERS - FORUM ADVISORS, INC. Forum Advisors, Inc., Treasury
Portfolio's investment adviser and Linden Asset Management, Inc., Government
Cash Portfolio's and Cash Portfolio's investment adviser each furnishes to the
Portfolio(s) which it advises at its own expense all services, facilities and
personnel necessary in connection with managing the Portfolio's investments and
effecting portfolio transactions for the Portfolio, pursuant to an investment
advisory agreement between the Adviser and Core Trust (an "Advisory Agreement").
Each Advisory Agreement provides, with respect to the Portfolio, for an initial
term of one year from its effective date and for its continuance in effect for
successive twelve-month periods
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thereafter, provided the Advisory Agreement is specifically approved at least
annually by the Core Trust Board or by vote of the shareholders of the
Portfolio, and in either case by a majority of the Trustees who are not parties
to the Advisory Agreement or interested persons of any such party.
Each Advisory Agreement is terminable without penalty by Core Trust with respect
to the Portfolio on 60 days' written notice when authorized either by vote of
the Portfolio's shareholders or by a vote of a majority of the Core Trust 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, with respect to the Portfolio, 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 Portfolio, 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 Advisory Agreement entered into by Core Trust on
behalf of Treasury Portfolio, Forum Advisors receives with respect to the
Portfolio a fee at an annual rate of 0.05% of the average daily net assets of
the Portfolio. Prior to January 15, 1996 Forum Advisors acted as the Fund's
investment adviser under an investment advisory agreement with Forum Funds, Inc.
Under this investment advisory agreement, Forum received a fee at an annual rate
of 0.20% of the average daily net assets of the Fund.
Fees payable under this advisory agreement with respect to the Fund during the
past three fiscal years of the Fund are outlined in the following table:
FISCAL YEAR ENDED GROSS FEE WAIVED FEE NET FEE
March 31, 1997 $20,637 $0 $20,637
March 31, 1996 $69,466 $0 $69,466
March 31, 1995 $59,382 $53,382 $6,000
For its services, Linden receives from each of Government Cash Portfolio and
Cash Portfolio an advisory fee based on the total average daily net assets of
those Portfolios and the other portfolio of Core Trust that Linden advises
("Total Portfolio Assets"). Linden's fee is calculated at an annual rate on a
cumulative basis as follows: 0.05% of the first $200 million of Total Portfolio
Assets, 0.03% of the next $300 million of Total Portfolio Assets, and 0.02% of
the remaining Total Portfolio Assets. (Neither Fund investing in the Portfolios
advised by Linden has been in operation for a full fiscal year.)
In addition to receiving an advisory fee from a Portfolio it advises, an Adviser
may also act and be compensated as investment manager for its clients with
respect to assets which are invested in the Portfolio. 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 Portfolio 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 Portfolio with respect to the client's assets invested
in the Portfolio.
Each Adviser has agreed, with respect to each portfolio(s) it manages, to
reimburse Core Trust for certain of the Portfolio'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 Portfolio's shares are
qualified for sale. 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 Portfolio'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 Portfolio'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 Core Trust for its excess
expenses, Core Trust and the Trust have confirmed their respective obligations
to pay all their 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 Core Trust and the Trust;
costs of reproduction, stationery and supplies; compensation of Trustees,
officers and employees of Core and costs of other personnel performing services
for Core Trust and the Trust who are not officers of an Adviser, the manager and
distributor or their respective affiliates; costs of corporate meetings; SEC
registration fees and related expenses; state securities laws registration fees
and related expenses; and fees payable to the Adviser under the Investment
Advisory Agreement.
INVESTMENT SUBADVISERS - Linden serves as an investment subadviser to Treasury
Portfolio under an Investment Subadvisory Agreement with Forum Advisors and Core
Trust. Forum Advisors serves as an investment advisor to Government Cash
Portfolio, Cash Portfolio under an Investment Subadvisory Agreement with Linden
and Core Trust. (Pursuant to each Investment Subadvisory Agreement, from time to
time the Subadviser provides the Adviser with assistance regarding certain of
the Adviser's responsibilities to the Portfolio, including management of all or
part of the Portfolio's investment portfolios. Each Investment Subadvisory
Agreement will remain in effect for a period of 24 months and will continue in
effect thereafter only if its continuance is specifically approved at least
annually by the Core Trust Board or by vote of the Portfolio's shareholders, and
in either case, by a majority of the Trustees of Core Trust who are not parties
to the Investment Subadvisory Agreement or interested persons of any such party
at a meeting called for the purpose of voting on the Investment Subadvisory
Agreement. To the extent and for the period of time the Adviser has delegated
its responsibilities to the Subadviser, the Adviser pays the advisory fee for
such period to the Subadviser.)
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Each Investment Subadvisory Agreement is terminable with respect to the
Portfolio without penalty by Core Trust on 60 days' written notice when
authorized either by vote of the Portfolio's shareholders or by vote of a
majority of the Core Trust Board, or by the Subadviser on 60 days' written
notice, and will automatically terminate in the event of its assignment. The
Investment Subadvisory Agreement also provides that, with respect to the
Portfolio, the Subadviser 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 Portfolio, except for willful misfeasance, bad faith or gross negligence in
the performance of the Subadvisers' duties or by reason of reckless disregard of
the Subadvisers' obligations and duties under the Investment Subadvisory
Agreement.
INVESTMENT ADVISORY SERVICES TO THE FUNDS. The Trust has retained Forum Advisors
as investment adviser to the Funds under arrangements and an agreement
substantially similar to the arrangements and agreement described above with
respect to the Portfolios and Forum Advisors. Linden has not been retained as an
advisor or subadvisor by the Trust or Forum Advisors. with respect to the Funds.
No fee is payable for investment advisory services under these agreements as
long as a Fund is invested in its corresponding Portfolio or a similar
investment.
ADMINISTRATION
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997 (the "Trust Administration Agreement"), FAS 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) and provides the Trust with general office
facilities. The Trust Administration Agreement may be terminated by either party
without penalty on 60 days' written notice and may not be assigned except upon
written consent by both parties. The Trust Administration Agreement also
provides that FAS 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 FAS's duties or by reason of reckless disregard of its obligations and duties
under the Trust Administration Agreement. Prior to June 19, 1997, FFSI provided
administration and distribution services to the Trust pursuant to a Management
and Distribution Agreement.
DISTRIBUTION
FFSI was incorporated under the laws of the State of Delaware on February 7,
1986 and serves as distributor of shares of the Portfolio pursuant to a
Distribution Agreement between FFSI and the Trust (the "Trust Distribution
Agreement"). The Trust Distribution Agreement provides, 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 Trust Distribution Agreement is specifically approved at least annually by
the Board or by the shareholders of the Fund, and in either case by a majority
of the Trustees who are not parties to the Trust Distribution Agreement or
interested persons of any such party.
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The Trust Distribution Agreement terminates automatically if it is assigned and
may be terminated without penalty with respect to each Fund by vote of the
Fund's shareholders or by either party on 60 days' written notice. The Trust
Distribution Agreement also provides that FFSI shall not be liable for any error
of judgment or mistake of law or for any act or omission in the performance of
services to the Trust, except for willful misfeasance, bad faith or gross
negligence in the performance of FFSI's duties or by reason of reckless
disregard of its obligations and duties under the Trust Distribution Agreement.
ADMINISTRATION OF CORE TRUST
Pursuant to a management agreement with Core Trust, FFSI supervises the overall
management of Core Trust (which includes, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the custodian and arranging for maintenance of books and records of
Core Trust) and provides Core Trust with general office facilities (the "Core
Trust Management Agreement"). The Core Trust Management Agreement provides, with
respect to the Portfolios, 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 Core Trust Board or by the shareholders of the Portfolios, and in either
case by a majority of the Trustees who are not parties to the Core Trust
Management Agreement or interested persons of any such party.
The Core Trust Management Agreement terminates automatically if it is assigned
and may be terminated without penalty with respect to the Portfolio by vote of a
Portfolio's shareholders or by either party on 60 days' written notice. The Core
Trust Management Agreement also provides that FFSI 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 Core 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 Core Trust Management
Agreement.
FFSI acts as sole placement agent for interests in the Portfolios and receives
no compensation for those services from the portfolios.
ADMINISTRATION FEES
For its services under the Trust Management and Distribution Agreement and the
Core Trust Management Agreement, FFSI receives with respect to each of the Funds
and Portfolios a fee at an annual rate of 0.10% of the average daily net assets
of each Fund and Portfolio, respectively. The fee structure is the same under
the current Administration Agreement. Fees payable under the Trust Management
and Distribution Agreement and the Core Trust Management Agreement with respect
to Daily Assets Treasury Fund during the past three fiscal years are set forth
in the following table:
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FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ------------------ --------- ---------- --------
1997 $82,506 $65,765 $16,741
1996 $108,685 $101,548 $7,137
1995 $89,073 $89,073 $0
For the fiscal year ended March 31, 1995, the Core Trust Management Agreement
with respect to the Treasury Portfolio was not in effect.
FAS provides persons satisfactory to the Board to serve as officers of the
Trust. Similarly, at the request of the Core Trust Board, FFSI provides persons
satisfactory to the Core Trust Board to serve as officers of Core Trust. Those
officers, as well as certain other employees and Trustees of the Trust, may be
Trustees, officers or employees of (and persons providing services to the Trust
may include) FAS, FFSI, their affiliates or affiliates of Forum Advisors.
TRANSFER AGENT
Forum Financial Corp. ("FFC") 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, with respect to the Funds, 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 Transfer Agency
Agreement is specifically approved at least annually by the Board or by a vote
of the shareholders of each Fund, and in either case by a majority of the
Trustees 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 FFC as transfer agent for the Trust are: (1)
answering customer inquiries regarding account status and history, the manner in
which purchases and redemptions of shares of each Fund may be effected and
certain other matters pertaining to each 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.
FFC 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
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shareholders of a Fund with respect to assets invested in that Fund. FFC 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 Portfolio. FFC, FAS or sub-transfer
agents or processing agents retained by the FFC 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 FFC or FAS.
For its services under the Transfer Agency Agreement, FFC 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. Fees payable under the Transfer Agent
Agreement with respect to Daily Assets Treasury Fund are outlined in the
following table:
FISCAL YEAR ENDED
MARCH 3 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- --------
1997 $116,051 $101,485 $14,566
1996 $110,792 $96,881 $13,911
1995 $74,227 $62,206 $12,021
Pursuant to a Fund Accounting Agreement, FFC also provides the Fund with
portfolio accounting, including the calculation of the Fund's net asset value.
For these services, FFC receives an annual fee ranging from $12,000 to $36,000
depending upon the number of securities in which the Fund invests and the number
of classes in the Fund. Pursuant to a Fund Accounting Agreement with Core Trust,
FFC also provides portfolio accounting services to Core Trust, including the
calculation of each Portfolio's net asset value. For these services, FFC
receives an annual fee of $48,000 per year plus surcharges depending upon the
amount and type of the Fund's portfolio transactions and positions. Fees payable
under the Fund Accounting Agreement with the Trust and the Fund Accounting
Agreement with Core Trust, with respect to fund accounting services for the
Daily Assets Treasury Fund are outlined in the following table:
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $60,000 $0 $60,000
1996 $33,379 $0 $33,379
1995 $36,000 $0 $36,000
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7. DETERMINATION OF NET ASSET VALUE
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, Columbus Day, Veterans' Day, Thanksgiving and
Christmas. The net asset value of each Portfolio is determined as of 2:00 P.M.,
Eastern time ("Valuation Time"), on all weekdays, except Federal holidays, Good
Friday and other days that the Federal reserve bank of San Francisco is closed
("Business Day"). 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.
Pursuant to the rules of the SEC, both the Board and the Core Trust Board have
established procedures to stabilize each Fund's and each Portfolio's, as
applicable, net asset value at $1.00 per share. These procedures include a
review of the extent of any deviation of net asset value per share as a result
of fluctuating interest rates, based on available market rates, from each Fund's
and Portfolio's, as applicable, $1.00 amortized cost price per share. Should
that deviation exceed 1/2 of 1%, the Board and the Core Trust Board,
respectively, will consider whether any action should be initiated to eliminate
or reduce material dilution or other unfair results to shareholders. Such action
may include redemption of shares in kind, selling portfolio securities prior to
maturity, reducing or withholding dividends and utilizing a net asset value per
share as determined by using available market quotations.
In determining the approximate market value of portfolio investments, the
Portfolios may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried at their face value.
Each investor in a Portfolio, including the Funds, may add to or reduce its
investment in that Portfolio on each Business Day. The Portfolios maintain the
same Business Days as do the Funds. As of the close of regular trading on any
Fund Business Day, the value of a Fund's beneficial interest in a Portfolio is
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents the Fund's share of the
aggregate beneficial interests in the Portfolio. Any additions or reductions,
which are to be effected as of the close of the Fund Business Day, are then
effected. The Fund's percentage of the aggregate beneficial interests in the
Portfolio are then recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of the Fund's investment in the Portfolio as of
the close of the Fund Business Day plus or minus, as the case may be, the amount
of net additions to or reductions from the Fund's investment in the Portfolio
effected as of that time, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of the close of the Fund Business Day plus or
minus, as the case may be, the amount of net additions to or reductions from the
aggregate investments in the Portfolio by all investors in the Portfolio. The
percentage determined is then applied to determine the value of the Fund's
interest in the Portfolio as of the close of the next Fund Business Day.
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8. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Portfolio usually are
principal transactions. Portfolio securities 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. Although Core
Trust does not anticipate that the Portfolio will pay any amounts of commission,
in the event the Portfolio pays brokerage commissions or other
transaction-related compensation, the payments may be made to broker-dealers who
pay expenses of the Portfolio that it would otherwise be obligated to pay
itself. Any transaction for which the Portfolio pays transaction-related
compensation will be effected at the best price and execution available, taking
into account the amount of any payments made on behalf of the Portfolio by the
broker-dealer effecting the transaction. 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 years ended March 31, 1995, 1996 and 1997, no brokerage fees were
paid by Daily Assets Treasury Fund (during the period the Fund invested directly
in securities) or Treasury Portfolio.
Allocations of transactions to dealers and the frequency of transactions are
determined for each Portfolio by the Advisers in their best judgment and in a
manner deemed to be in the best interest of shareholders of that Portfolio
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
Portfolio.
Investment decisions for the Portfolios will be made independently from those
for any other account or investment company that is or may in the future become
managed by an Adviser or their respective affiliates. If, however, a Portfolio
and other investment companies or accounts managed by an 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 Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for a
Portfolio and for other investment companies managed by an 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 Forum Advisors, Linden or any of
their affiliates.
9. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by the distributor without
any sales charge.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily 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
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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 from time to time.
The Trust has filed a formal election with the SEC pursuant to which the Funds
will only effect a redemption in portfolio securities in kind 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 the telephone redemption or 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.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any Participating Fund, which includes (i) all other funds
of the Trust and (ii) any other mutual fund for which Forum or its affiliates
act as investment adviser, manager or distributor and which participates in the
Trust's exchange privilege program. 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 exchanged into.
Exchange transactions are made on the basis of relative net asset values per
share at the time of the exchange transaction plus any applicable sales charge
of the Participating Fund whose shares are acquired. Exchanges are accomplished
by (i) a redemption of the shares of the Fund exchanged at the next
determination of that fund's net asset value after the exchange order in proper
form (including any necessary supporting documents required by the Fund whose
shares are being exchanged) is accepted by the Transfer Agent and (ii) a
purchase of the shares of the fund acquired at the next determination of that
fund's net asset value after (or occurring simultaneously with) the time of
redemption.
Shares of any Participating Fund may be exchanged without a sales charge for
shares of any Participating Fund that are offered without a sales charge. If the
Participating Fund whose shares are purchased in the exchange transaction
imposes a higher sales charge the shareholder will be required to pay the sales
charge on the purchased shares. Shareholders are entitled to any reduced sales
charges of the Participating Fund into which they are exchanging to the extent
those reduced sales charges would be applicable to that shareholder's purchase
of shares.
The Funds do not charge for the exchange privilege and there is currently no
limit on the number of exchanges a shareholder may make, but each Fund reserves
the right to limit excessive exchanges by any shareholder. A pattern of frequent
exchanges may be deemed by the Transfer
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Agent to be contrary to the best interests of the Fund's other shareholders and,
at the discretion of the Transfer Agent, may be limited by that Fund's refusal
to accept additional exchanges from the investor.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any Participating Fund 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 60 days' advance notice
to shareholders. No notice need be given of an amendment whose only material
effect is to reduce amount of sales charge required to be paid on the exchange
and no notice need be given if redemptions of shares of a Fund are suspended or
a Fund temporarily delays or ceases the sale of its shares.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Funds offer an individual retirement plan (the "IRA") for individuals who
wish to use shares of a 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
Funds' custodian furnishes custodial services to the IRAs for a service fee.
Shareholders wishing to invest in a Fund through an IRA should contact the
Transfer Agent for further information.
10. 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 each Fund and assume that the Funds qualify as regulated investment
companies. 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 none of the Funds' dividends or distributions will qualify for the
dividends-received deduction for corporations.
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 his shares by the amount of the distribution. To the extent that
capital gain was accrued by a Fund before the shareholder purchased his shares,
the distribution would be in effect a return of capital to that shareholder. All
capital gain distributions, including those that operate as a return of capital,
are
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taxable to the shareholder receiving them as described above regardless of the
length of time he may have held his shares prior to the distribution.
11. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement with Core Trust, The First National Bank of
Boston, 100 Federal Street, Boston, Massachusetts 02106, acts as the custodian
of the Portfolio's assets. The custodian's responsibilities include safeguarding
and controlling the Portfolio' cash and securities, determining income and
collecting interest on Fund investments. Core Trust pays the custodian a fee at
an annual rate of 0.025% of the Portfolio's average daily assets.
COUNSEL
Legal matters in connection with the issuance of shares of stock of the Trust
are passed upon by Seward & Kissel, 1200 G Street, N.W., Washington, D.C. 20005.
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, act as auditors for the Trust.
THE TRUST AND ITS SHARES
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. (FAS) 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
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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.
The Board is required to call a meeting of shareholders for the purpose of
voting upon the removal of any trustee when so requested in writing by the
shareholders of record holding at least 10% of the Trust's outstanding shares.
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.
SHAREHOLDINGS
As of July 1, 1997, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of the Funds. Also as of that date, the
shareholders listed below owned more than 5% of each Fund. Shareholders owning
25% or more of the shares of a Fund or of the Trust as a whole may be deemed to
be controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. As noted, certain of these shareholders are known to the Trust to hold
their shares of record only and have no beneficial interest, including the right
to vote, in the shares.
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DAILY ASSETS TREASURY FUND
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
---------- -------------
H.M. Payson & Co. Custody Account
P.O. Box 31
Portland, ME 04112 50.23%
H.M. Payson & Co. Custody Account
P.O. Box 31
Portland, ME 04112 28.42%
DAILY ASSETS CASH FUND
PERCENTAGE OF
FUND
SHAREHOLDER SHARES OWNED
- ----------- -------------
H.M. Payson & Co. Custody Account
P.O. Box 31
Portland, ME 04112 57.15%
H.M. Payson & Co. Custody Account
P.O. Box 31
Portland, ME 04112 36.42%
FUND STRUCTURE
CORE AND GATEWAY. The Funds seek to achieve their objective by investing all of
their investable assets in a separate portfolio of a registered, open-end
management investment company with substantially the same investment objective
and policies as the Fund. This "Core and Gateway" fund structure is an
arrangement whereby one or more investment companies or other collective
investment vehicles that share investment objectives -- but offer their shares
through distinct distribution channels -- pool their assets by investing in a
single investment company having substantially the same investment objective and
policies (a "Core Portfolio"). This means that the only investment securities
that will be held by a Fund will be the Fund's interest in the Core Portfolio.
This structure permits other collective investment vehicles to invest
collectively in a Core Portfolio, allowing for greater economies of scale in
managing operations of the single Core Portfolio. The Board retains the right to
withdraw a Fund's investments from a Core Portfolio at any time; the Fund would
then resume investing directly in individual securities of other issuers or
could re-invest all of its assets in another Core Portfolio.
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FUND SHAREHOLDERS' VOTING RIGHTS. A Core Portfolio normally will not hold
meetings of its investors except as required under the 1940 Act. As a
shareholder in a Core Portfolio, a Fund is entitled to vote in proportion to its
relative interest in the Core Portfolio. On any issue, a Fund will vote its
shares in a Core Portfolio in proportion to the votes cast by its shareholders.
If there are other investors in a Core Portfolio, there can be no assurance that
any issue that receives a majority of the votes cast by the Fund's shareholders
will receive a majority of votes cast by all Core Portfolio shareholders.
Generally, a Fund will hold a meeting of its shareholders to obtain instructions
on how to vote its interest in a Core Portfolio when the Core Portfolio is
conducting a meeting of its shareholders. However, subject to applicable
statutory and regulatory requirements, a Fund will not seek instructions from
its shareholders with respect to (i) any proposal relating to a Core Portfolio
that, if made with respect to the Fund, would not require the vote of Fund
shareholders, or (ii) any proposal relating to the Core Portfolio that is
identical to a proposal previously approved by the Fund's shareholders.
In addition to a vote to remove a trustee or change a fundamental policy,
examples of matters that will require approval of shareholders of a Core
Portfolio include, subject to applicable statutory and regulatory requirements:
the election of trustees; approval of an investment advisory contract; the
dissolution of a Core Portfolio; certain amendments of the organizational
documents for the Core Portfolio; a merger, consolidation or sale of
substantially all of a Core Portfolio's assets; or any additional matters
required or authorized by the charter or trust instrument and by-laws of a Core
Portfolio or any registration statement of a Core Portfolio, or as the directors
or trustees of the Core Portfolio may consider desirable. The board of trustees
of a Core Portfolio will typically reserve the power to change nonfundamental
policies without prior shareholder approval.
CONSIDERATIONS OF INVESTING IN A PORTFOLIO. A Fund's investment in a Core
Portfolio may be affected by the actions of other large investors in the Core
Portfolio, if any. For example, if the Core Portfolio had a large investor other
than the Fund that redeemed its interest in the Core Portfolio, the Core
Portfolio's remaining investors (including the Fund) might, as a result,
experience higher pro rata operating expenses, thereby producing lower returns.
A Fund may withdraw its entire investment from the Core Portfolio at any time,
if the Board determines that it is in the best interests of the Fund and its
shareholders to do so. A Fund might withdraw, for example, if other investors in
the Core Portfolio, by a vote of shareholders, changed the investment objective
or policies of the Core Portfolio in a manner not acceptable to the Board. A
withdrawal could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) by the Core Portfolio. That distribution could
result in a less diversified portfolio of investments for the Fund and could
affect adversely the liquidity of the Fund's portfolio. If the Fund decided to
convert those securities to cash, it normally would incur transaction costs. If
a Fund withdrew its investment from the Core Portfolio, the Board would consider
what action might be taken, including the management of the Fund's assets in
accordance with its investment objective and policies by Forum Advisors or the
investment of all of the Fund's investable assets in another pooled investment
entity having substantially the same investment objective as the Fund.
12. FINANCIAL STATEMENTS
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The audited Schedule of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, notes thereto and
Financial Highlights of Daily Assets Treasury Fund for the fiscal year ended
March 31, 1997 and the Independent Auditors' Report thereon (included in the
Annual Report to Shareholders), which are delivered along with this SAI, are
incorporated herein by reference.
The unaudited financial statements of Daily Assets Cash Fund for the period
October 1, 1996 through February 28, 1997, including the Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets, notes
thereto and Financial Highlights, are set forth in Appendix B to this SAI and
are incorporated herein by reference.
As Daily Assets Government Fund had not as of the date hereof commenced
operations, no financial statements are available.
36
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE 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.
Note: Those bonds in the Aa and A groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa1 and A1.
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.
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.
Note: The ratings for AA and A 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")
37
<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.
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 categories.
2. 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
38
<PAGE>
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
39
<PAGE>
APPENDIX B: FINANCIAL STATEMENTS (UNAUDITED)
DAILY ASSETS CASH FUND
(FOR THE PERIOD OCTOBER 1, 1996 THROUGH FEBRUARY 28, 1997)
- --------------------------------------------------------------------------------
FORUM FUNDS
DAILY ASSETS CASH FUND
STATEMENT OF ASSETS & LIABILITIES
FEBRUARY 28, 1997 (UNAUDITED)
ASSETS:
Investments in Cash Portfolio of Core Trust (Delaware)(Note 2)
(cost $7,601,196) $
7,601,196
---------------
LIABILITIES:
Dividends payable
27,323
Accrued fees and other expenses
2,061
---------------
TOTAL LIABILITIES
29,384
---------------
NET ASSETS $
7,571,812
===============
COMPONENTS OF NET ASSETS:
Paid in capital
7,571,806
Accumulated net realized gains (losses)
6
---------------
NET ASSETS $
7,571,812
===============
SHARES OF BENEFICIAL INTEREST
7,571,806
===============
NET ASSET VALUE PER SHARE
(OFFERING AND REDEMPTION PRICE PER SHARE) $
1.00
===============
40
<PAGE>
FORUM FUNDS
DAILY ASSETS CASH FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED FEBRUARY 28, 1997
(UNAUDITED)
INVESTMENT INCOME ALLOCATED FROM CASH PORTFOLIO
OF CORE TRUST (DELAWARE):
Interest Income $
125,432
Expenses
3,441
--------------
NET INVESTMENT INCOME ALLOCATED FROM CASH PORTFOLIO OF
CORE TRUST (DELAWARE) (NOTE 2)
121,991
--------------
EXPENSES:
Management (Note 3)
2,296
Transfer agent (Note 3)
10,764
Accounting (Note 3)
5,000
Legal (Note 3)
602
Registration
1,406
Audit
3,000
Miscellaneous
1,209
--------------
TOTAL EXPENSES
24,277
--------------
Expenses reimbursed and fees waived (Note 4)
(15,095)
--------------
NET EXPENSES
9,182
--------------
NET INVESTMENT INCOME
112,809
--------------
41
<PAGE>
NET REALIZED GAIN ON INVESTMENTS SOLD
6
--------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $
112,815
==============
42
<PAGE>
FORUM FUNDS
DAILY ASSETS CASH FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED FEBRUARY 28, 1997
(UNAUDITED)
NET ASSETS (A)
$
-
---------------
OPERATIONS:
Net investment income
112,809
Net realized gain (loss) on investments sold
6
---------------
Net increase (decrease) in net assets resulting
from operations
112,815
---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
(112,809)
---------------
CAPITAL SHARE TRANSACTIONS (AT $1.00 PER SHARE):
Sale of shares
15,141,761
Reinvestment of distributions
291
Redemption of shares
(7,570,246)
---------------
Net increase (decrease) in capital transactions
7,571,806
---------------
Net increase (decrease)
7,571,812
---------------
NET ASSETS - FEBRUARY 28, 1997 $
- -------------------------------
7,571,812
===============
(a) See Notes to Financial Statements for commencement of operations.
43
<PAGE>
FORUM FUNDS
DAILY ASSETS CASH FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
Forum Funds (the "Trust") is an open-end management investment company organized
as a Delaware business trust. The Trust currently has eleven active investment
portfolios. The Trust Instrument of the Trust authorizes each Fund to issue an
unlimited number of shares of beneficial interest without par value. Included in
this report is Daily Assets Cash Fund (the "Fund"), a diversified portfolio that
commenced operations on October 1, 1996.
MASTER FEEDER ARRANGEMENT - The Fund currently seeks to achieve its investment
objective by investing all of its investable assets in a separate portfolio of
Core Trust (Delaware)("Core Trust"). Core Trust is an open-end, management
investment company and the portfolio in which the Fund invests is the Cash
Portfolio, a diversified portfolio that has the same investment objective and
policies as the Fund. The value of the Fund's investment in the Cash Portfolio
reflects the Fund's proportionate interest in the net assets of the Cash
Portfolio. The Fund accounts for its investment in Cash Portfolio as a
partnership investment and records its share of the Portfolio's income, expense
and realized gain and loss daily. This is commonly referred to as a
master-feeder arrangement.
The performance of the Fund is directly affected by the performance of the Cash
Portfolio. The financial statements of the Cash Portfolio, including the
schedule of investments, are included elsewhere in this report and should be
read in conjunction with the Fund's financial statements. The percentage of the
Cash Portfolio owned by the Daily Assets Cash Fund at February 28, 1997, was
approximately 4.0%.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements are prepared in accordance with generally
accepted accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increase and decrease in net assets from
operations during the fiscal period. Actual results could differ from those
estimates but are expected to be immaterial.
The following represent significant accounting policies of the Fund:
SECURITY VALUATION - The Fund records its investment in the Portfolio at value.
Valuation of securities held by the Portfolio is discussed in Note 2 of the
Portfolio Notes to Financial Statements, which are included elsewhere in this
report.
44
<PAGE>
INVESTMENT INCOME AND EXPENSES - The Trust records daily its pro rata share of
the Portfolio's income, expenses and realized gain and loss. In addition, the
Fund accrues its own expenses.
DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders of net investment
income are declared daily and paid monthly. Net capital gain, if any, is
distributed to shareholders at least annually. Distributions are based on
amounts calculated in accordance with applicable income tax regulations.
FEDERAL TAXES - The Fund intends to qualify and continue to qualify each year as
a regulated investment company and distribute all of its taxable income. In
addition, by distributing in each calendar year substantially all of its net
investment income, capital gains and certain other amounts, the Fund will not be
subject to a federal excise tax. Therefore, no Federal income or excise tax
provision is required.
REALIZED GAIN AND LOSS - Security transactions are recorded on trade date.
Realized gain and loss on investments sold are recorded on the basis identified.
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ADVISORY, SERVICING FEES AND OTHER TRANSACTIONS
INVESTMENT ADVISER - The investment adviser of the Portfolio is Linden Asset
Management, Inc. (the "Adviser"). Pursuant to investment advisory agreements
with respect to the Portfolio among Core Trust, the Adviser and Forum Advisors,
Inc. ("Forum Advisors"), the Adviser may delegate responsibility for portfolio
management to Forum Advisors. The Fund may withdraw its investment from the
Portfolio at any time if the Board determines that it is in the best interest of
the Fund and its shareholders to do so. In the event the Fund were to make such
a withdrawal, the Trust has retained the Adviser and Forum Advisors to act as
investment advisers to the Fund. Neither the Adviser nor Forum Advisors receive
any advisory fees with respect to the Fund as long as the Fund remains
completely invested in the Portfolio.
MANAGEMENT AND OTHER SERVICES - Forum Financial Corp. ("FFC"), an affiliate of
Forum Advisors, serves as the Funds transfer agent and dividend disbursing
agent, and for those services receives an annual rate of 0.25% of the average
daily net assets of the Fund and an annual fee of $12,000 plus account and
series charges, plus certain amounts based upon the number and types of
portfolio transactions within the Fund.
The manager of the Trust is Forum Financial Services, Inc. ("the Manager"), an
affiliate of Forum Advisors, a registered broker-dealer and a member of the
National Association of Securities Dealers, Inc. The Manager receives a
management fee for its services to the Fund at an annual rate of 0.10% of the
average daily net assets of the Fund. In addition, certain legal expenses were
charged to the Trust by the Manager. The Manager also acts as the distributor of
the Fund's shares.
NOTE 4. WAIVER OF FEES AND REIMBURSEMENT OF EXPENSES
The Manager and FFC have voluntarily waived a portion of their fees and assumed
certain expenses of the Fund so that total expenses of the Fund would not exceed
a certain limitation including its allocation of expenses from the Portfolio.
For the period ended February 28, 1997, the Manager and FFC waived fees were
$2,296 and $5,188, respectively, and the Manager reimbursed expenses were
$7,445.
46
<PAGE>
NOTES TO FINANCIAL HIGHLIGHTS (CONTINUED)
NOTE 5. FINANCIAL HIGHLIGHTS
DAILY ASSETS CASH FUND
SELECTED PER SHARE DATA AND RATIOS
FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD
DAILY ASSETS CASH FUND
For The Period Ending
---------------------
February 28, 1997 (e)
---------------------
Beginning Net Asset $1.00
Value per Share (a)
Net Investment Income 0.02
Dividends from Net (0.02)
Investment Income
Ending Net Asset $1.00
Value per Share
Ratios to Average Net
Assets:
Expenses 0.55% (b)(c)
Net Investment Income 4.91% (b)(c)
Gross Expenses 1.21% (b)(c)
Total Return (d) 5.11% (b)
Net Assets at the End
of Period (000's Omitted) $7,572
(a) Date of commencement of operations: October 1, 1996.
(b) Annualized.
(c) Includes Daily Assets Cash Fund's proportionate share of income and
expenses of Cash Portfolio.
(d) Total Return calculation does not include sales charges.
(e) Unaudited
47
<PAGE>
CORE TRUST (DELAWARE)
CASH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997 (UNAUDITED)
ASSETS:
Investments: (Note 2)
Investments at cost $
125,930,001
Repurchase agreements at cost
59,690,000
--------------------
Total investments at value
185,620,001
Cash
25,504
Interest and other receivables
380,158
Organization costs, net of amortization (Note 2)
4,155
--------------------
TOTAL ASSETS
186,029,818
---------------------
LIABILITIES:
Payable to Adviser (Note 3)
5,938
Payable to other related parties (Note 3)
13,876
---------------------
TOTAL LIABILITIES
19,814
---------------------
NET ASSETS $
186,010,004
=====================
COMPONENTS OF NET ASSETS:
Investors' capital
186,012,104
Accumulated net realized gain (loss)
(2,100)
---------------------
NET ASSETS $
186,010,004
=====================
48
<PAGE>
CORE TRUST (DELAWARE)
CASH PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED)
INVESTMENT INCOME:
Interest income $
4,549,861
---------------------
EXPENSES:
Investment advisory (Note 3)
30,314
Administration (Note 3)
41,595
Custodian
20,798
Accounting (Note 3)
24,000
Audit
5,496
Trustee and Officer Insurance
3,611
Legal (Note 3)
1,857
Trustees
1,505
Miscellaneous
1,453
---------------------
TOTAL EXPENSES
130,629
---------------------
Expenses reimbursed and fees waived (Note 4)
(5,830)
---------------------
NET EXPENSES
124,799
---------------------
NET INVESTMENT INCOME
4,425,062
---------------------
NET REALIZED GAIN (LOSS) ON INVESTMENTS SOLD
(8,520)
---------------------
49
<PAGE>
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $
4,416,542
=====================
50
<PAGE>
CORE TRUST (DELAWARE)
CASH PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED AUGUST 31, 1996
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997
NET ASSETS - SEPTEMBER 1, 1995
- ------------------------------ $
-
---------------------
OPERATIONS:
Net investment income 6,173,705
Net realized gain (loss) on investments sold
6,420
---------------------
Net increase in net assets resulting
from operations
6,180,125
---------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST:
Contributions
466,894,348
Withdrawals
(346,791,550)
---------------------
Net Transactions in Investors' Beneficial Interests
120,102,798
---------------------
Net increase (decrease)
126,282,923
---------------------
NET ASSETS - AUGUST 31, 1996 $
- ----------------------------
126,282,923
---------------------
OPERATIONS:
Net investment income
4,425,062
Net realized gain (loss) on investments sold
(8,520)
---------------------
Net increase in net assets resulting
from operations
4,416,542
---------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST:
51
<PAGE>
Contributions
295,447,184
Withdrawals
(240,136,645)
---------------------
Net Transactions in Investors' Beneficial Interests
55,310,539
---------------------
Net increase (decrease)
59,727,081
---------------------
NET ASSETS - FEBRUARY 28, 1997 (UNAUDITED) $
- ------------------------------------------
186,010,004
=====================
52
<PAGE>
CORE TRUST (DELAWARE)
CASH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
Core Trust (Delaware) ("Core Trust") was formed as a Delaware business trust on
September 1, 1994. Core Trust, which is registered as an open-end, management
investment company under the Investment Company Act of 1940 (the "Act"),
currently has eight separate investment portfolios. This financial statements
relates to Cash Portfolio (the "Portfolio"), a diversified portfolio of Core
Trust which commenced operations on September 1, 1995. Interest in Cash
Portfolio are sold in private placement transactions without any sales charge to
institutional clients, including open-end management investment companies.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements are prepared in accordance with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of increase and decrease in net assets from operations during
the fiscal period. Actual results could differ from those estimates but any
differences are expected to be immaterial.
PORTFOLIO VALUATION - Core Trust determines the net asset value per share as of
1:00 p.m., Pacific time, on each Portfolio business day utilizing the amortized
cost method pursuant to Rule 2a-7 under the Act. Under this method, all
investments purchased at a discount or premium are valued by accreting or
amortizing, respectively, the difference between the original purchase price and
the maturity value of the investment over the period to the investment's
maturity.
REPURCHASE AGREEMENTS - The Portfolio may invest in repurchase agreements. The
Portfolio, through its custodian, receives delivery of the underlying
securities, whose market value must always equal or exceed the repurchase price
plus accrued interest. The investment adviser is responsible for determining the
value of the underlying securities at all times. In the event of default, the
Portfolio may have difficulties with the disposition of such securities.
ORGANIZATIONAL COSTS - The costs incurred by the Portfolio in connection with
its organization have been capitalized and are being amortized using the
straight-line method over a five year period beginning on the commencement of
the Portfolio's operations. These costs were paid by Forum Financial Corp. and
were reimbursed by the Portfolio.
FEDERAL TAXES - The Portfolio is not required to pay Federal income taxes on its
net investment income and net capital gain as it is treated as a partnership for
Federal income tax purposes. All
53
<PAGE>
interest, dividends, gain and loss of the Portfolio are deemed to have been
"passed through" to the partners in proportion to their holdings of the
Portfolio regardless of whether such interest, dividends or gain have been
distributed by the Portfolio.
SECURITIES TRANSACTIONS, INTEREST INCOME AND REALIZED GAIN AND LOSS - Security
transactions are recorded on a trade date basis, interest income is accrued as
earned and realized gain and loss on investments sold are recorded on the basis
of identified cost. The cost basis of investments for Federal income tax
purposes at February 28, 1997 is the same as for financial accounting purposes.
NOTE 3. ADVISORY, SERVICING FEES AND OTHER TRANSACTIONS
INVESTMENT ADVISER - The investment adviser of the Portfolio is Linden Asset
Management, Inc. (the "Adviser"). Effective January 1, 1997, pursuant to
investment advisory agreement, the Adviser receives from the Portfolio an
advisory fee based upon the total average daily net assets ("Total Portfolio
Assets") that is calculated on a NOTES TO FINANCIAL STATEMENTS (CONTINUED)
cumulative basis as follows: 0.06% for the first $200 million of Total Portfolio
Assets, 0.04% of the next $300 million of Total Portfolio Assets, and 0.03% of
the remaining Total Portfolio Assets. The minimum total annual advisory fee is
$50,000.
Prior to January 1, 1997, the Adviser received from the Portfolio an advisory
fee based upon Total Portfolio Assets that was calculated on a cumulative basis
as follows: 0.05% for the first $200 million of Total Portfolio Assets, 0.03% of
the next $300 million of Total Portfolio Assets, and 0.02% of the remaining
Total Portfolio Assets.
Pursuant to an investment advisory agreement among the Trust, the Adviser and
Forum Advisors, Inc. ("Forum Advisors"), the Adviser may delegate responsibility
for portfolio management to Forum Advisors. To the extent the Adviser has so
delegated its responsibilities, the Adviser pays its advisory fee to Forum
Advisors.
ADMINISTRATOR - The administrator of Core Trust is Forum Financial Services,
Inc. ("Forum"), a registered broker-dealer and a member of the National
Association of Securities Dealers, Inc. For its administrative services and
facilities, Forum receives from the Portfolio an administration fee at an annual
rate of 0.10% of the average daily net assets of the Portfolio. In addition,
certain legal expenses were charged to the Portfolio by Forum for the period
ended February 28, 1997 in the amount of $1,227.
OTHER SERVICE PROVIDERS - The interestholder record keeper and fund accountant
of the Portfolio is Forum Financial Corp. ("FFC"). FFC is paid an annual
accounting fee of the lesser of 0.05% of the average daily net assets of the
Portfolio on an annualized basis or $48,000, plus certain additional charges for
each interestholder in the Portfolio.
54
<PAGE>
PLACEMENT AGENT - Forum acts as Core Trust's placement agent pursuant to a
separate agreement with Core Trust and receives no compensation for these
services.
NOTE 4. WAIVER OF FEES
Forum has voluntarily waived a portion of its fees and assumed certain expenses
of the Portfolio so that total expenses of the Portfolio would not exceed
certain limitations. For the period ended February 28, 1997, the Administrator
waived management fees in the amount of $5,830.
NOTE 5. SPECIAL MEETING OF INTERESTHOLDERS
The following matter was submitted to a vote of interestholders of the Portfolio
at a special meeting held December 27, 1996: To approve an amendment to the
Investment Advisory Agreement between Core Trust (Delaware) and Linden Asset
Management, Inc. to increase the investment advisory fee with respect to the
Portfolio. Interests in the Portfolio were voted as follows: 58.63% For; 41.37%
Against; 0% Abstained.
55
<PAGE>
NOTES TO FINANCIAL HIGHLIGHTS
(CONTINUED)
NOTE 6. FINANCIAL HIGHLIGHTS
Portfolio performance for the period ended February 28, 1997.
RATIOS TO AVERAGE NET ASSETS
----------------------------
NET
INVESTMENT GROSS
EXPENSES INCOME EXPENSES (a)
--------------- ----------------- --------------------
Cash Portfolio 0.07% 2.64% 0.08%
(a) During the period, various fees and expenses were waived and reimbursed,
respectively. The ratio of Gross Expenses to Average Net Assets reflects
the expense ratio excluding any waivers and reimbursements.
56
<PAGE>
INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
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, 1997
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus dated August 1,
1997 offering shares of the Investors Bond Fund, TaxSaver Bond Fund, Maine
Municipal Bond Fund and New Hampshire 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 without charge by contacting the
Trust's Shareholder Servicing agent 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 - Investors Bond Fund and TaxSaver
Bond Fund
Appendix D - Hedging Strategies - Maine Municipal Bond Fund
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.
1
<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 settlements delayed 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
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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.
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.
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
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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
Each 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 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 without limit
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.
OTHER INVESTMENT COMPANIES
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 AND TAXSAVER BOND FUND
FUTURES CONTRACTS AND OPTIONS
Currently the Funds are prohibited from investing in 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. 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.
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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 assets 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 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. 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, 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
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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.
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. 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. 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 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
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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, MAINE MUNICIPAL BOND FUND
AND NEW HAMPSHIRE BOND FUND
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 income tax. The
municipal securities in which the Funds invest are limited to those obligations
which at the time of purchase: (i) in the case of TaxSaver Bond Fund, 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 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 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.
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, TaxSaver Bond
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 a 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
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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 each
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 a 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 each Fund on the basis of
published financial information, rating agency reports and other research
services to which a Fund or the Adviser may subscribe.
PARTICIPATION INTERESTS. Each 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 a 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, a 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.
No Fund will 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 each Fund on the basis of published financial
information, rating agency reports and other research services to which the
Funds or the Adviser may subscribe.
STAND-BY COMMITMENTS. Each 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,
each 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.
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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 a
Fund are valued at zero in determining net asset value. When a 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 a 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 a Fund's objective will be achieved. The
achievement of a 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.
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, 1996," and "Maine Counties, Selected
Economic Measures, History and Forecasts - May 1997" prepared and published by
the Economics Division of the Maine State Planning Office. In addition, certain
information was obtained from the Official Statement of the State of Maine
published in connection with the issuance of $42,700,000 general obligation
bonds dated May 1, 1997. Other information concerning Maine budgetary matters
was obtained from official legislative documents, the Office of the Commissioner
of the Maine Department of Administrative and Financial Services, the Office of
the Treasurer of the State of Maine, the Bureau of the Budget of the Maine
Department of Administrative and Financial Services, the Office of Fiscal and
Program Review of the Maine Legislature, the Maine Department of Human Services,
the Maine Department of Labor, and the Maine State Retirement System. 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
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the State of Maine published by S&P on September 23, 1996 and May 12, 1997, by
Moody's on May 13, 1997, and by Fitch Investors Service, Inc. ("Fitch"), on May
9, 1997.
Although the information derived from the above sources is believed to be
accurate, none of the information obtained from these sources has been verified
independently. 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 approximately 1,242,000.
The structure of the Maine economy is similar to that of the nation as a whole,
except that the Maine economy historically has had more activity in
manufacturing, defense-related activities, and tourism, and less activity in
finance and services. Recently, however, the manufacturing and defense-related
sectors of Maine's economy have decreased significantly, and the service
industry, retail, and financial services sectors of Maine's economy have
increased significantly.
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 ("EGI"),
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, or from 81% to 92% of the national average of per
capita personal income.
Beginning in the fourth quarter of 1989, however, the Maine economy experienced
a substantial temporary decline. 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, and the second quarter of 1991 saw the seventh
consecutive quarterly decline in the Maine EGI. The third and fourth quarters of
1991 showed barely positive economic growth of 0.9% and 0.2% respectively.
Economic recovery in Maine also has been hindered by significant 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. During the
1989-1991 period also, the State lost 6% of its entire job base.
Since 1991 the Maine economy has experienced a modest and sustained recovery,
and this recovery has continued slowly through the end of calendar year 1996. In
the words of the Economics Division of the Maine State Planning Office, "Maine
economic performance in 1996 was mixed, with the major indicators, on balance,
describing continued slow growth." In addition, the growth of Maine's economy in
1996 also continued to lag behind that of the nation as a whole, with real
growth in the Maine economy during 1996 of 2.1% compared to real growth in the
national Gross Domestic Product ("GDP") during 1996 of 2.4%. Of the 17 major
Maine economic indicators tracked by the Maine State
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Planning Office in calendar year 1996, eight were positive, eight were negative,
and one (building permits) showed no significant change.
On the positive side, after five full years of slow economic recovery, the Maine
economy in 1996 finally regained its pre-recession job count of 545,000. In
addition, at the end of 1996, Maine's labor participation rate (the number of
persons employed as a percentage of the number of persons in the working age
population, ages 16 through 64) was very close to the record high 69% measured
in 1989, at the peak of the 1980's economic boom. Also, during 1996 unemployment
rates in Maine dropped significantly and consistently throughout the State. In
1996, every county in Maine experienced a significant drop in its unemployment
rate. In November of 1996, seasonally unadjusted unemployment rates in all 16
Maine counties were significantly lower than in November 1995; most counties
experienced a typical 1.2 - 1.5% drop over the previous November's unemployment
rate; five Maine counties recorded seasonally unadjusted unemployment rates well
below 4%; and one county (Cumberland) recorded a seasonally unadjusted
unemployment rate below 3%, at 2.3%. In November 1996, the seasonally unadjusted
unemployment rate for Maine as a whole dropped to 4.4% from 5.7% during November
1995. This trend has continued through the Spring of 1997. The latest seasonally
unadjusted unemployment rates available (May 1997) show Maine's seasonally
unadjusted unemployment rate for May 1997 at 4.6% vs. 5.1% for May 1996. The
unemployment rates in some Maine counties are approaching levels that economists
traditionally have viewed as incompressible. In the words of the Economics
Division of the Maine State Planning Office, currently in Maine "there are few
people left who want jobs and don't have them."
Also, on the positive side, in contrast to calendar year 1995 and the first half
of 1996, numerous Maine employers announced, or are proceeding with, plans for
significant business expansions in the State. For example, National
Semiconductor Corporation is proceeding with construction of a $830 million
wafer chip manufacturing facility in South Portland, which is expected to add
800 new jobs to the greater Portland area. MBNA America Bank, N.A., the second
largest issuer of credit cards in the nation, recently has invested $37 million
in new facilities in five Maine communities and has created 1,700 skilled and
semi-skilled jobs in Maine. In addition, MBNA is expected to add 2,000 more jobs
to its Maine payrolls in the next 2 1/2 years. Guilford of Maine, Inc. has
recently completed construction of a $30 million textile factory, reputed to be
the worlds' most modern, in Piscataquis County, and is actively training new
employees in cooperation with local secondary schools. John J. Nissen Baking
Company has announced plans to invest $40 million to build the world's largest
bakery in Biddeford, Maine. Finally, Tambrands, Inc. is investing $36 million to
consolidate all of its manufacturing activities in Auburn, Maine.
A further positive factor in the growth of Maine's economy is that Maine
employers recently have experienced a substantial decrease in workers'
compensation costs. For many years, Maine possessed the highest workers'
compensation insurance rates in the country. The issue was so devisive that it
caused a shutdown of State government in 1992. Since that time, however, the
Maine Legislature has created the Maine Employers' Mutual Insurance Co. and has
passed numerous reforms in Maine's workers' compensation laws. As a result,
workers' compensation insurance rates in Maine have dropped 34% since 1994.
Another positive step concerning workers' compensation insurance rates in Maine
was taken in May of this year when the Maine Legislature, at the request of the
Governor,
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refused to accede to a effort by organized labor to roll back many of the
reforms in Maine's workers' compensation laws enacted since 1992.
An additional positive indicator for the Maine economy is that Maine taxable
consumer retail sales were up 5.3% for the first ten months of 1996 compared to
the same period in 1995. This is a noteworthy improvement over 1995, when sales
were only up only 1.7% over 1994. These consumer retail sales data (including
among other items taxable retail sales related to the tourist industry) 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 performance of taxable retail sales in Maine is directly
related to the ability of Maine State government to fund necessary governmental
expenditures. Additionally on the positive side during 1996, unit sales of homes
in Maine increased 5% over 1995, the average sales price of a home in Maine
increased to over $113,000, and the average time on the market prior to sale for
homes in Maine declined.
On the negative side, Maine's economic recovery as a whole continues to lag
behind the national and New England averages. For example, between the second
quarter of 1995 and the second quarter of 1996 personal income in Maine
increased by only 3.5%. By comparison, for the same period national personal
income increased by 5.5% and personal income in New England as a whole increased
by 4.8%. Similarly, during 1996 Maine payroll employment growth (people on
payrolls, not including the self-employed) was very slow. Such Maine payroll
employment growth grew only 0.4% during 1996 compared to 1.9% and 2.3% in 1995
and 1994 respectively. These statistics only underscore the fact that employment
growth at the national level continues to far outpace New England and Maine
employment growth. Since the trough of the recession in 1991, national
employment has increased a full 12%, or approximately 2% annually. By
comparison, New England employment growth for the same period has been only 7%,
and Maine employment growth for the same period has been only 6%, or 1/2 the
national average. In addition, despite very low unemployment rates and what the
Economics Division of the State Planning Office has alluded to as "tight labor
market conditions" in many of the most populous counties of the State,
bankruptcy filings, predominantly filings by individual debtors rather
businesses, have in the words of the State Planning Office, "skyrocketed through
1996." Such bankruptcy filings reached a level of 2,954 filings in 1996, or 30%
higher on an annual basis than was experienced in the depths of the recent
economic recession. In addition, the number of Maine residents receiving food
stamps has remained at very high levels, rising nearly 80% during the economic
recession, and dropping only 10% through the present when virtually all of the
jobs lost in the recession have been recovered. In addition, through most of
1996, construction contract awards in Maine were down 5% from the previous year.
These statistics show a very mixed picture for the performance of the Maine
economy during 1996, and in some instances during the first six months of 1997,
and they pose a continuing management challenge for those legislators and State
officials responsible for State fiscal policy.
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 Legislature, by itself, from issuing
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 provides for the
prohibition of debt issued by or on behalf of the State to fund
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"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 also have been adopted to permit the Legislature to authorize the
issuance of bonds to insure payment of up to: (i) $6,000,000 of revenue bonds of
the Maine School Building Authority; (ii) $4,000,000 of loans to Maine students
attending institutions of higher education; (iii) $1,000,000 of mortgage loans
for Indian housing; (iv) $4,000,000 of mortgage loans to resident Maine veterans
including businesses owned by resident Maine veterans; and (v) $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 general obligation bonds of the State, 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.
In recent years, Maine State government has skirted the Maine constitutional
balanced budget requirement by annually issuing significant amounts of tax
anticipation notes ("TANs") during the first few days after the July 1 beginning
of each new fiscal year and leaving such TANs outstanding until almost the
beginning of the next fiscal year. For example, on June 26, 1996 the State
issued $150,000,000 in TANs due June 27, 1997. Both the size of these issues and
fiscal legitimacy for them, however, have recently been criticized, and the
State is becoming more conservative with regard to what amounts to a former
practice of maintaining almost permanent TANS of significant size. This has been
made possible largely by the continued imposition of tightly conservative State
fiscal policies that allowed the State to end fiscal year 1997 solidly in the
black with an estimated approximate $50 million surplus. No TAN was issued
immediately following the July 1 start of the 1997 fiscal year, and its issuance
was put off at least until August 1997. Recently, the State has been considering
further putting off the issuance of any TAN for State cash flow purposes,
because the need for such an issuance has not yet legitimately presented itself.
As of March 31, 1997, there were outstanding general obligation bonds of the
State in the principal amount of $444,157,945. On June 5, 1997, the State issued
$42,700,000 general obligation bonds dated May 1, 1997. On June 27, 1997,
$150,000,000 outstanding tax anticipation notes of the State matured, and after
the start of the new fiscal year on July 1, 1997 the State did not issue new
TANs to roll over this debt. Various other Maine governmental agencies and
quasi-governmental agencies including, but not limited to, the Maine Municipal
Bond Bank, the Maine Court Facilities Authority, the Maine Health and Higher
Educational Facilities Authority, Maine Turnpike Authority, the Maine State
Housing Authority, the Maine Public Utility Financing Bank, and the Maine
Educational Loan Authority, 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 enabled the State to
accumulate relatively large unappropriated surpluses of general fund revenues.
During the economic recession 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. More recently, Maine State government has continued to downsize
and restructure its operations as part of an overall effort to improve the
management of numerous governmental programs. For example, recently the Maine
Legislature created a Productivity Realization Task Force and charged it with
identifying
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more than $45,000,000 of savings in State General Fund expenditures during the
1996-1997 fiscal biennium. The Task Force, in fact, completed the identification
of $45.28 million in cuts to General Fund expenditures and passed legislation to
implement those cuts during the 1996-1997 biennium. The work of the Task Force
also will result in additional ongoing cuts of $60.1 million in General Fund
expenditures during the 1998-1999 biennium, and the permanent elimination of
approximately 1352 State jobs. Such cuts in General Fund expenditures, other
fiscal cost reductions, and a continuing policy by the Governor not to allow the
creation of significant new State governmental programs or the taxes to fund
such programs, allowed the Governor, on March 26, 1997, to sign a balanced
budget for fiscal years 1998 and 1999 which provides: (i) for fiscal year 1998,
General Fund expenditures of $1,825,047,780 and Highway Fund expenditures of
$217,416,987; and (ii) for fiscal year 1999, General Fund Expenditures of
$1,984,859,413 and Highway Fund Expenditures of $218,026,687.
During the First Regular Session of the 118th Maine Legislature which adjourned
on March 27, 1997, and the First Special Session of the 118th Maine Legislature
which adjourned on June 1, 1997, the Governor and the Legislature also took
several steps to improve the State's fiscal condition. First, the Legislature
passed and the Governor signed into law a repeal of an across the board State
income tax cap that was enacted in 1995 and scheduled to go into effect on July
1, 1997. If this State income tax cap had not been repealed, income tax revenues
expendable by the State beginning in fiscal year 1998 would have been restricted
to $676,230,000. Second, the Legislature and the Governor refused to eliminate
prior to its scheduled elimination on June 30, 1998, an excise tax on the value
of gross hospital patient service revenue, and increased this tax for hospital
payment years that end in fiscal year 1998 from 3.56% to 5.27%. Third, the
Legislature and the Governor enacted into law a "Tax Relief Fund for Maine
Residents" which requires, according to a formula, that 75% of General Fund
Revenues which exceed officially accepted estimates be used to increase the
personal exemption amount of the Maine Individual Income Tax up to the personal
exemption amount of the Federal Individual Income Tax. Also according to the
formula provided by the tax-relief statute, 25% of General Fund revenues which
exceed accepted estimates must be used to reduce the unfunded liability of the
Maine State Retirement System. As of the close of State's fiscal year on June
30, 1997, Maine General Fund Revenues exceeded accepted estimates by
approximately $50 million. This means that 75% of such excess General Fund
revenues, or an estimated $37.5 million, will be allocated to tax relief for
Maine residents, and 25% of such excess General Fund revenues, or an estimated
$12.5 million will be allocated to reduce the unfunded liability of the Maine
State Retirement System. The State also maintains a "Rainy Day Fund" to be used
for significant unforeseen capital and operational expenditures. To the extent
that General Fund revenues which exceed accepted estimates are diverted to the
purposes of tax relief for Maine residents and reduction of the unfunded
liability of the Maine State Retirement System, lesser amounts of such excess
General Fund Revenues will be available to fund the Rainy Day Fund.
As of July 14, 1997 the balance in the State's Rainy Day Fund was $45,497,470.
There can be no assurance that the budget acts for fiscal years 1998 and 1999,
and the various other statutes passed by the Maine Legislature which affect the
State's fiscal position, will not be amended by the Legislature from time to
time.
The unfunded liability of the Maine State Retirement System is a significant
problem for Maine State government. This unfunded liability currently is
certified by the State's independent actuaries to be
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approximately $2.9 billion. Because of this, the State has adopted a
constitutional amendment (Me. Const. art. IX, ss.18-B) that requires the Maine
Legislature, beginning in fiscal year 1997, annually to appropriate funds that
will retire in 31 years or less the System's unfunded liability attributable to
State employees and teachers. The State has also adopted a separate
constitutional amendment (Me. Const. art. IX, ss.18-A) that requires the Maine
Legislature, beginning in fiscal year 1997, annually to appropriate monies to
fund the System on an actuarily sound basis. Under Article IX, ss.18-B of the
Maine Constitution, unfunded liabilities henceforth may not be created for the
System except those resulting from experience losses, and such unfunded
liabilities resulting from experience losses must be retired over a period not
exceeding 10 years.
Because of Maine's conservative debt policies and its constitutional requirement
that the 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 continues 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 slow but continuing improvements in the State of Maine economy, S&P currently
views the State's financial outlook as "stable," stating in its most recent May
12, 1997 credit report: "The outlook reflects the state's manageable budget
estimates and careful monitoring of revenues and expenditures. Economic growth
should continue at a slow, sustainable pace."
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 its State of Maine general
obligation bond rating 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. These ratings remained unchanged until
the current year. In its most recent credit report for the State of Maine, dated
May 13, 1997, Moody's "confirmed and refined from Aa to Aa3" the State's general
obligation bond rating. Moody's refinement of the State's bond rating on May 13,
1997 was part of a general redefinition by Moody's of its bond rating symbols
published on January 13, 1997. In its May 13, 1997 credit report, Moody's said:
"Among the factors contributing to the high grade rating are the state's sound
debt profile, with a moderate level of borrowing scheduled for rapid retirement,
and an improving financial trend, reflecting economic gains of recent years and
a fiscal policy aimed at achieving budgetary balance through steady government
cost-cutting and reduced reliance on one-time measures." In this same credit
report, however, Moody's also recognized specific negative factors which
affected the rating, saying: "The rating also recognizes the state's lagging
recovery from the recession of the early 1990s and continuing, though reduced,
exposure to potential defense contracting cutbacks; its narrow General Fund
position, whether measured on a GAAP or a cash basis; and its
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substantial unfunded pension obligation which, by a variety of measures, is
several times the size of its direct debt."
For its June 5, 1997 general obligation bond issue dated May 1, 1997, Maine also
received a credit report from Fitch. In this credit report dated May 9, 1997
Fitch assigned a rating of AA to Maine general obligation bonds, saying:
"Maine's general obligations are well secured, with strength in the low burden
that debt places on resources and in the unusually rapid rate of amortization.
The economy continues to recover from the severity of the recession and
financial operations have regained normality. Institutionalization of financial
reforms, including accounting, the revenue estimation process and debt control
will be of benefit and the reserve is reasonably funded."
CERTAIN INFORMATION CONCERNING THE STATE OF NEW HAMPSHIRE
Material in this section has been abstracted from the State of New Hampshire
Official Statement dated May 28, 1997, 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 1996 population was
1,163,000, representing a 1.3% increase from 1995 levels. New Hampshire's
population had increased by more than 25% in the 1980-1996 period.
New Hampshire's per capita personal income increased by 106.4% between 1980 and
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, resuming
faster growth relative to the region in 1994 and 1995. New Hampshire's per
capita personal income in 1996 was 109% of the national level, ranking 8th in
the United States.
In 1996, New Hampshire's largest employment sector was the service sector (28.8%
of employment), followed by retail and wholesale trade (25.8% of employment).
Manufacturing was the third largest sector (18.9% of employment).
Non-agricultural employment levels have remained fairly stable. The unemployment
rate declined to 4.2% in 1996, less than the national average, and preliminary
data for the month of March 1997 (seasonally adjusted) show New Hampshire's
unemployment rate at 2.1%, compared to a national average of 5.2%.
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, 1991 and 1992. In 1993, residential building activity
surpassed 1980 levels and activity in 1994, 1995 and 1996 surpassed 1993.
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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 are the Meals and Rooms Tax and the Business
Profits Tax. 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.
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. As of June 30, 1996 there was a
designated balance of $20 million in the Rainy Day Fund.
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
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government financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") and are independently audited annually.
During the 1992-1993 biennium, State revenues began recovering from the decline
that had characterized the recession years of 1989, 1990 and 1991. The General
Fund undesignated fund balance at June 30, 1992 was $43.1 Million, with
accumulated undesignated fund balance of $18.6 Million; at June 30, 1993, the
General Fund undesignated fund balance was $31.5 Million and at June 30, 1994,
$12.0 Million. For the fiscal year ended June 30, 1995, the General Fund
undesignated fund balance was zero, after transferring $35.1 Million from the
Healthcare Transition Fund to offset a delay in receipt of federal funds from
disproportionate share expenditures under the Medicaid program. At June 30,
1996, the General Fund undesignated fund balance was ($44.2 Million) after a net
transfer to the Healthcare Transition Fund of $21.9 Million, and is projected at
($25.8 Million) at June 30, 1997.
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 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 lawsuit was tried in the Spring of 1996, resulting in a decision
by the trial court denying any relief to the plaintiffs. The decision is
currently under appeal to the New Hampshire Supreme Court. The potential impact,
if any, of this litigation on the State's finances cannot presently be
determined.
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2. INVESTMENT LIMITATIONS
Investors Bond Fund, TaxSaver Bond Fund and Maine Municipal Bond Fund 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. No Fund may:
(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, 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.
(3) Act as an underwriter of securities of other issuers, except
to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) Invest in interests in oil or gas or interests in other
mineral exploration or development programs.
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In addition to the foregoing, Investors Bond Fund and TaxSaver Bond Fund have
adopted the following fundamental investment limitation concerning investment in
securities of issuers in the same industry. The Funds may not:
(1) 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.
Maine Municipal Bond Fund has adopted the following fundamental investment
limitations concerning investment in securities of issuers in the same industry
and investment in securities having voting rights. The Fund may not:
(1) 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.
(2) Purchase securities having voting rights except securities of
other investment companies.
Investors Bond Fund, TaxSaver Bond Fund and Maine Municipal Bond Fund have
adopted the following nonfundamental investment limitations that may be changed
by the Board without shareholder approval. No Fund may:
(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, except that the Fund may make margin deposits in
connection with permitted transactions in options, futures
contracts and options on futures contracts.
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(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) 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.)
In addition to the foregoing, Investors Bond Fund and TaxSaver Bond Fund have
adopted the following nonfundamental investment limitation concerning investment
in securities having voting rights. The Funds may not:
(a) Purchase securities having voting rights except securities of
other investment companies.
Maine Municipal Bond Fund has adopted the following nonfundamental investment
limitation. The Fund may not:
(a) 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.
The New Hampshire Bond 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:
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(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.
(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:
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(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.
23
<PAGE>
For purposes of limitation number 2 listed above with respect to TaxSaver Bond
Fund, 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 March 31, 1997 is set
forthin the following tables:
<TABLE>
<S> <C> <C> <C> <C> <C>
30 Day
30 Day Annualized Total Return
Annualized Tax Equivalent Total Return Total Return Since
Yield Yield 1 Year 5 Year Inception
----- ----- ---- ------ ---------
INVESTORS BOND
FUND 7.49% N/A 7.18% 7.91% 8.92%
TAXSAVER BOND
FUND 4.74 % 7.85% 5.15% 7.02% 7.38%
MAINE MUNICIPAL
BOND FUND 4.19% 7.58% 4.98% 6.73% 6.64%
NEW HAMPSHIRE
BOND FUND 4.34% 7.57% 4.56% N/A 5.73%
</TABLE>
24
<PAGE>
Tax-equivalent yield for Investors Bond Fund is based on a Federal income tax
rate of 39.6%. The tax equivalent yield for Maine Municipal Bond Fund is based
on a combined Federal and Maine state income tax rate of 48.1% (Federal 39.6%
and State of Maine 8.5%). The tax equivalent yield for New Hampshire Bond Fund
is based on a combined Federal and New Hampshire state income tax rate of 44.6%
(Federal 39.6% and State of New Hampshire 5.0%).
Investors Bond Fund and TaxSaver Bond Fund commenced operations on October 2,
1989. Maine Municipal Bond Fund and New Hampshire Bond Fund commenced operations
on December 5, 1991 and December 31, 1992, respectively.
In advertising performance 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 indices,
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
25
<PAGE>
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 (as defined
in the Prospectuses) may charge their customers direct fees in connection with
an investment in a Fund, which will have the effect of reducing the Fund's net
yield to those shareholders. The yields of each Fund are not fixed or
guaranteed, and an investment in a Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare shares of
a Fund with 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:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
26
<PAGE>
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.
John Y. Keffer,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), 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 Administrative Services, LLC serves as manager or
administrator and 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 53)
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.
27
<PAGE>
James C. Cheng, Trustee (age 54)
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 53)
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
41)
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.
Robert Campbell, Treasurer (age 36)
Director of Fund Accounting, Forum Financial Corp., with which he has
been associated since April 1997. Prior thereto, Mr. Campbell was the
Vice President of Domestic Operations for State Street Fund Services in
Toronto, Ontario, and prior to that, Mr. Cambell served as Assistant
Vice President/Fund Manager of Mutual Fund, State Street Bank & Trust
in Boston, Massachusetts. Mr. Campbell is also treasurer of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart. Mr. Goldstein is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto, Mr. Berueffy was on the staff of
the U.S. Securities and Exchange Commission for seven years, first in
the appellate branch of the Office of the General
28
<PAGE>
Counsel, then as a counsel to Commissioner Grundfest and finally as a
senior special counsel in the Division of Investment Management. Mr.
Berueffy is also Secretary or Assistant Secretary of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has
been associated since July 1996. Prior thereto, Ms. Tumlin was on the
staff of the U.S. Securities and Exchange Commission as an attorney in
the Division of Market Regulation and prior thereto Ms. Tumlin was an
associate with the law firm of Robinson Silverman Pearce Aronsohn &
Berman in New York, New York. Ms. Tumlin is also Assistant Secretary of
various registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1995. Ms. Turney was employed from 1992 as a
Senior Fund Accountant with First Data Corporation in Boston,
Massachusetts. Prior thereto she was a student at Montana State
University. Ms. Turney is also Assistant Secretary of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
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) and is paid $1,000
for each committee meeting attended on a date when a Board meeting is not held.
As of March 31, 1997, in addition to $1,000 for each Board meeting attended,
each Trustee receives $100 per active portfolio 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 the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
29
<PAGE>
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
ADVISER
Pursuant to an Advisory Agreement with the Trust (the "Investment Advisory
Agreement"), 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. The 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.
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 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. The Investment Advisory Agreement provides
that the Adviser may render services to others.
For its services under the Investment Advisory Agreement, the Advisor receives
with respect to each Fund a fee at an annual rate of 0.40% of the Fund's average
daily net assets. Fees payable under the Investment Advisory Agreement with
respect to the each Fund are set forth in the following tables:
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ------------------ --------- ---------- -------
1997 $100,163 $0 $100,163
1996 $107,061 $48,250 $58,811
1995 $100,098 $9,407 $90,691
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
30
<PAGE>
1997 $70,634 $0 $70,634
1996 $69,544 $0 $69,544
1995 $65,238 $59,238 $6,000
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $101,549 $0 $101,549
1996 $105,104 $0 105,104
1995 $105,063 $91,930 $13,133
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $31,774 $0 $31,774
1996 $23,870 $0 $23,870
1995 $17,826 $17,826 $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
31
<PAGE>
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; expenses incurred pursuant to state securities laws; and fees payable
to the Adviser under the Investment Advisory Agreement.
ADMINISTRATION
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997 (the "Administration Agreement"), FAS 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. The Administration Agreement may be terminated by either party
without penalty on 60 days' written notice and may not be assigned except upon
written consent by both parties. The Administration Agreement also provides that
FAS 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 FAS's
duties or by reason of reckless disregard of its obligations and duties under
the Administration Agreement. Prior to June 19, 1997, FFSI provided
administration and distribution services to the Trust pursuant to a Managment
Agreement (the "Management Agreement")
FAS provides persons satisfactory to the Board to serve as officers of the
Trust. Those officers, as well as certain other employees and Trustees of the
Trust, may be directors, officers or employees of (and persons providing
services to the Trust may include) FAS, its affiliates or certain affiliates of
the Adviser.
DISTRIBUTION
FFSI was incorporated under the laws of the State of Delaware on February 7,
1986 and serves as distributor of shares of the Portfolio pursuant to a
Distribution Agreement between FFSI and the Trust (the "Distribution
Agreement"). The Distribution Agreement provides, 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 by the shareholders of
the Fund, and in either case by a majority of the Trustees who are not parties
to the Distribution Agreement or interested persons of any such party.
32
<PAGE>
The Distribution Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to each Fund by vote of the Fund's
shareholders or by either party on 60 days' written notice. The Distribution
Agreement also provides that FFSI shall not be liable for any error of judgment
or mistake of law or for any act or omission in the performances of its services
to the Trust, except for willful misfeasance, bad faith or gross negligence in
the performance of FFSI's duties or by reason of reckless disregard of its
obligations and duties under the Distribution Agreement. Pursuant to the
Distribution Agreement, FFSI 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 FFSI 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
- ----------------- ------------ --------------- ----------------
1997 $1,951 $274 $1,677
1996 $6,252 $829 $5,423
1995 $1,706 $243 $1,463
TAXSAVER BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE MOUNT RETAINED AMOUNT REALLOWED
- ----------------- ------------ -------------- ----------------
1997 $16 $2 $14
1996 $13,336 $1,317 $12,019
1995 $7,701 $1,012 $6,689
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- ----------------- ------------ --------------- ----------------
1997 $117,032 $10,264 $106,768
1996 $106,683 $13,941 $92,742
1995 $133,896 $17,656 $116,239
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- ----------------- ------------ --------------- ----------------
1997 $54,094 $4,557 $49,537
1996 $24,865 $3,309 $21,556
33
<PAGE>
1995 $33,166 $4,429 $28,737
For its services under the Management Agreement, FFSI received 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
- ----------------- --------- ---------- -------
1997 $75,122 $75,122 $0
1996 $80,296 $80,296 $0
1995 $75,074 $75,074 $0
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $52,975 $52,975 $0
1996 $52,158 $52,158 $0
1995 $48,928 $48,928 $0
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $76,162 $76,162 $0
1996 $78,828 $78,828 $0
1995 $78,797 $78,797 $0
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $23,831 $23,831 $0
1996 $17,902 $17,902 $0
1995 $13,369 $13,369 $0
34
<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 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 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.
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 Agency Agreement, the Transfer Agent
receives, with respect to each Fund: (i) a fee at an annual rate of 0.25 percent
of the average daily net assets of each Fund (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. Fees payable under
the Transfer Agency Agreement with respect to each Fund are set forth in the
following tables:
INVESTORS BOND FUND
35
<PAGE>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $76,562 $58,271 $18,291
1996 $80,320 $60,882 $19,438
1995 $62,562 $49,813 $12,749
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $57,010 $40,248 $16,762
1996 $56,344 $38,888 $17,456
1995 $40,794 $28,091 $12,703
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $82,456 $39,581 $42,875
1996 $84,962 $41,754 $43,208
1995 $65,664 $49,488 $16,176
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $33,317 $6,539 $26,778
1996 $28,488 $645 $27,843
1995 $11,141 $8,715 $2,426
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.
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 Fund Accounting
Agreement with respect to fund accounting services for the Fund are set forth in
the following table:
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<PAGE>
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $41,000 $0 $41,000
1996 $38,000 $0 $38,000
1995 $36,000 $0 $36,000
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $36,000 $0 $36,000
1996 $39,000 $0 $39,000
1995 $36,000 $0 $36,000
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $48,000 $0 $48,000
1996 $48,000 $0 $48,000
1995 $48,000 $0 $48,000
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $37,000 $0 $37,000
1996 $37,000 $0 $37,000
1995 $36,000 $0 $36,000
5. DETERMINATION OF NET ASSET VALUE
The Trust does not determine net asset value on the following holidays: New
Year's Day, Dr. 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.
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<PAGE>
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, 1997, 1996, and 1995, 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 and investment
analysis services furnished by brokers or dealers 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 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 a Fund, 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 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.
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<PAGE>
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, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Investors TaxSaver Maine New Hampshire
Bond Bond Municipal Bond
Fund Fund Bond Fund Fund
---- ------------------------------------------
Net Asset Value Per Share $ 10.19 $ 10.49 10.73 10.31
Sales Charge, 3.75% of offering
price (3.90% of net asset value
per share) $ 0.40 $ 0.41 N/A N/A
Sales Charge, 2.50% of offering
price (2.56% of net asset value
per share) N/A N/A $ 0.27 $ 0.26
Offering to Public $ 10.59 $ 10.90 $11.00 $10.57
</TABLE>
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 an 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
39
<PAGE>
transaction may be invested in another Participating Fund (as defined below) 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 FAS 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 a lesser or 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 establish an IRA to invest in the
Fund 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
40
<PAGE>
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 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, 1200 G Street,
N.W., Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, act as auditors for the Trust.
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<PAGE>
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 Funds) and may in the
future divide portfolios or series into two or more classes of shares (such as
Investor and Institutional Shares). Currently the authorized shares of the Trust
are divided into 15 separate series.
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 required by Federal or state law. Shareholders (and Trustees)
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
As of July 8, 1997, 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.
INVESTORS BOND FUND
PERCENTAGE OF FUND
SHAREHOLDER SHARES OWNED
- ----------- ------------------
Irwin Union Bank & Trust Company 65.06%
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<PAGE>
500 Washington Street
Columbus, OH 47201
Firstrust Company National City Bank Trust Department 14.06%
227 Main Street
Evansville, Indiana 47708
TAXSAVER BOND FUND
PERCENTAGE OF FUND
SHAREHOLDER SHARES OWNED
- ----------- ------------------
Irwin Union Bank & Trust Company
500 Washington Street
Columbus, OH 47201 46.53%
Leonore Zusman TTEE
Leonore Zusman Living Trust
1st National Plaza - Suite 1708
Dayton, OH 45402 10.75%
Leonore L. Zusman TTEE
Leonore L. Zusman Living Trust
1st National Plaza - Suite 1708
Dayton, OH 45402 9.64%
Firstrust Company National City Bank Trust Department
227 Main Street
Evansville, Indiana 47708 6.67%
MAINE MUNICIPAL BOND FUND
PERCENTAGE OF FUND
SHAREHOLDER SHARES OWNED
- ----------- ------------------
BARHART Company Nominee
Attn: Trust Department
P.O. Box 218
Bar Harbor, ME 04609 5.62%
43
<PAGE>
Merrill Lynch, Pierce, Fenner & Smith, Inc., For the
Sole Benefit of its Cusotmers Trade House Account
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32216 5.07%
NEW HAMPSHIRE BOND FUND
PERCENTAGE OF FUND
SHAREHOLDER SHARES OWNED
- ----------- ------------------
INDEPENDENCE TRUST
ATTN: LINDA WEEDEN
200 BEDFORD STREET, 5TH FLOOR
MANCHESTER, NH 03105-0119 40.12%
FINANCIAL STATEMENTS
The financial statements of each Fund for the year ended March 31, 1997 (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.
44
<PAGE>
INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
NEW HAMPSHIRE 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.
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<PAGE>
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
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.
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<PAGE>
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. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the 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
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<PAGE>
alternatives can be identified which could assist the obligor in satisfying its
debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
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<PAGE>
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest
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<PAGE>
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.
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
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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.
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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.
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INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
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
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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.
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.
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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.
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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 assets 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 assets 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-
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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 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 indices 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:
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(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 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 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
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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").
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 accurately movements in the
direction of the overall securities and
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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 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 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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MAINE MUNICIPAL BOND FUND
APPENDIX D - 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
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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 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.
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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."
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
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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, 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.
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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
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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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, 1997
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus dated August 1,
1997 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 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.
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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 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 settlements delayed 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
dividends or 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.
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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 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
assets in an amount at least equal to its commitments to purchase securities on
a when-issued or forward commitment basis.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Trust's Board of Trustees ("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
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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.
TEMPORARY DEFENSIVE POSITION.
When a Fund assumes a temporary defensive position it may invest without limit
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 Advisor 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.
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SECURITIES OF INVESTMENT COMPANIES
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, assets 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.
Neither Fund will hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, neither
Fund will 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
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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 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 other 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. Neither Fund may:
(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) With respect to 75% of its assets, 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.
(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.
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(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. Neither Fund may:
(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.
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(e) Invest in or hold securities of any issuer if officers and
Trustees 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.
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.
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Total return information for the Funds as of March 31,1997, is set forth in the
following table:
Total Return 1 Total Return Total Return Since
Year 5 Year Inception*
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PAYSON VALUE FUND 13.01% N/A 14.77%
PAYSON BALANCED FUND 9.42% 11.69% 11.52%
*Payson Value Fund commenced operations on July 31, 1992. Payson Balanced Fund
commenced operations on November 25, 1991.
In advertising performance, 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
9
<PAGE>
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 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:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual 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
10
<PAGE>
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.
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), 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 Administrative Services, LLC serves as manager or
administrator and for which Forum Financial Services, Inc. serves as
distributor. His address is Two Portland Square, Portland, Maine
04101.
Costas Azariadis, Trustee (age 53)
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 54)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President
and Chief Executive Officer of
11
<PAGE>
Network Dynamics, Incorporated (a software development company). His
address is 27 Temple Street, Belmont, Massachusetts 02178.
J. Michael Parish, Trustee (age 53)
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
41)
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.
Robert Campbell, Treasurer (age 36)
Director of Fund Accounting, Forum Financial Corp., with which he has
been associated since April 1997. Prior thereto, Mr. Campbell was the
Vice President of Domestic Operations for State Street Fund Services in
Toronto, Ontario, and prior to that, Mr. Cambell served as Assistant
Vice President/Fund Manager of Mutual Fund, State Street Bank & Trust
in Boston, Massachusetts. Mr. Campbell is also treasurer of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart. Mr. Goldstein is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto, Mr. Berueffy was on the staff of
the U.S. Securities and Exchange Commission for seven years, first in
the appellate branch of the Office of the General Counsel, then as a
counsel to Commissioner Grundfest and finally as a senior special
counsel in the Division of Investment Management. Mr. Berueffy is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager,
12
<PAGE>
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has
been associated since July 1996. Prior thereto, Ms. Tumlin was on the
staff of the U.S. Securities and Exchange Commission as an attorney in
the Division of Market Regulation and prior thereto Ms. Tumlin was an
associate with the law firm of Robinson Silverman Pearce Aronsohn &
Berman in New York, New York. Ms. Tumlin is also Assistant Secretary of
various registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1995. Ms. Turney was employed from 1992 as a
Senior Fund Accountant with First Data Corporation in Boston,
Massachusetts. Ms. Turney is also Assistant Secretary of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. 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) and is paid $1,000
for each committee meeting attended on a date when a Board meeting is not
held. As of March 31, 1997, in addition to $1,000 for each Board meeting
attended, each Trustee receives $100 per active portfolio 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 the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
13
<PAGE>
ADVISOR
Pursuant to an Investment Advisory Agreement with the Trust (the "Advisory
Agreement"), 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 Trustees 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:
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ------------------ --------- ---------- --------
1997 $92,360 $0 $92,360
1996 $71,662 $0 $71,662
1995 $51,285 $0 $51,285
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- --------
1997 $107,243 $0 $107,243
14
<PAGE>
1996 $95,588 $0 $95,588
1995 $75,058 $0 $75,058
</TABLE>
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.
ADMINISTRATOR
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997, Forum Administrative Services, LLC ("FAS") supervises the overall
management of the Trust (which includes, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent, fund accountant and custodian and arranging for
maintenance of books and records of the Trust). FAS also provides persons
satisfactory to the Board to serve as officers of the Trust. Those officers, as
well as certain other employees and Trustees of the Trust, may be directors,
officers or employees of (and persons providing services to the Trust may
include) FAS, the Advisor or their respective affiliates. In addition, under the
Agreement, FAS is directly responsible for managing the Trust's regulatory and
legal compliance and overseeing the preparation of its registration statement.
Prior to June 19, 1997, administrative services were provided to the Fund
pursuant to a Management and Distribution Agreement between the Trust and FFSI.
For its services under the Management and Distribution Agreement, FFSI received
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 and Distribution
Agreement with respect to each Fund are set forth in the following tables:
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $23,090 $23,090 $0
1996 $17,916 $17,916 $0
1995 $12,821 $12,821 $0
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
15
<PAGE>
1997 $35,748 $35,748 $0
1996 $31,863 $31,863 $0
1995 $25,019 $25,019 $0
</TABLE>
Subject to the obligations of FAS 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, FAS or their respective affiliates;
costs of corporate meetings; SEC registration fees and related expenses; costs
incurred pursuant to state securities laws; fees payable to the Advisor under
the Advisory Agreement and to FAS under the Administration and all other fees
and expenses paid by the Trust under the Distribution Plan.
DISTRIBUTION
FFSI acts as distributor of the Fund's shares pursuant to a Distribution
Agreement with the Trust approved by the Board of Trustees on June 19, 1997 (the
"Distribution Agreement"). The Distribution Agreement will remain in effect for
a period of twelve months from the date of its effectiveness and will continue
in effect thereafter only if its continuance is specifically approved at least
annually by the Board of Trustees or by the shareholders and, in either case, by
a majority of the Trustees who are not parties to the agreement or interested
persons of any such party and do not have any direct or indirect financial
interest in the Distribution Agreement.
The Distribution Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party to the agreement on 60 days' written notice to
the Trust. The Distribution Agreement also provides that FFSI shall not be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust, except for willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the Distribution
Agreement.
Pursuant to the Distribution Agreement, FFSI receives, and may reallow to
certain financial institutions, the sales charge paid by the purchasers of each
Fund's shares.
DISTRIBUTION PLAN
16
<PAGE>
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 FFSI to prepare, at least
quarterly, written reports setting forth all amounts expended for distribution
purposes by the Trust, the Advisor and FFSI 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 Trustees 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, 1997, neither Fund paid any distribution
related expenses pursuant to the Distribution Plan.
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, 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 Trustees 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.
17
<PAGE>
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
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, FFSI 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 Agency Agreement, the Transfer Agent
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. Fees
payable under the Transfer Agent Agreement with respect to each Fund are set
forth in the following tables:
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $45,916 $27,131 $18,785
1996 $38,519 $21,273 $17,246
1995 $16,027 $3,820 $12,207
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $63,723 $42,011 $21,712
1996 $58,767 $37,798 $20,969
1995 $31,274 $19,059 $12,215
</TABLE>
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 Fund Accounting
Agreement with respect to fund accounting services for the Fund are set forth in
the following table:
18
<PAGE>
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $36,000 $0 $36,000
1996 $37,000 $0 $37,000
1995 $36,000 $0 $36,000
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- ----------------- --------- ---------- -------
1997 $37,000 $0 $37,000
1996 $38,000 $0 $38,000
1995 $36,000 $0 $36,000
</TABLE>
5. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value of the Funds on each Fund Business Day
as defined in the Prospectus. 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, 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. Debt 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 and Payson Balanced Fund (with respect to purchases of equity
securities) will effect purchases and sales through brokers who charge
commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the 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, 1997, 1996, and 1995, the aggregate brokerage
commissions paid by Payson Value Fund
19
<PAGE>
were $17,303, $27,008 and $15,276, respectively. For the fiscal years ended
March 31, 1997, 1996, and 1995, the aggregate brokerage commissions paid by
Payson Balanced Fund were $37,474, $36,756 and $27,143, respectively. For the
fiscal year ended March 31, 1997, $600, or 1.6% of aggregate brokerage
commissions paid, was paid to H.M. Payson an affiliated broker and 0.18% of the
total dollar amount of transactions involving payment of commission was effected
through an affiliated broker.
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 and investment
analysis services furnished by brokers or dealers to the Advisor 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 Advisor's own internal research and
investment strategy capabilities. The Advisor may use the research and analysis
in connection with services to clients other than the Fund, 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.
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 FFSI. 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 FFSI.
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
20
<PAGE>
$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,
1997.
Payson Payson
Value Balanced
Fund Fund
---- ----
Net Asset Value Per Share $16.10 $13.20
Sales Charge, 4.00% of offering
price (4.17% of net asset value
per share) $0.67 $0.55
Offering to Public $16.77 $13.75
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 an election with the SEC 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 FAS or FFSI or its affiliates
administrator 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 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
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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 or a
lesser 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 (an "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 invest through an 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, as amended 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
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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.
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.
In addition, the use of certain hedging strategies such as writing and
purchasing options, futures contracts and options on futures contracts involves
complex rules that will determine for income tax purposes the character and
timing of recognition of income received in connection therewith.
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.
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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, 1200 G Street,
N.W., Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, 02110,
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 Funds) and may in the
future divide portfolios or series into two or more classes of shares (such as
Investor and Institutional Shares). Currently the authorized shares of the Trust
are divided into 15 separate series.
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 required by Federal or state law. Shareholders (and Trustees)
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders. 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 July 1, 1997, 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
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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
- ----------- ------------------
Payse & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 20.50%
Ala & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 16.72%
PAYSON BALANCED FUND
PERCENTAGE OF FUND
SHAREHOLDER SHARES OWNED
- ----------- ------------------
Ala & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 17.75%
Payse & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 15.38%
FINANCIAL STATEMENTS
The financial statements of Payson Balanced Fund for the year ended March 31,
1997, 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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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.
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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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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.
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Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rated 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.
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CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
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.
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An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
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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.
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FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
F-3. Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
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AUSTIN GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
Austin Investment Management, Inc. Shareholder Servicing:
375 Park Avenue, Suite 2102 Forum Financial Corp.
New York, New York 10152 Two Portland Square
(212) 888-9292 Portland, Maine 04101
207-879-0001
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information ("SAI")supplements the Prospectus dated
August 1, 1997 offering shares of the Austin Global Equity Fund (the "Fund") and
should be read only in conjunction with the Prospectus, a copy of which may be
obtained by without charge by contacting shareholder servicing at the address
listed above.
TABLE OF CONTENTS
PAGE
----
1. Investment Policies
and Limitations..............................................
2. Performance Data.............................................
3. Management...................................................
4. Determination of Net Asset Value.............................
5. Portfolio Transactions.......................................
6. Custodian....................................................
7. Additional Purchase and
Redemption Information.......................................
8. Tax Matters..................................................
9. Other Matters................................................
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.
1
<PAGE>
1. INVESTMENT POLICIES AND LIMITATIONS
The Fund's investment adviser, Austin Investment Management, Inc. (the
"Adviser"), in determining the composition of the Fund's portfolio, seeks to
distribute investments among various countries, including the United States, and
various geographic regions. In making investment decisions, the Adviser
considers many factors, including: prospects for economic growth among the
various countries; relative amounts of capital invested in foreign countries;
expected levels of inflation; government policies influencing business
conditions; outlooks for relative currency exchange rates in the future; and the
range of investment opportunities available.
INVESTMENT IN FOREIGN SECURITIES
The Fund invests primarily in issuers based in the United States, Europe, Japan
and the Pacific Basin. The European and Pacific Basin countries in which issuers
will be based are primarily those of Western Europe, such as the United Kingdom,
Germany, France, Italy and the Scandinavian countries, and South Korea,
Australia and New Zealand.
Foreign securities are generally purchased in over-the-counter markets or on
stock exchanges located in the countries in which the respective principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign securities markets are generally not as developed
or efficient as those in the United States, and securities of foreign companies
may be less liquid and more volatile than securities of comparable United States
companies. Fixed commissions on foreign stock exchanges are generally higher
than negotiated commissions on United States exchanges, although the Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
stock exchanges, brokers and listed companies than in the United States. Foreign
countries may place limitations on the removal of funds or other assets of the
Fund, and diplomatic developments could affect United States investments in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States' economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, self-sufficiency of
natural resources and balance of payments position.
The dividends and interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction for U.S.
federal income tax purposes for the shareholder's proportionate share of foreign
taxes paid by the Fund. (See "Tax Matters.")
Although the Fund values its assets daily in terms of U.S. dollars, it will not
normally convert its holdings of foreign currencies into U.S. dollars on a daily
basis. It will do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (commonly
known as the "spread") between the price at which they are buying and selling
2
<PAGE>
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Investors should understand that the expense ratio of the Fund can be expected
to be higher than that of other investment companies investing solely in
domestic securities due to, among other things, the greater cost of maintaining
the custody of foreign securities and higher transaction charges, such as stamp
duties and turnover taxes that may be associated with the purchase and sale of
portfolio securities.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P") are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to corporate bonds, including convertible securities by Moody's
and S&P is included in Appendix A to this Statement of Additional Information.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation. Credit ratings attempt
to evaluate the safety of principal and interest payments and do not evaluate
the risks of fluctuations in market value. Also, rating agencies may fail to
make timely changes in credit ratings in response to subsequent events, so that
an issuer's current financial condition may be better or worse than the rating
indicates.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Although no
securities investment is without some risk, investment in convertible securities
generally entails less risk than in the issuer's common stock. However, the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stocks since they have fixed income characteristics
and
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(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases.
The investment value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value. The conversion value of a convertible security is determined by the
market price of the underlying common stock. If the conversion value is low
relative to the investment value, the price of the convertible security is
governed principally by its investment value and generally the conversion value
decreases as the convertible security approaches maturity. To the extent the
market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value. In addition, a convertible security generally will sell at
a premium over its conversion value determined by the extent to which investors
place value on the right to acquire the underlying common stock while holding a
fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
WARRANTS
The Fund may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. To the extent
that the market value of the security that may be purchased upon exercise of the
warrant rises above the exercise price, the value of the warrant will tend to
rise. To the extent that the exercise price equals or exceeds the market value
of such security, the warrants will have little or no market value. If a warrant
is not exercised within the specified time period, it will become worthless and
the Fund will lose the purchase price paid for the warrant and the right to
purchase the underlying security.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve currencies of foreign
countries. In addition, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs. Accordingly,
the value of the assets of the Fund as measured in United States dollars may be
affected by changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with conversions between
various currencies. The Fund may conduct foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into foreign currency forward
contracts ("forward contracts") to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than
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one year) from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. These contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers and involve the risk that the other party to the
contract may fail to deliver currency when due, which could result in losses to
the Fund. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Foreign exchange dealers
realize a profit based on the difference between the price at which they buy and
sell various currencies.
The Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, the Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Forward contracts involve the
risk of inaccurate predictions of currency price movements, which may cause the
Fund to incur losses on these contracts and transaction costs. The Adviser does
not intend to enter into forward contracts on a regular or continuous basis, and
will not do so if, as a result, the Fund will have more than 25% of the value of
its total assets committed to such contracts or the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency.
At or before the settlement of a forward currency contract, the Fund may either
make delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
the currency through the conversion of assets of the Fund into the currency. The
Fund may close out a forward contract obligating it to purchase a foreign
currency by selling an offsetting contract. If the Fund engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been a change in forward contract prices. Additionally, although forward
contracts may tend to minimize the risk of loss due to a decline in
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the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market. The interbank market in foreign currencies is a global,
around-the-clock market.
When required by applicable regulatory guidelines, the Fund will set aside cash,
U.S. Government Securities (as defined in the Prospectus) or other liquid assets
in a segregated account with its custodian in the prescribed amount.
HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser may engage in certain options and
futures strategies to attempt to hedge the Fund's portfolio. The instruments in
which the Fund may invest include (i) options on securities, stock indexes and
foreign currencies, (ii) stock index and foreign currency futures contracts
("futures contracts"), and (iii) options on futures contracts. Use of these
instruments is subject to regulation by the Securities and Exchange Commission
(the "SEC"), the several options and futures exchanges upon which options and
futures are traded, and the Commodities Futures Trading Commission (the "CFTC").
The various strategies referred to herein and in the Fund's Prospectus are
intended to illustrate the type of strategies that are available to, and may be
used by, the Adviser in managing the Fund's portfolio. No assurance can be
given, however, that any strategies will succeed.
The Fund will not use leverage in its hedging strategies. In the case of
transactions entered into as a hedge, the Fund will hold securities, currencies
or other options or futures positions whose values are expected to offset
("cover") its obligations thereunder. The Fund will not enter into a hedging
strategy that exposes the Fund to an obligation to another party unless it owns
either (1) an offsetting ("covered") position or (2) cash, U.S. Government
Securities or other liquid assets with a value sufficient at all times to cover
its potential obligations. When required by applicable regulatory guidelines,
the Fund will set aside cash, U.S. Government Securities or other liquid assets
in a segregated account with its custodian in the prescribed amount. Any assets
used for cover or held in a segregated account cannot be sold or closed out
while the hedging strategy is outstanding, unless they are replaced with similar
assets. As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
The Fund is subject to the following restrictions in its use of options and
futures contracts. The Fund will not (i) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged through the use of options or futures contracts,
(ii) purchase futures contracts or write put options if, as a result, the Fund's
total
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<PAGE>
obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets, or (iii) purchase call
options if, as a result, the current value of options premiums for options
purchased would exceed 5% of the Fund's total assets.
OPTIONS STRATEGIES
The Fund may purchase put and call options written by others and write (sell)
put and call options covering specified securities, stock index-related amounts
or currencies. A put option (sometimes called a "standby commitment") gives the
buyer of the option, upon payment of a premium, the right to deliver a specified
amount of a security or currency to the writer of the option on or before a
fixed date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of a
security or currency on or before a fixed date, at a predetermined price. The
predetermined prices may be higher or lower than the market value of the
underlying currency or security. The Fund may buy or sell both exchange-traded
and over-the-counter ("OTC") options. The Fund will purchase or write an option
only if that option is traded on a recognized U.S. options exchange or if the
Adviser believes that a liquid secondary market for the option exists. When the
Fund purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the securities or currency
underlying the option. Failure by the dealer to do so would result in the loss
of the premium paid by the Fund as well as the loss of the expected benefit of
the transaction. OTC options and the securities underlying these options
currently are treated as illiquid securities.
The Fund may purchase call options on equity securities that the Adviser intends
to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security increases above the exercise price and
the Fund either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid. The Fund may similarly purchase put options
in order to hedge against a decline in market value of securities held in its
portfolio. The put enables the Fund to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the Fund is limited
to the option premium paid. If the market price of the underlying security is
lower than the exercise price of the put, any profit the Fund realizes on the
sale of the security would be reduced by the premium paid for the put option
less any amount for which the put may be sold.
The Fund may write covered call options. The Fund may write 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.
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The Fund may purchase and write put and call options on stock indices in much
the same manner as the equity security options discussed above, except that
stock index options may serve as a hedge against overall fluctuations in the
securities markets (or market sectors) or as a means of participating in an
anticipated price increase in those markets. The effectiveness of hedging
techniques using stock index options will depend on the extent to which price
movements in the stock index selected correlate with price movements of the
securities which are being hedged. Stock index options are settled exclusively
in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
The Fund may take positions in options on foreign currencies in order to hedge
against the risk of foreign exchange fluctuation on foreign securities the Fund
holds in its portfolio or which it intends to purchase. Options on foreign
currencies are affected by the factors discussed in "Options Strategies" above
and "Foreign Currency Forward Transactions" which influence foreign exchange
sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those that may be
involved in the use of foreign currency options, the Fund may be disadvantaged
by having to deal in an odd lot market (generally consisting of transactions of
less than $1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
The Fund may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Fund
wished to terminate its potential obligation to sell securities or currencies
under a call option it had written, a call option of the same type would be
purchased by the Fund. Closing transactions essentially permit the Fund to
realize profits or limit losses on its options positions prior to the exercise
or expiration of the option. In addition:
(1) The successful use of options depends upon the Adviser's ability to
forecast the direction of price fluctuations in the underlying securities or
currency markets, or in the case of a stock index option, fluctuations in the
market sector represented by the index.
(2) Options normally have expiration dates of up to nine months.
Options that expire unexercised have no value. Unless an option purchased by the
Fund is exercised or unless a
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closing transaction is effected with respect to that position, a loss will be
realized in the amount of the premium paid.
(3) A position in an exchange-listed option may be closed out only on
an exchange which provides a market for identical options. Most exchange-listed
options relate to equity securities. Exchange markets for options on foreign
currencies are relatively new and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the over-the-counter markets (currently the primary markets for options on
foreign currencies) only by negotiating directly with the other party to the
option contract or in a secondary market for the option if such market exists.
There is no assurance that a liquid secondary market will exist for any
particular option at any specific time. If it is not possible to effect a
closing transaction, the Fund would have to exercise the option which it
purchased in order to realize any profit. The inability to effect a closing
transaction on an option written by the Fund may result in material losses to
the Fund.
(4) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
FUTURES STRATEGIES
A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash, securities or currencies
as called for in the contract at a specified future date and at a specified
price. For stock index futures contracts, delivery is of an amount of cash equal
to a specified dollar amount times the difference between the stock index value
at the time of the contract and the close of trading of the contract.
The Fund may sell stock index futures contracts in anticipation of a general
market or market sector decline that may adversely affect the market values of
the Fund's securities. To the extent that the Fund's portfolio correlates with a
given stock index, the sale of futures contracts on that index could reduce the
risks associated with a market decline and thus provide an alternative to the
liquidation of securities positions. The Fund may purchase a stock index futures
contract if a significant market or market sector advance is anticipated. These
purchases would serve as a temporary substitute for the purchase of individual
stocks, which stocks may then be purchased in the future.
The Fund may purchase call options on a stock index future as a means of
obtaining temporary exposure to market appreciation at limited risk. This
strategy is analogous to the purchase of a call option on an individual stock,
in that it can be used as a temporary substitute for a position in the stock
itself. The Fund may purchase a call option on a stock index future to hedge
against a market advance in stocks which the Fund planned to acquire at a future
date. The Fund may also purchase put options on stock index futures contracts.
These purchases are analogous to the purchase of protective puts on individual
stocks, where a level of protection is sought below which no additional economic
loss would be incurred by the Fund. The Fund may write covered call options on
stock index futures contracts as a partial hedge against a decline in the prices
of
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<PAGE>
stocks held in the Fund's portfolio. This is analogous to writing covered call
options on securities.
The Fund may sell foreign currency futures contracts to hedge against possible
variations in the exchange rate of the foreign currency in relation to the U.S.
dollar. In addition, the Fund may sell foreign currency futures contracts when
the Adviser anticipates a general weakening of foreign currency exchange rates
that could adversely affect the market values of the Fund's foreign securities
holdings. The Fund may purchase a foreign currency futures contract to hedge
against an anticipated foreign exchange rate increase pending completion of
anticipated transactions. Such a purchase would serve as a temporary measure to
protect the Fund against such increase. The Fund may also purchase call or put
options on foreign currency futures contracts to obtain a fixed foreign exchange
rate at limited risk. The Fund may write call options on foreign currency
futures contracts as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
No price is paid upon entering into futures contracts; rather, the Fund is
required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash or U.S. Government Securities generally
equal to 5% or less of the contract value. This amount is known as initial
margin. Subsequent payments, called variation margin, to and from the broker,
would be made on a daily basis as the value of the futures position varies. When
writing a call on a futures contract, variation margin must be deposited in
accordance with applicable exchange rules. The initial margin in futures
transactions is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Fund upon termination of the contract, assuming
all contractual obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts. For example, futures contracts on broad-based stock
indices can currently be entered into with respect to the Standard & Poor's 500
Stock Index on the Chicago Mercantile Exchange, the New York Stock Exchange
Composite Stock Index on the New York Futures Exchange, the Value Line Composite
Stock Index on the Kansas City Board of Trade and the Major Market Index of the
Chicago Board of Trade.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for the Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
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(1) Successful use by the Fund of futures contracts and related options
will depend upon the Adviser's ability to predict movements in the direction of
the overall securities and currency markets, which requires different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures contracts relate not to the current level of the underlying
instrument but to the anticipated levels at some point in the future; thus, for
example, trading of stock index futures may not reflect the trading of the
securities which are used to formulate an index or even actual fluctuations in
the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged securities or currencies due to price
distortions in the futures market or otherwise. There may be several reasons
unrelated to the value of the underlying securities or currencies which causes
this situation to occur. As a result, a correct forecast of general market
trends still may not result in successful hedging through the use of futures
contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not be
possible to close a position, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin.
(4) Like other options, options on futures contracts have a limited
life. The Fund will not trade options on futures contracts on any exchange or
board of trade unless and until, in the Adviser's opinion, the market for such
options has developed sufficiently that the risks in connection with options on
futures transactions are not greater than the risks in connection with futures
transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls which could be substantial in
the event of adverse price movements.
(6) The Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of added
brokerage commissions.
(7) Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the buying and selling of futures
generally. In addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated with
options on foreign currencies described above. In addition, settlement of
foreign currency futures contracts must occur within the country issuing that
currency. Thus, the Fund must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents, and
the Fund may be required to pay any fees, taxes or charges associated with such
delivery which are assessed in the issuing country.
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COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
The Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. The Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however, that in
addition, with respect to positions in commodity futures and option contracts
not for bona fide hedging purposes, the Fund represents that the aggregate
initial margin and premiums required to establish these positions (subject to
certain exclusions) will not exceed 5% of the liquidation value of the Fund's
assets after taking into account unrealized profits and losses on any such
contract the Fund has entered into.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand agreements,
there is no agreed upon repurchase date and interest payments are calculated
daily, often based upon the prevailing overnight repurchase rate. A counterparty
to a reverse repurchase agreement must be a primary dealer that reports to the
Federal Reserve Bank of New York ("primary dealers") or one of the largest 100
commercial banks in the United States.
Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase or sell portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased by a Fund with payment and delivery to take place in
the future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time it enters into the transaction. In those cases,
the purchase price and the interest rate payable on the securities are fixed on
the transaction date and delivery and payment may take place a month or more
after the date of the transaction. When the Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of the security, although delivery and
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payment occur at a later date. To facilitate such acquisitions, the Fund will
maintain with its custodian a separate account with portfolio securities in an
amount at least equal to such commitments.
At the time a Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, the Fund will record the transaction as a purchase
and thereafter reflect the value each day of such securities in determining its
net asset value. The value of the fixed income securities to be delivered in the
future will fluctuate as interest rates and the credit of the underlying issuer
vary. On delivery dates for such transactions, the Fund will meet its
obligations from maturities, sales of the securities held in the separate
account or from other available sources of cash. The Fund generally has the
ability to close out a purchase obligation on or before the settlement date,
rather than purchase the security. If the Fund chooses to dispose of the right
to acquire a when-issued security prior to its acquisition, it could, as with
the disposition of any other portfolio obligation, realize a gain or loss due to
market fluctuation.
To the extent the Fund engages in when-issued or delayed delivery transactions,
it will do so for the purpose of acquiring securities consistent with the Fund's
investment objectives and policies and not for the purpose of investment
leverage or to speculate in interest rate changes. The Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Fund reserves
the right to dispose of the right to acquire these securities before the
settlement date if deemed advisable.
The use of when-issued transactions and forward commitments enables the Fund to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, the Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, the
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices inferior to the
current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund enters into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities, as
the case may be. If the Fund, however, chooses to dispose of the right to
acquire a when-issued security prior to its acquisition or to dispose of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss. The Fund will establish and maintain with its custodian a separate account
with cash, U.S. Government Securities or other liquid assets in an amount at
least equal to such commitments. No when-issued or forward commitments will be
made by the Fund if, as a result, more than 10% of the value of the Fund's total
assets would be committed to such transactions.
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INVESTMENT COMPANY SECURITIES
In connection with managing its cash positions, the Fund may invest in the
securities of other investment companies that are money market funds within the
limits proscribed by the Investment Company Act of 1940 ("1940 Act"). The Fund
may invest up to 10% of the value of its net assets in the securities of money
market funds. In addition to the Fund's expenses (including the various fees),
as a shareholder in another investment company, a Fund would bear its pro rata
portion of the other investment company's expenses (including fees).
TEMPORARY DEFENSIVE POSITION
The cash or cash equivalents in which the Fund may invest include (i) short-term
U.S. Government Securities, (ii) certificates of deposit, bankers' acceptances
and interest-bearing savings deposits of commercial banks doing business in the
United States that are members of the Federal Deposit Insurance Corporation and
whose short term ratings are rated in one of the two highest rating categories
by S&P or Moody's or, if not rated by those agencies, determined by the Adviser
to be of comparable quality, (iii) commercial paper of prime quality rated A-2
or higher by S&P or Prime-2 or higher by Moody's or, if not rated by those
agencies, determined by the Adviser to be of comparable quality, and (iv)
repurchase agreements covering any of the securities in which the Fund may
invest directly.
FUNDAMENTAL POLICIES
Those policies of the Fund which are deemed to be fundamental may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. A majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act, means the lesser of: (i) 67% of the
shares of the Fund present or represented at a shareholders meeting at which the
holders of more than 50% of the shares are present or represented or (ii) more
than 50% of the outstanding shares of the Fund.
INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment limitations which are
in addition to those contained in the Fund's Prospectus and which may not be
changed without shareholder approval. The Fund may not:
(1) Borrow money, except that the Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets.
(2) Purchase securities, other than U.S. Government Securities, if,
immediately after each purchase, more than 25% of the Fund's total assets taken
at market value would be invested in securities of issuers conducting their
principal business activity in the same industry.
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(3) With respect to 75% of the value of its total assets, 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.
(4) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for purposes of the Securities Act of
1933.
(5) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements and through the
purchase of debt securities which are otherwise permissible investments.
(6) Purchase or sell real estate or any interest therein, except that
the Fund may invest in securities issued or guaranteed by corporate or
governmental entities secured by real estate or interests therein, such as
mortgage pass-throughs and collateralized mortgage obligations, or issued by
companies that invest in real estate or interests therein.
(7) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent a
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
(8) Issue senior securities, except that (a) the Fund may engage in
transactions that may result in the issuance of senior securities to the extent
permitted under applicable regulations and interpretations of the 1940 Act or an
exemptive order; (b) the Fund may acquire securities to the extent otherwise
permitted by its investment policies, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth above, the Fund may borrow money as authorized by the
1940 Act.
The Fund has adopted the following nonfundamental investment limitations that
may be changed by the Trust's Board of Trustees (the "Board of Trustees")
without shareholder approval. The Fund:
(a) May borrow money for temporary or emergency purposes in an amount
not exceeding 5% of the value of its total assets at the time when the loan is
made; provided that any such temporary or emergency borrowings representing more
than 5% of the Fund's total assets must be repaid before the Fund may make
additional investments.
(b) May not pledge, mortgage or hypothecate its assets, except to
secure permitted indebtedness. The deposit in escrow of securities in connection
with the writing of put and call options, collateralized loans of securities and
collateral arrangements with respect to margin for futures contracts are not
deemed to be pledges or hypothecations for this purpose.
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<PAGE>
(c) May not invest in securities of another registered investment
company, except in connection with a merger, consolidation, acquisition or
reorganization; and except that the Fund may invest in money market funds and
privately-issued mortgage related securities to the extent permitted by the 1940
Act.
(d) May not purchase securities on margin, or make short sales of
securities (except short sales against the box), except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities, but the Fund may make margin deposits in connection with
permitted transactions in options, futures contracts and options on futures
contracts.
(e) May not invest in securities (other than fully-collateralized debt
obligations) issued by companies that have conducted continuous operations for
less than three years, including the operations of predecessors, unless
guaranteed as to principal and interest by an issuer in whose securities the
Fund could invest, if as a result, more than 5% of the value of the Fund's total
assets would be so invested.
(f) May not invest in or hold securities of any issuer if to the Fund's
knowledge officers and Trustees of the Trust or the Fund's investment adviser,
individually owning beneficially more than 1/2 of 1% of the securities of the
issuer, in the aggregate own more than 5% of the issuer's securities.
(g) May not purchase securities for investment while any borrowing
equaling 5% or more of the Fund's total assets is outstanding or borrow money,
except for temporary or emergency purposes (including the meeting of redemption
requests), in an amount exceeding 5% of the value of the Fund's total assets.
(h) May not acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15% of the Fund's net
assets (taken at current value) would be invested in repurchase agreements not
entitling the holder to payment of principal within seven days and in securities
which are not readily marketable, including securities that are illiquid by
virtue of restrictions on the sale of such securities to the public without
registration under the Securities Act of 1933 ("Restricted Securities") or (ii)
10% of the Fund's total assets would be invested in Restricted Securities.
(i) May not invest in interests in oil or gas or interests in
other mineral exploration or development programs.
Except as required by the 1940 Act, whenever an amended or restated investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the acquisition of such security or other asset. Any subsequent
change in values, assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
or limitations.
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<PAGE>
2. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied by the Fund in advertising is historical and is not intended to
indicate future returns. The Fund's net asset value, yield and total return will
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
For the period beginning December 8, 1993 (the commencement of public
operations) to March 31, 1997, the Fund's average annual total return was
11.19%. For its most recent fiscal year, the Fund's total return was 5.38%. This
figure represents total return, which is not annualized, for the nine month
period June 30, 1996 through March 31, 1997. For the twelve month period ended
March 31, 1997, the Fund's total return was 8.51%.
In performance advertising each Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). Each Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Salomon Brothers Bond Index, the
Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Funds may refer to general market performances over past time periods such as
those published by Ibbotson Associates. In addition, the Funds may refer in such
materials to mutual fund performance rankings and other data published by Fund
Tracking Companies. Performance advertising may also refer to discussions of the
Funds and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in advertising reflect
all aspects of the Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in the Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
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P(1+T)n = ERV; where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value (ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 payment made at the beginning of
the applicable period.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1); where:
PT = period total return;
The other definitions are the same as in average annual total
return above.
3. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), 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 Administrative Services, LLC serves as manager or
administrator and for which Forum Financial Services, Inc. serves as
distributor. His address is Two Portland Square, Portland, Maine
04101.
Costas Azariadis, Trustee (age 53)
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
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address is Department of Economics, University of California, Los
Angeles, 405 Hilgard Avenue, Los Angeles, California 90024.
James C. Cheng, Trustee (age 54)
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 53)
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
41)
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.
Robert Campbell, Treasurer (age 36)
Director of Fund Accounting, Forum Financial Corp., with which he has
been associated since April 1997. Prior thereto, Mr. Campbell was the
Vice President of Domestic Operations for State Street Fund Services in
Toronto, Ontario, and prior to that, Mr. Cambell served as Assistant
Vice President/Fund Manager of Mutual Fund, State Street Bank & Trust
in Boston, Massachusetts. Mr. Campbell is also treasurer of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart. Mr. Goldstein is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
Max Berueffy, Assistant Secretary (age 44)
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Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto, Mr. Berueffy was on the staff of
the U.S. Securities and Exchange Commission for seven years, first in
the appellate branch of the Office of the General Counsel, then as a
counsel to Commissioner Grundfest and finally as a senior special
counsel in the Division of Investment Management. Mr. Berueffy is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has
been associated since July 1996. Prior thereto, Ms. Tumlin was on the
staff of the U.S. Securities and Exchange Commission as an attorney in
the Division of Market Regulation and prior thereto Ms. Tumlin was an
associate with the law firm of Robinson Silverman Pearce Aronsohn &
Berman in New York, New York. Ms. Tumlin is also Assistant Secretary of
various registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1995. Ms. Turney was employed from 1992 as a
Senior Fund Accountant with First Data Corporation in Boston,
Massachusetts. Ms. Turney is also Assistant Secretary of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. 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. 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 the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
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<TABLE>
<S> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
- ------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
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>
THE INVESTMENT ADVISER
Pursuant to an investment advisory agreement with the Trust (the "Advisory
Agreement"), the Fund's investment adviser, Austin Investment Management, Inc.
(the "Adviser") furnishes at its own expense all services, facilities and
personnel necessary in connection with managing the Fund's investments and
effecting portfolio transactions for the Fund. The Advisory Agreement will
remain in effect for a period of twelve months from the date of its
effectiveness and will continue in effect thereafter only if its continuance is
specifically approved at least annually by the Board of Trustees or by vote of
the shareholders, and in either case by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable without penalty by the Trust with respect
to the Fund on 60 days' written notice when authorized either by vote of its
shareholders or by a vote of a majority of the Board of Trustees, or by the
Adviser on 60 days' written notice to the Trust, and will automatically
terminate in the event of its assignment. The Advisory Agreement also provides
that, with respect to the Fund, the Adviser shall not be liable for any error of
judgment or mistake of law or for any act or omission in the performance of its
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to others.
In addition to receiving its advisory fee from the Fund of 1.5% of the Fund's
average daily net assets, the Adviser may also act and be compensated as
investment manager for its clients with respect to assets which are invested in
the Fund. In some instances the Adviser may elect to credit against any
investment management fee received from a client who is also a shareholder in
the Fund an amount equal to all or a portion of the fees received by the Adviser
or any affiliate of the Adviser from the Fund with respect to the client's
assets invested in the Fund.
The Adviser has agreed to reimburse the Trust for certain of the Fund's
operating expenses which in any year exceed the limits prescribed by any state
in which the Fund's shares are qualified for sale. The Trust may elect not to
qualify its shares for sale in every state. For the purpose of this obligation
to reimburse expenses, the Fund's annual expenses are estimated and accrued
daily, and any appropriate estimated payments will be made by the Adviser
monthly. Subject to the obligations of the Adviser to reimburse the Trust for
its excess expenses, the Trust has, under the Advisory Agreement, confirmed its
obligation to pay all its other expenses. The Fund believes that currently the
most restrictive expense ratio limitation imposed by any state is 2-1/2% of the
first $30 million of the Fund's average net asset, 2% of the next $70 million of
its average net assets and 1-1/2% of its average net assets in excess of $100
million. For the fiscal
21
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years ended March 31, 1997, and June 30, 1996 and 1995, the fees payable under
the Advisory Agreement were $118,156, $142,592 and $123,067, respectively;
$69,562, $71,022 and $56,735 of which, respectively, were waived by the Adviser.
ADMINISTRATION
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997, Forum Administrative Services, LLC ("FAS") supervises the overall
management of the Trust (which includes, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent, fund accountant and custodian and arranging for
maintenance of books and records of the Trust). FAS also provides persons
satisfactory to the Board of Trustees to serve as officers of the Trust. Those
officers, as well as certain other employees and Trustees of the Trust, may be
directors, officers or employees of (and persons providing services to the Trust
may include) FAS, the Adviser or their respective affiliates. In addition, under
the Agreement, FAS is directly responsible for managing the Trust's regulatory
and legal compliance and overseeing the preparation of its registration
statement.
Until May 31, 1994, Stone Bridge Trust Company ("SBTC"), as administrator, and
Forum Financial Services, Inc. ("FFSI"), as sub-administrator, supervised the
overall management of the Fund, which was then a series of The Stone Bridge
Funds, Inc., a registered management investment company (the "Company"),
including the administrative duties described above, pursuant to a
Co-Administration Agreement and a Distribution and Administration Agreement,
respectively. Effective June 1, 1994, the Company entered into an Administration
and Distribution Agreement with FFSI under which FFSI provided the
administration and distribution services it has provided since the Fund's
inception and assumed the administrative responsibilities formerly performed by
SBTC. As of November 25, 1996, administrative services were provided to the Fund
pursuant to a Management and Distribution Agreement between the Trust and FFSI.
Effective June 19, 1997, administrative services are provided by FAS under the
current Administration Agreement with the Trust.
For the fiscal years ending March 31, 1997 and June 30, 1996 and 1995, the fees
under the former Administration and Distribution Agreement and the Management
and Distribution Agreement were $19,693, $23,765 and $23,558, respectively.
DISTRIBUTION
FFSI acts as distributor of the Fund's shares pursuant to a Distribution
Agreement approved by the Board of Trustees on June 19, 1997. The Distribution
Agreement will remain in effect for a period of twelve months from the date of
its effectiveness and will continue in effect thereafter only if its continuance
is specifically approved at least annually by the Board of Trustees or by the
shareholders and, in either case, by a majority of the Trustees who are not
parties to the agreement or interested persons of any such party and do not have
any direct or indirect financial interest in the agreement.
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<PAGE>
The Distribution Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party to the agreement on 60 days' written notice to
the Trust. The agreement also provides that FFSI shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Trust, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the agreement.
In accordance with Rule 12b-1 adopted by the Securities and Exchange Commission,
the Trust has adopted a distribution plan ("Plan"), which provides that all
written agreements relating to the Plan must be in a form satisfactory to the
Board of Trustees. In addition, the Plan requires the Trust and FFSI to prepare,
at least quarterly, written reports setting forth all amounts expended for
distribution purposes by FFSI 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 may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Trustees,
including a majority of Trustees who are not interested persons of the Trust and
who have no direct or indirect interest in the operation of the Plan or in any
agreement related to the Plan. The Plan further provides that it may not be
amended to increase materially the costs which may be borne by the Trust for
distribution pursuant to the Plan without shareholder approval and that other
material amendments of the Plan must be approved by the directors in the manner
described in the preceding sentence. The Plan may be terminated at any time by a
vote of the Board of Trustees or, with respect to the Fund, by the Fund's
shareholders.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent and dividend
disbursing agent of the Trust pursuant to a Transfer Agency Agreement. For its
services, the Transfer Agent receives with respect to the Fund an annual fee of
$12,000 plus $25 per shareholder account. Pursuant to a Fund Accounting
Agreement, the Transfer Agent also provides the Fund with portfolio accounting,
including the calculation of the Fund's net asset value. For these services, the
Transfer Agent receives with respect to the Fund an annual fee ranging from
$36,000 to $60,000 depending upon the amount and type of the Fund's portfolio
transactions and positions.
Both the Transfer Agency Agreement and Fund Accounting Agreement were approved
by the Board of Trustees, including a majority of the Trustees who are not
parties to the respective agreements or interested persons of any such party, at
a meeting called for the purpose of voting on the respective agreements. Each of
these agreements will remain in effect for a period of one year and will
continue in effect thereafter only if its continuance is specifically approved
at least annually by the Board of Trustees or by a vote of the shareholders and
in either case by a majority of the Trustees who are not parties to the
respective agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the respective agreement.
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<PAGE>
OTHER INFORMATION
As of July 1, 1997 the officers and directors of the Trust owned as a group less
than 1% of the outstanding shares of the Fund. Also as of that date, the
following persons owned of record 5% or more of the outstanding shares of the
Fund: Bear Stearns Securities Corp., 581 Main Street, Woodbridge, New Jersey
07095-1198 - 91.21%.
4. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00 P.M.,
Eastern time, on Fund Business Days (as defined in the Prospectus), by dividing
the value of the Fund's net assets (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued) by the
number of shares outstanding at the time the determination is made. The Trust
does not determine net asset value on the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Securities listed or traded on United States or foreign securities exchanges are
valued at the last quoted sales prices on such exchanges prior to the time when
assets are valued. Securities listed or traded on certain foreign exchanges
whose operations are similar to the United States over-the-counter market are
valued at the price within the limits of the latest available current bid and
asked prices deemed best to reflect market value. Listed securities that are not
traded on a particular day, and securities regularly traded in the
over-the-counter market, are valued at the price within the limits of the latest
available current bid and asked prices deemed best to reflect market value. In
instances where market quotations are not readily available, the security is
valued in a manner intended to reflect its fair value. All other securities and
assets are valued in a manner determined to reflect their fair value. For
purposes of determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
United States dollars at the mean of the bid and asked prices of such currencies
against the United States dollar last quoted by any major bank.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of each Fund Business Day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not Fund Business Days in New York and on which the Fund's net asset
value is not calculated. Calculation of the net asset value per share of the
Fund does not take place contemporaneously with the determination of the prices
of the majority of the portfolio securities used in such calculation. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of the New York Stock Exchange, Inc. will
not be reflected in the Fund's calculation of net asset value unless it is
deemed that the particular event would materially affect net asset value, in
which case an adjustment will be made.
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<PAGE>
5. PORTFOLIO TRANSACTIONS
The Fund generally will effect purchases and sales through brokers who charge
commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the Adviser in its best judgment and
in a manner deemed to be in the best interest of shareholders of the Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner and at the most favorable price available to the Fund.
Transactions on stock exchanges involve the payment of brokerage commissions. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on foreign stock exchanges these commissions are generally
fixed. In the case of securities traded in the foreign and domestic
over-the-counter markets, there is generally no stated commission, but the price
usually includes an undisclosed commission or markup. In underwritten offerings,
the price includes a disclosed fixed commission or discount. Where transactions
are executed in the over-the-counter market, the Fund will seek to deal with the
primary market makers; but when necessary in order to obtain best execution, it
will utilize the services of others. In all cases the Fund will attempt to
negotiate best execution.
The Fund may not always pay the lowest commission or spread available. Rather,
in determining the amount of commission, including certain dealer spreads, paid
in connection with Fund transactions, the Adviser takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker. The Adviser may also take into account
payments made by brokers effecting transactions for the Fund (i) to the Fund or
(ii) to other persons on behalf of the Fund for services provided to it for
which it would be obligated to pay.
In addition, the Adviser may give consideration to research services furnished
by brokers to the Adviser for its use and may cause the Fund to pay these
brokers a higher amount of commission than may be charged by other brokers. Such
research and analysis may be used by the Adviser in connection with services to
clients other than the Fund, and the Adviser's fee is not reduced by reason of
the Adviser's receipt of the research services.
Investment decisions for the Fund will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Adviser are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by the Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for the Fund and for other investment companies and accounts
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
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<PAGE>
The Fund contemplates that, consistent with the policy of obtaining best net
results, brokerage transactions may be conducted through the Adviser's
affiliates, affiliates of those persons or FFSI. The Advisory Agreement
authorizes the Adviser to so execute trades. The Board of Trustees has adopted
procedures in conformity with applicable rules under the Investment Company Act
to ensure that all brokerage commissions paid to these persons are reasonable
and fair. For the fiscal years ended March 31, 1997 and June 30, 1996 and 1995,
the aggregate brokerage commissions incurred by the Fund were $11,976, $22,929
and $20,667, of which.0% ($0.00) was paid in each year to American Securities
Corporation, an affiliate of the Adviser. During those periods, 0.0% of the
total dollar amount of transactions by the Fund involving the payment of
commissions were effected through American Securities Corporation.
6. CUSTODIAN
Pursuant to a Custodian Agreement (the "Custodian Agreement"), The First
National Bank of Boston, P.O. Box 1959, Boston, Massachusetts, 02105, acts as
the custodian of the Funds' assets. The custodian's responsibilities include
safeguarding and controlling the Fund's cash and securities, determining income
and collecting interest on Fund investments. The Fund's custodian employs
foreign subcustodians to provide custody of the Fund's foreign assets in
accordance with applicable regulations. The custodian is paid a fee at an annual
rate of 0.02% of the first $100 million of the average daily net assets of the
Fund, 0.015% on the next $100 million of the average daily net assets of the
Fund and .001% of the average daily net assets over $200 million, and certain
transaction fees.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by FFSI at net asset value
without any sales charge. As of March 31, 1997, the Fund's net asset value per
share was $12.84.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partly in portfolio securities if the Board of Trustees determines
economic conditions exist which would make payment in cash detrimental to the
best interests of the Fund. If payment for shares redeemed is made wholly or
partly in portfolio securities, brokerage costs may be incurred by the
shareholder in converting the securities to cash. The Trust has filed an
election with the SEC to which the Fund may only effect a redemption in
portfolio securities if the particular shareholder is redeeming more than
$250,000 or 1% of the Fund's total net assets, whichever is less, during any
90-day period.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily to reimburse
the Fund for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to transactions effected for the benefit of a shareholder which
is applicable to the Fund's shares as provided in the Prospectus from time to
time.
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Shareholders' rights of redemption may not be suspended, except (i) for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the SEC determines that
trading thereon is restricted, (ii) for any period during which an emergency (as
determined by the SEC) exists as a result of which disposal by the Fund of its
securities is not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (iii) for such other period as the SEC may by order permit for the
protection of the shareholders of the Fund.
8. TAX MATTERS
FOREIGN INCOME TAXES
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries which entitle the Fund to
a reduced rate of such taxes or exemption from taxes on such income. It is
impossible to know the effective rate of foreign tax in advance since the amount
of the Fund's assets to be invested within various countries cannot be
determined.
U.S. FEDERAL INCOME TAXES
The Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment Trust" under the Internal Revenue Code of 1986, as amended
(the "Code"). Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements the
Fund must meet to qualify for such treatment.
Income received by the Fund from sources within various foreign countries may be
subject to foreign income tax. If more than 50% of the value of the Fund's total
assets at the close of its taxable year consists of the stock or securities of
foreign corporations, the Fund may elect to "pass through" to the Fund's
shareholders the amount of foreign income taxes paid by the Fund. Pursuant to
that election, shareholders would be required: (i) to include in gross income,
even though not actually received, their respective pro-rata share of foreign
taxes paid by the Fund; and (ii) either to deduct their pro-rata share of
foreign taxes in computing their taxable income, or, subject to certain
limitations, to use it as a foreign tax credit against federal income taxes (but
not both). No deduction for foreign taxes could be claimed by a shareholder who
does not itemize deductions.
The Fund may or may not meet the requirements of the Code to "pass through" to
its shareholders foreign income taxes paid. Each shareholder will be notified
after the close of each taxable year of the Fund whether the foreign taxes paid
by the Fund will "pass through" for that year, and, if so, the amount of each
shareholder's pro-rata share (by country) of (i) the foreign taxes paid, and
(ii) the Fund's gross income from foreign sources. Shareholders who are not
liable for Federal income taxes, such as retirement plans qualified under
Section 401 of the Code, will not be affected by any "pass through" of foreign
taxes.
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For Federal income tax purposes, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities are treated as ordinary income or ordinary loss. Similarly, gains or
losses from the disposition of (i) foreign currencies, (ii) debt securities
denominated in a foreign currency, or (iii) a forward contract denominated in a
foreign currency, which are attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the assets and the date of
disposition also are treated as ordinary gain or loss.
The use of certain hedging strategies such as writing and purchasing options,
futures contracts and options on futures contracts and entering into foreign
currency forward contracts and other foreign instruments, involves complex rules
that will determine for income tax purposes the character and timing of
recognition of income received by the Fund in connection therewith.
Dividends out of net ordinary income and distributions of net short-term capital
gain are eligible, in the case of corporate shareholders, for the
dividends-received deduction, subject to proportionate reduction of the amount
eligible for deduction if the aggregate qualifying dividends received by the
Fund from domestic corporations in any year are less than 100% of its gross
income (excluding long-term capital gain from securities transactions). A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in the Fund more than 45 days. Furthermore, provisions
of the tax law disallow the dividends-received deduction to the extent a
corporation's investment in shares of the Fund is financed with indebtedness.
9. OTHER MATTERS
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by Seward & Kissel, 1200 G Street, N.W.,
Washington, D.C. 20005.
Deloitte & Touche, LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, have been selected as auditors for the Trust.
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and assumed
the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996, Forum
Funds, Inc. was reorganized as a Delaware business trust. The Trust has an
unlimited number of authorized shares of beneficial interest. The Board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate portfolios or series (such as the Fund) and may in the future
divide portfolios or series into two or more classes of shares (such as Investor
and Institutional Shares). Currently the authorized shares of the Trust are
divided into 15 separate series. Prior to November 25, 1996, the Fund was a
separate portfolio named Austin Global Equity Fund of Stone Bridge Funds, Inc.,
a Maryland corporation.
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Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
(and Trustees) have available certain procedures for the removal of Trustees.
There are no conversion or preemptive rights in connection with shares of the
Trust. All shares when issued in accordance with the terms of the offering will
be fully paid and nonassessable. Shares are redeemable at net asset value, at
the option of the shareholders, subject to any contingent deferred sales charge
that may apply. A shareholder in a portfolio is entitled to the shareholder's
pro rata share of all dividends and distributions arising from that portfolio's
assets and, upon redeeming shares, will receive the portion of the portfolio's
net assets represented by the redeemed shares.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal year ended March 31,
1997 (included in the Annual Report to Shareholders), which are delivered along
with this Statement of Additional Information, are incorporated herein by
reference.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
---------------------------------
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(A) MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues,
as follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
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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) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas, they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated `BB' have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated `B' have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated `CCC' have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and
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repayment of principal. In the event of adverse business, financial, or economic
conditions, they are not likely to have the capacity to pay interest and repay
principal.
The `C' rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating `C' is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated `D' are in payment default. The `D' rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will made during such grace period. The `D' rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
PREFERRED STOCK
(A) MOODY'S
Moody's rates preferred stock issues as follows:
An issue which is rated aaa is a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment among
preferred stock issues.
An issue which is rated "aa" is a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "a" is an upper-medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classification,
earnings and asset protection are, nevertheless, expected to be maintained at
adequate levels.
An issue which is rated "baa" is a medium-grade preferred stock, neither highly
protected nor poorly secured. Earnings and asset protection appear adequate at
present but may be questionable over any great length of time.
An issue which is rated "ba" has speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
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An issue which is rated "caa" is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated "ca" is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated "c" can be regarded as having extremely poor prospects
of ever attaining any real investment standing. This is the lowest rated class
of preferred or preference stock.
(B) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues as follows:
"AAA" is the highest rating that is assigned by S&P to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock
obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas if normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the "A" category.
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
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.
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To provide more detailed indications of preferred stock quality, the ratings
from "AA" to "B" may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
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OAK HALL EQUITY FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
Oak Hall Capital Advisors, L.P. Shareholder Servicing:
122 East 42nd Street Forum Financial Corp.
New York, New York 10005 Two Portland Square
(212) 622-1996 Portland, Maine 04101
800-625-4255
207-879-0001
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information ("SAI") supplements the Prospectus date
August 1, 1997 offering shares of the Oak Hall Equity Fund (the "Fund") and
should be read only in conjunction with the Prospectus, a copy of which may be
obtained without charge by contacting shareholder servicing at the address
listed above.
TABLE OF CONTENTS
PAGE
----
1. Investment Policies
and Limitations............................................
2. Performance Data.............................................
3. Management...................................................
4. Determination of Net Asset Value.............................
5. Portfolio Transactions.......................................
6. Custodian....................................................
7. Additional Purchase and
Redemption Information.....................................
8. Taxation.....................................................
9. Other Matters................................................
Appendix A - Description of Securities Ratings
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
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1. INVESTMENT POLICIES AND LIMITATIONS
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P") are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to corporate bonds, including convertible securities by Moody's
and S&P is included in Appendix A to this Statement of Additional Information.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced. Oak Hall Capital Advisors, L.P. (the "Adviser") will
consider such an event in determining whether the Fund should continue to hold
the obligation. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
LOWER RATED DEBT SECURITIES
The Fund may invest up to 25% of its total assets in heavily discounted
non-investment grade, high risk, corporate debt securities (commonly referred to
as junk bonds). While the market for these high yield debt securities has been
in existence for many years and has weathered previous economic downturns, the
market in recent years has experienced a dramatic increase in the large-scale
use of these securities to fund highly leveraged corporate acquisitions and
restructurings. Accordingly, past experience may not provide an accurate
indication of future performance of the high yield bond market, especially
during periods of economic recession.
The market for lower rated debt securities may be thinner and less active than
that for higher quality securities, which can adversely affect the price at
which these securities can be sold. If market quotations are not available,
these lower rated securities will be valued in accordance with procedures
established by the Trust's Board of Trustees, including the use of outside
pricing services. Judgment plays a greater role in valuing high yield corporate
debt securities than is the case for securities for which more external sources
for quotations last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing services
used by the Fund to value its portfolio securities, and the Fund's ability to
dispose of these lower-rated securities.
The market prices of lower rated securities may fluctuate more than the prices
of higher rated securities and may decline significantly in periods of general
economic difficulty which may follow periods of rising interest rates. During an
economic downturn or a prolonged period of rising interest rates, the ability of
issuers of lower quality debt to service their payment obligations, meet
projected goals, or obtain additional financing may be impaired.
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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
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.
Convertible securities which are rated b by Moody's generally lack
characteristics of a desirable investment. Convertible securities which are
rated B by S&P are regarded, on balance, as
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predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation.
WARRANTS
The Fund may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. To the extent
that the market value of the security that may be purchased upon exercise of the
warrant rises above the exercise price, the value of the warrant will tend to
rise. To the extent that the exercise price equals or exceeds the market value
of such security, the warrants will have little or no market value. If a warrant
is not exercised within the specified time period, it will become worthless and
the Fund will lose the purchase price paid for the warrant and the right to
purchase the underlying security. The Fund may not invest more than 2% of its
net assets in warrants not traded on the American or New York Stock Exchange.
TEMPORARY DEFENSIVE POSITION
When the Adviser believes that business or financial conditions warrant, the
Fund may assume a temporary defensive position. For temporary defensive
purposes, the Fund may invest without limit in cash or in investment grade cash
equivalents, including (i) short-term obligations of the U.S. Government and its
agencies or instrumentalities, (ii) certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of commercial banks doing
business in the United States that have, at the time of investment, total assets
in excess of one billion dollars (or the equivalent in other currencies) and
that are members of the Federal Deposit Insurance Corporation, (iii) commercial
paper of prime quality rated A-2 or higher by S&P or Prime-2 or higher by
Moody's or, if not rated, determined by the Adviser to be of comparable quality,
(iv) repurchase agreements covering any of the securities in which the Fund may
invest directly and (v) money market mutual funds.
FOREIGN CURRENCY FORWARD CONTRACTS
Investments in foreign companies will usually involve currencies of foreign
countries. In addition, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs. Accordingly,
the value of the assets of the Fund as measured in United States dollars may be
affected by changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with conversions between
various currencies. The Fund may conduct foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into foreign currency forward
contracts ("forward contracts") to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one
year) from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers and involve the risk that the other
4
<PAGE>
party to the contract may fail to deliver currency when due, which could result
in losses to the Fund. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades. Foreign exchange dealers
realize a profit based on the difference between the price at which they buy and
sell various currencies.
The Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, the Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Forward contracts involve the
risk of inaccurate predictions of currency price movements, which may cause the
Fund to incur losses on these contracts and transaction costs. The Adviser does
not intend to enter into forward contracts on a regular or continuous basis, and
will not do so if, as a result, the Fund will have more than 25% of the value of
its total assets committed to such contracts or the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency.
At or before the settlement of a forward currency contract, the Fund may either
make delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
the currency through the conversion of assets of the Fund into the currency. The
Fund may close out a forward contract obligating it to purchase a foreign
currency by selling an offsetting contract. If the Fund engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been a change in forward contract prices. Additionally, although forward
contracts may tend to minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they tend to limit any potential gain
which might result should the value of such currency increase.
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There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market. The interbank market in foreign currencies is a global,
around-the-clock market.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated in a longer term investment decision made with regard to
overall diversification strategies. When required by applicable regulatory
guidelines, the Fund will set aside cash, U.S. Government securities or other
liquid assets in a segregated account with its custodian in the prescribed
amount.
HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser may engage in certain options and
futures strategies to attempt to hedge the Fund's portfolio. The instruments in
which the Fund may invest include (i) options on securities, stock indexes and
foreign currencies, (ii) stock index and foreign currency futures contracts
("futures contracts"), and (iii) options on futures contracts. Use of these
instruments is subject to regulation by the Securities and Exchange Commission
(the "SEC"), the several options and futures exchanges upon which options and
futures are traded, and the Commodities Futures Trading Commission (the "CFTC").
The various strategies referred to herein and in the Fund's Prospectus are
intended to illustrate the type of strategies that are available to, and may be
used by, the Adviser in managing the Fund's portfolio. No assurance can be
given, however, that any strategies will succeed.
The Fund will not use leverage in its hedging strategies. In the case of
transactions entered into as a hedge, the Fund will hold securities, currencies
or other options or futures positions whose values are expected to offset
("cover") its obligations thereunder. The Fund will not enter into a hedging
strategy that exposes the Fund to an obligation to another party unless it owns
either (1) an offsetting ("covered") position or (2) cash, U.S. Government
securities or other liquid assets with a value sufficient at all times to cover
its potential obligations. When required by applicable regulatory guidelines,
the Fund will set aside cash, U.S. Government securities or other liquid assets
in a segregated account with its custodian in the prescribed amount. Any assets
used for cover or held in a segregated account cannot be sold or closed out
while the hedging strategy is outstanding, unless they are replaced with similar
assets. As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
The Fund is subject to the following restrictions in its use of options and
futures contracts. The Fund will not (i) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged through the use of options or futures contracts,
(ii) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options
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would exceed 25% of its total assets, or (iii) purchase call options if, as a
result, the current value of options premiums for options purchased would exceed
5% of the Fund's total assets.
OPTIONS STRATEGIES. The Fund may purchase put and call options written by others
and write (sell) put and call options covering specified securities, stock
index-related amounts or currencies. A put option (sometimes called a "standby
commitment") gives the buyer of the option, upon payment of a premium, the right
to deliver a specified amount of a security or currency to the writer of the
option on or before a fixed date at a predetermined price. A call option
(sometimes called a "reverse standby commitment") gives the purchaser of the
option, upon payment of a premium, the right to call upon the writer to deliver
a specified amount of a security or currency on or before a fixed date, at a
predetermined price. The predetermined prices may be higher or lower than the
market value of the underlying currency or security. The Fund may buy or sell
both exchange-traded and over-the-counter ("OTC") options. The Fund will
purchase or write an option only if that option is traded on a recognized U.S.
options exchange or if the Adviser believes that a liquid secondary market for
the option exists. When the Fund purchases an OTC option, it relies on the
dealer from which it has purchased the OTC option to make or take delivery of
the securities or currency underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. OTC options and the securities
underlying these options, currently are treated as illiquid securities.
The Fund may purchase call options on equity securities that the Adviser intends
to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security increases above the exercise price and
the Fund either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid. The Fund may similarly purchase put options
in order to hedge against a decline in market value of securities held in its
portfolio. The put enables the Fund to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the Fund is limited
to the option premium paid. If the market price of the underlying security is
higher than the exercise price of the put, any profit the Fund realizes on the
sale of the security would be reduced by the premium paid for the put option
less any amount for which the put may be sold.
The Fund may write covered call options. The Fund may write call options on
behalf of the Fund 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.
The Fund may purchase and write put and call options on stock indices in much
the same manner as the equity security options discussed above, except that
stock index options may serve as a
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hedge against overall fluctuations in the securities markets (or market sectors)
or as a means of participating in an anticipated price increase in those
markets. The effectiveness of hedging techniques using stock index options will
depend on the extent to which price movements in the stock index selected
correlate with price movements of the securities which are being hedged. Stock
index options are settled exclusively in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS. The Fund may take positions in
options on foreign currencies in order to hedge against the risk of foreign
exchange fluctuation on foreign securities the Fund holds in its portfolio or
which it intends to purchase. Options on foreign currencies are affected by the
factors discussed in "Foreign Currency Forward Transactions" which influence
foreign exchange sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those that may be
involved in the use of foreign currency options, the Fund may be disadvantaged
by having to deal in an odd lot market (generally consisting of transactions of
less than $1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The Fund may effectively
terminate its right or obligation under an option contract by entering into a
closing transaction. For instance, if the Fund wished to terminate its potential
obligation to sell securities or currencies under a call option it had written,
a call option of the same type would be purchased by the Fund. Closing
transactions essentially permit the Fund to realize profits or limit losses on
its options positions prior to the exercise or expiration of the option. In
addition:
(1) The successful use of options depends upon the Adviser's ability to
forecast the direction of price fluctuations in the underlying securities or
currency markets, or in the case of a stock index option, fluctuations in the
market sector represented by the index.
(2) Options normally have expiration dates of up to nine months.
Options that expire unexercised have no value. Unless an option purchased by the
Fund is exercised or unless a closing transaction is effected with respect to
that position, a loss will be realized in the amount of the premium paid.
(3) A position in an exchange listed option may be closed out only on
an exchange which provides a market for identical options. Most exchange listed
options relate to equity securities. Exchange markets for options on foreign
currencies are relatively new and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the over-the-
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counter markets (currently the primary markets for options on foreign
currencies) only by negotiating directly with the other party to the option
contract or in a secondary market for the option if such market exists. There is
no assurance that a liquid secondary market will exist for any particular option
at any specific time. If it is not possible to effect a closing transaction, the
Fund would have to exercise the option which it purchased in order to realize
any profit. The inability to effect a closing transaction on an option written
by the Fund may result in material losses to the Fund.
(4) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
FUTURES STRATEGIES. A futures contract is a bilateral agreement wherein one
party agrees to accept, and the other party agrees to make, delivery of cash,
securities or currencies as called for in the contract at a specified future
date and at a specified price. For stock index futures contracts, delivery is of
an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the time of the contract and the close of
trading of the contract.
The Fund may sell stock index futures contracts in anticipation of a general
market or market sector decline that may adversely affect the market values of
the Fund's securities. To the extent that the Fund's portfolio correlates with a
given stock index, the sale of futures contracts on that index could reduce the
risks associated with a market decline and thus provide an alternative to the
liquidation of securities positions. The Fund may purchase a stock index futures
contract if a significant market or market sector advance is anticipated. These
purchases would serve as a temporary substitute for the purchase of individual
stocks, which stocks may then be purchased in the future.
The Fund may purchase call options on a stock index future as a means of
obtaining temporary exposure to market appreciation at limited risk. This
strategy is analogous to the purchase of a call option on an individual stock,
in that it can be used as a temporary substitute for a position in the stock
itself. The Fund may purchase a call option on a stock index future to hedge
against a market advance in stocks which the Fund planned to acquire at a future
date. The Fund may also purchase put options on stock index futures contracts.
These purchases are analogous to the purchase of protective puts on individual
stocks, where a level of protection is sought below which no additional economic
loss would be incurred by the Fund. The Fund may write covered call options on
stock index futures contracts as a partial hedge against a decline in the prices
of stocks held in the Fund's portfolio. This is analogous to writing covered
call options on securities.
The Fund may sell foreign currency futures contracts to hedge against possible
variations in the exchange rate of the foreign currency in relation to the U.S.
dollar. In addition, the Fund may sell foreign currency futures contracts when
the Adviser anticipates a general weakening of foreign currency exchange rates
that could adversely affect the market values of the Fund's foreign securities
holdings. The Fund may purchase a foreign currency futures contract to hedge
against an anticipated foreign exchange rate increase pending completion of
anticipated transactions. Such a purchase would serve as a temporary measure to
protect the Fund against
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<PAGE>
such increase. The Fund may also purchase call or put options on foreign
currency futures contracts to obtain a fixed foreign exchange rate at limited
risk. The Fund may write call options on foreign currency futures contracts as a
partial hedge against the effects of declining foreign exchange rates on the
value of foreign securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING. No
price is paid upon entering into futures contracts; rather, the Fund is required
to deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash or U.S. Government securities generally equal to 5% or
less of the contract value. This amount is known as initial margin. Subsequent
payments, called variation margin, to and from the broker, would be made on a
daily basis as the value of the futures position varies. When writing a call on
a futures contract, variation margin must be deposited in accordance with
applicable exchange rules. The initial margin in futures transactions is in the
nature of a performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination of the contract, assuming all contractual
obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts. For example, futures contracts on broad-based stock
indices can currently be entered into with respect to the Standard & Poor's 500
Stock Index on the Chicago Mercantile Exchange, the New York Stock Exchange
Composite Stock Index on the New York Futures Exchange, the Value Line Composite
Stock Index on the Kansas City Board of Trade and the Major Market Index of the
Chicago Board of Trade.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for the Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
(1) Successful use by the Fund of futures contracts and related options
will depend upon the Adviser's ability to predict movements in the direction of
the overall securities and currency markets, which requires different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures contracts relate not to the current level of the underlying
instrument but to the anticipated levels at some point in the future; thus, for
example, trading of stock index futures may not reflect the trading of the
securities which are used to formulate an index or even actual fluctuations in
the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged securities or currencies due to price
distortions in the futures market or otherwise.
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There may be several reasons unrelated to the value of the underlying securities
or currencies which causes this situation to occur. As a result, a correct
forecast of general market trends still may not result in successful hedging
through the use of future contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not be
possible to close a position, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin.
(4) Like other options, options on futures contracts have a limited
life. The Fund will not trade options on futures contracts on any exchange or
board of trade unless and until, in the Adviser's opinion, the market for such
options has developed sufficiently that the risks in connection with options on
futures transactions are not greater than the risks in connection with futures
transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls which could be substantial in
the event of adverse price movements.
(6) The Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of added
brokerage commissions.
(7) Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the buying and selling of futures
generally. In addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated with
options on foreign currencies described above. In addition, settlement of
foreign currency futures contracts must occur within the country issuing that
currency. Thus, the Fund must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents, and
the Fund may be required to pay any fees, taxes or charges associated with such
delivery which are assessed in the issuing country.
REGULATORY COMPLIANCE WITH RESPECT TO COMMODITY FUTURES CONTRACTS
AND COMMODITY OPTIONS
The Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. The Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however. that in
addition, with respect to positions in commodity futures and option contracts
not for bona fide hedging purposes, the Fund represents that the aggregate
initial margin and premiums required to establish these
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positions (subject to certain exclusions) will not exceed 5% of the liquidation
value of the Fund's assets after taking into account unrealized profits and
losses on any such contract the Fund has entered into.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand agreements,
there is no agreed upon repurchase date and interest payments are calculated
daily, often based upon the prevailing overnight repurchase rate.
Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by the Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase portfolio securities on a when-issued and purchase or sell
portfolio securities on forward commitment basis. When-issued or forward
commitment transactions arise when securities are purchased by the Fund with
payment and delivery to take place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time it
enters into the transaction. In those cases, the purchase price and the interest
rate payable on the securities are fixed on the transaction date and delivery
and payment may take place a month or more after the date of the transaction.
When the Fund enters into a forward commitment transaction, it becomes obligated
to purchase securities and it has all of the rights and risks attendant to
ownership of the security, although delivery and payment occur at a later date.
To facilitate such acquisitions, the Fund will maintain with its custodian a
separate account with portfolio securities in an amount at least equal to such
commitments.
At the time the Fund makes the commitment to purchase securities on a
when-issued or forward commitment basis, the Fund will record the transaction as
a purchase and thereafter reflect the value each day of such securities in
determining its net asset value. The value of the fixed income securities to be
delivered in the future will fluctuate as interest rates and the credit of the
underlying issuer vary. On delivery dates for such transactions, the Fund will
meet its obligations from maturities, sales of the securities held in the
separate account or from other available sources of cash. The Fund generally has
the ability to close out a purchase obligation on or before the settlement date,
rather than purchase the security. If the Fund chooses to dispose
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<PAGE>
of the right to acquire a when-issued security prior to its acquisition, it
could, as with the disposition of any other portfolio obligation, realize a gain
or loss due to market fluctuation.
To the extent the Fund engages in when-issued or delayed delivery transactions,
it will do so for the purpose of acquiring securities consistent with the Fund's
investment objectives and policies and not for the purpose of investment
leverage or to speculate in interest rate changes. The Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Fund reserves
the right to dispose of the right to acquire these securities before the
settlement date if deemed advisable.
The use of when-issued transactions and forward commitments enables the Fund to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, the Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices inferior to the
current market values.
When-issued securities may include bonds purchased on a "when, as and if issued"
basis under which the issuance of the securities depends upon the occurrence of
a subsequent event, such as approval of a proposed financing by appropriate
municipal authorities. Any significant commitment of the Fund's assets committed
to the purchase of securities on a "when, as and if issued" basis may increase
the volatility of its net asset value. No when-issued or forward commitments
will be made by the Fund if, as a result, more than 10% of the value of the
Fund's total assets would be committed to such transactions.
INVESTMENT LIMITATIONS
The Fund has adopted the following additional investment limitations which are
fundamental policies of the Fund and may not be changed without shareholder
approval. The Fund may not:
(1) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted to be incurred by the Fund. The deposit in
escrow of securities in connection with the writing of put and call
options, collateralized loans of securities and collateral arrangements
with respect to margin for futures contracts are not deemed to be
pledges or hypothecations for this purpose.
(2) Borrow money, except that the Fund may enter into commitments to
purchase securities in accordance with its investment program,
including delayed-delivery and when-issued securities and reverse
repurchase agreements, provided that the total amount of any such
borrowing does not exceed 33 1/3% of the Fund's total assets.
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<PAGE>
(3) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter for purpose of
the Securities Act of 1933.
(4) Purchase or sell real estate or any interest therein, except that
the Fund may invest in securities issued or guaranteed by corporate or
governmental entities secured by real estate or interests therein, such
as mortgage pass-throughs and collateralized mortgage obligations, or
issued by companies that invest in real estate or interests therein.
(5) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent a Fund from purchasing or selling options and futures contracts
or from investing in securities or other instruments backed by physical
commodities).
(6) Issue senior securities except that (a) the Fund may engage in
transactions that may result in the issuance of senior securities to
the extent permitted under applicable regulations and interpretations
of the Investment Company Act of 1940 ("1940 Act") or an exemptive
order; (b) the Fund may acquire securities to the extent otherwise
permitted by its investment policies, the acquisition of which may
result in the issuance of a senior security, to the extent permitted
under applicable regulations or interpretations of the 1940 Act; and
(c) subject to the restrictions set forth above, the Fund may borrow
money as authorized by the 1940 Act.
The Fund has adopted the following nonfundamental investment limitations that
may be changed by the Trust's Board of Trustees (the "Board of Trustees")
without shareholder approval. The Fund:
(a) May borrow money for temporary or emergency purposes in an amount
not exceeding 5% of the value of its total assets at the time when the
loan is made; provided that any such temporary or emergency borrowings
representing more than 5% of the Fund's total assets must be repaid
before the Fund may make additional investments.
(b) May not purchase securities on margin, except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities, but the Fund may make margin deposits in
connection with permitted transactions in options, futures and options
on futures.
(c) May not invest in securities of another registered investment
company except to the extent permitted by the 1940 Act.
(d) May not invest in interests in oil or gas or interests in othe
mineral exploration or development programs.
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(e) May not invest in or hold securities of any issuer if officers and
directors of the Trust or the Adviser, individually owning beneficially
more than 1/2 of 1% of the securities of the issuer, in the aggregate
own more than 5% of the issuer's securities.
(f) May not invest in securities (other than fully-collateralized debt
obligations) issued by companies that have conducted continuous
operations for less than three years, including the operations of
predecessors, unless guaranteed as to principal and interest by an
issuer in whose securities the Fund could invest, if as a result, more
than 5% of the value of the fund's total assets would be so invested.
(g) May not invest more than 15% of its net assets in securities that
are not readily marketable, including repurchase agreements maturing in
more than seven days.
Except as required by the 1940 Act, whenever an amended or restated investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the acquisition of such security or other asset. Any subsequent
change in values, assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment
limitations. If the Fund were to invest in money market funds as described in
limitation (c), it would indirectly incur its proportionate share of the
advisory and other expenses of the money market fund.
FUNDAMENTAL POLICIES
Those policies of the Fund which are deemed to be fundamental may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. A majority of the Fund's outstanding voting securities, as
defined in the 1940 Act means the lesser of: (i) 67% of the shares of the Fund
present or represented at a shareholders meeting at which the holders of more
than 50% of the shares are present or represented or (ii) more than 50% of the
outstanding shares of the Fund.
2. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied by the Fund in advertising is historical and is not intended to
indicate future returns. The Fund's net asset value, yield and total return will
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
The Fund's total return for the fiscal year ended March 31, 1997 was 1.40%. This
figure represents unannualized total return for the nine month period June 30,
1996 through March 31, 1997. Total return for the twelve months ending March 31,
1997 was 3.0%. For the period beginning July 13, 1992 (the commencement of
public operations) to March 31, 1997, the Fund's average annual total return was
10.92%.
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<PAGE>
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 indices,
including but not limited to the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Salomon Brothers Bond Index, the
Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Fund may refer to general market performances over past time periods such as
those published by Ibbotson Associates. In addition, the Fund may refer in such
materials to mutual fund performance rankings and other data published by Fund
Tracking Companies. Performance advertising may also refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in advertising reflect
all aspects of the Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in the Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV; where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value (ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 payment made
at the beginning of the applicable period.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns
16
<PAGE>
may be broken down into their components of income and capital (including
capital gains and changes in share price) in order to illustrate the
relationship of these factors and their contributions to total return. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph, or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1); where:
PT = period total return;
The other definitions are the same as in average annual total
return above.
3. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), 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 Administrative Services, LLC serves as manager or
administrator and for which Forum Financial Services, Inc. serves as
distributor. His address is Two Portland Square, Portland, Maine
04101.
Costas Azariadis, Trustee (age 53)
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 54)
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.
17
<PAGE>
J. Michael Parish, Trustee (age 53)
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
41)
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.
Robert Campbell, Treasurer (age 36)
Director of Fund Accounting, Forum Financial Corp., with which he has
been associated since April 1997. Prior thereto, Mr. Campbell was the
Vice President of Domestic Operations for State Street Fund Services in
Toronto, Ontario, and prior to that, Mr. Campbell served as Assistant
Vice President/Fund Manager of Mutual Fund, State Street Bank & Trust
in Boston, Massachusetts. Mr. Campbell is also treasurer of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart. Mr. Goldstein is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto, Mr. Berueffy was on the staff of
the U.S. Securities and Exchange Commission for seven years, first in
the appellate branch of the Office of the General Counsel, then as a
counsel to Commissioner Grundfest and finally as a senior special
counsel in the Division of Investment Management. Mr. Berueffy is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine 04101.
18
<PAGE>
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has
been associated since July 1996. Prior thereto, Ms. Tumlin was on the
staff of the U.S. Securities and Exchange Commission as an attorney in
the Division of Market Regulation and prior thereto Ms. Tumlin was an
associate with the law firm of Robinson Silverman Pearce Aronsohn &
Berman in New York, New York. Ms. Tumlin is also Assistant Secretary of
various registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1995. Ms. Turney was employed from 1992 as a
Senior Fund Accountant with First Data Corporation in Boston,
Massachusetts. Ms. Turney is also Assistant Secretary of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. 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. 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 the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation BEnefits Retirement Compensation
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
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>
19
<PAGE>
THE INVESTMENT ADVISER
Pursuant to an investment advisory agreement with the Trust (the "Advisory
Agreement"), the Fund's investment adviser, Oak Hall Capital Advisors, L.P.
furnishes at its own expense all services, facilities and personnel necessary in
connection with managing the Fund's investments and effecting portfolio
transactions for the Fund. The Advisory Agreement will remain in effect for a
period of twelve months from the date of its effectiveness and will continue in
effect thereafter only if its continuance is specifically approved at least
annually by the Board of Trustees or by vote of the shareholders, and in either
case by a majority of the Trustees who are not parties to the Advisory Agreement
or interested persons of any such party, at a meeting called for the purpose of
voting on the Advisory Agreement.
The Advisory Agreement is terminable without penalty by the Trust with respect
to the Fund on 60 days' written notice when authorized either by vote of its
shareholders or by a vote of a majority of the Board of Trustees, or by the
Adviser on 60 days' written notice to the Trust, and will automatically
terminate in the event of its assignment. The Advisory Agreement also provides
that, with respect to the Fund, the Adviser shall not be liable for any error of
judgment or mistake of law or for any act or omission in the performance of its
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to others.
In addition to receiving its advisory fee from the Fund of 0.75% of the Fund's
average daily net assets, the Adviser may also act and be compensated as
investment manager for its clients with respect to assets which are invested in
the Fund. In some instances the Adviser may elect to credit against any
investment management fee received from a client who is also a shareholder in
the Fund an amount equal to all or a portion of the fees received by the Adviser
or any affiliate of the Adviser from the Fund with respect to the client's
assets invested in the Fund.
The following table shows the dollar amount of fees payable under the Investment
Advisory Agreement between the Fund and Oak Hall Capital Advisors, L.P., the
amount of fee that was waived by the Adviser, if any, and the actual fee
received by the Adviser. The data is for the past three fiscal years.
<TABLE>
<S> <C> <C> <C>
Advisory Fee Advisory Fee Advisory Fee
Payable Waived Retained
------- ------ --------
Oak Hall Equity Fund
Year Ended March 31, 1997 $54,263 $54,263 $0
Year Ended June 30, 1996 110,257 64,502 45,755
Year Ended June 30, 1995 194,367 0 194,367
</TABLE>
ADMINISTRATION
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997, Forum Administrative Services, LLC ("FAS") supervises the overall
management of the Trust
20
<PAGE>
(which includes, among other responsibilities, negotiation of contracts and fees
with, and monitoring of performance and billing of, the transfer agent, fund
accountant and custodian and arranging for maintenance of books and records of
the Trust). FAS also provides persons satisfactory to the Board of Trustees to
serve as officers of the Trust. Those officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
(and persons providing services to the Trust may include) FAS, the Adviser or
their respective affiliates. In addition, under the Agreement, FAS is directly
responsible for managing the Trust's regulatory and legal compliance and
overseeing the preparation of its registration statement.
Until May 31, 1994, Stone Bridge Trust Company ("SBTC"), as administrator, and
FFSI, as sub-administrator, supervised the overall management of the Fund, which
was then a series of The Stone Bridge Funds, Inc., a registered management
investment company (the "Company"), including the administrative duties
described above, pursuant to a Co-Administration Agreement and a Distribution
and Administration Agreement, respectively. Effective June 1, 1994, the Company
entered into an Administration and Distribution Agreement with FFSI under which
FFSI provided the administration and distribution services it has provided since
the Fund's inception and assumed the administrative responsibilities formerly
performed by SBTC. As of November 25, 1996, administrative services were
provided to the Fund pursuant to a Management and Distribution Agreement between
the Trust and FFSI. Effective June 19, 1997, administrative services are
provided by FAS under the current Administration Agreement with the Trust.
For the fiscal years ending March 31, 1997 and June 30, 1996 and 1995, the fees
under the former Administration and Distribution Agreement and Management and
Distribution Agreement were $18,088, $36,752 and $75,871, respectively.
DISTRIBUTION
FFSI acts as distributor of the Fund's shares pursuant to a Distribution
Agreement with the Trust approved by the Board on June 19, 1997 (the
"Distribution Agreement"). The Distribution Agreement will remain in effect for
a period of twelve months from the date of its effectiveness and will continue
in effect thereafter only if its continuance is specifically approved at least
annually by the Board of Trustees or by the shareholders and, in either case, by
a majority of the Trustees who are not parties to the agreement or interested
persons of any such party and do not have any direct or indirect financial
interest in the Distribution Agreement.
The Distribution Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party to the agreement on 60 days' written notice to
the Trust. The Distribution Agreement also provides that FFSI shall not be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust, except for willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the Distribution
Agreement.
21
<PAGE>
In accordance with Rule 12b-1 adopted by the SEC, the Trust has adopted a
distribution plan ("Plan"), which provides that all written agreements relating
to the Plan must be in a form satisfactory to the Board of Trustees. In
addition, the Plan requires the Trust and FFSI to prepare, at least quarterly,
written reports setting forth all amounts expended for distribution purposes by
FFSI 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 may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Trustees,
including a majority of directors who are not interested persons of the Trust
and who have no direct or indirect interest in the operation of the Plan or in
any agreement related to the Plan. The Plan further provides that it may not be
amended to increase materially the costs which may be borne by the Trust for
distribution pursuant to the Plan without shareholder approval and that other
material amendments of the Plan must be approved by the Trustees in the manner
described in the preceding sentence. The Plan may be terminated at any time by a
vote of the Board of Trustees or, with respect to the Fund, by the Fund's
shareholders.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent and dividend
disbursing agent of the Trust pursuant to a Transfer Agency Agreement. For its
services, the Transfer Agent receives with respect to the Fund an annual fee of
$12,000 plus $25 per shareholder account. Pursuant to a Fund Accounting
Agreement, the Transfer Agent also provides the Fund with portfolio accounting,
including the calculation of the Fund's net asset value. For these services, the
Transfer Agent receives with respect to the Fund an annual fee ranging from
$36,000 to $60,000 depending upon the amount and type of the Fund's portfolio
transactions and positions.
Both the Transfer Agency Agreement and Fund Accounting Agreement were approved
by the Board of Trustees, including a majority of the Trustees who are not
parties to the respective agreements or interested persons of any such party, at
a meeting called for the purpose of voting on the respective agreements. Each of
these agreements will remain in effect for a period of one year and will
continue in effect thereafter only if its continuance is specifically approved
at least annually by the Board of Trustees or by a vote of the shareholders and
in either case by a majority of the Trustees who are not parties to the
respective agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the respective agreement.
EXPENSES
Subject to the obligations of the Adviser to reimburse the Trust for its excess
expenses as described in the Prospectus, the Trust has, under the Advisory
Agreement, confirmed its obligation to pay all its other expenses.
The Trust's expenses include: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer
22
<PAGE>
agent; fees of pricing, interest, dividend, credit and other reporting services;
costs of membership in trade associations; telecommunications expenses; funds
transmission expenses; auditing, legal and compliance expenses; costs of forming
the Trust and maintaining corporate existence; costs of preparing and printing
the Trust's prospectuses, statements of additional information and shareholder
reports and delivering them to existing shareholders; costs of maintaining books
and accounts; costs of reproduction, stationery and supplies; compensation of
the Trust's trustees; compensation of the Trust's officers and employees who are
not employees of the Adviser, FAS or their respective affiliates and costs of
other personnel performing services for the Trust; costs of corporate meetings;
Securities and Exchange Commission registration fees and related expenses; state
securities laws registration fees and related expenses; the fees payable under
the Advisory Agreement, the Administration Agreement and the Distribution and
Sub-Administration Agreement; and any fees and expenses payable pursuant to the
Plan.
OTHER INFORMATION
As of July 1, 1997, the officers and directors of the Trust owned as a group
owned less than 1% of the outstanding shares of the Fund. Also as of that date,
no persons owned of record 5% or more of the outstanding shares of the Fund.
4. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00 P.M.,
Eastern time, on Fund Business Days (as defined in the Prospectus), by dividing
the value of the Fund's net assets (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued) by the
number of shares outstanding at the time the determination is made. The Trust
does not determine net asset value on the following holidays: New Year's Day,
Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
5. PORTFOLIO TRANSACTIONS
The Fund generally will effect purchases and sales of securities 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.
23
<PAGE>
In addition, the Adviser may give consideration to research services furnished
by brokers to the Adviser for its use and may cause the Fund to pay these
brokers a higher amount of commission than may be charged by other brokers. Such
research and analysis may be used by the Adviser in connection with services to
clients other than the Fund, and the Adviser's fee is not reduced by reason of
the Adviser's receipt of the research services.
Investment decisions for the Fund will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Adviser are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by the Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for the Fund and for other investment companies and accounts
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
The Fund contemplates that, consistent with the policy of obtaining best net
results, brokerage transactions may be conducted through the Adviser's
affiliates, affiliates of those persons or Forum. The Advisory Agreement
authorizes the Adviser to so execute trades. The Board of Trustees has adopted
procedures in conformity with applicable rules under the Investment Company Act
to ensure that all brokerage commissions paid to these persons are reasonable
and fair. For the Trust's fiscal years ended March 31, 1997, and June 30, 1996
and 1995 the aggregate brokerage commissions incurred by the Fund were $66,316,
$198,598 and $450,930, respectively, of which 0%, 5.1% and 11.37% ($0, $10,095
and $51,250), respectively, was paid to American Securities Corporation, an
affiliate of the Adviser. During those periods, approximately 0%, 4.67% and
5.66%, respectively, of the total dollar amount of transactions by the Fund
involving the payment of commissions were effected through American Securities
Corporation.
6. CUSTODIAN
Pursuant to a Custodian Agreement (the "Custodian Agreement"), The First
National Bank of Boston, P.O. Box 1959, Boston, Massachusetts, 02105, acts as
the custodian of the Funds' assets. The custodian's responsibilities include
safeguarding and controlling the Fund's cash and securities, determining income
and collecting interest on Fund investments. The Fund's custodian employs
foreign subcustodians to provide custody of the Fund's foreign assets in
accordance with applicable regulations. The custodian is paid a fee at an annual
rate of 0.02% of the first $100 million of the average daily net assets of the
Fund, 0.015% on the next $100 million of the average daily net assets of the
Fund and . 01% of the average daily net assets over $200 million, and certain
transaction fees.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
24
<PAGE>
Shares of the Fund are sold on a continuous basis by FFSI at the net asset value
next determined without any sales charge. As of March 31, 1997, the Fund's net
asset value was $13.80.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partly in portfolio securities if the Board of Trustees determines
economic conditions exist which would make payment in cash detrimental to the
best interests of the Fund. If payment for shares redeemed is made wholly or
partly in portfolio securities, brokerage costs may be incurred by the
shareholder in converting the securities to cash. The Trust has filed an
election with the Securities and Exchange Commission pursuant to which the Fund
may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily to reimburse
the Fund for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to transactions effected for the benefit of a shareholder which
is applicable to the Fund's shares as provided in the Prospectus from time to
time.
Shareholders' rights of redemption may not be suspended, except (i) for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, (ii) for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by the Fund of its securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(iii) for such other period as the Securities and Exchange Commission may by
order permit for the protection of the shareholders of the Fund.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, the Fund may accept portfolio securities that meet the investment
objective and policies of the Fund as payment for Fund shares. The Fund will
only accept securities that (i) are not restricted as to transfer either by law
or liquidity of market and (ii) have a value which is readily ascertainable (and
not established only by valuation procedures).
8. TAXATION
The Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended. Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements the
Fund must meet to qualify for such treatment. The information set forth in the
Prospectus and the following discussion relate solely to Federal income taxes on
dividends and distributions by the Fund and assumes that the Fund qualifies as a
regulated investment company. Investors
25
<PAGE>
should consult their own counsel for further details and for the application of
state and local tax laws to his or her particular situation.
A portion of the dividends paid out of the Fund's net ordinary income may be
eligible for the dividends received deduction allowed to corporations.
For federal income tax purposes, gains and losses attributable to fluctuations
in exchange rates which occur between the time the Fund accrues interest or
other receivable or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities are treated as ordinary income or ordinary loss.
Similarly, gains or losses from the disposition of foreign currencies, from the
disposition of debt securities denominated in a foreign currency, or from the
disposition of a forward contract denominated in a foreign currency which are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also are treated as
ordinary gain or loss.
For federal income tax purposes, when equity or over-the-counter put and call
options which the Fund has purchased or sold or expire unexercised, the premiums
paid by the Fund give rise to short or long-term capital losses at the time of
sale or expiration (depending on the Fund's holding period with respect to the
put or call). When put and call options written by the Fund expire unexercised,
the premiums received by the Fund give rise to short-term capital gains at the
time of expiration. When the Fund exercises a call, the purchase price of the
security purchased is increased by the amount of the premium paid by the Fund.
When the Fund exercises a put, the proceeds from the sale of the related
security are decreased by the premium paid. When a put or call written by the
Fund is exercised, the purchase price (selling price in the case of a call) of
the security is decreased (increased in the case of a call) for tax purposes by
the premium received. There may be short or long term gains and losses
associated with closing purchase or sale transactions.
In addition, the use of certain hedging strategies such as writing and
purchasing options, futures contracts and options on futures contracts, and
entering into foreign currency forward contracts and other foreign instruments,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of income received in connection therewith.
9. OTHER MATTERS
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of stock of the Trust
are passed upon by Seward & Kissel, 1200 G. Street, NW, Washington, DC 20005.
Deloitte & Touche, LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, have been selected as auditors for the Trust.
26
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal year ended March 31,
1997 (included in the Annual Report to Shareholders), which are delivered along
with this Statement of Additional Information, are incorporated herein by
reference.
27
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
---------------------------------
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(A) MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues,
as follows:
Bonds which are rated Aaa are judged by Moody's to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
28
<PAGE>
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) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas, they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Bonds rated `BB' have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Bonds rated `B' have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal payments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
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Bonds rated `CCC' have currently identifiable vulnerability to default,
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued. The rating
`Cl' is reserved for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor
has filed for bankruptcy. Bonds rated `D' are in payment default. The `D' rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will made during such grace period. The `D' rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Note: The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show the relative standing within the rating
category.
PREFERRED STOCK
(A) MOODY'S
Moody's rates preferred stock issues as follows:
An issue which is rated aaa is a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue which is rated "aa" is a high-grade preferred stock. This
rating indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "a" is an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue which is rated "baa" is a medium-grade preferred stock,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
An issue which is rated "ba" has speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
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An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue which is rated "c" can be regarded as having extremely poor
prospects of ever attaining any real investment standing. This is the lowest
rated class of preferred or preference stock.
(B) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues as follows:
"AAA" is the highest rating that is assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas if normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
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.
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A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
To provide more detailed indications of preferred stock quality, the
ratings from "AA" to "B" may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
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